• License and Cloud Backlog increases 32% year over year
• First half revenue growth of 15% coupled with operating margin expansion
• Record operating cash flow of $86 million in first half of 2017

CAMBRIDGE, Mass., Aug. 09, 2017 (GLOBE NEWSWIRE) -- Pegasystems Inc. (NASDAQ:PEGA), the software company empowering customer engagement at the world’s leading enterprises, today announced its second quarter and first half 2017 financial results.

License and Cloud Backlog ACV

“The first half of 2017 has created a great foundation for the year,” said Alan Trefler, founder and CEO, Pegasystems. “We’re excited about the reception of our CRM capabilities and see a good mix of business between our applications and platform. We’re entering the second half of the year with tremendous momentum coming out of PegaWorld, our largest customer engagement and sales event to date, and we are very pleased with how the new products and partnerships we launched there are being received.”

“We’re very pleased with our first half results,” said Ken Stillwell, CFO, Pegasystems, “with revenue growth outpacing spending. In the second quarter we continued to see a higher than historical mix of recurring, which increases our longer-term visibility and predictability, and contributed to a 32% increase in license and cloud backlog compared to a year ago.”

SELECTED GAAP AND NON-GAAP FINANCIAL RESULTS (1)
($ in thousands, except per share amounts and %)		Three Months Ended  June 30,														Six Months Ended  June 30,
		2017					2016					Change				2017					2016				Change
Total Revenue (GAAP)		$	197,980				$	188,996				5	%			$	421,227				$	367,854			15	%
Total Revenue (Non-GAAP)		197,980					189,846					4	%			421,227					368,704				14	%
Net Income (GAAP)		11,406					4,536					151	%			38,427					14,936				157	%
Net Income (Non-GAAP)		12,231					14,644					(16	%)			44,171					32,447				36	%
Diluted Earnings per share (GAAP)		0.14					0.06					133	%			0.47					0.19				147	%
Diluted Earnings per share (Non-GAAP)		0.15					0.19					(21	%)			0.54					0.41				32	%

⁽¹⁾ See a reconciliation of our GAAP to Non-GAAP measures contained in the financial schedules at the end of this release.

Impact of New Revenue Standard: Historically, Recurring Revenue and License and Cloud Backlog have been our primary performance metrics. However, due to the change in the revenue recognition patterns of term license arrangements as a result of the expected implementation of the new revenue accounting standard (ASC 606 “Revenue from Contracts with Customers”) in the first quarter of 2018, we have started tracking the performance measure Annualized Contract Value (“ACV”). The change in ACV measures the growth and predictability of future cash flows from committed term license, cloud, and maintenance arrangements as of the end of the particular reporting period. Additional information about our future adoption of the new revenue standard and its impact can be found in Note 2. “New Accounting Pronouncements” contained in Item 1 of the Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.

Recurring Revenue and Total License, Cloud, and Maintenance Revenue

($ in thousands)			Three Months Ended  June 30,														Six Months Ended  June 30,
			2017					2016					Change				2017					2016					Change
Term license			$	30,782				$	18,864				63	%			$	84,492				$	73,196				15	%
Cloud			12,733					11,269					13	%			23,560					19,767					19	%
Maintenance			59,590					55,161					8	%			118,555					108,136					10	%
Total recurring revenue			103,105					85,294					21	%			226,607					201,099					13	%
Perpetual license			30,255					51,807					(42	%)			68,935					65,820					5	%
Total license, cloud, and maintenance revenue			$	133,360				$	137,101				(3	%)			$	295,542				$	266,919				11	%

License and Cloud Backlog⁽¹⁾: The Company computes license and cloud backlog by adding deferred license and cloud revenue as recorded on the Company’s balance sheet and license and cloud contractual commitments, which are not yet billed and not recorded on its balance sheet.

