Q1 2020 Revenue up 25% Driven by 57% Increase in Pega Cloud Revenue

CAMBRIDGE, Mass., April 29, 2020 /PRNewswire/ -- Pegasystems Inc. (NASDAQ: PEGA), the software company empowering digital transformation at the world's leading enterprises, released its financial results for the first quarter of 2020.

"In Q1, we demonstrated the resiliency of our business and delivered solid results, especially given the global pandemic," said Alan Trefler, Founder and CEO, Pegasystems. "Our team has navigated through many challenging times before, and we have always come out stronger on the other side. We've pivoted quickly to provide solutions that help our clients respond to the crisis while accelerating their digital transformation initiatives for long-term success. Based on the business-critical nature of the value we provide, we see opportunity to further expand our value proposition with existing and new clients."

"Total ACV grew 21% year over year to $711 million," said Ken Stillwell, CFO, Pegasystems. "This large shift to recurring revenue is further evidence that we're executing well on our multi-year cloud transition. Our business is now over 75 percent recurring revenue and, including Pega consulting revenue which is also highly predictable, we have over 90 percent visibility into our 2020 revenue target. Additionally, the timing of the convertible debt offering in Q1 provides us with the financial strength to market our digital transformation solutions and support our growth."

Pega is pleased to announce Hayden Stafford as President of Global Client Engagement, effective June 1, 2020, reporting directly to Alan Trefler, Founder and CEO, joining Pega from a leadership position at Microsoft. This new role will unify Pega's Corporate Strategy, Marketing, and Go-to-Market functions and bring together the talented teams of Doug Kra, SVP Client Success International, Tom Libretto, SVP Marketing and CMO, Jeff Taylor, SVP Business Strategy and Go-To-Market Operations, and Leon Trefler, SVP Client Success Americas.

"As Pega evolves and our business continues to grow, we are always on the lookout for people who can strengthen our culture and help accelerate our success. I'm excited to welcome Hayden to help deepen our client engagement and allow me to focus more time with strategic clients and evolving our technology," said Mr. Trefler.


     
              Financial and performance metrics (1)





     
              (Dollars in thousands,                                                                                       
            
           Three Months Ended
                                                                                                                                       
           March 31,

     
              except per share amounts)


                                   
            
              2020                                               2019                                                    Change


                                                                                                                   25




     
              Total revenue                                                                                    $
            
              265,591                             $
       
          212,546   %


                                                                                                                   12




     
              Net (loss) - GAAP                                                                               $
            
              (25,372)                           $
       
          (28,717)  %



     Net income (loss) - Non-GAAP                                                                                             $
            4,032                                   $
        (9,376)  *


                                                                                                                   14




     
              Diluted (loss) per share - GAAP                                                                   $
            
              (0.32)                             $
       
          (0.37)  %



     Diluted earnings (loss) per share - Non-GAAP                                                                              $
            0.05                                    $
        (0.12)  *





     * 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.

                   (Dollars in thousands)                                             
              
               Three Months Ended
                                                                                                
               March 31,


                       
              
                2020                                                         2019                         Change



     Cloud                                                      $
              43,466                      16                           $
             27,758    13                 $
     15,708   57

                                                                                                         %                                               %                              %



     Maintenance                                      73,695                                 28                              67,706                  32         5,989      9

                                                                                              %                                                     %                  %



     Term license                                     90,257                                 34                              48,314                  23        41,943     87

                                                                                              %                                                     %                  %



     Subscription (2)                                207,418                                 78                             143,778                  68        63,640     44

                                                                                              %                                                     %                  %



     Perpetual license                                 3,659                                  1                              14,950                   7      (11,291)  (76)

                                                                                              %                                                     %                  %



     Consulting                                       54,514                                 21                              53,818                  25           696      1

                                                                                              %                                                     %                  %


                                                                $
              265,591                     100                          $
             212,546   100                 $
     53,045   25

                                                                                                         %                                               %                              %






     (2) Reflects client arrangements (term license, cloud, and maintenance) that are subject to renewal.

Quarterly conference call

A conference call and audio-only webcast will be conducted at 5:00 p.m. ET on April 29, 2020.

Members of the public and investors are invited to join the call and participate in the question and answer session by dialing 1-888-394-8218 (domestic), 1-323-701-0225 (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 Relations 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. 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, expenses arising in connection with the issuance of our convertible senior notes and the related capped call transactions, losses arising from our venture investments, losses arising in connection with the change in format of PegaWorld, and income tax effects related to the foregoing. We believe 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. 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.

Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, intends to, projects, forecasts, guidance, likely, and usually, or variations of such words and other similar expressions are intended to identify forward-looking statements, which speak only as of the date the statement was made and are based on current expectations and assumptions.

