Pegasystems Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Financial statements are unaudited; amounts below are in U.S. dollars unless noted. Prior-period share and per-share data were restated for the April 2014 two-for-one stock split.
Business context and results
Pegasystems develops and licenses business process, customer relationship management, and decision-management software, with related maintenance, consulting, training, and cloud services. It reports one segment: Business Process Solutions.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $143.0m | $117.3m | $283.4m | $233.6m |
| Gross profit / margin | $96.3m / 67% | $79.4m / 68% | $190.8m / 67% | $158.0m / 68% |
| Operating income | $2.2m | $7.1m | $16.8m | $20.0m |
| Net income | $1.5m | $4.7m | $11.3m | $13.8m |
| Diluted EPS | $0.02 | $0.06 | $0.14 | $0.18 |
| Operating cash flow | Not separately provided | Not separately provided | $73.9m | $64.3m |
Financial position, cash flow, and liquidity
- At June 30, cash and cash equivalents were $127.1m and marketable securities were $89.1m, totaling $216.2m, up from $156.7m at December 31, 2013.
- Current assets were $363.6m versus current liabilities of $201.3m. Net accounts receivable was $114.6m, down from $165.6m at year-end.
- Total liabilities were $265.0m and stockholders’ equity was $280.6m. The balance sheet does not present a separate borrowing or debt balance.
- First-half cash from operations of $73.9m, investing outflow of $18.0m, and financing outflow of $11.3m produced a $46.9m increase in cash. Strong receivable collections were a key operating cash-flow driver.
- Financing outflows included $2.3m in dividends and $8.5m in repurchases under share repurchase programs. The company had $6.1m of authorization remaining at June 30.
Material changes versus comparable periods
- Q2 revenue grew 22% year over year; first-half revenue grew 21%. Q2 license revenue rose 34%, maintenance rose 20%, and services rose 11% year over year.
- Management attributed license growth to more and higher-value license arrangements, including one Q2 perpetual-license arrangement exceeding $10m. Revenue and executed license values may fluctuate with deal timing, license mix, and acceptance requirements.
- Despite higher revenue, Q2 operating income fell 68% and net income fell 68%; first-half operating income declined 16% and net income declined 18%. Operating expenses increased 30% in Q2 and 26% in the first half, outpacing revenue growth.
- Services gross margin fell to 7% from 17% in Q2 and to 7% from 15% for the first half. The company cited Antenna project losses, consulting costs whose revenue recognition criteria had not yet been met, and higher subcontractor and employee onboarding costs.
- Maintenance growth reflected a larger installed base and continued strong renewal rates. Cloud revenue nearly doubled in Q2, from $1.9m to $3.7m, though it remained a small share of services revenue.
Outlook, commentary, risks, and unusual items
- No specific full-year revenue or earnings guidance is provided. Management said current cash, cash equivalents, and operating cash flow should fund operations, dividends, and the repurchase program for at least the next 12 months.
- Contractual future receipts from existing license and Pega Cloud arrangements totaled about $298.7m at June 30, including $75.9m scheduled for the remainder of 2014. These are contractual receipts, not a guarantee of recognized revenue or collection timing beyond stated terms.
- The quarterly dividend was increased from $0.015 to $0.03 per share; management stated its current intention to continue paying $0.03 quarterly, subject to the board’s ability to change or terminate the program.
- Antenna, acquired in October 2013, contributed approximately $4.1m of Q2 revenue and recorded net loss of approximately $2.8m in Q2; its first-half contribution was $8.7m of revenue and $5.2m net loss. Purchase accounting remained preliminary, with remaining adjustments expected in Q3 2014.
- MeshLabs was acquired in April 2014 for $0.8m cash. After quarter-end, Pegasystems acquired Profeatable for $2.5m cash, including $0.2m cash acquired, to add Firefly collaboration technology.
- About $64.2m of cash and cash equivalents was held by foreign subsidiaries; repatriation could result in U.S. tax. The company was reassessing its currency hedging strategy and entered no forward contracts in Q2. Principal disclosed business risks include demand and license-revenue timing, global market uncertainty, industry consolidation, third-party relationships, and managing growth. Management reported no material change in risk factors from its 2013 Form 10-K.
- The company adopted no new accounting standard in the period that changed reported results. It was assessing the impact of the new revenue-recognition standard, effective for it January 1, 2017.
Important facts for investors to verify
- Whether the large license arrangements and $298.7m of contracted future receipts convert to cash and recognized revenue on expected schedules.
- Whether services margins recover as Antenna integration, project delivery costs, and consulting capacity utilization evolve.
- How much of the substantial year-over-year operating-expense growth is ongoing, particularly compensation, sales commissions, and research and development investment.
- Final Antenna purchase accounting, including tax-related adjustments, and the acquired business’s subsequent operating performance.
- The sustainability of operating cash flow, dividend payments, and buybacks, including any tax cost associated with repatriating foreign-held cash.