Cloud Growth Drives Pega Through $1 Billion Milestone in 2020

Financial and performance metrics ⁽¹⁾

(Dollars in thousands,

except per share amounts)

Three Months Ended
December 31,

Year Ended
December 31,

2020

2019

Change

2020

2019

Change

Total revenue

$

298,600

$

276,542

8

%

$

1,017,517

$

911,383

12

%

Net income (loss) - GAAP

$

4,006

$

918

336

%

$

(61,373)

$

(90,433)

32

%

Net income (loss) - Non-GAAP

$

15,513

$

15,682

(1)

%

$

(29,392)

$

(35,082)

16

%

Diluted earnings (loss) per share - GAAP

$

0.05

$

0.01

400

%

$

(0.76)

$

(1.14)

33

%

Diluted earnings (loss) per share - Non-GAAP

$

0.18

$

0.19

(5)

%

$

(0.37)

$

(0.44)

16

%

(1) A reconciliation of our Non-GAAP and GAAP measures is at the end of this release.

(2) Reflects client arrangements subject to renewal (Pega Cloud, maintenance, and term license).

2021 Guidance

As of February 17, 2021, we are providing the following guidance:

Year Ended December 31, 2021

(in millions, except per share amounts)

GAAP

Non-GAAP ⁽¹⁾

Revenue

$

1,250

$

1,250

Net (loss) income

$

(115.2)

$

21.5

Net (loss) income per share

$

(1.44)

$

0.25

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

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

Three Months Ended
December 31,

Year Ended
December 31,

2020

2019

2020

2019

Revenue

Software license

$

107,887

$

113,905

$

294,910

$

279,448

Maintenance

76,122

73,174

296,709

280,580

Pega Cloud

61,188

39,136

208,268

133,746

Consulting

53,403

50,327

217,630

217,609

Total revenue

298,600

276,542

1,017,517

911,383

Cost of revenue

Software license

574

674

2,928

3,656

Maintenance

5,666

6,341

22,311

25,656

Pega Cloud

20,337

18,059

76,575

65,828

Consulting

50,318

52,533

209,099

214,882

Total cost of revenue

76,895

77,607

310,913

310,022

Gross profit

221,705

198,935

706,604

601,361

Operating expenses

Selling and marketing

150,009

133,395

545,693

474,459

Research and development

59,366

52,408

236,986

205,210

General and administrative

18,260

14,877

67,452

56,570

Total operating expenses

227,635

200,680

850,131

736,239

(Loss) from operations

(5,930)

(1,745)

(143,527)

(134,878)

Foreign currency transaction gain (loss)

1,159

1,242

3,704

(2,335)

Interest income

131

129

1,223

2,020

Interest expense

(5,565)

(144)

(19,356)

(212)

Gain on capped call transactions

11,881

—

31,697

—

Other (loss) income, net

(4)

181

1,370

559

Income (loss) before (benefit from) income taxes

1,672

(337)

(124,889)

(134,846)

(Benefit from) income taxes

(2,334)

(1,255)

(63,516)

(44,413)

Net income (loss)

$

4,006

$

918

$

(61,373)

$

(90,433)

Earnings (loss) per share

Basic

$

0.05

$

0.01

$

(0.76)

$

(1.14)

Diluted

$

0.05

$

0.01

$

(0.76)

$

(1.14)

Weighted-average number of common shares outstanding

Basic

80,770

79,430

80,336

79,055

Diluted

86,080

83,624

80,336

79,055

PEGASYSTEMS INC.

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

(in thousands, except percentages and per share amounts)

Three Months Ended
December 31,

Year Ended
December 31,

2020

2019

Change

2020

2019

Change

Net income (loss) - GAAP

$

4,006

$

918

336

%

$

(61,373)

$

(90,433)

32

%

Stock-based compensation ⁽²⁾

26,313

20,666

103,068

80,909

Capped call transactions

(11,881)

—

(31,697)

—

Convertible debt

4,408

—

14,813

—

Amortization of intangible assets

919

1,018

3,970

6,625

Foreign currency transaction (gain) loss

(1,159)

(1,242)

(3,704)

2,335

Other

(384)