			June 30,
($ in thousands)			2017								2016								Change
Deferred license and cloud revenue on the balance sheet:(2)
Term license and cloud			$	25,104			45	%			$	19,021			37	%			32	%
Perpetual license			30,542				55	%			32,834				63	%			(7	%)
Total deferred license and cloud revenue			55,646				100	%			51,855				100	%			7	%
License and cloud contractual commitments not on the balance sheet:(3)
Term license and cloud			422,414				91	%			309,338				91	%			37	%
Perpetual license			39,949				9	%			31,439				9	%			27	%
Total license and cloud commitments			462,363				100	%			340,777				100	%			36	%
Total license (term and perpetual) and cloud backlog			$	518,009							$	392,632							32	%
Total term license and cloud backlog			447,518				86	%			328,359				84	%			36	%

⁽¹⁾ See historical quarterly license and cloud backlog amounts in a separate schedule at the end of this release.

⁽²⁾ See Note 9. “Deferred Revenue” contained in Item 1 of the Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.

⁽³⁾ See “Future Cash Receipts from Committed License and Cloud Arrangements” contained in Item 2 of the Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.

An infographic accompanying this release is available at http://www.globenewswire.com/NewsRoom/AttachmentNg/4677385e-56ba-4f54-aad8-f75dfab7665b

Annualized Contract Value (ACV): The change in ACV measures the growth and predictability of future cash flows from committed term license, cloud, and maintenance arrangements as of the end of the particular reporting period.

ACV is the sum of the following two components:

• Term and Cloud contract value divided by the number of committed contract years
• Quarterly Maintenance revenue reported for the three months ended multiplied by 4.

A second infographic accompanying this release is available at http://www.globenewswire.com/NewsRoom/AttachmentNg/b1edfca7-f50b-46ea-b42c-391f5d4ed379

Quarterly Conference Call

Pegasystems will host a conference call and audio-only Webcast associated with this announcement at 5:00 p.m. EDT today. A live audio Webcast of the conference call, together with detailed financial information, can be accessed through the Company’s Website at www.pega.com/about/investors. Dial-in information is as follows: 1-877-705-6003 (domestic) or 1-201-493-6725 (international). To listen to the Webcast, log onto www.pega.com at least five minutes prior to the event’s broadcast and click on the Webcast icon in the Investors section. A replay of the call will also be available on www.pega.com by clicking the Earnings Calls link in the Investors section.

Discussion of Non-GAAP Financial Measures

To supplement financial results presented in accordance with Generally Accepted Accounting Principles in the U.S. (“GAAP”), the Company provides non-GAAP measures, including in this release. Pegasystems’ management utilizes a number of different financial measures, both GAAP and non-GAAP, in analyzing and assessing the overall performance of the business, for making operating decisions, and for forecasting and planning for future periods. The Company’s annual financial plan is prepared both on a GAAP and non-GAAP basis, and both are approved by our board of directors. In addition and as a consequence of the importance of these measures in managing the business, the Company uses non-GAAP measures and financial performance results in the evaluation process to establish management’s compensation.

The non-GAAP measures exclude the effects of certain business combination accounting entries, stock-based compensation expense, amortization of acquired intangibles, acquisition-related and restructuring expenses, and certain other adjustments. The Company believes that these non-GAAP measures are helpful in understanding its past financial performance and its anticipated future results. These non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with the Company’s consolidated financial statements prepared in accordance with GAAP. A reconciliation of the Company’s GAAP to non-GAAP measures is included in the financial schedules at the end of this release.

Forward-Looking Statements

“Safe harbor” statement under the Private Securities Litigation Reform Act of 1995: 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.

These forward-looking statements are based on current expectations, estimates, forecasts, and projections about the industry and markets in which we operate, and management’s beliefs and assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on the Company’s behalf. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “could,” “estimate,” “may,” “target,” “strategy,” “is intended to,” “project,” “guidance,” “likely,” “usually,” or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. Important factors that could cause actual future activities and results to differ materially from those expressed in such forward-looking statements include, among others, variation in demand for the Company’s products and services and the difficulty in predicting the completion of product acceptance and other factors affecting the timing of license revenue recognition; the ongoing consolidation in the financial services, insurance, healthcare, and communications markets; reliance on third party relationships; the potential loss of vendor specific objective evidence for the Company’s consulting services; the inherent risks associated with international operations and the continued uncertainties in international economies; foreign currency exchange rates; the financial impact of the Company’s past acquisitions and any future acquisitions; the potential legal and financial liabilities and reputation damage due to cyber-attacks and security breaches; and management of the Company’s growth. These risks, and other factors that could cause actual results to differ materially from those expressed in such forward-looking statements, are described more completely in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

These documents are available on the Company’s website at http://www.pega.com/about/investors. The forward-looking statements contained in this press release represent the Company’s views as of August 9, 2017. 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, except as required by applicable law, 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 August 9, 2017.

