Strong Cloud Growth Drives Pega's Third Quarter 2018 Results

(Dollars in thousands, except per share amounts)

Three Months Ended

September 30,

Nine Months Ended

September 30,

2018

2017

Change

2018

2017

Change

Total revenue

$

203,263

$

190,957

6

%

$

635,224

$

633,862

—

%

Subscription revenue⁽²⁾

$

120,267

$

115,703

4

%

$

382,485

$

365,729

5

%

Net (loss) income (GAAP)

$

(7,587)

$

1,288

*

$

(5,796)

$

57,953

*

Net income (Non-GAAP)

$

3,192

$

7,635

(58)

%

$

23,147

$

65,973

(65)

%

Diluted (loss) earnings per share (GAAP)

$

(0.10)

$

0.01

*

$

(0.07)

$

0.70

*

Diluted earnings per share (Non-GAAP)

$

0.04

$

0.09

(56)

%

$

0.28

$

0.80

(65)

%

* not meaningful

⁽¹⁾

On January 1, 2018, we adopted the ASC 606 revenue recognition standard and have adjusted prior periods to conform. A reconciliation of our Non-GAAP measures to GAAP is contained in the financial schedules at the end of this release.

⁽²⁾

Subscription revenue reflects client arrangements (term license, cloud, and maintenance) which may be subject to a renewal.

(Dollars in thousands)

Three Months Ended

September 30,

Nine Months Ended

September 30,

2018

2017

Change

2018

2017

Change

Term license

$

32,066

16

%

$

40,611

21

%

$

(8,545)

(21)

%

$

128,070

20

%

$

149,573

24

%

$

(21,503)

(14)

%

Cloud

22,184

11

%

13,280

7

%

8,904

67

%

57,967

9

%

36,207

6

%

21,760

60

%

Maintenance

66,017

32

%

61,812

33

%

4,205

7

%

196,448

31

%

179,949

28

%

16,499

9

%

Subscription⁽²⁾

120,267

59

%

115,703

61

%

4,564

4

%

382,485

60

%

365,729

58

%

16,756

5

%

Perpetual license

20,276

10

%

12,623

7

%

7,653

61

%

56,829

9

%

81,819

13

%

(24,990)

(31)

%

Consulting

62,720

31

%

62,631

32

%

89

—

%

195,910

31

%

186,314

29

%

9,596

5

%

Total revenue

$

203,263

100

%

$

190,957

100

%

$

12,306

6

%

$

635,224

100

%

$

633,862

100

%

$

1,362

—

%

⁽¹⁾ On January 1, 2018, we adopted the ASC 606 revenue recognition standard and have adjusted prior periods to conform.

⁽²⁾ Subscription revenue reflects client arrangements (term license, cloud, and maintenance) which may be subject to a renewal.

September 30, 2018

(Dollars in thousands)

Perpetual license

Term license

Maintenance

Cloud

Consulting

Total

1 year or less

$

25,343

$

44,283

$

140,591

$

88,529

$

14,107

$

312,853

60

%

1-2 years

6,490

10,063

8,877

70,815

1,830

98,075

19

%

2-3 years

360

1,598

2,586

54,646

449

59,639

11

%

Greater than 3 years

1,306

218

1,079

49,110

50

51,763

10

%

$

33,499

$

56,162

$

153,133

$

263,100

$

16,436

$

522,330

100

%

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS⁽¹⁾

(in thousands, except per share amounts)

Three Months Ended

September 30,

Nine Months Ended

September 30,

2018

2017

2018

2017

Revenue

Software license

$

52,342

$

53,234

$

184,899

$

231,392

Maintenance

66,017

61,812

196,448

179,949

Services

84,904

75,911

253,877

222,521

Total revenue

203,263

190,957

635,224

633,862

Cost of revenue

Software license

1,255

1,276

3,772

3,826

Maintenance

6,079

6,716

18,035

20,945

Services

67,089

61,739

202,047

180,925

Total cost of revenue

74,423

69,731

223,854

205,696

Gross profit

128,840

121,226

411,370

428,166

Operating expenses

Selling and marketing

87,490

69,363

269,845

214,244

Research and development

46,504

41,031

135,261

121,089

General and administrative

12,104

13,133

38,749

38,174

Total operating expenses

146,098

123,527

443,855

373,507

(Loss) income from operations

(17,258)

