PEGASYSTEMS INC
FORM 10-K
(Annual Report)
Filed 02/12/25 for the Period Ending 12/31/24
Address
225 WYMAN STREET
STE 300
WALTHAM, MA, 02451-1293
Telephone
6173749600
CIK
0001013857
Symbol
PEGA
SIC Code
7374 - Services-Computer Processing and Data Preparation
Industry
Software
Sector
Technology
Fiscal Year
12/31
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-K
____________________________
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934
For the fiscal year ended December 31, 2024
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934
Commission File No. 1-11859
____________________
PEGASYSTEMS INC.
(Exact name of Registrant as specified in its charter)
____________________
Massachusetts
04-2787865
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
225 Wyman Street, Waltham, MA 02451
(Address of principal executive offices, including zip code)
(617) 374-9600
(Registrant’s telephone number, including area code)
____________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, $.01 par value per share
PEGA
NASDAQ Global Select Market
Securities 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 such
shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ 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 standards
provided 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 Section
404(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 to
previously 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 officers
during 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 $60.53,
on June 30, 2024 was approximately $2.7 billion.
There were 85,898,878 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on January 31, 2025.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement related to its 2025 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-K
TABLE OF CONTENTS
Item
Page
PART I
1
Business
4
1A
Risk Factors
10
1B
Unresolved Staff Comments
21
1C
Cybersecurity
21
2
Properties
23
3
Legal Proceedings
23
4
Mine Safety Disclosures
23
PART II
5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
24
6
[Reserved]
25
7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
7A
Quantitative and Qualitative Disclosures about Market Risk
33
8
Financial Statements and Supplementary Data
35
9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
67
9A
Controls and Procedures
67
9B
Other Information
67
9C
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
67
PART III
10
Directors, Executive Officers and Corporate Governance
68
11
Executive Compensation
68
12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
68
13
Certain Relationships and Related Transactions, and Director Independence
68
14
Principal Accountant Fees and Services
68
PART IV
15
Exhibits and Financial Statement Schedules
69
16
Form 10-K Summary
70
Signatures
71
2
PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (“Annual Report”), including without limitation, “Item 1. Business,” “Item 1A. Risk Factors,” “Item 5. Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,” and “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” along with other reports that we have filed with the Securities and Exchange Commission (“SEC”), external
documents, and oral presentations, contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995.
Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, intends to, projects, forecasts, guidance,
likely, and usually or variations of such words and other similar expressions identify forward-looking statements. These statements represent our views only as
of the date the statement was made and are based on current expectations and assumptions.
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 successful execution of investments in artificial intelligence;
• the continued payment of our quarterly dividends;
• the timing of revenue recognition;
• variation in demand for our products and services, including among clients in the public sector;
• reliance on key personnel;
• reliance on third-party service providers, including hosting providers;
• compliance with our debt obligations and covenants;
• foreign currency exchange rates;
• potential legal and financial liabilities, as well as 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 related
claims 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 “Item
1A. Risk Factors” of this Annual Report and other filings we make with the SEC.
Investors are cautioned not to place undue reliance on such forward-looking statements, and there are no assurances that the results included in such statements
will be achieved. Although subsequent events may cause our view to change, except as required by applicable law, we do not undertake and expressly disclaim
any obligation to publicly update or revise these forward-looking statements, whether as the result of new information, future events, or otherwise. The
forward-looking statements in this Annual Report represent our views as of February 12, 2025.
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ITEM 1. BUSINESS
Our Business
We develop, market, license, host, and support enterprise software that helps organizations optimize decisions and processes in real-time so they can deliver
outcomes that transform their business. Our powerful platform for enterprise artificial intelligence (“AI”) decisioning and workflow automation enables the
world’s leading brands and government agencies to hyper-personalize customer experiences, automate customer service, and streamline operations, mission-
critical business processes, and workflows. With Pega, our clients can leverage our AI technology and scalable architecture to accelerate their digital
transformation. In addition, our sales and client success teams, world-class partners, and clients are able to leverage Pega GenAI Blueprint
(“Blueprint”) to
rapidly prototype and accelerate the development and deployment of applications quickly and collaboratively.
To grow our business, we intend to:
• Increase market share by developing and delivering a platform for enterprise AI decisioning and workflow automation 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;
• Manage our expenses appropriately as we grow our organization;
• Develop new products and enhance our existing products; and
• Incorporate acquired technologies into our solutions and the unified Pega Platform™.
Our Products
Pega Infinity
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Pega Infinity™, the latest version of our software portfolio, helps build agility into our clients’ organizations so they can work smarter, unify experiences, and
adapt to meet changing requirements.
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”), and
Business Orchestration and Automation Technologies (“BOAT”);
• Low-code application development platforms (“LCAP”), including Multi-experience Development Platforms (“MXDP”);
• Robotic Process Automation (“RPA”), and Task-Centric Process Automation;
• Business Rules Management Systems (“BRMS”);
• Decision Management, including predictive and adaptive analytics and Real-time Interaction Management (“RTIM”); and
• the Vertical-Specific Software (“VSS”) market of industry solutions and packaged applications.
1:1 Customer Engagement
Our omnichannel customer engagement applications are designed to maximize the lifetime value of customers and help reduce the costs of serving customers
while ensuring a consistent, unified, and personalized customer experience. At the center of our customer engagement applications is the Pega Customer
Decision Hub™, our real-time, AI-powered decision engine, which can predict a customer’s behavior and recommend the “next best action” to take across
channels in real-time. It is designed to enable enterprises to improve customer acquisition and experience across inbound, outbound, and paid media channels.
It incorporates 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 Service
The Pega Customer Service™ application simplifies customer service. It is designed to anticipate customer needs, connect customers to the right people and
systems, automate or intelligently guide customer interactions, rapidly and continuously evolve the customer service experience, and allow enterprises to
deliver consistent interactions across channels and improve employee productivity. The application consists of a contact center desktop, case management for
customer 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 Sales
Automation™ automates and manages the entire sales process, from prospecting to product fulfillment. It allows enterprises to capture best practices and
leverage AI to guide sales teams through the sales and customer onboarding processes.
Workflow Automation
Pega Platform™, our software for AI-powered workflow automation, boosts the efficiency of our clients’ processes and operational workflows. This
technology allows organizations to take an end-to-end approach to transformation by using intelligence and design thinking to streamline processes and create
better customer and employee experiences. With Blueprint, clients can leverage the power of AI to design best practice processes for any industry domain in
minutes. Pega’s 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 workflow automation capabilities, the Pega Platform allows clients to break
down silos, improve customer-centricity, add agility to legacy technology, and provide end-to-end automation to support the needs of customers and
employees.
Our Capabilities
We 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 in
higher customer lifetime value.
• Customer Service: we enable clients to streamline customer service and deliver better service experiences for their customers and employees, resulting in
higher customer satisfaction and loyalty with reduced costs.
• Workflow Automation: we enable clients to automate mission-critical workflows, resulting in improved operational efficiency, faster time to value, and
lower cost.
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We deliver our solution through our Center-out Business® Architecture™, enabling clients to transcend channels and internal data silos to achieve quick wins
and long-term transformation. This approach insulates business logic from back-end and front-end complexity, delivering consistent customer experiences and
agility to the business.
The key aspects of this architecture are:
Centrally-managed AI-powered decisioning
Pega’s centrally-managed AI-powered decisioning ensures AI and business rules operate across all channels. Applications built on Pega’s low-code Platform
leverage predictive and adaptive analytics to deliver personalized customer experiences and maximize business objectives. For example, Pega Customer
Decision Hub, a centralized, always-on “customer brain,” unleashes the power of predictive analytics, machine learning, and real-time decisioning across our
clients’ data, systems, and touchpoints — orchestrating engagement across customer interaction channels and optimizing processes for better efficiency.
End-to-end workflow automation aligned with business outcomes
We combine human-assisted robotic desktop automation and unattended robotic process automation with our unified workflow automation and case
management capabilities. This combination provides our platform and applications the differentiated ability to automate customer-facing and back-office
operational processes from “end to end,” connecting across organizational and system silos to connect customers and employees to outcomes seamlessly and
efficiently.
Consistent omnichannel experiences
With centrally defined business and process logic, Pega provides dynamic, open APIs to align front-end channels and business logic for consistent customer
experiences. By leveraging innovative user interface (UI) technology, Pega-powered processes and decisions can be easily embedded into existing front ends or
used as the basis for new employee-facing applications.
Insulation of back-end complexity
Pega’s architecture insulates case and decision logic from the complexity of back-end systems. Our data virtualization automatically pulls in needed data in a
common structure, regardless of source. This capability allows clients the agility to build new experiences on existing systems, modernizing legacy systems
without breaking existing processes.
A layered approach to managing variation
Pega’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 initial
deployments 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 changing
architecture needs.
Rapid, AI-enabled transformation
Pega's approach to digital transformation projects brings business, IT, and AI together to accelerate collaboration, development, and time-to-value. We and our
customers are able to begin projects in Blueprint, which leverages generative AI to analyze business requirements and legacy documentation to generate a
starting point template aligned with clients' strategic business outcomes. From there, Blueprint streamlines business and IT collaboration, providing guidance to
teams through the end-to-end requirements gathering process – either through virtual collaboration or in a workshop setting.
Through use of Blueprint, our clients are able to generate a starting point application that gives developers a head start on deep configuration and integration.
Through our low-code configuration and AI-powered assistance, developers in Pega are aided in quickly building out and adapting application functionality.
We refer to this process as our Pega Express™ design and implementation. Pega Express assists in the acceleration of application build out in alignment with
client success criteria, emphasizing reusable components that ensure both immediate and long-term value creation, and uses an agile approach.
Pega Cloud
Pega Cloud allows clients to develop, test, and deploy, on an accelerated basis, our applications and the Pega Platform using a secure, flexible internet-based
infrastructure, minimizing cost while focusing on core revenue-generating competencies.
Some clients will choose to manage the Pega deployment themselves using the cloud architecture they prefer. This multi-cloud approach, which includes 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, and budget requirements of each application they deploy.
Our Services and Support
We offer services and support through our Global Client Success, Global Service Assurance and Client Support, and Pega Academy groups. We also use third-
party contractors to assist us in providing these services.
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• Global Client Success – Global Client Success guides our clients to maximize their investment in our technology and realize the business outcomes they
are targeting. Within Global Client Success, our Client Innovation team helps clients transform and prototype their customer journeys through our Pega
Catalyst™ offering, our Success team ensures our clients receive the maximum business value from their Pega investments, and our Pega Consulting team
provides planning, design, implementation, and assurance services.
• Global Service Assurance and Client Support – Global Service Assurance addresses risks to client success because of technical concerns. By providing
technical staff dedicated to client success, we reduce the time to resolve technical issues, eliminate lengthy deliberations of technical resource logistics, and
increase clients’ confidence in our technology and client service. Global Client Support provides technical support for our products and services. Support
services include cloud service reliability management, online support community management, self-service knowledge, proactive problem prevention
through information and knowledge sharing, problem tracking, prioritization, escalation, diagnosis, and resolution.
• Pega Academy – Pega Academy offers enablement content for all Pega product implementations to ensure the success of our Clients and Partners. We have
increased our ability to train partners and clients to implement our technology and made it easier for individuals to stay current as it evolves. We offer
many mediums, including instructor-led and online training to our employees, clients, and partners so individuals can learn in the way that best suits them.
We have also partnered with universities to provide our courseware as part of the student curriculum to expand our ecosystem of enablement content. In
addition, we have robust and comprehensive documentation on our documentation portal, so people have the information at their fingertips in the moment
of need. Lastly, engagement is an important part of our strategy to create a broad ecosystem passionate about Pega technology to further increase our
advocates across our clients and other key stakeholders.
Our Partners
We collaborate with global systems integrators and technology consulting firms that provide consulting services to our clients, as well as Independent Software
Vendors (“ISVs”), cloud hyperscalers, 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 these firms are important to our sales efforts because they influence buying decisions, identify sales opportunities, and complement our
software with their domain expertise, solutions, and service capabilities. These partners may deliver strategic business planning, consulting, project
management, training, and implementation services to our clients.
Our partners are recognized through our Pega partner program, helping those organizations differentiate themselves in the market place. They do so by
achieving distinctions in industries or across specific solutions areas and geographies. Pega’s largest partners include Aaseya, Accenture, Areteans, Capgemini,
Coforge, Cognizant Technology Solutions, Evonsys Inc, Ernst & Young, HCL Tech, Infosys, LTIMindtree, Tata Consultancy Services, and Virtusa.
Our Markets
Target Clients
Our target clients are Global 2000 organizations and government agencies that require solutions to distinguish themselves in the markets they serve. Our
solutions achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, and
reducing risk. Along with our partners, we deliver solutions tailored by industry.
Our clients represent many industries, including:
• Financial services – Pega’s software for AI-powered decisioning and workflow automation is used by financial services organizations for Customer
Engagement, Onboarding and KYC, Lending, Customer Service, Payment Exceptions, Bank Operations, and Managing Financial Crime. Our platform
enables clients to increase loyalty and wallet share, reduce time and effort to close loans and open accounts, address compliance more effectively while
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.
• Government – Pega’s software for AI-powered decisioning and workflow automation is used by government agencies for Enterprise Modernization,
Licensing, Investigative Case Management, Grants and Financial Management, Acquisition and Supply Chain Modernization, and Citizen Service. Our
platform enables clients to modernize legacy systems and processes to meet the growing demands for improved constituent service, lower costs, reduced
fraud, and greater transparency.
• Communications and media – Pega’s software for AI-powered decisioning and workflow automation is used by communications and media organizations
for Customer Engagement, Order Management, Customer Service, Service Assurance, Network Operations, and Shared Services. Our platform enables
clients to increase loyalty and wallet share, simplify experiences while accelerating revenues and processes, resolve service requests across channels more
quickly with less effort, drive a faster, simpler repair experience, and boost the efficiency of 5G, fiber, and cloud processes.
• Healthcare – Pega’s software for AI-powered decisioning and workflow automation is used by healthcare organizations for Consumer Engagement,
Onboarding and Enrollment, Customer Service, Care Management Services, and Claims/Core Admin. Our platform enables clients to improve member
and patient outcomes, loyalty, and retention, simplify experiences with reduced time and effort, resolve service requests faster and easier across channels,
advance efficient flexible healthcare coordination, and deliver streamlined, modern experiences for members, providers, and employees.
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• Insurance – Pega’s software for AI-powered decisioning and workflow automation is used by insurance companies for Customer Engagement, Sales,
Distribution, Underwriting, Policyholder Service, and Claims. Our platform enables clients to nurture and grow their book of business, increase agent sales
effectiveness, power better partner performance and loyalty, automate application intake and processing with intelligence, personalize seamless policy
lifecycle experiences, and improve claims handling efficiencies with more modern customer and employee experiences.
• Manufacturing and high tech – Pega’s software for AI-powered decisioning and workflow automation is used by manufacturers to streamline their
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 enterprise operations in
domains like supply chain, order management, quality management, shared services, customer service, and aftermarket services, including warranty
management and captive finance, while minimizing the constraints on digital transformation caused by legacy systems.
• Consumer services – Pega’s software for AI-powered decisioning and workflow automation is used by consumer services organizations for Customer
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 with simplified
experiences, automate the resolution of customer requests across channels with increased digital self-servicing, and streamline operations to rapidly reduce
cost, time, and risks while increasing customer satisfaction.
Competition
The markets for our offerings are intensely competitive, rapidly changing, and highly fragmented as current competitors expand their product offerings and
new companies enter the market.
We compete in the CRM, including marketing, sales, and customer service, and DPA, including BPM, case management, decision management, robotic
automation, low-code application development, and mobile application development platform software markets, as well as in markets for the vertical
applications we provide (e.g., Pega Know Your Customer
for Financial Services, Pega Smart Dispute™).
We also compete with clients’ internal information systems departments that seek to modify their existing systems or develop their own proprietary systems
and 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, including International
Business Machines Corporation (“IBM”), Microsoft Corporation, Oracle Corporation, Salesforce.com, SAP SE, and ServiceNow.
We have been most successful in competing for clients whose businesses are characterized by a high degree of change, complexity, and/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 user
interface, to build and evolve enterprise applications in a fraction of the time it would take with disjointed architectures and tools offered by many of our
competitors. 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 favorably
on some of the above factors against our larger competitors, many of which have greater sales, marketing, and financial resources, a more extensive
geographical presence, and greater name recognition. In addition, we may be at a competitive disadvantage against our larger competitors with respect to our
ability to provide expertise outside our target industries.
For additional information, see risk factor "The market for our offerings is intensely and increasingly competitive, rapidly changing, and fragmented" in Item
1A of this Annual Report.
Intellectual Property
We rely primarily on a combination of copyright, patent, trademark, and trade secrets laws, as well as confidentiality procedures and contractual provisions to
protect our intellectual property rights and our brand. We have obtained patents relating to our system architecture and products in strategic global markets. We
enter into confidentiality, intellectual property ownership, and license agreements with our employees, partners, clients, and other third parties. To protect our
proprietary rights, we also control access to and ownership of software, services, documentation, and other information. We also purchase or license third-party
technology, including open-source software and large language models, that we incorporate into our products and services.
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Sales and Marketing
We encourage our direct sales force and outside partners to co-market, pursue joint sales initiatives, and drive broader adoption of our technology, helping us
grow our business more efficiently and focus our resources on continued innovation and enhancement of our solutions. In addition, strategic partnerships with
management consulting firms and major systems integrators are important to our sales efforts because they influence buying decisions, help us identify sales
opportunities, and complement our software and services with their domain expertise and consulting capabilities. We also partner with technology providers
and application developers.
To support our sales efforts, we conduct a broad range of marketing programs, including awareness advertising, client and industry-targeted solution
campaigns, trade shows, including our PegaWorld user conference, solution seminars and webinars, industry analyst and press relations, web and digital
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 are premised on
the strength of our products, and the success of our clients, both as our products exist currently and as our products will continue to develop in the future
through our research and development efforts.
Research and Development
Our research and development organization is responsible for product architecture, core technology development, product testing, and quality assurance. Our
product development priority is to continue expanding our technology’s capabilities and ensure we deliver superior cloud-native solutions. We intend to
maintain and extend the support of our existing applications, and we may choose to invest in additional strategic applications that incorporate the latest
business innovations. We also intend to maintain and extend the support for popular public and private cloud platforms, and integration options to facilitate
easy and rapid deployment in diverse IT infrastructures. Our goal with all products is to enhance product capabilities, implementation ease, long-term
flexibility, and improve client service.
Backlog
As of December 31, 2024, we expected to recognize $1.6 billion in revenue from backlog on existing contracts in future periods. For additional information,
see "Note 15. Revenue" in Item 8 of this Annual Report.
People and Culture
As of January 31, 2025, we had 5,443 employees: 1,995 in the Americas, 1,223 in Europe, 1,904 in India, and 321 across Asia-Pacific.
Our people are the foundation of our success. We foster an environment where employees feel valued, supported, and empowered to do their best work.
Collaboration and fresh thinking drive how we work together, ensuring that our people can contribute meaningfully while growing in their careers.
We believe that when all perspectives are considered, we make better decisions and create stronger outcomes. By actively listening to our employees, and
refining our people strategies, we build a workplace of connection, engagement, and performance.
Learning and Development
Engaging with different perspectives strengthens learning, sharpens thinking, and enhances problem-solving across teams. We are committed to providing our
people with meaningful opportunities to learn, develop skills and grow their careers. Our people are encouraged to take ownership of their professional growth,
leveraging mentorship, on-demand learning, and structured development programs.
Total Rewards
We offer a competitive and comprehensive total rewards package that drives performance, supports well-being, and emphasizes career growth. Our
compensation philosophy is designed to recognize performance and align with Pega’s success, with a mix of base pay, short term cash incentives, and long-
term incentives.
Beyond compensation, we provide a market competitive benefits suite that promotes health and well-being. We regularly assess and evolve our offerings to
ensure they meet the needs of our workforce, recognizing that employees' priorities change over time.
Talent Cultivation
Talent Cultivation is the cornerstone of our people strategy. Our dynamic approach combines continuous feedback with development, enabling employees to
thrive in an ever-evolving digital landscape. We foster a culture of growth where every employee can navigate their career journey through our comprehensive
learning and development, mentoring, and job shadowing offerings.
Our approach to development prioritizes professional growth and personal well-being. Pega Academy helps accelerate skill development across our global
community of employees, clients, and partners, focusing on emerging technologies and capabilities. Our leadership development programs are designed to
cultivate leaders who drive high performance while fostering inclusive team environments. Our commitment to continuous learning is backed by education
reimbursement programs and external partnerships, ensuring our workforce stays ahead of industry trends and technological advancements.
Corporate Information
Pegasystems Inc. was incorporated in Massachusetts in 1983. Our stock is traded on the NASDAQ Global Select Market under the symbol “PEGA.” Our
website is at www.pega.com, and our investor relations website is at www.pega.com/about/investors.
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Available Information
We 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, free
of charge, through our website as soon as reasonably practicable after we electronically file such material with or furnish such material to the SEC. We also
make 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 Code
of 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 the
SEC at www.sec.gov.
ITEM 1A. RISK FACTORS
The 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 also
materially adversely affect our results of operations, cash flows, and financial condition.
Risks Related to Our Business and Industry
If we fail to operate our subscription-based business model successfully, our results of operations and/or cash flows could be negatively impacted.
Our clients largely prefer subscription-based offerings, requiring us to have a scalable organization and make a considerable investment of technical, financial,
legal, managerial, and sales resources.
Continued growth 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.
Other than in instances where clients manage Pega deployment themselves, our cloud-based subscription model also requires that we rely on third parties to
host our software for our clients and incur significant recurring third-party hosting expenses. These expenses may cause the gross margin we realize from our
Pega Cloud sales to be lower than the gross margin we realize from our perpetual and term license products or in instances where clients manage Pega
deployment themselves, in which cases we do not incur similar recurring third-party hosting expenses. If we are unable to meet these challenges effectively,
our operating results and financial condition could be materially adversely affected.
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 combined
Annual Contract Value (“ACV”) growth rate and free cash flow margin of at least 40%. Key elements of our strategy include increasing our market share by
developing and delivering robust solutions that can work together seamlessly with maximum differentiation and minimal customization, offering versatility in
the Pega Platform and application deployment and licensing options to meet the specific needs of our clients, growing our network of partner alliances, and
developing the talent and organizational structure capable of supporting our revenue and earnings growth targets. We may not achieve one or more of our key
initiatives. Our success depends on our ability to manage our expenses as we appropriately grow our organization, successfully execute our marketing and sales
strategies, successfully incorporate acquired technologies into our unified Pega Platform, and develop new products or product enhancements. If we are not
able to execute these actions, our business may not grow as we anticipate, and our operating results and financial condition could be materially adversely
affected.
If we are not successful in executing our investments in AI, including generative AI, our business, financial condition, and results of operations may be
harmed.
We are investing significantly in AI, including through our development and deployment of our Pega Customer Decision Hub
, Pega Customer Service
,
PegaPlatfom
, and Pega GenAI Blueprint
. This investment is occurring as the legal and regulatory landscape applicable to AI is uncertain and evolving
rapidly, and at the same time as our competitors are also investing in AI. There are significant risks in deploying AI, and there can be no assurance that using AI
in our solutions will enhance or be beneficial to our business, including our profitability. The rapid evolution of AI will require the application of resources to
develop, test, and maintain our products and services to help ensure that we implement AI in a manner that minimizes any unintended, harmful impact and that
maximizes our ability to provide products and services to our customers. Other companies may develop AI enabled products that are similar to ours or adopt
and implement AI more successfully or at a quicker pace than we do. If we fail to develop products in a manner that satisfies customer preferences in a timely
and cost-effective manner, we may fail to retain our existing customers or increase demand for our solutions. In addition, complying with multiple regulations
from different jurisdictions related to AI could increase our cost of doing business, may influence the way that we operate in certain jurisdictions, or may
impede our ability to offer certain products and services in certain jurisdictions if we are unable to comply with applicable regulations.
We depend on key personnel, including our Chief Executive Officer, and must attract and retain qualified personnel in the future.
TM
TM
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Our business is dependent on key, highly skilled technical, managerial, consulting, sales, and marketing personnel, including our Chief Executive Officer, who
is 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 currently
intend to obtain, significant key-person life insurance on officers or other employees. Our success will depend on attracting and retaining qualified personnel
and rapidly replacing and developing new management, as needed. 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 such
personnel. If we are unable to do so, our business, operating results, and financial condition could be materially adversely affected. We have from time to time
in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and difficulty in retaining highly skilled employees with
appropriate qualifications.