About Pegasystems

Pegasystems Inc. is the leader in software for customer engagement and operational excellence. Pega’s adaptive, cloud-architected software - built on its unified Pega® Platform - empowers people to rapidly deploy, and easily extend and change applications to meet strategic business needs. Over its 30-year history, Pega has delivered award-winning capabilities in CRM and BPM, powered by advanced artificial intelligence and robotic automation, to help the world’s leading brands achieve breakthrough business results. For more information on Pegasystems (NASDAQ:PEGA) visit www.pega.com.

All trademarks are the property of their respective owners.

PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
			Three Months Ended  June 30,										Six Months Ended  June 30,
			2017					2016					2017					2016
Revenue:
Software license			$	61,037				$	70,671				$	153,427				$	139,016
Maintenance			59,590					55,161					118,555					108,136
Services			77,353					63,164					149,245					120,702
Total revenue			197,980					188,996					421,227					367,854
Cost of revenue:
Software license			1,250					1,312					2,550					2,333
Maintenance			7,011					6,315					14,229					12,230
Services			59,614					52,473					119,186					102,047
Total cost of revenue			67,875					60,100					135,965					116,610
Gross profit			130,105					128,896					285,262					251,244
Operating expenses:
Selling and marketing			75,887					74,016					147,175					135,094
Research and development			39,762					35,574					80,058					70,494
General and administrative			12,706					11,294					25,041					22,342
Acquisition-related			—					1,623					—					2,542
Restructuring			—					29					—					287
Total operating expenses			128,355					122,536					252,274					230,759
Income from operations			1,750					6,360					32,988					20,485
Foreign currency transaction (loss) gain			(917		)			306					(241		)			1,682
Interest income, net			161					188					326					478
Other income (expense), net			566					(1,356		)			287					(3,654		)
Income before (benefit)/provision for income taxes			1,560					5,498					33,360					18,991
(Benefit)/provision for income taxes			(9,846		)			962					(5,067		)			4,055
Net income			$	11,406				$	4,536				$	38,427				$	14,936
Earnings per share:
Basic			$	0.15				$	0.06				$	0.50				$	0.20
Diluted			$	0.14				$	0.06				$	0.47				$	0.19
Weighted-average number of common shares outstanding:
Basic			77,313					76,318					77,039					76,347
Diluted			82,945					79,422					82,412					79,329
Cash dividends declared per share			$	0.03				$	0.03				$	0.06				$	0.06

