Pegasystems Reports $37.5 Million in Revenue and a Net Profit for First Quarter 2007

CAMBRIDGE, Mass. — May 21, 2007 — Pegasystems Inc. (Nasdaq: PEGA) today announced its first-quarter 2007 results. Total revenue for the quarter was $37.5 million, up 28% from the first quarter of 2006. License revenue increased $5.1 million, or 73%, from the first quarter of 2006. Professional services revenue increased $2.2 million, or 14%, from the first quarter of 2006 due to new license implementations.


Net income for the first quarter of 2007 was $1.0 million, compared to a net loss of $(0.9) million in the first quarter of 2006, reflecting the strong revenue performance in the current quarter. Total operating expenses in the first quarter of 2007 increased $4.3 million from the first quarter of 2006, driven primarily by continued investment in sales and professional services personnel to meet the demands of revenue growth. The Company generated $7.0 million in cash flow from operations during the first quarter of 2007, and ended the period with $132.8 million in cash and short-term investments.


The following table shows selected financial information for the three months ended March 31, 2007 and 2006:

                    Selected Financial Performance
----------------------------------------------------------------------
                                                    Three months ended
                                                        March 31,
                                                    ------------------
     (In millions, except per share data and
                    percentages)                     2007       2006
                                                    --------   -------
Total Revenue                                         $37.5     $29.2
License Revenue                                       $12.1      $7.0
                                 % of Total Revenue      32%       24%
Services Revenue                                      $25.4     $22.2
                                 % of Total Revenue      68%       76%
Gross Profit                                          $21.9     $15.1
Loss From Operations                                  $(0.2)    $(2.8)
Net Income (Loss)                                      $1.0     $(0.9)
Earnings (Loss) per Share, Basic                      $0.03    $(0.03)
Earnings (Loss) per Share, Diluted                    $0.03    $(0.03)

Alan Trefler, Chairman and CEO, commented, "New customer signings and extensions of existing relationships resulted in a significant increase in revenues for the first quarter of this year over last year. A leading property and casualty insurer, top US and UK banks, a leading UK government agency and a top 10 Fortune 500 company, among others, all signed as new customers this quarter while a significant number of our existing customers extended their relationships. We are looking forward to working closely with these customers to help them fully realize the benefits that a unified environment can bring and to capitalize on the competitive advantages of adopting a build for change approach."


Craig Dynes, CFO, commented, "This was an outstanding quarter as we generated $7 million in operating cash flow and increased revenue from Q4 to Q1. Since we now recognize revenue on term licenses as payments become due over the term, much of the revenue from these term licenses will benefit periods beyond 2007. We expect total revenue for 2007 to be in the range of $140 to $160 million depending on the mix of perpetual and term license signings throughout the rest of the year. We are committed to being the leader in the BPM market and will continue to invest in professional services and sales resources, as well as in R&D. Our level of investment will vary depending on our revenue results, and we expect to be profitable in 2007 even with this continued investment. We expect cash flow from operations to be approximately $20 million in 2007."


The Company filed its Quarterly Report on Form 10-Q for the first quarter of 2007 today (the "First Quarter 10-Q"). The deadline for this filing was May 15, 2007, as a result of the Company's filing of a Rule 12b-25 extension. As expected, the Company received a Staff Determination Letter from the Nasdaq Listing Qualifications Department on May 16, 2007, indicating Pegasystems was not in compliance with the filing requirement for continued listing as set forth in Marketplace Rule 4310(c)(14) due to the late First Quarter 10-Q filing. By filing the First Quarter 10-Q today, the Company has regained compliance with the Nasdaq listing requirements.


The Company will be hosting a conference call and live Webcast associated with this announcement at 9:00 a.m. ET on Tuesday, May 22, 2007. Dial-in information is as follows: 866-575-6537 (domestic) or 913-312-1241 (international). To listen to the Webcast, please log onto https://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 teleconference will be available at https://www.pega.com in the "Investor Relations" section, "Audio Archives" link.


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, without limitation, our expected revenue, profitability and cash flow from operations in 2007. The words "anticipate", "continue," "expect," "will," 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, without limitation, variation in demand and the difficulty in predicting the completion of product acceptance and other factors affecting the timing of our license revenue recognition, the level of software renewals, our ability to develop new products and evolve existing ones, the impact on our business of the ongoing consolidation in the financial services and healthcare markets, our ability to attract and retain key personnel, reliance on key third party relationships 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 Quarterly Report on Form 10-Q for the first quarter of 2007 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 May 21, 2007. 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 21, 2007.

                           PEGASYSTEMS INC.
          CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
              (in thousands, except share-related data)

                                                March 31, December 31,
                                                  2007       2006
                                                --------- ------------
                    ASSETS
-----------------------------------------------
Current assets:
   Cash and cash equivalents                    $ 24,218     $ 26,008
   Short-term investments                        108,546      101,750
                                                --------- ------------
      Total cash and short-term investments      132,764      127,758

   Trade accounts receivable, net of allowance
    for doubtful accounts of $365 in 2007 and
    2006                                          34,718       31,985
   Short-term license installments                17,047       21,790
   Other current assets                            7,285        9,065
                                                --------- ------------

       Total current assets                      191,814      190,598

Long-term license installments, net of unearned
 interest income                                  13,742       17,458
Equipment and improvements, net of accumulated
 depreciation and amortization                     2,884        2,453
Computer software for internal use, net of
 accumulated amortization                            924        1,054
Long-term deferred tax assets and other assets     6,035           99
Goodwill                                           2,346        2,346
                                                --------- ------------

