10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x  Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2012

or

¨  Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

  For the transition period from                      to                     

Commission File Number: 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.)
One Rogers Street Cambridge, MA	02142-1209
(Address of principal executive offices)	(Zip Code)
101 Main Street Cambridge, MA	02142-1590
(Former address of principal executive offices)	(Zip Code)

(617) 374-9600

(Registrant’s telephone number including area code)

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).      Yes  x      No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x	Accelerated filer  ¨	Non-accelerated filer  ¨	Smaller reporting company  ¨
	(Do not check if smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x

There were 37,887,686 shares of the Registrant’s common stock, $.01 par value per share, outstanding on October 29, 2012.

PEGASYSTEMS INC.

Index to Form 10-Q

		Page
	Part I—Financial Information
Item 1.	Financial Statements:
	Unaudited Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011		3
	Unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2012 and 2011		4
	Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011		5
	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011		6
	Notes to Unaudited Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		24
Item 4.	Controls and Procedures		24
	Part II—Other Information
Item 1A.	Risk Factors		25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		25
Item 6.	Exhibits		26
SIGNATURE			27

2

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	As of		As of
	September 30,    2012		December 31,    2011
ASSETS
Current assets:
Cash and cash equivalents	$	66,237	$	60,353
Marketable securities		45,092		51,079
Total cash, cash equivalents, and marketable securities		111,329		111,432
Trade accounts receivable, net of allowance of $1,274 and $926		80,849		98,293
Deferred income taxes		9,823		9,826
Income taxes receivable		10,776		7,545
Other current assets		6,276		4,865
Total current assets		219,053		231,961
Property and equipment, net		31,285		14,458
Long-term deferred income taxes		43,835		43,286
Long-term other assets		1,767		2,186
Intangible assets, net		61,009		69,369
Goodwill		20,451		20,451
Total assets	$	377,400	$	381,711
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,548		10,899
Accrued expenses		17,311		18,336
Accrued compensation and related expenses		26,779		39,170
Deferred revenue		74,784		73,840
Total current liabilities		123,422		142,245
Income taxes payable		9,113		9,547
Long-term deferred revenue		17,423		15,367
Other long-term liabilities		14,394		5,796
Total liabilities		164,352		172,955
Commitments and contingencies
Stockholders’ equity:
Preferred stock, 1,000 shares authorized; no shares issued and outstanding		—		—
Common stock, 100,000 shares and 70,000 shares authorized; 37,900 shares and 37,712 shares issued and outstanding		379		377
Additional paid-in capital		134,614		129,701
Retained earnings		75,078		77,029
Accumulated other comprehensive income		2,977		1,649
Total stockholders’ equity		213,048		208,756
Total liabilities and stockholders’ equity	$	377,400	$	381,711

See notes to unaudited condensed consolidated financial statements.

3

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

	Three Months  Ended September 30,				Nine Months  Ended September 30,
	2012		2011		2012		2011
Revenue:
Software license	$	28,575	$	25,346	$	95,517	$	93,453
Maintenance		32,317		29,971		97,657		85,713
Professional services		40,765		40,186		124,706		122,215
Total revenue		101,657		95,503		317,880		301,381
Cost of revenue:
Cost of software license		1,585		1,637		4,763		4,942
Cost of maintenance		3,745		2,980		11,072		9,614
Cost of professional services		32,335		37,194		103,351		107,668
Total cost of revenue		37,665		41,811		119,186		122,224
Gross profit		63,992		53,692		198,694		179,157
Operating expenses:
Selling and marketing		36,893		32,463		116,476		103,707
Research and development		19,506		16,218		57,411		47,047
General and administrative		7,192		7,222		21,171		21,193
Acquisition-related costs		—		—		—		482
Restructuring costs		—		(203)		—		(62)
Total operating expenses		63,591		55,700		195,058		172,367
Income (loss) from operations		401		(2,008)		3,636		6,790
Foreign currency transaction gain (loss)		438		(1,049)		337		140
Interest income, net		113		102		318		279
Other (expense) income, net		(920)		504		(1,496)		365
Income (loss) before provision (benefit) for income taxes		32		(2,451)		2,795		7,574
Provision (benefit) for income taxes		363		(7,410)		1,336		(4,389)
Net (loss) income	$	(331)	$	4,959	$	1,459	$	11,963
(Loss) earnings per share:
Basic	$	(0.01)	$	0.13	$	0.04	$	0.32
Diluted	$	(0.01)	$	0.13	$	0.04	$	0.31
Weighted-average number of common shares outstanding
Basic		37,881		37,588		37,834		37,425
Diluted		37,881		38,930		38,897		38,864
Cash dividends declared per share	$	0.03	$	0.03	$	0.09	$	0.09

See notes to unaudited condensed consolidated financial statements.

4

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

	Three Months  Ended September 30,				Nine Months  Ended September 30,
(in thousands)	2012		2011		2012		2011
Net (loss) income	$	(331)	$	4,959	$	1,459	$	11,963
Other comprehensive income (loss), net of tax:
Unrealized gain on securities, net of tax		33		13		80		39
Foreign currency translation adjustments		1,315		(741)		1,248		1,023
Total other comprehensive income (loss)		1,348		(728)		1,328		1,062
Comprehensive income	$	1,017	$	4,231	$	2,787	$	13,025

See notes to unaudited condensed consolidated financial statements.

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PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Nine Months Ended                  September 30,
	2012		2011
Operating activities:
Net income	$	1,459	$	11,963
Adjustment to reconcile net income to cash provided by operating activities:
Excess tax benefits from exercise or vesting of equity awards		(3,161)		(6,628)
Deferred income taxes		(511)		1,092
Depreciation and amortization		13,986		12,648
Stock-based compensation expense		8,622		6,722
Foreign currency transaction loss		785		624
Other non-cash items		4,604		528
Change in operating assets and liabilities:
Trade accounts receivable		17,769		2,264
Income taxes receivable and other current assets		(1,471)		(4,903)
Accounts payable and accrued expenses		(20,976)		(8,983)
Deferred revenue		2,747		8,250
Other long-term assets and liabilities		5,231		(3,930)
Cash provided by operating activities		29,084		19,647
Investing activities:
Purchase of marketable securities		(13,336)		(49,689)
Matured and called marketable securities		18,465		14,738
Sale of marketable securities		—		4,048
Investment in property and equipment		(21,875)		(5,108)
Cash used in investing activities		(16,746)		(36,011)
Financing activities:
Issuance of common stock for share-based compensation plans		753		2,164
Excess tax benefits from exercise or vesting of equity awards		3,161		6,628
Dividend payments to shareholders		(3,404)		(3,365)
Common stock repurchases for tax withholdings for net settlement of equity awards		(3,650)		(5,488)
Common stock repurchases under share repurchase programs		(3,910)		(3,460)
Cash used in financing activities		(7,050)		(3,521)
Effect of exchange rate on cash and cash equivalents		596		361
Net increase (decrease) in cash and cash equivalents		5,884		(19,524)
Cash and cash equivalents, beginning of period		60,353		71,127
Cash and cash equivalents, end of period	$	66,237	$	51,603

See notes to unaudited condensed consolidated financial statements.

6

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. ACCOUNTING POLICIES

Basis of Presentation

Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2011.

In the opinion of management, the Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2012.

2. NEW ACCOUNTING PRONOUNCEMENTS

Disclosures About Offsetting Assets and Liabilities: In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, “Balance Sheet (Topic 210): Disclosures About Offsetting Assets and Liabilities”, which creates new disclosure requirements regarding the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. Certain disclosures of the amounts of certain instruments subject to enforceable master netting arrangements or similar agreements would be required, irrespective of whether the entity has elected to offset those instruments in the statement of financial position. This ASU is effective for the Company on January 1, 2013 with retrospective application required. The adoption of this standard will not impact the Company’s financial position or results of operations as this accounting standard only requires enhanced disclosure.

3. MARKETABLE SECURITIES

(in thousands)	September 30, 2012
	Amortized                 Cost		Unrealized                 Gains		Unrealized                 Losses		Fair Value
Municipal bonds	$	28,700		79		(4)	$	28,775
Corporate bonds		14,212		105		—		14,317
Government sponsored enterprise bonds		2,000		—		—		2,000
	$	44,912		184		(4)	$	45,092

(in thousands)	December 31, 2011
	Amortized                 Cost		Unrealized                 Gains		Unrealized                 Losses		Fair Value
Municipal bonds	$	27,968		74		(2)	$	28,040
Corporate bonds		15,058		16		(34)		15,040
Government sponsored enterprise bonds		8,001		2		(4)		7,999
	$	51,027		92		(40)	$	51,079

The Company considers debt securities with maturities of three months or less from the purchase date to be cash equivalents. Interest is recorded when earned. All of the Company’s investments are classified as available-for-sale and are carried at fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive income, net of related income taxes.

As of September 30, 2012, remaining maturities of marketable debt securities ranged from November 2012 to December 2014, with a weighted-average remaining maturity of approximately 11 months.

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4. DERIVATIVE INSTRUMENTS

The Company uses forward foreign currency contracts to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated accounts receivable and cash. The U.S. operating company invoices most of its foreign customers in foreign currencies, which results in cash and receivables held at the end of the reporting period denominated in these foreign currencies. Since the U.S. operating company’s functional currency is the U.S. dollar, the Company recognizes a foreign currency transaction gain or (loss) on the foreign currency denominated cash and accounts receivable held by the U.S. operating company in its consolidated statements of income when there are changes in the foreign currency exchange rates versus the U.S. dollar. The Company is primarily exposed to changes in the value of the Euro and British pound relative to the U.S. dollar. The forward foreign currency contracts utilized by the Company are not designated as hedging instruments and as a result, the Company records the fair value of these contracts at the end of each reporting period in its consolidated balance sheet as other current assets for unrealized gains and accrued expenses for unrealized losses, with any fluctuations in the value of these contracts recognized in other (expense) income, net, in its consolidated statement of income. However, the fluctuations in the value of these forward foreign currency contracts partially offset the gains and losses from the remeasurement or settlement of the foreign currency denominated accounts receivable and cash held by the U.S. operating company, thus partly mitigating the volatility. Generally, the Company enters into forward foreign currency contracts with terms not greater than 90 days.

During the first nine months of 2012, the Company entered into and settled forward foreign currency contracts to sell €48.9 million and £39 million and receive in exchange $123.6 million. During the first nine months of 2011, the Company entered into and settled forward foreign currency contracts to sell €22.5 million and £16.5 million and receive in exchange $58.6 million. As of September 30, 2012 and December 31, 2011, the Company did not have any forward foreign currency contracts outstanding. During the third quarter and first nine months of 2012, the change in the fair value of the Company’s forward foreign currency contracts recorded in other (expense) income, net, was a loss of $0.9 million and $1.5 million, respectively. During the third quarter and first nine months of 2011, the change in the fair value of the Company’s forward foreign currency contracts recorded in other (expense) income, net, was a gain of $0.5 million and $0.3 million, respectively.

5. FAIR VALUE MEASUREMENTS

Assets Measured 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 observable inputs that are observable either directly or indirectly; and (Level 3) significant unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company records its marketable securities at fair value.

8

The fair value hierarchy of the Company’s cash equivalents and marketable securities at fair value is as follows:

			Fair Value Measurements at Reporting Date Using
(in thousands)	September 30,              2012		Quoted Prices in Active Markets for       Identical Assets       (Level 1)		Significant Other        Observable       Inputs (Level 2)
Money market funds	$	3,270	$	3,270	$	—
Marketable securities:
Government sponsored enterprise bonds	$	2,000	$	—	$	2,000
Corporate bonds		14,317		14,317		—
Municipal bonds		28,775		13,575		15,200
Total marketable securities	$	45,092	$	27,892	$	17,200

			Fair Value Measurements at Reporting Date Using
(in thousands)	December 31,              2011		Quoted Prices in Active Markets for       Identical Assets       (Level 1)		Significant Other        Observable       Inputs (Level 2)
Money market funds	$	3,067	$	3,067	$	—
Marketable securities:
Municipal bonds	$	28,040	$	6,110	$	21,930
Corporate bonds		15,040		15,040		0
Government sponsored enterprise bonds		7,999		2,001		5,998
Total marketable securities	$	51,079	$	23,151	$	27,928

Assets Measured at Fair Value on a Nonrecurring Basis

Assets not recorded at fair value on a recurring basis, such as property and equipment, and intangible assets, are recognized at fair value when they are impaired. During the first nine months of 2012 and 2011, the Company did not recognize any nonrecurring fair value measurements from impairments.

