PEGASYSTEMS INC (Form: 10-Q, Received: 10/27/2015 16:57:13)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2015

¨	Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

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)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 x

There were 76,421,098 shares of the Registrant’s common stock, $.01 par value per share, outstanding on October 16, 2015.

PEGASYSTEMS INC.

Index to Form 10-Q


		Page

Part I—Financial Information
Item 1.	Financial Statements (Unaudited) :
	Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014		3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014		4
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2015 and 2014		5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014		6
	Notes to Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		25
Item 4.	Controls and Procedures		26

Part II—Other Information
Item 1A.	Risk Factors		26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		26
Item 6.	Exhibits		27
SIGNATURE			28

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)


	As of September 30, 2015			As of December 31, 2014

*ASSETS*

Current assets:

Cash and cash equivalents	$	97,278		$	114,585

Marketable securities		126,738			96,631


Total cash, cash equivalents, and marketable securities		224,016			211,216

Trade accounts receivable, net of allowance of $2,100 and $1,540		129,252			154,844

Deferred income taxes		12,903			12,974

Income taxes receivable		14,688			4,502

Other current assets		12,310			9,544


Total current assets		393,169			393,080

Property and equipment, net		31,830			30,156

Long-term deferred income taxes		71,998			69,258

Long-term other assets		3,715			2,783

Intangible assets, net		36,412			45,664

Goodwill		46,816			46,860


Total assets	$	583,940		$	587,801


*LIABILITIES AND STOCKHOLDERS’ EQUITY*

Current liabilities:

Accounts payable	$	7,617		$	4,752

Accrued expenses		39,049			42,958

Accrued compensation and related expenses		43,386			47,250

Deferred revenue		134,075			134,672


Total current liabilities		224,127			229,632

Income taxes payable		24,562			24,896

Long-term deferred revenue		13,857			20,859

Other long-term liabilities		16,348			17,709


Total liabilities		278,894			293,096


Stockholders’ equity:

Preferred stock, 1,000 shares authorized; no shares issued and outstanding		—			—

Common stock, 200,000 shares authorized; 76,465 shares and 76,357 shares issued and outstanding		765			764

Additional paid-in capital		145,466			141,495

Retained earnings		161,522			153,058

Accumulated other comprehensive loss		(2,707	)		(612	)


Total stockholders’ equity		305,046			294,705


Total liabilities and stockholders’ equity	$	583,940		$	587,801

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014

Revenue:

Software license	$	58,948		$	48,292		$	180,420		$	154,918

Maintenance		52,285			47,281			150,366			137,555

Services		51,170			42,058			147,554			128,607


Total revenue		162,403			137,631			478,340			421,080


Cost of revenue:

Software license		1,000			1,076			3,106			3,832

Maintenance		5,644			5,385			16,300			15,093

Services		48,797			39,921			140,875			120,061


Total cost of revenue		55,441			46,382			160,281			138,986


Gross profit		106,962			91,249			318,059			282,094


Operating expenses:

Selling and marketing		53,640			48,623			169,764			150,772

Research and development		33,032			28,558			94,248			80,490

General and administrative		9,579			8,825			26,138			28,377

Acquisition-related		—			54			39			417

Restructuring		—			192			—			192


Total operating expenses		96,251			86,252			290,189			260,248


Income from operations		10,711			4,997			27,870			21,846

Foreign currency transaction loss		(412	)		(2,845	)		(4,342	)		(2,527	)

Interest income, net		278			181			807			468

Other (expense) income, net		(331	)		19			(328	)		(507	)


Income before provision for income taxes		10,246			2,352			24,007			19,280

Provision for income taxes		3,921			470			8,643			6,129


Net income	$	6,325		$	1,882		$	15,364		$	13,151


Earnings per share:

Basic	$	0.08		$	0.02		$	0.20		$	0.17


Diluted	$	0.08		$	0.02		$	0.19		$	0.17


Weighted-average number of common shares outstanding:

Basic		76,534			76,351			76,521			76,312

Diluted		79,174			78,653			78,906			78,531

Cash dividends declared per share	$	0.03		$	0.03		$	0.09		$	0.075

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014

Net income	$	6,325		$	1,882		$	15,364		$	13,151

Other comprehensive loss, net:

Unrealized gain (loss) on securities, net of tax		162			(90	)		167			(62	)

Foreign currency translation adjustments		(928	)		(3,046	)		(2,262	)		(1,770	)


Total other comprehensive loss, net		(766	)		(3,136	)		(2,095	)		(1,832	)


Comprehensive income (loss)	$	5,559		$	(1,254	)	$	13,269		$	11,319

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Nine Months Ended September 30,
	2015			2014

Operating activities:

Net income	$	15,364		$	13,151

Adjustments to reconcile net income to cash provided by operating activities:

Excess tax benefits from exercise or vesting of equity awards		(4,661	)		(3,754	)

Deferred income taxes		(2,889	)		(1,845	)

Depreciation and amortization		17,570			17,167

Stock-based compensation expense		23,005			13,721

Foreign currency transaction loss		4,342			2,527

Other non-cash items		1,129			939

Change in operating assets and liabilities:

Trade accounts receivable		21,969			59,049

Income taxes receivable and other current assets		(8,670	)		(3,839	)

Accounts payable and accrued expenses		(4,108	)		(1,448	)

Deferred revenue		(6,925	)		4,287

Other long-term assets and liabilities		(1,198	)		(1,688	)


Cash provided by operating activities		54,928			98,267


Investing activities:

Purchases of marketable securities		(66,946	)		(36,232	)

Proceeds from maturities and called marketable securities		33,916			22,156

Sale of marketable securities		1,915			—

Payments for acquisitions		(1,671	)		(2,600	)

Investment in property and equipment		(9,950	)		(5,809	)


Cash used in investing activities		(42,736	)		(22,485	)


Financing activities:

Issuance of common stock for share-based compensation plans		722			629

Excess tax benefits from exercise or vesting of equity awards		4,661			3,754

Dividend payments to shareholders		(6,896	)		(4,581	)

Common stock repurchases for tax withholdings for net settlement of equity awards		(7,149	)		(4,939	)

Common stock repurchases under share repurchase programs		(17,000	)		(12,266	)


Cash used in financing activities		(25,662	)		(17,403	)


Effect of exchange rates on cash and cash equivalents		(3,837	)		(2,065	)


Net (decrease) increase in cash and cash equivalents		(17,307	)		56,314

Cash and cash equivalents, beginning of period		114,585			80,231


Cash and cash equivalents, end of period	$	97,278		$	136,545

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	ACCOUNTING POLICIES

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 of the information and footnotes 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, 2014.

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 2015.

2.	NEW ACCOUNTING PRONOUNCEMENTS

Revenue from Contracts with Customers: In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This ASU amends the guidance for revenue recognition to replace numerous, industry-specific requirements, and converges areas under this topic with those of the International Financial Reporting Standards. This ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. This ASU also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers. This ASU originally had an effective date for the Company of January 1, 2017. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date,” which defers the effective date by one year while providing the option to adopt the standard on the original effective date. The new effective date for the Company will be January 1, 2018. Management is currently assessing the impact the adoption of this ASU will have on the Company’s consolidated financial statements.

3.	MARKETABLE SECURITIES


	September 30, 2015
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value

Municipal bonds	$	52,207	$	110	$	—		$	52,317

Corporate bonds		71,530		25		(31	)		71,524

Certificates of deposit		2,894		3		—			2,897


	$	126,631	$	138	$	(31	)	$	126,738


	December 31, 2014
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value

Municipal bonds	$	27,820	$	52	$	(17	)	$	27,855

Corporate bonds		65,487		5		(144	)		65,348

Certificates of deposit		3,428		2		(2	)		3,428


	$	96,735	$	59	$	(163	)	$	96,631

The Company considers debt securities with maturities of three months or less from the purchase date to be cash equivalents. Interest is recorded when earned. All of the Company’s investments are classified as available-for-sale and are carried at fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive loss, net of related income taxes.

As of September 30, 2015, remaining maturities of marketable debt securities ranged from October 2015 to September 2018, with a weighted-average remaining maturity of approximately 16 months.

4.	DERIVATIVE INSTRUMENTS

The Company has historically used foreign currency forward contracts (“forward contracts”) to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated cash, accounts receivable, and intercompany receivables and payables held by its U.S. operating company.

Effective on April 1, 2015, the Company restructured its operations with its clients based outside the Americas. These clients began transacting with Pegasystems Limited, a United Kingdom (“U.K.”) subsidiary of Pegasystems Inc., which has the British pound as its functional currency. This reorganization resulted in increased cash, accounts receivable, and intercompany receivables and payables held by Pegasystems Limited in currencies other than the British pound. As a result, the Company’s exposure to foreign currency exchange rate fluctuations in the U.S. dollar, the Euro, and the Australian dollar relative to the British pound increased, while its exposure to foreign currency exchange rate fluctuations in the British pound, the Euro, and the Australian dollar relative to the U.S. dollar decreased.

