Pegasystems Reports Third-Quarter Revenue of $25.1 Million, Year-to-Date Pre-Tax Profits of $18.9 Million — Up 38% over Prior Year

CAMBRIDGE, Mass., Oct. 23, 2003 — Pegasystems Inc. (Nasdaq: PEGA), a leader in rules-based, smart business process management (BPM) software, today announced its third-quarter results, reporting revenue of $25.1 million, pre-tax profits of $5.2 million, earnings per diluted share of $0.10, and positive cash flow from operations of $6.4 million.

                  Third Quarter Financial Performance
                                   Quarter               Nine months ended
    (In millions, except
    per share data and percentages)

                            Q3 2003       Q3 2002       9/30/03       9/30/02
    Total Revenue           $ 25.1        $ 25.6       $ 76.2         $76.4
    License Revenue         $ 13.6        $ 16.9       $ 45.7         $52.3
        % of Total Revenue     54%           66%          60%           68%
    Services Revenue        $ 11.5          $8.7       $ 30.5         $24.2
        % of Total Revenue     46%           34%          40%           32%
    Pre-tax Income            $5.2          $5.1       $ 18.9         $13.6
    Provision for income
     taxes                    $1.8          $0.3         $4.7          $0.8
    Net Income                $3.4          $4.8       $ 14.2         $12.9
    Basic Earnings
     Per Share              $ 0.10        $ 0.14       $ 0.41         $0.38
    Diluted Earnings
     Per Share              $ 0.10        $ 0.13       $ 0.40         $0.35

Henry Ancona, President and Chief Operating Officer, commented, "Our focus on operational execution continues to drive results, with year-to-date pre-tax profits up 38% over the first nine months of 2002. Services revenue was up 26% over the first nine months of 2002 on the strength of new license sales and the resulting customer implementations, and our services margins have improved significantly over last year. Service margins were 33% through the first nine months of 2003, compared with 8% for the same period last year. As noted previously, the rate of services-revenue growth and margin improvement may not be sustainable as we continue to build our network of service-integration partners.

"During the quarter, we saw continued success in the financial services market. A major mutual fund manager elected to deploy the PegaRULES Process Commander platform in its call center and direct-processing environments. Working with EDS, we significantly expanded our contract with Inland Revenue to provide enhanced taxpayer services. In the insurance market, alliance partner AgencyPort sold its privately labeled solution, built in part on PegaRULES Process Commander, to two property and casualty customers."

Ancona continued, "In terms of products, we have continued the release of packaged applications built on PegaRULES Process Commander. Most recently we announced PegaPAYMENT Smart Adjust 3.1, a product that can reach beyond our traditional check market and into other payment types. We also announced the release of PegaCARD Smart Dispute, a new product that helps credit and debit card companies streamline the processing of card charge disputes."

Founder and CEO Alan Trefler commented, "We continue to focus on our brand, our product, and our ability to compete. We continue to invest in PegaRULES Process Commander to provide developers and users extended capabilities with even greater ease of use. We look forward to leveraging our successes and helping a widening circle of customers manage complex and changing business processes."

Chris Sullivan, CFO, commented, "The third quarter was the first quarter in which we recognized license revenue related to completed implementations of our PegaRULES Process Commander sales.

"With the strong results year to date and continued confidence in our ability to generate cash, we are revising our 2003 guidance for annual cash from operations upward to $15–$19 million. We are maintaining our 2003 EPS expectation at $0.45, plus or minus 10%. In addition, as previously indicated, we continue to evaluate the possible reversal of an approximate $1.8 million tax allowance which would have the effect of adding $0.05 to EPS."

The Company will be hosting a conference call and live Webcast associated with this announcement at 9:00 a.m. ET on Friday, October 24, 2003. Dial-in information is as follows: 800-250-4434 (domestic) or 706-634-0667 (international). A replay of the teleconference will be available at 800-642-1687 (domestic) or 706-645-9291 (international).

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 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 October 23, 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 October 23, 2003.

                               PEGASYSTEMS INC.