(2,301)

(32,485)

54,659

Foreign currency transaction gain (loss)

399

(5,052)

558

(6,549)

Interest income, net

683

140

2,076

547

Other income, net

—

—

363

287

(Loss) income before benefit from income taxes

(16,176)

(7,213)

(29,488)

48,944

Benefit from income taxes

(8,589)

(8,501)

(23,692)

(9,009)

Net (loss) income

$

(7,587)

$

1,288

$

(5,796)

$

57,953

(Loss) earnings per share

Basic

$

(0.10)

$

0.01

$

(0.07)

$

0.75

Diluted

$

(0.10)

$

0.01

$

(0.07)

$

0.70

Weighted-average number of common shares outstanding

Basic

78,700

77,691

78,525

77,258

Diluted

78,700

83,323

78,525

82,717

Cash dividends declared per share

$

0.03

$

0.03

$

0.09

$

0.09

⁽¹⁾  On January 1, 2018, we adopted the ASC 606 revenue recognition standard and have adjusted prior periods to conform.

PEGASYSTEMS INC.

UNAUDITED RECONCILIATION OF SELECTED GAAP MEASURES TO NON-GAAP MEASURES⁽¹⁾⁽²⁾

(in thousands, except percentages and per share amounts)

Three Months Ended

September 30,

Nine Months Ended

September 30,

2018

2017

Change

2018

2017

Change

Total revenue (GAAP and Non-GAAP)

$

203,263

$

190,957

6

%

$

635,224

$

633,862

—

%

Gross profit (GAAP)

$

128,840

$

121,226

6

%

$

411,370

$

428,166

(4)

%

Amortization of intangible assets

1,232

1,232

3,695

3,871

Stock-based compensation⁽³⁾

4,319

3,613

12,277

10,913

Gross profit (Non-GAAP)

$

134,391

$

126,071

7

%

$

427,342

$

442,950

(4)

%

(Loss) income from operations (GAAP)

$

(17,258)

$

(2,301)

650

%

$

(32,485)

$

54,659

*

Amortization of intangible assets

2,835

3,105

8,508

9,479

Stock-based compensation⁽³⁾

16,408

13,489

47,573

39,929

Income from operations (Non-GAAP)

$

1,985

$

14,293

(86)

%

$

23,596

$

104,067

(77)

%

Net (loss) income (GAAP)

$

(7,587)

$

1,288

*

$

(5,796)

$

57,953

*

Amortization of intangible assets

2,835

3,105

8,508

9,479

Stock-based compensation⁽³⁾

16,408

13,489

47,573

39,929

Income tax effects⁽⁴⁾

(8,464)

(10,247)

(27,138)

(41,388)

Net income (Non-GAAP)

$

3,192

$

7,635

(58)

%

$

23,147

$

65,973

(65)

%

Diluted (loss) earnings per share (GAAP)

$

(0.10)

$

0.01

*

$

(0.07)

$

0.70

*

Amortization of intangible assets

0.03

0.04

0.10

0.11

Stock-based compensation⁽³⁾

0.20

0.16

0.57

0.48

Income tax effects⁽⁴⁾

(0.09)

(0.12)

(0.32)

(0.49)

Diluted earnings per share (Non-GAAP)

$

0.04

$

0.09

(56)

%

$

0.28

$

0.80

(65)

%

Diluted weighted-average number of common shares outstanding

(GAAP)

78,700

83,323

(6)

%

78,525

82,717

(5)

%

Incremental dilutive shares for non-GAAP

4,521

—

4,714

—

Diluted weighted average common shares outstanding (Non-GAAP)

83,221

83,323

—

%

83,239

82,717

1

%

* not meaningful

⁽¹⁾

On January 1, 2018, we adopted the ASC 606 revenue recognition standard and have adjusted prior periods to conform.