—

757

—

Income tax effects ⁽³⁾

(6,709)

(5,678)

(55,226)

(34,518)

Net income (loss) - Non-GAAP

$

15,513

$

15,682

(1)

%

$

(29,392)

$

(35,082)

16

%

Diluted earnings (loss) per share - GAAP

$

0.05

$

0.01

400

%

$

(0.76)

$

(1.14)

33

%

Non-GAAP adjustments

0.13

0.18

0.39

0.70

Diluted earnings (loss) per share - Non-GAAP

$

0.18

$

0.19

(5)

%

$

(0.37)

$

(0.44)

16

%

Diluted weighted-average number of common shares outstanding - GAAP

86,080

83,624

3

%

80,336

79,055

2

%

Diluted weighted-average number of common shares outstanding - Non-GAAP

86,080

83,624

3

%

80,336

79,055

2

%

(1)

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

•

Stock-based compensation: We have excluded stock-based compensation from our Non-GAAP operating expenses and profitability measures. Although stock-based compensation is a key incentive offered to our employees, and we believe such compensation contributed to our revenues recognized during the periods presented and is expected to contribute to our future period revenues, we continue to evaluate our business performance excluding stock-based compensation.

•

Capped call transactions: We have excluded gains and losses from our privately negotiated capped call transactions entered into concurrent with our issuance of the convertible senior notes to reduce potential dilution to our common stock upon any conversion of the convertible senior notes and/or offset any cash payments we are required to make in excess of the principal amount of convertible senior notes that may be converted, with such reduction and/or offset subject to a cap. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the types of events giving rise to them are not representative of our core business operations and ongoing operating performance.

•

Convertible senior notes: In February 2020, we issued $600 million of convertible senior notes, which bear interest at an annual fixed rate of 0.75%. A debt discount resulting from the conversion feature and debt issuance costs reduced the convertible debt instrument's carrying value. Debt discount and issuance costs are amortized as interest expense over the debt's life based upon an effective interest rate of 4.31%. We believe excluding these amounts provides a more useful comparison of our operational performance in different periods.

•

Amortization of intangible assets: We have excluded the amortization of intangible assets from our Non-GAAP operating expenses and profitability measures. Amortization of intangible assets fluctuates in amount and frequency and is significantly affected by our acquisitions' timing and size. Investors should note that the use of intangible assets contributed to our revenues recognized during the periods presented and is expected to contribute to our future period revenues. Amortization of intangible assets is likely to recur in future periods.

•

Foreign currency transaction (gain) loss: We have excluded foreign currency transaction gains and losses from our Non-GAAP profitability measures. Foreign currency transaction gains and losses fluctuate in amount and frequency and are significantly affected by foreign exchange market rates. Foreign currency transaction gains and losses are likely to recur in future periods.

•

Other: We have excluded gains and losses on our venture investments, incremental fees incurred due to the cancellation of the live event portion of our annual PegaWorld conference due to the COVID-19 pandemic, and incremental expenses incurred from the integration of acquisitions. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the types of events giving rise to them are not representative of our core business operations and ongoing operating performance.

⁽²⁾ Stock-based compensation was:

Three Months Ended
December 31,

Year Ended
December 31,

(in thousands)

2020

2019

2020

2019

Cost of revenue

$

5,160

$

4,605

$

20,796

$

18,822

Selling and marketing

12,315

8,610

46,283

32,665

Research and development

5,819

4,948

22,885

18,938

General and administrative

3,019

2,503

13,104

10,484

$

26,313

$

20,666

$

103,068

$

80,909

Income tax benefit

$

(5,171)

$

(4,166)

$

(20,464)

$

(16,392)

⁽³⁾ Effective income tax rates were:

Year Ended
December 31,

2020

2019

GAAP

51

%

33

%

Non-GAAP

22

%

22

%

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

December 31, 2020

December 31, 2019

Assets

Cash, cash equivalents, and marketable securities

$

465,168

$

68,363

Receivables (billed and unbilled)

