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PEGASYSTEMS INC

PEGASYSTEMS INCPEGAEarnings & Financial Report

Nasdaq · Information Technology · Services-Computer Processing & Data Preparation

Pegasystems Inc. (Pega) is a global software company based in Waltham, Massachusetts, in the United States, and founded in 1983. The company has been publicly traded since 1996 as PEGA (NASDAQ). Pega is a low-code platform for workflow automation and generative AI-powered decision-making for businesses.

What changed in PEGASYSTEMS INC's 10-K — 2022 vs 2023

Top changes in PEGASYSTEMS INC's 2023 10-K

196 paragraphs added · 198 removed · 149 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

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Our Services and Support We offer services and support through our Global Client Success, Global Service Assurance, Global Client Support, and Pega Academy groups.
Our Services and Support We offer services and support through our Global Client Success, Global Service Assurance and Client Support, and Pega Academy groups.
Competitors vary in size, scope, and breadth of the products and services they offer and include some of the world’s largest companies, including Salesforce.com, Microsoft Corporation, Oracle Corporation, SAP SE, ServiceNow, and International Business Machines Corporation (“IBM”). We have been most successful in competing for clients whose businesses are characterized by a high degree of change, complexity, or regulation.
Competitors vary in size, scope, and breadth of the products and services they offer and include some of the world’s largest companies, including International Business Machines Corporation (“IBM”), Microsoft Corporation, Oracle Corporation, Salesforce.com, SAP SE, and ServiceNow. We have been most successful in competing for clients whose businesses are characterized by a high degree of change, complexity, and/or regulation.
See risk factor "The market for our offerings is intensely and increasingly competitive, rapidly changing, and fragmented" in Item 1A of this Annual Report for additional information. Intellectual Property We rely primarily on a combination of copyright, patent, trademark, and trade secrets laws, as well as confidentiality procedures and contractual provisions to protect our intellectual property rights and our brand.
For additional information, see risk factor "The market for our offerings is intensely and increasingly competitive, rapidly changing, and fragmented" in Item 1A of this Annual Report. Intellectual Property We rely primarily on a combination of copyright, patent, trademark, and trade secrets laws, as well as confidentiality procedures and contractual provisions to protect our intellectual property rights and our brand.
We evolve our corporate culture through various initiatives, including global equity, inclusion and belonging, employee engagement, pay equity, and employee development. Diversity, Equity, Inclusion and Belonging (“DEIB”) We celebrate, welcome and foster diverse perspectives at Pega because we believe this will accelerate our ability to deliver innovative products and services to our clients.
We evolve our corporate culture through various initiatives, including global equity, inclusion, and belonging initiatives, employee engagement, pay equity, and employee development. Diversity, Equity, Inclusion, and Belonging (“DEIB”) We celebrate, welcome, and foster diverse perspectives at Pega because we believe this will accelerate our ability to deliver innovative products and services to our clients.
Our stock is traded on the NASDAQ Global Select Market under the symbol “PEGA.” Our website is located at www.pega.com, and our investor relations website is located at www.pega.com/about/investors. 9 Available Information We make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports, free of charge, through our website as soon as reasonably practicable after we electronically file such material with or furnish such material to the SEC.
Our stock is traded on the NASDAQ Global Select Market under the symbol “PEGA.” Our website is at www.pega.com, and our investor relations website is at www.pega.com/about/investors. 9 Available Information We make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports, free of charge, through our website as soon as reasonably practicable after we electronically file such material with or furnish such material to the SEC.
Our Products Pega Infinity™, the latest version of our software portfolio, helps build agility into our clients organizations so they can work smarter, unify experiences, and adapt to meet changing requirements. 4 Our applications and low-code platform intersect with and encompass several software markets, including: • Customer Engagement, including Customer Relationship Management (“CRM”); • Digital Process Automation (“DPA”), including Business Process Management (“BPM”), Workflow, and Dynamic Case Management (“DCM”); • Low-code application development platforms (“LCAP”), including Multi-experience Development Platforms (“MXDP”); • Robotic Process Automation (“RPA”); • Business Rules Management Systems (“BRMS”); • Decision Management, including predictive and adaptive analytics; and • the Vertical-Specific Software (“VSS”) market of industry solutions and packaged applications. 1:1 Customer Engagement Our omnichannel customer engagement applications are designed to maximize the lifetime value of customers and help reduce the costs of serving customers while ensuring a consistent, unified, and personalized customer experience.
Our Products Pega Infinity Pega Infinity™, the latest version of our software portfolio, helps build agility into our clients’ organizations so they can work smarter, unify experiences, and adapt to meet changing requirements. 4 Our applications and low-code platform intersect with and encompass several software markets, including: • Customer Engagement, including Customer Relationship Management (“CRM”); • Digital Process Automation (“DPA”), including Business Process Management (“BPM”), Workflow, and Dynamic Case Management (“DCM”); • Low-code application development platforms (“LCAP”), including Multi-experience Development Platforms (“MXDP”); • Robotic Process Automation (“RPA”); • Business Rules Management Systems (“BRMS”); • Decision Management, including predictive and adaptive analytics; and • the Vertical-Specific Software (“VSS”) market of industry solutions and packaged applications. 1:1 Customer Engagement Our omnichannel customer engagement applications are designed to maximize the lifetime value of customers and help reduce the costs of serving customers while ensuring a consistent, unified, and personalized customer experience.
We also purchase or license technology that we incorporate into our services. Sales and Marketing We encourage our direct sales force and outside partners to co-market, pursue joint sales initiatives, and drive broader adoption of our technology, helping us grow our business more efficiently and focus our resources on continued innovation and enhancement of our solutions.
We also purchase or license technology that we incorporate into our products and services. Sales and Marketing We encourage our direct sales force and outside partners to co-market, pursue joint sales initiatives, and drive broader adoption of our technology, helping us grow our business more efficiently and focus our resources on continued innovation and enhancement of our solutions.
Our platform enables clients to enable more personalized real-time next best action, accelerate onboarding with simplified experiences, automate resolution of customer requests across channels with increased digital self-servicing, and streamline operations to rapidly reduce cost, time, and risks while increasing customer satisfaction. 7 • Manufacturing and high tech – Pega’s low-code platform for AI-powered decisioning and workflow automation is used by manufacturers to streamline their complex global operations and create more value for their customers, dealers, distributors, and suppliers while directly managing the performance, uptime, and impact of their connected products, equipment, and experiences.
Our platform enables clients to enable more personalized real-time next best action, accelerate onboarding with simplified experiences, automate the resolution of customer requests across channels with increased digital self-servicing, and streamline operations to rapidly reduce cost, time, and risks while increasing customer satisfaction. 7 • Manufacturing and high tech – Pega’s software for AI-powered decisioning and workflow automation is used by manufacturers to streamline their complex global operations and create more value for their customers, dealers, distributors, and suppliers while directly managing the performance, uptime, and impact of their connected products, equipment, and experiences.
Our platform enables clients to nurture and grow their book of business, increase agent sales effectiveness, power better partner performance and loyalty, automate application intake and processing with intelligence, personalize seamless policy lifecycle experiences, and improve claims handling efficiencies with more modern customer and employee experiences. • Consumer services – Pega’s low-code platform for AI-powered decisioning and workflow automation is used by consumer services organizations for Customer Engagement, Supplier Onboarding, Customer Service, and Enterprise Operations in industries such as transportation, utilities, internet providers, retail, hospitality, and entertainment.
Our platform enables clients to nurture and grow their book of business, increase agent sales effectiveness, power better partner performance and loyalty, automate application intake and processing with intelligence, personalize seamless policy lifecycle experiences, and improve claims handling efficiencies with more modern customer and employee experiences. • Consumer services – Pega’s software for AI-powered decisioning and workflow automation is used by consumer services organizations for Customer Engagement, Supplier Onboarding, Customer Service, and Enterprise Operations in industries such as transportation, utilities, internet providers, retail, hospitality, and entertainment.
Our powerful low-code platform for workflow automation and artificial intelligence-powered decisioning enables the world’s leading brands and government agencies to hyper-personalize customer experiences, streamline customer service, and automate mission-critical business processes and workflows. With Pega, our clients can leverage our intelligent technology and scalable architecture to accelerate their digital transformation.
Our powerful, low-code platform for workflow automation and artificial intelligence-powered decisioning enables the world’s leading brands and government agencies to hyper-personalize customer experiences, streamline customer service, and automate mission-critical business processes and workflows. With Pega, our clients can leverage our artificial intelligence (“AI”) technology and scalable architecture to accelerate their digital transformation.
Within Global Client Success, our Client Innovation team helps clients transform and prototype their customer journeys through our Pega Catalyst™ offering, our Success team ensures our clients receive the maximum business value from their Pega investments, and our Pega Consulting team provides planning, design, implementation, and advisory and assurance services. • Global Service Assurance – Global Service Assurance addresses risks to client success because of technical concerns.
Within Global Client Success, our Client Innovation team helps clients transform and prototype their customer journeys through our Pega Catalyst™ offering, our Success team ensures our clients receive the maximum business value from their Pega investments, and our Pega Consulting team provides planning, design, implementation, and assurance services. • Global Service Assurance and Client Support – Global Service Assurance addresses risks to client success because of technical concerns.
Whether we are successful depends, in part, on our ability to: • execute our marketing and sales strategies; • appropriately manage our expenses as we grow our organization; • effectively develop new products and enhance our existing products; and • incorporate acquired technologies into our solutions and unified Pega Platform™.
Whether we are successful depends, in part, on our ability to: • Execute our marketing and sales strategies; • Manage our expenses appropriately as we grow our organization; • Develop new products and enhance our existing products; and • Incorporate acquired technologies into our solutions and the unified Pega Platform™.
By providing technical staff dedicated to client success, we reduce the time to resolve technical issues, eliminate lengthy deliberations of technical resource logistics, and increase clients’ confidence in our technology and client service. • Global Client Support – Global Client Support provides technical support for our products and Pega Cloud services.
By providing technical staff dedicated to client success, we reduce the time to resolve technical issues, eliminate lengthy deliberations of technical resource logistics, and increase clients’ confidence in our technology and client service. Global Client Support provides technical support for our products and services.
Consistent omnichannel experiences With centrally defined business and process logic, Pega provides dynamic, open APIs to keep front-end channels and business logic aligned for consistent customer experiences. By leveraging innovative user interface (UI) technology, Pega-powered processes and decisions can be easily embedded into existing front-ends or used as the basis for new employee-facing applications.
Consistent omnichannel experiences With centrally defined business and process logic, Pega provides dynamic, open APIs to align front-end channels and business logic for consistent customer experiences. By leveraging innovative user interface (UI) technology, Pega-powered processes and decisions can be easily embedded into existing front ends or used as the basis for new employee-facing applications.
Along with our partners, we deliver solutions tailored to the specific industry needs of our clients. Our clients represent many industries, including: • Financial services – Pega’s low-code platform for AI-powered decisioning and workflow automation is used by financial services organizations for Customer Engagement, Onboarding and KYC, Lending, Customer Service, Payment Exceptions, Bank Operations and Managing Financial Crime.
Along with our partners, we deliver solutions tailored to the specific industry needs of our clients. Our clients represent many industries, including: • Financial services – Pega’s software for AI-powered decisioning and workflow automation is used by financial services organizations for Customer Engagement, Onboarding and KYC, Lending, Customer Service, Payment Exceptions, Bank Operations, and Managing Financial Crime.
Our platform enables clients to modernize legacy systems and processes to meet the growing demands for improved constituent service, lower costs, reduced fraud, and greater transparency. • Healthcare – Pega’s low-code platform for AI-powered decisioning and workflow automation is used by healthcare organizations for Consumer Engagement, Onboarding and Enrollment, Customer Service, Care Management Services and Core Admin.
Our platform enables clients to modernize legacy systems and processes to meet the growing demands for improved constituent service, lower costs, reduced fraud, and greater transparency. • Healthcare – Pega’s software for AI-powered decisioning and workflow automation is used by healthcare organizations for Consumer Engagement, Onboarding and Enrollment, Customer Service, Care Management Services and Claims/Core Admin.
In addition to our employee survey and continuous feedback tools, we host regular sessions led by executive leadership team where any employee can ask any question. We are committed to fostering an environment that supports our employees’ health and overall well-being, with emphasis on physical, emotional, financial, and personal wellness.
