SOURCE: Pegasystems

Pegasystems

October 27, 2015 16:02 ET

Pegasystems Announces Financial Results for Third Quarter and Nine Months of 2015

Achieved Strong License and Cloud Revenue Growth While Increasing Backlog by 14% Over Q3 2014

CAMBRIDGE, MA--(Marketwired - October 27, 2015) - Pegasystems Inc. (NASDAQ: PEGA), the software company empowering the world's leading enterprises with strategic business applications, today announced results for its third quarter and nine months ended September 30, 2015.

"We are very pleased with our strong performance this quarter and through the first nine months of 2015," said Alan Trefler, Founder and CEO of Pegasystems. "Once again, we exceeded our revenue goals while building backlog during what is often our most challenging quarter. Our strategy to reach a broader target base is bearing fruit, and we are seeing an increase in the number and size of deals from new logos, while continuing to expand our business with existing clients."

 
SELECTED GAAP & NON-GAAP RESULTS (1)
 
 Three Months Ended September 30,  
($ in thousands except per share amounts)2015 2015 2014 2014 % Increase
GAAP Non-GAAP GAAP Non-GAAP GAAP Non-GAAP
Total Revenue$162,403 $162,403 $137,631 $138,307 18% 17%
License Revenue$58,948 $58,948 $48,292 $48,814 22% 21%
Cloud Revenue$8,244 $8,244 $4,561 $4,620 81% 78%
Net Income$6,325 $13,247 $1,882 $8,368 236% 58%
Diluted Earnings per share$0.08 $0.17 $0.02 $0.11 300% 55%
                  
  Nine Months Ended September 30,   
($ in thousands except per share amounts) 2015  2015  2014  2014 % Increase 
 GAAP  Non-GAAP  GAAP  Non-GAAP GAAP  Non-GAAP 
Total Revenue$478,340 $478,340 $421,080 $424,398 14% 13%
License Revenue$180,420 $180,420 $154,918 $156,483 16% 15%
Cloud Revenue$21,700 $21,700 $12,146 $12,802 79% 70%
Net Income$15,364 $34,378 $13,151 $32,063 17% 7%
Diluted Earnings per share$0.19 $0.44 $0.17 $0.41 12% 7%
                  
(1) See a reconciliation of our GAAP to Non-GAAP measures contained in the financial schedules at the end of this release. 

Cash: Total cash, cash equivalents, and marketable securities at September 30, 2015 was $224 million, up 6% from 2014 year-end.

Cash generated from operations for the nine months of 2015 was $55 million. Free Cash Flow, which we define as operating cash flow less Cap Ex, was $45 million for the nine months of 2015.

License and Cloud Backlog: The Company computes license and cloud 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.

 
License and Cloud Backlog (1)
 September 30, 
($ in thousands)20152014% Change
 Total billed deferred license and cloud revenue55,37068,561(19%)
 Total off-balance sheet license and cloud commitments (2)324,340265,30922%
TOTAL LICENSE AND CLOUD BACKLOG379,710333,87014%
(1) See historical quarterly license backlog amounts including cloud in a separate schedule at the end of this release.
(2) See the "Future Cash Receipts from License and Cloud Arrangements" table on page 23 of the Quarterly Report on Form 10-Q for the period ending September 30, 2015.

"Our results to date demonstrate continued strong execution toward our financial goals and evidence of transaction in the market across our product offerings," said Rafe Brown, Pegasystems CFO. "While the mix of deal types in a given quarter will significantly influence our results for that period, our growth in License and Cloud revenue, along with continued strength of our total backlog, indicates that our investments in sales, marketing, and product are paying off. We are thus continuing our investments in these areas and even accelerating some of our 2016 investments as a reflection of our confidence in the long-term prospects for the company."

Quarterly Conference Call

Pegasystems will host a conference call and audio-only Webcast associated with this announcement at 5:00 p.m. EDT today. A live audio webcast of the conference call, together with detailed financial information, can be accessed through the Company's Website at www.pega.com/about/investors. Dial-in information is as follows: 1-877-407-3982 (domestic) or 1-201-493-6780 (international). To listen to the Webcast, log onto www.pega.com at least five 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 by clicking the Earnings Calls link in the Investors section.

