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PEGASYSTEMS INC — Interim / Quarterly Report 2019
Nov 7, 2019
30600_10-q_2019-11-07_562e639b-d0a9-47c1-b042-7bbce7b14ca2.zip
Interim / Quarterly Report
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2019
OR
☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 1-11859
PEGASYSTEMS INC.
(Exact name of Registrant as specified in its charter)
| Massachusetts | 04-2787865 | ||||
|---|---|---|---|---|---|
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | ||||
| One Rogers Street | , | Cambridge | , | MA | 02142-1209 |
| (Address of principal executive offices) | (Zip Code) |
( 617 ) 374-9600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
|---|---|---|
| Common Stock, $.01 par value per share | PEGA | NASDAQ Global Select Market |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were 79,332,662 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on October 31, 2019 .
Table of Contents
PEGASYSTEMS INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
| Page | |
|---|---|
| PART I - FINANCIAL INFORMATION | |
| Item 1. Unaudited Condensed Consolidated Financial Statements | |
| Unaudited Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 | 3 |
| Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018 | 4 |
| Unaudited Condensed Consolidated Statements of Comprehensive (Loss) for the three and nine months ended September 30, 2019 and 2018 | 5 |
| Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2019 and 2018 | 6 |
| Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 | 8 |
| Notes to Unaudited Condensed Consolidated Financial Statements | 9 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 24 |
| Item 4. Controls and Procedures | 24 |
| PART II - OTHER INFORMATION | |
| Item 1A. Risk Factors | 25 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 25 |
| Item 5. Other Information | 25 |
| Item 6. Exhibits | 26 |
| Signature | 27 |
2
Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
| September 30, 2019 | December 31, 2018 | |||
|---|---|---|---|---|
| Assets | ||||
| Current assets: | ||||
| Cash and cash equivalents | $ 92,104 | $ 114,422 | ||
| Marketable securities | 20,465 | 93,001 | ||
| Total cash, cash equivalents, and marketable securities | 112,569 | 207,423 | ||
| Accounts receivable | 123,268 | 180,872 | ||
| Unbilled receivables | 172,090 | 172,656 | ||
| Other current assets | 58,204 | 49,684 | ||
| Total current assets | 466,131 | 610,635 | ||
| Long-term unbilled receivables | 123,962 | 151,237 | ||
| Goodwill | 78,862 | 72,858 | ||
| Other long-term assets | 248,069 | 147,823 | ||
| Total assets | $ 917,024 | $ 982,553 | ||
| Liabilities and stockholders’ equity | ||||
| Current liabilities: | ||||
| Accounts payable | $ 15,435 | $ 16,487 | ||
| Accrued expenses | 41,520 | 45,506 | ||
| Accrued compensation and related expenses | 88,349 | 84,671 | ||
| Deferred revenue | 159,849 | 185,145 | ||
| Other current liabilities | 15,742 | — | ||
| Total current liabilities | 320,895 | 331,809 | ||
| Operating lease liabilities | 56,904 | — | ||
| Other long-term liabilities | 10,393 | 29,213 | ||
| Total liabilities | 388,192 | 361,022 | ||
| Stockholders’ equity: | ||||
| Preferred stock, 1,000 shares authorized; none issued | — | — | ||
| Common stock, 200,000 shares authorized; 79,324 and 78,526 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 793 | 785 | ||
| Additional paid-in capital | 129,559 | 123,205 | ||
| Retained earnings | 412,389 | 510,863 | ||
| Accumulated other comprehensive (loss) | ( 13,909 | ) | ( 13,322 | ) |
| Total stockholders’ equity | 528,832 | 621,531 | ||
| Total liabilities and stockholders’ equity | $ 917,024 | $ 982,553 |
See notes to unaudited condensed consolidated financial statements.
3
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| Three Months Ended September 30, — 2019 | 2018 | Nine Months Ended September 30, — 2019 | 2018 | |||||
|---|---|---|---|---|---|---|---|---|
| Revenue | ||||||||
| Software license | $ 58,005 | $ 52,342 | $ 165,543 | $ 184,899 | ||||
| Maintenance | 70,371 | 66,017 | 207,406 | 196,448 | ||||
| Services | 88,327 | 84,904 | 261,892 | 253,877 | ||||
| Total revenue | 216,703 | 203,263 | 634,841 | 635,224 | ||||
| Cost of revenue | ||||||||
| Software license | 676 | 1,255 | 2,982 | 3,772 | ||||
| Maintenance | 6,688 | 6,079 | 19,315 | 18,035 | ||||
| Services | 73,534 | 67,089 | 210,118 | 202,047 | ||||
| Total cost of revenue | 80,898 | 74,423 | 232,415 | 223,854 | ||||
| Gross profit | 135,805 | 128,840 | 402,426 | 411,370 | ||||
| Operating expenses | ||||||||
| Selling and marketing | 115,237 | 87,490 | 341,064 | 269,845 | ||||
| Research and development | 52,492 | 46,504 | 152,802 | 135,261 | ||||
| General and administrative | 14,843 | 12,104 | 41,693 | 38,749 | ||||
| Total operating expenses | 182,572 | 146,098 | 535,559 | 443,855 | ||||
| (Loss) from operations | ( 46,767 | ) | ( 17,258 | ) | ( 133,133 | ) | ( 32,485 | ) |
| Foreign currency transaction (loss) gain | ( 1,970 | ) | 399 | ( 3,577 | ) | 558 | ||
| Interest income, net | 556 | 683 | 1,823 | 2,076 | ||||
| Other income, net | 323 | — | 378 | 363 | ||||
| (Loss) before (benefit from) income taxes | ( 47,858 | ) | ( 16,176 | ) | ( 134,509 | ) | ( 29,488 | ) |
| (Benefit from) income taxes | ( 17,520 | ) | ( 8,589 | ) | ( 43,158 | ) | ( 23,692 | ) |
| Net (loss) | $ ( 30,338 | ) | $ ( 7,587 | ) | $ ( 91,351 | ) | $ ( 5,796 | ) |
| (Loss) per share | ||||||||
| Basic | $ ( 0.38 | ) | $ ( 0.10 | ) | $ ( 1.16 | ) | $ ( 0.07 | ) |
| Diluted | $ ( 0.38 | ) | $ ( 0.10 | ) | $ ( 1.16 | ) | $ ( 0.07 | ) |
| Weighted-average number of common shares outstanding | ||||||||
| Basic | 79,200 | 78,700 | 78,928 | 78,525 | ||||
| Diluted | 79,200 | 78,700 | 78,928 | 78,525 |
See notes to unaudited condensed consolidated financial statements.
4
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)
(in thousands)
| Three Months Ended September 30, — 2019 | 2018 | Nine Months Ended September 30, — 2019 | 2018 | |||||
|---|---|---|---|---|---|---|---|---|
| Net (loss) | $ ( 30,338 | ) | $ ( 7,587 | ) | $ ( 91,351 | ) | $ ( 5,796 | ) |
| Other comprehensive (loss), net of tax | ||||||||
| Unrealized (loss) gain on available-for-sale marketable securities | ( 216 | ) | ( 162 | ) | 396 | ( 277 | ) | |
| Foreign currency translation adjustments | ( 2,201 | ) | ( 1,934 | ) | ( 983 | ) | ( 4,898 | ) |
| Total other comprehensive (loss), net of tax | ( 2,417 | ) | ( 2,096 | ) | ( 587 | ) | ( 5,175 | ) |
| Comprehensive (loss) | $ ( 32,755 | ) | $ ( 9,683 | ) | $ ( 91,938 | ) | $ ( 10,971 | ) |
See notes to unaudited condensed consolidated financial statements.
