SOURCE: Pegasystems

Pegasystems

March 16, 2011 16:30 ET

Pegasystems Announces Financial Results for Fourth Quarter and Year Ended December 31, 2010

GAAP revenue for Q4 increases 22% to $89.3 million, Non-GAAP revenue increases 26% to $91.9 million; Record Q4 bookings expected to grow 2011 Revenue by 28% to approximately $431 million on a GAAP basis

CAMBRIDGE, MA--(Marketwire - March 16, 2011) - Pegasystems Inc. (NASDAQ: PEGA) today announced financial results for the fourth quarter and year ended December 31, 2010. GAAP revenue for 2010 increased 27% to $336.6 million compared to 2009. Non-GAAP revenue for 2010 increased 32% to $348.2 million compared to 2009. GAAP net loss for 2010 was ($5.9) million or ($0.16) per share, compared to GAAP net income of $32.2 million, or $0.85 per share (diluted), for 2009. Non-GAAP net income for 2010 was $22.5 million or $0.57 per share (diluted), compared to Non-GAAP net income of $35.5 million, or $0.93 per share (diluted), for 2009.


                   SELECTED GAAP & NON-GAAP RESULTS (1)

                        Three Months Ended December 31,       % Increase
                    --------------------------------------
                      2010      2010      2009      2009      (Decrease)
                                                            -------------

($ in '000s)          GAAP    Non-GAAP    GAAP    Non-GAAP   GAAP  Non-GAAP
                    --------  --------- --------- --------- -----   -----
Total revenue       $ 89,253  $  91,880 $  72,947 $  72,947    22 %    26 %
Operating (loss)
 income             $ (3,945) $   5,571 $  10,189 $  11,375  (139)%   (51)%
Net (loss) income   $ (4,693) $   2,644 $   6,328 $   7,025  (174)%   (62)%
Basic (loss)
 earnings per share $  (0.13) $    0.07 $    0.17 $    0.19  (176)%   (63)%
Diluted (loss)
 earnings per share $  (0.13) $    0.07 $    0.16 $    0.18  (181)%   (61)%


                            Year Ended December 31,           % Increase
                    --------------------------------------
                      2010      2010      2009      2009      (Decrease)
                                                            -------------

($ in '000s)          GAAP    Non-GAAP    GAAP    Non-GAAP   GAAP  Non-GAAP
                    --------  --------- --------- --------- -----   -----

Total revenue       $336,599  $ 348,236 $ 264,013 $ 264,013    27 %    32 %
Operating (loss)
 income             $ (2,580) $  37,491 $  41,819 $  46,633  (106)%   (20)%
Net (loss) income   $ (5,891) $  22,498 $  32,212 $  35,483  (118)%   (37)%
Basic (loss)
 earnings per share $  (0.16) $    0.61 $    0.89 $    0.98  (118)%   (38)%
Diluted (loss)
 earnings per share $  (0.16) $    0.57 $    0.85 $    0.93  (119)%   (39)%


(1) See a reconciliation of our GAAP to Non-GAAP measures contained in the
    financial schedules at the end of this release.


Business Perspective

"Overall, 2010 was a tremendous year for Pegasystems," said Alan Trefler, Founder and CEO of Pegasystems. "We successfully integrated the Chordiant acquisition, expanding our solution portfolio, client base and market reach. We invested significantly to build capability in sales, R&D and client support. We meaningfully increased our ecosystem of top-tier partners, who themselves have been building significant new capacity to support our expanding client base. We signed more than double the number of new clients in 2010 compared to 2009, and opened important new verticals and geographies. We have had numerous client projects recognized in the media, showing how our Build for Change® technology accelerates transformation initiatives while driving pragmatic benefit."

"Our core product offerings and packaged industry solutions saw accelerated innovation and new releases that scale to the needs of the world's most sophisticated companies, even as we simplify how our implementations are delivered. These offerings significantly improve time to value for our clients and address the most critical business issues they are facing. We have extended our enterprise cloud offering with improved integration, enhanced security, and rapid deployment, so our clients can confidently use PegaCLOUD® for development, testing and production. These advances led Pega to be recognized for leadership in multiple market categories by top industry analyst firms, including our recent recognition as a leader in case management, which is a core need of the industries we target," concluded Mr. Trefler.

