Pega Cloud ACV Grows 51%** in the First Three Quarters of 2019 - Pegasystems (NASDAQ:PEGA)

CAMBRIDGE, Mass., Nov. 7, 2019 /PRNewswire/ -- Pegasystems Inc. PEGA, the software company empowering digital transformation at the world's leading enterprises, released its financial results for the third quarter of 2019.

"I'm pleased with the state of our business as we continue to make strong progress in our transition to Cloud," said Alan Trefler, founder and CEO, Pegasystems. "It's terrific to see the continued momentum in our traditional markets as well as enthusiasm in some of our newer industries. For example, over recent weeks we've engaged more than 1,000 thought leaders from our clients and prospects in the government and healthcare industries through our customer engagement roadshow."

"Total ACV increased 20% in constant currency year over year, reaching $634 million," said Ken Stillwell, CFO, Pegasystems. "This strong ACV growth reflects solid demand worldwide for our digital transformation solutions."

Financial metrics ^{(1) (2)}

(Dollars in thousands, except per share amounts)	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		Change		2019		2018		Change
Total revenue	$	216,703	$	203,263	7	%	$	634,841	$	635,224	—	%
Subscription revenue ⁽³⁾	$	154,513	$	120,267	28	%	$	424,273	$	382,485	11	%
Net (loss) - GAAP	$	(30,338)	$	(7,587)	(300)	%	$	(91,351)	$	(5,796)	(1,476)	%
Net (loss) income - Non-GAAP	$	(17,961)	$	2,001	*		$	(50,764)	$	19,526	*
Diluted (loss) per share - GAAP	$	(0.38)	$	(0.10)	(280)	%	$	(1.16)	$	(0.07)	(1,557)	%
Diluted (loss) earnings per share - Non-GAAP	$	(0.23)	$	0.02	*		$	(0.64)	$	0.23	*

* not meaningful
⁽¹⁾ A reconciliation of the GAAP measures to our Non-GAAP measures is contained in the financial schedules at the end of this release.
⁽²⁾As previously discussed, our profitability and operating cash flows have declined in the short term as we transition to cloud, and our cloud business continues to grow and scale.
⁽³⁾Reflects client arrangements (term license, cloud, and maintenance) that are subject to renewal.

(Dollars in thousands)	Three Months Ended September 30,												Nine Months Ended September 30,
(Dollars in thousands)	2019				2018				Change				2019				2018				Change
Cloud	$	35,153	16	%	$	22,184	11	%	$	12,969	58	%	$	94,610	15	%	$	57,967	9	%	$	36,643	63	%
Term license	48,989		23	%	32,066		16	%	16,923		53	%	122,257		19	%	128,070		20	%	(5,813)		(5)	%
Maintenance	70,371		32	%	66,017		32	%	4,354		7	%	207,406		33	%	196,448		31	%	10,958		6	%
Subscription	154,513		71	%	120,267		59	%	34,246		28	%	424,273		67	%	382,485		60	%	41,788		11	%
Perpetual license	9,016		4	%	20,276		10	%	(11,260)		(56)	%	43,286		7	%	56,829		9	%	(13,543)		(24)	%
Consulting	53,174		25	%	62,720		31	%	(9,546)		(15)	%	167,282		26	%	195,910		31	%	(28,628)		(15)	%
Total revenue	$	216,703	100	%	$	203,263	100	%	$	13,440	7	%	$	634,841	100	%	$	635,224	100	%	$	(383)	—	%

Annual contract value ("ACV") ^{(1) (2)}

The change in ACV measures the growth and predictability of future cash flows from Pega Cloud and Client Cloud committed arrangements as of the end of the particular reporting period.

Annual contract value (

	September 30,				Change			Constant Currency Change
(Dollars in thousands)	2019		2018
Maintenance	$	281,484	$	264,068	$	17,416	7%	9%
Term	207,317		174,320		32,997		19%	20%
Client Cloud	488,801		438,388		50,413		11%	13%
Pega Cloud	145,549		98,373		47,176		48%	51%
Total ACV	$	634,350	$	536,761	$	97,589	18%	20%

(1)	Total ACV, as of a given date, is the sum of the following two components:

	•	Client Cloud: the sum of (1) the annual value of each term license contract in effect on such date, which is equal to its total license value divided by the total number of years and (2) maintenance revenue reported for the quarter ended on such date, multiplied by four. We do not provide hosting services for Client Cloud arrangements.

	•	Pega Cloud: the sum of the annual value of each cloud contract in effect on such date, which is equal to its total value divided by the total number of years.

(2)	As foreign currency exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of ACV growth rates on a constant currency basis enhances the understanding of our results and evaluation of our performance in comparison to prior periods.