6. TRADE ACCOUNTS RECEIVABLE, NET OF ALLOWANCES

(in thousands)	September 30,     2012		December 31,     2011
Trade accounts receivable	$	63,370	$	77,123
Unbilled trade accounts receivable		18,753		22,096
Total accounts receivable		82,123		99,219
Allowance for doubtful accounts		—		(31)
Allowance for sales credit memos		(1,274)		(895)
Total allowance		(1,274)		(926)
	$	80,849	$	98,293

Unbilled trade accounts receivable relate to services earned under time and material arrangements, and maintenance and license arrangements that had not been invoiced as of September 30, 2012 and December 31, 2011, respectively.

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7. GOODWILL AND OTHER INTANGIBLE ASSETS

There were no changes in the carrying amount of goodwill during the first nine months of 2012.

Intangible assets are recorded at cost and are amortized using the straight-line method over their estimated useful life, which range from 5 to 9 years.

(in thousands)	Cost		Accumulated              Amortization		Net Book                 Value
As of September 30, 2012
Customer related intangibles	$	44,355	$	(11,910)	$	32,445
Technology		43,446		(14,891)		28,555
Trade name		248		(248)		—
Technology designs		490		(490)		—
Non-compete agreements		100		(91)		9
Intellectual property		1,400		(1,400)		—
Total	$	90,039	$	(29,030)	$	61,009
	Cost		Accumulated Amortization		Net Book Value
As of December 31, 2011
Customer related intangibles	$	44,355	$	(8,214)	$	36,141
Technology		43,446		(10,269)		33,177
Trade name		248		(248)		—
Technology designs		490		(463)		27
Non-compete agreements		100		(76)		24
Intellectual property		1,400		(1,400)		—
Total	$	90,039	$	(20,670)	$	69,369

For the third quarter and first nine months of 2012 and 2011, amortization of intangibles was reflected in the Company’s unaudited condensed consolidated statements of income as follows:

	Three Months  Ended September 30,				Nine Months  Ended September 30,
(in thousands)	2012		2011		2012		2011
Cost of software license	$	1,541	$	1,571	$	4,649	$	4,713
Selling and marketing		1,232		1,232		3,696		3,696
General and administrative		5		5		15		98
Total amortization expense	$	2,778	$	2,808	$	8,360	$	8,507

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Amortization of intangibles is estimated to be recorded over their remaining useful lives as follows:

(in thousands) As of September 30, 2012	Future estimated       amortization      expense
Remainder of 2012	$	2,777
2013		11,095
2014		9,489
2015		8,688
2016		8,688
2017		8,688
Thereafter		11,584
	$	61,009

8. ACCRUED EXPENSES

(in thousands)	September 30,      2012		December 31,      2011
Other taxes	$	2,351	$	2,759
Restructuring		429		626
Professional fees		1,191		1,146
Income taxes		670		1,954
Professional services partners fees		725		120
Short-term deferred rent		1,671		1,428
Self-insurance health and dental claims		1,709		1,931
Dividends payable		1,138		1,132
Employee reimbursable expenses		1,785		897
Construction in process		627		—
Other		5,015		6,343
	$	17,311	$	18,336

9. DEFERRED REVENUE

(in thousands)	September 30,      2012		December 31,      2011
Software license	$	13,686	$	15,005
Maintenance		52,761		50,916
Professional services and other		8,337		7,919
Current deferred revenue		74,784		73,840
Software license		17,312		13,532
Maintenance and professional services		111		1,835
Long-term deferred revenue		17,423		15,367
	$	92,207	$	89,207

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10. ACCRUED RESTRUCTURING COSTS

During 2010, in connection with the Company’s integration plan of Chordiant, the Company recorded $6.5 million of severance and related benefit costs, which were paid by the end of the first quarter of 2012. Also, in connection with the Company’s evaluation of its combined facilities, the Company eliminated space within one facility and recognized $1.6 million of restructuring expenses, representing future lease payments and demising costs, net of estimated sublease income for this space. The lease expires at the end of 2013.

A summary of the restructuring activity during the first nine months of 2012 is as follows:

(in thousands)	Personnel		Facilities		Total
Balance as of December 31, 2011	$	243	$	800	$	1,043
Cash payments		(243)		(258)		(501)
Balance as of September 30, 2012	$	—	$	542	$	542

(in thousands)	September 30,      2012		December 31,      2011
Reported as:
Accrued expenses	$	429	$	626
Other long-term liabilities		113		417
	$	542	$	1,043

11. STOCK-BASED COMPENSATION

For the third quarter and first nine months of 2012 and 2011, stock-based compensation expense was reflected in the Company’s unaudited condensed consolidated statements of income as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2012		2011		2012		2011
Cost of services	$	849	$	659	$	2,710	$	2,009
Operating expenses		1,935		1,663		5,912		4,713
Total stock-based compensation before tax	$	2,784	$	2,322	$	8,622	$	6,722
Income tax benefit		(915)		(676)		(2,781)		(2,175)

During the first nine months of 2012, the Company issued approximately 296,000 shares to its employees under the Company’s share-based compensation plans.

During the first nine months of 2012, the Company granted approximately 156,000 restricted stock units (“RSUs”) with a total fair value of $5.2 million. Approximately 52,000 RSUs were issued in connection with the election by employees to receive 50% of their 2012 target incentive compensation under the Company’s Corporate Incentive Compensation Plan (the “CICP”) in the form of RSUs instead of cash. Stock-based compensation of approximately $1.9 million associated with this RSU grant will be recognized over one year.

As of September 30, 2012, the Company had approximately $10.4 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to all unvested RSUs and unvested stock options that is expected to be recognized over a weighted-average period of 2.1 years.

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12. EARNINGS PER SHARE

Basic earnings per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding options, RSUs, and warrants, using the treasury stock method and the average market price of our common stock during the applicable period. Certain shares related to some of our outstanding stock options and RSUs were excluded from the computation of diluted earnings per share because they were antidilutive in the periods presented, but could be dilutive in the future.

	Three Months Ended                          September 30,				Nine Months Ended                          September 30,
(in thousands, except per share amounts)	2012		2011		2012		2011
Basic
Net (loss) income	$	(331)	$	4,959	$	1,459	$	11,963
Weighted-average common shares outstanding		37,881		37,588		37,834		37,425
(Loss) earnings per share, basic	$	(0.01)	$	0.13	$	0.04	$	0.32
Diluted
Net (loss) income	$	(331)	$	4,959	$	1,459	$	11,963
Weighted-average common shares outstanding, basic		37,881		37,588		37,834		37,425
Weighted-average effect of dilutive securities:
Stock options		—		1,078		817		1,187
RSUs		—		261		246		249
Warrants		—		3		—		3
Effect of assumed exercise of stock options, warrants and RSUs		—		1,342		1,063		1,439
Weighted-average common shares outstanding, diluted		37,881		38,930		38,897		38,864
(Loss) earnings per share, diluted	$	(0.01)	$	0.13	$	0.04	$	0.31
Outstanding options and RSUs excluded as impact would be antidilutive		1,865		27		55		27

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13. GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS

The Company develops and licenses its rules-based software solutions and provides professional services, maintenance, and training related to its software. The Company derives substantially all of its revenue from the sale and support of one group of similar products and services – software that provides business process solutions in the enterprise applications market. To assess performance, the Company’s chief operating decision maker primarily reviews financial information on a consolidated basis. Therefore, the Company has determined it operates in one segment — Business Process Solutions.

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2012			2011			2012			2011
U.S.	$	56,475	56%	$	49,166	51%	$	173,406	55%	$	160,489	53%
United Kingdom		18,862	18%		17,822	19%		55,329	17%		60,455	20%
Europe, other		12,836	13%		19,515	21%		45,051	14%		52,884	18%
Other		13,484	13%		9,000	9%		44,094	14%		27,553	9%
	$	101,657	100%	$	95,503	100%	$	317,880	100%	$	301,381	100%

There were no customers accounting for 10% or more of the Company’s total revenue during the third quarter and first nine months of 2012 and 2011. There was one customer that accounted for 10% or more of the Company’s outstanding trade receivables, net, as of December 31, 2011, as listed below.

	As of         September 30,		As of         December 31,
(Dollars in thousands)	2012		2011
Trade receivables, net of allowances	$	80,849	$	98,293
Customer A		—		14%

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements about our future financial performance and business plans, the adequacy of our liquidity and capital resources, the continued payment of quarterly dividends by the Company, and the timing of recognizing revenue under existing term license agreements. 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,” “project,” or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Important factors that could cause actual future activities and results to differ include, among others, variation in demand for our products and services and the difficulty in predicting the completion of product acceptance and other factors affecting the timing of license revenue recognition, the ongoing uncertainty and volatility in the global financial markets related to the European sovereign debt crisis and the so-called “fiscal cliff” in the U.S., the ongoing consolidation in the financial services and healthcare markets, reliance on third party relationships, the potential loss of vendor specific objective evidence for our professional services, and management of the Company’s growth. These risks are described more completely in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2011 and in Item 1A of Part II of this Quarterly Report on Form 10-Q. We do not intend to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Business overview

We develop, market, license, and support software, which allows organizations to build, deploy, and change enterprise applications easily and quickly. Our unified software platform includes all the necessary elements and technologies to build enterprise applications in a fraction of the time it would take with competitive disjointed architectures, by directly capturing business objectives, automating programming, and automating work. Our customers use our software to improve their customer service and customer experience, generate new business, and enhance productivity and profitability. We also provide professional services, maintenance, and training related to our software.

We focus our sales efforts on target accounts, which are large companies or divisions within companies and typically leaders in their industry. Our strategy is to sell a series of smaller licenses that are focused on specific purposes or areas of operations, rather than sell large enterprise licenses.

Our license revenue is primarily derived from sales of our PegaRULES Process Commander ^® (“PRPC”) software and related solution frameworks. PRPC is a comprehensive platform for building and managing business process management (“BPM”) applications that unifies business rules and business processes. Our solution frameworks, built on the capabilities of PRPC, are purpose or industry-specific collections of best practice functionality, which allow organizations to quickly implement new customer-facing practices and processes, bring new offerings to market, and provide customized or specialized processing. Our products are simpler, easier to use and often result in shorter implementation periods than competitive enterprise software products. PRPC and related solution frameworks can be used by a broad range of customers within financial services, insurance, healthcare, communications, energy, and government markets.

Our solution frameworks products include customer relationship management (“CRM”) software, which enables unified predictive decisioning and analytics and optimizes the overall customer experience. Our decision management products and capabilities are designed to manage processes so that all actions optimize the outcome based on business objectives. We continue to invest in the development of new products and intend to remain a leader in BPM, CRM, and decision management.

We also license Pega Cloud, a service offering that allows customers to create and/or run Pega applications using an Internet-based infrastructure. This offering enables our customers to immediately build, test, and deploy their applications in a secure cloud environment while minimizing their infrastructure and hardware costs. Revenue from our Pega Cloud offering is included in professional services revenue.

We offer training for our customers and partners at our regional training facilities, at numerous third party facilities, and at customer sites. In 2012, we began offering training online through Pega Academy, which provides an alternative way to learn our software in a virtual environment quickly and easily. We expect that this online training will help expand the number of trained experts at a faster pace, but at a lower average price per student per class.