Craig Dynes, Pegasystems' CFO, added, "We ended 2010 with an unprecedented level of activity. In fact, we set quarterly and annual records for new license signings, including a large license agreement of approximately $20 million with opportunities for significant follow-on business. We collected payment from the customer and paid sales commissions on this order, but did not recognize it as revenue in 2010. We expect to recognize this arrangement ratably at approximately $1.5 million of license and maintenance revenue per quarter beginning in Q1. Had this revenue not been deferred, we would have easily surpassed our annual revenue guidance. This arrangement is the primary reason that the total of short and long-term deferred revenue increased by $24.1 million from $50.6 million at September 30, 2010 to $74.7 million at December 31, 2010."

"We ended the year with record backlog and we begin 2011 with record pipeline, leading us to estimate 2011 revenue to be $431 million on a GAAP basis, or $435 million on a Non-GAAP basis. We expect 2011, like 2010, to be a back-end loaded year. Accordingly, we estimate that revenue for the first half of 2011 to be approximately 45% of our annual guidance on both a GAAP and Non-GAAP basis."

"Our investment in sales headcount in early 2010 was one of the reasons for our record license signings in Q4. This has been a major driver of our growth and we will continue to invest in both sales and research and development. Given this growth investment, we estimate that net income for 2011 will be $27 million, or $0.69 per share, on a GAAP basis, or $45 million, or $1.16 per share on a Non-GAAP basis. Like 2010, we will invest early in the year. This, along with the expenses for our annual Sales Kickoff in Q1 and our annual PegaWORLD user conference in Q2, should result in earnings per share for the first half of 2011 to be approximately $0.06 on a GAAP basis, or $0.30 on a Non-GAAP basis," concluded Mr. Dynes.

Messrs. Trefler and Dynes will be hosting a conference call and live Webcast associated with this announcement at 6:00 p.m. EDT on March 16, 2011. Dial-in information is as follows: 1 (866) 393-1604 (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 Investor Relations section. A replay of the call will also be available on www.pega.com in the Investor Relations section Audio Archives link.

Discussion of Non-GAAP Measures

To supplement financial results presented on a GAAP basis, the Company provides Non-GAAP measures included in this release, including the tables contained herein. 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 the Non-GAAP annual financial plan is 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 results in the evaluation process to establish management's compensation.

These measures exclude certain business combination accounting entries and expenses related to our acquisition of Chordiant, as well as other significant expenses including stock-based compensation. The Company believes that these Non-GAAP measures are helpful in understanding our past financial performance and our 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 our consolidated financial statements prepared in accordance with GAAP. A reconciliation of the Company's GAAP measures to Non-GAAP measures is included in the financial schedules at the end of the release.

Forward-Looking Statements
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, including those relating to our revenue, net income and earnings per share. 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, the Company's ability to successfully integrate the operations of Chordiant Software, Inc., 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 mix of perpetual and term licenses and the level of term license renewals, our ability to develop new products and evolve existing ones, the weak global economy and the ongoing consolidation in the financial services and healthcare markets, our ability to attract and retain key personnel, reliance on key third party relationships, the potential loss of vendor specific objective evidence for our professional services, 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, 2010 and other recent filings with the Securities and Exchange Commission. The forward-looking statements contained in this press release represent the Company's views as of March 16, 2011. 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 March 16, 2011.

