Annual contract value grows 21 percent as profitability improves in Q1 2022

(Dollars in thousands,

except per share amounts)

Three Months Ended

March 31,

2022

2021

Change

Total revenue

$                   376,307

$                   313,499

20%

Net (loss) - GAAP

$                          (379)

$                       (6,617)

94%

Net income - non-GAAP

$                      50,174

$                      23,642

112%

Diluted (loss) per share - GAAP

$                          0.00

$                         (0.08)

100%

Diluted earnings per share - non-GAAP

$                          0.59

$                          0.27

119%

Three Months Ended

March 31,

Change

(Dollars in thousands)

2022

2021

Pega Cloud

$               90,317

$               67,858

$            22,459

33%

Maintenance

79,716

75,561

4,155

5%

     Subscription services

170,033

143,419

26,614

19%

     Subscription license

137,533

111,509

26,024

23%

          Subscription

307,566

254,928

52,638

21%

Perpetual license

7,440

5,452

1,988

36%

Consulting

61,301

53,119

8,182

15%

     Total revenue

$             376,307

$             313,499

$            62,808

20%

_________________________

(1)

See the Schedules at the end of this release for additional information, including a reconciliation of our non-GAAP and GAAP measures.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

Three Months Ended

March 31,

2022

2021

Revenue

     Subscription services

$      170,033

$      143,419

     Subscription license

137,533

111,509

     Perpetual license

7,440

5,452

     Consulting

61,301

53,119

          Total revenue

376,307

313,499

Cost of revenue

     Subscription services

32,030

28,343

     Subscription license

622

620

     Perpetual license

34

30

     Consulting

55,511

53,454

          Total cost of revenue

88,197

82,447

Gross profit

288,110

231,052

Operating expenses

     Selling and marketing

162,236

148,739

     Research and development

71,490

62,442

     General and administrative

35,764

18,270

          Total operating expenses

269,490

229,451

               Income from operations

18,620

1,601

Foreign currency transaction gain (loss)

2,876

(5,098)

Interest income

207

153

Interest expense

(1,946)

(1,880)

(Loss) on capped call transactions

(30,560)

(19,117)

Other income, net

2,741

106

                    (Loss) before (benefit from) income taxes

(8,062)

(24,235)

(Benefit from) income taxes

(7,683)

(17,618)

                         Net (loss)

$             (379)

$         (6,617)

(Loss) per share

     Basic

$                 —

$           (0.08)

     Diluted

$                 —

$           (0.08)

Weighted-average number of common shares outstanding

     Basic

81,680

81,004

     Diluted

81,680

81,004

PEGASYSTEMS INC.

UNAUDITED RECONCILIATION OF SELECTED GAAP MEASURES TO NON-GAAP MEASURES ⁽¹⁾

(in thousands, except percentages and per share amounts)

Three Months Ended

March 31,

2022

2021

Net (loss) - GAAP

$               (379)

$        (6,617)

94%

     Stock-based compensation ⁽²⁾

28,227

30,100

     Capped call transactions

30,560

19,117

     Litigation

17,368

1,960

     Convertible senior notes

719

673

     Headquarters lease

—

(3,417)

     Amortization of intangible assets

972

1,002

     Foreign currency transaction (gain) loss

(2,876)

5,098

     Other

(2,582)

12

Income tax effects ⁽³⁾

(21,835)

(24,286)

Net income - non-GAAP

$           50,174

$        23,642

112%

Diluted (loss) per share - GAAP

$               0.00

$           (0.08)

100%

     non-GAAP adjustments

0.59

0.35

Diluted earnings per share - non-GAAP

$               0.59

$            0.27

119%

Diluted weighted-average number of common shares outstanding - GAAP

81,680

81,004

1%

     non-GAAP Adjustments

2,743

5,129

Diluted weighted-average number of common shares outstanding - non-GAAP

84,423

86,133

(2)%

(1)

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.
• Other: We have excluded gains and losses from our venture investments and incremental expenses incurred integrating acquisitions and evaluating potential acquisitions. In addition, incremental fees were incurred in the three months ended March 31, 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.