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Our total revenue during the third quarter and first nine months of 2012 increased 6% and 5%, respectively, compared to the same periods in 2011. License revenue increased 13% and 2% during the third quarter and first nine months of 2012, respectively, compared to the same periods in 2011. The slower growth in our license revenue for the first nine months of 2012 was mainly due to a higher proportion of term than perpetual license arrangements executed. It was also due to customer delays in signing arrangements due to uncertain U.S. economic conditions and the weak European economy. Maintenance revenue increased 8% during the third quarter of 2012 and 14% during the first nine months of 2012 compared to the same periods in 2011 primarily due to the growth in the aggregate value of the installed base of our software and continued strong renewal rates. The professional services gross margins increased to 21% in the third quarter of 2012 largely due to lower on-boarding time and expenses associated with reduced hiring as more of our customers became enabled and more implementation projects were led by our partners. During the first nine months of 2012, we generated approximately $29.1 million in cash from operations due to our strong collections and ended the quarter with $111.3 million in cash, cash equivalents, and marketable securities.

Critical accounting policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the SEC for interim financial reporting. The preparation of 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 of what could occur in the future given available information.

There have been no changes in our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011. For more information regarding our critical accounting policies, we encourage you to read the discussion contained in Item 7 under the heading “Critical Accounting Policies and Estimates” and Note 2. “Significant Accounting Policies” included in the notes to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2011.

Results of Operations

	Three Months Ended September 30,				Increase (Decrease)			Nine Months Ended September 30,				Increase (Decrease)
(Dollars in thousands)	2012		2011					2012		2011
Total revenue	$	101,657	$	95,503	$	6,154	6%	$	317,880	$	301,381	$	16,499	5%
Gross profit	$	63,992	$	53,692	$	10,300	19%	$	198,694	$	179,157	$	19,537	11%
Total operating expenses	$	63,591	$	55,700	$	7,891	14%	$	195,058	$	172,367	$	22,691	13%
Income (loss) from operations	$	401	$	(2,008)	$	2,409	(120)%	$	3,636	$	6,790	$	(3,154)	(46)%
Income (loss) before provision (benefit) for income taxes	$	32	$	(2,451)	$	2,483	(101)%	$	2,795	$	7,574	$	(4,779)	(63)%

The aggregate value of license arrangements executed during the third quarter of 2012 was significantly higher than in the third quarter of 2011. However, for the first nine months of 2012, the aggregate value of license arrangements executed were lower compared to the same period in 2011 due to the continued weak global economic conditions, especially in Europe, where the value of new license arrangements executed was almost 50% lower. The aggregate value of license arrangements executed fluctuates quarter to quarter. During the first nine months of 2012 and 2011, approximately 69% and 55%, respectively, of license arrangements were executed with existing customers.

The increase in gross profit during the third quarter of 2012 compared to the same period in 2011 was primarily due to an increase in license revenue and lower consulting services expenses. The increase in gross profit during the first nine months of 2012 compared to the same period in 2011 was primarily due to the increase in maintenance revenue and lower consulting services expenses.

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The increases in operating expenses were primarily due to the increases in selling and marketing and research and development expenses associated with higher headcount.

While income before provision for income taxes increased during the third quarter of 2012 compared to the same period in 2011, it decreased during the first nine months of 2012 compared to the same period in 2011. The decrease was primarily due to our operating expenses, associated with increased hiring, growing faster than our revenue. The decrease was also due to a $1.5 million loss on our forward foreign currency contracts recorded in the first nine months of 2012 compared to a gain of $0.3 million recorded in the first nine months of 2011. See Note 4 “Derivative Instruments” in the notes to the accompanying unaudited condensed consolidated financial statements for further discussion.

Revenue

	Three Months Ended September 30,						Increase			Nine Months Ended September 30,						Increase (Decrease)
(Dollars in thousands)	2012			2011						2012			2011
License revenue
Perpetual licenses	$	16,999	60%	$	15,527	61%	$	1,472	9%	$	50,448	53%	$	59,808	64%	$	(9,360)	(16)%
Term licenses		9,742	34%		9,034	36%		708	8%		32,650	34%		25,852	28%		6,798	26%
Subscription		1,834	6%		785	3%		1,049	134%		12,419	13%		7,793	8%		4,626	59%
Total license revenue	$	28,575	100%	$	25,346	100%	$	3,229	13%	$	95,517	100%	$	93,453	100%	$	2,064	2%

The mix between perpetual and term license arrangements executed in a particular period varies based on customer needs. A change in the mix between perpetual and term license arrangements executed over time may cause our revenues to vary materially as a higher proportion of term license arrangements would result in license revenue to be recognized over longer periods as payments become due or earlier if prepaid. Since the fourth quarter of 2011, the mix has moved toward term licenses resulting in higher term and lower perpetual license revenue during the first nine months of 2012 compared to the same period in 2011. In addition, some of our perpetual license arrangements include extended payment terms and some others include additional rights of use that also delay the recognition of revenue over longer periods.

The aggregate value of payments due under noncancellable term licenses grew to $155.9 million as of September 30, 2012 compared to $84.5 million as of September 30, 2011. We expect to recognize $8.6 million of the $155.9 million as revenue during the fourth quarter of 2012 in addition to new term license agreements we may complete or prepayments we may receive for existing term license agreements in the fourth quarter of 2012. The aggregate value of payments due under perpetual license arrangements was $39.4 million as of September 30, 2012 compared to $36 million as of September 30, 2011. See the table of future cash receipts on page 23.

Subscription revenue primarily consists of the ratable recognition of license, maintenance and bundled services revenue on perpetual license arrangements that include a right to unspecified future products. Subscription revenue does not include revenue from our Pega Cloud offerings. The timing of scheduled payments under customer arrangements may limit the amount of revenue that can be recognized in a reporting period. Consequently, our subscription revenue may vary quarter to quarter. The increases in subscription revenue were primarily due to the revenue recognized in the third quarter and first nine months of 2012 on some arrangements for which revenue recognition criteria had not been met for the same periods in 2011.

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	Three Months Ended September 30,				Increase			Nine Months Ended September 30,				Increase
(Dollars in thousands)	2012		2011					2012		2011
Maintenance revenue
Maintenance	$	32,317	$	29,971	$	2,346	8%	$	97,657	$	85,713	$	11,944	14%

The increases in maintenance revenue were primarily due to the growth in the aggregate value of the installed base of our software and continued strong renewal rates. For the first nine months of 2012, the increase was also due to the revenue recognition of a $2 million one-time fee associated with a customer maintenance agreement during the second quarter of 2012.

	Three Months Ended September 30,								Increase (Decrease)				Nine Months Ended September 30,							Increase (Decrease)
(Dollars in thousands)	2012				2011								2012				2011
Professional services revenue
Consulting Services	$	39,549	97	%	$	38,436	96	%	$	1,113	3	%	$	119,825	96	%	$	117,003	96%	$	2,822		2%
Training		1,216	3	%		1,750	4	%		(534)	(31	)%		4,881	4	%		5,212	4%		(331	)	(6)%
Total Professional services	$	40,765	100	%	$	40,186	100	%	$	579	1	%	$	124,706	100	%	$	122,215	100%	$	2,491		2%

Professional services are primarily consulting services related to new license implementations. Our consulting services revenue may fluctuate quarter to quarter based on customer requirements and budget availability, the number of license arrangements executed, and the mix of services performed by us or our enabled partners. The slight increases in our consulting services revenue were as a result of more customers becoming enabled and our partners leading more implementation projects.

	Three Months Ended September 30,				Increase			Nine Months Ended September 30,				Increase
(Dollars in thousands)	2012		2011					2012		2011
Gross Profit
Software license	$	26,990	$	23,709	$	3,281	14%	$	90,754	$	88,511	$	2,243	3%
Maintenance		28,572		26,991		1,581	6%		86,585		76,099		10,486	14%
Professional services		8,430		2,992		5,438	182%		21,355		14,547		6,808	47%
Total gross profit	$	63,992	$	53,692	$	10,300	19%	$	198,694	$	179,157	$	19,537	11%
Total gross profit %		63%		56%					63%		59%
Software license gross profit %		94%		94%					95%		95%
Maintenance gross profit %		88%		90%					89%		89%
Professional services gross profit %		21%		7%					17%		12%

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As a result of the increased number of customer and partner led implementations, we have slowed the hiring of professional services personnel, reducing non-billable on-boarding time and increasing utilization rates of our staff, resulting in higher gross profit percentages. If we increase our hiring pace in future periods, we may incur enablement costs that may result in lower professional services gross profit percentages.

	Three Months Ended September 30,				(Decrease)			Nine Months Ended September 30,				(Decrease)
(Dollars in thousands)	2012		2011					2012		2011
Amortization of intangibles:
Cost of software license	$	1,541	$	1,571	$	(30)	(2)%	$	4,649	$	4,713	$	(64)	(1)%
Selling and marketing		1,232		1,232		—	—		3,696		3,696		—	—%
General and Administrative		5		5		—	—		15		98		(83)	(85)%
Total amortization expense	$	2,778	$	2,808	$	(30)	(1)%	$	8,360	$	8,507	$	(147)	(2)%

The decreases in amortization expense were due to the amortization in full of the trade name intangible asset in 2011 and the technology designs intangible asset in the first quarter of 2012.

Operating expenses

	Three Months Ended September 30,				Increase			Nine Months Ended September 30,				Increase
(Dollars in thousands)	2012		2011					2012		2011
Selling and marketing
Selling and marketing	$	36,893	$	32,463	$	4,430	14%	$	116,476	$	103,707	$	12,769	12%
As a percent of total revenue		36%		34%					37%		34%
Selling and marketing headcount at September 30									524		430		94	22%

Selling and marketing expenses include compensation, benefits, and other headcount-related expenses associated with our selling and marketing personnel as well as advertising, promotions, trade shows, seminars, and other programs. Selling and marketing expenses also include the amortization of customer related intangibles.

We continue to create additional sales capacity by increasing sales headcount to target new accounts in existing industries, as well as to expand coverage in new industries and geographies. The increase in selling and marketing expenses during the third quarter of 2012 compared to the same period in 2011 was primarily due to a $4.3 million increase in compensation and benefit expenses associated with higher headcount. The increase in selling and marketing expenses during the first nine months of 2012 compared to the same period in 2011 was primarily due to a $14.4 million increase in compensation and benefit expenses associated with higher headcount, partially offset by a $2.2 million decrease in commission expense associated with the lower value of license arrangements executed during the first nine months of 2012 compared to the same period in 2011.

	Three Months Ended September 30,				Increase			Nine Months Ended September 30,				Increase
(Dollars in thousands)	2012		2011					2012		2011
Research and development
Research and development	$	19,506	$	16,218	$	3,288	20%	$	57,411	$	47,047	$	10,364	22%
As a percent of total revenue		19%		17%					18%		16%
Research and development headcount at September 30,									713		467		246	53%

Research and development expenses include compensation, benefits, contracted services, and other headcount-related expenses associated with research and development. The increase in headcount reflects the growth in our Indian research facility.

The increases in research and development expenses during the third quarter and first nine months of 2012 compared to the same periods in 2011 were primarily due to increases in compensation and benefit expenses associated with higher headcount of

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approximately $3.2 million and $7.5 million, respectively, and increases in rent and facilities related expenses associated with the build-out of our U.S. and India facilities of $0.9 million and $3 million, respectively.

	Three Months Ended September 30,				(Decrease)			Nine Months Ended September 30,				(Decrease)
(Dollars in thousands)	2012		2011					2012		2011
General and administrative
General and administrative	$	7,192	$	7,222	$	(30)	—	$	21,171	$	21,193	$	(22)	—
As a percent of total revenue		7%		8%					6%		7%
General and administrative headcount at September 30									243		206		37	18%

General and administrative expenses include compensation, benefits, and other headcount-related expenses associated with finance, legal, corporate governance, and other administrative headcount. It also includes accounting, legal, and other administrative fees. The general and administrative headcount includes employees in human resources, information technology and corporate services departments whose costs are allocated to the rest of the Company’s functional departments.