In addition to our employee engagement survey and continuous feedback tools, we host regular sessions led by the executive leadership team where any employee can ask questions. We are committed to fostering an environment that supports our employees’ health and overall well-being, with an emphasis on physical, emotional, financial, and personal wellness.
We strive to be a place where people come to build a career in an equitable, inclusive, and diverse culture. We believe that cultivating our talent is at the heart of engaging, motivating, and retaining our workforce to support our clients and our business.
We strive to be a place where people build their career in an inclusive, equitable, and diverse culture. We believe cultivating our talent is at the heart of engaging, motivating, and retaining our workforce to support our clients, partners, and business.
We are continuously expanding our sponsorship of formal employee resource groups and are proud to share our support for the following communities: women, veterans, Black, LGBTQIA+, Asian, Latinx, and persons with disabilities. Employee Engagement, Health, and Well-Being Our efforts to retain and attract diverse and passionate employees include providing competitive rewards packages and encouraging active two-way communication throughout the Company.
We are continuously expanding our sponsorship of formal employee resource groups and are proud to share our support for the following communities: women, veterans, Black, LGBTQIA+, Asian, LatinX, and persons with disabilities. Employee Engagement, Health, and Well-Being Our efforts to retain and attract employees include providing competitive reward packages and encouraging active and transparent communication throughout the Company.
Backlog As of December 31, 2022, we expected to recognize approximately $1.4 billion in revenue from backlog on existing contracts in future periods. See "Remaining performance obligations ("Backlog")" in Item 7 of this Annual Report for additional information.
Backlog As of December 31, 2023, we expected to recognize $1.5 billion in revenue from backlog on existing contracts in future periods. For additional information, see "Remaining Performance Obligations ("Backlog")" in Item 7 of this Annual Report.
We promote a culture of transparency, regularly seeking feedback to better understand and improve our employee experience, and are committed to fostering an environment where every team member feels connected at Pega. We share the responsibility to preserve, strengthen, and evolve our culture while continuously reviewing the way we do things to propel us forward together.
We regularly seek feedback to better understand and improve our employee experience, and we are committed to fostering an environment where everyone feels connected at Pega. We share the responsibility to preserve, strengthen, and evolve our culture while continuously reviewing the way we do things to propel us forward together.
These partners may deliver strategic business planning, consulting, project management, training, and implementation services to our clients. Our partners include well-respected major firms, such as Accenture PLC, Amazon.com, Inc., Areteans, Capgemini SA, Coforge, Cognizant Technology Solutions Corporation, EY, Google, HCL Infosys, Merkle, PwC, Tata Consultancy Services Limited, Tech Mahindra Limited, Virtusa Corporation, and Wipro Limited.
Our partners include well-respected major firms, such as Accenture PLC, Amazon.com, Inc., Areteans, Capgemini SA, Coforge, Cognizant Technology Solutions Corporation, EY, Google, HCL Infosys, Merkle, PwC, Tata Consultancy Services Limited, Tech Mahindra Limited, Virtusa Corporation, and Wipro Limited.
Our platform enables clients to improve member and patient outcomes, loyalty and retention, simplify experiences with reduced time and effort, resolve service requests faster and easier across channels, advance efficient flexible healthcare coordination, and deliver streamlined, modern experiences for members, providers and employees. • Insurance – Pega’s low-code platform for AI-powered decisioning and workflow automation is used by insurance companies for Customer Engagement, Sales, Distribution, Underwriting, Policy Holder Service and Claims.
Our platform enables clients to improve member and patient outcomes, loyalty, and retention, simplify experiences with reduced time and effort, resolve service requests faster and easier across channels, advance efficient flexible healthcare coordination, and deliver streamlined, modern experiences for members, providers, and employees. • Communications and media – Pega’s software for AI-powered decisioning and workflow automation is used by communications and media organizations for Customer Engagement, Order Management, Customer Service, Service Assurance, Network Operations, and Shared Services.
Support services include cloud service reliability management, online support community management, self-service knowledge, proactive problem prevention through information and knowledge sharing, problem tracking, prioritization, escalation, diagnosis, and resolution. 6 • Pega Academy – The success of our sales strategy for repeat sales to target clients depends on enablement and ecosystem engagement.
Support services include cloud service reliability management, online support community management, self-service knowledge, proactive problem prevention through information and knowledge sharing, problem tracking, prioritization, escalation, diagnosis, and resolution. 6 • Pega Academy – Pega Academy offers enablement content for all Pega product implementations to ensure the success of our Clients and Partners.
It is critical to strive for representation of diverse backgrounds, but it is even more critical to create an environment where all individuals are respected, valued and supported, have access to opportunities, and feel that they belong. Our commitment to DEIB begins with a highly skilled and diverse board, and includes inclusion and allyship programs amongst other investments.
It is critical for us to create an environment where all individuals are respected, valued, and supported, have access to opportunities, and feel that they belong. Our commitment to DEIB includes inclusion and allyship programs, amongst other investments.
Our platform enables clients to increase loyalty and wallet share, reduce time and effort to close loans and open accounts, address compliance more effectively while simplifying customer experiences, resolve service requests across channels more quickly with less effort, and boost the efficiency of various back-office processes with fewer human touches. • Communications and media – Pega’s low-code platform for AI-powered decisioning and workflow automation is used by communications and media organizations for Customer Engagement, Order Management, Customer Service, Service Assurance, Network Operations and Shared Services.
Our platform enables clients to increase loyalty and wallet share, reduce time and effort to close loans and open accounts, address compliance more effectively while simplifying customer experiences, resolve service requests across channels more quickly with less effort, and boost the efficiency of various back-office processes with fewer human touches. • Government – Pega’s software for AI-powered decisioning and workflow automation is used by government agencies for Enterprise Modernization, Licensing, Investigative Case Management, Grants and Financial Management, Acquisition and Supply Chain Modernization, and Citizen Service.
Our platform enables clients to increase loyalty and wallet share, simplify experiences while accelerating revenues and processes, resolve service requests across channels more quickly with less effort, drive a faster, simpler repair experience, and boost efficiency of 5G, fiber and cloud processes. • Government – Pega’s low-code platform for AI-powered decisioning and workflow automation is used by government agencies for Enterprise Modernization, Licensing, Investigative Case Management, Grants and Financial Management, Acquisition and Supply Chain Modernization, and Citizen Service.
Our platform enables clients to increase loyalty and wallet share, simplify experiences while accelerating revenues and processes, resolve service requests across channels more quickly with less effort, drive a faster, simpler repair experience, and boost the efficiency of 5G, fiber, and cloud processes. • Insurance – Pega’s software for AI-powered decisioning and workflow automation is used by insurance companies for Customer Engagement, Sales, Distribution, Underwriting, Policy Holder Service, and Claims.
Pega Academy helps employees, clients, and partners gain and rapidly advance Pega software skills. A series of leadership and management development programs equip our managers with the skills and knowledge to successfully build a culture of engagement and high performance. Additionally, we provide educational resources and classes, career training, and education reimbursement programs.
A series of leadership and management development programs equip our managers with the skills and knowledge to successfully build a culture of engagement and high performance. Additionally, we provide educational resources and classes, career training, and education reimbursement programs. Corporate Information Pegasystems Inc. was incorporated in Massachusetts in 1983.
Our People As of January 31, 2023, we had 6,145 employees, of which 2,385 were based in the Americas, 1,457 were based in Europe, 1,953 were based in India, and 350 were based elsewhere in Asia-Pacific. As a high-technology company, our people are critical to our success.
Our People As of January 31, 2024, we had 5,406 employees, of which 1,998 were based in the Americas, 1,224 were based in Europe, 1,873 were based in India, and 311 were based elsewhere in Asia-Pacific. Our people are critical to our success.
In addition, Authorized Training Partners (“ATPs”) support Pega customers in local languages, while our Workforce Development Partners let clients outsource their recruiting . Strategic partnerships with these firms are important to our sales efforts because they influence buying decisions, identify sales opportunities, and complement our software with their domain expertise, solutions, and service capabilities.
Strategic partnerships with these firms are important to our sales efforts because they influence buying decisions, identify sales opportunities, and complement our software with their domain expertise, solutions, and service capabilities. These partners may deliver strategic business planning, consulting, project management, training, and implementation services to our clients.
We have increased our ability to train partners and clients to implement our technology and made it easier for individuals to stay current as it evolves. We offer instructor-led and online training to our employees, clients, and partners. We have also partnered with universities to provide our courseware as part of student curriculum to expand our ecosystem.
We have increased our ability to train partners and clients to implement our technology and made it easier for individuals to stay current as it evolves. We offer many mediums, including instructor-led and online training to our employees, clients, and partners so individuals can learn in the way that best suits them.
Engagement is an important part of our strategy to create a broad ecosystem passionate about Pega technology. Our Partners We collaborate with global systems integrators and technology consulting firms that provide consulting services to our clients, as well as Independent Software Vendors (“ISVs”) and technology partners that extend clients’ investments with integrated solutions .
Our Partners We collaborate with global systems integrators and technology consulting firms that provide consulting services to our clients, as well as Independent Software Vendors (“ISVs”) and technology partners that extend clients’ investments with integrated solutions . In addition, Authorized Training Partners (“ATPs”) support Pega customers in local languages, while our Workforce Development Partners let clients outsource their recruiting .
It is an ongoing, dynamic process that enables our employees to focus on both performance and development goals, receive continuous feedback, and drive their future path for growth. We invest in our employees’ career growth and progression by providing a wide range of opportunities, including formal and informal development, mentoring, and coaching.
Talent Cultivation Talent Cultivation is at the foundation of our people strategy. It is an ongoing, dynamic process that encourages our employees to focus on performance and development goals, receive continuous feedback, and drive their future path for growth.
Pay Equity We compensate our employees for what they do and how they do it, regardless of their gender, race, or other characteristics. To deliver on that commitment, we benchmark and set pay ranges based on market data and consider individual factors, such as an employee’s role and experience, job location, and job performance.
To deliver on that commitment, we benchmark and set pay ranges based on market data and consider individual factors, such as an employee’s role and experience, location, and performance. We regularly review our compensation practices, in terms of our overall workforce and individual employees, to ensure our pay is fair and equitable against local markets.
PegaUp!, our employee wellness program, includes awareness campaigns, fitness classes, guided meditation, as well as health, wellness, and in 2022, we implemented quarterly global Wellness Days when our entire company takes a break for a day to recharge.
PegaUp!, our employee wellness program, includes awareness campaigns, fitness classes, guided meditation, and health and wellness offerings. In 2022, we also implemented global Wellness Days, where we encourage our people to take a break to recharge. Pay Equity We compensate our employees for what they do and how they do it, regardless of their gender, race, or other characteristics.
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Subscription transition We are transitioning our business to sell software primarily through subscription arrangements. Until we fully complete our subscription transition, which we expect will occur in 2023, our operating results may be impacted. Operating performance, revenue mix, and new arrangements in each period can fluctuate based on client preferences for our perpetual and subscription offerings.
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We have also partnered with universities to provide our courseware as part of the student curriculum to expand our ecosystem of enablement content. In addition, we have robust and comprehensive documentation on our documentation portal, so people have the information at their fingertips in the moment of need.
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See risk factor "If we fail to manage our transition to a more subscription-based business model successfully, our results of operations and/or cash flows could be negatively impacted" in Item 1A of this Annual Report for additional information.
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Lastly, engagement is an important part of our strategy to create a broad ecosystem passionate about Pega technology to further increase our advocates across our clients and other key stakeholders.
Removed
We regularly review our compensation practices, in terms of our overall workforce and individual employees, to ensure our pay is fair and equitable against local markets. Talent Cultivation Talent Cultivation is at the foundation of our people strategy and enables us to provide innovative products and services to our clients.
Added
We invest in our employees’ career growth and progression by providing a wide range of opportunities, including formal and informal development, mentoring, sponsorship, and coaching. Pega Academy helps employees, clients, and partners gain and rapidly advance Pega software skills.
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Corporate Information Pegasystems Inc. was incorporated in Massachusetts in 1983.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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We do not carry, nor do we currently intend to obtain, significant key-person life insurance on officers or other employees. Our success will depend on attracting and retaining qualified personnel and, as needed, rapidly replacing and developing new management.
We do not carry, nor do we currently intend to obtain, significant key-person life insurance on officers or other employees. Our success will depend on attracting and retaining qualified personnel and rapidly replacing and developing new management, as needed.
