10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934

For the fiscal year ended December 31, 2013

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934

Commission File No. 1-11859 

PEGASYSTEMS INC.

(Exact name of Registrant as specified in its charter)

Massachusetts

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No. 04-2787865)

One Rogers Street Cambridge, MA	02142-1209
(Address of principal executive offices)	(zip code)

(617) 374-9600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $0.01 par value per share	NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.    Yes  ¨    No   x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes   ¨    No  x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

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. (Check one):

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

The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant based on the closing price (as reported by NASDAQ) of such common stock on the last business day of the Registrant’s most recently completed second fiscal quarter (June 30, 2013) was approximately $576 million.

There were 38,135,303 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on February 5, 2014.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement related to its 2014 annual meeting of stockholders to be filed subsequently are incorporated by reference into Part III of this report.

TABLE OF CONTENTS

Item		Page
	PART I
1	Business		1
1A	Risk Factors		8
1B	Unresolved Staff Comments		14
2	Properties		14
3	Legal Proceedings		14
4	Mine Safety Disclosures		14
	PART II
5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		15
6	Selected Financial Data		18
7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
7A	Quantitative and Qualitative Disclosure about Market Risk		37
8	Financial Statements and Supplementary Data		40
9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		74
9A	Controls and Procedures		74
9B	Other Information		74
	PART III
10	Directors, Executive Officers, and Corporate Governance		75
11	Executive Compensation		76
12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		76
13	Certain Relationships and Related Transactions, and Director Independence		78
14	Principal Accounting Fees and Services		78
	PART IV
15	Exhibits, Financial Statement Schedules		78
	Signatures		79

PART I

Forward-looking statements

This Annual Report on Form 10-K contains or incorporates forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. 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. 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. We have identified certain risk factors included in Item 1A of this Annual Report on Form 10-K that we believe could cause our actual results to differ materially from the forward-looking statements we make. We do not intend to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 1. Business

Pegasystems Inc. was incorporated in Massachusetts in 1983. Our stock is traded on the NASDAQ Global Select Market under the symbol PEGA. Our Website address is www.pega.com. We are not including the information contained on our Website as part of, or incorporating it by reference into, this Annual Report on Form 10-K. Unless the context otherwise requires, references in this Annual Report on Form 10-K to “the Company,” “Pega,” “we,” “us” or “our” refer to Pegasystems Inc. and its subsidiaries.

Our business: Better Business Software^™

We believe that business success requires that organizations become digital enterprises in order to serve today’s empowered customers, and that software either accelerates or impedes that transformation. Pega powers the digital enterprise with Better Business Software™ that replaces archaic programming or multiple software packages with a comprehensive model built on visual metaphors that businesspeople can understand and drive. The resulting digital enterprise engages customers, simplifies processes, and turns the power to change into a competitive advantage.

We develop, market, and license software solutions that help clients improve their business results by giving them the power to engage customers, simplify their operations, and adapt to change. Pegasystems’ software allows clients to build and change enterprise software applications much more rapidly than they can with traditional programming, while engaging the collaborative efforts of both businesspeople and technologists.

Pegasystems unified platform intersects with several traditional software markets, including: Customer Relationship Management (“CRM”), Business Process Management (“BPM”), Business Rules Management Systems (“BRMS”) Dynamic Case Management (“DCM”), Decision Management, including predictive and adaptive analytics, and the Vertical Specific Software (“VSS”) market of vertical industry solutions and packaged applications. Pegasystems unified and highly scalable platform provides superior capability and agility to its clients.

Pegasystems also provides consulting services and implementation support, training, and technical support services to help clients maximize the business value from our software. We focus our sales efforts primarily on target accounts, which are large companies or divisions within companies, and typically leaders in their industries. Our strategy is to sell a client a series of licenses, each focused on a specific purpose or area of operations. As we have found meaningful interest from smaller companies, we are working to invest in expanding our sales force to extend coverage beyond our traditional Fortune 500 focus.

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Our partners

We maintain alliances with global systems integrators and technology consulting firms that provide consulting services to our clients. Strategic partnerships with technology consulting firms and systems integrators are important to our sales efforts because they influence buying decisions, help us to identify sales opportunities, and complement our software with their domain expertise and services capabilities. These partners may deliver strategic business planning, consulting, project management, and implementation services to our clients. Currently, our partners include well respected, major firms such as Accenture Ltd., Capgemini SA, Cognizant Technology Solutions Inc., Infosys Technologies Limited, Mahindra Satyam, Tata Consultancy Services Limited, PricewaterhouseCoopers LLP, Virtusa Corporation, and Wipro Ltd.

Our products

Pega Build for Change^® Platform

The Pega Build for Change^® platform (PegaRULES Process Commander^®) is a unified platform that enables clients to build enterprise applications in a fraction of the time it would take using traditional programming technologies. Business and IT personnel collaborate, using a visual “language” that models the requirements and design of the application in a readily understandable manner. This agile approach facilitates continuous improvement methodologies, such as BPM or Lean Six Sigma, to effectively manage individual projects or drive a complete enterprise transformation. All aspects of the application are defined in the model: business strategy mapping, business processes, data models, case definitions, rules, decisions, reporting, interfaces, intelligent work management capabilities, business activity monitoring, and the user experience across both web and mobile devices.

Once defined this way, the finished application and its documentation are generated and immediately ready for use. Our approach bypasses the error-prone and time-consuming process of manually translating requirements into code. The software application is automatically created directly from the model, closing the costly gap between vision and execution. The Pega Build for Change^® platform is standards-based and can leverage a client’s existing technology to create new business applications that cross technology silos and bridge front and back-office.

Business Process Solutions

Pegasystems also offers purpose or industry-specific solutions built on its platform. These solutions provide a best-practice starting point for key industry processes, yet maintain a flexibility not delivered by traditional “commercial off the shelf” products. This allows organizations to quickly implement new processes, refine customer experiences, bring new offerings to market, and provide customized or specialized processing to meet the needs of different customers, departments, geographies or regulatory requirements.

Pega Customer Engagement Solutions

Pega Customer Engagement Solutions offer a process-driven, customer-centric CRM solution to maximize the lifetime value of customers and reduce the costs of serving customers. We provide marketing, sales, and service solutions to optimize sales processes and customer service interactions. Our case management and business process solutions facilitate the fulfillment of customer requests, while our “Next-Best-Action” analytics predict and adapt to customer behavior to improve both business outcomes and the customer experience.

Decision management is incorporated into these solutions to guide actions and optimize process outcomes based on business objectives. Solutions, including cross-sell/up-sell, retention, service recommendations, and collections help businesses deploy automated decision making quickly. The predictive and adaptive analytics incorporated into these solutions support the creation and improvement of decision models to improve outcomes.

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Pega Application Mobility Platform

Our acquisition of Antenna Software, Inc. (“Antenna”) expanded our Pega Application Mobility Platform, which enables clients to build, manage, and deploy mobile applications. Our mobile application development platform permits clients to manage the complex elements of the mobile application lifecycle including security, integration, testing, and management of mobile applications and devices. It also helps businesses significantly reduce their development time, deployment cost, and the complexity associated with run-the-business mobile applications.

Pega Cloud^®

Pega Cloud^® is Pegasystems’ service offering that allows clients to create and deploy our software applications using an Internet-based infrastructure. This offering enables our clients to rapidly build, test, and deploy their applications in a secure cloud environment, while minimizing their infrastructure and hardware costs.

Our services and support

We offer services and support through our Pega consulting group, our global client support group, and our training services group. We also utilize third party contractors to assist us in providing these services.

Pega Consulting

Our Pega consulting group provides guidance and implementation services to our clients and partners on how to best apply our technology and develop strong implementation expertise.

Global Client support

Our global client support group is responsible for support of our software deployed at client sites. Support services include automated problem tracking, prioritization and escalation procedures, periodic preventive maintenance, documentation updates, and new software releases.

Training Services

The success of our sales strategy for multiple follow-on sales to target clients depends on our ability to train a large number of partners and clients to implement our technology. We offer training for our staff, clients, and partners. Training is offered at our regional training facilities in Cambridge, Massachusetts, Bedford, New Hampshire, Reading, England, Hyderabad, India, Sydney, Australia, at third party facilities in numerous other locations, and at client sites. We also offer training online through PegaACADEMY, which offers an alternative way to learn our software quickly, easily, and cost effectively. We expect that the online training will help expand the number of trained experts at a faster pace. Our courses are designed to meet the specific requirements of process architects, system architects, and system administrators.

Our markets

Our target clients are primarily large, industry-leading organizations faced with managing changes to their complex business processes in order to increase business agility, drive growth, improve productivity, retain customers, and help ensure compliance. Our clients have typically been large companies in the financial services, healthcare, insurance, government, communications and media, manufacturing and high tech, and life sciences markets. We are expanding our client base to a broader range of companies within those markets as well as to additional industries, such as energy, travel and entertainment.

Financial Services

Financial services organizations rely on software to improve the quality, accuracy, and efficiency of customer interactions and transactions processing. Pegasystems’ customer service process, marketing, and exceptions management products allow clients to be responsive to changing business requirements.

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Healthcare

Healthcare organizations seek products that integrate their front and back office initiatives and help drive customer service, efficiency, and productivity. Our claims products allow healthcare clients to address financial, administrative and coverage requirements of healthcare consumerism and reform.

Insurance

Insurance companies, whether competing globally or nationally for customers and channels, need software to automate the key activities of distribution management, quoting, underwriting, claims, and policy servicing as well as products that improve customer service and the overall customer experience. Pega’s solutions for insurance carriers increase business value by delivering customer-focused experiences that drive higher sales, lower expense ratios, and improve risk mitigation.

Communications and Media

Communications and media organizations need to address high levels of customer churn, growing pressure to increase revenue and an ability to respond quickly to changing market conditions. Our solutions enable organizations to reshape the way they interact with customers, streamline operations and bring new services and products to market.

Government

Government agencies need to modernize legacy systems and processes to meet the growing demands for improved constituent service, lower costs and greater levels of transparency. Pegasystems offers a proven, economical and highly effective solution that delivers advanced capabilities to streamline application development and delivery via an agile, multi-channel environment.

Life Sciences

Life sciences organizations are looking for solutions to increase efficiencies and transparency across the product development lifecycle by automating and streamlining business processes across people, applications, business rules and enterprise systems. Our solutions for life sciences focus on product development, safety and risk management, CRM, and regulatory transparency delivering advanced capabilities to streamline development and bring to market industry leading solutions quickly.

Manufacturing and High Technology

Manufacturers world-wide are transforming their businesses to better engage customers and suppliers, as well as directly manage the performance of their products—from the earliest designs to beyond the manufacturing stage and throughout the product life-cycle. Our manufacturing solutions address supplier risk, manage warranties, recalls, repairs, and returns, as well as extend ERP system capabilities.

Other Industries

We offer solutions to a broad range of other types of companies and industries. For example, we sell our BPM technology to clients in energy, transportation, retail, travel, and other services.

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Competition

We compete in the BPM, Case Management, CRM, Business Rules, Decision Management, and mobile application development platform software markets. These markets are intensely competitive, rapidly changing, and highly fragmented, as current competitors expand their product offerings and new companies enter the market. Competitors vary in size and in the scope and breadth of the products and services offered. We encounter competition from:

• BPM vendors, including Service-Oriented Architecture (“SOA”) middleware vendors such as IBM, Oracle Corporation, Software AG, and Tibco Software Inc., and other BPM vendors such as Appian Corporation and the Cordys division of Open Text;

• Case Management vendors such as the Documentum division of EMC Corporation, the FileNet division of IBM’s Information Management Group, and the BPM/Case Management division of Open Text;

• CRM application vendors such as Salesforce.com, the Siebel division of Oracle, and the Microsoft Dynamics CRM division of Microsoft;

• Decision Management vendors including Business Rules Engine vendors such as the ILOG and SPSS divisions of IBM, and the Blaze division of FICO, and vendors of solutions that leverage predictive analytics in managing customer relationships including the Unica Division of IBM;

• Companies that provide application specific software for the financial services, healthcare, insurance and other specific markets such as Guidewire Software, Inc., the Detica NetReveal Division of BAE, SmartStream Technologies Ltd., SunGard, SAP, and The TriZetto Group, Inc.;

• Mobile application development platform vendors, including IBM and SAP, as well as open source mobile technologies, including the jQuery Mobile platform from the jQuery Foundation;

• Professional service organizations that develop custom software in conjunction with rendering consulting services; and

• Clients’ current information technology departments, which may seek to modify their existing systems or develop their own proprietary systems.

We have been most successful competing for clients whose businesses are characterized by a high degree of change, complexity, and regulation. We believe that the principal competitive factors within our market include:

• Product adaptability, scalability, functionality, and performance;

• Proven success in delivering cost-savings and efficiency improvements;

• Ease-of-use for developers, business units, and end-users;

• Timely development and introduction of new products and product enhancements;

• Establishment of a significant base of reference clients;

• Ability to integrate with other products and technologies;

• Customer service and support;

• Product price;

• Vendor reputation; and

• Relationships with systems integrators.

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We believe we are competitively differentiated as our unified Build for Change^® technology allows both client business and IT staff, using a single, intuitive user interface, to build enterprise applications in a fraction of the time it would take with the types of disjointed architectures and tools offered by our competitors. We believe we compete favorably due to our expertise in our target industries and our long-standing client relationships. We believe we compete less favorably on the basis of some of these factors with respect to our larger competitors, many of which have greater sales, marketing and financial resources, more extensive geographical presence and greater name recognition than we do. In addition, we may be at a disadvantage with respect to our ability to provide expertise outside our target industries. See “Risk Factors—The market for our offerings is intensely and increasingly competitive, rapidly changing and highly fragmented” in Item 1A of this Annual Report on Form 10-K.

Sales and marketing

We market our software and services primarily through a direct sales force. Strategic partnerships with consultants and systems integrators are important to our sales efforts because they influence buying decisions, help us to identify sales opportunities, and complement our software and services with their domain expertise and professional services capabilities.

To support our sales efforts, we conduct a broad range of marketing programs, including client and industry targeted solution campaigns, trade shows, including our PegaWORLD user conference, solution seminars and Webinars, industry analyst and press relations, Web and digital marketing, community development, social media, and other direct and indirect marketing efforts. Our consulting staff, business partners, and other third parties also conduct joint and separate marketing campaigns that generate sales leads.

Sales by geography

In 2013, 2012, and 2011, sales to clients based outside of the United States of America (“U.S.”) represented approximately 45%, 46%, and 48%, respectively, of our total revenue. We currently operate in one reportable segment — business process solutions. We derive substantially all of our operating revenue from the sale and support of one group of similar products and services. The majority of our assets are located within the U.S. See Note 18 “Geographic Information and Major Clients” included in the notes to the accompanying audited consolidated financial statements for further detail. See “Risk Factors—We face risks from operations and clients based outside of the U.S.” in Item 1A of this Annual Report on Form 10-K.

Research and development

Our development organization is responsible for product architecture, core technology development, product testing, and quality assurance. Our product development priority is to continue expanding the capabilities of our integrator technology. We intend to maintain and extend the support of our existing solution frameworks, and we may choose to invest in additional frameworks which incorporate the latest business innovations. We also intend to maintain and extend the support of popular hardware platforms, operating systems, databases, and connectivity options to facilitate easy and rapid deployment in diverse information technology infrastructures. Our goal with all of our products is to enhance product capabilities, ease of implementation, long-term flexibility, and the ability to provide improved client service.

During 2013, 2012, and 2011, research and development expenses were approximately $79.7 million, $76.7 million, and $65.3 million, respectively. We expect that we will continue to commit significant resources to our product research and development in the future to maintain our leadership position.

Employees

As of January 31, 2014, we had 2,627 employees worldwide, of which 1,219 were based in North America, 548 were based in Europe, and 860 were based in Asia Pacific.

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Backlog of license, maintenance, and services

As of December 31, 2013, we had software license, maintenance, and services agreements with clients expected to result in approximately $506.1 million of future revenue, of which we expect approximately $279.7 million to be recognized in 2014. As of December 31, 2012, we had backlog of software license, maintenance, and services agreements with clients of approximately $438 million. Under some of these agreements, we must fulfill certain conditions prior to recognizing revenue, and there can be no assurance when, if ever, we will be able to satisfy all such conditions in each instance. Business conditions could change and, therefore, backlog may not be a reliable indicator of future financial performance.

Available Information

We make available free of charge through our Website www.pega.com/about-us/investors/sec filings our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission (“SEC”). The SEC maintains a Website that contains reports, proxy, and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. We make available on our Website reports filed by our executive officers and Directors on Forms 3, 4, and 5 regarding their ownership of our securities. Our Code of Conduct, and any amendments to our Code of Conduct, is also available on our Website.

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ITEM 1A. Risk Factors

The following important factors could cause our actual business and financial results to differ materially from those contained in forward-looking statements made in this Annual Report on Form 10-K or elsewhere by management from time to time.

Factors relating to our financial results

The timing of our license revenue is difficult to predict accurately, which may cause our quarterly operating results to vary considerably. A change in the number or size of high value license arrangements, or a change in the mix between perpetual licenses, term licenses, and Pega Cloud^® subscriptions can cause our revenues to fluctuate materially from quarter to quarter. Our decision to enter into term licenses and Pega Cloud^® subscriptions that require the revenue to be recognized over the license term may adversely affect our profitability in any period due to sales commissions being paid at the time of signing and the corresponding revenue being recognized over time. We budget for our selling and marketing, product development, and other expenses based on anticipated future revenue. If the timing or amount of revenue fails to meet our expectations in any given quarter, our financial performance is likely to be adversely affected because only small portions of expenses vary with revenue. As a result, period-to-period comparisons of our operating results are not necessarily meaningful and should not be relied upon to predict future performance.

The number of our license arrangements has been increasing, and we may not be able to sustain this growth unless we and our partners can provide sufficient high quality consulting services, training, and maintenance resources to enable our clients to realize significant business value from our software. Our clients typically request consulting services and training to assist them in implementing our products. Our clients also purchase maintenance on our products in almost all cases. As a result, an increase in the number of license arrangements is likely to increase demand for consulting services, training, and maintenance relating to our products. Given that the number of our license arrangements has been increasing, we will need to provide our clients with more consulting services, training, and maintenance to enable our clients to realize significant business value from our software. We have been increasingly enabling our partners and clients through training to create an expanded universe of people that are skilled in the implementation of our products. However, if we and our partners are unable to provide sufficient high quality consulting services, training, or maintenance resources to our clients, our clients may not realize sufficient business value from our products to justify follow-on sales, which could impact our future financial performance. In addition, the growth required to meet the increased demand for our consulting services could strain our ability to deliver our services engagements at desired levels of profitability, thereby impacting our overall profitability and financial results.

We frequently enter into a series of licenses that are focused on a specific purpose or area of operations. If we are not successful in obtaining follow-on business from these clients, our financial performance could be adversely affected. We frequently enter into a series of licenses with our new clients that are focused on a specific purpose or area of operations. Once a client has realized the value of our software, we work with the client to identify opportunities for follow-on sales. However, we may not be successful in demonstrating this value to some clients, for reasons relating to the performance of our products, the quality of the services and support we provide for our products, or external reasons. For these clients, we may not obtain follow-on sales or the follow-on sales may be delayed, and our license revenue could be limited. This could lower the total value of all transactions and adversely affect our financial performance.

Our consulting services revenue is dependent to a significant extent on closing new license transactions with clients. We derive a substantial portion of our consulting services revenue from implementation of new software licenses with our clients, both from implementations that are led by our consulting services staff and from implementations where we provide consulting to our partners and clients to support their implementations. Accordingly, it is imperative that we close more license transactions with our clients if we are to maintain or grow our services revenue.

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If we are unable to maintain vendor specific objective evidence (“VSOE”) of fair value of our consulting services arrangements, we may be required to delay the recognition of a portion of our revenue to future periods. We have established VSOE of fair value of our consulting services in North America, Australia, and Europe, based on the price charged when these services are sold separately. The weakened economy and significant competition within our industry have created pricing pressure on consulting services provided by technology companies. If we elect to discount our consulting services pricing or otherwise introduce variability in our consulting services arrangements to attract or retain clients, this could lead to an insufficient number of consistently priced consulting services arrangements for us to maintain VSOE. If we do not have VSOE of fair value of our consulting services, we may be required to recognize all revenue for these consulting services arrangements, including any related license, maintenance, and other services revenue if the consulting services are bundled in an arrangement, ratably over the longer of the software maintenance period or the service period.

Our financial results may be adversely affected if we are required to change certain estimates, judgments, and positions relative to our income taxes. In the ordinary course of conducting a global business enterprise, there are many transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertainties arise as a consequence of positions we have taken regarding valuation of deferred tax assets, transfer pricing for transactions with our subsidiaries, and potential challenges to nexus and tax credit estimates. We estimate our exposure to unfavorable outcomes related to these uncertainties and estimate the probability of such outcomes. Future realization of our deferred tax assets ultimately depends on the existence of sufficient taxable income within the available carryback or carryforward periods. We record a valuation allowance to reduce our deferred tax assets to an amount we believe is more likely than not to be realized. If our taxable income is not consistent with our expectations or the timing of income is not within the applicable carryforward period, we may be required to establish a valuation allowance on all or a portion of these deferred tax assets. Changes in our valuation allowance impact income tax expense in the period of adjustment. Although we believe our estimates are reasonable, no assurance can be given that the final tax outcome of these matters or our current estimates regarding these matters will not be different from what is reflected in our historical income tax provisions, returns, and accruals. Such differences, or changes in estimates relating to potential differences, could have a material impact, unfavorable or favorable, on our income tax provisions, require us to change the recorded value of deferred tax assets, and adversely affect our financial results.

We are investing heavily in sales and marketing and support in anticipation of a continued increase in license arrangements, and we may experience decreased profitability or losses if we are unsuccessful in increasing the value of our license arrangements in the future. We have been increasing our investment in sales and marketing to meet increasing demand for our software by hiring additional sales and marketing personnel. We anticipate that we will need to provide our clients with more maintenance support as a result of this increase in demand, and have been hiring additional personnel in this area. These investments have resulted in increased fixed costs that do not vary with the level of revenue. If the increased demand for our products does not continue, we could experience decreased profitability or losses as a result of these increased fixed costs.

Factors relating to our products and markets

We will need to acquire or develop new products, evolve existing ones, and adapt to technology change. Technical developments, client requirements, programming languages, and industry standards change frequently in our markets. As a result, success in current markets and new markets will depend upon our ability to enhance current products, to acquire or develop and introduce new products that meet client needs, keep pace with technology changes, respond to competitive products, and achieve market acceptance. Product development requires substantial investments for research, refinement, and testing. There can be no assurance that we will have sufficient resources to make necessary product development investments. We may experience difficulties that will delay or prevent the successful development, introduction, or implementation of new or enhanced products. Inability to introduce or implement new or enhanced products in a timely manner would adversely affect future financial performance.

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The market for our offerings is intensely and increasingly competitive, rapidly changing, and highly fragmented. We compete in the BPM, Case Management, CRM, Decision Management, and mobile application development platform software markets. The markets for our software and related implementation, consulting, and training services are intensely competitive, rapidly changing and highly fragmented. We currently encounter significant competition from internal information systems departments of potential or existing clients that develop custom software. We also compete with companies that target the BPM, Case Management, Decision Management, and mobile application development platform markets as well as professional service organizations that develop custom software in conjunction with rendering consulting services. Competition for market share and pressure to reduce prices and make sales concessions are likely to increase. Many of our competitors, such as IBM, Oracle and SAP, are large and have far greater resources and may be able to respond more quickly and efficiently to new or emerging technologies, programming languages or standards or to changes in client requirements or preferences. Competitors may also be able to devote greater managerial and financial resources to develop, promote, and distribute products and provide related consulting and training services. There can be no assurance that we will be able to compete successfully against current or future competitors or that the competitive pressures faced by us will not materially adversely affect our business, operating results, and financial condition.

The continued weakness in the U.S and international economies may negatively impact our sales to, and the collection of receivables from, our financial services and insurance clients and possibly our clients in other industries. Our sales to, and our collection of receivables from, our clients may be impacted by adverse changes in global economic conditions, especially in the U.S., Europe and Asia Pacific. In the past few years, these regions have experienced instability in financial markets, tightening credit, and weak overall economic conditions, which has impacted the financial services and insurance industries in particular. These trends could impact the ability and willingness of our financial services and insurance clients, and possibly our clients in other industries, to make investments in technology, which may delay or reduce the amount of purchases of our software and services. These factors could also impact the ability and willingness of these clients to pay their trade obligations and honor their contractual commitments under their noncancellable term licenses. These clients may also become subject to increasingly restrictive regulatory requirements, which could limit or delay their ability to proceed with new technology purchases. Our financial services and insurance clients as a group represent a significant amount of our revenues and receivables. Accordingly, their potential financial instability could negatively impact our business, operating results, and financial condition.

We have historically sold to the financial services, insurance and healthcare markets, and rapid changes or consolidation in these markets could affect the level of demand for our products. We have historically derived a significant portion of our revenue from clients in the financial services, insurance, and healthcare markets, and sales to these markets are important for our future growth. Competitive pressures, industry consolidation, decreasing operating margins, regulatory changes, and privacy concerns affect the financial condition of our clients and their willingness to buy. In addition, clients’ purchasing patterns in these industries for large technology projects are somewhat discretionary. The financial services and insurance markets are undergoing intense domestic and international consolidation and financial turmoil, and consolidation has been occurring in the healthcare market. Consolidation may interrupt normal buying behaviors and increase the volatility of our operating results. In recent years, several of our clients have been merged or consolidated, and we expect this to continue in the near future. Future mergers or consolidations may cause a decline in revenues and adversely affect our future financial performance. All of these factors affect the level of demand for our products from clients in these industries, and could adversely affect our business, operating results and financial condition.

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We rely on certain third-party relationships. We have a number of relationships with third parties that are significant to sales, marketing and support activities, and product development efforts. We rely on software and hardware vendors, large system integrators, and technology consulting firms to provide marketing and sales opportunities for the direct sales force and to strengthen our products through the use of industry-standard tools and utilities. We also have relationships with third parties that distribute our products. There can be no assurance that these companies, most of which have significantly greater financial and marketing resources, will not develop or market products that compete with ours in the future or will not otherwise end or limit their relationships with us.

We face risks from operations and clients based outside of the U.S. Sales to clients located outside of the U.S. represented approximately 45% of our total revenue in 2013, approximately 46% of our total revenue in 2012, and approximately 48% of our total revenue in 2011. We, in part through our wholly owned subsidiaries, market products and render consulting and training services to clients based outside of the U.S. including clients based in Canada, Europe, Asia and Australia. We have established offices in North America, Europe, Asia, including India, and Australia. We believe that growth will necessitate expanded international operations, requiring a diversion of managerial attention and increased costs. We anticipate hiring additional personnel to accommodate international growth, and we may also enter into agreements with local distributors, representatives, or resellers. If we are unable to do one or more of these things in a timely manner, our growth, if any, in our foreign operations may be restricted, and our business, operating results, and financial condition could be materially and adversely affected. 

In addition, there can be no assurance that we will be able to maintain or increase international market demand for our products. Additional risks inherent in our international business activities generally include laws and business practices favoring local competitors, compliance with multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy and data protection laws and regulations, increased tariffs and other trade barriers, the costs of localizing products for local markets, including translation into foreign languages and associated expenses and complying with local business customs, longer accounts receivable patterns and difficulties in collecting foreign accounts receivable, difficulties in enforcing contractual and intellectual property rights and pressure on the creditworthiness of sovereign nations, particularly in Europe. Liquidity issues or political actions by sovereign nations could result in decreased values of any cash balances held in our European entities. Other inherent risks include complying with regional data privacy laws, treatment of revenue from international sources and changes to tax codes, including being subject to foreign tax laws and being liable for paying withholding income or other taxes in foreign jurisdictions, potentially adverse tax consequences (including restrictions on repatriating earnings and the threat of “double taxation”), increased accounting and internal control expenses, and the burden of complying with a wide variety of foreign laws, heightened risks of political and economic instability, foreign currency fluctuations and controls, different pricing environments, difficulties in staffing and managing foreign operations, natural disasters, acts of war, terrorism, pandemics or security breaches, and regional economic and political conditions.

There can be no assurance that one or more of these factors will not have a material adverse effect on our foreign operations, and, consequentially, our business, operating results, and financial condition.

11

We are exposed to fluctuations in currency exchange rates that could negatively impact our financial results and cash flows. Because a significant portion of our business is conducted outside the U.S., we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve, and they could have a material adverse impact on our financial results and cash flows. Our international sales are usually denominated in foreign currencies. The operating expenses of our foreign operations are primarily denominated in foreign currencies, which partially offset our foreign currency exposure on our international sales. Our U.S. operating company invoices most of our foreign clients in foreign currencies, so it holds cash and accounts receivable denominated in these foreign currencies, which are subject to foreign currency transaction gains or losses. Beginning in the second quarter of 2011, we have entered into foreign currency forward contracts to manage our exposure to changes in foreign currency exchange rates affecting foreign currency denominated accounts receivable and cash held by our U.S. operating company. The use of these foreign currency forward contracts partially mitigates the exposure to the foreign currency transaction gains and losses. If we were to cease or reduce our use of foreign currency forward contracts or similar hedging arrangements, a decrease in the value of foreign currencies, particularly the British pound and the Euro relative to the U.S. dollar, could adversely impact our financial results and cash flows.

Factors relating to our internal operations and potential liabilities

We depend on certain key personnel, and must be able to attract and retain qualified personnel in the future. The business is dependent on a number of key, highly skilled technical, managerial, consulting, sales, and marketing personnel, including our Chief Executive Officer. The loss of key personnel could adversely affect financial performance. We do not have any significant key-man life insurance on any officers or employees and do not plan to obtain any. Our success will depend in large part on the ability to hire and retain qualified personnel. The number of potential employees who have the extensive knowledge of computer hardware and operating systems needed to develop, sell, and maintain our products is limited, and competition for their services is intense, and there can be no assurance that we will be able to attract and retain such personnel. If we are unable to do so, our business, operating results, and financial condition could be materially adversely affected.

We may experience significant errors or security flaws in our product and services, and could face privacy, product liability and warranty claims as a result. Despite testing prior to their release, software products frequently contain errors or security flaws, especially when first introduced or when new versions are released. Errors in our software products could affect the ability of our products to work with other hardware or software products, or could delay the development or release of new products or new versions of products. The detection and correction of any security flaws can be time consuming and costly. Errors or security flaws in our software could result in the inadvertent disclosure of confidential information or personal data relating to our clients, employees, or third parties. Software product errors and security flaws in our products or services could expose us to privacy, product liability and warranty claims as well as harm our reputation, which could impact our future sales of products and services. Our license agreements typically contain provisions intended to limit the nature and extent of our risk of product liability and warranty claims. There is a risk that a court might interpret these terms in a limited way or could hold part or all of these terms to be unenforceable. Also, there is a risk that these contract terms might not bind a party other than the direct client. Furthermore, some of our licenses with our clients are governed by non-U.S. law, and there is a risk that foreign law might give us less or different protection. Although we have not experienced any material product liability claims to date, a product liability suit or action claiming a breach of warranty, whether or not meritorious, could result in substantial costs and a diversion of management’s attention and our resources.

12

We face risks related to intellectual property claims or appropriation of our intellectual property rights. We rely primarily on a combination of copyright, trademark and trade secrets laws, as well as confidentiality agreements to protect our proprietary rights. We have obtained patents worldwide relating to the architecture of our systems. We cannot assure that such patents will not be invalidated or circumvented or that rights granted thereunder or the claims contained therein will provide us with competitive advantages. Moreover, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain the use of information that we regard as proprietary. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the U.S. There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology.

There can be no assurance that third parties will not claim infringement by us with respect to current or future products. Although we attempt to limit the amount and type of our contractual liability for infringement of the proprietary rights of third parties, these limitations often contain certain exclusions, and we cannot be assured that these limitations will be applicable and enforceable in all cases. Even if these limitations are found to be applicable and enforceable, our liability to our clients for these types of claims could be material in amount given the size of certain of our transactions. We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays, or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could have a material adverse effect upon our business, operating results, and financial condition.

We are subject to increasingly complex and burdensome U.S. and foreign laws and regulations, and any failure to comply with these laws and regulations could subject us to, among other things, penalties and legal expenses that could harm our reputation or have a material adverse effect on our business, financial condition and results of operations. We are subject to extensive federal, state and foreign laws and regulations including but not limited to the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, data privacy, protection and security laws, and similar laws and regulations. The Foreign Corrupt Practices Act, the U.K. Bribery Act and similar foreign anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to non-U.S. persons for the purpose of obtaining or retaining business. Similar laws and regulations exist in many other countries throughout the world in which we do or intend to do business. We have developed and implemented a compliance program based on what we believe are current best practices, but we cannot guarantee that we, our employees, our consultants or our contractors are or will be in compliance with all federal, state and foreign regulations, particularly as we expand our operations outside of the U.S. If we or our representatives fail to comply with any of these laws or regulations, a range of fines, penalties and/or other sanctions could be imposed on us, which could have a material adverse effect on our business, financial condition and results of operations. Even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, which could also have an adverse effect on our business, financial condition and results of operations. In addition, regulation of data privacy, protection and security laws is increasing worldwide, including various restrictions on cross-border access or transfer of data including personal data of our employees, clients and customers of our clients. Compliance with such regulations may increase our costs and there is a risk of enforcement of such laws resulting in damage to our brand as well as financial penalties.

13

If our security measures are breached and/or unauthorized access is obtained to confidential information from our cloud computing service offering or other offerings, we may be exposed to significant legal and financial liabilities. Our cloud computing service offering allows clients to create and deploy PRPC-based applications using an internet-based infrastructure. This offering involves the hosting of clients’ applications which may contain confidential information, including personal and financial data regarding their end customers on the servers of a third-party technology provider. We also rely on third-party systems including encryption, virtualized infrastructure and support. Because we do not control the transmissions between our clients and our third-party infrastructure providers, the processing of data on the servers of the third-party technology providers, or the internal controls maintained by the third-party technology providers that could prevent unauthorized access and provide appropriate data encryption, we cannot ensure the complete integrity or security of such transmissions, data or processing. Our security measures may be breached as a result of third-party action, including intentional misconduct by computer hackers, system error, human error or otherwise. Because the techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. While we have invested in the protection of our data and our client’s data to reduce these risks, there can be no assurance that our efforts will prevent breaches in our systems. Security breaches could expose us and our clients to a risk of loss or misuse of this information. Any security breach could result in a loss of confidence in the security of our service, damage our reputation, disrupt our business, lead to legal liability and negatively impact our future sales. We carry data breach insurance coverage to potentially mitigate the financial impact of such potential legal liability. In addition, privacy and security concerns in some parts of the world may inhibit demand for our cloud offering or lead to requirements to provide our products or services in configurations that may increase the cost of serving such markets.

The acquisition of other businesses and technologies may present new risks. We have recently undertaken an acquisition and we continue to evaluate and consider other potential strategic transactions, including acquisitions of businesses, technologies, services, products and other assets. These acquisitions, if undertaken, may involve significant new risks and uncertainties, including distraction of management attention away from our current business operations, insufficient new revenue to offset expenses, inadequate return on capital, integration challenges, new regulatory requirements, new third-party intellectual property infringement claims related to the acquired technology and/or services, and issues not discovered in our due diligence process. No assurance can be given that such acquisitions will be successful and will not adversely affect our profitability or operations.

ITEM 1B. Unresolved Staff Comments

None.

ITEM 2. Properties

Our principal administrative, sales, marketing, support, and research and development operations are located at One Rogers Street, Cambridge, Massachusetts in an approximately 163,000 square foot leased facility. Our lease expires in 2023, subject to our option to extend for two additional five-year periods. We also lease space for our other offices in North America, Europe and the Asia Pacific under leases that expire at various dates through 2021. We periodically evaluate the adequacy of existing facilities and additional facilities in new cities, and we believe that additional or alternative space will be available as needed in the future on commercially reasonable terms.

ITEM 3. Legal Proceedings

None.

ITEM 4. Mine Safety Disclosures

Not applicable.

14

PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is quoted on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “PEGA.” The following table sets forth the range of high and low sales prices of our common stock on NASDAQ for each quarter in the years ended December 31:

	Common Stock Price
	2013				2012
	High		Low		High		Low
First Quarter	$	30.35	$	22.77	$	39.09	$	25.81
Second Quarter	$	33.56	$	24.46	$	39.97	$	29.76
Third Quarter	$	40.55	$	32.57	$	33.36	$	22.51
Fourth Quarter	$	51.53	$	36.79	$	29.19	$	19.00

Holders

As of February 5, 2014, we had approximately 28 stockholders of record and approximately 33,000 beneficial owners of our common stock.

Dividends

In July 2006, we began paying a quarterly cash dividend of $0.03 per share of common stock. Quarterly cash dividends are expected to continue at $0.03 per share, subject to change or elimination at any time by our Board of Directors.

Issuer Purchases of Equity Securities

The following table sets forth information regarding our repurchases of our common stock during the fourth quarter of 2013.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number  of Shares Purchased as Part of Publicly Announced Share Repurchase Program (1)		Approximate Dollar Value of Shares That May Yet Be  Purchased Under Publicly Announced Share Repurchased Programs (1) (in thousands)
10/1/2013 – 10/31/2013		35,540	$	38.10		35,540	$	4,207
11/1/2013 – 11/30/2013		17,592	$	44.62		17,592	$	3,422
12/1/2013 – 12/31/2013		23,633	$	48.81		23,633	$	14,433
Total		76,765	$	42.89

15

(1) Since 2004, our Board of Directors has approved stock repurchase programs that have authorized the repurchase, in the aggregate, of up to $104.5 million of our common stock. On December 16, 2013, we announced that our Board of Directors extended the expiration date of the current stock repurchase program (the “Current Program”) to December 31, 2014 and authorized the Company to repurchase up to $15 million of our stock between December 11, 2013 and December 31, 2014. Under 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, intended to comply with the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, and 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.

For the restricted stock units granted to employees, the number of shares otherwise issuable on the vesting date is reduced by a number of shares having a value equal to the minimum statutory income withholding tax that we are required pay in cash to the applicable taxing authorities on behalf of our employees. We do not consider these transactions to be common stock repurchases.