In July 2015, as a result of this operational reorganization, the Company implemented its revised hedging program under which it fully or partially hedges its non-functional currency exposures for Pegasystems Inc. and Pegasystems Limited, utilizing forward contracts with terms not greater than six months.

The forward contracts are not designated as hedging instruments. As a result, the Company records the fair value of these contracts at the end of each reporting period in its consolidated balance sheets as other current assets for unrealized gains and accrued expenses for unrealized losses, with any fluctuations in the value of these contracts recognized in other (expense) income, net, in its consolidated statements of operations. The cash flows related to these forward contracts are classified as operating activities in the Company’s consolidated statements of cash flows.

As of September 30, 2015, the total notional amount of the Company’s outstanding forward contracts was $55.7 million. The Company did not have any outstanding forward contracts as of December 31, 2014.

The fair value of the Company’s outstanding forward contracts as of September 30, 2015 was as follows:

(in thousands)

Asset Derivatives

Liability Derivatives

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Foreign currency forward contracts

Other current assets

140

Accrued expenses

1,035

The Company entered into forward contracts with notional values as follows:


	Notional Amount
	Three Months Ended September 30,				Nine Months Ended September 30,
Currency (in thousands)	2015		2014		2015		2014

Euro	€	33,309	€	—	€	33,309	€	21,900

British pound	£	10,300	£	—	£	10,300	£	26,500

Australian dollar	A$	27,000	A$	—	A$	27,000	A$	12,900

Indian rupee	Rs	300,000	Rs	—	Rs	300,000	Rs	204,000

United States dollar	$	45,500	$	—	$	45,500	$	—


	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2015			2014			2015			2014

Loss from the change in the fair value of forward contracts included in other (expense) income, net	$	(319	)	$	—		$	(319	)	$	(532	)

Foreign currency transaction losses from the remeasurement of foreign currency assets and liabilities	$	(412	)	$	(2,845	)	$	(4,342	)	$	(2,527	)

5.	FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company records its marketable securities and forward contracts 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 money market funds are classified within Level 1 of the fair value hierarchy. The Company’s investments 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 foreign currency forward contracts which are all classified within Level 2 of the fair value hierarchy are valued based on the notional amounts and rates under the contracts and observable market inputs such as currency exchange rates and credit risk. 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 significant transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2015.

The Company’s assets and liabilities measured at fair value on a recurring basis consisted of the following:


			Fair Value Measurements at Reporting Date Using
(in thousands)	September 30, 2015		Level 1		Level 2

Fair Value Assets:

Money market funds	$	479	$	479	$	—

Marketable securities:

Municipal bonds	$	52,317	$	—	$	52,317

Corporate bonds		71,524		—		71,524

Certificates of deposit		2,897		—		2,897


Total marketable securities	$	126,738	$	—	$	126,738

Foreign currency forward contracts	$	140	$	—	$	140


	$	127,357	$	479	$	126,878


Fair Value Liabilities:

Foreign currency forward contracts	$	1,035	$	—	$	1,035


			Fair Value Measurements at Reporting Date Using
(in thousands)	December 31, 2014		Level 1		Level 2

Fair Value Assets:

Money market funds	$	2,295	$	2,295	$	—

Marketable securities:

Municipal bonds	$	27,855	$	—	$	27,855

Corporate bonds		65,348		—		65,348

Certificates of deposit		3,428		—		3,428


Total marketable securities	$	96,631	$	—	$	96,631


	$	98,926	$	2,295	$	96,631

Assets Measured at Fair Value on a Nonrecurring Basis

Assets recorded at fair value on a nonrecurring basis, such as property and equipment, and intangible assets, are recognized at fair value when they are impaired. During the nine months of 2015 and 2014, the Company did not recognize any impairments on its assets measured at fair value on a nonrecurring basis.

6.	TRADE ACCOUNTS RECEIVABLE, NET OF ALLOWANCE


(in thousands)	September 30, 2015			December 31, 2014

Trade accounts receivable	$	113,207		$	128,757

Unbilled trade accounts receivable		18,145			27,627


Total accounts receivable		131,352			156,384


Allowance for sales credit memos		(2,100	)		(1,540	)


	$	129,252		$	154,844

Unbilled trade accounts receivable primarily relate to services revenue earned under time and materials arrangements and to maintenance and license arrangements that have commenced or been delivered but have not been invoiced.

7.	GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill:


(in thousands)	2015

Balance as of January 1,	$	46,860

Translation adjustments		(44	)


Balance as of September 30,	$	46,816

Intangible assets are recorded at cost and are amortized using the straight-line method over their estimated useful lives.


(in thousands)	Range of Useful Lives		Cost		Accumulated Amortization			Net Book Value

As of September 30, 2015

Customer related intangibles		4-9 years	$	49,567	$	(28,933	)	$	20,634

Technology		3-9 years		48,342		(32,931	)		15,411

Other intangibles		3 years		5,361		(4,994	)		367


Total			$	103,270	$	(66,858	)	$	36,412


(in thousands)	Range of Useful Lives		Cost		Accumulated Amortization			Net Book Value

As of December 31, 2014

Customer related intangibles		4-9 years	$	49,590	$	(24,338	)	$	25,252

Technology		3-9 years		48,342		(28,890	)		19,452

Other intangibles		1-3 years		5,361		(4,401	)		960


Total			$	103,293	$	(57,629	)	$	45,664

Amortization of intangibles was reflected in the Company’s unaudited condensed consolidated statements of operations as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2015		2014		2015		2014

Cost of revenue	$	1,351	$	1,382	$	4,041	$	4,666

Selling and marketing		1,537		1,501		4,602		4,496

General and administrative		91		574		593		1,475


Total amortization expense	$	2,979	$	3,457	$	9,236	$	10,637

Amortization of intangibles is estimated to be recorded over their remaining useful lives as follows:


(in thousands) as of September 30, 2015	Future estimated amortization expense

Remainder of 2015	$	2,972

2016		11,520

2017		9,822

2018		8,822

2019 and thereafter		3,276


	$	36,412

8.	ACCRUED EXPENSES


(in thousands)	September 30, 2015		December 31, 2014

Partner commissions	$	3,421	$	2,441

Other taxes		9,744		10,970

Employee reimbursable expenses		2,544		1,474

Dividends payable		2,298		2,294

Professional services contractor fees		5,100		2,297

Self-insurance health and dental claims		2,471		2,115

Professional fees		1,936		2,444

Short-term deferred rent		1,581		1,446

Income taxes payable		1,175		8,966

Acquisition-related expenses and merger consideration		1,085		2,702

Restructuring		397		461

Marketing and sales program expenses		1,698		1,914

Purchased securities settled after period end		331		—

Cloud hosting expenses		771		516

Foreign currency forward contracts		1,035		—

Leasehold improvements in process		681		—

Other		2,781		2,918


	$	39,049	$	42,958

9.	DEFERRED REVENUE


(in thousands)	September 30, 2015		December 31, 2014

Software license	$	33,495	$	38,961

Maintenance		80,830		83,467

Cloud		8,151		4,209

Services and other		11,599		8,035


Current deferred revenue		134,075		134,672


Software license		13,724		19,878

Maintenance and services		133		981


Long-term deferred revenue		13,857		20,859


	$	147,932	$	155,531

10.

STOCK-BASED COMPENSATION

Stock-based compensation expense was reflected in the Company’s unaudited condensed consolidated statements of operations as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2015			2014			2015			2014

Cost of revenues	$	2,285		$	1,418		$	6,519		$	3,816

Operating expenses		5,806			3,850			16,486			9,905


Total stock-based compensation before tax	$	8,091		$	5,268		$	23,005		$	13,721

Income tax benefit	$	(2,326	)	$	(1,395	)	$	(6,437	)	$	(3,977	)

During the nine months of 2015, the Company issued approximately 825,000 shares of common stock to its employees and 31,000 shares to its non-employee directors under the Company’s share-based compensation plans.

During the nine months of 2015, the Company granted approximately 1,775,000 restricted stock units (“RSUs”) and 2,197,000 non-qualified stock options to its employees with total fair values of approximately $35.8 million and $16.6 million, respectively. Approximately 250,000 RSUs were granted in connection with the election by employees to receive 50% of their 2015 target incentive compensation under the Company’s Corporate Incentive Compensation Plan (the “CICP”) in the form of RSUs instead of cash. Stock-based compensation of approximately $4.3 million associated with this RSU grant will be recognized over a one-year period beginning on the grant date.

The Company recognizes stock based compensation on the accelerated recognition method, while treating each vesting tranche as if it were an individual grant. As of September 30, 2015, the Company had approximately $37 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to all unvested RSUs and unvested stock options that is expected to be recognized over a weighted-average period of 2.2 years.

11.

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 options and RSUs, using the treasury stock method and the average market price of the Company’s common stock during the applicable period. Certain shares related to some of the Company’s outstanding stock options and RSUs were excluded from the computation of diluted earnings per share because they were anti-dilutive in the periods presented, but could be dilutive in the future.