In addition, we believe our corporate culture has been a key contributor to our success. If we fail to maintain and enhance our corporate culture within an
environment of hybrid work, our ability to retain and recruit personnel essential to our success may be negatively affected.
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, subscription licenses, and Pega
Cloud arrangements, can cause our revenues and cash flows to fluctuate materially between periods. Revenue from subscription service arrangements, which
includes Pega Cloud and maintenance, is typically recognized over the contract term, while revenue from license sales is recognized when the license rights
become effective, typically upfront. Subscription licenses and services are typically billed and collected over the contract term, while perpetual licenses are
generally 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 or
amount of revenue fails to meet our expectations, our financial performance is likely to be materially adversely affected because only a small portion of our
expenses 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. If
our 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, or
due to other factors discussed elsewhere in this section, the price of our common stock may decline.
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 partners
and we can provide sufficient high-quality consulting, training, and maintenance resources to enable our clients to realize significant business value from
our software.
Our clients typically request consulting and training to assist them in implementing our license and Pega Cloud offerings. Our clients also usually purchase
maintenance 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 increase
demand for consulting, training, and maintenance related to our offerings. Given that the number and value of our license and Pega Cloud arrangements has
been growing, we will need to provide our clients with more consulting, training, and maintenance to enable them to realize significant business value from our
software. We have been increasing our partner and client enablement through training to create an expanded ecosystem of people that are skilled in the
implementation 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 and
Pega Cloud offerings or if there is negative publicity regarding these engagements (even if unrelated to our services or offerings), our reputation could be
harmed, and our future financial performance could be negatively impacted. Finally, the investments required to meet the increased demand for our consulting
services 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.
The majority of our revenue is derived from our subscription offerings. Our clients have no obligation to renew their subscriptions, although historically, most
have elected to do so. If our retention rate for those clients decreases, our business, operating results, and financial condition could be materially affected.
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Investments we are making to continue to grow license and Pega Cloud arrangements may result in decreased profitability 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 balance our 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 and
development to expand and improve the Pega Platform and applications. These investments have resulted in increased fixed costs that do not vary with the
level of revenue. If the increased demand for our offerings does not continue, we could experience decreased profitability or losses and reduced or negative
cash flow because of these increased fixed costs. Conversely, if we are unable to achieve an appropriate balance of sales and marketing personnel to meet
future demand or research and development personnel to enhance our current products or develop new products, we may not be able to achieve our sales and
profitability 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 hosting
facilities for our Pega Cloud offering. We rely on software and hardware vendors, large system integrators, and technology consulting firms to supply
marketing and sales opportunities for our direct sales force and to strengthen our offerings using industry-standard tools and utilities. We also have
relationships with third parties that distribute our products. There can be no assurance that these companies, many of which have far greater financial and
marketing 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 with
us. 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 data
security, which despite our due diligence, may be or become inadequate, as further discussed below under the risk factor “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 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 44% of our revenue over the last three years. We have established offices
in the Americas, Europe, Asia, and Australia. We anticipate hiring personnel to accommodate increased international demand, and we may also enter into
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, the growth,
if any, of our international operations may be restricted, and our business, operating results, and financial condition could be materially adversely affected.
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 and
protection;
• 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;
• 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 threat
of “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 our
business, operating results, and financial condition.
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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 consulting
personnel and consulting for partner and client-led implementation efforts. Our strategy is to support and encourage partner-led and client-led implementations
to increase the breadth, capability, and depth of market capacity to deliver implementation services to our clients. Accordingly, if our consulting personnel’s
involvement 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 not
successful 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 successful
in demonstrating this value for several reasons, including the performance of our products, the quality of the services and support provided by our partners and
us, or external factors. Also, some of our smaller clients may have limited additional sales opportunities available. We may not obtain follow-on sales, or the
follow-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 in
which we operate. The introduction of third-party solutions embodying new technologies, including generative AI and the emergence of new industry standards
could make our existing and future software solutions obsolete and unmarketable. As a result, our success will depend upon our ability to enhance current
products, address any product defects or errors, acquire or develop and introduce new products that meet client needs, keep pace with technology and
regulatory changes, respond to competitive products, and achieve market acceptance. Product development requires substantial investments for research,
refinement, and testing. We may not have sufficient resources to make the necessary product development investments. We may experience technical or other
difficulties that will delay or prevent the successful development, introduction, or implementation of new or enhanced products. We may also experience
technical or other challenges integrating acquired technologies into our existing platform and applications. Inability to introduce or implement new or enhanced
products in a timely manner could result 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 to further development or modification of acquired technologies, and materially adversely affect our financial performance. We
may also fail to anticipate adequately and prepare for the development of new markets and applications for our technology and the commercialization of
emerging technologies such as generative AI and thereby fail to take advantage of new market opportunities or fall behind early movers in those markets.
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, and
service-oriented architecture middleware vendors;
• case management vendors;
• decision management, data science, and AI vendors, as well as vendors of solutions that leverage decision making and data science in managing 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 International Business Machines Corporation (“IBM”), Microsoft Corporation, Oracle Corporation, Salesforce.com, SAP SE,
and ServiceNow, 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 and
financial resources to develop, promote, and distribute products and to provide related consulting and training services.
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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;
• effective and efficient integration of AI into products;
• 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 to
compete successfully against current or future competitors or that the competitive pressures we face will not materially adversely affect our business, operating
results, and financial condition.
For additional information, see "Item 1. Business" of this Annual Report.
Our Chief Executive Officer is our largest stockholder and can exert significant influence over matters submitted to our stockholders, which could
materially adversely affect our other stockholders.
As of December 31, 2024, our Chief Executive Officer beneficially owned approximately 46 percent of our outstanding common stock. As a result, he has the
ability 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. Under Massachusetts law and our governing documents, approval of a merger, share exchange or sale of all or substantially
all of our assets requires approval of two-thirds of all shares entitled to vote. As a result, this concentration of ownership may delay or prevent a change in
control, impede a merger, consolidation, takeover, or other business combination involving us, discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us, or result in actions that may be opposed by other stockholders.
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 be
adversely 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 “Notes
to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report. On September 15, 2022, the circuit court of Fairfax County entered
judgment for Appian in the amount of $2,060,479,287 with post-judgment interest. The Company filed a notice of appeal from the judgment the same day with
the Court of Appeals of Virginia. On September 29, 2022, the circuit court approved the $25,000,000 letter of credit obtained by the Company to secure the
judgment and suspended the judgment during the pendency of the Company’s appeal. A panel of the Court of Appeals of Virginia heard oral arguments on
November 15, 2023, and issued a written opinion on July 30, 2024. The Court of Appeals reversed the judgment on Appian’s Virginia Uniform Trade Secrets
Act claim and ordered a new trial on that claim. Appian filed a petition for appeal with the Supreme Court of Virginia on August 29, 2024, and we filed a
response to the petition on October 21, 2024. Under the Court’s rules, Appian is entitled to a 10-minute oral argument in support of its petition. The Supreme
Court of Virginia scheduled that argument for February 11, 2025. Although it is not possible to predict timing, the entirety of the appeals process could
potentially take years to complete. We continue to believe we did not misappropriate any alleged trade secrets and that sales of our products at issue were not
caused by, or the result of, any alleged misappropriation of trade secrets. We are 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.
We believe we have strong grounds to prevail in the appeal and a potential retrial. But if we are ultimately unsuccessful in prevailing in the matter in its entirety
or in substantially reducing any judgment, we may be required to incur additional debt or otherwise engage in capital markets transactions, which may include
a public offering or private placement of our equity securities or a sale or license of assets. While we believe we have the financial strength to pay the judgment
and accrued interest thereon if it ever became necessary, it is possible that we may not be able to engage in financing activities on desirable terms, which could
have a material adverse effect on our business, financial condition, and operating results. Further discussion of these risks is contained below under the heading
“Risks Related to Our Financial Obligations and Indebtedness.”
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Risks Related to Information Technology Resilience and Security
We 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 that
is robust and reliable within competitive and regulatory constraints that continue to evolve. Inefficiencies or operational failures, including temporary or
permanent loss of client data, power outages, or telecommunications infrastructure outages, by our third-party service providers or us, could diminish the
quality of our user experience resulting in contractual liability, claims by clients and others, damage to our reputation, loss of current and potential clients, and
negatively 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 financial
liabilities.
High-profile security breaches at other companies have increased in recent years. Security industry experts and government officials have warned about the
risks of hackers and cyber-attackers targeting information technology products and businesses. Threats to IT security can take a variety of forms. Individual
hackers, groups of hackers, and sophisticated organizations, including state-sponsored organizations, or nation-states themselves, may take steps that threaten
our clients, suppliers, third-party technology providers, 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 in
the 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 or
their customers, or to our intellectual property, disabling or degrading service, or sabotaging systems or information. Any such security breach could result in a
loss of confidence in the security of our services, damage our reputation, disrupt our business, require us to incur significant costs of investigation, remediation
and/or payment of a ransom, lead to legal liability, negatively impact our future sales, and result in a substantial financial loss. Additionally, our Pega Cloud
offering 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, those of our suppliers, third-party technology providers, and our clients may be breached because of third-party actions or those of
employees, consultants, clients, or others, including intentional misconduct by computer hackers, system errors, human errors, technical flaws in our products,
or otherwise. Because we do not control the configuration of Pega 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 or provide 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 our products or services in configurations that may increase the cost of serving such markets. The
techniques used to obtain unauthorized access or sabotage systems change frequently and are generally only recognized once launched against a target. While
we have invested in protecting our data and systems and clients' data to reduce these risks and actively monitor for risks of data breaches, regulatory non-
compliance incidents and cyber security incidents, there can be no assurance that our efforts will prevent breaches. Moreover, like most software companies,
we incorporate open-source code into our software products and services, which also creates a potential risk. We deal with security issues regularly and have
experienced security incidents from time to time. We have a standing Compliance and Risk Governing Committee composed of senior representatives across
the Company that reports to and assists the Audit Committee and the Board as a whole in the oversight of compliance and risk management programs,
including cybersecurity measures. In addition, we have a standing Security Steering Group, whose members include our Chief Information Security Officer,
Chief Product Officer, and Vice President of Cloud Technology, and which is charged with providing strategic direction for the implementation and ongoing
operation of our cyber security program. Even with the efforts the Company has undertaken, there is a risk that a security breach will be successful, and such an
event will be material. We carry data breach insurance coverage to mitigate the financial impact of a security breach, though this may prove insufficient in the
event of a breach.
Our Pega Cloud offering involves hosting client applications on the servers of third-party technology providers. We also rely on third-party systems and
technology, including encryption, virtualized infrastructure, and support, and employ a shared security model with our clients and third-party technology
providers.
To defend against security threats, we need to continuously engineer products and services with enhanced security and reliability features, improve the
deployment of software updates to address security vulnerabilities, apply technologies that mitigate the risk of attacks, and maintain a digital security
infrastructure that protects the integrity of our network, products, and services. The cost of these steps could negatively impact our operating results. While we
actively work to improve vulnerability scanning, patching, threat intelligence, security event detection, security event alerting and forensics, it is possible that
security breaches, whether due to unpatched vulnerabilities or otherwise, occur and may be undetected when they occur. Any such security breach could result
in a loss of confidence in the security of our services, damage our reputation, disrupt our business, require us to incur significant costs of investigation,
remediation and/or payment of a ransom, lead to legal liability, negatively impact our future sales, and result in a substantial financial loss.
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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 our
business.
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, despite
our 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 access
our cloud services or our website to download our software within an acceptable amount of time. We use third-party service providers for key infrastructure
components, particularly when developing and delivering our cloud-based products. These service providers give us greater flexibility in efficiently delivering
a more tailored, scalable customer experience and expose us to additional risks and vulnerabilities. Third-party service providers operate platforms we access
and which are vulnerable to service interruptions. We may experience interruptions, delays, and outages in service and availability due to problems with our
third-party service providers’ infrastructure. This infrastructure’s lack of availability could be due to many potential causes, including technical failures, power
shortages, natural disasters, fraud, terrorism, or security attacks that we cannot predict or prevent. Such outages could trigger our service level agreements and
the 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 we
need to add new cloud services providers to increase capacity and uptime, we could experience interruptions, downtime, delays, and additional expenses
related to transferring to and providing support for these new platforms. Any of the above circumstances or events may harm our reputation and brand, reduce
our platforms’ availability or usage, and impair our ability to attract new users, which could adversely affect our business, financial condition, and results of
operations.
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 are
released. 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 new
versions of our software. Additionally, detecting and correcting any security flaws, including those introduced by our use of open-source, can be time-
consuming and costly. Errors or security flaws in our software could result in the inadvertent disclosure of confidential information or personal data relating to
our clients, employees, or third parties. Software errors and security flaws in our products or services could expose us to privacy, product liability, or warranty
claims and harm our reputation, which could impact our future sales of products and services. Typically, we enter into license agreements that contain
provisions intended to limit the nature and extent of our risk of product 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 that these 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, and there 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, a product liability suit or action claiming a breach of warranty, whether meritorious, could result in
substantial costs and a diversion of management’s attention and our resources.
We may require additional capital in the future.
As of December 31, 2024, we had $467.9 million in aggregate principal indebtedness under our convertible senior notes due March 1, 2025 (the “Notes”). We
may repay the Notes at their March 1, 2025 maturity date using available cash balances. Concurrent with maturity of the Notes, the then outstanding Capped
Call Transactions we entered into with certain financial institutions in connection with the Notes’ issuance will expire by their terms. While the Notes are
currently convertible, the conversion rate is 7.4045 shares of common stock per each $1,000 principal amount of Notes, or an effective conversion price of
$135.05. Accordingly, we do not currently expect holders of Notes to elect to convert prior to the March 1, 2025 maturity date, but there can be no assurance
that holders of Notes do not elect to convert all or a portion of their Notes. If we repay the Notes at maturity with current cash balances, it will reduce our
current cash balances. We believe our current cash, marketable securities, cash flow provided by operations, borrowing capacity, and ability to engage in capital
market transactions will be sufficient to fund our operations, stock repurchases, and quarterly cash dividends for at least the next 12 months and to meet our
known long-term cash requirements. However, it is possible that 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, our existing stockholders could suffer significant dilution, and any new equity securities we
issue could have rights, preferences, and privileges superior to those of holders of our common stock. Any future debt financing could involve restrictive
covenants relating to our capital raising activities and other financial and operations matters, which may increase the risks related to our business and our
ability to service and repay our indebtedness.
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We are required to comply with certain financial and operating covenants under our revolving credit facility. Failure to comply with these covenants could
cause 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 as
we 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 not
cured or waived, would result in any amounts outstanding, including any accrued interest and/or unpaid fees, becoming immediately due and payable. We
might not have sufficient working capital or liquidity to satisfy any repayment obligations in the event of an acceleration of those obligations. In addition, if we
are 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 borrow
funds. The financial and operating covenants under the credit facility may limit our ability to borrow funds or capital, including for strategic acquisitions, share
repurchases, and other general corporate purposes.
Risks Related to Intellectual Property and Government Regulation
We 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 to
protect our proprietary rights. We also try to control access to and distribution of our technologies and other proprietary information. We have obtained patents
in 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 to
protect our proprietary rights, unauthorized parties may attempt to copy aspects of our software or to obtain the use of information that we regard as
proprietary. Although we generally enter into intellectual property and confidentiality agreements with our employees and strategic partners, despite our efforts
our former employees may seek employment with our business partners, clients, vendors, or competitors, and there can be no assurance that the confidential
nature of our proprietary information will be maintained. In addition, the laws of some foreign countries do not protect our proprietary rights as effectively as
they do in the 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 develop similar technology.
Other companies or individuals have obtained proprietary rights covering a variety of designs, processes, and systems. Third parties have claimed and may in
the future claim that we have infringed or otherwise violated their intellectual property. We are currently party to litigation with Appian Corp. — see Part I,
Item 3 “Legal Proceedings”, "Note 20. Commitments And Contingencies" in the “Notes to Consolidated Financial Statements” 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 court judgment in our litigation with Appian Corp.,
our operating 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 and
assert ownership of work product and intellectual property rights as appropriate, there are often exceptions, and limitations may not be applicable and
enforceable 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 material
given the size of certain of our transactions. We expect that software product developers, including us, will increasingly be subject to infringement and other
intellectual property violation claims as the number of products and competitors in our industry segment grows and the functionality of products in different
industry segments overlaps. As evidenced by our previously mentioned litigation with Appian Corp., depending on when and how asserted, these claims, with
or without merit, are often time-consuming, result in costly litigation, and subject us to significant liability for damages. It is also possible that these claims
result in treble damages if we are found to have willfully infringed patents or copyrights, cause product shipment and delivery delays, require us to enter into
royalty or licensing agreements, or preclude us from making and selling the infringing software, if such proprietary rights are found to be valid. Royalty or
licensing 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 pay
significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which
could require substantial time, effort, and cost. If we cannot license or develop technology for any infringing aspect of our business, we would be forced to
limit or stop sales of our software and may be unable to compete effectively, which could have a material effect upon our business, operating results, and
financial condition.
Intellectual property rights claims by third parties are extremely costly to defend, could require us to pay significant damages, and could limit our ability to
use 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. In
addition, many of these companies can dedicate greater resources to enforce their intellectual property rights and to defend claims that may be brought against
them. The litigation may involve patent holding companies or other adverse patent owners that have no relevant product revenues and against which our
patents may, therefore, provide little or no deterrence. Third parties have claimed and may claim in the future that we have misappropriated, misused, or
infringed other parties' intellectual property rights, and customers have sought and may seek future indemnification for intellectual property claims to which
they are subject. To the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual property claims.
17
Any litigation regarding intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel from
our business operations. Significant judgments are required for the determination of probability and the range of the outcomes in any legal dispute, and the
estimates are based only on the information available to us at the time. Due to the inherent uncertainties involved in claims, legal proceedings, and in
estimating the losses that may arise, actual outcomes may differ from our estimates. Contingencies deemed not probable or for which losses were not estimable
in one period may become probable, or losses may become estimable in later periods which may have a material impact on our results of operations and
financial position. Intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on
unfavorable terms, prevent us from manufacturing or licensing certain of our products, cause severe disruptions to our operations or the markets in which we
compete or require us to satisfy indemnification commitments to our customers. Any of these could seriously harm our business. We are currently party to
litigation with Appian Corp. — see Part I, Item 3 “Legal Proceedings”, "Note 20. Commitments And Contingencies" in the “Notes to Consolidated Financial
Statements” 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 court
judgment in our litigation with Appian Corp., our operating results and financial condition would be adversely impacted.” While we continue to believe that we
have 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 desirable
terms, 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 and
growth 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 or
otherwise 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 do
business in connection with governmental agencies. These laws and regulations may impose added costs on our business, and failure to comply with these laws
and regulations or other applicable requirements, including non-compliance in the past, could lead to claims for damages from our channel partners or
government clients, penalties, termination of contracts, loss of intellectual property rights, and temporary suspension or permanent debarment from government
contracting. Any such damages, penalties, disruptions, or limitations in our ability to do business with the public sector could have a material adverse effect on
our business, results of operations, financial condition, and cash flows.
We are subject to increasingly complex U.S. and foreign laws and regulations, requiring costly compliance measures. Any failure to comply with these laws
and regulations could subject us to, among other things, penalties and legal expenses that could harm our reputation or otherwise have a material adverse
effect 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, information security, resiliency, and AI laws, and similar laws and regulations. The U.S. Foreign Corrupt Practices Act, the U.K.
Bribery Act, and similar foreign anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to obtain or retain
business. Similar laws and regulations exist in many other countries where we do or intend to do business.
18
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 EU and UK
General Data Protection Regulations extend the scope of their protection to any entity that does business in those jurisdictions and controls or processes
personal data of EU or UK residents in connection with the offer of goods or services or the monitoring of behavior in those jurisdictions and imposes many
compliance obligations concerning the handling of personal data. The California Consumer Privacy Act (as amended by the California Privacy Rights Acts, the
“CCPA”) and other similar laws in a number of US states require, among other things, covered companies to provide disclosure to consumers about such
companies’ data collection, use and sharing practices, provide such consumers ways to make requests about their personal information, including requests to
delete their personal information, to know what information a company has about the consumer, and to opt-out of certain sales, transfers, or sharing of personal
information. Some US state data privacy laws, including the CCPA, also provide consumers with additional causes of action. In 2023, Europe finalized the
first-ever comprehensive legal framework for governance of the development and use of AI, the European Union Artificial Intelligence Act, with rolling
effective dates beginning in 2025, and is moving forward with finalizing applicable regulations. Many jurisdictions in the US are considering or have passed
laws governing the development or use of AI. Similarly, Europe has enacted laws governing cyber resilience, and we expect more laws will be considered and
passed on this issue. Compliance with these varying regimes has caused and will cause us to incur additional costs, and may challenge our business and the
expansion of that business, 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 our
current partners and prospective clients and partners. We cannot guarantee, however, that we, our employees, our consultants, our partners, our vendors, or our
contractors are or will be compliant with all federal, state, and foreign regulations. If our representatives or we fail 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 material adverse effect on our business, financial
condition, and results of operations. Even if we are determined not to have violated these laws, government inquiries into 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, including personal data of our employees, our clients,
and customers of our clients. Compliance with such regulations may increase our costs, and there is a risk of enforcement 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 many
transactions and calculations where the ultimate tax determination is uncertain. Like many other multinational corporations, we are subject to tax in multiple
U.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, and
the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or
periods for which such determination is made. While we have established reserves based on assumptions and estimates that we believe are reasonable to cover
such 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 our
deferred tax assets and liabilities, because of changes in tax laws, regulations, or accounting principles, as well as by certain discrete items.
Considering fiscal challenges in many jurisdictions, various levels of government are increasingly focused on tax reform and other legislative actions to
increase tax revenue, including corporate income taxes. Several U.S. states have attempted to increase corporate tax revenues by taking an expansive view of
corporate presence to attempt to impose corporate income taxes and other direct business taxes on companies that have no physical presence in their state, and
taxing authorities in foreign jurisdictions may take similar actions. Many U.S. states are also altering their apportionment formulas to increase the amount of
taxable income or loss attributable to their state from certain out-of-state businesses. Similarly, in Europe and elsewhere globally, various tax reform efforts
underway are designed to increase the taxes paid by corporate entities.
On December 15, 2022, the European Union (EU) Member States formally adopted the EU’s Pillar Two Directive, which generally provides for a minimum
effective tax rate of 15%, as established by the Organization for Economic Co-operation and Development (OECD) Pillar Two Framework that was supported
by over 130 countries worldwide. The EU effective dates were January 1, 2024, and January 1, 2025, for different aspects of the directive. The impact of the
Pillar Two Framework on the Company’s income tax provision in 2024 was not material. The Company is continuing to evaluate the potential impact of the
Pillar Two Framework on future periods, pending legislative adoption by additional individual countries.
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, 2024, $185.6 million of our cash and cash equivalents were held in our foreign subsidiaries. If it becomes necessary or desirable to
repatriate foreign funds, we may have to pay federal, state, and local income taxes as well as foreign withholding taxes upon repatriation. We consider the
earnings of our foreign subsidiaries to be permanently reinvested. As a result, domestic and foreign taxes on such earnings have not been provided in our
financial statements. 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.
19
General Risk Factors
The provision in our amended and restated bylaws, requiring exclusive forum in certain courts in The Commonwealth of Massachusetts or the federal
district 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 the
Superior 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 a
fiduciary 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 the
Massachusetts Business Corporation Act (the “MBCA”), our articles of organization, or our bylaws (as each may be amended from time to time), or (iv) any
action 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 it
finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits against us or our directors, officers, and
other employees. Alternatively, if a court were to find the choice of forum provision in our amended and restated bylaws to be inapplicable or unenforceable in
an action, we may incur additional costs associated with resolving such action in other jurisdictions. The exclusive forum provision in our amended and
restated 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 promulgated
thereunder.
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 financial
markets. Various factors contribute to the uncertain economic environment, including the level and volatility of interest rates, high inflation, the conflict
between Russia and Ukraine and between Israel and Gaza, an actual recession or fears of a recession, trade policies and tariffs, and geopolitical tensions.
