Pegasystems Reports Financial Results for Third Quarter and First Nine Months of 2012

YTD Q3 2012 Revenue of $317.9 Million, a 5% Increase Compared to YTD Q3 2011; YTD Q3 2012 GAAP EPS of $0.04 and YTD Q3 2012 Non-GAAP EPS of $0.45

Marketwired

CAMBRIDGE, MA--(Marketwire - Nov 8, 2012) - Pegasystems Inc. (NASDAQ: PEGA), the leader in Business Process Management (BPM) and a leading provider of Customer Relationship Management (CRM) solutions, today announced financial results for the third quarter and first nine months of 2012. Revenue for the third quarter of 2012 increased 6% compared to the third quarter of 2011. Net loss for the third quarter of 2012 was $(0.3) million, or $(0.01) per diluted share, compared to net income of $5 million, or $0.13 per diluted share, for the third quarter of 2011. Revenue for the first nine months of 2012 increased 5% to $317.9 million compared to the first nine months of 2011. Net income for the first nine months of 2012 was $1.5 million, or $0.04 per diluted share, compared to net income of $12 million, or $0.31 per diluted share for the first nine months of 2011.

 
SELECTED FINANCIAL RESULTS
                     
    Three Months Ended     Nine Months Ended
    September 30,     September 30,
($ in '000s)   2012     2011     2012   2011
Total revenue   $ 101,657     $ 95,503     $ 317,880   $ 301,381
Income (loss) from operations   $ 401     $ (2,008 )   $ 3,636   $ 6,790
Net (loss) income   $ (331 )   $ 4,959     $ 1,459   $ 11,963
(Loss) earnings per share, basic   $ (0.01 )   $ 0.13     $ 0.04   $ 0.32
(Loss) earnings per share, diluted   $ (0.01 )   $ 0.13     $ 0.04   $ 0.31
                             

Business Perspective
"Despite economic headwinds, revenue increased year over year," said Alan Trefler, Founder and CEO of Pegasystems. "We saw good balance across our industry verticals, including financial services, insurance, healthcare, communications & media, public sector, life sciences, and travel & hospitality. Clients are adopting and increasing their Pega deployments because of our product's unmatched ability to help our customers rapidly optimize the customer experience and intelligently automate operations." 

"We are proud to have these unique qualities acknowledged in this quarter by independent industry analysts. A leading analyst firm once again highlighted Pega as leading the newly updated Magic Quadrant for Intelligent Business Process Management (iBPMS), which emphasizes real-world business outcomes and the real-time agility that leading organizations require. Pega's strength in case management and dynamic analytics helped us to sustain our leadership in this market. We were also named leader in treasury onboarding within the financial services space by another analyst firm during the quarter. These analysts' opinions confirm what our client success already demonstrates, that Pega empowers business people to create and evolve their critical business systems faster and more cost effectively than inflexible packaged applications or laborious manual coding."

Craig Dynes, Pegasystems' CFO, commented, "After more than six years at Pegasystems, I have decided to leave the Company in 2013 following the filing of the Form 10K, ideally to work with a promising late stage private company. It has been a tremendous honor to be part of such a successful organization that has more than tripled annual revenue over the past five years in the face of some of the worst economic conditions in recent history. These economic conditions have, very similar to last year, resulted in an extremely back-end loaded year with customers appearing to delay execution of large license agreements until the end of their budget period." Mr. Trefler concluded, "We deeply appreciate Craig's many contributions during the last six years of dramatic growth, wish him the best, and will be working diligently to find a worthy successor."

Messrs. Trefler and Dynes will host a conference call and live Webcast associated with this announcement at 5:30 p.m. EST on November 8, 2012. Dial-in information is as follows: 1 (866) 393-1604 (domestic) or 1 (678) 809-1046 (international). To listen to the Webcast log onto www.pega.com at least 5 minutes prior to the event's broadcast and click on the Webcast icon in the Investor Relations section. A replay of the call will also be available on www.pega.com in the Investor Relations section Audio Archives link.

Discussion of Non-GAAP 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 amortization of intangible assets, stock-based compensation and relocation expenses associated with the move of our office headquarters. The Company believes that these Non-GAAP measures are helpful in understanding our past financial performance and our 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 our 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 the release.

