8-K

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): February 12, 2020

____________________

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 Rogers Street, Cambridge, MA 02142-1209

(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 class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $.01 par value per share	PEGA	NASDAQ 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 February 12, 2020, Pegasystems Inc. issued a press release announcing its financial results for the fourth quarter and full year 2019. 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 Form 8-K and the Exhibit 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	Press release issued by Pegasystems Inc.
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:	February 12, 2020	By:	/s/ KENNETH STILLWELL
			Kenneth Stillwell
			Chief Financial Officer and Chief Administrative Officer
			(Principal Financial Officer)

EX-99.1

EXHIBIT 99.1

Pega Cloud ACV Grows 54% in 2019

• Total ACV up 22% to $693 million, powered by Pega Cloud Choice™

• Pega Cloud Backlog up 41% to $422 million

• Pega Cloud Revenue up 62% to $134 million

• 2020 Guidance: Revenue $1.1 billion

CAMBRIDGE, Mass. —February 12, 2020 — Pegasystems Inc. (NASDAQ: PEGA), the software company empowering digital transformation at the world’s leading enterprises, released its financial results for the fourth quarter and full year 2019.

“We delivered a very strong Q4, capping off a solid year, and we’re excited about our prospects in this new decade,” said Alan Trefler, founder and CEO, Pegasystems. “We have a tremendous opportunity to help our clients achieve their digital transformation goals, and I’m confident in our ability to execute.”

“Total ACVincreased 22% year over year, reaching $693 million, and total Backlog increased by 33% to $836 million,” said Ken Stillwell, CFO, Pegasystems. “We expect these outstanding results to set the foundation for Pega to breakthrough $1 billion in annual revenue in 2020.”

Financial and performance metrics ⁽¹⁾ 

(Dollars in thousands, except per share amounts)	Three Months Ended December 31,						Year Ended December 31,
	2019		2018		Change		2019			2018		Change
Total revenue	$	276,542	$	256,357	8	%	$	911,383		$	891,581	2	%
Subscription revenue (2)	$	189,486	$	142,273	33	%	$	613,759		$	524,758	17	%
Net income (loss) - GAAP	$	918	$	16,413	(94	)%	$	(90,433	)	$	10,617	*
Net income (loss) - Non-GAAP	$	15,682	$	26,480	(41	)%	$	(35,082	)	$	46,006	*
Diluted earnings (loss) per share - GAAP	$	0.01	$	0.20	(95	)%	$	(1.14	)	$	0.13	*
Diluted earnings (loss) per share - Non-GAAP	$	0.19	$	0.32	(41	)%	$	(0.44	)	$	0.55	*

* not meaningful

⁽¹⁾A reconciliation of the GAAP measures to our Non-GAAP measures is contained in the financial schedules at the end of this release.

⁽²⁾ Reflects client arrangements (term license, cloud, and maintenance) that are subject to renewal.

(Dollars in thousands)	Three Months Ended December 31,													Year Ended December 31,
	2019				2018				Change					2019				2018				Change
Cloud	$	39,136	14	%	$	24,660	10	%	$	14,476		59	%	$	133,746	15	%	$	82,627	9	%	$	51,119		62	%
Term license	77,176		28	%	50,186		20	%	26,990			54	%	199,433		22	%	178,256		20	%	21,177			12	%
Maintenance	73,174		27	%	67,427		25	%	5,747			9	%	280,580		30	%	263,875		30	%	16,705			6	%
Subscription	189,486		69	%	142,273		55	%	47,213			33	%	613,759		67	%	524,758		59	%	89,001			17	%
Perpetual license	36,729		13	%	53,034		21	%	(16,305		)	(31	)%	80,015		9	%	109,863		12	%	(29,848		)	(27	)%
Consulting	50,327		18	%	61,050		24	%	(10,723		)	(18	)%	217,609		24	%	256,960		29	%	(39,351		)	(15	)%
Total revenue	$	276,542	100	%	$	256,357	100	%	$	20,185		8	%	$	911,383	100	%	$	891,581	100	%	$	19,802		2	%

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Annual contract value (“ACV”) ⁽¹⁾ 

The change in ACV measures the growth and predictability of future cash flows from committed Pega Cloud and Client Cloud arrangements as of the end of the particular reporting period.

⁽¹⁾ See schedules at the end of this release for additional information.