5
| PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Total Stockholders’ Equity | ||||||||
| Number of Shares | Amount | |||||||||||
| December 31, 2017 | 78,081 | $ 781 | $ 152,097 | $ 509,697 | $ ( 6,705 | ) | $ 655,870 | |||||
| Repurchase of common stock | ( 101 | ) | ( 1 | ) | ( 5,688 | ) | — | — | ( 5,689 | ) | ||
| Issuance of common stock for share-based compensation plans | 566 | 5 | ( 15,556 | ) | — | — | ( 15,551 | ) | ||||
| Stock-based compensation | — | — | 15,109 | — | — | 15,109 | ||||||
| Cash dividends declared ($0.12 per share) | — | — | — | ( 2,355 | ) | — | ( 2,355 | ) | ||||
| Other comprehensive income | — | — | — | — | 4,262 | 4,262 | ||||||
| Net income | — | — | — | 12,200 | — | 12,200 | ||||||
| March 31, 2018 | 78,546 | 785 | 145,962 | 519,542 | ( 2,443 | ) | 663,846 | |||||
| Repurchase of common stock | ( 171 | ) | ( 2 | ) | ( 10,179 | ) | — | — | ( 10,181 | ) | ||
| Issuance of common stock for share-based compensation plans | 358 | 4 | ( 11,395 | ) | — | — | ( 11,391 | ) | ||||
| Issuance of common stock under Employee Stock Purchase Plan | 15 | — | 849 | — | — | 849 | ||||||
| Stock-based compensation | — | — | 16,163 | — | — | 16,163 | ||||||
| Cash dividends declared ($0.12 per share) | — | — | — | ( 2,364 | ) | — | ( 2,364 | ) | ||||
| Other comprehensive (loss) | — | — | — | — | ( 7,341 | ) | ( 7,341 | ) | ||||
| Net (loss) | — | — | — | ( 10,409 | ) | — | ( 10,409 | ) | ||||
| June 30, 2018 | 78,748 | 787 | 141,400 | 506,769 | ( 9,784 | ) | 639,172 | |||||
| Repurchase of common stock | ( 242 | ) | ( 2 | ) | ( 14,277 | ) | — | — | ( 14,279 | ) | ||
| Issuance of common stock for share-based compensation plans | 310 | 3 | ( 8,399 | ) | — | — | ( 8,396 | ) | ||||
| Stock-based compensation | — | — | 16,408 | — | 16,408 | |||||||
| Cash dividends declared ($0.12 per share) | — | — | — | ( 2,367 | ) | — | ( 2,367 | ) | ||||
| Other comprehensive (loss) | — | — | — | — | ( 2,096 | ) | ( 2,096 | ) | ||||
| Net (loss) | — | — | — | ( 7,587 | ) | — | ( 7,587 | ) | ||||
| September 30, 2018 | 78,816 | $ 788 | $ 135,132 | $ 496,815 | $ ( 11,880 | ) | $ 620,855 | |||||
| See notes to unaudited condensed consolidated financial statements. |
6
| PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Total Stockholders’ Equity | ||||||||
| Number of Shares | Amount | |||||||||||
| December 31, 2018 | 78,526 | $ 785 | $ 123,205 | $ 510,863 | $ ( 13,322 | ) | $ 621,531 | |||||
| Repurchase of common stock | ( 144 | ) | ( 1 | ) | ( 7,586 | ) | — | — | ( 7,587 | ) | ||
| Issuance of common stock for share-based compensation plans | 514 | 5 | ( 14,843 | ) | — | — | ( 14,838 | ) | ||||
| Stock-based compensation | — | — | 18,406 | — | — | 18,406 | ||||||
| Cash dividends declared ($0.12 per share) | — | — | — | ( 2,367 | ) | — | ( 2,367 | ) | ||||
| Other comprehensive income | — | — | — | — | 2,001 | 2,001 | ||||||
| Net (loss) | — | — | — | ( 28,717 | ) | — | ( 28,717 | ) | ||||
| March 31, 2019 | 78,896 | 789 | 119,182 | 479,779 | ( 11,321 | ) | 588,429 | |||||
| Repurchase of common stock | ( 88 | ) | ( 1 | ) | ( 6,301 | ) | — | — | ( 6,302 | ) | ||
| Issuance of common stock for share-based compensation plans | 320 | 3 | ( 11,217 | ) | — | — | ( 11,214 | ) | ||||
| Issuance of common stock under Employee Stock Purchase Plan | 16 | — | 1,103 | — | — | 1,103 | ||||||
| Stock-based compensation | — | — | 20,113 | — | — | 20,113 | ||||||
| Cash dividends declared ($0.12 per share) | — | — | — | ( 2,375 | ) | — | ( 2,375 | ) | ||||
| Other comprehensive (loss) | — | — | — | — | ( 171 | ) | ( 171 | ) | ||||
| Net (loss) | — | — | — | ( 32,296 | ) | — | ( 32,296 | ) | ||||
| June 30, 2019 | 79,144 | 791 | 122,880 | 445,108 | ( 11,492 | ) | 557,287 | |||||
| Repurchase of common stock | ( 88 | ) | ( 1 | ) | ( 6,396 | ) | — | — | ( 6,397 | ) | ||
| Issuance of common stock for share-based compensation plans | 268 | 3 | ( 8,804 | ) | — | — | ( 8,801 | ) | ||||
| Stock-based compensation | — | — | 21,879 | — | — | 21,879 | ||||||
| Cash dividends declared ($0.12 per share) | — | — | — | ( 2,381 | ) | — | ( 2,381 | ) | ||||
| Other comprehensive (loss) | — | — | — | — | ( 2,417 | ) | ( 2,417 | ) | ||||
| Net (loss) | — | — | — | ( 30,338 | ) | — | ( 30,338 | ) | ||||
| September 30, 2019 | 79,324 | $ 793 | $ 129,559 | $ 412,389 | $ ( 13,909 | ) | $ 528,832 |
See notes to unaudited condensed consolidated financial statements.
7
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Nine Months Ended September 30, — 2019 | 2018 | |||
|---|---|---|---|---|
| Operating activities | ||||
| Net (loss) | $ ( 91,351 | ) | $ ( 5,796 | ) |
| Adjustments to reconcile net (loss) to cash (used in) provided by operating activities | ||||
| Stock-based compensation | 60,242 | 47,573 | ||
| Amortization and depreciation | 50,622 | 31,742 | ||
| Deferred income taxes | ( 40,531 | ) | ( 1,388 | ) |
| Foreign currency transaction loss (gain) | 3,577 | ( 558 | ) | |
| Other non-cash | ( 363 | ) | ( 1,377 | ) |
| Change in operating assets and liabilities, net | 4,342 | ( 3,108 | ) | |
| Cash (used in) provided by operating activities | ( 13,462 | ) | 67,088 | |
| Investing activities | ||||
| Purchases of investments | ( 11,182 | ) | ( 68,177 | ) |
| Proceeds from maturities and called investments | 13,066 | 26,456 | ||
| Sales of investments | 68,937 | — | ||
| Payments for acquisitions, net of cash acquired | ( 10,934 | ) | — | |
| Investment in property and equipment | ( 6,439 | ) | ( 7,874 | ) |
| Cash provided by (used in) investing activities | 53,448 | ( 49,595 | ) | |
| Financing activities | ||||
| Dividend payments to shareholders | ( 7,105 | ) | ( 7,067 | ) |
| Common stock repurchases | ( 54,836 | ) | ( 64,597 | ) |
| Cash (used in) financing activities | ( 61,941 | ) | ( 71,664 | ) |
| Effect of exchange rate changes on cash and cash equivalents | ( 363 | ) | ( 1,913 | ) |
| Net (decrease) in cash and cash equivalents | ( 22,318 | ) | ( 56,084 | ) |
| Cash and cash equivalents, beginning of period | 114,422 | 162,279 | ||
| Cash and cash equivalents, end of period | $ 92,104 | $ 106,195 |
See notes to unaudited condensed consolidated financial statements.
8
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all the information required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2018 .
In the opinion of management, the Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented.
The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2019 .
2. NEW ACCOUNTING PRONOUNCEMENTS
Leases
On January 1, 2019, the Company adopted Accounting Standards Codification 842 “Leases” (“ASC 842”) using the modified retrospective method, reflecting any cumulative effect as an adjustment to equity. Results for reporting periods beginning on or after January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historical accounting under ASC 840 “Leases”.
The Company elected the permitted practical expedients to not reassess the following related to leases that commenced before the effective date of ASC 842: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. Upon adoption, the Company recorded right of use assets of $ 41.8 million and lease liabilities of $ 54.2 million . The difference between the value of the right of use assets and lease liabilities is due to the reclassification of existing deferred rent, prepaid rent, and unamortized lease incentives as of January 1, 2019.
See Note 9. “Leases” for additional information.
Financial instruments
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected credit losses for financial assets measured at amortized cost, including accounts receivable, upon initial recognition of that financial asset using a forward-looking expected loss model, rather than an incurred loss model. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses when the fair value is below the amortized cost of the asset, removing the concept of “other-than-temporary” impairments. The effective date for the Company will be January 1, 2020, with early adoption permitted. The Company does not expect the adoption of this standard will have a material effect on its financial position or results of operations.