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 those relating to our future financial performance, including our revenue, expenses and license signings. The words "anticipate," "project," "expect," "plan," "intend," "believe," "estimate," "should", "target," "forecast," "could," "preliminary," "guidance" 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, among others, variation in demand for our products and services and the difficulty in predicting the completion of product acceptance and other factors affecting the timing of our license revenue recognition, the ongoing uncertainty and volatility in the global financial markets related to the European sovereign debt crisis and the so called "fiscal cliff" in the U.S., the ongoing consolidation in the financial services and healthcare markets, reliance on third party relationships, the potential loss of vendor specific objective evidence for our professional services, and management of the Company's growth. 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 Annual Report on Form 10-K for the year ended December 31, 2011, the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 and other recent filings with the Securities and Exchange Commission. The forward-looking statements contained in this press release represent the Company's views as of November 8, 2012. 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 November 8, 2012.

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About Pegasystems
Pegasystems revolutionizes how leading organizations optimize customer experience and automate operations. Our patented Build for Change® technology empowers business people to create and evolve their critical business systems. Pegasystems is the recognized leader in business process management and is also ranked as a leader in customer relationship management software by leading industry analysts. For more information, please visit us at www.pega.com

All trademarks are the property of their respective owners.

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.

   
Pegasystems Inc.  
Unaudited Condensed Consolidated Statements of Operations  
(In thousands, except per share amounts)  
   
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2012     2011     2012     2011  
Revenue:                                
Software license   $ 28,575     $ 25,346     $ 95,517     $ 93,453  
Maintenance     32,317       29,971       97,657       85,713  
Professional services     40,765       40,186       124,706       122,215  
  Total revenue     101,657       95,503       317,880       301,381  
Cost of revenue:                                
Cost of software license     1,585       1,637       4,763       4,942  
Cost of maintenance     3,745       2,980       11,072       9,614  
Cost of professional services     32,335       37,194       103,351       107,668  
  Total cost of revenue (1)     37,665       41,811       119,186       122,224  
Gross profit     63,992       53,692       198,694       179,157  
Operating expenses:                                
Selling and marketing     36,893       32,463       116,476       103,707  
Research and development     19,506       16,218       57,411       47,047  
General and administrative     7,192       7,222       21,171       21,193  
Acquisition-related costs     --       --       --       482  
Restructuring costs     --       (203 )     --       (62 )
  Total operating expenses (1)     63,591       55,700       195,058       172,367  
Income (loss) from operations     401       (2,008 )     3,636       6,790  
Foreign currency transaction gain (loss)     438       (1,049 )     337       140  
Interest income, net     113       102       318       279  
Other (expense) income, net     (920 )     504       (1,496 )     365  
Income (loss) before provision (benefit) for income taxes     32       (2,451 )     2,795       7,574  
Provision (benefit) for income taxes     363       (7,410 )     1,336       (4,389 )
  Net (loss) income   $ (331 )   $ 4,959     $ 1,459     $ 11,963  
(Loss) earnings per share:                                
Basic   $ (0.01 )   $ 0.13     $ 0.04     $ 0.32  
Diluted   $ (0.01 )   $ 0.13     $ 0.04     $ 0.31  
Weighted-average number of common shares outstanding:                                
Basic     37,881       37,588       37,834       37,425  
Diluted     37,881       38,930       38,897       38,864  
Dividends per share   $ 0.03     $ 0.03     $ 0.09     $ 0.09  
(1) Includes stock-based compensation as follows:                                
Cost of revenue     849       659       2,710       2,009  
Operating expenses     1,935       1,663       5,912       4,713  
                                 
                                 
                                 
PEGASYSTEMS INC.
RECONCILIATION OF SELECTED GAAP TO NON-GAAP MEASURES (1)
($ in thousands, except per share data)
                     
    Three Months Ended     Nine Months Ended
    September 30, 2012     September 30, 2012
                             
Net (Loss) Income and Diluted EPS - GAAP basis   $ (331 )   $ (0.01 )   $ 1,459   $ 0.04
                             
Adjustment to exclude amortization of intangible assets, net of tax     1,889       0.05       5,535     0.14
                             
Adjustment to exclude stock-based compensation, net of tax     1,893       0.05       5,709     0.15
                             
Adjustment to exclude expenses for relocation of headquarters, net of tax     1,623       0.04       4,609     0.12
                             
                             
Net Income and Diluted EPS - Non-GAAP basis   $ 5,074     $ 0.13     $ 17,312   $ 0.45
                             
                             
Weighted-average common shares - diluted GAAP     37,881               38,897      
                             
Weighted-average common shares - diluted Non-GAAP     38,833               38,897      
                             
                             
                             
PEGASYSTEMS INC.
FOOTNOTES FOR RECONCILIATON OF
SELECTED GAAP MEASURES TO NON-GAAP MEASURES
 

(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 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:

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 expenses: 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 that it will contribute to the generation of future period revenues, we continue to evaluate our business performance excluding stock-based compensation expense.

