Pegasystems Inc. (NASDAQ: PEGA) — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Unless stated otherwise, financial figures are in U.S. dollars; amounts below are rounded to millions.
Business context
Pegasystems develops and licenses business-process software, including BPM, CRM, decision-management, and mobile application solutions. It also earns revenue from maintenance, consulting, training, and cloud services. The company primarily targets large organizations and reported one business-process-solutions segment. Approximately 45% of 2013 revenue came from clients outside the United States.
Financial performance and liquidity
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $509.0m | $461.7m | +10% |
| Gross profit / margin | $351.5m / 69% | $304.3m / 66% | Margin +3 percentage points |
| Operating income | $58.1m | $31.4m | +85% |
| Net income | $38.0m | $21.9m | +74% |
| Diluted EPS | $0.98 | $0.56 | +$0.42 |
| Cash from operating activities | $80.7m | $43.6m | +$37.1m |
- License revenue increased 17% to $191.9m, including perpetual licenses of $122.6m, term licenses of $62.7m, and subscription revenue of $6.5m. Maintenance revenue rose 18% to $157.3m. Services revenue declined 3% to $159.8m, including a 2% decrease in consulting revenue.
- Services gross margin fell to 15% from 17%; license and maintenance gross margins were 97% and 90%, respectively. Overall operating expenses rose 8% to $293.5m, including $1.3m of acquisition-related costs and $1.7m of restructuring costs.
- Cash, cash equivalents, and marketable securities totaled $156.7m at year-end, versus $123.0m a year earlier. Working capital was $159.8m. The balance sheet presents no borrowing or debt line item.
- Operating cash flow benefited in part from $26.4m of deferred-revenue growth, primarily maintenance billings. Investing activities used $64.0m, including the Antenna acquisition and purchases of marketable securities; financing activities used $14.6m, primarily for repurchases and dividends.
- Total liabilities were $261.9m, including $145.1m of current and long-term deferred revenue. Operating lease obligations totaled $95.4m.
Material changes and unusual items
- Pegasystems acquired mobile-platform provider Antenna on October 9, 2013, for approximately $27.7m in cash. Antenna contributed $3.9m of revenue and a $2.6m loss from the acquisition date. The preliminary allocation included $17.0m of goodwill and $10.4m of identifiable intangible assets.
- Approximately 80% of the value of new license arrangements in 2013 was with existing clients, compared with 74% in 2012. Management said the aggregate value of new arrangements increased year over year, but was slightly lower in fourth-quarter 2013 than fourth-quarter 2012.
- Fourth-quarter 2013 revenue was $153.4m and net income was $15.6m, compared with $143.8m and $20.4m, respectively, in fourth-quarter 2012.
- Backlog of license, maintenance, and services agreements was approximately $506.1m at year-end, with about $279.7m expected to be recognized in 2014. The filing cautions that backlog may not reliably predict future performance and may depend on satisfaction of contractual conditions.
Outlook, risks, and contingencies
The filing provides no formal revenue or earnings guidance. Management said it expects to continue committing significant resources to product research and development and believes existing cash, investments, and operating cash flow will fund operations and the share-repurchase program for at least 12 months. The company intended to continue quarterly dividends of $0.03 per share, subject to Board discretion.
- Results can fluctuate with the timing, size, and mix of license deals and with revenue-recognition timing. Term licenses and cloud subscriptions can defer revenue while sales commissions are incurred earlier.
- Management noted that consulting revenue could continue to decline as clients and partners lead more implementations. It also cited competitive pressure, reliance on partners and follow-on sales, and the risk that higher fixed selling, marketing, and support costs may weigh on profitability if demand slows.
- Key exposures include competition from larger software vendors, economic conditions and customer concentration in financial services, insurance, and healthcare, international operations and foreign exchange, and the ability to recruit and retain personnel.
- Other risks include software defects and cybersecurity or privacy breaches, intellectual-property claims, regulatory compliance, acquisition integration, and uncertainty in tax positions and deferred-tax-asset realization. Foreign currency transactions and forward contracts together resulted in an approximately $2.3m net loss in 2013.
- The company reported no material legal proceedings. It disclosed ordinary-course contractual disputes, litigation, and potential claims, which it did not believe would materially affect financial position or results. Unrecognized tax benefits were $40.9m; $19.2m was recorded as a liability for uncertain tax positions, with settlement timing uncertain.
Important facts for investors to verify
- Whether new license bookings and the high share of existing-client arrangements translate into sustainable revenue growth, particularly given quarterly deal volatility and deferred recognition.
- Whether services revenue and services margins stabilize as clients and partners take on more implementation work.
- How Antenna performs after integration, including the final purchase-price allocation, acquired tax attributes, and expected strategic benefits.
- Cash conversion and receivables quality: receivables rose to $165.6m, and one client represented 16% of year-end net receivables.
- Exposure to tax uncertainties, foreign currencies, lease commitments, and the continuing costs of repurchases and dividends.