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share amounts)	2015		2014		2015		2014

*Basic*

Net income	$	6,325	$	1,882	$	15,364	$	13,151


Weighted-average common shares outstanding		76,534		76,351		76,521		76,312


Earnings per share, basic	$	0.08	$	0.02	$	0.20	$	0.17


*Diluted*

Net income	$	6,325	$	1,882	$	15,364	$	13,151


Weighted-average common shares outstanding, basic		76,534		76,351		76,521		76,312

Weighted-average effect of dilutive securities:

Stock options		1,603		1,730		1,546		1,754

RSUs		1,037		572		839		465


Effect of assumed exercise of stock options and RSUs		2,640		2,302		2,385		2,219


Weighted-average common shares outstanding, diluted		79,174		78,653		78,906		78,531


Earnings per share, diluted	$	0.08	$	0.02	$	0.19	$	0.17


Outstanding options and RSUs excluded as impact would be anti-dilutive		320		107		201		110

12.

GEOGRAPHIC INFORMATION AND MAJOR CLIENTS

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance.

The Company develops and licenses its strategic software applications and Pega 7 platform, and provides consulting services, maintenance, and training related to its offerings. The Company derives substantially all of its revenue from the sale and support of one group of similar products and services – software that provides business process solutions in the enterprise applications market. To assess performance, the Company’s CODM reviews financial information on a consolidated basis. Therefore, the Company determined it has one reportable segment — Digital Enterprise Business Solutions, and one reporting unit.

The Company’s international revenue is from clients based outside of the U.S. The Company derived its revenue from the following geographic areas:


	Three Months Ended September 30,								Nine Months Ended September 30,
(Dollars in thousands)	2015				2014				2015				2014

U.S.	$	89,640	55	%	$	77,792	57	%	$	267,671	56	%	$	230,220	55	%

Other Americas		6,602	4	%		12,195	9	%		46,278	10	%		21,499	5	%

United Kingdom		19,491	12	%		19,098	14	%		60,867	13	%		72,655	17	%

Other EMEA		20,672	13	%		15,910	11	%		55,376	11	%		66,218	16	%

Asia Pacific		25,998	16	%		12,636	9	%		48,148	10	%		30,488	7	%


	$	162,403	100	%	$	137,631	100	%	$	478,340	100	%	$	421,080	100	%

There were no clients accounting for 10% or more of the Company’s total revenue during the third quarter and nine months of 2015 and 2014. There were no clients accounting for 10% or more of the Company’s total outstanding trade receivables as of September 30, 2015 and December 31, 2014.

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 by the Company, and the timing of recognizing revenue under existing term license agreements. 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,” or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. Important factors that could cause actual future activities and results to differ include, among others, variation in demand for our products and services and the difficulty in predicting the completion of product acceptance and other factors affecting the timing of license revenue recognition; the ongoing consolidation in the financial services, insurance, healthcare, and communications markets; reliance on third party relationships; the potential loss of vendor specific objective evidence for our consulting services; the inherent risks associated with international operations and the continued weakness in international economies; foreign currency exchange rates; the financial impact of the Company’s past acquisitions and any future acquisitions; and management of the Company’s growth. These risks are described more completely in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2014. We do not intend to update any forward-looking statements publicly, whether as a result of new information, future events, or otherwise.

Business overview

We develop, market, license, and support strategic software applications for marketing, sales and onboarding, customer service, and operations. In addition, we license our Pega 7 platform for clients that wish to build and extend their own applications. Pega 7 assists our clients in building, deploying, and evolving enterprise applications, creating an environment in which business and IT can collaborate to manage back office operations, front office sales, marketing, and/or customer service needs. We also provide consulting services, maintenance, and training for our software and our applications. Our applications and Pega 7 can be deployed in the Cloud or on-premises.

Pega 7 and our related applications are used by our clients in the financial services, healthcare, insurance, communications and media, public sector, manufacturing, life sciences, and other markets. We sell our software directly and also through a network of business and technology alliances. Our partners include major systems integrators, management consulting firms, technology providers, and application developers.

Our clients include Global 500 companies and government agencies that seek to manage complex enterprise systems and customer service issues more nimbly and cost-effectively. Our strategy is to sell a client a series of licenses, each focused on a specific purpose or area of operations. As we have found meaningful interest from smaller companies, we are expanding our sales force to extend coverage beyond our traditional Global 500 focus. We license our products and render consulting and training services to clients domestically and internationally, including in Canada, Europe, the Middle East, Latin America, Asia, and Australia. In the third quarter of 2015 and 2014, revenue from clients based outside of the United States of America (“U.S.”) represented 45% and 43% of our total revenue, respectively. In the nine months of 2015 and 2014, revenue from clients based outside of the U.S. represented 44% and 45% of our total revenue, respectively.

Our license revenue is primarily derived from sales of our applications. Our consulting services revenue is primarily related to new license implementations. Our consulting services revenue may be lower in future periods as more of our clients become enabled and our partners lead more projects. We offer training for our staff, clients, and partners at our regional training facilities and at third-party facilities, including client sites. Our online training through Pega Academy provides an alternative way to learn our software in a virtual environment. We believe that this online training will continue to expand the number of trained experts at a faster pace.

We continue to invest heavily in research and development to enhance our software. Our research and development operations are primarily located in the U.S. and India. We also regularly evaluate acquisitions or investment opportunities in complementary businesses, services and technologies, and intellectual property rights in an effort to expand and enhance our product offerings.


	Three Months Ended September 30,				Increase				Nine Months Ended September 30,				Increase (Decrease)
(Dollars in thousands, except per share amounts)	2015		2014						2015		2014

Total revenue	$	162,403	$	137,631	$	24,772	18	%	$	478,340	$	421,080	$	57,260		14	%

License revenue	$	58,948	$	48,292	$	10,656	22	%	$	180,420	$	154,918	$	25,502		16	%

Diluted earnings per share	$	0.08	$	0.02	$	0.06	300	%	$	0.19	$	0.17	$	0.02		12	%

Cash flow provided by operating activities									$	54,928	$	98,267	$	(43,339	)	(44	)%

In addition to the key financial metrics in the above table, management also focuses on aggregate license and Cloud backlog. We compute license and Cloud backlog by adding billed deferred license and Cloud revenue as recorded on the balance sheet and license and Cloud contractual commitments, which are not billed and not recorded on our balance sheet. License and Cloud backlog may vary in any given period depending on the amount and timing of when arrangements are executed, as well as the mix between perpetual, term and Cloud license arrangements.


	As of September 30,				% Change
(Dollars in thousands)	2015		2014

Total License and Cloud deferred revenue	$	55,370	$	68,561		(19	)%

Total License and Cloud commitments not on the balance sheet		324,340		265,309		22	%


Total License and Cloud Backlog	$	379,710	$	333,870		14	%

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 of America (“U.S. GAAP”) and with 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 beliefs of what could occur in the future given available information.

There have been no changes in our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014. For more information regarding our critical accounting policies, we encourage you to read the discussion contained in Item 7 under the heading “Critical Accounting Estimates and Significant Judgments” and Note 2 “Significant Accounting Policies” included in the notes to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2014.

Results of Operations


	Three Months Ended September 30,		Increase		Nine Months Ended September 30,		Increase
(Dollars in thousands)	2015	2014			2015	2014

Total revenue	$ 162,403	$ 137,631	$ 24,772	18%	$ 478,340	$ 421,080	$ 57,260	14%

Gross profit	$ 106,962	$ 91,249	$ 15,713	17%	$ 318,059	$ 282,094	$ 35,965	13%

Total operating expenses	$ 96,251	$ 86,252	$ 9,999	12%	$ 290,189	$ 260,248	$ 29,941	12%

Income from operations	$ 10,711	$ 4,997	$ 5,714	114%	$ 27,870	$ 21,846	$ 6,024	28%

Income before provision for income taxes	$ 10,246	$ 2,352	$ 7,894	336%	$ 24,007	$ 19,280	$ 4,727	25%

Revenue


	Three Months Ended September 30,				Increase (Decrease)		Nine Months Ended September 30,				Increase
(Dollars in thousands)	2015		2014				2015		2014

*License revenue*

Perpetual licenses	$ 40,455	69%	$ 27,338	57%	$ 13,117		$ 103,547	57%	$ 83,995	54%	$ 19,552

Term licenses	16,556	28%	19,220	40%	(2,664)		70,778	39%	65,086	42%	5,692

Subscription	1,937	3%	1,734	3%	203		6,095	4%	5,837	4%	258


Total license revenue	$ 58,948	100%	$ 48,292	100%	$ 10,656	22%	$ 180,420	100%	$ 154,918	100%	$ 25,502	16%

The aggregate value of new license arrangements executed during the third quarter of 2015 significantly increased compared to the same period of 2014, primarily due to the higher average value of arrangements executed in the third quarter of 2015. The aggregate value of new license arrangements executed during the nine months of 2015 significantly increased compared to the same period of 2014, primarily due to a higher number and higher average value of arrangements executed in the nine months of 2015. The higher average value was due to two arrangements, each greater than $10 million, executed in the nine months of 2015. The aggregate value of new license arrangements executed fluctuates quarter to quarter. During the nine months of 2015 and 2014, approximately 62% and 86%, respectively, of the value of new license arrangements were executed with existing clients.

