•Annual contract value (ACV) grows 16% year over year (constant currency)

•Pega Cloud gross margin reaches 70%

•2023 free cash flow expected to increase to $150 million

CAMBRIDGE, Mass. — February 15, 2023 — Pegasystems Inc., the low-code platform provider empowering the world’s leading enterprises to Build for Change®, released its financial results for the fourth quarter and full-year 2022.

“I’m pleased with our strong finish to 2022 and proud of our resilient team who performed so well in a year that included a number of major distractions and economic headwinds,” said Alan Trefler, Pega founder and CEO. “We have a tremendous opportunity in front of us as we move into 2023. We’re building a client-first business for the long-term, focused on a balance of growth and profitability.”

“Surpassing $1 billion in subscription revenue is a significant milestone in our multi-year journey to transform our business,” said Ken Stillwell, Pega COO and CFO. “As we complete the subscription transition in 2023, we’re focused on our Rule of 40 progress, which will lead to significantly improved operating leverage and cash generation.”

Financial and performance metrics (1)

(Dollars in thousands, except per share amounts)			Three Months Ended December 31,																		Year Ended December 31,
			2022						2021						Change						2022						2021						Change
Total revenue			$	396,470					$	316,184					25		%				$	1,317,845					$	1,211,653					9		%
Net income (loss) - GAAP			$	34,613					$	(37,246)					*						$	(345,582)					$	(63,040)					(448)		%
Net income - non-GAAP			$	68,341					$	3,051					2140		%				$	59,611					$	18,812					217		%
Diluted earnings (loss) per share - GAAP			$	0.41					$	(0.46)					*						$	(4.22)					$	(0.77)					(448)		%
Diluted earnings per share - non-GAAP			$	0.82					$	0.04					1950		%				$	0.72					$	0.22					227		%

(1) See the Schedules at the end of this release for additional information, including a reconciliation of our non-GAAP and GAAP measures.

Note: Constant currency measures are calculated by applying foreign exchange rates for the earliest period shown to all periods. The above constant currency measures reflect foreign exchange rates applicable as of Q4 2021.

2023 Guidance (1)

As of February 15, 2023, we are providing the following guidance:

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

A conference call and audio-only webcast will be conducted at 5:00 p.m. EST on Wednesday, February 15, 2023. Members of the public and investors are invited to join the call and participate in the question and answer session by dialing 1-888-394-8218 (domestic), 1-323-994-2093 (international), or via webcast (https://viavid.webcasts.com/starthere.jsp?ei=1593309&tp_key=815b2c6ffa) by logging onto www.pega.com at least five minutes prior to the event's broadcast and clicking on the webcast icon in the Investors section.

We believe that non-GAAP financial measures help investors understand our core operating results and prospects, consistent with how management measures and forecasts our performance without the effect of often one-time charges and other items outside our normal operations. The supplementary non-GAAP financial measures are not meant to be superior to or a substitute for financial measures prepared under U.S. GAAP.

Reconciliations of our non-GAAP and GAAP measures are at the end of this release.

Certain statements in this press release may be "forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995.

Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, projects, forecasts, guidance, likely, and usually, or variations of such words and other similar expressions identify forward-looking statements, which are based on current expectations and assumptions.

Forward-looking statements deal with future events and are subject to risks and uncertainties that are difficult to predict, including, but not limited to:

•our future financial performance and business plans;

•the adequacy of our liquidity and capital resources;

•the continued payment of our quarterly dividends;

•the timing of revenue recognition;

•management of our transition to a more subscription-based business model;

•variation in demand for our products and services, including among clients in the public sector;

•reliance on key personnel;

•global economic and political conditions and uncertainty, including impacts from public health emergencies and the war in Ukraine;

•reliance on third-party service providers, including hosting providers;

•compliance with our debt obligations and covenants;

•the potential impact of our convertible senior notes and Capped Call Transactions;

•foreign currency exchange rates;

•the potential legal and financial liabilities and damage to our reputation due to cyber-attacks;

•security breaches and security flaws;

•our ability to protect our intellectual property rights, costs associated with defending such rights, intellectual property rights claims, and other related claims by third parties against us, including related costs, damages, and other relief that may be granted against us;

•our ongoing litigation with Appian Corp.;

•our client retention rate; and

•management of our growth.

These risks and others that may cause actual results to differ materially from those expressed in such forward-looking statements are described further in Part I of our Annual Report on Form 10-K for the year ended December 31, 2022, and other filings we make with the U.S. Securities and Exchange Commission (“SEC”).

