Pegasystems Reports Increased Revenue, Earnings, and Cash; Delivers Sixth Consecutive Quarter of Profitability and Growth for Second Quarter 2002

CAMBRIDGE, Mass., Jul 22, 2002 — Pegasystems Inc. (NASDAQ: PEGA) today announced its second-quarter 2002 results, reporting revenues of $26.7 million, an increase of 10% from the first quarter of 2002 and a year-over-year increase of 13%. The Company achieved earnings per diluted share of $0.13 for the quarter ended June 30, 2002, up from $0.10 per share in the first quarter of 2002 and $.08 per share for the second quarter of 2001.

Second Quarter Financial Performance
(In millions, except per
 share data and                  Current Qtr. Prior Qtr.  Prior Yr.
 percentages)                     Q2 2002     Q1 2002     Q2 2001
Total Revenue                    $   26.7    $   24.2    $    23.5
License Revenue                  $   19.1    $   16.3    $     8.6
         % of Total Revenue            72%         67%          37%
Services Revenue                 $    7.6    $    7.9    $    14.9
         % of Total Revenue            28%         33%          63%
Net Income                       $    4.6    $    3.4    $     2.7
Basic Earnings Per Share         $   0.14    $   0.10    $    0.08
Diluted Earnings Per Share       $   0.13    $   0.10    $    0.08

Pegasystems reported sequential growth in revenues, and posted net profits of $4.6 million and $7.7 million in positive cash flow for the quarter. Total cash and cash equivalents increased to $49.0 million at June 30, 2002, up 19% sequentially and nearly doubled from June 2001.

"In the midst of challenging economic times, we have successfully delivered our sixth consecutive quarter of profitability and growth," said Rick Jones, president and COO, Pegasystems. "This achievement was primarily driven by the strength and satisfaction of our existing customer base, which enabled us to generate increased license revenues through significant renewals, expansions, and product extensions.

"This quarter, we announced two significant license agreements, adding the Inland Revenue of the United Kingdom and Hospitals Contribution Fund of Australia to our client roster. Additionally, we recorded more than $2.0 million in revenue from six new customers in the quarter. Noteworthy among these accomplishments, the Federal Reserve completed its rollout of our software to three new Federal Reserve banks. With the inclusion of these additional banks, our software is now the sole and standard check-adjustment platform for the entire Federal Reserve system. This national platform will allow the Federal Reserve to achieve efficiencies and provide consistent levels of service across the nation."

"In looking toward the second half of the year, we anticipate market conditions will remain challenging," commented Chris Sullivan, treasurer and CFO, Pegasystems. "However, due to increased visibility, anticipated incremental revenue from renewals, and our strong second-quarter results, we are reiterating our guidance for full-year revenue and earnings, and raising our expectations for year-end cash balances. We currently expect full-year revenues will be $100 million, plus or minus 15%, and anticipate that full-year diluted EPS will be $0.42, plus or minus $0.10. We expect ending cash balances for 2002 to be $50 million, plus or minus 10%."

"As we announced last quarter, we are once again an active participant in the credit-card services market," continued Jones. "We have demonstrated strength in this industry in the past, where our rules-based technology currently automates complex business processes at seven of the top fifteen North American card issuers, including Citibank, N.A. In support of this market initiative, we launched our PegaCARD SERVICES product during the second quarter, which includes industry-specific capabilities, including customer service, collections, dispute and chargeback management, credit fraud, and correspondence management. We are optimistic that PegaCARD SERVICES will allow us to deepen our penetration of the credit-card services market."

Added Jones, "Our partner program gained momentum this quarter, with positive developments in both new and existing relationships. Through our relationship with EDS, we completed a competitive selection process and were successfully chosen as the call center solution and a business process management platform of choice for Inland Revenue. This is an exciting opportunity to serve the public sector and is compatible with our notable history of providing similar capabilities for large, transaction-intensive financial services organizations."

Concluded Jones, "Overall, capital spending remains weak. However, we continue to invest in sales, marketing, and new technologies. These investments have helped to keep our pipeline strong. Our management team remains cautiously optimistic for the second half of the year."

"We are pleased with the interest we continue to see from large blue-chip organizations for our software," commented Alan Trefler, founder and CEO, Pegasystems. "Our rules-driven approach to process automation and business process management has delivered tangible productivity and operational improvements for our customers, often prompting them to extend the use of our software deeper into the enterprise.

"Recently, HealthNow successfully completed its implementation of the first phase of Pegasystems' claims-automation software. After three weeks of use, this BlueCross BlueShield provider reduced claims inventory by more than 40%, eliminated numerous manual processes, increased the number of pending claims handled per hour, reduced overtime, and increased management control. This type of demonstrable financial return is the reason transaction-intensive organizations can justify the purchase of our software during difficult economic times."

Concluded Trefler, "We continue to make progress in the early stages of the adoption of PegaRULES Process Commander. This quarter, we signed our first PegaRULES partners and have successfully engaged in several proof-of-concepts with leading companies in industries divergent from those of our traditional business. Our sales and marketing efforts have increased in support of Process Commander, and we are hopeful that revenues from the PegaRULES business will occur in the second half of this year."

Second Quarter Conference Call

The Company will be hosting a conference call and live Webcast associated with this announcement at 9:00 a.m. EST on Tuesday, July 23, 2002. Dial-in information is as follows: 800-982-3472 (local), 703-871-3022 (international). A digital replay of the teleconference will be available at 888-266-2081 (local), 703-871-3022 (international), with a passcode of 6067826.

If interested in listening to the Webcast, log onto 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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 and other recent filings on file with the Securities and Exchange Commission. 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.