The mix between perpetual and term license arrangements executed in a particular period varies based on client needs. A change in the mix between perpetual and term license arrangements executed may cause our revenues to vary materially from period to period. A higher proportion of term license arrangements executed would result in more license revenue being recognized over longer periods. Additionally, some of our perpetual license arrangements include extended payment terms or additional rights of use, which also result in the recognition of revenue over longer periods.

The increases in perpetual license revenue during the third quarter and nine months of 2015 compared to the same periods in 2014 were primarily due to revenue recognized from the higher volume and higher average value of arrangements executed during the nine months of 2015. The aggregate value of payments due under noncancellable perpetual licenses was $36.5 million as of September 30, 2015 compared to $15.3 million as of September 30, 2014. We expect to recognize $5.5 million of the $36.5 million as revenue in the fourth quarter of 2015.

The fluctuations in term license revenue during the third quarter and nine months of 2015 compared to the same periods in 2014 were primarily due to the prepayment of a large renewal in the second quarter of 2015. The aggregate value of payments due under noncancellable term licenses and our Cloud arrangements grew to $287.9 million as of September 30, 2015 compared to $250 million as of September 30, 2014. We expect to recognize $22.4 million of the $287.9 million as revenue in the fourth quarter of 2015 in addition to new term license and Cloud arrangements we may complete or prepayments we may receive from existing term license agreements. See the table of future cash receipts in Liquidity and Capital Resources - Cash Provided by Operating Activities.

Subscription revenue primarily consists of the ratable recognition of license, maintenance, and bundled services revenue on license arrangements that include a right to successor products or unspecified future products. Subscription revenue does not include revenue from our Cloud arrangements, which is included in services revenue. The timing of scheduled payments under

client arrangements may limit the amount of revenue recognized in a reporting period. Consequently, our subscription revenue may vary materially quarter to quarter.


	Three Months Ended September 30,				Increase				Nine Months Ended September 30,				Increase
(Dollars in thousands)	2015		2014						2015		2014

*Maintenance revenue*

Maintenance	$	52,285	$	47,281	$	5,004	11	%	$	150,366	$	137,555	$	12,811	9	%

The increases were primarily due to the growth in the aggregate value of the installed base of our software and continued strong renewal rates.


	Three Months Ended September 30,								Increase (Decrease)					Nine Months Ended September 30,								Increase
(Dollars in thousands)	2015				2014									2015				2014

*Services revenue*

Consulting services	$	41,472	81	%	$	35,951	85	%	$	5,521		15	%	$	121,810	83	%	$	112,862	88	%	$	8,948	8	%

Cloud		8,244	16	%		4,561	11	%		3,683		81	%		21,700	15	%		12,146	9	%		9,554	79	%

Training		1,454	3	%		1,546	4	%		(92	)	(6	)%		4,044	2	%		3,599	3	%		445	12	%


Total services	$	51,170	100	%	$	42,058	100	%	$	9,112		22	%	$	147,554	100	%	$	128,607	100	%	$	18,947	15	%

Consulting services represents revenue primarily from new license implementations. Our consulting services revenue may fluctuate in future periods depending on the mix of new implementation projects we perform as compared to those performed by our enabled clients or led by our partners. The increases in consulting services revenue were due to the higher number of projects and billable hours in the third quarter and nine months of 2015 compared to the same periods in 2014.

Cloud represents revenue from our Cloud offerings. The increases in Cloud revenue were primarily due to continued growth of our Cloud client base.

Gross profit


	Three Months Ended September 30,						Increase				Nine Months Ended September 30,						Increase (Decrease)
(Dollars in thousands)	2015			2014							2015			2014

*Gross Profit*

Software license	$	57,948		$	47,216		$	10,732	23	%	$	177,314		$	151,086		$	26,228		17	%

Maintenance		46,641			41,896			4,745	11	%		134,066			122,462			11,604		9	%

Services		2,373			2,137			236	11	%		6,679			8,546			(1,867	)	(22	)%


Total gross profit	$	106,962		$	91,249		$	15,713	17	%	$	318,059		$	282,094		$	35,965		13	%


Total gross profit %		66	%		66	%						66	%		67	%

Software license gross profit %		98	%		98	%						98	%		98	%

Maintenance gross profit %		89	%		89	%						89	%		89	%

Services gross profit %		5	%		5	%						5	%		7	%

The increases in total gross profit were primarily due to the increases in software license and maintenance revenue.

The decrease in services gross profit percent during the nine months of 2015 compared to the nine months of 2014 was primarily due to increased software license costs and significant cost overruns on two North American projects.

Operating expenses


	Three Months Ended September 30,		Increase (Decrease)		Nine Months Ended September 30,		Increase (Decrease)
(Dollars in thousands)	2015	2014			2015	2014

*Amortization of intangibles:*

Cost of revenue	$ 1,351	$ 1,382	$ (31)	(2)%	$ 4,041	$ 4,666	$ (625)	(13)%

Selling and marketing	1,537	1,501	36	2%	4,602	4,496	106	2%

General and administrative	91	574	(483)	(84)%	593	1,475	(882)	(60)%


	$ 2,979	$ 3,457	$ (478)	(14)%	$ 9,236	$ 10,637	$ (1,401)	(13)%

The decreases were primarily due to the full amortization in 2014 of certain acquired technology and other intangibles.


	Three Months Ended September 30,		Increase		Nine Months Ended September 30,		Increase
(Dollars in thousands)	2015	2014			2015	2014

*Selling and marketing*

Selling and marketing	$ 53,640	$ 48,623	$ 5,017	10%	$ 169,764	$ 150,772	$ 18,992	13%

As a percent of total revenue	33%	35%			35%	36%

Selling and marketing headcount at September 30,					707	637	70	11%

Selling and marketing expenses include compensation, benefits, and other headcount-related expenses associated with our selling and marketing personnel as well as advertising, promotions, trade shows, seminars, and other programs. Selling and marketing expenses also include the amortization of customer related intangibles.

The increase in selling and marketing expenses during the third quarter of 2015 compared to the same period in 2014 was primarily due to a $3.7 million increase in compensation and benefits associated with higher headcount and a $1 million increase in sales and marketing program expenses.

The increase in selling and marketing expenses during the nine months of 2015 compared to the same period in 2014 was primarily due to a $9.4 million increase in compensation and benefits associated with higher headcount, a $7 million increase in marketing and sales program expenses, and a $3.1 million increase in sales commissions associated with the higher value of new license arrangements executed during the nine months of 2015 compared to the nine months of 2014.


	Three Months Ended September 30,		Increase		Nine Months Ended September 30,		Increase
(Dollars in thousands)	2015	2014			2015	2014

*Research and development*

Research and development	$ 33,032	$ 28,558	$ 4,474	16%	$ 94,248	$ 80,490	$ 13,758	17%

As a percent of total revenue	20%	21%			20%	19%

Research and development headcount at September 30,					1,189	1,046	143	14%

Research and development expenses include compensation, benefits, contracted services, and other headcount-related expenses associated with the creation and development of our products as well as enhancements and engineering changes to existing products.

The increase in headcount reflects the growth in our India research facility. The increase in offshore headcount lowered our average compensation expense per employee.

The increase in research and development expenses during the third quarter of 2015 compared to the same period in 2014 was primarily due to a $2.9 million increase in compensation and benefit expenses associated with higher headcount, a $0.5 million increase in outsourced hosting services, a $0.3 million increase in equipment and software license costs, and a $0.2 million increase in contracted professional services.

The increase in research and development expenses during the nine months of 2015 compared to the same period in 2014 was primarily due to a $8.7 million increase in compensation and benefit expenses associated with higher headcount, a $1.2 million increase in outsourced hosting services, a $1.1 million increase in equipment and software license costs, and a $0.9 million increase in contracted professional services.


	Three Months Ended September 30,		Increase		Nine Months Ended September 30,		Increase (Decrease)
(Dollars in thousands)	2015	2014			2015	2014

General and administrative

General and administrative	$ 9,579	$ 8,825	$ 754	9%	$ 26,138	$ 28,377	$ (2,239)	(8)%

As a percent of total revenue	6%	6%			5%	7%

General and administrative headcount at September 30,					327	298	29	10%

General and administrative expenses include compensation, benefits, and other headcount-related expenses associated with finance, legal, corporate governance, and other administrative headcount. It also includes accounting, legal, and other administrative fees. The general and administrative headcount includes employees in human resources, information technology, and corporate services departments whose costs are allocated to our other functional departments.

The increase in general and administrative expenses during the third quarter of 2015 compared to the same period in 2014 was primarily due to a $0.8 million increase in compensation and benefit expenses associated with higher headcount.