Remaining performance obligations ("Backlog")

Expected future revenue on existing contracts:

	December 31, 2019
(Dollars in thousands)	Perpetual license			Term license			Maintenance			Cloud			Consulting			Total
1 year or less	$	2,305		$	97,826		$	206,882		$	165,571		$	20,798		$	493,382		58	%
1-2 years	2,179			12,014			30,291			128,109			1,439			174,032			21	%
2-3 years	—			3,132			17,844			84,788			132			105,896			13	%
Greater than 3 years	—			3,861			13,277			43,702			1,993			62,833			8	%
	$	4,484		$	116,833		$	268,294		$	422,170		$	24,362		$	836,143		100	%
Change in Backlog Since December 31, 2018
	$	(14,185	)	$	32,453		$	60,380		$	123,353		$	3,169		$	205,170
	(76		)%	38		%	29		%	41		%	15		%	33		%

	December 31, 2018
(Dollars in thousands)	Perpetual license		Term license		Maintenance		Cloud		Consulting		Total
1 year or less	$	14,665	$	72,378	$	192,274	$	103,354	$	17,235	$	399,906	63	%
1-2 years	2,343		10,355		10,436		80,214		2,810		106,158		17	%
2-3 years	1,661		1,414		3,644		61,906		940		69,565		11	%
Greater than 3 years	—		233		1,560		53,343		208		55,344		9	%
	$	18,669	$	84,380	$	207,914	$	298,817	$	21,193	$	630,973	100	%

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Guidance for 2020

As of February 12, 2020, we are providing the following guidance:

	Year Ended December 31, 2020
(in millions, except per share amounts)	GAAP			Non-GAAP (1)
Revenue	$	1,100		$	1,100
Net income (loss)	$	(70.5	)	$	16.7
Diluted earnings (loss) per share	$	(0.89	)	$	0.20

⁽¹⁾ A reconciliation of our GAAP and Non-GAAP guidance is contained in the financial schedules at the end of this release.

Quarterly conference call

A conference call and audio-only webcast will be conducted at 5:00 p.m. EDT on February 12, 2020.

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 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/about/investors by clicking the earnings calls link in the Investors Relations section.

Discussion of Non-GAAP financial measures

To supplement the financial results presented in accordance with generally accepted accounting principles in the U.S. (“GAAP”), we provide Non-GAAP measures, including in this release. We utilize several different financial measures, both GAAP and Non-GAAP, in analyzing and assessing the overall performance of the business, for making operating decisions, and for forecasting and planning for future periods. Our annual financial plan is prepared on both a GAAP and a Non-GAAP basis. In addition, because of the importance of these measures in managing the business, we use Non-GAAP measures and financial performance results in the evaluation process to establish management’s compensation.

The Non-GAAP measures exclude the effects of stock-based compensation expense, amortization of intangible assets, and foreign currency transaction gains and losses. We believe these Non-GAAP measures are helpful in understanding our past financial performance and our anticipated future results.

These Non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures. They should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.

A reconciliation of the GAAP measures to our Non-GAAP measures is contained in the financial schedules at the end of this release.

Forward-looking statements

Certain statements contained in this press release may be construed as “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995

These forward-looking statements are based on current expectations, estimates, forecasts, and projections about the industry and markets in which we operate and management’s beliefs and assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “could,” “estimate,” “may,” “target,” “strategy,” “project,” “guidance,” “likely,” “usually,” or variations of such words and similar expressions are intended to identify such forward-looking statements.

Important factors that could cause actual future activities and results to differ materially from those expressed in such forward-looking statements include, among others, management of our transition to a more subscription-based business model, variation in demand for our products and services, the adequacy of our liquidity and capital resources, compliance with our debt obligations and debt covenants, reliance on third-party relationships, reliance on key personnel, the inherent risks associated with international operations and the continued uncertainties in the global economy, our continued effort to market and sell both domestically and internationally, foreign currency exchange rates, the potential legal and financial liabilities and reputation damage due to cyber-attacks and security breaches, and management of our growth. These risks and other factors that could 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, 2019, and other filings we make with the U.S. Securities and Exchange Commission (“SEC”). These documents are available on the Company’s website at www.pega.com/about/investors.

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Investors are cautioned not to place undue reliance on such forward-looking statements, and there are no assurances that the results contained in such statements will be achieved. Although new information, future events, or risks may cause actual results to differ materially from future results expressed or implied by such forward-looking statements, 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 contained in this press release represent the Company’s views as of February 12, 2020.

About Pegasystems

Pega is the leader in cloud software for customer engagement and operational excellence. The world’s most recognized and successful brands rely on Pega’s AI-powered software to optimize every customer interaction on any channel while ensuring their brand promises are kept. Pega’s low-code application development platform allows enterprises to quickly build and evolve apps to meet their customer and employee needs and drive digital transformation on a global scale. For more than 35 years, Pega has enabled higher customer satisfaction, lower costs, and increased customer lifetime value.

For more information on Pegasystems (NASDAQ: PEGA) visit www.pega.com.