We completed the move to our new office headquarters in the third quarter of 2012. We recorded approximately $1.4 million and $4.4 million of rent expense under the new lease arrangement during the third quarter and first nine months of 2012, respectively, and approximately $0.4 million during each of the third quarter and first nine months of 2011. We will continue to incur duplicate rent and rent related expenses until the earlier of when the lease for our old headquarters expires in May 2013 or we are able to return the property to the landlord without further obligation.

Stock-based compensation

The following table summarizes stock-based compensation expense included in our unaudited condensed consolidated statements of income:

	Three Months Ended September 30,				Increase			Nine Months Ended September 30,				Increase
(Dollars in thousands)	2012		2011					2012		2011
Cost of services	$	849	$	659	$	190	29%	$	2,710	$	2,009	$	701	35%
Operating expenses		1,935		1,663		272	16%		5,912		4,713		1,199	25%
Total stock-based compensation before tax		2,784		2,322		462	20%		8,622		6,722		1,900	28%
Income tax benefit		(915)		(676)					(2,781)		(2,175)

The increases in stock-based compensation expense during the third quarter and first nine months of 2012 compared to the same periods in 2011 were primarily due to the higher value of the annual periodic equity grant, the annual executive grant and new hire grants.

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Non-operating income and expenses, net

	Three Months Ended September 30,				Change			Nine Months Ended September 30,				Change
(Dollars in thousands)	2012		2011					2012		2011
Foreign currency transaction gain (loss)	$	438	$	(1,049)	$	1,487	(142)%	$	337	$	140	$	197	141%
Interest income, net		113		102		11	11%		318		279		39	14%
Other (expense) income, net		(920)		504		(1,424)	(283)%		(1,496)		365		(1,861)	(510)%
Non-operating income (loss) and expenses, net	$	(369)	$	(443)	$	74	(17)%	$	(841)	$	784	$	(1,625)	(207)%

We hold foreign currency denominated accounts receivable and cash in our U.S. operating company where the functional currency is the U.S. dollar. As a result, these receivables and cash are subject to foreign currency transaction gains and losses when there are changes in exchange rates between the U.S. dollar and the foreign currencies. The fluctuations in foreign currency transaction gains and losses were primarily due to the changes in the value of the British pound and Euro relative to the U.S. dollar during the third quarter and first nine months of 2012 and 2011.

Beginning in the second quarter of 2011, we enter into forward foreign currency contracts to manage our exposure to changes in foreign currency exchange rates affecting the foreign currency denominated accounts receivable and cash held by our U.S. operating company. We have not designated these forward foreign currency contracts as hedging instruments and as a result, we record the fair value of the outstanding contracts at the end of the reporting period in our consolidated balance sheet, with any fluctuations in the value of these contracts recognized in other (expense) income, net. The fluctuations in the value of these forward foreign currency contracts recorded in other (expense) income, net, partially offset in net income the gains and losses from the remeasurement or settlement of the foreign currency denominated accounts receivable and cash held by the U.S. operating company recorded in foreign currency transaction gain.

The total change in the fair value of our forward foreign currency contracts recorded in other (expense) income, net, during the third quarter and first nine months of 2012 was a loss of $0.9 million and $1.5 million, respectively. During the third quarter and first nine months of 2011, the total change in the fair value of the Company’s forward foreign currency contracts recorded in other (expense) income, net, was a gain of $0.5 million and $0.3 million, respectively.

Provision for income taxes

The Company accounts for income taxes at each interim period using its estimated annual effective tax rate. The provision for income taxes represents current and future amounts owed for federal, state, and foreign taxes. For the first nine months of 2012, our annual effective tax rate was 47.8%. During the third quarter and first nine months of 2012, we recorded provisions of $0.4 million and $1.3 million, respectively. During the third quarter of 2011, the Company recorded a $2.4 million reduction in unrecognized tax benefits and a corresponding reduction in income tax expense related to uncertain tax positions of prior years for which the statute of limitations had expired. As a result of its estimated annual effective tax rate benefit and the $2.4 million of discrete items recorded as a reduction of tax expense in the third quarter of 2011, the Company recorded a net tax benefit of approximately $7.4 million in the third quarter of 2011 and a benefit of $4.4 million for the first nine months of 2011.

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Liquidity and capital resources

	Nine Months Ended
	September 30,
(in thousands)	2012		2011
Cash provided by (used in)
Operating activities	$	29,084	$	19,647
Investing activities		(16,746)		(36,011)
Financing activities		(7,050)		(3,521)
Effect of exchange rate on cash		596		361
Net increase (decrease) in cash and cash equivalents	$	5,884	$	(19,524)

	As of   September  30,   2012		As of December 31, 2011
Total cash, cash equivalents, and marketable securities	$	111,329	$	111,432

We believe that our current cash, cash equivalents, and cash flow from operations will be sufficient to fund our operations and our share repurchase program for at least the next 12 months.

In June 2011, we entered into a lease arrangement for our new office headquarters in Cambridge, Massachusetts commencing on July 1, 2011 and terminating on December 31, 2023, subject to our option to extend for two additional five-year periods. As mentioned above, we completed the move to our new office headquarters in the third quarter of 2012. We will continue to pay our monthly rent under the lease for our old office headquarters in Cambridge, Massachusetts, through the remaining term of that lease, which is scheduled to expire on May 31, 2013. We invested approximately $11.2 million in the first nine months of 2012, net of our landlord tenant improvement allowance, and we expect to invest approximately $0.8 million in the remainder of 2012, net of our landlord tenant improvement allowance, for furniture, fixtures, IT equipment, and leasehold improvements for our new office headquarters.

We evaluate acquisition opportunities from time to time, which if pursued, could require use of our funds. Approximately $44.6 million of our cash and cash equivalents is held in our foreign subsidiaries. If it became necessary to repatriate these funds, we may be required to pay U.S. tax, net of any applicable foreign tax credits, upon repatriation. We consider the earnings of our foreign subsidiaries to be permanently reinvested and, as a result, U.S. taxes on such earnings are not provided. It is impractical to estimate the amount of U.S. tax we could have to pay upon repatriation due to the complexity of the foreign tax credit calculations and because we consider our earnings permanently reinvested. There can be no assurance that changes in our plans or other events affecting our operations will not result in materially accelerated or unexpected expenditures.

Cash provided by operating activities

The primary driver of cash provided by operating activities during the first nine months of 2012 was a $17.8 million decrease in accounts receivable due to our strong collections.

The primary drivers of cash provided by operating activities during the first nine months of 2011 were $12 million of net income and an $8.3 million increase in deferred revenue primarily resulting from the difference in timing of billings and revenue recognition for annual maintenance.

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Future Cash Receipts from License Arrangements

Total contractual future cash receipts due from our existing license agreements was approximately $195.2 million as of September 30, 2012 compared to $120.6 million as of September 30, 2011. The future cash receipts due as of September 30, 2012 are summarized as follows:

As of September 30, (in thousands)	Contractual payments for term licenses not recorded   on the balance sheet (1)		Other contractual     license payments not     recorded on the balance sheet (2)		Total
Remainder of 2012	$	8,566	$	9,467	$	18,033
2013		42,837		10,430		53,267
2014		40,393		4,280		44,673
2015		34,504		5,793		40,297
2016 and thereafter		29,554		9,384		38,938
Total	$	155,854	$	39,354	$	195,208

(1) These amounts will be recognized as revenue in the future over the term of the agreement as payments become due or earlier if prepaid.

(2) These amounts will be recognized as revenue in future periods and relate to perpetual and subscription licenses with extended payment terms and/or additional rights of use.

Cash used in investing activities

During the first nine months of 2012, we invested $21.9 million primarily in leasehold improvements, furniture and fixtures and equipment for the build-out of our U.S. and India offices.

During the first nine months of 2011, cash used in investing activities was primarily for purchases of marketable debt securities of $49.7 million, partially offset by the proceeds received from the sales and maturities of marketable debt securities of $18.8 million.

Cash used in financing activities

Cash used in financing activities during the first nine months of 2012 and 2011 was primarily for repurchases of our common stock and the payment of our quarterly dividend. Since 2004, our Board of Directors has approved annual stock repurchase programs that have authorized the repurchase in the aggregate of up to $86.3 million of our common stock. Purchases under these programs have been made on the open market.

The following table is a summary of our repurchase activity under all of our repurchase programs during the first nine months of 2012 and 2011:

	Nine Months Ended September 30,
	2012				2011
(Dollars in thousands)	Shares		Amount		Shares		Amount
Prior year authorization as of January 1,			$	13,963			$	13,237
Repurchases paid		125,891		(3,861)		92,158		(3,439)
Repurchases unsettled		1,692		(48)		3,026		(102)
Authorization remaining as of September 30,			$	10,054			$	9,696

In addition to the share repurchases made under our repurchase programs, we net settled the majority of our employee stock option exercises and RSU vesting, which resulted in the withholding of shares to cover the option exercise price and the minimum statutory tax withholding obligations.

23

During the first nine months of 2012 and 2011, option and RSU holders net settled stock options and vested RSUs representing the right to purchase a total of 424,000 shares and 620,000 shares, respectively, of which only 243,000 shares and 375,000 shares, respectively, were issued to the option and RSU holders and the balance of the shares were surrendered to us to pay for the exercise price and the applicable taxes. During the first nine months of 2012 and 2011, instead of receiving cash from the equity holders, we withheld shares with a value of $3.6 million and $5.5 million, respectively, for withholding taxes and $2.4 million and $4.2 million, respectively, for the exercise price. The value of share repurchases and shares withheld for net settlement of our employee stock option exercises and vesting of RSUs offset the proceeds received under our various share-based compensation plans during the first nine months of 2012 and 2011.

Dividends

The Company declared a cash dividend of $0.03 per share for each quarter in the first nine months of 2012 and 2011, and paid cash dividends of $3.4 million in both the first nine months of 2012 and 2011. It is our current intention to pay a quarterly cash dividend of $0.03 per share to shareholders of record as of each quarter, however, the Board of Directors may terminate or modify this dividend program at any time without notice.

 Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the risk of loss that may affect us due to adverse changes in financial market prices and rates. Our market risk exposure is primarily related to fluctuations in foreign exchange rates. We enter into forward foreign currency contracts to partially mitigate our exposure to the fluctuations in foreign exchange rates. See Note 4 “Derivative Instruments” in the notes to the accompanying unaudited condensed consolidated financial statements for further discussion.

There were no significant changes to our quantitative and qualitative disclosures about market risk during the first nine months of 2012. Please refer to Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk included in our Annual Report on Form 10-K for the year ended December  31, 2011 for a more complete discussion of our market risk exposure.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or 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 September 30, 2012. 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 September 30, 2012.

(b) Changes in Internal Control over Financial Reporting.

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

24

Part II—Other Information:

 Item 1A. Risk Factors

We encourage you to carefully consider the risk factors identified in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011. These risk factors could materially affect our business, financial condition and future results and could cause our actual business and financial results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q or elsewhere by management from time to time. Except as described below, there have been no material changes during the first nine months of 2012 to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

The ongoing uncertainty and volatility in the global financial markets related to the European sovereign debt crisis and the so-called “fiscal cliff” in the U.S. may adversely affect the Company’s operating results.

