9. REVENUE

Revenue policy

The Company’s revenue is primarily derived from:

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Software license revenue is primarily derived from sales of the Company’s software applications and Pega Platform.

•

Maintenance revenue includes revenue from client support including software upgrades, on a when and-if available basis, telephone support, and bug fixes or patches.

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Services revenue is primarily derived from cloud revenue, which is sales of the Company’s hosted Pega Platform and software application environments and consulting revenue which is primarily related to new license implementations.

Contracts with multiple performance obligations

The Company’s license and cloud arrangements often contain multiple performance obligations, including maintenance, consulting, and training. For contracts with multiple performance obligations, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative stand-alone selling price basis. If the transaction price contains discounts or the Company expects to provide a future price concession, these elements are considered when determining the transaction price prior to allocation. Variable fees within the transaction price are estimated and recognized in revenue as the Company satisfies each performance obligation to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable fee is resolved. If the contract grants the client the option to acquire additional products or services, the Company assesses whether or not any discount on the included products and services is in excess of levels normally available to similar clients and, if so, accounts for that discount as an additional performance obligation.

Software licenses

The Company has concluded that its software licenses are distinct performance obligations as the client can benefit from the software on its own. Software license revenue is typically recognized at a point in time when control is transferred to the client, which is defined as the point in time when the client can use and benefit from the license. The software license is delivered before related services are provided and is functional without services, updates, and technical support. Stand-alone selling price for software licenses is determined using the residual approach. The Company utilizes the residual approach as license performance obligations are sold for a broad range of amounts (the selling price is highly variable) and a stand-alone selling price is not discernible from past transactions or other observable evidence. Periodically, the Company evaluates whether the residual approach is appropriate for its license and cloud performance obligations when sold with other performance obligations. As a result, if the standalone selling price analysis illustrates that the license and cloud performance obligations are no longer highly variable, the Company will utilize the relative allocation method for such arrangements.

Term license fees are usually payable in advance on a monthly, quarterly, or annual basis over the term of the license agreement, which is typically three to five years and may be renewed for additional terms at the client’s option. Perpetual license fees are usually payable when the contract is executed.

Maintenance

Software maintenance contracts entitle clients to receive technical support and software updates, on a when and if available basis, during the term of the maintenance contract. Technical support and software updates are considered distinct services but accounted for as a single performance obligation as they each constitute a series of distinct services that are substantially the same and have the same pattern of transfer to the client. Software maintenance revenue is recognized over time on a straight-line basis over the contract period. Maintenance fees are usually payable in advance on a monthly, quarterly, or annual basis over the term of the agreement.

Each of the performance obligations included in maintenance are priced as a percentage of the selling price of the related software license, which is highly variable. The Company determined the standalone selling price of each performance obligation included in maintenance based on this pricing relationship, which has remained constant within a narrow range, and observable data from standalone sales of maintenance, along with all other observable data.

Services

The Company’s services revenue is comprised of consulting and training, including software license implementations, training, reimbursable expenses, and cloud which is derived from sales of the Company’s hosted Pega Platform and software application environments. The Company has concluded that most services are distinct performance obligations. Consulting may be provided on a stand-alone basis or bundled with license and software maintenance services.

The stand-alone selling price for consulting in time and materials contracts is determined by observable prices in similar transactions without multiple performance obligations and recognized as revenue as the services are performed. Fees for time and materials consulting contracts are usually payable shortly after the service is provided.

The Company estimates the stand-alone selling price for fixed price services based on the estimated hours versus actual hours in similar geographies and for similar contract sizes. Revenue for fixed price services is recognized over time as the services are provided. Fees for fixed price services consulting contracts are usually payable as contract milestones are achieved.

The stand-alone selling price of cloud sales of production environments is determined based on the residual approach when sold with services and is recognized over the term of the service. The Company utilizes the residual approach as cloud performance obligations are sold for a broad range of amounts (the selling price is highly variable) and a stand-alone selling price is not discernible from past transactions or other observable evidence. The stand-alone selling price for cloud sales of development and testing environments is developed using observable prices in similar transactions without multiple performance obligations and is recognized over time over the term of the service. Cloud fees are usually payable in advance on a monthly, quarterly, or annual basis over the term of the service.

Contract modifications

The Company sometimes enters into amendments to previously executed contracts which constitute contract modifications. The Company assesses each of these contract modifications to determine:

If the additional products and services are distinct from the products and services in the original arrangement, and

If the amount of consideration expected for the added products and services reflects the stand-alone selling price of those products and services.

A contract modification meeting both criteria is accounted for as a separate contract. A contract modification not meeting both criteria is considered a change to the original contract and is accounted for on either:

a prospective basis as a termination of the existing contract and the creation of a new contract; or

a cumulative catch-up basis.

Geographic revenue


	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2018			2017			2018			2017
U.S.	$	110,349	55%	$	102,098	55%	$	224,334	52%	$	271,760	62%
Other Americas		9,627	5%		13,177	7%		27,342	6%		23,583	5%
United Kingdom (“U.K.”)		23,079	12%		22,524	12%		49,173	11%		48,866	11%
Europe (excluding U.K.), Middle East, and Africa		27,070	14%		26,237	14%		58,896	14%		50,448	11%
Asia-Pacific		26,654	14%		22,560	12%		72,216	17%		48,248	11%

Total revenue	$	196,779	100%	$	186,596	100%	$	431,961	100%	$	442,905	100%

Major products and services


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2018		2017		2018		2017
Perpetual license	$	13,475	$	31,297	$	36,553	$	69,196
Term license		31,309		19,853		96,004		108,962

Revenue recognized at a point in time		44,784		51,150		132,557		178,158
Maintenance		65,906		59,424		130,431		118,137
Cloud		20,201		12,525		35,783		22,927
Consulting and training		65,888		63,497		133,190		123,683

Revenue recognized over time		151,995		135,446		299,404		264,747

Total revenue	$	196,779	$	186,596	$	431,961	$	442,905

During the six months ended June 30, 2018 and 2017, there were no material changes in the Company’s estimate of variable fees.

Committed not yet recognized revenue

Committed not recognized revenue represents contracted revenue that has not yet been recognized in revenue. Committed not recognized revenue is expected to be recognized in the future as follows:


(in thousands)	June 30, 2018
Remainder of 2018	$	213,244
2019		140,209
2020		63,603
2021 and thereafter		59,604

	$	476,660

For reporting periods prior to January 1, 2018, the date of initial adoption of ASC 606, the Company has elected the practical expedient and not compiled and disclosed the amount of the transaction price allocated to the remaining performance obligations.

Major clients

Clients accounting for 10% or more of the Company’s total revenue were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2018		2017		2018		2017

Total revenue	$	196,779	$	186,596	$	431,961	$	442,905
Client A		*		11%		*		*

*Client accounted for less than 10% of total revenue.