3. MARKETABLE SECURITIES
| (in thousands) | September 30, 2019 — Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value |
|---|---|---|---|---|
| Municipal bonds | $ 10,680 | $ 69 | $ — | $ 10,749 |
| Corporate bonds | 9,611 | 105 | — | 9,716 |
| $ 20,291 | $ 174 | $ — | $ 20,465 |
| (in thousands) | December 31, 2018 — Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |
|---|---|---|---|---|---|
| Municipal bonds | $ 44,802 | $ 13 | $ ( 110 | ) | $ 44,705 |
| Corporate bonds | 48,499 | 23 | ( 226 | ) | 48,296 |
| $ 93,301 | $ 36 | $ ( 336 | ) | $ 93,001 |
As of September 30, 2019 , maturities of marketable securities ranged from May 2020 to August 2022 , with a weighted-average remaining maturity of approximately 1.5 years .
9
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
Receivables
| (in thousands) | September 30, 2019 | December 31, 2018 |
|---|---|---|
| Accounts receivable | $ 123,268 | $ 180,872 |
| Unbilled receivables | 172,090 | 172,656 |
| Long-term unbilled receivables | 123,962 | 151,237 |
| $ 419,320 | $ 504,765 |
Unbilled receivables are client committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time.
Unbilled receivables are expected to be billed in the future as follows :
| (Dollars in thousands) | September 30, 2019 | |
|---|---|---|
| 1 year or less | $ 172,090 | 59 % |
| 1-2 years | 84,045 | 28 % |
| 2-5 years | 39,917 | 13 % |
| $ 296,052 | 100 % |
Contract assets and deferred revenue
| (in thousands) | September 30, 2019 | December 31, 2018 |
|---|---|---|
| Contract assets (1) | $ 5,046 | $ 3,711 |
| Long-term contract assets (2) | 2,381 | 2,543 |
| $ 7,427 | $ 6,254 |
(1) Included in other current assets. (2) Included in other long-term assets.
| (in thousands) | September 30, 2019 | December 31, 2018 |
|---|---|---|
| Deferred revenue | $ 159,849 | $ 185,145 |
| Long-term deferred revenue (1) | 4,029 | 5,344 |
| $ 163,878 | $ 190,489 |
(1) Included in other long-term liabilities.
Contract assets are client committed amounts for which revenue recognized exceeds the amount billed to the client and the right to payment is subject to conditions other than the passage of time, such as the completion of a related performance obligation. Deferred revenue consists of billings and payments received in advance of revenue recognition. Contract assets and deferred revenue are netted at the contract level for each reporting period.
The change in deferred revenue in the nine months ended September 30, 2019 was primarily due to revenue recognized during the period that was included in deferred revenue at December 31, 2018 , partially offset by new billings in advance of revenue recognition.
5. DEFERRED CONTRACT COSTS
The Company recognizes an asset for the incremental costs of obtaining a client contract, which relate to sales commissions. The Company expects to benefit from those costs for more than one year, as the Company generally only pays sales commissions on the initial contract and not any subsequent contract renewals. As a result, there are no commensurate commissions paid on contract renewals. Deferred costs are amortized on a straight-line basis over the benefit period, which is on average 5 years .
| (in thousands) | September 30, 2019 | December 31, 2018 |
|---|---|---|
| Deferred contract costs (1) | $ 67,182 | $ 64,367 |
(1) Included in other long-term assets.
| (in thousands) | Three Months Ended September 30, — 2019 | 2018 | Nine Months Ended September 30, — 2019 | 2018 |
|---|---|---|---|---|
| Amortization of deferred contract costs (1) | $ 8,193 | $ 4,208 | $ 22,372 | $ 11,806 |
(1) Included in selling and marketing expenses .
10
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The change in the carrying amount of goodwill was:
| (in thousands) | Nine Months Ended September 30, 2019 | |
|---|---|---|
| Balance as of January 1, | $ 72,858 | |
| Acquisition (1) | 6,179 | |
| Currency translation adjustments | ( 175 | ) |
| Balance as of September 30, | $ 78,862 |
(1) In May 2019, the Company acquired In the Chat Communications Inc., a privately-held software provider of digital customer service software, for $ 10.9 million , net of cash acquired. The Company also expects to issue up to approximately 15 thousand shares in retention-based bonus payments to a key employee upon the achievement of specified retention milestones. The principal assets and liabilities acquired as part of the business combination were additional goodwill and technology intangible assets of $ 6.2 million and $ 5.1 million .
Intangibles
Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives as follows:
| (in thousands) | Useful Lives | September 30, 2019 — Cost | Accumulated Amortization | Net Book Value (1) | |
|---|---|---|---|---|---|
| Client-related | 4-10 years | $ 63,089 | $ ( 53,960 | ) | $ 9,129 |
| Technology | 2-10 years | 64,843 | ( 53,252 | ) | 11,591 |
| Other | 1 - 5 years | 5,361 | ( 5,361 | ) | — |
| $ 133,293 | $ ( 112,573 | ) | $ 20,720 |
(1) Included in other long-term assets.
| (in thousands) | Useful Lives | December 31, 2018 — Cost | Accumulated Amortization | Net Book Value (1) | |
|---|---|---|---|---|---|
| Client-related | 4-10 years | $ 63,115 | $ ( 51,224 | ) | $ 11,891 |
| Technology | 2-10 years | 59,742 | ( 50,398 | ) | 9,344 |
| Other | 1 - 5 years | 5,361 | ( 5,361 | ) | — |
| $ 128,218 | $ ( 106,983 | ) | $ 21,235 |
(1) Included in other long-term assets.
Amortization of intangible assets was:
| (in thousands) | Three Months Ended September 30, — 2019 | 2018 | Nine Months Ended September 30, — 2019 | 2018 |
|---|---|---|---|---|
| Cost of revenue | $ 647 | $ 1,232 | $ 2,854 | $ 3,695 |
| Selling and marketing | 370 | 1,603 | 2,754 | 4,813 |
| $ 1,017 | $ 2,835 | $ 5,608 | $ 8,508 |
7. ACCRUED EXPENSES
| (in thousands) | September 30, 2019 | December 31, 2018 |
|---|---|---|
| Outside professional services expenses | $ 8,568 | $ 10,367 |
| Income and other taxes | 5,418 | 10,387 |
| Marketing and sales program expenses | 5,969 | 5,860 |
| Dividends payable | 2,381 | 2,363 |
| Employee-related expenses | 4,785 | 3,536 |
| Cloud hosting expenses | 10,158 | 4,604 |
| Other | 4,241 | 8,389 |
| $ 41,520 | $ 45,506 |
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PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. FAIR VALUE MEASUREMENTS
Assets and liabilities measured at fair value on a recurring basis
The Company records its cash equivalents, marketable securities, and investments in privately-held companies at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants based on assumptions that market participants would use in pricing an asset or liability.
As a basis for classifying the fair value measurements, a three-tier fair value hierarchy, which classifies the fair value measurements based on the inputs used in measuring fair value, was established as follows:
• Level 1 - observable inputs such as quoted prices in active markets for identical assets or liabilities;
• Level 2 - significant other inputs that are observable either directly or indirectly; and
• Level 3 - significant unobservable inputs on which there is little or no market data, which require the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
The Company’s cash equivalents are composed of money market funds and time deposits, which are classified within Level 1 and Level 2, respectively, in the fair value hierarchy. The Company’s marketable securities, which are classified within Level 2 of the fair value hierarchy, are valued based on a market approach using quoted prices, when available, or matrix pricing compiled by third-party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk. The Company’s investments in privately-held companies are classified within Level 3 of the fair value hierarchy.
If applicable, the Company will recognize transfers into and out of levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstance occurs. There were no transfers between levels during the nine months ended September 30, 2019 .
The Company’s assets and liabilities measured at fair value on a recurring basis were:
| (in thousands) | September 30, 2019 — Level 1 | Level 2 | Level 3 | Total |
|---|---|---|---|---|
| Cash equivalents | $ 88 | $ — | $ — | $ 88 |
| Marketable securities: | ||||
| Municipal bonds | $ — | $ 10,749 | $ — | $ 10,749 |
| Corporate bonds | — | 9,716 | — | 9,716 |
| Total marketable securities | $ — | $ 20,465 | $ — | $ 20,465 |
| Investments in privately-held companies (1) | $ — | $ — | $ 4,583 | $ 4,583 |
(1) Included in other long-term assets.
| (in thousands) | December 31, 2018 — Level 1 | Level 2 | Level 3 | Total |
|---|---|---|---|---|
| Cash equivalents | $ 10,155 | $ 10,000 | $ — | $ 20,155 |
| Marketable securities: | ||||
| Municipal bonds | $ — | $ 44,705 | $ — | $ 44,705 |
| Corporate bonds | — | 48,296 | — | 48,296 |
| Total marketable securities | $ — | $ 93,001 | $ — | $ 93,001 |
| Investments in privately-held companies (1) | $ — | $ — | $ 3,390 | $ 3,390 |
(1) Included in other long-term assets.