These forward-looking statements deal with future events, and are subject to various risks and uncertainties that are difficult to predict, including, but are not limited to, statements about our future financial performance and business plans, the adequacy of our liquidity and capital resources, the continued payment of quarterly dividends, and the timing of revenue recognition, management of our transition to a more subscription-based business model, variation in demand for our products and services, including among clients in the public sector, the impact of actual or threatened public health emergencies, such as the Coronavirus (COVID-19), reliance on third-party service providers, compliance with our debt obligations and debt covenants, the potential impact of our convertible senior notes and related capped call transactions, reliance on key personnel, and the continued uncertainties in the global economy, foreign currency exchange rates, the potential legal and financial liabilities and reputation damage due to cyber-attacks, security breaches and security flaws, our ability to protect our intellectual property rights and costs associated with defending such rights, maintenance of our client retention rate, 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 further in Part I of our Annual Report on Form 10-K for the year ended December 31, 2019, and other filings we make with the U.S. Securities and Exchange Commission ("SEC"). These documents are available on our website at www.pega.com/about/investors.

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 our views as of April 29, 2020.

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.

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
                                                                                                                                           
         March 31,


                                                                                                                                  2020                         2019



     
                Revenue



     Software license                                                                                                                     $
       93,916                            $
        63,264



     Maintenance                                                                                                               73,695                                  67,706



     Services                                                                                                                  97,980                                  81,576



     Total revenue                                                                                                            265,591                                 212,546



     
                Cost of revenue



     Software license                                                                                                             684                                   1,378



     Maintenance                                                                                                                5,576                                   6,335



     Services                                                                                                                  73,268                                  66,724



     Total cost of revenue                                                                                                     79,528                                  74,437



     Gross profit                                                                                                             186,063                                 138,109



     
                Operating expenses



     Selling and marketing                                                                                                    136,024                                 108,865



     Research and development                                                                                                  58,727                                  50,596



     General and administrative                                                                                                15,630                                  12,676



     Total operating expenses                                                                                                 210,381                                 172,137



     (Loss) from operations                                                                                                  (24,318)                               (34,028)



     Foreign currency transaction (loss)                                                                                      (5,947)                                (3,712)



     Interest income                                                                                                              607                                     723



     Interest expense                                                                                                         (2,306)



     Other (loss), net                                                                                                       (17,218)



     (Loss) before (benefit from) income taxes                                                                               (49,182)                               (37,017)



     (Benefit from) income taxes                                                                                             (23,810)                                (8,300)



     Net (loss)                                                                                                                         $
       (25,372)                         $
        (28,717)



     
                (Loss) per share



     Basic                                                                                                                                $
       (0.32)                           $
        (0.37)



     Diluted                                                                                                                              $
       (0.32)                           $
        (0.37)



     
                Weighted-average number of common shares outstanding



     Basic                                                                                                                     79,808                                  78,584



     Diluted                                                                                                                   79,808                                  78,584

                                                                                                  
              
                PEGASYSTEMS INC.


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


                                                                                   
         
                (in thousands, except percentages and per share amounts)




                                                                                                                
              
                Three Months Ended
                                                                                                                          
                March 31,


                                                                                           2020                                             2019                        Change



     
                Net (loss) - GAAP                                                              $
              
                (25,372)                                            $
       
          (28,717)      12

                                                                                                                                                                                                          %



     Amortization of intangible assets                                                   1,018                                                        2,935



     Stock-based compensation (2)                                                       23,175                                                       18,350



     Foreign currency transaction loss                                                   5,947                                                        3,712



     Convertible senior notes                                                            1,719



     Capped call transactions                                                           18,592



     Venture investments                                                               (1,374)



     PegaWorld                                                                           5,273



     Income tax effects (3)                                                           (24,946)                                                     (5,656)



     Net income (loss) - Non-GAAP                                                                                $
              4,032                                                    $
        (9,376)       *





     
                Diluted (loss) per share - GAAP                                                  $
              
                (0.32)                                              $
       
          (0.37)      14

                                                                                                                                                                                                          %



     Non-GAAP adjustments                                                                 0.37                                                         0.25



     Diluted earnings (loss) per share - Non-GAAP                                                                 $
              0.05                                                     $
        (0.12)       *




                   Diluted weighted-average number of common shares outstanding - GAAP   79,808                                                       78,584                                           2

                                                                                                                                                                                                     %



     Incremental dilutive shares for Non-GAAP                                            4,337


      Diluted weighted-average number of common shares outstanding - Non-GAAP            84,145                                                       78,584                                           7

                                                                                                                                                                                                     %






      *     
      not meaningful



     
     (1)    Our 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. 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:
                             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.