Economic uncertainty has and could continue to negatively affect the business and purchasing decisions of companies in industries in which 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 our software 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 technology purchases and
may result in longer sales cycles, increased price competition, and reductions in sales of our products and services. At the same time, factors such as inflation
may increase our costs of operation. The combination of these factors could negatively impact our business, 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. Our
international sales are usually denominated in foreign currencies. The operating expenses of our foreign operations are also primarily denominated in foreign
currencies, which partially offset our foreign currency exposure on our international sales. Our results of operations and cash flows are subject to fluctuations
due 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 do not currently use foreign currency forward contracts to hedge our exposure to changes in foreign currency exchange rates. We may 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 currency
exchange rates associated with these exposures and changes in those rates, whether we have entered forward contracts to offset these exposures, and other
factors. All these factors could materially impact our operating results, financial condition, and cash flows.
20
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 of
our common stock. In the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action
litigation. 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 stock
price 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, our
management must make certain assumptions and judgments about our future performance. Furthermore, analysts and investors may develop and publish their
own projections of our business, which may form a consensus about our future performance. Our business results may vary significantly from such guidance or
that consensus due to a number of factors, many of which are outside of our control and which could materially adversely affect our operations and operating
results. Furthermore, if we make downward revisions of our previously announced guidance, or if our publicly announced guidance of future operating results
fails 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 and
trading 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. We
do 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 downgrade
our 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 publish
reports 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 COMMENTS
None.
ITEM 1C. CYBERSECURITY
We recognize the critical importance of maintaining the safety and security of our systems and data and have a comprehensive approach to overseeing and
managing cybersecurity and related risks. Our Board of Directors (the “Board”), the Audit Committee of the Board (the “Audit Committee”), and our
management are actively involved in the oversight of our risk management program, of which cybersecurity represents an important component. We have
established policies, standards, processes, and practices for assessing, identifying, and managing material risks from cybersecurity threats. A key component of
this is our standing Security Steering Group (“SSG”), whose members include, among others, our Chief Information Security Officer (“CISO”), Chief Product
Officer, and Vice President of Cloud Technology. We have devoted significant financial and personnel resources to implement and maintain security measures
to meet regulatory requirements and customer expectations, and we intend to continue to make significant investments to maintain the security of our data and
cybersecurity infrastructure. There can be no guarantee that our policies, standards, processes, and practices will be properly followed in every instance or that
they will be effective.
21
Although we are not aware of having experienced any prior material data breaches, regulatory non-compliance incidents, or cyber security incidents, we may in
the future be impacted by such an event, exposing our clients and us to the risk of someone obtaining access to our information, to the information of our
clients or their customers, or to our intellectual property, disabling or degrading service, or sabotaging systems or information. Any such security incident could
result in a loss of confidence in the security of our services, damage our reputation, disrupt our business, require us to incur significant costs of investigation,
remediation, and/or payment of a ransom, lead to legal liability, negatively impact our future sales, and result in a substantial financial loss. For additional
information, see "Item 1A. Risk Factors" of this Annual Report.
Risk Management and Strategy
Our policies, standards, processes, and practices for assessing, identifying, and managing material risks from cybersecurity threats are integrated into our
overall risk management program and are based on frameworks established by the National Institute of Standards and Technology, the International
Organization for Standardization, and certain other applicable industry standards.
Our cybersecurity program focuses on the following key areas:
Collaboration
We have implemented a governance structure and processes to aggregate reported cybersecurity risks on behalf of Pega Cloud, Pega’s software products, and
the corporate environment. Our SSG is responsible for providing strategic direction for implementing and maintaining our cyber risk management program.
Risk Assessment
Our cyber risk management program is designed to follow the ISO 31000 and the NIST Special Publication 800-37 frameworks and is within the scope of our
ISO 27001 certifications.
At least annually, we conduct cybersecurity risk assessments that consider information from internal stakeholders, known information security vulnerabilities,
and information from external sources, such as reported security incidents that have impacted other companies, industry trends, and evaluations by third parties
and consultants. The results of the assessments are provided to our SSG and are used to drive alignment on, and prioritization of, initiatives to enhance our
security controls, make recommendations to improve processes, and inform our broader enterprise-level risk assessment. Key findings of these assessments are
periodically presented to the Board and the Audit Committee.
Technical Safeguards
We regularly assess and deploy technical safeguards designed to protect our information systems from cybersecurity threats. Such safeguards are regularly
evaluated and improved based on vulnerability assessments, cybersecurity threat intelligence, and incident response experience.
Incident Response and Recovery Planning
We have implemented Cyber Incident Response Programs, which are within the scope of our ISO 27001 certifications. We have also implemented Business
Continuity Programs, which are within the scope of our ISO 22301 certification. We have established comprehensive incident response and recovery plans and
test and evaluate the effectiveness of those plans regularly.
Third-Party Risk Management
We have implemented a Vendor Cybersecurity Risk Management Program (“VCRMP”), which is within the scope of our ISO 27001 certifications. The
VCRMP controls are designed to identify and mitigate cybersecurity threats associated with our use of third-party service providers. These providers are
subject to security risk assessments at the time of onboarding, contract renewal, and upon detection of an increase in risk profile. We use a variety of inputs in
making these risk assessments, including information supplied by providers and third parties. In addition, we require our providers to meet appropriate security
requirements, controls and responsibilities, and investigate security incidents that have impacted our third-party providers, as appropriate.
Education and Awareness
We require all employees to participate in security awareness training, including frequent phishing tests. Currently, our mandatory employee training courses
include Security Awareness, Physical Security Awareness, Mobile Device Security, Business Continuity and Phishing, Work From Home, and AI Chatbot. In
addition, all of our employee software developers are required to take additional security awareness training, currently including Secure Development. We
periodically adjust the list of mandatory and optional courses.
Corporate Security Posture
We periodically conduct independent security assessments to assess our corporate environment’s security posture and inform where cyber security investments
should be made. For systems in our corporate environment where our cloud certifications have an operational dependency, we also maintain ISO/IEC 27001
certifications relating to overall IT processes and controls and ISO 22301 certification relating to business continuity.
22
Product Security Posture
To facilitate identification of security vulnerabilities in our products, we periodically conduct third party penetration tests and participate in the independent
Verified By Veracode program, as detailed on its website (https://www.veracode.com/verified/directory/pegasystemsInc) which is included as an inactive
reference and the content of which is not incorporated by reference into this Annual Report. We also generate a monthly software bill of materials that identifies
open source included in certain of our product offerings and periodically have an independent security assessment firm evaluate the security risks linked to
suppliers we use, including source code repositories, the infrastructure employed for software development, and the mechanisms used for software delivery,
such as Amazon Web Services (“AWS”), Google Cloud, and Microsoft Azure. Our Chief Product Officer reviews these findings and provides updates to our
SSG.
We regularly release new versions of our products to address identified security vulnerabilities, enabling clients to stay updated with the latest product releases.
However, even after we make these updates available, it is possible that clients do not implement these updates or use products on extended support that do not
include security updates.
Pega Cloud Security Posture
Pega Cloud undergoes several security assessments a year. Redacted versions of these reports are made available to our clients. Pega Cloud also maintains
several security certifications, which are listed at https://pega.com/trust, which is included as an inactive reference and the content of which is not incorporated
by reference into this Annual Report.
Pega Cloud for Government is rated FedRAMP Moderate and undergoes several security assessments a year as part of the FedRAMP certification process.
Our Vice President of Cloud Technology reviews these assessments and provides updates to our SSG.
Governance
Board Oversight
As part of our corporate governance process, the Board, along with the Audit Committee, oversee our risk management process, which includes cybersecurity
and related risks. Our CISO periodically meets with the Board and Audit Committee to inform and update them on our cybersecurity program.
SSG and Key Personnel
We have a standing SSG whose members include, among others, our CISO, Chief Product Officer, and Vice President of Cloud Technology. The SSG is
charged with providing strategic direction for the implementation and ongoing operation of our cyber security program. The SSG meets at least quarterly. Our
CISO chairs the SSG and decisions and recommendations are based on a consensus of the members.
Our CISO has over twenty years of professional experience, with twelve years in information security roles. He has been with Pega for five years and has a
Master of Science degree from Northwestern University.
Our Chief Product Officer has been with Pega for thirty-two years, has extensive experience in software development, and has a Bachelor of Science from the
Indiana University of Pennsylvania.
Our Vice President of Cloud Technology has been with Pega for seven years and has twenty-five years of networking and security management experience,
with seventeen years of leadership roles in cloud services and related information security issues.
ITEM 2. PROPERTIES
Our principal administrative, sales, marketing, support, and research and development operations are in Cambridge, Massachusetts, our corporate headquarters,
and Hyderabad, India. Effective January 1, 2025, our corporate headquarters was relocated to Waltham, Massachusetts. We also maintain offices elsewhere in
the Americas, Europe, and the Asia-Pacific regions. All of our properties are leased. We believe we will be able to obtain future space as needed on acceptable
and commercially reasonable terms.
For additional information, see "Note 10. Leases" in Item 8 of this Annual Report.
ITEM 3. LEGAL PROCEEDINGS
The information set forth in "Note 20. Commitments And Contingencies" in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this
Annual Report is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
23
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market information
Our common stock is quoted on the NASDAQ Global Select Market under the symbol “PEGA.”
Holders
As of January 31, 2025, we had 62 stockholders of record.
Dividends
During 2024, 2023, and 2022, we paid a quarterly cash dividend of $0.03 per share of common stock. We 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, 2024:
(in thousands, except per share amounts)
Total Number
of Shares
Purchased
Average Price
Paid per
Share
Total Number
of Shares Purchased as Part of
Publicly Announced Share
Repurchase Program
Approximate Dollar
Value of Shares That
May Yet Be Purchased at Period
End Under Publicly Announced
Share Repurchased Programs
October 1, 2024 - October 31, 2024
158
$
74.01
146
$
287,492
November 1, 2024 - November 30, 2024
237
$
88.55
215
$
268,356
December 1, 2024 - December 31, 2024
321
$
95.27
293
$
240,443
Total
716
$
88.35
(1) For additional information, see "Stock Repurchase Program" in Item 7 of this Annual Report.
(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 $100
investment on December 31, 2019 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,
2019
2020
2021
2022
2023
2024
Pegasystems Inc.
$
100.00
$
167.49
$
140.66
$
43.19
$
61.78
$
117.99
NASDAQ Composite
$
100.00
$
144.92
$
177.06
$
119.45
$
172.77
$
223.87
S&P NA Tech Software
$
100.00
$
151.90
$
175.13
$
112.05
$
178.86
$
223.41
(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 OF
OPERATIONS
NON-GAAP MEASURES
Our non-GAAP financial measures should only be read in conjunction with our consolidated financial statements prepared in accordance with GAAP. We
believe that these measures help investors understand our core operating results and prospects, which is consistent with how management measures and
forecasts our performance without the effect of often one-time charges and other items outside our normal operations. Management uses these measures to
assess the performance of the company's operations and establish operational goals and incentives. They are not a substitute for financial measures prepared
under U.S. GAAP. A reconciliation of GAAP and non-GAAP measures is located with each non-GAAP measure.
(1)
25
BUSINESS OVERVIEW
We develop, market, license, host, and support enterprise software that helps organizations optimize decisions and processes in real-time so they can deliver
outcomes that transform their business. Our powerful platform for enterprise AI decisioning and workflow automation enables the world’s leading brands and
government agencies to hyper-personalize customer experiences, automate customer service, and streamline operations, mission-critical business processes,
and workflows. With Pega, our clients can leverage our AI technology and scalable architecture to accelerate their digital transformation. In addition, our sales
and client success teams, world-class partners, and clients are able to leverage Pega GenAI Blueprint
(“Blueprint”) to rapidly prototype and accelerate the
development and deployment of 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. Our
solutions achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, and
reducing risk. Along with our partners, we deliver solutions tailored by industry.
Performance metrics
We 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”) represents the annualized value of our active contracts as of the measurement date. The contract's total value is divided by its
duration in years to calculate ACV. ACV is a performance measure that we believe provides useful information to our management and investors.
(Dollars in thousands)
December 31, 2024
December 31, 2023
Change
Constant Currency Change
Pega Cloud
$
652,443
$
552,998
$
99,445
18 %
21 %
Maintenance
291,807
324,091
(32,284)
(10)%
(8)%
Subscription services
944,250
877,089
67,161
8 %
10 %
Subscription license
427,268
377,794
49,474
13 %
14 %
$
1,371,518
$
1,254,883
$
116,635
9 %
11 %
Reconciliation of ACV and constant currency ACV
(in millions, except percentages)
December 31, 2023
December 31, 2024
1-Year Change
ACV
$
1,255
$
1,372
9 %
Impact of changes in foreign exchange rates
—
23
Constant currency ACV
$
1,255
$
1,395
11 %
Note: Constant currency ACV is calculated by applying the December 31, 2023 foreign exchange rates to all periods shown.
TM
26
(Dollars in thousands)
2024
2023
Cash provided by operating activities
$
345,926
$
217,785
59 %
Investment in property and equipment
(7,712)
(16,781)
Free cash flow
$
338,214
$
201,004
68 %
Supplemental information
Litigation settlement, net of recoveries
$
32,403
$
—
Legal fees
16,197
14,645
Restructuring
5,252
29,401
Interest on convertible senior notes
3,810
4,134
Other
—
601
Income taxes
82,317
11,664
$
139,979
$
60,445
(1) Our non-GAAP free cash flow is defined as cash provided by operating activities less 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 our facilities. We provide information on free cash flow to enable investors to assess our ability to generate cash
without incurring additional external financings. This information is not a substitute for financial measures prepared under U.S. GAAP.
(2) The supplemental information discloses items that affect our cash flows and are considered by management not to be representative of our core business operations and ongoing operational
performance.
◦Litigation settlement, net of recoveries: Cost to settle litigation, net of insurance recoveries, arising from proceedings outside the ordinary course of business. See "Note 20. Commitments And
Contingencies" in Item 8 of this Annual Report for further information.
◦Legal fees: Legal and related fees arising from proceedings outside the ordinary course of business.
◦Restructuring: Restructuring fluctuates in amount and frequency and is significantly affected by the timing and size of our restructuring activities.
◦Interest on convertible senior notes: In February 2020, we issued convertible senior notes, due March 1, 2025, in a private placement. The convertible senior notes accrue interest at an annual
rate of 0.75%, payable semi-annually in arrears on March 1 and September 1.
◦Other: Fees related to canceled in-person sales and marketing events.
◦Income taxes: Direct income taxes paid net of refunds received.
(1)
(2)
27
Reconciliation of
Backlog and Constant Currency Backlog (Non-GAAP)
(in millions, except percentages)
December 31, 2023
December 31, 2024
1-Year Growth Rate
Backlog - GAAP
$
1,463
$
1,623
11 %
Impact of changes in foreign exchange rates
—
39
Constant currency backlog
$
1,463
$
1,662
14 %
Note: Constant currency Backlog is calculated by applying the December 31, 2023 foreign exchange rates to all periods shown.
RESULTS OF OPERATIONS
Revenue
(Dollars in thousands)
2024
2023
Change
Pega Cloud
$
558,734
37 %
$
461,328
32 %
$
97,406
21 %
Maintenance
323,304
22 %
331,856
24 %
(8,552)
(3)%
Subscription services
882,038
59 %
793,184
56 %
88,854
11 %
Subscription license
398,102
27 %
407,625
28 %
(9,523)
(2)%
Subscription
1,280,140
86 %
1,200,809
84 %
79,331
7 %
Perpetual license
3,767
— %
10,101
1 %
(6,334)
(63)%
Consulting
213,273
14 %
221,706
15 %
(8,433)
(4)%
$
1,497,180
100 %
$
1,432,616
100 %
$
64,564
5 %
• The increase in Pega Cloud revenue in 2024 was primarily due to expanded adoption of Pega Cloud by our existing clients.
• The decrease in maintenance revenue in 2024 was primarily due to our clients’ shift to Pega Cloud-based offerings, which do not generally result in
maintenance revenue.
• The decrease in subscription license revenue in 2024 was primarily due to our clients’ shift to Pega Cloud-based offerings, and several large multi-year
subscription license contracts recognized in revenue in 2023.
• The decrease in perpetual license revenue in 2024 reflects our strategy of promoting subscription-based arrangements.
• The decrease in consulting revenue in 2024 was primarily due to decreases in consultant billable hours.
28
Gross profit
2024
2023
(Dollars in thousands)
Gross Profit %
Gross Profit %
Change
Pega Cloud
$
434,261
78 %
$
342,670
74 %
$
91,591
27 %
Maintenance
297,859
92 %
306,264
92 %
(8,405)
(3)%
Subscription services
732,120
83 %
648,934
82 %
83,186
13 %
Subscription license
396,214
100 %
405,019
99 %
(8,805)
(2)%
Subscription
1,128,334
88 %
1,053,953
88 %
74,381
7 %
Perpetual license
3,750
100 %
10,034
99 %
(6,284)
(63)%
Consulting
(25,569)
(12)%
(9,854)
(4)%
(15,715)
(159)%
$
1,106,515
74 %
$
1,054,133
74 %
$
52,382
5 %
The gross profit change in 2024 was primarily due to a shift in the revenue mix. Also contributing to the change was:
• The increase in Pega Cloud gross profit percent in 2024 was primarily due to increased cost efficiency, primarily for hosting services and employee
compensation and benefits, as Pega Cloud continues to grow and scale.
• The decrease in consulting gross profit percent in 2024 was primarily due to a decrease in utilization rates.
Operating expenses
2024
2023
Change
(Dollars in thousands)
% of Revenue
% of Revenue
Selling and marketing
$
534,780
36 %
$
559,177
39 %
$
(24,397)
(4)%
Research and development
$
298,074
20 %
$
295,512
21 %
$
2,562
1 %
General and administrative
$
112,848
8 %
$
96,743
7 %
$
16,105
17 %
Litigation settlement, net of recoveries
$
32,403
2 %
$
—
— %
$
32,403
*
Restructuring
$
4,528
— %
$
21,747
2 %
$
(17,219)
(79)%
* not meaningful
• The decrease in selling and marketing in 2024 was primarily due to a decrease in compensation and benefits of $27.8 million due to reduced headcount
from the optimization of our go-to-market strategy. For additional information, see "Note 12. Restructuring" in Item 8 of this Annual Report.
• The increase in general and administrative in 2024 was primarily due to an increase of $10.7 million in compensation and benefits including $4.8 million
of stock based compensation expense associated with performance stock options granted in 2023 (see "Note 16. Stock-Based Compensation") and an
increase of $4.8 million in legal fees and related expenses arising from legal proceedings outside the ordinary course of business. We expect to continue to
incur additional costs for these proceedings. For additional information, see "Note 20. Commitments And Contingencies" in Item 8 of this Annual Report.
• The restructuring in 2024 and 2023 was primarily due to our efforts to optimize our go-to-market organization and office space. For additional
information, see "Note 12. Restructuring" in Item 8 of this Annual Report.
Other income and expenses
(Dollars in thousands)
2024
2023
Change
Foreign currency transaction (loss) gain
$
(912)
$
(5,242)
$
4,330
83 %
Interest income
25,779
9,259
16,520
178 %
Interest expense
(6,835)
(6,876)
41
1 %
(Loss) on capped call transactions
(663)
(1,348)
685
51 %
Other income, net
1,385
18,693
(17,308)
(93)%
$
18,754
$
14,486
$
4,268
29 %
• The change in foreign currency transaction (loss) gain in 2024 was primarily due to the impact of fluctuations in foreign currency exchange rates
associated with foreign currency-denominated cash and receivables held by our subsidiary in the United Kingdom.
• The increase in interest income in 2024 was primarily due to higher investment balances and higher interest rate yields.
• The change in (loss) on capped call transactions in 2024 was due to fair value adjustments for our capped call transactions.
• The decrease in other income, net in 2024, was due to a reduction of $7.4 million in the gain from repurchases of our convertible senior notes and a
reduction of $10 million in the gain in the value of equity securities held in our venture investments portfolio. For additional information, see "Note 11.
Debt" and "Note 13. Fair Value Measurements" in Item 8 of this Annual Report.
29
Provision for income taxes
(Dollars in thousands)
2024
2023
Provision for income taxes
$
43,447
$
27,632
Effective income tax rate
30 %
29 %
The effective income tax rate in 2024 was primarily driven by the valuation allowance on our deferred tax assets and tax expense in the U.S. and U.K., partially
offset by available tax attributes.
On December 15, 2022, the European Union (EU) Member States formally adopted the EU’s Pillar Two Directive, which generally provides for a minimum
effective tax rate of 15%, as established by the Organization for Economic Co-operation and Development (OECD) Pillar Two Framework that was supported
by over 130 countries worldwide. The EU effective dates were January 1, 2024, and January 1, 2025, for different aspects of the directive. The impact of the
Pillar Two Framework on the Company’s income tax provision in 2024 was not material. The Company is continuing to evaluate the potential impact of the
Pillar Two Framework on future periods, pending legislative adoption by additional individual countries.
LIQUIDITY AND CAPITAL RESOURCES
(in thousands)
2024
2023
Cash provided by (used in)
Operating activities
$
345,926
$
217,785
Investing activities
(202,576)
(50,750)
Financing activities
(30,214)
(81,963)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(4,434)
2,701
Net increase in cash, cash equivalents, and restricted cash
$
108,702
$
87,773
December 31,
(in thousands)
2024
2023
Held in U.S. entities
$
474,509
$
263,453
Held in foreign entities
265,464
159,885
Total cash, cash equivalents, and marketable securities
739,973
423,338
Restricted cash included in other current assets
98
—
Restricted cash included in other long-term assets
4,328
2,925
Total cash, cash equivalents, marketable securities, and restricted cash
$
744,399
$
426,263
We believe that our current cash, marketable securities, cash flow provided by operations, borrowing capacity, and ability to engage in capital market
transactions will be sufficient to fund our operations, settlement of our convertible senior notes due on March 1, 2025, stock repurchases, and quarterly cash
dividends for at least the next 12 months and to meet our known long-term cash requirements. Whether these resources are adequate to meet our liquidity needs
beyond that period will depend on our future growth, operating results, and the investments needed to support 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 foreign funds, we may have to pay federal, state, and local income taxes as well as foreign withholding taxes
upon repatriation. However, estimating the taxes we would have to pay is impracticable due to the complexity of income tax laws and regulations. For
additional information, see risk factor "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" in Item 1A of this Annual Report.
Operating activities
The change in cash provided by operating activities in 2024 was primarily due to growth in client collections and the impact of our cost-efficiency initiatives.
For additional information, see "Note 12. Restructuring" in Item 8 of this Annual Report. We expect to continue to incur legal fees and related costs arising
from proceedings outside the ordinary course of business. For additional information, see "Note 20. Commitments And Contingencies" in Item 8 of this Annual
Report.
Investing activities
The change in cash (used in) investing activities in 2024 was primarily due to our increased investments in financial instruments and reduced investment in
property and equipment as we optimized our office space.
30
Financing activities
Debt financing
In February 2020, we issued $600 million in aggregate principal amount of convertible senior notes, which mature on March 1, 2025. In 2024, we paid $33.9
million to repurchase $34.4 million in aggregate principal amount of convertible senior notes. As of December 31, 2024, we had $468 million in aggregate
principal amount of convertible senior notes outstanding due on March 1, 2025. For additional information, see "Note 11. Debt" in Item 8 of this Annual
Report.
In November 2019, and as since amended, we entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC
Bank, National Association. As of December 31, 2024 and December 31, 2023, we had $27.3 million in outstanding letters of credit under the Credit Facility,
reducing available borrowing capacity, but no outstanding cash borrowings. For additional information, see "Note 11. Debt" in Item 8 of this Annual Report.
Stock repurchase program
Changes in the remaining stock repurchase authority:
(in thousands)
2024
December 31, 2023
$
60,000
Authorizations
250,000
Repurchases
(69,557)
December 31, 2024
$
240,443
(1) On April 23, 2024, the Company’s Board of Directors extended the expiration date of the share repurchase program from June 30, 2024 to June 30, 2025. On October 22, 2024, the Company’s
Board of Directors further extended the expiration date of the share repurchase program from June 30, 2025 to December 31, 2025 and increased the authorized repurchases by $250 million to
$310 million as of that date.
(2) All purchases under this program have been made on the open market.
Common stock repurchases
2024
2023
(in thousands)
Shares
Amount
Shares
Amount
Repurchases paid
809
$
68,057
—
—
Repurchases unpaid at period end
16
1,500
—
—
Stock repurchase program
825
69,557
—
—
Tax withholdings for net settlement of equity awards
75
5,435
44
1,916
900
$
74,992
44
$
1,916
In 2024 and 2023, instead of receiving cash from the equity holders, we withheld shares with a value of $6.3 million and $1.2 million, respectively, for the
exercise price of options. These amounts are not included in the table above.
