Pegasystems Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; comparison with the corresponding 2010 periods. Unaudited results. Pegasystems develops and licenses business-process software and provides related maintenance, professional services, training, and cloud services. The company reports one operating segment.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $103.5 | $82.2 | $205.9 | $157.3 |
| Gross profit / margin | $63.1 / 61% | $51.0 / 62% | $125.5 / 61% | $99.6 / 63% |
| Operating income (loss) | $3.2 | ($9.1) | $8.8 | ($0.6) |
| Net income (loss) | $2.3 | ($8.2) | $7.0 | ($4.3) |
| Diluted EPS | $0.06 | ($0.22) | $0.18 | ($0.12) |
- Revenue increased 26% in Q2 and 31% in the first half. Q2 software license revenue rose 23% to $34.6 million, maintenance rose 39% to $28.3 million, and professional services rose 21% to $40.6 million. First-half increases were 16%, 57%, and 30%, respectively.
- Q2 operating margin was approximately 3.1%, versus negative 11.1% a year earlier; first-half operating margin was approximately 4.3%, versus negative 0.4%. Q2 net margin was approximately 2.2%, versus negative 10.0%; first-half net margin was approximately 3.4%, versus negative 2.8%.
- Q2 operating income improved as gross profit grew and 2010 acquisition and restructuring costs subsided. First-half selling and marketing expense rose 38% and R&D expense rose 20%, with increased staffing and sales commissions among the drivers.
Cash flow, liquidity and balance sheet
- First-half cash from operations was $17.2 million, compared with cash used of $6.3 million in 2010. Deferred revenue increased $18.4 million, while receivables rose $15.8 million and used cash.
- Cash and cash equivalents were $67.0 million and marketable securities $32.6 million at June 30, for combined liquidity of $99.6 million, up from $87.3 million at December 31, 2010. Current assets were $220.2 million and current liabilities $131.5 million. No interest-bearing debt is presented in the supplied balance sheet.
- Cash and cash equivalents declined $4.1 million during the half. Investing used $20.1 million, including $25.4 million of securities purchases, partly offset by maturities and sales. Financing used $2.2 million, including dividends and repurchases.
- Deferred revenue totaled $93.4 million, including $76.0 million current. The company reported $85.9 million of future term-license installment payments and $44.7 million of other license payments not recorded on the balance sheet; these amounts are expected to be recognized as revenue in future periods under the applicable terms.
- The company paid $2.2 million in dividends and repurchased $2.1 million of shares under its program in the first half. It stated its current intention to pay a quarterly dividend of $0.03 per share, subject to board discretion.
Changes, outlook and notable items
- Growth reflected increased demand, expanded solution frameworks, and sales to new customers. Management said first-half license arrangements were significantly higher than a year earlier, particularly from new customers, but cautioned that this activity is not necessarily indicative of future periods. License revenue can vary with deal mix, payment timing, and prepayments.
- Management said cash, cash equivalents, and expected 2011 operating cash flow should fund operations and the share-repurchase program for at least the next 12 months. The filing gives no specific revenue or earnings forecast.
- A new Cambridge headquarters lease began July 1, 2011 and runs through December 31, 2023, subject to two five-year extension options. Future rent under the new lease totals $75.8 million. The company also expects about $2.5 million of office-related investment in the remainder of 2011 and $4.6 million in the first half of 2012. It will continue paying rent on its current offices through the existing lease term, scheduled to end May 2013; the new lease includes a rent-free period for equivalent space during that overlap.
- The move prompted an estimated $0.2 million incremental Q2 depreciation charge; management expected approximately $0.5 million of additional depreciation per quarter through Q2 2012.
- Approximately $43 million of cash and cash equivalents was held in foreign subsidiaries. Management considered earnings permanently reinvested and said potential U.S. tax on repatriation was impractical to estimate. Euro and British pound exposures are partly offset by short-term forward contracts; Q2 net currency impact was nearly zero.
- The Chordiant-related copyright litigation was settled in April 2011 and the settlement was paid. The company said it did not expect other ordinary-course disputes and claims to materially affect its financial position or results. No material changes to previously disclosed risk factors were reported.
- Management identified execution challenges including sustaining growth, expanding industry expertise, and maintaining leadership in decision management and business-process management. Disclosure controls were judged effective at quarter-end.
Important facts for investors to verify
- Whether the high level of new license arrangements converts to recognized revenue and collections; review deal mix, payment schedules, and the $85.9 million and $44.7 million of future license receipts.
- Whether receivables and unbilled receivables convert to cash on schedule, given their increase and the role of deferred revenue in first-half operating cash flow.
- Professional-services capacity and profitability: services gross margin was 13% in Q2 and 14% for the first half, below the prior-year 18% in both periods.
- The cash and earnings effects of the new headquarters lease, overlapping current lease, planned office investment, and expected additional depreciation.
- Foreign-subsidiary cash, possible repatriation tax, and foreign-exchange exposure despite the use of short-term forwards.
- Ongoing dilution from stock awards and repurchases, the sustainability of the stated dividend intention, and any material developments in contingencies.