Pegasystems Inc. — Q3 2015 Form 10-Q
Business context and period. Pegasystems develops and licenses enterprise software, including the Pega 7 platform, and provides maintenance, cloud, consulting, and training services. This unaudited filing covers the quarter and nine months ended September 30, 2015; comparisons are with the same 2014 periods unless noted.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $162.4 | $137.6 | $478.3 | $421.1 |
| Gross profit / margin | $107.0 / 66% | $91.2 / 66% | $318.1 / 66% | $282.1 / 67% |
| Operating income / margin | $10.7 / 6.6% | $5.0 / 3.6% | $27.9 / 5.8% | $21.8 / 5.2% |
| Net income | $6.3 | $1.9 | $15.4 | $13.2 |
| Diluted EPS | $0.08 | $0.02 | $0.19 | $0.17 |
| Operating cash flow | Not provided for quarter | $54.9 | $98.3 |
- Q3 revenue grew 18%; license revenue rose 22% to $58.9 million, maintenance rose 11% to $52.3 million, and services rose 22% to $51.2 million. Nine-month revenue increased 14%.
- At September 30, cash and cash equivalents were $97.3 million and marketable securities were $126.7 million, totaling $224.0 million, versus $211.2 million at December 31, 2014. Current assets were $393.2 million and current liabilities $224.1 million. No borrowings are reported on the presented balance sheet.
- Total liabilities were $278.9 million and stockholders’ equity $305.0 million. Deferred revenue totaled $147.9 million, down from $155.5 million at year-end 2014.
- License and Cloud backlog was $379.7 million, up 14% year over year; $324.3 million was contractual commitments not recorded on the balance sheet.
Material changes versus comparable periods
- Q3 operating income more than doubled, while nine-month operating income rose 28%. Net income increased 236% in Q3 and 17% for the nine-month period.
- Nine-month operating cash flow declined 44% to $54.9 million. The prior-year period benefited from a larger working-capital contribution, including substantial receivables collections; 2015 cash flow included $23.0 million of stock-based compensation.
- Nine-month services gross margin declined to 5% from 7%, primarily due to increased software license costs and cost overruns on two North American projects. Total gross margin was 66%, compared with 67%.
- Stock-based compensation increased to $23.0 million for nine months from $13.7 million. Selling and marketing and R&D costs also rose, reflecting higher headcount and program spending.
Outlook, commentary, and risks
- Management said existing cash, securities, and operating cash flow should fund operations, dividends, and the share repurchase program for at least the next 12 months. It stated an intention to continue the $0.03 quarterly dividend, subject to board discretion; no specific earnings or revenue guidance is provided in the filing.
- Management expected to recognize $5.5 million of payments due on perpetual licenses and $22.4 million of payments due on term licenses and Cloud arrangements as revenue in Q4 2015, in addition to new arrangements or prepayments. Revenue timing can vary with deal timing and license mix.
- The company reported $51.9 million of cash held by foreign subsidiaries; repatriation could trigger U.S. tax, which management said was impractical to estimate. It implemented a revised foreign-currency hedging program after international clients began transacting through its U.K. subsidiary. Outstanding forward-contract notional was $55.7 million; Q3 forward-contract fair-value loss was $0.3 million.
- Nine-month foreign-currency transaction losses were $4.3 million, versus $2.5 million in 2014. The nine-month effective tax rate increased to 36.0% from 31.8%, attributed mainly to a lower share of income in low-tax jurisdictions, a reduced anticipated domestic production deduction, and the research credit not yet being extended for 2015.
- Potential risks include variable demand and license-revenue timing, international economic and currency exposure, industry consolidation, reliance on third parties, acquisition outcomes, and managing growth. The company reported no material changes to its previously disclosed risk factors and no material changes in internal control over financial reporting. Management concluded disclosure controls were effective.
- The company may owe up to $1.2 million in additional acquisition-related cash consideration, contingent on performance milestones through the end of 2016. A $3.4 million benefit from settlements of Antenna indemnification claims and indirect tax liabilities reduced nine-month G&A expense.
Important facts for investors to verify
- Whether license and Cloud backlog converts to revenue and cash on the expected schedule, given the filing’s cautions on timing and contract mix.
- Whether the lower operating cash flow reflects timing effects or a sustained change, and how collections and deferred revenue develop.
- Whether services project economics improve after the disclosed cost overruns and margin decline.
- How increased stock-based compensation, foreign-exchange exposure, and the higher effective tax rate affect future earnings and dilution.
- Whether cash-generation assumptions support planned dividends, repurchases, and any acquisition commitments; the filing’s liquidity outlook is management’s expectation, not a guarantee.