For certain other financial instruments, including accounts receivable and accounts payable, the carrying value approximates fair value due to the relatively short maturity of these items.
9. LEASES
The Company’s leases are primarily for office space used in the ordinary course of business.
Accounting policy
All the Company’s leases are operating leases. The Company accounts for a contract as a lease when it has the right to control the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines the initial classification and measurement of its operating right of use assets and lease liabilities at the lease commencement date and thereafter if modified. Fixed lease costs are recognized on a straight-line basis over the term of the lease. Variable lease costs are recognized in the period in which the obligation for those payments is incurred. The Company combines lease and non-lease components in the determination of lease costs for its office space leases. The lease liability includes lease payments related to options to extend or renew the lease term if the Company is
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PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
reasonably certain it will exercise those options. The Company’s leases do not contain any material residual value guarantees or restrictive covenants.
Expense
| (in thousands) | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 |
|---|---|---|
| Fixed lease costs | $ 4,763 | $ 13,344 |
| Variable lease costs | 1,470 | 4,153 |
| $ 6,233 | $ 17,497 |
Right of use assets and lease liabilities
| (in thousands) | September 30, 2019 |
|---|---|
| Right of use assets (1) | $ 62,296 |
| Lease liabilities (2) | $ 15,742 |
| Long-term lease liabilities | $ 56,904 |
(1) Represents the Company’s right to use the leased asset during the lease term. Included in other long-term assets. (2) Included in other current liabilities.
The weighted-average remaining lease term and discount rate for the Company’s leases were:
| September 30, 2019 | |
|---|---|
| Weighted-average remaining lease term | 4.2 years |
| Weighted-average discount rate (1) | 5.8 % |
(1) The rates implicit in most of the Company’s leases are not readily determinable, therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease.
Maturities of lease liabilities are:
| (in thousands) | September 30, 2019 | |
|---|---|---|
| Remainder of 2019 | $ 3,402 | |
| 2020 | 21,061 | |
| 2021 | 18,800 | |
| 2022 | 17,642 | |
| 2023 and thereafter | 21,375 | |
| Total lease payments | 82,280 | |
| Less: imputed interest (1) | ( 9,634 | ) |
| Total short and long-term lease liabilities | $ 72,646 |
(1) Lease liabilities are measured at the present value of the remaining lease payments using a discount rate determined at lease commencement unless the discount rate is updated as a result of a lease reassessment event.
As of December 31, 2018 , the Company’s future minimum rental payments required under operating leases with noncancellable terms in excess of one year as determined before the adoption of ASC 842 were:
| (in thousands) | Operating Leases (1) |
|---|---|
| 2019 | $ 15,993 |
| 2020 | 14,807 |
| 2021 | 13,262 |
| 2022 | 12,279 |
| 2023 | 11,084 |
| $ 67,425 |
(1) Operating leases include future minimum rent payments, net of estimated sublease income for facilities that the Company has vacated pursuant to its restructuring activities.
Cash flow information
| (in thousands) | Nine Months Ended September 30, 2019 |
|---|---|
| Cash paid for leases | 14,586 |
| Right of use assets recognized for new leases and amendments (non-cash) | 31,126 |
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PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. REVENUE
Geographic revenue
| (Dollars in thousands) | Three Months Ended September 30, — 2019 | 2018 | Nine Months Ended September 30, — 2019 | 2018 | ||||
|---|---|---|---|---|---|---|---|---|
| U.S. | $ 123,447 | 57 % | $ 103,075 | 51 % | $ 347,120 | 55 % | $ 327,409 | 51 % |
| Other Americas | 11,748 | 5 % | 10,424 | 5 % | 49,450 | 8 % | 37,766 | 6 % |
| United Kingdom (“U.K.”) | 23,034 | 11 % | 19,277 | 9 % | 64,269 | 10 % | 68,450 | 11 % |
| Europe (excluding U.K.), Middle East, and Africa | 34,761 | 16 % | 42,254 | 21 % | 102,342 | 16 % | 101,150 | 16 % |
| Asia-Pacific | 23,713 | 11 % | 28,233 | 14 % | 71,660 | 11 % | 100,449 | 16 % |
| $ 216,703 | 100 % | $ 203,263 | 100 % | $ 634,841 | 100 % | $ 635,224 | 100 % |
Revenue streams
| (in thousands) | Three Months Ended September 30, — 2019 | 2018 | Nine Months Ended September 30, — 2019 | 2018 |
|---|---|---|---|---|
| Perpetual license | $ 9,016 | $ 20,276 | $ 43,286 | $ 56,829 |
| Term license | 48,989 | 32,066 | 122,257 | 128,070 |
| Revenue recognized at a point in time | 58,005 | 52,342 | 165,543 | 184,899 |
| Maintenance | 70,371 | 66,017 | 207,406 | 196,448 |
| Cloud | 35,153 | 22,184 | 94,610 | 57,967 |
| Consulting | 53,174 | 62,720 | 167,282 | 195,910 |
| Revenue recognized over time | 158,698 | 150,921 | 469,298 | 450,325 |
| $ 216,703 | $ 203,263 | $ 634,841 | $ 635,224 |
| (in thousands) | Three Months Ended September 30, — 2019 | 2018 | Nine Months Ended September 30, — 2019 | 2018 |
|---|---|---|---|---|
| Term license | $ 48,989 | $ 32,066 | $ 122,257 | $ 128,070 |
| Cloud | 35,153 | 22,184 | 94,610 | 57,967 |
| Maintenance | 70,371 | 66,017 | 207,406 | 196,448 |
| Subscription (1) | 154,513 | 120,267 | 424,273 | 382,485 |
| Perpetual license | 9,016 | 20,276 | 43,286 | 56,829 |
| Consulting | 53,174 | 62,720 | 167,282 | 195,910 |
| $ 216,703 | $ 203,263 | $ 634,841 | $ 635,224 |
(1) Reflects client arrangements (term license, cloud, and maintenance) that are subject to renewal.
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PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Remaining performance obligations (“RPO”)
Expected future revenue on existing contracts:
| (Dollars in thousands) | September 30, 2019 — Perpetual license | Term license | Maintenance | Cloud | Consulting | Total | |
|---|---|---|---|---|---|---|---|
| 1 year or less | $ 7,689 | $ 25,948 | $ 158,220 | $ 133,785 | $ 13,145 | $ 338,787 | 56 % |
| 1-2 years | 853 | 3,798 | 18,590 | 105,081 | 863 | 129,185 | 21 % |
| 2-3 years | 1,306 | 591 | 8,323 | 72,915 | 841 | 83,976 | 14 % |
| Greater than 3 years | — | 85 | 4,959 | 51,591 | — | 56,635 | 9 % |
| $ 9,848 | $ 30,422 | $ 190,092 | $ 363,372 | $ 14,849 | $ 608,583 | 100 % |
| (Dollars in thousands) | September 30, 2018 — Perpetual license | Term License | Maintenance | Cloud | Consulting | Total | |
|---|---|---|---|---|---|---|---|
| 1 year or less | $ 25,343 | $ 44,283 | $ 140,591 | $ 88,529 | $ 14,107 | $ 312,853 | 60 % |
| 1-2 years | 6,490 | 10,063 | 8,877 | 70,815 | 1,830 | 98,075 | 19 % |
| 2-3 years | 360 | 1,598 | 2,586 | 54,646 | 449 | 59,639 | 11 % |
| Greater than 3 years | 1,306 | 218 | 1,079 | 49,110 | 50 | 51,763 | 10 % |
| $ 33,499 | $ 56,162 | $ 153,133 | $ 263,100 | $ 16,436 | $ 522,330 | 100 % |
Major clients
Clients accounting for 10% or more of the Company’s total revenue were:
| (in thousands) | Three Months Ended September 30, — 2019 | 2018 | Nine Months Ended September 30, — 2019 | 2018 |
|---|---|---|---|---|
| Total revenue | $ 216,703 | $ 203,263 | $ 634,841 | $ 635,224 |
| Client A | * | 10 % | * | * |
*Client accounted for less than 10% of total revenue.