536,260

501,675

Goodwill

79,231

79,039

Other assets

523,603

335,735

Total assets

$

1,604,262

$

984,812

Liabilities and stockholders' equity

Accrued expenses, including compensation and related expenses

$

182,273

$

152,127

Deferred revenue, current

232,865

190,080

Convertible senior notes, net

518,203

—

Other liabilities

128,749

103,595

Stockholders' equity

542,172

539,010

Total liabilities and stockholders' equity

$

1,604,262

$

984,812

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Year Ended
December 31,

2020

2019

Net (loss)

$

(61,373)

$

(90,433)

Adjustments to reconcile net (loss) to cash (used in) operating activities

Non-cash items

93,795

99,251

Change in operating assets and liabilities, net

(32,985)

(50,983)

Cash (used in) operating activities

(563)

(42,165)

Cash (used in) provided by investing activities

(321,683)

70,074

Cash provided by (used in) financing activities

423,448

(74,258)

Effect of exchange rate changes on cash and cash equivalents

2,334

290

Net increase (decrease) in cash and cash equivalents

103,536

(46,059)

Cash and cash equivalents, beginning of period

68,363

114,422

Cash and cash equivalents, end of period

$

171,899

$

68,363

PEGASYSTEMS INC.

ANNUAL CONTRACT VALUE ("ACV")

(in thousands, except percentages)

Annual contract value ("ACV") ⁽¹⁾ - ACV, as reported, represents the annualized value of our active contracts as of the measurement date. The contract's total value is divided by its duration in years to calculate ACV for term license and Pega Cloud contracts. Maintenance revenue for the quarter then ended is multiplied by four to calculate ACV for maintenance. Client Cloud ACV is composed of maintenance ACV and ACV from term license contracts. ACV is a performance measure that we believe provides useful information to our management and investors, particularly during our Cloud Transition. Reported amounts have not been adjusted for changes in foreign exchange rates.

December 31, 2020

December 31, 2019

Change

Maintenance

$

304,488

$

292,696

$

11,792

4

%

Term

264,346

231,267

33,079

14

%

Client Cloud

568,834

523,963

44,871

9

%

Pega Cloud

266,642

169,329

97,313

57

%

Total

$

835,476

$

693,292

$

142,184

21

%

(1) Foreign currency contributed 1%-2% to ACV growth in 2020.

PEGASYSTEMS INC.

BACKLOG

(in thousands, except percentages)

Remaining performance obligations ("Backlog") - Backlog represents contracted revenue that has not yet been recognized and includes deferred revenue and non-cancellable amounts expected to be invoiced and recognized as revenue in future periods.

December 31, 2020

Perpetual license

Term license

Maintenance

Pega Cloud

Consulting

Total

1 year or less

$

11,514

$

105,920

$

227,803

$

248,223

$

19,226

$

612,686

57

%

1-2 years

395

7,962

54,509

193,064

346

256,276

24

%

2-3 years

—

4,928

28,320

104,542

851

138,641

13

%

Greater than 3 years

—

4

19,283

44,308

1,189

64,784

6

%

$

11,909

$

118,814

$

329,915

$

590,137

$

21,612

$

1,072,387

100

%

Change in Backlog Since December 31, 2019

$

7,425

$

1,981

$

61,621

$

167,967

$

(2,750)

$

236,244

166

%

2

%

23

%

40

%

(11)

%

28

%

PEGASYSTEMS INC.

RECONCILIATION OF FORWARD-LOOKING GUIDANCE

(in millions, except per share amounts)

Year Ended December 31, 2021

Revenue (GAAP and Non-GAAP)

$

1,250

Net loss (GAAP)

$

(115.2)

Stock-based compensation

125.3

Convertible debt

18.4

Amortization of intangible assets

3.7

Foreign currency transaction (gain) loss

(2.0)

Income tax effects

(8.7)

Net Income (Non-GAAP)

$

21.5

Diluted (loss) per share - GAAP

$

(1.44)

Non-GAAP adjustments

1.69

Diluted earnings per share - Non-GAAP

$

0.25

Diluted weighted-average number of common shares outstanding - GAAP

80.0

Incremental dilutive shares for Non-GAAP

5.0

Diluted weighted-average number of common shares outstanding - Non-GAAP

85.0