Pegasystems Reports Third Quarter Results and Announces Share Repurchase Program

CAMBRIDGE, Mass., Oct. 28 — Pegasystems today announced its 2004 third quarter results, reporting revenue of $21.5 million, pre-tax income of $1.1 million, and earnings per diluted share of $0.02.

                       Quarterly Financial Performance

                                                    Quarter
    (In millions, except per share data and
     percentages)                   Q3 2004         Q2 2004       Q3 2003
    Total Revenue                     $21.5           $24.0         $25.1
    License Revenue                    $6.9           $11.7         $13.6
    % of Total Revenue                  32%             49%           54%
    Services Revenue                  $14.6           $12.4         $11.5
    % of Total Revenue                  68%             51%           46%
    Pre-tax Income                     $1.1            $3.3          $5.2
    Provision for Income Taxes         $0.4            $1.2          $1.8
    Net Income                         $0.7            $2.1          $3.4
    Basic Earnings Per Share          $0.02           $0.06         $0.10
    Diluted Earnings Per Share        $0.02           $0.06         $0.10

Henry Ancona, President and Chief Operating Officer commented, "The quarter's revenue was down year over year, due in part to a delay in finalizing two large revenue transactions, both of which have since closed. We have continued to experience lengthy negotiations and delays in customers signing contracts. Nevertheless, there is broadening interest in the unification of a best-in-class rules engine with leading-edge business process management (BPM) technology, and we remain confident of our long-term outlook. As such, we continue to invest in our business with an emphasis on sales and sales support personnel.


"We signed six new license customers during the quarter, including four who selected our PegaRULES Process Commander (PRPC) business process management suite as a development platform and two customers who selected Pegasystems-developed financial applications built on PegaRULES Process Commander. Those customers include: a leading hotel and leisure company using our PRPC BPM platform to optimize reservations and pricing; a global financial services firm using PegaRULES Process Commander platform in support of compliance; a state insurance agency using PRPC for underwriting and a national insurance company who will also be utilizing PRPC for underwriting. In addition, Nordea, the leading Nordic financial services group, will be using our SmartInvestigate product to automate investigations of payments processing; and a leading merchandiser has selected SmartDispute to automate credit card transaction processing.


"As we continue to shift our business strategy to leverage our smart BPM platform, we are selling to a broader array of customers and industries. Substantially all of this new business uses a perpetual license model, much of which is recognized as revenue at the time of license sale. This, together with the fact that our business is characterized by a small number of large-value transactions, results in fluctuations in quarterly revenue. Our strategy is to continue to sell with our partners who will deliver an increasing percentage of implementation services. As a result, we expect a decline in the rate of growth of our professional services revenue."


Chris Sullivan, CFO, commented, "License revenue in the third quarter was down significantly from the prior year due in part to the anticipated $3.5 million reduction in license revenue from First Data Resources (FDR). This was exacerbated by delays in closing perpetual license transactions. Services revenue in the third quarter increased 27% year-over-year due to increased license installations and maintenance revenue growth. On a year-to-date basis, total revenue increased 7% excluding the anticipated $10.6 million reduction in revenue associated with the restructured FDR agreement. Implementation revenue increased 36% and maintenance revenue increased 42% compared to the first nine months of 2003. Historically, our mix of license and services revenue has fluctuated and we do not believe this quarter's license and service revenue composition reflects a permanent shift in favor of services revenue.


"We are continuing to tighten the range of our annual guidance and now expect 2004 revenues to be in the range of $95 to $103 million. Profit before tax should be between $11 and $17 million and cash flow from operations in the range of $7 to $11 million."


Founder and CEO Alan Trefler commented, "We first recognized license revenue from PegaRULES Process Commander one year ago and it is exciting to see the market depth and penetration we have achieved to date. Through the first nine months of this year we have been selected by customers ranging from a major manufacturing systems contractor to a leading hotel and leisure company, with uses encompassing everything from full automation of a factory systems environment to "one-and-done" underwriting. It is clear there is a strong demand for providing operational efficiencies and the ability to manage complex, changing business processes."


Share Repurchase Program


Pegasystems also announced today that its Board of Directors has authorized the repurchase of up to $10 million of Pegasystems common stock. At the company's discretion, the purchases will be made from time to time on the open market or in privately negotiated transactions. Under the program, shares may be repurchased in such amounts as market conditions warrant, subject to regulatory and other considerations.


Trefler commented, "We believe the long-term prospects for our best-in- class business process management software are strong. The stock repurchase program enables the company to utilize its strong cash position in a manner that benefits both the company and its shareholders by enhancing earnings per share and return on equity."


The Company will be hosting a conference call and live Webcast associated with this announcement at 9:00 a.m. ET on Friday, October 29, 2004. Dial-in information is as follows: 800-250-4434 (domestic) or 706-634-0667 (international). A replay of the teleconference will be available through November 5 at 800-642-1687 (domestic) or 706-645-9291 (international), passcode 1398435.


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.


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 2004 revenue, profit before tax, cash flow from operations and future mix of license and services revenue. The words "believe," "expect," "hope," "anticipate," "plan," "should" 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 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 October 28, 2004. 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 October 28, 2004.