PEGASYSTEMS INC. UNAUDITED RECONCILIATION OF SELECTED GAAP MEASURES TO NON-GAAP MEASURES (1) (in thousands, except per share amounts)
			Three Months Ended  June 30,														Six Months Ended  June 30,
			2017					2016					Change				2017					2016					Change
GAAP total revenue			$	197,980				$	188,996				5	%			$	421,227				$	367,854				15	%
Deferred revenue purchase accounting			—					850									—					850
Non-GAAP total revenue			$	197,980				$	189,846				4	%			$	421,227				$	368,704				14	%
GAAP gross profit			$	130,105				$	128,896				1	%			$	285,262				$	251,244				14	%
Deferred revenue purchase accounting			—					850									—					850
Amortization of intangible assets			1,305					1,638									2,639					2,984
Stock-based compensation (2)			3,677					2,914									7,299					5,594
Non-GAAP gross profit			$	135,087				$	134,298				1	%			$	295,200				$	260,672				13	%
GAAP income from operations			$	1,750				$	6,360				(72	%)			$	32,988				$	20,485				61	%
Deferred revenue purchase accounting			—					850									—					850
Amortization of intangible assets			3,174					3,604									6,374					6,569
Stock-based compensation (2)			13,932					10,881									26,440					19,816
Other adjustments			—					(220		)							—					(220		)
Acquisition-related			—					1,271									—					2,190
Restructuring			—					29									—					287
Non-GAAP income from operations			$	18,856				$	22,775				(17	%)			$	65,802				$	49,977				32	%
GAAP net income			$	11,406				$	4,536				151	%			$	38,427				$	14,936				157	%
Deferred revenue purchase accounting			—					850									—					850
Amortization of intangible assets			3,174					3,604									6,374					6,569
Stock-based compensation (2)			13,932					10,881									26,440					19,816
Other adjustments			—					(220		)							—					(220		)
Acquisition-related			—					1,271									—					2,190
Restructuring			—					29									—					287
Income tax effects (3)			(16,281		)			(6,307		)							(27,070		)			(11,981		)
Non-GAAP net income			$	12,231				$	14,644				(16	%)			$	44,171				$	32,447				36	%
GAAP diluted earnings per share			$	0.14				$	0.06				133	%			$	0.47				$	0.19				147	%
Deferred revenue purchase accounting			—					0.01									—					0.01
Amortization of intangible assets			0.04					0.05									0.08					0.08
Stock-based compensation (2)			0.17					0.14									0.32					0.25
Acquisition-related			—					0.02									—					0.03
Income tax effects (3)			(0.20		)			(0.09		)							(0.33		)			(0.15		)
Non-GAAP diluted earnings per share			$	0.15				$	0.19				(21	%)			$	0.54				$	0.41				32	%
GAAP and non-GAAP diluted weighted average common shares outstanding			82,945					79,422					4	%			82,412					79,329					4	%

⁽¹⁾ This presentation includes non-GAAP measures. Our non-GAAP measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures, and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. For a detailed explanation of the adjustments made to comparable GAAP measures, the reasons why management uses these measures, the usefulness of these measures, and the material limitations on the usefulness of these measures, see disclosure under Discussion of Non-GAAP Financial Measures included earlier in this release and below.

Our non-GAAP financial measures reflect adjustments based on the following items, as well as the related income tax effects:

• Deferred revenue purchase accounting: Business combination accounting rules require that we determine the fair value of the deferred revenue liability for contractual obligations assumed primarily from our acquisition of OpenSpan in April 2016. In post-acquisition reporting periods, we recognize revenue for the fair value of these contracts, when all the revenue recognition criteria are satisfied, instead of the revenue that would have been recognized by OpenSpan as an independent company. We add back the effect of the deferred revenue fair value adjustment in non-GAAP revenue to reflect the full amount of these revenues to provide a more complete comparison of the revenue guidance to peer companies.
  
  
• Amortization of intangible assets: We have excluded the amortization expense of intangible assets from our non-GAAP operating expenses and net earnings measures. Amortization of intangible assets is inconsistent in amount and frequency and is significantly affected by the timing and size of our acquisitions. Investors should note that the use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. Amortization of intangible assets will recur in future periods.
  
  
• Stock-based compensation expense: We have excluded stock-based compensation expense from our non-GAAP operating expenses and net earnings measures. Although stock-based compensation is a key incentive offered to our employees, and we believe such compensation contributed to the revenues earned during the periods presented and will contribute to the generation of future period revenues, we continue to evaluate our business performance excluding stock-based compensation expense.
  
  
• Acquisition-related and restructuring expenses: We have excluded the effect of acquisition-related and restructuring expenses from our non-GAAP operating expenses and net earnings measures. We incurred direct and incremental expenses associated primarily with the OpenSpan acquisition. These acquisition related expenses were primarily professional fees to affect the acquisition. We have also incurred restructuring expenses for one-time employee termination benefits related to the closure of one of our domestic offices, which we generally would not have otherwise incurred in the periods presented as a part of our continuing operations. We believe it is useful for investors to understand the effects of these items on our total operating expenses.

