Pegasystems Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Financial statement amounts below are in millions of dollars unless noted. Comparisons are with the corresponding 2015 periods.
Business context and performance
Pegasystems develops and licenses enterprise software and its Pega 7 platform, and provides maintenance, consulting, training, and cloud services. It reports one operating segment. International clients generated 45% of Q2 revenue and 47% of first-half revenue. The company acquired robotic process automation and workforce analytics provider OpenSpan on April 11, 2016.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $189.0 (+17%) | $162.0 | $367.9 (+16%) | $315.9 |
| Gross profit / margin | $128.9 / 68% | $107.2 / 66% | $251.2 / 68% | $211.1 / 67% |
| Operating income / margin | $6.4 / 3.4% | $5.3 / 3.2% | $20.5 / 5.6% | $17.2 / 5.4% |
| Net income | $3.6 | $3.1 | $12.7 | $9.0 |
| Diluted EPS | $0.05 | $0.04 | $0.16 | $0.11 |
| Operating cash flow | Not presented separately | Not presented separately | $9.3 | $39.4 |
- Q2 revenue growth reflected license revenue of $70.7 million (+11%), maintenance of $55.2 million (+12%), and services of $63.2 million (+28%). First-half license, maintenance, and services revenue rose 14%, 10%, and 25%, respectively.
- Q2 and first-half services gross margins were 17% and 15%, compared with 2% and 4% in 2015. The company attributed the improvement largely to revenue recognized on delayed projects whose costs had mostly been recorded in prior periods.
- Operating expenses increased 20% in both Q2 and the first half, including higher selling and marketing, R&D, and stock-based compensation. First-half stock-based compensation was $19.8 million versus $14.9 million.
- First-half operating cash flow fell $30.1 million year over year. Cash uses included increases in income taxes receivable and other current assets, lower accounts payable and accrued expenses, and a decrease in deferred revenue.
- At June 30, cash and cash equivalents were $64.3 million and marketable securities were $73.3 million, totaling $137.6 million, versus $219.1 million at year-end 2015. Current assets were $384.5 million and current liabilities $243.0 million. The balance sheet presents no borrowings as debt.
- Total liabilities were $278.6 million; stockholders’ equity was $324.8 million. The company paid $4.6 million in dividends and repurchased $19.2 million of shares under repurchase programs during the first half.
Changes, outlook, and notable items
- Revenue and earnings increased, but operating cash flow was substantially lower than in the prior-year half. License revenue mix shifted: Q2 perpetual license revenue rose 47% while term license revenue fell 33%; first-half term license revenue rose 25%.
- License and cloud backlog was $392.6 million, essentially unchanged from $391.4 million a year earlier. Contractual license and cloud cash receipts not recorded on the balance sheet totaled $340.8 million, up from $330.0 million.
- OpenSpan was acquired for $48.8 million net of cash acquired. The purchase added $27.8 million of goodwill and $24.3 million of intangible assets; $7.4 million of consideration remained in escrow. Acquisition-related expenses were $2.5 million in the first half.
- Brexit-related currency movements contributed to a $1.4 million Q2 loss on foreign currency forward contracts and $3.7 million of such losses in the first half, reported in other expense. Management said Brexit had not materially affected revenue through June 30, but further sterling weakness could adversely affect future results.
- No formal earnings or revenue guidance is provided in the supplied filing text. Management said existing liquidity and operating cash flow should fund operations, dividends, and the repurchase program for at least the next 12 months. The company stated its current intention to pay a quarterly dividend of $0.03 per share; the board may change or terminate it.
- Key risks include variable timing and mix of license revenue recognition, international economic and currency exposure, Brexit uncertainty, reliance on third parties, acquisition integration and costs, and the possibility that consulting revenue may decline as clients and partners perform more implementations. The filing also notes that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether license and cloud backlog converts to recognized revenue and cash on the expected timetable, given the variable license mix and deferred revenue decline.
- Whether cash generation improves after first-half operating cash flow fell to $9.3 million, and how working-capital movements develop.
- OpenSpan integration, acquisition-related costs, final purchase-price allocation, and realization of expected strategic benefits.
- Exposure to sterling and other currencies, including the impact of Brexit and the effectiveness and accounting volatility of forward contracts.
- Sustainability of the dividend and share repurchases relative to liquidity, investment needs, and operating cash flow.