About Pegasystems
Pegasystems, the leader in business process management and a leading provider of CRM solutions, helps organizations enhance customer loyalty, generate new business, and improve productivity. Our patented Build for Change® technology speeds the delivery of critical business solutions by directly capturing business objectives and eliminating manual programming. Pegasystems enables clients to quickly adapt to changing business conditions in order to outperform the competition. 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 Ended      Year Ended
                                       December 31,        December 31,
                                      2010      2009      2010      2009
                                    --------  --------  --------  ---------
Revenue:
  Software license                  $ 27,407  $ 33,889  $119,839  $ 115,934
  Maintenance                         24,986    13,491    83,878     50,099
  Professional services               36,860    25,567   132,882     97,980
                                    --------  --------  --------  ---------
    Total revenue                     89,253    72,947   336,599    264,013
                                    --------  --------  --------  ---------
Cost of revenue:
  Cost of software license             1,592        31     4,303        121
  Cost of maintenance                  3,202     1,751    11,041      6,203
  Cost of professional services       31,254    22,972   113,390     84,613
                                    --------  --------  --------  ---------
    Total cost of revenue (1)         36,048    24,754   128,734     90,937
                                    --------  --------  --------  ---------
Gross profit                          53,205    48,193   207,865    173,076
                                    --------  --------  --------  ---------
Operating expenses:
  Selling and marketing               33,242    22,715   116,230     74,378
  Research and development            14,633    10,664    55,193     38,862
  General and administrative           6,788     4,625    25,034     18,017
  Acquisition-related costs              910         -     5,924          -
  Restructuring costs                  1,577         -     8,064          -
                                    --------  --------  --------  ---------
    Total operating expenses (1)      57,150    38,004   210,445    131,257
                                    --------  --------  --------  ---------
(Loss) income from operations         (3,945)   10,189    (2,580)    41,819
Foreign currency transaction (loss)
 gain                                 (1,466)     (294)   (5,569)     2,083
Interest income, net                     122       740       883      3,144
Installment receivable interest
 income                                  100       123       255        347
Other income, net                          -         5       814         22
                                    --------  --------  --------  ---------
(Loss) income before (benefit)
 provision for income taxes           (5,189)   10,763    (6,197)    47,415
(Benefit) provision for income
 taxes                                  (496)    4,435      (306)    15,203
                                    --------  --------  --------  ---------
    Net (loss) income               $ (4,693) $  6,328  $ (5,891) $  32,212
                                    ========  ========  ========  =========
Net (loss) earnings  per share:
Basic                               $  (0.13) $   0.17  $  (0.16) $    0.89
                                    ========  ========  ========  =========
Diluted                             $  (0.13) $   0.16  $  (0.16) $    0.85
                                    ========  ========  ========  =========
Weighted-average number of common
 shares outstanding:
Basic                                 37,078    36,725    37,031     36,208
Diluted                               37,078    38,584    37,031     38,113
Dividends per share                 $   0.03  $   0.03  $   0.12  $    0.12
                                    ========  ========  ========  =========
(1) Includes stock-based
 compensation as follows:
Cost of revenue                     $    497  $    212  $  1,825  $   1,096
Operating expenses                  $  1,035  $    938  $  4,920  $   3,577







                             PEGASYSTEMS INC.
    RECONCILIATION OF SELECTED GAAP MEASURES TO NON-GAAP MEASURES (1)
                  ($ in thousands, except per share data)


                               Three Months Ended December 31,
                   -------------------------------------------------------
                     2010               2010     2009               2009
                     GAAP      Adj.  Non-GAAP    GAAP     Adj.    Non-GAAP
                   --------  -------  -------  -------  --------  --------
TOTAL REVENUE (2)
 (3) (4)           $ 89,253  $ 2,627  $91,880  $72,947  $      -  $ 72,947
  Software license
   (2)               27,407      307   27,714   33,889         -    33,889
  Maintenance (3)    24,986    2,256   27,242   13,491         -    13,491
  Professional
   services (4)      36,860       64   36,924   25,567         -    25,567

TOTAL COST OF
 REVENUE (5) (6)   $ 36,048  $(2,068) $33,980  $24,754  $   (243) $ 24,511
  Amortization of
   intangible
   assets (5)         1,571   (1,571)       -       31       (31)        -
  Stock-based
   compensation
   (6)                  497     (497)       -      212      (212)        -

