Pegasystems Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Pegasystems develops enterprise software and is transitioning toward subscription offerings, particularly Pega Cloud.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Revenue | $313.5 million | $265.6 million | Up 18% |
| Gross profit / margin | $231.1 million / 74% | $186.1 million / 70% | Margin expanded 4 percentage points |
| Operating income (loss) | $1.6 million | $(24.3) million | Improved substantially |
| Net loss | $(6.6) million | $(25.4) million | Loss per diluted share was $(0.08), versus $(0.32) |
| Operating cash flow | $21.7 million | $(18.3) million | Improvement primarily reflected higher client collections |
| Cash, cash equivalents and marketable securities | $442.4 million | $465.2 million at Dec. 31, 2020 | Down $22.8 million |
| Convertible senior notes | $588.4 million net carrying value | $518.2 million at Dec. 31, 2020 | $600 million principal, due March 2025 |
Revenue by stream: software license $117.0 million (+25%), maintenance $75.6 million (+3%), Pega Cloud $67.9 million (+56%), and consulting $53.1 million (−3%). Subscription revenue, as defined by the company to include Pega Cloud, maintenance and term licenses, was $254.9 million, up 23% and 81% of total revenue.
Operating expenses were $229.5 million, up 9%. Selling and marketing increased 9%, research and development 6%, and general and administrative 17%. Other expense included a $19.1 million fair-value loss on capped call transactions and a $5.1 million foreign-currency transaction loss. A 73% effective tax benefit rate contributed to the reported net loss; management attributed the elevated rate principally to stock-compensation tax benefits and capped-call fair-value adjustments.
Cash, liquidity and debt
Investing activities provided $15.5 million, including investment maturities and sales, partly offset by purchases and a $5.0 million acquisition payment. Financing activities used $34.8 million, including $34.7 million of share repurchases and equity-award tax withholding and $2.4 million of dividends. The company had no borrowings under its $100 million revolving credit facility and stated that cash, operating cash flow and borrowing capacity should fund operations, repurchases and dividends for at least the next 12 months.
The revolving facility requires at least $200 million of cash and investments through Q4 2021; additional financial covenants begin in Q1 2022. The filing reports no outstanding revolver borrowings at quarter-end. ASU 2020-06 adoption increased the notes’ carrying value and reduced additional paid-in capital; the adoption also increased retained earnings by $9.4 million.
Material changes, outlook and notable items
- Management expects the shift to subscriptions to continue affecting revenue recognition and cash-collection timing; it anticipates substantially completing the Cloud Transition in late 2022 or early 2023. The filing cautions that growth in revenue and operating cash flow may remain lower or cash flow may be negative during the transition.
- Annual contract value increased 20% year over year, with foreign exchange contributing 3 percentage points to growth. Backlog—expected future revenue on existing non-cancellable contracts—increased 30% to $979.8 million.
- Management said Q1 2021 COVID-19 effects had not materially affected results or financial condition. Consulting revenue declined partly because of lower billable travel; management also expects greater partner involvement could restrain future consulting growth.
- In February, the company agreed to exit its Cambridge headquarters by October 1, 2021, in exchange for an $18 million landlord payment expected in Q4 2021. The modification reduced lease liabilities by $21.1 million and accelerated depreciation of related property and equipment.
- Management declared an intended quarterly dividend of $0.03 per share, subject to the board’s ability to modify or terminate the program. No specific numerical revenue or earnings guidance for the year is provided in the supplied filing text.
Key risks highlighted include execution of the Cloud Transition, demand variability, COVID-19 and global economic uncertainty, foreign exchange, debt covenant compliance, cybersecurity and intellectual-property exposure, client retention, reliance on third parties and key personnel, and the headquarters relocation. Disclosure controls were assessed as effective at March 31, 2021.
Important facts for investors to verify
- Whether ACV and backlog growth translate into recognized revenue and cash collections as the subscription mix increases.
- The timing, size and cash-flow impact of the expected $18 million headquarters payment and the related lease exit.
- The company’s ability to maintain liquidity and meet the $200 million cash-and-investment covenant and later credit-facility covenants.
- The effect of capped-call fair-value movements, foreign exchange and stock-based compensation on earnings and taxes.
- The conversion, dilution and repayment implications of the $600 million notes due in 2025; noteholders were not eligible to convert at their election as of March 31, 2021.