Pegasystems Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited results; amounts below are in U.S. dollars. The company develops enterprise software and is transitioning toward subscription arrangements, particularly Pega Cloud.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $325.7 million | $227.4 million | $639.2 million | $493.0 million |
| Gross profit / margin | $241.2 million / 74% | $150.7 million / 66% | $472.2 million / 74% | $336.7 million / 68% |
| Operating income (loss) | $1.2 million | $(51.4) million | $2.8 million | $(75.8) million |
| Net income (loss) | $37.3 million | $(20.7) million | $30.7 million | $(46.1) million |
| Diluted EPS | $0.43 | $(0.26) | $0.36 | $(0.58) |
- Q2 revenue increased 43% year over year; first-half revenue increased 30%. Subscription revenue, defined by the company as Pega Cloud, maintenance, and term license, rose 55% in Q2 and 37% in the first half. It represented 79% and 80% of revenue, respectively.
- Q2 Pega Cloud revenue rose 50% to $73.3 million; first-half Pega Cloud revenue rose 53% to $141.2 million. Term license revenue rose 136% in Q2 and 60% in the first half, while maintenance rose 9% and 6%, respectively.
- Operating expenses rose 19% in Q2 and 14% in the first half, led by compensation and benefits associated with higher headcount and equity compensation. Management attributed gross-profit improvement to revenue growth, the cloud transition, and cost efficiencies as Pega Cloud scales.
- Reported net income included gains on capped-call transactions of $26.3 million in Q2 and $7.2 million in the first half. The first-half result also included a $29.5 million income tax benefit; tax benefits and discrete tax items make the effective rate highly variable.
Cash flow, liquidity, and debt
- First-half operating cash flow was $19.4 million, versus cash used of $21.2 million a year earlier; management attributed the improvement primarily to increased client collections. Investing activities provided $10.5 million, and financing activities used $60.7 million.
- Cash, cash equivalents, and marketable securities totaled $411.3 million at June 30, 2021, down from $465.2 million at December 31, 2020. The company reported $139.9 million of cash and cash equivalents and $271.5 million of marketable securities.
- Convertible senior notes had $600 million principal and a $589.1 million carrying value, mature March 2025, and bear a 0.75% coupon. No borrowings were outstanding under the $100 million revolving credit facility. The notes were not eligible for holder-initiated conversion as of June 30, 2021.
- First-half cash use included $61.0 million of common-stock repurchases and $4.9 million of dividends. The company said it intended to continue quarterly dividends of $0.03 per share and believed available liquidity, operating cash flow, and borrowing capacity would fund operations and capital returns for at least 12 months.
Balance sheet, commitments, and notable items
- Total assets were $1.60 billion and stockholders’ equity was $522.5 million at June 30, 2021. Current liabilities were $430.2 million. Receivables, including current and long-term unbilled receivables, totaled $546.7 million; unbilled receivables totaled $380.5 million.
- Backlog, or expected revenue on existing non-cancellable contracts, was $1.03 billion, up 26% from June 30, 2020; 56% was expected within one year. ACV increased 22% year over year, with foreign exchange contributing 3–4 percentage points to ACV growth. A single client represented 13% of Q2 revenue.
- The company adopted ASU 2020-06 on January 1, 2021, increasing the notes’ carrying value by $69.5 million and retained earnings by $9.4 million; it also reduced reported interest expense by ending amortization of the prior debt discount.
- The company agreed to accelerate its Cambridge headquarters exit to October 1, 2021, in exchange for an $18 million landlord payment expected in Q4 2021; the modification reduced future lease liabilities by $21.1 million. A subsequent July 2021 lease for 131,000 square feet in Waltham has an approximately 11-year term, $6 million first-year base rent with 3% annual increases, and an $11.8 million improvement allowance.
Outlook and risks
- Management expects the cloud transition to be substantially complete in 2023. It cautioned that the transition may constrain revenue growth and operating cash flow growth, or result in negative cash flow in the near term, as subscription arrangements are generally billed and collected over time rather than upfront.
- No specific revenue or earnings guidance for the remainder of 2021 is provided in the filing text. Management stated that interim results are not necessarily indicative of full-year results.
- Disclosed risks include changes in client demand and revenue-recognition timing, the cloud transition, COVID-19 and broader economic uncertainty, foreign-exchange movements, cybersecurity and intellectual-property risks, key-personnel reliance, debt covenant compliance, and execution of the headquarters relocation. Management said COVID-19 had not materially affected results or financial condition as of June 30, 2021.
Investor verification points
- Assess the sustainability and composition of growth, particularly the large Q2 term-license increase, which management said was driven in part by an existing customer’s expanded and renewed contract.
- Track subscription and Pega Cloud growth against cash collections and operating cash flow during the transition; review the timing and recoverability of the sizable unbilled receivable balance.
- Separate operating performance from capped-call fair-value gains and significant tax benefits when evaluating reported earnings and EPS.
- Review the $600 million 2025 note maturity, credit-facility covenants, ongoing buybacks and dividends, and the cost and timing of the new Waltham lease and headquarters exit.