16

Stock Performance Graph and Cumulative Total Stockholder Return

The following performance graph represents a comparison of the cumulative total stockholder return (assuming the reinvestment of dividends) for a $100 investment on December 31, 2008 in our common stock, the Total Return Index for the NASDAQ Composite (“NASDAQ Composite”), a broad market index, and the Standard & Poors (“S&P”) North Software-Software Index™ (“S&P NSSI”), a published industry index. We paid dividends of $.09 per share during 2013, $0.15 per share during 2012 and $0.12 per share during 2011, 2010, and 2009, respectively. The graph lines merely connect measurement dates and do not reflect fluctuations between those dates.

	12/31/2008		12/31/2009		12/31/2010		12/31/2011		12/31/2012		12/31/2013
Pegasystems Inc.		$100.00		$276.32		$298.75		$240.61		$186.39		$405.52
NASDAQ Composite		$100.00		$145.34		$171.70		$170.34		$200.57		$281.14
S&P NSSI		$100.00		$147.90		$185.10		$172.42		$202.46		$265.43

17

ITEM 6. Selected Financial Data

The selected financial data presented below has been derived from our audited consolidated financial statements. This data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the consolidated financial statements and accompanying notes.

	Year Ended December 31,
	2013		2012		2011		2010			2009
	(in thousands, except per share amounts)
Consolidated Statements of Operations Data:
Total revenue	$	508,954	$	461,710	$	416,675	$	336,599		$	264,013
Income (loss) from operations		58,097		31,426		10,494		(2,580	)		41,819
Income (loss) before provision (benefit) for income taxes		56,393		30,945		10,813		(6,197	)		47,415
Net income (loss)		38,043		21,868		10,108		(5,891	)		32,212
Earnings (loss) per share:
Basic	$	1.00	$	0.58	$	0.27	$	(0.16	)	$	0.89
Diluted	$	0.98	$	0.56	$	0.26	$	(0.16	)	$	0.85
Cash dividends declared per common share	$	0.12	$	0.12	$	0.12	$	0.12		$	0.12
	Year Ended December 31,
	2013		2012		2011		2010			2009
	(in thousands)
Consolidated Balance Sheet Data:
Total cash, cash equivalents, and marketable securities	$	156,692	$	122,985	$	111,432	$	87,251		$	202,653
Working capital		159,772		123,885		89,716		73,606			188,552
Intangible assets, net of accumulated amortization		56,574		58,232		69,369		80,684			336
Goodwill		37,463		20,451		20,451		20,451			2,391
Total assets		533,662		439,492		381,711		337,475			279,585
Total stockholders’ equity		271,788		236,479		208,756		195,670			205,219

The following items impact the comparability of our consolidated financial data:

• Our acquisition of Antenna in October 2013 and our acquisition of Chordiant in April 2010.

• Foreign currency transaction (losses) gains of $(1.6) million, $0.8 million, $(0.9) million, $(5.6) million and $2.1 million, during the years ended December 31, 2013, 2012, 2011, 2010, and 2009, respectively. See Item 7A. “Quantitative and Qualitative Disclosure about Market Risk” for further discussion of our foreign currency exchange risk.

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business overview

We develop, market, license, and support software solutions that help clients improve their business results by giving them the power to engage customers, simplify their operations, and adapt to change. Our unified software platform enables our clients to build, deploy, and change enterprise applications easily and quickly, by directly capturing business objectives, automating programming, and automating work. We also provide consulting services, maintenance, and training related to our software.

We focus our sales efforts primarily 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 licenses that are focused on a specific purpose or area of operations.

Our license revenue is primarily derived from sales of our PRPC software and related business solutions. PRPC is a comprehensive platform for building and managing BPM applications that unifies business rules and business processes. Our solutions, 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 business solutions can be used by a broad range of clients across markets including financial services, insurance, healthcare, communications and media, life sciences, manufacturing and high technology, and government markets.

Our business solution products include 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 actions optimize the process outcomes 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 offer Pega Cloud^®, a service offering that allows our clients 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 consulting services revenue.

Our acquisition of Antenna expands Pega’s Application Mobility Platform, which provides clients with a mobile application development platform to build, manage, and deploy mobile applications as part of a seamless omnichannel experience. Enterprises can manage the complex elements of the mobile application lifecycle including security, integration, testing, and management of mobile applications and devices. Pega’s mobile application development solutions help businesses to significantly reduce their development time, deployment costs, and the complexity associated with run-the-business mobile applications. The operations of Antenna are included in our operating results from the date of acquisition. Total revenue attributable to Antenna included in our consolidated statements of operations in 2013 was $3.9 million. Due to the rapid integration of the products, sales force, and operations of Antenna, other than the maintenance and hosting revenue attributable to the recognition of the fair value of acquired deferred maintenance and hosting revenue, it may not be feasible for us to identify revenue from new arrangements attributable to Antenna.

We offer training for our staff, clients, and partners at our regional training facilities, at third party facilities, and at client sites. In 2012, we began offering training online through PegaACADEMY, which provides an alternative way to learn our software in a virtual environment quickly and easily. We believe that this online training will continue to expand the number of trained experts at a faster pace.

19

RESULTS OF OPERATIONS

2013 Compared to 2012

(Dollars in thousands)	Year Ended December 31,				Increase
	2013		2012
Total revenue	$	508,954	$	461,710	$	47,244	10	%
Gross profit		351,548		304,330		47,218	16	%
Acquisition-related costs		1,306		—		1,306	n/m
Restructuring costs		1,731		—		1,731	n/m
Other operating expenses		290,414		272,904		17,510	6	%
Total operating expenses		293,451		272,904		20,547	8	%
Income from operations		58,097		31,426		26,671	85	%
Income before provision for income taxes		56,393		30,945		25,448	82	%

n/m – not meaningful

Revenue

(Dollars in thousands)	Year Ended December 31,								Increase
	2013				2012
Software license revenue
Perpetual licenses	$	122,644	64	%	$	102,438	63	%	$	20,206
Term licenses		62,711	33	%		46,638	28	%		16,073
Subscription		6,521	3	%		14,830	9	%		(8,309	)
Total software license revenue	$	191,876	100	%	$	163,906	100	%	$	27,970		17	%

The aggregate value of new license arrangements executed in 2013 was higher than in 2012. The aggregate value of new license arrangements executed in the fourth quarter of 2013 was down slightly as compared to the fourth quarter of 2012.The aggregate value of new license arrangements executed fluctuates quarter to quarter. During 2013 and 2012, approximately 80% and 74%, respectively, of the value of new license arrangements were executed with existing clients.

The mix between perpetual and term license arrangements executed in a particular period varies based on client needs. A change in the mix between perpetual and term license arrangements executed may cause our revenues to vary materially from period to period. A higher proportion of term license arrangements executed would result in more license revenue being recognized over longer periods as payments become due or earlier if prepaid. However, some of our perpetual license arrangements include extended payment terms or additional rights of use, which also result in the recognition of revenue over longer periods.

The increase in perpetual license revenue was primarily due to higher value perpetual arrangements executed during 2013 and the fourth quarter of 2012 than during 2012 and the fourth quarter of 2011.

The increase in term license revenue was primarily due to revenue recognized on term license arrangements executed in 2012 and 2011. The aggregate value of payments due under noncancellable term licenses increased to $233.6 million as of December 31, 2013 compared to $211.5 million as of December 31, 2012. See the table of future cash receipts from these term licenses on page 31.

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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, which is included in consulting services revenue. The timing of scheduled payments under client arrangements may limit the amount of revenue recognized in a reporting period. Consequently, our subscription revenue may vary quarter to quarter. The decrease in subscription revenue in 2013 was primarily due to revenue recognized in the second quarter of 2012 for a large payment that became due.

(Dollars in thousands)	Year Ended December 31,				Increase
	2013		2012
Maintenance revenue
Maintenance	$	157,309	$	133,527	$	23,782	18	%

The increase in maintenance revenue was primarily due to the growth in the aggregate value of the installed base of our software and continued strong renewal rates. Maintenance revenue primarily attributable to recognition of the fair value of the acquired Antenna deferred maintenance revenue was $0.8 million in 2013.

(Dollars in thousands)	Year Ended December 31,								(Decrease)
	2013				2012
Services revenue
Consulting services	$	154,500	97	%	$	157,792	96	%	$	(3,292	)	(2	)%
Training		5,269	3	%		6,485	4	%		(1,216	)	(19	)%
Total Services	$	159,769	100	%	$	164,277	100	%	$	(4,508)		(3	)%

Consulting services revenue includes revenue from our Pega Cloud^® service offerings. Consulting services revenue decreased, partially offset by a $4.4 million revenue increase from our Pega Cloud^® service offerings, of which $1.1 million was attributable to the acquired Antenna business. The decrease was primarily the result of more clients becoming enabled and our partners leading more implementation projects. If this trend continues, our consulting services revenue may continue to decrease in future periods. The decrease in our training revenue was primarily due to the increased adoption of our PegaACADEMY self-service online training by our partners, which has a significantly lower average price per student as compared to our traditional instructor-led training.

(Dollars in thousands)	Year Ended December 31,						Increase (Decrease)
	2013			2012
Gross Profit
Software license	$	185,595		$	157,567		$	28,028		18	%
Maintenance		142,037			118,740			23,297		20	%
Services		23,916			28,023			(4,107	)	(15	)%
Total gross profit	$	351,548		$	304,330		$	47,218		16	%
Total gross profit %		69	%		66	%
Software license gross profit %		97	%		96	%
Maintenance gross profit %		90	%		89	%
Services gross profit %		15	%		17	%

The increase in total gross profit was due to increases in license and maintenance revenue.

21

The decrease in services gross profit percent was primarily due to lower consulting revenues, costs incurred on several projects for which the corresponding revenue will be recognized in future periods as revenue recognition criteria had not been met, and increased employee incentive expenses.

(Dollars in thousands)	Year Ended December 31,				Increase
	2013		2012
Amortization of intangibles:
Cost of revenue	$	6,443	$	6,189	$	254	4	%
Selling and marketing		5,174		4,928		246	5	%
General and administrative		396		20		376	1,880	%
	$	12,013	$	11,137	$	876	8	%

The increase in amortization expense was due to the amortization associated with $10.4 million of intangibles acquired from Antenna.

Operating expenses

(Dollars in thousands)	Year Ended December 31,						Increase
	2013			2012
Selling and marketing
Selling and marketing	$	181,094		$	167,263		$	13,831	8	%
As a percent of total revenue		36	%		36	%
Selling and marketing headcount		598			520			78	15	%

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.

The increase in selling and marketing expenses was primarily due to a $9.9 million increase in compensation and benefit expenses associated with higher headcount, a $1.7 million increase in marketing programs, a $1.2 million increase in commission expense, and a $1.3 million increase in partner commission expense.

(Dollars in thousands)	Year Ended December 31,						Increase
	2013			2012
Research and development
Research and development	$	79,726		$	76,726		$	3,000	4	%
As a percent of total revenue		16	%		17	%
Research and development headcount		913			727			186	26	%

Research and development expenses include compensation, benefits, contracted services, and other headcount-related expenses associated with research and development. The increase in headcount reflects growth in our India research facility as we have been replacing contractors with employees. The increase in offshore headcount lowered our average compensation expense per employee.

22

The increase in research and development expenses was primarily due to a $7.4 million increase in compensation and benefit expenses associated with higher headcount, partially offset by a $2.3 million decrease in engineering contractor expenses and a decrease in rent and equipment-related expenses.

(Dollars in thousands)	Year Ended December 31,						Increase
	2013			2012
General and administrative
General and administrative	$	29,594		$	28,915		$	679	2	%
As a percent of total revenue		6	%		6	%
General and administrative headcount		271			251			20	8	%

General and administrative expenses include compensation, benefits, and other headcount-related expenses associated with the finance, legal, corporate governance, and other administrative headcount. It also includes accounting, legal, and other professional consulting, and 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 our functional departments.

The increase in general and administrative expenses was primarily due to increase in compensation and benefits associated with higher headcount.

Acquisition-related costs

Acquisition-related costs are expensed as incurred and include direct and incremental costs associated with an impending or completed acquisition. During 2013, the $1.3 million of acquisition-related costs were primarily professional fees associated with our acquisition of Antenna.

Restructuring costs

In 2013, restructuring costs include future lease payments and demising costs, net of estimated sublease income, for the elimination of space within one facility related to the integration of Antenna. See Note 12 “Accrued Restructuring Costs” in the notes to the accompanying consolidated financial statements for further detail.

Stock-based compensation

We recognize stock-based compensation expense associated with equity awards in our consolidated statements of operations based on the fair value of these awards at the date of grant.

(Dollars in thousands)	Year Ended December 31,						Increase
	2013			2012
Stock-based compensation:
Cost of services	$	4,085		$	3,655		$	430	12	%
Operating expenses		8,784			7,851			933	12	%
Total stock-based compensation before tax		12,869			11,506		$	1,363	12	%
Income tax benefit		(3,918	)		(3,699	)

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The increase in stock-based compensation expense was primarily due to a full year of expense on the December 2012 annual employee equity grants. See Note 15 “Stock-Based Compensation” in the notes to the accompanying audited consolidated financial statements for further information on our stock-based awards.

Non-operating income and (expenses), net

(Dollars in thousands)	Year Ended December 31,						Change
	2013			2012
Foreign currency transaction (loss) gain	$	(1,593	)	$	780		$	(2,373	)	(304	)%
Interest income, net		524			419			105		25	%
Other (expense) income, net		(635	)		(1,680	)		1,045		(62	)%
	$	(1,704	)	$	(481	)	$	(1,223	)	254	%

We use foreign currency forward contracts (“forward contracts”) to manage our exposure to changes in foreign currency denominated accounts receivable, intercompany payables, and cash primarily held by our U.S. operating company. We have not designated these forward 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 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, intercompany payables, and cash held by the U.S. operating company recorded in foreign currency transaction loss.

We have been primarily exposed to the fluctuation in the British pound and Euro relative to the U.S. dollar. More recently, we have experienced increased levels of exposure to the Australian dollar and Indian rupee. See Note 4 “Derivative Instruments” in the notes to the accompanying consolidated financial statements for discussion on our use of forward contracts.

The total change in the fair value of our foreign currency forward contracts recorded in other (expense) income, net, during 2013 and 2012 was a loss of $0.7 million and $1.7 million, respectively.

Provision for income taxes

The provision for income taxes represents current and future amounts owed for federal, state, and foreign taxes. During 2013 and 2012, we recorded an $18.4 million provision and a $9.1 million provision, respectively, which resulted in an effective tax rate of 32.5% and 29.3%, respectively

Our effective income tax rate for 2013 was below the statutory federal income tax rate due to a $2.1 million benefit related to the current period domestic production activities deduction, a $1.2 million benefit related to income generated in foreign jurisdictions that is subject to tax at a rate lower than the U.S. statutory tax rate, and a $1.6 million benefit related to the 2012 and 2013 federal research and experimentation (“R&E”) credit. These benefits were partially offset by $1.4 million of permanent differences related to nondeductible meals and entertainment expenses, foreign stock compensation, and transaction costs.

Our effective income tax rate for 2012 was below the statutory federal income tax rate due to a $1.2 million benefit related to the domestic production activities deduction and a $1.2 million benefit related to income generated in foreign jurisdictions that is subject to tax at a rate lower than the U.S. statutory rate. These benefits were partially offset by $1 million of permanent differences related to nondeductible meals and entertainment expenses and nondeductible foreign stock compensation.

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The American Taxpayer Relief Act of 2012 (the “Act”) was signed into law by President Obama on January 2, 2013. Among other things, the Act retroactively extended the R&E credit through the end of 2013. Under ASC 740, Income Taxes, the effects of new legislation are recognized upon enactment, which means that both the retroactive tax effects for the 2012 R&E credit and the tax effects for the 2013 R&E are recognized in the 2013 financial statements. If we had recognized the effects of the 2012 R&E credit in the 2012 financial statements, the effective tax rate in 2012 would have been lowered by approximately 2.6%.

As of December 31, 2013, we had approximately $40.9 million of total unrecognized tax benefits, of which $25.2 million would decrease our effective tax rate if recognized. The remaining $15.7 million of unrecognized tax benefits relate to acquired net operating losses (“NOLs”) and R&E credits that are subject to limitations on their use. We expect that the changes in the unrecognized benefits within the next twelve months will be approximately $0.1 million, all of which would reduce our effective tax rate if realized.

2012 Compared to 2011

(Dollars in thousands)	Year Ended December 31,				Increase
	2012		2011
Total revenue	$	461,710	$	416,675	$	45,035	11	%
Gross profit		304,330		251,877		52,453	21	%
Total operating expenses		272,904		241,383		31,521	13	%
Income from operations		31,426		10,494		20,932	199	%
Income before provision for income taxes		30,945		10,813		20,132	186	%

The aggregate value of new license arrangements executed in 2012 was slightly higher than in 2011. The aggregate value of new license arrangements executed fluctuates quarter to quarter. During 2012 and 2011, approximately 74% and 58%, respectively, of new license arrangements were executed with existing clients. We believe the continued demand for our software products and related services is due to the strong value proposition, short implementation period, and variety of licensing models we offer our clients.

The increase in gross profit was primarily due to the increase in license revenue and to a lesser extent the increase in maintenance revenue.

The increase in operating expenses was primarily due to the increase in selling and marketing expenses and to a lesser extent the increase in research and development expenses, associated with higher headcount.

The increase in income from operations and income before provision for income taxes was primarily due to the higher increases in license and maintenance gross profit compared to the increase in operating expenses.

Revenue

(Dollars in thousands)	Year Ended December 31,								Increase
	2012				2011
License revenue
Perpetual licenses	$	102,438	63	%	$	94,129	68	%	$	8,309	9	%
Term licenses		46,638	28	%		34,453	25	%		12,185	35	%
Subscription		14,830	9	%		10,225	7	%		4,605	45	%
Total license revenue	$	163,906	100	%	$	138,807	100	%	$	25,099	18	%

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In both 2011 and 2012, more than 50% of the aggregate value of new license arrangements for the fiscal year was executed in our fourth quarter. A large proportion of the value of these arrangements was term licenses that contributed very little to the increase in our term license revenue in 2012, but will be recognized as revenue in future periods. As a result, the aggregate value of future payments due under noncancellable term licenses increased significantly in both 2011 and 2012 from $90.9 million as of December 31, 2010 to $161.4 million as of December 31, 2011 and to $211.5 million as of December 31, 2012. The increase in term license revenue for 2012 is a result of the increase in the aggregate value of future payments due under noncancellable term licenses arrangements from prior years.

The increases in the aggregate value of term license arrangements executed in a certain period is not necessarily indicative of the volume level in future periods.

The mix between perpetual and term license arrangements executed in a particular period varies based on client needs. A change in the mix between perpetual and term license arrangements executed over time may cause our revenues to vary materially from period to period. The increase in perpetual license revenue was primarily due to the increase in the aggregate value of new perpetual license arrangements executed during the fourth quarter of 2012.

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 client 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 increase in subscription revenue was primarily due to the full year of revenue recognized in 2012 on some arrangements for which we began recognizing revenue in the fourth quarter of 2011.

(Dollars in thousands)	Year Ended December 31,				Increase
	2012		2011
Maintenance revenue
Maintenance	$	133,527	$	117,110	$	16,417	14	%

The increase in maintenance revenue was primarily due to the growth in the aggregate value of the installed base of our software and continued strong renewal rates.

(Dollars in thousands)	Year Ended December 31,								Increase (Decrease)
	2012				2011
Services revenue
Consulting services	$	157,792	96	%	$	153,919	96	%	$	3,873		3	%
Training		6,485	4	%		6,839	4	%		(354	)	(5	)%
Total Services	$	164,277	100	%	$	160,758	100	%	$	3,519		2	%

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Revenue from our Pega Cloud^® offerings is included in consulting services revenue and was the primary driver for the increase in services revenue in 2012. In addition, our consulting services revenue increased due to higher realization rates in 2012 compared to 2011. As more of our clients are becoming enabled and our partners are leading the majority of implementation projects, our consulting services revenue may be lower in future periods.

(Dollars in thousands)	Year Ended December 31,						Increase
	2012			2011
Gross Profit
Software license	$	157,567		$	132,114		$	25,453	19	%
Maintenance		118,740			104,033			14,707	14	%
Services		28,023			15,730			12,293	78	%
Total gross profit	$	304,330		$	251,877		$	52,453	21	%
Total gross profit percent		66	%		60	%
Software license gross profit percent		96	%		95	%
Maintenance gross profit percent		89	%		89	%
Services gross profit percent		17	%		10	%

As a result of the increased number of client and partner led implementations, we have slowed the hiring of consulting 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 again incur on-boarding and enablement costs that may result in lower services gross profit percentages.

(Dollars in thousands)	Year Ended December 31,				Increase (Decrease)
	2012		2011
Amortization of intangibles:
Cost of software license	$	6,189	$	6,284	$	(95	)	(2	)%
Selling and marketing		4,928		4,928		—		—	%
General and administrative		20		103		(83	)	(81	)%
	$	11,137	$	11,315	$	(178)		(2	)%

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

Operating expenses

(Dollars in thousands)	Year Ended December 31,						Increase
	2012			2011
Selling and marketing
Selling and marketing	$	167,263		$	147,457		$	19,806	13	%
As a percent of total revenue		36	%		35	%
Selling and marketing headcount		520			464			56	12	%

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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 was primarily due to a $19.3 million increase in compensation and benefit expenses associated with higher headcount, partially offset by a $1.1 million decrease in commission expense.

(Dollars in thousands)	Year Ended December 31,						Increase
	2012			2011
Research and development
Research and development	$	76,726		$	65,308		$	11,418	17	%
As a percent of total revenue		17	%		16	%
Research and development headcount		727			523			204	39	%

The increase in headcount reflects growth in our India research facility as we have been replacing contractors with employees. The increase in offshore headcount lowered our average compensation expense per employee.

The increase in research and development expenses was primarily due to a $9.9 million increase in compensation and benefit expenses associated with higher headcount and a $3.3 million increase in rent and facilities related expenses associated with the build-out of our U.S. and India facilities, partially offset by a $2.3 million decrease in engineering contractor expenses.

(Dollars in thousands)	Year Ended December 31,						Increase
	2012			2011
General and administrative
General and administrative	$	28,915		$	28,198		$	717	3	%
As a percent of total revenue		6	%		7	%
General and administrative headcount		251			216			35	16	%

We completed the move to our new office headquarters in the third quarter of 2012 and ceased use of the former office space in the fourth quarter of 2012, resulting in approximately $0.2 million in lease exit costs. We recorded approximately $5.7 million and $1.9 million of rent expense under the new lease arrangement during 2012 and 2011, respectively.

Stock-based compensation

We recognize stock-based compensation expense associated with equity awards in our consolidated statements of operations based on the fair value of these awards at the date of grant.

(Dollars in thousands)	Year Ended December 31,						Increase
	2012			2011
Stock-based compensation:
Cost of services	$	3,655		$	2,737		$	918	34	%
Operating expenses		7,851			6,291			1,560	25	%
Total stock-based compensation before tax		11,506			9,028		$	2,478	27	%
Income tax benefit		(3,699	)		(2,854	)

The increase in stock-based compensation expense was primarily due to the higher value of the annual periodic equity grant, the annual executive grant and new hire grants. See Note 15 “Stock-Based Compensation” in the notes to the accompanying audited consolidated financial statements for further information on our stock-based awards.

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Non-operating income and (expenses), net

(Dollars in thousands)	Year Ended December 31,						Change
	2012			2011
Foreign currency transaction gain (loss)	$	780		$	(935	)	$	1,715		n/m
Interest income, net		419			398			21		5	%
Other income, net		(1,680	)		856			(2,536	)	n/m
	$	(481	)	$	319		$	(800	)	n/m

n/m – not meaningful

We hold foreign currency denominated accounts receivable, intercompany payables, and cash in our U.S. operating company where the functional currency is the U.S. dollar. As a result, these receivables, intercompany payables, 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 2012 and 2011.

Beginning in the second quarter of 2011, we entered into foreign currency forward contracts to manage our exposure to changes in foreign currency exchange rates affecting the foreign currency denominated accounts receivable, intercompany payables, and cash held by our U.S. operating company. We have not designated these foreign currency forward 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 foreign currency forward 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, intercompany payables, and cash held by the U.S. operating company recorded in foreign currency transaction gain (loss).

The total change in the fair value of our foreign currency forward contracts recorded in other (expense) income, net, during 2012 and 2011 was a loss of $1.7 million and a gain of $0.8 million, respectively.

Provision (benefit) for income taxes

The provision for income taxes represents current and future amounts owed for federal, state, and foreign taxes. During 2012 and 2011, we recorded a $9.1 million provision and a $0.7 million provision, respectively, which resulted in an effective tax rate of 29.3% and 6.5%, respectively

Our effective income tax rate for 2012 was below the statutory federal income tax rate due to a $1.2 million benefit related to the current period domestic production activities and a $1.2 million benefit related to lower foreign income tax rates. These benefits were partially offset by $1 million of permanent differences related to nondeductible meals and foreign stock compensation.

Our effective income tax rate for 2011 was below the statutory federal income tax rate due to a $2.5 million reduction in liabilities established for 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 expired, a $1.5 million benefit related to the current period domestic production activities and a $0.6 million benefit related to tax credits from our continued investment in research and development activities. These benefits were partially offset by a $0.3 million increase in our valuation allowances and $0.6 million of permanent differences related to nondeductible meals.

As of December 31, 2012, the Company had approximately $26.3 million of total unrecognized tax benefits, of which $16 million would decrease the Company’s effective tax rate if recognized. However, approximately $9.2 million of these unrecognized tax benefits relate to acquired NOLs and research tax credits, which are subject to limitations on use.

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LIQUIDITY AND CAPITAL RESOURCES

(in thousands)	Year Ended December 31,
	2013			2012			2011
Cash provided by (used in):
Operating activities	$	80,703		$	43,579		$	39,815
Investing activities		(63,997	)		(19,238	)		(45,388	)
Financing activities		(14,567	)		(8,091	)		(6,312	)
Effect of exchange rate on cash		567			922			1,111
Net increase (decrease) in cash and cash equivalents	$	2,706		$	17,172		$	(10,774	)
	As of December 31,
	2013			2012			2011
Total cash, cash equivalents, and marketable securities	$	156,692		$	122,985		$	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. There can be no assurance that changes in our plans or other events affecting our operations will not result in materially accelerated or unexpected cash requirements.

We evaluate acquisition opportunities from time to time, which if pursued, could require use of our funds. On October 9, 2013, we acquired Antenna for $27.7 million in cash, inclusive of cash acquired and a preliminary working capital adjustment. During 2013, we incurred $1.3 million, primarily in professional fees to affect this acquisition and expect to incur an additional estimated $0.4 million in such fees.

As of December 31, 2013, approximately $43.3 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.

Cash provided by operating activities

The primary drivers of cash provided by operating activities during 2013 were net income of $38.0 million and a $26.4 million increase in deferred revenue primarily resulting from the difference in timing of billings and revenue recognition for annual maintenance.

The primary drivers of cash provided by operating activities during 2012 were $21.9 million of net income and a $24.8 million increase in deferred revenue primarily resulting from the difference in timing of billings and revenue recognition for annual maintenance.

Cash used in operating activities during 2011 was primarily due to our net income of $10.1 million and an $18.5 million increase in accounts receivable.

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Future Cash Receipts from License Arrangements

Total contractual future cash receipts due from our existing license agreements was approximately $264.3 million as of December 31, 2013 compared to $255 million as of December 31, 2012. The future cash receipts due as of December 31, 2013 are summarized as follows:

As of December 31, (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
2014	$	69,287	$	22,947	$	92,234
2015		62,978		4,652		67,630
2016		50,037		3,128		53,165
2017		28,459		—		28,459
2018 and thereafter		22,829		—		22,829
Total	$	233,590	$	30,727	$	264,317

(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 2013, cash used in investing activities was primarily for purchases of marketable debt securities for $60.6 million, partially offset by the proceeds received from the maturities and called marketable debt securities of $27.8 million. We paid $25.6 million to acquire Antenna, net of cash acquired and a preliminary working capital adjustment. We also invested $5.6 million primarily in leasehold improvements and computer equipment for the build-out of our U.S. and India offices.

During 2012, we invested $23.6 million primarily in leasehold improvements, furniture and fixtures and equipment for the build-out of our U.S. and India offices.

During 2011, cash used in investing activities was primarily for purchases of marketable debt securities for $57.2 million, partially offset by the proceeds received from the sales, maturities and called marketable debt securities of $21.7 million. We also invested $9.8 million in property and equipment, primarily leasehold improvements, computer equipment and furniture and fixtures for our U.S. and UK offices.

Cash used in financing activities

Net cash used in financing activities during 2013, 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 up to $104.5 million of our common stock. As of December 31, 2013, approximately $83.7 million has been repurchased, approximately $14.4 million remains available for repurchase and approximately $6.4 million expired. Purchases under these programs have been made on the open market.

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Common stock repurchases

The following table is a summary of our repurchase activity under all of our stock repurchase programs:

	Year ended December 31,
(Dollars in thousands)	2013					2012					2011
	Shares		Amount			Shares		Amount			Shares		Amount
Prior year authorizations at January 1,			$	14,793				$	13,963				$	13,237
Authorizations				12,164					6,036					5,590
Repurchases paid		386,629		(12,370	)		181,803		(5,130	)		137,429		(4,815	)
Repurchases unsettled		3,141		(154	)		3,399		(76	)		1,688		(49	)
Authorized dollars remaining as of December 31,			$	14,433				$	14,793				$	13,963

In addition to the share repurchases made under our repurchase programs, we net settled the majority of our employee stock options exercised and RSUs vested. During 2013 and 2012, option and RSU holders net settled stock options and vested RSUs representing the right to purchase a total of 861,000 shares and 548,000 shares, respectively, of which only 432,000 shares and 319,000 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 with respect to stock options and the applicable taxes for both options and RSUs. During 2013 and 2012, instead of receiving cash from the equity holders, we withheld shares with a value of $7.4 million and $4.4 million, respectively, for withholding taxes, and $9.0 million and $2.7 million, respectively, for the exercise price.

Dividends

We declared quarterly dividends totaling $0.12 per share for each of the years ended December 31, 2013, 2012, and 2011. Our Board of Directors authorized us to accelerate the payment of the fourth quarter 2012 dividend otherwise payable in January 2013 to December 2012. Therefore, we paid $5.7 million in dividends in 2012. For the years ended December 31, 2013 and 2011, we paid cash dividends of $3.4 million, and $4.5 million, respectively. It is our current intention to pay a quarterly cash dividend of $0.03 per share, however, the Board of Directors may terminate or modify this dividend program at any time without notice.

Contractual obligations

As of December 31, 2013, we had purchase obligations for customer support and marketing programs and payments under operating leases. Our lease arrangement for our new office headquarters expires in 2023, subject to our option to extend for two additional five-year periods. We also lease space for our other offices under noncancellable operating leases that expire at various dates through 2021.

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As of December 31, 2013, our known contractual obligations, including future minimum rental payments required under operating leases with noncancellable terms in excess of one year were as follows:

			Payment due by period
Contractual obligations: (in thousands)	Total		2014		2015 & 2016		2017 & 2018		2019 & Thereafter		Other
Purchase obligations (1)	$	1,114	$	1,114	$	—	$	—	$	—	$	—
Liability for uncertain tax positions (2)		19,154		—		—		—		—		19,154
Operating lease obligations (3)		95,429		11,947		22,625		19,427		41,430		—
Total	$	115,697	$	13,061	$	22,625	$	19,427	$	41,430	$	19,154

(1) Represents the fixed or minimum amounts due under purchase obligations for customer support and marketing programs.

(2) As of December 31, 2013, our recorded liability for uncertain tax positions was approximately $19.2 million. We are unable to reasonably estimate the timing of the cash outflow due to uncertainties in the timing of the effective settlement of tax positions.

(3) Includes deferred rent of approximately $0.7 million included in accrued expenses and approximately $11.1 million in other long-term liabilities in the accompanying audited consolidated balance sheet as of December 31, 2013.

CRITICAL ACCOUNTING POLICIES, SIGNIFICANT JUDGMENTS AND ESTIMATES

Management’s discussion and analysis of the financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. and the rules and regulations of the SEC for annual 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. We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment. If actual results differ significantly from management’s estimates and projections, there could be a material effect on our financial statements.

Revenue recognition

Our revenue is derived primarily from software licenses, maintenance fees related to our software licenses, and consulting services. Our license arrangements, whether involving a perpetual license or a term license, generally contain multiple elements, including consulting services, training, and software maintenance services.

Software revenue recognition requires judgment, including whether a software arrangement includes multiple elements, and if so, whether vendor-specific objective evidence (“VSOE”) of fair value exists for those elements. The amount of arrangement consideration allocated to undelivered elements is based on the VSOE of fair value for those elements and recognized as those elements are delivered. Any remaining portion of the total arrangement fee is allocated to the software license, the first delivered element. Revenue is recognized for each element when all of the revenue recognition criteria have been met.

Changes in the mix of the elements in a software arrangement, the ability to identify VSOE for those elements, the fair value of the respective elements, and changes to a product’s estimated life cycle could materially impact the amount of earned and unearned revenue.

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Before we can recognize revenue, the following four basic criteria must be met:

• Persuasive evidence of an arrangement—As evidence of the existence of an arrangement, we use a contract or purchase order signed by the client for software and maintenance and a statement of work for consulting services. In the event the client is a reseller we ensure a binding agreement exists between the reseller and end user of the software.

• Delivery of product—Software is delivered electronically or shipped via disk media. Services, including maintenance, are considered delivered as the work is performed or, in the case of maintenance, over the contractual service period.

• Fee is fixed or determinable—We assess whether a fee is fixed or determinable at the outset of the arrangement. In addition, we assess whether contract modifications to an existing term arrangement constitute a concession. Our agreements do not include a right of return.

• Collection of fee is probable—We assess the probability of collecting from each client at the outset of the arrangement based on a number of factors, including the client’s payment history, its current creditworthiness, economic conditions in the client’s industry and geographic location, and general economic conditions. If in our judgment collection of a fee is not probable, revenue is recognized as cash is collected, provided all other conditions for revenue recognition have been met.

Software license revenues

Perpetual software license fees are recognized as revenue when the software is delivered, any acceptance required by contract that is not perfunctory is obtained, no significant obligations or contingencies exist related to the software, other than maintenance, and all other revenue recognition criteria are met.

Term software license fees are payable on a monthly, quarterly, or annual basis under license agreements that typically have a three to five-year term and may be renewed for additional terms at the client’s option.

As a result of our focus on frequent sales to our targeted clients, our strategy to sell initial term licensing agreements to those clients with the goal to generate follow-on sales, and as a result of extended payment terms and other factors, such as the risk of concessions, we recognize term license revenue over the term of the agreement as payments become due or earlier if prepaid, provided all other criteria for revenue recognition have been met.

Subscription revenue primarily consists of license, maintenance and bundled services revenue recognized on our license arrangements that include a right to unspecified future products, which is recognized ratably over the term of the subscription period.

Maintenance revenues

First-year maintenance typically is sold with the related software license and renewed on an annual basis thereafter. Maintenance revenue is deferred and recognized ratably over the term of the support period, which is generally one year and subject to annual renewals. Perpetual license maintenance obligations are based on separately stated renewal rates in the arrangement that are substantive and therefore represent VSOE of fair value. Term license arrangements include separately stated maintenance fees and we use separate sales to determine VSOE of fair value.

Services revenues

Our services revenue is comprised of fees for consulting services, including software implementation, training, reimbursable expenses and sales of our Pega Cloud^® offering (“Pega Cloud^®”). Consulting services may be provided on a “stand-alone” basis or bundled with a license and software maintenance services.

34

Revenue from training services and consulting services under time and materials contracts is recognized as services are performed. We have VSOE of fair value for our training services and consulting services under time and materials contracts in North America, Australia, and Europe.

Consulting services may occasionally be provided on a fixed-price basis. We do not have VSOE of fair value for fixed-price services or time and materials services in certain geographical regions. When these services are part of a multiple element arrangement, and the services are not essential to the functionality of the software, and when services, including maintenance, are the only undelivered element, we recognize the revenue from the total arrangement ratably over the longer of the software maintenance period or the service period. Revenue from fixed-price services that are not bundled with a software license is generally recognized ratably during the service period, which is typically less than four months.

Revenue from stand-alone sales of Pega Cloud^® is recognized ratably over the term of the service. When implementation services are sold together with our Pega Cloud^® offering and these services have stand-alone value to the client, we account for these services separately from our Pega Cloud^® offering as described earlier. Stand-alone value is established through the client’s ability to buy these services from many trained partner system integrators and from transactions sold independently from the sale of Pega Cloud^®. Since these multiple-element arrangements are not software license sales, we apply a selling price hierarchy. Under the selling price hierarchy, third-party evidence of selling price (“TPE”) will be considered if VSOE does not exist, and estimated selling price (“ESP”) will be used if neither VSOE nor TPE is available. Generally, we are not able to determine TPE as our sales strategy is customized to the needs of our clients and our products or services are dissimilar to comparable products or services in the marketplace. In determining ESP, we apply significant judgment as we weigh a variety of factors, based on the facts and circumstances of the arrangement. We typically arrive at an ESP for a service that is not sold separately by considering company-specific factors such as geographies, competitive landscape, and pricing practices used to establish bundled pricing and discounting.

Warranties and Indemnification

We warrant to our clients that our software products will conform to documented specifications for a limited period. We have not experienced significant claims related to software warranties beyond the scope of maintenance support, which we are already obligated to provide, and consequently we have not established reserves for warranty obligations.

Our agreements with clients generally require us to indemnify the client against claims that our software infringes third party patent, copyright, trademark or other proprietary rights. Such indemnification obligations are generally limited in a variety of industry-standard respects, including our right to replace an infringing product. As of December 31, 2013, we had not experienced any losses related to these indemnification obligations and no claims were outstanding.

Deferred revenue

Deferred software license revenue typically results from client billings for which all of the criteria to recognize revenue have not been met. Deferred maintenance revenue represents software license updates and product support contracts that are typically billed in advance and are recognized ratably over the support periods. Deferred services revenue represents advanced billings for consulting, hosting, and training services that are recognized as the services are performed.