⁽²⁾ Stock-based compensation expense (in thousands) was as follows:

			Three Months Ended  June 30,										Six Months Ended  June 30,
			2017					2016					2017					2016
Cost of revenues			$	3,677				$	2,914				$	7,299				$	5,594
Operating expenses			$	10,255				$	7,967				$	19,141				$	14,222
Total stock-based compensation before tax			$	13,932				$	10,881				$	26,440				$	19,816

⁽³⁾ The GAAP effective tax rate was (631%) and 17% for the three months ended June 30, 2017 and 2016, respectively. The effective non-GAAP tax rate was 34% and 33% for the three months ended June 30, 2017 and 2016, respectively. The differences between our GAAP and non-GAAP effective tax rates for the three months ended June 30, 2017 and 2016 primarily relate to the impact of excess tax benefits generated by our stock compensation plans adjustments on our GAAP effective tax rate.

The GAAP effective tax rate was (15%) and 21% for the six months ended June 30, 2017 and 2016, respectively. The effective non-GAAP tax rate was 33% and 33% for the six months ended June 30, 2017 and 2016, respectively. The differences between our GAAP and non-GAAP effective tax rates for the six months ended June 30, 2017 and 2016 primarily relate to the impact of excess tax benefits generated by our stock compensation plans adjustments on our GAAP effective tax rate.

PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
			June 30,  2017					December 31,  2016
Assets:
Total cash, cash equivalents, and marketable securities			$	180,040				$	133,761
Trade accounts receivable, net			217,020					265,028
Property and equipment, net			38,881					38,281
Deferred income taxes			71,096					69,898
Goodwill and Intangible assets, net			110,734					117,355
Other assets			45,201					30,333
Total assets			$	662,972				$	654,656
Liabilities and Stockholders’ Equity:
Accrued expenses, including compensation and related expenses			$	82,524				$	97,411
Deferred revenue			178,357					186,636
Other liabilities			33,456					34,720
Stockholders’ equity			368,635					335,889
Total liabilities and stockholders’ equity			$	662,972				$	654,656

 

PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
			Six Months Ended  June 30,
			2017					2016
Operating activities:
Net Income			$	38,427				$	14,936
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation, amortization, foreign currency transaction loss, and other non-cash items			11,724					13,379
Stock-based compensation expense			26,440					19,816
Change in operating assets and liabilities, net			9,178					(36,562		)
Cash provided by operating activities			85,769					11,569
Cash used in investing activities			(1,159		)			(7,930		)
Cash used in financing activities			(34,860		)			(31,666		)
Effect of exchange rates on cash and cash equivalents			1,282					(738		)
Net increase (decrease) in cash and cash equivalents			51,032					(28,765		)
Cash and cash equivalents, beginning of period			70,594					93,026
Cash and cash equivalents, end of period			$	121,626				$	64,261

PEGASYSTEMS INC. HISTORICAL LICENSE AND CLOUD BACKLOG (in thousands)
			2017									2016																	2015
			Q2				Q1					Q4				Q3				Q2				Q1					Q4				Q3
Deferred license and cloud revenue on the balance sheet:
Term license and cloud			$	25,104			$	29,297				$	30,725			$	19,627			$	19,021			$	18,409				$	29,929			$	14,123
Perpetual license			30,542				32,141					31,098				27,653				32,834				39,381					33,483				41,247
Total deferred license and cloud revenue			55,646				61,438					61,823				47,280				51,855				57,790					63,412				55,370
License and cloud contractual commitments not on the balance sheet:
Term license and cloud			422,414				416,088					434,323				352,804				309,338				287,926					322,844				287,863
Perpetual license			39,949				35,532					31,652				19,728				31,439				43,944					33,544				36,477
Total license and cloud commitments			462,363				451,620					465,975				372,532				340,777				331,870					356,388				324,340
Total license (term and perpetual) and cloud backlog			518,009				513,058					527,798				419,812				392,632				389,660					419,800				379,710
Total term license and cloud backlog			$	447,518			$	445,385				$	465,048			$	372,431			$	328,359			$	306,335				$	352,773			$	301,986
Term license and cloud backlog as a % of total license and cloud backlog			86		%		87		%			88		%		89		%		84		%		79		%			84		%		80		%

 

Press Contact:
Lisa Pintchman
Pegasystems Inc.
lisa.pintchman@pega.com
(617) 866-6022
Twitter: @pega

Investor Contact:
Garo Toomajanian
ICR for Pegasystems
PegaInvestorRelations@pega.com
(617) 866-6077

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