PR Newswire | Oct 27, 2021 04:06PM EDT

10/27 15:05 CDT

Pega continues accelerated growth through Q3 2021-- Total ACV grows 22 percent, powered by Pega Cloud Choice-- Pega subscription revenue grows 32 percent year over year-- Total Backlog increases 23 percent year over year CAMBRIDGE, Mass., Oct. 27, 2021

CAMBRIDGE, Mass., Oct. 27, 2021 /PRNewswire/ -- Pegasystems Inc. (NASDAQ: PEGA), the software company that crushes business complexity, released its financial results for the third quarter of 2021.

"Sophisticated organizations are pursuing digital transformation with great energy," said Alan Trefler, founder and CEO, Pegasystems. "Organizations know they must adapt for today's needs while preparing for the inevitable changes that will come tomorrow. In an unpredictable world, we help our clients crush business complexity with solutions built on a low-code platform and an outcome-centric approach to workflow that helps them work smarter, simpler, and faster. I'm excited about how Pega is meeting their needs with our highly differentiated offering."

"It's great to see total ACV growth of 22 percent year-over-year in Q3 2021 - once again powered by Pega Cloud Choice," said Ken Stillwell, COO and CFO, Pegasystems. "Our cumulative results through the first three quarters of this year demonstrate that digital transformation continues to be a top priority for our clients around the world."

Financial and performance metrics (1)



(Dollars in Three Months Ended Nine Months Ended thousands, September 30, September 30, except per share amounts) 2021 2020 Change 2021 2020 Change

Total revenue$256,268 $225,951 13 %$895,469 $718,917 25%

Net (loss) - $(56,468) $(19,267) (193)%$(25,794) $(65,379) 61% GAAP

Net (loss) income - $(32,860) $(26,701) (23) %$9,196 $(44,905) * Non-GAAP

Diluted (loss) per $(0.69) $(0.24) (188)%$(0.32) $(0.82) 61% share - GAAP

Diluted (loss) earnings per $(0.40) $(0.33) (21) %$0.11 $(0.56) * share - Non-GAAP

* not meaningful.

Three Months Ended Nine Months Ended (Dollars in thousands) September 30, September 30, 2021 2020 Change 2021 2020 Change

Pega Cloud $78,369 31 %$54,776 24 %$23,59343 %$219,52025 %$147,08020 %$72,440 49%

Client Cloud 118,609 46 %110,602 49 %8,007 7 %488,757 54 %391,042 55 %97,715 25%

Cloud subscription $196,97877 %$165,37873 %$31,60019 %$708,27779 %$538,12275 %$170,15532%

Perpetual license 2,874 1 %3,852 2 %(978) (25)%20,922 2 %16,568 2 %4,354 26%

Consulting 56,416 22 %56,721 25 %(305) (1) %166,270 19 %164,227 23 %2,043 1 %

Total revenue $256,268100%$225,951100%$30,31713 %$895,469100%$718,917100%$176,55225%

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

Quarterly conference call

A conference call and audio-only webcast will be conducted at 5:00 p.m. EDT on October 27, 2021.

Members of the public and investors are invited to join the call and participate in the question and answer session by dialing 1-866-548-4713 (domestic), 1-323-794-2093 (international), or via webcast ( http://public.viavid.com/index.php?id=146749) 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.

A replay of the call will also be available on www.pega.com by clicking the Earnings Calls link 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 the Company's 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, results of operations prepared under U.S. GAAP.

A reconciliation of our Non-GAAP and GAAP measures is 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; * the impact of actual or threatened public health emergencies, such as the Coronavirus ("COVID-19"); * reliance on third-party service providers; * compliance with our debt obligations and covenants; * the potential impact of our convertible senior notes and Capped Call Transactions; * reliance on key personnel; * the relocation of our corporate headquarters; * the continued uncertainties in the global economy; * foreign currency exchange rates; * the potential legal and financial liabilities and reputation damage due to cyber-attacks; * security breaches and security flaws; * our ability to protect our intellectual property rights and costs associated with defending such rights; * 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, 2020, 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 from new information, future events, or otherwise.