The decrease in general and administrative expenses during the nine months of 2015 compared to the same period in 2014 was primarily due to the recognition in the first quarter of 2015 of the $1.8 million benefit from the settlement of the Antenna indemnification claims and the $1.6 million benefit from the settlement of indirect tax liabilities, and a decrease in amortization expense of $0.9 million due to the full amortization of certain Antenna intangibles in the fourth quarter of 2014, partially offset by a $2 million increase in compensation and benefit expenses associated with higher headcount.

Stock-based compensation

The following table summarizes stock-based compensation expense included in our unaudited condensed consolidated statements of operations:


	Three Months Ended September 30,		Increase		Nine Months Ended September 30,		Increase
(Dollars in thousands)	2015	2014			2015	2014

Cost of revenues	$ 2,285	$ 1,418	$ 867	61%	$ 6,519	$ 3,816	$ 2,703	71%

Operating expenses	5,806	3,850	1,956	51%	16,486	9,905	6,581	66%


Total stock-based compensation before tax	$ 8,091	$ 5,268	$ 2,823	54%	$ 23,005	$ 13,721	$ 9,284	68%

Income tax benefit	$ (2,326)	$ (1,395)			$ (6,437)	$ (3,977)

The increases were primarily due to the higher value of the 2014 annual periodic equity grant compared to the 2013 grant, which occurred in March 2015 and 2014, respectively.

Non-operating income and expenses, net


	Three Months Ended September 30,		Increase (Decrease)		Nine Months Ended September 30,		Increase (Decrease)
(Dollars in thousands)	2015	2014			2015	2014

Foreign currency transaction loss	$ (412)	$ (2,845)	$ 2,433	(86)%	$ (4,342)	$ (2,527)	$ (1,815)	72%

Interest income, net	278	181	97	54%	807	468	339	72%

Other (expense) income, net	(331)	19	(350)	n/m	(328)	(507)	179	(35)%


Non-operating loss	$ (465)	$ (2,645)	$ 2,180	(82)%	$ (3,863)	$ (2,566)	$ (1,297)	51%

n/m - not meaningful

We have historically used foreign currency forward contracts (“forward contracts”) to manage our exposure to changes in foreign currency exchange rates associated with cash, accounts receivable, and intercompany receivables and payables held by Pegasystems Inc., our U.S. operating company, in currencies other than the U.S. dollar.

Effective on April 1, 2015, our clients based outside the Americas began transacting with Pegasystems Limited, a U.K. subsidiary, which has the British pound as its functional currency. This reorganization resulted in increased cash, accounts receivable, and intercompany receivables and payables held by Pegasystems Limited in currencies other than the British pound.

We did not enter into any forward contracts between March 2014 and June 2015. In the third quarter of 2015, as a result of this operational reorganization, we implemented our revised hedging program, under which we fully or partially hedge our non-functional currency exposures for Pegasystems Inc. and Pegasystems Limited, utilizing forward contracts with terms not greater than six months.

These forward contracts are not designated as hedging instruments. As a result, we record the fair value of the outstanding contracts at the end of the reporting period in our consolidated balance sheet, with any fluctuations in the value of these contracts recognized in other (expense) income, net.

See Note 4 “Derivative Instruments” in the notes to the accompanying unaudited condensed consolidated financial statements for discussion of our use of forward contracts.

Provision for income taxes

We account for income taxes at each interim period using our estimated annual effective tax rate and adjust for discrete tax items recorded in the same period. The provision for income taxes represents current and future amounts owed for federal, state, and foreign taxes. During the third quarter of 2015 and 2014, we recorded tax provisions of $3.9 million and $0.5 million, respectively, which resulted in an effective tax rate of 38.3% and 20.0%, respectively. During the nine months of 2015 and 2014, we recorded a provision of $8.6 million and $6.1 million, respectively, which resulted in an effective tax rate of 36.0% and 31.8%, respectively. The increases in our effective tax rates during the third quarter and nine months of 2015 compared to the same periods in 2014 were primarily due to a lower proportion of our income being subjected to tax in low tax rate jurisdictions, a decrease in our anticipated domestic production activities deduction, and the fact that the research and experimentation credit has not yet been extended to 2015.

Liquidity and capital resources


	Nine Months Ended
	September 30,
(in thousands)	2015			2014

Cash provided by (used in):

Operating activities	$	54,928		$	98,267

Investing activities		(42,736	)		(22,485	)

Financing activities		(25,662	)		(17,403	)

Effect of exchange rate on cash		(3,837	)		(2,065	)


Net (decrease) increase in cash and cash equivalents	$	(17,307	)	$	56,314


	As of			As of
	September 30, 2015			December 31, 2014

Total cash, cash equivalents, and marketable securities	$	224,016		$	211,216

The decrease in cash and cash equivalents during the nine months of 2015 was primarily due to cash used in investing and financing activities. We believe that our current cash, cash equivalents, marketable securities, and cash flow from operations will be sufficient to fund our operations, our dividend payments, and our share repurchase program for at least the next 12 months.

We evaluate acquisition opportunities from time to time, which if pursued, could require use of our funds. During the nine months of 2014, we paid $0.8 million of the remaining merger consideration related to the final working capital adjustment for our October 2013 acquisition of Antenna Software, Inc., $0.8 million in cash consideration to acquire Meshlabs Software Private Limited, and $1.2 million representing the closing cash consideration to acquire Profeatable Corporation, inclusive of $0.2 million in cash acquired. During the nine months of 2015, we paid $1.1 million representing the remaining cash

consideration to the selling shareholders of one of the three companies acquired in 2014 and $0.5 million in additional cash consideration to the selling shareholders of another one of the three companies acquired in 2014 based on the achievement of certain performance milestones. We may be required to pay an additional $1.2 million in cash to the same selling shareholders based on the achievement of additional performance milestones through the end of 2016.

As of September 30, 2015, approximately $51.9 million of our cash and cash equivalents was held in our foreign subsidiaries. If it becomes necessary to repatriate these funds, we may be required to pay U.S. tax, net of any applicable foreign tax credits, upon repatriation. We consider the earnings of our foreign subsidiaries to be permanently reinvested and, as a result, U.S. taxes on such earnings are not provided. It is impractical to estimate the amount of U.S. tax we could have to pay upon repatriation due to the complexity of the foreign tax credit calculations. There can be no assurance that changes in our plans or other events affecting our operations will not result in materially accelerated or unexpected expenditures.

Cash provided by operating activities

The primary drivers of cash provided by operating activities during the nine months of 2015 were net income of $15.4 million and $23 million of stock-based compensation expense.

The primary drivers of cash provided by operating activities during the nine months of 2014 were net income of $13.2 million and a $56.4 million net change in assets and liabilities. The net change in assets and liabilities primarily consisted of a decrease in trade accounts receivable due to our significant collections, partially offset by an increase in income taxes receivable due to estimated tax payments and the tax benefits associated with domestic stock-based compensation expense.

Future Cash Receipts from License and Cloud Arrangements

Total contractual future cash receipts due from our existing license and Cloud arrangements was approximately $324.3 million as of September 30, 2015, compared to $265.3 million as of September 30, 2014. The future cash receipts due are summarized as follows:


(in thousands) as of September 30, 2015	Contractual payments for term licenses and Cloud arrangements not recorded on the balance sheet ⁽¹⁾		Other contractual license payments not recorded on the balance sheet ⁽²⁾		Total

Remainder of 2015	$	22,362	$	5,480	$	27,842

2016		107,287		20,795		128,082

2017		66,903		6,481		73,384

2018		49,825		3,076		52,901

2019 and thereafter		41,486		645		42,131


Total	$	287,863	$	36,477	$	324,340

⁽¹⁾	These amounts include contractual future cash receipts related to our on-premises term licenses and hosted Cloud service offerings. The timing of future revenue recognition and future cash receipts may not coincide.

⁽²⁾	These amounts include contractual future cash receipts related to perpetual licenses with extended payment terms and/or additional rights of use.

Cash used in investing activities

During the nine months of 2015, cash used in investing activities was primarily for purchases of marketable debt securities of $66.9 million, partially offset by the proceeds received from the maturities of marketable debt securities of $33.9 million.

During the nine months of 2014, cash used in investing activities was primarily for purchases of marketable debt securities of $36.2 million, partially offset by the proceeds received from the maturities of marketable debt securities of $22.2 million.

Cash used in financing activities

Cash used in financing activities during the nine months of 2015 and 2014 was primarily for repurchases of our common stock. Since 2004, our Board of Directors has approved annual stock repurchase programs that have authorized the repurchase in the aggregate of up to $169 million of our common stock. On June 4, 2015, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30, 2016 and authorized the Company to repurchase an

additional $50 million of our stock between June 4, 2015 and June 30, 2016. Purchases under these programs have been made on the open market.