⁽²⁾

Our 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. 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 "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:

•

Amortization of intangible assets: We have excluded the amortization expense of intangible assets from our non-GAAP operating expenses and profitability 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 recognized during the periods presented and is expected to contribute to our future period revenues as well. Amortization of intangible assets is likely to recur in future periods.

•

Stock-based compensation: We have excluded stock-based compensation expense from our non-GAAP operating expenses and profitability measures. Although stock-based compensation is a key incentive offered to our employees, and we believe such compensation contributed to the revenues recognized 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.

•

Incremental dilutive shares for non-GAAP: We have included in our non-GAAP results the dilutive impact of awards that are dilutive to our non-GAAP results. We have excluded from our GAAP results the impact of those same awards, as the impact of those awards is anti-dilutive to our GAAP results due to a GAAP net loss in the period.

⁽³⁾ Stock-based compensation was as follows:

Three Months Ended

September 30,

Nine Months Ended

September 30,

(in thousands)

2018

2017

2018

2017

Cost of revenues

$

4,319

$

3,613

$

12,277

$

10,913

Selling and marketing

6,198

3,976

16,895

11,482

Research and development

3,917

3,420

11,356

10,306

General and administrative

1,974

2,480

7,045

7,228

$

16,408

$

13,489

$

47,573

$

39,929

Income tax benefit

$

(3,555)

$

(4,129)

$

(10,037)

$

(12,231)

⁽⁴⁾ Effective income tax rates were as follows:

Nine Months Ended

September 30,

2018

2017

GAAP

80

%

(18)

%

Non-GAAP

13

%

33

%

The difference between our GAAP and non-GAAP effective income tax rates for the nine months ended September 30, 2018 and 2017 primarily related to the impact of the following items on our GAAP effective income tax rate:

•      Excess tax benefits generated by our stock-based compensation plans;

•      Tax credits for stock-based compensation awards to research and development employees; and

•      Unfavorable foreign stock-based compensation adjustments.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS ⁽¹⁾

(in thousands)

September 30,

2018

December 31,

2017

Assets

Total cash, cash equivalents, and marketable securities

$

205,977

$

223,748

Total receivables (billed and unbilled)

475,626

542,341

Goodwill

72,897

72,952

Other assets

208,143

172,526

Total assets

$

962,643

$

1,011,567

Liabilities and stockholders' equity

Accrued expenses, including compensation and related expenses

$

111,147

$

111,548

Short-term deferred revenue

158,178

166,297

Deferred income tax liabilities

36,166

38,463

Other liabilities

36,297

41,022

Stockholders' equity

620,855

654,237

Total liabilities and stockholders' equity

$

962,643

$

1,011,567

⁽¹⁾  On January 1, 2018, we adopted the ASC 606 revenue recognition standard and have adjusted prior periods to conform.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ⁽¹⁾

(in thousands)

Nine Months Ended

September 30,

2018

2017

Operating activities:

Net (loss) income

$

(5,796)

$

57,953

Adjustment to reconcile net (loss) income to cash provided by operating activities:

Change in operating assets and liabilities, net

8,698

(15,455)

Stock-based compensation expense

47,573

39,929

Amortization of intangible assets and depreciation

18,692

18,703

Other non-cash

(2,079)

12,796

Cash provided by operating activities

67,088

113,926

Cash used in investing activities

(49,595)

(11,966)

Cash used in financing activities

(71,664)

(44,040)

Effect of exchange rates on cash and cash equivalents

(1,913)

2,054

Net (decrease) increase in cash and cash equivalents

(56,084)

59,974

Cash and cash equivalents, beginning of period

162,279

70,594

Cash and cash equivalents, end of period

$

106,195

$

130,568

⁽¹⁾  On January 1, 2018, we adopted the ASC 606 revenue recognition standard and have adjusted prior periods to conform.