Cloud Drives Strong 2018 Performance and Year-Over-Year Growth

(Dollars in thousands, except per share amounts)

Three Months Ended
December 31,

Year Ended
December 31,

2018

2017

Change

2018

2017

Change

Total revenue

$

256,357

$

254,605

1

%

$

891,581

$

888,467

?

%

Subscription revenue ⁽³⁾

$

142,273

$

134,099

6

%

$

524,758

$

499,828

5

%

Net income (GAAP)

$

16,413

$

40,595

(60)

%

$

10,617

$

98,548

(89)

%

Net income (Non-GAAP)

$

30,155

$

37,489

(20)

%

$

53,302

$

103,462

(48)

%

Diluted earnings per share (GAAP)

$

0.20

$

0.49

(59)

%

$

0.13

$

1.19

(89)

%

Diluted earnings per share (Non-GAAP)

$

0.36

$

0.45

(20)

%

$

0.64

$

1.25

(49)

%

⁽¹⁾ On January 1, 2018, we adopted the ASC 606 revenue recognition standard and have adjusted prior periods to conform.

⁽²⁾ A reconciliation of our GAAP measures to Non-GAAP measures is contained in the financial schedules at the end of this release.

⁽³⁾ Subscription revenue reflects client arrangements (term license, cloud, and maintenance) which are subject to renewal.

(Dollars in thousands)

Three Months Ended
December 31,

Year Ended
December 31,

2018

2017

Change

2018

2017

Change

 Cloud

$

24,660

10

%

$

14,890

6

%

$

9,770

66

%

$

82,627

9

%

$

51,097

6

%

$

31,530

62

%

 Term license

50,186

20

%

56,838

22

%

(6,652)

(12)

%

178,256

20

%

206,411

23

%

(28,155)

(14)

%

 Maintenance

67,427

25

%

62,371

25

%

5,056

8

%

263,875

30

%

242,320

27

%

21,555

9

%

Subscription

142,273

55

%

134,099

53

%

8,174

6

%

524,758

59

%

499,828

56

%

24,930

5

%

 Perpetual license

53,034

21

%

51,064

20

%

1,970

4

%

109,863

12

%

132,883

15

%

(23,020)

(17)

%

 Consulting

61,050

24

%

69,442

27

%

(8,392)

(12)

%

256,960

29

%

255,756

29

%

1,204

?

%

Total revenue

$

256,357

100

%

$

254,605

100

%

$

1,752

1

%

$

891,581

100

%

$

888,467

100

%

$

3,114

?

%

⁽¹⁾ On January 1, 2018, we adopted the ASC 606 revenue recognition standard and have adjusted prior periods to conform.

December 31, 2018

(Dollars in thousands)

Perpetual license

Term license

Maintenance

Cloud

Consulting

Total

1 year or less

$

14,665

$

72,378

$

192,274

$

103,354

$

17,235

$

399,906

63

%

1-2 years

2,343

10,355

10,436

80,214

2,810

106,158

17

%

2-3 years

1,661

1,414

3,644

61,906

940

69,565

11

%

Greater than 3 years

?

233

1,560

53,343

208

55,344

9

%

$

18,669

$

84,380

$

207,914

$

298,817

$

21,193

$

630,973

100

%

Year Ended December 31, 2019

(in millions, except per share amounts)

GAAP

Non-GAAP ⁽¹⁾

Revenue

$

965

$

965

Net Income

$

(17.5)

$

42.1

Diluted Earnings Per Share

$

(0.22)

$

0.50

⁽¹⁾ A reconciliation of our GAAP to Non-GAAP guidance is contained in the financial schedules at the end of this release.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ⁽¹⁾

(in thousands, except per share amounts)

Three Months Ended
December 31,

Year Ended
December 31,

2018

2017

2018

2017

Revenue

Software license

$

103,220

$

107,902

$

288,119

$

339,294

Maintenance

67,427

62,371

263,875

242,320

Services

85,710

84,332

339,587

306,853

Total revenue

256,357

254,605

891,581

888,467

Cost of revenue

Software license

1,397

1,259

5,169

5,085

Maintenance

6,530

6,960

24,565

27,905

Services

69,984

65,758

272,031

246,683

Total cost of revenue

77,911

73,977

301,765

279,673

Gross profit

178,446

180,628

589,816

608,794

Operating expenses

Selling and marketing

103,650

86,334

373,495

300,578

Research and development

46,449

41,797

181,710

162,886

General and administrative

12,894

13,979

51,643

52,153

Total operating expenses

162,993

142,110

606,848

515,617

Income (loss) from operations

15,453

38,518

(17,032)

93,177

Foreign currency transaction gain (loss)

1,863

136

2,421

(6,413)

Interest income, net

629

315

2,705

862

Other (expense) income, net

?