Press contact:

Lisa Pintchman

Pegasystems Inc.

lisa.pintchman@pega.com

(617) 866-6022            

Twitter: @pega

Investor contact:

Garo Toomajanian                

ICR for Pegasystems Inc.    

pegainvestorrelations@pega.com

(617) 866-6077

All trademarks are the property of their respective owners.

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PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

	Three Months Ended December 31,					Year Ended December 31,
	2019			2018		2019			2018
Revenue
Software license	$	113,905		$	103,220	$	279,448		$	288,119
Maintenance	73,174			67,427		280,580			263,875
Services	89,463			85,710		351,355			339,587
Total revenue	276,542			256,357		911,383			891,581
Cost of revenue
Software license	674			1,397		3,656			5,169
Maintenance	6,341			6,530		25,656			24,565
Services	70,592			69,984		280,710			272,031
Total cost of revenue	77,607			77,911		310,022			301,765
Gross profit	198,935			178,446		601,361			589,816
Operating expenses
Selling and marketing	133,395			103,650		474,459			373,495
Research and development	52,408			46,449		205,210			181,710
General and administrative	14,877			12,894		56,570			51,643
Total operating expenses	200,680			162,993		736,239			606,848
(Loss) income from operations	(1,745		)	15,453		(134,878		)	(17,032		)
Foreign currency transaction gain (loss)	1,242			1,863		(2,335		)	2,421
Interest (loss) income, net	(15		)	629		1,808			2,705
Other income, net	181			—		559			363
(Loss) income before (benefit from) provision for income taxes	(337		)	17,945		(134,846		)	(11,543		)
(Benefit from) provision for income taxes	(1,255		)	1,532		(44,413		)	(22,160		)
Net income (loss)	$	918		$	16,413	$	(90,433	)	$	10,617
Earnings (loss) per share
Basic	$	0.01		$	0.21	$	(1.14	)	$	0.14
Diluted	$	0.01		$	0.20	$	(1.14	)	$	0.13
Weighted-average number of common shares outstanding
Basic	79,430			78,680		79,055			78,564
Diluted	83,624			82,536		79,055			83,064

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PEGASYSTEMS INC.

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

(in thousands, except percentages and per share amounts)

	Three Months Ended December 31,								Year Ended December 31,
	2019			2018			Change		2019			2018			Change
Total revenue - GAAP and Non-GAAP	$	276,542		$	256,357		8	%	$	911,383		$	891,581		2	%
Net income (loss) - GAAP	$	918		$	16,413		(94	)%	$	(90,433	)	$	10,617		*
Amortization of intangible assets	1,018			2,935					6,625			11,443
Stock-based compensation (2)	20,666			16,289					80,909			63,862
Foreign currency transaction (gain) loss	(1,242		)	(1,863		)			2,335			(2,421		)
Income tax effects (3)	(5,678		)	(7,294		)			(34,518		)	(37,495		)
Net income (loss) - Non-GAAP	$	15,682		$	26,480		(41	)%	$	(35,082	)	$	46,006		*
Diluted earnings (loss) per share - GAAP	$	0.01		$	0.20		(95	)%	$	(1.14	)	$	0.13		*
Non-GAAP adjustments	0.18			0.12					0.70			0.42
Diluted earnings (loss) per share - Non-GAAP	$	0.19		$	0.32		(41	)%	$	(0.44	)	$	0.55		*
Diluted weighted-average number of common shares outstanding - GAAP	83,624			82,536			1	%	79,055			83,064			(5	)%
Incremental dilutive shares for Non-GAAP	—			—					—			—
Diluted weighted-average number of common shares outstanding - Non-GAAP	83,624			82,536			1	%	79,055			83,064			(5	)%

* not meaningful

⁽¹⁾ Our Non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures. They should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.

Our Non-GAAP financial measures reflect adjustments based on the following items:

• 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 our 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 our future period revenues as well. Amortization of intangible assets is likely to recur in future periods.

• 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 period revenues, we continue to evaluate our business performance excluding stock-based compensation.

• 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 changes in foreign exchange market rates. Foreign currency transaction gains and losses will recur in future periods.

For additional information about our use of Non-GAAP measures, the reasons why management uses these measures, the usefulness of these measures, and the material limitations on the usefulness of these measures, see “Discussion of Non-GAAP financial measures” included earlier in this release and below.

6

⁽²⁾ Stock-based compensation was:

	Three Months Ended December 31,						Year Ended December 31,
(in thousands)	2019			2018			2019			2018
Cost of revenues	$	4,605		$	4,585		$	18,822		$	16,862
Selling and marketing	8,610			6,342			32,665			23,237
Research and development	4,948			3,919			18,938			15,274
General and administrative	2,503			1,443			10,484			8,489
	$	20,666		$	16,289		$	80,909		$	63,862
Income tax benefit	$	(4,166	)	$	(3,346	)	$	(16,392	)	$	(13,383	)

⁽³⁾ Effective income tax rates were:

	Year Ended December 31,
	2019		2018
GAAP	33	%	192	%
Non-GAAP	22	%	25	%

Our effective income tax rate under GAAP is subject to significant fluctuations due to a variety of factors, including excess tax benefits generated by our stock-based compensation plans, 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 forecast 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 effective income tax rate on a basis consistent with the effective income tax rate in our annual plan as established at the beginning of each year given this tax rate volatility.

