Pegasystems Inc. — Q3 2013 Form 10-Q
Business context and period. Pegasystems develops business-process and enterprise-application software, with related licensing, maintenance, consulting, cloud and training services. This unaudited filing covers the quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $122.0 | $101.7 | $355.6 | $317.9 |
| Gross profit / margin | $83.9 / 68.8% | $64.0 / 62.9% | $241.9 / 68.1% | $198.7 / 62.5% |
| Operating income | $13.8 | $0.4 | $33.8 | $3.6 |
| Net income (loss) | $8.7 | $(0.3) | $22.5 | $1.5 |
| Diluted EPS | $0.22 | $(0.01) | $0.58 | $0.04 |
- Revenue mix: Q3 software license revenue was $44.8 million, maintenance $38.0 million and professional services $39.2 million. For the nine-month period, the respective amounts were $128.2 million, $112.2 million and $115.1 million.
- Cash flow: Nine-month operating cash flow was $83.4 million versus $29.1 million. Strong receivable collections contributed $42.6 million to operating cash flow. Property and equipment investment was $4.2 million, compared with $21.9 million in the prior period.
- Cash and liquidity: At September 30, cash and equivalents were $108.8 million and marketable securities $79.6 million, totaling $188.4 million, up from $123.0 million at year-end 2012. Current assets were $300.3 million and current liabilities $146.8 million. Approximately $54.8 million of cash and equivalents was held in foreign subsidiaries.
- Debt and capital returns: The balance sheet does not show a separate interest-bearing debt balance. The company paid $2.3 million in dividends and repurchased $9.2 million of shares during the first nine months. The declared dividend was $0.03 per share quarterly.
Changes versus the prior comparable periods
- Revenue increased 20% in Q3 and 12% for the first nine months. License revenue rose 57% and 34%, respectively, while maintenance revenue increased 18% and 15%.
- Professional services revenue declined 4% in Q3 and 8% year to date. Management attributed the decrease mainly to more clients becoming enabled and partners leading more implementation work; it said this trend could continue. Training revenue also declined year to date, partly due to uptake of lower-priced online training.
- Profitability improved substantially as license and maintenance growth lifted gross profit while operating expenses grew more slowly than revenue. Professional-services gross margin weakened, which management attributed to lower consulting revenue, project costs whose related revenue had not yet qualified for recognition, and higher employee incentive costs.
- Cash and marketable securities increased, supported by collections, while deferred revenue declined to $109.7 million from $114.3 million at December 31, 2012. Receivables fell to $90.6 million from $134.1 million.
Outlook, commentary, risks and unusual items
- Outlook: The filing gives no specific revenue or earnings guidance. Management said cash, cash equivalents and operating cash flow should fund operations, dividends and the share-repurchase program for at least the next 12 months. It currently intended to continue the $0.03 quarterly dividend, subject to board change.
- License visibility and variability: Contractual future cash receipts from existing license agreements totaled $234.2 million, including $203.6 million for term licenses not yet recorded on the balance sheet. Management expected to recognize $16 million of the term-license amount as revenue during the remainder of 2013, in addition to new agreements or prepayments. License revenue timing depends on agreement terms, payment schedules and acceptance criteria, and can vary materially.
- Acquisition: On October 9, 2013, after quarter-end, Pegasystems acquired Antenna Software for $26.3 million in cash. The purchase-price allocation was still being prepared. Acquisition-related costs were $0.5 million in Q3, with an additional estimated $2.2 million expected. Management cited mobile application development and related capabilities as strategic benefits.
- Risks and contingencies: Key disclosed risks include variable demand and license-revenue timing, global market volatility, consolidation in financial services and healthcare, reliance on third parties, and managing growth. The filing added risks from acquisitions, including integration challenges, management distraction, insufficient returns and potential acquired-technology claims. Foreign-exchange exposure includes the pound and euro, with increased exposure to the Australian dollar and Indian rupee; forward contracts are used but are not designated as accounting hedges.
- Other items: The nine-month effective tax rate was 29.9%, versus 47.8% in 2012; management cited tax deductions, foreign tax-rate differences and a research-credit benefit. Potential U.S. tax on repatriating foreign cash was not quantified. One client represented 10% of Q3 revenue and 13% of receivables at September 30. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether strong license growth and the reported future contractual receipts convert into revenue and cash on expected schedules, given the filing’s cautions about recognition timing and quarterly variability.
- Whether the services-revenue decline and weaker professional-services margin continue as clients and partners take on more implementation work.
- The Antenna acquisition’s final purchase-price allocation, integration costs and contribution to revenue, profitability and cash flow.
- Cash-flow quality and sustainability, including the role of receivable collections, foreign-held cash and potential repatriation taxes.
- Customer concentration, foreign-exchange exposure, and the board’s continuation of dividends and share repurchases.