The following table is a summary of our repurchase activity under all of our repurchase programs during the nine months of 2015 and 2014:


	Nine Months Ended September 30,
	2015					2014
(Dollars in thousands)	Shares		Amount			Shares		Amount

Prior year authorization as of January 1,			$	13,284				$	14,433

Authorizations		—		50,000			—		—

Repurchases paid		727,591		(16,705	)		598,273		(12,112	)

Repurchases unsettled		20,946		(510	)		10,125		(197	)


Authorization remaining as of September 30,			$	46,069				$	2,124

In addition to the share repurchases made under our repurchase programs, we net settled the majority of our employee stock option exercises and RSU vesting, which resulted in the withholding of shares to cover the option exercise price and the minimum statutory tax withholding obligations.

During the nine months of 2015 and 2014, option and RSU holders net settled a total of 1,422,000 shares and 948,000 shares, respectively, of which only 745,000 shares and 529,000 shares, respectively, were issued to the option and RSU holders. The balance of the shares were surrendered to us to pay for the exercise price and the applicable taxes. During the nine months of 2015 and 2014, instead of receiving cash from the equity holders, we withheld shares with a value of $7.1 million and $4.9 million, respectively, for withholding taxes, and $8.5 million and $4.9 million, respectively, for the exercise price. The value of share repurchases and shares withheld for net settlement of our employee stock option exercises and vesting of RSUs offset the proceeds received under our various share-based compensation plans during the nine months of 2015 and 2014.

Dividends

On May 27, 2014, we announced an increase in our quarterly cash dividend from $0.015 to $0.03 per share. We declared a cash dividend of $0.09 and $0.075 in the nine months of 2015 and 2014, respectively. We paid cash dividends of $6.9 million and $4.6 million in the nine months of 2015 and 2014, respectively. 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 this dividend program at any time without notice.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the risk of loss that may affect us due to adverse changes in financial market prices and rates. Our market risk exposure is primarily related to fluctuations in foreign exchange rates.

See Note 4 “Derivative Instruments” in the notes to the accompanying unaudited condensed consolidated financial statements for further discussion.

There were no significant changes to our quantitative and qualitative disclosures about market risk during the nine months of 2015. Please refer to Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk included in our Annual Report on Form 10-K for the year ended December 31, 2014 for a more complete discussion of our market risk exposure.

Item 4.

Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or 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) as of September 30, 2015. 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, 2015.

(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 Securities Exchange Act) during the quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II—Other Information:

Item 1A.

Risk Factors

We encourage you to carefully consider the risk factors identified in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014. These risk factors could materially affect our business, financial condition, and future results and 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. There have been no material changes during the nine months of 2015 to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information regarding our repurchases of our common stock during the third quarter of 2015:


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Programs ⁽¹⁾		Approximate Dollar Value of Shares That May Yet Be Purchased Under Publicly Announced Share Repurchase Programs ⁽¹⁾ (in thousands)

7/1/2015 - 7/31/2015		189,025	$	23.40		189,025	$	51,332

8/1/2015 - 8/31/2015		72,718	$	25.16		72,718	$	49,503

9/1/2015 - 9/30/2015		139,473	$	24.62		139,473	$	46,069


Total		401,216	$	24.14

⁽¹⁾

Since 2004, our Board of Directors has approved stock repurchase programs that have authorized the repurchase, in the aggregate, of up to $169 million of our common stock. On June 4, 2015, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30, 2016 and authorized the Company to repurchase an additional $50 million of our stock between June 4, 2015 and June 30, 2016 (the “Current Program”). Under the Current Program, purchases may be made from time to time on the open market or in privately negotiated transactions. Shares may be repurchased in such amounts as market conditions warrant, subject to regulatory and other considerations. We have established a pre-arranged stock repurchase plan, intended to comply with the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-18 under the Exchange Act (the “10b5-1 Plan”). All share repurchases under the Current Program during closed trading window periods will be made pursuant to the 10b5-1 Plan.

Item 6.

Exhibits

The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed or furnished, as the case may be, as part of this report and such Exhibit Index is incorporated herein by reference.

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.


	Pegasystems Inc.

Date: October 27, 2015	By:	/s/ RAFEAL E. BROWN
		Rafeal E. Brown

		Chief Financial Officer, Chief Administrative Officer and Senior Vice President

		(Principal Financial Officer)

PEGASYSTEMS INC.

Exhibit Index


Exhibit No.		Description

10.1+		Compensation program for non-employee members of the Registrant’s Board of Directors, effective August 6, 2015.

10.2		First Amendment to Lease Agreement dated November 11, 2014 between Charles Park One, LLC and Pegasystems Inc.

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		The following materials from Pegasystems Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 formatted in XBRL (Extensible Business Reporting Language): (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statements of Comprehensive Income, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Condensed Consolidated Financial Statements.

+	Management contracts and compensatory plans or arrangements.

Exhibit 10.1

PEGASYSTEMS INC.

DIRECTOR COMPENSATION PROGRAM

(as amended August 6, 2015)

In consideration for their service on the Company’s board of directors (the “Board”), non-employee Directors are paid an annual cash retainer of $55,000 and receive an annual equity grant (the “Annual Equity Grant”). The Annual Equity Grant is in the form of shares of unrestricted common stock of the Company, typically issued on the date of the Company’s annual stockholders meeting. On August 6, 2015, the Company increased the value of the Annual Equity Grant from $95,000 to $125,000 (and issued to each non-employee Director on such date $30,000 of unrestricted common stock, prorated to reflect the period of service remaining to the Company’s 2016 stockholders meeting, to supplement the $95,000 issuance made to each of them on the date of the Company’s 2015 annual stockholders meeting). Accordingly, it is expected in the future on the date of each annual stockholders meeting the Company will issue to each non-employee Director a number of shares of unrestricted common stock equal to $125,000 divided by the fair market value of a share of the Company’s common stock on such date.

Additionally, the Company eliminated the provision of an initial award of restricted stock units (“RSUs”) to non-employee Directors when they are first elected to the Board prospectively from August 6, 2015. Initial awards issued prior to August 6, 2015 had been valued at approximately $75,000, based on the fair market value of the Company’s common stock on the grant date, and vested in three equal annual installments.

For Board committee service, the Company pays an annual cash retainer (paid in quarterly installments) to non-employee Directors serving on the Audit and Compensation Committees: $10,000 to each Audit Committee member and $20,000 to the Audit Committee Chair; and $6,000 to each Compensation Committee member and $8,000 to the Compensation Committee Chair.

In addition to the above, the Company also offers to reimburse non-employee Directors for expenses incurred in attending Board, committee or other Company meetings.

Exhibit 10.2

First Amendment to Lease

This First Amendment to Lease (this “ Amendment ”), is made as of the 11th day of November, 2014 by and between CHARLES PARK ONE, LLC, a Delaware limited liability company, with a business address c/o Principal Real Estate Investors, 801 Grand Avenue, Des Moines, Iowa 50392-1370 (the “ Landlord ”) and PEGASYSTEMS, INC., a Massachusetts corporation, with a business address of One Rogers Street, Cambridge, Massachusetts 02142 (the “ Tenant ”).

WITNESSETH:

Reference is hereby made to the following facts:

A. Landlord and Tenant entered into that certain lease (as previously amended, the “ Existing Lease ”), dated as of June 29, 2011, for certain premises (the “ Existing Premises ”) comprised of 19,826 rentable square feet located on the fifth (5 ^th ) floor of the building commonly known as One Charles Park (as more particularly described in the Existing Lease, the “ Building ”) in Cambridge, Massachusetts, all as more particularly described in the Existing Lease. All capitalized words and phrases not otherwise defined herein shall have the meanings ascribed to them in the Existing Lease. The Existing Lease, as modified and amended by this Amendment, is referred to herein as the “ Lease .”

B. Landlord and Tenant have agreed to add additional premises consisting of 21,791 rentable square feet to the premises demised under the Lease, and to modify and amend the Existing Lease, all in the manner hereinafter set forth.

NOW THEREFORE, in consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt, sufficiency and delivery of which are hereby acknowledged, the parties agree that the Existing Lease is hereby amended as follows:

1. Demise of First Amendment Expansion Premises . Landlord hereby demises and leases to Tenant, and Tenant hereby hires and takes from Landlord, subject to and in accordance with the terms and conditions of the Lease, additional premises consisting of 21,791 rentable square feet located on the third (3 ^rd ) floor of the Building (the “ First Amendment Expansion Premises ”), which First Amendment Expansion Premises are depicted on the plan attached to this Amendment as Exhibit A-1 and incorporated herein by this reference, for a term commencing on September 1, 2015 (the “ First Amendment Expansion Premises Commencement Date ”) and terminating on the Expiration Date, unless extended or earlier terminated in accordance with the provisions of the Lease. The demise and use of the First Amendment Expansion Premises shall be upon and subject to all of the terms and conditions of the Existing Lease, except as expressly set forth in this Amendment. Article 4 of the Existing Lease shall be inapplicable and of no force or effect with respect the leasing of the First Amendment Expansion Premises. From and after the First Amendment Expansion Premises Commencement Date, each reference contained in the Lease to the “Premises” shall be considered to be a reference to the Existing Premises and First Amendment Expansion Premises, collectively.

