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Pegasystems (PEGA) Q1 Earnings Miss, Revenues Beat Estimates

Zacks Equity Research
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CAE (CAE) Misses Q1 Earnings and Revenue Estimates

CAE (CAE) delivered earnings and revenue surprises of -4.76% and -0.51%, respectively, for the quarter ended June 2018. Do the numbers hold clues to what lies ahead for the stock?

Pegasystems Inc. PEGA reported first-quarter 2018 non-GAAP earnings of 24 cents per share, declining 64% year over year. Moreover, the figure missed the Zacks Consensus Estimate by 6 cents.

Non-GAAP total revenues fell 8.2% to $235.18 million in the reported quarter but came ahead of the Zacks Consensus Estimate of $227 million.

Notably, the company has adopted the new revenue rules of ASC 606 and incorporated the same while reporting the first-quarter results.

Quarter in Detail

Software License revenues (accounted for 37.3%) decreased 30.9% from the year-ago quarter to $87.8 million.

Maintenance revenues (27.4%) increased 9.9% to almost $64.5 million

Services revenues (35.2%) advanced almost 17.5% to $82.9 million.

Pegasystems Inc. Revenue (TTM)

Pegasystems Inc. Revenue (TTM) | Pegasystems Inc. Quote

Maintenance annual contract value (ACV) grew 9.9% year over year to $258 million.

Term and Cloud ACV surged 22.3% to $236 million.

As a result total ACV increased 15.4% to $494 million.

Notably, the adoption of Pegasystems’ solutions continues with Ford, Fleet core technology, Singtel Office and Wills Tower Watson. The company is also working at various levels with Dell, Philips Healthcare, PayPal and Raytheon, to mention a few.

During the quarter, the company launched a first-of-a-kind AI-driven Pega Sales Coach to empower sales personnel with meaningful suggestions such that they can beat their sales quota. The company partnered with Idio to propel the closure of business-to-business (B2B) deals by furnishing them with relevant AI-driven insights and consequently enhance engagement

Furthermore, the government of Andhra Pradesh, India deployed Pega Government Platform to accelerate digital transformation across the state.

Management noted that almost 25% of the full-year revenue guidance has been achieved in the first quarter of the year, resulting in a balanced performance.

Operating Details

Gross margin decreased 540 basis points (bps) to 69.9% in the reported quarter.

Reported operating expenses surged 24%. This can be attributed to increase in all the three expenses, namely, selling and marketing (S&M), research and development (R&D) and general and administrative (G&A).

Operating margin declined 20.8% from the year-ago quarter to reach 11%.

Balance Sheet & Cash Flow

Cash, cash equivalents, were $165.8 million as of Mar 31, 2018 up from $83.8 million as of Mar 30, 2017.

The company declared a quarterly dividend payment of 3 cents for the March quarter to be paid on Apr 16, 2018 payable to shareholders as on Apr 2, 2018.

Operating cash flow came in at $55.7 million up from $32.4 million in the year-ago quarter.

Guidance

Pegasystems maintained its 2018 guidance. For full-year 2018, revenues are projected to be approximately $950 million, up 13% over 2017 levels. The Zacks Consensus Estimate is pegged at $952.87 million.

Non-GAAP earnings are anticipated to be approximately $1.20 per share. The Zacks Consensus Estimate is currently pegged at $1.16 per share, representing annual growth of 34.9%.

The management envisions annual growth in ACV to be greater than 20%.

Pegasystems Inc. Price, Consensus and EPS Surprise

Pegasystems Inc. Price, Consensus and EPS Surprise | Pegasystems Inc. Quote

Conclusion

Pegasystems faces intense competition from other Customer Relationship Management (“CRM”) software providers in the market. In order to survive as well as strengthen its position the company is transitioning to a cloud-based subscription model.

However, the increasing expenses accompanying the shift as well as in product launches are limiting growth, considering near term outlook. Moreover, volatility in foreign exchange rate keeps the analysts cautious. Furthermore, maintaining fiscal 2018 outlook raises questions given the prospects of CRM.

Per a recent report by Gartner, worldwide CRM software revenues in 2017 came in at $39.5 billion, becoming the largest software market in the year. For 2018, CRM software market revenue is projected to grow at 16%, making it the fastest growing software market.

We believe in order to capitalize this growth opportunity Pegasystems needs to pull up its socks as soon as possible.

Zacks Rank and Key Picks

Currently, Pegasystems has a Zacks Rank #4 (Sell).

Better-ranked stocks in the industry are Cadence Design Systems CDNS, Citrix Systems CTXS and SAP SAP, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Cadence, Citrix and SAP are projected to be 12%, 9.05% and 7.21%, respectively.

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