The forward-looking statements in this press release represent our views as of October 27, 2021.

About Pegasystems

Pega delivers innovative software that crushes business complexity so our clients can make better decisions and get work done. We help the world's leading brands solve their biggest business challenges: maximizing customer lifetime value, streamlining customer service, and boosting operational efficiency. Pega technology is powered by real-time AI and intelligent automation, while our scalable architecture and low-code platform help enterprises adapt to rapid change and transform for tomorrow. For more information, please visit www.pega.com.

Press contact:Lisa PintchmanPegasystems Inc.lisapintchman.rogers@pega.com(617) 866-6022 Twitter: @pega

Investor contact:Garo ToomajanianICR for Pegasystems Inc.pegainvestorrelations@pega.com(617) 866-6077

All trademarks are the property of their respective owners.

PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)



Three Months Ended Nine Months Ended September 30, September 30,

2021 2020 2021 2020

Revenue

Pega Cloud $78,369 $54,776 $219,520 $147,080

Maintenance 83,188 74,670 237,531 220,587

Software license 38,295 39,784 272,148 187,023

Consulting 56,416 56,721 166,270 164,227

Total revenue 256,268 225,951 895,469 718,917

Cost of revenue

Pega Cloud 25,524 19,717 72,132 56,238

Maintenance 5,293 5,478 16,074 16,645

Software license 656 691 1,962 2,354

Consulting 52,749 51,913 161,032 158,781

Total cost of revenue 84,222 77,799 251,200 234,018

Gross profit 172,046 148,152 644,269 484,899

Operating expenses

Selling and marketing 152,479 132,053 457,641 395,684

Research and development 64,728 60,024 191,565 177,620

General and administrative20,176 17,907 57,607 49,192

Total operating expenses 237,383 209,984 706,813 622,496

(Loss) from operations (65,337) (61,832) (62,544) (137,597)

Foreign currency 518 4,236 (4,983) 2,545 transaction gain (loss)

Interest income 166 243 555 1,092

Interest expense (1,908) (5,956) (5,747) (13,791)

(Loss) income on capped (14,735) 18,989 (7,543) 19,816 call transactions

Other income, net 2 - 108 1,374

(Loss) before (benefit (81,294) (44,320) (80,154) (126,561) from) income taxes

(Benefit from) income (24,826) (25,053) (54,360) (61,182) taxes

Net (loss) $(56,468)$(19,267)$(25,794)$(65,379)

(Loss) per share

Basic $(0.69) $(0.24) $(0.32) $(0.82)

Diluted $(0.69) $(0.24) $(0.32) $(0.82)

Weighted-average number of common shares outstanding

Basic 81,526 80,537 81,284 80,191

Diluted 81,526 80,537 81,284 80,191

PEGASYSTEMS INC. UNAUDITED RECONCILIATION OF SELECTED GAAP MEASURES TO NON-GAAP MEASURES ^(1) (in thousands, except percentages and per share amounts)



Three Months Ended Nine Months Ended September 30, September 30,

2021 2020 Change 2021 2020 Change

Net (loss) - $(56,468)$(19,267)(193)%$(25,794)$(65,379)61 %GAAP

Stock-based compensation ^ 28,695 27,925 89,483 76,755 (2)

Capped call 14,735 (18,989) 7,543 (19,816) transactions

Convertible 677 4,372 2,025 10,405 senior notes

Headquarters (5,428) - (15,111) - lease

Amortization of intangible 1,002 1,018 3,006 3,051 assets

Foreign currency transaction (518) (4,236) 4,983 (2,545) (gain) loss

Other 3 - 15 1,141

Income tax (15,558) (17,524) (56,954) (48,517) effects ^(3)