Remaining performance obligations ("RPO")

Expected future revenue on existing contracts:

	September 30, 2019
(Dollars in thousands)	Perpetual license		Term license		Maintenance		Cloud		Consulting		Total
1 year or less	$	7,689	$	25,948	$	158,220	$	133,785	$	13,145	$	338,787	56%
1-2 years	853		3,798		18,590		105,081		863		129,185		21%
2-3 years	1,306		591		8,323		72,915		841		83,976		14%
Greater than 3 years	—		85		4,959		51,591		—		56,635		9%
	$	9,848	$	30,422	$	190,092	$	363,372	$	14,849	$	608,583	100%
Change in RPO Since September 30, 2018
	$	(23,651)	$	(25,740)	$	36,959	$	100,272	$	(1,587)	$	86,253
	(71)%		(46)%		24%		38%		(10)%		17%


	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%

Quarterly conference call

A conference call and audio-only webcast will be conducted at 5:00 p.m. EDT on November 7, 2019.

Members of the public and investors are invited to join the call and participate in the question and answer session by dialing 1-877-300-8521 (domestic), 1-412-317-6026 (international), or via webcast by logging onto www.pega.com at least five minutes prior to the event's broadcast and clicking on the webcast icon in the Investors section.

A replay of the call will also be available on www.pega.com/about/investors by clicking the earnings calls link in the investors section.

Discussion of non-GAAP financial measures

To supplement the financial results presented in accordance with generally accepted accounting principles in the U.S. ("GAAP"), we provide non-GAAP measures, including in this release. We utilize several 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. Our annual financial plan is prepared on both a GAAP and a non-GAAP basis, and both are approved by our board of directors. In addition, because of the importance of these measures in managing the business, we use non-GAAP measures, and financial performance results in the evaluation process to establish management's compensation.

The non-GAAP measures exclude the effects of stock-based compensation expense, amortization of intangible assets, and foreign currency transaction gains and losses. We believe 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. They should be read-only in conjunction with our consolidated financial statements prepared in accordance with GAAP.

A reconciliation of the GAAP measures to our Non-GAAP measures is contained in the financial schedules at the end of this 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.

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 our 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.

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 our products and services, reliance on third-party relationships, reliance on key personnel, the inherent risks associated with international operations and the continued uncertainties in the global economy, our continued effort to market and sell both domestically and internationally, foreign currency exchange rates, the potential legal and financial liabilities and reputation damage due to cyber-attacks and security breaches, and management of our 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 Part I of our Annual Report on Form 10-K for the year ended December 31, 2018, and other filings we make with the U.S. Securities and Exchange Commission ("SEC"). These documents are available on the Company's website at www.pega.com/about/investors.

Investors are cautioned not to place undue reliance on such forward-looking statements, and there are no assurances that the results contained in such statements will be achieved. Although new information, future events, or risks may cause actual results to differ materially from future results expressed or implied by such forward-looking statements, except as required by applicable law, we do not undertake and expressly disclaim any obligation to publicly update or revise these forward-looking statements whether as the result of new information, future events, or otherwise.

The forward-looking statements contained in this press release represent the Company's views as of November 7, 2019.

About Pegasystems

Pega is the leader in cloud software for customer engagement and operational excellence. The world's most recognized and successful brands rely on Pega's AI-powered software to optimize every customer interaction on any channel while ensuring their brand promises are kept. Pega's low-code application development platform allows enterprises to quickly build and evolve apps to meet their customer and employee needs and drive digital transformation on a global scale. For more than 35 years, Pega has enabled higher customer satisfaction, lower costs, and increased customer lifetime value. For more information on Pegasystems PEGA visit www.pega.com.

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

Investor contact:
Garo Toomajanian
ICR for Pegasystems Inc.
pegainvestorrelations@pega.com
(617) 866-6077

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 September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Revenue
Software license	$	58,005	$	52,342	$	165,543	$	184,899
Maintenance	70,371		66,017		207,406		196,448
Services	88,327		84,904		261,892		253,877
Total revenue	216,703		203,263		634,841		635,224
Cost of revenue
Software license	676		1,255		2,982		3,772
Maintenance	6,688		6,079		19,315		18,035
Services	73,534		67,089		210,118		202,047
Total cost of revenue	80,898		74,423		232,415		223,854
Gross profit	135,805		128,840		402,426		411,370
Operating expenses
Selling and marketing	115,237		87,490		341,064		269,845
Research and development	52,492		46,504		152,802		135,261
General and administrative	14,843		12,104		41,693		38,749
Total operating expenses	182,572		146,098		535,559		443,855
(Loss) from operations	(46,767)		(17,258)		(133,133)		(32,485)
Foreign currency transaction (loss) gain	(1,970)		399		(3,577)		558
Interest income, net	556		683		1,823		2,076
Other income, net	323		—		378		363
(Loss) before (benefit from) income taxes	(47,858)		(16,176)		(134,509)		(29,488)
(Benefit from) income taxes	(17,520)		(8,589)		(43,158)		(23,692)
Net (loss)	$	(30,338)	$	(7,587)	$	(91,351)	$	(5,796)
(Loss) per share
Basic	$	(0.38)	$	(0.10)	$	(1.16)	$	(0.07)
Diluted	$	(0.38)	$	(0.10)	$	(1.16)	$	(0.07)
Weighted-average number of common shares outstanding
Basic	79,200		78,700		78,928		78,525
Diluted	79,200		78,700		78,928		78,525

