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Form 8-K PEGASYSTEMS INC For: Jul 27

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July 27, 2022 4:17 PM EDT
false000101385700010138572022-07-272022-07-27

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_________________________________
 FORM 8-K
_________________________________
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 27, 2022
____________________
PEGASYSTEMS INC.
(Exact name of Registrant as specified in its charter)
_________________________________
Massachusetts
1-11859
04-2787865
(State or other jurisdiction of incorporation)(Commission File Number)(IRS Employer Identification No.)
One Main Street, Cambridge, MA 02142
(Address of principal executive offices, including zip code)

(617) 374-9600
(Registrant’s telephone number, including area code)

Not Applicable
(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions:
☐Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, $.01 par value per sharePEGANASDAQ Global Select Market
Indicate by check mark whether the Registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).                         
                                                Emerging growth company ☐
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐


ITEM 2.02    RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On July 27, 2022, Pegasystems Inc. issued a press release announcing its financial results for the second quarter of 2022. A copy of the press release is attached as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated herein by reference in its entirety.
The information in this Item 2.02 and the Exhibits attached hereto shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except as expressly set forth by specific reference in such a filing.
ITEM 9.01    FINANCIAL STATEMENTS AND EXHIBITS
Exhibit No.Description
99.1
104
Cover Page Interactive Data File (formatted as Inline XBRL)



SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Pegasystems Inc.
Dated:July 27, 2022By:/s/ KENNETH STILLWELL
Kenneth Stillwell
Chief Operating Officer and Chief Financial Officer
(Principal Financial Officer)


EXHIBIT 99.1
q42019pegalogo.jpg
Client Adoption Drives Pega Cloud to 70% of New Client Commitments in First Half of 2022
•Total revenue increases to $651 million in first six months of 2022
•Annual contract value grows 14 percent (19 percent in constant currency)
•Total backlog of $1.1 billion as of June 30, 2022

CAMBRIDGE, Mass. — July 27, 2022 — Pegasystems Inc. (NASDAQ: PEGA), the low-code platform provider that builds agility into the world's leading organizations, released its financial results for the second quarter of 2022.
"This year has turned out to be an extremely volatile business environment,” said Alan Trefler, founder and CEO, Pegasystems. “The ongoing uncertainty will continue to put pressure on our clients. But this is an environment for which Pega is uniquely suited, as our low-code platform allows these same organizations to more easily adapt to change.”
"In the first half of 2022, we’ve grown annual contract value (“ACV”) 19 percent year-over-year in constant currency while showing additional signs of improving profitability,” said Ken Stillwell, COO and CFO, Pegasystems. “We’re doubling down on our work to become a Rule of 40 company in 2024.”
Financial and performance metrics (1)
(Dollars in thousands,
except per share amounts)
Three Months Ended
June 30,		Six Months Ended
June 30,
20222021Change20222021Change
Total revenue$274,337 $325,702 (16)%$650,644 $639,201 2 %
Net (loss) income - GAAP$(286,296)$37,291 *$(286,675)$30,674 *
Net (loss) income - non-GAAP$(31,406)$21,792 *$18,768 $45,433 (59)%
Diluted (loss) earnings per share - GAAP$(3.50)$0.43 *$(3.51)$0.36 *
Diluted (loss) earnings per share - non-GAAP$(0.38)$0.25 *$0.22 $0.53 (58)%
* not meaningful
(Dollars in thousands)Three Months Ended
June 30,		ChangeSix Months Ended
June 30,		Change
2022202120222021
Pega Cloud$93,506 34 %$73,293 23 %$20,213 28 %$183,823 28 %$141,151 22 %$42,672 30 %
Maintenance78,326 29 %78,782 24 %(456)(1)%158,042 24 %154,343 24 %3,699 2 %
Subscription services171,832 63 %152,075 47 %19,757 13 %341,865 52 %295,494 46 %46,371 16 %
Subscription license41,600 15 %104,296 32 %(62,696)(60)%179,133 28 %215,805 34 %(36,672)(17)%
Subscription213,432 78 %256,371 79 %(42,939)(17)%520,998 80 %511,299 80 %9,699 2 %
Perpetual license2,266 1 %12,596 4 %(10,330)(82)%9,706 1 %18,048 3 %(8,342)(46)%
Consulting58,639 21 %56,735 17 %1,904 3 %119,940 19 %109,854 17 %10,086 9 %
$274,337 100 %$325,702 100 %$(51,365)(16)%$650,644 100 %$639,201 100 %$11,443 2 %


