Pegasystems Reports First Quarter Revenue of $27.1 Million

CAMBRIDGE, Mass., May 3 — Pegasystems Inc. (Nasdaq: PEGA) today announced its first quarter 2006 results. Total revenue for the quarter was $27.1 million, reflecting growth of 12% from the first quarter of 2005. Compared to the first quarter of 2005, professional services revenue was up $5.5 million, primarily due to new license implementations, while maintenance revenue grew $1.4 million. License revenue decreased $4.0 million from the first quarter of 2005, but deferred revenue increased by $8.3 million to $24.1 million over this period, due to an increase in deferred license revenue.


The first quarter net loss of ($1.3) million was due to continued investments to support growth in service and sales and stock option expense related to the adoption of FAS123R. Total expenses in the first quarter of 2006 increased by $2.9 million from the fourth quarter of 2005, driven primarily by the normal fourth quarter to first quarter increase in employee benefit costs. Cash flow from operations in the first quarter was $3.1 million.

                   First Quarter 2006 Financial Performance
                                                             Quarter
    (In millions, except per share
      data and percentages)                          Q1 2006        Q1 2005
    Total Revenue                                      $27.1         $ 24.2
    License Revenue                                     $6.9         $ 10.9
       % of Total Revenue                                25%            45%
    Services Revenue                                   $20.2         $ 13.4
       % of Total Revenue                                75%            55%
    Pre-tax Income                                    $(1.6)           $0.2
    Provision (benefit) for Income Taxes              $(0.2)           $0.1
    Net Income (loss)                                 $(1.3)           $0.1
    Earnings Per Share, Basic and Diluted            $(0.04)         $ 0.00

Alan Trefler, Chairman and CEO commented, "The first quarter of 2006 showed improvement in license signings and total revenue over the comparable quarter last year. We are increasing our sales to new customers and extending relationships with existing customers. During the quarter Pegasystems' SmartBPM was selected for use by 17 customers including an international bank, a leading investment and insurance company, two Blue Cross Blue Shield organizations, a global investment banking firm and one of the largest insurance and financial services companies in the world.


"Customers are using Pegasystems' new class of BPM software to manage, automate and optimize a wide range of business processes including procurement and disbursement requests, enterprise-wide healthcare claims, disease management and call center support, financial product development, pricing and management and worldwide insurance underwriting.


"Organizations increasingly understand the imperative that BPM not only provides a solution to today's business processes challenges, but also next month's and next year's challenges. Pegasystems SmartBPM provides business and IT with a unified environment, allowing organizations the competitive advantage to build for change."


Chris Sullivan, CFO, commented, "Customer license signings in the first quarter of 2006 increased significantly from the first quarter of 2005. Though first quarter license revenue is down year over year, we are succeeding in licensing additional software to existing customers. Sometimes multiple licenses to a single customer are deemed a single bundled arrangement, delaying the recognition of revenue until all elements are complete. This is reflected in the $8.3 million year-over-year increase in deferred revenue.


"Services revenue continues to benefit from more implementations and maintenance contracts. As a result of the larger customer base, maintenance revenue increased 30% over the first quarter of 2005. Services margins remain under pressure as we continue to invest in resources. We are fine-tuning our implementation methodology to better align with our sales success including more tightly defined project scope and enhanced project governance."


As disclosed previously, Pegasystems expects to structure most new term licenses and term license renewals in a manner that will result in revenue being recognized ratably over the term of the license, rather than based on the present value of future payments method historically used. This will reduce the up-front revenue associated with term licenses in favor of a stream of future recurring revenue. Term licenses scheduled to renew in 2006 have a present value of approximately $10 million, the majority of which, assuming those licenses are renewed, is expected to be recorded ratably over the term of the agreements. Approximately $1 million in term license signings and renewals which occurred during the first quarter of 2006 will be recognized as revenue over the term of the agreements.


The Company is updating its guidance for 2006. It is increasing its full year revenue estimate to between $107 and $117 million. This increase is driven primarily by an anticipated increase in customer reimbursed expenses related to professional service engagements. The incremental revenue related to these expenses generates no incremental margin and therefore the company's expectation for profit (loss) before tax remains between $(3) million and $3 million. The expected results for 2006 reflect an anticipated cost of approximately $1 million associated with the expensing of stock options under the revised FAS123R rules. Cash flow from operations in 2006 is expected to be in the range of $12 to $20 million.


Pegasystems also announced that Chris Sullivan is resigning from his position of Chief Financial Officer, effective June 1, 2006, to join one of the largest privately held investment companies as a senior finance executive. While a search is conducted for his replacement, Shawn Hoyt, the Company's Vice President and General Counsel, will assume the role of interim CFO. James Reilly, the Company's Vice President, Finance, is being promoted to the role of Chief Accounting Officer.


"Chris has contributed greatly to Pegasystems over the past five years and leaves having established a strong finance department and solid financial position. We wish him all the best," said Alan Trefler.


Messrs. Trefler and Sullivan will be hosting a conference call and live Webcast associated with this announcement at 9:00 a.m. ET on May 4, 2006. Dial-in information is as follows: 800-250-4434 (domestic) or 706-634-0667 (international), passcode 8514980.


If interested in listening to the Webcast, 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 call will also be available on 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 financial guidance with respect to 2006 revenue, profit before tax, stock option expense, cash flow from operations, future employee benefit costs and customer reimbursed expenses. 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 volatility of our quarterly operating results, difficulty in predicting the completion of product acceptance and consequently the timing of our license revenue recognition, the level of term software license 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, historically our core markets, our ability to attract and retain key employees, reliance on certain key third-party relationships, 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 with the Securities and Exchange Commission. The forward-looking statements contained in this press release represent the Company's views as of May 3, 2006. 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 3, 2006.

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.

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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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