Dividends
(in thousands)
2024
2023
Dividend payments to stockholders
$
10,199
$
9,964
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 prior
notice.
Contractual obligations
As of December 31, 2024, our contractual obligations were:
Payments due by period
(in thousands)
2025
2026
2027
2028
2029 and
thereafter
Other
Total
Convertible senior notes
$
469,618
$
—
$
—
$
—
$
—
$
—
$
469,618
Purchase obligations
134,631
150,178
165,000
28,242
1,003
—
479,054
Operating lease obligations
18,106
15,404
13,972
13,367
34,277
—
95,126
Venture investment commitments
500
500
—
—
—
—
1,000
Liability for uncertain tax positions
—
—
—
—
—
15,956
15,956
$
622,855
$
166,082
$
178,972
$
41,609
$
35,280
$
15,956
$
1,060,754
(1) Includes principal and interest.
(2) Represents the fixed amount owed for purchase obligations including software licenses, hosting services, and sales and marketing programs.
(3) Represents the maximum funding under existing venture investment agreements. Our venture investment agreements generally allow us to withhold unpaid funds at our discretion.
(4) We cannot reasonably estimate the timing of this cash outflow due to uncertainties in the timing of the effective settlement of tax positions.
(1)
(2)
(1)
(2)
(3)
(4)
31
A detailed discussion and analysis of the 2023 year-over-year changes can be found in "Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2023.
CRITICAL ACCOUNTING ESTIMATES AND SIGNIFICANT JUDGMENTS
Management’s discussion and analysis of the financial condition and results of operations is based upon our consolidated financial statements, which have
been prepared following accounting principles generally accepted in the U.S. and the rules and regulations of the U.S. Securities and Exchange
Commission for annual financial reporting. Preparing these financial statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on
historical 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, the
following accounting policies are most important to the portrayal of our financial condition and require the most subjective judgment. Accordingly, these
are 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.
Revenue recognition
Our client contracts typically contain promises by us to provide multiple products and services. Specifically, contracts associated with Pega Platform sales and
other 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 for
separately requires significant judgment. Accordingly, we review client contracts to identify all separate promises to transfer goods and services that would be
considered performance obligations. Judgment is also required in determining whether an option to acquire additional products and services within a client
contract 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 whether
they should be accounted for as part of the original contract or as a separate contract. This determination requires significant judgment, which could impact the
timing of revenue recognition. We typically account for contract modifications prospectively as a separate contract. The additional performance obligation(s) in
our 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 each
performance obligation's relative stand-alone selling price. Judgment is required in estimating stand-alone selling prices. We maximize the use of observable
inputs by maintaining pricing analyses that consider our pricing policies, historical stand-alone sales when they exist, and historical renewal prices charged to
clients. 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, which is determined based on the total transaction
price minus 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
arrangements remains appropriate.
Changes in the assumptions or judgments used in determining the performance obligations in client contracts and stand-alone selling prices could significantly
impact the timing and amount of revenue we report in a particular period.
For additional information see "Note 2. Significant Accounting Policies", "Note 4. Receivables, Contract Assets, And Deferred Revenue", and "Note 15.
Revenue" in Item 8 of this Annual Report
Goodwill impairment
Our goodwill arises 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 to
determine whether further impairment testing is necessary. If, based on the qualitative assessment, we consider it more-likely-than-not that our reporting
unit'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 that
goodwill 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 the
future, we may be required to record impairment charges to reduce our goodwill's carrying value. Changes in the valuation of goodwill could materially
impact our operating results and financial position.
32
As of December 31, 2024, we had $81.1 million of goodwill. Changes in the valuation of long-lived assets could materially impact our operating results
and financial position. To date, there have been no impairments of goodwill.
For additional information see "Note 2. Significant Accounting Policies" and "Note 7. Goodwill And Other Intangible Assets" in Item 8 of this Annual
Report.
Accounting for income taxes
Significant judgment is required to determine our provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in
applying accounting principles and complex tax laws. Accordingly, changes in tax laws or our interpretation of tax laws and the resolution of any tax audits
could 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 on
sufficient taxable income within the available carryback or carryforward periods. Changes in our valuation allowance impact income tax expense in the period
of adjustment. Our deferred tax valuation allowance requires significant judgment and uncertainties, including assumptions about future taxable income based
on historical and projected information.
We recognize deferred tax assets to the extent that we believe they are more likely than not to be realized. In making such a determination, we consider all
available objective and verifiable negative and positive evidence, including future reversals of existing taxable temporary differences, projected future taxable
income (including the impact of enacted legislation), tax-planning strategies and results of recent operations. The Company determined that the objectively and
verifiable negative evidence outweighed the positive evidence, as such maintained a valuation allowance 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 the
reporting 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 with
a 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 financial
statements.
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 the
ordinary course of our business, transactions and calculations occur whose ultimate tax outcome cannot be certain. Some of these uncertainties arise due to
transfer pricing for transactions with our subsidiaries, the determination of tax nexus, and tax credit estimates. In addition, the calculation of acquired tax
attributes and the associated limitations are complex. We estimate our exposure to unfavorable outcomes related to these uncertainties and the probability
of such outcomes.
Although we believe our estimates are reasonable, there is no guarantee that the final tax outcome will not differ from what is reflected in our historical
income tax provisions, returns, and accruals. Such differences, or changes in estimates relating to potential differences, could have a material impact on
our income tax provision and operating results in the period such a determination is made.
For additional information see "Note 2. Significant Accounting Policies" and "Note 18. Income Taxes" in Item 8 of this Annual Report.
Loss Contingencies
We are subject to various claims, including claims with customers and vendors, pending and potential legal actions for damages, investigations relating to
governmental laws and regulations, and other matters arising out of the normal conduct of our business. When a loss is considered probable and reasonably
estimable, 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 particular
contingency 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 information
available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of the contingency. Moreover, it is
common for such matters to be resolved over many years, during which time relevant developments and new information must be reevaluated at least quarterly
to 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 reasonably
possible or probable, but a reasonable estimate cannot be made, disclosure of the proceeding is provided. Legal fees are recognized as incurred when the legal
services 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 the
potential 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 RISK
Market risk is the risk of loss from adverse changes in financial market prices and rates.
Foreign currency exposure
Translation risk
Our international operations’ operating expenses are primarily denominated in foreign currencies. However, our international sales are also primarily
denominated in foreign currencies, partially offsetting our foreign currency exposure.
33
A hypothetical 10% strengthening in the U.S. dollar against other currencies would have resulted in the following:
2024
2023
2022
(Decrease) in revenue
(4)%
(4)%
(3)%
(Decrease) increase in net income
(9)%
(8)%
2 %
Remeasurement risk
We incur transaction gains and losses from the remeasurement of monetary assets and liabilities denominated in currencies other than the functional currency
of the entities in which they are recorded.
We are primarily exposed to changes in foreign currency exchange rates associated with the Australian dollar, Euro, and U.S. dollar-denominated cash, cash
equivalents, marketable securities, receivables, and intercompany balances held by our U.K. subsidiary, a British pound functional entity.
A hypothetical 10% strengthening in the British pound exchange rate in comparison to the Australian dollar, Euro, and U.S. dollar would have resulted in the
following impact:
(in thousands)
December 31, 2024
December 31, 2023
December 31, 2022
Foreign currency (loss)
$
(19,337)
$
(11,892)
$
(10,164)
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34)
36
Consolidated Balance Sheets as of December 31, 2024 and 2023
38
Consolidated Statements of Operations for the years ended December 31, 2024, 2023, and 2022
39
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2024, 2023, and 2022
40
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2024, 2023, and 2022
41
Consolidated Statements of Cash Flows for the years ended December 31, 2024, 2023, and 2022
42
Notes to Consolidated Financial Statements
44
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Pegasystems Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Pegasystems Inc. and subsidiaries (the "Company") as of December 31, 2024 and 2023, the related consolidated statements of
operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2024, 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, 2024, based on criteria established in Internal Control — Integrated
Framework (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, 2024 and 2023, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America. Also, in
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control —
Integrated Framework (2013) issued by COSO.
Basis for Opinions
The 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 internal
control 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 these
financial 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 Accounting
Oversight 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 regulations
of 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 financial
statements 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 procedures
to 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 the
accounting 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 financial
reporting 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 operating
effectiveness 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 audits
provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A 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 statements
for 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 the
maintenance 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 are
recorded 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 made
only 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, or
disposition 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 to
the 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 Matter
The 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 audit
committee 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. The
communication 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, providing
a 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 statements
Critical Audit Matter Description
The 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 or
negotiated separately. Additionally, the Company enters into amendments to previously executed contracts which constitute contract modifications. Certain complex arrangements require that
management 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 orders
Given the accounting complexity and the management judgment necessary to properly identify, classify, and account for performance obligations, auditing such estimates involved a high degree of
auditor judgment when performing audit procedures and evaluating the license and cloud revenue arrangements.
36
How the Critical Audit Matter Was Addressed in the Audit
Our 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 of
contract 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 the
individual 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 period
and 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 in
the 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 and
services.
◦
Evaluated management’s determination of whether certain renewal clauses, additional product offers, or additional usage offers represent material rights included in the contract
and 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 will
require 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 LLP
Boston, Massachusetts
February 12, 2025
We have served as the Company's auditor since 2000.
37
PEGASYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
December 31, 2024
December 31, 2023
Assets
Current assets:
Cash and cash equivalents
$
337,103
$
229,902
Marketable securities
402,870
193,436
Total cash, cash equivalents, and marketable securities
739,973
423,338
Accounts receivable, net
305,468
300,173
Unbilled receivables, net
173,085
237,379
Other current assets
115,178
68,137
Total current assets
1,333,704
1,029,027
Long-term unbilled receivables, net
61,407
85,402
Goodwill
81,113
81,611
Other long-term assets
292,049
314,696
Total assets
$
1,768,273
$
1,510,736
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
$
6,226
$
11,290
Accrued expenses
31,544
39,941
Accrued compensation and related expenses
138,042
126,640
Deferred revenue
423,910
377,845
Convertible senior notes, net
467,470
—
Other current liabilities
18,866
21,343
Total current liabilities
1,086,058
577,059
Long-term convertible senior notes, net
—
499,368
Long-term operating lease liabilities
67,647
66,901
Other long-term liabilities
29,088
13,570
Total liabilities
1,182,793
1,156,898
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; 86,112 and 83,840 shares issued and outstanding as of December 31, 2024
and 2023, respectively
861
838
Additional paid-in capital
526,963
379,584
Retained earnings (accumulated deficit)
87,901
(8,705)
Accumulated other comprehensive (loss)
Net unrealized gain on available-for-sale securities, net of tax
230
669
Foreign currency translation adjustments
(30,475)
(18,548)
Total stockholders’ equity
585,480
353,838
Total liabilities and stockholders’ equity
$
1,768,273
$
1,510,736
See notes to consolidated financial statements.
38
PEGASYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31,
2024
2023
2022
Revenue
Subscription services
$
882,038
$
793,184
$
701,835
Subscription license
398,102
407,625
366,063
Consulting
213,273
221,706
230,654
Perpetual license
3,767
10,101
19,293
Total revenue
1,497,180
1,432,616
1,317,845
Cost of revenue
Subscription services
149,918
144,250
138,736
Subscription license
1,888
2,606
2,642
Consulting
238,842
231,560
227,082
Perpetual license
17
67
175
Total cost of revenue
390,665
378,483
368,635
Gross profit
1,106,515
1,054,133
949,210
Operating expenses
Selling and marketing
534,780
559,177
624,789
Research and development
298,074
295,512
294,349
General and administrative
112,848
96,743
117,734
Litigation settlement, net of recoveries
32,403
—
—
Restructuring
4,528
21,747
21,743
Total operating expenses
982,633
973,179
1,058,615
Income (loss) from operations
123,882
80,954
(109,405)
Foreign currency transaction (loss) gain
(912)
(5,242)
4,560
Interest income
25,779
9,259
1,643
Interest expense
(6,835)
(6,876)
(7,792)
(Loss) on capped call transactions
(663)
(1,348)
(57,382)
Other income, net
1,385
18,693
6,579
Income (loss) before provision for income taxes
142,636
95,440
(161,797)
Provision for income taxes
43,447
27,632
183,785
Net income (loss)
$
99,189
$
67,808
$
(345,582)
Earnings (loss) per share
Basic
$
1.16
$
0.82
$
(4.22)
Diluted
$
1.11
$
0.73
$
(4.22)
Weighted-average number of common shares outstanding
Basic
85,265
83,162
81,947
Diluted
89,634
84,914
81,947
See notes to consolidated financial statements.
39
PEGASYSTEMS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Year Ended December 31,
2024
2023
2022
Net income (loss)
$
99,189
$
67,808
$
(345,582)
Other comprehensive (loss) income, net of tax
Unrealized (loss) gain on available-for-sale securities
(439)
152
(169)
Foreign currency translation adjustments
(11,927)
5,039
(15,913)
Total other comprehensive (loss) income, net of tax
(12,366)
5,191
(16,082)
Comprehensive income (loss)
$
86,823
$
72,999
$
(361,664)
See notes to consolidated financial statements.
40
PEGASYSTEMS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
Common Stock
Additional
paid-in
capital
Retained
earnings
(accumulated
deficit)
Accumulated other
comprehensive (loss)
Total
stockholders’
equity
Number
of shares
Amount
January 1, 2022
81,712
$
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 plans
754
7
(20,627)
—
—
(20,620)
Issuance of common stock under the employee stock purchase plan
250
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, 2022
82,436
$
824
$
229,602
$
(76,513)
$
(23,070)
$
130,843
Issuance of common stock for stock compensation plans
1,212
12
8,893
—
—
8,905
Issuance of common stock under the employee stock purchase plan
192
2
7,742
—
—
7,744
Stock-based compensation
—
—
143,352
—
—
143,352
Cash dividends declared ($0.12 per share)
—
—
(10,005)
—
—
(10,005)
Other comprehensive income
—
—
—
—
5,191
5,191
Net income
—
—
—
67,808
—
67,808
December 31, 2023
83,840
$
838
$
379,584
$
(8,705)
$
(17,879)
$
353,838
Repurchase of common stock
(825)
(8)
(69,549)
—
—
(69,557)
Issuance of common stock for stock compensation plans
2,985
30
75,186
—
—
75,216
Issuance of common stock under the employee stock purchase plan
112
1
6,708
—
—
6,709
Stock-based compensation
—
—
142,718
—
—
142,718
Cash dividends declared ($0.12 per share)
—
—
(7,684)
(2,583)
—
(10,267)
Other comprehensive (loss)
—
—
—
—
(12,366)
(12,366)
Net income
—
—
—
99,189
—
99,189
December 31, 2024
86,112
$
861
$
526,963
$
87,901
$
(30,245)
$
585,480
See notes to consolidated financial statements.
41
PEGASYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2024
2023
2022
Operating activities
Net income (loss)
$
99,189
$
67,808
$
(345,582)
Adjustments to reconcile net income (loss) to cash provided by operating activities
Stock-based compensation
142,718
143,352
122,210
Amortization of deferred commissions
62,269
59,461
53,471
Amortization of intangible assets and depreciation
17,585
18,746
18,780
Amortization of right-of-use lease assets
17,842
15,912
15,940
Foreign currency transaction loss (gain)
912
5,242
(4,560)
Loss on capped call transactions
663
1,348
57,382
Deferred income taxes
(1,544)
363
168,890
(Accretion) amortization of investments
(15,263)
(3,302)
1,972
(Gain) on investments
(869)
(10,841)
(6,578)
(Gain) on repurchases of convertible senior notes
(459)
(7,855)
—
Other non-cash
3,728
5,557
4,763
Change in operating assets and liabilities:
Accounts receivable, unbilled receivables, and contract assets
79,034
(57,602)
(51,157)
Other current assets
(50,005)
11,360
(9,133)
Other current liabilities
(7,115)
(8,777)
529
Deferred revenue
48,360
45,123
62,578
Deferred commissions
(57,628)
(44,529)
(53,857)
Other long-term assets and liabilities
6,509
(23,581)
(13,312)
Cash provided by operating activities
345,926
217,785
22,336
Investing activities
Purchases of investments
(559,365)
(287,287)
(41,015)
Proceeds from maturities and called investments
364,501
242,593
66,583
Sales of investments
—
10,725
23,808
Payments for acquisitions, net of cash acquired
—
—
(922)
Investment in property and equipment
(7,712)
(16,781)
(35,379)
Cash (used in) provided by investing activities
(202,576)
(50,750)
13,075
Financing activities
Repurchases of convertible senior notes
(33,890)
(88,989)
—
Dividend payments to stockholders
(10,199)
(9,964)
(9,834)
Proceeds from employee stock purchase plan
6,709
7,744
9,172
Proceeds from stock option exercises
80,651
10,821
—
Common stock repurchases for tax withholdings for net settlement of equity awards
(5,435)
(1,916)
(20,620)
Common stock repurchases under stock repurchase program
(68,057)
—
(25,707)
Other
7
341
—
Cash (used in) financing activities
(30,214)
(81,963)
(46,989)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(4,434)
2,701
(3,333)
Net increase (decrease) in cash, cash equivalents and restricted cash
108,702
87,773
(14,911)
Cash, cash equivalents, and restricted cash, beginning of period
232,827
145,054
159,965
Cash, cash equivalents, and restricted cash, end of period
$
341,529
$
232,827
$
145,054
Cash and cash equivalents
$
337,103
$
229,902
$
145,054
Restricted cash included in other current assets
98
—
—
Restricted cash included in other long-term assets
4,328
2,925
—
Total cash, cash equivalents and restricted cash
$
341,529
$
232,827
$
145,054
42
Supplemental disclosures
Interest paid on convertible notes
$
3,810
$
4,134
$
4,500
Income taxes paid
$
82,317
$
11,664
$
7,645
Non-cash investing and financing activity:
Investment in property and equipment included in accounts payable and accrued liabilities
$
1,723
$
66
$
9,914
Dividends payable
$
2,583
$
2,515
$
2,474
See notes to consolidated financial statements.
43
PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Business
The Company develops, markets, licenses, hosts, and supports enterprise software that helps organizations optimize decisions and processes in real-time.
The Company’s platform for enterprise artificial intelligence (“AI”) decisioning and workflow automation enables clients to personalize customer
experiences, automate customer service, and streamline operations, business processes, and workflows. The Company provides consulting, training,
support, and hosting services to facilitate the use of its software.
Management estimates and reporting
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.”) requires
management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those
estimates. 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, and goodwill.
Principles of consolidation
The 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.
Reclassifications
Certain prior period amounts reported in our consolidated financial statements and notes thereto have been reclassified to conform to the current year
presentation. Such reclassifications did not affect total revenues, income (loss) from operations, or net income (loss).
2. SIGNIFICANT ACCOUNTING POLICIES
Revenue
The 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 software
applications. 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 licenses
represent 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. Perpetual
licenses 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 obligations
The Company’s software license and Pega Cloud arrangements often contain multiple performance obligations. If a contract contains multiple performance
obligations, the Company accounts for each distinct performance obligation separately. The transaction price is allocated to the separate performance
obligations on a relative stand-alone selling price basis. Any discounts or expected potential future price concessions are considered when determining the total
transaction price. The Company’s policy is to exclude sales and similar taxes collected from clients from the determination of transaction price.
44
The Company’s typical performance obligations are:
Performance
obligation
How stand-alone selling price is typically
determined
When performance obligation is typically satisfied
When payment is typically due
Income statement line
item
Pega Cloud
Residual approach
Ratably over the term of the service (over time)
Annually, or more frequently, over
the term of the service
Subscription services
Term license
Residual approach
Upon transfer of control to the client, defined as when
the client can use and benefit from the license (point in
time)
Annually, or more frequently, over
the term of the license
Subscription license
Maintenance
Consistent pricing relationship as a percentage of the
related license and observable in stand-alone renewal
transactions
Ratably over the term of the maintenance (over time)
Annually, or more frequently, over
the term of the maintenance
Subscription services
Perpetual license
Residual approach
Upon transfer of control to the client, defined as when
the client can use and benefit from the license (point in
time)
Effective date of the license
Perpetual license
Consulting
- time and
materials
Observable hourly rate for time and materials-based
services in similar geographies
Based on hours incurred to date (over time)
Monthly
Consulting
Consulting
- fixed price
Observable hourly rate for time and materials-based
services in similar geographies multiplied by
estimated hours for the project
Based on hours incurred as a percentage of total
estimated hours (over time)
As contract milestones are achieved
Consulting
(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 the
stand-alone selling price is not discernible from past transactions or other observable evidence. Periodically, the Company reevaluates whether the residual
approach remains appropriate. As required, the Company evaluates its residual approach estimate compared to all available observable data before concluding
the 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 the
client that the client would not receive without entering into that contract. Discounts on options to purchase additional products and services greater than
discounts 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 transfer
control of the performance obligation related to the software license at the inception of the contract term. A significant portion of the total contract
consideration is typically allocated to the license performance obligation. Therefore, the Company’s contracts often result in the recording of unbilled
receivables and contract assets throughout most of the contract term. The Company records an unbilled receivable or contract asset when revenue recognized
on a contract exceeds the billings. The Company recognizes an impairment on receivables and contract assets if, after contract inception, it becomes probable
that payment is not collectible. The Company reviews receivables and contract assets on an individual basis for impairment.
Variable consideration
The Company’s arrangements can include variable fees, such as the option to purchase additional usage of a previously delivered software license. The
Company may also provide pricing concessions to clients, a business practice that gives rise to variable fees. For variable fees arising from the client’s
acquisition of additional usage of a previously delivered software license, the Company applies the sales and usage-based royalties guidance related to a license
of intellectual property and recognizes the revenue in the period the underlying sale or usage occurs. The Company includes variable fees in the determination
of 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 value
amount, whichever is more appropriate for specific circumstances, to estimate variable consideration, and the estimates are based on the level of historical price
concessions 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 components
The Company generally does not intend to provide financing to its clients, as financing arrangements are not contemplated as part of the negotiated terms of
contracts between the Company and its clients. Although there may be an intervening period between the delivery of the license and the payment, typically in
term 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 or
fees that are non-proportional to the associated usage of software licenses. In these instances, the Company evaluates whether a significant financing
component exists. This evaluation includes determining the difference between the consideration the client would have paid when the performance obligation
was satisfied and the amount of consideration paid. Contracts that include a significant financing component are adjusted for the time value of money at the
rate inherent in the contract, the client’s borrowing rate, or the Company’s incremental borrowing rate, depending upon the recipient of the financing.
During 2024, 2023, and 2022, significant financing components were not material.
(1)
45
Contract modifications
The 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
either:
• on a prospective basis as a termination of the existing contract and the creation of a new contract; or
• on a cumulative catch-up basis.
Deferred commissions
The Company recognizes an asset for the incremental costs of obtaining a client contract, primarily related to sales commissions. The Company expects to
benefit from those costs for more than one year. Commissions earned upon the execution of initial contracts are allocated to each performance obligation
within the contract and amortized according to the transfer of underlying goods and services within those contracts and expected renewals. The expected
benefit period is determined based on the length of the client contracts, client attrition rates, the underlying technology lifecycle, and the competitive
marketplace’s influence on the products and services sold. Deferred costs allocated to maintenance and deferred costs for Pega Cloud arrangements are
amortized over an average expected benefit period of 4.5 years. Deferred costs allocated to software licenses, and any expected renewals of term software
licenses within the 4.5 years expected benefit period, are amortized at the point in time control of the software license is transferred. Deferred costs
allocated to consulting are amortized over a period consistent with the pattern of transfer of control for the related services. Commissions earned on
contract amendments and renewals are allocated to each performance obligation within the contract and amortized over the contractual term.
Financial instruments
The principal financial instruments held by the Company consist of cash equivalents, marketable securities, receivables, capped call transactions, and
accounts payable. The Company considers debt securities readily convertible to known amounts of cash with maturities of three months or less from the
purchase date to be cash equivalents. Interest is recorded when earned. The Company’s investments are classified as available-for-sale and are carried at
fair value. Unrealized gains and losses considered temporary are recorded as a component of accumulated other comprehensive (loss), net of related
income taxes. The Company reviews all investments for reductions in fair value that are other-than-temporary. When such reductions occur, the investment
cost is adjusted to fair value by recording a loss on investments in the consolidated statements of operations. Gains and losses on investments are
calculated based on the specific investment.