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Goodwill and Intangible Assets Impairment

Our goodwill and intangibles assets result from our business acquisitions. Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least annually or as circumstances indicate their value may no longer be recoverable. We do not carry any intangible assets with indefinite useful lives other than goodwill. We perform our annual goodwill impairment during the fourth quarter of the fiscal year. With the acquisition of Antenna, we have determined our business has two operating segments, which are our two reporting units. To assess if goodwill is impaired, we first perform a qualitative assessment to determine whether further impairment testing is necessary. If, as a result of the qualitative assessment, we consider it more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, we perform a quantitative impairment test in a two-step process. For the first step, we screen for impairment, and if any possible impairment exists, we undertake a second step of measuring such impairment by performing discounted cash flow analyses. These analyses are based on cash flow assumptions that are consistent with the plans and estimates being used to manage our business. In the first step, we review the carrying amount of our reporting unit compared to the “fair value” of the reporting unit. An excess carrying value to fair value would indicate that goodwill may be impaired. If we determined that goodwill may be impaired, then we would compare the “implied fair value” to the carrying value of the goodwill. We periodically re-evaluate our business and have determined that we have two operating segments, which are our two reporting units. If our assumptions change in the future, we may be required to record impairment charges to reduce the carrying value of our goodwill. Changes in the valuation of goodwill could materially impact our operating results and financial position.

We evaluate our intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. In evaluating potential impairment of these assets, we specifically consider whether any indicators of impairment are present, including, but not limited to:

• whether there has been a significant adverse change in the business climate that affects the value of an asset;

• whether there has been a significant change in the extent or manner in which an asset is used; and

• whether there is an expectation that the asset will be sold or disposed of before the end of its originally estimated useful life.

If indicators of impairment are present, we compare the estimated undiscounted cash flows that the specific asset is expected to generate to its carrying value. These estimates involve significant subjectivity. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value.

As of December 31, 2013, we had $37.5 million of goodwill and $56.6 million of acquired intangible assets. If our estimates or the related assumptions change in the future, we may be required to record impairment charges to reduce the carrying value of these assets. Changes in the valuation of long-lived assets could materially impact our operating results and financial position. To date, there have been no impairments of goodwill or intangibles assets.

Accounting for Income Taxes

We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

36

We regularly assess the need for a valuation allowance against our deferred tax assets. Future realization of our deferred tax assets ultimately depends on the existence of sufficient taxable income within the available carryback or carryforward periods. Sources of taxable income include taxable income in prior carryback years, future reversals of existing taxable temporary differences, tax planning strategies, and future taxable income. We record a valuation allowance to reduce our deferred tax assets to an amount we believe is more likely than not to be realized. Changes in our valuation allowance impact income tax expense in the period of adjustment. Our deferred tax valuation allowances require significant judgment and uncertainties, including assumptions about future taxable income that are based on historical and projected information.

As of December 31, 2013, we had approximately $127.5 million of acquired Chordiant federal NOLs that are subject to annual use limitations under section 382 of the Internal Revenue Code. Based on those limitations we anticipate using $101.7 million of the remaining NOLs by 2029. In addition, we had $0.9 million of deferred tax assets related to state NOLs as of December 31, 2013.

We acquired approximately $52 million and $58.1 million of federal and foreign NOLs, respectively, in the Antenna transaction. We have preliminarily determined that we may utilize $18.4 million of the acquired Antenna federal NOLs under the applicable section 382 limitation, and these losses are scheduled to expire in 2032. A valuation allowance is recorded on the deferred tax assets in excess of the federal NOLs that are deemed recoverable under the preliminary limitation. With regard to the acquired foreign NOLs, a full valuation allowance has been recorded as of December 31, 2013 due to uncertainty regarding the availability of these NOLs to offset future income generated by the related foreign businesses due to limitations under local country change in control provisions.

We assess our income tax positions and record tax benefits based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, we record the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit is recognized in the financial statements. We classify liabilities for uncertain tax positions as non-current liabilities unless the uncertainty is expected to be resolved within one year. We classify interest and penalties on uncertain tax positions as income tax expense.

As a global company, we use significant judgment to calculate and provide for income taxes in each of the tax jurisdictions in which we operate. In the ordinary course of our business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertainties arise as a consequence of transfer pricing for transactions with our subsidiaries and nexus and tax credit estimates. In addition, the calculation of acquired tax attributes and the associated limitations are complex. We estimate our exposure to unfavorable outcomes related to these uncertainties and estimate the probability of such outcomes.

Although we believe our estimates are reasonable, no assurance can be given that the final tax outcome will not be different from what is reflected in our historical income tax provisions, returns, and accruals. Such differences, or changes in estimates relating to potential differences, could have a material impact on our income tax provision and operating results in the period in which such a determination is made.

See Note 16 “Income Taxes” in the notes to the accompanying audited consolidated financial statements for further information.

ITEM 7A. Quantitative and Qualitative Disclosure 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 and interest rates.

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Foreign currency exposure

We derived approximately 45%, 46%, and 48%, of our total revenue from sales to clients based outside of the U.S. in 2013, 2012 and 2011, respectively. Our international sales are usually denominated in foreign currencies. However, the operating expenses of our foreign operations are also primarily denominated in foreign currencies, which partially offset our foreign currency exposure. A decrease in the value of foreign currencies, particularly the British pound and the Euro relative to the U.S. dollar, could adversely impact our revenues and operating results.

Since the second quarter of 2011, we have used forward contracts to manage our exposure to changes in foreign currency exchange rates affecting foreign currency denominated accounts receivable, intercompany payables, and cash primarily held by our U.S. operating company.

Our U.S. operating company invoices most of our foreign clients in foreign currencies, so it holds cash and receivables denominated in these foreign currencies. Our U.S. operating company’s functional currency is the U.S. dollar. Therefore, when there are changes in the foreign currency exchange rates versus the U.S. dollar, we recognize a foreign currency transaction gain or (loss) in our consolidated statements of operations. In addition, we have intercompany accounts that are eliminated in consolidation, but that expose us to foreign currency exchange rate fluctuation, which are recorded as foreign currency transaction gains or (losses) in our consolidated statements of operations.

We have been primarily exposed to changes in the value of the Euro and British pound relative to the U.S. dollar. More recently, we have experienced increased levels of exposure to the Australian dollar and Indian rupee. We have not designated the forward contracts as hedging instruments and as a result, we record their fair value at the end of each reporting period in our 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 income, net, in our consolidated statements of operations. Generally, we enter into contracts with terms of 90 days or less.

The fluctuations in the value of these forward contracts partially offset the gains and losses from the remeasurement or settlement of the foreign currency denominated accounts receivable, intercompany payables, and cash held by the U.S. operating company recorded in foreign currency transaction (loss) gain, thus partially mitigating the volatility.

We entered into forward contracts with notional values as follows:

	Year Ended December 31,
Foreign currency (in thousands)	2013			2012			2011
Euro		€	102,300		€	49,700		€	28,500
British pound		£	85,400		£	52,000		£	19,500
Australian dollar		A$	26,300		A$	—		A$	—
Indian rupee		Rs	690,000		Rs	—		Rs	—

The total change in the fair value of our forward contracts recorded in other (expense) income, net, was as follows:

	Change in Fair Value in USD
	Year Ended December 31,
(in thousands)	2013			2012			2011
(Loss) gain included in other (expense) income, net	$	(747	)	$	(1,738	)	$	764

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The impact on net income of the gains and losses recorded on the foreign currency forward contracts, which is included in other (expense) income, net, in the accompanying consolidated statements of operations, and the foreign currency transaction gains and losses recorded on the remeasurement and settlement of the foreign currency denominated assets, which is included in foreign currency transaction gain (loss) in the accompanying consolidated statements of operations, was a net loss of approximately $2.3 million, $1 million and $0.2 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Interest rate exposure

As of December 31, 2013, we had $76.5 million of marketable debt securities, which consisted primarily of corporate and municipal bonds, with a weighted-average remaining maturity of 12 months. Due to the overall short-term remaining maturities of our marketable debt securities, our interest rate exposure is not significant. As of December 31, 2013, a 200 basis point increase in market interest rates would have reduced the fair value of our fixed rate marketable debt securities by approximately $1.6 million.

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ITEM 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm		41
Consolidated Balance Sheets as of December 31, 2013 and 2012		42
Consolidated Statements of Operations for the years ended December 31, 2013, 2012, and 2011		43
Consolidated Statements of Comprehensive Income (Loss) for the years ended December  31, 2013, 2012, and 2011		44
Consolidated Statements of Stockholders’ Equity for the years ended December  31, 2013, 2012, and 2011		45
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012, and 2011		46
Notes to Consolidated Financial Statements		47

40

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Pegasystems Inc.

Cambridge, Massachusetts

We have audited the accompanying consolidated balance sheets of Pegasystems Inc. and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013. We also have audited the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, a company’s principal executive and principal financial officers, or persons performing similar functions, and effected by a company’s board of directors, management, and other personnel 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of a company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pegasystems Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/ DELOITTE & TOUCHE LLP

Boston, Massachusetts

February 25, 2014

41

PEGASYSTEMS INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

	As of December 31,
	2013		2012
ASSETS
Current assets:
Cash and cash equivalents	$	80,231	$	77,525
Marketable securities		76,461		45,460
Total cash, cash equivalents, and marketable securities		156,692		122,985
Trade accounts receivable, net of allowance of $1,997 and $963		165,594		134,066
Deferred income taxes		11,106		10,202
Income taxes receivable		4,708		6,261
Other current assets		9,117		5,496
Total current assets		347,217		279,010
Property and equipment, net		28,957		30,827
Long-term deferred income taxes		60,925		49,292
Long-term other assets		2,526		1,680
Intangible assets, net		56,574		58,232
Goodwill		37,463		20,451
Total assets	$	533,662	$	439,492
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,745	$	3,330
Accrued expenses		28,419		15,534
Accrued compensation and related expenses		44,399		40,715
Deferred revenue		110,882		95,546
Total current liabilities		187,445		155,125
Income taxes payable		21,392		13,551
Long-term deferred revenue		34,196		18,719
Other long-term liabilities		18,841		15,618
Total liabilities		261,874		203,013
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $0.01 par value, 1,000 shares authorized; no shares issued and outstanding		—		—
Common stock, $0.01 par value, 100,000 shares authorized; 38,162 shares and 37,945 shares issued and outstanding		382		379
Additional paid-in capital		139,947		138,576
Retained earnings		127,826		94,349
Accumulated other comprehensive income:
Net unrealized gain on available-for-sale marketable securities		77		88
Foreign currency translation adjustments		3,556		3,087
Total stockholders’ equity		271,788		236,479
Total liabilities and stockholders’ equity	$	533,662	$	439,492

See notes to consolidated financial statements.

42

PEGASYSTEMS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

	Year ended December 31,
	2013			2012			2011
Revenue:
Software license	$	191,876		$	163,906		$	138,807
Maintenance		157,309			133,527			117,110
Services		159,769			164,277			160,758
Total revenue		508,954			461,710			416,675
Cost of revenue:
Software license		6,281			6,339			6,693
Maintenance		15,272			14,787			13,077
Services		135,853			136,254			145,028
Total cost of revenue		157,406			157,380			164,798
Gross profit		351,548			304,330			251,877
Selling and marketing		181,094			167,263			147,457
Research and development		79,726			76,726			65,308
General and administrative		29,594			28,915			28,198
Acquisition-related costs		1,306			—			482
Restructuring costs		1,731			—			(62	)
Total operating expenses		293,451			272,904			241,383
Income from operations		58,097			31,426			10,494
Foreign currency transaction (loss) gain		(1,593	)		780			(935	)
Interest income, net		524			419			398
Other (expense) income, net		(635	)		(1,680	)		856
Income before provision for income taxes		56,393			30,945			10,813
Provision for income taxes		18,350			9,077			705
Net income	$	38,043		$	21,868		$	10,108
Earnings per share:
Basic	$	1.00		$	0.58		$	0.27
Diluted	$	0.98		$	0.56		$	0.26
Weighted-average number of common shares outstanding
Basic		37,973			37,853			37,496
Diluted		38,987			38,859			39,404

See notes to consolidated financial statements.

43

PEGASYSTEMS INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

	Year ended December 31,
	2013			2012		2011
Net income	$	38,043		$	21,868	$	10,108
Other comprehensive income:
Unrealized (loss) gain on securities, net of tax		(11	)		31		93
Foreign currency translation adjustments		469			1,495		296
Total other comprehensive income		458			1,526		389
Comprehensive income	$	38,501		$	23,394	$	10,497

See notes to consolidated financial statements.

44

PEGASYSTEMS INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except per share amounts)

	Common Stock						Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total Stockholders’ Equity
	Number of Shares			Amount
Balance at January 1, 2011		37,250		$	372		$	122,607		$	71,431		$	1,260	$	195,670
Repurchase of common stock		(139	)		(1	)		(4,863	)		—			—		(4,864	)
Issuance of common stock for share-based compensation plans		575			6			(4,293	)		—			—		(4,287	)
Issuance of stock under Employee Stock Purchase Plan		18			—			647			—			—		647
Issuance of stock awards		8			—			350			—			—		350
Stock-based compensation expense		—			—			8,678			—			—		8,678
Tax benefit from exercise or vesting of equity awards, net of deferred tax asset deficiencies of $83		—			—			6,575			—			—		6,575
Cash dividends declared ($0.12 per share)		—			—			—			(4,510	)		—		(4,510	)
Other comprehensive income														389		389
Net income		—			—			—			10,108			—		10,108
Balance at December 31, 2011		37,712		$	377		$	129,701		$	77,029		$	1,649	$	208,756
Repurchase of common stock		(185	)		(2	)		(5,204	)		—			—		(5,206	)
Issuance of common stock for share-based compensation plans		382			4			(3,869	)		—			—		(3,865	)
Exercise of Common Stock Warrants		2			—			—			—			—		—
Issuance of stock under Employee Stock Purchase Plan		22			—			603			—			—		603
Issuance of stock awards		12			—			—			—			—		—
Stock-based compensation expense		—			—			11,506			—			—		11,506
Tax benefit from exercise or vesting of equity awards, net of deferred tax asset deficiencies of $284		—			—			5,839			—			—		5,839
Cash dividends declared ($0.12 per share)		—			—			—			(4,548	)		—		(4,548	)
Other comprehensive income														1,526		1,526
Net income		—			—			—			21,868			—		21,868
Balance at December 31, 2012		37,945		$	379		$	138,576		$	94,349		$	3,175	$	236,479
Repurchase of common stock		(390	)		(4	)		(12,521	)		—			—		(12,525	)
Issuance of common stock for share-based compensation plans		574			7			(5,686	)		—			—		(5,679	)
Issuance of stock under Employee Stock Purchase Plan		19			—			545			—			—		545
Issuance of stock awards		14			—			—			—			—		—
Stock-based compensation expense		—			—			12,869			—			—		12,869
Tax benefit from exercise or vesting of equity awards, net of deferred tax asset deficiencies of $435		—			—			6,164			—			—		6,164
Cash dividends declared ($0.12 per share)		—			—			—			(4,566	)		—		(4,566	)
Other comprehensive income														458		458
Net income		—			—			—			38,043			—		38,043
Balance at December 31, 2013		38,162		$	382		$	139,947		$	127,826		$	3,633	$	271,788

See notes to consolidated financial statements.

45

PEGASYSTEMS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year ended December 31,
	2013			2012			2011
Operating activities:
Net income	$	38,043		$	21,868		$	10,108
Adjustment to reconcile net income to cash provided by operating activities:
Excess tax benefits from exercise or vesting of equity awards		(6,435	)		(6,031	)		(6,658	)
Deferred income taxes		(7,008	)		(6,164	)		(15,269	)
Depreciation and amortization		20,035			18,566			17,462
Amortization of investments		1,776			1,419			849
Stock-based compensation expense		12,869			11,506			9,028
Foreign currency transaction loss (gain)		1,593			(780	)		935
Other non-cash		1,670			3,357			1,749
Change in operating assets and liabilities:
Trade accounts receivable		(28,316	)		(33,664	)		(18,450	)
Income taxes receivable and other current assets		7,076			6,570			10,519
Accounts payable and accrued expenses		5,794			(7,656	)		9,038
Deferred revenue		26,362			24,787			14,595
Other long-term assets and liabilities		7,244			9,801			5,909
Cash provided by operating activities		80,703			43,579			39,815
Investing activities:
Purchases of marketable securities		(60,648	)		(20,204	)		(57,249	)
Proceeds from maturities and called marketable securities		27,814			24,576			20,648
Sale of marketable securities		—			—			1,048
Payment for 2013 acquisition, net of cash acquired		(25,565	)		—			—
Investment in property and equipment		(5,598	)		(23,610	)		(9,835	)
Cash used in investing activities		(63,997	)		(19,238	)		(45,388	)
Financing activities:
Issuance of common stock for share-based compensation plans		2,210			1,128			2,622
Excess tax benefits from exercise or vesting of equity awards		6,435			6,031			6,658
Dividend payments to shareholders		(3,421	)		(5,680	)		(4,495	)
Common stock repurchases for tax withholdings for net settlement of equity awards		(7,345	)		(4,391	)		(6,262	)
Common stock repurchases under share repurchase programs		(12,446	)		(5,179	)		(4,835	)
Cash used in financing activities		(14,567	)		(8,091	)		(6,312	)
Effect of exchange rate on cash and cash equivalents		567			922			1,111
Net increase (decrease) in cash and cash equivalents		2,706			17,172			(10,774	)
Cash and cash equivalents, beginning of year		77,525			60,353			71,127
Cash and cash equivalents, end of year	$	80,231		$	77,525		$	60,353
Supplemental disclosures:
Income taxes paid	$	11,107		$	5,106		$	2,566
Non-cash investing and financing activity:
Dividends payable	$	1,145		$	—		$	1,132

See notes to consolidated financial statements.

46

PEGASYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

(a) Business

The Company develops, markets, licenses, and supports software to automate complex, changing business processes. The Company provides implementation, consulting, training, technical support and hosting services to facilitate the use of its software.

(b) Management estimates and reporting

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.”) requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates. Accounts with reported amounts based on significant estimates and judgments include revenue, allowance for sales credit memos, deferred income taxes, income taxes payable, fair value of assets acquired and liabilities assumed, intangible assets, goodwill, accrued expenses, deferred revenue, and stock-based compensation.

(c) Principles of consolidation

The consolidated financial statements include Pegasystems Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

2. SIGNIFICANT ACCOUNTING POLICIES

(a) Revenue recognition

The Company’s revenue is derived primarily from software licenses, maintenance fees related to the Company’s software licenses, and consulting services. The Company’s license arrangements, whether involving a perpetual license or a term license, generally contain multiple elements, including consulting services, training, and software maintenance services.

Software revenue recognition requires judgment, including whether a software arrangement includes multiple elements, and if so, whether vendor-specific objective evidence (“VSOE”) of fair value exists for those elements. The amount of arrangement consideration allocated to undelivered elements is based on the VSOE of fair value for those elements and recognized as those elements are delivered. Any remaining portion of the total arrangement fee is allocated to the software license, the first delivered element.

Before the Company can recognize revenue, the following four basic criteria must be met:

• Persuasive evidence of an arrangement—As evidence of the existence of an arrangement, the Company uses a contract or purchase order signed by the client for software and maintenance, and a statement of work for consulting services. In the event the client is a reseller the Company ensures a binding agreement exists between the reseller and end user of the software.

• Delivery of product—The Company delivers its software electronically or ships it via disk media. Services, including maintenance, are considered delivered as the work is performed or, in the case of maintenance, over the contractual service period.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

• Fee is fixed or determinable—The Company assesses whether a fee is fixed or determinable at the outset of the arrangement. In addition, the Company assesses whether contract modifications to an existing term arrangement constitute a concession. The Company’s agreements do not include a right of return.

• Collection of fee is probable—The Company assesses the probability of collecting from each client at the outset of the arrangement based on a number of factors, including the client’s payment history, its current creditworthiness, economic conditions in the client’s industry and geographic location, and general economic conditions. If in the Company’s judgment collection of a fee is not probable, revenue is recognized as cash is collected, provided all other conditions for revenue recognition have been met.

Software license revenues

Perpetual software license fees are recognized as revenue when the software is delivered, any acceptance required by contract that is not perfunctory is obtained, no significant obligations or contingencies exist related to the software, other than maintenance, and all other revenue recognition criteria are met.

Term software license fees are payable on a monthly, quarterly, or annual basis under license agreements that typically have a three to five-year term and may be renewed for additional terms at the client’s option.

As a result of the Company’s focus on frequent sales to its targeted clients, the Company’s strategy is to sell initial term licensing agreements to those clients with the goal to generate follow-on sales, and as a result of extended payment terms and other factors, such as the risk of concessions, the Company recognizes term license revenue over the term of the agreement as payments become due or earlier if prepaid, provided all other criteria for revenue recognition have been met.

Subscription revenue primarily consists of license, maintenance, and bundled services revenue recognized on the Company’s license arrangements that include a right to unspecified future products, which is recognized ratably over the term of the subscription period.

Maintenance revenues

First-year maintenance typically is sold with the related software license and renewed on an annual basis thereafter. Maintenance revenue is deferred and recognized ratably over the term of the support period, which is generally one year and subject to annual renewals. Perpetual license maintenance obligations are based on separately stated renewal rates in the arrangement that are substantive and therefore represent VSOE of fair value. Term license arrangements include separately stated maintenance fees and the Company uses separate sales to determine VSOE of fair value.

Services revenues

The Company’s services revenue is comprised of fees for training, consulting services including software implementation, reimbursable expenses, and sales of its Pega Cloud^® as-a-platform offering (“Pega Cloud^®”). Consulting services may be provided on a “stand-alone” basis or bundled with a license and software maintenance services.

Revenue from “stand-alone” training services and consulting services under time and materials contracts is recognized as services are performed. The Company has VSOE of fair value for its training services and consulting services under time and materials contracts in North America, Australia, and Europe.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Consulting services may be provided on a fixed-price basis. The Company does not have VSOE of fair value for fixed-price services or time and materials services in certain geographical regions. When these services are part of a multiple element arrangement, and the services are not essential to the functionality of the software, and when services including maintenance, are the only undelivered element, the Company recognizes the revenue from the total arrangement ratably over the longer of the software maintenance period or the service period. Revenue from fixed-price services that are not bundled with a software license is generally recognized ratably during the service period, which is typically less than four months.

Revenue from stand-alone sales of Pega Cloud^® is recognized ratably over the term of the service. When implementation services are sold together with the Company’s Pega Cloud^® offering and these services have stand-alone value to the client, the Company accounts for these services separately from its Pega Cloud^® offering as described earlier. Stand-alone value is established through the client’s ability to buy these services from many trained partner system integrators and from transactions sold independently from the sale of Pega Cloud^®. Since these multiple-element arrangements are not software license sales, the Company applies a selling price hierarchy. Under the selling price hierarchy, third-party evidence of selling price (“TPE”) will be considered if VSOE does not exist, and estimated selling price (“ESP”) will be used if neither VSOE nor TPE is available. Generally, the Company is not able to determine TPE as its sales strategy is customized to the needs of its clients and the Company’s products and services are dissimilar to comparable products or services in the marketplace. In determining ESP, the Company applies significant judgment as it weighs a variety of factors, based on the facts and circumstances of the arrangement. The Company typically arrives at an ESP for a service that is not sold separately by considering company-specific factors such as geographies, competitive landscape, and pricing practices used to establish bundled pricing and discounting.

Warranties and Indemnification

The Company warrants to its clients that its software products will conform to documented specifications for a limited period. The Company has not experienced significant claims related to software warranties beyond the scope of maintenance support, which it is already obligated to provide, and consequently it has not established reserves for warranty obligations.

The Company’s agreements with clients generally require it to indemnify the client against claims that the Company’s software infringes third party patent, copyright, trademark or other proprietary rights. Such indemnification obligations are generally limited in a variety of industry-standard respects, including the Company’s right to replace an infringing product. As of December 31, 2013, the Company had not experienced any losses related to these indemnification obligations and no claims were outstanding.

Deferred revenue

Deferred software license revenue typically results from contractual billings for which all of the criteria to recognize revenue have not been met. Deferred maintenance revenue represents software license updates and product support contracts that are typically billed in advance and are recognized ratably over the support periods. Deferred services revenue represents advanced billings for consulting hosting, and training services that are recognized as the services are performed.

(b) Fair value of financial instruments

The principal financial instruments held by the Company consist of cash equivalents, marketable securities, accounts receivable, and accounts payable. The carrying value of these instruments approximates their fair value due to their short maturities. See Note 3 “Marketable Securities” and Note 5 “Fair Value Measurements” for further discussion of financial instruments that are carried at fair value on a recurring basis.

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PEGASYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(c) Derivative instruments

The Company uses foreign currency forward contracts to manage its exposures to changes in foreign currency exchange rates associated with its foreign currency denominated accounts receivable, intercompany payables, and cash. The foreign currency forward 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 operations. The fluctuations in the value of these foreign currency forward contracts partially offset the gains and losses from the remeasurement or settlement of the foreign currency denominated accounts receivable, intercompany payables, and cash held by the U.S. operating company, thus partly mitigating the volatility. Generally, the Company enters into foreign currency forward contracts with terms of 90 days or less.

(d) Property and equipment

Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which are three years for equipment and five years for furniture and fixtures. Leasehold improvements are amortized over the lesser of the term of the lease or the useful life of the asset. Repairs and maintenance costs are expensed as incurred.

The Company capitalizes and amortizes certain direct costs associated with computer software developed or purchased for internal use. The Company amortizes capitalized software costs generally over three to five years commencing on the date the software is placed into service. During 2013, 2012, and 2011, the Company did not capitalize any costs for computer software developed for internal use.

(e) Goodwill

Goodwill represents the residual purchase price paid in a business combination after all identified assets and liabilities have been recorded. Goodwill is not amortized. The Company performed its qualitative assessment in the fourth quarters of 2013, 2012, and 2011, and concluded it was not more likely than not that the fair value of its reporting units was less than their carrying value.

(f) Intangible Assets

All of the Company’s intangible assets are amortized using the straight-line method over their estimated useful life. The Company evaluates its intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Impairment is assessed by comparing the undiscounted cash flows expected to be generated by the intangible asset to its carrying value. If impairment exists, the Company calculates the impairment by comparing the carrying value of the intangible asset to its fair value as determined by discounted expected cash flows. The Company did not record any impairment in 2013, 2012, or 2011.

(g) Research and development and software costs

Research and development costs are expensed as incurred. Capitalization of computer software developed for resale begins upon the establishment of technological feasibility, generally demonstrated by a working model or an operative version of the computer software product. Such costs have not been material to date as technological feasibility is established within a short timeframe from the software’s general availability and, as a result, no costs were capitalized in 2013, 2012, or 2011.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(h) Stock-Based Compensation

The Company recognizes stock-based compensation expense associated with equity awards based on the fair value of these awards at the grant date. Stock-based compensation is recognized over the requisite service period, which is generally the vesting period of the equity award, and is adjusted each period for anticipated forfeitures. The Company recognizes stock-based compensation using the ratable method, which treats each vesting tranche as if it were an individual grant. See Note 15 “Stock-based Compensation” for discussion of the Company’s key assumptions included in determining the fair value of its equity awards at grant date.

(i) Acquisition-related costs

Acquisition-related costs are expensed as incurred and include direct and incremental costs associated with an impending or completed acquisition. During 2013, the $1.3 million of acquisition-related costs were primarily professional fees associated with the Company’s acquisition of Antenna Software, Inc. (“Antenna”). During 2011, the $0.5 million of acquisition-related costs were primarily legal fees associated with litigation assumed in the Company’s acquisition of Chordiant Software, Inc. (“Chordiant”).

(j) Restructuring costs

Restructuring costs are recorded when a plan of restructuring is in place and management has committed to execution of the plan. To the extent that a restructuring plan provides employee benefits for services rendered in future periods beyond a minimum period, the costs are recognized over the requisite service period. In 2013, restructuring costs include future lease payments and demising costs, net of estimated sublease income, for the elimination of space within one facility related to the integration of Antenna. See Note 12 “Accrued Restructuring Costs” for further detail.

(k) Foreign currency translation

The translation of assets and liabilities for the majority of the Company’s foreign subsidiaries is made at period-end exchange rates, while revenue and expense accounts are translated at the average exchange rates during the period transactions occurred. The resulting translation adjustments are reflected in accumulated other comprehensive income. The Company’s India subsidiary uses the U.S. dollar as its functional currency, therefore, its monetary assets and liabilities are remeasured at current rates and its non-monetary assets are recorded at historical exchange rates. Realized and unrealized exchange gains or losses from transactions and remeasurement adjustments are reflected in foreign currency transaction gain (loss), in the accompanying consolidated statements of operations.

(l) Accounting for Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Future realization of the Company’s deferred tax assets ultimately depends on the existence of sufficient taxable income within the available carryback or carryforward periods. Sources of taxable income include taxable income in prior carryback years, future reversals of existing taxable temporary differences, tax planning strategies, and future taxable income. The Company records a valuation allowance to reduce its deferred tax assets to an amount it believes is more-likely-than-not to be realized. Changes in the valuation allowance impacts income tax expense in the period of adjustment. The Company’s deferred tax valuation allowance requires significant judgment and uncertainties, including assumptions about future taxable income that are based on historical and projected information. The Company recognizes excess tax benefits when they are realized, through a reduction in income taxes payable using the with and without stock option method.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company assesses its income tax positions and records tax benefits based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, the Company records the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit is recognized in the financial statements. The Company classifies liabilities for uncertain tax positions as non-current liabilities unless the uncertainty is expected to be resolved within one year. The Company classifies interest and penalties on uncertain tax positions as income tax expense.

As a global company, the Company uses significant judgment to calculate and provide for income taxes in each of the tax jurisdictions in which it operates. In the ordinary course of the Company’s business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertainties arise as a consequence of transfer pricing for transactions with the Company’s subsidiaries and nexus and tax credit estimates. In addition, the calculation of acquired tax attributes and the associated limitations are complex. See Note 16 “Income Taxes” for further information.

3. MARKETABLE SECURITIES

(in thousands)	December 31, 2013
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Marketable securities:
Municipal bonds	$	41,545		75		(20	)	$	41,600
Corporate bonds		31,868		52		(4	)		31,916
Certificates of deposit		2,948		1		(4	)		2,945
Marketable securities	$	76,361		128		(28	)	$	76,461
(in thousands)	December 31, 2012
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Marketable securities:
Municipal bonds	$	30,488		48		(10	)	$	30,526
Corporate bonds		14,853		83		(2	)		14,934
Marketable securities	$	45,341		131		(12	)	$	45,460

The Company considers debt securities with maturities of three months or less when purchased, 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 December 31, 2013, remaining maturities of marketable debt securities ranged from January 2014 to February 2016, with a weighted-average remaining maturity of approximately 12 months.

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PEGASYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. DERIVATIVE INSTRUMENTS

The Company uses foreign currency forward contracts to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated accounts receivable, cash and intercompany payables. The U.S. operating company invoices most of its foreign clients 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, intercompany payables and accounts receivable held by the U.S. operating company in its consolidated statements of operations when there are changes in the foreign currency exchange rates versus the U.S. dollar. The Company has been primarily exposed to the fluctuation in the British pound and Euro relative to the U.S. dollar. More recently, the Company has experienced increased levels of exposure to the Australian dollar and Indian rupee, for which it began to use forward contracts in the third quarter of 2013.

The foreign currency forward 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 operations. However, the fluctuations in the value of these foreign currency forward contracts partially offset the gains and losses from the remeasurement or settlement of the foreign currency denominated accounts receivable, intercompany payables, and cash held by the U.S. operating company, thus partly mitigating the volatility. Generally, the Company enters into foreign currency forward contracts with terms not greater than 90 days.

As of December 31, 2013, 2012, and 2011, the Company did not have any forward contracts outstanding.

The Company entered into forward contracts with notional values as follows:

	Year Ended December 31,
Foreign currency (in thousands)	2013		2012		2011
Euro	€	102,300	€	49,700	€	28,500
British pound	£	85,400	£	52,000	£	19,500
Australian dollar	A$	26,300	A$	—	A$	—
Indian rupee	Rs	690,000	Rs	—	Rs	—

The total change in the fair value of the Company’s forward contracts recorded in other (expense) income, net, was as follows:

	Change in Fair Value in USD
	Year Ended December 31,
(in thousands)	2013			2012			2011
(Loss) gain included in other (expense) income, net	$	(747	)	$	(1,738	)	$	764

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PEGASYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5. FAIR VALUE MEASUREMENTS

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 Company’s investments classified within Level 1 of the fair value hierarchy are valued using quoted market prices. The Company’s investments classified within Level 2 of the fair value hierarchy are valued based on matrix pricing compiled by third party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk.

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)	December 31,2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Money market funds	$	2,232	$	2,232	$	—
Marketable securities:
Municipal bonds	$	41,600	$	10,569	$	31,031
Corporate bonds		31,916		31,916		—
Certificates of deposit		2,945		—		2,945
Total marketable securities	$	76,461	$	42,485	$	33,976

			Fair Value Measurements at Reporting Date Using
(in thousands)	December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Money market funds	$	2,873	$	2,873	$	—
Marketable securities:
Municipal bonds	$	30,526	$	11,966	$	18,560
Corporate bonds		14,934		14,934		—
Total marketable securities	$	45,460	$	26,900	$	18,560

Assets Measured at Fair Value on a Nonrecurring Basis

Assets recorded at fair value on a nonrecurring basis, such as property and equipment, and intangible assets are recognized at fair value when they are impaired. During 2013, 2012, and 2011, the Company did not recognize any impairments on its assets measured at fair value on a nonrecurring basis.

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PEGASYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. TRADE ACCOUNTS RECEIVABLE, NET OF ALLOWANCE

Unbilled trade accounts receivable relate to services earned under time and material arrangements, maintenance and license arrangements that had not been invoiced.

	December 31,
(in thousands)	2013			2012
Trade accounts receivable	$	128,973		$	112,106
Unbilled accounts receivable		38,618			22,923
Total accounts receivable		167,591			135,029
Allowance for sales credit memos		(1,997	)		(963	)
	$	165,594		$	134,066

The Company records an allowance for estimates of potential sales credit memos when the related revenue is recorded and reviews this allowance periodically. The following reflects the activity of the allowance for sales credit memos:

	Year Ended December 31,
(in thousands)	2013			2012			2011
Balance at beginning of year	$	963		$	895		$	1,027
Provision for credit memos		5,374			1,773			2,877
Credit memos issued		(4,340	)		(1,705	)		(3,009	)
	$	1,997		$	963		$	895

7. PROPERTY AND EQUIPMENT

	December 31,
(in thousands)	2013			2012
Leasehold improvements	$	24,242		$	23,065
Computer equipment		13,004			11,715
Furniture and fixtures		5,150			5,160
Computer software purchased		3,750			3,048
Computer software developed for internal use		721			721
Fixed assets in progress		449			161
		47,316			43,870
Less: accumulated depreciation and amortization		(18,359	)		(13,043	)
Property and equipment, net	$	28,957		$	30,827

Depreciation and amortization expense was approximately $8.2 million, $7.5 million, and $6.1 million, for the years ended December 31, 2013, 2012, and 2011, respectively.

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PEGASYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

8. ACQUISITION

On October 9, 2013, the Company acquired Antenna, a leading provider of mobile application development platforms. The Company acquired all of the outstanding capital stock of Antenna in a cash merger for $27.7 million, subject to a working capital adjustment calculated at the time of closing that is preliminary. The total purchase price of $27.7 million included $4.2 million, which was deposited in escrow to secure the selling stockholders’ indemnification obligations to the Company under the merger agreement that will be paid to the former shareholders of Antenna over certain periods through April 2015 less any amounts presented and approved for payment against the escrow. During 2013, the Company incurred direct and incremental expenses associated with the transaction of $1.3 million and expects to incur an additional estimated $0.4 million of such expenses that are primarily professional fees.

The Company believes the acquisition will offer its collective clients faster time-to-market and increased flexibility in end-to-end mobile application development, powerful device management and cloud-based mobile Backend-as-a-Service.

The operations of Antenna are included in the Company’s operating results from the date of acquisition. The amount of revenue and earnings of Antenna included in the Company’s consolidated statement of operations were approximately $3.9 million and a loss of approximately $2.6 million, respectively. Due to the rapid integration of the products, sales force, and operations of Antenna, other than the maintenance and hosting revenue attributable to the recognition of the fair value of acquired deferred maintenance and hosting revenue, it may not be feasible for the Company to identify revenue from new arrangements attributable to Antenna.

The Company is in the process of investigating the facts and circumstances existing as of the acquisition date in order to finalize the allocation of the purchase price to the fair value of assets acquired and liabilities assumed and establish the related tax basis. As a result of the preliminary purchase price allocation, the Company recognized $17 million of goodwill, which is primarily due to the expected synergies of the combined entities and the workforce in place. The goodwill created by the transaction is nondeductible for tax purposes. The Company recorded $36.7 million of deferred tax assets, a $24.2 million valuation allowance related to the Company’s preliminary determination it will not be able to utilize the acquired Antenna federal and foreign NOLs due to various limitations and restrictions, and a $6.9 million deferred tax liability associated with the acquired intangibles, for a net deferred tax asset of $5.6 million. A summary of the preliminary purchase price allocation for the acquisition of Antenna is as follows:

(in thousands)
Total purchase consideration:
Cash	$	27,698
Allocation of the purchase consideration:
Cash	$	783
Accounts receivable, net of allowance		4,136
Other assets		3,947
Property and equipment		655
Deferred tax assets, net		5,589
Identifiable intangible assets		10,355
Goodwill		17,012
Accounts payable		(1,470	)
Accrued liabilities		(8,931	)
Deferred revenue		(4,378	)
Net assets acquired	$	27,698

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The valuation of the assumed deferred revenue was based on the Company’s contractual commitment to provide post-contract customer support to Antenna clients and future contractual performance obligations under existing hosting arrangements. The fair value of this assumed liability was based on the estimated cost plus a reasonable margin to fulfill these service obligations. The majority of the deferred revenue is expected to be recognized in the 12 months following the acquisition.

