SOURCE: Pegasystems

Pegasystems

May 06, 2014 16:30 ET

Pegasystems Announces Financial Results for First Quarter of 2014

GAAP License Revenue Increases 22% in the First Quarter of 2014; Q1'14 GAAP EPS of $0.12; Q1'14 Non-GAAP EPS of $0.20 Increases 18% Over Q1'13

CAMBRIDGE, MA--(Marketwired - May 6, 2014) - Pegasystems Inc. (NASDAQ: PEGA), the software company powering the digital enterprise with Better Business Software®, today announced results for its first quarter ended March 31, 2014.

"Pegasystems kicked off 2014 with a strong first quarter," said Alan Trefler, Founder and CEO of Pegasystems. "With license revenue growing at 22% on a year-over-year basis, it is clear that the Pega 7 Build for Change®  platform is continuing to gain adoption as our clients realize the value of improved customer engagements, simplified processes, and the ability to adapt and change their businesses to meet the needs of today's dynamic and challenging business world."

Mr. Trefler continued, "Throughout the world and across business sectors, our clients are utilizing Pega for both tactical and transformative engagements. With continued accolades from many leading industry analysts reinforcing what our clients already know about the strength of Pega solutions, we are thrilled to invite our clients, partners, and investors to join us at PegaWORLD 2014, June 8-10 in Washington, D.C., to learn more from this vibrant and active community about how they are addressing business challenges by transforming into digital enterprises that are better able to adapt and respond to change."

   
SELECTED GAAP & NON-GAAP RESULTS (1)  
                             
    Three Months Ended March 31,   % Increase  
    2014   2014   2013   2013      
($ in '000s)   GAAP   Non-GAAP   GAAP   Non-GAAP   GAAP     Non-GAAP  
Total Revenue   $ 140,464   $ 142,223   $ 116,246   $ 116,246   21 %   22 %
License Revenue   $ 52,614   $ 53,136   $ 43,209   $ 43,209   22 %   23 %
Net Income   $ 9,765   $ 15,706   $ 9,069   $ 12,893   8 %   22 %
Diluted Earnings per share (2)   $ 0.12   $ 0.20   $ 0.12   $ 0.17   0 %   18 %
                                     
(1) See a reconciliation of our GAAP to Non-GAAP measures contained in the financial schedules at the end of this release.  
(2) The number of common shares and per share amounts have been retroactively restated for all prior periods to reflect the Company's two-for-one common stock split effected in the form of a common stock dividend distributed on April 1, 2014.  
   
   

Cash: Total cash, cash equivalents, and marketable securities at the end of the quarter was $221 million, up 41% from 2013 year-end.

Cash generated from operations for the quarter was $72.9 million, an increase of 10% on a year-over-year basis. Free Cash Flow, which we define as operating cash flow less Cap Ex, was $71.6 million, an increase of 10% on a year-over-year basis.

License Backlog: The Company computes license backlog by adding billed deferred license and cloud revenue and off-balance sheet license and cloud commitments, which is business that is contracted, unbilled and not recorded on the Company's balance sheet.

Total billed deferred license and cloud revenue on the balance sheet as of March 31, 2014 was $62.7 million, an increase of 98% on a year-over-year basis. Off-balance sheet license and cloud commitments as of March 31, 2014 totaled $270.2 million, an increase of 7% on a year-over-year basis.

"With strong revenue and EPS performance and growth in year-over-year license backlog, we are executing well against our plan for 2014. Our Insurance vertical led the way in Q1, and we had a particularly strong quarter in Europe," said Rafe Brown, Pegasystems CFO. "Our client momentum is encouraging as we look forward to the remainder of the year. We are also pleased to have recently been recognized by Forbes Magazine as one of 'America's Most Trustworthy Companies,' adding to the recent accolades we have received in numerous industry analyst reports."

Quarterly Conference Call

Pegasystems will host a conference call and live Webcast associated with this announcement at 6:00 p.m. EDT today. A live audio webcast of the conference call, together with detailed financial information, can be accessed through the Company's Web site at www.pega.com/about-us/investors. Dial-in information is as follows: 1 (877) 348-9349 (domestic) or 1 (678) 809-1046 (international). To listen to the Webcast log onto www.pega.com at least 5 minutes prior to the event's broadcast and click on the Webcast icon in the Investors section. A replay of the call will also be available on www.pega.com in the Investors section Audio Archives link.