For additional information see "Note 4. Receivables, Contract Assets, And Deferred Revenue", "Note 11. Debt", and "Note 13. Fair Value Measurements".
Property and equipment
Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful life of
each asset, which are three years for computer equipment and five years for furniture and fixtures. Leasehold improvements are amortized over the lesser
of the lease’s term or the useful life of the asset. Repairs and maintenance costs are expensed as incurred.
Leases
All 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 the
right to control the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines the initial
classification and measurement of its operating right of use assets and lease liabilities at the lease commencement date and thereafter if modified. Fixed lease
costs are recognized on a straight-line basis over the lease term. Variable lease costs include payments required under leases for common area maintenance, real
estate taxes, utilities, service charges, and other variable costs that are not reflected in the measurement of right of use assets and lease liabilities and are
recognized in the period in which the obligation for those payments is incurred. The Company combines lease and non-lease components when determining
lease costs for its office space leases. The lease liability includes lease payments related to options to extend or renew the lease term if the Company is
reasonably certain it will exercise those options. The Company’s leases do not contain material residual value guarantees or restrictive covenants.
Loss contingencies and legal costs
The Company accrues loss contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
46
Significant judgments are required to determine the probability and the range of the outcomes, and the estimates are based only on the information available to
the Company at the time. Due to the inherent uncertainties involved in claims, legal proceedings, and in estimating the losses that may arise, actual outcomes
may differ from the Company’s estimates. Contingencies deemed not probable, or for which losses were not estimable in one period, may become probable or
losses may become estimable in later periods, which may have a material impact on the Company’s results of operations and financial position. As additional
information becomes 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. Legal costs are expensed as incurred.
Internal-use software
The Company capitalizes and amortizes certain direct costs associated with computer software developed or purchased for internal use incurred during the
application development stage. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. The Company
amortizes capitalized internal-use software on a straight-line basis over its estimated useful life, which is generally over three to five years, commencing
on the date the software is placed into service.
Goodwill
Goodwill 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 qualitative assessments as of November 30, 2024, 2023,
and 2022, respectively, 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 its carrying value.
Intangible and long-lived assets
The Company’s intangible assets are amortized using the straight-line method over their estimated useful life. The Company evaluates its long-lived
tangible and intangible assets for impairment whenever events or changes in circumstances indicate that such assets’ carrying amount may not be
recoverable. Impairment is assessed by comparing the undiscounted cash flows expected to be generated by the long-lived tangible or intangible assets to
their carrying value. If impairment exists, the Company calculates the impairment by comparing the carrying value to its fair value as determined by
discounted expected cash flows.
Cash equivalents
Cash equivalents include money market funds and other investments with original maturities of three months or less.
Restricted cash
The Company records restricted cash amounts as a current asset on the consolidated balance sheets if the restriction expires in less than 12 months, or as a non-
current asset if the restriction is greater than 12 months. If there is no minimum time frame during which the cash must remain restricted, the nature of the
transactions related to the restriction determine the classification. Restricted cash primarily relates to amounts deposited to secure customer guarantees and
various letters of credit.
Business combinations
The Company uses its estimates and assumptions to assign a fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition
date. The Company’s estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the
acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the
corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business
combination as of the acquisition date. The Company reevaluates these estimates and assumptions quarterly as new information arises and records any
adjustments to the Company’s preliminary estimates to goodwill provided that the Company is within the measurement period. Upon the conclusion of the
measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are
recorded to the Company’s consolidated statements of operations.
Research and development and software development costs
Research and development costs are expensed as incurred. Capitalization of computer software developed for resale begins upon the establishment of
technological feasibility, generally demonstrated by a working model or an operative version of the computer software product. Such costs have not been
material to date, as technological feasibility is established within a short time frame from the software’s general availability. As a result, no costs were
capitalized in 2024, 2023, or 2022.
47
Stock-based compensation
The Company recognizes stock-based compensation expense associated with equity awards based on the award’s fair value at the grant date. Stock-based
compensation expense is adjusted each period for anticipated forfeitures. For service-based awards, stock-based compensation is recognized over the requisite
service period, which is generally the vesting period. For performance-based awards, stock-based compensation expense is recognized over the longer of (a)
the implicit service period for performance-metric achievement or (b) the requisite service period. During each reporting period, stock-based compensation
expense is recorded based on expected achievement of performance targets. Changes in estimates of the expected achievement of performance targets that
result in a change in the number of shares that are expected to vest are recognized on a cumulative catch-up basis during the reporting period in which the
estimate changed. See "Note 16. Stock-Based Compensation" for a discussion of the Company’s key assumptions when determining the fair value of its equity
awards at the grant date.
Foreign currency translation and remeasurement
The translation of assets and liabilities for the Company’s subsidiaries with functional currencies other than the U.S. dollar are made at period-end
exchange rates. Revenue and expense accounts are translated at the average exchange rates during the period transactions occur. The resulting translation
adjustments are reflected in accumulated other comprehensive (loss). Realized and unrealized exchange gains or losses from transactions and
remeasurement adjustments are reflected in foreign currency transaction gain (loss) in the accompanying consolidated statements of operations.
Accounting for income taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined
based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. The Company regularly assesses the need for a valuation allowance against its deferred tax assets. Future
realization 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, tax planning strategies,
and projected future taxable income. The Company records a valuation allowance to reduce its deferred tax assets 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 of adjustment. 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 information
available 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 largest
amount of tax benefit with a 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 financial statements. The Company classifies liabilities for uncertain tax positions as non-current liabilities unless the uncertainty is
expected 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. In
the ordinary course of the Company’s business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of
these uncertainties arise because of transfer pricing for transactions with the Company’s subsidiaries and nexus and tax credit estimates. In addition, the
calculation of acquired tax attributes and the associated limitations are complex.
For additional information, see "Note 18. Income Taxes".
Advertising expense
Advertising costs are expensed as incurred. Advertising expenses were $4.7 million, $3.5 million, and $6.6 million during 2024, 2023, and 2022,
respectively.
Newly adopted accounting pronouncements
Segment reporting
In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures (“ASU 2023-07”). The amendments in ASU 2023-07 are
effective for all public entities for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024.
ASU 2023-07 did not change how a public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds
to determine its reportable segments. Under ASU 2023-07, public entities with a single reportable segment must apply all of the ASU’s disclosure
requirements and the existing segment disclosure and reconciliation requirements in ASC 280 - Segment Reporting on an annual and interim basis. The
Company implemented this ASU in 2024 and its impact was immaterial.
Accounting pronouncements not yet effective
Improvements to Income Tax Disclosures
48
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09
includes expanded income tax rate reconciliation disclosures, a disaggregation of income taxes paid, and other expanded disclosures. The ASU will be effective
for the Company for the year ending December 31, 2025. The Company expects the adoption to result in disclosure changes only.
Disaggregation of Income Statement Expenses
In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic
220-40): Disaggregation of Income Statement Expenses (ASU “2024-03”). Among other items, the requirements include expanded disclosures around
employee compensation and selling expenses. ASU 2024-03 will be effective for the Company for the year ending December 31, 2027. The Company is still
evaluating the impact of this new guidance on its consolidated financial statements but expect the adoption to result in disclosure changes only.
3. MARKETABLE SECURITIES
December 31, 2024
December 31, 2023
(in thousands)
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
Government debt
$
11,851
$
1
$
(19)
$
11,833
$
11,471
$
33
$
(1)
$
11,503
Corporate debt
391,097
63
(123)
391,037
181,960
200
(227)
181,933
$
402,948
$
64
$
(142)
$
402,870
$
193,431
$
233
$
(228)
$
193,436
As of December 31, 2024, marketable securities’ maturities ranged from January 2025 to December 2027, with a weighted-average remaining maturity of 0.3
years.
4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
Receivables
(in thousands)
December 31, 2024
December 31, 2023
Accounts receivable, net
$
305,468
$
300,173
Unbilled receivables, net
173,085
237,379
Long-term unbilled receivables, net
61,407
85,402
$
539,960
$
622,954
Unbilled receivables
Unbilled receivables are client-committed amounts for which revenue recognition precedes billing. Billing is solely subject to the passage of time.
Unbilled receivables by expected collection date:
(Dollars in thousands)
December 31, 2024
1 year or less
$
173,085
74 %
1-2 years
43,341
18 %
2-5 years
18,066
8 %
$
234,492
100 %
Unbilled receivables by contract effective date:
(Dollars in thousands)
December 31, 2024
2024
$
137,027
58 %
2023
79,650
35 %
2022
10,357
4 %
2021
5,836
2 %
2020 and prior
1,622
1 %
$
234,492
100 %
Major clients
Clients that represented 10% or more of the Company’s total accounts receivable and unbilled receivables:
December 31, 2024
December 31, 2023
Client A
Accounts receivable
20 %
*
Unbilled receivables
— %
*
Total receivables
11 %
*
49
* Client accounted for less than 10% of receivables.
Contract assets
Contract assets are client-committed amounts for which revenue recognized exceeds the amount billed to the client, and billing is subject to conditions other
than the passage of time, such as the completion of a related performance obligation.
(in thousands)
December 31, 2024
December 31, 2023
Contract assets
$
13,498
$
16,238
Long-term contract assets
18,321
20,635
$
31,819
$
36,873
(1) Included in other current assets.
(2) Included in other long-term assets.
Deferred revenue
Deferred revenue consists of billings made and payments received in advance of revenue recognition.
(in thousands)
December 31, 2024
December 31, 2023
Deferred revenue
$
423,910
$
377,845
Long-term deferred revenue
2,121
2,478
$
426,031
$
380,323
(1) Included in other long-term liabilities.
The change in deferred revenue in 2024 was primarily due to new billings in advance of revenue recognition and $374.1 million of revenue recognized during
the period included in deferred revenue as of December 31, 2023.
5. DEFERRED COMMISSIONS
December 31,
(in thousands)
2024
2023
Deferred commissions
$
105,405
$
114,119
(1) Included in other long-term assets.
(in thousands)
2024
2023
2022
Amortization of deferred commissions
$
62,269
$
59,461
$
53,471
(1) Included in selling and marketing expenses.
6. PROPERTY AND EQUIPMENT
(in thousands)
December 31,
2024
2023
Leasehold improvements
$
51,932
$
62,787
Computer equipment
29,817
31,144
Furniture and fixtures
4,603
6,665
Computer software purchased
9,918
10,060
Computer software developed for internal use
19,776
19,470
Fixed assets in progress
5,038
223
121,084
130,349
Less: accumulated depreciation
(79,278)
(83,070)
$
41,806
$
47,279
(1) Included in other long-term assets.
During 2024, $17.8 million of depreciated assets were disposed of, which primarily related to office closures.
(in thousands)
2024
2023
2022
Depreciation expense
$
14,432
$
14,806
$
14,687
(1)
(2)
(1)
(1)
(1)
(1)
50
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
(in thousands)
2024
2023
January 1,
$
81,611
$
81,399
Currency translation adjustments
(498)
212
December 31,
$
81,113
$
81,611
Intangibles
Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives:
December 31, 2024
(in thousands)
Useful Lives
Cost
Accumulated Amortization
Net Book Value
Client-related
4-10 years
$
63,107
$
(61,395)
$
1,712
Technology
2-10 years
68,115
(65,995)
2,120
Other
1-5 years
5,361
(5,361)
—
$
136,583
$
(132,751)
$
3,832
Included in other long-term assets.
December 31, 2023
(in thousands)
Useful Lives
Cost
Accumulated Amortization
Net Book Value
Client-related
4-10 years
$
63,117
$
(60,035)
$
3,082
Technology
2-10 years
68,138
(64,218)
3,920
Other
1-5 years
5,361
(5,361)
—
$
136,616
$
(129,614)
$
7,002
Included in other long-term assets.
Future estimated intangible assets amortization:
(in thousands)
December 31, 2024
2025
$
2,630
2026
874
2027
328
$
3,832
Amortization of intangible assets:
(in thousands)
2024
2023
2022
Cost of revenue
$
1,783
$
2,570
$
2,723
Selling and marketing
1,370
1,370
1,370
$
3,153
$
3,940
$
4,093
8. OTHER ASSETS AND LIABILITIES
Other current assets
(in thousands)
December 31, 2024
December 31, 2023
Prepaid expenses
$
38,155
$
33,647
Income tax receivables
58,359
4,804
Contract assets
13,498
16,238
Insurance receivable
—
1,954
Indirect tax receivable
2,488
1,924
Capped call transactions
223
—
Restricted cash
98
—
Other
2,357
9,570
$
115,178
$
68,137
(1)
(1)
(1)
(1)
51
Other long-term assets
(in thousands)
December 31, 2024
December 31, 2023
Deferred commissions
$
105,405
$
114,119
Right of use assets
62,429
64,198
Property and equipment
41,806
47,279
Venture investments
21,234
19,450
Contract assets
18,321
20,635
Income tax receivables
13,299
20,633
Intangible assets
3,832
7,002
Capped call transactions
—
893
Deferred income taxes
4,268
3,678
Restricted cash
4,328
2,925
Other
17,127
13,884
$
292,049
$
314,696
Accrued expenses
(in thousands)
December 31, 2024
December 31, 2023
Cloud hosting
$
1,802
$
1,358
Outside professional services
10,639
10,419
Marketing and sales program
2,150
2,557
Income and other taxes
5,055
15,428
Employee related
4,833
4,486
Repurchases of common stock unsettled
1,500
—
Other
5,565
5,693
$
31,544
$
39,941
Other current liabilities
(in thousands)
December 31, 2024
December 31, 2023
Operating lease liabilities
$
14,551
$
15,000
Dividends payable
2,583
2,515
Other
1,732
3,828
$
18,866
$
21,343
Other long-term liabilities
(in thousands)
December 31, 2024
December 31, 2023
Deferred revenue
$
2,121
$
2,478
Income taxes payable
15,956
859
Other
11,011
10,233
$
29,088
$
13,570
9. SEGMENT INFORMATION
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief
operating 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 case
management, business process management, and real-time decisioning solutions to improve customer engagement and operational excellence in the
enterprise applications market. To assess performance, the Company’s CODM, the Chief Executive Officer, reviews financial information on a
consolidated basis. Therefore, the Company determined it has one operating segment and one reportable segment. The accounting policies of the
Company’s operating segment are the same as those described in "Note 2. Significant Accounting Policies". The CODM uses consolidated net income
(loss) to set financial performance targets, assess performance, and make expense allocation decisions.
52
(in thousands)
2024
2023
2022
Total revenue
$
1,497,180
$
1,432,616
$
1,317,845
Total cost of revenue
390,665
378,483
368,635
Selling
450,527
474,405
519,192
Marketing
84,253
84,772
105,597
Research and development
298,074
295,512
294,349
General and administrative
112,848
96,743
117,734
Other segment items, net
18,177
7,261
74,135
Provision for income taxes
43,447
27,632
183,785
Net income (loss)
$
99,189
$
67,808
$
(345,582)
(1) Includes Litigation settlement, net of recoveries, Restructuring, Foreign currency transaction (loss) gain, Interest income, Interest expense, (Loss) on capped call transactions, and Other income,
net.
Long-lived assets related to the Company’s U.S. and international operations consist of property and equipment, which are included in Other long-term
assets in the Company’s consolidated balance sheet:
(in thousands)
December 31, 2024
December 31, 2023
U.S.
$
37,405
89 %
$
44,414
94 %
International
4,401
11 %
2,865
6 %
$
41,806
100 %
$
47,279
100 %
10. LEASES
The Company leased office space beginning in March 2021 at One Main Street, Cambridge, Massachusetts to serve as its corporate headquarters (the
“Cambridge office”). The 4.5 year lease includes a base rent of $2 million per year. In December 2024, the Company closed the Cambridge office and relocated
its corporate headquarters to office space already leased in Waltham, Massachusetts (the “Waltham office”), effective January 1, 2025. The Company recorded
a restructuring expense of $3.7 million as a result of closing the Cambridge office.
The Waltham office is 131 thousand square feet of leased office space located at 225 Wyman Street, Waltham, Massachusetts. The lease term of 11 years began
on August 1, 2021, with no rent due until August 1, 2022. The annual rent equals the base rent of approximately $6 million, with 3% annual increases, plus a
portion of building operating costs and real estate taxes. In addition, the Company received an improvement allowance from the landlord of $11.8 million.
Expense
(in thousands)
2024
2023
2022
Fixed lease costs
$
21,422
$
19,718
$
20,186
Short-term lease costs
1,746
2,884
3,356
Variable lease costs
6,901
8,148
3,894
$
30,069
$
30,750
$
27,436
Right of use assets and lease liabilities
(in thousands)
December 31, 2024
December 31, 2023
Right of use assets
$
62,429
$
64,198
Operating lease liabilities
$
14,551
$
15,000
Long-term operating lease liabilities
$
67,647
$
66,901
(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, 2024
December 31, 2023
Weighted-average remaining lease term
6.2 years
6.8 years
Weighted-average discount rate
4.8 %
4.0 %
(1) The rates implicit in the Company’s leases are not readily determinable. Therefore, the Company uses its incremental borrowing rate as the discount rate when measuring operating lease
liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur to borrow an amount equal to the lease payments on a collateralized basis over the
lease term in a similar economic environment.
(1)
(1)
(2)
(1)
53
Maturities of lease liabilities:
(in thousands)
December 31, 2024
2025
$
18,106
2026
15,404
2027
13,972
2028
13,367
2029
10,742
Thereafter
23,535
Total lease payments
95,126
Less: imputed interest
(12,928)
$
82,198
(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 lease
reassessment event.
Cash flow information
(in thousands)
2024
2023
Cash paid for operating leases, net of tenant improvement allowances
$
18,444
$
20,045
Right of use assets recognized for new leases and amendments (non-cash)
$
16,682
$
1,460
11. DEBT
Convertible senior notes and capped calls
Convertible senior notes
In February 2020, the Company issued convertible senior notes (the "Notes") with an aggregate principal of $600 million, due March 1, 2025, in a private
placement. 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 1
and September 1, beginning September 1, 2020.
In 2024 and 2023, the Company recognized gains of $0.5 million and $7.9 million in other income, net from repurchases of Notes representing $34.4 million
and $97.7 million in aggregate principal amount, respectively.
Conversion rights
The conversion rate is 7.4045 shares of common stock per $1,000 principal amount of the Notes, representing an initial conversion price of $135.05 per share
of common stock. The conversion rate will be adjusted upon certain events, including spin-offs, tender offers, exchange offers, and certain stockholder
distributions. The Company will settle conversions by paying or delivering cash, shares of its common stock, or a combination of cash and shares of its
common stock, at the Company’s election, based on the applicable conversion rate.
Beginning on September 1, 2024, noteholders may convert their Notes at any time at their election.
Before September 1, 2024, noteholders could 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 the
Company’s common stock exceeds 130% of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 30
consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter.
• During the five consecutive business days immediately after any five consecutive trading day period (the “Measurement Period”), if the trading price per
$1,000 principal amount of Notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price per share
of common stock on such trading day and the conversion rate on such trading day.
• Upon certain corporate events or distributions or if the Company calls any Notes for redemption, noteholders may convert before the close of business on
the business day immediately before the related redemption date (or, if the Company fails to pay the redemption price in full on the redemption date until
the Company pays the redemption price).
Repurchase rights
On or after March 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, the Company may redeem for cash all or part
of the Notes at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if the last reported sale price of the Company’s
common stock exceeded 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading
day period ending on, and including, the trading day immediately preceding the date on which the Company provides a redemption notice.
If certain corporate events that constitute a “Fundamental Change” occur, each noteholder will have the right to require the Company to repurchase for cash all
of such noteholder’s Notes, or any portion of the principal thereof that is equal to $1,000 or a multiple of $1,000, at a repurchase price equal to 100% of the
principal amount thereof, plus accrued and unpaid interest. A Fundamental Change relates to mergers, changes in control of the Company,
liquidation/dissolution of the Company, or the delisting of the Company’s common stock.
(1)
54
Carrying value of the Notes:
(in thousands)
December 31, 2024
December 31, 2023
Principal
$
467,864
$
502,270
Unamortized issuance costs
(394)
(2,902)
Convertible senior notes, net
$
467,470
$
499,368
Interest expense related to the Notes:
(in thousands)
2024
2023
Contractual interest expense (0.75% coupon)
$
3,725
$
3,891
Amortization of issuance costs
2,451
2,603
$
6,176
$
6,494
The average interest rate on the Notes in 2024 and 2023 was 1.2%.
Future payments of principal and contractual interest:
December 31, 2024
(in thousands)
Principal
Interest
Total
2025
$
467,864
$
1,754
$
469,618
$
467,864
$
1,754
$
469,618
Capped call transactions
In February 2020, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain financial institutions.
The Capped Call Transactions initially covered approximately 4.4 million shares (representing the number of shares for which the Notes were initially
convertible) of the Company’s common stock. In 2024, Capped Call Transactions covering approximately 0.3 million shares were settled for proceeds of $0.01
million. As of December 31, 2024, Capped Call Transactions covering approximately 3.5 million shares were outstanding.
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
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 the Capped 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 calculated following the governing documents may not represent a fair value measurement. The Capped
Call Transactions are remeasured to fair value each reporting period, resulting in a non-operating gain or loss.
Change in capped call transactions:
(in thousands)
2024
2023
January 1,
$
893
$
2,582
Settlements
(7)
(341)
Fair value adjustment
(663)
(1,348)
December 31,
$
223
$
893
Credit facility
In 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 to
specific conditions and the agreement of the financial institutions lending the additional amount, the aggregate commitment may be increased to $200 million.
The Credit Facility, as amended, contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures,
and affiliate transactions. Beginning with the fiscal quarter ended March 31, 2024, the Company must maintain 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. Effective as of February 4, 2025, the Credit
Facility was amended to extend the expiration date to February 4, 2027.
As of December 31, 2024 and December 31, 2023, the Company had $27.3 million in outstanding letters of credit under the Credit Facility, reducing available
borrowing capacity, but no outstanding cash borrowings.
55
12. RESTRUCTURING
The Company has undertaken the following restructuring activities as it optimizes its go-to-market strategy and reassesses its office space needs:
(in thousands)
2024
2023
2022
Employee severance and related benefits
$
(614)
$
18,721
$
18,549
Office space reductions
5,142
3,026
3,194
$
4,528
$
21,747
$
21,743
(1) These primarily relate to non-cash operating lease adjustments.
Restructuring activity:
Accrued employee severance and related benefits:
(in thousands)
2024
January 1,
$
8,095
Costs incurred
(614)
Cash disbursements
(5,252)
Currency translation adjustments
(229)
December 31,
$
2,000
(1) Included in accrued compensation and related expenses.
13. FAIR VALUE MEASUREMENTS
Assets and liabilities measured at fair value on a recurring basis
The Company records its cash equivalents, marketable securities, capped call transactions, and venture investments at fair value on a recurring basis. Fair value
is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market
participants based on assumptions that market participants would use in pricing an asset or liability.
As a basis for classifying the fair value measurements, a three-tier fair value hierarchy, which classifies the fair value measurements based on the inputs used in
measuring fair value, was established as follows:
• Level 1 - observable inputs, such as quoted prices in active markets for identical assets or liabilities;
• Level 2 - significant other inputs that are observable either directly or indirectly; and
• Level 3 - significant unobservable inputs with little or no market data, which require the Company to develop its own assumptions.
This hierarchy requires the Company to use observable market data when available and minimize unobservable inputs when determining fair value.
The fair value of the Capped Call Transactions at the end of each reporting period is determined using a Black-Scholes option-pricing model. The valuation
model uses various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend
yield. The Company applies judgment when determining expected volatility. The Company considers the underlying equity security’s historical and implied
volatility levels. The Company’s venture investments are recorded at fair value based on multiple valuation methods, including observable public companies
and transaction prices and unobservable inputs, including the volatility, rights, and obligations of the securities the Company holds.
(1)
(1)
56
Assets and liabilities measured at fair value on a recurring basis:
December 31, 2024
December 31, 2023
(in thousands)
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Cash equivalents
$
5,318
$
148,926
$
—
$
154,244
$
54,357
$
—
$
—
$
54,357
Marketable securities
$
—
$
402,870
$
—
$
402,870
$
—
$
193,436
$
—
$
193,436
Capped Call Transactions
$
—
$
223
$
—
$
223
$
—
$
893
$
—
$
893
Venture investments
$
—
$
—
$
21,234
$
21,234
$
—
$
—
$
19,450
$
19,450
Changes in venture investments:
(in thousands)
2024
2023
January 1,
$
19,450
$
13,069
New investments
550
400
Sales of investments
—
(2,773)
Changes in foreign exchange rates
(32)
129
Changes in fair value:
included in other income, net
1,628
10,886
included in other comprehensive income
(362)
(2,261)
December 31,
$
21,234
$
19,450
The carrying value of certain financial instruments, including receivables and accounts payable, approximates fair value due to their short maturities.