(1,678)

363

(1,391)

Income (loss) before provision (benefit) from income taxes

17,945

37,291

(11,543)

86,235

Provision (benefit) from income taxes

1,532

(3,304)

(22,160)

(12,313)

Net income

$

16,413

$

40,595

$

10,617

$

98,548

Earnings per share

Basic

$

0.21

$

0.52

$

0.14

$

1.27

Diluted

$

0.20

$

0.49

$

0.13

$

1.19

Weighted-average number of common shares outstanding

Basic

78,680

77,944

78,564

77,431

Diluted

82,536

83,168

83,064

82,832

⁽¹⁾  On January 1, 2018, we adopted the ASC 606 revenue recognition standard and have adjusted prior periods to conform.

PEGASYSTEMS INC.

UNAUDITED RECONCILIATION OF SELECTED GAAP MEASURES TO NON-GAAP MEASURES ⁽¹⁾⁽²⁾

(in thousands, except percentages and per share amounts)

Three Months Ended
December 31,

Year Ended
December 31,

2018

2017

Change

2018

2017

Change

Total revenue (GAAP and Non-GAAP)

$

256,357

$

254,605

1

%

$

891,581

$

888,467

?

%

Gross profit (GAAP)

$

178,446

$

180,628

(1)

%

$

589,816

$

608,794

(3)

%

Amortization of intangible assets

1,332

1,232

5,027

5,103

Stock-based compensation ⁽³⁾

4,585

3,661

16,862

14,573

Gross profit (Non-GAAP)

$

184,363

$

185,521

(1)

%

$

611,705

$

628,470

(3)

%

Income (loss) from operations (GAAP)

$

15,453

$

38,518

(60)

%

$

(17,032)

$

93,177

*

Amortization of intangible assets

2,935

2,859

11,443

12,338

Stock-based compensation ⁽³⁾

16,289

13,384

63,862

53,313

Income from operations (Non-GAAP)

$

34,677

$

54,761

(37)

%

$

58,273

$

158,828

(63)

%

Net income (GAAP)

$

16,413

$

40,595

(60)

%

$

10,617

$

98,548

(89)

%

Amortization of intangible assets

2,935

2,859

11,443

12,338

Stock-based compensation ⁽³⁾

16,289

13,384

63,862

53,313

Other

?

1,678

?

1,678

Income tax effects ⁽⁴⁾

(5,482)

(21,027)

(32,620)

(62,415)

Net income (Non-GAAP)

$

30,155

$

37,489

(20)

%

$

53,302

$

103,462

(48)

%

Diluted earnings per share (GAAP)

$

0.20

$

0.49

(59)

%

$

0.13

$

1.19

(89)

%

Amortization of intangible assets

0.04

0.03

0.14

0.15

Stock-based compensation ⁽³⁾

0.20

0.16

0.77

0.64

Other

0.00

0.02

0.00

0.02

Income tax effects ⁽⁴⁾

(0.08)

(0.25)

(0.40)

(0.75)

Diluted earnings per share (Non-GAAP)

$

0.36

$

0.45

(20)

%

$

0.64

$

1.25

(49)

%

Diluted weighted-average number of common shares outstanding (GAAP and Non-GAAP)

82,536

83,168

(1)

%

83,064

82,832

?

%

* not meaningful

⁽¹⁾ On January 1, 2018, we adopted the ASC 606 revenue recognition standard and have adjusted prior periods to conform.

⁽²⁾ Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.

Our non-GAAP financial measures reflect adjustments based on the following items, as well as the related income tax effects:

• Amortization of intangible assets: We have excluded the amortization expense of intangible assets from our non-GAAP operating expenses and profitability measures. Amortization of intangible assets is inconsistent in amount and frequency and is significantly affected by the timing and size of our acquisitions. Investors should note that the use of intangible assets contributed to our revenues recognized during the periods presented and is expected to contribute to our future period revenues as well. Amortization of intangible assets is likely to recur in future periods.
• Stock-based compensation: We have excluded stock-based compensation expense from our non-GAAP operating expenses and profitability measures. Although stock-based compensation is a key incentive offered to our employees, and we believe such compensation contributed to our revenues recognized during the periods presented and is expected to contribute to our future period revenues, we continue to evaluate our business performance excluding stock-based compensation expense.
• Other: We have excluded the effect of capital advisory expenses, which are primarily for investment banking and professional fees, from our non-GAAP expenses and profitability measures. Capital advisory expenses are inconsistent in amount and frequency and we continue to evaluate our business performance excluding capital advisory expenses.