Discussion of Non-GAAP Financial Measures:

To supplement financial results presented in accordance with Generally Accepted Accounting Principles in the U.S. ("GAAP"), the Company provides non-GAAP measures, including in this release. Pegasystems' management utilizes a number of different financial measures, both GAAP and non-GAAP, in analyzing and assessing the overall performance of the business, for making operating decisions, and for forecasting and planning for future periods. The Company's annual financial plan is prepared both on a GAAP and non-GAAP basis, and both are approved by our board of directors. In addition and as a consequence of the importance of these measures in managing the business, the Company uses non-GAAP measures and financial performance results in the evaluation process to establish management's compensation.

The non-GAAP measures exclude the effects of certain business combination accounting entries, stock-based compensation expense, amortization of acquired intangibles, acquisition-related costs, and restructuring costs. The Company believes that these Non-GAAP measures are helpful in understanding its past financial performance and its anticipated future results. These non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with the Company's consolidated financial statements prepared in accordance with GAAP. A reconciliation of the Company's GAAP to non-GAAP measures is included in the financial schedules at the end of this release.

Forward-Looking Statements

"Safe harbor" statement under the Private Securities Litigation Reform Act of 1995: Certain statements contained in this press release may be construed as "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. The words "anticipate," "project," "expect," "plan," "intend," "believe," "estimate," "should," "target," "forecast," "could," "preliminary," "guidance" and similar expressions, among others, identify forward-looking statements, which speak only as of the date the statement was made. These statements are based on current expectations and assumptions and involve various risks and uncertainties, which could cause the Company's actual results to differ from those expressed in such forward-looking statements. These risks and uncertainties 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 our license revenue recognition, the ongoing consolidation in the financial services and healthcare markets, reliance on third party relationships, the potential loss of vendor specific objective evidence for our professional services, the financial impact of the Antenna acquisition, and management of the Company's growth. Further information regarding these and other factors which could cause the Company's actual results to differ materially from any forward-looking statements contained in this press release is contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 and other recent filings with the Securities and Exchange Commission. These documents are available on the Company's website at www.pega.com/about-us/investors/sec-filings. The forward-looking statements contained in this press release represent the Company's views as of May 6, 2014. Investors are cautioned not to place undue reliance on such forward-looking statements and there are no assurances that the matters contained in such statements will be achieved. Although subsequent events may cause the Company's view to change, the Company does not undertake and specifically disclaims any obligation to publicly update or revise these forward-looking statements whether as the result of new information, future events or otherwise. The statements should therefore not be relied upon as representing the Company's view as of any date subsequent to May 6, 2014.

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About Pegasystems
Pegasystems Build for Change® Platform is the heart of Better Business Software®. It delivers business agility and empowers leading organizations to rapidly close execution gaps and seize new opportunities. Pegasystems leverages its recognized leadership in Business Process Management (BPM), Multi-Channel Customer Relationship Management (CRM), Business Rules, and Adaptive Analytics to uniquely give its clients the power to engage customers, simplify operations and Build For Change®. For more information, please visit us at www.pega.com

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Pegasystems Inc.  
Unaudited Condensed Consolidated Statements of Operations  
(In thousands, except per share amounts)  
             
    Three Months Ended  
    March 31,  
    2014     2013  
Revenue:                
  Software license   $ 52,614     $ 43,209  
  Maintenance     44,881       36,322  
  Services     42,969       36,715  
    Total revenue     140,464       116,246  
Cost of revenue:                
  Software license     1,579       1,583  
  Maintenance     4,664       3,735  
  Services     39,670       32,335  
  Total cost of revenue (1)     45,913       37,653  
    Gross profit     94,551       78,593  
Operating expenses:                
  Selling and marketing     45,807       39,270  
  Research and development     24,609       19,576  
  General and administrative     9,302       6,796  
  Acquisition-related costs     206       -  
    Total operating expenses (1)     79,924       65,642  
Income from operations     14,627       12,951  
Foreign currency transaction gain (loss)     322       (1,890 )
Interest income, net     124       118  
Other (expense), income net     (532 )     839  
Income before provision for income taxes     14,541       12,018  
Provision for income taxes     4,776       2,949  
Net income   $ 9,765     $ 9,069  
Earnings per share (2):                
Basic   $ 0.13     $ 0.12  
Diluted   $ 0.12     $ 0.12  
                 
Weighted-average number of common shares outstanding (2):                
Basic     76,298       75,894  
Diluted     78,661       77,576  
                 
Dividends declared per share (2)   $ 0.015     $ 0.015  
                 
(1) Includes stock-based compensation as follows:                
Cost of revenue   $ 1,011     $ 1,173  
Operating expenses   $ 2,284     $ 2,259  
                 
(2) The number of common shares and per share amounts have been retroactively restated for all prior periods to reflect the Company's two-for-one common stock split effected in the form of a common stock dividend distributed on April 1, 2014  
   
                 
 