PEGASYSTEMS INC. UNAUDITED RECONCILIATION OF SELECTED GAAP MEASURES TO NON-GAAP MEASURES ⁽¹⁾ (in thousands, except percentages and per share amounts)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2019		2018		Change	2019		2018		Change
Total revenue - GAAP and Non-GAAP	$	216,703	$	203,263	7%	$	634,841	$	635,224	—%

Net (loss) - GAAP	$	(30,338)	$	(7,587)	(300)%	$	(91,351)	$	(5,796)	(1,476)%
Amortization of intangible assets	1,017		2,835			5,608		8,508
Stock-based compensation ⁽²⁾	21,846		16,408			60,242		47,573
Foreign currency transaction loss (gain)	1,970		(399)			3,577		(558)
Income tax effects ⁽³⁾	(12,456)		(9,256)			(28,840)		(30,201)
Net (loss) income - Non-GAAP	$	(17,961)	$	2,001	*	$	(50,764)	$	19,526	*

Diluted (loss) per share - GAAP	$	(0.38)	$	(0.10)	(280)%	$	(1.16)	$	(0.07)	(1,557)%
Non-GAAP adjustments	0.15		0.12			0.52		0.30
Diluted (loss) earnings per share - Non-GAAP	$	(0.23)	$	0.02	*	$	(0.64)	$	0.23	*

Diluted weighted-average number of common shares outstanding - GAAP	79,200		78,700		1%	78,928		78,525		1%
Incremental dilutive shares for non-GAAP	—		4,521			—		4,714
Diluted weighted-average number of common shares outstanding - Non-GAAP	79,200		83,221		(5)%	78,928		83,239		(5)%

* not meaningful


⁽¹⁾	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.

	Our non-GAAP financial measures reflect adjustments based on the following items:

		•	Amortization of intangible assets: We have excluded the amortization of intangible assets from our non-GAAP operating expenses and profitability measures. Amortization of intangible assets fluctuates 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 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 our revenues recognized during the periods presented and is expected to contribute to our future period revenues, we continue to evaluate our business performance excluding stock-based compensation.

		•	Foreign currency transaction loss (gain): We have excluded foreign currency transaction gains and losses from our non-GAAP profitability measures. Foreign currency transaction gains and losses fluctuate in amount and frequency and are significantly affected by changes in foreign exchange market rates. Foreign currency transaction gains and losses will recur in future periods.

	For additional information about our use of Non-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.

⁽²⁾	Stock-based compensation was:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Cost of revenues	$	4,787	$	4,319	$	14,216	$	12,277
Selling and marketing	8,317		6,198		24,055		16,895
Research and development	4,858		3,917		13,990		11,356
General and administrative	3,884		1,974		7,981		7,045
	$	21,846	$	16,408	$	60,242	$	47,573
Income tax benefit	$	(4,430)	$	(3,555)	$	(12,226)	$	(10,037)

⁽³⁾ Effective income tax rates were:

	Nine Months Ended September 30,
	2019		2018
GAAP	32	%	80	%
Non-GAAP	22	%	25	%

Our effective income tax rate under GAAP is subject to significant fluctuations due to a variety of factors, including 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. We determine our non-GAAP income tax rate by using applicable rates in taxing jurisdictions and assessing certain factors, including our historical and forecast earnings by jurisdiction, discrete items, and our ability to realize tax assets. We believe it is beneficial for our management to review our non-GAAP effective income tax rate on a basis consistent with the effective income tax rate in our annual plan as established at the beginning of each year given this tax rate volatility.

PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)


	September 30, 2019		December 31, 2018
Assets
Total cash, cash equivalents, and marketable securities	$	112,569	$	207,423
Total receivables (billed and unbilled)	419,320		504,765
Goodwill	78,862		72,858
Other assets	306,273		197,507
Total assets	$	917,024	$	982,553

Liabilities and stockholders' equity
Accrued expenses, including compensation and related expenses	$	129,869	$	130,177
Deferred revenue, current	159,849		185,145
Other liabilities	98,474		45,700
Stockholders' equity	528,832		621,531
Total liabilities and stockholders' equity	$	917,024	$	982,553

PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)


	Nine Months Ended September 30,
	2019		2018
Net (loss)	$	(91,351)	$	(5,796)
Adjustments to reconcile net (loss) to cash (used in) provided by operating activities
Non-cash items	73,547		75,992
Change in operating assets and liabilities, net	4,342		(3,108)
Cash (used in) provided by operating activities	(13,462)		67,088
Cash provided by (used in) investing activities	53,448		(49,595)
Cash (used in) financing activities	(61,941)		(71,664)
Effect of exchange rate changes on cash and cash equivalents	(363)		(1,913)
Net (decrease) in cash and cash equivalents	(22,318)		(56,084)
Cash and cash equivalents, beginning of period	114,422		162,279
Cash and cash equivalents, end of period	$	92,104	$	106,195

The corporate logo for Pega (PRNewsfoto/Pegasystems Inc.)

SOURCE Pegasystems Inc.

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