(1) See the Schedules at the end of this release for additional information, including a reconciliation of our non-GAAP and GAAP measures.
1
EXHIBIT 99.1
(continued)
chart-b081cfb50b814ea6887.jpg
chart-26c21744e0bd432692c.jpg
Note: Constant currency measures are calculated by applying foreign exchange rates for the earliest period shown to all periods. The above constant currency measures reflect foreign exchange rates applicable as of Q2 2021.
2
EXHIBIT 99.1
(continued)
Quarterly conference call
A conference call and audio-only webcast will be conducted at 5:00 p.m. EDT on Wednesday, July 27, 2022. Members of the public and investors are invited to join the call and participate in the question and answer session by dialing 1-888-394-8218 (domestic), 1-323-794-2588 (international), or via webcast (https://viavid.webcasts.com/starthere.jsp?ei=1558139&tp_key=0cc6605362) by logging onto www.pega.com at least five minutes prior to the event's broadcast and clicking on the webcast icon in the Investors section.
Discussion of non-GAAP financial measures
We believe that non-GAAP financial measures help investors understand our core operating results and prospects, consistent with how management measures and forecasts our performance without the effect of often one-time charges and other items outside our normal operations. The supplementary non-GAAP financial measures are not meant to be superior to or a substitute for financial measures prepared under U.S. GAAP.
Reconciliations of our non-GAAP and GAAP measures are at the end of this release.
Forward-looking statements
Certain statements in this press release may be "forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995.
Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, projects, forecasts, guidance, likely, and usually, or variations of such words and other similar expressions identify forward-looking statements, which are based on current expectations and assumptions.
Forward-looking statements deal with future events and are subject to risks and uncertainties that are difficult to predict, including, but not limited to:
•our future financial performance and business plans;
•the adequacy of our liquidity and capital resources;
•the continued payment of our quarterly dividends;
•the timing of revenue recognition;
•management of our transition to a more subscription-based business model;
•variation in demand for our products and services, including among clients in the public sector;
•reliance on key personnel;
•global economic and political conditions and uncertainty, including continued impacts from the ongoing COVID-19 pandemic and the war in Ukraine;
•reliance on third-party service providers, including hosting providers;
•compliance with our debt obligations and covenants;
•the potential impact of our convertible senior notes and Capped Call Transactions;
•foreign currency exchange rates;
•the potential legal and financial liabilities and damage to our reputation due to cyber-attacks;
•security breaches and security flaws;
•our ability to protect our intellectual property rights, costs associated with defending such rights, intellectual property rights claims and other related claims by third parties against us, including related costs, damages, and other relief that may be granted against us;
•our client retention rate; and
•management of our growth.
These risks and others that may cause actual results to differ materially from those expressed in such forward-looking statements are described further in Part I of our Annual Report on Form 10-K for the year ended December 31, 2021, Part II of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, and other filings we make with the U.S. Securities and Exchange Commission (“SEC”).
Except as required by applicable law, we do not undertake and expressly disclaim any obligation to update or revise these forward-looking statements publicly, whether due to new information, future events, or otherwise.
The forward-looking statements in this press release represent our views as of July 27, 2022.
3
EXHIBIT 99.1
(continued)
About Pegasystems
Pega provides a powerful low-code platform that builds agility into the world’s leading organizations so they can adapt to change. Clients use our AI-powered decisioning and workflow automation to solve their most pressing business challenges – from personalizing engagement to automating service to streamlining operations. Since 1983, we’ve built our scalable and flexible architecture to help enterprises meet today’s customer demands while continuously transforming for tomorrow. For more information on Pegasystems (NASDAQ: PEGA), visit www.pega.com
Press contact:
Lisa Pintchman
VP, Corporate Communications
lisapintchman.rogers@pega.com
617-866-6022
Twitter: @pega
Investor contact:
Peter Welburn
VP, Corporate Development & Investor Relations
PegaInvestorRelations@pega.com
617-498-8968
All trademarks are the property of their respective owners.
4
EXHIBIT 99.1
(continued)

PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended
June 30,		Six Months Ended
June 30,
2022202120222021
Revenue
Subscription services$171,832 $152,075 $341,865 $295,494 
Subscription license41,600 104,296 179,133 215,805 
Perpetual license2,266 12,596 9,706 18,048 
Consulting58,639 56,735 119,940 109,854 
Total revenue274,337 325,702 650,644 639,201 
Cost of revenue
Subscription services36,533 29,046 68,563 57,389 
Subscription license673 585 1,295 1,205 
Perpetual license36 71 70 101 
Consulting57,873 54,829 113,384 108,283 
Total cost of revenue95,115 84,531 183,312 166,978 
Gross profit179,222 241,171 467,332 472,223 
Operating expenses
Selling and marketing157,198 156,423 319,434 305,162 
Research and development74,341 64,395 145,831 126,837 
General and administrative32,723 19,161 68,487 37,431 
Total operating expenses264,262 239,979 533,752 469,430 
(Loss) income from operations(85,040)1,192 (66,420)2,793 
Foreign currency transaction gain (loss)1,713 (403)4,589 (5,501)
Interest income309 236 516 389 
Interest expense(1,944)(1,959)(3,890)(3,839)
(Loss) income on capped call transactions(18,945)26,309 (49,505)7,192 
Other income, net3,785 — 6,526 106 
(Loss) income before provision for (benefit from) income taxes(100,122)25,375 (108,184)1,140 
Provision for (benefit from) income taxes186,174 (11,916)178,491 (29,534)
Net (loss) income$(286,296)$37,291 $(286,675)$30,674 
(Loss) earnings per share
Basic$(3.50)$0.46 $(3.51)$0.38 
Diluted$(3.50)$0.43 $(3.51)$0.36 
Weighted-average number of common shares outstanding
Basic81,847 81,316 81,764 81,161 
Diluted81,847 90,320 81,764 86,006 
5
EXHIBIT 99.1
(continued)
PEGASYSTEMS INC.
UNAUDITED RECONCILIATION OF SELECTED GAAP MEASURES TO NON-GAAP MEASURES
(in thousands, except percentages and per share amounts)Three Months Ended
June 30,		Six Months Ended
June 30,
20222021Change20222021Change
Net (loss) income - GAAP$(286,296)$37,291 *$(286,675)$30,674 *
Stock-based compensation (1)
31,300 30,688 59,527 60,788 
Capped call transactions18,945 (26,309)49,505 (7,192)
Litigation10,582 2,369 27,950 4,329 
Convertible senior notes720 675 1,439 1,348 
Headquarters lease— (6,266)— (9,683)
Amortization of intangible assets1,025 1,002 1,997 2,004 
Foreign currency transaction (gain) loss(1,713)403 (4,589)5,501 
Other(1,001)— (3,583)12 
Income tax effects (2)
195,032 (18,061)173,197 (42,348)
Net (loss) income - non-GAAP$(31,406)$21,792 *$18,768 $45,433 (59)%
Diluted (loss) earnings per share - GAAP$(3.50)$0.43 *$(3.51)$0.36 *
non-GAAP adjustments3.12 (0.18)3.73 0.17 
Diluted (loss) earnings per share - non-GAAP$(0.38)$0.25 *$0.22 $0.53 (58)%
Diluted weighted-average number of common shares outstanding - GAAP81,847 90,320 (9)%81,764 86,006 (5)%
non-GAAP Adjustments— (4,443)2,063 — 
Diluted weighted-average number of common shares outstanding - non-GAAP81,847 85,877 (5)%83,827 86,006 (3)%
* not meaningful
Our non-GAAP financial measures reflect the following adjustments:
•Stock-based compensation: We have excluded stock-based compensation from our non-GAAP operating expenses and profitability measures. Although stock-based compensation is a key incentive offered to our employees, and we believe such compensation contributed to our revenues recognized during the periods presented and is expected to contribute to our future revenues, we continue to evaluate our business performance excluding stock-based compensation.
•Capped call transactions: We have excluded gains and losses related to our capped call transactions held at fair value under U.S. GAAP. The capped call transactions are expected to reduce common stock dilution and/or offset any potential cash payments we must make, other than for principal and interest, upon conversion of the Notes. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the types of events giving rise to them are not representative of our core business operations and ongoing operating performance. In addition, we reflect the effect of the capped call transactions on the weighted-average number of common shares outstanding in our non-GAAP financial measures as we believe it provides investors with useful information when evaluating our financial performance on a per-share basis.
•Litigation: Includes legal fees and related expenses arising from proceedings outside of the ordinary course of business. We believe excluding these expenses from our non-GAAP financial measures is useful to investors as the disputes giving rise to them are not representative of our core business operations and ongoing operating performance.
•Convertible senior notes: In February 2020, we issued convertible senior notes with an aggregate principal amount of $600 million, due March 1, 2025, in a private placement. We believe excluding the amortization of debt discounts and issuance costs provides a useful comparison of our operational performance in different periods.