Many of our competitors, such as Salesforce.com, Microsoft Corporation, Oracle Corporation, SAP SE, ServiceNow, and International Business Machines Corporation (“IBM”), have far greater resources than we do and may be able to respond more quickly and efficiently to new or emerging technologies, programming languages or standards, or changes in client requirements or preferences.
Many of our competitors, such as International Business Machines Corporation (“IBM”), Microsoft Corporation, Oracle Corporation, Salesforce.com, SAP SE, and ServiceNow, have far greater resources than we do and may be able to respond more quickly and efficiently to new or emerging technologies, programming languages or standards, or changes in client requirements or preferences.
Additional risks inherent in our international business activities include: • laws and business practices favoring local competitors; • compliance with multiple, conflicting, and changing governmental laws and regulations, including employment, tax, privacy, and data privacy and protection; • increased tariffs and other trade barriers; • the costs of localizing offerings for local markets, including translation into foreign languages and associated expenses; • longer payment cycles and credit and collectability risk on our foreign trade receivables; • difficulties in enforcing contractual and intellectual property rights; 12 • heightened fraud and bribery risks; • treatment of revenue from international sources and changes to tax codes, including being subject to foreign tax laws, being liable for paying withholding, income or other taxes in foreign jurisdictions, and other potentially adverse tax consequences (including restrictions on repatriating earnings and the threat of “double taxation”); • management of our international operations, including increased administrative and compliance expenses; • heightened risks of political and economic instability; and • foreign currency exchange rate fluctuations and controls.
Additional risks inherent in our international business activities include: • laws and business practices favoring local competitors; • compliance with multiple, conflicting, and changing governmental laws and regulations, including employment, tax, privacy, and data privacy and protection; • increased tariffs and other trade barriers; • the costs of localizing offerings for local markets, including translation into foreign languages and associated expenses; • longer payment cycles and credit and collectability risk on our foreign trade receivables; • difficulties in enforcing contractual and intellectual property rights; • heightened fraud and bribery risks; • treatment of revenue from international sources and changes to tax codes, including being subject to foreign tax laws, being liable for paying withholding, income or other taxes in foreign jurisdictions, and other potentially adverse tax consequences (including restrictions on repatriating earnings and the threat of “double taxation”); • management of our international operations, including increased administrative and compliance expenses; • heightened risks of political and economic instability; and • foreign currency exchange rate fluctuations and controls.
Any such damages, penalties, disruptions, or limitations in our ability to do business with the public sector could have a material adverse effect on our business, results of operations, financial condition, and cash flows. 19 We are subject to increasingly complex U.S. and foreign laws and regulations, requiring costly compliance measures.
Any such damages, penalties, disruptions, or limitations in our ability to do business with the public sector could have a material adverse effect on our business, results of operations, financial condition, and cash flows. We are subject to increasingly complex U.S. and foreign laws and regulations, requiring costly compliance measures.
Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all. Even if a license were available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require substantial effort and cost.
Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all. Even if a license were available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require substantial time, effort, and cost.
Any future debt financing could involve restrictive covenants relating to our capital raising activities and other financial and operations matters, which may increase the risks related to our business and our ability to service and repay our indebtedness. The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.
Any future debt financing could involve restrictive covenants relating to our capital raising activities and other financial and operations matters, which may increase the risks related to our business and our ability to service and repay our indebtedness. 16 The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.
Although we generally enter into intellectual property and confidentiality agreements with our employees and strategic partners, despite our efforts our former employees may seek employment with our business partners, clients, or competitors, and there can be no assurance that the confidential nature of our proprietary information will be maintained.
Although we generally enter into intellectual property and confidentiality agreements with our employees and strategic partners, despite our efforts our former employees may seek employment with our business partners, clients, vendors, or competitors, and there can be no assurance that the confidential nature of our proprietary information will be maintained.
Conversely, if we are unable to achieve an appropriate balance of sales and marketing personnel to meet future demand or research and development personnel to enhance our current products or develop new products, we may not be able to achieve our sales and profitability targets . We rely on third-party relationships.
Conversely, if we are unable to achieve an appropriate balance of sales and marketing personnel to meet future demand or research and development personnel to enhance our current products or develop new products, we may not be able to achieve our sales and profitability targets . 11 We rely on third-party relationships.
We may not obtain follow-on sales, or the follow-on sales may be delayed, and our future revenue could be limited. We will need to acquire or develop new products, evolve existing ones, address defects or errors, and adapt to technology changes.
We may not obtain follow-on sales, or the follow-on sales may be delayed, and our future revenue could be limited. 12 We will need to acquire or develop new products, evolve existing ones, address defects or errors, and adapt to technology changes.
Similar laws and regulations exist in many other countries where we do or intend to do business. Within recent years, there has been an increase in the scope and enforcement of data privacy laws in the jurisdictions in which we do business.
Similar laws and regulations exist in many other countries where we do or intend to do business. 19 Within recent years, there has been an increase in the scope and enforcement of data privacy laws in the jurisdictions in which we do business.
Subscription licenses and services are typically billed and collected over the contract term, while perpetual license arrangements are generally billed and collected upfront when the license rights become effective.
Subscription licenses and services are typically billed and collected over the contract term, while perpetual licenses are generally billed and collected upfront when the license rights become effective.
The CCPA was modified as of January 1, 2023 by the California Privacy Rights Act (“CPRA”) which expands California consumers’ rights with respect to sensitive personal information and which created a new state agency that is vested with authority to implement and enforce the CCPA and CPRA.
The CCPA was modified as of January 1, 2023 by the California Privacy Rights Act (“CPRA”) which expands California consumers’ rights with respect to sensitive personal information and which created a new state agency that is vested with authority to implement and enforce the CCPA, CPRA and associated regulations.
We market our products and services to clients based outside of the U.S., representing 42% of our revenue over the last three years. We have established offices in the Americas, Europe, Asia, and Australia. We anticipate hiring additional personnel to accommodate increased international demand, and we may also enter into agreements with local distributors, representatives, or resellers.
We market our products and services to clients based outside of the U.S., representing 43% of our revenue over the last three years. We have established offices in the Americas, Europe, Asia, and Australia. We anticipate hiring personnel to accommodate increased international demand, and we may also enter into agreements with local distributors, representatives, or resellers.
A change in the size or volume of license and Pega Cloud arrangements, or a change in the mix between perpetual licenses, term licenses, and Pega Cloud arrangements, can cause our revenues and cash flows to fluctuate materially between periods.
A change in the size or volume of license and Pega Cloud arrangements, or a change in the mix between perpetual licenses, subscription licenses, and Pega Cloud arrangements, can cause our revenues and cash flows to fluctuate materially between periods.
Technical developments, client requirements, programming languages, industry standards, and regulatory requirements frequently change in the markets in which we operate. The introduction of third-party solutions embodying new technologies and the emergence of new industry standards could make our existing and future software solutions obsolete and unmarketable.
Technical developments, client requirements, programming languages, industry standards, and regulatory requirements frequently change in the markets in which we operate. The introduction of third-party solutions embodying new technologies, including generative AI and the emergence of new industry standards could make our existing and future software solutions obsolete and unmarketable.
Market acceptance of our subscription-based offerings will depend on our ability to continue to: • innovate and include new functionality and improve the usability of our products in a manner that addresses our clients’ needs and requirements; and • optimally price our products considering marketplace conditions, competition, our costs, and client demand.
Continued growth of our subscription-based offerings will depend on our ability to continue to: • innovate and include new functionality and improve the usability of our products in a manner that addresses our clients’ needs and requirements; and • optimally price our products considering marketplace conditions, competition, our costs, and client demand.
Our security measures and those of our clients may be breached because of third-party actions or that of employees, consultants, or others, including intentional misconduct by computer hackers, system errors, human errors, technical flaws in our products, or otherwise.
Our security measures, those of our suppliers, third-party technology providers, and our clients may be breached because of third-party actions or those of employees, consultants, clients, or others, including intentional misconduct by computer hackers, system errors, human errors, technical flaws in our products, or otherwise.
We have historically used but do not currently use foreign currency forward contracts to hedge our exposure to changes in foreign currency exchange rates. We may enter into hedging contracts again in the future if we believe it is appropriate.
We do not currently use foreign currency forward contracts to hedge our exposure to changes in foreign currency exchange rates. We may enter into hedging contracts again in the future if we believe it is appropriate.
As of December 31, 2022, we had $600 million in aggregate principal indebtedness under our Notes and have outstanding letters of credit under our credit facility, including a $25 million letter of credit obtained to secure the judgment in our litigation with Appian.
As of December 31, 2023, we had $502.27 million in aggregate principal indebtedness under our Notes and have outstanding letters of credit under our credit facility, including a $25 million letter of credit obtained to secure the judgment in our litigation with Appian.
Finally, the investments required to meet the increased demand for our consulting services could strain our ability to deliver our consulting engagements at desired profitability, thereby impacting our overall profitability and financial results. We may not be able to maintain our retention rate for our subscription clients. An increasing percentage of our revenue has been derived from our subscription offerings.
Finally, the investments required to meet the increased demand for our consulting services could strain our ability to deliver our consulting engagements at desired profitability, thereby impacting our overall profitability and financial results. We may not be able to maintain our retention rate for our subscription clients. The majority of our revenue is derived from our subscription offerings.
We believe the principal competitive factors within our market include: • product adaptability, scalability, functionality, and performance; • proven success in delivering cost-savings and efficiency improvements; • proven success in enabling improved customer interactions; • 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.
We believe the principal competitive factors within our market include: • product adaptability, scalability, functionality, and performance; • proven success in delivering cost-savings and efficiency improvements; • proven success in enabling improved customer interactions; • 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. 13 Competition for market share and pressure to reduce prices and make sales concessions is likely to increase.
Various factors contribute to the uncertain economic environment, including the level and volatility of interest rates, high inflation, the conflict between Russia and Ukraine, the continuing effects of the COVID-19 pandemic, an actual recession or fears of a recession, trade policies and tariffs, and geopolitical tensions.
Various factors contribute to the uncertain economic environment, including the level and volatility of interest rates, high inflation, the conflict between Russia and Ukraine and between Israel and Gaza, an actual recession or fears of a recession, trade policies and tariffs, and geopolitical tensions.
Our indebtedness may: • limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, or other general business purposes; • limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions, or other general business purposes; • require us to use a substantial portion of our cash flow from operations to make debt service payments; • limit our flexibility to plan for, or react to, changes in our business and industry; • place us at a competitive disadvantage compared to less leveraged competitors; • dilute existing stockholders from the issuance of common stock if the Notes are converted; and • increase our vulnerability to the impact of adverse economic and industry conditions. 16 Our ability to pay our debt when due or refinance our indebtedness, including the Notes, depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control.
Our indebtedness may: • limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, or other general business purposes; • limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions, or other general business purposes; • require us to use a substantial portion of our cash flow from operations to make debt service payments; • limit our flexibility to plan for, or react to, changes in our business and industry; • place us at a competitive disadvantage compared to less leveraged competitors; • dilute existing stockholders from the issuance of common stock if the Notes are converted; and • increase our vulnerability to the impact of adverse economic and industry conditions.
As of December 31, 2022, $48.8 million of our cash and cash equivalents were held in our foreign subsidiaries. If it becomes necessary or desirable to repatriate these funds, we may be required to pay federal, state, and local income and foreign withholding taxes upon repatriation. We consider the earnings of our foreign subsidiaries to be permanently reinvested.
As of December 31, 2023, $159.9 million of our cash and cash equivalents were held in our foreign subsidiaries. If it becomes necessary or desirable to repatriate foreign funds, we may have to pay federal, state, and local income taxes as well as foreign withholding taxes upon repatriation. We consider the earnings of our foreign subsidiaries to be permanently reinvested.
We currently intend to grow our business by pursuing strategic initiatives consistent with becoming a Rule of 40 company, meaning a company with combined Annual Contract Value (“ACV”) growth rate and free cash flow margin of at least 40%.
We may not achieve the key elements of our strategy and grow our business as anticipated. We currently intend to grow our business by pursuing strategic initiatives consistent with becoming a Rule of 40 company, meaning a company with combined Annual Contract Value (“ACV”) growth rate and free cash flow margin of at least 40%.
We are investing heavily in our business in anticipation of continued growth in license and Pega Cloud arrangements, and we may experience decreased profitability or losses and reduced or negative cash flow if we do not continue to increase the value of our license and Pega Cloud arrangements to balance our growth in expenses.