TOTAL OPERATING
 EXPENSES (5) (6)  $ 57,150  $(4,821) $52,329  $38,004  $   (943) $ 37,061
  Amortization of
   intangible
   assets (5)         1,299   (1,299)       -        5        (5)        -
  Stock-based
   compensation
   (6)                1,035   (1,035)       -      938      (938)        -
  Acquisition-
   related costs        910     (910)       -        -         -         -
  Restructuring
   costs              1,577   (1,577)       -        -         -         -

(LOSS) INCOME FROM
 OPERATIONS        $ (3,945) $ 9,516  $ 5,571  $10,189  $  1,186  $ 11,375

OPERATING MARGIN %    -4.42%             6.06%   13.97%              15.59%

INCOME TAX EFFECTS
 (7)               $   (496) $ 2,179  $ 1,683  $ 4,435  $    489  $  4,924

NET (LOSS) INCOME  $ (4,693) $ 7,337  $ 2,644  $ 6,328  $    697  $  7,025

NET (LOSS) EARNINGS
 PER SHARE:
BASIC              $  (0.13)          $  0.07  $  0.17            $   0.19
DILUTED            $  (0.13)          $  0.07  $  0.16            $   0.18

WEIGHTED-AVERAGE
 NUMBER OF COMMON
 SHARES OUTSTANDING
BASIC                37,078        -   37,078   36,725         -    36,725
DILUTED (8)          37,078    2,196   39,274   38,584         -    38,584




                         % Increase
                         (Decrease)
                   ----------------------
                     GAAP       Non-GAAP
                   --------    ---------
TOTAL REVENUE (2)
 (3) (4)                 22%          26%
  Software license
   (2)                  -19%         -18%
  Maintenance (3)        85%         102%
  Professional
   services (4)          44%          44%

TOTAL COST OF
 REVENUE (5) (6)         46%          39%
  Amortization of
   intangible
   assets (5)           n/m            0%
  Stock-based
   compensation
   (6)                  134%           0%

TOTAL OPERATING
 EXPENSES (5) (6)        50%          41%
  Amortization of
   intangible
   assets (5)           n/m            0%
  Stock-based
   compensation
   (6)                   10%           0%
  Acquisition-
   related costs        n/m            0%
  Restructuring
   costs                n/m            0%

(LOSS) INCOME FROM
 OPERATIONS            -139%         -51%

OPERATING MARGIN %  (0.1839) bp  (0.0953) bp

INCOME TAX EFFECTS
 (7)                   -111%         -66%

NET (LOSS) INCOME      -174%         -62%

NET (LOSS) EARNINGS
 PER SHARE:
BASIC                  -176%         -63%
DILUTED                -181%         -61%

WEIGHTED-AVERAGE
 NUMBER OF COMMON
 SHARES OUTSTANDING
BASIC                     1%           1%
DILUTED (8)              -4%           2%

n/m - not meaningful







                             PEGASYSTEMS INC.
    RECONCILIATION OF SELECTED GAAP MEASURES TO NON-GAAP MEASURES (1)
                  ($ in thousands, except per share data)


                                 Year  Ended December 31,
                ----------------------------------------------------------
                  2010                2010      2009                2009
                  GAAP      Adj.    Non-GAAP    GAAP      Adj.    Non-GAAP
                --------  --------  --------  --------  --------  --------
TOTAL REVENUE
 (2) (3) (4)    $336,599  $ 11,637  $348,236  $264,013  $      -  $264,013
  Software
   license (2)   119,839     3,971   123,810   115,934         -   115,934
  Maintenance
   (3)            83,878     7,363    91,241    50,099         -    50,099
  Professional
   services (4)  132,882       303   133,185    97,980         -    97,980

TOTAL COST OF
 REVENUE (5)
 (6)            $128,734  $ (6,056) $122,678  $ 90,937  $ (1,217) $ 89,720
  Amortization
   of
   intangible
   assets (5)      4,231    (4,231)        -       121      (121)        -
  Stock-based
   compensation
   (6)             1,825    (1,825)        -     1,096    (1,096)        -