11. STOCK-BASED COMPENSATION
Expense
| (in thousands) | Three Months Ended September 30, — 2019 | 2018 | Nine Months Ended September 30, — 2019 | 2018 | ||||
|---|---|---|---|---|---|---|---|---|
| Cost of revenues | $ 4,787 | $ 4,319 | $ 14,216 | $ 12,277 | ||||
| Selling and marketing | 8,317 | 6,198 | 24,055 | 16,895 | ||||
| Research and development | 4,858 | 3,917 | 13,990 | 11,356 | ||||
| General and administrative | 3,884 | 1,974 | 7,981 | 7,045 | ||||
| $ 21,846 | $ 16,408 | $ 60,242 | $ 47,573 | |||||
| Income tax benefit | $ ( 4,430 | ) | $ ( 3,555 | ) | $ ( 12,226 | ) | $ ( 10,037 | ) |
As of September 30, 2019 , the Company had $ 95.6 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2.2 years.
Grants
The Company granted the following stock-based compensation awards:
| (in thousands) | Nine Months Ended September 30, 2019 — Shares | Total Fair Value |
|---|---|---|
| RSUs | 1,153 | $ 75,510 |
| Non-qualified stock options | 2,165 | $ 41,260 |
| Common stock | 11 | $ 800 |
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Common stock issued
During the nine months ended September 30, 2019 , the Company issued 1.1 million shares of common stock unde r the Company’s stock-based compensation plans.
12. INCOME TAXES
Effective income tax rate
| (Dollars in thousands) | Nine Months Ended September 30, — 2019 | 2018 | ||
|---|---|---|---|---|
| (Benefit from) income taxes | $ ( 43,158 | ) | $ ( 23,692 | ) |
| Effective income tax rate | 32 | % | 80 | % |
During the nine months ended September 30, 2019 , the Company’s effective income tax rate decreased primarily due to the Global Intangible Low-Taxed Income (“GILTI”) provision of the Tax Reform Act. The Company’s effective income tax rate was also affected by excess tax benefits from stock-based compensation and an increase in U.S. research and development tax credits.
13. EARNINGS PER SHARE
Basic earnings per share is computed using the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is computed using the weighted-average number of common shares outstanding during the applicable period, plus the dilutive effect of outstanding stock options and RSUs, using the treasury stock method. In periods of loss, all stock options and RSUs are excluded, as their inclusion would be anti-dilutive.
The calculation of the basic and diluted earnings per share was:
| (in thousands, except per share amounts) | Three Months Ended September 30, — 2019 | 2018 | Nine Months Ended September 30, — 2019 | 2018 | ||||
|---|---|---|---|---|---|---|---|---|
| Basic | ||||||||
| Net (loss) | $ ( 30,338 | ) | $ ( 7,587 | ) | $ ( 91,351 | ) | $ ( 5,796 | ) |
| Weighted-average common shares outstanding | 79,200 | 78,700 | 78,928 | 78,525 | ||||
| (Loss) per share, basic | $ ( 0.38 | ) | $ ( 0.10 | ) | $ ( 1.16 | ) | $ ( 0.07 | ) |
| Diluted | ||||||||
| Net (loss) | $ ( 30,338 | ) | $ ( 7,587 | ) | $ ( 91,351 | ) | $ ( 5,796 | ) |
| Weighted-average effect of dilutive securities: | ||||||||
| Stock options | — | — | — | — | ||||
| RSUs | — | — | — | — | ||||
| Effect of dilutive securities | — | — | — | — | ||||
| Weighted-average common shares outstanding, assuming dilution | 79,200 | 78,700 | 78,928 | 78,525 | ||||
| (Loss) per share, diluted | $ ( 0.38 | ) | $ ( 0.10 | ) | $ ( 1.16 | ) | $ ( 0.07 | ) |
| Outstanding anti-dilutive stock options and RSUs (1) | 5,953 | 6,119 | 5,923 | 6,380 |
(1) Certain outstanding stock options and RSUs were excluded from the computation of diluted earnings per share because they were anti-dilutive in the period presented. These awards may be dilutive in the future.
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PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. SUBSEQUENT EVENTS
On November 6, 2019 , the Company entered into a five -year $ 100 million , senior secured revolving credit agreement (the “Credit Agreement”) with PNC Bank, National Association (“PNC”). The Company may use borrowings to finance working capital needs and for general corporate purposes. Subject to specific circumstances, the Credit Agreement allows the Company to increase the aggregate commitment up to $ 200 million .
The Credit Agreement contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestures and affiliate transactions. The Company is also required to comply with financial covenants that consist of a maximum net consolidated leverage ratio of 3.5 (with a step-up in the event of certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 . The commitments expire on November 4, 2024 , and any outstanding loans will be payable on such date.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements about our future financial performance and business plans, the adequacy of our liquidity and capital resources, the continued payment of quarterly dividends, and the timing of revenue recognition, and are described more completely in Part I of our Annual Report on Form 10-K for the year ended December 31, 2018 .
These forward-looking statements are based on current expectations, estimates, forecasts, and projections about the industry and markets in which we operate and management’s beliefs and assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “could,” “estimate,” “may,” “target,” “strategy,” “is intended to,” “project,” “guidance,” “likely,” “usually,” or variations of such words and similar expressions are intended to identify such forward-looking statements.
Important factors that could cause actual future activities and results to differ materially from those expressed in such forward-looking statements include, among others, variation in demand for our products and services, reliance on third-party relationships, reliance on key personnel, the inherent risks associated with international operations and the continued uncertainties in the global economy, our continued effort to market and sell both domestically and internationally, foreign currency exchange rates, the potential legal and financial liabilities and reputation damage due to cyber-attacks and security breaches, and management of our growth. These risks and other factors that could cause actual results to differ materially from those expressed in such forward-looking statements are described more completely in Part I of our Annual Report on Form 10-K for the year ended December 31, 2018 and other filings we make with the U.S. Securities and Exchange Commission (“SEC”).
Investors are cautioned not to place undue reliance on such forward-looking statements, and there are no assurances that the results contained in such statements will be achieved. Although new information, future events, or risks may cause actual results to differ materially from future results expressed or implied by such forward-looking statements, except as required by applicable law, we do not undertake and expressly disclaim any obligation to publicly update or revise these forward-looking statements whether as the result of new information, future events, or otherwise.
BUSINESS OVERVIEW
We develop, market, license, and support enterprise software applications that help organizations transform the way they engage with their customers and process and complete work across their enterprise. We also license our no-code Pega Platform™ for rapid application development to clients that wish to build and extend their business applications. Our cloud-architected portfolio of customer engagement and digital process automation applications leverages artificial intelligence (“AI”), case management, and robotic automation technology, built on our unified no-code Pega Platform, empowering businesses to quickly design, extend, and scale their enterprise applications to meet strategic business needs.
Our target clients are Global 3000 organizations and government agencies that require applications to differentiate themselves in the markets they serve. Our applications achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, and reducing risk. We deliver applications tailored to our clients’ specific industry needs.
Performance metrics
We utilize several performance metrics in analyzing and assessing our overall performance, making operating decisions, and forecasting and planning for future periods.
| (Dollars in thousands, except per share amounts) | Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Total revenue | $ 216,703 | $ 203,263 | $ 13,440 | 7 | % | $ 634,841 | $ 635,224 | $ (383 | ) | — | % | |||||
| Subscription revenue (1) | $ 154,513 | $ 120,267 | $ 34,246 | 28 | % | $ 424,273 | $ 382,485 | $ 41,788 | 11 | % | ||||||
| Net (loss) | $ (30,338 | ) | $ (7,587 | ) | $ (22,751 | ) | (300 | )% | $ (91,351 | ) | $ (5,796 | ) | $ (85,555 | ) | (1,476 | )% |
| (Loss) per share, diluted | $ (0.38 | ) | $ (0.10 | ) | $ (0.28 | ) | (280 | )% | $ (1.16 | ) | $ (0.07 | ) | $ (1.09 | ) | (1,557 | )% |
(1) Reflects client arrangements (term license, cloud, and maintenance) that are subject to renewal.
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Annual contract value (“ACV”) (1) (2)
The change in ACV measures the growth and predictability of future cash flows from Pega Cloud and Client Cloud committed arrangements as of the end of the particular reporting period.
| (Dollars in thousands) | September 30, — 2019 | 2018 | Change | Constant Currency Change | |
|---|---|---|---|---|---|
| Maintenance | $ 281,484 | $ 264,068 | $ 17,416 | 7 % | 9 % |
| Term | 207,317 | 174,320 | $ 32,997 | 19 % | 20 % |
| Client Cloud | 488,801 | 438,388 | $ 50,413 | 11 % | 13 % |
| Pega Cloud | 145,549 | 98,373 | 47,176 | 48 % | 51 % |
| Total ACV | $ 634,350 | $ 536,761 | $ 97,589 | 18 % | 20 % |
(1) Total ACV, as of a given date, is the sum of the following two components:
• Client Cloud: the sum of (1) the annual value of each term license contract in effect on such date, which is equal to its total license value divided by the total number of years and (2) maintenance revenue reported for the quarter ended on such date, multiplied by four. We do not provide hosting services for Client Cloud arrangements.