Investments we are making to continue to grow license and Pega Cloud arrangements may result in decreased profitability or losses and reduced or negative cash flow if we do not continue to increase the value of our license and Pega Cloud arrangements to balance our growth in expenses.
We may also fail to anticipate adequately and prepare for the development of new markets and applications for our technology and the commercialization of emerging technologies such as blockchain and thereby fail to take advantage of new market opportunities or fall behind early movers in those markets. 13 The market for our offerings is intensely and increasingly competitive, rapidly changing, and fragmented.
We may also fail to anticipate adequately and prepare for the development of new markets and applications for our technology and the commercialization of emerging technologies such as generative AI and thereby fail to take advantage of new market opportunities or fall behind early movers in those markets.
Although we are not aware of having experienced any prior material data breaches, regulatory non-compliance incidents or cyber security incidents, we may in the future be impacted by such an event, exposing our clients and us to a risk of someone obtaining access to our information, to information of our clients or their customers, or to our intellectual property, disabling or degrading service, or sabotaging systems or information.
Individual hackers, groups of hackers, and sophisticated organizations, including state-sponsored organizations, or nation-states themselves, may take steps that threaten our clients, suppliers, third-party technology providers, and us. 14 Although we are not aware of having experienced any prior material data breaches, regulatory non-compliance incidents or cyber security incidents, we may in the future be impacted by such an event, exposing our clients and us to a risk of someone obtaining access to our information, to information of our clients or their customers, or to our intellectual property, disabling or degrading service, or sabotaging systems or information.
We also rely on third-party systems and technology, including encryption, virtualized infrastructure, and support, and employ a shared security model with our clients and third-party technology providers.
Our Pega Cloud offering involves hosting client applications on the servers of third-party technology providers. We also rely on third-party systems and technology, including encryption, virtualized infrastructure, and support, and employ a shared security model with our clients and third-party technology providers.
See "Competition" in Item 1 of this Annual Report for additional information. Our Chief Executive Officer is our largest stockholder and can exert significant influence over matters submitted to our stockholders, which could materially adversely affect our other stockholders. As of December 31, 2022, our Chief Executive Officer beneficially owned approximately 48 percent of our outstanding common stock.
Our Chief Executive Officer is our largest stockholder and can exert significant influence over matters submitted to our stockholders, which could materially adversely affect our other stockholders. As of December 31, 2023, our Chief Executive Officer beneficially owned approximately 47 percent of our outstanding common stock.
Our use of third-party hosting facilities requires us to rely on the functionality and availability of the third-party services and their data security, which, despite our due diligence, may be or become inadequate.
We rely on third-party hosting providers to deliver our offerings, and any disruption or interference with our use of these services could adversely affect our business. Our use of third-party hosting facilities requires us to rely on the functionality and availability of the third-party services and their data security, which, despite our due diligence, may be or become inadequate.
Risks Related to Our Business and Industry If we fail to manage our transition to a more subscription-based business model successfully, our results of operations and/or cash flows could be negatively impacted. We are transitioning to a more subscription-based business model, which impacts our revenue and cash flow.
Risks Related to Our Business and Industry If we fail to operate our subscription-based business model successfully, our results of operations and/or cash flows could be negatively impacted.
Any of the above circumstances or events may harm our reputation and brand, reduce our platforms’ availability or usage, and impair our ability to attract new users, which could adversely affect our business, financial condition, and results of operations.
Any of the above circumstances or events may harm our reputation and brand, reduce our platforms’ availability or usage, and impair our ability to attract new users, which could adversely affect our business, financial condition, and results of operations. 15 We may experience significant errors or security flaws in our products and services and could face privacy, product liability, and warranty claims.
In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could be used to satisfy short positions, or anticipated conversion of the Notes into shares of our common stock could depress the price of our common stock.
In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could be used to satisfy short positions, or anticipated conversion of the Notes into shares of our common stock could depress the price of our common stock. 17 We are required to comply with certain financial and operating covenants under our revolving credit facility.
In addition, if a “make-whole fundamental change” (as defined in the Indenture) occurs prior to the maturity date, we will in some cases be required to increase the conversion rate of the Notes for a holder that elects to convert its Notes in connection with such make-whole fundamental change. 17 Furthermore, the Indenture prohibits us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the Notes.
In addition, if a “make-whole fundamental change” (as defined in the Indenture) occurs prior to the maturity date, we will in some cases be required to increase the conversion rate of the Notes for a holder that elects to convert its Notes in connection with such make-whole fundamental change.
Third parties have claimed and may claim in the future that we have misappropriated, misused, or infringed other parties' intellectual property rights, and, to the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual property claims.
Third parties have claimed and may claim in the future that we have misappropriated, misused, or infringed other parties' intellectual property rights, and, to the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual property claims. 18 Any litigation regarding intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations.
We are required to comply with certain financial and operating covenants under our revolving credit facility. Failure to comply with these covenants could cause amounts borrowed to become immediately due and payable and/or prevent us from borrowing under the credit facility.
Failure to comply with these covenants could cause amounts borrowed to become immediately due and payable and/or prevent us from borrowing under the credit facility. We must comply with specified financial and operating covenants under our credit facility and make payments, limiting our ability to operate our business as we otherwise might.
If we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop sales of our software and may be unable to compete effectively, which could have a material effect upon our business, operating results, and financial condition. 18 Intellectual property rights claims by third parties are extremely costly to defend, could require us to pay significant damages, and could limit our ability to use certain technologies.
If we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop sales of our software and may be unable to compete effectively, which could have a material effect upon our business, operating results, and financial condition.
If the Notes were converted, there would be dilution of the ownership interests of existing stockholders to the extent we deliver shares of our common stock upon conversion of any of the Notes. Any sales in the public market of the common stock issuable upon such conversion could adversely affect our common stock’s prevailing market prices.
Conversion of the Notes may dilute the ownership interest of existing stockholders. If the Notes were converted, there would be dilution of the ownership interests of existing stockholders to the extent we deliver shares of our common stock upon conversion of any of the Notes.
This concentration of ownership may delay or prevent a change in control, impede a merger, consolidation, takeover, or other business combination involving us, discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, or result in actions that may be opposed by other stockholders. 14 If we are unsuccessful in the appeal of the trial court judgment in our litigation with Appian Corp., our operating results and financial condition would be adversely impacted.
As a result, this concentration of ownership may delay or prevent a change in control, impede a merger, consolidation, takeover, or other business combination involving us, discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, or result in actions that may be opposed by other stockholders.
We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
Our ability to refinance our indebtedness will depend on the capital market conditions and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
Competition for market share and pressure to reduce prices and make sales concessions is likely to increase. There can be no assurance that we will be able to compete successfully against current or future competitors or that the competitive pressures we face will not materially adversely affect our business, operating results, and financial condition.
There can be no assurance that we will be able to compete successfully against current or future competitors or that the competitive pressures we face will not materially adversely affect our business, operating results, and financial condition. For additional information, see "Item 1. Business" of this Annual Report.
If our revenues and operating results do not meet the expectations of our investors or securities analysts or fall below guidance we may provide to the market, or due to other factors discussed elsewhere in this section, the price of our common stock may decline. 11 The number and value of license and Pega Cloud arrangements has been increasing, and we may not be able to sustain this growth unless our partners and we can provide sufficient high-quality consulting, training, and maintenance resources to enable our clients to realize significant business value from our software.
The number and value of license and Pega Cloud arrangements has been increasing, and we may not be able to sustain this growth unless our partners and we can provide sufficient high-quality consulting, training, and maintenance resources to enable our clients to realize significant business value from our software.
Many U.S. states are also altering their apportionment formulas to increase the amount of taxable income or loss attributable to their state from certain out-of-state businesses.
Many U.S. states are also altering their apportionment formulas to increase the amount of taxable income or loss attributable to their state from certain out-of-state businesses. Similarly, in Europe and elsewhere globally, various tax reform efforts underway are designed to increase the taxes paid by corporate entities.
The market price of our common stock may be highly volatile and fluctuate due to a variety of factors, some of which are related in complex ways.
All these factors could materially impact our operating results, financial condition, and cash flows. 21 The market price of our common stock has been and is likely to continue to be volatile . The market price of our common stock may be highly volatile and fluctuate due to a variety of factors, some of which are related in complex ways.
Because a significant portion of our business is conducted outside of the U.S., we face exposure to movements in foreign currency exchange rates. Our international sales are usually denominated in foreign currencies. The operating expenses of our foreign operations are also primarily denominated in foreign currencies, which partially offset our foreign currency exposure on our international sales.
Our international sales are usually denominated in foreign currencies. The operating expenses of our foreign operations are also primarily denominated in foreign currencies, which partially offset our foreign currency exposure on our international sales.
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.
Additionally, detecting and correcting any security flaws, including those introduced by our use of open-source, 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.
These and other provisions in the Indenture could deter or prevent a third party from acquiring us even when the acquisition may be favorable to our stockholders. Conversion of the Notes may dilute the ownership interest of existing stockholders.
Furthermore, the Indenture prohibits us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the Notes. These and other provisions in the Indenture could deter or prevent a third party from acquiring us even when the acquisition may be favorable to our stockholders.
Due to the inherent uncertainties involved in claims, legal proceedings, and in estimating the losses that may arise, actual outcomes may differ from our estimates.
Significant judgments are required for the determination of probability and the range of the outcomes in any legal dispute, and the estimates are based only on the information available to us at the time. Due to the inherent uncertainties involved in claims, legal proceedings, and in estimating the losses that may arise, actual outcomes may differ from our estimates.
Errors in our software could affect its ability to work with hardware or other software or delay the development or release of new products or new versions of our software. Additionally, detecting and correcting any security flaws can be time-consuming and costly.
Despite quality testing each release, our software frequently contains errors or security flaws, especially when first introduced or when new versions are released. Errors in our software could affect its ability to work with hardware or other software or delay the development or release of new products or new versions of our software.
Considering fiscal challenges in many jurisdictions, various levels of government are increasingly focused on tax reform and other legislative actions to increase tax revenue, including corporate income taxes.
In the United States, this may include any changes to the currently enacted law regarding mandatory capitalization of research and experimentation expenses, effective for tax years beginning after December 31, 2021. Considering fiscal challenges in many jurisdictions, various levels of government are increasingly focused on tax reform and other legislative actions to increase tax revenue, including corporate income taxes.
There can be no assurance that one or more of these factors will not have a material adverse effect on our international operations and, consequently, on our business, operating results, and financial condition. We are exposed to fluctuations in foreign currency exchange rates that could negatively impact our financial results and cash flows.
There can be no assurance that one or more of these factors will not have a material adverse effect on our international operations and, consequently, on our business, operating results, and financial condition. Our consulting revenue is significantly dependent upon our consulting personnel implementing new license and Pega Cloud arrangements.
On September 15, 2022, the circuit court of Fairfax County entered judgment for Appian in the amount of $2,060,479,287 and awarding post-judgment interest. The Company filed a notice of appeal from the judgment the same day.
Commitments And Contingencies" in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report. On September 15, 2022, the circuit court of Fairfax County entered judgment for Appian in the amount of $2,060,479,287 and awarding post-judgment interest.
The techniques used to obtain unauthorized access or sabotage systems change frequently and are generally only recognized once launched against a target. While we have invested in protecting our data and systems and clients' data to reduce these risks, there can be no assurance that our efforts will prevent breaches.
The techniques used to obtain unauthorized access or sabotage systems change frequently and are generally only recognized once launched against a target.
On September 29, 2022, the court approved the $25,000,000 letter of credit obtained by the Company to secure the judgment and suspended the judgment during the pendency of the Company’s appeal. Appellate briefing is currently in process. Although it is not possible to predict timing, this appeals process could potentially take years to complete.
The Company filed a notice of appeal from the judgment the same day with the Court of Appeals of Virginia. On September 29, 2022, the circuit court approved the $25,000,000 letter of credit obtained by the Company to secure the judgment and suspended the judgment during the pendency of the Company’s appeal.
We are currently party to litigation with Appian Corp. - see Part I, Item 3 “Legal Proceedings” and "Note 20. Commitments And Contingencies" in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report.
If we are unsuccessful in the appeal of the trial court judgment in our litigation with Appian Corp., our operating results and financial condition would be adversely impacted. We are currently party to litigation with Appian Corp. — see Part I, Item 3 “Legal Proceedings” and "Note 20.
The timing of our license and Pega Cloud revenue is difficult to predict, which may cause our operating results to vary considerably.