PEGASYSTEMS INC.
RECONCILIATION OF SELECTED GAAP MEASURES TO NON-GAAP MEASURES (1)
($ in thousands, except per share data)
                                                     
                                        % Increase
    Three Months Ended December 31,     (Decrease)
    2014           2014     2013           2013                  
    GAAP     Adj.     Non-GAAP     GAAP     Adj.     Non-GAAP     GAAP       Non-GAAP    
TOTAL REVENUE   $ 140,464     $ 1,759     $ 142,223     $ 116,246     $ -     $ 116,246     21 %     22 %  
  Software license (2)     52,614       522       53,136       43,209       -       43,209     22 %     23 %  
  Maintenance (3)     44,881       222       45,103       36,322       -       36,322     24 %     24 %  
  Services (4)     42,969       1,015       43,984       36,715       -       36,715     17 %     20 %  
                                                                 
TOTAL COST OF REVENUE   $ 45,913     $ (2,851 )   $ 43,062     $ 37,653     $ (2,714 )   $ 34,939     22 %     23 %  
  Amortization of intangible assets (5)     1,840       (1,840 )     -       1,541       (1,541 )     -                  
  Stock-based compensation     1,011       (1,011 )     -       1,173       (1,173 )     -                  
                                                                 
GROSS MARGIN %     67 %             70 %     68 %             70 %   (30 ) bp   (22 ) bp
                                                                 
TOTAL OPERATING EXPENSES   $ 79,924     $ (4,406 )   $ 75,518     $ 65,642     $ (3,495 )   $ 62,147     22 %     22 %  
  Amortization of intangible assets (5)     1,916       (1,916 )     -       1,236       (1,236 )     -                  
  Stock-based compensation     2,284       (2,284 )     -       2,259       (2,259 )     -                  
  Acquisition-related costs     206       (206 )     -       -       -       -                  
                                                                 
INCOME FROM OPERATIONS   $ 14,627     $ 9,016     $ 23,643     $ 12,951     $ 6,209     $ 19,160     13 %     23 %  
                                                                 
OPERATING MARGIN %     10 %             17 %     11 %             16 %   (73 ) bp   14   bp
                                                                 
INCOME TAX EFFECTS (6)   $ 4,776     $ 3,075     $ 7,851     $ 2,949     $ 2,385     $ 5,334     62 %     47 %  
                                                                 
NET INCOME   $ 9,765     $ 5,941     $ 15,706     $ 9,069     $ 3,824     $ 12,893     8 %     22 %  
                                                                 
DILUTED EARNINGS PER SHARE (7)   $ 0.12     $ 0.08     $ 0.20     $ 0.12     $ 0.05     $ 0.17     0 %     18 %  
                                                                 
DILUTED WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING (7)     78,661       -       78,661       77,576       -       77,576     1 %     1 %  
 
(7) The number of common shares and per share amounts have been retroactively restated for all prior periods to reflect the Company's two-for-one common stock split effected in the form of a common stock dividend distributed on April 1, 2014
 
 
 
PEGASYSTEMS INC.
FOOTNOTES FOR RECONCILIATON OF
SELECTED GAAP MEASURES TO NON-GAAP MEASURES
 
(1) This presentation includes non-GAAP measures. Our non-GAAP measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures, and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. For a detailed explanation of the adjustments made to comparable GAAP measures, the reasons why management uses these measures, the usefulness of these measures and the material limitations on the usefulness of these measures see disclosure under Discussion of non-GAAP Measures included earlier in this release and below. Our non-GAAP financial measures reflect adjustments based on the following items, as well as the related income tax effects:
   
  Revenue: Business combination accounting rules require that we determine the fair value of the deferred revenue liability for contractual obligations assumed from Antenna. In post-acquisition reporting periods, we recognize revenue for the fair value of these contracts, when all the revenue recognition criteria are satisfied, instead of the revenue that would have been recognized by Antenna as an independent company. We add back the affect of the deferred revenue fair value adjustment in non-GAAP revenue to reflect the full amount of these revenues to provide a more complete comparison of the revenue guidance to peer companies.
   
  Amortization of intangible assets: We have excluded the amortization expense of intangible assets from our non-GAAP operating expenses and net earnings measures. Amortization of intangible assets is inconsistent in amount and frequency and is significantly affected by the timing and size of our acquisitions. Investors should note that the use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. Amortization of intangible assets will recur in future periods.
   
  Stock-based compensation expenses: We have excluded stock-based compensation expense from our non-GAAP operating expenses and net earnings measures. Although stock-based compensation is a key incentive offered to our employees, and we believe such compensation contributed to the revenues earned during the periods presented and that it will contribute to the generation of future period revenues, we continue to evaluate our business performance excluding stock-based compensation expense.
   