• Pega Cloud: the sum of the annual value of each cloud contract in effect on such date, which is equal to its total value divided by the total number of years.
(2) As foreign currency exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of ACV growth rates on a constant currency basis enhances the understanding of our results and evaluation of our performance in comparison to prior periods.
Remaining performance obligations (“RPO”)
Expected future revenue on existing contracts:
| (Dollars in thousands) | September 30, 2019 — Perpetual license | Term license | Maintenance | Cloud | Consulting | Total | ||||
|---|---|---|---|---|---|---|---|---|---|---|
| 1 year or less | $ 7,689 | $ 25,948 | $ 158,220 | $ 133,785 | $ 13,145 | $ 338,787 | 56 % | |||
| 1-2 years | 853 | 3,798 | 18,590 | 105,081 | 863 | 129,185 | 21 % | |||
| 2-3 years | 1,306 | 591 | 8,323 | 72,915 | 841 | 83,976 | 14 % | |||
| Greater than 3 years | — | 85 | 4,959 | 51,591 | — | 56,635 | 9 % | |||
| $ 9,848 | $ 30,422 | $ 190,092 | $ 363,372 | $ 14,849 | $ 608,583 | 100 % | ||||
| Change in RPO Since September 30, 2018 | ||||||||||
| $ (23,651 | ) | $ (25,740 | ) | $ 36,959 | $ 100,272 | $ (1,587 | ) | $ 86,253 | ||
| (71 | )% | (46 | )% | 24 % | 38 % | (10 | )% | 17 % |
| (Dollars in thousands) | September 30, 2018 — Perpetual license | Term license | Maintenance | Cloud | Consulting | Total | |
|---|---|---|---|---|---|---|---|
| 1 year or less | $ 25,343 | $ 44,283 | $ 140,591 | $ 88,529 | $ 14,107 | $ 312,853 | 60 % |
| 1-2 years | 6,490 | 10,063 | 8,877 | 70,815 | 1,830 | 98,075 | 19 % |
| 2-3 years | 360 | 1,598 | 2,586 | 54,646 | 449 | 59,639 | 11 % |
| Greater than 3 years | 1,306 | 218 | 1,079 | 49,110 | 50 | 51,763 | 10 % |
| $ 33,499 | $ 56,162 | $ 153,133 | $ 263,100 | $ 16,436 | $ 522,330 | 100 % |
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CRITICAL ACCOUNTING POLICIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.”) and the rules and regulations of the SEC for interim financial reporting. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions, and expectations of what could occur in the future given available information.
For more information regarding our critical accounting policies, we encourage you to read the discussion contained in the following locations in our Annual Report on Form 10-K for the year ended December 31, 2018 :
• “Critical Accounting Estimates and Significant Judgments” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and
• Note 2. “Significant Accounting Policies” in Item 8. “Financial Statements and Supplementary Data”.
There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018 .
RESULTS OF OPERATIONS
Revenue
| (Dollars in thousands) | Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Cloud | $ 35,153 | 16 % | $ 22,184 | 11 % | $ 12,969 | 58 | % | $ 94,610 | 15 % | $ 57,967 | 9 % | $ 36,643 | 63 | % | ||
| Term license | 48,989 | 23 % | 32,066 | 16 % | 16,923 | 53 | % | 122,257 | 19 % | 128,070 | 20 % | (5,813 | ) | (5 | )% | |
| Maintenance | 70,371 | 32 % | 66,017 | 32 % | 4,354 | 7 | % | 207,406 | 33 % | 196,448 | 31 % | 10,958 | 6 | % | ||
| Subscription (1) | 154,513 | 71 % | 120,267 | 59 % | 34,246 | 28 | % | 424,273 | 67 % | 382,485 | 60 % | 41,788 | 11 | % | ||
| Perpetual license | 9,016 | 4 % | 20,276 | 10 % | (11,260 | ) | (56 | )% | 43,286 | 7 % | 56,829 | 9 % | (13,543 | ) | (24 | )% |
| Consulting | 53,174 | 25 % | 62,720 | 31 % | (9,546 | ) | (15 | )% | 167,282 | 26 % | 195,910 | 31 % | (28,628 | ) | (15 | )% |
| $ 216,703 | 100 % | $ 203,263 | 100 % | $ 13,440 | 7 | % | $ 634,841 | 100 % | $ 635,224 | 100 % | $ (383 | ) | — | % |
(1) Reflects client arrangements (term license, cloud, and maintenance) that are subject to renewal.
Our license revenue is derived from sales of our applications and Pega Platform. Our cloud revenue is derived from our hosted Pega Platform and software applications.
We expect our revenue mix to continue to shift in favor of our subscription offerings, particularly cloud arrangements, which could result in slower total revenue growth in the near term. Revenue from cloud arrangements is generally recognized over the service period, while revenue from term and perpetual license arrangements is generally recognized upfront when the license rights become effective.
Subscription revenue
The increases in cloud revenue in the three and nine months ended September 30, 2019 reflect the shift in client preferences to cloud arrangements from other types of arrangements . The increase in term license revenue in the three months ended September 30, 2019 was due to revenue recognized from several large, multi-year term license contracts in the three months ended September 30, 2019 . The decrease in term license revenue in the nine months ended September 30, 2019 was attributable to revenue recognized from term license contracts in the nine months ended September 30, 2019 with multi-year committed maintenance periods, which resulted in a greater portion of the contract value being allocated to maintenance. The increases in maintenance revenue in the three and nine months ended September 30, 2019 were primarily due to the continued growth in the aggregate value of the installed base of our software and strong renewal rates in excess of 90% .
Perpetual license
The decreases in perpetual license revenue in the three and nine months ended September 30, 2019 reflects the shift in client preferences in favor of our cloud offerings instead of our perpetual license arrangements.
Consulting
Our consulting revenue fluctuates depending upon the mix of new implementation projects we perform as compared to those performed by our enabled clients or led by our partners. The decreases in consulting revenue in the three and nine months ended September 30, 2019 were primarily due to decreases in billable hours.
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Gross profit
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Software license | $ 57,329 | 99 | % | $ 51,087 | 98 % | $ 6,242 | 12 % | $ 162,561 | 98 % | $ 181,127 | 98 % | $ (18,566 | ) | (10 | )% | ||
| Maintenance | 63,683 | 90 | % | 59,938 | 91 % | 3,745 | 6 % | 188,091 | 91 % | 178,413 | 91 % | 9,678 | 5 | % | |||
| Cloud | 17,329 | 49 | % | 12,569 | 57 % | 4,760 | 38 % | 46,841 | 50 % | 31,853 | 55 % | 14,988 | 47 | % | |||
| Consulting | (2,536 | ) | (5 | )% | 5,246 | 8 % | (7,782 | ) | * | 4,933 | 3 % | 19,977 | 10 % | (15,044 | ) | (75 | )% |
| $ 135,805 | 63 | % | $ 128,840 | 63 % | $ 6,965 | 5 % | $ 402,426 | 63 % | $ 411,370 | 65 % | $ (8,944 | ) | (2 | )% |
- not meaningful
The recent shift in our revenue mix toward cloud arrangements has resulted in slower total gross profit growth as our cloud business continues to grow and scale. Revenue from cloud arrangements is generally recognized over the service period, while revenue from term and perpetual license arrangements is generally recognized upfront when the license rights become effective.
The increase in total gross profit in the three months ended September 30, 2019 was primarily due to an increase in term revenue recognized from several large, multi-year term license contracts in the three months ended September 30, 2019 . It was also due to an increase in cloud revenue reflecting the shift in client preferences to cloud arrangements from other types of arrangements , an increase in maintenance revenue due to the continued growth in the aggregate value of the installed base of our software and strong renewal rates in excess of 90% .
The decrease in total gross profit in the nine months ended September 30, 2019 was primarily due to a decrease in term and perpetual license revenue and a decrease in consulting revenue due to a decrease in billable hours .
The decrease in total gross profit percent in the nine months ended September 30, 2019 was driven by the shift in client preferences in favor of cloud arrangements, which are lower margin than our term and perpetual license revenue streams and decreases in cloud and consulting gross profit percent.