TOTAL OPERATING
 EXPENSES (5)
 (6)            $210,445  $(22,378) $188,067  $131,257  $ (3,597) $127,660
  Amortization
   of
   intangible
   assets (5)      3,470    (3,470)        -        20       (20)        -
  Stock-based
   compensation
   (6)             4,920    (4,920)        -     3,577    (3,577)        -
  Acquisition-
   related
   costs           5,924    (5,924)        -         -         -         -
  Restructuring
   costs           8,064    (8,064)        -         -         -         -

(LOSS) INCOME
 FROM
 OPERATIONS     $ (2,580) $ 40,071  $ 37,491  $ 41,819  $  4,814  $ 46,633

OPERATING
 MARGIN %             -1%                 11%       16%                 18%

INCOME TAX
 EFFECTS (7)    $   (306) $ 11,682  $ 11,376  $ 15,203  $  1,543  $ 16,746

NET (LOSS)
 INCOME         $ (5,891) $ 28,389  $ 22,498  $ 32,212  $  3,271  $ 35,483

NET (LOSS)
 EARNINGS PER
 SHARE:
BASIC           $  (0.16)           $   0.61  $   0.89            $   0.98
DILUTED         $  (0.16)           $   0.57  $   0.85            $   0.93

WEIGHTED-AVERAGE
 NUMBER OF
 COMMON SHARES
 OUTSTANDING
BASIC             37,031         -    37,031    36,208         -    36,208
DILUTED (8)       37,031     2,378    39,409    38,113         -    38,113




                     % Increase
                     (Decrease)
                ---------------------
                  GAAP       Non-GAAP
                --------     --------
TOTAL REVENUE
 (2) (3) (4)          27%          32%
  Software
   license (2)         3%           7%
  Maintenance
   (3)                67%          82%
  Professional
   services (4)       36%          36%

TOTAL COST OF
 REVENUE (5)
 (6)                  42%          37%
  Amortization
   of
   intangible
   assets (5)        n/m            0%
  Stock-based
   compensation
   (6)                67%           0%

TOTAL OPERATING
 EXPENSES (5)
 (6)                  60%          47%
  Amortization
   of
   intangible
   assets (5)        n/m            0%
  Stock-based
   compensation
   (6)                38%           0%
  Acquisition-
   related
   costs             n/m            0%
  Restructuring
   costs             n/m            0%

(LOSS) INCOME
 FROM
 OPERATIONS         -106%         -20%

OPERATING
 MARGIN %        (0.1661) bp  (0.0690) bp

INCOME TAX
 EFFECTS (7)        -102%         -32%

NET (LOSS)
 INCOME             -118%         -37%

NET (LOSS)
 EARNINGS PER
 SHARE:
BASIC               -118%         -38%
DILUTED             -119%         -39%

WEIGHTED-AVERAGE
 NUMBER OF
 COMMON SHARES
 OUTSTANDING
BASIC                  2%           2%
DILUTED (8)           -3%           3%

n/m - not meaningful


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 Chordiant. 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 Chordiant 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 effect of amortization of intangible assets acquired from Chordiant 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 the effect of stock-based compensation expenses 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 also believe 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 Chordiant acquisition. These acquisition-related costs were primarily due diligence costs, advisory and legal transaction fees, and valuation and tax consulting fees. 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 of employee severance and other exit costs. We believe it is useful for investors to understand the effects of these items on our total operating expenses.

(2) As of April 21, 2010, approximately $0.6 million, $0.5 million, and $0.2 million in estimated revenues related to assumed software license contracts will not be recognized in fiscal 2011, fiscal 2012, and fiscal 2013, respectively, due to business combination accounting rules.

(3) As of April 21, 2010, approximately $2.9 million and $0.5 million in estimated revenues related to assumed software support contracts will not be recognized in fiscal 2011 and fiscal 2012, respectively, due to business combination accounting rules.