Headquarters relocation expenses: We completed the move of our office headquarters in the third quarter of 2012. As a result of this planned move, we accelerated the depreciation on certain leasehold improvements and furniture and fixtures to be abandoned from our prior headquarters. We recorded incremental depreciation expense of $0.1 million and $0.4 million during the third quarter and first nine months of 2012, respectively. In addition, we recorded rent expense of $1.4 million and $4.4 million associated with our new office headquarters during the third quarter and first nine months of 2012, respectively. Lastly, we incurred approximately $0.9 million and $2.2 million for rent-related and equipment expenses and other moving expenses in connection with our move during the third quarter and first nine months of 2012, respectively. We believe these incremental expenses for existing and new office headquarters as a result of our moving our headquarters is not representative of our ongoing business.

Taxes: The differences between our GAAP and Non-GAAP effective tax rates in the third quarter and first nine months of 2012 were primarily due to the impact of higher Non-GAAP income before taxes.

Weighted-average common shares: The diluted weighted-average common shares used for the calculation of Non-GAAP diluted earnings per share for the third quarter of 2012 includes the dilutive effect of outstanding options, restricted stock units, and warrants, and the average market price of our common stock during the applicable period using the treasury stock method.

 
 
PEGASYSTEMS INC.
Unaudited Condensed Consolidated Balance Sheets
 
    As of   As of
    September 30,
2012
  December 31,
2011
ASSETS            
Current assets:            
  Cash and cash equivalents   $ 66,237   $ 60,353
  Marketable securities     45,092     51,079
    Total cash, cash equivalents, and marketable securities     111,329     111,432
  Trade accounts receivable, net of allowance     80,849     98,293
  Deferred income taxes     9,823     9,826
  Income taxes receivable     10,776     7,545
  Other current assets     6,276     4,865
      Total current assets     219,053     231,961
Property and equipment, net     31,285     14,458
Long-term deferred income taxes     43,835     43,286
Long-term other assets     1,767     2,186
Intangible assets, net     61,009     69,369
Goodwill     20,451     20,451
      Total assets   $ 377,400   $ 381,711
LIABILITIES AND STOCKHOLDERS'EQUITY            
Current liabilities:            
  Accounts payable   $ 4,548   $ 10,899
  Accrued expenses     17,311     18,336
  Accrued compensation and related expenses     26,779     39,170
  Deferred revenue     74,784     73,840
      Total current liabilities     123,422     142,245
Income taxes payable     9,113     9,547
Long-term deferred revenue     17,423     15,367
Other long-term liabilities     14,394     5,796
      Total liabilities     164,352     172,955
Stockholders' equity:     213,048     208,756
      Total liabilities and stockholders' equity   $ 377,400   $ 381,711
             
             
             
PEGASYSTEMS INC.  
Unaudited Condensed Consolidated Statements of Cash Flows  
   
    Nine Months Ended  
    September 30,  
    2012     2011  
    (in thousands)  
Operating activities:                
  Net income   $ 1,459     $ 11,963  
  Adjustments to reconcile net income to cash used in operating activities:                
  Excess tax benefit from equity awards and deferred income taxes     (3,672 )     (5,536 )
  Depreciation, amortization, and other non-cash items     18,590       13,176  
  Stock-based compensation expense     8,622       6,722  
  Foreign currency transaction loss     785       624  
  Change in operating assets and liabilities, and other, net     3,300       (7,302 )
  Cash provided by operating activities     29,084       19,647  
  Cash used in investing activities     (16,746 )     (36,011 )
  Cash used in financing activities     (7,050 )     (3,521 )
Effect of exchange rate changes on cash and cash equivalents     596       361  
Net increase (decrease) in cash and cash equivalents     5,884       (19,524 )
Cash and cash equivalents, beginning of period     60,353       71,127  
Cash and cash equivalents, end of period   $ 66,237     $ 51,603  
Contact:
For Information, contact:
Craig Dynes
Chief Financial Officer
617-866-6020
CDynes@pega.com
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