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

                                               September 30,   December 31,
                                                        2003           2002

    Current assets
              Cash and cash equivalents             $ 73,134       $ 57,393
              Trade accounts receivable,
               net of allowance for doubtful
               accounts of $418 in 2003
               and $507 in 2002                        7,915          4,897
              Short-term license installments         33,544         32,178
             Short-term investments                    8,841          5,303
             Prepaid expenses and other
              current assets                             949            790
                      Total current assets           124,383        100,561

    Long-term license installments,
     net of unearned interest income                  50,927         48,667
    Long-term investments                                 --            750
    Equipment and improvements, net
     of accumulated depreciation and
     amortization                                      1,139          1,727
    Acquired technology, net
     of accumulated amortization                         817          1,079
    Other assets                                         151            196
    Goodwill                                           2,346          3,246
                     Total assets                  $ 179,763      $ 156,226

    Liabilities and Stockholders' Equity

    Current liabilities
               Accrued payroll related expenses      $ 7,908        $ 7,695
               Accounts payable and accrued
                expenses                               9,865          5,220
               Deferred revenue                       14,248         12,145
                          Total current liabilities   32,021         25,060

    Deferred income taxes                              1,100             --
    Other long-term liabilities                          231            239
                         Total liabilities            33,352         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;
               34,571,655 shares and 34,291,389
               shares issued and outstanding
               in 2003 and 2002, respectively            346            343
              Additional paid-in capital             114,424        113,488
              Stock warrants                             374            374
              Retained earnings                       30,218         16,054
              Accumulated other comprehensive income:
                 Net unrealized gain on
                  investments available for sale          12             --
                 Foreign currency translation
                  adjustments                          1,037            668

                   Total stockholders' equity        146,411        130,927
                   Total liabilities and
                     stockholders' equity           $179,763      $ 156,226

           See notes to condensed consolidated financial statements

                               PEGASYSTEMS INC.

               Condensed Consolidated Statements of Operations
                   (in thousands, except per share amounts)

                               Three Months Ended          Nine Months Ended
                                  September 30,              September 30,
                              2003          2002         2003          2002
      Software license     $13,587       $16,902      $45,721       $52,273
      Services              11,524         8,663       30,502        24,170
         Total revenue      25,111        25,565       76,223        76,443

    Cost of revenue
     Cost of software license   87           672          262         1,988
     Cost of services        7,392         7,352       20,313        22,245
      Total cost of revenue  7,479         8,024       20,575        24,233

    Gross profit            17,632        17,541       55,648        52,210

    Operating expenses
     Research and
      development            5,305         5,349       15,504        16,703
     Selling and marketing   5,966         6,296       17,878        18,003
     General and
      administrative         2,766         1,871        8,155         7,383
       Total operating
        expenses            14,037        13,516       41,537        42,089

    Income from operations   3,595         4,025       14,111        10,121

    Installment receivable
     interest income         1,350         1,258        3,900         3,774
    Other interest income,
     net                       188           218          524           541
    Other income (expense),
     net                       106         (373)          327         (816)
    Income before provision
     for income taxes        5,239         5,128       18,862        13,620
    Provision for income
     taxes                   1,798           302        4,698           752
    Net income              $3,441       $ 4,826      $14,164       $12,868

    Earnings per share
       Basic                $ 0.10        $ 0.14       $ 0.41        $ 0.38
       Diluted              $ 0.10        $ 0.13       $ 0.40        $ 0.35

    Weighted average number
     of common and common
     equivalent shares

       Basic                34,488        34,176       34,393        33,956
       Diluted              36,086        36,275       35,551        36,292

    See notes to condensed consolidated financial statements.

                               PEGASYSTEMS INC.

               Condensed Consolidated Statements of Cash Flows
                                (in thousands)

                                                         Nine Months Ended
                                                           September 30,
                                                        2003           2002

    Cash flows from operating activities
         Net income                                 $ 14,164       $ 12,868
         Adjustments to reconcile net income
         to net cash provided by operating activities:
               Stock option income tax benefits          617            ---
               Deferred income tax                     1,100            ---
               Depreciation and amortization           1,207          3,512
               Reduction in provision for doubtful
                accounts receivable                     (90)            ---
         Changes in operating assets and liabilities:
             Trade and installment accounts
              receivable                             (6,582)          (306)
             Prepaid expenses and other current
              assets                                   (114)            974
             Accounts payable and accrued expenses     4,668          (151)
             Deferred revenue                          2,103          3,762
                 Net cash provided by operating
                  activities                          17,073         20,659

    Cash flows from investing activities
         Purchase of investments                    (11,196)        (4,800)
         Maturing investments                          8,421            ---
         Acquisition of 1mind                            ---          (573)
         Purchase of equipment and improvements        (346)          (558)
         Other long-term assets and liabilities           59            (3)
                 Net cash used in investing
                  activities                         (3,062)        (5,934)

    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                       969          3,887
                 Net cash provided by financing
                  activities                           1,222          3,983

    Effect of exchange rate on cash
     and cash equivalents                                508            538

    NET INCREASE IN CASH AND CASH EQUIVALENTS         15,741         19,246

    CASH AND CASH EQUIVALENTS, END OF PERIOD        $ 73,134       $ 52,263

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