The valuation of the acquired intangible assets is inherently subjective and relies on significant unobservable inputs. The Company used an income approach to value the acquired customer related, technology and trade name intangible assets. The non-compete assets were valued using the with-and-without method, a form of the income approach which considers the cash flow differentials under multiple scenarios with or without key executives. The valuation for each of these intangible assets was based on estimated projections of expected cash flows to be generated by the assets, discounted to the present value at discount rates commensurate with perceived risk. The valuation assumptions take into consideration the Company’s estimates of contract renewal, technology attrition and revenue growth projections.

The estimated fair values for specifically identifiable intangible assets acquired, by major asset class, are as follows:

(in thousands)			Weighted-average amortization period (in years)
Customer related intangible assets	$	4,279		4
Technology		3,656		3
Non-compete		1,342		1
Trade name		1,078		3
	$	10,355		3.2

Pro forma Information

The following pro forma financial information presents the combined results of operations of the Company and Antenna as if the acquisition had occurred on January 1, 2012 after giving effect to certain pro forma adjustments. The pro forma adjustments reflected herein include only those adjustments that are directly attributable to the Antenna acquisition, factually supportable, and expected to have a continuing impact on the Company. These pro forma adjustments include a net increase in amortization expense to eliminate historical amortization of Antenna intangible assets and to record amortization expense for the $10.4 million of acquired identifiable intangibles, a decrease in interest income as a result of the cash paid for the acquisition, a decrease in interest expense as a result of the repayment of all Antenna outstanding debt in connection with the acquisition, and the elimination of approximately $1.3 million of acquisition-related costs, including transaction costs incurred by the Company and Antenna. The pro forma financial information does not reflect any adjustments for anticipated synergies resulting from the acquisition and is not necessarily indicative of the operating results that would have actually occurred had the transaction been consummated on January 1, 2012.

	Pro Forma Year Ended December 31,
(in thousands, except per share amounts)	2013		2012
Revenue	$	532,978	$	499,839
Net income	$	35,814	$	9,028
Net income per basic share	$	0.94	$	0.24
Net income per diluted share	$	0.92	$	0.23

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

9. GOODWILL AND OTHER INTANGIBLE ASSETS

As discussed in Note 18 “Geographic Information and Major Clients”, the Company operates in one reportable segment, business process solutions, and has two reporting units.

The following table presents the changes in the carrying amount of goodwill:

	Year Ended December 31,
(in thousands)	2013		2012		2011
Balance as of January 1,	$	20,451	$	20,451	$	20,451
Goodwill acquired during the year		17,012		—		—
Balance as of December 31,	$	37,463	$	20,451	$	20,451

Intangible assets are recorded at cost and are amortized using the straight-line method over their estimated useful lives.

(in thousands)	Range of Useful Lives		Cost		Accumulated Amortization			Net book value
December 31, 2013
Customer related intangibles		4-9 years	$	48,634	$	(18,317	)	$	30,317
Technology		3-9 years		47,102		(22,873	)		24,229
Other intangibles		1-5 years		4,658		(2,630	)		2,028
Total			$	100,394	$	(43,820	)	$	56,574
December 31, 2012
Customer related intangibles		9 years	$	44,355	$	(13,142	)	$	31,213
Technology		4-9 years		43,446		(16,431	)		27,015
Other intangibles		1-5 years		2,238		(2,234	)		4
Total			$	90,039	$	(31,807	)	$	58,232

Amortization expense of acquired intangibles was reflected in the Company’s consolidated statements of operations as follows:

	Year Ended December 31,
(in thousands)	2013		2012		2011
Amortization expense:
Cost of revenue	$	6,443	$	6,189	$	6,284
Selling and marketing		5,174		4,928		4,928
General and administrative		396		20		103
Total amortization expense	$	12,013	$	11,137	$	11,315

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2013, future estimated amortization expense is as follows:

(in thousands)	Future estimated amortization expense
2014		13,170
2015		11,336
2016		10,973
2017		9,512
2018 and thereafter		11,583
	$	56,574

10. ACCRUED EXPENSES

	December 31,
(in thousands)	2013		2012
Partner commissions	$	4,106	$	1,723
Other taxes		6,492		2,711
Employee reimbursable expenses		1,539		879
Dividends payable		1,145		—
Professional services contractor fees		1,997		602
Self-insurance health and dental claims		1,265		1,707
Professional fees		2,378		1,114
Short-term deferred rent		740		1,111
Income taxes payable		1,770		1,167
Acquisition-related and merger consideration costs		1,459		—
Restructuring		371		441
Other		5,157		4,079
	$	28,419	$	15,534

11. DEFERRED REVENUE

	December 31,
(in thousands)	2013		2012
Software license	$	28,826	$	24,303
Maintenance		72,715		62,144
Services		9,341		9,099
Current deferred revenue		110,882		95,546
Software license		32,727		15,407
Maintenance and services		1,469		3,312
Long-term deferred revenue		34,196		18,719
	$	145,078	$	114,265

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PEGASYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. ACCRUED RESTRUCTURING COSTS

During the fourth quarter of 2013, in connection with the Company’s evaluation of its combined facilities with Antenna, the Company approved a plan to eliminate space within one facility. The Company ceased use of this space during the fourth quarter of 2013 and recognized $1.7 million of restructuring expenses, representing future lease payments and demising costs, net of estimated sublease income for this space. The lease expires in 2021.

A summary of the restructuring activity is as follows:

(in thousands)	2010 personnel restructuring			2010 facilities restructuring			2013 personnel and facilities restructuring (1)			Total
Balance as of December 31, 2010	$	2,752		$	2,117		$	—		$	4,869
Restructuring costs		—			(62	)		—			(62	)
Cash payments		(2,509	)		(1,255	)		—			(3,764	)
Balance as of December 31, 2011		243			800			—			1,043
Cash payments		(243	)		(359	)		—			(602	)
Balance as of December 31, 2012		—			441			—			441
Restructuring costs		—			—			1,731			1,731
Cash payments		—			(441	)		—			(441	)
Other (2)		—			—			(140	)		(140	)
Balance as of December 31, 2013	$	—		$	—		$	1,591		$	1,591

(1) Includes $34 thousand of severance and related benefit costs for the reduction of six personnel in redundant roles that will be paid by the end of the second quarter of 2014.

(2) Reflects the asset initially recorded for the acquired below market operating lease terms at acquisition, which was subsequently restructured and included in restructuring costs above.

	December 31,
(in thousands)	2013		2012
Reported as:
Accrued expenses	$	371	$	441
Other long-term liabilities		1,220		—
	$	1,591	$	441

13. COMMITMENTS AND CONTINGENCIES

Commitments

The Company leases space for its offices under noncancellable operating leases that expire at various dates through 2023.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2013, the Company’s future minimum rental payments required under operating leases with noncancellable terms in excess of one year were as follows:

(in thousands) For the calendar year	Operating Leases
2014	$	11,947
2015		11,634
2016		10,991
2017		9,875
2018		9,552
2019 & Thereafter		41,430
	$	95,429

Rent expense under operating leases is recognized on a straight-line basis to account for scheduled rent increases and landlord tenant allowances. In connection with the Company’s lease for its office headquarters, the Company has a landlord tenant allowance totaling approximately $8.4 million, all of which was used and reimbursed to the Company as of December 31, 2012 and will be amortized as a reduction to rent expense on a straight-line basis over the term of the lease. Total rent expense under operating leases was approximately $11.7 million, $14.1 million and $11.4 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Contingencies

The Company is a party in various contractual disputes, litigation and potential claims arising in the ordinary course of business. The Company does not believe that the resolution of these matters will have a material adverse effect on its financial position or results of operations.

14. STOCKHOLDERS’ EQUITY

(a) Preferred stock

The Company has authorized 1,000,000 shares of preferred stock, which may be issued from time to time in one or more series. The Board of Directors has the authority to issue the shares of preferred stock in one or more series, to establish the number of shares to be included in each series, and to fix the designation, powers, preferences and rights of the shares of each series and the qualifications, limitations or restrictions thereof, without any further vote or action by the stockholders. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to holders of common stock, and may have the effect of delaying, deferring or defeating a change in control of the Company. The Company had not issued any shares of preferred stock through December 31, 2013.

(b) Common stock

The Company has 100,000,000 authorized shares of common stock, $0.01 par value per share, of which 38,162,000 shares were issued and outstanding at December 31, 2013.

Since 2004, the Company’s Board of Directors has approved stock repurchase programs that have authorized the Company to repurchase in the aggregate up to $104.5 million of its common stock. Purchases under these programs have been made on the open market.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table is a summary of the Company’s repurchase activity under all of the Company’s repurchase programs for the years ended December 31:

						Year Ended December 31,
(Dollars in thousands)	2013					2012					2011
	Shares		Amount			Shares		Amount			Shares		Amount
Prior year authorizations at January 1,			$	14,793				$	13,963				$	13,237
Authorizations				12,164					6,036					5,590
Repurchases paid		386,629		(12,370	)		181,803		(5,130	)		137,429		(4,815	)
Repurchases unsettled		3,141		(154	)		3,399		(76	)		1,688		(49	)
Authorized dollars remaining as of December 31,			$	14,433				$	14,793				$	13,963

(c) Dividends

On May 30, 2006, the Company’s Board of Directors approved an ongoing quarterly cash dividend of $0.03 per share, beginning with the second quarter ended June 30, 2006. For the years ended December 31, 2013 and 2011, the Company declared dividends of $0.12 per share and paid cash dividends of $3.4 million, and $4.5 million, respectively. The Company declared $0.12 per share for the year ended December 31, 2012, but the Board of Directors authorized the acceleration of the fourth quarter dividend otherwise payable in January 2013 to December 2012. Therefore, the Company paid $5.7 million in dividends in 2012. It is the Company’s current intention to pay a quarterly cash dividend of $0.03 per share, however, the Board of Directors may terminate or modify this dividend program at any time without notice.

(d) Warrants summary

In January 2012, a former stockholder of 1mind Corporation (“1mind”) exercised a warrant to purchase 2,464 shares of the Company’s common stock, which was originally issued as part of the consideration for the Company’s acquisition of 1mind in 2002. In accordance with the net exercise provisions of this warrant, the Company withheld 78 shares of its common stock to cover the exercise price of the warrant, which shares were valued at $2,094 based on the average closing price of its common stock over the ten consecutive trading days ending on the third trading day prior to the exercise date, and issued 2,386 shares of its common stock. The issuance of these shares was made in reliance on an exemption from registration under Regulation D under the Securities Act of 1933. As of December 31, 2013 and December 31, 2012, there were no warrants outstanding.

15. STOCK-BASED COMPENSATION

The majority of the Company’s stock-based compensation arrangements vest over either a four or five year vesting schedule and the Company’s stock options have a ten-year term. The Company recognizes stock-based compensation using the ratable method, which treats each vesting tranche as if it were an individual grant.

The Company periodically grants stock options and restricted stock units (“RSUs”) for a fixed number of shares to employees and non-employee Directors. The exercise price for stock options is greater than or equal to the fair market value of the shares at the grant date. RSUs deliver to the recipient a right to receive a specified number of shares of the Company’s common stock upon vesting. Unlike stock options, there is no cost to the employee at share issuance. The Company values its RSUs at the fair value of its common stock on the grant date, which is the closing price of its common stock on the grant date, less the present value of expected dividends, as the employee is not entitled to dividends during the requisite service period. Upon vesting of the RSUs, the Company withholds shares of common stock in an amount sufficient to cover the minimum statutory tax withholding obligations and issues shares of its common stock for the remaining amount.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Employees may elect to receive 50% of their target incentive compensation under the Company’s Corporate Incentive Compensation Plan (the “CICP”) in the form of RSUs instead of cash. If elected by an employee, the equity amount is equal in value on the date of grant to 50% of his or her target incentive opportunity, based on the employee’s base salary. The number of RSUs granted is determined by dividing 50% of the employee’s target incentive opportunity by the fair value of a RSU on the grant date. If elected, the award vests 100% on the CICP payout date of the following year for all participants. Vesting is conditioned upon the performance conditions of the CICP and on continued employment; if threshold funding does not occur, the equity grant will be cancelled. The Company considers vesting to be probable on the grant date and recognizes the associated stock-based compensation expense over the requisite service period beginning on the grant date and ending on the vest date.

The Company grants options that allow for the settlement of vested stock options on a net share basis (“net settled stock options”), instead of settlement with a cash payment (“cash settled stock options”). With net settled stock options, the employee does not surrender any cash or shares upon exercise. Rather, the Company withholds the number of shares to cover the option exercise price and the minimum statutory tax withholding obligations from the shares that would otherwise be issued upon exercise. The settlement of vested stock options on a net share basis results in fewer shares issued by the Company.

Share-Based Compensation Plans:

(a) 1994 Long-term Incentive Plan

In 1994, the Company adopted a 1994 Long-Term Incentive Plan (as amended in 2003, the “1994 Plan”) to provide employees, Directors and consultants with opportunities to purchase stock through incentive stock options and non-qualified stock options. In addition to options, participants under the 1994 Plan were eligible to receive stock appreciation rights, restricted stock and long-term performance awards. As of December 31, 2013, options to purchase an aggregate of approximately 5,000 shares of common stock were outstanding under the 1994 Plan. The Company does not intend to issue any additional options or make any other awards under the 1994 Plan in the future.

(b) 1996 Non-Employee Director Stock Option Plan

In 1996, the Company adopted a 1996 Non-Employee Director Stock Option Plan (the “Director Plan”), which provided for the grant to non-employee Directors of the Company of options to purchase shares of its common stock. All shares authorized for issue under this plan have been awarded. Since 2006, in lieu of granting fully vested options, the Company has granted shares of its common stock to its non-employee directors under the 2004 Long-Term Incentive Plan, as described below. As of December 31, 2013, options to purchase an aggregate of approximately 30,000 shares of common stock were outstanding under the Director Plan.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(c) Amended and Restated 2004 Long-Term Incentive Plan

In 2004, the Company adopted a 2004 Long-Term Incentive Plan (the “2004 Plan”) to provide employees, non-employee Directors and consultants with opportunities to purchase stock through incentive stock options and non-qualified stock options. In addition to options, eligible participants under the 2004 Plan may be granted stock purchase rights and other stock-based awards. In July 2011, the Company’s stockholders approved the Pegasystems Inc. Amended and Restated 2004 Long-Term Incentive Plan (the “Restated 2004 Plan”), which authorized the issuance of an additional 5,000,000 shares under the plan and extended the term of the plan to 2021. Since 2006, the Company has granted to each non-employee director of the Company shares of common stock on an annual basis in consideration of their board service. For each of 2013, 2012, and 2011 the number of shares granted to each non-employee director was equal to $70,000, divided by the fair market value of the Company’s common stock on the grant date. As of December 31, 2013, approximately 3,427,000 shares were subject to outstanding options and stock-based awards under the Restated 2004 Plan.

(d) 2006 Employee Stock Purchase Plan

In 2006, the Company adopted a 2006 Employee Stock Purchase Plan (the “2006 ESPP”) pursuant to which the Company’s employees are entitled to purchase up to an aggregate of 500,000 shares of common stock at a price equal to at least 85% of the fair market value of the Company’s common stock on either the commencement date or completion date for offerings under the plan, whichever is less, or such higher price as the Company’s Board of Directors may establish from time to time. Until the Company’s Board of Directors determines otherwise, the Board has set the purchase price at 95% of the fair market value on the completion date of the offering period. As a result, the 2006 ESPP is non-compensatory and is tax qualified. Therefore, as of December 31, 2013, no compensation expense related to shares issued under the plan had been recognized. In October 2012, the Company’s Board of Directors amended the term of the 2006 ESPP such that it will continue until there are no shares remaining to be issued under the plan or until the plan is terminated by the Board of Directors, whichever occurs first. As of December 31, 2013, approximately 138,000 shares had been issued thereunder.

Shares reserved

As of December 31, 2013, there were approximately 4,086,000 shares remaining for issuance for future equity grants under the Company’s stock plans, consisting of approximately 3,724,000 shares under the Restated 2004 Plan and approximately 362,000 shares under the 2006 ESPP. There were no shares available for future equity grants under the 1994 Plan or the Director Plan.

Equity grants, assumptions and activity

During 2013, the Company issued approximately 593,000 shares to its employees under the Company’s share-based compensation plans and approximately 14,000 shares to the non-employee members of its Board of Directors.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents the stock-based compensation expense included in the Company’s consolidated statements of operations:

	Year ended December 31,
(in thousands)	2013			2012			2011
Stock-based compensation expense:
Cost of services	$	4,085		$	3,655		$	2,737
Operating expenses		8,784			7,851			6,291
Total stock-based compensation before tax		12,869			11,506			9,028
Income tax benefit		(3,918	)		(3,699	)		(2,854	)

Stock Options

The Company estimates the fair value of stock options using a Black-Scholes option valuation model. Key inputs used to estimate the fair value of stock options include the exercise price of the award, the expected term of the option, the expected volatility of the Company’s common stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. The amount of stock-based compensation recognized during a period is based on the value of the awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the Company recognizes the actual expense over the vesting period only for the shares that vest. The weighted-average grant-date fair value for stock options granted in 2013, 2012, and 2011, was $13.43, $9.43 and $11.91, respectively.

The weighted-average assumptions used in the Black-Scholes option valuation model are as follows:

	Year ended December 31,
	2013			2012			2011
Expected volatility (1)		49	%		54	%		45	%
Expected term in years (2)		4.5			4.3			5.1
Risk-free interest rate (3)		1.02	%		0.63	%		1.18	%
Expected annual dividend yield (4)		0.42	%		0.52	%		0.58	%

(1) The expected volatility for each grant is determined based on the average of historical daily price changes of the Company’s common stock over a period of time which approximates the expected option term.

(2) The expected option term for each grant is determined based on the historical exercise behavior of employees and post-vesting employment termination behavior.

(3) The risk-free interest rate is based on the yield of zero-coupon U.S. Treasury securities for a period that is commensurate with the expected option term at the time of grant.

(4) The expected annual dividend yield is based on the weighted-average of the dividend yield assumptions used for options granted during the applicable period. The expected annual dividend is based on the expected dividend of $0.12 per share, per year ($0.03 per share, per quarter times 4 quarters) divided by the average stock price.

The Company elected to adopt the alternative transition method (“short cut method”) in calculating their historical pool of windfall tax benefits in regards to its share-based compensation.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes the combined stock option activity under the Company’s stock option plans for the year ended December 31, 2013:

	Shares (in thousands)			Weighted-average exercise price		Weighted- average remaining contractual term (in years)		Aggregate intrinsic value (in thousands)
Options outstanding as of January 1, 2013		3,897		$	19.32
Granted		104			34.40
Exercised		(785	)		13.59
Forfeited/Cancelled		(218	)		24.20
Options outstanding as of December 31, 2013		2,998		$	20.97
Vested and expected to vest as December 31, 2013		2,524		$	20.24		6.5	$	73,048
Exercisable as of December 31, 2013		1,332		$	16.33		4.5	$	43,771

The aggregate intrinsic value of stock options exercised (i.e., the difference between the market price at exercise and the price paid by the employee at exercise) in 2013, 2012, and 2011 was $20.6 million, $8.5 million and $19.4 million, respectively. The aggregate intrinsic value of stock options outstanding and exercisable as of December 31, 2013 is based on the difference between the closing price of the Company’s stock of $49.18 on December 31, 2013 and the exercise price of the applicable stock options.

As of December 31, 2013, the Company had unrecognized stock-based compensation expense related to the unvested portion of stock options of approximately $7.0 million that is expected to be recognized as expense over a weighted-average period of approximately 2.3 years.

RSUs

The weighted-average grant-date fair value for RSUs granted in 2013, 2012, and 2011 was $32.11, $32.35, and $30.87, respectively. The following table summarizes the combined RSU activity for periodic grants and the CICP under the Restated 2004 Plan for the year ended December 31, 2013:

	Shares     (in thousands)			Weighted- Average Grant-Date     Fair Value		Aggregate Intrinsic Value     (in thousands)
Nonvested as of January 1, 2013		567		$	31.19
Granted		179			32.11
Vested		(216	)		30.27
Forfeited		(66	)		30.81
Nonvested as of December 31, 2013		464		$	32.04	$	22,814
Expected to vest as of December 31, 2013		335		$	31.93	$	16,470

The RSUs associated with periodic grants vest over five years with 20% vesting after one year and the remaining 80% vesting in equal quarterly installments over the remaining four years. Approximately 59,000 RSUs granted in connection with the 2013 CICP are expected to vest 100% in March 2014.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The fair value of RSUs vested in 2013, 2012, and 2011 was $7.3 million, $7.1 million, and $6.4 million, respectively. The aggregate intrinsic value of RSUs outstanding and expected to vest as of December 31, 2013 is based on the closing price of the Company’s stock of $49.18 on December 31, 2013.

As of December 31, 2013, the Company had approximately $4.8 million of unrecognized stock-based compensation expense related to all unvested RSUs that is expected to be recognized as expense over a weighted-average period of approximately 2 years.

16. INCOME TAXES

Effective tax rate

The components of income before provision for income taxes are as follows for the years ended December 31:

(in thousands)	2013		2012		2011
Domestic	$	47,054	$	20,497	$	1,862
Foreign		9,339		10,448		8,951
Total income before provision	$	56,393	$	30,945	$	10,813

The components of the provision for income taxes are as follows for the years ended December 31:

(in thousands)	2013			2012			2011
Current:
Federal	$	20,277		$	12,128		$	11,698
State		2,054			971			1,775
Foreign		3,027			2,142			2,501
Total current provision		25,358			15,241			15,974
Deferred:
Federal		(6,069	)		(4,759	)		(13,978	)
State		(634	)		(870	)		(2,204	)
Foreign		(305	)		(535	)		913
Total deferred benefit		(7,008	)		(6,164	)		(15,269	)
Total provision	$	18,350		$	9,077		$	705

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The effective income tax rate differed from the statutory federal income tax rate due to the following:

	2013			2012			2011
Statutory federal income tax rate		35.0	%		35.0	%		35.0	%
Valuation allowance		—			(3.0	)		3.0
Transaction costs		0.4			—			—
State income taxes, net of federal benefit and tax credits		1.4			(0.8	)		(4.6	)
Permanent differences		1.0			1.7			5.4
Domestic production activities		(3.8	)		(3.9	)		(13.6	)
Federal research and experimentation credits		(2.8	)		0.0			(5.3	)
Tax effects of foreign activities		(1.9	)		(2.7	)		1.7
Tax-exempt income		(0.1	)		(0.1	)		(0.3	)
Provision to return adjustments		0.8			0.6			2.5
Non-deductible compensation		1.2			1.5			3.0
Provision for uncertain tax positions		1.5			2.8			(19.7	)
Other		(0.2	)		(1.8	)		(0.6	)
Effective income tax rate		32.5	%		29.3	%		6.5	%

Deferred income taxes

Deferred income taxes reflect the tax attributes and tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of net deferred tax assets and liabilities are as follows:

(in thousands)	2013			2012
Deferred tax assets:
Net operating loss carryforwards	$	91,927		$	61,248
Accruals and reserves		19,946			16,521
Software revenue		7,863			6,529
Depreciation		4,753			4,882
Tax credit carryforwards		5,359			4,914
Other		(22	)		(31	)
Total deferred tax assets		129,826			94,063
Less valuation allowances		(36,484	)		(12,128	)
Total deferred tax assets	$	93,342		$	81,935
Deferred tax liabilities:
Intangibles	$	(21,311	)		(22,441	)
Total deferred tax liabilities		(21,311	)		(22,441	)
Net deferred income tax assets	$	72,031		$	59,494
Reported as:
Current deferred tax asset	$	11,106		$	10,202
Long-term deferred income tax assets		60,925			49,292
Total deferred income taxes	$	72,031		$	59,494

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized. This determination requires significant judgment, including assumptions about future taxable income that are based on historical and projected information. The $24.4 million net increase in the valuation allowance during 2013 primarily relates to the valuation allowance recorded against the acquired Antenna federal and foreign net operating losses (“NOLs”) that the Company has preliminarily determined it will not be able to utilize due to various limitations and restrictions. The $0.9 million net decrease in the valuation allowance during 2012 primarily relates to the release of a $1.1 million valuation allowance previously recorded against NOLs as a result of the expiration of their applicable statute, partially offset by a $0.2 million valuation allowance recorded against certain state tax credits generated during the year.

The Company acquired approximately $52 million and $58.1 million of federal and foreign NOLs, respectively, in the Antenna acquisition. The Company has preliminarily determined that it may utilize $18.4 million of the acquired Antenna federal NOLs under the applicable section 382 limitation, and these losses are scheduled to expire through 2032. A valuation allowance is recorded on the deferred tax assets in excess of the federal NOLs that are deemed recoverable under the preliminary limitation. With regard to the acquired foreign NOLs, a full valuation allowance has been recorded as of December 31, 2013 due to uncertainty regarding the availability of these NOLs to offset future income generated by the related foreign businesses due to limitations under local country change in control provisions.

As of December 31, 2013, the Company had approximately $127.5 million of acquired Chordiant federal NOLs, which are subject to annual use limitations under section 382. Based on those limitations, the Company anticipates using $101.7 million of the remaining NOLs by 2029. In addition, the Company has $0.9 million of deferred tax assets related to state NOLs as of December 31, 2013.

As of December 31, 2013, the Company had available $5.8 million of state tax research and experimentation (“R&E”) credits and $0.5 million of investment tax credits expiring in the years 2014 through 2028.

The Company’s India subsidiary is a development center in an area designated as a Special Economic Zone (“SEZ”) and is entitled to a tax holiday in India. The tax holiday reduces or eliminates income tax in that country and is scheduled to expire in 2022. For the years ended December 31, 2013, 2012, and 2011, the effect of the income tax holiday was to reduce the overall income tax provision by approximately $0.5 million, $0.5 million, and $0.3 million, respectively.

In 2013, the Company reduced its income tax payable by $5.5 million for the tax benefit realized from the exercise, sale or vesting of equity awards.

Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $41.4 million as of December 31, 2013. The Company has not provided any additional federal or state income taxes or foreign withholding taxes on the undistributed earnings as such earnings have been indefinitely reinvested in the business. It is impractical to estimate the amount of tax the Company could have to pay upon repatriation due to the complexity of foreign tax credit calculations and because the Company considers its earnings permanently reinvested.

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PEGASYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Uncertain tax benefits and other considerations

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:

(in thousands)	2013			2012			2011
Balance as of January 1,	$	26,317		$	25,312		$	20,266
Additions based on tax positions related to the current year		4,320			3,855			7,231
Additions for tax positions of prior years		350			969			3
Additions for acquired uncertain tax benefits		10,268			—			—
Reductions for tax positions of prior years		(326	)		(3,819	)		(2,188	)
Balance as of December 31,	$	40,929		$	26,317		$	25,312

As of December 31, 2013, the Company had approximately $40.9 million of total unrecognized tax benefits, of which $25.2 million would decrease the Company’s effective tax rate if recognized. However, approximately $15.7 million of these unrecognized tax benefits relate to acquired NOLs and research tax credits, which are subject to limitations on use. The Company expects that the changes in the unrecognized benefits within the next twelve months will be approximately $0.1 million, all of which relate to the expiration of applicable statute of limitations and would reduce the Company’s effective tax rate if realized.

For the years ended December 31, 2013, 2012, and 2011, the reductions for tax positions of prior years were related to the lapse in the applicable statute of limitations for the Company’s tax years 2009 and earlier.

The Company recognizes interest accrued and penalties related to unrecognized tax benefits in the income tax provision. For the years ended December 31, 2013 and 2012, the Company recognized interest expense of approximately $0.3 million and $0.1 million, respectively. For the year ended December 31, 2011, the Company recognized a reduction of interest expense of approximately $0.4 million. For the years ended December 31, 2013, 2012, and 2011, the Company did not recognize any significant penalties. As of December 31, 2013 and 2012, the Company had accrued approximately $1.1 million and $0.7 million, respectively, for interest and penalties.

The Company files income tax returns in the U.S. and in foreign jurisdictions. The Company’s 2008 and 2010 federal income tax returns are under examination. The Company is generally not subject to U.S. federal, state, or local, or foreign income tax examinations by tax authorities for the years before 2008. With few exceptions, the statute of limitations remains open in all other jurisdictions for the tax years 2008 to the present.

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PEGASYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

17. 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, warrants, and RSUs, using the treasury stock method and the average market price of the Company’s common stock during the applicable period. Certain shares related to some of the Company’s outstanding stock options, warrants 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.

	Year Ended December 31,
(in thousands, except per share amounts)	2013		2012		2011
Basic
Net income	$	38,043	$	21,868	$	10,108
Weighted-average common shares outstanding		37,973		37,853		37,496
Earnings per share, basic	$	1.00	$	0.58	$	0.27
Diluted
Net income	$	38,043	$	21,868	$	10,108
Weighted-average common shares outstanding		37,973		37,853		37,496
Weighted-average effect of dilutive securities:
Stock options and warrants		813		777		1,612
RSUs		201		229		296
Effect of assumed exercise of stock options, warrants and RSUs		1,014		1,006		1,908
Weighted-average common shares outstanding, assuming dilution		38,987		38,859		39,404
Earnings per share, diluted	$	0.98	$	0.56	$	0.26
Outstanding options, warrants and RSUs excluded as impact would be antidilutive		113		62		32

18. GEOGRAPHIC INFORMATION AND MAJOR CLIENTS

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance.

The Company develops and licenses its software solutions and provides consulting 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 CODM reviews financial information for two operating segments, which the Company has determined can be aggregated and represent one reportable segment—business process solutions.

71

PEGASYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company’s international revenue is from sales to clients based outside of the U.S. The Company derived its operating revenue from the following geographic areas:

	Year ended December 31,
(Dollars in thousands)	2013				2012				2011
U.S.	$	278,945	55	%	$	250,022	54	%	$	216,365	52	%
Other Americas		18,942	4	%		27,741	6	%		16,779	4	%
United Kingdom		83,134	16	%		87,135	19	%		94,338	23	%
Other EMEA (1)		82,743	16	%		70,583	15	%		72,004	17	%
Asia Pacific		45,190	9	%		26,229	6	%		17,189	4	%
	$	508,954	100	%	$	461,710	100	%	$	416,675	100	%

(1) Includes Europe other than the UK, the Middle East and Africa, (“Other EMEA”).

Long-lived assets related to the Company’s U.S. and international operations were as follows:

	December 31,
(Dollars in thousands)	2013				2012
U.S.	$	21,282	74	%	$	22,693	73	%
India		4,645	16	%		5,461	18	%
International, other		3,030	10	%		2,673	9	%
	$	28,957	100	%	$	30,827	100	%

There were no clients accounting for 10% or more of the Company’s total revenue in 2013, 2012, and 2011. There was one client that accounted for 10% or more of the Company’s trade receivables, net, as of December 31, 2013 and one client as of December 31, 2012, as listed below. The Company’s financial services, healthcare and insurance clients as a group represent a significant amount of the Company’s revenues and receivables. However, the Company determined this concentration did not have a material impact on its allowance for sales credit memos as of December 31, 2013.

	December 31,
(Dollars in thousands)	2013			2012
Trade receivables, net of allowance	$	165,594		$	134,066
Client A		16	%
Client B					10	%

Marketable securities are another financial instrument that potentially subject the Company to a concentration of credit risk. See Note 3 “Marketable Securities” and Note 5 “Fair Value Measurements” for further discussion.

19. EMPLOYEE BENEFIT PLANS

The Company sponsors a 401(k) defined contribution retirement plan for qualifying employees pursuant to which the Company makes discretionary matching contributions. Company contributions under the plan totaled approximately $2.9 million in 2013, $2.8 million in 2012, and $2.5 million in 2011. In addition, the Company has defined contribution plans for qualifying international employees and contributions expensed under those plans totaled approximately $3.7 million in 2013, $3.2 million in 2012, and $2.1 million in 2011.

72

PEGASYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

20. SELECTED QUARTERLY INFORMATION (UNAUDITED)

	2013
(in thousands, except per share amounts)	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter (1)
Revenue	$	116,246	$	117,315	$	122,011	$	153,382
Gross profit		78,593		79,437		83,913		109,605
Income from operations		12,951		7,053		13,789		24,304
Income before provision for income taxes		12,018		6,657		13,410		24,308
Net income		9,069		4,703		8,710		15,561
Net earnings per share, basic	$	0.24	$	0.12	$	0.23	$	0.41
Net earnings per share, diluted	$	0.23	$	0.12	$	0.22	$	0.40

(1) Reflects the Company’s acquisition of Antenna on October 9, 2013.

	2012
(in thousands, except per share amounts)	1st Quarter		2nd Quarter			3rd Quarter			4th Quarter
Revenue	$	111,167	$	105,056		$	101,657		$	143,830
Gross profit		69,633		65,069			63,992			105,636
Income (loss) from operations		5,919		(2,684	)		401			27,790
Income (loss) before provision (benefit) for income taxes		5,931		(3,168	)		32			28,150
Net income (loss)		4,057		(2,267	)		(331	)		20,409
Net earnings (loss) per share, basic	$	0.11	$	(0.06	)	$	(0.01	)	$	0.54
Net earnings (loss) per share, diluted	$	0.10	$	(0.06	)	$	(0.01	)	$	0.53

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ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A. 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 December 31, 2013. 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 December 31, 2013.

(b) Management’s Report on Internal Control over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act. Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets, provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made in accordance with authorizations of our management and Directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material effect on our financial statements.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. Based on this evaluation, our management concluded that we maintained effective internal control over financial reporting as of December 31, 2013, based on criteria in Internal Control — Integrated Framework (1992) issued by the COSO.

Deloitte & Touche LLP, our independent registered public accounting firm which also audited our consolidated financial statements, has issued an attestation report on our internal control over financial reporting, which is included on page 41 in Item 8 Financial Statements and Supplementary Data.

(c) 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 December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. Other Information

None.

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PART III

ITEM 10. Directors, Executive Officers, and Corporate Governance

Except as set forth below, the information required by this Item is contained in our proxy statement for our 2014 annual stockholders meeting (the “2014 proxy statement”) under the heading “Election of Directors,” and is incorporated herein by reference. Information relating to certain filings on Forms 3, 4, and 5 is contained in our 2014 proxy statement under the heading “Section 16(a) Beneficial Ownership Reporting Compliance,” and is incorporated herein by reference. Information required by this item pursuant to Items 407 (c) (3), 407(d) (4), and 407(d) (5) of Regulation S-K relating to an audit committee financial expert, the identification of the audit committee of our Board of Directors and procedures of security holders to recommend nominees to our Board of Directors is contained in the 2014 proxy statement under the heading “Corporate Governance” and is incorporated herein by reference.

We have adopted a written code of conduct that applies to our Board of Directors and all of our employees, including our principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions. A copy of our code of conduct can be found on our website, www.pega.com. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K and under the applicable the NASDAQ Global Select Market rules by posting such information on our website in accordance with such requirements.

EXECUTIVE OFFICERS

The names of our executive officers and certain information about them are set forth below as of February 1, 2014:

Alan Trefler, age 57, a founder of Pegasystems, serves as Chief Executive Officer and Chairman and has been a Director since we organized in 1983. Prior to 1983, he managed an electronic funds transfer product for TMI Systems Corporation, a software and services company. Mr. Trefler holds a B.A. degree in Economics and Computer Science from Dartmouth College.

Rafeal Brown, age 45, joined Pegasystems in October 2013 as Chief Financial Officer, Chief Administrative Officer and Senior Vice President. From 2004 to 2013, Mr. Brown served as a Senior Vice President of Finance, treasury and tax, at Salesforce.com, a leading provider of cloud computing software applications. From 1999 to 2004, Mr. Brown worked at Cisco Systems, a leading provider of networking technologies. Mr. Brown is a certified public accountant and holds a B.S. in accounting from Southern Utah University and a Masters in accounting from Brigham Young University.

Efstathios Kouninis, age 52, joined Pegasystems in April 2008 as Vice President of Finance. In May 2008, the Board of Directors appointed Mr. Kouninis as the Company’s Chief Accounting Officer. From February 2006 to April 2008, Mr. Kouninis served as Chief Financial Officer and Treasurer of Tasker Products Corporation, a publicly traded manufacturer of antimicrobial chemicals. From November 2004 to February 2006, Mr. Kouninis served on the Staff of the Division of Corporation Finance of the U. S. Securities and Exchange Commission. Mr. Kouninis holds a Post Baccalaureate in Accounting, a M.S. in taxation from Bentley College, and a B.S. from the University of Massachusetts.

Douglas Kra, age 51, joined Pegasystems in November 2004 as Vice President of Global Services. From 2002 to 2004, Mr. Kra served as Vice President at eLoyalty Corp., a consulting company specializing in customer relationship management. From 2000 to 2001, Mr. Kra served as President of Zefer Corp., an internet consulting firm. Prior to Zefer, Mr. Kra spent ten years at Cambridge Technology Partners Inc. in a variety of senior roles. He holds a B.A. in Computer Science from Brandeis University and an M.B.A. in finance from the New York University Stern School of Business.

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Michael Pyle, age 59, joined Pegasystems in 1985 and has served as Senior Vice President of Product Development since August 2000. Including his positions with Pegasystems, Mr. Pyle’s professional background encompasses almost thirty years of software development and managerial experience throughout Europe and the U.S. Mr. Pyle completed his B.C.S. specializing in Computer Science and Systems Programming at the Civil Service College in London.

Leon Trefler, age 53, joined Pegasystems in April 1998 as an Account Executive for Strategic Business Development. Since then he has held various senior sales management positions across the Company and in Channel Sales. In 2002, he launched the commercialization of PRPC. From April 2007 to January 2010, Mr. Trefler served as Vice President of Sales, North America and in January 2010, Mr. Trefler was promoted to Senior Vice President of Sales. Mr. Trefler holds a B.A. degree from Dartmouth College.

Alan Trefler and Leon Trefler are brothers. There are no other family relationships among any of our executive officers or Directors.

ITEM 11. Executive Compensation

The information required by this item is contained in the 2014 proxy statement under the headings “Director Compensation”, “Compensation Discussion and Analysis”, and “Executive Compensation” and is incorporated herein by reference.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required by this item with respect to stock ownership of certain beneficial owners and management is contained in the 2014 proxy statement under the heading “Security Ownership of Certain Beneficial Owners and Management” and is incorporated herein by reference.

