Pegasystems Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Amounts below are in millions of U.S. dollars, except per-share data. Financial statements are unaudited.
Business context and financial performance
Pegasystems develops and licenses enterprise software for customer engagement and operations, and provides maintenance, cloud, consulting, and training. It reports one operating segment.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $198.0 | $189.0 | $421.2 | $367.9 |
| Gross profit / margin | $130.1 / 66% | $128.9 / 68% | $285.3 / 68% | $251.2 / 68% |
| Operating income / margin | $1.8 / 1% | $6.4 / 3% | $33.0 / 8% | $20.5 / 6% |
| Net income | $11.4 | $4.5 | $38.4 | $14.9 |
| Diluted EPS | $0.14 | $0.06 | $0.47 | $0.19 |
| Operating cash flow | Not separately stated | Not separately stated | $85.8 | $11.6 |
- Q2 revenue grew 5%; six-month revenue grew 15%. Q2 license revenue fell 14% to $61.0 million, as perpetual license revenue declined 42%, partly offset by 63% growth in term licenses. For the first half, license revenue increased 10%.
- Maintenance revenue rose 8% in Q2 and 10% for the first half. Services revenue grew 22% in Q2 and 24% for the first half, mainly from consulting work on a large project begun in late 2016. Cloud revenue increased 13% in Q2 and 19% in the first half.
- Q2 operating income declined 72% despite revenue growth, as operating expenses increased 5% and gross margin eased two percentage points. First-half operating income increased 61%.
- Net income benefited from income tax benefits of $9.8 million in Q2 and $5.1 million for the first half, principally excess tax benefits from stock compensation. The resulting effective tax rates were unusually low and may vary with share price, award vesting, and option exercises.
Liquidity, cash flow, and capital
- At June 30, cash and cash equivalents were $121.6 million and marketable securities were $58.4 million, totaling $180.0 million, up from $133.8 million at year-end 2016. Current assets were $437.6 million and current liabilities $266.0 million.
- First-half operating cash flow was $85.8 million, compared with $11.6 million a year earlier. Management attributed the increase largely to $53.0 million from accounts receivable, reflecting collections and billing timing, and higher net income.
- Investing activities used $1.2 million; financing activities used $34.9 million, including $4.6 million of dividends, $27.3 million for share withholding related to equity awards, and $3.0 million of program repurchases.
- The balance sheet presents no borrowings or debt. Total liabilities were $294.3 million; deferred revenue totaled $178.4 million. No client represented 10% or more of revenue or receivables.
- Management said cash, securities, and operating cash flow should fund operations, dividends, and repurchases for at least the next 12 months. Approximately $56.9 million of cash was held by foreign subsidiaries; repatriation could incur U.S. tax.
Material changes, outlook, and risks
- Recurring revenue was $103.1 million in Q2, up 21%, and $226.6 million for the first half, up 13%. Management cited term-license backlog, a prepaid first-year renewal, maintenance growth, and cloud expansion. Maintenance renewal rates were described as significantly above 90%.
- License and cloud backlog was $518.0 million at June 30, up 32% year over year, including $447.5 million of term-license and cloud backlog. Future committed cash receipts not yet billed totaled $462.4 million; timing of receipts may differ from revenue recognition.
- The company began tracking Annualized Contract Value (ACV) as it prepares for ASC 606 adoption on January 1, 2018, using the full retrospective method. It expects changes to the timing and allocation of revenue, contract assets, sales-commission accounting, and taxes; the total financial impact was still being quantified.
- In May 2017, the company discontinued its foreign-currency forward-contract program; no contracts were outstanding at quarter-end. It may resume hedging if deemed necessary.
- Management’s current intention was to continue a quarterly dividend of $0.03 per share, but the board may change or discontinue it. The share-repurchase authorization was extended through June 30, 2018.
- No formal revenue or earnings guidance is provided in the supplied filing text. Risks highlighted include demand variability and license-revenue timing, industry consolidation, third-party relationships, international and foreign-exchange exposure, acquisitions, cyberattacks and security breaches, and managing growth. The filing reported no material changes to the prior annual report’s risk factors.
Key investor verification points
- Assess whether term-license, maintenance, cloud, and backlog growth converts into recognized revenue and cash as expected, particularly under ASC 606.
- Evaluate the sustainability of operating cash flow, given the substantial contribution from receivables collections and billing timing.
- Separate underlying earnings performance from the unusually large stock-compensation tax benefits and rising stock-based compensation expense ($26.4 million for the first half, up 33%).
- Monitor Q2 operating-margin compression, services delivery costs, and the variability of perpetual-license mix and revenue timing.
- Review foreign-cash repatriation tax exposure, the dividend and repurchase plans, and the company’s currency exposure after ending forward-contract hedging.