Pegasystems Inc. (NASDAQ: PEGA) — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Financial statements are unaudited. Pegasystems develops enterprise workflow automation and AI-powered decisioning software and is transitioning toward subscription-based sales, a shift management expects to complete in 2023.
Financial performance and liquidity
Amounts below are in millions of U.S. dollars, except percentages and per-share data.
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total revenue | $376.3 | $313.5; up 20% |
| Subscription revenue | $307.6 | $254.9; up 21%, 82% of revenue |
| Gross profit / margin | $288.1 / 77% | $231.1 / 74% |
| Operating expenses | $269.5 | $229.5 |
| Operating income | $18.6 | $1.6 |
| Net loss | $(0.4); $0.00 per diluted share | $(6.6); $(0.08) per diluted share |
| Cash provided by operating activities | $15.1 | $21.7 |
| Cash and marketable securities | $332.2 at March 31 | $362.8 at December 31, 2021 |
| Convertible senior notes | $600.0 principal; $591.4 net carrying value | Due March 2025; 0.75% coupon |
Q1 net loss included a $30.6 million non-operating loss from fair-value changes in capped call transactions. The company reported a $7.7 million income tax benefit. Cash and cash equivalents declined $27.2 million in the quarter. Investing activities used $6.1 million and financing activities used $35.9 million, including $35.9 million of common-stock repurchases and $2.5 million of dividends.
Current assets were $803.8 million and current liabilities were $435.0 million at quarter-end. The company had no borrowings on its $100 million revolving credit facility. It reported $90.7 million of long-term operating lease liabilities, in addition to $4.9 million current. Management said available cash, operating cash flow, and borrowing capacity should fund operations, repurchases, and dividends for at least the next 12 months.
Material changes and management commentary
- Pega Cloud revenue rose 33% to $90.3 million; subscription license revenue increased 23% to $137.5 million. Consulting revenue grew 15% to $61.3 million.
- Management attributed higher gross profit and margin to revenue growth, the subscription transition, and cost efficiencies as Pega Cloud scales. Consulting profitability also improved with higher North American consultant realization rates.
- General and administrative expense nearly doubled to $35.8 million, primarily due to a $15.4 million increase in legal fees and related costs. The company also cited $17.4 million of legal costs in its discussion of operating cash flow and expects further such expenses in 2022.
- Annual contract value increased 21% year over year, with foreign exchange a 1%–2% headwind to growth. Backlog, defined as expected future revenue under existing non-cancellable contracts, increased 20% to $1.176 billion.
- Operating cash flow was lower year over year, which management attributed primarily to the subscription transition, increased investment in Pega Cloud and selling and marketing, and litigation costs. Subscription arrangements generally spread billings and collections over the contract term, unlike upfront perpetual-license arrangements.
Outlook, risks and contingencies
The filing provides no specific numerical revenue or earnings guidance. Management expects the subscription transition to continue affecting revenue and operating cash flow, and states that results may fluctuate with client preferences for subscription versus perpetual offerings. COVID-19 had not materially affected results or financial condition as of March 31, 2022. Direct financial exposure to Ukraine, Russia, and Belarus was described as not material, but the broader effects of the war remain uncertain.
Litigation with Appian is a significant uncertainty. In Appian’s Virginia case, the jury trial began March 21, 2022; Appian withdrew its tortious-interference claim on April 13. The court described a potential burden-shifting standard concerning alleged trade-secret misappropriation, which the company said had not previously been adopted by Virginia courts. In Pegasystems’ separate Massachusetts case against Appian and BPM, the parties filed summary-judgment motions on April 15. The company said it could not reasonably estimate potential damages in either matter and had accrued no litigation losses at March 31.
The convertible notes were not eligible for conversion at March 31. The credit-facility amendment effective March 31 revised financial covenants and moved floating-rate commitments from LIBOR to SOFR. From Q1 through Q4 2022, the company must maintain at least $200 million in cash, investments, and revolver availability; it reported $332.2 million in cash and marketable securities, before counting any unused facility availability. Additional leverage and interest-coverage covenants begin in 2023.
Important facts for investors to verify
- Progress in the subscription transition, including ACV, backlog, revenue mix, billings, collections, and operating cash flow.
- Developments and potential financial exposure in both Appian proceedings, including legal-cost trends and any change in the company’s ability to estimate losses.
- Compliance with the credit-facility liquidity covenant and the company’s cash needs amid repurchases, dividends, and investment spending.
- The effect of capped-call fair-value movements on reported earnings; the Q1 $30.6 million loss was non-operating and non-cash in the cash-flow reconciliation.
- Unbilled receivables totaled $362.0 million, including $136.0 million classified as long-term; one client represented 11% of total receivables.