Pegasystems Reports 2004 Results

CAMBRIDGE, Mass., Feb 24, 2005 — Pegasystems Inc. (Nasdaq: PEGA), a leader in rules-based business process management (BPM) software, today announced its fourth quarter and full-year 2004 results, reporting revenue for 2004 of $96.5 million, pre-tax profits of $11.1 million, diluted earnings per share of $0.20, and positive cash flow from operations of $7.6 million.

Fourth Quarter and Full Year 2004 Financial Performance
                                  Quarter                     Full Year
     (In millions, except per share data and percentages)
                           Q4 2004      Q4 2003         2004         2003
    Total Revenue           $ 26.2       $ 23.1       $ 96.5        $99.3
    License Revenue         $ 13.3       $ 12.0       $ 41.6        $57.7
      % of Total Revenue       51%          52%          43%          58%
    Services Revenue        $ 12.9        $11.1       $ 54.9        $41.6
      % of Total Revenue       49%          48%          57%          42%
    Pre-tax Income            $4.0         $3.0       $ 11.1        $21.8
    (Benefit) Provision for
     Income Taxes             $1.1       $(0.5)         $3.6         $4.2
    Net Income                $2.9         $3.5        $ 7.6        $17.7
    Basic Earnings Per
     Share                  $ 0.08       $ 0.10       $ 0.21        $0.51
    Diluted Earnings Per
     Share                  $ 0.08       $ 0.10       $ 0.20        $0.49

Alan Trefler, Chairman and Chief Executive Officer, commented, "2004's results represent both successes and challenges. Total revenue was down 3% compared to last year. However, on a year-over-year basis, total revenue increased 9%, excluding the anticipated $10.6 million reduction in revenue associated with the restructured First Data Resources agreement. This increase was the result of growing market enthusiasm for our rules-driven PegaRULES technology and our all-purpose BPM software, PegaRULES Process Commander® (PRPC). We also experienced diminished demand for our pre-built applications and continued lengthy negotiations and delays closing deals.

"In 2004 we signed a record number of new license customers, more than double the number signed in 2003. These customers, representing a wide range of industries, serve as testaments to our technological leadership, which provides our customers agility for growth, productivity, and compliance. New customers will be using Pegasystems' rules-based BPM software to manage a variety of complex, changing business processes, including to optimize hotel reservations and pricing, to automate semiconductor-product manufacturing cycles, to manage insurance policies and claims, to automate consulting-proposal creation, and to manage best practices for mortgage-lending customer service. Many of our new customers are working with our partner network to implement our software and extend its use.

"We are also pleased to report the continued recognition of our best-in-class technology including awards and accolades from magazines such as Fortune Small Business, Intelligent Enterprise, and Waters; and from leading industry analysts, including Gartner and META Group, all of whom have referenced the competitive differentiation we offer in the BPM market with our rules-based technology.

"Still, the fact that our best-in-class technology and brand leadership did not translate into the top-line growth we planned for in 2004 has led us to reassess the strategies and tactics we are employing to establish Pegasystems as the leader in BPM software. In particular, we will be focusing more of our efforts on our rules-based BPM software, PegaRULES Process Commander (PRPC). Industry leaders across multiple industries have selected PRPC as a critical solution to automate key business processes and close the execution gap that results as strategy changes outpace the ability of operations and systems to respond."

Chris Sullivan, CFO, commented, "For 2004, we reported a $16.1 million decrease in license revenue compared to 2003. This includes a $13.8 million, or 46%, reduction in term license revenue and the $10.6 million reduction in perpetual license revenue associated with the restructured First Data Resources agreement, partially offset by a $7.8 million, or 53%, increase in other perpetual license revenue.

"We reported a $13.3 million, or 32%, increase in services revenue as we continued to support new customer sales and implementations, even as we deepened our relationships with system-integration partners. Implementation, consulting, and training revenue was up 30% year-over-year; and maintenance revenue grew 38% primarily on the strength of a larger installed base. At the same time, we improved our services margins for 2004.

"For 2005, we anticipate full-year revenue between $97 and $105 million with revenues and earnings weighted to the latter part of 2005. We expect license-revenue growth to be driven primarily through sales of perpetual licenses. Any license-revenue growth from term-license renewals is likely to be modest. We are committed to becoming the leader in BPM software, and are therefore planning to invest more heavily in sales and marketing in 2005 than 2004. We believe this investment will better position Pegasystems to achieve accelerated growth in future years, but we also anticipate it will result in lower profit before tax in 2005 compared to 2004. We expect earnings per diluted share to be between $0.05 and $0.15. Cash flow from operations is expected to be in the range of $4 to $8 million, depending primarily on the revenue achieved. Our incremental sales and marketing investment will begin in the first quarter of 2005. As a result, we expect our first-quarter net income may be break-even or below.

"These estimates for 2005 do not include the impact of recent accounting pronouncements requiring the expensing of stock options as of July 1, 2005. We expect this will have a significant impact on our financial statements. However, the factors used to determine the exact impact are subject to significant changes prior to the effective date."

The Company will be hosting a conference call and live Webcast associated with this announcement at 9:00 a.m. ET on Friday, February 25, 2005. Dial-in information is as follows: 800-250-4434 (domestic) or 706-634-0667 (international). A replay of the teleconference will be available at 800-642- 1687 (domestic) or 706-645-9291 (international), passcode 3880756.

To listen to the Webcast, please log onto at least 5 minutes prior to the event's broadcast, and click on the Webcast icon in the "Investor Relations" section.

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 3000 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

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The information contained in this press release is not a commitment, promise, or legal obligation to deliver any material, code or functionality. The development, release and timing of any features or functionality described remains at the sole discretion of Pegasystems, Pegasystems specifically disclaims any liability with respect to this information.


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Pegasystems Inc.
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Cambridge, MA 02142
Phone +1 617-374-9600
Fax +1 617-374-9620