The decreases in cloud gross profit percent in the three and nine months ended September 30, 2019 were driven by an increase in costs as we accelerated our investments in cloud infrastructure and service delivery to support future growth. The decreases in consulting gross profit percent in the three and nine months ended September 30, 2019 were driven by a decrease in billable hours as consulting resources were transitioning to new projects after completing a large project and an increase in consulting resource availability as we continue growing and leveraging our partner network.
Operating expenses
Selling and marketing
| (Dollars in thousands) | Three Months Ended September 30, — 2019 | 2018 | Change | Nine Months Ended September 30, — 2019 | 2018 | Change | ||
|---|---|---|---|---|---|---|---|---|
| Selling and marketing (1) | $ 115,237 | $ 87,490 | $ 27,747 | 32 % | $ 341,064 | $ 269,845 | $ 71,219 | 26 % |
| As a percent of total revenue | 53 % | 43 % | 54 % | 42 % | ||||
| Selling and marketing headcount, end of period | 1,532 | 1,194 | 338 | 28 % |
(1) Includes compensation, benefits, and other headcount-related expenses associated with selling and marketing activities, as well as advertising, promotions, trade shows, seminars, and the amortization of client-related intangibles.
The increases in the three and nine months ended September 30, 2019 were primarily due to compensation and benefits of $22.6 million and $58.1 million , attributable to increased headcount, equity compensation, and increases of $4.0 million and $10.6 million in deferred contract cost amortization. Also, contributing to the increases were travel and entertainment of $2.6 million and $4.5 million. The increase in headcount reflects our efforts to increase our sales capacity to deepen relationships with existing clients and target new accounts .
Research and development
| (Dollars in thousands) | Three Months Ended September 30, — 2019 | 2018 | Change | Nine Months Ended September 30, — 2019 | 2018 | Change | ||
|---|---|---|---|---|---|---|---|---|
| Research and development (1) | $ 52,492 | $ 46,504 | $ 5,988 | 13 % | $ 152,802 | $ 135,261 | $ 17,541 | 13 % |
| As a percent of total revenue | 24 % | 23 % | 24 % | 21 % | ||||
| Research and development headcount, end of period | 1,631 | 1,595 | 36 | 2 % |
(1) Includes compensation, benefits, contracted services, and other headcount-related expenses associated with the development of our products, as well as enhancements and design changes to existing products and the integration of acquired technologies.
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The increases in the three and nine months ended September 30, 2019 were primarily due to compensation and benefits of $3.8 million and $10.5 million , attributable to an increase in headcount and equity compensation, and $1.2 million and $4.5 million in cloud hosting expenses as we expand our cloud-focused research and development activities.
General and administrative
| (Dollars in thousands) | Three Months Ended September 30, — 2019 | 2018 | Change | Nine Months Ended September 30, — 2019 | 2018 | Change | ||
|---|---|---|---|---|---|---|---|---|
| General and administrative (1) | $ 14,843 | $ 12,104 | $ 2,739 | 23 % | $ 41,693 | $ 38,749 | $ 2,944 | 8 % |
| As a percent of total revenue | 7 % | 6 % | 7 % | 6 % | ||||
| General and administrative headcount, end of period (2) | 420 | 326 | 94 | 29 % |
(1) Includes compensation, benefits, and other headcount-related expenses associated with finance, legal, corporate governance, and other administrative headcount. It also includes accounting, legal, and other professional consulting and administrative fees. (2) The headcount includes employees in corporate services departments, whose costs are partially allocated to other operating expense areas.
The increases in the three and nine months ended September 30, 2019 were primarily due to compensation and benefits of $3.2 million and $3.7 million , due to increased headcount.
Stock-based compensation
| (Dollars in thousands) | Three Months Ended September 30, — 2019 | 2018 | Change | Nine Months Ended September 30, — 2019 | 2018 | Change | ||
|---|---|---|---|---|---|---|---|---|
| Cost of revenues | $ 4,787 | $ 4,319 | $ 468 | 11 % | $ 14,216 | $ 12,277 | $ 1,939 | 16 % |
| Selling and marketing | 8,317 | 6,198 | 2,119 | 34 % | 24,055 | 16,895 | 7,160 | 42 % |
| Research and development | 4,858 | 3,917 | 941 | 24 % | 13,990 | 11,356 | 2,634 | 23 % |
| General and administrative | 3,884 | 1,974 | 1,910 | 97 % | 7,981 | 7,045 | 936 | 13 % |
| $ 21,846 | $ 16,408 | $ 5,438 | 33 % | $ 60,242 | $ 47,573 | $ 12,669 | 27 % |
The increases in the three and nine months ended September 30, 2019 were primarily due to the increased value of our annual periodic equity awards granted in March 2019 and 2018 and increased headcount. These awards generally have a five-year vesting schedule.
Other income (expense), net
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||
| Foreign currency transaction (loss) gain | $ (1,970 | ) | $ 399 | $ (2,369 | ) | * | $ (3,577 | ) | $ 558 | $ (4,135 | ) | * | ||
| Interest income, net | 556 | 683 | (127 | ) | (19 | )% | 1,823 | 2,076 | (253 | ) | (12 | )% | ||
| Other income, net | 323 | — | 323 | * | 378 | 363 | 15 | 4 | % | |||||
| $ (1,091 | ) | $ 1,082 | $ (2,173 | ) | * | $ (1,376 | ) | $ 2,997 | $ (4,373 | ) | * |
- not meaningful
The changes in foreign currency transaction (loss) gain were primarily due to the impact of fluctuations in foreign currency exchange rates associated with our foreign currency-denominated cash, accounts receivable, and intercompany receivables and payables held by our United Kingdom (“U.K.”) subsidiary.
(Benefit from) income taxes
| (Dollars in thousands) | Three Months Ended September 30, — 2019 | 2018 | Nine Months Ended September 30, — 2019 | 2018 | ||||
|---|---|---|---|---|---|---|---|---|
| (Benefit from) income taxes | $ (17,520 | ) | $ (8,589 | ) | $ (43,158 | ) | $ (23,692 | ) |
| Effective income tax rate | 32 | % | 80 | % |
The inclusion of excess tax benefits from stock-based compensation in the provision for income taxes has increased the variability of the effective tax rates in recent periods. This fluctuation may continue in future periods, depending on our future stock price in relation to the fair value of awards, the timing of RSU vestings, the exercise behavior of our stock option holders, and the total value of future grants of stock-based compensation awards.
During the nine months ended September 30, 2019 , the Company’s effective income tax rate changed primarily due to the Global Intangible Low-Taxed Income (“GILTI”) provision of the Tax Reform Act. The Company’s effective income tax rate was also affected by excess tax benefits from stock-based compensation and an increase in U.S. research and development tax credits.
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LIQUIDITY AND CAPITAL RESOURCES
| (in thousands) | Nine Months Ended September 30, — 2019 | 2018 | ||
|---|---|---|---|---|
| Cash provided by (used in): | ||||
| Operating activities | $ (13,462 | ) | $ 67,088 | |
| Investing activities | 53,448 | (49,595 | ) | |
| Financing activities | (61,941 | ) | (71,664 | ) |
| Effect of exchange rates on cash and cash equivalents | (363 | ) | (1,913 | ) |
| Net (decrease) in cash and cash equivalents | $ (22,318 | ) | $ (56,084 | ) |
| (in thousands) | September 30, 2019 | December 31, 2018 |
|---|---|---|
| Held by U.S. entities | $ 41,484 | $ 143,533 |
| Held by foreign entities | 71,085 | 63,890 |
| Total cash, cash equivalents, and marketable securities | $ 112,569 | $ 207,423 |
On November 6, 2019 , we entered into a five -year $100 million senior secured revolving credit agreement (the “Credit Agreement”) with PNC Bank, National Association (“PNC”). We may use borrowings to finance working capital needs and for general corporate purposes. Subject to specific circumstances, the Credit Agreement allows us to increase the aggregate commitment up to $200 million . See Item 5. “Other Information” for additional information.
We believe that our current cash, cash equivalents, marketable securities, cash flow from operations, and borrowing capacity will be sufficient to fund our operations, quarterly cash dividends, and stock repurchases for at least the next 12 months. Whether these resources are adequate to meet our liquidity needs beyond that period will depend on our growth, operating results, and the investments required to meet possible increased demand for our services. If we require additional capital resources to grow our business, we may seek to finance our operations from available funds or additional external financing.