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Equity Compensation Plan Information

The following table provides certain information with respect to our equity compensation plans in effect as of December 31, 2013:

(In thousands, except per share amounts)	(a)		(b)		(c)
	Number of shares of common stock to be issued upon  exercise of outstanding stock options and vesting of RSUs (3)		Weighted-average exercise price per share of outstanding stock options (4)		Number of shares of Common stock Remaining available For future issuance (excluding those in Column (a)) (5)
Equity compensation plans approved by stockholders (1)		3,422	$	20.89		4,086
Equity compensation plans not approved by stockholders (2)		40	$	26.81		—

(1) Our equity compensation plans include the Amended and Restated 1994 Long-Term Incentive Plan (the “1994 Plan”), the 1996 Non-Employee Director Stock Option Plan (the “Director Plan”), the Amended and Restated 2004 Long-Term Incentive Plan (the “Restated 2004 Plan”), and the 2006 Employee Stock Purchase Plan as amended, (the “2006 ESPP”). Our stockholders previously approved each of these plans and all amendments that were subject to stockholder approval. In addition to the issuance of stock options, the 1994 Plan allowed for the issuance of stock appreciation rights, restricted stock, and long-term performance awards. The Company does not intend to issue any additional options or make any other awards under the 1994 Plan or the Director Plan in the future. In addition to the issuance of stock options, the Restated 2004 Plan allows for the issuance of stock purchase rights and other stock-based awards, including RSUs. See Note 15 “Stock-Based Compensation” included in the notes to the accompanying audited consolidated financial statements for further information and description of our equity compensation plans.

(2) These stock options were assumed in connection with our acquisition of Chordiant and were originally granted under the Chordiant Software, Inc. 2005 Equity Incentive Plan (the “2005 Plan”), the Chordiant Software, Inc. 2000 Nonstatutory Equity Incentive Plan (the “2000 Plan”), the Chordiant Software, Inc. Amended and Restated 1999 Non-Employee Director Stock Option Plan (the “1999 Director Plan”), and the Prime Response Group, Inc. 1998 Stock Options/Stock Issuance Plan (the “1998 Prime Response Plan”) (collectively, the “Chordiant Plans”). No additional awards were or may be granted under the Chordiant Plans following the date of acquisition. These plans were not approved by our stockholders since they were adopted at the date of acquisition. In connection with our acquisition of Chordiant, all outstanding equity awards issued under the Chordiant Plans with an exercise price of $6.00 or lower were assumed by us and converted into the right to receive 0.13 shares of Pegasystems common stock for every one share of Chordiant common stock covered by such awards. All other outstanding equity awards issued under the Chordiant Plans were cancelled.

The 2005 Plan was approved by Chordiant’s stockholders and provided for the grant of incentive stock options, nonstatutory stock options, stock purchase awards, RSAs, RSUs and other forms of equity compensation. Awards granted under the 2005 Plan generally expire four to ten years after the grant date and generally become exercisable over a period of two to four years, with either yearly or monthly vesting. The 2000 Plan provided for the grant of nonstatutory stock options, restricted stock and stock bonuses to employees. Generally, awards under the 2000 Plan vest over a period of four years in equal monthly installments with 25% of the shares vesting after one year, and the remainder vesting in equal monthly installments over the remaining three years. The 1999 Director Plan provided directors to be issued a single grant at each year’s annual meeting of the stockholders equal to a number of shares of restricted stock equal to $100,000 divided by the fair market value of Chordiant’s common stock on the date of the annual meeting. These shares of restricted stock generally vest on the earlier of the next Chordiant annual meeting or twelve months from the date of grant. The 1998 Prime Response Plan provided for the grant of stock options, common stock and stock bonuses to employees, non-employee directors, and consultants or other independent advisors who provided service to Prime Response. Awards granted under this plan had a maximum expiration of ten years.

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(3) The number of shares of common stock issued upon exercise of vested stock options and vesting of RSUs will be less than 3,462,000 because of the “net settlement” feature of most of these stock options and RSUs. This feature enables the employee to satisfy the cost to exercise (in the case of stock options) and, if applicable, taxes due (in the case of stock options and RSUs) by surrendering shares to the Company based on the fair value of the shares at the exercise date (in the case of stock options) or vesting date (in the case of RSUs), instead of selling all of the shares on the open market to satisfy these obligations. The settlement of vested stock options and vested RSUs on a net share basis will result in fewer shares issued by the Company. During 2013, stock option and RSU holders net settled stock options and RSUs representing the right to purchase a total of 861,000 shares, of which only 432,000 were issued to the stock option and RSU holders and the balance of the shares were surrendered to the Company to pay for the exercise price and the applicable taxes.

(4) The weighted-average exercise price does not take into account the shares issuable upon vesting of outstanding RSUs, which have no exercise price.

(5) Includes approximately 362,000 shares remaining available for issuance as of December 31, 2013 under the 2006 ESPP.

ITEM 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this item is contained in the 2014 proxy statement under the headings “Certain Relationships and Related Transactions” and “Determination of Independence” and is incorporated herein by reference.

ITEM 14. Principal Accounting Fees and Services

The information required by this item is contained in the 2014 proxy statement under the heading “Independent Registered Public Accounting Firm Fees and Services” and is incorporated herein by reference.

PART IV

ITEM 15. Exhibits, Financial Statement Schedules

(a) The following are filed as part of this Annual Report on Form 10-K:

(1) Financial Statements

The following consolidated financial statements are included in Item 8:

	Page
Consolidated Balance Sheets as of December 31, 2013 and 2012		42
Consolidated Statements of Operations for the years ended December 31, 2013, 2012, and 2011		43
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2013, 2012, and 2011		44
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2013, 2012, and 2011		45
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012, and 2011		46

(b) Exhibits

The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed as part of this Annual Report on Form 10-K.

(c) Financial Statement Schedules

All financial statement schedules are omitted because the required information is not present or not present in sufficient amounts to require submission of the schedule or because the information is reflected in the consolidated financial statements or notes thereto.

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Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

PEGASYSTEMS INC.
BY:	/s/  RAFEAL E. BROWN
	Rafeal E. Brown
	Chief Financial Officer, Chief Administrative Officer and Senior Vice President (principal financial officer)

Date: February 25, 2014

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below on February 25, 2014 by the following persons on behalf of the Registrant and in the capacities indicated.

Signature	Title
/s/  ALAN TREFLER Alan Trefler	Chief Executive Officer and Chairman (principal executive officer)
/s/  RAFEAL E. BROWN Rafeal E. Brown	Chief Financial Officer, Chief Administrative Officer and Senior Vice President (principal financial officer)
/s/  EFSTATHIOS KOUNINIS Efstathios Kouninis	Vice President of Finance and Chief Accounting Officer (principal accounting officer)
/s/  RICHARD JONES Richard Jones	Vice Chairman and Director
/s/  PETER GYENES Peter Gyenes	Director
/s/  STEVEN KAPLAN Steven Kaplan	Director
/s/  JAMES O’HALLORAN James O’Halloran	Director
/s/  LARRY WEBER Larry Weber	Director
/s/  WILLIAM WYMAN William Wyman	Director

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EXHIBIT INDEX

Exhibit No.	Description
2.1	Agreement and Plan of Merger, dated as of March 14, 2010, by and among Pegasystems Inc., Maple Leaf Acquisition Corp. and Chordiant Software, Inc. (Filed as Exhibit 2.1 to the Registrant’s March 15, 2010 Form 8-K and incorporated herein by reference.)
2.2	Agreement and Plan of Merger, dated as of October 9, 2013, by and among Pegasystems Inc., Aries Merger Sub, Inc., Antenna Software, Inc. and Shareholder Representative Services LLC, solely in its capacity as representative of Stockholders thereunder. (Filed as Exhibit 2.1 to the Registrant’s October 11, 2013 Form 8-K and incorporated herein by reference.)
3.1	Restated Articles of Organization of the Registrant and Amendment thereto. (Filed as Exhibit 3.1 to the Registrant’s 2012 Form 10-K and incorporated herein by reference.)
3.2	Amended and Restated Bylaws of Pegasystems Inc. (Filed as Exhibit 3.1 to the Registrant’s December 17, 2013 Form 8-K and incorporated herein by reference.)
4.1	Specimen Certificate Representing the Common Stock. (Filed as Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-03807) or an amendment thereto and incorporated herein by reference.)
10.1++	Amended and Restated 1994 Long-Term Incentive Plan. (Filed in the Registrant’s Proxy Statement for its 2003 annual stockholders meeting and incorporated herein by reference.)
10.2++	1996 Non-Employee Director Stock Option Plan. (Filed in the Registrant’s Proxy Statement for its 2000 annual stockholders meeting and incorporated herein by reference.)
10.3	Lease Agreement dated February 26, 1993 between the Registrant and Riverside Office Park Joint Venture. (Filed as Exhibit 10.13 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-03807) or an amendment thereto and incorporated herein by reference.)
10.4	Amendment Number 1 to Lease Agreement dated August 17, 1994 between the Registrant and Riverside Office Park Joint Venture. (Filed as Exhibit 10.14 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-03807) or an amendment thereto and incorporated herein by reference.)
10.5	Amendment Number 8 to Lease Agreement dated July 31, 2002 between the Registrant and NOP Riverfront LLC. (Filed as Exhibit 10.23 to the Registrant’s 2002 Form 10-K and incorporated herein by reference.)
10.6	Letter Amendment to Lease Agreement dated July 31, 2002 between the Registrant and NOP Riverfront LLC. (Filed as Exhibit 10.24 to the Registrant’s 2002 Form 10-K and incorporated herein by reference.)
10.7++	Amended and Restated 2004 Long-Term Incentive Plan, dated May 18, 2011 (Filed as Appendix A within the Registrant’s 2011 Proxy Statement, filed May 23, 2011 and incorporated herein by reference).
10.8++	Form of Employee Stock Option Agreement, as amended on December 15, 2009. (Filed as Exhibit 10.8 to the Registrant’s 2009 Form 10-K and incorporated herein by reference.)
10.9++	Form of Restricted Stock Unit Agreement, as amended on December 15, 2009. (Filed as Exhibit 10.9 to the Registrant’s 2009 Form 10-K and incorporated herein by reference.)
10.10	Form of Non-Employee Director Stock Option Agreement. (Filed as Exhibit 10.2 to the Registrant’s September 30, 2004 Form 10-Q and incorporated herein by reference.)
10.11++	Offer Letter between the Registrant and Douglas I. Kra dated October 19, 2004. (Filed as Exhibit 10.20 to the Registrant’s 2004 Form 10-K and incorporated herein by reference.)
10.12	Form of Director Indemnification Agreement. (Filed as Exhibit 99.1 to the Registrant’s April 11, 2005 Form 8-K and incorporated herein by reference.)

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EXHIBIT INDEX—(CONTINUED)

Exhibit No.	Description
10.13++	Compensation program for members of the Registrant’s Board of Directors, effective May 30, 2006. (Detailed in Registrant’s June 5, 2006 Form 8-K and incorporated herein by reference.)
10.14	Amendment Number 10 to Lease Agreement dated July 24, 2006 between the Registrant and NOP Riverfront LLC. (Filed as Exhibit 10.1 to the Registrant’s September 30, 2006 Form 10-Q and incorporated herein by reference.)
10.15++	Amendment to Stock Option Agreement between the Registrant and Richard H. Jones dated December 29, 2006. (Filed as Exhibit 99.1 to the Registrant’s January 4, 2007 Form 8-K and incorporated herein by reference.)
10.16	Amendment Number 11 to Lease Agreement dated as of June 11, 2008 between the Registrant and NOP Riverfront LLC. (Filed as Exhibit 10.2 to the Registrant’s June 30, 2008 Form 10-Q and incorporated herein by reference.)
10.17	Form of Tender and Voting Agreement by and among Pegasystems Inc., Maple Leaf Acquisition Corp. and the individuals listed on the signatures pages thereto, dated as of March 14, 2010 (Filed as Exhibit 10.1 to the Registrant’s March 15, 2010 Form 8-K and incorporated herein by reference.)
10.18	Lease Agreement, dated June 29, 2011 between Charles Park One, LLC and Pegasystems Inc. for premises at One Charles Park (Filed as Exhibit 99.1 to the Registrant’s Form 8-K/A filed on July 6, 2011 and incorporated herein by reference.)
10.19++	2012 Section 16 Officer/FLT Member Corporate Incentive Compensation Plan. (Filed as Exhibit 99.1 to the Registrant’s February 22, 2012 Form 8-K and incorporated herein by reference.)
10.20++	2012 Section 16 Executive Officers Base Salaries and Target Bonus Payments. (Filed as Exhibit 99.2 to the Registrant’s February 22, 2012 Form 8-K and incorporated herein by reference.)
10.21++	2006 Employee Stock Purchase Plan, as amended on October 25, 2012. (Filed as Exhibit 10.24 to the Registrant’s 2012 Form 10-K and incorporated herein by reference.)
10.22++	2013 Section 16 Officer/FLT Member Corporate Incentive Compensation Plan. (Filed as Exhibit 99.1 to the Registrant’s February 21, 2013 Form 8-K and incorporated herein by reference.)
10.23++	2013 Section 16 Executive Officers Base Salaries and Target Bonus Payments. (Filed as Exhibit 99.2 to the Registrant’s February 21, 2013 Form 8-K and incorporated herein by reference.)
10.24++	Offer Letter between Pegasystems Inc. and Rafeal E. Brown dated August 28, 2013. (Filed as Exhibit 99.1 to the Registrant’s September 4, 2013 Form 8-K and incorporated herein by reference.)
+21.1	Subsidiaries of the Registrant.
+23.1	Consent of Independent Registered Public Accounting Firm—Deloitte & Touche LLP.
+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.

81

EXHIBIT INDEX—(CONTINUED)

Exhibit no.	Description
101.INS **	XBRL Instance document.
101.SCH**	XBRL Taxonomy Extension Schema Document.
101.CAL**	XBRL Taxonomy Calculation Linkbase Document.
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB**	XBRL Taxonomy Label Linkbase Document.
101.PRE**	XBRL Taxonomy Presentation Linkbase Document.

++ Management contracts and compensatory plan or arrangements required to be filed pursuant to Item 15(b) of Form 10-K.

+ Filed herewith

** Submitted electronically herewith Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2013 and December 31, 2012, (ii) Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011, (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2013, 2012 and 2011, (iv) Consolidated Statements of Stockholders’ Equity (v) Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011, and (vi) Notes to Consolidated Financial Statements.

82

EX-21.1

Exhibit 21.1

SUBSIDIARIES OF PEGASYSTEMS INC.

Name of Subsidiary	State or Jurisdiction of Entity
Antenna Acquisition Corp.	Delaware
Antenna Canada, Inc.	Canada
Antenna Dexterra Asia Pacific PTY Ltd.	Australia
Antenna Dexterra, Inc.	Delaware
Antenna Dexterra International, Inc.	Delaware
Antenna Software India Private Ltd.	India
Antenna Software, LLC	Delaware
Antenna Vaultus Holdings, Inc.	Delaware
Antenna Vaultus, Inc.	Delaware
Antenna Volantis Ltd.	United Kingdom
Antenna Volantis Mobile Systems Private Ltd.	India
Antenna Volantis, Inc.	Oregon
Chordiant Software Europe Limited	United Kingdom
Chordiant Software International BV	Netherlands
Chordiant Software International Limited	United Kingdom
Pegasystems AG	Switzerland
Pegasystems Bermuda Limited	Bermuda
Pegasystems BV	Netherlands
Pegasystems Canada Inc.	Canada
Pegasystems France, S.A.R.L.	France
Pegasystems GmbH	Germany
Pegasystems Investment Inc.	Massachusetts
Pega Japan K.K.	Japan
Pegasystems Limited	United Kingdom
Pegasystems Mauritius	Mauritius
Pegasystems Pte Limited	Singapore
Pegasystems PTY Limited	Australia
Pegasystems Rus LLC	Russia
PEGASYSTEMS Software (Beijing) Co., Limited	China
Pegasystems Sp. Z o.o.	Poland
Pegasystems Spain, S.L.	Spain
Pegasystems Worldwide Inc.	Massachusetts
Pegasystems Worldwide India Private Limited	India
RPA Antenna Inc.	New Jersey

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement No. 333-09305, 333-53746, 333-89707, 333-104788, 333-116660, 333-135596, 333-166287, 333-166544 and 333-176810 on Form S-8 of our reports dated February 25, 2014, relating to the financial statements of Pegasystems Inc., and the effectiveness of Pegasystems Inc.’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of Pegasystems Inc. for the year ended December 31, 2013.

DELOITTE & TOUCHE LLP

Boston, Massachusetts

February 25, 2014

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Alan Trefler, certify that:

1. I have reviewed this Annual Report on Form 10-K 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: February 25, 2014

/S/ ALAN TREFLER

Alan Trefler

Chairman and Chief Executive Officer

(principal executive officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Rafeal E. Brown, certify that:

1. I have reviewed this Annual Report on Form 10-K 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: February 25, 2014

/S/ RAFEAL E. BROWN

Rafeal E. Brown

Chief Financial Officer, Chief Administrative Officer and Senior Vice President

(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 Annual Report of Pegasystems Inc. (the Company) on Form 10-K for the year ended December 31, 2013 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 Rafeal E. Brown, Chief Financial Officer, Chief Administrative 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

Alan Trefler

Chairman and Chief Executive Officer

(principal executive officer)

/S/ RAFEAL E. BROWN

Rafeal E. Brown

Chief Financial Officer, Chief Administrative Officer and Senior Vice President

(principal financial officer)

Dated: February 25, 2014

XML

ACCRUED RESTRUCTURING COSTS (Tables)

12 Months Ended

Dec. 31, 2013

Summary of Restructuring Activity

A summary of the restructuring activity is as follows:

(in thousands)	2010 personnel restructuring			2010 facilities restructuring			2013 personnel and facilities restructuring (1)			Total
Balance as of December 31, 2010	$	2,752		$	2,117		$	—		$	4,869
Restructuring costs		—			(62	)		—			(62	)
Cash payments		(2,509	)		(1,255	)		—			(3,764	)
Balance as of December 31, 2011		243			800			—			1,043
Cash payments		(243	)		(359	)		—			(602	)
Balance as of December 31, 2012		—			441			—			441
Restructuring costs		—			—			1,731			1,731
Cash payments		—			(441	)		—			(441	)
Other (2)		—			—			(140	)		(140	)
Balance as of December 31, 2013	$	—		$	—		$	1,591		$	1,591

(1) Includes $34 thousand of severance and related benefit costs for the reduction of six personnel in redundant roles that will be paid by the end of the second quarter of 2014.

(2) Reflects the asset initially recorded for the acquired below market operating lease terms at acquisition, which was subsequently restructured and included in restructuring costs above.

Schedule of Restructuring Reserve

	December 31,
(in thousands)	2013		2012
Reported as:
Accrued expenses	$	371	$	441
Other long-term liabilities		1,220		—
	$	1,591	$	441

XML

Unbilled Trade Accounts Receivable (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total accounts receivable	$ 167,591	$ 135,029
Allowance for sales credit memos	(1,997)	(963)
Total accounts receivable net	165,594	134,066
Trade accounts receivable
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total accounts receivable	128,973	112,106
Unbilled accounts receivable
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total accounts receivable	$ 38,618	$ 22,923

XML

Schedule of Marketable Securities (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	$ 76,361	$ 45,341
Unrealized Gains	128	131
Unrealized Losses	(28)	(12)
Fair Value	76,461	45,460
Municipal bonds
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	41,545	30,488
Unrealized Gains	75	48
Unrealized Losses	(20)	(10)
Fair Value	41,600	30,526
Corporate bonds
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	31,868	14,853
Unrealized Gains	52	83
Unrealized Losses	(4)	(2)
Fair Value	31,916	14,934
Certificates of Deposit
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	2,948
Unrealized Gains	1
Unrealized Losses	(4)
Fair Value	$ 2,945

XML

Summary of Restructuring Activity (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		12 Months Ended
	Dec. 31, 2013		Dec. 31, 2013		Dec. 31, 2012	Dec. 31, 2011
Restructuring Cost and Reserve [Line Items]
Restructuring Reserve, Beginning Balance			$ 441		$ 1,043	$ 4,869
Restructuring costs	1,700		1,731			(62)
Cash payments			(441)		(602)	(3,764)
Restructuring Reserve, Ending Balance	1,591		1,591		441	1,043
Other			(140)	[1]
Personnel
Restructuring Cost and Reserve [Line Items]
Restructuring Reserve, Beginning Balance					243	2,752
Cash payments					(243)	(2,509)
Restructuring Reserve, Ending Balance						243
Facility | 2010 restructuring
Restructuring Cost and Reserve [Line Items]
Restructuring Reserve, Beginning Balance			441		800	2,117
Restructuring costs						(62)
Cash payments			(441)		(359)	(1,255)
Restructuring Reserve, Ending Balance					441	800
Facility | 2013 restructuring
Restructuring Cost and Reserve [Line Items]
Restructuring costs			1,731	[2]
Restructuring Reserve, Ending Balance	1,591	[2]	1,591	[2]
Other			$ (140)	[1],[2]

[1] Reflects the asset initially recorded for the acquired below market operating lease terms at acquisition, which was subsequently restructured and included in restructuring costs above.

[2] Includes $34 thousand of severance and related benefit costs for the reduction of six personnel in redundant roles that will be paid by the end of the second quarter of 2014.

XML

Activity of Allowance for Sales Credit Memos (Detail) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Financing Receivable, Allowance for Credit Losses [Line Items]
Balance at beginning of year	$ 963	$ 895	$ 1,027
Provision for credit memos	5,374	1,773	2,877
Credit memos issued	(4,340)	(1,705)	(3,009)
Balance at end of year	$ 1,997	$ 963	$ 895

XML

Stock Based Compensation Expense Included in Consolidated Statements of Operations (Detail) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation before tax	$ 12,869	$ 11,506	$ 9,028
Income tax benefit	(3,918)	(3,699)	(2,854)
Cost of Services
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation before tax	4,085	3,655	2,737
Operating Expenses
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation before tax	$ 8,784	$ 7,851	$ 6,291

XML

SELECTED QUARTERLY INFORMATION (UNAUDITED) (Tables)

12 Months Ended

Dec. 31, 2013

Summary of Selected Quarterly Information

	2013
(in thousands, except per share amounts)	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter (1)
Revenue	$	116,246	$	117,315	$	122,011	$	153,382
Gross profit		78,593		79,437		83,913		109,605
Income from operations		12,951		7,053		13,789		24,304
Income before provision for income taxes		12,018		6,657		13,410		24,308
Net income		9,069		4,703		8,710		15,561
Net earnings per share, basic	$	0.24	$	0.12	$	0.23	$	0.41
Net earnings per share, diluted	$	0.23	$	0.12	$	0.22	$	0.40

(1) Reflects the Company’s acquisition of Antenna on October 9, 2013.

	2012
(in thousands, except per share amounts)	1st Quarter		2nd Quarter			3rd Quarter			4th Quarter
Revenue	$	111,167	$	105,056		$	101,657		$	143,830
Gross profit		69,633		65,069			63,992			105,636
Income (loss) from operations		5,919		(2,684	)		401			27,790
Income (loss) before provision (benefit) for income taxes		5,931		(3,168	)		32			28,150
Net income (loss)		4,057		(2,267	)		(331	)		20,409
Net earnings (loss) per share, basic	$	0.11	$	(0.06	)	$	(0.01	)	$	0.54
Net earnings (loss) per share, diluted	$	0.10	$	(0.06	)	$	(0.01	)	$	0.53

XML

TRADE ACCOUNTS RECEIVABLE, NET OF ALLOWANCE (Tables)

12 Months Ended

Dec. 31, 2013

Schedule of Unbilled Trade Accounts Receivable

Unbilled trade accounts receivable relate to services earned under time and material arrangements, maintenance and license arrangements that had not been invoiced.

	December 31,
(in thousands)	2013			2012
Trade accounts receivable	$	128,973		$	112,106
Unbilled accounts receivable		38,618			22,923
Total accounts receivable		167,591			135,029
Allowance for sales credit memos		(1,997	)		(963	)
	$	165,594		$	134,066

Activity of Allowance for Sales Credit Memos

The following reflects the activity of the allowance for sales credit memos:

	Year Ended December 31,
(in thousands)	2013			2012			2011
Balance at beginning of year	$	963		$	895		$	1,027
Provision for credit memos		5,374			1,773			2,877
Credit memos issued		(4,340	)		(1,705	)		(3,009	)
	$	1,997		$	963		$	895

XML

Weighted Average Assumptions used in Black Scholes Option Valuation Model (Detail)	12 Months Ended
	Dec. 31, 2013		Dec. 31, 2012		Dec. 31, 2011
Share Based Payment Award Stock Options Valuation Assumptions [Line Items]
Expected volatility	49.00%	[1]	54.00%	[1]	45.00%	[1]
Expected term in years	4 years 6 months	[2]	4 years 3 months 18 days	[2]	5 years 1 month 6 days	[2]
Risk-free interest rate	1.02%	[3]	0.63%	[3]	1.18%	[3]
Expected annual dividend yield	0.42%	[4]	0.52%	[4]	0.58%	[4]

[1] The expected volatility for each grant is determined based on the average of historical daily price changes of the Company's common stock over a period of time which approximates the expected option term.

[2] The expected option term for each grant is determined based on the historical exercise behavior of employees and post-vesting employment termination behavior.

[3] The risk-free interest rate is based on the yield of zero-coupon U.S. Treasury securities for a period that is commensurate with the expected option term at the time of grant.

[4] The expected annual dividend yield is based on the weighted-average of the dividend yield assumptions used for options granted during the applicable period. The expected annual dividend is based on the expected dividend of $0.12 per share, per year ($0.03 per share, per quarter times 4 quarters) divided by the average stock price.

XML

Commitments and Contingencies - Additional Information (Detail) (USD $) In Millions, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Commitment And Contingencies [Line Items]
Tenant allowance total		$ 8.4
Rent expense under operating leases	$ 11.7	$ 14.1	$ 11.4
Other Lease Arrangements
Commitment And Contingencies [Line Items]
Operating lease expiration year	2023

XML

Summary of Basic and Diluted Earnings Per Share (Detail) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended									12 Months Ended
	Dec. 31, 2013		Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Earning per share reconciliation
Net income	$ 15,561	[1]	$ 8,710	$ 4,703	$ 9,069	$ 20,409	$ (331)	$ (2,267)	$ 4,057	$ 38,043	$ 21,868	$ 10,108
Weighted-average common shares outstanding										37,973	37,853	37,496
Earnings per share, basic	$ 0.41	[1]	$ 0.23	$ 0.12	$ 0.24	$ 0.54	$ (0.01)	$ (0.06)	$ 0.11	$ 1.00	$ 0.58	$ 0.27
Net income	$ 15,561	[1]	$ 8,710	$ 4,703	$ 9,069	$ 20,409	$ (331)	$ (2,267)	$ 4,057	$ 38,043	$ 21,868	$ 10,108
Weighted-average common shares outstanding										37,973	37,853	37,496
Effect of assumed exercise of stock options, warrants and RSUs										1,014	1,006	1,908
Weighted-average common shares outstanding, assuming dilution										38,987	38,859	39,404
Earnings per share, diluted	$ 0.40	[1]	$ 0.22	$ 0.12	$ 0.23	$ 0.53	$ (0.01)	$ (0.06)	$ 0.10	$ 0.98	$ 0.56	$ 0.26
Outstanding options, warrants and RSUs excluded as impact would be antidilutive										113	62	32
Stock Options
Earning per share reconciliation
Weighted-average effect of dilutive securities										813	777	1,612
RSUs
Earning per share reconciliation
Weighted-average effect of dilutive securities										201	229	296

[1] Reflects the Company's acquisition of Antenna on October 9, 2013.

XML

Property and Equipment - Additional Information (Detail) (USD $) In Millions, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Property, Plant and Equipment [Line Items]
Depreciation and amortization expense	$ 8.2	$ 7.5	$ 6.1

XML

Summary of Repurchase Activity under Repurchase Programs (Detail) (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Stock Repurchase Program [Line Items]
Repurchases paid, Shares	386,629	181,803	137,429
Repurchases unsettled, Shares	3,141	3,399	1,688
Prior year authorizations at January 1,	$ 14,793	$ 13,963	$ 13,237
Authorizations	12,164	6,036	5,590
Repurchases paid	(12,370)	(5,130)	(4,815)
Repurchases unsettled	(154)	(76)	(49)
Authorized dollars remaining as of December 31,	$ 14,433	$ 14,793	$ 13,963

XML

Components of Net Deferred Tax Assets and Liabilities (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Components Of Deferred Income Tax Assets And Liabilities [Line Items]
Net operating loss carryforwards	$ 91,927	$ 61,248
Accruals and reserves	19,946	16,521
Software revenue	7,863	6,529
Depreciation	4,753	4,882
Tax credit carryforwards	5,359	4,914
Other	(22)	(31)
Total deferred tax assets	129,826	94,063
Less valuation allowances	(36,484)	(12,128)
Total deferred tax assets	93,342	81,935
Intangibles	(21,311)	(22,441)
Total deferred tax liabilities	(21,311)	(22,441)
Net deferred income tax assets	72,031	59,494
Current deferred tax asset	11,106	10,202
Long-term deferred income tax assets	60,925	49,292
Total deferred income taxes	$ 72,031	$ 59,494

XML

Combined Stock Option Activity (Detail) (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013
Number of shares
Beginning Balance	3,897
Granted	104
Exercised	(785)
Forfeited/Cancelled	(218)
Ending Balance	2,998
Vested and expected to vest as December 31, 2013	2,524
Exercisable as of December 31, 2013	1,332
Weighted Average Exercise Price
Beginning Balance	$ 19.32
Granted	$ 34.40
Exercised	$ 13.59
Forfeited/Cancelled	$ 24.20
Ending Balance	$ 20.97
Vested and expected to vest as December 31, 2013	$ 20.24
Exercisable as of December 31, 2013	$ 16.33
Weighted average remaining contractual term
Vested and expected to vest as December 31, 2013	6 years 6 months
Exercisable as of December 31, 2013	4 years 6 months
Aggregate Intrinsic Value
Vested and expected to vest as December 31, 2013	$ 73,048
Exercisable as of December 31, 2013	$ 43,771

XML

Income Taxes - Additional Information (Detail) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Income Tax Contingency [Line Items]
Valuation allowance, net increase decrease		$ (900,000)
Valuation allowance against tax credit		200,000
Deferred Tax Assets, Operating Loss Carry forwards, State and Local	900,000
Reduction of income tax provision due to tax holidays	500,000	500,000	300,000
Tax holiday expiration date	2022
Reduction of income tax payable	5,500,000
Undistributed earnings of foreign subsidiaries	41,400,000
Unrecognized Tax Benefits	40,929,000	26,317,000	25,312,000	20,266,000
Unrecognized tax benefits that would decrease effective tax rate if recognized	25,200,000
Expected changes in unrecognized tax benefits in next 12 months that would reduce effective tax rate	100,000
Recognized interest expense	300,000	100,000
Tax-exempt income			400,000
Accrued interest and penalties	1,100,000	700,000
Tax open years for all other jurisdictions	2008 to the present
Net Operating Losses
Income Tax Contingency [Line Items]
Valuation allowance previously recorded against NOL		1,100,000
Period One
Income Tax Contingency [Line Items]
Year under federal income tax returns examination	2008
Period Two
Income Tax Contingency [Line Items]
Year under federal income tax returns examination	2010
Antenna
Income Tax Contingency [Line Items]
Federal and foreign net operating losses utilized in acquisition	18,400,000
Antenna | Net Operating Losses
Income Tax Contingency [Line Items]
Valuation allowance, net increase decrease	24,400,000
Chordiant Software, Inc.
Income Tax Contingency [Line Items]
Federal net operating losses utilized in acquisition	101,700,000
Federal net operating losses, date through which is subject to annual limitations	2029
State
Income Tax Contingency [Line Items]
Tax research and experimentation	5,800,000
Tax credits	500,000
Tax credits expiration date	2014 through 2028
Acquired Net Operating Losses And Research Tax Credit
Income Tax Contingency [Line Items]
Unrecognized tax benefits that would decrease effective tax rate if recognized	15,700,000
Federal
Income Tax Contingency [Line Items]
Net operating losses	127,500,000
Federal | Antenna
Income Tax Contingency [Line Items]
Net operating losses	52,000,000
Foreign | Antenna
Income Tax Contingency [Line Items]
Net operating losses	$ 58,100,000

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Stock Based Compensation - Additional Information (Detail) (USD $)	12 Months Ended							12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2013 1994 Long-Term Incentive Plan	Dec. 31, 2013 1996 Non-Employee Director Stock Option Plan	Dec. 31, 2013 2004 Long-Term Incentive Plan	Jul. 31, 2011 2004 Long-Term Incentive Plan	Mar. 31, 2010 2004 Long-Term Incentive Plan	Dec. 31, 2013 2006 Employee Stock Purchase Plan	Dec. 31, 2013 Employees Stock Compensation Plan	Dec. 31, 2013 Non-Employee Members Stock Compensation Plan	Dec. 31, 2013 RSUs	Dec. 31, 2012 RSUs	Dec. 31, 2011 RSUs	Dec. 31, 2013 RSUs Corporate Incentive Compensation Plan	Dec. 31, 2013 Stock Options	Dec. 31, 2012 Stock Options	Dec. 31, 2011 Stock Options	Dec. 31, 2013 Minimum	Dec. 31, 2013 Maximum
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock option term	10 years
Stock-based compensation arrangement vesting period, in years																		4 years	5 years
Compensation percentage of target incentive compensation eligible to be elected and received by employees														50.00%
Percentage on date of grant of equity amount for elected employees on target incentive compensation														50.00%
Vesting percentage of awards for elected employees of target incentive compensation														100.00%
Number of shares outstanding	2,998,000	3,897,000	5,000	30,000	3,427,000			500,000
Number of authorized shares						5,000,000
Value of common stock grantable to employees gross of fair market value of common stock adjustments on date of grant							$ 70,000
Stock price percentage of fair market value								85.00%
Stock purchase price percentage on completion date of offering period								95.00%
Aggregate number of shares issued under plan								138,000
Shares remaining for issuance for future equity grants	4,086,000				3,724,000			362,000
Shares granted									593,000	14,000
Weighted-average grant-date fair value of options granted															$ 13.43	$ 9.43	$ 11.91
Aggregate intrinsic value of options exercised															20,600,000	8,500,000	19,400,000
Closing price of common stock											$ 49.18				$ 49.18
Unrecognized stock-based compensation expense											4,800,000				7,000,000
Weighted-average period of recognition of unrecognized stock-based compensation expense (in years)											2 years				2 years 3 months 18 days
Weighted-average grant-date fair value of stock units granted											$ 32.11	$ 32.35	$ 30.87
Stock units, period of vesting											5 years
Vesting percentage of stock units within one year											20.00%
Vesting percentage of stock units within four years following year one											80.00%
Issued to employees														59,000
Vesting percentage of stock units														100.00%
RSU expected vesting date														March 2014
Restricted stock units, fair value											$ 7,300,000	$ 7,100,000	$ 6,400,000

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Summary of Restructuring Activity (Parenthetical) (Detail) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013 Employee
Restructuring Cost and Reserve [Line Items]
Severance and related benefit costs	$ 34
Number of employees reduced	6

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EARNINGS PER SHARE

12 Months Ended

Dec. 31, 2013

EARNINGS PER SHARE

17. 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, warrants, and RSUs, using the treasury stock method and the average market price of the Company’s common stock during the applicable period. Certain shares related to some of the Company’s outstanding stock options, warrants 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.

	Year Ended December 31,
(in thousands, except per share amounts)	2013		2012		2011
Basic
Net income	$	38,043	$	21,868	$	10,108
Weighted-average common shares outstanding		37,973		37,853		37,496
Earnings per share, basic	$	1.00	$	0.58	$	0.27
Diluted
Net income	$	38,043	$	21,868	$	10,108
Weighted-average common shares outstanding		37,973		37,853		37,496
Weighted-average effect of dilutive securities:
Stock options and warrants		813		777		1,612
RSUs		201		229		296
Effect of assumed exercise of stock options, warrants and RSUs		1,014		1,006		1,908
Weighted-average common shares outstanding, assuming dilution		38,987		38,859		39,404
Earnings per share, diluted	$	0.98	$	0.56	$	0.26
Outstanding options, warrants and RSUs excluded as impact would be antidilutive		113		62		32

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Derivative Instruments - Additional Information (Detail) (Foreign Exchange Forward, Maximum)	12 Months Ended
	Dec. 31, 2013
Foreign Exchange Forward | Maximum
Derivative [Line Items]
Term of derivative contracts	90 days

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STOCK-BASED COMPENSATION (Tables)

12 Months Ended

Dec. 31, 2013

Stock-Based Compensation Expense Included in Consolidated Statements of Operations

The following table presents the stock-based compensation expense included in the Company’s consolidated statements of operations:

	Year ended December 31,
(in thousands)	2013			2012			2011
Stock-based compensation expense:
Cost of services	$	4,085		$	3,655		$	2,737
Operating expenses		8,784			7,851			6,291
Total stock-based compensation before tax		12,869			11,506			9,028
Income tax benefit		(3,918	)		(3,699	)		(2,854	)

Weighted-Average Assumptions Used in Black-Scholes Option Valuation Model

The weighted-average assumptions used in the Black-Scholes option valuation model are as follows:

	Year ended December 31,
	2013			2012			2011
Expected volatility (1)		49	%		54	%		45	%
Expected term in years (2)		4.5			4.3			5.1
Risk-free interest rate (3)		1.02	%		0.63	%		1.18	%
Expected annual dividend yield (4)		0.42	%		0.52	%		0.58	%

(1) The expected volatility for each grant is determined based on the average of historical daily price changes of the Company’s common stock over a period of time which approximates the expected option term.

(2) The expected option term for each grant is determined based on the historical exercise behavior of employees and post-vesting employment termination behavior.

(3) The risk-free interest rate is based on the yield of zero-coupon U.S. Treasury securities for a period that is commensurate with the expected option term at the time of grant.

(4) The expected annual dividend yield is based on the weighted-average of the dividend yield assumptions used for options granted during the applicable period. The expected annual dividend is based on the expected dividend of $0.12 per share, per year ($0.03 per share, per quarter times 4 quarters) divided by the average stock price.