For additional information about our use of Non-GAAP measures, the reasons why management uses these measures, the usefulness of these measures, and the material limitations on the usefulness of these measures, see "Discussion of non-GAAP financial measures" included earlier in this release and below.

⁽³⁾ Stock-based compensation was as follows:

Year Ended
December 31,

(in thousands)

2018

2017

2016

Cost of revenues

$

16,862

$

14,573

$

11,459

Selling and marketing

23,237

15,720

12,464

Research and development

15,274

13,618

10,043

General and administrative

8,489

9,402

6,513

Acquisition-related

?

?

342

$

63,862

$

53,313

$

40,821

Income tax benefit

$

(13,383)

$

(12,113)

$

(12,198)

⁽⁴⁾ Effective income tax rates were as follows:

Year Ended
December 31,

2018

2017

GAAP

192

%

(14)

%

Non-GAAP

16

%

33

%

The difference between our GAAP and non-GAAP effective income tax rates for the year ended December 31, 2018 and 2017 primarily related to the impact of the following items on our GAAP effective income tax rate:

• Excess tax benefits generated by our stock-based compensation plans;
• Tax credits for stock-based compensation awards to research and development employees; and
• Unfavorable foreign stock-based compensation adjustments.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS ⁽¹⁾

(in thousands)

December 31, 2018

December 31, 2017

Assets

Total cash, cash equivalents, and marketable securities

$

207,423

$

223,748

Total receivables (billed and unbilled)

504,765

543,527

Goodwill

72,858

72,952

Other assets

197,507

172,526

Total assets

$

982,553

$

1,012,753

Liabilities and stockholders' equity

Accrued expenses, including compensation and related expenses

$

130,177

$

111,548

Short-term deferred revenue

185,145

165,850

Deferred income tax liabilities

6,939

38,463

Other liabilities

38,761

41,022

Stockholders' equity

621,531

655,870

Total liabilities and stockholders' equity

$

982,553

$

1,012,753

⁽¹⁾  On January 1, 2018, we adopted the ASC 606 revenue recognition standard and have adjusted prior periods to conform.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ⁽¹⁾

(in thousands)

Year Ended
December 31,

2018

2017

Operating activities:

Net income

$

10,617

$

98,548

Adjustment to reconcile net income to cash provided by operating activities:

Change in operating assets and liabilities, net

20,712

(34,076)

Stock-based compensation expense

63,862

53,313

Amortization of intangible assets and depreciation

25,295

24,713

Amortization of deferred contract costs

17,271

12,106

Other non-cash

(33,401)

3,631

Cash provided by operating activities

104,356

158,235

Cash used in investing activities

(48,196)

(14,759)

Cash used in financing activities

(101,460)

(54,229)

Effect of exchange rates on cash and cash equivalents

(2,557)

2,438

Net (decrease) increase in cash and cash equivalents

(47,857)

91,685

Cash and cash equivalents, beginning of period

162,279

70,594

Cash and cash equivalents, end of period

$

114,422

$

162,279

⁽¹⁾  On January 1, 2018, we adopted the ASC 606 revenue recognition standard and have adjusted prior periods to conform.

PEGASYSTEMS INC.

Reconciliation of Forward-Looking Guidance

(in millions, except per share amounts)

Year Ended
December 31,

Net loss (GAAP)

$

(17.5)

Amortization of intangible assets

5.9

Stock-based compensation

80.8

Income tax effects

(27.1)

Net loss (Non-GAAP)

$

42.1

Diluted loss per share (GAAP)

$

(0.22)

Amortization of intangible assets

0.07

Stock-based compensation

1.03

Income tax effects

(0.34)

Incremental dilutive shares for non-GAAP

(0.04)

Diluted earnings per share (Non-GAAP)

$

0.50

Diluted weighted-average number of common shares outstanding (GAAP)

78.8

Incremental dilutive shares for non-GAAP

5

Diluted weighted-average number of common shares outstanding (Non-GAAP)

83.8