Fair value of the Notes
The fair value of the Notes outstanding (including the embedded conversion feature) was $463.9 million as of December 31, 2024 and $466.5 million as of
December 31, 2023.
The fair value was determined based on the Notes’ quoted price in an over-the-counter market on the last trading day of the reporting period and classified
within Level 2 in the fair value hierarchy.
Credit risk
In addition to receivables, the Company is potentially subject to concentrations of credit risk from the Company’s cash, cash equivalents, and marketable
securities. The Company’s cash and cash equivalents are generally held with large, diverse financial institutions worldwide to reduce the Company’s credit risk
exposure. Investment policies have been implemented that limit purchases of marketable debt securities to investment-grade securities.
14. STOCKHOLDERS’ EQUITY
Preferred stock
The 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,
2024.
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 in
each series, and to determine the designation, powers, preferences, and rights of the shares of each series and the qualifications, limitations, or restrictions
thereof, without any further vote or action by the stockholders. The issuance of preferred stock could decrease the earnings and assets available for
distribution to holders of common stock and may have the effect of delaying, deferring, or defeating a change in control of the Company.
Common stock
The Company has 200 million authorized shares of common stock, $0.01 par value per share, of which 86.1 million were issued and outstanding as of
December 31, 2024.
Dividends declared
2024
2023
2022
Dividends declared (per share)
$
0.12
$
0.12
$
0.12
Dividend payments to stockholders (in thousands)
$
10,199
$
9,964
$
9,834
The Company paid a quarterly cash dividend of $0.03 per share in 2024, 2023, and 2022. In the future, the Board of Directors may terminate or modify the
dividend program without prior notice.
Stock repurchase program
57
On April 23, 2024, the Company’s Board of Directors extended the expiration date of the share repurchase program from June 30, 2024 to June 30, 2025. On
October 22, 2024, the Company’s Board of Directors further extended the expiration date of the share repurchase program from June 30, 2025 to December 31,
2025 and increased the authorized repurchases by $250 million to $310 million as of that date.
Stock repurchase authorization activity:
(in thousands)
2024
2023
2022
Shares
Amount
Shares
Amount
Shares
Amount
January 1,
$
60,000
$
58,075
$
22,583
Authorizations
250,000
1,925
60,000
Repurchases paid
(809)
(68,057)
—
—
(280)
(24,508)
Repurchases unpaid at period end
(16)
(1,500)
—
—
—
—
December 31,
$
240,443
$
60,000
$
58,075
(1) This represents increases in the repurchase authority made by the Board of Directors.
(2) Purchases under this program have been made on the open market.
15. REVENUE
Geographic revenue
Revenues by geography are determined based on client location:
(Dollars in thousands)
2024
2023
2022
U.S.
$
828,332
55 %
$
785,029
55 %
$
763,558
57 %
Other Americas
95,698
6 %
85,149
6 %
102,980
8 %
United Kingdom (“U.K.”)
157,830
11 %
158,014
11 %
115,793
9 %
Europe (excluding U.K.), Middle East, and Africa
249,325
17 %
242,303
17 %
194,563
15 %
Asia-Pacific
165,995
11 %
162,121
11 %
140,951
11 %
$
1,497,180
100 %
$
1,432,616
100 %
$
1,317,845
100 %
Revenue streams
(in thousands)
2024
2023
2022
Pega Cloud
$
558,734
$
461,328
$
384,271
Maintenance
323,304
331,856
317,564
Consulting
213,273
221,706
230,654
Revenue recognized over time
1,095,311
1,014,890
932,489
Subscription license
398,102
407,625
366,063
Perpetual license
3,767
10,101
19,293
Revenue recognized at a point in time
401,869
417,726
385,356
$
1,497,180
$
1,432,616
$
1,317,845
(in thousands)
2024
2023
2022
Pega Cloud
$
558,734
$
461,328
$
384,271
Maintenance
323,304
331,856
317,564
Subscription services
882,038
793,184
701,835
Subscription license
398,102
407,625
366,063
Subscription
1,280,140
1,200,809
1,067,898
Consulting
213,273
221,706
230,654
Perpetual license
3,767
10,101
19,293
$
1,497,180
$
1,432,616
$
1,317,845
(1)
(2)
(2)
58
Remaining performance obligations ("Backlog")
Expected future revenue from existing non-cancellable contracts:
As of December 31, 2024:
(Dollars in thousands)
Subscription services
Subscription license
Perpetual license
Consulting
Total
Pega Cloud
Maintenance
1 year or less
$
525,133
$
230,866
$
88,880
$
317
$
50,519
$
895,715
56 %
1-2 years
328,234
65,461
10,874
—
3,297
407,866
25 %
2-3 years
159,536
24,598
733
—
125
184,992
11 %
Greater than 3 years
114,256
19,935
678
—
50
134,919
8 %
$
1,127,159
$
340,860
$
101,165
$
317
$
53,991
$
1,623,492
100 %
As of December 31, 2023:
(Dollars in thousands)
Subscription services
Subscription license
Perpetual license
Consulting
Total
Pega Cloud
Maintenance
1 year or less
$
446,160
$
245,271
$
62,070
$
2,284
$
39,810
$
795,595
54 %
1-2 years
279,474
67,720
9,138
443
2,020
358,795
25 %
2-3 years
144,453
37,142
9,789
—
2,896
194,280
13 %
Greater than 3 years
90,177
24,421
100
—
—
114,698
8 %
$
960,264
$
374,554
$
81,097
$
2,727
$
44,726
$
1,463,368
100 %
16. STOCK-BASED COMPENSATION
(in thousands)
2024
2023
2022
Cost of revenue
$
27,353
$
28,994
$
26,400
Selling and marketing
55,084
57,675
46,769
Research and development
29,838
31,039
29,266
General and administrative
30,443
25,644
19,775
$
142,718
$
143,352
$
122,210
Income tax benefit
$
(1,799)
$
(2,187)
$
(1,881)
The Company periodically grants employees stock options and restricted stock units (“RSUs”) and non-employee Directors common stock and stock
options.
In 2022, most of the Company’s stock based compensation arrangements vest over five years, with 20% vesting after one year and the remaining 80%
vesting quarterly over the remaining four years. Beginning in 2023, most of the Company’s stock based compensation arrangements vest over four years,
with 25% vesting after one year and the remaining 75% vesting quarterly over the remaining three years. The Company’s stock options have a term of ten
years. In 2024, the Company also granted 0.6 million performance stock options with a total grant date fair value of $13.9 million, which vest over 2 years
based on the Company’s achievement of certain financial performance targets.
The Company recognizes stock-based compensation using the accelerated attribution method, treating each vesting tranche as an individual grant. The
stock-based compensation expense recognized during a period 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 subsequent periods if actual forfeitures differ from those estimates. Ultimately, the Company recognizes the
actual expense over the vesting period only for the shares that 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’s
target incentive opportunity, based on the employee’s base salary. The number of RSUs granted is determined by dividing 50% of the employee’s target
incentive opportunity by 85% of the closing price of the Company’s common stock on the grant date, less the present value of expected dividends during
the vesting period. If elected, the award vests 100% on the following year’s CICP payout date. Vesting is conditioned upon the performance conditions of
the CICP and on continued employment; if threshold funding does not occur, the RSUs will not vest. The Company considers vesting probable on the grant
date and recognizes the associated stock-based compensation expense over the requisite service period beginning on the grant date and ending on the
vesting date.
59
Historically, the Company has granted awards that allow for the settlement of vested stock options and RSUs on a net share basis (“net settled awards”).
With net settled awards, the Company withholds shares to cover the exercise price (for stock options) and the minimum statutory tax withholding
obligations (for stock options and RSUs) from the shares that would otherwise be issued upon exercise or settlement. In 2023, the Company moved to
cashless settlement for most of its awards. Under cashless settlement, shares are automatically sold in the market at exercise (for stock options) or vest (for
RSUs) to cover the exercise price (for stock options) and the minimum statutory tax withholding obligations (for stock options and RSUs).
Stock-based compensation plans
2004 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-employee
Directors, and consultants with opportunities to purchase stock through incentive and non-qualified stock options. Subsequent amendments to the plan
increased the number of shares authorized for issuance under the plan to 42 million, extended the term of the plan to 2030, and limited annual
compensation to any non-employee Director to $0.5 million.
As of December 31, 2024, 17.0 million shares were subject to outstanding options and stock-based awards under the 2004 Plan.
2006 Employee Stock Purchase Plan
In 2006, the Company adopted the 2006 Employee Stock Purchase Plan (the “2006 ESPP”) under which employees may purchase 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 commencement date 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 October 2012, the Company’s Board of Directors
amended the 2006 ESPP to continue until no shares remain. In 2023, the number of shares authorized for purchase under the 2006 ESPP was increased to
2 million. For 2024, 2023, and 2022, the Company’s Board of Directors set the purchase price at 85% of the fair market value on the completion date of the
offering period.
(in thousands)
2024
2023
2022
Compensation expense from 2006 ESPP
$
1,184
$
1,367
$
1,614
As of December 31, 2024, 1.1 million shares had been issued under the plan.
Shares issued and available for issuance
In 2024, the Company issued 3.0 million shares to its employees and directors under the Company’s stock-based compensation plans.
As of December 31, 2024, there were 3.9 million shares available for issuance for future equity grants under the Company’s stock plans, consisting of 3.0
million shares under the 2004 Plan and 0.9 million shares under the 2006 ESPP.
Grant activity
Stock options
The Company estimates the fair value of stock options using a Black-Scholes option-pricing model. Key inputs used to estimate the fair value of stock
options include the exercise price of the award, expected term of the option, expected volatility of the Company’s common stock over the option’s
expected term, risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. The exercise price for stock
options is equal to the shares’ fair market value at the grant date.
The following table summarizes the Company’s fair value assumptions for stock options:
2024
2023
2022
Weighted-average grant-date fair value
$
25.82
$
20.55
$
17.49
Assumptions used in the Black-Scholes option-pricing model:
Expected annual volatility
49 %
48 %
42 %
Expected term in years
3.9
3.5
3.9
Risk-free interest rate
4.2 %
4.2 %
3.4 %
Expected annual dividend yield
0.2 %
0.1 %
0.1 %
(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 expected
option 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.
(1)
(2)
(3)
(4)
60
The following table summarizes the time-based vesting stock option activity under the Company’s stock option plans for 2024:
Shares
(in thousands)
Weighted-average
Exercise Price
Weighted-average Remaining
Contractual Term (in years)
Aggregate Intrinsic Value
(in thousands)
Options outstanding as of January 1, 2024
13,853
$
59.32
Granted
1,857
62.90
Exercised
(1,937)
43.94
Forfeited
(515)
54.91
Expired
(284)
90.16
Options outstanding as of December 31, 2024
12,974
$
61.63
Vested and expected to vest as of December 31, 2024
11,477
$
62.04
6.7
$
391,228
Exercisable as of December 31, 2024
7,351
$
65.37
5.8
$
232,270
(1) The aggregate intrinsic value of stock options as of December 31, 2024 is based on the difference between the closing price of the Company’s stock of $93.20 and the exercise price of the
applicable stock options.
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 at
exercise) in 2024, 2023, and 2022 was $58.7 million, $6.2 million, and $15.6 million, respectively. As of December 31, 2024, the Company had
unrecognized stock-based compensation expense related to the unvested portion of stock options of $35.2 million that is expected to be recognized as
expense over a weighted-average period of 1.6 years.
Performance stock options
In 2023, the Company began awarding performance stock options. These performance stock options allow the holder to purchase a specified number of
common stock shares at an exercise price equal to the shares' fair market value at the grant date. For the performance stock options granted in 2024, 25%
can vest on the first anniversary of the grant date, and 75% can vest on the second anniversary of the grant date, based on the achievement of specific
performance conditions for 2024 and 2025, respectively, including year over year growth in Annual Contract Value and Free Cash Flow Margin. The
options expire ten years from the grant date.
The following table summarizes the Company’s performance stock option activity for 2024:
Shares
(in thousands)
Weighted-average
Exercise Price
Weighted-average Remaining
Contractual Term (in years)
Aggregate Intrinsic
Value
(in thousands)
Performance options outstanding as of January 1, 2024
886
$
47.27
Granted
566
62.10
Exercised
(39)
47.27
Forfeited
(23)
53.86
Performance options outstanding as of December 31, 2024
1,390
$
53.20
Vested and expected to vest as of December 31, 2024
1,173
$
53.12
8.6
$
47,001
Exercisable as of December 31, 2024
181
$
47.27
8.2
$
8,304
(1) The aggregate intrinsic value of stock options as of December 31, 2024 is based on the difference between the closing price of the Company’s stock of $93.20 and the exercise price of the
applicable stock options.
The aggregate intrinsic value of performance stock options exercised in 2024 and 2023 was $1.5 million and none, respectively. As of December 31, 2024,
the Company had unrecognized stock-based compensation expense related to the unvested portion of performance stock options of $11.0 million that is
expected to be recognized as expense over a weighted-average period of 1 year.
RSUs
RSUs 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 at
the 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 expected
dividends during the vesting period, as the recipient is not entitled to dividends during the requisite service period. RSU grants include units issued when
employees 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.
(1)
(1)
61
The weighted-average grant-date fair value for RSUs granted in 2024, 2023, and 2022 was $62.57, $46.57, and $74.50, respectively.
The following table summarizes the combined RSU activity for all grants, including the CICP, under the 2004 Plan for 2024:
Shares
(in thousands)
Weighted- Average Grant-Date
Fair Value
Aggregate Intrinsic Value
(in thousands)
Nonvested as of January 1, 2024
2,616
$
64.85
Granted
1,366
62.57
Vested
(1,160)
67.39
Forfeited
(209)
63.78
Nonvested as of December 31, 2024
2,613
$
64.21
$
243,516
Expected to vest as of December 31, 2024
1,962
$
63.39
$
182,854
The fair value of RSUs vested in 2024, 2023, and 2022 was $78.2 million, $42.8 million, and $50.3 million, respectively. The aggregate intrinsic value of
RSUs outstanding and expected to vest as of December 31, 2024 is based on the closing price of the Company’s stock of $93.20 as of December 31, 2024.
As of December 31, 2024, the Company had $48.7 million of unrecognized stock-based compensation expense related to all unvested RSUs that is
expected to be recognized as expense over a weighted-average period of 1.6 years.
Common stock
In 2024, the Company granted 0.01 million shares of common stock to Directors with a weighted-average grant-date fair value of $69.19 per share.
17. EMPLOYEE BENEFIT PLANS
The Company sponsors defined contribution plans for qualifying employees, including a 401(k) plan in the United States to which the Company makes
discretionary matching contributions.
Employee benefit plan expenses:
(in thousands)
2024
2023
2022
U.S. 401(k) Plan
$
7,937
$
8,169
$
8,994
International plans
20,303
21,256
21,141
$
28,240
$
29,425
$
30,135
18. INCOME TAXES
The components of income (loss) before provision for income taxes are:
(in thousands)
2024
2023
2022
Domestic
$
51,966
$
14,016
$
(185,820)
Foreign
90,670
81,424
24,023
$
142,636
$
95,440
$
(161,797)
The components of provision for income taxes are:
(in thousands)
2024
2023
2022
Current:
Federal
$
22,941
$
7,827
$
3,920
State
7,503
4,480
775
Foreign
14,547
14,962
10,200
Total current provision
44,991
27,269
14,895
Deferred:
Federal
—
—
149,028
State
—
—
20,704
Foreign
(1,544)
363
(842)
Total deferred (benefit) provision
(1,544)
363
168,890
$
43,447
$
27,632
$
183,785
62
A reconciliation of the U.S federal statutory tax rate and the Company’s effective tax rate:
(in thousands)
2024
2023
2022
U.S. federal income taxes at statutory rates
$
29,954
$
20,042
$
(33,977)
Valuation allowance
(1,504)
(19,272)
188,258
State income taxes, net of federal benefit and tax credits
1,297
4,117
(2,433)
Permanent differences
786
435
11,561
Federal research and experimentation credits
(4,888)
(3,709)
(5,012)
Tax effects of foreign activities
(7,817)
658
3,770
GILTI, FDII, and BEAT
13,945
14,022
16,390
Provision to return adjustments
121
(3,728)
(6,317)
Non-deductible compensation
10,933
6,818
4,769
Tax Reserves
5,917
1,850
5,673
Excess tax (benefits) / detriments related to share-based compensation
(5,645)
4,666
1,563
Impact of change in tax law
—
1,726
(793)
Other
348
7
333
$
43,447
$
27,632
$
183,785
The effective income tax rate in 2024 was primarily driven by the valuation allowance on our deferred tax assets and tax expense in the U.S. and U.K., partially
offset by available tax attributes.
Deferred income taxes
Significant components of net deferred tax assets and liabilities are:
December 31,
(in thousands)
2024
2023
Deferred tax assets:
Net operating loss carryforwards
$
72,089
$
84,656
Accruals and reserves
57,312
41,323
Software revenue
454
3,186
Convertible senior notes
355
2,645
Tax credit carryforwards
10,441
28,456
Research and development capitalization
75,289
58,866
Total deferred tax assets
215,940
219,132
Valuation allowances
(195,252)
(196,901)
Total net deferred tax assets
20,688
22,231
Deferred tax liabilities:
Capped call transactions
(57)
(223)
Depreciation
(3,663)
(4,428)
Intangibles
(9,116)
(11,979)
Other, net
(3,554)
(2,782)
Total deferred tax liabilities
(16,390)
(19,412)
$
4,298
$
2,819
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 deferred
tax assets ultimately depends on sufficient taxable income within the available carryback or carryforward periods. The Company’s deferred tax valuation
allowance requires significant judgment and has uncertainties, including assumptions about future taxable income based on historical and projected
information. In assessing the Company’s ability to realize its net deferred tax assets, the Company considered various factors including future reversals of
existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial results to determine whether it is more
likely than not that some portion or all of its net deferred tax assets will not be realized. Based upon these factors, the Company has determined that the
uncertainty regarding the realization of these assets is sufficient to warrant the need for a full valuation allowance against its net U.S. and U.K. deferred tax
assets as of December 31, 2024. Accordingly, the Company maintained a valuation allowance of $195.3 million at December 31, 2024, a decrease of $1.6
million as a result of the operations of its entities throughout the year.
Given the Company’s recent earnings, the Company believes that there is a reasonable possibility that in a future period sufficient positive evidence may
become available to allow the Company to reach a conclusion that a substantial portion of the valuation allowance will no longer be needed. However, the
exact timing and amount of the valuation allowance release are subject to significant judgement. Release of the valuation allowance would result in the
recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded.
63
The Company had approximately $5.4 million and $8.8 million of post apportionment state net operating loss carryforwards, as of December 31, 2024 and
2023, respectively. The U.S. state losses expire at various times through 2044. Additionally, as of December 31, 2024, the Company had $10.4 million of state
tax credit carryforwards.
The Company’s federal net operating loss carryforwards were approximately $14.2 million and $20.6 million at December 31, 2024 and 2023, respectively.
These federal carryforward losses and state credits expire between 2025 and 2039, except for $1.2 million of federal net operating losses and $1 million of state
credits, which have an unlimited carryforward period.
The Company’s UK net operating loss carryforwards were approximately $147.9 million and $183.1 million at December 31, 2024 and 2023, respectively,
which have indefinite carryforward periods.
Uncertain tax benefits
A rollforward of the Company’s gross unrecognized tax benefits is:
(in thousands)
2024
2023
2022
Balance as of January 1,
$
30,655
$
19,746
$
17,584
Additions for tax positions related to the current year
7,316
4,859
1,706
Additions for tax positions of prior years
2,941
7,921
728
Reductions for tax positions of prior years
(3,026)
(1,871)
(272)
Balance as of December 31,
$
37,886
$
30,655
$
19,746
The total amount of accrued liabilities related to uncertain tax positions that would affect the Company's effective tax rate, if recognized, is $12.9 million as of
December 31, 2024.
Tax examinations
The 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 its
subsidiaries are examined by various tax authorities, including the Internal Revenue Service in the U.S. As of December 31, 2024, the Company’s U.S. federal
tax returns for the years 2014 through 2019 were under examination by the Internal Revenue Service. In addition, certain foreign jurisdictions are auditing the
Company’s income tax returns for periods ranging from 2018 through 2022. The Company does not expect the results of these audits to have a material effect
on the Company’s financial condition, results of operations, or cash flows. With few exceptions, the statute of limitations remains open in all jurisdictions for
all tax years since 2018.
19. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per
share is calculated using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options,
RSUs, and convertible senior notes.
Calculation of earnings (loss) per share:
(in thousands, except per share amounts)
2024
2023
2022
Net income (loss)
$
99,189
$
67,808
$
(345,582)
Weighted-average common shares outstanding
85,265
83,162
81,947
Earnings (loss) per share, basic
$
1.16
$
0.82
$
(4.22)
Net income (loss)
$
99,189
$
67,808
$
(345,582)
Convertible senior notes - interest expense and settlement gains, net of tax
(76)
(5,528)
—
Numerator for diluted EPS
$
99,113
$
62,280
$
(345,582)
Weighted-average effect of dilutive securities:
Convertible senior notes
214
235
—
Stock options
2,710
794
—
RSUs
1,445
723
—
Effect of dilutive securities
4,369
1,752
—
Weighted-average common shares outstanding, assuming dilution
89,634
84,914
81,947
Earnings per share, diluted
$
1.11
$
0.73
$
(4.22)
Outstanding anti-dilutive stock options and RSUs
148
250
3,367
(1) All dilutive securities are excluded when their inclusion would be anti-dilutive.
(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 fully
exercised, the Company would issue approximately 3.5 million shares as of December 31, 2024.
(1) (2) (3)
(4)
64
(3) The Company’s Capped Call Transactions represent the equivalent of approximately 3.5 million shares of the Company’s common stock (representing the number of shares for which the Notes
are convertible) as of December 31, 2024. 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 principal and 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 shares outstanding, 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 earnings per share. These awards may
be dilutive in the future.
20. COMMITMENTS AND CONTINGENCIES
Commitments
For additional information, see "Note 10. Leases".
Legal proceedings
In addition to the matters below, the Company is or may become involved in a variety of claims, demands, suits, investigations, and proceedings that arise from
time 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 and
settlement 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 the
effect may be material. The Company had no accrued losses for litigation for the below matters as of December 31, 2024 and December 31, 2023.
Appian Corp. v. Pegasystems Inc. & Youyong Zou
The Company is a defendant in litigation brought by Appian in the Circuit Court of Fairfax County, Virginia (the “Court”) titled Appian Corp. v. Pegasystems
Inc. & Youyong Zou, No. 2020-07216 (Fairfax Cty. Ct.). On May 9, 2022, the jury rendered its verdict finding that the Company had misappropriated one or
more of Appian’s trade secrets, that the Company had violated the Virginia Computer Crimes Act, and that the trade secret misappropriation was willful and
malicious. The jury awarded damages of $2,036,860,045 for trade secret misappropriation and $1.00 for violating the Virginia Computer Crimes Act. On
September 15, 2022, the circuit court of Fairfax County entered judgment of $2,060,479,287, consisting of the damages previously awarded 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 date of 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 the Company’s appeal. A panel of the
Court of Appeals of Virginia heard oral arguments on November 15, 2023, and issued a written opinion on July 30, 2024. The Court of Appeals reversed the
judgment on Appian’s Virginia Uniform Trade Secrets Act claim and ordered a new trial on that claim. Appian filed a petition for appeal with the Supreme
Court of Virginia on August 29, 2024, and the Company filed a response to the petition on October 21, 2024. Under the Court’s rules, Appian is entitled to a
10-minute oral argument in support of its petition. The Supreme Court of Virginia has scheduled that argument for February 11, 2025. Although it is not
possible to predict timing, the entirety of the appeals process could potentially take years to complete. 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 were not 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.
PS Lit Recovery, LLC v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell and Eminence Fund Long Master, Ltd., Eminence Fund Master, Ltd., Eminence
Fund II Master, LP, Eminence Partners Long II, LP, Eminence Fund Leveraged Master, Ltd., Eminence Partners, L.P., Eminence Partners II, L.P. v.