Global financial markets continue to experience disruptions, including increased volatility, and diminished liquidity and credit availability. In particular, developments in Europe have created uncertainty with respect to the ability of certain European countries to continue to service their sovereign debt obligations. This debt crisis and related European financial restructuring efforts may cause the value of the Euro to deteriorate, reducing the purchasing power of our European customers and reducing the translation of Euro based revenues into U.S. dollars. For the first nine months of 2012, approximately 11% of our revenues were derived from countries which use the Euro as their primary currency. In the event that one or more countries were to replace the Euro with their legacy currency, then the Company’s sales in and to such countries, or Europe generally, would likely be adversely affected until stable exchange rates were established. In addition, the European crisis is contributing to instability in global credit markets. Finally, global credit markets and the condition of the U.S. domestic and global economy could be further affected by the “fiscal cliff” tax increases and spending cuts that will go into effect automatically on January 1, 2013 in the absence of prior Congressional action. If these austerity measures are allowed to go into effect, economic growth in the United States could stall or go into recession which, among other things, could decrease demand for our products and services and adversely affect our cash flows and results of operations. If global economic and market conditions, or economic and financial market conditions in Europe, the United States or other key markets, remain uncertain, persist, or deteriorate further, our customers may respond by suspending, delaying or reducing their expenditures, which may adversely affect our cash flows and results of operations.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information regarding our repurchases of our common stock during the third quarter of 2012:

Period	Total Number   of Shares Purchased		Average Price     Paid per Share		Total Number of Shares     Purchased as Part     of Publicly Announced Share Repurchase Programs (1)		Approximate Dollar Value  of Shares That     May Yet Be Purchased     Under Publicly Announced Share Repurchase Programs (in thousands) (1)
7/1/12-7/31/12		18,432	$	28.85		18,432	$	10,908
8/1/12-8/31/12		23,748		26.89		23,748		10,269
9/1/12-9/30/12		7,480		28.83		7,480		10,054
Total		49,660	$	27.91

(1) Since 2004, our Board of Directors has approved stock repurchase programs that have authorized the repurchase of $86.3 million of our common stock. On November 9, 2011, we announced that our Board of Directors approved a $5.6 million increase in the remaining funds available under the program expiring on December 31, 2011, and an extension of the expiration date to December 31, 2012. Under this program, the “Current Program”, purchases may be made from time to time on the open market or in privately negotiated transactions. Shares may be repurchased in such amounts as market conditions warrant, subject to regulatory and other considerations. We have established a pre-arranged stock repurchase plan, which is intended to comply with the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, and of Rule 10b-18 of the Exchange Act (the “10b5-1 Plan”). All share repurchases under the Current Program during closed trading window periods will be made pursuant to the 10b5-1 Plan.

25

Item 6.  Exhibits

The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed or furnished, as the case may be, as part of this report and such Exhibit Index is incorporated herein by reference.

26

SIGNATURES

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.
Date: November 8, 2012	By:	/s/ CRAIG DYNES
		Craig Dynes
		Senior Vice President, Chief Financial Officer
		(principal financial officer)

27

PEGASYSTEMS INC.

Exhibit Index

Exhibit No.	Description
31.1	Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.
31.2	Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer.
32	Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer and the Chief Financial Officer.

101 The following materials from Pegasystems Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Unaudited Condensed Consolidated Balance Sheets (ii) the Unaudited Condensed Consolidated Statements of Income, (iii) the Unaudited Condensed Consolidated Statements of Comprehensive Income (iv) the Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to the Unaudited Condensed Consolidated Financial Statements. *

*Pursuant to Rule 406T of Regulation S-T, these interactive data files shall not be deemed “filed” for purpose of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

28

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Alan Trefler, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q 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: November 8, 2012

/s/    ALAN TREFLER        

Chairman and Chief Executive Officer

(principal executive officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Craig Dynes, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q 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: November 8, 2012

/s/    CRAIG DYNES        

Senior Vice President, Chief Financial Officer

(principal financial officer)

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Pegasystems Inc. (the Company) on Form 10-Q for the quarter ended September 30, 2012 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 Craig Dynes, Chief Financial Officer and Senior Vice President 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.

/s/    ALAN TREFLER        

Chairman and Chief Executive Officer

(principal executive officer)

/s/    CRAIG DYNES        

Senior Vice President, Chief Financial Officer

(principal financial officer)

Dated: November 8, 2012

XML

Estimated Future Amortization Expense (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012
Goodwill and Intangible Assets Disclosure [Line Items]
Remainder of 2012	$ 2,777
2013	11,095
2014	9,489
2015	8,688
2016	8,688
2017	8,688
Thereafter	11,584
Future estimated amortization expense, total	$ 61,009

XML

Geographic Information and Major Customers - Additional Information (Detail)	9 Months Ended
	Sep. 30, 2012 Entity
Geographic Reporting Disclosure [Line Items]
Number of reportable segments	1
Major customer percentage	10.00%
Trade Accounts Receivable
Geographic Reporting Disclosure [Line Items]
Number of customers that accounted for 10% or more of outstanding trade receivables	1
Trade Accounts Receivable | Minimum
Geographic Reporting Disclosure [Line Items]
Percentage of company outstanding trade receivables accounted by one customer	10.00%

XML

Stock Based Compensation - Additional Information (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock-based compensation	$ 2,784,000	$ 2,322,000	$ 8,622,000	$ 6,722,000
RSUs
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock-based compensation			1,900,000
Total stock-based compensation, period of recognition			1 year
Unrecognized stock-based compensation expense	10,400,000		10,400,000
Weighted-average period of recognition of unrecognized unvested stock-based compensation expense (in years)			2 years 1 month 6 days
RSUs | Corporate Incentive Compensation Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of units expected to vest			156,000
Restricted stock units, fair value			$ 5,200,000
Issued to employees			52,000
Compensation percentage of target incentive compensation eligible to be elected and received by employees			50.00%
Employees | Stock Compensation Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares granted			296,000

XML

Derivative Instruments - Additional Information (Detail) (Foreign Exchange Forward) In Millions, unless otherwise specified	3 Months Ended		9 Months Ended						9 Months Ended
	Sep. 30, 2012 USD ($)	Sep. 30, 2011 USD ($)	Sep. 30, 2012 USD ($)	Sep. 30, 2011 USD ($)	Sep. 30, 2012 EUR (€)	Sep. 30, 2012 GBP (£)	Sep. 30, 2011 EUR (€)	Sep. 30, 2011 GBP (£)	Sep. 30, 2012 Maximum D
Derivative [Line Items]
Term of derivative contracts (in days)									90
Notional amount of forward foreign currency sale contracts					€ 48.9	£ 39.0	€ 22.5	£ 16.5
Cash received on sale of derivative contracts			123.6	58.6
Net gain (loss) on forward foreign currency contracts as a result of change in fair value	$ 0.9	$ 0.5	$ 1.5	$ 0.3

XML

DEFERRED REVENUE (Tables)

9 Months Ended

Sep. 30, 2012

Schedule Of Deferred Revenue

(in thousands)	September 30,      2012		December 31,      2011
Software license	$	13,686	$	15,005
Maintenance		52,761		50,916
Professional services and other		8,337		7,919
Current deferred revenue		74,784		73,840
Software license		17,312		13,532
Maintenance and professional services		111		1,835
Long-term deferred revenue		17,423		15,367
	$	92,207	$	89,207

XML

Trade Receivables of Major Customers (Detail) (USD $) In Thousands, unless otherwise specified			12 Months Ended
	Sep. 30, 2012	Dec. 31, 2011	Dec. 31, 2011 Customer A
Revenue from External Customer [Line Items]
Trade receivables, net of allowances	$ 80,849	$ 98,293
Major customer percentage of trade receivables			14.00%

XML

Accrued Restructuring Costs - Additional Information (Detail) (USD $)	3 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended
	Sep. 30, 2011	Sep. 30, 2011	Dec. 31, 2010	Sep. 30, 2012 Facility Closing	Dec. 31, 2010 Facility Closing
Restructuring Cost and Reserve [Line Items]
Severance and related benefit costs			$ 6,500,000
Restructuring costs	$ 203,000	$ 62,000			$ 1,600,000
Lease expiration date				2013

XML

Schedule of Amortizable Intangible Asset (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Finite-Lived Intangible Assets [Line Items]
Cost	$ 90,039	$ 90,039
Accumulated Amortization	(29,030)	(20,670)
Net Book Value	61,009	69,369
Customer Related Intangibles Assets
Finite-Lived Intangible Assets [Line Items]
Cost	44,355	44,355
Accumulated Amortization	(11,910)	(8,214)
Net Book Value	32,445	36,141
Technology
Finite-Lived Intangible Assets [Line Items]
Cost	43,446	43,446
Accumulated Amortization	(14,891)	(10,269)
Net Book Value	28,555	33,177
Trade Name
Finite-Lived Intangible Assets [Line Items]
Cost	248	248
Accumulated Amortization	(248)	(248)
Technology Designs
Finite-Lived Intangible Assets [Line Items]
Cost	490	490
Accumulated Amortization	(490)	(463)
Net Book Value		27
Non-Compete Agreements
Finite-Lived Intangible Assets [Line Items]
Cost	100	100
Accumulated Amortization	(91)	(76)
Net Book Value	9	24
Intellectual Property
Finite-Lived Intangible Assets [Line Items]
Cost	1,400	1,400
Accumulated Amortization	$ (1,400)	$ (1,400)

XML

Summary of Basic and Diluted Earnings Per Share (Detail) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Earnings Per Share Basic And Diluted [Line Items]
Net income (loss)	$ (331)	$ 4,959	$ 1,459	$ 11,963
Weighted-average common shares outstanding	37,881	37,588	37,834	37,425
Earnings (loss) per share, basic	$ (0.01)	$ 0.13	$ 0.04	$ 0.32
Net income (loss)	$ (331)	$ 4,959	$ 1,459	$ 11,963
Weighted-average common shares outstanding, basic	37,881	37,588	37,834	37,425
Effect of assumed exercise of stock options, warrants and RSUs		1,342	1,063	1,439
Weighted-average common shares outstanding, diluted	37,881	38,930	38,897	38,864
Earnings (loss) per share, diluted	$ (0.01)	$ 0.13	$ 0.04	$ 0.31
Outstanding options and RSUs excluded as impact would be antidilutive	1,865	27	55	27
Stock Options
Earnings Per Share Basic And Diluted [Line Items]
Weighted-average effect of dilutive securities		1,078	817	1,187
RSUs
Earnings Per Share Basic And Diluted [Line Items]
Weighted-average effect of dilutive securities		261	246	249
Warrants
Earnings Per Share Basic And Diluted [Line Items]
Weighted-average effect of dilutive securities		3		3

XML

MARKETABLE SECURITIES

9 Months Ended

Sep. 30, 2012

MARKETABLE SECURITIES

3. MARKETABLE SECURITIES

(in thousands)	September 30, 2012
	Amortized                 Cost		Unrealized                 Gains		Unrealized                 Losses		Fair Value
Municipal bonds	$	28,700		79		(4)	$	28,775
Corporate bonds		14,212		105		—		14,317
Government sponsored enterprise bonds		2,000		—		—		2,000
	$	44,912		184		(4)	$	45,092

(in thousands)	December 31, 2011
	Amortized                 Cost		Unrealized                 Gains		Unrealized                 Losses		Fair Value
Municipal bonds	$	27,968		74		(2)	$	28,040
Corporate bonds		15,058		16		(34)		15,040
Government sponsored enterprise bonds		8,001		2		(4)		7,999
	$	51,027		92		(40)	$	51,079

The Company considers debt securities with maturities of three months or less from the purchase date to be cash equivalents. Interest is recorded when earned. All of the Company’s investments are classified as available-for-sale and are carried at fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive income, net of related income taxes.

As of September 30, 2012, remaining maturities of marketable debt securities ranged from November 2012 to December 2014, with a weighted-average remaining maturity of approximately 11 months.

XML

Summary of Restructuring Activity (Detail) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012
Restructuring Cost and Reserve [Line Items]
Restructuring reserve, beginning balance	$ 1,043
Cash payments	(501)
Restructuring reserve, ending balance	542
Personnel
Restructuring Cost and Reserve [Line Items]
Restructuring reserve, beginning balance	243
Cash payments	(243)
Facility Closing
Restructuring Cost and Reserve [Line Items]
Restructuring reserve, beginning balance	800
Cash payments	(258)
Restructuring reserve, ending balance	$ 542

XML

GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS (Tables)

9 Months Ended

Sep. 30, 2012

Revenue From International Customers By Geographic Areas

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2012			2011			2012			2011
U.S.	$	56,475	56%	$	49,166	51%	$	173,406	55%	$	160,489	53%
United Kingdom		18,862	18%		17,822	19%		55,329	17%		60,455	20%
Europe, other		12,836	13%		19,515	21%		45,051	14%		52,884	18%
Other		13,484	13%		9,000	9%		44,094	14%		27,553	9%
	$	101,657	100%	$	95,503	100%	$	317,880	100%	$	301,381	100%

Trade Receivables Of Major Customers

There was one customer that accounted for 10% or more of the Company’s outstanding trade receivables, net, as of December 31, 2011, as listed below.