If we fail to maintain and enhance our corporate culture within an environment of hybrid work, our ability to retain and recruit personnel essential to our success may be negatively affected. 10 The timing of our license and Pega Cloud revenue is difficult to predict, which may cause our operating results to vary considerably.
The shift of our clients’ preference to subscription-based offerings requires a scalable organization and a considerable investment of technical, financial, legal, managerial, and sales resources. Until we fully complete our subscription transition, which we expect will occur in 2023, our operating results may be impacted.
We have substantially completed our transition to a more subscription-based business model, in which clients have the right to access our software in a hosted environment or use downloaded software for a specified subscription period. The shift of our clients’ preference to subscription-based offerings requires a scalable organization and a considerable investment of technical, financial, legal, managerial, and sales resources.
Our business may not generate sufficient cash flow from operations to service our debt and make necessary investments in our business. Our ability to refinance our indebtedness will depend on the capital market conditions and our financial condition at such time.
Our ability to pay our debt when due or refinance our indebtedness, including the Notes, depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not generate sufficient cash flow from operations to service our debt and make necessary investments in our business.
We believe we have strong grounds to overturn the result in the trial court.
Although it is not possible to predict timing, this appeals process could potentially take years to complete. We believe we have strong grounds to overturn the result in the trial court.
Similarly, in Europe and elsewhere globally, various tax reform efforts underway are designed to increase the taxes paid by corporate entities. 20 If it becomes necessary or desirable to repatriate our foreign cash balances to the United States, we may be subject to increased taxes, other restrictions, and limitations.
The Company is continuing to evaluate the potential impact of the Pillar Two Framework on future periods, pending legislative adoption by additional individual countries. 20 If it becomes necessary or desirable to repatriate our foreign cash balances to the United States, we may be subject to increased taxes, other restrictions, and limitations.
We carry data breach insurance coverage to mitigate the financial impact of a security breach, though this may prove insufficient in the event of a breach. 15 Our Pega Cloud offering involves hosting client applications on the servers of third-party technology providers.
Even with the efforts the Company has undertaken, there is a risk that a security breach will be successful, and such an event will be material. We carry data breach insurance coverage to mitigate the financial impact of a security breach, though this may prove insufficient in the event of a breach.
In addition, we believe our corporate culture has been a key contributor to our success. Shifting workforce priorities, including an increase in remote workers, may make it more difficult to maintain important aspects of our corporate culture, negatively affecting our ability to retain and recruit personnel essential to our success.
In addition, we believe our corporate culture has been a key contributor to our success.
Removed
The subscription model prices and delivers our software differently than a perpetual license model. These changes reflect a significant shift from perpetual license sales in favor of providing our clients the right to access our software in a hosted environment or use downloaded software for a specified subscription period.
Added
If our revenues and operating results do not meet the expectations of our investors or securities analysts or fall below guidance we may provide to the market, or due to other factors discussed elsewhere in this section, the price of our common stock may decline.
Removed
Operating performance, revenue mix, and new arrangements in each period can fluctuate based on client preferences for our perpetual and subscription offerings.
Added
The market for our offerings is intensely and increasingly competitive, rapidly changing, and fragmented.
Removed
The transition to a subscription-based business model gives rise to several risks, including: • our revenues and cash flows may fluctuate more than anticipated in the near term; • if the increased demand for our offerings does not continue, we could experience decreased profitability or losses and reduced or negative cash flow because of our continued significant investments in our Pega Cloud offering; • if new or current clients desire only perpetual licenses, our subscription sales may trail our expectations; • we may be unsuccessful in maintaining or implementing our target pricing or new pricing models, product adoption, and projected renewal rates, or we may select a target price or new pricing model that is not optimal and could negatively affect our sales or earnings; • a failure to achieve the anticipated level of subscriptions may cause our revenue to decline and our business to be materially adversely affected on an ongoing basis due to lower-than-expected recurring revenue; and • we may incur sales compensation costs at a higher than forecasted rate if the pace of our subscription transition is faster than anticipated.
Added
Under Massachusetts law and our governing documents, approval of a merger, share exchange or sale of all or substantially all of our assets requires approval of two-thirds of all shares entitled to vote.
Removed
The metrics our investors and we use to monitor our business model transition may evolve during the transition as significant trends emerge.
Added
On November 15, 2023, the Court of Appeals of Virginia heard oral arguments in the appeal. After the Court issues an opinion, the non-prevailing party or, depending on the ruling of the court, parties may file a petition for rehearing with the Court of Appeals of Virginia and/or file a petition for appeal with the Supreme Court of Virginia.
Removed
Therefore, it may be difficult to accurately determine the impact of this transition on our business on a contemporaneous basis or to communicate the appropriate metrics to our investors clearly. 10 We may not achieve the key elements of our strategy and grow our business as anticipated.
Added
Threats to IT security can take a variety of forms.
Removed
All these factors could materially impact our operating results, financial condition, and cash flows. Our consulting revenue is significantly dependent upon our consulting personnel implementing new license and Pega Cloud arrangements.
Added
While we have invested in protecting our data and systems and clients' data to reduce these risks and actively monitor for risks of data breaches, regulatory non-compliance incidents and cyber security incidents, there can be no assurance that our efforts will prevent breaches.
Removed
Threats to IT security can take a variety of forms. Individual hackers, groups of hackers, and sophisticated organizations, including state-sponsored organizations, or nation-states themselves, may take steps that threaten our clients and us.
Added
Moreover, like most software companies, we incorporate open-source code into our software products and services, which also creates a potential risk. We deal with security issues regularly and have experienced security incidents from time to time.
Removed
We deal with security issues regularly and have experienced security incidents from time to time. Accordingly, there is a risk that a security breach will be successful, and such an event will be material.
Added
We have a standing Compliance and Risk Governing Committee composed of senior representatives across the Company that reports to and assists the Audit Committee and the Board as a whole in the oversight of compliance and risk management programs, including cybersecurity measures.
Removed
The cost of these steps could negatively impact our operating results. We rely on third-party hosting providers to deliver our offerings, and any disruption or interference with our use of these services could adversely affect our business.

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Item 2. Properties

Properties — owned and leased real estate

1 edited+0 added−0 removed1 unchanged
See "Note 11. Leases" in Item 8 of this Annual Report for additional information.
For additional information, see "Note 10. Leases" in Item 8 of this Annual Report.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

5 edited+0 added−0 removed0 unchanged
(2) Shares withheld to cover the option exercise price and tax withholding obligations under the net settlement provisions of our stock compensation awards have been included in these amounts. 24 Stock performance graph and cumulative total stockholder return (1) 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, 2017 in our common stock, the Total Return Index for the NASDAQ Composite, a broad market index, and the Standard & Poor’s (“S&P”) North American Technology Sector - Software Index™ (“S&P NA Tech Software”), a published industry index.
(2) Shares withheld to cover the option exercise price and tax withholding obligations under the net settlement provisions of our stock compensation awards have been included in these amounts. 25 Stock performance graph and cumulative total stockholder return (1) 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, 2018 in our common stock, the Total Return Index for the NASDAQ Composite, a broad market index, and the Standard & Poor’s (“S&P”) North American Technology Sector - Software Index™ (“S&P NA Tech Software”), a published industry index.
Dividends During 2022, 2021, and 2020, we paid a quarterly cash dividend of $0.03 per share of common stock. We currently expect to pay a quarterly cash dividend of $0.03 per share, however, the Board of Directors may terminate or modify this dividend program without prior notice.
Dividends During 2023, 2022, and 2021, we paid a quarterly cash dividend of $0.03 per share of common stock. We expect to pay a quarterly cash dividend of $0.03 per share; however, the Board of Directors may terminate or modify this dividend program without prior notice.
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 under the symbol “PEGA.” Holders As of February 6, 2023, we had 51 stockholders of record.
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 under the symbol “PEGA.” Holders As of February 6, 2024, we had 49 stockholders of record.
Issuer purchases of equity securities (1) Common stock repurchased in the three months ended December 31, 2022: (in thousands, except per share amounts) Total Number of Shares Purchased (2) Average Price Paid per Share (2) Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchased Programs October 1, 2022 - October 31, 2022 43 $ 32.48 — $ 58,075 November 1, 2022 - November 30, 2022 44 $ 35.55 — $ 58,075 December 1, 2022 - December 31, 2022 82 $ 36.28 — $ 58,075 Total 169 $ 35.13 (1) See "Stock repurchase program" in Item 7 of this Annual Report for additional information.
Issuer purchases of equity securities (1) Common stock repurchased in the three months ended December 31, 2023: (in thousands, except per share amounts) Total Number of Shares Purchased (2) Average Price Paid per Share (2) Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchased Programs October 1, 2023 - October 31, 2023 — $ — — $ 60,000 November 1, 2023 - November 30, 2023 3 $ 52.39 — $ 60,000 December 1, 2023 - December 31, 2023 5 $ 52.73 — $ 60,000 Total 8 $ 52.59 (1) For additional information, see "Stock Repurchase Program" in Item 7 of this Annual Report.
December 31, 2017 2018 2019 2020 2021 2022 Pegasystems Inc. $ 100.00 $ 101.65 $ 169.54 $ 283.95 $ 238.47 $ 73.22 NASDAQ Composite $ 100.00 $ 97.16 $ 132.81 $ 192.47 $ 235.15 $ 158.65 S&P NA Tech Software $ 100.00 $ 112.64 $ 151.60 $ 230.28 $ 265.50 $ 169.86 (1) The graph lines merely connect measurement dates and do not reflect fluctuations between those dates.
December 31, 2018 2019 2020 2021 2022 2023 Pegasystems Inc. $ 100.00 $ 166.79 $ 279.35 $ 234.61 $ 72.03 $ 103.03 NASDAQ Composite $ 100.00 $ 136.69 $ 198.10 $ 242.03 $ 163.28 $ 236.17 S&P NA Tech Software $ 100.00 $ 134.59 $ 204.44 $ 235.70 $ 150.80 $ 240.73 (1) The graph lines merely connect measurement dates and do not reflect fluctuations between those dates.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

41 edited+26 added−26 removed22 unchanged
Changes in our valuation allowance impact income tax expense in the period of adjustment. Our deferred tax valuation allowance requires significant judgment and uncertainties, including assumptions about future taxable income based on historical and projected information. We recognize deferred tax assets to the extent that we believe that they are 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 allowance requires significant judgment and uncertainties, including assumptions about future taxable income based on historical and projected information. We recognize deferred tax assets to the extent that we believe they are more likely than not to be realized.
The Capped Call Transactions are accounted for as derivative instruments and do not qualify for the Company’s own equity scope exception in ASC 815 since, in some cases of early settlement, the settlement value of the Capped Call Transactions, calculated following the governing documents, may not represent a fair value measurement.
The capped call transactions are accounted for as derivative instruments and do not qualify for the Company’s own equity scope exception in ASC 815 since, in some cases of early settlement, the settlement value calculated following the governing documents may not represent a fair value measurement.
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 2. Significant Accounting Policies" and "Note 18. Income Taxes" in Item 8 of this Annual Report for additional information.
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 such a determination is made. For additional information see "Note 2. Significant Accounting Policies" and "Note 18. Income Taxes" in Item 8 of this Annual Report.
In addition, our client success teams, world-class partners, and clients leverage our Pega Express™ methodology to design and deploy mission-critical applications quickly and collaboratively. Our target clients are Global 2000 organizations and government agencies that require solutions to distinguish themselves in the markets they serve.
In addition, our client success teams, world-class partners, and clients leverage our Pega Express™ methodology to design and deploy mission-critical applications quickly and collaboratively. 26 Our target clients are Global 2000 organizations and government agencies that require solutions to distinguish themselves in the markets they serve.
If actual results differ significantly from management’s estimates and projections, there could be a material effect on our financial statements. 31 Revenue recognition Our client contracts typically contain promises by us to provide multiple products and services.
If actual results differ significantly from management’s estimates and projections, there could be a material effect on our financial statements. Revenue recognition Our client contracts typically contain promises by us to provide multiple products and services.
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 way an asset is used; and • whether it is expected that the asset will be sold or disposed of before the end of its originally estimated useful life.
When 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 way an asset is used; and 33 • whether it is expected that the asset will be sold or disposed of before the end of its originally estimated useful life.
Our powerful low-code platform for workflow automation and artificial intelligence-powered decisioning enables the world’s leading brands and government agencies to hyper-personalize customer experiences, streamline customer service, and automate mission-critical business processes and workflows. With Pega, our clients can leverage our intelligent technology and scalable architecture to accelerate their digital transformation.