Net (loss) income - $(32,860)$(26,701)(23) %$9,196 $(44,905)* Non-GAAP



Diluted (loss) $(0.69) $(0.24) (188)%$(0.32) $(0.82) 61 %per share - GAAP

Non-GAAP 0.29 (0.09) 0.43 0.26 adjustments

Diluted (loss) earnings per $(0.40) $(0.33) (21) %$0.11 $(0.56) * share - Non-GAAP



Diluted weighted-average number of common81,526 80,537 1 %81,284 80,191 1 %shares outstanding - GAAP

Non-GAAP - - 4,718 - Adjustments

Diluted weighted-average number of common81,526 80,537 1 %86,002 80,191 7 %shares outstanding - Non-GAAP

* not meaningful

(1) We believe that non-GAAP financial measures help investors understand our core operating results and prospects, consistent with how management measures and forecasts the Company's 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, results of operations prepared under U.S. GAAP.

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 the Company 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 in evaluating our financial performance on a per-share basis. * 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. Under U.S. GAAP in 2020, the conversion feature was recorded as a reduction of the debt instrument's book value which was amortized over the debt's life. After our adoption of Accounting Standards Update 2020-06 on January 1, 2021, the conversion feature is no longer recorded as a reduction of the debt instrument's book value which is amortized over the debt's life. See "Note 2. New Accounting Pronouncements" and "Note 8. Debt" in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 for additional information. In both periods, debt issuance costs reduce the debt instrument's book value and are amortized over the debt's life. We believe excluding the amortization of debt discount and issuance costs provide a useful comparison of our operational performance in different periods. * Headquarters lease: In February 2021, the Company agreed to accelerate its exit from its Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from the Company's landlord of $18 million which was paid 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 the use of intangible assets contributed to our revenues recognized during the periods presented and is 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 on our venture investments and incremental fees incurred due to the cancellation of in-person sales and marketing events due to the COVID-19 pandemic, including the live event portion of our 2020 PegaWorld conference. 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 Nine Months Ended September 30, September 30,

(in thousands) 2021 2020 2021 2020

Cost of revenue $5,114 $5,100 $16,889 $15,636

Selling and marketing 13,376 12,658 41,844 33,968

Research and development 6,231 5,765 19,343 17,066

General and administrative3,974 4,402 11,407 10,085

$28,695 $27,925 $89,483 $76,755

Income tax benefit $(5,845)$(5,604)$(18,028)$(15,293)

(3) Effective income tax rates:

Nine Months Ended September 30,

2021 2020

GAAP 68 % 48 %

Non-GAAP22 % 22 %

Our GAAP effective income tax rate is subject to significant fluctuations due to various 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 by 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. 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 this tax rate volatility.

PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)



September 30, December 31, 2021 2020

Assets

Current assets:

Cash and cash equivalents $116,411 $171,899

Marketable securities 235,437 293,269

Total cash, cash equivalents, and marketable 351,848 465,168 securities

Accounts receivable 143,445 215,827

Unbilled receivables 239,774 207,155

Other current assets 93,819 88,760

Total current assets 828,886 976,910

Unbilled receivables 132,147 113,278

Goodwill 81,954 79,231

Other long-term assets 512,410 434,843

Total assets $1,555,397 $1,604,262

Liabilities and stockholders' equity

Current liabilities:

Accounts payable $25,604 $24,028

Accrued expenses 46,583 59,261

Accrued compensation and related expenses 86,018 123,012

Deferred revenue 229,103 232,865

Other current liabilities 13,118 20,969

Total current liabilities 400,426 460,135

Convertible senior notes, net 589,769 518,203

Operating lease liabilities 87,088 59,053

Other long-term liabilities 18,482 24,699

Total liabilities 1,095,765 1,062,090

Total stockholders' equity 459,632 542,172

Total liabilities and stockholders' equity $1,555,397 $1,604,262

PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)



Nine Months Ended September 30,

2021 2020

Net (loss) $(25,794)$(65,379)

Adjustments to reconcile net (loss) to cash (used in) operating activities

Non-cash items 100,309 72,797

Change in operating assets and liabilities, net (79,836) (33,675)

Cash (used in) operating activities (5,321) (26,257)