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

                                               September 30,   December 31,
                                                        2004           2003

    Assets

    Current assets:
      Cash and equivalents                           $33,492        $67,989
      Short-term investments                          62,335         19,946
       Total cash and short-term investments          95,827         87,935
     Trade accounts receivable, net of allowance
      for doubtful accounts of $365 in 2004 and 2003  12,105          9,602
     Short-term license installments                  31,104         28,565
     Prepaid expenses and other current assets         1,429            727
       Total current assets                          140,465        126,829

    Long-term license installments, net of
     unearned interest income                         43,432         53,666
    Equipment, furniture and improvements, net
     of accumulated depreciation and amortization      1,452            992
    Acquired technology, net of accumulated
     amortization                                        467            729
    Other assets                                         114            166
    Goodwill                                           2,346          2,346
           Total assets                             $188,276       $184,728
    Liabilities and Stockholders' Equity

    Current liabilities:
    Accrued payroll related expenses                  $6,308         $8,886
    Accounts payable and accrued expenses              9,399          7,784
    Deferred revenue                                   9,363         14,180
    Current portion of capital lease obligation           96             --
           Total current liabilities                  25,166         30,850

    Deferred income taxes                              1,775            625
    Capital lease obligation, net of current portion     190             --
    Other long-term liabilities                           81             81
           Total liabilities                          27,212         31,556
    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, 70,000,000
     shares authorized; 35,828,585 shares
     and 35,212,505 shares issued and outstanding
     in 2004 and 2003, respectively                      358            352
    Additional paid-in capital                       121,054        117,391
    Stock warrants                                       249            374
    Retained earnings                                 38,340         33,735
    Accumulated other comprehensive income (loss):
    Net unrealized loss on short-term investments      (202)            (9)
    Foreign currency translation adjustments           1,265          1,329
      Total stockholders' equity                     161,064        153,172
      Total liabilities and stockholders' equity    $188,276       $184,728


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


                                  Three Months Ended Nine Months Ended
                                   September 30,              September 30,
                               2004        2003          2004         2003
    Revenue:
      Software license      $6,883      $13,587      $28,223      $45,721
      Services              14,645       11,524       42,002       30,502
       Total revenue        21,528       25,111       70,225       76,223

    Cost of revenue:
      Cost of software license  88           87          262          262
      Cost of services       6,441        7,392       19,121       20,313
       Total cost of revenue 6,529        7,479       19,383       20,575

    Gross profit            14,999       17,632       50,842       55,648

    Operating expenses:
      Research and
       development           5,078        5,305       15,388       15,504
      Selling and marketing  7,243        5,966       22,900       17,878
      General and
       administrative        2,999        2,766        8,688        8,155
        Total operating
         expenses           15,320       14,037       46,976       41,537

    (Loss) income from
     operations              (321)        3,595        3,866       14,111

    Installment receivable
     interest income           856        1,350        2,243        3,900
    Other interest
     income, net               511          188        1,280          524
    Other income
     (expense), net             95          106        (284)          327
    Income before provision
     for income taxes        1,141        5,239        7,105       18,862
    Provision for income
     taxes                     400        1,798        2,500        4,698
    Net income                $741       $3,441       $4,605      $14,164

    Earnings per share:
      Basic                 $ 0.02       $ 0.10       $ 0.13       $ 0.41
      Diluted               $ 0.02       $ 0.10       $ 0.12       $ 0.40

    Weighted average
     number of common and
     common equivalent shares
     outstanding:
      Basic                 35,786       34,488       35,610       34,393
      Diluted               36,723       36,086       36,941       35,551



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

                                                         Nine Months Ended
                                                           September 30,
                                                        2004           2003

    Cash flows from operating activities:
      Net income                                      $4,605        $14,164
      Adjustments to reconcile net income to net
       cash provided by operating activities:
      Stock option income tax benefits                   721            617
      Deferred income taxes                            1,150          1,100
      Depreciation and amortization                    1,053          1,207
      Issuance of common stock warrants                   38             --
      Reduction in provision for doubtful
       accounts receivable                                --           (90)
    Changes in operating assets and liabilities:
      Trade accounts receivable and license
       installments                                    5,188        (6,582)
      Prepaid expenses and other current assets        (714)          (114)
      Accounts payable and accrued expenses            (948)          4,668
      Deferred revenue                               (4,817)          2,103
      Cash flows from operating activities             6,276         17,073

    Cash flows from investing activities:
      Purchase of investments                       (71,672)       (11,196)
      Maturing and called investments                 13,350          8,421
      Sale of investments                             15,578            ---
      Purchase of equipment, furniture and
       improvements                                    (782)          (346)
      Other long-term assets and liabilities              49             59
      Cash flows from investing activities          (43,477)        (3,062)

    Cash flows from financing activities:
      Proceeds from sale of stock under Employee
       Stock Purchase Plan                               329            253
      Payments on capital lease obligation              (16)            ---
      Exercise of stock options                        2,457            969
      Cash flows from financing activities             2,770          1,222

    Effect of exchange rate on cash and
     equivalents                                        (66)            508

    NET (DECREASE) INCREASE IN CASH AND
     EQUIVALENTS                                    (34,497)         15,741

    CASH AND EQUIVALENTS, BEGINNING OF PERIOD         67,989         57,393
    CASH AND EQUIVALENTS, END OF PERIOD              $33,492        $73,134

    Non-cash financing activity:
      Capital lease of computer equipment               $302             --

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