Pegasystems Reports First Quarter Earnings of $0.19 EPS

CAMBRIDGE, Mass., Apr 28, 2003 — Pegasystems Inc. (Nasdaq: PEGA), a leading provider of rules-based, smart business process management (BPM) software, today announced its first quarter 2003 results, reporting revenues of $25.6 million, an increase of 6% from the first quarter of 2002. The Company achieved earnings per diluted share of $0.19 for the quarter ended March 31, 2003, nearly double the $.10 per share for the first quarter of 2002.

    (In millions, except per share data and percentages)
                                                     Q1 2003        Q1 2002
    Total Revenue                                     $ 25.6         $ 24.2
    License Revenue                                   $ 16.2         $ 16.3
         % of Total Revenue                              63%            67%
    Services Revenue                                    $9.4           $7.9
         % of Total Revenue                              37%            33%
    Net Income                                          $6.8           $3.4
    Basic Earnings Per Share                           $0.20          $0.10
    Diluted Earnings Per Share                         $0.19          $0.10

Pegasystems earned net profits of $6.8 million and generated $4.8 million in net cash flow for the quarter. Total cash and investments increased to $67.7 million at March 31, 2003, up significantly from $41.3 million at March 31, 2002.


Henry Ancona, President and COO, said, "The quarter was a resounding success — we signed three new customers, we expanded a significant customer relationship, we saw growth in services revenue and margins, and we benefited from reduced expenses.


"These three new customer wins, which are anticipated to result in services and license revenues in future quarters, included two new healthcare organizations and one financial services institution. During the first quarter, one of the larger health plans in the country selected the PegaHEALTH Claims Automation application to manage exceptions for its million-plus enrollee base. The second new healthcare customer win, Blue Cross & Blue Shield of Rhode Island, selected the PegaHEALTH Member Services application to provide an integrated service center for its 650,000 members. The third new customer, an international financial services institution, selected the PegaINTEGRATED INVESTIGATIONS suite of applications to automate payments-investigations processing.


"We are not, however, immune to the challenges of the soft IT-spending environment. In particular, while buyers continue to show interest in our new technologies, corporate purchasing decisions continue to be delayed, resulting in risk to new product revenue growth.


"The quarter's performance is also solid validation of another element of our growth strategy, that of continuing to expand our footprint within our installed base. A long-term financial services customer extended both the term and usage of their PegaINTEGRATED INVESTIGATIONS and PegaCHECK suite of services, more than doubling their users of Pegasystems' best-practices software.


"Our services revenue for the quarter reflects implementation services associated with earlier new customer signings. We also saw an improvement in services margin as a result of our focus on services productivity. Going forward, as we continue to complement our direct selling and support efforts with those of our alliance partners, we do not expect to sustain this rate of services-revenue growth."


Ancona concluded, "Although operating expenses were lower for the first quarter, we expect expenses to grow as we continue to invest in strengthening our market and technology leadership."


Chris Sullivan, CFO, commented, "We continue to execute on our strategy for long-term growth with a solid focus on operations. We offset an anticipated decline in FDR revenue with a significant extension from an existing customer; license costs decreased due to the final amortization in the fourth quarter of 2002 of previously acquired technology, and services revenue grew 19% compared with the first quarter of 2002, driven by new customer implementations. Services margin improved to 32% due to an increase in higher-margin consulting services coupled with reduced staff costs. We continue to operate on a positive cash-flow basis and generated operating cash flows of $3.8 million during the quarter.


"As noted in the past, our revenue in any given quarter is composed of a small number of large deals; and significant fluctuations, both up and down, are to be expected. We are maintaining our full-year 2003 revenue guidance which, as we have previously indicated, we believe will be in line with 2002, plus or minus 10%. We have adjusted our full-year EPS expectation upward to $0.45, plus or minus 10%, and we expect to generate between $5 million and $15 million of cash from operations in 2003."


Alan Trefler, founder and CEO, commented, "The quarter's results are testimony to the strength of our technology. Customers continue to respond to our software, which is flexible enough to incorporate change and powerful enough to improve an organization's productivity and responsiveness. New customers look to Pegasystems to integrate smart, rules-based decisioning with sophisticated, rules-based fulfillment; and existing customers are able to extend Pegasystems' best practices for even greater ROI."


The Company will be hosting a conference call and live Webcast associated with this announcement at 9:00 a.m. ET on Tuesday, April 29, 2003. Dial-in information is as follows: 888-243-0812 (domestic), 703-736-7293 (international). A digital replay of the teleconference will be available at 888-266-2081 (local), 703-925-2533 (international), with a passcode of 6483115.


If interested in listening to the Webcast, log onto www.pegasystems.com at least 5 minutes prior to the event's broadcast, and click on the Webcast icon in the "Investors" section.


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. The words "believe," "expect," "hope," "anticipate," "plan" and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. The Company does not undertake and specifically disclaims any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 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 volatility of our quarterly operating results, difficulty in predicting the completion of product implementations and consequently the timing of our license revenue recognition, our ability to develop new products and evolve existing ones, the impact on our business of the ongoing consolidation in the financial services market, historically our core market, our ability to attract and retain key employees, reliance on certain key third-party relationships, management of the Company's growth, and other risks and uncertainties. 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 most recent report on form 10-Q or 10-K and other recent filings on file with the Securities and Exchange Commission. The forward-looking statements contained in this press release represent the Company's views as of April 28, 2003. 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 April 28, 2003.