•Headquarters lease: In February 2021, we agreed to accelerate our exit from our then Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million, which was received in October 2021. We believe excluding the impact from our non-GAAP financial measures is useful to investors as the modified lease, including the $18 million payment, is not representative of our core business operations and ongoing operating performance.
•Amortization of intangible assets: We have excluded the amortization of intangible assets from our non-GAAP operating expenses and profitability measures. Amortization of intangible assets fluctuates in amount and frequency and is significantly affected by the timing and size of acquisitions. Investors should note that intangible assets contributed to our revenues recognized during the periods presented and are expected to contribute to future revenues. Amortization of intangible assets is likely to recur in future periods.
•Foreign currency transaction (gain) loss: We have excluded foreign currency transaction gains and losses from our non-GAAP profitability measures. Foreign currency transaction gains and losses fluctuate in amount and frequency and are significantly affected by foreign exchange market rates. Foreign currency transaction gains and losses are likely to recur in future periods.
6
EXHIBIT 99.1
(continued)
•Other: We have excluded gains and losses from our venture investments, capital advisory expenses, and incremental expenses incurred integrating acquisitions and evaluating potential acquisitions. In addition, incremental fees were incurred in the three and six months ended June 30, 2021 due to the cancellation of in-person sales and marketing events due to the COVID-19 pandemic. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the types of events giving rise to them are not representative of our core business operations and ongoing operating performance.
(1) Stock-based compensation:
Three Months Ended
June 30,		Six Months Ended
June 30,
(in thousands)2022202120222021
Cost of revenue$6,579 $5,849 $12,957 $11,774 
Selling and marketing12,633 14,748 23,591 28,468 
Research and development7,355 6,343 14,701 13,113 
General and administrative4,733 3,748 8,278 7,433 
$31,300 $30,688 $59,527 $60,788 
Income tax benefit$(543)$(6,192)$(905)$(12,183)
(2) Effective income tax rates:
Six Months Ended
June 30,
20222021
GAAP165 %(2,591)%
non-GAAP22 %22 %
Our GAAP effective income tax rate is subject to significant fluctuations due to several factors, including excess tax benefits generated by our stock-based compensation plans, gains and losses on our capped call transactions, tax credits for stock-based compensation awards to research and development employees, and unfavorable foreign stock-based compensation adjustments. We determine our non-GAAP income tax rate using applicable rates in taxing jurisdictions and assessing certain factors, including our historical and forecasted earnings by jurisdiction, discrete items, and our ability to realize tax assets. Under GAAP we recorded a valuation allowance on our deferred tax assets of $192 million in the three months ended June 30, 2022. See "Note 12. Income Taxes" in Part I, Item 1 of our Quarterly Report on Form 10-Q for the three months ended June 30, 2022 for additional information. We believe it is beneficial for our management to review our non-GAAP results consistent with our annual plan's effective income tax rate as established at the beginning of each year, given tax rate volatility.
7
EXHIBIT 99.1
(continued)
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, 2022December 31, 2021
Assets
Current assets:
Cash and cash equivalents$109,275 $159,965 
Marketable securities187,613 202,814 
Total cash, cash equivalents, and marketable securities296,888 362,779 
Accounts receivable171,556 182,717 
Unbilled receivables201,130 226,714 
Other current assets70,633 68,008 
Total current assets740,207 840,218 
Unbilled receivables115,901 129,789 
Goodwill81,717 81,923 
Other long-term assets320,557 541,601 
Total assets$1,258,382 $1,593,531 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$21,465 $15,281 
Accrued expenses63,120 63,890 
Accrued compensation and related expenses73,945 120,946 
Deferred revenue269,121 275,844 
Other current liabilities7,800 9,443 
Total current liabilities435,451 485,404 
Convertible senior notes, net592,161 590,722 
Operating lease liabilities84,170 87,818 
Other long-term liabilities12,821 13,499 
Total liabilities1,124,603 1,177,443 
Total stockholders’ equity133,779 416,088 
Total liabilities and stockholders’ equity$1,258,382 $1,593,531 

PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
June 30,
20222021
Net (loss) income$(286,675)$30,674 
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities
Non-cash items314,231 76,906 
Change in operating assets and liabilities, net(32,625)(88,170)
Cash (used in) provided by operating activities(5,069)19,410 
Cash (used in) provided by investing activities(1,523)10,493 
Cash (used in) financing activities(41,191)(60,717)
Effect of exchange rate changes on cash and cash equivalents(2,907)(1,207)
Net (decrease) in cash and cash equivalents(50,690)(32,021)
Cash and cash equivalents, beginning of period159,965 171,899 
Cash and cash equivalents, end of period$109,275 $139,878 
8
EXHIBIT 99.1
(continued)
PEGASYSTEMS INC.
ANNUAL CONTRACT VALUE
(in thousands, except percentages)

Annual contract value (“ACV”) - ACV represents the annualized value of our active contracts as of the measurement date. The contract's total value is divided by its duration in years to calculate ACV for subscription license and Pega Cloud contracts. Maintenance revenue for the quarter then ended is multiplied by four to calculate ACV for maintenance. ACV is a performance measure that we believe provides useful information to our management and investors, particularly during our subscription transition.
June 30, 2022June 30, 2021Change
Pega Cloud$404,109 $306,919 $97,190 32 %
Maintenance313,304 315,128 (1,824)(1)%
Subscription services717,413 622,047 95,366 15 %
Subscription license
310,139 277,388 32,751 12 %
$1,027,552 $899,435 $128,117 14 %

PEGASYSTEMS INC.
BACKLOG
(in thousands, except percentages)

Remaining performance obligations (“Backlog”) - Expected future revenue from existing non-cancellable contracts:
As of June 30, 2022:
Subscription servicesSubscription licensePerpetual licenseConsultingTotal
MaintenancePega Cloud
1 year or less
$204,974 $320,102 $46,810 $6,681 $32,159 $610,726 54 %
1-2 years
57,862 200,135 10,711 4,505 7,919 281,132 25 %
2-3 years
28,403 96,861 2,126 2,252 2,574 132,216 12 %
Greater than 3 years
18,447 81,069 1,680 — 424 101,620 9 %
$309,686 $698,167 $61,327 $13,438 $43,076 $1,125,694 100 %
% of Total28 %62 %5 %1 %4 %100 %
Change since June 30, 2021
$(26,763)$95,432 $(1,691)$6,497 $21,083 $94,558 
(8)%16 %(3)%94 %96 %9 %
As of June 30, 2021:
Subscription servicesSubscription licensePerpetual licenseConsultingTotal
MaintenancePega Cloud
1 year or less
$214,645 $281,793 $46,146 $6,707 $17,863 $567,154 56 %
1-2 years
59,164 194,841 15,708 234 2,675 272,622 26 %
2-3 years
36,076 88,855 909 — 762 126,602 12 %
Greater than 3 years
26,564 37,246 255 — 693 64,758 6 %
$336,449 $602,735 $63,018 $6,941 $21,993 $1,031,136 100 %
% of Total33 %58 %6 %1 %2 %100 %

RECONCILIATION OF GAAP BACKLOG AND CONSTANT CURRENCY BACKLOG
(in millions)Q2 20221 Year Growth Rate
Backlog - GAAP$1,126 9 %
Impact of changes in foreign exchange rates57 6 %
Backlog - Constant Currency$1,183 15 %
Note: Constant currency Backlog is calculated by applying foreign exchange rates for the earliest period shown to all periods. The above constant currency measures reflect foreign exchange rates applicable as of Q2 2021.
9

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