      --                     Convertible senior notes: In
                             February 2020, we issued $600
                             million of convertible senior
                             notes, which bear interest at an
                             annual fixed rate of 0.75%. The
                             imputed interest rate of the
                             convertible senior notes was
                             approximately 4.31%, which results
                             in a debt discount recorded for the
                             conversion feature that is required
                             to be separately accounted for as
                             equity, and debt issuance costs,
                             which reduce the carrying value of
                             the convertible debt instrument.
                             The debt discount and issuance
                             costs are amortized as interest
                             expense over the life of the debt.
                             We believe excluding these amounts
                             provides a more useful comparison
                             of our operational performance in
                             different periods.





      --                     Capped call transactions: We have
                             excluded gains and losses from our
                             privately negotiated capped call
                             transactions entered into
                             concurrent with our issuance of the
                             convertible senior notes to reduce
                             potential dilution to our common
                             stock upon any conversion of the
                             convertible senior notes and/or
                             offset any potential cash payments
                             we are required to make in excess
                             of the principal amount of
                             convertible senior notes that may
                             be converted, with such reduction
                             and/or offset subject to a cap. We
                             believe excluding these amounts
                             from our non-GAAP financial
                             measures is useful to investors as
                             the types of events giving rise to
                             them are not representative of our
                             core business operations and
                             ongoing operating performance.





      --                     Venture investments: We have
                             excluded gains and losses from our
                             venture investments. We believe
                             excluding these amounts from our
                             non-GAAP financial measures is
                             useful to investors as the types of
                             events giving rise to them are not
                             representative of our core business
                             operations and ongoing operating
                             performance.





      --                     PegaWorld: Due to the global COVID-
                             19 pandemic, to help ensure the
                             health and safety of attendees and
                             employees, we converted our annual
                             PegaWorld conference from a multi-
                             day live event to a free virtual
                             event. We have excluded the
                             incremental fees we incurred due to
                             the cancellation of the live event
                             from our Non-GAAP operating
                             expenses and profitability
                             measures.





              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
                                                 
           March 31,


                   (in
                    thousands)               2020                          2019


      Cost of
       revenues                                       $
         5,152                       $
        4,519


      Selling and
       marketing                            9,718                               7,374


      Research and
       development                          5,496                               4,560


      General and
       administrative                       2,809                               1,897


                                                     $
         23,175                      $
        18,350


      Income tax
       benefit                                      $
         (4,582)                    $
        (3,740)


              
                (3) Effective income tax rates were:




                                                   Three Months Ended
                                        March 31,


                               2020                    2019



              GAAP              48                                 22

                                  %                                 %



              Non-GAAP          22                                 22

                                  %                                 %

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)




                                                                 March 31, 2020                                 December 31,
                                                                                                                 2019



     
                Assets


      Cash and cash equivalents                                                     $
              538,142                   $
      68,363


      Receivables (billed and
       unbilled)                                                        484,325                         501,675



     Goodwill                                                           78,498                          79,039



     Other assets                                                      373,428                         335,735



     Total assets                                                                $
              1,474,393                  $
      984,812


                   Liabilities and stockholders' equity


      Accrued expenses, including
       compensation and related
       expenses                                                                      $
              96,913                  $
      152,127


      Deferred revenue, current                                         197,018                         190,080


      Convertible senior notes, net                                     505,108



     Other liabilities                                                 108,743                         103,595



     Stockholders' equity                                              566,611                         539,010


      Total liabilities and
       stockholders' equity                                                       $
              1,474,393                  $
      984,812


                                       
              
                PEGASYSTEMS INC.


                  
              
                UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


                                        
              
                (in thousands)




                                                                       Three Months Ended
                                                         
                March 31,


                                                2020                                2019



     Net (loss)                                       $
              (25,372)                          $
       (28,717)


      Adjustments to reconcile net (loss) to cash
       (used in) provided by operating activities



     Non-cash items                          56,096                                          42,307


      Change in operating assets
       and liabilities, net                 (49,047)                                          9,113


      Cash (used in) provided by
       operating activities                 (18,323)                                         22,703


      Cash (used in) investing
       activities                           (12,562)                                        (1,466)


      Cash provided by (used in)
       financing activities                  502,174                                        (25,587)


      Effect of exchange rate
       changes on cash and cash
       equivalents                           (1,510)                                            295


      Net increase (decrease) in
       cash and cash equivalents             469,779                                         (4,055)


      Cash and cash equivalents,
       beginning of period                    68,363                                         114,422


      Cash and cash equivalents,
       end of period                                    $
              538,142                            $
       110,367


                                                                            
              
                PEGASYSTEMS INC.


