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.
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 --
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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