Our powerful, low-code platform for workflow automation and artificial intelligence-powered decisioning enables the world’s leading brands and government agencies to hyper-personalize customer experiences, streamline customer service, and automate mission-critical business processes and workflows. With Pega, our clients can leverage our artificial intelligence (“AI”) technology and scalable architecture to accelerate their digital transformation.
Changes in the assumptions or judgments used in determining the performance obligations in client contracts and stand-alone selling prices could significantly impact the timing and amount of revenue we report in a particular period. See "Note 2. Significant Accounting Policies", "Note 4. Receivables, Contract Assets, And Deferred Revenue", and "Note 15.
Changes in the assumptions or judgments used in determining the performance obligations in client contracts and stand-alone selling prices could significantly impact the timing and amount of revenue we report in a particular period. For additional information see "Note 2. Significant Accounting Policies", "Note 4. Receivables, Contract Assets, And Deferred Revenue", and "Note 15.
In these instances, we estimate the stand-alone selling prices using the residual approach, determined based on the total transaction price minus the stand-alone selling price of other performance obligations promised in the contract.
In these instances, we estimate the stand-alone selling prices using the residual approach, which is determined based on the total transaction price minus the stand-alone selling price of other performance obligations promised in the contract.
We estimate our exposure to unfavorable outcomes related to these uncertainties and the probability of such outcomes. Although we believe our estimates are reasonable, there is no guarantee that the final tax outcome will not be different from what is reflected in our historical income tax provisions, returns, and accruals.
We estimate our exposure to unfavorable outcomes related to these uncertainties and the probability of such outcomes. Although we believe our estimates are reasonable, there is no guarantee that the final tax outcome will not differ from what is reflected in our historical income tax provisions, returns, and accruals.
Goodwill And Other Intangible Assets" in Item 8 of this Annual Report for additional information. 32 Accounting for income taxes Significant judgment is required to determine our provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in applying accounting principles and complex tax laws.
Goodwill And Other Intangible Assets" in Item 8 of this Annual Report. Accounting for income taxes Significant judgment is required to determine our provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in applying accounting principles and complex tax laws.
In making such a determination, we consider all available objective and verifiable negative and positive evidence, including future reversals of existing taxable temporary differences, our firm contractual backlog, projected future taxable income (including the impact of enacted legislation), tax-planning strategies and results of recent operations.
In making such a determination, we consider all available objective and verifiable negative and positive evidence, including future reversals of existing taxable temporary differences, projected future taxable income (including the impact of enacted legislation), tax-planning strategies and results of recent operations.
Goodwill and intangible assets impairment Our goodwill and intangible assets arise from our previous business acquisitions. • Goodwill is tested for impairment at least annually or as circumstances indicate its value may no longer be recoverable. • We do not have any intangible assets with indefinite useful lives other than goodwill. • We perform our annual goodwill impairment test as of November 30th.
Revenue" in Item 8 of this Annual Report Goodwill and intangible assets impairment Our goodwill and intangible assets arise from our previous business acquisitions. • Goodwill is tested for impairment at least annually or as circumstances indicate its value may no longer be recoverable. • We do not have any intangible assets with indefinite useful lives other than goodwill. • We perform our annual goodwill impairment test as of November 30th.
Fair Value Measurements" in Item 8 of this Annual Report for additional information. 33 Loss Contingencies We are subject to various claims, including claims with customers and vendors, pending and potential legal actions for damages, investigations relating to governmental laws and regulations, and other matters arising out of the normal conduct of our business.
Debt", and "Note 13. Fair Value Measurements" in Item 8 of this Annual Report. 34 Loss Contingencies We are subject to various claims, including claims with customers and vendors, pending and potential legal actions for damages, investigations relating to governmental laws and regulations, and other matters arising out of the normal conduct of our business.
If it becomes necessary or desirable to repatriate these funds, we may be required to pay federal, state, and local income and foreign withholding taxes upon repatriation. However, due to the complexity of income tax laws and regulations, it is impracticable to estimate the amount of taxes we would have to pay.
If it becomes necessary or desirable to repatriate foreign funds, we may have to pay federal, state, and local income taxes as well as foreign withholding taxes upon repatriation. However, estimating the taxes we would have to pay is impracticable due to the complexity of income tax laws and regulations.
As of December 31, 2022, we had $81.4 million of goodwill and $10.9 million of intangible 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 intangible assets. See "Note 2. Significant Accounting Policies" and "Note 7.
As of December 31, 2023, we had $81.6 million of goodwill and $7.0 million of intangible 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 intangible assets. For additional information see "Note 2. Significant Accounting Policies" and "Note 7.
In 2022, we determined that the objectively and verifiable negative evidence outweighed the positive evidence, and we recorded a full valuation allowance of $188.3 million on our U.S. and U.K. deferred tax assets. We assess our income tax positions and record tax benefits based on management’s evaluation of the facts, circumstances, and information available at the reporting date.
The Company determined that the objectively and verifiable negative evidence outweighed the positive evidence, as such maintained a valuation allowance on our U.S. and U.K. deferred tax assets. We assess our income tax positions and record tax benefits based on management’s evaluation of the facts, circumstances, and information available at the reporting date.
These amounts have been excluded from the table above. Dividends (in thousands) 2022 2021 Dividend payments to stockholders $ 9,834 $ 9,761 We intend to pay a quarterly cash dividend of $0.03 per share. However, the Board of Directors may terminate or modify the dividend program without prior notice.
These amounts are not included in the table above. Dividends (in thousands) 2023 2022 Dividend payments to stockholders $ 9,964 $ 9,834 We intend to pay a quarterly cash dividend of $0.03 per share. However, the Board of Directors may terminate or modify the dividend program without prior notice.
Performance metrics We use performance metrics to analyze and assess our overall performance, make operating decisions, and forecast and plan for future periods, including: Annual contract value (“ACV”) ACV represents the annualized value of our active contracts as of the measurement date.
Performance metrics We use performance metrics to analyze and assess our overall performance, make operating decisions, and forecast and plan for future periods, including: Annual contract value (“ACV”) ACV 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.
Our solutions achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, and reducing risk. Along with our partners, we deliver solutions tailored to the specific industry needs of our clients. 25 Subscription transition We are transitioning our business to sell software primarily through subscription arrangements.
Our solutions achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, and reducing risk. Along with our partners, we deliver solutions tailored to the specific industry needs of our clients.
See risk factor "If it becomes necessary or desirable to repatriate our foreign cash balances to the United States, we may be subject to increased taxes, other restrictions, and limitations" in Item 1A of this Annual Report for additional information. Cash provided by operating activities We are transitioning our business to sell software primarily through subscription arrangements.
For additional information, see risk factor "If it becomes necessary or desirable to repatriate our foreign cash balances to the United States, we may be subject to increased taxes, other restrictions, and limitations" in Item 1A of this Annual Report.
CRITICAL ACCOUNTING ESTIMATES AND SIGNIFICANT JUDGMENTS Management’s discussion and analysis of the financial condition and results of operations is based upon our consolidated financial statements, which have been prepared following accounting principles generally accepted in the U.S. and the rules and regulations of the U.S. Securities and Exchange Commission for annual financial reporting.
Management’s Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2022. 32 CRITICAL ACCOUNTING ESTIMATES AND SIGNIFICANT JUDGMENTS Management’s discussion and analysis of the financial condition and results of operations is based upon our consolidated financial statements, which have been prepared following accounting principles generally accepted in the U.S. and the rules and regulations of the U.S.
As of December 31, 2022, a hypothetical 10% increase in our stock price would have increased the fair value of the capped call to $3.6 million, while a hypothetical 10% decrease in our stock price would have decreased the fair value of the capped call to $1.7 million. See "Note 2. Significant Accounting Policies", "Note 12. Debt", and "Note 14.
As of December 31, 2023, a hypothetical 10% increase in our stock price would have increased the fair value of the capped call to $1.6 million, while a hypothetical 10% decrease in our stock price would have decreased the fair value of the capped call to $0.5 million. For additional information see "Note 2. Significant Accounting Policies", "Note 11.
Revenue" in Item 8 of this Annual Report for additional information.
For additional information, see "Note 11. Debt" in Item 8 of this Annual Report.
We believe that of our significant accounting policies, described in “Note 2. Significant Accounting Policies” in Item 8 of this Annual Report, the following accounting policies are most important to the portrayal of our financial condition and require the most subjective judgment.
Significant Accounting Policies” in Item 8 of this Annual Report, the following accounting policies are most important to the portrayal of our financial condition and require the most subjective judgment. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
The Capped Call Transactions cover 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of our common stock and are generally expected to reduce potential dilution of our common stock upon any conversion of the Notes.
These capped call transactions are generally expected to reduce the potential dilution of our common stock upon any conversion of the Notes.
Common stock repurchases 2022 2021 (in thousands) Shares Amount Shares Amount Repurchases paid 280 $ 24,508 422 $ 52,411 Repurchases unpaid at period end — — 10 1,199 Stock repurchase program 280 24,508 432 53,610 Tax withholdings for net settlement of equity awards 342 20,620 550 69,925 622 $ 45,128 982 $ 123,535 During 2022 and 2021, instead of receiving cash from the equity holders for the exercise price of options, we withheld shares with a value of $14.3 million and $56.1 million, respectively.
Common stock repurchases Year Ended December 31, 2023 2022 (in thousands) Shares Amount Shares Amount Stock repurchase program — — 280 24,508 Tax withholdings for net settlement of equity awards 44 1,916 342 20,620 44 $ 1,916 622 $ 45,128 In 2023 and 2022, instead of receiving cash from the equity holders, we withheld shares with a value of $1.2 million and $14.3 million, respectively, for the exercise price of options.
The above constant currency measures reflect foreign exchange rates applicable as of Q4 2021. We believe that non-GAAP financial measures help investors understand our core operating results and prospects, consistent with how management measures and forecasts our performance without the effect of often one-time charges and other items outside our normal operations.
We believe that these measures help investors understand our core operating results and prospects, which is consistent with how management measures and forecasts our performance without the effect of often one-time charges and other items outside our normal operations. They are not a substitute for financial measures prepared under U.S. GAAP.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS OVERVIEW We develop, market, license, host, and support enterprise software that helps organizations build agility into their business so they can adapt to change.
A reconciliation of GAAP and non-GAAP measures is located with each non-GAAP measure. BUSINESS OVERVIEW We develop, market, license, host, and support enterprise software that helps organizations build agility into their business so they can adapt to change.
Provision for (benefit from) income taxes (Dollars in thousands) 2022 2021 Provision for (benefit from) income taxes $ 183,785 $ (68,947) Effective income tax rate (benefit rate) 114 % (52) % The change in the effective income tax rate (benefit rate) in 2022 was primarily due to the recognition of a full valuation allowance of $188.3 million on our U.S. and U.K. deferred tax assets. 29 LIQUIDITY AND CAPITAL RESOURCES (in thousands) 2022 2021 Cash (used in) provided by Operating activities $ 22,336 $ 39,118 Investing activities 13,075 72,503 Financing activities (46,989) (121,843) Effect of exchange rate on cash and cash equivalents (3,333) (1,712) Net (decrease) in cash and cash equivalents $ (14,911) $ (11,934) December 31, (in thousands) 2022 2021 Held in U.S. entities $ 248,389 $ 274,813 Held in foreign entities 48,832 87,966 Total cash, cash equivalents, and marketable securities $ 297,221 $ 362,779 We believe that our current cash, cash flow from operations, borrowing capacity, and ability to engage in capital market transactions will be sufficient to fund our operations, stock repurchases, and quarterly cash dividends for at least the next 12 months and to meet our known long-term cash requirements.
LIQUIDITY AND CAPITAL RESOURCES (in thousands) 2023 2022 Cash provided by (used in) Operating activities $ 217,785 $ 22,336 Investing activities (50,750) 13,075 Financing activities (81,963) (46,989) Effect of exchange rate changes on cash, cash equivalents, and restricted cash 2,701 (3,333) Net increase (decrease) in cash, cash equivalents, and restricted cash $ 87,773 $ (14,911) December 31, (in thousands) 2023 2022 Held in U.S. entities $ 263,453 $ 248,389 Held in foreign entities 159,885 48,832 Total cash, cash equivalents, and marketable securities 423,338 297,221 Restricted cash 2,925 — Total cash, cash equivalents, marketable securities, and restricted cash $ 426,263 $ 297,221 We believe that our current cash, marketable securities, cash flow provided by operations, borrowing capacity, and ability to engage in capital market transactions will be sufficient to fund our operations, stock repurchases, and quarterly cash dividends for at least the next 12 months and to meet our known long-term cash requirements, including our convertible senior notes due March 1, 2025.