If it became necessary to repatriate foreign funds, we may be required to pay U.S. state and local taxes, as well as foreign taxes, upon repatriation. Due to the complexity of income tax laws and regulations, and the effects of the Tax Reform Act, it is impracticable to estimate the amount of taxes we would have to pay.
Cash (used in) provided by operating activities
As client preferences continue to shift in favor of cloud arrangements, we could continue to experience slower operating cash flow growth, or negative cash flow, in the near term. Cash from cloud arrangements is generally collected over an average service period of three years , while cash from perpetual license arrangements is generally collected upfront, shortly after the license rights become effective .
The primary driver of the decrease in the nine months ended September 30, 2019 was the recent shift in our revenue mix toward cloud arrangements, which are generally collected over an average service period of three years , and increased costs as the Company accelerated investments in its cloud offerings and selling and marketing activities to support future growth.
Cash provided by (used in) investing activities
The change in cash provided by (used in) investing activities was primarily driven by the payment of consideration for the acquisition of In the Chat Communications Inc. in May 2019.
Cash (used in) financing activities
We primarily used cash in financing activities for repurchases of our common stock under our publicly announced stock repurchase programs, stock repurchases for tax withholdings for the net settlement of our equity awards, and the payment of our quarterly dividend.
Stock repurchase program (1)
The changes in the remaining stock repurchase authority were:
| (in thousands) | Nine Months Ended September 30, — 2019 | |
|---|---|---|
| January 1, | $ 6,620 | |
| Authorizations (2) | 60,000 | |
| Repurchases | (20,286 | ) |
| September 30, | $ 46,334 |
(1) Purchases under these programs have been made on the open market. (2) On March 15, 2019, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30, 2020 and increased the amount of common stock we are authorized to repurchase by $60 million .
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Common stock repurchases
| Nine Months Ended September 30, — 2019 | 2018 | |||
|---|---|---|---|---|
| (in thousands) | Shares | Amount | Shares | Amount |
| Tax withholdings for net settlement of equity awards | 514 | $ 34,871 | 591 | $ 35,530 |
| Stock repurchase program (1) | ||||
| Repurchases paid | 318 | 20,086 | 512 | 29,949 |
| Repurchases unsettled at period end | 3 | 200 | 3 | 200 |
| Activity in period (2) | 835 | $ 55,157 | 1,106 | $ 65,679 |
(1) Represents activity under our publicly announced stock repurchase programs. (2) During the nine months ended September 30, 2019 and 2018 , instead of receiving cash from the equity holders, we withheld shares with a value of $31.6 million and $28.2 million , respectively, for the exercise price of options. These amounts have been excluded from the table above.
Dividends
| (in thousands) | Nine Months Ended September 30, — 2019 | 2018 |
|---|---|---|
| Dividend payments to shareholders | $ 7,105 | $ 7,067 |
It is our current intention to pay a quarterly cash dividend of $0.03 per share, however, the Board of Directors may terminate or modify the dividend program at any time without prior notice.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes during the nine months ended September 30, 2019 to the market risk exposure disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018 .
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of September 30, 2019 . In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2019 .
(b) Changes in internal control over financial reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1A. RISK FACTORS
We encourage you to carefully consider the risk factors identified below and in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018 . These risk factors could materially affect our business, financial condition, and future results and they could cause our actual business and financial results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q or elsewhere by management from time to time.
On November 6, 2019 , we entered into a five -year $100 million , senior secured revolving credit agreement (the “Credit Agreement”) with PNC Bank, National Association (“PNC”). We may use borrowings to finance working capital needs and for general corporate purposes. Subject to specific circumstances, the Credit Agreement allows us to increase the aggregate commitment up to $200 million . See Item 5. “Other Information” for additional information.
Any failure to meet our debt obligations would damage our business.
Our ability to repay any amounts we borrow under our Credit Agreement will depend on market conditions and our future performance, which are subject to economic, financial, competitive, and other factors beyond our control. If we are not profitable in the future or if we use more cash than we generate in the future, our level of indebtedness at such time could adversely affect our operations by increasing our vulnerability to adverse changes in general economic and industry conditions and by limiting or prohibiting our ability to obtain additional financing for additional capital expenditures, acquisitions and general corporate and other purposes. If we incur significantly more debt, this could intensify the risks described above.
We are required to comply with certain financial and operating covenants under our revolving credit facility. Any failure to comply with those covenants could cause amounts borrowed to become immediately due and payable and/or prevent us from borrowing under the credit facility.
We are required to comply with certain financial and operating covenants under our Credit Agreement. Any failure to comply with those covenants could cause amounts borrowed to become immediately due and payable and/or prevent us from borrowing under the Credit Agreement. We are required to comply with specified financial and operating covenants under our Credit Agreement and to make payments, which limit our ability to operate our business as we otherwise might operate it. Our failure to comply with any of these covenants or to meet any debt payment obligations could result in an event of default which, if not cured or waived, would result in any amounts outstanding, including any accrued interest and/or unpaid fees, becoming immediately due and payable. We might not have sufficient working capital or liquidity to satisfy any repayment obligations in the event of an acceleration of those obligations. In addition, if we are not in compliance with the financial and operating covenants under the Credit Agreement at the time we wish to borrow funds, we will be unable to borrow funds. The financial and operating covenants under the Credit Agreement also may limit our ability to borrow funds, including for strategic acquisitions and share repurchases.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
Common stock repurchased in the three months ended September 30, 2019 was:
| (in thousands, except per share amounts) | Total Number of Shares Purchased (1) (2) | Average Price Paid per Share (1) (2) | Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program (2) | Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchase Programs (2) |
|---|---|---|---|---|
| July 1, 2019 - July 31, 2019 | 37 | $ 75.30 | 29 | $ 50,532 |
| August 1, 2019 - August 31, 2019 | 94 | $ 72.06 | 31 | $ 48,333 |
| September 1, 2019 - September 30, 2019 | 199 | $ 71.12 | 28 | $ 46,334 |
| 330 | $ 71.86 |
(1) 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.
(2) See “Liquidity and Capital Resources” in Item 2. “ Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.
ITEM 5. OTHER INFORMATION
On November 6, 2019 , we entered into a five -year $100 million senior secured revolving credit agreement (the “Credit Agreement”) with PNC Bank, National Association (“PNC”). We may use borrowings to finance working capital needs and for general corporate purposes. Subject to specific circumstances, the Credit Agreement allows us to increase the aggregate commitment up to $200 million .
The Credit Agreement contains customary representations and warranties, affirmative and negative covenants, and events of default. Principal covenants include a maximum net consolidated leverage ratio of 3.5 (with a step-up in the event of certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 . Our obligations under the Credit Agreement may be accelerated upon the occurrence of an event of default under the Credit Agreement, which includes, among other things, payment defaults, defaults in the performance of
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affirmative and negative covenants, the inaccuracy of representations or warranties, cross-defaults, bankruptcy and insolvency-related defaults, defaults relating to judgments, certain events resulting in a material adverse effect on us and a change of control of us.
The interest rates applicable to revolving loans under the Credit Agreement are, at our option, either:
• the London Interbank Offered Rates (“LIBOR”) Rate plus an interest margin based on our net consolidated leverage ratio; or
• a base rate (which is the highest of (1) PNC’s prime rate, (2) the Federal Funds open rate in effect on such day plus 0.5%, and (3) the daily LIBOR Rate plus 1%) plus an interest margin based on our net consolidated leverage ratio.
We are obligated to pay an unused commitment fee during the term of the Credit Agreement that varies between 0.15% and 0.225% depending on our net consolidated leverage ratio. The credit facility includes a provision for the replacement of the LIBOR rate in the event that such rate is no longer available. The replacement rate will be determined by PNC in consultation with us. The revolving credit facility may be prepaid before maturity in whole or in part at our option without penalty or premium. We may at any time reduce or terminate the commitments under the credit facility.
The description of the Credit Agreement contained herein is qualified in its entirety by reference to the Credit Agreement, a copy of which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q.
ITEM 6. EXHIBITS
| Exhibit No. | Description |
|---|---|
| 10.1 | Credit Facility Agreement |
| 31.1 | Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer. |
| 31.2 | Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer. |
| 32+ | Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer and the Chief Financial Officer. |
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH | XBRL Taxonomy Extension Schema Document. |
| 101.CAL | XBRL Taxonomy Calculation Linkbase Document. |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB | XBRL Taxonomy Label Linkbase Document. |
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document. |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
- Indicates that the exhibit is being furnished with this report and is not filed as a part of it.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| /s/ KENNETH STILLWELL |
|---|
| Kenneth Stillwell |
| Chief Financial Officer and Chief Administrative Officer |
| (Principal Financial Officer) |
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