(4) As of April 21, 2010, approximately $0.3 million, $0.3 million, and $0.1 million in estimated revenues related to assumed software installation services contracts will not be recognized in fiscal 2011, fiscal 2012, and fiscal 2013, respectively, due to business combination accounting rules.

(5) Estimated future annual amortization expense related to intangible assets as of December 31, 2010 is as follows:



Fiscal 2011                                                     $    11,315
Fiscal 2012                                                          11,137
Fiscal 2013                                                          11,095
Fiscal 2014                                                           9,489
Fiscal 2015                                                           8,688
Fiscal 2016 and thereafter                                           28,960
                                                                -----------
    Total intangible assets subject to amortization             $    80,684
                                                                -----------

(6) Stock-based compensation is included in operating expense as follows:



                            Three Months Ended       Three Months Ended
                             December 31, 2010        December 31, 2009
                          ------------------------ ------------------------
                            GAAP     Adj.  Non-GAAP  GAAP     Adj. Non-GAAP
                          -------- -------  ------ -------- -------  ------
Cost of revenue           $    497 $  (497) $    - $    212 $  (212) $    -
Selling and Marketing          454    (454)      -      322    (322)      -
Research and development       211    (211)      -      302    (302)      -
General and
 administrative                370    (370)      -      314    (314)      -
                          -------- -------  ------ -------- -------  ------
  Total stock-based
   compensation           $  1,532 $(1,532) $    - $  1,150 $(1,150) $    -
                          -------- -------  ------ -------- -------  ------


                                 Year Ended              Year Ended
                             December 31, 2010        December 31, 2009
                          ------------------------ ------------------------
                            GAAP     Adj.  Non-GAAP  GAAP     Adj. Non-GAAP
                          -------- -------  ------ -------- -------  ------
Cost of revenue           $  1,825 $(1,825) $    - $  1,096 $(1,096) $    -
Selling and Marketing        2,048  (2,048)      -      901    (901)      -
Research and development       975    (975)      -      861    (861)      -
General and
 administrative              1,897  (1,897)      -    1,815  (1,815)      -
                          -------- -------  ------ -------- -------  ------
  Total stock-based
   compensation           $  6,745 $(6,745) $    - $  4,673 $(4,673) $    -
                          -------- -------  ------ -------- -------  ------


(7) The GAAP (benefit) provision for income taxes reflects an effective tax rate of (9.6)% and 41.2% in the fourth quarter of 2010 and 2009, respectively, and an effective tax rate of (4.9)% and 32.1% in 2010 and 2009, respectively. The Non-GAAP provision for income taxes reflects an effective tax rate of 38.9% and 41.2% in the fourth quarter of 2010 and 2009, respectively, and an effective tax rate of 33.6% and 32.1% in 2010 and 2009, respectively.

The difference between our GAAP and Non-GAAP effective tax rates in the fourth quarter and year ended December 31, 2010 primarily relates to the impact of non-deductible acquisition-related costs, the valuation allowance recorded on certain state credits, and the deduction for the domestic production activities, which was altered by the change in income and timing differences related to the Chordiant acquisition. We exclude the impact of these items from our Non-GAAP income tax provision.

(8) The diluted weighted-average common shares used for the calculation of Non-GAAP diluted earnings per share for the fourth quarter and year ended December 31, 2010 include the dilutive effect of outstanding options, restricted stock units, and warrants, and the average market price of our common stock during the applicable periods using the treasury stock method.


                             Pegasystems Inc.
                  Condensed Consolidated Balance Sheets



                                                     As of        As of
                                                  December 31, December 31,
                                                      2010         2009
                                                  ------------ ------------
                                                       (in thousands)
Current Assets:
  Cash and cash equivalents                       $     71,127 $     63,857
  Marketable securities                                 16,124      138,796
                                                  ------------ ------------
    Total cash, cash equivalents, and marketable
     securities                                         87,251      202,653
  Trade accounts receivable, net                        77,638       39,396
  Short-term license installments                        2,258        2,829
  Deferred income taxes                                  5,466        2,523
  Income taxes receivable and other current
   assets                                               14,387        8,840
                                                  ------------ ------------
    Total current assets                               187,000      256,241
Long-term license installments, net                      1,223        2,976
Property and equipment, net                             11,010        8,931
Long-term deferred income taxes                         32,729        7,515
Other assets                                             2,217        1,195
Intangible assets, net                                  80,684          336
Goodwill                                                22,618        2,391
                                                  ------------ ------------
    Total assets                                  $    337,481 $    279,585
                                                  ============ ============