	As of         September 30,		As of         December 31,
(Dollars in thousands)	2012		2011
Trade receivables, net of allowances	$	80,849	$	98,293
Customer A		—		14%

XML

EARNINGS PER SHARE (Tables)

9 Months Ended

Sep. 30, 2012

Summary Of Basic And Diluted Earnings Per Share

	Three Months Ended                          September 30,				Nine Months Ended                          September 30,
(in thousands, except per share amounts)	2012		2011		2012		2011
Basic
Net (loss) income	$	(331)	$	4,959	$	1,459	$	11,963
Weighted-average common shares outstanding		37,881		37,588		37,834		37,425
(Loss) earnings per share, basic	$	(0.01)	$	0.13	$	0.04	$	0.32
Diluted
Net (loss) income	$	(331)	$	4,959	$	1,459	$	11,963
Weighted-average common shares outstanding, basic		37,881		37,588		37,834		37,425
Weighted-average effect of dilutive securities:
Stock options		—		1,078		817		1,187
RSUs		—		261		246		249
Warrants		—		3		—		3
Effect of assumed exercise of stock options, warrants and RSUs		—		1,342		1,063		1,439
Weighted-average common shares outstanding, diluted		37,881		38,930		38,897		38,864
(Loss) earnings per share, diluted	$	(0.01)	$	0.13	$	0.04	$	0.31
Outstanding options and RSUs excluded as impact would be antidilutive		1,865		27		55		27

XML

Schedule of Restructuring Reserve (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Restructuring Cost and Reserve [Line Items]
Accrued expenses	$ 429	$ 626
Other long-term liabilities	113	417
Restructuring Reserve, Total	$ 542	$ 1,043

XML

New Accounting Pronouncements - Additional Information (Detail)	9 Months Ended
	Sep. 30, 2012
Significant Accounting Policies [Line Items]
ASU effective date	01-01-2013

XML

Schedule of Marketable Securities (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	$ 44,912	$ 51,027
Unrealized Gains	184	92
Unrealized Losses	(4)	(40)
Fair Value	45,092	51,079
Municipal Bonds
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	28,700	27,968
Unrealized Gains	79	74
Unrealized Losses	(4)	(2)
Fair Value	28,775	28,040
Corporate Bonds
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	14,212	15,058
Unrealized Gains	105	16
Unrealized Losses		(34)
Fair Value	14,317	15,040
Government Sponsored Enterprises Bonds
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	2,000	8,001
Unrealized Gains		2
Unrealized Losses		(4)
Fair Value	$ 2,000	$ 7,999

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NEW ACCOUNTING PRONOUNCEMENTS

9 Months Ended

Sep. 30, 2012

NEW ACCOUNTING PRONOUNCEMENTS

2. NEW ACCOUNTING PRONOUNCEMENTS

Disclosures About Offsetting Assets and Liabilities: In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, “Balance Sheet (Topic 210): Disclosures About Offsetting Assets and Liabilities”, which creates new disclosure requirements regarding the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. Certain disclosures of the amounts of certain instruments subject to enforceable master netting arrangements or similar agreements would be required, irrespective of whether the entity has elected to offset those instruments in the statement of financial position. This ASU is effective for the Company on January 1, 2013 with retrospective application required. The adoption of this standard will not impact the Company’s financial position or results of operations as this accounting standard only requires enhanced disclosure.

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Marketable Securities - Additional Information (Detail)	9 Months Ended
	Sep. 30, 2012 M
Schedule of Available-for-sale Securities [Line Items]
Debt securities maturities	3 months
Weighted-average remaining maturity period of marketable debt securities, months	11
Minimum
Schedule of Available-for-sale Securities [Line Items]
Remaining maturities of marketable debt securities	2012-11
Maximum
Schedule of Available-for-sale Securities [Line Items]
Remaining maturities of marketable debt securities	2014-12

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Schedule of Accrued Expenses (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Schedule of Accrued Liabilities [Line Items]
Other taxes	$ 2,351	$ 2,759
Restructuring	429	626
Professional fees	1,191	1,146
Income taxes	670	1,954
Professional services partners fees	725	120
Short-term deferred rent	1,671	1,428
Self-insurance health and dental claims	1,709	1,931
Dividends payable	1,138	1,132
Employee reimbursable expenses	1,785	897
Construction in process	627
Other	5,015	6,343
Total accrued expenses	$ 17,311	$ 18,336

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Current assets:
Cash and cash equivalents	$ 66,237	$ 60,353
Marketable securities	45,092	51,079
Total cash, cash equivalents, and marketable securities	111,329	111,432
Trade accounts receivable, net of allowance of $1,274 and $926	80,849	98,293
Deferred income taxes	9,823	9,826
Income taxes receivable	10,776	7,545
Other current assets	6,276	4,865
Total current assets	219,053	231,961
Property and equipment, net	31,285	14,458
Long-term deferred income taxes	43,835	43,286
Long-term other assets	1,767	2,186
Intangible assets, net	61,009	69,369
Goodwill	20,451	20,451
Total assets	377,400	381,711
Current liabilities:
Accounts payable	4,548	10,899
Accrued expenses	17,311	18,336
Accrued compensation and related expenses	26,779	39,170
Deferred revenue	74,784	73,840
Total current liabilities	123,422	142,245
Income taxes payable	9,113	9,547
Long-term deferred revenue	17,423	15,367
Other long-term liabilities	14,394	5,796
Total liabilities	164,352	172,955
Commitments and contingencies
Stockholders' equity:
Preferred stock, 1,000 shares authorized; no shares issued and outstanding
Common stock, 100,000 shares and 70,000 shares authorized; 37,900 shares and 37,712 shares issued and outstanding	379	377
Additional paid-in capital	134,614	129,701
Retained earnings	75,078	77,029
Accumulated other comprehensive income	2,977	1,649
Total stockholders' equity	213,048	208,756
Total liabilities and stockholders' equity	$ 377,400	$ 381,711

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Stock Based Compensation Expense Included in Consolidated Statements of Income (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation before tax	$ 2,784	$ 2,322	$ 8,622	$ 6,722
Income tax benefit	(915)	(676)	(2,781)	(2,175)
Cost of Services
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation before tax	849	659	2,710	2,009
Operating Expenses
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation before tax	$ 1,935	$ 1,663	$ 5,912	$ 4,713

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Operating activities:
Net income	$ 1,459	$ 11,963
Adjustment to reconcile net income to cash provided by operating activities:
Excess tax benefits from exercise or vesting of equity awards	(3,161)	(6,628)
Deferred income taxes	(511)	1,092
Depreciation and amortization	13,986	12,648
Stock-based compensation expense	8,622	6,722
Foreign currency transaction loss	785	624
Other non-cash items	4,604	528
Change in operating assets and liabilities:
Trade accounts receivable	17,769	2,264
Income taxes receivable and other current assets	(1,471)	(4,903)
Accounts payable and accrued expenses	(20,976)	(8,983)
Deferred revenue	2,747	8,250
Other long-term assets and liabilities	5,231	(3,930)
Cash provided by operating activities	29,084	19,647
Investing activities:
Purchase of marketable securities	(13,336)	(49,689)
Matured and called marketable securities	18,465	14,738
Sale of marketable securities		4,048
Investment in property and equipment	(21,875)	(5,108)
Cash used in investing activities	(16,746)	(36,011)
Financing activities:
Issuance of common stock for share-based compensation plans	753	2,164
Excess tax benefits from exercise or vesting of equity awards	3,161	6,628
Dividend payments to shareholders	(3,404)	(3,365)
Common stock repurchases for tax withholdings for net settlement of equity awards	(3,650)	(5,488)
Common stock repurchases under share repurchase programs	(3,910)	(3,460)
Cash used in financing activities	(7,050)	(3,521)
Effect of exchange rate on cash and cash equivalents	596	361
Net increase (decrease) in cash and cash equivalents	5,884	(19,524)
Cash and cash equivalents, beginning of period	60,353	71,127
Cash and cash equivalents, end of period	$ 66,237	$ 51,603

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Schedule of Unbilled Trade Accounts Receivable (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total accounts receivable	$ 82,123	$ 99,219
Allowance for doubtful accounts		(31)
Allowance for sales credit memos	(1,274)	(895)
Total allowance	(1,274)	(926)
Total accounts receivable	80,849	98,293
Trade Accounts Receivable
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total accounts receivable	63,370	77,123
Unbilled Trade Accounts Receivable
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total accounts receivable	$ 18,753	$ 22,096

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TRADE ACCOUNTS RECEIVABLE, NET OF ALLOWANCES (Tables)

9 Months Ended

Sep. 30, 2012

Schedule Of Unbilled Trade Accounts Receivable

(in thousands)	September 30,     2012		December 31,     2011
Trade accounts receivable	$	63,370	$	77,123
Unbilled trade accounts receivable		18,753		22,096
Total accounts receivable		82,123		99,219
Allowance for doubtful accounts		—		(31)
Allowance for sales credit memos		(1,274)		(895)
Total allowance		(1,274)		(926)
	$	80,849	$	98,293

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Goodwill and Other Intangible Assets - Additional Information (Detail)	9 Months Ended
	Sep. 30, 2012
Minimum
Finite-Lived Intangible Assets [Line Items]
Intangible assets, estimated useful life	5 years
Maximum
Finite-Lived Intangible Assets [Line Items]
Intangible assets, estimated useful life	9 years

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ACCRUED EXPENSES (Tables)

9 Months Ended

Sep. 30, 2012

Schedule of Accrued Expenses

(in thousands)	September 30,      2012		December 31,      2011
Other taxes	$	2,351	$	2,759
Restructuring		429		626
Professional fees		1,191		1,146
Income taxes		670		1,954
Professional services partners fees		725		120
Short-term deferred rent		1,671		1,428
Self-insurance health and dental claims		1,709		1,931
Dividends payable		1,138		1,132
Employee reimbursable expenses		1,785		897
Construction in process		627		—
Other		5,015		6,343
	$	17,311	$	18,336

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ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2012

ACCOUNTING POLICIES

1. ACCOUNTING POLICIES

Basis of Presentation

Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2011.

In the opinion of management, the Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2012.

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Trade accounts receivable, allowance	$ 1,274	$ 926
Preferred stock, shares authorized	1,000	1,000
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, shares authorized	100,000	70,000
Common stock, shares issued	37,900	37,712
Common stock, shares outstanding	37,900	37,712

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STOCK-BASED COMPENSATION

9 Months Ended

Sep. 30, 2012

STOCK-BASED COMPENSATION

11. STOCK-BASED COMPENSATION

For the third quarter and first nine months of 2012 and 2011, stock-based compensation expense was reflected in the Company’s unaudited condensed consolidated statements of income as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2012		2011		2012		2011
Cost of services	$	849	$	659	$	2,710	$	2,009
Operating expenses		1,935		1,663		5,912		4,713
Total stock-based compensation before tax	$	2,784	$	2,322	$	8,622	$	6,722
Income tax benefit		(915)		(676)		(2,781)		(2,175)

During the first nine months of 2012, the Company issued approximately 296,000 shares to its employees under the Company’s share-based compensation plans.

During the first nine months of 2012, the Company granted approximately 156,000 restricted stock units (“RSUs”) with a total fair value of $5.2 million. Approximately 52,000 RSUs were issued in connection with the election by employees to receive 50% of their 2012 target incentive compensation under the Company’s Corporate Incentive Compensation Plan (the “CICP”) in the form of RSUs instead of cash. Stock-based compensation of approximately $1.9 million associated with this RSU grant will be recognized over one year.