  Acquisition-related costs and restructuring costs: We have excluded the effect of acquisition-related costs and restructuring costs from our non-GAAP operating expenses and net earnings measures. We incurred direct and incremental costs associated with the Antenna acquisition. These acquisition-related costs were primarily professional fees to affect the acquisition. We have also incurred restructuring costs related to the integration of the acquisition, which we generally would not have otherwise incurred in the periods presented as a part of our continuing operations. Restructuring costs consist primarily of lease exit costs. We believe it is useful for investors to understand the effects of these items on our total operating expenses.
   
(2) As of March 31, 2014, approximately $1 million in estimated revenues related to assumed software license contracts will not be recognized in fiscal 2014 due to business combination accounting rules.
   
(3) As of March 31, 2014, approximately $0.4 million in estimated revenues related to assumed software support contracts will not be recognized in fiscal 2014 due to business combination accounting rules.
   
(4) As of March 31, 2014, approximately $0.7 million in estimated revenues related to assumed hosting and services contracts will not be recognized in fiscal 2014 due to business combination accounting rules.
   
(5) Estimated future annual amortization expense related to intangible assets as of March 31, 2014 is as follows:
       
Fiscal 2014   $ 9,414
Fiscal 2015     11,336
Fiscal 2016     10,973
Fiscal 2017     9,512
Fiscal 2018 and thereafter     11,583
  Total intangible assets subject to amortization   $ 52,818
       
       
(6) The income tax effects were calculated using an effective GAAP tax rate of 32.8% and 24.5% in the first quarter of 2014 and 2013, respectively, and an effective non-GAAP tax rate of 33.3% and 29.3% in the first quarter of 2014 and 2013, respectively.
   
  The differences between our GAAP and non-GAAP effective tax rates in 2014 and 2013 primarily relates to the impact of higher non-GAAP income subjected to tax in higher tax rate jurisdictions.
   
(7) The number of common shares and per share amounts have been retroactively restated for all prior periods to reflect the Company's two-for-one common stock split effected in the form of a common stock dividend distributed on April 1, 2014.
   
         
Pegasystems Inc.
Unaudited Condensed Consolidated Balance Sheets
     
    As of   As of
    March 31, 2014   December 31, 2013
    (in thousands)
Current Assets:            
  Cash and cash equivalents   $ 144,330   $ 80,231
  Marketable securities     76,634     76,461
    Total cash, cash equivalents, and marketable securities     220,964     156,692
  Trade accounts receivable, net     108,651     165,628
  Deferred income taxes     11,132     11,106
  Income taxes receivable     4,795     4,708
  Other current assets     8,537     9,148
    Total current assets     354,079     347,282
Property and equipment, net     27,838     28,957
Long-term deferred income taxes     60,938     60,925
Other assets     3,169     2,526
Intangible assets, net     52,818     56,574
Goodwill     36,869     36,869
    Total assets   $ 535,711   $ 533,133
             
Current liabilities:            
  Accounts payable   $ 4,799   $ 3,678
  Accrued expenses     23,461     27,957
  Accrued compensation and related expenses     25,682     44,399
  Deferred revenue     134,077     110,882
    Total current liabilities     188,019     186,916
Income taxes payable     21,431     21,392
Long-term deferred revenue     29,396     34,196
Other long-term liabilities     18,024     18,841
    Total liabilities     256,870     261,345
Stockholders' equity:     278,841     271,788
    Total liabilities and stockholders' equity   $ 535,711   $ 533,133
             
             
   
Pegasystems Inc.  
Unaudited Condensed Consolidated Statements of Cash Flows  
             
    Three Months Ended  
    March 31,  
    2014     2013  
    (in thousands)  
Operating activities:                
  Net income   $ 9,765     $ 9,069  
  Adjustments to reconcile net income to cash provided by operating activities:                
    Excess tax benefit from equity awards and deferred income taxes     (927 )     (669 )
    Depreciation, amortization, foreign currency transaction loss (gain), and other non-cash items     5,746       7,858  
    Stock-based compensation expense     3,295       3,432  
    Change in operating assets and liabilities, and other, net     54,979       46,356  
  Cash provided by operating activities     72,858       66,046  
  Cash used in investing activities     (2,630 )     (13,224 )
  Cash used in financing activities     (6,587 )     (4,127 )
Effect of exchange rate changes on cash and cash equivalents     458       (2,489 )
Net increase in cash and cash equivalents     64,099       46,206  
Cash and cash equivalents, beginning of period     80,231       77,525  
Cash and cash equivalents, end of period   $ 144,330     $ 123,731  
                 
                 

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