2. Condition of the First Amendment Expansion Premises . Landlord shall deliver and Tenant shall accept possession of the First Amendment Expansion Premises, in vacant, broom-clean condition, with all trade fixtures, furniture and moveable personal property removed, and in all other respects, in “as-is”, “where-is” condition, without any obligation on the part of Landlord to construct any alterations or improvements therein or in the Building or excepting only the Landlord’s Expansion Premises Contribution (as hereinafter defined), to provide any contributions or allowances in connection therewith, and without any representation or warranty (express or implied) on the part of Landlord as to the condition of the First Amendment Expansion Premises, except as expressly set forth in this Amendment. Subject to the right of Tenant to dispute the accuracy of Landlord’s statement by giving notice thereof not later than ten (10) days after delivery of the following notice by Landlord (time being of the essence of the delivery of said notice), Landlord shall be deemed to have tendered possession of the First Amendment Expansion Premises to Tenant upon the giving of notice by Landlord to Tenant stating that the First Amendment Expansion Premises is vacant and in the condition required by this Amendment. Tenant shall be responsible, at its sole cost and expense, for performing all alterations or improvements to be performed in the First Amendment Expansion Premises, in accordance with the terms and conditions of the Lease, including Article 5 thereof. Landlord represents that, to its actual knowledge (without inquiry), as of the delivery thereof to Tenant, the First Amendment Expansion Premises shall be in compliance with all applicable Requirements, including without limitation all laws applicable to the Hazardous Materials. Landlord represents that as of the delivery thereof to Tenant, all Building Systems serving the First Amendment Expansion Premises shall be in good working order and condition.

3. Rent for First Amendment Expansion Premises . For and with respect to the First Amendment Expansion Premises, (i) commencing on January 1, 2016 (the “ First Amendment Expansion Premises Rent Commencement Date ”) and thereafter throughout the Term, Tenant shall pay Fixed Rent, Tenant’s Tax Payment, and Tenant’s Operating Payment, and (ii) commencing on the First Amendment Expansion Premises Commencement Date and thereafter throughout the Term, for and

with respect to the First Amendment Expansion Premises, Tenant shall pay all other Additional Rent, including all electricity charges, charges for air conditioning or heat, service charges, late charges, overtime charges, payable pursuant to the Lease. All such amounts shall be payable in accordance with the terms and provisions of the Existing Lease.

The Fixed Rent payable with respect to the First Amendment Expansion Premises shall be as follows: (i) There shall be no Fixed Rent payable for and with respect to the period of time through and including December 31, 2015; (ii) For and with respect to the period of time commencing on January 1, 2016 through and including December 31, 2016 (both dates inclusive), the Fixed Rent will be payable at the rate of $1,154,923.00 per annum ($96,243.58 per month), calculated at the rate of $53.00 per rentable square foot in the First Amendment Expansion Premises; (iii) For and with respect to the period of time commencing on January 1, 2017 through and including December 31, 2017 (both dates inclusive), the Fixed Rent will be payable at the rate of $1,176,714.00 per annum ($98,059.50 per month), calculated at the rate of $54.00 per rentable square foot in the First Amendment Expansion Premises; (iv) For and with respect to the period of time commencing on January 1, 2018 through and including December 31, 2018 (both dates inclusive), the Fixed Rent will be payable at the rate of $1,198,505.00 per annum ($99,875.41 per month), calculated at the rate of $55.00 per rentable square foot in the First Amendment Expansion Premises; (v) For and with respect to the period of time commencing on January 1, 2019 through and including December 31, 2019 (both dates inclusive), the Fixed Rent will be payable at the rate of $1,220,296.00 per annum ($101,691.33 per month), calculated at the rate of $56.00 per rentable square foot in the First Amendment Expansion Premises; (vi) For and with respect to the period of time commencing on January 1, 2020 through and including December 31, 2020 (both dates inclusive), the Fixed Rent will be payable at the rate of $1,242,087.00 per annum ($103,507.25 per month), calculated at the rate of $57.00 per rentable square foot in the First Amendment Expansion Premises; (vii) For and with respect to the period of time commencing on January 1, 2021 through and including December 31, 2021 (both dates inclusive), the Fixed Rent will be payable at the rate of $1,263,878.00 per annum ($105,323.16 per month), calculated at the rate of $58.00 per rentable square foot in the First Amendment Expansion Premises; (viii) For and with respect to the period of time commencing on January 1, 2022 through and including December 31, 2022 (both dates inclusive), the Fixed Rent will be payable at the rate of $1,285,669.00 per annum ($107,139.08 per month), calculated at the rate of $59.00 per rentable square foot in the First Amendment Expansion Premises; and (ix) For and with respect to the period of time commencing on January 1, 2023 through and including the Expiration Date (both dates inclusive), the Fixed Rent will be payable at the rate of $1,307,460.00 per annum ($108,955.00 per month), calculated at the rate of $60.00 per rentable square foot in the First Amendment Expansion Premises.

For purposes of determining the Tenant’s Tax Payment, and Tenant’s Operating Payment payable by Tenant with respect to the First Amendment Expansion Premises, (i) the Base Tax Year shall be the Tax Year commencing on July 1, 2015 and ending on June 30, 2016 (ii) the Base Expense Year shall be calendar year 2016; and (iii) Tenant’s Proportionate Share with respect to the First Amendment Expansion Premises shall be 19.81%.

4. Landlord’s Expansion Premises Contribution . (a) Landlord shall provide to Tenant a tenant improvement allowance (the “ Landlord’s Expansion Premises Contribution ”) in an amount not to exceed $980,595.00, provided that (i) as of the date on which Landlord is required to make payment thereof, the Lease is in full force and effect; (ii) as of both the date of the respective Contribution Request Notice (as hereinafter defined), and as of the respective date on which Landlord is required to make payment thereof, no Event of Default then exists (provided however if an Event of Default then exists but is subsequently cured by Tenant within the applicable cure period then Landlord will be required to make such payments after Tenant so cures the Event of Default); and (iii) Tenant shall provide not less than thirty (30) days prior notice (each, a “ Contribution Request Notice ”) of its request for payment of all or a portion of the Landlord’s Expansion Premises Contribution. Tenant shall pay all costs of constructing all Alterations in and to the First Amendment Expansion Premises to the extent such costs exceed the Landlord’s expansion Premises Contribution. The Landlord’s Expansion Premises Contribution shall be payable solely on account of construction costs (i.e. “hard” and “soft” construction costs including consultants fees, security systems and voice/data wiring). Landlord shall exercise customary commercially reasonable efforts to cooperate with Tenant’s efforts to obtain any municipal permits required for the construction of any Alterations for the First Amendment Expansion Premises; provided, however, in no event will Landlord be obligated to incur any expense, cost, liabilities, or obligations in connection therewith. Notwithstanding the provisions of Section 5.6 of the Lease, Tenant shall not be obligated to pay Landlord any construction administration fee in connection with the initial improvements to be made to the First Amendment Expansion Premises.

(b) Landlord shall make progress payments on account of Landlord’s Expansion Premises Contribution to Tenant on a monthly basis, for the work performed during the previous month. Each of Landlord’s progress payments shall be limited to an amount equal to the aggregate amounts theretofore paid by Tenant (as certified by a duly authorized officer of Tenant) to Tenant’s contractors, subcontractors, material suppliers, and service providers which have not been subject to previous disbursements from Landlord’s Expansion Premises Contribution, multiplied by a fraction the numerator of which is the amount of Landlord’s Expansion Premises Contribution, and the denominator of which is the total contract price (or, if there is no specified or fixed contract price for the Alterations, then Landlord’s reasonable estimate thereof) for the performance of all of the Alterations shown on all plans and specifications approved by Landlord, provided that in no event shall such fraction be greater than one. Such progress payments shall be made within thirty (30) days next following the delivery to Landlord of requisitions therefor. Each requisition

shall be executed by a duly authorized officer of Tenant, and shall be accompanied by (i) with the exception of the first requisition, copies of partial waivers of lien from all contractors, subcontractors, material suppliers, and service providers covering all work and materials which were the subject of previous progress payments by Landlord and Tenant, (ii) a certification from Tenant’s architect that the work for which the requisition is being made has been performed in accordance with the plans and specifications approved by Landlord, and (iii) such other documents and information as Landlord or its mortgagee may reasonably request. Landlord shall disburse the final requisition upon submission by Tenant to Landlord of Tenant’s requisition therefor accompanied by all documentation required under the foregoing provisions of this Section 4(b), together with (A) proof of the satisfactory completion of all required inspections and issuance of any required approvals, permits and sign-offs for the Alterations by Governmental Authorities having jurisdiction thereover, (B) final “as-built” plans and specifications for the Alterations as required pursuant to Section 5.1(c) of the Lease, and (C) issuance of final lien waivers by all contractors, subcontractors, material suppliers, and service providers covering all of the Alterations. The right to receive Landlord’s Expansion Premises Contribution is for the exclusive benefit of Tenant, and in no event shall such right be assigned to or be enforceable by or for the benefit of any third party, including any contractor, subcontractor, materialman, laborer, architect, engineer, attorney or other person or entity.

