Pegasystems Reports Second-Quarter Pre-Tax Profits of $5.9 Million, 22% Increase over Comparable Quarter Last Year

CAMBRIDGE, Mass., July 28 — Pegasystems Inc. (Nasdaq: PEGA), a leading provider of smart business process management (BPM) software, today announced its second quarter results, reporting revenues of $25.5 million, pre-tax profits of $5.9 million, earnings per diluted share of $0.11, and positive cash flow from operations of $6.8 million.

                     Second Quarter Financial Performance

    (In millions, except per share data and percentages)

                             Current Qtr.  Prior Qtr.   Prior Yr.
                                Q2 2003    Q1 2003      Q2 2002
    Total Revenue               $ 25.5      $ 25.6      $ 26.7
    License Revenue             $ 15.9      $ 16.2       $19.1
         % of Total Revenue        63%         63%         72%
    Services Revenue              $9.6        $9.4        $7.6
         % of Total Revenue        37%         37%         28%
    Pre-tax Income                $5.9        $7.7        $4.9
    Provision for income taxes    $2.0        $0.9        $0.3
    Net Income                    $3.9        $6.8        $4.6
    Basic Earnings Per Share     $0.11 $0.20 $0.14
    Diluted Earnings Per Share   $0.11 $0.19 $0.13 

Henry Ancona, President and Chief Operating Officer, commented, "Building on the first quarter's success in the healthcare market, we saw continued success in financial services in the second quarter. During the quarter, we sold our PegaCHECK Smart Adjust product to a Midwest banking organization, and we extended a relationship with a user of our PegaCARD solution. In both cases, the organizations needed a solution to ensure differentiated service to their end users, and in both cases Pegasystems offered the winning solution.

"We have had good success through the first half of the year and continue to focus on Simply Smart BPM. We have signed four new customers through the first half of the year, and renewed and expanded two existing customer relationships. Service revenues were $19 million for the first half of the year, up 22% over the first half of 2002, reflective of the additional projects underway. Service margins through the first half of the year were 32%, a significant improvement over 4% in the comparable period last year, and further validation of our focus on execution. We do not expect to continue this rate of services-revenue growth and margin improvement as we move toward our goal of complementing our direct selling and support efforts with those of our alliance partners.

Ancona concluded, "As noted last quarter, customers remain cautious in making purchasing decisions. However, because we continue to receive positive response to our new technologies, we have committed to increase our investment in research and development and marketing."

Said founder and CEO Alan Trefler, "We were delighted to see record attendance at this year's user conference. Held midway through the quarter, we attracted a broad group of customers, partners, and prospects. Based on positive feedback regarding our technology and attendees' need for agile and flexible business processes, we look forward to continuing to leverage our rules-based BPM platform."

Chris Sullivan, CFO, commented, "Total revenue of $25.5 million for the second quarter was essentially unchanged from the first quarter's $25.6 million, and down $1.2 million from the comparable quarter last year as a decrease in license revenue was only partially offset by an increase in services revenue. We reported license revenue of $15.9 million, a decrease of $3.2 million compared to the second quarter of 2002, due primarily to the anticipated decline in FDR license revenue of approximately $2.4 million. Substantially all of our license revenue continued to be from existing customers who continue to confirm their support of Pegasystems with renewals, add-ons, and extensions of existing licenses. We reported services revenue of $9.6 million, an increase of $2 million compared to the second quarter of 2002, primarily due to implementation projects associated with new-customer license signings. While we have succeeded in signing more new-customer license business in the first half of 2003, the implementation projects are not yet complete, and therefore the associated license revenue has not yet been recognized.

"We continue to operate on a positive cash-flow basis, and generated operating cash flows of $10.6 million during the first six months. Profits before taxes were $5.9 million for the second quarter, compared with $4.9 million for the comparable period last year. Net income for the second quarter, however, was negatively impacted as our effective tax rate trended higher. This trend is expected to continue, though the quarterly effective tax rate is subject to fluctuations due to a variety of factors including valuation allowance adjustments.

"We are maintaining our full-year 2003 revenue guidance in line with 2002's $97.4 million, plus or minus 10%, and are maintaining our full-year EPS expectation at $0.45, plus or minus 10%. With the continued strong cash flow performance through the second quarter, we now expect to generate between $12–$18 million of cash from operations in 2003."

The Company will be hosting a conference call and live Webcast associated with this announcement at 9:00 a.m. ET on Tuesday, July 29, 2003. Dial-in information is as follows: 800-982-3472 (domestic) or 703-871-3022 (international). A replay of the teleconference will be available at 888-266- 2081 (domestic), 703-925-2533 (international), with a passcode of 196826.

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 "Investor Relations" 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 including without limitation our financial guidance with respect to 2003 revenue, earnings per share and cash from operations. The words "believe," "expect," "hope," "anticipate," "plan," and similar expressions, among others, 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, 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 July 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 July 28, 2003.