(2)

Stock-based compensation:

Three Months Ended

March 31,

2022

2021

Cost of revenue

$                      6,378

$                      5,925

Selling and marketing

10,958

13,720

Research and development

7,346

6,770

General and administrative

3,545

3,685

$                    28,227

$                    30,100

Income tax benefit

$                     (5,311)

$                     (5,991)

(3)

Effective income tax rates:

Three Months Ended

March 31,

2022

2021

GAAP

95%

73%

non-GAAP                             

22%

22%

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

March 31, 2022

December 31, 2021

Assets

Current assets:

     Cash and cash equivalents

$                            132,771

$                           159,965

     Marketable securities

199,401

202,814

          Total cash, cash equivalents, and marketable securities

332,172

362,779

     Accounts receivable

171,181

182,717

     Unbilled receivables

226,052

226,714

     Other current assets

74,408

68,008

               Total current assets

803,813

840,218

Unbilled receivables

135,975

129,789

Goodwill

82,031

81,923

Other long-term assets

516,661

541,601

                    Total assets

$                         1,538,480

$                        1,593,531

Liabilities and stockholders' equity

Current liabilities:

     Accounts payable

$                               18,628

$                             15,281

     Accrued expenses

63,401

63,890

     Accrued compensation and related expenses

54,804

120,946

     Deferred revenue

290,873

275,844

     Other current liabilities

7,309

9,443

          Total current liabilities

435,015

485,404

Convertible senior notes, net

591,440

590,722

Operating lease liabilities

90,699

87,818

Other long-term liabilities

14,658

13,499

               Total liabilities

1,131,812

1,177,443

               Total stockholders' equity

406,668

416,088

                    Total liabilities and stockholders' equity

$                         1,538,480

$                        1,593,531

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Three Months Ended

March 31,

2022

2021

Net (loss)

$                                   (379)

$                              (6,617)

Adjustments to reconcile net (loss) to cash provided by operating activities

     Non-cash items

70,827

62,621

     Change in operating assets and liabilities, net

(55,332)

(34,354)

          Cash provided by operating activities

15,116

21,650

          Cash (used in) provided by investing activities

(6,082)

15,489

          Cash (used in) financing activities

(35,918)

(34,794)

Effect of exchange rate changes on cash and cash equivalents

(310)

(1,536)

               Net (decrease) increase in cash and cash equivalents

(27,194)

809

Cash and cash equivalents, beginning of period

159,965

171,899

Cash and cash equivalents, end of period

$                            132,771

$                           172,708

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.

March 31, 2022

March 31, 2021

Change

Pega Cloud

$                         401,753

$                         282,389

$                         119,364

42%

Maintenance

318,864

302,244

16,620

5%

     Subscription services

720,617

584,633

135,984

23%

     Subscription license

313,200

267,931

45,269

17%

$                      1,033,817

$                         852,564

$                         181,253

21%

PEGASYSTEMS INC.

BACKLOG

(in thousands, except percentages)

Remaining performance obligations ("Backlog") - Expected future revenue from existing non-cancellable contracts:

As of March 31, 2022:

Subscription services

Subscription

license

Perpetual

license

Consulting

Total

Maintenance

1 year or less

$           228,984

$           329,857

$              47,428

$                7,281

$              40,661

$           654,211

55%

1-2 years

63,870

208,875

16,111

4,505

10,955

304,316

26%

2-3 years

33,617

106,156

2,422

2,252

3,876

148,323

13%

Greater than 3 years

22,611

44,596

1,758

—

522

69,487

6%

$           349,082

$           689,484

$              67,719

$             14,038

$              56,014

$        1,176,337

100%

% of Total

29%

59%

6%

1%

5%

100%

Change since March 31, 2021

$             26,445

$           125,168

$                9,388

$                3,760

$              31,766

$           196,527

8%

22%

16%

37%

131%

20%

Subscription services

Subscription

license

Perpetual

license

Consulting

Total

Maintenance

1 year or less

$           220,100

$           252,104

$              41,025

$                9,649

$              21,068

$           543,946

55%

1-2 years

52,366

187,456

9,874

629

914

251,239

26%

2-3 years

33,337

91,861

7,055

—

1,756

134,009

14%

Greater than 3 years

16,834

32,895

377

—

510

50,616

5%

$           322,637

$           564,316

$              58,331

$             10,278

$              24,248

$           979,810

100%

% of Total

33%

58%

6%

1%

2%

100%