Pegasystems Inc. — Q1 2012 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2012, compared with the same period in 2011. Pegasystems develops and licenses business process, customer relationship management, and decision-management software, and provides related maintenance, professional services, and training. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $111.2 | $102.4 | +9% |
| Software license revenue | $35.9 | $33.5 | +7% |
| Maintenance revenue | $30.8 | $27.4 | +12% |
| Professional services revenue | $44.4 | $41.5 | +7% |
| Gross profit / margin | $69.6 / 63% | $62.3 / 61% | +12%; +2 percentage points |
| Operating income / margin | $5.9 / 5.3% | $5.6 / 5.4% | +6% |
| Net income | $4.1 | $4.7 | -14% |
| Diluted EPS | $0.10 | $0.12 | Down $0.02 |
| Cash used in operating activities | $17.8 | $8.1 | Greater cash use |
Revenue grew across all three categories. License mix shifted: perpetual license revenue declined 13% to $20.4 million, while term license revenue rose 39% to $13.7 million; subscription revenue was $1.8 million versus none reported in Q1 2011. Gross margin improved, including professional services margin of 18% versus 16%. Operating expenses increased 12% to $63.7 million, principally from higher selling and marketing and research and development headcount. Net income was lower despite higher operating income, partly because non-operating income fell to $0.01 million from $1.13 million; Q1 2011 included a larger foreign-currency gain.
Liquidity, cash flow, and balance sheet
- Cash, cash equivalents, and marketable securities totaled $88.1 million at March 31, 2012, down from $111.4 million at December 31, 2011. Cash and cash equivalents alone were $33.5 million.
- Operating cash use was $17.8 million; investing cash use was $8.0 million and financing cash use was $2.1 million. Operating cash use reflected, among other items, $25.8 million of decreases in accounts payable and accrued expenses, primarily annual incentive compensation payments, and an $8.1 million increase in receivables, partly offset by a $4.7 million increase in deferred revenue.
- Current assets were $219.0 million and current liabilities were $125.5 million; working capital was $93.5 million. Total liabilities were $155.8 million. The balance sheet presents no borrowings or debt balance.
- The company paid $1.1 million in dividends and repurchased $0.8 million of stock under its repurchase program during the quarter. The declared quarterly dividend was $0.03 per share.
Outlook, commentary, and risks
- Management said current cash, cash equivalents, and 2012 operating cash flow should fund operations and the share repurchase program for at least the next 12 months. No earnings or revenue guidance was provided.
- Management attributed revenue growth to its targeted global sales strategy and demand for its software and services. It identified continued growth, expansion into industries, and maintaining leadership in BPM, CRM, and decision management as ongoing challenges.
- The company expects approximately $9.8 million of additional investment in its new Cambridge headquarters during the remainder of 2012. The new lease runs through December 2023, while rent on the current headquarters continues through May 2013.
- Future contractual cash receipts from existing license arrangements were approximately $210.4 million, compared with $117.0 million a year earlier. These amounts are not all recognized revenue or balance-sheet receivables; timing depends on contractual payment terms, and term-license revenue is recognized over the agreement period as payments become due or earlier if prepaid.
- Customer and timing concentration warrant attention: one customer accounted for 11% of Q1 revenue; two customers each represented 13% of net receivables at quarter-end. International revenue was 50% of total. Management noted that license mix and payment schedules can cause quarterly revenue variability.
- Foreign exchange remains a market risk. The company reported a $0.7 million transaction gain and a $0.8 million loss on forward contracts in Q1, for an approximately $0.1 million net loss from these items. No forward contracts were outstanding at quarter-end.
- Management reported no material changes to the risk factors in its 2011 Form 10-K, no material changes in internal control during the quarter, and effective disclosure controls as of March 31, 2012. The interim statements are unaudited; results for the quarter are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether license growth, particularly term licenses, converts into recognized revenue and cash receipts on expected schedules.
- Whether operating cash flow improves after the first-quarter incentive-compensation and working-capital outflows.
- Whether higher sales and R&D spending delivers sustained growth and operating-margin improvement.
- The collectability and billing timing of receivables, including unbilled receivables and customer concentrations.
- Cash requirements for the headquarters build-out, ongoing repurchases and dividends, and any tax cost if foreign cash is repatriated.
- Exposure to currency movements and the volatility of gains or losses on foreign-currency balances and related contracts.