Pegasystems Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unaudited consolidated results; comparisons are with Q1 2018 unless otherwise stated. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $212.5 million | $235.2 million | Down 10% |
| Gross profit / margin | $138.1 million / 65% | $159.6 million / 68% | Down $21.5 million / 3 percentage points |
| Operating expenses | $172.1 million | $151.6 million | Up $20.5 million |
| Operating income (loss) | $(34.0) million | $7.9 million | Declined $42.0 million |
| Net income (loss) | $(28.7) million | $12.2 million | Diluted EPS $(0.37) vs. $0.15 |
| Cash from operations | $22.7 million | $55.7 million | Down $33.0 million |
Revenue mix shifted further toward recurring offerings: subscription revenue (term license, cloud, and maintenance) was $143.8 million, down 1%. Cloud revenue grew 78% to $27.8 million, while term license revenue fell 25% to $48.3 million, perpetual license revenue fell 35% to $15.0 million, and consulting revenue fell 20% to $53.8 million. Maintenance increased 5% to $67.7 million.
Cash and marketable securities totaled $202.2 million at March 31, down from $207.4 million at year-end. Current assets were $562.7 million and current liabilities were $302.1 million. The filing does not show a separate borrowings or debt balance. Total liabilities were $368.1 million. Operating cash flow was positive, but cash declined $4.1 million after $25.6 million of financing outflows, chiefly repurchases and dividends.
Material changes and management commentary
- Management attributed lower revenue and gross profit mainly to client preference shifting from upfront-recognized term and perpetual licenses toward cloud contracts, whose revenue is recognized over service periods and whose margins are currently lower. Cloud gross margin increased to 52% from 50% as the business scaled.
- Selling and marketing expense rose 23% to $108.9 million, primarily from higher compensation and benefits associated with increased headcount and higher deferred commission amortization. R&D expense rose 8% to $50.6 million, including higher compensation and cloud hosting costs.
- Annual Contract Value was $590.8 million, up 20% year over year: Pega Cloud ACV rose 76% to $128.6 million and Client Cloud ACV rose 10% to $462.1 million. Remaining performance obligations were $632.6 million, versus $459.3 million a year earlier.
- Management said cash, cash equivalents, marketable securities, and operating cash flow should fund operations, quarterly dividends, and repurchases for at least the next 12 months. It cautioned that the shift to cloud could slow revenue and operating cash flow growth in the near term.
- The company continued to intend to pay a quarterly dividend of $0.03 per share, subject to Board discretion. The repurchase authorization was increased by $60 million and extended through June 30, 2020; $59.0 million remained available at quarter-end.
Outlook, risks, and unusual items
No specific revenue or earnings guidance was provided in the filing. Management expects revenue mix to continue shifting toward subscription offerings, particularly cloud, potentially slowing total revenue growth in the near term. Forward-looking risks cited include demand variability, third-party and key-personnel reliance, international operations and foreign exchange, global economic uncertainty, cybersecurity incidents, and managing growth. The filing reports no material changes to the risk factors from the 2018 Form 10-K and no material changes in market-risk exposure.
The company adopted lease accounting standard ASC 842 on January 1, 2019, recording $41.8 million of right-of-use assets and $54.2 million of lease liabilities at adoption. At quarter-end it reported $46.5 million of right-of-use assets and $57.8 million of lease liabilities. Foreign-currency transaction losses were $3.7 million, versus $1.1 million a year earlier, mainly from U.K. subsidiary cash and receivables. The quarter’s tax benefit was $8.3 million; management cited tax-law provisions, stock-based compensation tax benefits, R&D credits, and a lapse of limitations on certain foreign tax reserves as rate factors.
Important facts for investors to verify
- Whether cloud growth and ACV gains translate into sustained recognized revenue, operating cash flow, and improving cloud margins.
- Whether lower license and consulting revenue, and higher selling and marketing spending, continue to pressure profitability.
- Cash conversion and collections: management cited $78.1 million generated from client receivables, largely due to collections and billing timing.
- The sustainability of the dividend and pace of repurchases relative to operating cash generation; both remain subject to Board decisions and market conditions.
- Lease obligations, foreign-exchange exposure, and variability in tax benefits and stock-based compensation.