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

                 Condensed Consolidated Balance Sheets
             (in thousands, except share-related amounts)
                                              June 30,   December 31,
                                                2002         2001
Current assets:
   Cash and cash equivalents                  $ 49,020     $ 33,017
   Trade accounts receivable, net of
    allowance for doubtful accounts
    of $1,038 in 2002 and $1,034 in 2001         4,790        9,592
   Short-term license installments,
    net                                         35,733       31,359
   Prepaid expenses and other
    current assets                                 663        2,286
       Total current assets                     90,206       76,254
   Long-term license installments, net          45,088       43,155
   Equipment and improvements, net               2,325        3,053
   Acquired technology, net                      1,254           --
   Purchased software and other assets, net      1,443        2,610
   Goodwill                                      3,167           --
         Total assets                         $143,483     $125,072
Liabilities and Stockholders' Equity
Current liabilities:
   Accrued payroll expenses                   $  7,313     $  7,940
   Accounts payable and accrued other expenses   4,820        4,900
   Deferred revenue                              9,033        6,176
   Current portion of capital lease
    obligations                                     --           81
       Total current liabilities                21,166       19,097
Commitments and contingencies
Deferred income taxes                            1,000        1,000
Other long-term liabilities                        202           17
          Total liabilities                     22,368       20,114
Stockholders' equity:
   Preferred stock, $.01 par value,
    1,000,000 shares authorized; no
    shares issued and outstanding                   --           --
   Common stock, $.01 par value,
    45,000,000 shares authorized;
    34,135,434 shares and 32,754,648
    shares issued and outstanding in
    2002 and 2001, respectively                    341          328
   Additional paid-in capital                  108,407      101,318
   Stock warrants                                3,271        2,897
   Retained earnings                             8,798          757
   Accumulated other comprehensive
    income (loss)                                  298         (342)
       Total stockholders' equity              121,115      104,958
         Total liabilities and
          stockholders' equity                $143,483     $125,072
                           PEGASYSTEMS INC.
            Condensed Consolidated Statements of Operations
               (in thousands, except per share amounts)
                              Three Months Ended   Six Months Ended
                                   June 30,            June 30,
                                2002      2001      2002      2001
   Software license            $19,105   $ 8,653   $35,371   $19,534
   Services                      7,562    14,862    15,507    27,585
     Total revenue              26,667    23,515    50,878    47,119
Cost of revenue:
   Cost of software license        673     1,231     1,316     1,878
   Cost of services              7,601     9,900    14,893    20,144
     Total cost of revenue       8,274    11,131    16,209    22,022
Gross Profit                    18,393    12,384    34,669    25,097
Operating expenses:
   Research and development      5,604     4,995    11,354     9,986
   Selling and marketing         5,979     4,231    11,708     9,140
   General and administrative    3,103     2,106     5,512     5,096
     Total operating expenses   14,686    11,332    28,574    24,222
Income from operations           3,707     1,052     6,095       875
Installment receivable
interest income                 1,258     1,450     2,516     2,900
Other interest income, net         180       234       323       448
Other income (expense), net      (292)       141     (443)        (2)
Income before provision for
income taxes                    4,853     2,877     8,491     4,221
Provision for income taxes         250       225       450       475
Net income                     $ 4,603   $ 2,652   $ 8,041   $ 3,746
Earnings per share:
  Basic                        $  0.14   $  0.08   $  0.24   $  0.11
  Diluted                      $  0.13   $  0.08   $  0.22   $  0.11
Weighted average number of
common and common
equivalent shares
  Basic                         33,738    32,655    33,442    32,625
  Diluted                       36,819    33,379    35,900    33,371
                           PEGASYSTEMS INC.
            Condensed Consolidated Statements of Cash Flows
                            (in thousands)
                                                 Six Months Ended
                                                     June 30,
                                                2002           2001
Cash Flows from Operating Activities:
     Net income                                $ 8,041        $ 3,746
     Adjustments to reconcile net
      income to net cash provided by
      operating activities:
         Depreciation and amortization           2,504          3,539
         Changes in operating assets and
           Trade and installment accounts
            receivable                          (1,208)        (3,575)
           Prepaid expenses and other
            current assets                       1,650            337
           Accounts payable and accrued
            expenses                              (946)         1,531
           Deferred revenue                      2,798          1,889
              Net cash provided by
               operating activities             12,839          7,467
Cash Flows from Investing Activities:
     Acquisition of 1mind                         (573)            --
     Purchase of equipment and improvements       (291)          (252)
     Other long term assets and liabilities         (3)           173
              Net cash used in investing
               activities                         (867)           (79)
Cash Flows from Financing Activities:
     Payments of capital lease obligations         (81)          (159)
     Proceeds from sale of stock under
      employee stock purchase plan                 177            164
     Exercise of stock options                   3,631             49
               Net cash provided by financing
                activities                       3,727             54
Effect of exchange rate changes on cash and
cash equivalents                                  304           (192)
Net INCREASE IN cash and cash
      equivalents                               16,003          7,250
Cash and cash equivalents, beginning of period  33,017         17,339
Cash and cash equivalents, end of period       $49,020        $24,589

CONTACT:          Pegasystems Inc.
                  Chris Sullivan
                  Chief Financial Officer
                  (617) 374-9600, ext. 6020
                  [email protected]
                  Pegasystems Inc.
                  Leah Goldman
                  Investor Relations Manager
                  (617) 374-9600, ext. 6154
                  [email protected]

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

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
Phone +1 617-374-9600
Fax +1 617-374-9620