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 Pega Platform and software applications.

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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 applications, 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. 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 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 reevaluates whether the residual approach is appropriate for its license performance obligations when sold with other performance obligations. If the standalone selling price analysis illustrates that software license 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

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. Maintenance revenue is recognized over time on a straight-line basis over the contract period.

The maintenance performance obligation is priced as a percentage of the selling price of the related software license, which is highly variable. The Company determined the standalone selling price 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.

Maintenance fees are usually payable in advance on a monthly, quarterly, or annual basis over the term of the agreement.

Services

Services revenue is comprised of consulting, 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 other performance obligations.

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The stand-alone selling price for time and materials consulting 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.

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

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The stand-alone selling price of cloud sales of production environments is determined based on the residual approach when sold with other performance obligations 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. Cloud fees for production environments are usually payable in advance on a monthly, quarterly, or annual basis over the term of the service.

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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 the term of the service. Cloud fees for development and testing environments are usually payable in advance on a monthly, quarterly, or annual basis over the term of the service.

Contract modifications

The Company 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 September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2018			2017			2018			2017
U.S.	$	103,075	51%	$	105,059	55%	$	327,409	51%	$	376,819	59%
Other Americas		10,424	5%		9,307	5%		37,766	6%		32,890	5%
United Kingdom (“U.K.”)		19,277	9%		18,537	10%		68,450	11%		67,403	11%
Europe (excluding U.K.), Middle East, and Africa		42,254	21%		31,109	16%		101,150	16%		81,557	13%
Asia-Pacific		28,233	14%		26,945	14%		100,449	16%		75,193	12%

Total revenue	$	203,263	100%	$	190,957	100%	$	635,224	100%	$	633,862	100%

Revenue streams


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2018		2017		2018		2017
Perpetual license	$	20,276	$	12,623	$	56,829	$	81,819
Term license		32,066		40,611		128,070		149,573

Revenue recognized at a point in time		52,342		53,234		184,899		231,392
Maintenance		66,017		61,812		196,448		179,949
Cloud		22,184		13,280		57,967		36,207
Consulting		62,720		62,631		195,910		186,314

Revenue recognized over time		150,921		137,723		450,325		402,470

Total revenue	$	203,263	$	190,957	$	635,224	$	633,862


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2018		2017		2018		2017
Term license	$	32,066	$	40,611	$	128,070	$	149,573
Cloud		22,184		13,280		57,967		36,207
Maintenance		66,017		61,812		196,448		179,949

Subscription⁽¹⁾		120,267		115,703		382,485		365,729
Perpetual license		20,276		12,623		56,829		81,819
Consulting		62,720		62,631		195,910		186,314

Total revenue	$	203,263	$	190,957	$	635,224	$	633,862

⁽¹⁾Subscription revenue reflects client arrangements (term license, cloud, and maintenance) which may be subject to a renewal.

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

Remaining performance obligations (formerly reported as “committed not yet recognized revenue”)

Revenue for the remaining performance obligations on existing contracts is expected to be recognized in the future as follows:


	September 30, 2018
(Dollars in thousands)	Perpetual license		Term license		Maintenance		Cloud		Consulting		Total
1 year or less	$	25,343	$	44,283	$	140,591	$	88,529	$	14,107	$	312,853	60%
1-2 years		6,490		10,063		8,877		70,815		1,830		98,075	19%
2-3 years		360		1,598		2,586		54,646		449		59,639	11%
Greater than 3 years		1,306		218		1,079		49,110		50		51,763	10%

	$	33,499	$	56,162	$	153,133	$	263,100	$	16,436	$	522,330	100%

Major clients

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2018		2017		2018		2017
Total revenue	$	203,263	$	190,957	$	635,224	$	633,862
Client A		10%		10%		*		*

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