Pegasystems Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. Pegasystems develops and licenses enterprise software, including the Pega 7 platform, and provides maintenance, cloud, consulting, and training services. Amounts below are in millions of dollars except per-share data.
Financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $178.9 | $153.9 | +16% |
| Gross profit / margin | $122.3 / 68% | $103.9 / 67% | +18% |
| Operating income / margin | $14.1 / 7.9% | $11.9 / 7.7% | +19% |
| Net income | $9.0 | $5.9 | +52% |
| Diluted EPS | $0.11 | $0.08 | +38% |
| Operating cash flow | $8.6 | $27.5 | −69% |
- License revenue rose 18% to $68.3 million: term licenses increased 81% to $54.3 million, while perpetual licenses fell 50% to $14.0 million. Management attributed the term-license increase partly to a prepaid arrangement exceeding $10 million. New license arrangements executed were lower in aggregate value than a year earlier.
- Maintenance revenue increased 9% to $53.0 million, reflecting installed-base growth and strong renewals. Services revenue grew 22% to $57.5 million, including consulting growth and cloud revenue growth of 38% to $8.5 million.
- Operating expenses increased 18% to $108.2 million. Selling and marketing rose 10%, research and development 17%, and general and administrative 74%. The latter comparison included $3.4 million of prior-year benefits from settlements that did not recur, as well as higher legal expense.
- Net income benefited from a $1.4 million foreign-currency transaction gain versus a $3.0 million loss in Q1 2015. Other expense was $2.3 million, primarily the loss on foreign-currency forward contracts. The effective tax rate was 33.3%, down from 35.9%.
Cash, liquidity, and capital
- At March 31, cash and cash equivalents were $92.2 million and marketable securities were $101.7 million, totaling $193.9 million, versus $219.1 million at year-end 2015. Current assets were $436.8 million and current liabilities $248.7 million; the current ratio was approximately 1.76.
- The balance sheet presents no borrowing or debt line item. Total liabilities were $283.7 million, including $171.6 million of deferred revenue. Management said cash, securities, and operating cash flow should fund operations, dividends, and repurchases for at least 12 months.
- Operating cash flow fell year over year, principally reflecting a $23.4 million decline in accounts payable and accrued expenses, including payout of 2015 bonuses and commissions. Q1 2015 operating cash flow had benefited from a $33.9 million increase in deferred revenue.
- Investing activities provided $9.4 million, mainly from security sales and maturities; financing activities used $18.4 million, including $11.9 million of repurchases under the buyback program, $5.7 million of share withholding for equity-award taxes, and $2.3 million of dividends. The quarterly dividend was $0.03 per share; continuation is subject to board discretion.
- License and cloud backlog was $389.7 million, up 4% from $374.1 million a year earlier. Off-balance-sheet license and cloud commitments were $331.9 million, up 13%; billed deferred license and cloud revenue was $57.8 million, down 27%.
Outlook, changes, and risks
- The filing gives no specific full-year 2016 revenue or earnings guidance. Management expects to recognize during the remainder of 2016 $25.7 million of payments due under perpetual licenses and $69.1 million under term licenses and cloud arrangements; timing of cash receipts and revenue recognition may differ.
- On April 11, 2016, after quarter-end, Pegasystems acquired OpenSpan for $52.3 million cash, subject to a working-capital adjustment. The price included $7.6 million placed in escrow and $1.5 million contingent on revenue targets. The company expected additional transaction expenses of about $1.1 million and said the acquisition would add robotic automation and workforce analytics capabilities. Purchase-price allocation was still in process.
- International revenue represented 48% of the total, versus 41% a year earlier. Management identifies revenue timing and deal mix, client demand, partner relationships, international operations and economic conditions, foreign exchange, acquisitions, and growth management as risks. It cautions that interim results are not necessarily indicative of full-year results; no material risk-factor changes were reported.
- Foreign-exchange forwards had $59.3 million in notional value at quarter-end. The company does not designate them as hedges for accounting purposes; fair-value changes flow through earnings. About $33.5 million of cash and cash equivalents was held by foreign subsidiaries, and repatriation could result in U.S. tax.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the growth in term licenses, cloud, and backlog converts into recognized revenue and cash on the expected schedule, given weaker perpetual-license revenue and quarterly variability in new bookings.
- Whether Q1 services-margin improvement is repeatable; management said it reflected delayed projects with costs already recognized and prior-year project overruns.
- How operating cash flow performs after the working-capital outflows, and how the OpenSpan acquisition affects cash, expenses, and future results.
- The ongoing impact of stock-based compensation, which was $8.9 million in Q1, and dilution from outstanding awards and repurchases.
- Foreign-exchange exposure, potential tax costs on repatriating foreign cash, and the board’s future decisions on dividends and repurchases.