Pegasystems Inc. — Q2 2015 Form 10-Q
Business context and period. Unaudited results for the three and six months ended June 30, 2015, compared with the same 2014 periods. Pegasystems develops and licenses enterprise software and provides maintenance, consulting, training, and cloud services. It reports one operating segment. Figures below are in millions of dollars except per-share data.
Key financial results
| Metric | Q2 2015 | Q2 2014 | H1 2015 | H1 2014 |
|---|---|---|---|---|
| Revenue | $162.0 | $143.0 | $315.9 | $283.4 |
| Gross profit / margin | $107.2 / 66% | $96.3 / 67% | $211.1 / 67% | $190.8 / 67% |
| Operating income / margin | $5.3 / 3.2% | $2.2 / 1.6% | $17.2 / 5.4% | $16.8 / 5.9% |
| Net income | $3.1 | $1.5 | $9.0 | $11.3 |
| Diluted EPS | $0.04 | $0.02 | $0.11 | $0.14 |
- Q2 revenue increased 13%; license revenue rose 18%, maintenance 9%, and services 13%. Cloud revenue grew 95% in Q2 to $7.3 million; consulting services rose 5%.
- H1 revenue increased 11%. License revenue rose 14% and maintenance 9%; services rose 11%. H1 diluted EPS fell 21%.
- Q2 operating income increased 136%, while H1 operating income was nearly flat. Services gross margin declined to 2% in Q2 from 7%, and to 4% for H1 from 7%.
- Cash and marketable securities totaled $226.9 million at June 30, up from $211.2 million at year-end 2014. Current assets were $396.4 million and current liabilities $228.9 million. The balance sheet presents no interest-bearing debt line item.
- H1 operating cash flow was $39.4 million versus $73.9 million in 2014. Investing used $18.2 million and financing used $13.2 million; cash and cash equivalents increased $6.3 million. The company attributed lower operating cash flow mainly to larger outstanding billings at the prior-year comparison date. H1 capital investment in property and equipment was $7.3 million.
- Deferred revenue was $159.2 million. License and Cloud backlog, including billed deferred revenue and unbilled contractual commitments, was $391.4 million, up 11% year over year.
Changes, outlook, and risks
- Management attributed Q2 profit improvement mainly to higher operating income; foreign-currency transaction losses partly offset the increase. H1 included a $3.9 million foreign-currency transaction loss, versus a $0.3 million gain in H1 2014, contributing to lower net income.
- Stock-based compensation rose 76% in H1 to $14.9 million. Selling and marketing and R&D spending increased with headcount and program costs. Lower services profitability reflected higher employee and software costs, lower realization on two North American projects, and greater subcontractor use.
- Two license arrangements each exceeding $10 million contributed to the higher value of new arrangements in H1. Management noted that license revenue timing and the mix of perpetual, term, and subscription arrangements can cause material period-to-period variation. It expected to recognize $28.2 million of specified perpetual-license payments and $36.6 million of term-license and Cloud receipts as revenue during the rest of 2015; these amounts exclude new arrangements and may not align with cash receipt timing.
- Management said available cash, securities, and operating cash flow should fund operations, dividends, and repurchases for at least 12 months. It stated its current intention to continue a $0.03 quarterly dividend, subject to board modification. The repurchase authorization was extended through June 30, 2016, with an additional $50 million authorized.
- Clients outside the Americas began transacting through the U.K. subsidiary on April 1, increasing its exposure to non-sterling currencies. The company implemented revised foreign-exchange hedging and entered forward contracts in July 2015; there were none outstanding at June 30. H1 currency losses and exchange-rate movements remain relevant risks.
- Approximately $41.7 million of cash was held in foreign subsidiaries; repatriation could trigger U.S. tax, which the company said it could not practicably estimate. An additional $1.2 million acquisition-related payment may be due through 2016 based on performance milestones; a separate $1.1 million payment was made in July.
- No specific full-year financial guidance is provided in the supplied filing text. Management cited demand and license-recognition timing, international economic conditions, currency rates, third-party relationships, acquisitions, and growth management among risks. It reported no material risk-factor changes from the 2014 Form 10-K and said disclosure controls were effective.
Most important facts to verify
- Whether the Q2 improvement in operating income is sustainable given higher sales and R&D spending, rising stock compensation, and weaker services margins.
- How much of the $391.4 million license and Cloud backlog converts to revenue and cash, and when; backlog includes unbilled commitments.
- Whether operating cash flow rebounds, considering the year-over-year decline and the effect of billing and collection timing.
- The scale and earnings impact of foreign-exchange exposure after the operating reorganization and the effectiveness of the revised hedging program.
- Future dilution and compensation expense from equity awards; the filing reports $41.6 million of unrecognized stock-based compensation at June 30.