Combined Stock Option Activity

The following table summarizes the combined stock option activity under the Company’s stock option plans for the year ended December 31, 2013:

	Shares (in thousands)			Weighted-average exercise price		Weighted- average remaining contractual term (in years)		Aggregate intrinsic value (in thousands)
Options outstanding as of January 1, 2013		3,897		$	19.32
Granted		104			34.40
Exercised		(785	)		13.59
Forfeited/Cancelled		(218	)		24.20
Options outstanding as of December 31, 2013		2,998		$	20.97
Vested and expected to vest as December 31, 2013		2,524		$	20.24		6.5	$	73,048
Exercisable as of December 31, 2013		1,332		$	16.33		4.5	$	43,771

Combined Restricted Stock Units Activity

The following table summarizes the combined RSU activity for periodic grants and the CICP under the Restated 2004 Plan for the year ended December 31, 2013:

	Shares     (in thousands)			Weighted- Average Grant-Date     Fair Value		Aggregate Intrinsic Value     (in thousands)
Nonvested as of January 1, 2013		567		$	31.19
Granted		179			32.11
Vested		(216	)		30.27
Forfeited		(66	)		30.81
Nonvested as of December 31, 2013		464		$	32.04	$	22,814
Expected to vest as of December 31, 2013		335		$	31.93	$	16,470

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Stockholders' Equity - Additional Information (Detail) (USD $)	1 Months Ended	3 Months Ended	12 Months Ended
	Jan. 31, 2012	Jun. 30, 2006	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Shareholders Equity [Line Items]
Preferred stock, shares authorized			1,000,000	1,000,000
Common stock, shares authorized			100,000,000	100,000,000
Common stock, par value			$ 0.01	$ 0.01
Common stock, shares issued			38,162,000	37,945,000
Common stock, shares outstanding			38,162,000	37,945,000
Aggregate amount of stock repurchases authorized			$ 104,500,000
Cash dividends declared, per share		$ 0.03	$ 0.12	$ 0.12	$ 0.12
Cash dividends paid			(4,566,000)	(4,548,000)	(4,510,000)
Exercise of warrants	2,464
Common Stock Shares with held in connection with exercise of warrants			78
Value of common Stock Shares with held			$ 2,094
Number of common stock issued in connection with exercise of warrants			2,386

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ACCRUED EXPENSES (Tables)

12 Months Ended

Dec. 31, 2013

Schedule of Accrued Expenses

	December 31,
(in thousands)	2013		2012
Partner commissions	$	4,106	$	1,723
Other taxes		6,492		2,711
Employee reimbursable expenses		1,539		879
Dividends payable		1,145		—
Professional services contractor fees		1,997		602
Self-insurance health and dental claims		1,265		1,707
Professional fees		2,378		1,114
Short-term deferred rent		740		1,111
Income taxes payable		1,770		1,167
Acquisition-related and merger consideration costs		1,459		—
Restructuring		371		441
Other		5,157		4,079
	$	28,419	$	15,534

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Change in Fair Value of Forward Contracts Recorded in Other (Expense) Income, Net (Detail) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Derivative Instruments and Hedging Activities Disclosures [Line Items]
(Loss) gain included in other (expense) income, net	$ (747)	$ (1,738)	$ 764

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Schedule of Accrued Expenses (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Accrued expenses
Partner commissions	$ 4,106	$ 1,723
Other taxes	6,492	2,711
Employee reimbursable expenses	1,539	879
Dividends payable	1,145		1,132
Professional services contractor fees	1,997	602
Self-insurance health and dental claims	1,265	1,707
Professional fees	2,378	1,114
Short-term deferred rent	740	1,111
Income taxes payable	1,770	1,167
Acquisition-related and merger consideration costs	1,459
Restructuring	371	441
Other	5,157	4,079
Total accrued expenses	$ 28,419	$ 15,534

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Pro Forma Financial Information (Detail) (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Business Acquisition [Line Items]
Revenue	$ 532,978	$ 499,839
Net income	$ 35,814	$ 9,028
Net income per basic share	$ 0.94	$ 0.24
Net income per diluted share	$ 0.92	$ 0.23

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Significant Accounting Policies - Additional Information (Detail) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Significant Accounting Policies [Line Items]
Acquisition-related costs	$ 1,306,000		$ 482,000
More-likely-than-not benefit likelihood percentage being realized upon ultimate settlement with taxing authority resulting from sustainability of tax examination	50.00%
Antenna
Significant Accounting Policies [Line Items]
Acquisition-related costs	1,300,000
Chordiant Software, Inc.
Significant Accounting Policies [Line Items]
Acquisition-related costs			500,000
Capitalized Computer Software
Significant Accounting Policies [Line Items]
Computer software capitalized during period	$ 0	$ 0	$ 0
Capitalized Computer Software | Minimum
Significant Accounting Policies [Line Items]
Property and equipment, average useful life, years	3 years
Capitalized Computer Software | Maximum
Significant Accounting Policies [Line Items]
Property and equipment, average useful life, years	5 years
Equipment
Significant Accounting Policies [Line Items]
Property and equipment, average useful life, years	3 years
Furniture and fixtures
Significant Accounting Policies [Line Items]
Property and equipment, average useful life, years	5 years
Foreign Exchange Forward | Maximum
Significant Accounting Policies [Line Items]
Term of derivative contracts	90 days
Software Licenses | Minimum
Significant Accounting Policies [Line Items]
Term of license fees, years	3
Software Licenses | Maximum
Significant Accounting Policies [Line Items]
Term of license fees, years	5
Maintenance Revenue
Significant Accounting Policies [Line Items]
Deferred revenue, period of recognition	One year
Professional Services Revenues | Maximum
Significant Accounting Policies [Line Items]
Deferred revenue, period of recognition	Four months

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BASIS OF PRESENTATION

12 Months Ended

Dec. 31, 2013

BASIS OF PRESENTATION

1. BASIS OF PRESENTATION

(a) Business

The Company develops, markets, licenses, and supports software to automate complex, changing business processes. The Company provides implementation, consulting, training, technical support and hosting services to facilitate the use of its software.

(b) Management estimates and reporting

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.”) requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates. Accounts with reported amounts based on significant estimates and judgments include revenue, allowance for sales credit memos, deferred income taxes, income taxes payable, fair value of assets acquired and liabilities assumed, intangible assets, goodwill, accrued expenses, deferred revenue, and stock-based compensation.

(c) Principles of consolidation

The consolidated financial statements include Pegasystems Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

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Goodwill and Other Intangible Assets - Additional Information (Detail)	12 Months Ended
	Dec. 31, 2013 Segment
Finite-Lived Intangible Assets [Line Items]
Number of operating segments	2
Business process solutions
Finite-Lived Intangible Assets [Line Items]
Number of reportable segment	1

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INCOME TAXES (Tables)

12 Months Ended

Dec. 31, 2013

Components of Income before Provision for Income Taxes

The components of income before provision for income taxes are as follows for the years ended December 31:

(in thousands)	2013		2012		2011
Domestic	$	47,054	$	20,497	$	1,862
Foreign		9,339		10,448		8,951
Total income before provision	$	56,393	$	30,945	$	10,813

Components of Provision for Income Taxes

The components of the provision for income taxes are as follows for the years ended December 31:

(in thousands)	2013			2012			2011
Current:
Federal	$	20,277		$	12,128		$	11,698
State		2,054			971			1,775
Foreign		3,027			2,142			2,501
Total current provision		25,358			15,241			15,974
Deferred:
Federal		(6,069	)		(4,759	)		(13,978	)
State		(634	)		(870	)		(2,204	)
Foreign		(305	)		(535	)		913
Total deferred benefit		(7,008	)		(6,164	)		(15,269	)
Total provision	$	18,350		$	9,077		$	705

Reconciliation of Effective Income Tax Rate from Statutory Federal Income Tax Rate

The effective income tax rate differed from the statutory federal income tax rate due to the following:

	2013			2012			2011
Statutory federal income tax rate		35.0	%		35.0	%		35.0	%
Valuation allowance		—			(3.0	)		3.0
Transaction costs		0.4			—			—
State income taxes, net of federal benefit and tax credits		1.4			(0.8	)		(4.6	)
Permanent differences		1.0			1.7			5.4
Domestic production activities		(3.8	)		(3.9	)		(13.6	)
Federal research and experimentation credits		(2.8	)		0.0			(5.3	)
Tax effects of foreign activities		(1.9	)		(2.7	)		1.7
Tax-exempt income		(0.1	)		(0.1	)		(0.3	)
Provision to return adjustments		0.8			0.6			2.5
Non-deductible compensation		1.2			1.5			3.0
Provision for uncertain tax positions		1.5			2.8			(19.7	)
Other		(0.2	)		(1.8	)		(0.6	)
Effective income tax rate		32.5	%		29.3	%		6.5	%

Components of Net Deferred Tax Assets and Liabilities

Significant components of net deferred tax assets and liabilities are as follows:

(in thousands)	2013			2012
Deferred tax assets:
Net operating loss carryforwards	$	91,927		$	61,248
Accruals and reserves		19,946			16,521
Software revenue		7,863			6,529
Depreciation		4,753			4,882
Tax credit carryforwards		5,359			4,914
Other		(22	)		(31	)
Total deferred tax assets		129,826			94,063
Less valuation allowances		(36,484	)		(12,128	)
Total deferred tax assets	$	93,342		$	81,935
Deferred tax liabilities:
Intangibles	$	(21,311	)		(22,441	)
Total deferred tax liabilities		(21,311	)		(22,441	)
Net deferred income tax assets	$	72,031		$	59,494
Reported as:
Current deferred tax asset	$	11,106		$	10,202
Long-term deferred income tax assets		60,925			49,292
Total deferred income taxes	$	72,031		$	59,494

Reconciliation of Beginning and Ending Balances of Gross Unrecognized Tax Benefits

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:

(in thousands)	2013			2012			2011
Balance as of January 1,	$	26,317		$	25,312		$	20,266
Additions based on tax positions related to the current year		4,320			3,855			7,231
Additions for tax positions of prior years		350			969			3
Additions for acquired uncertain tax benefits		10,268			—			—
Reductions for tax positions of prior years		(326	)		(3,819	)		(2,188	)
Balance as of December 31,	$	40,929		$	26,317		$	25,312

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SIGNIFICANT ACCOUNTING POLICIES (Policies)

12 Months Ended

Dec. 31, 2013

Revenue recognition

(a) Revenue recognition

The Company’s revenue is derived primarily from software licenses, maintenance fees related to the Company’s software licenses, and consulting services. The Company’s license arrangements, whether involving a perpetual license or a term license, generally contain multiple elements, including consulting services, training, and software maintenance services.

Software revenue recognition requires judgment, including whether a software arrangement includes multiple elements, and if so, whether vendor-specific objective evidence (“VSOE”) of fair value exists for those elements. The amount of arrangement consideration allocated to undelivered elements is based on the VSOE of fair value for those elements and recognized as those elements are delivered. Any remaining portion of the total arrangement fee is allocated to the software license, the first delivered element.

Before the Company can recognize revenue, the following four basic criteria must be met:

• Persuasive evidence of an arrangement—As evidence of the existence of an arrangement, the Company uses a contract or purchase order signed by the client for software and maintenance, and a statement of work for consulting services. In the event the client is a reseller the Company ensures a binding agreement exists between the reseller and end user of the software.

• Delivery of product—The Company delivers its software electronically or ships it via disk media. Services, including maintenance, are considered delivered as the work is performed or, in the case of maintenance, over the contractual service period.

• Fee is fixed or determinable—The Company assesses whether a fee is fixed or determinable at the outset of the arrangement. In addition, the Company assesses whether contract modifications to an existing term arrangement constitute a concession. The Company’s agreements do not include a right of return.

• Collection of fee is probable—The Company assesses the probability of collecting from each client at the outset of the arrangement based on a number of factors, including the client’s payment history, its current creditworthiness, economic conditions in the client’s industry and geographic location, and general economic conditions. If in the Company’s judgment collection of a fee is not probable, revenue is recognized as cash is collected, provided all other conditions for revenue recognition have been met.

Software license revenues

Perpetual software license fees are recognized as revenue when the software is delivered, any acceptance required by contract that is not perfunctory is obtained, no significant obligations or contingencies exist related to the software, other than maintenance, and all other revenue recognition criteria are met.

Term software license fees are payable on a monthly, quarterly, or annual basis under license agreements that typically have a three to five-year term and may be renewed for additional terms at the client’s option.

As a result of the Company’s focus on frequent sales to its targeted clients, the Company’s strategy is to sell initial term licensing agreements to those clients with the goal to generate follow-on sales, and as a result of extended payment terms and other factors, such as the risk of concessions, the Company recognizes term license revenue over the term of the agreement as payments become due or earlier if prepaid, provided all other criteria for revenue recognition have been met.

Subscription revenue primarily consists of license, maintenance, and bundled services revenue recognized on the Company’s license arrangements that include a right to unspecified future products, which is recognized ratably over the term of the subscription period.

Maintenance revenues

First-year maintenance typically is sold with the related software license and renewed on an annual basis thereafter. Maintenance revenue is deferred and recognized ratably over the term of the support period, which is generally one year and subject to annual renewals. Perpetual license maintenance obligations are based on separately stated renewal rates in the arrangement that are substantive and therefore represent VSOE of fair value. Term license arrangements include separately stated maintenance fees and the Company uses separate sales to determine VSOE of fair value.

Services revenues

The Company’s services revenue is comprised of fees for training, consulting services including software implementation, reimbursable expenses, and sales of its Pega Cloud^® as-a-platform offering (“Pega Cloud^®”). Consulting services may be provided on a “stand-alone” basis or bundled with a license and software maintenance services.

Revenue from “stand-alone” training services and consulting services under time and materials contracts is recognized as services are performed. The Company has VSOE of fair value for its training services and consulting services under time and materials contracts in North America, Australia, and Europe.

Consulting services may be provided on a fixed-price basis. The Company does not have VSOE of fair value for fixed-price services or time and materials services in certain geographical regions. When these services are part of a multiple element arrangement, and the services are not essential to the functionality of the software, and when services including maintenance, are the only undelivered element, the Company recognizes the revenue from the total arrangement ratably over the longer of the software maintenance period or the service period. Revenue from fixed-price services that are not bundled with a software license is generally recognized ratably during the service period, which is typically less than four months.

Revenue from stand-alone sales of Pega Cloud^® is recognized ratably over the term of the service. When implementation services are sold together with the Company’s Pega Cloud^® offering and these services have stand-alone value to the client, the Company accounts for these services separately from its Pega Cloud^® offering as described earlier. Stand-alone value is established through the client’s ability to buy these services from many trained partner system integrators and from transactions sold independently from the sale of Pega Cloud^®. Since these multiple-element arrangements are not software license sales, the Company applies a selling price hierarchy. Under the selling price hierarchy, third-party evidence of selling price (“TPE”) will be considered if VSOE does not exist, and estimated selling price (“ESP”) will be used if neither VSOE nor TPE is available. Generally, the Company is not able to determine TPE as its sales strategy is customized to the needs of its clients and the Company’s products and services are dissimilar to comparable products or services in the marketplace. In determining ESP, the Company applies significant judgment as it weighs a variety of factors, based on the facts and circumstances of the arrangement. The Company typically arrives at an ESP for a service that is not sold separately by considering company-specific factors such as geographies, competitive landscape, and pricing practices used to establish bundled pricing and discounting.

Warranties and Indemnification

The Company warrants to its clients that its software products will conform to documented specifications for a limited period. The Company has not experienced significant claims related to software warranties beyond the scope of maintenance support, which it is already obligated to provide, and consequently it has not established reserves for warranty obligations.

The Company’s agreements with clients generally require it to indemnify the client against claims that the Company’s software infringes third party patent, copyright, trademark or other proprietary rights. Such indemnification obligations are generally limited in a variety of industry-standard respects, including the Company’s right to replace an infringing product. As of December 31, 2013, the Company had not experienced any losses related to these indemnification obligations and no claims were outstanding.

Deferred revenue

Deferred software license revenue typically results from contractual billings for which all of the criteria to recognize revenue have not been met. Deferred maintenance revenue represents software license updates and product support contracts that are typically billed in advance and are recognized ratably over the support periods. Deferred services revenue represents advanced billings for consulting hosting, and training services that are recognized as the services are performed.

Fair value of financial instruments

(b) Fair value of financial instruments

The principal financial instruments held by the Company consist of cash equivalents, marketable securities, accounts receivable, and accounts payable. The carrying value of these instruments approximates their fair value due to their short maturities. See Note 3 “Marketable Securities” and Note 5 “Fair Value Measurements” for further discussion of financial instruments that are carried at fair value on a recurring basis.

Derivative instruments

(c) Derivative instruments

The Company uses foreign currency forward contracts to manage its exposures to changes in foreign currency exchange rates associated with its foreign currency denominated accounts receivable, intercompany payables, and cash. The foreign currency forward 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 operations. The fluctuations in the value of these foreign currency forward contracts partially offset the gains and losses from the remeasurement or settlement of the foreign currency denominated accounts receivable, intercompany payables, and cash held by the U.S. operating company, thus partly mitigating the volatility. Generally, the Company enters into foreign currency forward contracts with terms of 90 days or less.

Property and equipment

(d) Property and equipment

Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which are three years for equipment and five years for furniture and fixtures. Leasehold improvements are amortized over the lesser of the term of the lease or the useful life of the asset. Repairs and maintenance costs are expensed as incurred.

The Company capitalizes and amortizes certain direct costs associated with computer software developed or purchased for internal use. The Company amortizes capitalized software costs generally over three to five years commencing on the date the software is placed into service. During 2013, 2012, and 2011, the Company did not capitalize any costs for computer software developed for internal use.

Goodwill

(e) Goodwill

Goodwill represents the residual purchase price paid in a business combination after all identified assets and liabilities have been recorded. Goodwill is not amortized. The Company performed its qualitative assessment in the fourth quarters of 2013, 2012, and 2011, and concluded it was not more likely than not that the fair value of its reporting units was less than their carrying value.

Intangible Assets

(f) Intangible Assets

All of the Company’s intangible assets are amortized using the straight-line method over their estimated useful life. The Company evaluates its intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Impairment is assessed by comparing the undiscounted cash flows expected to be generated by the intangible asset to its carrying value. If impairment exists, the Company calculates the impairment by comparing the carrying value of the intangible asset to its fair value as determined by discounted expected cash flows. The Company did not record any impairment in 2013, 2012, or 2011.

Research and development and software costs

(g) Research and development and software costs

Research and development costs are expensed as incurred. Capitalization of computer software developed for resale begins upon the establishment of technological feasibility, generally demonstrated by a working model or an operative version of the computer software product. Such costs have not been material to date as technological feasibility is established within a short timeframe from the software’s general availability and, as a result, no costs were capitalized in 2013, 2012, or 2011.

Stock-Based Compensation

(h) Stock-Based Compensation

The Company recognizes stock-based compensation expense associated with equity awards based on the fair value of these awards at the grant date. Stock-based compensation is recognized over the requisite service period, which is generally the vesting period of the equity award, and is adjusted each period for anticipated forfeitures. The Company recognizes stock-based compensation using the ratable method, which treats each vesting tranche as if it were an individual grant. See Note 15 “Stock-based Compensation” for discussion of the Company’s key assumptions included in determining the fair value of its equity awards at grant date.

Acquisition-related costs

(i) Acquisition-related costs

Acquisition-related costs are expensed as incurred and include direct and incremental costs associated with an impending or completed acquisition. During 2013, the $1.3 million of acquisition-related costs were primarily professional fees associated with the Company’s acquisition of Antenna Software, Inc. (“Antenna”). During 2011, the $0.5 million of acquisition-related costs were primarily legal fees associated with litigation assumed in the Company’s acquisition of Chordiant Software, Inc. (“Chordiant”).

Restructuring costs

(j) Restructuring costs

Restructuring costs are recorded when a plan of restructuring is in place and management has committed to execution of the plan. To the extent that a restructuring plan provides employee benefits for services rendered in future periods beyond a minimum period, the costs are recognized over the requisite service period. In 2013, restructuring costs include future lease payments and demising costs, net of estimated sublease income, for the elimination of space within one facility related to the integration of Antenna. See Note 12 “Accrued Restructuring Costs” for further detail.

Foreign currency translation

(k) Foreign currency translation

The translation of assets and liabilities for the majority of the Company’s foreign subsidiaries is made at period-end exchange rates, while revenue and expense accounts are translated at the average exchange rates during the period transactions occurred. The resulting translation adjustments are reflected in accumulated other comprehensive income. The Company’s India subsidiary uses the U.S. dollar as its functional currency, therefore, its monetary assets and liabilities are remeasured at current rates and its non-monetary assets are recorded at historical exchange rates. Realized and unrealized exchange gains or losses from transactions and remeasurement adjustments are reflected in foreign currency transaction gain (loss), in the accompanying consolidated statements of operations.

Accounting for Income Taxes

(l) Accounting for Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Future realization of the Company’s deferred tax assets ultimately depends on the existence of sufficient taxable income within the available carryback or carryforward periods. Sources of taxable income include taxable income in prior carryback years, future reversals of existing taxable temporary differences, tax planning strategies, and future taxable income. The Company records a valuation allowance to reduce its deferred tax assets to an amount it believes is more-likely-than-not to be realized. Changes in the valuation allowance impacts income tax expense in the period of adjustment. The Company’s deferred tax valuation allowance requires significant judgment and uncertainties, including assumptions about future taxable income that are based on historical and projected information. The Company recognizes excess tax benefits when they are realized, through a reduction in income taxes payable using the with and without stock option method.

The Company assesses its income tax positions and records tax benefits based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, the Company records the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit is recognized in the financial statements. The Company classifies liabilities for uncertain tax positions as non-current liabilities unless the uncertainty is expected to be resolved within one year. The Company classifies interest and penalties on uncertain tax positions as income tax expense.

As a global company, the Company uses significant judgment to calculate and provide for income taxes in each of the tax jurisdictions in which it operates. In the ordinary course of the Company’s business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertainties arise as a consequence of transfer pricing for transactions with the Company’s subsidiaries and nexus and tax credit estimates. In addition, the calculation of acquired tax attributes and the associated limitations are complex. See Note 16 “Income Taxes” for further information.

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SELECTED QUARTERLY INFORMATION (UNAUDITED)

12 Months Ended

Dec. 31, 2013

SELECTED QUARTERLY INFORMATION (UNAUDITED)

20. SELECTED QUARTERLY INFORMATION (UNAUDITED)

	2013
(in thousands, except per share amounts)	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter (1)
Revenue	$	116,246	$	117,315	$	122,011	$	153,382
Gross profit		78,593		79,437		83,913		109,605
Income from operations		12,951		7,053		13,789		24,304
Income before provision for income taxes		12,018		6,657		13,410		24,308
Net income		9,069		4,703		8,710		15,561
Net earnings per share, basic	$	0.24	$	0.12	$	0.23	$	0.41
Net earnings per share, diluted	$	0.23	$	0.12	$	0.22	$	0.40

(1) Reflects the Company’s acquisition of Antenna on October 9, 2013.

	2012
(in thousands, except per share amounts)	1st Quarter		2nd Quarter			3rd Quarter			4th Quarter
Revenue	$	111,167	$	105,056		$	101,657		$	143,830
Gross profit		69,633		65,069			63,992			105,636
Income (loss) from operations		5,919		(2,684	)		401			27,790
Income (loss) before provision (benefit) for income taxes		5,931		(3,168	)		32			28,150
Net income (loss)		4,057		(2,267	)		(331	)		20,409
Net earnings (loss) per share, basic	$	0.11	$	(0.06	)	$	(0.01	)	$	0.54
Net earnings (loss) per share, diluted	$	0.10	$	(0.06	)	$	(0.01	)	$	0.53

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Property and Equipment (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Property, Plant and Equipment [Line Items]
Property and equipment, gross	$ 47,316	$ 43,870
Less: accumulated depreciation and amortization	(18,359)	(13,043)
Property and equipment, net	28,957	30,827
Leasehold improvements
Property, Plant and Equipment [Line Items]
Property and equipment, gross	24,242	23,065
Computer equipment
Property, Plant and Equipment [Line Items]
Property and equipment, gross	13,004	11,715
Furniture and fixtures
Property, Plant and Equipment [Line Items]
Property and equipment, gross	5,150	5,160
Computer software purchased
Property, Plant and Equipment [Line Items]
Property and equipment, gross	3,750	3,048
Computer software developed for internal use
Property, Plant and Equipment [Line Items]
Property and equipment, gross	721	721
Fixed assets in progress
Property, Plant and Equipment [Line Items]
Property and equipment, gross	$ 449	$ 161

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EARNINGS PER SHARE (Tables)

12 Months Ended

Dec. 31, 2013

Summary of Basic and Diluted Earnings (Loss) Per Share

	Year Ended December 31,
(in thousands, except per share amounts)	2013		2012		2011
Basic
Net income	$	38,043	$	21,868	$	10,108
Weighted-average common shares outstanding		37,973		37,853		37,496
Earnings per share, basic	$	1.00	$	0.58	$	0.27
Diluted
Net income	$	38,043	$	21,868	$	10,108
Weighted-average common shares outstanding		37,973		37,853		37,496
Weighted-average effect of dilutive securities:
Stock options and warrants		813		777		1,612
RSUs		201		229		296
Effect of assumed exercise of stock options, warrants and RSUs		1,014		1,006		1,908
Weighted-average common shares outstanding, assuming dilution		38,987		38,859		39,404
Earnings per share, diluted	$	0.98	$	0.56	$	0.26
Outstanding options, warrants and RSUs excluded as impact would be antidilutive		113		62		32

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MARKETABLE SECURITIES (Tables)

12 Months Ended

Dec. 31, 2013

Schedule of Available for Sale Securities Reconciliation

(in thousands)	December 31, 2013
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Marketable securities:
Municipal bonds	$	41,545		75		(20	)	$	41,600
Corporate bonds		31,868		52		(4	)		31,916
Certificates of deposit		2,948		1		(4	)		2,945
Marketable securities	$	76,361		128		(28	)	$	76,461
(in thousands)	December 31, 2012
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Marketable securities:
Municipal bonds	$	30,488		48		(10	)	$	30,526
Corporate bonds		14,853		83		(2	)		14,934
Marketable securities	$	45,341		131		(12	)	$	45,460

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DERIVATIVE INSTRUMENTS (Tables)

12 Months Ended

Dec. 31, 2013

Forward Contracts with Notional Values

The Company entered into forward contracts with notional values as follows:

	Year Ended December 31,
Foreign currency (in thousands)	2013		2012		2011
Euro	€	102,300	€	49,700	€	28,500
British pound	£	85,400	£	52,000	£	19,500
Australian dollar	A$	26,300	A$	—	A$	—
Indian rupee	Rs	690,000	Rs	—	Rs	—

Change in Fair Value of Forward Contracts Recorded in Other (Expense) Income, Net

The total change in the fair value of the Company’s forward contracts recorded in other (expense) income, net, was as follows:

	Change in Fair Value in USD
	Year Ended December 31,
(in thousands)	2013			2012			2011
(Loss) gain included in other (expense) income, net	$	(747	)	$	(1,738	)	$	764

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Operating activities:
Net income	$ 38,043	$ 21,868	$ 10,108
Adjustment to reconcile net income to cash provided by operating activities:
Excess tax benefits from exercise or vesting of equity awards	(6,435)	(6,031)	(6,658)
Deferred income taxes	(7,008)	(6,164)	(15,269)
Depreciation and amortization	20,035	18,566	17,462
Amortization of investments	1,776	1,419	849
Stock-based compensation expense	12,869	11,506	9,028
Foreign currency transaction loss (gain)	1,593	(780)	935
Other non-cash	1,670	3,357	1,749
Change in operating assets and liabilities:
Trade accounts receivable	(28,316)	(33,664)	(18,450)
Income taxes receivable and other current assets	7,076	6,570	10,519
Accounts payable and accrued expenses	5,794	(7,656)	9,038
Deferred revenue	26,362	24,787	14,595
Other long-term assets and liabilities	7,244	9,801	5,909
Cash provided by operating activities	80,703	43,579	39,815
Investing activities:
Purchases of marketable securities	(60,648)	(20,204)	(57,249)
Proceeds from maturities and called marketable securities	27,814	24,576	20,648
Sale of marketable securities			1,048
Payment for 2013 acquisition, net of cash acquired	(25,565)
Investment in property and equipment	(5,598)	(23,610)	(9,835)
Cash used in investing activities	(63,997)	(19,238)	(45,388)
Financing activities:
Issuance of common stock for share-based compensation plans	2,210	1,128	2,622
Excess tax benefits from exercise or vesting of equity awards	6,435	6,031	6,658
Dividend payments to shareholders	(3,421)	(5,680)	(4,495)
Common stock repurchases for tax withholdings for net settlement of equity awards	(7,345)	(4,391)	(6,262)
Common stock repurchases under share repurchase programs	(12,446)	(5,179)	(4,835)
Cash used in financing activities	(14,567)	(8,091)	(6,312)
Effect of exchange rate on cash and cash equivalents	567	922	1,111
Net increase (decrease) in cash and cash equivalents	2,706	17,172	(10,774)
Cash and cash equivalents, beginning of year	77,525	60,353	71,127
Cash and cash equivalents, end of year	80,231	77,525	60,353
Supplemental disclosures:
Income taxes paid	11,107	5,106	2,566
Non-cash investing and financing activity:
Dividends payable	$ 1,145		$ 1,132

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FAIR VALUE MEASUREMENTS (Tables)

12 Months Ended

Dec. 31, 2013

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)	December 31,2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Money market funds	$	2,232	$	2,232	$	—
Marketable securities:
Municipal bonds	$	41,600	$	10,569	$	31,031
Corporate bonds		31,916		31,916		—
Certificates of deposit		2,945		—		2,945
Total marketable securities	$	76,461	$	42,485	$	33,976

			Fair Value Measurements at Reporting Date Using
(in thousands)	December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Money market funds	$	2,873	$	2,873	$	—
Marketable securities:
Municipal bonds	$	30,526	$	11,966	$	18,560
Corporate bonds		14,934		14,934		—
Total marketable securities	$	45,460	$	26,900	$	18,560

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Components of Loss Income Before Benefit Provision for Income Taxes (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended									12 Months Ended
	Dec. 31, 2013		Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Schedule of Income Before Income Tax [Line Items]
Domestic										$ 47,054	$ 20,497	$ 1,862
Foreign										9,339	10,448	8,951
Income (loss) before provision (benefit) for income taxes	$ 24,308	[1]	$ 13,410	$ 6,657	$ 12,018	$ 28,150	$ 32	$ (3,168)	$ 5,931	$ 56,393	$ 30,945	$ 10,813

[1] Reflects the Company's acquisition of Antenna on October 9, 2013.

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COMMITMENTS AND CONTINGENCIES (Tables)

12 Months Ended

Dec. 31, 2013

Future Minimum Rental Payments for Operating Leases

As of December 31, 2013, the Company’s future minimum rental payments required under operating leases with noncancellable terms in excess of one year were as follows:

(in thousands) For the calendar year	Operating Leases
2014	$	11,947
2015		11,634
2016		10,991
2017		9,875
2018		9,552
2019 & Thereafter		41,430
	$	95,429

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Cash Equivalents and Marketable Securities at Fair Value (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Money market funds	$ 2,232	$ 2,873
Total marketable securities	76,461	45,460
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	2,232	2,873
Total marketable securities	42,485	26,900
Significant Other Observable Inputs (Level 2)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total marketable securities	33,976	18,560
Municipal bonds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total marketable securities	41,600	30,526
Municipal bonds | Quoted Prices In Active Markets For Identical Assets (Level 1)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total marketable securities	10,569	11,966
Municipal bonds | Significant Other Observable Inputs (Level 2)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total marketable securities	31,031	18,560
Corporate bonds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total marketable securities	31,916	14,934
Corporate bonds | Quoted Prices In Active Markets For Identical Assets (Level 1)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total marketable securities	31,916	14,934
Certificates of Deposit
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total marketable securities	2,945
Certificates of Deposit | Significant Other Observable Inputs (Level 2)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total marketable securities	$ 2,945

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Schedule of Restructuring Reserve (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Restructuring Cost and Reserve [Line Items]
Accrued expenses	$ 371	$ 441
Other long-term liabilities	1,220
Restructuring Reserve, Total	$ 1,591	$ 441	$ 1,043	$ 4,869

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Current assets:
Cash and cash equivalents	$ 80,231	$ 77,525
Marketable securities	76,461	45,460
Total cash, cash equivalents, and marketable securities	156,692	122,985
Trade accounts receivable, net of allowance of $1,997 and $963	165,594	134,066
Deferred income taxes	11,106	10,202
Income taxes receivable	4,708	6,261
Other current assets	9,117	5,496
Total current assets	347,217	279,010
Property and equipment, net	28,957	30,827
Long-term deferred income taxes	60,925	49,292
Long-term other assets	2,526	1,680
Intangible assets, net	56,574	58,232
Goodwill	37,463	20,451
Total assets	533,662	439,492
Current liabilities:
Accounts payable	3,745	3,330
Accrued expenses	28,419	15,534
Accrued compensation and related expenses	44,399	40,715
Deferred revenue	110,882	95,546
Total current liabilities	187,445	155,125
Income taxes payable	21,392	13,551
Long-term deferred revenue	34,196	18,719
Other long-term liabilities	18,841	15,618
Total liabilities	261,874	203,013
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000 shares authorized; no shares issued and outstanding
Common stock, $0.01 par value, 100,000 shares authorized; 38,162 shares and 37,945 shares issued and outstanding	382	379
Additional paid-in capital	139,947	138,576
Retained earnings	127,826	94,349
Accumulated other comprehensive income
Net unrealized gain on available-for-sale marketable securities	77	88
Foreign currency translation adjustments	3,556	3,087
Total stockholders' equity	271,788	236,479
Total liabilities and stockholders' equity	$ 533,662	$ 439,492

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GEOGRAPHIC INFORMATION AND MAJOR CLIENTS (Tables)

12 Months Ended

Dec. 31, 2013

Revenue from International Clients by Geographic Area

The Company’s international revenue is from sales to clients based outside of the U.S. The Company derived its operating revenue from the following geographic areas:

	Year ended December 31,
(Dollars in thousands)	2013				2012				2011
U.S.	$	278,945	55	%	$	250,022	54	%	$	216,365	52	%
Other Americas		18,942	4	%		27,741	6	%		16,779	4	%
United Kingdom		83,134	16	%		87,135	19	%		94,338	23	%
Other EMEA (1)		82,743	16	%		70,583	15	%		72,004	17	%
Asia Pacific		45,190	9	%		26,229	6	%		17,189	4	%
	$	508,954	100	%	$	461,710	100	%	$	416,675	100	%

(1) Includes Europe other than the UK, the Middle East and Africa, (“Other EMEA”).

Long-Lived Assets by Geographic Area

Long-lived assets related to the Company’s U.S. and international operations were as follows:

	December 31,
(Dollars in thousands)	2013				2012
U.S.	$	21,282	74	%	$	22,693	73	%
India		4,645	16	%		5,461	18	%
International, other		3,030	10	%		2,673	9	%
	$	28,957	100	%	$	30,827	100	%

Trade Receivables of Major Clients

The Company’s financial services, healthcare and insurance clients as a group represent a significant amount of the Company’s revenues and receivables. However, the Company determined this concentration did not have a material impact on its allowance for sales credit memos as of December 31, 2013.

	December 31,
(Dollars in thousands)	2013			2012
Trade receivables, net of allowance	$	165,594		$	134,066
Client A		16	%
Client B					10	%

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Consolidated Statements of Stockholders' Equity (USD $) In Thousands	Total	Common Stock	Additional Paid-In Capital	Retained Earnings	Accumulated Other Comprehensive Loss
Beginning balance at Dec. 31, 2010	$ 195,670	$ 372	$ 122,607	$ 71,431	$ 1,260
Beginning balance (in shares) at Dec. 31, 2010		37,250
Repurchase of common stock (in shares)		(139)
Repurchase of common stock	(4,864)	(1)	(4,863)
Issuance of common stock for share-based compensation plans (in shares)		575
Issuance of common stock for share-based compensation plans	(4,287)	6	(4,293)
Issuance of stock under Employee Stock Purchase Plan (in shares)		18
Issuance of stock under Employee Stock Purchase Plan	647		647
Issuance of stock awards		8
Issuance of stock awards	350		350
Stock-based compensation expense	8,678		8,678
Tax benefit from exercise or vesting of equity awards, net of deferred tax asset deficiencies	6,575		6,575
Cash dividends declared	(4,510)			(4,510)
Other comprehensive income	389				389
Net income	10,108			10,108
Ending balance at Dec. 31, 2011	208,756	377	129,701	77,029	1,649
Ending balance (in shares) at Dec. 31, 2011		37,712
Repurchase of common stock (in shares)		(185)
Repurchase of common stock	(5,206)	(2)	(5,204)
Issuance of common stock for share-based compensation plans (in shares)		382
Issuance of common stock for share-based compensation plans	(3,865)	4	(3,869)
Exercise of Common Stock Warrants (in shares)		2
Issuance of stock under Employee Stock Purchase Plan (in shares)		22
Issuance of stock under Employee Stock Purchase Plan	603		603
Issuance of stock awards		12
Stock-based compensation expense	11,506		11,506
Tax benefit from exercise or vesting of equity awards, net of deferred tax asset deficiencies	5,839		5,839
Cash dividends declared	(4,548)			(4,548)
Other comprehensive income	1,526				1,526
Net income	21,868			21,868
Ending balance at Dec. 31, 2012	236,479	379	138,576	94,349	3,175
Ending balance (in shares) at Dec. 31, 2012		37,945
Repurchase of common stock (in shares)		(390)
Repurchase of common stock	(12,525)	(4)	(12,521)
Issuance of common stock for share-based compensation plans (in shares)		574
Issuance of common stock for share-based compensation plans	(5,679)	7	(5,686)
Issuance of stock under Employee Stock Purchase Plan (in shares)		19
Issuance of stock under Employee Stock Purchase Plan	545		545
Issuance of stock awards		14
Stock-based compensation expense	12,869		12,869
Tax benefit from exercise or vesting of equity awards, net of deferred tax asset deficiencies	6,164		6,164
Cash dividends declared	(4,566)			(4,566)
Other comprehensive income	458				458
Net income	38,043			38,043
Ending balance at Dec. 31, 2013	$ 271,788	$ 382	$ 139,947	$ 127,826	$ 3,633
Ending balance (in shares) at Dec. 31, 2013		38,162

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Employee Benefit Plans - Additional Information (Detail) (USD $) In Millions, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
401 (k) Plan
Defined Benefit Plan Disclosure [Line Items]
Company contributions under the plan	$ 2.9	$ 2.8	$ 2.5
Defined Contribution Plans
Defined Benefit Plan Disclosure [Line Items]
Company contributions under the plan	$ 3.7	$ 3.2	$ 2.1

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Summary of Preliminary Purchase Price Allocation for Acquisition (Detail) (USD $) In Thousands, unless otherwise specified	12 Months Ended				1 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010	Oct. 09, 2013 Antenna
Total purchase consideration:
Cash	$ 25,565				$ 27,698
Allocation of the purchase consideration:
Cash					783
Accounts receivable, net of allowance					4,136
Other assets					3,947
Property and equipment					655
Deferred tax assets, net					5,589
Identifiable intangible assets	10,355				10,355
Goodwill	37,463	20,451	20,451	20,451	17,012
Accounts payable					(1,470)
Accrued liabilities					(8,931)
Deferred revenue					(4,378)
Net assets acquired					$ 27,698

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ACQUISITION (Tables)

12 Months Ended

Dec. 31, 2013

Preliminary Purchase Price Allocation for Acquisition

 A summary of the preliminary purchase price allocation for the acquisition of Antenna is as follows:

(in thousands)
Total purchase consideration:
Cash	$	27,698
Allocation of the purchase consideration:
Cash	$	783
Accounts receivable, net of allowance		4,136
Other assets		3,947
Property and equipment		655
Deferred tax assets, net		5,589
Identifiable intangible assets		10,355
Goodwill		17,012
Accounts payable		(1,470	)
Accrued liabilities		(8,931	)
Deferred revenue		(4,378	)
Net assets acquired	$	27,698

Schedule of Acquired Identifiable Intangible Assets Acquired

The estimated fair values for specifically identifiable intangible assets acquired, by major asset class, are as follows:

(in thousands)			Weighted-average amortization period (in years)
Customer related intangible assets	$	4,279		4
Technology		3,656		3
Non-compete		1,342		1
Trade name		1,078		3
	$	10,355		3.2

Proforma Financial Information

The pro forma financial information does not reflect any adjustments for anticipated synergies resulting from the acquisition and is not necessarily indicative of the operating results that would have actually occurred had the transaction been consummated on January 1, 2012.