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 and restructuring expenses, and the benefit associated with favorable settlements of certain indemnification claims and indirect tax liabilities. 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 "expect," "anticipate," "intend," "plan," "believe," "could," "estimate," "may," "target," "strategy," "is intended to," "project," "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, insurance, healthcare, and communications markets; reliance on third party relationships; the potential loss of vendor specific objective evidence for our time and materials professional services arrangements; 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. 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, 2014 and other recent filings with the Securities and Exchange Commission. These documents are available on the Company's website at http://www.pega.com/about/investors. The forward-looking statements contained in this press release represent the Company's views as of October 27, 2015. 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, except as required by applicable law, 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 October 27, 2015.

About Pegasystems

Pegasystems (NASDAQ: PEGA) develops strategic applications for marketing, sales, service, and operations. Pega's applications streamline critical business operations, connect enterprises to their customers seamlessly in real-time across channels, and adapt to meet rapidly changing requirements. Pega's Global 2000 customers include many of the world's most sophisticated and successful enterprises. Pega's applications, available in the cloud or on-premises, are built on its unified Pega 7 platform, which uses visual tools to easily extend and change applications to meet clients' strategic business needs. Pega's clients report that Pega gives them the fastest time to value, extremely rapid deployment, efficient re-use and global scale. For more information, please visit us at www.pega.com.

All trademarks are the property of their respective owners.

 
Pegasystems Inc.
Unaudited Condensed Consolidated Statements of Operations
($ in thousands, except per share amounts)
     
 Three Months EndedNine Months Ended
 September 30,September 30,
 2015201420152014
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 (1) 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 (1) 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 76,543  76,351  76,521  76,312 
Diluted 79,174  78,653  78,906  78,531 
             
Dividends declared per share$0.03 $0.03 $0.09 $0.075 
             
(1) Includes stock-based compensation as follows:            
Cost of revenue$2,285 $1,418 $6,519 $3,816 
Operating expenses$5,806 $3,850 $16,486 $9,905 
             

  
PEGASYSTEMS INC. 
RECONCILIATION OF SELECTED GAAP MEASURES TO NON-GAAP MEASURES (1) 
($ in thousands, except per share amounts) 
                
            % Increase 
 Three Months Ended September 30, (Decrease) 
 2015  2015 2014   2014     
 GAAPAdj. Non-GAAP GAAP Adj. Non-GAAP GAAP Non-GAAP 
TOTAL REVENUE$162,403 $-  $162,403  $137,631  $676  $138,307  18% 17% 
 Software license 58,948  -   58,948   48,292   522   48,814  22% 21% 
 Maintenance 52,285  -   52,285   47,281   95   47,376  11% 10% 
 Services 51,170  -   51,170   42,058   59   42,117  22% 21% 
                              
TOTAL COST OF REVENUE$55,441 $(3,636) $51,805  $46,382  $(2,800) $43,582  20% 19% 
 Amortization of intangible assets (2) 1,351  (1,351)  -   1,382   (1,382)  -        
 Stock-based compensation 2,285  (2,285)  -   1,418   (1,418)  -        
                              
GROSS MARGIN % 66%     68%  66%      68% (44) bp (39) bp 
                              
TOTAL OPERATING EXPENSES (3)$96,251 $(7,434) $88,817  $86,252  $(6,171) $80,081  12% 11% 
 Amortization of intangible assets (2) 1,628  (1,628)  -   2,075   (2,075)  -        
 Stock-based compensation 5,806  (5,806)  -   3,850   (3,850)  -        
 Acquisition-related -  -   -   54   (54)  -        
 Restructuring -  -   -   192   (192)  -        
                              
INCOME FROM OPERATIONS$10,711 $11,070  $21,781  $4,997  $9,647  $14,644  114% 49% 
                              
OPERATING MARGIN % 7%     13%  4%      11% 296 bp 282 bp 
                              
INCOME TAX EFFECTS (4)$3,921 $4,148  $8,069  $470  $3,161  $3,631  734% 122% 
                              
NET INCOME$6,325 $6,922  $13,247  $1,882  $6,486  $8,368  236% 58% 
                              
DILUTED EARNINGS PER SHARE$0.08 $0.09  $0.17  $0.02  $0.09  $0.11  300% 55% 
                              
DILUTED WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 79,174  -   79,174   78,653   -   78,653  1% 1% 
                              

 
PEGASYSTEMS INC.
RECONCILIATION OF SELECTED GAAP MEASURES TO NON-GAAP MEASURES (1)
($ in thousands, except per share amounts)
              