Except as required by applicable law, we do not undertake and expressly disclaim any obligation to update or revise these forward-looking statements publicly, whether due to new information, future events, or otherwise.

The forward-looking statements in this press release represent our views as of February 15, 2023.

Pega provides a powerful low-code platform that empowers the world's leading enterprises to Build for Change®. Clients use our AI-powered decisioning and workflow automation to solve their most pressing business challenges - from personalizing engagement to automating service to streamlining operations. Since 1983, we've built our scalable and flexible architecture to help enterprises meet today's customer demands while continuously transforming for tomorrow. For more information on Pegasystems (NASDAQ: PEGA), visit www.pega.com.

Lisa Pintchman

VP, Corporate Communications

lisapintchman.rogers@pega.com

617-866-6022

Twitter: @pega

Peter Welburn

VP, Corporate Development & Investor Relations

PegaInvestorRelations@pega.com

617-498-8968

Our non-GAAP financial measures reflect the following adjustments:

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

•Capped call transactions: We have excluded gains and losses related to our capped call transactions held at fair value under U.S. GAAP. The capped call transactions are expected to reduce common stock dilution and/or offset any potential cash payments we must make, other than for principal and interest, upon conversion of the Notes. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the types of events giving rise to them are not representative of our core business operations and ongoing operating performance.

•Legal Fees: Includes legal and related fees arising from proceedings outside of the ordinary course of business. We believe excluding these expenses from our non-GAAP financial measures is useful to investors as the disputes giving rise to them are not representative of our core business operations and ongoing operating performance.

•Restructuring: During the fourth quarter of 2022, management committed to a restructuring plan aligned with our target organization go-to-market strategy and commitment to be a Rule of 40 managed company. The plan resulted in a restructuring expense of $21.7 million in 2022, primarily associated with severance and benefits for impacted employees and expenses incurred as a result of the closure of our Salem, New Hampshire office. We believe excluding the impact from our non-GAAP financial measures is useful to investors as these amounts are not representative of our core business operations and ongoing operating performance.

•Interest on convertible senior notes: In February 2020, we issued convertible senior notes with an aggregate principal amount of $600 million, due March 1, 2025, in a private placement. We believe excluding the amortization of issuance costs provides a useful comparison of our operational performance in different periods.

•Facilities: In February 2021, we agreed to accelerate our exit from our then Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million, which was received in October 2021. We believe excluding the impact from our non-GAAP financial measures is useful to investors as the modified lease, including the $18 million payment, is not representative of our core business operations and ongoing operating performance.

•Amortization of intangible assets: We have excluded the amortization of intangible assets from our non-GAAP operating expenses and profitability measures. Amortization of intangible assets fluctuates in amount and frequency and is significantly affected by the timing and size of acquisitions. Investors should note that intangible assets contributed to our revenues recognized during the periods presented and are expected to contribute to future revenues. Amortization of intangible assets is likely to recur in future periods. We believe excluding these amounts provides a useful comparison of our operational performance in different periods.

•Foreign currency transaction loss (gain): We have excluded foreign currency transaction gains and losses from our non-GAAP profitability measures. Foreign currency transaction gains and losses fluctuate in amount and frequency and are significantly affected by foreign exchange market rates. Foreign currency transaction gains and losses are likely to recur in future periods. We believe excluding these amounts provides a useful comparison of our operational performance in different periods.

•Other: We have excluded gains and losses from our venture investments, capital advisory expenses, and expenses incurred due to the cancellation of in-person sales and marketing events. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the types of events giving rise to them are not representative of our core business operations and ongoing operating performance.

•Diluted weighted-average number of common shares outstanding:

•Stock-based compensation: In periods of non-GAAP income, we've included the dilutive impact of stock-based compensation in our non-GAAP weighted-average shares. In periods of GAAP loss, these shares would have been excluded from our GAAP results as they would be anti-dilutive for GAAP. We believe including the dilutive effect of stock-based compensation in our non-GAAP financial measures in periods of income is helpful to investors as this provides a useful comparison of our operational performance in different periods.

•Capped call transactions: In periods of GAAP income, the approximately 4.4 million shares which would be issued if the Company’s Convertible Senior Notes were fully converted to common shares are included in the diluted weighted-average shares outstanding. The Capped Call Transactions are expected to reduce common stock dilution and/or offset any potential cash payments the Company must make, other than for principal and interest, upon conversion of the Convertible Senior Notes, with such reduction and/or offset subject to a cap of $196.44. We believe that including the expected impact of the Capped Call Transactions in our non-GAAP financial measures provides a useful comparison of our operational performance in different periods.