Current liabilities:
  Accounts payable                                $      6,286 $      4,791
  Accrued expenses                                      24,742        6,748
  Accrued compensation and related expenses             27,125       23,280
  Deferred revenue                                      56,903       32,870
                                                  ------------ ------------
    Total current liabilities                          115,056       67,689
Income taxes payable                                     5,783        4,828
Other long-term liabilities                             20,972        1,849
                                                  ------------ ------------
    Total liabilities                                  141,811       74,366
Stockholders' equity:                                  195,670      205,219
                                                  ------------ ------------
    Total liabilities and stockholders' equity    $    337,481 $    279,585
                                                  ============ ============






                             Pegasystems Inc.
              Condensed Consolidated Statements of Cash Flows


                                                          Year Ended
                                                         December 31,
                                                       2010        2009
                                                    ----------  ----------
                                                        (in thousands)
Operating activities:
  Net (loss) income                                 $   (5,891) $   32,212
  Adjustments to reconcile net (loss) income to
   cash provided by operating activities:
    Excess tax benefit from equity awards and
     deferred income taxes                              (5,293)    (13,998)
    Depreciation, amortization, and other non-cash
     items                                              10,985       2,915
    Foreign currency transaction loss                    4,753           -
    Amortization of investments and realized gain
     on sale of investments                                752       3,909
    Stock-based compensation expense                     6,745       4,673
    Change in operating assets and liabilities,
     and other, net                                      6,363      19,870
                                                    ----------  ----------
  Cash provided by operating activities                 18,414      49,581
                                                    ----------  ----------
  Cash provided by (used in) investing activities        6,841     (18,163)
                                                    ----------  ----------
  Cash used in financing activities                    (13,251)     (5,049)
                                                    ----------  ----------
Effect of exchange rate on cash and cash
 equivalents                                            (4,734)      1,401
                                                    ----------  ----------
Net increase in cash and cash equivalents                7,270      27,770
Cash and cash equivalents, beginning of year            63,857      36,087
                                                    ----------  ----------
Cash and cash equivalents, end of year              $   71,127  $   63,857
                                                    ==========  ==========





              2011 Reconciliation of Forward-Looking Guidance


($ in 000's, except per share amounts)        FY 2011        YTD Q2 2011
                                          ---------------- ----------------

Revenue Guidance - GAAP basis             $ 431,200        $ 192,500
Adjustment to exclude deferred revenue
 fair value adjustment                        3,800            2,500
                                          ---------        ---------
Revenue Guidance - Non-GAAP basis         $ 435,000        $ 195,000
                                          =========        =========

Net Income Guidance -  GAAP basis         $  27,000 $ 0.69 $   2,500 $ 0.06

Adjustment to exclude deferred revenue
 fair value adjustment, net of tax            2,524   0.06     1,660   0.04
Adjustment to exclude amortization of
 intangible assets, net of tax                7,771   0.20     3,859   0.10
Adjustment to exclude stock-based
 compensation, net of tax                     6,509   0.17     3,298   0.08
Adjustment to exclude acquisition-related
 expenses, net of tax                         1,594   0.04       631   0.02

                                          --------- ------ --------- ------
Net Income Guidance - Non-GAAP basis      $  45,398 $ 1.16 $  11,948 $ 0.30
                                          ========= ====== ========= ======

                                                    ------           ------
Estimated weighted-average common shares            39,200           39,200
                                                    ------           ------


Contact Information

  • For Information, contact:
    Craig Dynes
    Chief Financial Officer
    617-866-6020
    CDynes@pega.com