	Pro Forma Year Ended December 31,
	2013		2012
Revenue	$	532,978	$	499,839
Net income	$	35,814	$	9,028
Net income per basic share	$	0.94	$	0.24
Net income per diluted share	$	0.92	$	0.23

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Amortization Expense of Acquired Intangibles (Detail) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Amortization expense:
Total amortization expense	$ 12,013	$ 11,137	$ 11,315
Cost of revenue
Amortization expense:
Total amortization expense	6,443	6,189	6,284
Selling and marketing
Amortization expense:
Total amortization expense	5,174	4,928	4,928
General and administrative
Amortization expense:
Total amortization expense	$ 396	$ 20	$ 103

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STOCKHOLDERS' EQUITY

12 Months Ended

Dec. 31, 2013

STOCKHOLDERS' EQUITY

14. STOCKHOLDERS’ EQUITY

(a) Preferred stock

The Company has authorized 1,000,000 shares of preferred stock, which may be issued from time to time in one or more series. The Board of Directors has the authority to issue the shares of preferred stock in one or more series, to establish the number of shares to be included in each series, and to fix the designation, powers, preferences and rights of the shares of each series and the qualifications, limitations or restrictions thereof, without any further vote or action by the stockholders. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to holders of common stock, and may have the effect of delaying, deferring or defeating a change in control of the Company. The Company had not issued any shares of preferred stock through December 31, 2013.

(b) Common stock

The Company has 100,000,000 authorized shares of common stock, $0.01 par value per share, of which 38,162,000 shares were issued and outstanding at December 31, 2013.

Since 2004, the Company’s Board of Directors has approved stock repurchase programs that have authorized the Company to repurchase in the aggregate up to $104.5 million of its common stock. Purchases under these programs have been made on the open market.

The following table is a summary of the Company’s repurchase activity under all of the Company’s repurchase programs for the years ended December 31:

						Year Ended December 31,
(Dollars in thousands)	2013					2012					2011
	Shares		Amount			Shares		Amount			Shares		Amount
Prior year authorizations at January 1,			$	14,793				$	13,963				$	13,237
Authorizations				12,164					6,036					5,590
Repurchases paid		386,629		(12,370	)		181,803		(5,130	)		137,429		(4,815	)
Repurchases unsettled		3,141		(154	)		3,399		(76	)		1,688		(49	)
Authorized dollars remaining as of December 31,			$	14,433				$	14,793				$	13,963

(c) Dividends

On May 30, 2006, the Company’s Board of Directors approved an ongoing quarterly cash dividend of $0.03 per share, beginning with the second quarter ended June 30, 2006. For the years ended December 31, 2013 and 2011, the Company declared dividends of $0.12 per share and paid cash dividends of $3.4 million, and $4.5 million, respectively. The Company declared $0.12 per share for the year ended December 31, 2012, but the Board of Directors authorized the acceleration of the fourth quarter dividend otherwise payable in January 2013 to December 2012. Therefore, the Company paid $5.7 million in dividends in 2012. It is the Company’s current intention to pay a quarterly cash dividend of $0.03 per share, however, the Board of Directors may terminate or modify this dividend program at any time without notice.

(d) Warrants summary

In January 2012, a former stockholder of 1mind Corporation (“1mind”) exercised a warrant to purchase 2,464 shares of the Company’s common stock, which was originally issued as part of the consideration for the Company’s acquisition of 1mind in 2002. In accordance with the net exercise provisions of this warrant, the Company withheld 78 shares of its common stock to cover the exercise price of the warrant, which shares were valued at $2,094 based on the average closing price of its common stock over the ten consecutive trading days ending on the third trading day prior to the exercise date, and issued 2,386 shares of its common stock. The issuance of these shares was made in reliance on an exemption from registration under Regulation D under the Securities Act of 1933. As of December 31, 2013 and December 31, 2012, there were no warrants outstanding.

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GOODWILL AND OTHER INTANGIBLE ASSETS (Tables)

12 Months Ended

Dec. 31, 2013

Changes in Carrying Amount of Goodwill

The following table presents the changes in the carrying amount of goodwill:

	Year Ended December 31,
(in thousands)	2013		2012		2011
Balance as of January 1,	$	20,451	$	20,451	$	20,451
Goodwill acquired during the year		17,012		—		—
Balance as of December 31,	$	37,463	$	20,451	$	20,451

Schedule of Amortizable Intangible Assets

Intangible assets are recorded at cost and are amortized using the straight-line method over their estimated useful lives.

(in thousands)	Range of Useful Lives		Cost		Accumulated Amortization			Net book value
December 31, 2013
Customer related intangibles		4-9 years	$	48,634	$	(18,317	)	$	30,317
Technology		3-9 years		47,102		(22,873	)		24,229
Other intangibles		1-5 years		4,658		(2,630	)		2,028
Total			$	100,394	$	(43,820	)	$	56,574
December 31, 2012
Customer related intangibles		9 years	$	44,355	$	(13,142	)	$	31,213
Technology		4-9 years		43,446		(16,431	)		27,015
Other intangibles		1-5 years		2,238		(2,234	)		4
Total			$	90,039	$	(31,807	)	$	58,232

Amortization Expense of Acquired Intangibles

Amortization expense of acquired intangibles was reflected in the Company’s consolidated statements of operations as follows:

	Year Ended December 31,
(in thousands)	2013		2012		2011
Amortization expense:
Cost of revenue	$	6,443	$	6,189	$	6,284
Selling and marketing		5,174		4,928		4,928
General and administrative		396		20		103
Total amortization expense	$	12,013	$	11,137	$	11,315

Estimated Future Amortization Expense

As of December 31, 2013, future estimated amortization expense is as follows:

(in thousands)	Future estimated amortization expense
2014		13,170
2015		11,336
2016		10,973
2017		9,512
2018 and thereafter		11,583
	$	56,574

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INCOME TAXES

12 Months Ended

Dec. 31, 2013

INCOME TAXES

16. INCOME TAXES

Effective tax rate

The components of income before provision for income taxes are as follows for the years ended December 31:

(in thousands)	2013		2012		2011
Domestic	$	47,054	$	20,497	$	1,862
Foreign		9,339		10,448		8,951
Total income before provision	$	56,393	$	30,945	$	10,813

The components of the provision for income taxes are as follows for the years ended December 31:

(in thousands)	2013			2012			2011
Current:
Federal	$	20,277		$	12,128		$	11,698
State		2,054			971			1,775
Foreign		3,027			2,142			2,501
Total current provision		25,358			15,241			15,974
Deferred:
Federal		(6,069	)		(4,759	)		(13,978	)
State		(634	)		(870	)		(2,204	)
Foreign		(305	)		(535	)		913
Total deferred benefit		(7,008	)		(6,164	)		(15,269	)
Total provision	$	18,350		$	9,077		$	705

The effective income tax rate differed from the statutory federal income tax rate due to the following:

	2013			2012			2011
Statutory federal income tax rate		35.0	%		35.0	%		35.0	%
Valuation allowance		—			(3.0	)		3.0
Transaction costs		0.4			—			—
State income taxes, net of federal benefit and tax credits		1.4			(0.8	)		(4.6	)
Permanent differences		1.0			1.7			5.4
Domestic production activities		(3.8	)		(3.9	)		(13.6	)
Federal research and experimentation credits		(2.8	)		0.0			(5.3	)
Tax effects of foreign activities		(1.9	)		(2.7	)		1.7
Tax-exempt income		(0.1	)		(0.1	)		(0.3	)
Provision to return adjustments		0.8			0.6			2.5
Non-deductible compensation		1.2			1.5			3.0
Provision for uncertain tax positions		1.5			2.8			(19.7	)
Other		(0.2	)		(1.8	)		(0.6	)
Effective income tax rate		32.5	%		29.3	%		6.5	%

Deferred income taxes

Deferred income taxes reflect the tax attributes and tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of net deferred tax assets and liabilities are as follows:

(in thousands)	2013			2012
Deferred tax assets:
Net operating loss carryforwards	$	91,927		$	61,248
Accruals and reserves		19,946			16,521
Software revenue		7,863			6,529
Depreciation		4,753			4,882
Tax credit carryforwards		5,359			4,914
Other		(22	)		(31	)
Total deferred tax assets		129,826			94,063
Less valuation allowances		(36,484	)		(12,128	)
Total deferred tax assets	$	93,342		$	81,935
Deferred tax liabilities:
Intangibles	$	(21,311	)		(22,441	)
Total deferred tax liabilities		(21,311	)		(22,441	)
Net deferred income tax assets	$	72,031		$	59,494
Reported as:
Current deferred tax asset	$	11,106		$	10,202
Long-term deferred income tax assets		60,925			49,292
Total deferred income taxes	$	72,031		$	59,494

The Company regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized. This determination requires significant judgment, including assumptions about future taxable income that are based on historical and projected information. The $24.4 million net increase in the valuation allowance during 2013 primarily relates to the valuation allowance recorded against the acquired Antenna federal and foreign net operating losses (“NOLs”) that the Company has preliminarily determined it will not be able to utilize due to various limitations and restrictions. The $0.9 million net decrease in the valuation allowance during 2012 primarily relates to the release of a $1.1 million valuation allowance previously recorded against NOLs as a result of the expiration of their applicable statute, partially offset by a $0.2 million valuation allowance recorded against certain state tax credits generated during the year.

The Company acquired approximately $52 million and $58.1 million of federal and foreign NOLs, respectively, in the Antenna acquisition. The Company has preliminarily determined that it may utilize $18.4 million of the acquired Antenna federal NOLs under the applicable section 382 limitation, and these losses are scheduled to expire through 2032. A valuation allowance is recorded on the deferred tax assets in excess of the federal NOLs that are deemed recoverable under the preliminary limitation. With regard to the acquired foreign NOLs, a full valuation allowance has been recorded as of December 31, 2013 due to uncertainty regarding the availability of these NOLs to offset future income generated by the related foreign businesses due to limitations under local country change in control provisions.

As of December 31, 2013, the Company had approximately $127.5 million of acquired Chordiant federal NOLs, which are subject to annual use limitations under section 382. Based on those limitations, the Company anticipates using $101.7 million of the remaining NOLs by 2029. In addition, the Company has $0.9 million of deferred tax assets related to state NOLs as of December 31, 2013.

As of December 31, 2013, the Company had available $5.8 million of state tax research and experimentation (“R&E”) credits and $0.5 million of investment tax credits expiring in the years 2014 through 2028.

The Company’s India subsidiary is a development center in an area designated as a Special Economic Zone (“SEZ”) and is entitled to a tax holiday in India. The tax holiday reduces or eliminates income tax in that country and is scheduled to expire in 2022. For the years ended December 31, 2013, 2012, and 2011, the effect of the income tax holiday was to reduce the overall income tax provision by approximately $0.5 million, $0.5 million, and $0.3 million, respectively.

In 2013, the Company reduced its income tax payable by $5.5 million for the tax benefit realized from the exercise, sale or vesting of equity awards.

Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $41.4 million as of December 31, 2013. The Company has not provided any additional federal or state income taxes or foreign withholding taxes on the undistributed earnings as such earnings have been indefinitely reinvested in the business. It is impractical to estimate the amount of tax the Company could have to pay upon repatriation due to the complexity of foreign tax credit calculations and because the Company considers its earnings permanently reinvested.

Uncertain tax benefits and other considerations

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:

(in thousands)	2013			2012			2011
Balance as of January 1,	$	26,317		$	25,312		$	20,266
Additions based on tax positions related to the current year		4,320			3,855			7,231
Additions for tax positions of prior years		350			969			3
Additions for acquired uncertain tax benefits		10,268			—			—
Reductions for tax positions of prior years		(326	)		(3,819	)		(2,188	)
Balance as of December 31,	$	40,929		$	26,317		$	25,312

As of December 31, 2013, the Company had approximately $40.9 million of total unrecognized tax benefits, of which $25.2 million would decrease the Company’s effective tax rate if recognized. However, approximately $15.7 million of these unrecognized tax benefits relate to acquired NOLs and research tax credits, which are subject to limitations on use. The Company expects that the changes in the unrecognized benefits within the next twelve months will be approximately $0.1 million, all of which relate to the expiration of applicable statute of limitations and would reduce the Company’s effective tax rate if realized.

For the years ended December 31, 2013, 2012, and 2011, the reductions for tax positions of prior years were related to the lapse in the applicable statute of limitations for the Company’s tax years 2009 and earlier.

The Company recognizes interest accrued and penalties related to unrecognized tax benefits in the income tax provision. For the years ended December 31, 2013 and 2012, the Company recognized interest expense of approximately $0.3 million and $0.1 million, respectively. For the year ended December 31, 2011, the Company recognized a reduction of interest expense of approximately $0.4 million. For the years ended December 31, 2013, 2012, and 2011, the Company did not recognize any significant penalties. As of December 31, 2013 and 2012, the Company had accrued approximately $1.1 million and $0.7 million, respectively, for interest and penalties.

The Company files income tax returns in the U.S. and in foreign jurisdictions. The Company’s 2008 and 2010 federal income tax returns are under examination. The Company is generally not subject to U.S. federal, state, or local, or foreign income tax examinations by tax authorities for the years before 2008. With few exceptions, the statute of limitations remains open in all other jurisdictions for the tax years 2008 to the present.

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Schedule of Deferred Revenue (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Deferred Revenue Arrangement [Line Items]
Current deferred revenue	$ 110,882	$ 95,546
Long-term deferred revenue	34,196	18,719
Total deferred revenue	145,078	114,265
Software license
Deferred Revenue Arrangement [Line Items]
Current deferred revenue	28,826	24,303
Long-term deferred revenue	32,727	15,407
Maintenance
Deferred Revenue Arrangement [Line Items]
Current deferred revenue	72,715	62,144
Services
Deferred Revenue Arrangement [Line Items]
Current deferred revenue	9,341	9,099
Maintenance and services
Deferred Revenue Arrangement [Line Items]
Long-term deferred revenue	$ 1,469	$ 3,312

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Consolidated Statements of Stockholders' Equity (Parenthetical) (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Tax benefit from exercise or vesting of equity awards, deferred tax asset deficiencies	$ 435	$ 284	$ 83
Cash dividends declared, per share	$ 0.12	$ 0.12	$ 0.12

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Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Per Share data, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Allowance for sales credit memos	$ 1,997	$ 963
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	1,000	1,000
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	100,000	100,000
Common stock, shares issued	38,162	37,945
Common stock, shares outstanding	38,162	37,945

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GOODWILL AND OTHER INTANGIBLE ASSETS

12 Months Ended

Dec. 31, 2013

GOODWILL AND OTHER INTANGIBLE ASSETS

9. GOODWILL AND OTHER INTANGIBLE ASSETS

As discussed in Note 18 “Geographic Information and Major Clients”, the Company operates in one reportable segment, business process solutions, and has two reporting units.

The following table presents the changes in the carrying amount of goodwill:

	Year Ended December 31,
(in thousands)	2013		2012		2011
Balance as of January 1,	$	20,451	$	20,451	$	20,451
Goodwill acquired during the year		17,012		—		—
Balance as of December 31,	$	37,463	$	20,451	$	20,451

Intangible assets are recorded at cost and are amortized using the straight-line method over their estimated useful lives.

(in thousands)	Range of Useful Lives		Cost		Accumulated Amortization			Net book value
December 31, 2013
Customer related intangibles		4-9 years	$	48,634	$	(18,317	)	$	30,317
Technology		3-9 years		47,102		(22,873	)		24,229
Other intangibles		1-5 years		4,658		(2,630	)		2,028
Total			$	100,394	$	(43,820	)	$	56,574
December 31, 2012
Customer related intangibles		9 years	$	44,355	$	(13,142	)	$	31,213
Technology		4-9 years		43,446		(16,431	)		27,015
Other intangibles		1-5 years		2,238		(2,234	)		4
Total			$	90,039	$	(31,807	)	$	58,232

Amortization expense of acquired intangibles was reflected in the Company’s consolidated statements of operations as follows:

	Year Ended December 31,
(in thousands)	2013		2012		2011
Amortization expense:
Cost of revenue	$	6,443	$	6,189	$	6,284
Selling and marketing		5,174		4,928		4,928
General and administrative		396		20		103
Total amortization expense	$	12,013	$	11,137	$	11,315

As of December 31, 2013, future estimated amortization expense is as follows:

(in thousands)	Future estimated amortization expense
2014		13,170
2015		11,336
2016		10,973
2017		9,512
2018 and thereafter		11,583
	$	56,574

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Trade Receivables of Major Clients (Detail) (USD $) In Thousands, unless otherwise specified			12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2013 Client A	Dec. 31, 2012 Customer B
Revenue, Major Customer [Line Items]
Trade receivables, net of allowance	$ 165,594	$ 134,066
Major clients percentage of trade receivables			16.00%	10.00%

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Revenue from International Clients by Geographic Areas (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended									12 Months Ended
	Dec. 31, 2013		Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2013		Dec. 31, 2012		Dec. 31, 2011
Revenues from External Customers and Long-Lived Assets [Line Items]
Geographic revenue	$ 153,382	[1]	$ 122,011	$ 117,315	$ 116,246	$ 143,830	$ 101,657	$ 105,056	$ 111,167	$ 508,954		$ 461,710		$ 416,675
Geographic revenue percentage										100.00%		100.00%		100.00%
U.S.
Revenues from External Customers and Long-Lived Assets [Line Items]
Geographic revenue										278,945		250,022		216,365
Geographic revenue percentage										55.00%		54.00%		52.00%
Other Americas
Revenues from External Customers and Long-Lived Assets [Line Items]
Geographic revenue										18,942		27,741		16,779
Geographic revenue percentage										4.00%		6.00%		4.00%
United Kingdom
Revenues from External Customers and Long-Lived Assets [Line Items]
Geographic revenue										83,134		87,135		94,338
Geographic revenue percentage										16.00%		19.00%		23.00%
Other EMEA
Revenues from External Customers and Long-Lived Assets [Line Items]
Geographic revenue										82,743	[2]	70,583	[2]	72,004	[2]
Geographic revenue percentage										16.00%	[2]	15.00%	[2]	17.00%	[2]
Asia Pacific
Revenues from External Customers and Long-Lived Assets [Line Items]
Geographic revenue										$ 45,190		$ 26,229		$ 17,189
Geographic revenue percentage										9.00%		6.00%		4.00%

[1] Reflects the Company's acquisition of Antenna on October 9, 2013.

[2] Includes Europe other than the UK, the Middle East and Africa, ("Other EMEA").

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Document and Entity Information (USD $)	12 Months Ended
	Dec. 31, 2013	Feb. 05, 2014	Jun. 30, 2013
Document Information [Line Items]
Document Type	10-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2013
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	FY
Trading Symbol	PEGA
Entity Registrant Name	PEGASYSTEMS INC
Entity Central Index Key	0001013857
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		38,135,303
Entity Public Float			$ 576,000,000

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ACCRUED EXPENSES

12 Months Ended

Dec. 31, 2013

ACCRUED EXPENSES

10. ACCRUED EXPENSES

	December 31,
(in thousands)	2013		2012
Partner commissions	$	4,106	$	1,723
Other taxes		6,492		2,711
Employee reimbursable expenses		1,539		879
Dividends payable		1,145		—
Professional services contractor fees		1,997		602
Self-insurance health and dental claims		1,265		1,707
Professional fees		2,378		1,114
Short-term deferred rent		740		1,111
Income taxes payable		1,770		1,167
Acquisition-related and merger consideration costs		1,459		—
Restructuring		371		441
Other		5,157		4,079
	$	28,419	$	15,534

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Weighted Average Assumptions used in Black Scholes Option Valuation Model (Parenthetical) (Detail) (USD $)	Dec. 31, 2013
Share Based Payment Award Stock Options Valuation Assumptions [Line Items]
Expected annual dividend rate per share	$ 0.12
Expected quarterly dividend rate per share	$ 0.03

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Geographic Information and Major Clients - Additional Information (Detail)	12 Months Ended
	Dec. 31, 2013 Segment	Dec. 31, 2012	Dec. 31, 2011
Geographic information and major clients
Number of operating segments	2
Major customer percentage	10.00%	10.00%	10.00%
Business process solutions
Geographic information and major clients
Number of reportable segment	1
Trade accounts receivable
Geographic information and major clients
Number of customers that accounted for 10% or more of outstanding trade receivables	1	1
Trade accounts receivable | Minimum
Geographic information and major clients
Percentage of company outstanding trade receivables accounted by one customer	10.00%

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Consolidated Statements of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Revenue:
Software license	$ 191,876	$ 163,906	$ 138,807
Maintenance	157,309	133,527	117,110
Services	159,769	164,277	160,758
Total revenue	508,954	461,710	416,675
Cost of revenue:
Software license	6,281	6,339	6,693
Maintenance	15,272	14,787	13,077
Services	135,853	136,254	145,028
Total cost of revenue	157,406	157,380	164,798
Gross profit	351,548	304,330	251,877
Selling and marketing	181,094	167,263	147,457
Research and development	79,726	76,726	65,308
General and administrative	29,594	28,915	28,198
Acquisition-related costs	1,306		482
Restructuring costs	1,731		(62)
Total operating expenses	293,451	272,904	241,383
Income from operations	58,097	31,426	10,494
Foreign currency transaction (loss) gain	(1,593)	780	(935)
Interest income, net	524	419	398
Other (expense) income, net	(635)	(1,680)	856
Income (loss) before provision (benefit) for income taxes	56,393	30,945	10,813
Provision for income taxes	18,350	9,077	705
Net income	$ 38,043	$ 21,868	$ 10,108
Earnings per share:
Basic	$ 1.00	$ 0.58	$ 0.27
Diluted	$ 0.98	$ 0.56	$ 0.26
Weighted-average number of common shares outstanding
Basic	37,973	37,853	37,496
Diluted	38,987	38,859	39,404

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DERIVATIVE INSTRUMENTS

12 Months Ended

Dec. 31, 2013

DERIVATIVE INSTRUMENTS

4. DERIVATIVE INSTRUMENTS

The Company uses foreign currency forward contracts to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated accounts receivable, cash and intercompany payables. The U.S. operating company invoices most of its foreign clients 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, intercompany payables and accounts receivable held by the U.S. operating company in its consolidated statements of operations when there are changes in the foreign currency exchange rates versus the U.S. dollar. The Company has been primarily exposed to the fluctuation in the British pound and Euro relative to the U.S. dollar. More recently, the Company has experienced increased levels of exposure to the Australian dollar and Indian rupee, for which it began to use forward contracts in the third quarter of 2013.

The foreign currency forward 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 operations. However, the fluctuations in the value of these foreign currency forward contracts partially offset the gains and losses from the remeasurement or settlement of the foreign currency denominated accounts receivable, intercompany payables, and cash held by the U.S. operating company, thus partly mitigating the volatility. Generally, the Company enters into foreign currency forward contracts with terms not greater than 90 days.

As of December 31, 2013, 2012, and 2011, the Company did not have any forward contracts outstanding.

The Company entered into forward contracts with notional values as follows:

	Year Ended December 31,
Foreign currency (in thousands)	2013		2012		2011
Euro	€	102,300	€	49,700	€	28,500
British pound	£	85,400	£	52,000	£	19,500
Australian dollar	A$	26,300	A$	—	A$	—
Indian rupee	Rs	690,000	Rs	—	Rs	—

The total change in the fair value of the Company’s forward contracts recorded in other (expense) income, net, was as follows:

	Change in Fair Value in USD
	Year Ended December 31,
(in thousands)	2013			2012			2011
(Loss) gain included in other (expense) income, net	$	(747	)	$	(1,738	)	$	764

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MARKETABLE SECURITIES

12 Months Ended

Dec. 31, 2013

MARKETABLE SECURITIES

3. MARKETABLE SECURITIES

(in thousands)	December 31, 2013
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Marketable securities:
Municipal bonds	$	41,545		75		(20	)	$	41,600
Corporate bonds		31,868		52		(4	)		31,916
Certificates of deposit		2,948		1		(4	)		2,945
Marketable securities	$	76,361		128		(28	)	$	76,461
(in thousands)	December 31, 2012
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Marketable securities:
Municipal bonds	$	30,488		48		(10	)	$	30,526
Corporate bonds		14,853		83		(2	)		14,934
Marketable securities	$	45,341		131		(12	)	$	45,460

The Company considers debt securities with maturities of three months or less when purchased, 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 December 31, 2013, remaining maturities of marketable debt securities ranged from January 2014 to February 2016, with a weighted-average remaining maturity of approximately 12 months.

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STOCK-BASED COMPENSATION

12 Months Ended

Dec. 31, 2013

STOCK-BASED COMPENSATION

15. STOCK-BASED COMPENSATION

The majority of the Company’s stock-based compensation arrangements vest over either a four or five year vesting schedule and the Company’s stock options have a ten-year term. The Company recognizes stock-based compensation using the ratable method, which treats each vesting tranche as if it were an individual grant.

The Company periodically grants stock options and restricted stock units (“RSUs”) for a fixed number of shares to employees and non-employee Directors. The exercise price for stock options is greater than or equal to the fair market value of the shares at the grant date. RSUs deliver to the recipient a right to receive a specified number of shares of the Company’s common stock upon vesting. Unlike stock options, there is no cost to the employee at share issuance. The Company values its RSUs at the fair value of its common stock on the grant date, which is the closing price of its common stock on the grant date, less the present value of expected dividends, as the employee is not entitled to dividends during the requisite service period. Upon vesting of the RSUs, the Company withholds shares of common stock in an amount sufficient to cover the minimum statutory tax withholding obligations and issues shares of its common stock for the remaining amount.

Employees may elect to receive 50% of their target incentive compensation under the Company’s Corporate Incentive Compensation Plan (the “CICP”) in the form of RSUs instead of cash. If elected by an employee, the equity amount is equal in value on the date of grant to 50% of his or her target incentive opportunity, based on the employee’s base salary. The number of RSUs granted is determined by dividing 50% of the employee’s target incentive opportunity by the fair value of a RSU on the grant date. If elected, the award vests 100% on the CICP payout date of the following year for all participants. Vesting is conditioned upon the performance conditions of the CICP and on continued employment; if threshold funding does not occur, the equity grant will be cancelled. The Company considers vesting to be probable on the grant date and recognizes the associated stock-based compensation expense over the requisite service period beginning on the grant date and ending on the vest date.

The Company grants options that allow for the settlement of vested stock options on a net share basis (“net settled stock options”), instead of settlement with a cash payment (“cash settled stock options”). With net settled stock options, the employee does not surrender any cash or shares upon exercise. Rather, the Company withholds the number of shares to cover the option exercise price and the minimum statutory tax withholding obligations from the shares that would otherwise be issued upon exercise. The settlement of vested stock options on a net share basis results in fewer shares issued by the Company.

Share-Based Compensation Plans:

(a) 1994 Long-term Incentive Plan

In 1994, the Company adopted a 1994 Long-Term Incentive Plan (as amended in 2003, the “1994 Plan”) to provide employees, Directors and consultants with opportunities to purchase stock through incentive stock options and non-qualified stock options. In addition to options, participants under the 1994 Plan were eligible to receive stock appreciation rights, restricted stock and long-term performance awards. As of December 31, 2013, options to purchase an aggregate of approximately 5,000 shares of common stock were outstanding under the 1994 Plan. The Company does not intend to issue any additional options or make any other awards under the 1994 Plan in the future.

(b) 1996 Non-Employee Director Stock Option Plan

In 1996, the Company adopted a 1996 Non-Employee Director Stock Option Plan (the “Director Plan”), which provided for the grant to non-employee Directors of the Company of options to purchase shares of its common stock. All shares authorized for issue under this plan have been awarded. Since 2006, in lieu of granting fully vested options, the Company has granted shares of its common stock to its non-employee directors under the 2004 Long-Term Incentive Plan, as described below. As of December 31, 2013, options to purchase an aggregate of approximately 30,000 shares of common stock were outstanding under the Director Plan.

(c) Amended and Restated 2004 Long-Term Incentive Plan

In 2004, the Company adopted a 2004 Long-Term Incentive Plan (the “2004 Plan”) to provide employees, non-employee Directors and consultants with opportunities to purchase stock through incentive stock options and non-qualified stock options. In addition to options, eligible participants under the 2004 Plan may be granted stock purchase rights and other stock-based awards. In July 2011, the Company’s stockholders approved the Pegasystems Inc. Amended and Restated 2004 Long-Term Incentive Plan (the “Restated 2004 Plan”), which authorized the issuance of an additional 5,000,000 shares under the plan and extended the term of the plan to 2021. Since 2006, the Company has granted to each non-employee director of the Company shares of common stock on an annual basis in consideration of their board service. For each of 2013, 2012, and 2011 the number of shares granted to each non-employee director was equal to $70,000, divided by the fair market value of the Company’s common stock on the grant date. As of December 31, 2013, approximately 3,427,000 shares were subject to outstanding options and stock-based awards under the Restated 2004 Plan.

(d) 2006 Employee Stock Purchase Plan

In 2006, the Company adopted a 2006 Employee Stock Purchase Plan (the “2006 ESPP”) pursuant to which the Company’s employees are entitled to purchase up to an aggregate of 500,000 shares of common stock at a price equal to at least 85% of the fair market value of the Company’s common stock on either the commencement date or completion date for offerings under the plan, whichever is less, or such higher price as the Company’s Board of Directors may establish from time to time. Until the Company’s Board of Directors determines otherwise, the Board has set the purchase price at 95% of the fair market value on the completion date of the offering period. As a result, the 2006 ESPP is non-compensatory and is tax qualified. Therefore, as of December 31, 2013, no compensation expense related to shares issued under the plan had been recognized. In October 2012, the Company’s Board of Directors amended the term of the 2006 ESPP such that it will continue until there are no shares remaining to be issued under the plan or until the plan is terminated by the Board of Directors, whichever occurs first. As of December 31, 2013, approximately 138,000 shares had been issued thereunder.

Shares reserved

As of December 31, 2013, there were approximately 4,086,000 shares remaining for issuance for future equity grants under the Company’s stock plans, consisting of approximately 3,724,000 shares under the Restated 2004 Plan and approximately 362,000 shares under the 2006 ESPP. There were no shares available for future equity grants under the 1994 Plan or the Director Plan.

Equity grants, assumptions and activity

During 2013, the Company issued approximately 593,000 shares to its employees under the Company’s share-based compensation plans and approximately 14,000 shares to the non-employee members of its Board of Directors.

The following table presents the stock-based compensation expense included in the Company’s consolidated statements of operations:

	Year ended December 31,
(in thousands)	2013			2012			2011
Stock-based compensation expense:
Cost of services	$	4,085		$	3,655		$	2,737
Operating expenses		8,784			7,851			6,291
Total stock-based compensation before tax		12,869			11,506			9,028
Income tax benefit		(3,918	)		(3,699	)		(2,854	)

Stock Options

The Company estimates the fair value of stock options using a Black-Scholes option valuation model. Key inputs used to estimate the fair value of stock options include the exercise price of the award, the expected term of the option, the expected volatility of the Company’s common stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. The amount of stock-based compensation recognized during a period is based on the value of the awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the Company recognizes the actual expense over the vesting period only for the shares that vest. The weighted-average grant-date fair value for stock options granted in 2013, 2012, and 2011, was $13.43, $9.43 and $11.91, respectively.

The weighted-average assumptions used in the Black-Scholes option valuation model are as follows:

	Year ended December 31,
	2013			2012			2011
Expected volatility (1)		49	%		54	%		45	%
Expected term in years (2)		4.5			4.3			5.1
Risk-free interest rate (3)		1.02	%		0.63	%		1.18	%
Expected annual dividend yield (4)		0.42	%		0.52	%		0.58	%

(1) The expected volatility for each grant is determined based on the average of historical daily price changes of the Company’s common stock over a period of time which approximates the expected option term.

(2) The expected option term for each grant is determined based on the historical exercise behavior of employees and post-vesting employment termination behavior.

(3) The risk-free interest rate is based on the yield of zero-coupon U.S. Treasury securities for a period that is commensurate with the expected option term at the time of grant.

(4) The expected annual dividend yield is based on the weighted-average of the dividend yield assumptions used for options granted during the applicable period. The expected annual dividend is based on the expected dividend of $0.12 per share, per year ($0.03 per share, per quarter times 4 quarters) divided by the average stock price.

The Company elected to adopt the alternative transition method (“short cut method”) in calculating their historical pool of windfall tax benefits in regards to its share-based compensation.

The following table summarizes the combined stock option activity under the Company’s stock option plans for the year ended December 31, 2013:

	Shares (in thousands)			Weighted-average exercise price		Weighted- average remaining contractual term (in years)		Aggregate intrinsic value (in thousands)
Options outstanding as of January 1, 2013		3,897		$	19.32
Granted		104			34.40
Exercised		(785	)		13.59
Forfeited/Cancelled		(218	)		24.20
Options outstanding as of December 31, 2013		2,998		$	20.97
Vested and expected to vest as December 31, 2013		2,524		$	20.24		6.5	$	73,048
Exercisable as of December 31, 2013		1,332		$	16.33		4.5	$	43,771

The aggregate intrinsic value of stock options exercised (i.e., the difference between the market price at exercise and the price paid by the employee at exercise) in 2013, 2012, and 2011 was $20.6 million, $8.5 million and $19.4 million, respectively. The aggregate intrinsic value of stock options outstanding and exercisable as of December 31, 2013 is based on the difference between the closing price of the Company’s stock of $49.18 on December 31, 2013 and the exercise price of the applicable stock options.

As of December 31, 2013, the Company had unrecognized stock-based compensation expense related to the unvested portion of stock options of approximately $7.0 million that is expected to be recognized as expense over a weighted-average period of approximately 2.3 years.

RSUs

The weighted-average grant-date fair value for RSUs granted in 2013, 2012, and 2011 was $32.11, $32.35, and $30.87, respectively. The following table summarizes the combined RSU activity for periodic grants and the CICP under the Restated 2004 Plan for the year ended December 31, 2013:

	Shares     (in thousands)			Weighted- Average Grant-Date     Fair Value		Aggregate Intrinsic Value     (in thousands)
Nonvested as of January 1, 2013		567		$	31.19
Granted		179			32.11
Vested		(216	)		30.27
Forfeited		(66	)		30.81
Nonvested as of December 31, 2013		464		$	32.04	$	22,814
Expected to vest as of December 31, 2013		335		$	31.93	$	16,470

The RSUs associated with periodic grants vest over five years with 20% vesting after one year and the remaining 80% vesting in equal quarterly installments over the remaining four years. Approximately 59,000 RSUs granted in connection with the 2013 CICP are expected to vest 100% in March 2014.

The fair value of RSUs vested in 2013, 2012, and 2011 was $7.3 million, $7.1 million, and $6.4 million, respectively. The aggregate intrinsic value of RSUs outstanding and expected to vest as of December 31, 2013 is based on the closing price of the Company’s stock of $49.18 on December 31, 2013.

As of December 31, 2013, the Company had approximately $4.8 million of unrecognized stock-based compensation expense related to all unvested RSUs that is expected to be recognized as expense over a weighted-average period of approximately 2 years.

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DEFERRED REVENUE

12 Months Ended

Dec. 31, 2013

DEFERRED REVENUE

11. DEFERRED REVENUE

	December 31,
(in thousands)	2013		2012
Software license	$	28,826	$	24,303
Maintenance		72,715		62,144
Services		9,341		9,099
Current deferred revenue		110,882		95,546
Software license		32,727		15,407
Maintenance and services		1,469		3,312
Long-term deferred revenue		34,196		18,719
	$	145,078	$	114,265

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Components of Provision for Income Taxes (Detail) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Components Of Income Tax Expense Benefit [Line Items]
Current, Federal	$ 20,277	$ 12,128	$ 11,698
Current, State	2,054	971	1,775
Current, Foreign	3,027	2,142	2,501
Total current provision	25,358	15,241	15,974
Deferred, Federal	(6,069)	(4,759)	(13,978)
Deferred, State	(634)	(870)	(2,204)
Deferred, Foreign	(305)	(535)	913
Total deferred benefit	(7,008)	(6,164)	(15,269)
Total provision	$ 18,350	$ 9,077	$ 705

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PROPERTY AND EQUIPMENT

12 Months Ended

Dec. 31, 2013

PROPERTY AND EQUIPMENT

7. PROPERTY AND EQUIPMENT

	December 31,
(in thousands)	2013			2012
Leasehold improvements	$	24,242		$	23,065
Computer equipment		13,004			11,715
Furniture and fixtures		5,150			5,160
Computer software purchased		3,750			3,048
Computer software developed for internal use		721			721
Fixed assets in progress		449			161
		47,316			43,870
Less: accumulated depreciation and amortization		(18,359	)		(13,043	)
Property and equipment, net	$	28,957		$	30,827

Depreciation and amortization expense was approximately $8.2 million, $7.5 million, and $6.1 million, for the years ended December 31, 2013, 2012, and 2011, respectively.