5. Reference Information . Effective as of the Extension Term Commencement Date, Article 1 of Existing Lease is hereby amended as follows:

(i) by deleting the definition of “ Premises ,” “ Agreed Area of the Premises ”, “ Tenant’s Address for Notices ” and replacing said definitions with the following:


		PREMISES:		41,617 rentable square feet, comprised of (i) 19,826 rentable square feet on the fifth (5 ^th ) floor of the Building, and (ii) 21,791 rentable square feet on the third (3 ^rd ) floor of the Building. The floor plans depicting the Premises are attached to this Lease as Exhibit A and Exhibit A-1, respectively.

		AGREED AREA OF THE PREMISES:		41,617 rentable square feet, as mutually agreed upon by Landlord and Tenant.

		TENANT’S ADDRESS FOR NOTICES:		One Rogers Street Cambridge, Massachusetts 02142

(ii)	by inserting the following at the end of the definition of Fixed Rent:

“There shall be no Fixed Rent payable for and with respect to the period of time through and including December 31, 2015 with respect to the First Amendment Expansion Premises.

For and with respect to the period of time commencing on January 1, 2016 through and including December 31, 2016 (both dates inclusive), the Fixed Rent will be payable at the rate of $1,154,923.00 per annum ($96,243.58 per month), calculated at the rate of $53.00 per rentable square foot in the First Amendment Expansion Premises.

For and with respect to the period of time commencing on January 1, 2017 through and including December 31, 2017 (both dates inclusive), the Fixed Rent will be payable at the rate of $1,176,714.00 per annum ($98,059.50 per month), calculated at the rate of $54.00 per rentable square foot in the First Amendment Expansion Premises.

For and with respect to the period of time commencing on January 1, 2018 through and including December 31, 2018 (both dates inclusive), the Fixed Rent will be payable at the rate of $1,198,505.00 per annum ($99,875.41 per month), calculated at the rate of $55.00 per rentable square foot in the First Amendment Expansion Premises.

For and with respect to the period of time commencing on January 1, 2019 through and including December 31, 2019 (both dates inclusive), the Fixed Rent will be payable at the rate of $1,220,296.00 per annum ($101,691.33 per month), calculated at the rate of $56.00 per rentable square foot in the First Amendment Expansion Premises.

For and with respect to the period of time commencing on January 1, 2020 through and including December 31, 2020 (both dates inclusive), the Fixed Rent will be payable at the rate of $1,242,087.00 per annum ($103,507.25 per month), calculated at the rate of $57.00 per rentable square foot in the First Amendment Expansion Premises.

For and with respect to the period of time commencing on January 1, 2021 through and including December 31, 2021 (both dates inclusive), the Fixed Rent will be payable at the rate of $1,263,878.00 per annum ($105,323.16 per month), calculated at the rate of $58.00 per rentable square foot in the First Amendment Expansion Premises.

For and with respect to the period of time commencing on January 1, 2022 through and including December 31, 2022 (both dates inclusive), the Fixed Rent will be payable at the rate of $1,285,669.00 per annum ($107,139.08 per month), calculated at the rate of $59.00 per rentable square foot in the First Amendment Expansion Premises.

For and with respect to the period of time commencing on January 1, 2023 through and including the Expiration Date (both dates inclusive), the Fixed Rent will be payable at the rate of $1,307,460.00 per annum ($108,955.00 per month), calculated at the rate of $60.00 per rentable square foot in the First Amendment Expansion Premises.”

and

(iii) by inserting the following after the definitions of “ Base Tax Year ,” “ Base Expense Year ,” “ Tenant’s Proportionate Share ,” and “ Landlord’s Allowance ,” respectively.


BASE TAX YEAR FOR FIRST AMENDMENT EXPANSION PREMISES:		The Tax Year commencing on July 1, 2015 and ending on June 30, 2016.

BASE EXPENSE YEAR FOR FIRST AMENDMENT EXPANSION PREMISES:		Calendar year 2016.

TENANT’S PROPORTIONATE SHARE FOR FIRST AMENDMENT EXPANSION PREMISES:		19.81%.

LANDLORD’S ALLOWANCE FOR FIRST AMENDMENT EXPANSION PREMISES:		$980,595.00

6. Brokerage . Tenant warrants and represents to Landlord, and Landlord warrants and represents to Tenant, that it has dealt with no broker or agent in connection with this Amendment, other than Jones Lang LaSalle and T3 Advisors. Each of Tenant and Landlord shall indemnify and hold harmless the other from and against any and all loss, cost and expense (including commercially reasonable attorneys’ fees) arising out of or resulting from any breach of said warranty and representation by the indemnifying party, including any claims for a brokerage commission, finder’s fee or similar compensation made by any person other than Jones Lang LaSalle and T3 Advisors arising out of or in connection with this Amendment. The Landlord shall be responsible for payment of all fees payable to Jones Lang LaSalle and T3 Advisors in connection with this Amendment pursuant to a separate agreement.

7. Miscellaneous . Tenant hereby represents and warrants to Landlord, as of the date of this Amendment, as follows: (i) the execution and delivery of this Amendment by Tenant has been duly authorized by all requisite corporate action; (ii) neither the Existing Lease nor the interest of Tenant therein has been assigned, sublet, encumbered or otherwise transferred; (iii) to the actual knowledge of Tenant, there are no defenses or counterclaims to the enforcement of the Existing Lease or the liabilities and obligations of Tenant thereunder; (iv) to the actual knowledge of Tenant, Tenant is not entitled to any offset, abatement or reduction of rent under the Existing Lease; (v) to the actual knowledge of Tenant, neither Landlord or Tenant is in breach or default of any its respective obligations under the Existing Lease; (vi) Landlord has performed all work and constructed all improvements required pursuant to the Existing Lease; (vii) excepting only Landlord’s Expansion Premises Contribution, Landlord has provided all allowances and contributions required pursuant to the Lease; and (viii) Landlord has made no representations or warranties, except as expressly and specifically set in this Amendment. The submission of drafts of this document for examination and negotiation does not constitute an offer, or a reservation of or option for, the First Amendment Expansion Premises or any of the other terms and conditions set forth in this Amendment, and this Amendment shall not be binding upon Landlord or Tenant unless and until Landlord shall have executed and delivered a fully executed copy of this Amendment to Tenant. Except as expressly and specifically set forth in this Amendment, the Existing Lease is hereby ratified and confirmed, and all of the terms, covenants, agreements and provisions of the Existing Lease shall remain unaltered and unmodified and in full force and effect throughout the balance of the term of the Lease, as extended hereby. Except as expressly set forth herein, all of the covenants, representations and warranties made by Tenant contained in the Existing Lease are hereby remade, reaffirmed and ratified as of the date hereof.

(signatures on following page)

EXECUTED as an instrument under seal as of the date first above-written.


LANDLORD:

CHARLES PARK ONE, LLC, a Delaware limited liability company

BY:	PRINCIPAL REAL ESTATE INVESTORS, LLC, a Delaware limited liability company, its authorized signatory

	By:
		Name:
		Its:

	By:
		Name:
		Its:

TENANT:

PEGASYSTEMS INC. a Massachusetts corporation

By:
	Name:
	Its:

Exhibit A-1

Floor Plan of First Amendment Expansion Premises

Exhibit 31.1

CERTIFICATION

I, Alan Trefler, certify that:

I have reviewed this Quarterly Report on Form 10-Q of Pegasystems Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: October 27, 2015

/ S / ALAN TREFLER

Alan Trefler

Chairman and Chief Executive Officer

(Principal Executive Officer)

Exhibit 31.2

CERTIFICATION

I, Rafeal E. Brown, certify that:

I have reviewed this Quarterly Report on Form 10-Q of Pegasystems Inc.;

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: October 27, 2015

/ S / RAFEAL E. BROWN

Rafeal E. Brown

Chief Financial Officer, Chief Administrative Officer and Senior Vice President

(Principal Financial Officer)

Exhibit 32

CERTIFICATION PURSUANT TO SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Pegasystems Inc. (the Company) on Form 10-Q for the quarter ended September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Alan Trefler, Chairman and Chief Executive Officer of Pegasystems Inc., and Rafeal E. Brown, Chief Financial Officer, Chief Administrative Officer, and Senior Vice President of Pegasystems Inc., each certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: October 27, 2015

/ S / ALAN TREFLER

Alan Trefler

Chairman and Chief Executive Officer

(Principal Executive Officer)

/ S / RAFEAL E. BROWN

Rafeal E. Brown

Chief Financial Officer, Chief Administrative Officer and Senior Vice President

(Principal Financial Officer)

Large accelerated filer

Accelerated filer

Non-accelerated filer

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Smaller reporting company