Cash provided by (used in) investing activities 42,730 (210,701)

Cash (used in) provided by financing activities (91,431) 449,630

Effect of exchange rate changes on cash and cash (1,466) 183 equivalents

Net (decrease) increase in cash and cash equivalents (55,488) 212,855

Cash and cash equivalents, beginning of period 171,899 68,363

Cash and cash equivalents, end of period $116,411 $281,218

PEGASYSTEMS INC. REVENUE DETAIL (in thousands, except percentages)





Three Months Ended Nine Months Ended (Dollars in thousands) September 30, September 30, 2021 2020 Change 2021 2020 Change

Pega Cloud $78,369 31% $54,776 24% $23,59343% $219,52025% $147,08020% $72,440 49%

Client Cloud ^(1) $118,60946% $110,60249% $8,007 7% $488,75754% $391,04255% $97,715 25%

Maintenance 83,188 32% 74,670 33% 8,518 11% 237,531 26% 220,587 31% 16,944 8%

Term license 35,421 14% 35,932 16% (511) (1)%251,226 28% 170,455 24% 80,771 47%

Subscription ^(2) $196,97877% $165,37873% $31,60019% $708,27779% $538,12275% $170,15532%

Perpetual license 2,874 1% 3,852 2% (978) (25)20,922 2% 16,568 2% 4,354 26% %

Consulting 56,416 22% 56,721 25% (305) (1)%166,270 19% 164,227 23% 2,043 1%

$256,268100%$225,951100%$30,31713% $895,469100%$718,917100%$176,55225%

(1) Composed of maintenance and term revenue.(2) Reflects client arrangements subject to renewal (Pega Cloud, maintenance, and term license).

PEGASYSTEMS INC.ANNUAL CONTRACT VALUE ("ACV")(in thousands, except percentages)

Annual contract value ("ACV") (1) -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 term license and Pega Cloud contracts. Maintenance revenue for the quarter then ended is multiplied by four to calculate ACV for maintenance. Client Cloud ACV is composed of maintenance ACV and term license ACV. ACV is a performance measure that we believe provides useful information to our management and investors, particularly during our Cloud Transition.

September 30, 2021September 30, 2020Change

Pega Cloud $ 320,653 $ 232,176 $88,477 38%

Client Cloud$ 627,072 $ 544,575 $82,497 15%

Total $ 947,725 $ 776,751 $170,97422%

(1) Foreign currency exchange rate changes contributed 1-2% to total ACV growth in 2021.

PEGASYSTEMS INC.BACKLOG(in thousands, except percentages)

Remaining performance obligations ("Backlog") - Backlog represents expected future revenue from existing non-cancellable contracts.

As of September 30, 2021:

Client Cloud (Dollars Pega Cloud Term Perpetual ConsultingTotal in Maintenancelicense license thousands)

1 year or $284,359 $196,667 $49,265 $15,686 $31,673 $577,650 56 %less

1-2 years 177,214 59,360 16,872 1,064 6,561 261,071 25 %

2-3 years 79,775 37,734 420 4,094 5,165 127,188 12 %

Greater than 3 30,113 33,935 245 2,127 1,697 68,117 7 %years

$571,461 $327,696 $66,802 $22,971 $45,096 $1,034,026 100%



Change in Backlog Since September 30, 2020

$64,654 $88,548 $3,617 $12,563 $26,654 $196,036

13 %37 %6 %121 %145 %23 %

As of September 30, 2020:

Client Cloud Pega CloudConsultingTotal (Dollars in MaintenanceTerm Perpetual thousands) license license

1 year or $211,661$ 170,643$50,788$8,708 $ 14,977$456,77754 %less

1-2 years 157,500 40,631 5,341 1,700 2,042 207,214 25 %

2-3 years 93,283 18,277 7,052 - 770 119,382 14 %

Greater than44,363 9,597 4 - 653 54,617 7 %3 years

$506,807$ 239,148$63,185$10,408$ 18,442$837,990100%

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SOURCE Pegasystems Inc.