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

                                                    June 30,     December 31,
                                                      2003           2002

    Current assets
        Cash and cash equivalents                   $ 70,125 $ 57,393
        Trade accounts receivable,
         net of allowance for doubtful
         accounts of $417 in 2003 and $507 in 2002     6,198          4,897
        Short-term license installments               33,838         32,178
        Short-term investments                         4,874          5,303
        Prepaid expenses and other current assets        544            790
           Total current assets                      115,579        100,561

    Long-term license installments,
     net of unearned interest income                  55,017         48,667
    Long-term investments                                 --            750
    Equipment and improvements,
     net of accumulated depreciation
     and amortization                                  1,127          1,727
    Acquired technology,
     net of accumulated amortization                     904          1,079
    Other assets                                         227            196
    Goodwill                                           2,346          3,246
         Total assets                              $ 175,200 $ 156,226

    Liabilities and Stockholders' Equity

    Current liabilities
        Accrued payroll related expenses             $ 6,434 $ 7,695
        Accounts payable and accrued expenses          8,168          5,220
        Deferred revenue                              17,367         12,145
          Total current liabilities                   31,969         25,060

    Deferred income taxes                              1,100             --
    Other long-term liabilities                          232            239
         Total liabilities                            33,301         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; 34,356,188
         shares and 34,291,389 shares issued
         and outstanding in 2003 and 2002,
         respectively                                    344            343
        Additional paid-in capital                   113,507        113,488
        Stock warrants                                   374            374
        Retained earnings                             26,776         16,054
       Accumulated other comprehensive income:
         Net unrealized gain on
          investments available for sale                   5             --
         Foreign currency translation adjustments        893            668
            Total stockholders' equity               141,899        130,927
            Total liabilities and
             stockholders' equity                   $175,200 $156,226 PEGASYSTEMS INC.
               Condensed Consolidated Statements of Operations
                   (in thousands, except per share amounts)

                            Three Months Ended           Six Months Ended
                                  June 30,                    June 30,
                             2003          2002         2003          2002
       Software license    $15,937 $19,105 $32,134 $35,371
       Services              9,550         7,562       18,977        15,507
         Total revenue      25,487        26,667       51,111        50,878

    Cost of revenue
       Cost of software
        license                 88           673          175         1,316
       Cost of services      6,525         7,601       12,921        14,893
         Total cost of
          revenue            6,613         8,274       13,096        16,209

    Gross profit            18,874        18,393       38,015        34,669

    Operating expenses
       Research and
        development          5,438         5,604       10,198        11,354
       Selling and
        marketing            6,379         5,979       11,912        11,708
       General and
        administrative       2,879         3,103        5,389         5,512
         Total operating
                            14,696        14,686       27,499        28,574

    Income from operations   4,178         3,707       10,516         6,095

    Installment receivable
     interest income         1,350         1,258        2,550         2,516
    Other interest
     income, net               130           180          335           323
    Other income
     (expense), net            260         (292)          221         (443)
    Income before provision
     for income taxes        5,918         4,853       13,622         8,491
    Provision for
     income taxes            2,000           250        2,900           450
    Net income             $ 3,918 $ 4,603 $ 10,722 $ 8,041

    Earnings per share
       Basic                $ 0.11 $ 0.14 $ 0.31 $ 0.24
       Diluted              $ 0.11 $ 0.13 $ 0.30 $ 0.22

    Weighted average number of common and common
     equivalent shares outstanding

       Basic                34,337        33,738       34,345        33,442
       Diluted              35,516        36,819       35,261        35,900

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

                                                         Six Months Ended
                                                              June 30,
                                                        2003           2002

    Cash flows from operating activities
     Net income                                     $ 10,722 $ 8,041
     Adjustments to reconcile net income
      to net cash provided
      by operating activities:
        Stock option income tax benefits                 252            ---
        Deferred income tax                            1,100            ---
        Depreciation and amortization                    860          2,504
        Reduction in provision for
         doubtful accounts receivable                   (90)            ---
        Changes in operating assets and liabilities:
          Trade and installment accounts receivable  (9,222)        (1,208)
          Prepaid expenses and other current assets      258          1,650
          Accounts payable and accrued expenses        1,537          (946)
          Deferred revenue                             5,222          2,798
            Net cash provided by operating activities 10,639         12,839

    Cash flows from investing activities
       Purchase of investments                       (3,620)            ---
       Maturing investments                            4,799            ---
       Acquisition of 1mind                              ---          (573)
       Purchase of equipment and improvements           (84)          (291)
       Other long-term assets and liabilities           (20)            (3)
          Net cash provided by
           (used in) investing activities              1,075          (867)

    Cash flows from financing activities
       Payments under capital lease obligation           ---           (81)
       Proceeds from sale of stock
        under Employee Stock Purchase Plan               253            177
       Exercise of stock options                         419          3,631
           Net cash provided by financing activities     672          3,727

    Effect of exchange rate on cash and cash equivalents 346            304

    NET INCREASE IN CASH AND CASH EQUIVALENTS         12,732         16,003

    CASH AND CASH EQUIVALENTS, END OF PERIOD        $ 70,125 $ 49,020

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