(1) Stock-based compensation:

			Three Months Ended December 31,												Year Ended December 31,
(in thousands)			2022						2021						2022						2021
Cost of revenue			$	6,646					$	4,933					$	26,400					$	21,822
Selling and marketing			10,245						12,337						46,769						54,182
Research and development			6,841						6,070						29,266						25,413
General and administrative			5,177						3,123						19,775						14,530
			$	28,909					$	26,463					$	122,210					$	115,947
Income tax benefit			$	(376)					$	(5,382)					$	(1,881)					$	(23,410)

(2) Effective income tax rates:

			Year Ended December 31,
			2022						2021
GAAP			114		%				(52)		%
non-GAAP			22		%				22		%

Our GAAP effective income tax rate is subject to significant fluctuations due to several factors, including excess tax benefits generated by our stock-based compensation plans, gains and losses on our capped call transactions, tax credits for stock-based compensation awards to research and development employees, and unfavorable foreign stock-based compensation adjustments. We determine our non-GAAP income tax rate using applicable rates in taxing jurisdictions and assessing certain factors, including our historical and forecasted earnings by jurisdiction, discrete items, and our ability to realize tax assets. Under GAAP, we recorded a valuation allowance on our deferred tax assets of $192 million in the three months ended June 30, 2022. See "Note 18. Income Taxes" in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information. We believe it is beneficial for our management to review our non-GAAP results consistent with our annual plan's effective income tax rate as established at the beginning of each year, given tax rate volatility.

Our non-GAAP free cash flow measures reflect the following adjustments:

•Investment in property and equipment: Investment in property and equipment fluctuates in amount and frequency and is significantly affected by the timing and size of investments in our facilities. We believe excluding these amounts provides a useful comparison of our operational performance in different periods.

•Legal Fees: Includes legal and related fees arising from proceedings outside of the ordinary course of business. We believe excluding these expenses from our non-GAAP financial measures is useful to investors as the disputes giving rise to them are not representative of our core business operations and ongoing operating performance.

•Interest on convertible senior notes: In February 2020, we issued convertible senior notes with an aggregate principal amount of $600 million, due March 1, 2025, in a private placement. We believe excluding the interest payments provides a useful comparison of our operational performance in different periods.

•Facilities: In February 2021, we agreed to accelerate our exit from our then Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million, which was received in October 2021. We believe excluding the impact from our non-GAAP financial measures is useful to investors as the modified lease, including the $18 million payment, is not representative of our core business operations and ongoing operating performance.

•Other: We have excluded capital advisory fees and fees incurred due to the cancellation of in-person sales and marketing events. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the types of events giving rise to them are not representative of our core business operations and ongoing operating performance.

Annual contract value (“ACV”) - ACV represents the annualized value of our active contracts as of the measurement date. The contract's total value is divided by its duration in years to calculate ACV for subscription license and Pega Cloud contracts. Maintenance revenue for the quarter then ended is multiplied by four to calculate ACV for maintenance. ACV is a performance measure that we believe provides useful information to our management and investors, particularly during our subscription transition.

			December 31, 2022						December 31, 2021						Change
Pega Cloud			$	454,567					$	363,970					$	90,597		25		%
Maintenance			327,983						330,904						(2,921)			(1)		%
Subscription services			782,550						694,874						87,676			13		%
Subscription license			345,942						307,750						38,192			12		%
			$	1,128,492					$	1,002,624					$	125,868		13		%

Remaining performance obligations (“Backlog”) - Expected future revenue from existing non-cancellable contracts:

As of December 31, 2022:

			Subscription services												Subscription license						Perpetual license						Consulting						Total
			Maintenance						Pega Cloud
1 year or less			$	242,073					$	379,648					$	60,668					$	5,310					$	32,374					$	720,073		53		%
1-2 years			66,207						246,195						3,803						2,253						6,371						324,829			24		%
2-3 years			26,746						143,901						1,707						—						1,647						174,001			13		%
Greater than 3 years			15,602						115,944						5,283						—						—						136,829			10		%
			$	350,628					$	885,688					$	71,461					$	7,563					$	40,392					$	1,355,732		100		%
% of Total			26		%				65		%				5		%				1		%				3		%				100		%
Change since December 31, 2021
			$	(16,380)					$	154,125					$	(100,694)					$	(10,146)					$	(16,067)					$	10,838
			(4)		%				21		%				(58)		%				(57)		%				(28)		%				1		%

As of December 31, 2021:

Note: Constant currency Backlog is calculated by applying foreign exchange rates for the earliest period shown to all periods. The above constant currency measures reflect foreign exchange rates applicable as of Q4 2021.