          % Increase
 Nine Months Ended September 30,(Decrease)
 2015  20152014   2014    
 GAAP Adj.Non-GAAPGAAP Adj. Non-GAAPGAAP Non-GAAP 
TOTAL REVENUE$478,340  $- $478,340 $421,080  $3,318  $424,398 14% 13% 
 Software license 180,420   -  180,420  154,918   1,565   156,483 16% 15% 
 Maintenance 150,366   -  150,366  137,555   470   138,025 9% 9% 
 Services 147,554   -  147,554  128,607   1,283   129,890 15% 14% 
                            
TOTAL COST OF REVENUE$160,281  $(10,485)$149,796 $138,986  $(8,482) $130,504 15% 15% 
 Amortization of intangible assets (2) 4,041   (4,041) -  4,666   (4,666)  -       
 Stock-based compensation 6,519   (6,519) -  3,816   (3,816)  -       
 Indemnification claim and indirect tax settlements (75)  75  -  -   -   -       
                            
GROSS MARGIN % 66%     69% 67%      69%(50)bp(57)bp
                            
TOTAL OPERATING EXPENSES (3)$290,189  $(17,865)$272,324 $260,248  $(16,485) $243,763 12% 12% 
 Amortization of intangible assets (2) 5,195   (5,195) -  5,971   (5,971)  -       
 Stock-based compensation 16,486   (16,486) -  9,905   (9,905)  -       
 Indemnification claim and indirect tax settlements (3,855)  3,855  -  -   -   -       
 Acquisition-related 39   (39) -  417   (417)  -       
 Restructuring -   -  -  192   (192)  -       
                            
INCOME FROM OPERATIONS$27,870  $28,350 $56,220 $21,846  $28,285  $50,131 28% 12% 
                            
OPERATING MARGIN % 6%     12% 5%      12%64 bp(6)bp
                            
INCOME TAX EFFECTS (4)$8,643  $9,336 $17,979 $6,129  $9,373  $15,502 41% 16% 
                            
NET INCOME$15,364  $19,014 $34,378 $13,151  $18,912  $32,063 17% 7% 
                            
DILUTED EARNINGS PER SHARE$0.19  $0.25 $0.44 $0.17  $0.24  $0.41 12% 7% 
                            
DILUTED WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 78,906   -  78,906  78,531   -   78,531 0% 0% 

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 Financial 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 primarily from our acquisition of Antenna Software, Inc. and its subsidiaries ("Antenna") in October 2013. 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 effect 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. No adjustments were made to revenue for the nine months of 2015.
  • 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 expense: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 will contribute to the generation of future period revenues, we continue to evaluate our business performance excluding stock-based compensation expense.
  • Acquisition-related and restructuring expenses:We have excluded the effect of acquisition-related and restructuring expenses from our non-GAAP operating expenses and net earnings measures. We incurred direct and incremental expenses associated with the Antenna and 2014 acquisitions. These acquisition-related expenses were primarily professional fees to affect the acquisitions. We have also incurred restructuring expenses related to the integration of the Antenna acquisition, which we generally would not have otherwise incurred in the periods presented as a part of our continuing operations. Restructuring expenses 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.
  • Indemnification claim and indirect tax settlements:We reached an agreement with the former shareholders of Antenna to release a portion of the funds held in escrow as security for their indemnification obligations to us in settlement of the outstanding indemnification claims. The settlement resulted in a benefit to cost of revenue and operating expenses in the first quarter of 2015. In addition, we favorably settled indirect tax liabilities related to the Antenna acquisition, which resulted in a benefit to operating expenses in the first quarter of 2015. We believe the benefit associated with the settlements of the Antenna indemnification claims and indirect tax liabilities is not representative of our ongoing business, and we have excluded the effects of these items from our non-GAAP operating results and net earnings measures.
  1. Estimated future annual amortization expense related to intangible assets as of September 30, 2015 is as follows:
   
(in thousands)  
Remainder of 2015$2,972 
2016 11,520 
2017 9,822 
2018 8,822 
2019 and thereafter 3,276 
Total intangible assets subject to amortization$36,412
 