                                                                     
              
                ANNUAL CONTRACT VALUE ("ACV")


                                                                   
              
                (in millions, except percentages)




                   Annual contract value ("ACV") -ACV represents the annualized value of our active contracts as of the measurement date. ACV for term license
                    and cloud contracts is calculated by dividing the total value of the contract by the duration of the contract in years. ACV for maintenance
                    is calculated as maintenance revenue for the quarter then ended multiplied by four. Client cloud ACV is composed of maintenance ACV and ACV
                    from term license contracts. We believe the presentation of ACV on a constant currency basis enhances the understanding of our results and
                    evaluation of our performance in comparison to prior periods, as it provides visibility into the impact of changes in foreign currency
                    exchange rates, which are outside of our control. All periods shown reflect foreign currency exchange rates as of March 31, 2020.




                                                       March 31,                                             March 31,
                                                          2020                                                 2019                                Change


      Maintenance                                                  $
              295                                                              $
              271        $
      24    9

                                                                                                                                                                              %



     Term                                                   234                                                              190                             44   23

                                                                                                                                                                 %


      Client Cloud                                           529                                                              461                             68   15

                                                                                                                                                                 %


      Pega Cloud                                             182                                                              127                             55   43

                                                                                                                                                                 %



     Total                                                        $
              711                                                              $
              588       $
      123   21

                                                                                                                                                                              %


                                                                                                                                                                                                                             
              
                PEGASYSTEMS INC.


                                                                                                                                                                                                                                  
              
                BACKLOG


                                                                                                                                                                                                                    
              
                (in thousands, except percentages)







       
                Remaining performance obligations ("Backlog") - Backlog represents contracted revenue that has not yet been recognized, and includes deferred revenue and non-cancellable amounts that will be invoiced and recognized as revenue in future periods.




                                                                                                                                                                                 
              
                March 31, 2020


                                                                         Perpetual license                                                 Term license                                       Maintenance                                                 Cloud                Consulting                   Total



       1 year or less                                                                         $
              3,995                                                                                              $
              30,962                                                           $
          205,083               $
      174,277               $
      18,945     $
       433,262    58

                                                                                                                                                                                                                                                                                                                                                                               %



       1-2 years                                                                    2,168                                                                     5,088                                                                                       34,633                                   125,473       1,215                   168,577            22

                                                                                                                                                                                                                                                                                                                                                        %



       2-3 years                                                                        -                                                                    6,504                                                                                       19,411                                    81,187         107                   107,209            14

                                                                                                                                                                                                                                                                                                                                                        %



       Greater than 3 years                                                             -                                                                      635                                                                                       10,596                                    33,537          10                    44,778             6

                                                                                                                                                                                                                                                                                                                                                        %


                                                                                               $
              6,163                                                                                              $
              43,189                                                           $
          269,723               $
      414,474               $
      20,277     $
       753,826   100

                                                                                                                                                                                                                                                                                                                                                                               %




       
                Change in Backlog Since March 31, 2019

    ---

                                                                                             $
              (7,278)                                                                                            $
              (6,380)                                                           $
          66,603                $
      63,136                $
      5,163     $
       121,244


                                                                                      (54)                                                                     (13)
                                                                                         %                                                                        %                                                                                33
            %                               18
          %     34
      %                  19
       %




                                                                                                                                                                                 
              
                March 31, 2019


                                                                         Perpetual license                                                 Term license                                       Maintenance                                                 Cloud                Consulting                   Total



       1 year or less                                                                        $
              10,263                                                                                              $
              44,404                                                           $
          187,324               $
      115,548               $
      13,251     $
       370,790    58

                                                                                                                                                                                                                                                                                                                                                                               %



       1-2 years                                                                      998                                                                     4,274                                                                                        9,350                                    91,539       1,363                   107,524            17

                                                                                                                                                                                                                                                                                                                                                        %



       2-3 years                                                                    2,180                                                                       756                                                                                        4,438                                    71,509         473                    79,356            13

                                                                                                                                                                                                                                                                                                                                                        %



       Greater than 3 years                                                             -                                                                      135                                                                                        2,008                                    72,742          27                    74,912            12

                                                                                                                                                                                                                                                                                                                                                        %


                                                                                              $
              13,441                                                                                              $
              49,569                                                           $
          203,120               $
      351,338               $
      15,114     $
       632,582   100

                                                                                                                                                                                                                                                                                                                                                                               %

                                                                                                                                                                                                                                                                                                                                                                                     ===

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SOURCE Pegasystems Inc.