In addition, in 2022 and 2021, we incurred $34.6 million and $18.2 million in legal fees and related expenses arising from proceedings that originated outside of the ordinary course of business. We expect to continue to incur additional costs for these proceedings. See "Note 20. Commitments And Contingencies" in Item 8 and Item 1A.
For additional information, see "Note 12. Restructuring" in Item 8 of this Annual Report. • The decrease in general and administrative in 2023 was primarily due to a decrease of $20.7 million in legal fees and related expenses arising from proceedings outside the ordinary course of business. We expect to continue to incur additional costs for these proceedings.
Other income and expenses (Dollars in thousands) 2022 2021 Change Foreign currency transaction gain (loss) $ 4,560 $ (6,459) $ 11,019 * Interest income 1,643 704 939 133 % Interest expense (7,792) (7,956) 164 2 % (Loss) gain on capped call transactions (57,382) (23,633) (33,749) (143) % Other income, net 6,579 89 6,490 7,292 % $ (52,392) $ (37,255) $ (15,137) (41) % * not meaningful • The increase in foreign currency transaction gain (loss) was primarily due to the impact of fluctuations in foreign currency exchange rates associated with foreign currency-denominated cash and receivables held by our subsidiary in the United Kingdom. • The increase in interest income was primarily due to increases in market interest rates. • The increase in (loss) gain on capped call transactions was due to fair value adjustments for our capped call transactions.
Other income and expenses (Dollars in thousands) 2023 2022 Change Foreign currency transaction (loss) gain $ (5,242) $ 4,560 $ (9,802) * Interest income 9,259 1,643 7,616 464 % Interest expense (6,876) (7,792) 916 12 % (Loss) on capped call transactions (1,348) (57,382) 56,034 98 % Other income, net 18,693 6,579 12,114 184 % $ 14,486 $ (52,392) $ 66,878 * * not meaningful • The change in foreign currency transaction (loss) gain in 2023 was primarily due to the impact of fluctuations in foreign currency exchange rates associated with foreign currency-denominated cash and receivables held by our subsidiary in the United Kingdom. • The increase in interest income in 2023 was primarily due to an increase in market interest rates. • The decrease in interest expense in 2023 was due to our repurchases of convertible senior notes.
Preparing 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 about what could occur in the future, given the available information.
We base our estimates and judgments on historical experience, knowledge of current conditions, and beliefs about what could occur in the future, given the available information. We believe that of our significant accounting policies, described in “Note 2.
Debt" in Item 8 of this Annual Report for additional information. 30 Stock repurchase program Changes in the remaining stock repurchase authority: (in thousands) 2022 December 31, 2021 $ 22,583 Authorizations (1) 60,000 Repurchases (2) (24,508) December 31, 2022 $ 58,075 (1) On June 2, 2022, we announced that our Board of Directors extended the current stock repurchase program’s expiration date to June 30, 2023.
Stock repurchase program Changes in the remaining stock repurchase authority: (in thousands) Year Ended December 31, 2023 December 31, 2022 $ 58,075 Authorizations (1) 1,925 December 31, 2023 $ 60,000 (1) On April 25, 2023, our Board of Directors extended the expiration date of our current share repurchase program from June 30, 2023 to June 30, 2024, and the amount of stock we are authorized to repurchase was increased to $60 million.
ACV is a performance measure that we believe provides useful information to our management and investors, particularly during our subscription transition. 26 Remaining performance obligations (“Backlog”) Reconciliation of GAAP Backlog and Constant Currency Backlog (in millions, except percentages) Q4 2022 1 Year Growth Rate Backlog $ 1,356 1 % Impact of changes in foreign exchange rates 39 3 % Backlog - Constant Currency $ 1,395 4 % Note: Constant currency measures are calculated by applying foreign exchange rates for the earliest period shown to all periods.
Remaining performance obligations (“Backlog”) Reconciliation of Backlog and Constant Currency Backlog (Non-GAAP) December 31, 2022 December 31, 2023 1 Year Growth Rate Backlog - GAAP $ 1,356 $ 1,463 8 % Impact of changes in foreign exchange rates — (16) Constant currency backlog $ 1,356 $ 1,447 7 % Note: Constant currency Backlog is calculated by applying the Q4 2022 foreign exchange rates to all periods shown.
See "Note 14. Fair Value Measurements" in Item 8 of this Annual Report for additional information. • The increase in other income, net was due to gains on our venture investments.
For additional information, see "Note 11. Debt" and "Note 13. Fair Value Measurements" in Item 8 of this Annual Report.
As of December 31, 2022, we had no outstanding cash borrowings under the Credit Facility but had $27.3 million in outstanding letters of credit which reduce the available borrowing capacity. See "Note 12.
In November 2019, and as since amended, we entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association. As of December 31, 2023 and December 31, 2022, we had $27.3 million in outstanding letters of credit, reducing available borrowing capacity under the Credit Facility, but no outstanding cash borrowings.
Contractual obligations As of December 31, 2022, our contractual obligations were: Payments due by period (in thousands) 2023 2024 2025 2026 2027 and thereafter Other Total Convertible senior notes (1) $ 4,500 $ 4,500 $ 602,250 $ — $ — $ — $ 611,250 Purchase obligations (2) 21,708 18,525 20,471 14,646 14 — 75,364 Operating lease obligations 18,476 17,101 14,444 10,860 49,079 — 109,960 Investment commitments 1,000 — — — — — 1,000 Liability for uncertain tax positions (3) — — — — — 3,207 3,207 $ 45,684 $ 40,126 $ 637,165 $ 25,506 $ 49,093 $ 3,207 $ 800,781 (1) Includes principal and interest.
Contractual obligations As of December 31, 2023, our contractual obligations were: Payments due by period (in thousands) 2024 2025 2026 2027 2028 and thereafter Other Total Convertible senior notes (1) $ 3,767 $ 504,154 $ — $ — $ — $ — $ 507,921 Purchase obligations (2) 138,662 134,825 126,637 138,208 990 — 539,322 Operating lease obligations 17,971 15,602 11,164 10,114 39,549 — 94,400 Venture investment commitments (3) 1,000 — — — — — 1,000 Liability for uncertain tax positions (4) — — — — — 859 859 $ 161,400 $ 654,581 $ 137,801 $ 148,322 $ 40,539 $ 859 $ 1,143,502 (1) Includes principal and interest.
We believe excluding these expenses from our non-GAAP financial measures is useful to investors as the disputes giving rise to them are not representative of our core business operations and ongoing operating performance. • Interest on convertible senior notes : In February 2020, we issued convertible senior notes with an aggregate principal amount of $600 million, due March 1, 2025, in a private placement.
(3) The supplemental information discloses items that affect our cash flows and are considered by management not to be representative of our core business operations and ongoing operational performance. • Restructuring : Restructuring fluctuates in amount and frequency and is significantly affected by the timing and size of our restructuring activities. • Legal fees: Legal and related fees arising from proceedings outside the ordinary course of business. • Interest on convertible senior notes : In February 2020, we issued convertible senior notes, due March 1, 2025, in a private placement.
Financing activities Debt financing In February 2020, we issued $600 million in aggregate principal amount of convertible senior notes, which mature on March 1, 2025. In November 2019, and as since amended, we entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association.
Investing activities The change in cash (used in) provided by investing activities in 2023 was primarily due to our increased investments in financial instruments and reduced investment in property and equipment as we optimize our office space. 31 Financing activities Debt financing In February 2020, we issued $600 million in aggregate principal amount of convertible senior notes, which mature on March 1, 2025.
The contract's total value is divided by its duration in years to calculate ACV for subscription license and Pega Cloud contracts. Maintenance revenue for the quarter then ended is multiplied by four to calculate ACV for maintenance.
Previously, ACV for maintenance was calculated as the maintenance revenue for the quarter then ended, multiplied by four, and ACV for contracts less than 12 months was equal to the contract’s total value. The Company believes the simplified methodology better represents the current value of its contracts and better aligns its definition with comparable companies.
Removed
Until we fully complete our subscription transition, which we expect will occur in 2023, our operating results may be impacted. Operating performance, revenue mix, and new arrangements in each period can fluctuate based on client preferences for our perpetual and subscription offerings.
Added
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NON-GAAP MEASURES Our non-GAAP financial measures should only be read in conjunction with our consolidated financial statements prepared in accordance with GAAP.
Removed
See risk factor "If we fail to manage our transition to a more subscription-based business model successfully, our results of operations and/or cash flows could be negatively impacted" in Item 1A of this Annual Report for additional information. Ukraine Our direct financial exposure to Ukraine, Russia, and Belarus is not material.
Added
ACV is a performance measure that we believe provides useful information to our management and investors. In 2023, the Company revised its ACV methodology for maintenance and all contracts less than 12 months as its overall client renewal rate exceeds 90%.
Removed
In 2021, before Russia's invasion of Ukraine, we made a business decision to stop pursuing new clients in Russia and closed our local office.
Added
The impact of the change was $3 million or 0.3% of Total ACV or less for all quarters in 2022. Previously disclosed ACV amounts have been updated to allow for comparability.
Removed
However, the ultimate impact of Russia’s invasion of Ukraine on our business will depend on future developments, including the duration and spread of the conflict and the impact on our people, partners, clients, and vendors in neighboring countries and globally, all of which are uncertain and unpredictable.
Added
This simplification, made possible by improvements to the Company’s financial systems, ensures that ACV for all contract types and lengths is consistently calculated as the total contract value divided by the duration in years.
Removed
The supplementary non-GAAP financial measures are not meant to be superior to or a substitute for financial measures prepared under U.S. GAAP.
Added
Reconciliation of ACV and ACV (constant currency) (in millions, except percentages) December 31, 2022 December 31, 2023 1-Year Change ACV $ 1,126 $ 1,255 11 % Impact of changes in foreign exchange rates — (11) ACV (constant currency) $ 1,126 $ 1,244 11 % Note: ACV (constant currency) is calculated by applying the December 31, 2022 foreign exchange rates to all periods shown. 27 Cash flow Note: Starting in the third quarter of 2023, the Company calculated free cash flow as cash provided by operating activities less investments in property and equipment.
Removed
Free Cash Flow (1) (in thousands, except percentages) Year Ended December 31, 2022 2021 Change Cash provided by operating activities $ 22,336 $ 39,118 (43) % Investment in property and equipment (35,379) (10,456) Legal fees 41,789 11,390 Interest on convertible senior notes 4,500 4,500 Facilities — (18,000) Other 6,805 115 Free cash flow $ 40,051 $ 26,667 50 % Total Revenue $ 1,317,845 $ 1,211,653 Free cash flow margin 3 % 2 % * not meaningful 27 (1) Our non-GAAP free cash flow measures reflect the following adjustments: • Investment in property and equipment : Investment in property and equipment fluctuates in amount and frequency and is significantly affected by the timing and size of investments in our facilities.
Added
To ensure comparability, previously disclosed amounts have been updated. 2023 2022 Margin (2) Margin (2) Cash provided by operating activities $ 217,785 15 % $ 22,336 2 % Investment in property and equipment (16,781) (35,379) Free cash flow (1) $ 201,004 14 % $ (13,043) (1) % Supplemental information (3) Restructuring $ 29,401 $ — Legal fees 14,645 41,789 Interest on convertible senior notes 4,134 4,500 Other 601 6,805 Income taxes 11,664 7,645 $ 60,445 $ 60,739 Effect of supplemental information to Rule of 40 achievement (4) 4 % 5 % (1) Our non-GAAP free cash flow is defined as cash provided by operating activities less investment in property and equipment.
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We believe excluding these amounts provides a useful comparison of our operational performance in different periods. • Legal Fees : Includes legal and related fees arising from proceedings outside of the ordinary course of business.
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Investment in property and equipment fluctuates in amount and frequency and is significantly affected by the timing and size of investments in our facilities. We provide information on free cash flow to enable investors to assess our ability to generate cash without incurring additional external financings. This information is not a substitute for financial measures prepared under U.S. GAAP.
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We believe excluding the interest payments provides a useful comparison of our operational performance in different periods. • Facilities : In February 2021, we agreed to accelerate our exit from our then Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million, which was received in October 2021.