Pegasystems Inc., Alan Trefler, and Kenneth Stillwell
On December 4, 2024, the shareholders representing approximately 3% of the settlement class that opted out of the court approved settlement in the class
action matter captioned City of Fort Lauderdale Police and Firefighters’ Retirement System, 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 “Class Action”) filed two lawsuits against the Company, the
Company’s chief executive officer, and the Company’s chief operating and financial officer in the United States District Court for the District of Massachusetts.
The first is captioned Eminence Fund Long Master, Ltd., Eminence Fund Master, Ltd., Eminence Fund II Master, LP, Eminence Partners Long II, LP,
Eminence Fund Leveraged Master, Ltd., Eminence Partners, L.P., and Eminence Partners II, L.P. v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell (Case
1:24-cv-12999-WGY); the second is captioned PS Lit Recovery, LLC v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell (Case 1:24-cv-11220-WGY).
The complaints, which are substantially similar, generally allege, 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 by allegedly 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 complaints also assert claims
for common law fraud and negligent misrepresentation, and seek unspecified damages. The defendants’ motion to dismiss is due ten business days following
the court’s entry of the parties’ stipulation coordinating the cases, which the parties filed in the court on February 4, 2025. The Company is unable to
reasonably estimate possible damages or a range of possible damages in these matters given the stage of the lawsuits and there being no specified quantum of
damages sought in the complaints.
65
In re Pegasystems Inc., Derivative Litigation
On 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 and
the Company in the United States District Court for the District of Massachusetts, captioned Mary Larkin, derivatively on behalf of nominal defendant
Pegasystems 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 while
in possession of material nonpublic information relating to (i) the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described
above, and (ii) alleged misconduct by Company employees alleged in that litigation. On April 28, 2023, a lawsuit was filed in the United States District Court
for the District of Massachusetts by Dag Sagfors, derivatively on behalf of nominal defendant Pegasystems Inc., asserting breach of fiduciary duty and related
claims relating to the Virginia Appian litigation against the same defendants as the Larkin lawsuit. On May 17, 2023, the Larkin and Sagfors cases were
consolidated and a joint motion to stay the consolidated case is pending before the Court (“Consolidated Action”). The Company also has received confidential
demand letters raising substantially the same allegations set forth in the foregoing derivative complaints. On April 12, 2023, the Company’s board of directors
(other than Mr. Trefler, who recused himself), formed a committee consisting solely of independent directors, to review, analyze, and investigate the matters
raised in the demands and to determine in good faith what actions (if any) are reasonably believed to be appropriate under similar circumstances and reasonably
believed to be in the best interests of the Company in response to the demand letters On December 4, 2024, the defendants moved to dismiss the complaint in
the Consolidated Action. On December 17, 2024, the plaintiffs moved to voluntarily dismiss the Consolidated Action, and the Court granted the motion on
December 18, 2024.
On February 7, 2025, the plaintiffs in the Consolidated Action filed a new complaint against the members of the Company’s board of directors, certain
employees of the Company, and the Company in the United States District Court for the District of Massachusetts, captioned Mary Larkin and Dag Sagfors,
derivatively on behalf of nominal defendant Pegasystems Inc. v. Alan Trefler, Peter Gyenes, Richard Jones, Christopher Lafond, Dianne Ledingham, Sharon
Rowlands, Leon Trefler, Larry Weber, Kenneth Stillwell, Don Schuerman, Kerim Akgonul, and Benjamin Baril, defendants, and Pegasystems Inc., nominal
defendant (Case 1:25-cv-10303). The complaint asserts against Defendants claims for breach of fiduciary duty, unjust enrichment, and violations of the
Exchange Act relating to (i) the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described above; (ii) alleged misconduct by
Company employees alleged in that litigation; and the Class Action, described above.
On June 28, 2024, a lawsuit was filed against members of the Company’s board of directors, certain employees of the Company and the Company in the
Business Litigation Section of the Superior Court in Suffolk County, Massachusetts, captioned John Dwyer and Ray Gerber, Plaintiffs, v. Alan Trefler, Peter
Gyenes, Richard Jones, Christopher Lafond, Dianne Ledingham, Sharon Rowlands, Larry Weber, Leon Trefler, Don Schuerman, Kerim Akgonul, and
Benjamin Baril, Defendants, and Pegasystems Inc., Nominal Defendant (Case 2484CV01734) (“Dwyer Action”). The complaint generally alleges the
defendants breached their fiduciary duties in connection with alleged misconduct by Company employees alleged in the litigation brought by Appian in the
Circuit Court of Fairfax County, Virginia, described above, and alleges damages from the approximately $2 billion verdict in the litigation brought by Appian
in the Circuit Court of Fairfax County, Virginia, described above, the settlement of the Class Action, and litigation costs from various proceedings. On October
18, 2024 the defendants served a motion to dismiss the complaint, which the defendants then withdrew on November 26, 2024 pending resolution of whether
this complaint and the other derivative actions would be consolidated in Superior Court in Suffolk County, Massachusetts.
On November 22, 2024, a lawsuit was filed against members of the Company’s board of directors, certain employees of the Company and the Company in the
Business Litigation Section of the Superior Court in Suffolk County, Massachusetts, captioned Jayne Birch and Robert Garfield, Plaintiffs, v. Alan Trefler,
Peter Gyenes, Richard Jones, Christopher Lafond, Dianne Ledingham, Sharon Rowlands, Larry Weber, Leon Trefler, Kerim Akgonul, Don Schuerman, Leon
Trefler, Douglas Kim, John Petronio, Benjamin Baril, and Kenneth Stillwell, Defendants, and Pegasystems Inc., Nominal Defendant (Case 2484CV03076-
BLS-1) (“Birch Action”). The complaint generally alleges the defendants breached their fiduciary duties in connection with alleged misconduct by Company
employees alleged in the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described above, and alleges damages from the
approximately $2 billion verdict in the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described above, the settlement of the
Class Action, and litigation costs from various proceedings. The parties agreed on November 26, 2024 to suspend indefinitely the deadlines for any response to
the complaint pending resolution of whether this complaint and the other derivative actions would be consolidated in the Superior Court in Suffolk County,
Massachusetts.
On February 4, 2025, the parties to the Dwyer and Birch Actions filed a stipulation and proposed order in the Business Litigation Section of the Superior Court
in Suffolk County, Massachusetts consolidating the two actions and setting a schedule for the filing of a consolidated complaint and any motion to dismiss.
Pursuant to the stipulation, a consolidated complaint must be filed by March 18, 2025, and any motion to dismiss must be served by May 15, 2025. The court
held a hearing on February 11, 2025, at which it indicated it would issue an order consolidating the Dwyer and Birch Actions and approving the schedule for
the filing of a consolidated complaint and a motion to dismiss. The court scheduled a hearing on the motion to dismiss for September 4, 2025.
The Company is unable to reasonably estimate possible damages or a range of possible damages in these matters given the stage of the lawsuits and there being
no specified quantum of damages sought in the complaints.
66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of December 31, 2024. In designing and
evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2024.
Management’s report on and changes in internal control over financial reporting
Our 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, we
conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2024 based on the framework in the updated
Internal 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, 2024 and (ii) no
change 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 the
quarter ended December 31, 2024 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 attestation
report on our internal control over financial reporting, which is included in Item 8 “Financial Statements and Supplementary Data”.
ITEM 9B. OTHER INFORMATION
Rule 10b5-1 and non-rule 10b5-1 trading arrangements
On November 6, 2024, Alan Trefler, our Chief Executive Officer, entered into a trading plan that provides for the sale of 630,000 shares of our common stock.
The plan will terminate on January 22, 2026, subject to early termination for certain specified events set forth in the plan.
On November 25, 2024, Rifat Kerim Akgonul, our Chief Product Officer, entered into a trading plan that provides for the sale of 18,000 shares of our common
stock. The plan will terminate on March 31, 2026, subject to early termination for certain specified events set forth in the plan.
On November 26, 2024, Leon Trefler, our Chief of Clients and Markets, entered into a trading plan that provides for the sale of 8,198 shares of our common
stock. The plan will terminate on December 31, 2025, subject to early termination for certain specified events set forth in the plan.
Proposed Stock Split
On February 12, 2025, our Board approved a two-for-one forward stock split of our common stock, to be effected as a stock dividend. Effectiveness of the
stock split is subject to approval by our stockholders at our June 17, 2025 annual meeting of stockholders of a proportionate increase in our authorized shares
of common stock. Our financial results in this Annual Report do not include any impact of the stock split.
Credit Facility
Effective as of February 4, 2025, we entered into an amendment to our $100 million senior secured revolving credit agreement with PNC Bank, National
Association which extends the expiration date of the Credit Facility to February 4, 2027. The description contained herein is qualified in its entirety by
reference to the Amendment, a copy of which is filed as Exhibit 10.23 to this Annual Report on Form 10-K.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
67
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Except as set forth below, information required by this item is incorporated herein by reference from the information contained in our proxy statement for our
2025 annual stockholders meeting (the “2025 proxy statement”) under the headings Executive Compensation, Election of Directors, Corporate Governance,
Executive Officers, Insider Trading Policies and Procedures, and Delinquent Section 16(a) Reports, which will be filed with the Securities and Exchange
Commission within 120 days after the close of the fiscal year.
We have adopted a written code of conduct that applies to our Board of Directors and employees, including our principal executive officer, principal
financial 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 by
posting such information on our website.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference from the information contained in the 2025 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 RELATED
STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference from the information contained in the 2025 proxy statement under the headings
“Executive Compensation”, “Equity Compensation Plan Information”, and “Security Ownership of Certain Beneficial Owners and Management”, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference from the information contained in the 2025 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 SERVICES
The information required by this item is incorporated herein by reference from the information contained in the 2025 proxy statement under the heading
“Independent Registered Public Accounting Firm Fees and Services” and is incorporated herein by reference.
68
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following are filed as part of this Annual Report:
(1) Financial Statements
The following consolidated financial statements are included in Item 8:
Page
Report of Independent Registered Public Accounting Firm
36
Consolidated Balance Sheets as of December 31, 2024 and 2023
38
Consolidated Statements of Operations for the years ended December 31, 2024, 2023, and 2022
39
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2024, 2023, and 2022
40
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2024, 2023, and 2022
41
Consolidated Statements of Cash Flows for the years ended December 31, 2024, 2023, and 2022
42
(b) Exhibits
Exhibit
No.
Description
Incorporation by Reference
Filed
Herewith
Form
Location
Filing Date
3.1
Restated Articles of Organization of the Registrant and Amendments thereto
10-Q
3.1
11/4/14
3.2
Amended and Restated Bylaws of Pegasystems Inc
8-K
3.2
6/15/20
4.1
Specimen Certificate Representing the Common Stock
S-1
4.1
6/19/96
4.2
Indenture, dated as of February 24, 2020, between Pegasystems Inc. and U.S. Bank National
Association, as trustee
8-K
4.1
2/24/20
4.3
Form of certificate representing the 0.75% Convertible Senior Notes due 2025
8-K
Exhibit A to 4.1
2/24/20
4.4
Description of Common Stock
10-K
4.2
2/12/20
10.1
2004 Long-Term Incentive Plan (as amended and restated)++
DEF 14A
Appendix A to 2023
Proxy Statement
4/28/23
10.2
Restricted Stock Unit Sub-Plan of the Registrant’s 2004 Long-Term Incentive Plan for French
Participants++
DEF 14A
Appendix B to 2016
Proxy Statement
4/18/16
10.3
2006 Employee Stock Purchase Plan, as amended on June 20, 2023++
DEF 14A
Appendix B to 2023
Proxy Statement
4/28/23
10.4
Form of Employee Stock Option Agreement, as amended++
10-Q
10.3
5/10/17
10.5
Form of Global Stock Option Agreement++
10-K
10.5
2/17/21
10.6
Form of Restricted Stock Unit Agreement, as amended++
10-Q
10.4
5/10/17
10.7
Form of Global Restricted Stock Unit Agreement++
10-K
10.7
2/17/21
10.8
Form of Non-Employee Director Stock Option Agreement++
10-Q
10.2
10/29/04
10.9
Form of Director Indemnification Agreement++
8-K
99.1
4/11/05
10.10
Offer Letter between the Registrant and Kenneth Stillwell dated June 1, 2016++
8-K
99.1
6/14/16
10.11
Offer Letter between the Registrant and John Higgins executed December 13, 2020++
10-Q
10.3
4/26/23
10.12
Compensation Program for non-employee members of the Registrant’s Board of Directors++
X
10.13
2023 Section 16 Officers/FLT Member Corporate Incentive Compensation Plan++
8-K
99.1
2/13/23
10.14
2024 Section 16 Officers/FLT Member Corporate Incentive Compensation Plan++
8-K
99.1
2/12/24
10.15
Credit Agreement dated as of November 5, 2019 with PNC Bank, National Association
10-Q
10.1
11/7/19
10.16
Amendment to Loan Documents, dated February 18, 2020, between Pegasystems Inc. and PNC Bank,
National Association
8-K
10.3
2/24/20
10.17
Amendment 2 to Loan Documents, dated July 22, 2020, between Pegasystems Inc. and PNC Bank,
National Association
10-Q
10.2
7/28/20
69
Exhibit
No.
Description
Incorporation by Reference
Filed
Herewith
Form
Location
Filing Date
10.18**
Amendment to Loan Documents, dated as of September 30, 2020, between Pegasystems Inc. and PNC
Bank, National Association
10-Q
10.3
10/28/20
10.19
Fourth Amendment to Loan Documents, dated as of March 31, 2022, between Pegasystems Inc. and
PNC Bank, National Association
10-Q
10.1
3/31/22
10.20
Fifth Amendment to Loan Documents, dated as of July 25, 2022, between Pegasystems Inc. and PNC
Bank, National Association
10-Q
10.1
7/27/22
10.21
Sixth Amendment to Loan Documents, dated as of March 31, 2023, between Pegasystems Inc. and PNC
Bank, National Association
10-Q
10.1
4/26/23
10.22
Seventh Amendment to Loan Documents, dated as of April 23, 2024, between Pegasystems Inc. and
PNC Bank, National Association
10-Q
10.1
4/24/24
10.23
Eighth Amendment to Loan Documents, dated as of February 7, 2025 and effective as of February 4,
2025, between Pegasystems Inc. and PNC Bank, National Association
X
10.24
Fee Letter, dated as of March 31, 2023, for Senior Credit Facility
10-Q
10.2
4/26/23
10.25
Form of Side Letter to Base Call Option Transaction
10-Q
10.1
10/28/20
10.26
Form of Side Letter to Additional Call Option Transaction
10-Q
10.2
10/28/20
10.27
Form of Confirmation of Base Call Option Transaction
8-K
10.1
2/24/20
10.28
Form of Confirmation of Additional Call Option Transaction
8-K
10.2
2/24/20
10.29
Sublease, dated March 31, 2021 for Office Space at One Main Street, Cambridge, MA
10-Q
10.1
7/28/21
10.30
Lease between Pegasystems Inc. and 275 Wyman LLC**
8-K
10.1
7/9/21
19.1
Pegasystems Inc. Insider Trading Policy
X
21.1
Subsidiaries of the Registrant.
X
23.1
Consent of Independent Registered Public Accounting Firm—Deloitte & Touche LLP.
X
31.1
Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.
X
31.2
Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer.
X
32
Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer and the Chief Financial
Officer.
+
97.1
Pegasystems Inc. Compensation Recovery Policy
10-K
97.1
2/14/24
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File
because its XBRL tags are embedded within the Inline XBRL document.
X
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
X
101.CAL
Inline XBRL Taxonomy Calculation Linkbase Document.
X
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
X
101.LAB
Inline XBRL Taxonomy Label Linkbase Document.
X
101.PRE
Inline XBRL Taxonomy Presentation Linkbase Document.
X
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
X
+ Indicates that the exhibit is being furnished with this report and is not filed as a part of it.
++ Management contracts and compensatory plans or arrangements required to be filed pursuant to Item 15(b) of Form 10-K.
** Certain portions of this exhibit are considered confidential and have been omitted as allowed under SEC rules and regulations
(c) Financial Statement Schedules
All financial statement schedules are omitted because the required information is not present or not present in sufficient amounts to require submission of
the schedule or because the information is reflected in the consolidated financial statements or notes thereto.
ITEM 16. FORM 10-K SUMMARY
Omitted at Registrant’s option.
70
SIGNATURES
Pursuant 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 to
be signed on its behalf by the undersigned, thereunto duly authorized.
Pegasystems Inc.
Date:
February 12, 2025
By:
/s/ KENNETH STILLWELL
Kenneth Stillwell
Chief 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 12, 2025 by the
following persons on behalf of the Registrant and in the capacities indicated.
Signature
Title
/s/ ALAN TREFLER
Chairman and Chief Executive Officer
(Principal Executive Officer)
Alan Trefler
/s/ KENNETH STILLWELL
Chief Operating Officer and Chief Financial Officer
Kenneth Stillwell
(Principal Financial Officer)
/s/ EFSTATHIOS KOUNINIS
Chief Accounting Officer, Senior Vice President, and Treasurer
(Principal Accounting Officer)
Efstathios Kouninis
/s/ ROHIT GHAI
Director
Rohit Ghai
/s/ PETER GYENES
Director
Peter Gyenes
/s/ RICHARD JONES
Director
Richard Jones
/s/ CHRISTOPHER LAFOND
Director
Christopher Lafond
/s/ DIANNE LEDINGHAM
Director
Dianne Ledingham
/s/ SHARON ROWLANDS
Director
Sharon Rowlands
/s/ LARRY WEBER
Director
Larry Weber
71
EXHIBIT 10.12
Compensation Program for non-employee members of the Registrant’s Board of Directors
(as amended July 23, 2024)
1.
The annual equity grant provided to non-employee members of the Board to be made on August 15 of each year (each such date, a
“Grant Date”) and to consist of $125,000 of Common Stock of the Corporation (based on the closing price on the Grant Date as reported
by Nasdaq) and $125,000 of fully vested ten year non-statutory stock options to purchase Common Stock of the Corporation (based on
the Grant Date fair value used by the Corporation for financial reporting purposes), such stock and options to be issued in accordance
with the terms of the Corporation’s 2004 Long Term Incentive Plan, as amended.
2.
The annual cash retainer for non-employee members of the Board to be $50,000, and that the annual cash retainers for each committee
member to be as follows: Nominating and Corporate Governance Chair: $12,500; Audit Committee Chair: $27,000; Audit Committee
Member: $15,000; Compensation Committee Chair: $20,000; and Compensation Committee member: $10,000.
3.
The annual cash retainer and committee retainer payments to be payable on the Grant Date.
th
EXHIBIT 10.23
Eighth Amendment to Loan Documents
THIS EIGHTH AMENDMENT TO LOAN DOCUMENTS (this “Amendment”) is entered into on February 4, 2025, by and among
PEGASYSTEMS INC. (the “Borrower”), the Guarantors (as such term is defined in the Credit Agreement referred to in Exhibit A attached
hereto and made a part hereof (the “Loan Agreement”)) party hereto (the “Guarantors” and each, individually, a “Guarantor”; the Borrower
and the Guarantors are collectively referred to herein as the “Loan Parties” and each, individually, a “Loan Party”), the Lenders (as such term
is defined in the Loan Agreement) party hereto (the “Lenders”) and PNC BANK, NATIONAL ASSOCIATION (the “Agent”), in its capacity
as “Agent” (as such term is defined in the Loan Agreement) for the Lenders.
BACKGROUND
A. The Loan Parties have executed and delivered to the Agent and/or the Lenders one or more promissory notes, letter agreements, loan
agreements, security agreements, pledge agreements, collateral assignments, and other agreements, instruments, certificates and documents,
some or all of which are more fully described on Exhibit A attached hereto, which is made a part of this Amendment (collectively, as amended
from time to time, the “Loan Documents”) which evidence or secure some or all of the Borrower’s Obligations.
B. The Loan Parties, the Lenders and the Agent desire to amend the Loan Documents as provided for in this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants herein contained and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Certain of the Loan Documents are amended as set forth in Exhibit A attached hereto and made a part hereof. Any and all references to
any Loan Document which is amended hereby in any other Loan Document shall be deemed to refer to such Loan Document as amended by this
Amendment. This Amendment is deemed incorporated into each of the Loan Documents being amended hereby. Any initially capitalized terms
used in this Amendment without definition shall have the meanings assigned to those terms in the Loan Agreement. To the extent that any term
or provision of this Amendment is or may be inconsistent with any term or provision in any Loan Document, the terms and provisions of this
Amendment shall control.
2. The Borrower hereby certifies that (a) all of its representations and warranties in the Loan Documents, as amended by this Amendment,
are, except as may otherwise be stated in this Amendment, (i) true and correct in all material respects (except for any representation or warranty
which expressly relates to an earlier date, in which case such representation and warranty was true and correct as of such earlier date) as of the
date of this Amendment, (ii) except as previously disclosed by Borrower to Agent in connection with this Amendment, ratified and confirmed
without condition as if made anew (except for any representation or warranty which expressly relates to an earlier date, in which case such
representation and warranty shall be ratified and confirmed as of such earlier date), and (iii) incorporated into this Amendment by reference; (b)
no Event of Default or event which, with the passage of time or the giving of notice or both, would constitute an Event of Default, exists under
any Loan Document which will not be cured by the execution and effectiveness of this Amendment; (c) no consent, approval, order or
authorization of, or registration or filing with, any third party is required in connection with the execution, delivery and carrying out of this
Amendment or, if required, has been obtained; and (d) this Amendment has been duly authorized, executed and delivered so that it constitutes
the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. The Borrower confirms that the Obligations
remain outstanding without defense, set off, counterclaim, discount or charge of any kind as of the date of this Amendment.
EXHIBIT 10.23
(continued)
3. The Borrower hereby confirms that any collateral for the Obligations, including liens, security interests, mortgages, and pledges granted
by the Borrower or third parties (if applicable), shall continue unimpaired and in full force and effect, and shall cover and secure all of the
Borrower’s existing and future Obligations to the Lenders, as modified by this Amendment.
4. As a condition precedent to the effectiveness of this Amendment, the Borrower shall comply with the terms and conditions specified in
Exhibit A attached hereto and made a part hereof.
5. To induce the Agent and the Lenders to enter into this Amendment, each Loan Party reaffirms all of its indemnification obligations
contained in the Loan Documents, including, without limitation, pursuant to Section 11.3.2 of the Loan Agreement.
6. This Amendment may be signed in any number of counterpart copies and by the parties to this Amendment on separate counterparts, but
all such copies shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment by
electronic or facsimile transmission shall be effective as delivery of a manually executed counterpart. Any party so executing this Amendment by
electronic or facsimile transmission shall promptly deliver a manually executed counterpart, provided that any failure to do so shall not affect the
validity of the counterpart executed by electronic or facsimile transmission, as applicable.
7. Notwithstanding any other provision herein or in the other Loan Documents, each Loan Party agrees that this Amendment, the Note, the
other Loan Documents, any other amendments thereto and any other information, notice, signature card, agreement or authorization related
thereto (each, a “Communication”) may, at the Agent’s option, be in the form of an electronic record. Any Communication may, at the Agent’s
option, be signed or executed using electronic signatures. For the avoidance of doubt, the authorization under this paragraph may include,
without limitation, use or acceptance by the Agent of a manually signed paper Communication which has been converted into electronic form
(such as scanned into PDF format) for transmission, delivery and/or retention. Each Loan Party, each Lender and the Agent acknowledge and
agree that the methods for delivering Communications, including notices, under the Loan Documents include electronic transmittal to any
electronic address provided by either party to the other party from time to time.
8. This Amendment will be binding upon and inure to the benefit of each Loan Party, the Agent, and the Lenders and their respective heirs,
executors, administrators, successors and assigns.
9. This Amendment has been delivered to and accepted by the Agent and the Lenders and will be deemed to be made in the State of New
York. This Amendment will be interpreted and the rights and liabilities of the parties hereto determined in accordance with the laws of the State
of New York, excluding its conflict of laws rules, including without limitation the Electronic Signatures and Records Act (or equivalent) in such
State (or, to the extent controlling, the laws of the United States of America, including without limitation the Electronic Signatures in Global and
National Commerce Act).
10. Except as amended hereby, the terms and provisions of the Loan Documents remain unchanged, are and shall remain in full force and
effect unless and until modified or amended in writing in accordance with their terms, and are hereby ratified, reaffirmed and confirmed. Except
as expressly provided herein, this Amendment shall not constitute an amendment, waiver, consent or release with respect to any provision of any
Loan Document, a waiver of any default or Event of Default under any Loan Document, or a waiver or release of any of the Agent’s or Lenders’
rights and remedies (all of which are hereby reserved). Each Loan Party, the Agent and the Lenders mutually expressly ratify and confirm
the waiver of jury trial or arbitration provisions contained in the Loan Documents, all of which are incorporated herein by reference.