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Schedule of Identifiable Intangible Assets Acquired, by Major Asset Class (Detail) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013
Acquired Finite-Lived Intangible Assets [Line Items]
Value of acquired intangible assets	$ 10,355
Weighted-average amortization period	3 years 2 months 12 days
Customer-related intangible assets
Acquired Finite-Lived Intangible Assets [Line Items]
Value of acquired intangible assets	4,279
Weighted-average amortization period	4 years
Technology
Acquired Finite-Lived Intangible Assets [Line Items]
Value of acquired intangible assets	3,656
Weighted-average amortization period	3 years
Non-compete
Acquired Finite-Lived Intangible Assets [Line Items]
Value of acquired intangible assets	1,342
Weighted-average amortization period	1 year
Trade name
Acquired Finite-Lived Intangible Assets [Line Items]
Value of acquired intangible assets	$ 1,078
Weighted-average amortization period	3 years

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FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2013

FAIR VALUE MEASUREMENTS

5. FAIR VALUE MEASUREMENTS

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 Company’s investments classified within Level 1 of the fair value hierarchy are valued using quoted market prices. The Company’s investments classified within Level 2 of the fair value hierarchy are valued based on matrix pricing compiled by third party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk.

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)	December 31,2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Money market funds	$	2,232	$	2,232	$	—
Marketable securities:
Municipal bonds	$	41,600	$	10,569	$	31,031
Corporate bonds		31,916		31,916		—
Certificates of deposit		2,945		—		2,945
Total marketable securities	$	76,461	$	42,485	$	33,976

			Fair Value Measurements at Reporting Date Using
(in thousands)	December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Money market funds	$	2,873	$	2,873	$	—
Marketable securities:
Municipal bonds	$	30,526	$	11,966	$	18,560
Corporate bonds		14,934		14,934		—
Total marketable securities	$	45,460	$	26,900	$	18,560

Assets Measured at Fair Value on a Nonrecurring Basis

Assets recorded at fair value on a nonrecurring basis, such as property and equipment, and intangible assets are recognized at fair value when they are impaired. During 2013, 2012, and 2011, the Company did not recognize any impairments on its assets measured at fair value on a nonrecurring basis.

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TRADE ACCOUNTS RECEIVABLE, NET OF ALLOWANCE

12 Months Ended

Dec. 31, 2013

TRADE ACCOUNTS RECEIVABLE, NET OF ALLOWANCE

6. TRADE ACCOUNTS RECEIVABLE, NET OF ALLOWANCE

Unbilled trade accounts receivable relate to services earned under time and material arrangements, maintenance and license arrangements that had not been invoiced.

	December 31,
(in thousands)	2013			2012
Trade accounts receivable	$	128,973		$	112,106
Unbilled accounts receivable		38,618			22,923
Total accounts receivable		167,591			135,029
Allowance for sales credit memos		(1,997	)		(963	)
	$	165,594		$	134,066

The Company records an allowance for estimates of potential sales credit memos when the related revenue is recorded and reviews this allowance periodically. The following reflects the activity of the allowance for sales credit memos:

	Year Ended December 31,
(in thousands)	2013			2012			2011
Balance at beginning of year	$	963		$	895		$	1,027
Provision for credit memos		5,374			1,773			2,877
Credit memos issued		(4,340	)		(1,705	)		(3,009	)
	$	1,997		$	963		$	895

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ACQUISITION

12 Months Ended

Dec. 31, 2013

ACQUISITION

8. ACQUISITION

On October 9, 2013, the Company acquired Antenna, a leading provider of mobile application development platforms. The Company acquired all of the outstanding capital stock of Antenna in a cash merger for $27.7 million, subject to a working capital adjustment calculated at the time of closing that is preliminary. The total purchase price of $27.7 million included $4.2 million, which was deposited in escrow to secure the selling stockholders’ indemnification obligations to the Company under the merger agreement that will be paid to the former shareholders of Antenna over certain periods through April 2015 less any amounts presented and approved for payment against the escrow. During 2013, the Company incurred direct and incremental expenses associated with the transaction of $1.3 million and expects to incur an additional estimated $0.4 million of such expenses that are primarily professional fees.

The Company believes the acquisition will offer its collective clients faster time-to-market and increased flexibility in end-to-end mobile application development, powerful device management and cloud-based mobile Backend-as-a-Service.

The operations of Antenna are included in the Company’s operating results from the date of acquisition. The amount of revenue and earnings of Antenna included in the Company’s consolidated statement of operations were approximately $3.9 million and a loss of approximately $2.6 million, respectively. Due to the rapid integration of the products, sales force, and operations of Antenna, other than the maintenance and hosting revenue attributable to the recognition of the fair value of acquired deferred maintenance and hosting revenue, it may not be feasible for the Company to identify revenue from new arrangements attributable to Antenna.

The Company is in the process of investigating the facts and circumstances existing as of the acquisition date in order to finalize the allocation of the purchase price to the fair value of assets acquired and liabilities assumed and establish the related tax basis. As a result of the preliminary purchase price allocation, the Company recognized $17 million of goodwill, which is primarily due to the expected synergies of the combined entities and the workforce in place. The goodwill created by the transaction is nondeductible for tax purposes. The Company recorded $36.7 million of deferred tax assets, a $24.2 million valuation allowance related to the Company’s preliminary determination it will not be able to utilize the acquired Antenna federal and foreign NOLs due to various limitations and restrictions, and a $6.9 million deferred tax liability associated with the acquired intangibles, for a net deferred tax asset of $5.6 million. A summary of the preliminary purchase price allocation for the acquisition of Antenna is as follows:

(in thousands)
Total purchase consideration:
Cash	$	27,698
Allocation of the purchase consideration:
Cash	$	783
Accounts receivable, net of allowance		4,136
Other assets		3,947
Property and equipment		655
Deferred tax assets, net		5,589
Identifiable intangible assets		10,355
Goodwill		17,012
Accounts payable		(1,470	)
Accrued liabilities		(8,931	)
Deferred revenue		(4,378	)
Net assets acquired	$	27,698

The valuation of the assumed deferred revenue was based on the Company’s contractual commitment to provide post-contract customer support to Antenna clients and future contractual performance obligations under existing hosting arrangements. The fair value of this assumed liability was based on the estimated cost plus a reasonable margin to fulfill these service obligations. The majority of the deferred revenue is expected to be recognized in the 12 months following the acquisition.

The valuation of the acquired intangible assets is inherently subjective and relies on significant unobservable inputs. The Company used an income approach to value the acquired customer related, technology and trade name intangible assets. The non-compete assets were valued using the with-and-without method, a form of the income approach which considers the cash flow differentials under multiple scenarios with or without key executives. The valuation for each of these intangible assets was based on estimated projections of expected cash flows to be generated by the assets, discounted to the present value at discount rates commensurate with perceived risk. The valuation assumptions take into consideration the Company’s estimates of contract renewal, technology attrition and revenue growth projections.

The estimated fair values for specifically identifiable intangible assets acquired, by major asset class, are as follows:

(in thousands)			Weighted-average amortization period (in years)
Customer related intangible assets	$	4,279		4
Technology		3,656		3
Non-compete		1,342		1
Trade name		1,078		3
	$	10,355		3.2

Pro forma Information

The following pro forma financial information presents the combined results of operations of the Company and Antenna as if the acquisition had occurred on January 1, 2012 after giving effect to certain pro forma adjustments. The pro forma adjustments reflected herein include only those adjustments that are directly attributable to the Antenna acquisition, factually supportable, and expected to have a continuing impact on the Company. These pro forma adjustments include a net increase in amortization expense to eliminate historical amortization of Antenna intangible assets and to record amortization expense for the $10.4 million of acquired identifiable intangibles, a decrease in interest income as a result of the cash paid for the acquisition, a decrease in interest expense as a result of the repayment of all Antenna outstanding debt in connection with the acquisition, and the elimination of approximately $1.3 million of acquisition-related costs, including transaction costs incurred by the Company and Antenna. The pro forma financial information does not reflect any adjustments for anticipated synergies resulting from the acquisition and is not necessarily indicative of the operating results that would have actually occurred had the transaction been consummated on January 1, 2012.

	Pro Forma Year Ended December 31,
	2013		2012
Revenue	$	532,978	$	499,839
Net income	$	35,814	$	9,028
Net income per basic share	$	0.94	$	0.24
Net income per diluted share	$	0.92	$	0.23

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Schedule of Amortizable Intangible Asset (Detail) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Finite-Lived Intangible Assets [Line Items]
Cost	$ 100,394	$ 90,039
Accumulated Amortization	(43,820)	(31,807)
Net book value	56,574	58,232
Customer related intangibles
Finite-Lived Intangible Assets [Line Items]
Cost	48,634	44,355
Accumulated Amortization	(18,317)	(13,142)
Net book value	30,317	31,213
Customer related intangibles | Minimum
Finite-Lived Intangible Assets [Line Items]
Range of Useful Lives	4 years
Customer related intangibles | Maximum
Finite-Lived Intangible Assets [Line Items]
Range of Useful Lives	9 years	9 years
Technology
Finite-Lived Intangible Assets [Line Items]
Cost	47,102	43,446
Accumulated Amortization	(22,873)	(16,431)
Net book value	24,229	27,015
Technology | Minimum
Finite-Lived Intangible Assets [Line Items]
Range of Useful Lives	3 years	4 years
Technology | Maximum
Finite-Lived Intangible Assets [Line Items]
Range of Useful Lives	9 years	9 years
Other intangibles
Finite-Lived Intangible Assets [Line Items]
Cost	4,658	2,238
Accumulated Amortization	(2,630)	(2,234)
Net book value	$ 2,028	$ 4
Other intangibles | Minimum
Finite-Lived Intangible Assets [Line Items]
Range of Useful Lives	1 year	1 year
Other intangibles | Maximum
Finite-Lived Intangible Assets [Line Items]
Range of Useful Lives	5 years	5 years

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Reconciliation of Effective Income Tax Rate from Statutory Federal Income Tax Rate (Detail)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Reconciliation of Effective Income Tax Rate [Line Items]
Statutory federal income tax rate	35.00%	35.00%	35.00%
Valuation allowance		(3.00%)	3.00%
Transaction costs	0.40%
State income taxes, net of federal benefit and tax credits	1.40%	(0.80%)	(4.60%)
Permanent differences	1.00%	1.70%	5.40%
Domestic production activities	(3.80%)	(3.90%)	(13.60%)
Federal research and experimentation credits	(2.80%)	0.00%	(5.30%)
Tax effects of foreign activities	(1.90%)	(2.70%)	1.70%
Tax-exempt income	(0.10%)	(0.10%)	(0.30%)
Provision to return adjustments	0.80%	0.60%	2.50%
Non-deductible compensation	1.20%	1.50%	3.00%
Provision for uncertain tax positions	1.50%	2.80%	(19.70%)
Other	(0.20%)	(1.80%)	(0.60%)
Effective income tax rate	32.50%	29.30%	6.50%

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Estimated Future Amortization Expense (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013
Finite-Lived Intangible Assets [Line Items]
2014	$ 13,170
2015	11,336
2016	10,973
2017	9,512
2018 and thereafter	11,583
Future estimated amortization expense, total	$ 56,574

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Changes in Carrying Amount of Goodwill (Detail) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2011	Dec. 31, 2010
Goodwill [Line Items]
Balance as of January 1,	$ 20,451	$ 20,451	$ 20,451
Goodwill acquired during the year	17,012
Balance as of December 31,	$ 37,463	$ 20,451	$ 20,451

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Long Lived Assets by Geographic Area (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Long-Lived Assets by Geographical Areas [Line Items]
Long-lived assets	$ 28,957	$ 30,827
Long-lived assets percentage	100.00%	100.00%
U.S.
Long-Lived Assets by Geographical Areas [Line Items]
Long-lived assets	21,282	22,693
Long-lived assets percentage	74.00%	73.00%
India
Long-Lived Assets by Geographical Areas [Line Items]
Long-lived assets	4,645	5,461
Long-lived assets percentage	16.00%	18.00%
International, other
Long-Lived Assets by Geographical Areas [Line Items]
Long-lived assets	$ 3,030	$ 2,673
Long-lived assets percentage	10.00%	9.00%

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PROPERTY AND EQUIPMENT (Tables)

12 Months Ended

Dec. 31, 2013

Property and Equipment

	December 31,
(in thousands)	2013			2012
Leasehold improvements	$	24,242		$	23,065
Computer equipment		13,004			11,715
Furniture and fixtures		5,150			5,160
Computer software purchased		3,750			3,048
Computer software developed for internal use		721			721
Fixed assets in progress		449			161
		47,316			43,870
Less: accumulated depreciation and amortization		(18,359	)		(13,043	)
Property and equipment, net	$	28,957		$	30,827

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Forward Contracts with Notional Values (Detail) (Forward Contracts) In Thousands, unless otherwise specified	Dec. 31, 2013 Euro EUR (€)	Dec. 31, 2012 Euro EUR (€)	Dec. 31, 2011 Euro EUR (€)	Dec. 31, 2013 British pound GBP (£)	Dec. 31, 2012 British pound GBP (£)	Dec. 31, 2011 British pound GBP (£)	Dec. 31, 2013 Australian Dollar AUD	Dec. 31, 2013 Indian Rupees INR
Derivative [Line Items]
Notional amount	€ 102,300	€ 49,700	€ 28,500	£ 85,400	£ 52,000	£ 19,500	26,300	690,000

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COMMITMENTS AND CONTINGENCIES

12 Months Ended

Dec. 31, 2013

COMMITMENTS AND CONTINGENCIES

13. COMMITMENTS AND CONTINGENCIES

Commitments

The Company leases space for its offices under noncancellable operating leases that expire at various dates through 2023.

As of December 31, 2013, the Company’s future minimum rental payments required under operating leases with noncancellable terms in excess of one year were as follows:

(in thousands) For the calendar year	Operating Leases
2014	$	11,947
2015		11,634
2016		10,991
2017		9,875
2018		9,552
2019 & Thereafter		41,430
	$	95,429

Rent expense under operating leases is recognized on a straight-line basis to account for scheduled rent increases and landlord tenant allowances. In connection with the Company’s lease for its office headquarters, the Company has a landlord tenant allowance totaling approximately $8.4 million, all of which was used and reimbursed to the Company as of December 31, 2012 and will be amortized as a reduction to rent expense on a straight-line basis over the term of the lease. Total rent expense under operating leases was approximately $11.7 million, $14.1 million and $11.4 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Contingencies

The Company is a party in various contractual disputes, litigation and potential claims arising in the ordinary course of business. The Company does not believe that the resolution of these matters will have a material adverse effect on its financial position or results of operations.

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GEOGRAPHIC INFORMATION AND MAJOR CLIENTS

12 Months Ended

Dec. 31, 2013

GEOGRAPHIC INFORMATION AND MAJOR CLIENTS

18. GEOGRAPHIC INFORMATION AND MAJOR CLIENTS

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance.

The Company develops and licenses its software solutions and provides consulting 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 CODM reviews financial information for two operating segments, which the Company has determined can be aggregated and represent one reportable segment—business process solutions.

The Company’s international revenue is from sales to clients based outside of the U.S. The Company derived its operating revenue from the following geographic areas:

	Year ended December 31,
(Dollars in thousands)	2013				2012				2011
U.S.	$	278,945	55	%	$	250,022	54	%	$	216,365	52	%
Other Americas		18,942	4	%		27,741	6	%		16,779	4	%
United Kingdom		83,134	16	%		87,135	19	%		94,338	23	%
Other EMEA (1)		82,743	16	%		70,583	15	%		72,004	17	%
Asia Pacific		45,190	9	%		26,229	6	%		17,189	4	%
	$	508,954	100	%	$	461,710	100	%	$	416,675	100	%

(1) Includes Europe other than the UK, the Middle East and Africa, (“Other EMEA”).

Long-lived assets related to the Company’s U.S. and international operations were as follows:

	December 31,
(Dollars in thousands)	2013				2012
U.S.	$	21,282	74	%	$	22,693	73	%
India		4,645	16	%		5,461	18	%
International, other		3,030	10	%		2,673	9	%
	$	28,957	100	%	$	30,827	100	%

There were no clients accounting for 10% or more of the Company’s total revenue in 2013, 2012, and 2011. There was one client that accounted for 10% or more of the Company’s trade receivables, net, as of December 31, 2013 and one client as of December 31, 2012, as listed below. The Company’s financial services, healthcare and insurance clients as a group represent a significant amount of the Company’s revenues and receivables. However, the Company determined this concentration did not have a material impact on its allowance for sales credit memos as of December 31, 2013.

	December 31,
(Dollars in thousands)	2013			2012
Trade receivables, net of allowance	$	165,594		$	134,066
Client A		16	%
Client B					10	%

Marketable securities are another financial instrument that potentially subject the Company to a concentration of credit risk. See Note 3 “Marketable Securities” and Note 5 “Fair Value Measurements” for further discussion.

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Selected Quarterly Information (Detail) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended									12 Months Ended
	Dec. 31, 2013		Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Supplemental Financial Information [Line Items]
Revenue	$ 153,382	[1]	$ 122,011	$ 117,315	$ 116,246	$ 143,830	$ 101,657	$ 105,056	$ 111,167	$ 508,954	$ 461,710	$ 416,675
Gross profit	109,605	[1]	83,913	79,437	78,593	105,636	63,992	65,069	69,633	351,548	304,330	251,877
Income (loss) from operations	24,304	[1]	13,789	7,053	12,951	27,790	401	(2,684)	5,919	58,097	31,426	10,494
Income (loss) before provision (benefit) for income taxes	24,308	[1]	13,410	6,657	12,018	28,150	32	(3,168)	5,931	56,393	30,945	10,813
Net income	$ 15,561	[1]	$ 8,710	$ 4,703	$ 9,069	$ 20,409	$ (331)	$ (2,267)	$ 4,057	$ 38,043	$ 21,868	$ 10,108
Net earnings (loss) per share, basic	$ 0.41	[1]	$ 0.23	$ 0.12	$ 0.24	$ 0.54	$ (0.01)	$ (0.06)	$ 0.11	$ 1.00	$ 0.58	$ 0.27
Net earnings (loss) per share, diluted	$ 0.40	[1]	$ 0.22	$ 0.12	$ 0.23	$ 0.53	$ (0.01)	$ (0.06)	$ 0.10	$ 0.98	$ 0.56	$ 0.26

[1] Reflects the Company's acquisition of Antenna on October 9, 2013.

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Marketable Securities - Additional Information (Detail)	12 Months Ended
	Dec. 31, 2013 M
Schedule of Available-for-sale Securities [Line Items]
Weighted-average remaining maturity period of marketable debt securities, months	12
Minimum
Schedule of Available-for-sale Securities [Line Items]
Remaining maturities of marketable debt securities	2014-01
Maximum
Schedule of Available-for-sale Securities [Line Items]
Remaining maturities of marketable debt securities	2016-02

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STOCKHOLDERS' EQUITY (Tables)

12 Months Ended

Dec. 31, 2013

Summary of Repurchase Activity under Repurchase Programs

The following table is a summary of the Company’s repurchase activity under all of the Company’s repurchase programs for the years ended December 31:

						Year Ended December 31,
(Dollars in thousands)	2013					2012					2011
	Shares		Amount			Shares		Amount			Shares		Amount
Prior year authorizations at January 1,			$	14,793				$	13,963				$	13,237
Authorizations				12,164					6,036					5,590
Repurchases paid		386,629		(12,370	)		181,803		(5,130	)		137,429		(4,815	)
Repurchases unsettled		3,141		(154	)		3,399		(76	)		1,688		(49	)
Authorized dollars remaining as of December 31,			$	14,433				$	14,793				$	13,963

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Consolidated Statements of Comprehensive Income (Loss) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Net income	$ 38,043	$ 21,868	$ 10,108
Other comprehensive income:
Unrealized (loss) gain on securities, net of tax	(11)	31	93
Foreign currency translation adjustments	469	1,495	296
Total other comprehensive income	458	1,526	389
Comprehensive income	$ 38,501	$ 23,394	$ 10,497

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Reconciliation of Beginning and Ending Balances of Gross Unrecognized Tax Benefits (Detail) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Reconciliation of Unrecognized Tax Benefits [Line Items]
Balance as of January 1,	$ 26,317	$ 25,312	$ 20,266
Additions based on tax positions related to the current year	4,320	3,855	7,231
Additions for tax positions of prior years	350	969	3
Additions for acquired uncertain tax benefits	10,268
Reductions for tax positions of prior years	(326)	(3,819)	(2,188)
Balance as of December 31,	$ 40,929	$ 26,317	$ 25,312

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SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Dec. 31, 2013

SIGNIFICANT ACCOUNTING POLICIES

2. SIGNIFICANT ACCOUNTING POLICIES

(a) Revenue recognition

The Company’s revenue is derived primarily from software licenses, maintenance fees related to the Company’s software licenses, and consulting services. The Company’s license arrangements, whether involving a perpetual license or a term license, generally contain multiple elements, including consulting services, training, and software maintenance services.

Software revenue recognition requires judgment, including whether a software arrangement includes multiple elements, and if so, whether vendor-specific objective evidence (“VSOE”) of fair value exists for those elements. The amount of arrangement consideration allocated to undelivered elements is based on the VSOE of fair value for those elements and recognized as those elements are delivered. Any remaining portion of the total arrangement fee is allocated to the software license, the first delivered element.

Before the Company can recognize revenue, the following four basic criteria must be met:

• Persuasive evidence of an arrangement—As evidence of the existence of an arrangement, the Company uses a contract or purchase order signed by the client for software and maintenance, and a statement of work for consulting services. In the event the client is a reseller the Company ensures a binding agreement exists between the reseller and end user of the software.

• Delivery of product—The Company delivers its software electronically or ships it via disk media. Services, including maintenance, are considered delivered as the work is performed or, in the case of maintenance, over the contractual service period.

• Fee is fixed or determinable—The Company assesses whether a fee is fixed or determinable at the outset of the arrangement. In addition, the Company assesses whether contract modifications to an existing term arrangement constitute a concession. The Company’s agreements do not include a right of return.

• Collection of fee is probable—The Company assesses the probability of collecting from each client at the outset of the arrangement based on a number of factors, including the client’s payment history, its current creditworthiness, economic conditions in the client’s industry and geographic location, and general economic conditions. If in the Company’s judgment collection of a fee is not probable, revenue is recognized as cash is collected, provided all other conditions for revenue recognition have been met.

Software license revenues

Perpetual software license fees are recognized as revenue when the software is delivered, any acceptance required by contract that is not perfunctory is obtained, no significant obligations or contingencies exist related to the software, other than maintenance, and all other revenue recognition criteria are met.

Term software license fees are payable on a monthly, quarterly, or annual basis under license agreements that typically have a three to five-year term and may be renewed for additional terms at the client’s option.

As a result of the Company’s focus on frequent sales to its targeted clients, the Company’s strategy is to sell initial term licensing agreements to those clients with the goal to generate follow-on sales, and as a result of extended payment terms and other factors, such as the risk of concessions, the Company recognizes term license revenue over the term of the agreement as payments become due or earlier if prepaid, provided all other criteria for revenue recognition have been met.

Subscription revenue primarily consists of license, maintenance, and bundled services revenue recognized on the Company’s license arrangements that include a right to unspecified future products, which is recognized ratably over the term of the subscription period.

Maintenance revenues

First-year maintenance typically is sold with the related software license and renewed on an annual basis thereafter. Maintenance revenue is deferred and recognized ratably over the term of the support period, which is generally one year and subject to annual renewals. Perpetual license maintenance obligations are based on separately stated renewal rates in the arrangement that are substantive and therefore represent VSOE of fair value. Term license arrangements include separately stated maintenance fees and the Company uses separate sales to determine VSOE of fair value.

Services revenues

The Company’s services revenue is comprised of fees for training, consulting services including software implementation, reimbursable expenses, and sales of its Pega Cloud^® as-a-platform offering (“Pega Cloud^®”). Consulting services may be provided on a “stand-alone” basis or bundled with a license and software maintenance services.

Revenue from “stand-alone” training services and consulting services under time and materials contracts is recognized as services are performed. The Company has VSOE of fair value for its training services and consulting services under time and materials contracts in North America, Australia, and Europe.

Consulting services may be provided on a fixed-price basis. The Company does not have VSOE of fair value for fixed-price services or time and materials services in certain geographical regions. When these services are part of a multiple element arrangement, and the services are not essential to the functionality of the software, and when services including maintenance, are the only undelivered element, the Company recognizes the revenue from the total arrangement ratably over the longer of the software maintenance period or the service period. Revenue from fixed-price services that are not bundled with a software license is generally recognized ratably during the service period, which is typically less than four months.

Revenue from stand-alone sales of Pega Cloud^® is recognized ratably over the term of the service. When implementation services are sold together with the Company’s Pega Cloud^® offering and these services have stand-alone value to the client, the Company accounts for these services separately from its Pega Cloud^® offering as described earlier. Stand-alone value is established through the client’s ability to buy these services from many trained partner system integrators and from transactions sold independently from the sale of Pega Cloud^®. Since these multiple-element arrangements are not software license sales, the Company applies a selling price hierarchy. Under the selling price hierarchy, third-party evidence of selling price (“TPE”) will be considered if VSOE does not exist, and estimated selling price (“ESP”) will be used if neither VSOE nor TPE is available. Generally, the Company is not able to determine TPE as its sales strategy is customized to the needs of its clients and the Company’s products and services are dissimilar to comparable products or services in the marketplace. In determining ESP, the Company applies significant judgment as it weighs a variety of factors, based on the facts and circumstances of the arrangement. The Company typically arrives at an ESP for a service that is not sold separately by considering company-specific factors such as geographies, competitive landscape, and pricing practices used to establish bundled pricing and discounting.

Warranties and Indemnification

The Company warrants to its clients that its software products will conform to documented specifications for a limited period. The Company has not experienced significant claims related to software warranties beyond the scope of maintenance support, which it is already obligated to provide, and consequently it has not established reserves for warranty obligations.

The Company’s agreements with clients generally require it to indemnify the client against claims that the Company’s software infringes third party patent, copyright, trademark or other proprietary rights. Such indemnification obligations are generally limited in a variety of industry-standard respects, including the Company’s right to replace an infringing product. As of December 31, 2013, the Company had not experienced any losses related to these indemnification obligations and no claims were outstanding.

Deferred revenue

Deferred software license revenue typically results from contractual billings for which all of the criteria to recognize revenue have not been met. Deferred maintenance revenue represents software license updates and product support contracts that are typically billed in advance and are recognized ratably over the support periods. Deferred services revenue represents advanced billings for consulting hosting, and training services that are recognized as the services are performed.

(b) Fair value of financial instruments

The principal financial instruments held by the Company consist of cash equivalents, marketable securities, accounts receivable, and accounts payable. The carrying value of these instruments approximates their fair value due to their short maturities. See Note 3 “Marketable Securities” and Note 5 “Fair Value Measurements” for further discussion of financial instruments that are carried at fair value on a recurring basis.

(c) Derivative instruments

The Company uses foreign currency forward contracts to manage its exposures to changes in foreign currency exchange rates associated with its foreign currency denominated accounts receivable, intercompany payables, and cash. The foreign currency forward 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 operations. The fluctuations in the value of these foreign currency forward contracts partially offset the gains and losses from the remeasurement or settlement of the foreign currency denominated accounts receivable, intercompany payables, and cash held by the U.S. operating company, thus partly mitigating the volatility. Generally, the Company enters into foreign currency forward contracts with terms of 90 days or less.

(d) Property and equipment

Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which are three years for equipment and five years for furniture and fixtures. Leasehold improvements are amortized over the lesser of the term of the lease or the useful life of the asset. Repairs and maintenance costs are expensed as incurred.

The Company capitalizes and amortizes certain direct costs associated with computer software developed or purchased for internal use. The Company amortizes capitalized software costs generally over three to five years commencing on the date the software is placed into service. During 2013, 2012, and 2011, the Company did not capitalize any costs for computer software developed for internal use.

(e) Goodwill

Goodwill represents the residual purchase price paid in a business combination after all identified assets and liabilities have been recorded. Goodwill is not amortized. The Company performed its qualitative assessment in the fourth quarters of 2013, 2012, and 2011, and concluded it was not more likely than not that the fair value of its reporting units was less than their carrying value.

(f) Intangible Assets

All of the Company’s intangible assets are amortized using the straight-line method over their estimated useful life. The Company evaluates its intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Impairment is assessed by comparing the undiscounted cash flows expected to be generated by the intangible asset to its carrying value. If impairment exists, the Company calculates the impairment by comparing the carrying value of the intangible asset to its fair value as determined by discounted expected cash flows. The Company did not record any impairment in 2013, 2012, or 2011.

(g) Research and development and software costs

Research and development costs are expensed as incurred. Capitalization of computer software developed for resale begins upon the establishment of technological feasibility, generally demonstrated by a working model or an operative version of the computer software product. Such costs have not been material to date as technological feasibility is established within a short timeframe from the software’s general availability and, as a result, no costs were capitalized in 2013, 2012, or 2011.

(h) Stock-Based Compensation

The Company recognizes stock-based compensation expense associated with equity awards based on the fair value of these awards at the grant date. Stock-based compensation is recognized over the requisite service period, which is generally the vesting period of the equity award, and is adjusted each period for anticipated forfeitures. The Company recognizes stock-based compensation using the ratable method, which treats each vesting tranche as if it were an individual grant. See Note 15 “Stock-based Compensation” for discussion of the Company’s key assumptions included in determining the fair value of its equity awards at grant date.

(i) Acquisition-related costs

Acquisition-related costs are expensed as incurred and include direct and incremental costs associated with an impending or completed acquisition. During 2013, the $1.3 million of acquisition-related costs were primarily professional fees associated with the Company’s acquisition of Antenna Software, Inc. (“Antenna”). During 2011, the $0.5 million of acquisition-related costs were primarily legal fees associated with litigation assumed in the Company’s acquisition of Chordiant Software, Inc. (“Chordiant”).

(j) Restructuring costs

Restructuring costs are recorded when a plan of restructuring is in place and management has committed to execution of the plan. To the extent that a restructuring plan provides employee benefits for services rendered in future periods beyond a minimum period, the costs are recognized over the requisite service period. In 2013, restructuring costs include future lease payments and demising costs, net of estimated sublease income, for the elimination of space within one facility related to the integration of Antenna. See Note 12 “Accrued Restructuring Costs” for further detail.

(k) Foreign currency translation

The translation of assets and liabilities for the majority of the Company’s foreign subsidiaries is made at period-end exchange rates, while revenue and expense accounts are translated at the average exchange rates during the period transactions occurred. The resulting translation adjustments are reflected in accumulated other comprehensive income. The Company’s India subsidiary uses the U.S. dollar as its functional currency, therefore, its monetary assets and liabilities are remeasured at current rates and its non-monetary assets are recorded at historical exchange rates. Realized and unrealized exchange gains or losses from transactions and remeasurement adjustments are reflected in foreign currency transaction gain (loss), in the accompanying consolidated statements of operations.

(l) Accounting for Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Future realization of the Company’s deferred tax assets ultimately depends on the existence of sufficient taxable income within the available carryback or carryforward periods. Sources of taxable income include taxable income in prior carryback years, future reversals of existing taxable temporary differences, tax planning strategies, and future taxable income. The Company records a valuation allowance to reduce its deferred tax assets to an amount it believes is more-likely-than-not to be realized. Changes in the valuation allowance impacts income tax expense in the period of adjustment. The Company’s deferred tax valuation allowance requires significant judgment and uncertainties, including assumptions about future taxable income that are based on historical and projected information. The Company recognizes excess tax benefits when they are realized, through a reduction in income taxes payable using the with and without stock option method.

The Company assesses its income tax positions and records tax benefits based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, the Company records the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit is recognized in the financial statements. The Company classifies liabilities for uncertain tax positions as non-current liabilities unless the uncertainty is expected to be resolved within one year. The Company classifies interest and penalties on uncertain tax positions as income tax expense.

As a global company, the Company uses significant judgment to calculate and provide for income taxes in each of the tax jurisdictions in which it operates. In the ordinary course of the Company’s business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertainties arise as a consequence of transfer pricing for transactions with the Company’s subsidiaries and nexus and tax credit estimates. In addition, the calculation of acquired tax attributes and the associated limitations are complex. See Note 16 “Income Taxes” for further information.

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Acquisition - Additional Information (Detail) (USD $)	12 Months Ended				1 Months Ended	3 Months Ended	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010	Oct. 09, 2013 Antenna	Dec. 31, 2013 Antenna	Dec. 31, 2013 Antenna	Dec. 31, 2013 Antenna Acquisition One	Dec. 31, 2013 Antenna Expected Incremental Expense
Business Acquisition [Line Items]
Purchase price of acquired company	$ 25,565,000				$ 27,698,000
Cash purchase price deposited in escrow					4,200,000
Acquisition-related costs	1,306,000		482,000				1,300,000	1,300,000	400,000
Revenue since acquisition date						3,900,000
Earnings(loss) since acquisition date						(2,600,000)
Goodwill	37,463,000	20,451,000	20,451,000	20,451,000	17,012,000
Deferred tax assets					36,700,000
Defered tax assets, valuation allowance					24,200,000
Deferred tax liability					6,900,000
Deferred tax assets, net					5,600,000
Amortization expense of acquired intangibles assets	12,013,000	11,137,000	11,315,000				10,400,000
Acquisition-related costs, including transaction costs						$ 1,300,000	$ 1,300,000

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Combined Restricted Stock Units Activity (Detail) (Restricted Stock Units, USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013
Restricted Stock Units
Number of shares
Nonvested as of January 1, 2013	567
Granted	179
Vested	(216)
Forfeited	(66)
Nonvested as of December 31, 2013	464
Expected to vest as of December 31, 2013	335
Weighted average grant date fair value
Nonvested as of January 1, 2013	$ 31.19
Granted	$ 32.11
Vested	$ 30.27
Forfeited	$ 30.81
Nonvested as of December 31, 2013	$ 32.04
Expected to vest as of December 31, 2013	$ 31.93
Aggregate Intrinsic value
Nonvested as of December 31, 2013	$ 22,814
Expected to vest as of December 31, 2013	$ 16,470

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Accrued Restructuring Costs - Additional Information (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2013	Dec. 31, 2011
Restructuring Cost and Reserve [Line Items]
Restructuring costs	$ 1,700	$ 1,731	$ (62)
Lease expiration date	2021

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EMPLOYEE BENEFIT PLANS

12 Months Ended

Dec. 31, 2013

EMPLOYEE BENEFIT PLANS

19. EMPLOYEE BENEFIT PLANS

The Company sponsors a 401(k) defined contribution retirement plan for qualifying employees pursuant to which the Company makes discretionary matching contributions. Company contributions under the plan totaled approximately $2.9 million in 2013, $2.8 million in 2012, and $2.5 million in 2011. In addition, the Company has defined contribution plans for qualifying international employees and contributions expensed under those plans totaled approximately $3.7 million in 2013, $3.2 million in 2012, and $2.1 million in 2011.

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Future Minimum Rental Payments for Operating Leases (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013
Leases Future Minimum Payments [Line Items]
2014	$ 11,947
2015	11,634
2016	10,991
2017	9,875
2018	9,552
2019 & Thereafter	41,430
Total future minimum rental payments for operating leases	$ 95,429

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DEFERRED REVENUE (Tables)

12 Months Ended

Dec. 31, 2013

Schedule of Deferred Revenue

	December 31,
(in thousands)	2013		2012
Software license	$	28,826	$	24,303
Maintenance		72,715		62,144
Services		9,341		9,099
Current deferred revenue		110,882		95,546
Software license		32,727		15,407
Maintenance and services		1,469		3,312
Long-term deferred revenue		34,196		18,719
	$	145,078	$	114,265

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ACCRUED RESTRUCTURING COSTS

12 Months Ended

Dec. 31, 2013

ACCRUED RESTRUCTURING COSTS

12. ACCRUED RESTRUCTURING COSTS

During the fourth quarter of 2013, in connection with the Company’s evaluation of its combined facilities with Antenna, the Company approved a plan to eliminate space within one facility. The Company ceased use of this space during the fourth quarter of 2013 and recognized $1.7 million of restructuring expenses, representing future lease payments and demising costs, net of estimated sublease income for this space. The lease expires in 2021.

A summary of the restructuring activity is as follows:

(in thousands)	2010 personnel restructuring			2010 facilities restructuring			2013 personnel and facilities restructuring (1)			Total
Balance as of December 31, 2010	$	2,752		$	2,117		$	—		$	4,869
Restructuring costs		—			(62	)		—			(62	)
Cash payments		(2,509	)		(1,255	)		—			(3,764	)
Balance as of December 31, 2011		243			800			—			1,043
Cash payments		(243	)		(359	)		—			(602	)
Balance as of December 31, 2012		—			441			—			441
Restructuring costs		—			—			1,731			1,731
Cash payments		—			(441	)		—			(441	)
Other (2)		—			—			(140	)		(140	)
Balance as of December 31, 2013	$	—		$	—		$	1,591		$	1,591

(1) Includes $34 thousand of severance and related benefit costs for the reduction of six personnel in redundant roles that will be paid by the end of the second quarter of 2014.

(2) Reflects the asset initially recorded for the acquired below market operating lease terms at acquisition, which was subsequently restructured and included in restructuring costs above.

	December 31,
(in thousands)	2013		2012
Reported as:
Accrued expenses	$	371	$	441
Other long-term liabilities		1,220		—
	$	1,591	$	441