Pegasystems Inc. — Q3 2021 Form 10-Q
Business context and period. Pegasystems develops enterprise software and is shifting toward subscription offerings, particularly Pega Cloud. This unaudited report covers the three and nine months ended September 30, 2021; dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $256.3 | $226.0 | $895.5 | $718.9 |
| Gross profit / margin | $172.0 / 67% | $148.2 / 66% | $644.3 / 72% | $484.9 / 67% |
| Operating loss | $(65.3) | $(61.8) | $(62.5) | $(137.6) |
| Net loss | $(56.5) | $(19.3) | $(25.8) | $(65.4) |
| Diluted loss per share | $(0.69) | $(0.24) | $(0.32) | $(0.82) |
- Q3 revenue rose 13%; nine-month revenue rose 25%. Pega Cloud revenue increased 43% in Q3 and 49% year to date. Nine-month term-license revenue increased 47%, primarily reflecting several large contracts.
- Q3 operating expenses rose 13% to $237.4 million, including higher compensation, headcount, commissions, and equity compensation. Selling and marketing was 59% of Q3 revenue.
- Q3 net loss widened despite higher revenue and gross profit. The main unusual year-over-year factor was a $14.7 million capped-call fair-value loss, versus a $19.0 million gain in Q3 2020. For nine months, the comparable capped-call result was a $7.5 million loss versus a $19.8 million gain.
- Cash used in operations was $5.3 million for the first nine months, compared with $26.3 million used in 2020. Investing activities provided $42.7 million, while financing used $91.4 million, including $91.9 million of share repurchases and $7.3 million of dividends. Cash and cash equivalents declined $55.5 million.
Liquidity, debt, and balance sheet
- Cash, cash equivalents, and marketable securities totaled $351.8 million at September 30, down from $465.2 million at December 31, 2020. Current assets were $828.9 million versus current liabilities of $400.4 million.
- The company had $600 million principal amount of 0.75% convertible notes due March 2025, with a net carrying value of $589.8 million. No principal is due before maturity. There were no borrowings under the $100 million revolving credit facility.
- Credit-facility covenants required at least $200 million in cash and investments through December 31, 2021; the company reported $351.8 million at quarter-end. Additional leverage and interest-coverage tests begin in March 2022.
- Operating lease liabilities were $97.8 million, including current and long-term amounts. A new 11-year Waltham lease added $42.1 million of lease liabilities and right-of-use assets.
- Receivables totaled $515.4 million, including $371.9 million of unbilled receivables. Backlog, defined as expected future revenue from existing non-cancellable contracts, was $1.034 billion.
Changes, outlook, and risks
- Management reported ACV up 22% and backlog up 23% from September 30, 2020; foreign exchange contributed 1–2 percentage points to ACV growth. Maintenance renewal rates were above 90%.
- The company expects its Cloud Transition to be substantially complete in 2023. Management cautioned that the shift in billing and collections toward subscription contracts may constrain revenue growth and operating cash flow, or cause negative cash flow, in the near term. No numerical earnings or revenue guidance is provided in the filing text.
- Management said current cash, operating cash flow, and borrowing capacity should fund operations, repurchases, and dividends for at least the next 12 months. The quarterly dividend was $0.03 per share, subject to board discretion.
- In February, the company agreed to exit its former headquarters by October 1 in exchange for an $18 million landlord payment, received in October; the modification reduced future lease liabilities by $21.1 million. A new Cambridge headquarters lease carries base rent of $2 million annually.
- COVID-19 had not materially affected results or financial condition as of quarter-end. Disclosed risks include the subscription transition, revenue timing, client demand and retention, foreign exchange, cyber and security incidents, key-personnel reliance, debt covenants, and execution of growth and office-transition plans. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
- ASU 2020-06 adoption increased the notes’ carrying value by $69.5 million and reduced additional paid-in capital, with a $9.4 million increase to retained earnings. It also reduced reported interest expense by eliminating amortization of the prior debt discount.
Key facts for investors to verify
- Whether subscription and Pega Cloud growth can translate into stronger operating cash flow as the transition progresses.
- How much future revenue growth depends on large license contracts, and whether backlog converts to revenue on expected timing.
- The drivers of the Q3 net-loss increase, particularly capped-call fair-value movements, tax benefits, and ongoing stock-based compensation.
- Cash and investment levels against the credit-facility covenant, and compliance with the leverage and interest-coverage tests beginning in 2022.
- Future cash commitments from the 2025 convertible notes, new leases, repurchases, and dividends; the filing reports $131.7 million of unrecognized stock-based compensation expense.