Notes:


Pegasystems is a registered trademark of Pegasystems Inc. Other product and company names may be trademarks of their respective owners.

                               PEGASYSTEMS INC.
                    Condensed Consolidated Balance Sheets
                 (in thousands, except share-related amounts)

                                             March 31, 2003  December 31, 2002
    Assets

    Current Assets
         Cash and cash equivalents                  $ 62,151       $ 57,393
         Trade accounts receivable,
          net of allowance for doubtful
          accounts of $506 in 2003 and $507
          in 2002                                     12,332          4,897
         Short-term license installments              31,278         32,178
         Short-term investments                        5,539          5,303
         Prepaid expenses and other current assets       779            790
              Total current assets                   112,079        100,561

    Long-term license installments,
     net of unearned interest income                  49,415         48,667
    Long-term investments                                 --            750
    Equipment and improvements,
     net of accumulated depreciation
     and amortization                                  1,340          1,727
    Acquired technology, net
     of accumulated amortization                         992          1,079
    Other assets                                         225            196
    Goodwill                                           3,246          3,246
            Total assets                           $ 167,297      $ 156,226

    Liabilities and Stockholders' Equity

    Current liabilities
         Accrued payroll related expenses            $ 5,670        $ 7,695
         Accounts payable and accrued expenses         6,289          5,220
         Deferred revenue                             16,955         12,145
              Total current liabilities               28,914         25,060

    Other long-term liabilities                          231            239
              Total liabilities                       29,145         25,299
    Commitments and contingencies

    Stockholders' equity
         Preferred stock, $0.01 par value,
          1,000,000 shares authorized; no shares
          issued and outstanding                          --             --
         Common stock, $0.01 par value, 45,000,000
          shares authorized; 34,381,319 shares and
          34,291,389 shares issued and outstanding
          in 2003 and 2002, respectively                 344            343
         Additional paid-in capital                  113,840        113,488
         Stock warrants                                  374            374
         Retained earnings                            22,858         16,054
         Accumulated other comprehensive income:
          Net unrealized gain on investments
           available for sale                              5             --
          Foreign currency translation adjustments       731            668
             Total stockholders' equity              138,152        130,927
             Total liabilities and stockholders'
              equity                                $167,297      $ 156,226

                                 PEGASYSTEMS INC.
                 Condensed Consolidated Statements of Operations
                     (in thousands, except per share amounts)


                                                       Three Months Ended
                                                            March 31,

                                                        2003           2002
    Revenue
     Software license                               $ 16,198       $ 16,266
     Services                                          9,427          7,945
      Total revenue                                   25,625         24,211

    Cost of revenue
       Cost of software license                           88            643
       Cost of services                                6,396          7,292
           Total cost of revenue                       6,484          7,935

    Gross profit                                      19,141         16,276

    Operating expenses
     Research and development                          4,760          5,750
     Selling and marketing                             5,534          5,729
     General and administrative                        2,510          2,409
      Total operating expenses                        12,804         13,888

    Income from operations                             6,337          2,388

    Installment receivable interest income             1,200          1,258
    Other interest income, net                           206            143
    Other expenses, net                                 (39)          (151)
    Income before provision for income taxes           7,704          3,638
    Provision for income taxes                           900            200
    Net income                                       $ 6,804        $ 3,438

    Earnings per share
     Basic                                            $ 0.20         $ 0.10
     Diluted                                          $ 0.19         $ 0.10

    Weighted average number of common and
     common equivalent shares outstanding
     Basic                                            34,353         32,799
     Diluted                                          35,039         34,739

                                 PEGASYSTEMS INC.
                 Condensed Consolidated Statements of Cash Flows
                                  (in thousands)


                                                         Three Months Ended
                                                             March 31,
                                                        2003           2002

    Cash flows from operating activities
    Net income                                       $ 6,804        $ 3,438
    Adjustments to reconcile net income
     to net cash provided by operating activities:
    Depreciation and amortization                        474          1,184
    Changes in operating assets and liabilities:
    Trade and installment accounts receivable        (7,285)          3,044
    Prepaid expenses and other current assets              7          1,325
    Accounts payable and accrued expenses              (964)        (2,825)
    Deferred revenue                                   4,809          2,287
    Net cash provided by operating activities          3,845          8,453

    Cash flows from investing activities
    Purchase of investments                          (2,257)            ---
    Maturing investments                               2,771            ---
    Acquisition of 1mind                                 ---          (573)
    Purchase of equipment and improvements               (6)          (140)
    Other long-term assets and liabilities                57             59
    Net cash provided by (used in) investing activities  565          (654)

    Cash flows from financing activities
    Payments under capital lease obligation              ---           (54)
    Exercise of stock options                            353            620
    Net cash provided by financing activities            353            566

    Effect of exchange rate on cash and cash equivalents (5)           (42)

    NET INCREASE IN CASH AND CASH EQUIVALENTS          4,758          8,323

    CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD    57,393         33,017
    CASH AND CASH EQUIVALENTS, END OF PERIOD        $ 62,151       $ 41,340

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