As of September 30, 2012, the Company had approximately $10.4 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to all unvested RSUs and unvested stock options that is expected to be recognized over a weighted-average period of 2.1 years.

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Document and Entity Information	9 Months Ended
	Sep. 30, 2012	Oct. 29, 2012
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2012
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q3
Trading Symbol	PEGA
Entity Registrant Name	PEGASYSTEMS INC
Entity Central Index Key	0001013857
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		37,887,686

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EARNINGS PER SHARE

9 Months Ended

Sep. 30, 2012

EARNINGS PER SHARE

12. EARNINGS PER SHARE

Basic earnings per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding options, RSUs, and warrants, using the treasury stock method and the average market price of our common stock during the applicable period. Certain shares related to some of our outstanding stock options and RSUs were excluded from the computation of diluted earnings per share because they were antidilutive in the periods presented, but could be dilutive in the future.

	Three Months Ended                          September 30,				Nine Months Ended                          September 30,
(in thousands, except per share amounts)	2012		2011		2012		2011
Basic
Net (loss) income	$	(331)	$	4,959	$	1,459	$	11,963
Weighted-average common shares outstanding		37,881		37,588		37,834		37,425
(Loss) earnings per share, basic	$	(0.01)	$	0.13	$	0.04	$	0.32
Diluted
Net (loss) income	$	(331)	$	4,959	$	1,459	$	11,963
Weighted-average common shares outstanding, basic		37,881		37,588		37,834		37,425
Weighted-average effect of dilutive securities:
Stock options		—		1,078		817		1,187
RSUs		—		261		246		249
Warrants		—		3		—		3
Effect of assumed exercise of stock options, warrants and RSUs		—		1,342		1,063		1,439
Weighted-average common shares outstanding, diluted		37,881		38,930		38,897		38,864
(Loss) earnings per share, diluted	$	(0.01)	$	0.13	$	0.04	$	0.31
Outstanding options and RSUs excluded as impact would be antidilutive		1,865		27		55		27

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Revenue:
Software license	$ 28,575	$ 25,346	$ 95,517	$ 93,453
Maintenance	32,317	29,971	97,657	85,713
Professional services	40,765	40,186	124,706	122,215
Total revenue	101,657	95,503	317,880	301,381
Cost of revenue:
Cost of software license	1,585	1,637	4,763	4,942
Cost of maintenance	3,745	2,980	11,072	9,614
Cost of professional services	32,335	37,194	103,351	107,668
Total cost of revenue	37,665	41,811	119,186	122,224
Gross profit	63,992	53,692	198,694	179,157
Operating expenses:
Selling and marketing	36,893	32,463	116,476	103,707
Research and development	19,506	16,218	57,411	47,047
General and administrative	7,192	7,222	21,171	21,193
Acquisition-related costs				482
Restructuring costs		(203)		(62)
Total operating expenses	63,591	55,700	195,058	172,367
Income (loss) from operations	401	(2,008)	3,636	6,790
Foreign currency transaction gain (loss)	438	(1,049)	337	140
Interest income, net	113	102	318	279
Other (expense) income, net	(920)	504	(1,496)	365
Income (loss) before provision (benefit) for income taxes	32	(2,451)	2,795	7,574
Provision (benefit) for income taxes	363	(7,410)	1,336	(4,389)
Net (loss) income	$ (331)	$ 4,959	$ 1,459	$ 11,963
(Loss) earnings per share:
Basic	$ (0.01)	$ 0.13	$ 0.04	$ 0.32
Diluted	$ (0.01)	$ 0.13	$ 0.04	$ 0.31
Weighted-average number of common shares outstanding
Basic	37,881	37,588	37,834	37,425
Diluted	37,881	38,930	38,897	38,864
Cash dividends declared per share	$ 0.03	$ 0.03	$ 0.09	$ 0.09

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TRADE ACCOUNTS RECEIVABLE, NET OF ALLOWANCES

9 Months Ended

Sep. 30, 2012

TRADE ACCOUNTS RECEIVABLE, NET OF ALLOWANCES

6. TRADE ACCOUNTS RECEIVABLE, NET OF ALLOWANCES

(in thousands)	September 30,     2012		December 31,     2011
Trade accounts receivable	$	63,370	$	77,123
Unbilled trade accounts receivable		18,753		22,096
Total accounts receivable		82,123		99,219
Allowance for doubtful accounts		—		(31)
Allowance for sales credit memos		(1,274)		(895)
Total allowance		(1,274)		(926)
	$	80,849	$	98,293

Unbilled trade accounts receivable relate to services earned under time and material arrangements, and maintenance and license arrangements that had not been invoiced as of September 30, 2012 and December 31, 2011, respectively.

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FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2012

FAIR VALUE MEASUREMENTS

5. FAIR VALUE MEASUREMENTS

Assets Measured 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 observable inputs that are observable either directly or indirectly; and (Level 3) significant unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company records its marketable securities at fair value.

The fair value hierarchy of the Company’s cash equivalents and marketable securities at fair value is as follows:

			Fair Value Measurements at Reporting Date Using
(in thousands)	September 30,              2012		Quoted Prices in Active Markets for       Identical Assets       (Level 1)		Significant Other        Observable       Inputs (Level 2)
Money market funds	$	3,270	$	3,270	$	—
Marketable securities:
Government sponsored enterprise bonds	$	2,000	$	—	$	2,000
Corporate bonds		14,317		14,317		—
Municipal bonds		28,775		13,575		15,200
Total marketable securities	$	45,092	$	27,892	$	17,200

			Fair Value Measurements at Reporting Date Using
(in thousands)	December 31,              2011		Quoted Prices in Active Markets for       Identical Assets       (Level 1)		Significant Other        Observable       Inputs (Level 2)
Money market funds	$	3,067	$	3,067	$	—
Marketable securities:
Municipal bonds	$	28,040	$	6,110	$	21,930
Corporate bonds		15,040		15,040		0
Government sponsored enterprise bonds		7,999		2,001		5,998
Total marketable securities	$	51,079	$	23,151	$	27,928

Assets Measured at Fair Value on a Nonrecurring Basis

Assets not recorded at fair value on a recurring basis, such as property and equipment, and intangible assets, are recognized at fair value when they are impaired. During the first nine months of 2012 and 2011, the Company did not recognize any nonrecurring fair value measurements from impairments.

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GOODWILL AND OTHER INTANGIBLE ASSETS (Tables)

9 Months Ended

Sep. 30, 2012

Schedule Of Amortizable Intangible Assets

Intangible assets are recorded at cost and are amortized using the straight-line method over their estimated useful life, which range from 5 to 9 years.

(in thousands)	Cost		Accumulated              Amortization		Net Book                 Value
As of September 30, 2012
Customer related intangibles	$	44,355	$	(11,910)	$	32,445
Technology		43,446		(14,891)		28,555
Trade name		248		(248)		—
Technology designs		490		(490)		—
Non-compete agreements		100		(91)		9
Intellectual property		1,400		(1,400)		—
Total	$	90,039	$	(29,030)	$	61,009
	Cost		Accumulated Amortization		Net Book Value
As of December 31, 2011
Customer related intangibles	$	44,355	$	(8,214)	$	36,141
Technology		43,446		(10,269)		33,177
Trade name		248		(248)		—
Technology designs		490		(463)		27
Non-compete agreements		100		(76)		24
Intellectual property		1,400		(1,400)		—
Total	$	90,039	$	(20,670)	$	69,369

Amortization Expense Of Acquired Intangibles

For the third quarter and first nine months of 2012 and 2011, amortization of intangibles was reflected in the Company’s unaudited condensed consolidated statements of income as follows:

	Three Months  Ended September 30,				Nine Months  Ended September 30,
(in thousands)	2012		2011		2012		2011
Cost of software license	$	1,541	$	1,571	$	4,649	$	4,713
Selling and marketing		1,232		1,232		3,696		3,696
General and administrative		5		5		15		98
Total amortization expense	$	2,778	$	2,808	$	8,360	$	8,507

Estimated Future Amortization Expense

Amortization of intangibles is estimated to be recorded over their remaining useful lives as follows:

(in thousands) As of September 30, 2012	Future estimated       amortization      expense
Remainder of 2012	$	2,777
2013		11,095
2014		9,489
2015		8,688
2016		8,688
2017		8,688
Thereafter		11,584
	$	61,009

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GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS

9 Months Ended

Sep. 30, 2012

GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS

13. GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS

The Company develops and licenses its rules-based software solutions and provides professional services, maintenance, and training related to its software. The Company derives substantially all of its revenue from the sale and support of one group of similar products and services – software that provides business process solutions in the enterprise applications market. To assess performance, the Company’s chief operating decision maker primarily reviews financial information on a consolidated basis. Therefore, the Company has determined it operates in one segment — Business Process Solutions.

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2012			2011			2012			2011
U.S.	$	56,475	56%	$	49,166	51%	$	173,406	55%	$	160,489	53%
United Kingdom		18,862	18%		17,822	19%		55,329	17%		60,455	20%
Europe, other		12,836	13%		19,515	21%		45,051	14%		52,884	18%
Other		13,484	13%		9,000	9%		44,094	14%		27,553	9%
	$	101,657	100%	$	95,503	100%	$	317,880	100%	$	301,381	100%

There were no customers accounting for 10% or more of the Company’s total revenue during the third quarter and first nine months of 2012 and 2011. There was one customer that accounted for 10% or more of the Company’s outstanding trade receivables, net, as of December 31, 2011, as listed below.

	As of         September 30,		As of         December 31,
(Dollars in thousands)	2012		2011
Trade receivables, net of allowances	$	80,849	$	98,293
Customer A		—		14%

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DEFERRED REVENUE

9 Months Ended

Sep. 30, 2012

DEFERRED REVENUE

9. DEFERRED REVENUE

(in thousands)	September 30,      2012		December 31,      2011
Software license	$	13,686	$	15,005
Maintenance		52,761		50,916
Professional services and other		8,337		7,919
Current deferred revenue		74,784		73,840
Software license		17,312		13,532
Maintenance and professional services		111		1,835
Long-term deferred revenue		17,423		15,367
	$	92,207	$	89,207

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GOODWILL AND OTHER INTANGIBLE ASSETS

9 Months Ended

Sep. 30, 2012

GOODWILL AND OTHER INTANGIBLE ASSETS

7. GOODWILL AND OTHER INTANGIBLE ASSETS

There were no changes in the carrying amount of goodwill during the first nine months of 2012.

Intangible assets are recorded at cost and are amortized using the straight-line method over their estimated useful life, which range from 5 to 9 years.