       Total assets                             $217,745     $214,008
                                                ========= ============

     LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------------------

Current liabilities:
   Accrued payroll related expenses             $  7,717     $ 11,770
   Accounts payable and accrued expenses          12,266       14,474
   Deferred revenue                               20,971       17,062
   Current portion of capital lease obligation        36           63
                                                --------- ------------

       Total current liabilities                  40,990       43,369

Long-term deferred income taxes                       --        2,344
Income taxes payable and other long-term
 liabilities                                      11,165        2,137
                                                --------- ------------

       Total liabilities                          52,155       47,850
                                                --------- ------------

Commitments and contingencies

Stockholders' equity:
   Preferred stock, $.01 par value, 1,000,000
    shares authorized; no shares issued and
    outstanding                                       --           --
   Common stock, $.01 par value, 70,000,000
    shares authorized; 35,367,873 and
    35,308,978 shares issued and outstanding at
    March 31, 2007 and December 31, 2006,
    respectively                                     354          353
   Additional paid-in capital                    118,824      118,027
   Stock warrants                                     94           94
   Retained earnings                              45,018       46,549
   Accumulated other comprehensive income
    (loss):
      Net unrealized loss on investments
       available-for-sale                           (214)        (343)
      Foreign currency translation adjustments     1,514        1,478
                                                --------- ------------

        Total stockholders' equity               165,590      166,158
                                                --------- ------------

        Total liabilities and stockholders'
         equity                                 $217,745     $214,008
                                                ========= ============

                           PEGASYSTEMS INC.
     CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
               (in thousands, except per share amounts)

                                                   Three months ended
                                                        March 31,
                                                     2007      2006
                                                   --------- ---------
Revenue:
  Software license                                  $12,084   $ 6,998
  Services                                           25,405    22,201
                                                   --------- ---------
      Total revenue                                  37,489    29,199
                                                   --------- ---------

Cost of revenue:
  Cost of software license                               --        31
  Cost of services                                   15,564    14,087
                                                   --------- ---------
      Total cost of revenue                          15,564    14,118
                                                   --------- ---------

Gross profit                                         21,925    15,081
                                                   --------- ---------

Operating expenses:
  Research and development                            6,185     5,402
  Selling and marketing                              11,769     9,810
  General and administrative                          4,215     2,637
                                                   --------- ---------
      Total operating expenses                       22,169    17,849
                                                   --------- ---------

Loss from operations                                   (244)   (2,768)

Installment receivable interest income                  276       447
Other interest income, net                            1,545     1,115
Other income (expense), net                             (20)      245
                                                   --------- ---------
Income (loss) before provision (benefit) for
 income taxes                                         1,557      (961)

Provision (benefit) for income taxes                    537       (50)
                                                   --------- ---------
      Net income (loss)                             $ 1,020   $  (911)
                                                   ========= =========

Earnings (loss) per share, basic and diluted        $  0.03   $ (0.03)

Weighted average number of common shares
 outstanding, basic                                  35,349    35,572
Weighted average number of common shares
 outstanding, diluted                                37,614    35,572

                           PEGASYSTEMS INC.
     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
                            (in thousands)

                                                   Three months ended
                                                        March 31,
                                                     2007      2006
                                                   --------- ---------
Cash flows from operating activities:
  Net income (loss)                                $  1,020  $   (911)
  Adjustment to reconcile net income to cash flows
   from operating activities:
    Stock option income tax benefits                      -       (42)
    Deferred income taxes                              (259)     (351)
    Depreciation, amortization, and other non cash
     items                                              553       611
    Stock-based compensation expense                    396       263
    Change in operating assets and liabilities:
      Trade accounts receivable and license
       installments                                   5,726     1,289
      Other current assets                            1,754       534
      Accounts payable and accrued expenses          (6,695)   (2,575)
      Deferred revenue                                3,909     3,988
      Other long-term assets and liabilities            588       313
                                                   --------- ---------

        Cash flows from operating activities          6,992     3,119
                                                   --------- ---------

Cash flows from investing activities:
  Purchase of investments                           (25,189)  (21,608)
  Maturing and called investments                    17,820    14,900
  Investment in software, equipment and
   improvements                                        (774)     (806)
                                                   --------- ---------

        Cash flows from investing activities         (8,143)   (7,514)
                                                   --------- ---------

Cash flows from financing activities:
  Payments under capital lease obligation               (27)      (25)
  Exercise of stock options                             401       351
  Tax benefit from vested stock options                   -        42
  Dividend payments to stockholders                  (1,059)        -
  Repurchase of common stock                              -      (311)
                                                   --------- ---------

        Cash flows from financing activities           (685)       57
                                                   --------- ---------

Effect of exchange rate on cash and cash
 equivalents                                             46        40
                                                   --------- ---------

        Net decrease in cash and cash equivalents    (1,790)   (4,298)

Cash and cash equivalents, beginning of period       26,008    21,314
                                                   --------- ---------
Cash and cash equivalents, end of period           $ 24,218  $ 17,016
                                                   ========= =========

Supplemental disclosures of cash flow information:
Cash paid during the year to date period for:
  Interest                                         $      1  $      3
  Income taxes                                     $    276  $    150
Non-cash financing activity:
  Dividends payable                                $  1,061  $      -

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 www.pega.com.

All trademarks are the property of their respective owners.

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.
One Rogers St.
Cambridge, MA 02142
U.S.A.
Phone +1 617-374-9600
Fax +1 617-374-9620