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Starting in the third quarter of 2023, the Company calculated free cash flow as cash provided by operating activities less investments in property and equipment. To ensure comparability, previously disclosed amounts have been updated. (2) Operating and free cash flow margin are calculated by comparing the respective cash flow to total revenue.
Removed
We believe excluding the impact from our non-GAAP financial measures is useful to investors as the modified lease, including the $18 million payment, is not representative of our core business operations and ongoing operating performance. • Other : We have excluded capital advisory fees and fees incurred due to the cancellation of in-person sales and marketing events.
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The Notes accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1. • Other : Fees related to capital advisory services, canceled in-person sales and marketing events, and incremental costs incurred integrating acquisitions. • Income taxes : Direct income taxes paid net of refunds received. 28 (4) Rule of 40 : A performance metric calculated by adding the annual contract value (“ACV”) growth rate and the free cash flow margin.
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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. RESULTS OF OPERATIONS Revenue Subscription transition We are transitioning our business to sell software primarily through subscription arrangements.
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We also provide a table of supplemental information of other items that affect our cash flows and Rule of 40 achievement.
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This transition has impacted revenue growth as revenue from subscription service arrangements, which includes Pega Cloud and maintenance, is typically recognized over the contract term, while revenue from license sales is recognized when the license rights become effective, typically upfront.
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RESULTS OF OPERATIONS Revenue (Dollars in thousands) 2023 2022 Change Pega Cloud $ 461,328 32 % $ 384,271 29 % $ 77,057 20 % Maintenance 331,856 24 % 317,564 24 % 14,292 5 % Subscription services 793,184 56 % 701,835 53 % 91,349 13 % Subscription license 407,625 28 % 366,063 28 % 41,562 11 % Subscription 1,200,809 84 % 1,067,898 81 % 132,911 12 % Perpetual license 10,101 1 % 19,293 1 % (9,192) (48) % Consulting 221,706 15 % 230,654 18 % (8,948) (4) % $ 1,432,616 100 % $ 1,317,845 100 % $ 114,771 9 % • The increase in Pega Cloud revenue in 2023 was primarily due to the growth of the hosted client base as our clients continued to expand their use of Pega Cloud. • The increase in maintenance revenue in 2023 was primarily due to continued demand for our subscription license offerings, which are sold with maintenance committed for the full term of the subscription license • The increase in subscription license revenue in 2023 was primarily due to high renewal activity, resulting in an increase in license deliveries. • The decrease in perpetual license revenue in 2023 reflects our strategy of promoting subscription-based arrangements. 29 • The decrease in consulting revenue in 2023 was primarily due to lower consultant billable hours outside of North America and lower realization rates in North America.
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(Dollars in thousands) 2022 2021 Change Pega Cloud $ 384,271 29 % $ 300,966 25 % $ 83,305 28 % Maintenance 317,564 24 % 320,257 26 % (2,693) (1) % Subscription services 701,835 53 % 621,223 51 % 80,612 13 % Subscription license 366,063 28 % 336,248 28 % 29,815 9 % Subscription 1,067,898 81 % 957,471 79 % 110,427 12 % Perpetual license 19,293 1 % 32,172 3 % (12,879) (40) % Consulting 230,654 18 % 222,010 18 % 8,644 4 % $ 1,317,845 100 % $ 1,211,653 100 % $ 106,192 9 % The revenue change in 2022 generally reflects the impact of our subscription transition.
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Gross profit 2023 2022 (Dollars in thousands) Gross Profit % Gross Profit % Change Pega Cloud $ 342,670 74 % $ 267,523 70 % $ 75,147 28 % Maintenance 306,264 92 % 295,576 93 % 10,688 4 % Subscription services 648,934 82 % 563,099 80 % 85,835 15 % Subscription license 405,019 99 % 363,421 99 % 41,598 11 % Subscription 1,053,953 88 % 926,520 87 % 127,433 14 % Perpetual license 10,034 99 % 19,118 99 % (9,084) (48) % Consulting (9,854) (4) % 3,572 2 % (13,426) * $ 1,054,133 74 % $ 949,210 72 % $ 104,923 11 % * not meaningful The gross profit change in 2023 was primarily due to a shift in the revenue mix.
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Other factors impacting our revenue include: • The U.S. dollar has strengthened against foreign currencies in our operating markets, which reduced total revenue growth by approximately 4 percent. • The decrease in maintenance revenue was primarily due to the continuing shift to Pega Cloud. • The increase in consulting revenue was primarily due to an increase in consultant billable hours in North America.
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Also contributing to the change was: • The increase in Pega Cloud gross profit percent in 2023 was primarily due to an increase in cost efficiency, particularly for hosting services, as Pega Cloud continues to grow and scale. • The decrease in maintenance gross profit percent in 2023 was primarily due to an increase in compensation and benefits as a result of an increase in headcount. • The decrease in consulting gross profit percent in 2023 was primarily due to lower consultant billable hours outside of North America and lower realization rates in North America.
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Gross profit (Dollars in thousands) 2022 2021 Change Pega Cloud $ 267,523 70 % $ 202,171 67 % $ 65,352 32 % Maintenance 295,576 93 % 298,606 93 % (3,030) (1) % Subscription services 563,099 80 % 500,777 81 % 62,322 12 % Subscription license 363,421 99 % 333,859 99 % 29,562 9 % Subscription 926,520 87 % 834,636 87 % 91,884 11 % Perpetual license 19,118 99 % 31,943 99 % (12,825) (40) % Consulting 3,572 2 % 8,711 4 % (5,139) (59) % $ 949,210 72 % $ 875,290 72 % $ 73,920 8 % The gross profit change in 2022 was primarily due to a shift in the revenue mix. • The increase in Pega Cloud gross profit percent was primarily due to cost-efficiency gains as Pega Cloud grows and scales. • The decrease in consulting gross profit percent was due to an increase in consultant availability. 28 Operating expenses 2022 2021 Change (Dollars in thousands) % of Revenue % of Revenue Selling and marketing $ 624,789 47 % $ 625,886 52 % $ (1,097) — % Research and development $ 294,349 22 % $ 260,630 22 % $ 33,719 13 % General and administrative $ 117,734 9 % $ 83,506 7 % $ 34,228 41 % Restructuring $ 21,743 2 % $ — — % $ 21,743 * * not meaningful • The decrease in selling and marketing was primarily due to a decrease in marketing programs of $12.1 million, partially offset by an increase in professional services of $4.9 million and an increase in facilities expense of $4.9 million. • The increase in research and development was primarily due to an increase in compensation and benefits of $24.2 million, attributable to an increase in headcount and incentive compensation, and an increase in facilities expense of $4.2 million.
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Operating expenses 2023 2022 Change (Dollars in thousands) % of Revenue % of Revenue Selling and marketing $ 559,177 39 % $ 624,789 47 % $ (65,612) (11) % Research and development $ 295,512 21 % $ 294,349 22 % $ 1,163 — % General and administrative $ 96,743 7 % $ 117,734 9 % $ (20,991) (18) % Restructuring $ 21,747 2 % $ 21,743 2 % $ 4 — % * not meaningful • The decrease in selling and marketing in 2023 was primarily due to a decrease in compensation and benefits of $59.5 million due to reduced headcount as we optimize our go-to-market strategy.
Removed
The increase in headcount reflects additional investments in developing our solutions. • The increase in general and administrative was primarily due to an increase in compensation and benefits of $8.4 million, an increase in facilities expense of $2.9 million, and an increase in legal fees and related expenses arising from litigation proceedings outside the ordinary course of business of $16.4 million.
Added
For additional information, see "Note 20. Commitments And Contingencies" in Item 8 of this Annual Report. • The restructuring in 2023 and 2022 was primarily due to our efforts to optimize our go-to-market organization. For additional information, see "Note 12. Restructuring" in Item 8 of this Annual Report.
Removed
We have incurred and expect to continue to incur additional costs for these proceedings in 2023. See "Note 20. Commitments And Contingencies" in Item 8 and Item 1A.
Added
Debt" in Item 8 of this Annual Report. • The change in (loss) on capped call transactions in 2023 was due to fair value adjustments for our capped call transactions. 30 • The increase in other income, net in 2023, was due to a $7.9 million gain from repurchases of our convertible senior notes and a $10.9 million increase in the value of equity securities held in our venture investments portfolio.
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“Risk Factors” in this Annual Report for additional information. • During the fourth quarter of 2022, management committed to a restructuring plan aligned with our target organization go-to-market strategy and commitment to be a Rule of 40 managed company.
Added
Provision for income taxes (Dollars in thousands) 2023 2022 Provision for income taxes $ 27,632 $ 183,785 Effective income tax rate 29 % 114 % The effective income tax rate in the year ended December 31, 2023 was primarily driven by the valuation allowance on our deferred tax assets in the U.S. and U.K. and the taxable income position in the U.S and the UK., partially offset by available tax credits and losses in those jurisdictions.
Removed
The plan resulted in a restructuring expense of $21.7 million in 2022, primarily associated with severance and benefits for impacted employees and expenses incurred as a result of the closure of our Salem, New Hampshire office.
Added
On December 15, 2022, the European Union (EU) Member States formally adopted the EU’s Pillar Two Directive, which generally provides for a minimum effective tax rate of 15%, as established by the Organization for Economic Co-operation and Development (OECD) Pillar Two Framework that was supported by over 130 countries worldwide.
Removed
This transition has impacted and is expected to continue affecting our billings and cash collections. Subscription licenses and services are typically billed and collected over the contract term, while perpetual license arrangements are generally billed and collected upfront when the license rights become effective.
Added
The effective dates are January 1, 2024, and January 1, 2025, for different aspects of the directive. A significant number of countries are also implementing similar local legislation. The Company is continuing to evaluate the potential impact of the Pillar Two Framework on future periods, pending legislative adoption by additional individual countries.
Removed
The change in cash provided by operating activities in 2022 was primarily due to our subscription transition and increased costs as we invested in research and development to support the development of our offerings, partially offset by strong client collections.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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We are primarily exposed to changes in foreign currency exchange rates associated with the Australian dollar, Euro, and U.S. dollar-denominated cash and cash equivalents, accounts receivable, unbilled receivables, and intercompany receivables and payables held by our U.K. subsidiary, a British pound functional entity.
We are primarily exposed to changes in foreign currency exchange rates associated with the Australian dollar, Euro, and U.S. dollar-denominated cash, cash equivalents, receivables, and intercompany balances held by our U.K. subsidiary, a British pound functional entity.
A hypothetical 10% strengthening in the U.S. dollar against other currencies would result in the following impact: 2022 2021 2020 (Decrease) in revenue (3) % (4) % (4) % Increase (decrease) in net income 2 % 1 % 12 % Remeasurement risk We experience fluctuations in transaction gains or losses from the remeasurement of monetary assets and liabilities denominated in currencies other than the functional currency of the entities in which they are recorded.
A hypothetical 10% strengthening in the U.S. dollar against other currencies would have resulted in the following: 2023 2022 2021 (Decrease) in revenue (4) % (3) % (4) % (Decrease) increase in net income (8) % 2 % 1 % Remeasurement risk We incur transaction gains and losses from the remeasurement of monetary assets and liabilities denominated in currencies other than the functional currency of the entities in which they are recorded.
A hypothetical 10% strengthening in the British pound exchange rate against the Australian dollar, Euro, and U.S. dollar would result in the following impact: (in thousands) December 31, 2022 December 31, 2021 December 31, 2020 Foreign currency (loss) gain $ (10,164) $ (8,352) $ (7,782) 34
A hypothetical 10% strengthening in the British pound exchange rate in comparison to the Australian dollar, Euro, and U.S. dollar would have resulted in the following impact: (in thousands) December 31, 2023 December 31, 2022 December 31, 2021 Foreign currency (loss) $ (11,892) $ (10,164) $ (8,352) 35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the risk of loss that may affect us due to adverse financial market price and rate changes. Foreign currency exposure Translation risk Our foreign operations’ operating expenses are primarily denominated in foreign currencies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss from adverse changes in financial market prices and rates. Foreign currency exposure Translation risk Our international operations’ operating expenses are primarily denominated in foreign currencies. However, our international sales are also primarily denominated in foreign currencies, partially offsetting our foreign currency exposure.
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However, our international sales are also primarily denominated in foreign currencies, which partially offsets our foreign currency exposure.

Other PEGA 10-K year-over-year comparisons