(in thousands)	Cost		Accumulated              Amortization		Net Book                 Value
As of September 30, 2012
Customer related intangibles	$	44,355	$	(11,910)	$	32,445
Technology		43,446		(14,891)		28,555
Trade name		248		(248)		—
Technology designs		490		(490)		—
Non-compete agreements		100		(91)		9
Intellectual property		1,400		(1,400)		—
Total	$	90,039	$	(29,030)	$	61,009
	Cost		Accumulated Amortization		Net Book Value
As of December 31, 2011
Customer related intangibles	$	44,355	$	(8,214)	$	36,141
Technology		43,446		(10,269)		33,177
Trade name		248		(248)		—
Technology designs		490		(463)		27
Non-compete agreements		100		(76)		24
Intellectual property		1,400		(1,400)		—
Total	$	90,039	$	(20,670)	$	69,369

For the third quarter and first nine months of 2012 and 2011, amortization of intangibles was reflected in the Company’s unaudited condensed consolidated statements of income as follows:

	Three Months  Ended September 30,				Nine Months  Ended September 30,
(in thousands)	2012		2011		2012		2011
Cost of software license	$	1,541	$	1,571	$	4,649	$	4,713
Selling and marketing		1,232		1,232		3,696		3,696
General and administrative		5		5		15		98
Total amortization expense	$	2,778	$	2,808	$	8,360	$	8,507

Amortization of intangibles is estimated to be recorded over their remaining useful lives as follows:

(in thousands) As of September 30, 2012	Future estimated       amortization      expense
Remainder of 2012	$	2,777
2013		11,095
2014		9,489
2015		8,688
2016		8,688
2017		8,688
Thereafter		11,584
	$	61,009

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ACCRUED EXPENSES

9 Months Ended

Sep. 30, 2012

ACCRUED EXPENSES

8. ACCRUED EXPENSES

(in thousands)	September 30,      2012		December 31,      2011
Other taxes	$	2,351	$	2,759
Restructuring		429		626
Professional fees		1,191		1,146
Income taxes		670		1,954
Professional services partners fees		725		120
Short-term deferred rent		1,671		1,428
Self-insurance health and dental claims		1,709		1,931
Dividends payable		1,138		1,132
Employee reimbursable expenses		1,785		897
Construction in process		627		—
Other		5,015		6,343
	$	17,311	$	18,336

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ACCRUED RESTRUCTURING COSTS

9 Months Ended

Sep. 30, 2012

ACCRUED RESTRUCTURING COSTS

10. ACCRUED RESTRUCTURING COSTS

During 2010, in connection with the Company’s integration plan of Chordiant, the Company recorded $6.5 million of severance and related benefit costs, which were paid by the end of the first quarter of 2012. Also, in connection with the Company’s evaluation of its combined facilities, the Company eliminated space within one facility and recognized $1.6 million of restructuring expenses, representing future lease payments and demising costs, net of estimated sublease income for this space. The lease expires at the end of 2013.

A summary of the restructuring activity during the first nine months of 2012 is as follows:

(in thousands)	Personnel		Facilities		Total
Balance as of December 31, 2011	$	243	$	800	$	1,043
Cash payments		(243)		(258)		(501)
Balance as of September 30, 2012	$	—	$	542	$	542

(in thousands)	September 30,      2012		December 31,      2011
Reported as:
Accrued expenses	$	429	$	626
Other long-term liabilities		113		417
	$	542	$	1,043

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Cash Equivalents and Marketable Securities at Fair Value (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Money market funds	$ 3,270	$ 3,067
Total marketable securities	45,092	51,079
Government Sponsored Enterprises Bonds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total marketable securities	2,000	7,999
Corporate Bonds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total marketable securities	14,317	15,040
Municipal Bonds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total marketable securities	28,775	28,040
Quoted Prices In Active Markets For Identical Assets (Level 1)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Money market funds	3,270	3,067
Total marketable securities	27,892	23,151
Quoted Prices In Active Markets For Identical Assets (Level 1) | Government Sponsored Enterprises Bonds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total marketable securities		2,001
Quoted Prices In Active Markets For Identical Assets (Level 1) | Corporate Bonds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total marketable securities	14,317	15,040
Quoted Prices In Active Markets For Identical Assets (Level 1) | Municipal Bonds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total marketable securities	13,575	6,110
Significant Other Observable Inputs (Level 2)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total marketable securities	17,200	27,928
Significant Other Observable Inputs (Level 2) | Government Sponsored Enterprises Bonds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total marketable securities	2,000	5,998
Significant Other Observable Inputs (Level 2) | Corporate Bonds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total marketable securities		0
Significant Other Observable Inputs (Level 2) | Municipal Bonds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total marketable securities	$ 15,200	$ 21,930

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FAIR VALUE MEASUREMENTS (Tables)

9 Months Ended

Sep. 30, 2012

Cash Equivalents And Marketable Securities At Fair Value

The fair value hierarchy of the Company’s cash equivalents and marketable securities at fair value is as follows:

			Fair Value Measurements at Reporting Date Using
(in thousands)	September 30,              2012		Quoted Prices in Active Markets for       Identical Assets       (Level 1)		Significant Other        Observable       Inputs (Level 2)
Money market funds	$	3,270	$	3,270	$	—
Marketable securities:
Government sponsored enterprise bonds	$	2,000	$	—	$	2,000
Corporate bonds		14,317		14,317		—
Municipal bonds		28,775		13,575		15,200
Total marketable securities	$	45,092	$	27,892	$	17,200

			Fair Value Measurements at Reporting Date Using
(in thousands)	December 31,              2011		Quoted Prices in Active Markets for       Identical Assets       (Level 1)		Significant Other        Observable       Inputs (Level 2)
Money market funds	$	3,067	$	3,067	$	—
Marketable securities:
Municipal bonds	$	28,040	$	6,110	$	21,930
Corporate bonds		15,040		15,040		0
Government sponsored enterprise bonds		7,999		2,001		5,998
Total marketable securities	$	51,079	$	23,151	$	27,928

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ACCRUED RESTRUCTURING COSTS (Tables)

9 Months Ended

Sep. 30, 2012

Summary Of Restructuring Activity

A summary of the restructuring activity during the first nine months of 2012 is as follows:

(in thousands)	Personnel		Facilities		Total
Balance as of December 31, 2011	$	243	$	800	$	1,043
Cash payments		(243)		(258)		(501)
Balance as of September 30, 2012	$	—	$	542	$	542

Schedule Of Restructuring Reserve

(in thousands)	September 30,      2012		December 31,      2011
Reported as:
Accrued expenses	$	429	$	626
Other long-term liabilities		113		417
	$	542	$	1,043

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Revenue from International Customers by Geographic Areas (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Revenues from External Customers and Long-Lived Assets [Line Items]
Geographic revenue	$ 101,657	$ 95,503	$ 317,880	$ 301,381
Geographic revenue percentage	100.00%	100.00%	100.00%	100.00%
U.S.
Revenues from External Customers and Long-Lived Assets [Line Items]
Geographic revenue	56,475	49,166	173,406	160,489
Geographic revenue percentage	56.00%	51.00%	55.00%	53.00%
United Kingdom
Revenues from External Customers and Long-Lived Assets [Line Items]
Geographic revenue	18,862	17,822	55,329	60,455
Geographic revenue percentage	18.00%	19.00%	17.00%	20.00%
Europe, Other
Revenues from External Customers and Long-Lived Assets [Line Items]
Geographic revenue	12,836	19,515	45,051	52,884
Geographic revenue percentage	13.00%	21.00%	14.00%	18.00%
Other
Revenues from External Customers and Long-Lived Assets [Line Items]
Geographic revenue	$ 13,484	$ 9,000	$ 44,094	$ 27,553
Geographic revenue percentage	13.00%	9.00%	14.00%	9.00%

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Schedule of Deferred Revenue (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Deferred Revenue Arrangement [Line Items]
Current deferred revenue	$ 74,784	$ 73,840
Long-term deferred revenue	17,423	15,367
Total deferred revenue	92,207	89,207
Software License Arrangement
Deferred Revenue Arrangement [Line Items]
Current deferred revenue	13,686	15,005
Long-term deferred revenue	17,312	13,532
Maintenance
Deferred Revenue Arrangement [Line Items]
Current deferred revenue	52,761	50,916
Professional Services And Other
Deferred Revenue Arrangement [Line Items]
Current deferred revenue	8,337	7,919
Maintenance And Professional Services
Deferred Revenue Arrangement [Line Items]
Long-term deferred revenue	$ 111	$ 1,835

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Net (loss) income	$ (331)	$ 4,959	$ 1,459	$ 11,963
Other comprehensive income (loss), net of tax:
Unrealized gain on securities, net of tax	33	13	80	39
Foreign currency translation adjustments	1,315	(741)	1,248	1,023
Total other comprehensive income (loss)	1,348	(728)	1,328	1,062
Comprehensive income	$ 1,017	$ 4,231	$ 2,787	$ 13,025

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DERIVATIVE INSTRUMENTS

9 Months Ended

Sep. 30, 2012

DERIVATIVE INSTRUMENTS

4. DERIVATIVE INSTRUMENTS

The Company uses forward foreign currency contracts to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated accounts receivable and cash. The U.S. operating company invoices most of its foreign customers in foreign currencies, which results in cash and receivables held at the end of the reporting period denominated in these foreign currencies. Since the U.S. operating company’s functional currency is the U.S. dollar, the Company recognizes a foreign currency transaction gain or (loss) on the foreign currency denominated cash and accounts receivable held by the U.S. operating company in its consolidated statements of income when there are changes in the foreign currency exchange rates versus the U.S. dollar. The Company is primarily exposed to changes in the value of the Euro and British pound relative to the U.S. dollar. The forward foreign currency contracts utilized by the Company are not designated as hedging instruments and as a result, the Company records the fair value of these contracts at the end of each reporting period in its consolidated balance sheet as other current assets for unrealized gains and accrued expenses for unrealized losses, with any fluctuations in the value of these contracts recognized in other (expense) income, net, in its consolidated statement of income. However, the fluctuations in the value of these forward foreign currency contracts partially offset the gains and losses from the remeasurement or settlement of the foreign currency denominated accounts receivable and cash held by the U.S. operating company, thus partly mitigating the volatility. Generally, the Company enters into forward foreign currency contracts with terms not greater than 90 days.

During the first nine months of 2012, the Company entered into and settled forward foreign currency contracts to sell €48.9 million and £39 million and receive in exchange $123.6 million. During the first nine months of 2011, the Company entered into and settled forward foreign currency contracts to sell €22.5 million and £16.5 million and receive in exchange $58.6 million. As of September 30, 2012 and December 31, 2011, the Company did not have any forward foreign currency contracts outstanding. During the third quarter and first nine months of 2012, the change in the fair value of the Company’s forward foreign currency contracts recorded in other (expense) income, net, was a loss of $0.9 million and $1.5 million, respectively. During the third quarter and first nine months of 2011, the change in the fair value of the Company’s forward foreign currency contracts recorded in other (expense) income, net, was a gain of $0.5 million and $0.3 million, respectively.

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STOCK-BASED COMPENSATION (Tables)

9 Months Ended

Sep. 30, 2012

Stock-Based Compensation Expense Included In Consolidated Statements Of Income

For the third quarter and first nine months of 2012 and 2011, stock-based compensation expense was reflected in the Company’s unaudited condensed consolidated statements of income as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2012		2011		2012		2011
Cost of services	$	849	$	659	$	2,710	$	2,009
Operating expenses		1,935		1,663		5,912		4,713
Total stock-based compensation before tax	$	2,784	$	2,322	$	8,622	$	6,722
Income tax benefit		(915)		(676)		(2,781)		(2,175)

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Amortization Expense of Acquired Intangibles (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Acquired Finite-Lived Intangible Assets [Line Items]
Total amortization expense	$ 2,778	$ 2,808	$ 8,360	$ 8,507
Cost Of Software License
Acquired Finite-Lived Intangible Assets [Line Items]
Total amortization expense	1,541	1,571	4,649	4,713
Selling And Marketing
Acquired Finite-Lived Intangible Assets [Line Items]
Total amortization expense	1,232	1,232	3,696	3,696
General and Administrative
Acquired Finite-Lived Intangible Assets [Line Items]
Total amortization expense	$ 5	$ 5	$ 15	$ 98

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MARKETABLE SECURITIES (Tables)

9 Months Ended

Sep. 30, 2012

Schedule Of Available For Sale Securities Reconciliation

(in thousands)	September 30, 2012
	Amortized                 Cost		Unrealized                 Gains		Unrealized                 Losses		Fair Value
Municipal bonds	$	28,700		79		(4)	$	28,775
Corporate bonds		14,212		105		—		14,317
Government sponsored enterprise bonds		2,000		—		—		2,000
	$	44,912		184		(4)	$	45,092

(in thousands)	December 31, 2011
	Amortized                 Cost		Unrealized                 Gains		Unrealized                 Losses		Fair Value
Municipal bonds	$	27,968		74		(2)	$	28,040
Corporate bonds		15,058		16		(34)		15,040
Government sponsored enterprise bonds		8,001		2		(4)		7,999
	$	51,027		92		(40)	$	51,079