[signatures appear on following page]
2
EXHIBIT 10.23
(continued)
WITNESS the due execution of this Amendment as of the date first written above, with the intent to be legally bound hereby.
BORROWER:
PEGASYSTEMS INC.
By: /s/ Kenneth Stillwell
Name: Kenneth Stillwell
Title: Chief Operating Officer and Chief
Financial Officer
GUARANTORS:
PEGASYSTEMS WORLDWIDE INC.
By: /s/ Efstathios Kouninis
Name: Efstathios Kouninis
Title: Director
ANTENNA SOFTWARE, LLC
By: PEGASYSTEMS INC., its sole member
By: /s/ Kenneth Stillwell
Name: Kenneth Stillwell
Title: Chief Operating Officer and Chief
Financial Officer
PEGA GOVERNMENT LLC
By: /s/ Efstathios Kouninis
Name: Efstathios Kouninis,
Title: Manager
Signature Page – Loan Parties – Eighth Amendment to Loan Documents
EXHIBIT 10.23
(continued)
PNC BANK, NATIONAL ASSOCIATION,
Individually and as Agent
By: /s/ Terence J. O’Malley ____________
Name: Terence J. O’Malley
Title: Senior Vice President
Signature Page – PNC Bank – Eighth Amendment to Loan Documents
EXHIBIT 10.23
(continued)
EXHIBIT A
TO EIGHTH AMENDMENT TO LOAN DOCUMENTS
DATED AS OF FEBRUARY 4, 2025
A. The “Loan Documents” that are the subject of this Amendment include the following (as any of the foregoing have previously been
amended, modified or otherwise supplemented):
1.
Credit Agreement dated as of November 5, 2019 made by and among Pegasystems Inc., (the “Borrower”), each of the
Guarantors, and the Agent.
2.
Amendment to Loan Documents dated as of February 18, 2020 made by and among the Borrower, each of the Guarantors, and
the Agent.
3.
Second Amendment to Loan Documents dated as of July 22, 2020 made by and among the Borrower, each of the Guarantors,
and the Agent.
4.
Third Amendment to Loan Documents dated as of September 20, 2020 made by and among the Borrower, each of the
Guarantors, and the Agent.
5.
Fourth Amendment to Loan Documents dated as of March 31, 2022 made by and among the Borrower, each of the Guarantors,
and the Agent.
6.
Fifth Amendment to Loan Documents dated as of July 25, 2022 made by and among the Borrower, each of the Guarantors, and
the Agent.
7.
Sixth Amendment to Loan Documents dated as of March 31, 2023 made by and among the Borrower, each of the Guarantors,
and the Agent.
8.
Seventh Amendment to Loan Documents dated as of April 23, 2024 made by and among the Borrower, each of the Guarantors,
and the Agent.
9.
Guarantor Joinder and Assumption Agreement made as of August 24, 2020, by Pega Government LLC in favor of the Agent and
the Lenders.
10.
Revolving Credit Note in the principal amount of $100,000,000.00 dated as of November 5, 2019 executed by the Borrower in
favor of the Agent.
11.
Security Agreement dated as of November 5, 2019, by and between the Borrower and the Agent.
12.
Security Agreement dated as of November 5, 2019, by and among Pegasystems Worldwide, Inc., Antenna Software, LLC and
the Agent.
13.
Continuing Agreement of Guaranty and Suretyship dated as of November 5, 2019, by and among Pegasystems Worldwide, Inc.,
Antenna Software, LLC and the Agent.
14.
Pledge Agreement dated as of November 5, 2019, by and between the Borrower and the Agent.
15.
First Amendment to Pledge Agreement dated as of August 24, 2020, by and between the Borrower and the Agent.
16.
Pledge Agreement (Bank Deposits) dated as of November 5, 2019, by and among the Borrower and the Agent.
Exhibit A - 1
EXHIBIT 10.23
(continued)
17.
Deposit Account Control Agreement dated as of December 23, 2019, by and among the Borrower, the Agent and Bank of
America, N.A..
18.
Patent, Trademark and Copyright Security Agreement dated as of November 5, 2019, by and between the Borrower and the
Agent.
19.
Patent, Trademark and Copyright Security Agreement dated as of November 5, 2019, by and between Antenna Software, LLC
and the Agent.
20.
Fee Letter dated as of March 31, 2023 made by and among the Borrower and the Agent.
21.
All other documents, instruments, agreements, and certificates executed and delivered in connection with the Loan Documents
listed in this Exhibit A.
B. Amendments to Loan Documents. Effective as of February 4, 2025, the Loan Documents are hereby amended and modified as follows:
1.
Amendments to Loan Agreement.
1.01
Reference is hereby made to the definition of “Expiration Date” in Section 1.1 of the Loan Agreement. Said definition of
“Expiration Date” in Section 1.1 of the Loan Agreement is hereby amended and restated as follows:
“Expiration Date shall mean, with respect to the Revolving Credit Commitments, February 4, 2027.”
C. Conditions to Effectiveness of Amendment. The Agent’s willingness to agree to the amendments set forth in this Amendment is subject to
the prior satisfaction of the following conditions:
1.
Execution by all applicable parties and delivery to the Agent of this Amendment (including the attached Consent).
2.
Reimbursement by the Borrower to the Agent of the fees and expenses of the Agent and the Agent's outside counsel in
connection with this Amendment, including without limitation an upfront renewal fee of ten basis points multiplied by the
aggregate amount of Revolving Credit Commitments which the Borrower acknowledges is fully earned and non-refundable as
of the date hereof.
3.
Evidence that adequate insurance required to be maintained under the Loan Agreement is in full force and effect, with additional
insured and lender loss payable special endorsements attached thereto in form and substance satisfactory to the Agent and its
counsel naming the Agent as additional insured and lender loss payee
4.
A Lien search in acceptable scope and with acceptable results.
5.
All representations and warranties contained in the Loan Documents are true and correct in all material respects on the date
hereof (except for any representation or warranty which expressly relates to an earlier date, in which case such representation
and warranty was true and correct as of such earlier date).
6.
Immediately after giving effect to this Amendment, no default or Event of Default shall have occurred and be continuing under
the Loan Agreement or any of the other Loan Documents.
Exhibit A - 2
EXHIBIT 10.23
(continued)
CONSENT OF GUARANTOR
Each of the undersigned guarantors (jointly and severally if more than one, the “Guarantors”) consent to the provisions of the foregoing
Amendment, any and all documents executed in connection therewith, and all prior amendments (if any) and confirms and agrees that (a) the
Guarantors’ obligations under the Guaranty shall be unimpaired by the Amendment; (b) as of the date hereof, the Guarantors have no defenses,
set offs, counterclaims, discounts or charges of any kind against the Agent and/or the Lenders, their respective officers, directors, employees,
agents or attorneys with respect to the Guaranty; (c) except as expressly modified by the foregoing Amendment, all of the terms, conditions and
covenants in the Guaranty remain unaltered and in full force and effect and are hereby ratified and confirmed and apply to the Obligations, as
modified by the Amendment; and (d) the Guarantors are bound by the terms and provisions of paragraph 5 of the Amendment. The Guarantors
certify that all representations and warranties made in the Guaranty are true and correct in all material respects (except for any representation or
warranty which expressly relates to an earlier date, in which case such representation and warranty was true and correct as of such earlier date).
By signing below, the Guarantors agree that this Consent, the Guaranty, the other Loan Documents, any amendments thereto and any other
information, notice, signature card, agreement or authorization related thereto (each, a “Communication”) may, at the Agent’s option, be in the
form of an electronic record. Any Communication may, at the Agent’s option, be signed or executed using electronic signatures. For the
avoidance of doubt, the authorization under this paragraph may include, without limitation, use or acceptance by the Agent of a manually signed
paper Communication which has been converted into electronic form (such as scanned into PDF format) for transmission, delivery and/or
retention. The Guarantor acknowledges and agrees that the methods for delivering Communications, including notices, under the Guaranty and
the other Loan Documents include electronic transmittal to any electronic address provided by any party to the other party from time to time.
The Guarantors hereby confirm that any collateral for the Obligations, including liens, security interests, mortgages, and pledges granted by
the Guarantors, shall continue unimpaired and in full force and effect, shall cover and secure all of the Guarantors’ existing and future
Obligations to the Lenders, as modified by this Amendment.
The Guarantor ratifies and confirms the indemnification (if any) and waiver of jury trial provisions contained in the Guaranty.
[signatures appear on following page]
EXHIBIT 10.23
(continued)
WITNESS the due execution of this Consent as of the date of the Amendment, intending to be legally bound hereby.
GUARANTORS:
PEGASYSTEMS WORLDWIDE INC.
By: /s/ Efstathios Kouninis
Name: Efstathios Kouninis,
Title Director
ANTENNA SOFTWARE, LLC
By: PEGASYSTEMS INC., its sole member
By: /s/ Kenneth Stillwell
Name: Kenneth Stillwell
Title: Chief Operating Officer and Chief
Financial Officer
PEGA GOVERNMENT LLC
By: /s/ Efstathios Kouninis
Name: Efstathios Kouninis,
Title: Manager
Signature Page – Guarantors – Eighth Amendment to Loan Documents
EXHIBIT 19.1
Pegasystems Inc.
Insider Trading Policy
Department: Legal
Owner: General Counsel and Chief Compliance Officer
Version: V4.3
Effective: 9/19/2002
Last Reviewed: 12/10/2024
Last Revised: 12/10/2024
Last Approved: 12/27/2024
Reviewed: Annually
OBJECTIVE
Pegasystems has established this Insider Trading Policy (this “Policy”) to promote compliance by its Staff (as defined below) with federal,
state, and foreign securities laws prohibiting insider trading. This Policy does not replace each person’s individual responsibility to
understand and comply with the legal prohibition of insider trading.
Trading in a company’s securities while in possession of material non-public information regarding that company, commonly called
“insider trading,” is illegal. Anyone who commits insider trading can be criminally prosecuted and required to pay substantial fines.
Pegasystems is committed to preventing insider trading by its Staff.
The U.S. Securities and Exchange Commission (“SEC”) and other regulators aggressively investigate and prosecute people that commit
insider trading or tip material non-public information about a company to others who may commit insider trading on the basis of that
information. These regulators use sophisticated computer-assisted enforcement techniques to monitor trading activity and
automatically detect unusual trading in a company’s stock, even in small amounts. The odds that unlawful trading will be detected are
far greater than is commonly realized. Given the seriousness of insider trading violations, this Policy goes beyond the legal requirements
in some areas, as an additional precaution.
SCOPE
This Policy applies to all Directors, Officers, employees, and contractors (together, “Staff”) of Pegasystems Inc. and its subsidiaries
(together, “Pegasystems” or the “Company”). The term “Staff” also includes (i) the spouse, immediate family members, others sharing
the Staff member’s household and outside family members subject to the influence of a Staff member or who may consult with a Staff
member before trading in securities subject to this Policy (collectively “Family Members”), regardless of whether the Staff member is
aware of trading conducted by these persons and regardless of whether the Staff member derives any benefit from the trading actions
of these persons and (ii) any entities that any Staff or Family Member influences or controls, including corporations, partnerships or
trusts, and transactions by any such entity will be treated for the purposes of this Policy and applicable securities laws as if they were
made for the account of the applicable Staff member.
1 of 5
POLICY
1.
No Trading When Aware of Material, Nonpublic Information. Staff who are aware of Material Nonpublic Information must not buy,
sell, or otherwise engage in transactions in the Company’s securities (including derivative securities), directly or through others.
2.
No Trading During “Blackout” Periods. As an additional precaution, Staff must not buy or sell Company securities, directly or
through others, during the last two weeks of each fiscal quarter and continuing until one full business day after the public release
of the Company’s financial results for that quarter, or during any other trading “blackout” period that the Company may impose
on a Staff member as a result of that Staff member’s access to Material Nonpublic Information.
3.
No Short Sales or Hedging Activities. Staff must not trade in Company securities in the form of a short sale, put, call, straddle,
prepaid variable forward, equity swap, exchange fund or through any other similar security or transaction that would permit
Staff to own Company securities without the full risks and rewards of ownership.
4.
No Tipping or Misappropriation. Staff must not communicate or “tip” Material Nonpublic Information involving the Company to any
third party ("tippee"), or misappropriate any Material Nonpublic Information regarding the Company to which they were not
entitled to have access. This includes communications or tips to tippees made at social, business or other gatherings outside
Pegasystems’ workplace.
5.
No Improper Trading in Stock of Other Companies. In addition, Staff who, in the course of working for or on behalf of the Company,
learn of Material Nonpublic Information about any other company, including a customer or supplier of the Company, must not trade
in that company’s securities, directly or through other persons or entities, until the information becomes public or is no longer
material.
6. Bona Fide Gifts. Bona fide gifts are not transactions subject to this Policy, unless the Staff person making the gift has reason to
believe that the recipient intends to sell the Company securities while the Staff person making the gift is aware of material non-
public information or during a blackout period.
Transactions that Staff may believe are necessary or justifiable for independent reasons (such as the need to raise money for an
emergency) are not excluded from this Policy. The securities laws do not recognize such mitigating circumstances, and even the
appearance of an improper transaction must be avoided to preserve the Company’s reputation for adhering to high standards of
conduct.
Certain Exceptions
1.
Permitted Transactions. This Policy generally does not apply to the following transactions in Pegasystems securities:
•
Exercise of Pegasystems stock options by paying the full exercise price in cash, provided that no shares of common stock received
upon such exercise may be sold (including through any broker-assisted cashless exercise) except in compliance with this Policy,
whether to fund the exercise, pay taxes or otherwise;
•
Automatic “sell to cover” transactions conducted by Pegasystems’ Equity Administrator and mandated by Pegasystems’ election
under one or more of its equity incentive compensation plans to require the satisfaction of tax withholding obligations in
connection with the vesting of a Staff’s restricted stock units (whether performance or time-based) to be funded by such sell to
cover transactions;
•
Ongoing investments under the Employee Stock Purchase Plan pursuant to existing investment elections; or
•
Buying or selling investments in publicly traded mutual funds.
2.
Rule 10b5-1 Plans. The trading blackout and trade pre-clearance requirements under this Policy do not apply to purchases or sales
of Pegasystems securities made pursuant to a previously established and approved “Rule 10b5-1 plan.” Rule 10b5-1 under the
Securities Exchange Act of 1934, as amended (the "Act"), provides an affirmative defense from insider trading liability to the extent
a plan meets certain conditions specified in Rule 10b5-1. Any Staff who wish to enter into a Rule 10b5-1 plan must contact the
General Counsel for pre-clearance.
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To be pre-cleared by the General Counsel, a Rule 10b5-1 plan must comply with both the requirements of Rule 10b5-1 and the
following guidelines:
•
The Rule 10b5-1 plan can only be established or amended at a time when the Staff does not possess material nonpublic
information about Pegasystems;
•
The Rule 10b5-1 plan cannot be established or amended during a trading blackout period;
•
The Rule 10b5-1 plan must include a “cooling off period” between establishment or modification and a transaction under that
plan.
o
For Staff that are Directors or Officers within the meaning of Section 16 of the Exchange Act, the “cooling off period” is
the later of (i) 90 days following establishment or modification of the Rule 10b5-1 plan and (ii) two business days
following disclosure in the Form 10-K or Form 10-Q filed by Pegasystems disclosing the Pegasystems financial results for
the period in which the plan was established or modified, in all cases subject to maximum “cooling off period” of 120
days.
o
For other Staff, the “cooling off period” is 30 days following establishment or modification of the Rule 10b5-1 plan.
o
Consistent with guidance from the SEC, for this limited purpose it will not be considered a modification of a Rule 10b5-1
plan if the modification does not change the sales or purchase prices or price ranges, the amount of securities to be sold
or purchased, or the timing of transactions under a Rule 10b5-1 plan;
•
Other than in limited circumstances as approved by the Chief Compliance Officer or a person designated by the Chief Compliance
Officer, Staff may not at any one time have more than one Rule 10b5-1 plan that covers all or a portion of the same time period.
For clarity, this policy does not limit the ability of a Staff who adopts a Rule 10b5-1 plan from engaging in the permitted
transactions specified in the preceding section; nor would it impact the automatic “sell to cover” transactions that may be
conducted by Pegasystems’ Equity Administrator and mandated by Pegasystems’ election, as outlined above;
•
Staff may not adopt more than one Rule 10b5-1 plan in any consecutive 12 month period that is a single-trade plan or is designed
to effect the purchase and sale as a single transaction and which has the practical effect of requiring such a result;
•
The Rule 10b5-1 plan must comply with any additional guidelines established by the Chief Compliance Officer from time to time,
which will be made available upon request; and
•
The Rule 10b5-1 plan cannot be established or amended without the prior written pre-clearance of the Chief Compliance Officer
or a person designated by the Chief Compliance Officer; and
•
The Rule 10b5-1 plan cannot be terminated without prior written notice to the Chief Compliance Officer or a person designated
by the Chief Compliance Officer.
Please note that the pre-clearance of a Rule 10b5-1 plan by the Chief Compliance Officer in no way guarantees compliance with Rule 10b5-1
or reduces or eliminates any obligation by Staff to comply with the U.S. securities laws, including the reporting and short-swing trading
provisions under Section 16 of the Exchange Act. If any questions arise, Staff should consult with their own counsel when implementing a
Rule 10b5-1 plan.
Policy Violations, Disciplinary Actions
Violation of this Policy or securities laws is grounds for immediate disciplinary action, up to and including termination of employment,
disgorgement of profits and/or other actions deemed appropriate by the Company.
•
Criminal sanctions and civil penalties sought by the SEC and private actions for damages can be substantial.
•
Violation of state or federal securities laws for personal profit or advantage and accounting for profit pursuant to Section 16(b) of
the Act are excluded as insurable events under Pegasystems’ Director and Officers Liability Insurance. Additionally, Pegasystems
will not assume responsibility for the defense, or attorney’s fees incurred in the defense, of a Section 16(b) violation or other
willful violation of the securities laws, upon adjudication by a court of law.
If you have questions relative to this Policy and your obligations under this Policy, contact the General Counsel and Chief Compliance
Officer.
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Additional Provisions Applicable to Pegasystems’ Directors and Officers
1. Pursuant to Section 16(a) of the Act, Directors and Officers must report on SEC Forms 3, 4, or 5 all transactions in the Company’s
securities including purchases or sales of stock, gifts and stock option/RSU transactions.
2. Directors” are defined as those individuals serving on the Board of Directors of Pegasystems Inc.
3. For purposes of Section 16, “Officers” are defined as the president, the principal financial officer, the principal accounting officer,
any vice president in charge of a principal business unit, division or function and any other person who performs a significant policy
making function for the Company. The Company will identify from time to time those persons it considers to be “Officers.”
4. All Directors and Officers are liable to the Company for any profits realized in any short-swing transaction involving the Company’s
stock. A short-swing transaction is defined as any sale and purchase or any purchase and sale of Pegasystems’ stock within any six-
month period.
5. Purchases under the Employee Stock Purchase Plan and exercises of employee stock options under the Company’s Amended and
Restated 2004 Stock Incentive Plan are not deemed a "purchase" for purposes of Section 16(b). Sales of stock acquired pursuant to
these plans, however, must be reported on Form 4 and any sale of such stock will be deemed a "sale" for purposes of Section 16(b).
6. Pre-clearance Procedures. Directors and Officers may not engage in any transaction in the Company’s securities without first
obtaining written pre-clearance of the transaction from the Chief Compliance Officer or a person designated by the Chief
Compliance Officer. The Chief Compliance Officer is under no obligation to approve a transaction submitted for pre-clearance, and
may determine not to permit the transaction. If a person seeks pre-clearance and permission to engage in the transaction is denied,
then he or she should refrain from initiating any transaction in Company securities, and should not inform any other person of the
restriction. When a request for pre-clearance is made, the requestor should carefully consider whether he or she may be aware of
any Material Nonpublic Information about the Company, and should describe fully those circumstances to the Chief Compliance
Officer.
DEFINITION
“Material Nonpublic Information” means information that is considered “material” if a reasonable investor would consider that
information important in making a decision to buy, hold or sell securities. Any information that could be expected to affect the
Company’s stock price, whether it is positive or negative, should be considered material. There is no bright-line standard for
assessing materiality; rather, materiality is based on an assessment of all of the facts and circumstances, and is often evaluated by
enforcement authorities with the benefit of hindsight. Information that has not been disclosed to the public is generally considered
to be nonpublic information.
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RESPONSIBILITIES
General Counsel and Chief Compliance Officer:
•
Determines whether matters should be handled internally by Legal Team members or by outside counsel
•
Approves all Legal Policies
•
Enforces Legal Policies
•
Provide Staff training regarding this and other policies concerning Company securities.
•
Review and respond to pre-clearance requests.
•
Review and approve trading plans.
Legal Team Members:
•
Interpret Legal Policies
•
Assist in enforcing Legal Policies
DOCUMENT APPROVAL
The Owner of this document is responsible for ensuring that it is reviewed annually. The current version of this policy was approved by
the Compliance & Risk Governing Committee on the approval date recorded above and is issued on a version-controlled basis under their
authority.
VERSION HISTORY
*List the latest changes at the top of the below table
Version
Date
Author
(Pega ID)
Reason for change
4.3
December 10, 2024
bonit
Minor updates.
4.2
April 11, 2024
folec
Updated to include previously approved changes; minor updates.
4.1
November 7, 2023
Schij3
No changes; review only.
4.0
February 7, 2023
bursj
Updated to reflect Amended SEC rules regarding Rule 10b5-1.
3.1
November 28, 2022
Schij3
No changes, review only
3.1
November 30, 2021
Lancd
No changes, review only.
3.1
November 20,2020
Ralea
No changes
3.1
March 5, 2020
Schij3
Update Copyright date, no other changes.
3.1
February 20, 2019
mesrj
Revised footer in alignment with Data Classification Policy; review only.
3.1
May 8, 2018
rosip
Minor updates
3.0
May 26, 2017
kaplb
No changes, review only.
3.0
Aug. 1, 2016
kaplb
No changes, review only.
3.0
May 24, 2015
kaplb
Updated policy.
2.0
August 3, 2009
1.0
September 19, 2002
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EXHIBIT 21.1
SUBSIDIARIES OF PEGASYSTEMS INC*
Name of Subsidiary
State or Jurisdiction of Entity
Pegasystems BV
Netherlands
Pegasystems France
France
Pegasystems GmbH
Germany
Pegasystems Limited
United Kingdom
Pegasystems PTY Limited
Australia
Pegasystems Software Limited sp. z.o.o.
Poland
Pegasystems Worldwide India Private Limited
India
* Omits subsidiaries, which, considered in the aggregate, would not constitute a significant subsidiary.
1
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-09305, 333-89707, 333-53746, 333-104788, 333-116660, 333-135596, 333-
166287, 333-166544, 333-176810, 333-213953, 333-239889, and 333-272774 on Form S-8 of our report dated February 12, 2025, relating to the financial
statements of Pegasystems Inc. and the effectiveness of Pegasystems Inc.’s internal control over financial reporting, appearing in this Annual Report on Form
10-K for the year ended December 31, 2024.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 12, 2025
1
EXHIBIT 31.1
CERTIFICATION
I, 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 the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Dated: February 12, 2025
/s/ ALAN TREFLER
Alan Trefler
Chairman and Chief Executive Officer
(Principal Executive Officer)
1
EXHIBIT 31.2
CERTIFICATION
I, 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 the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Dated: February 12, 2025
/s/ KENNETH STILLWELL
Kenneth Stillwell
Chief Operating Officer and Chief Financial Officer
(Principal Financial Officer)
1
EXHIBIT 32
CERTIFICATION PURSUANT TO SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Pegasystems Inc. (the “Company”) on Form 10-K for the year ended December 31, 2024 as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), Alan Trefler, Chairman and Chief Executive Officer of Pegasystems Inc., and Kenneth Stillwell,
Chief Operating Officer and Chief Financial Officer of Pegasystems Inc., each certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: February 12, 2025
/s/ ALAN TREFLER
Alan Trefler
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ KENNETH STILLWELL
Kenneth Stillwell
Chief Operating Officer and Chief Financial Officer
(Principal Financial Officer)
1