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PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	December 31, 2019		December 31, 2018
Assets
Cash, cash equivalents, and marketable securities	$	68,363	$	207,423
Receivables (billed and unbilled)	501,675		504,765
Goodwill	79,039		72,858
Other assets	335,735		197,507
Total assets	$	984,812	$	982,553
Liabilities and stockholders’ equity
Accrued expenses, including compensation and related expenses	$	152,127	$	127,814
Deferred revenue, current	190,080		185,145
Other liabilities	103,595		48,063
Stockholders’ equity	539,010		621,531
Total liabilities and stockholders’ equity	$	984,812	$	982,553

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended December 31,
	2019			2018
Net (loss) income	$	(90,433	)	$	10,617
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities
Non-cash items	99,251			73,027
Change in operating assets and liabilities, net	(50,983		)	20,712
Cash (used in) provided by operating activities	(42,165		)	104,356
Cash provided by (used in) investing activities	70,074			(48,196		)
Cash (used in) financing activities	(74,258		)	(101,460		)
Effect of exchange rate changes on cash and cash equivalents	290			(2,557		)
Net (decrease) in cash and cash equivalents	(46,059		)	(47,857		)
Cash and cash equivalents, beginning of period	114,422			162,279
Cash and cash equivalents, end of period	$	68,363		$	114,422

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PEGASYSTEMS INC.

ANNUAL CONTRACT VALUE (“ACV”) ^{(1) (2)} 

(in thousands, except percentages)

	December 31,				Change
	2019		2018		Reported				Constant currency
Maintenance	$	292,696	$	269,708	$	22,988	9	%	8	%
Term	231,267		190,349		40,918		21	%	21	%
Client Cloud	523,963		460,057		63,906		14	%	14	%
Pega Cloud	169,329		109,973		59,356		54	%	54	%
Total ACV	$	693,292	$	570,030	$	123,262	22	%	22	%

⁽¹⁾Total ACV, as of a given date, is the sum of the following two components:

• Client Cloud: the sum of (1) the annual value of each term license contract in effect on such date, which is equal to its total license value divided by the total number of years and (2) maintenance revenue reported for the quarter ended on such date, multiplied by four. We do not provide hosting services for Client Cloud arrangements.

• Pega Cloud: the sum of the annual value of each cloud contract in effect on such date, which is equal to its total value divided by the total number of years.

⁽²⁾As foreign currency exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of ACV growth rates on a constant currency basis enhances the understanding of our results and evaluation of our performance in comparison to prior periods.

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PEGASYSTEMS INC.

RECONCILIATION OF FORWARD-LOOKING GUIDANCE

(in millions, except per share amounts)

	Year Ended December 31, 2020
Revenue (GAAP and Non-GAAP)	$	1,100.0
Net loss (GAAP)	$	(70.5	)
Amortization of intangible assets	4.0
Stock-based compensation	101.6
Income tax effects	(18.4		)
Net income (Non-GAAP)	$	16.7
Diluted loss per share (GAAP)	$	(0.89	)
Non-GAAP adjustments	1.09
Diluted income per share (Non-GAAP)	$	0.20
Diluted weighted-average number of common shares outstanding - GAAP	79.2
Incremental dilutive shares for Non-GAAP	5.8
Diluted weighted-average number of common shares outstanding - Non-GAAP	85.0

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XML

COVER PAGE	Feb. 12, 2020
Cover page.
Document Type	8-K
Document Period End Date	Feb. 12, 2020
Entity Registrant Name	PEGASYSTEMS INC.
Entity Incorporation, State or Country Code	MA
Entity File Number	1-11859
Entity Tax Identification Number	04-2787865
Entity Address, Address Line One	One Rogers Street
Entity Address, City or Town	Cambridge
Entity Address, State or Province	MA
Entity Address, Postal Zip Code	02142-1209
City Area Code	617
Local Phone Number	374-9600
Written Communications	false
Soliciting Material	false
Pre-commencement Tender Offer	false
Pre-commencement Issuer Tender Offer	false
Title of 12(b) Security	Common Stock, $.01 par value per share
Trading Symbol	PEGA
Security Exchange Name	NASDAQ
Entity Emerging Growth Company	false
Amendment Flag	false
Entity Central Index Key	0001013857