    
  1. Below is a reconciliation of non-GAAP operating expenses:
            
 Three Months Ended September 30,
 2015   2015 2014   2014
(in thousands)GAAP Adj. Non-GAAP GAAP Adj. Non-GAAP
Selling and marketing$53,640  $(3,942) $49,698 $48,623 $(2,927) $45,696
 Amortization of intangible assets 1,537   (1,537)  -  1,501  (1,501)  -
 Stock-based compensation 2,405   (2,405)  -  1,426  (1,426)  -
Research and development$33,032  $(2,047) $30,985 $28,558 $(1,452) $27,106
 Stock-based compensation 2,047   (2,047)  -  1,452  (1,452)  -
General and administrative$9,579  $(1,445) $8,134 $8,825 $(1,546) $7,279
 Amortization of intangible assets 91   (91)  -  574  (574)  -
 Stock-based compensation 1,354   (1,354)  -  972  (972)  -
Acquisition-related$-  $-  $- $54 $(54) $-
Restructuring$-  $-  $- $192 $(192) $-
TOTAL OPERATING EXPENSES$96,251  $(7,434) $88,817 $86,252 $(6,171) $80,081
                     
 Nine Months Ended September 30,
 2015   2015 2014   2014
(in thousands)GAAP Adj. Non-GAAP GAAP Adj. Non-GAAP
Selling and marketing$169,764  $(10,878) $158,886 $150,772 $(8,358) $142,414
 Amortization of intangible assets 4,602   (4,602)  -  4,496  (4,496)  -
 Stock-based compensation 6,283   (6,283)  -  3,862  (3,862)  -
 Indemnification claim and indirect tax settlements (7)  7   -  -  -   -
Research and development$94,248  $(5,738) $88,510 $80,490 $(3,201) $77,289
 Stock-based compensation 6,178   (6,178)  -  3,201  (3,201)  -
 Indemnification claim and indirect tax settlements (440)  440   -  -  -   -
General and administrative$26,138  $(1,210) $24,928 $28,377 $(4,317) $24,060
 Amortization of intangible assets 593   (593)  -  1,475  (1,475)  -
 Stock-based compensation 4,025   (4,025)  -  2,842  (2,842)  -
 Indemnification claim and indirect tax settlements (3,408)  3,408   -  -  -   -
Acquisition-related$39  $(39) $- $417 $(417) $-
Restructuring$-  $-  $- $192 $(192) $-
TOTAL OPERATING EXPENSES$290,189  $(17,865) $272,324 $260,248 $(16,485) $243,763
  1. The GAAP income tax effects were calculated using an effective tax rate of 38.3% and 20.0% for the third quarter of 2015 and 2014, respectively. The non-GAAP income tax effects were calculated using an effective non-GAAP tax rate of 37.9% and 30.3% for the third quarter of 2015 and 2014, respectively.
  • The GAAP income tax effects were calculated using an effective tax rate of 36.0% and 31.8% for the nine months of 2015 and 2014, respectively. The non-GAAP income tax effects were calculated using an effective non-GAAP tax rate of 34.3% and 32.6% for the nine months of 2015 and 2014, respectively.
  • The differences between our GAAP and non-GAAP effective tax rates in the third quarter and nine months of 2015 primarily relate to the favorable impact of stock-based compensation expense adjustments on non-GAAP effective tax rates.

Pegasystems Inc.
    
Unaudited Condensed Consolidated Balance Sheets
(in thousands)
    
 As of September 30, 2015 As of December 31, 2014
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 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
      
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: 305,046  294,705
  Total liabilities and stockholders' equity$583,940 $587,801
        

 
Pegasystems Inc.
 
Unaudited Condensed Consolidated Statements of Cash Flow
(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 equity awards and deferred income taxes (7,550)  (5,599)
  Depreciation, amortization, foreign currency transaction loss, and other non-cash items 23,041  20,633
  Stock-based compensation expense 23,005  13,721
  Change in operating assets and liabilities, net 1,068  56,361
 Cash provided by operating activities 54,928  98,267
 Cash used in investing activities (42,736)  (22,485)
 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

 
 
Pegasystems Inc.
Historical License and Cloud Backlog
(in thousands)
               
  2015 2015 2015 2014 2014 2014 2014 2013 2013
  Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
 Total billed deferred license and cloud revenue  55,370  61,339  79,639  63,048  68,561  54,938  62,741  64,267  34,644
 Total off-balance sheet license and cloud commitments  324,340  330,043  294,412  301,409  265,309  298,658  270,243  283,099  248,403
TOTAL LICENSE AND CLOUD BACKLOG $379,710 $391,382 $374,051 $364,457 $333,870 $353,596 $332,984 $347,366 $283,047

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