Pega Cloud ACV Grows 65% in the First Half of 2019

(Dollars in thousands, except per share amounts)

Three Months Ended
June 30,

Six Months Ended
June 30,

2019

2018

Change

2019

2018

Change

Total revenue

$

205,592

$

196,779

4

%

$

418,138

$

431,961

(3)

%

Subscription revenue ⁽²⁾

$

125,982

$

117,416

7

%

$

269,760

$

262,218

3

%

Net (loss) income - GAAP

$

(32,296)

$

(10,409)

(210)

%

$

(61,013)

$

1,791

*

Net (loss) income - Non-GAAP

$

(23,427)

$

(2,732)

(758)

%

$

(32,803)

$

17,525

*

Diluted (loss) earnings per share - GAAP

$

(0.41)

$

(0.13)

(215)

%

$

(0.77)

$

0.02

*

Diluted (loss) earnings per share - Non-GAAP

$

(0.30)

$

(0.03)

(900)

%

$

(0.42)

$

0.21

*

*

not meaningful

⁽¹⁾

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

⁽²⁾

Reflects client arrangements (term license, cloud, and maintenance) that are subject to renewal.

(Dollars in thousands)

Three Months Ended
June 30,

Six Months Ended
June 30,

2019

2018

Change

2019

2018

Change

Cloud

$

31,699

15

%

$

20,201

10

%

$

11,498

57

%

$

59,457

14

%

$

35,783

8

%

$

23,674

66

%

Term license

24,954

12

%

31,309

16

%

(6,355)

(20)

%

73,268

18

%

96,004

22

%

(22,736)

(24)

%

Maintenance

69,329

34

%

65,906

34

%

3,423

5

%

137,035

33

%

130,431

31

%

6,604

5

%

Subscription

125,982

61

%

117,416

60

%

8,566

7

%

269,760

65

%

262,218

61

%

7,542

3

%

Perpetual license

19,320

9

%

13,475

7

%

5,845

43

%

34,270

8

%

36,553

8

%

(2,283)

(6)

%

Consulting

60,290

30

%

65,888

33

%

(5,598)

(8)

%

114,108

27

%

133,190

31

%

(19,082)

(14)

%

Total revenue

$

205,592

100

%

$

196,779

100

%

$

8,813

4

%

$

418,138

100

%

$

431,961

100

%

$

(13,823)

(3)

%

June 30,

Change

Constant Currency
Change

(Dollars in thousands)

2019

2018

$

277,316

$

263,624

$

13,692

5

%

7

%

Term ACV

199,299

168,528

30,771

18

%

19

%

Client Cloud ACV

476,615

432,152

44,463

10

%

12

%

Pega Cloud ACV

136,074

82,376

53,698

65

%

67

%

Total ACV

$

612,689

$

514,528

$

98,161

19

%

21

%

⁽¹⁾

Total ACV, as of a given date, is the sum of the following two components:

• Client Cloud: the sum of (1) the annual value of each term license contract in effect on such date, which is equal to its total license value divided by the total number of years and (2) maintenance revenue reported for the quarter ended on such date, multiplied by four. We do not provide hosting for Client Cloud arrangements.

• Pega Cloud: the total of the annual value of each cloud contract in effect on such date, which is equal to its total value divided by the total number of years.

⁽²⁾

As foreign currency exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of ACV growth rates on a constant currency basis enhances the understanding of our results and evaluation of our performance in comparison to prior periods. The percent change in constant currency is calculated by applying the applicable current period exchange rates to prior period ACV.

June 30, 2019

(Dollars in thousands)

Perpetual license

Term license

Maintenance

Cloud

Consulting

Total

1 year or less

$

8,429

$

38,080

$

173,421

$

124,134

$

16,259

$

360,323

57

%

1-2 years

915

4,678

12,530

98,842

942

117,907

19

%

2-3 years

1,306

641

5,801

75,828

227

83,803

13

%

Greater than 3 years

?

185

2,812

63,259

?

66,256

11

%

$

10,650

$

43,584

$

194,564

$

362,063

$

17,428

$

628,289

100

%

Change in RPO Since June 30, 2018

$

(36,623)

$

6,640

$

32,273

$

148,253

$

1,086

$

151,629

(77)

%

18

%

20

%

69

%

7

%

32

%

June 30, 2018

(Dollars in thousands)

Perpetual license

Term license

Maintenance

Cloud

Consulting

Total

1 year or less

$

28,626

$

20,457

$

111,086

$

41,036

$

12,039

$

213,244

45

%

1-2 years

15,862

9,878

43,837

66,529

4,103

140,209

29

%

2-3 years

2,423

5,665

5,265

50,250

?

63,603

13

%

Greater than 3 years

362

944

2,103

55,995

200

59,604

13

$

47,273

$

36,944

$

162,291

$

213,810

$

16,342

$

476,660

100

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

Three Months Ended
June 30,

Six Months Ended
June 30,

2019

2018

2019

2018

Revenue

Software license

$

44,274

$

44,784

$

107,538

$

132,557

Maintenance

69,329

65,906

137,035

130,431

Services

91,989

86,089

173,565

168,973

Total revenue

205,592

196,779

418,138

431,961

Cost of revenue

Software license

928

1,262

2,306

2,517

Maintenance

6,292

5,874

12,627

11,956

Services

69,860

66,681

136,584

134,958

Total cost of revenue

77,080

73,817

151,517

149,431

Gross profit

128,512

122,962

266,621

282,530

Operating expenses

Selling and marketing

116,962

93,972

225,827

182,355

Research and development

49,714

41,972

100,310

88,757

General and administrative

14,174

10,181

26,850

26,645

Total operating expenses

180,850

146,125

352,987

297,757

(Loss) from operations

(52,338)

(23,163)

(86,366)

(15,227)

Foreign currency transaction gain (loss)

2,105

1,244

(1,607)

159

Interest income, net

544

629

1,267

1,393

Other income, net

55

?

55

363

(Loss) before (benefit from) income taxes

(49,634)

(21,290)

(86,651)

(13,312)

(Benefit from) income taxes

(17,338)

(10,881)

(25,638)

(15,103)

Net (loss) income

$

(32,296)

$

(10,409)

$

(61,013)

$

1,791

(Loss) earnings per share

Basic

$

(0.41)

$

(0.13)

$

(0.77)

$

0.02

Diluted

$

(0.41)

$

(0.13)

$

(0.77)

$

0.02

Weighted-average number of common shares
outstanding

Basic

78,987

78,635

78,787

78,436

Diluted

78,987

78,635

78,787

83,247

PEGASYSTEMS INC.

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

(in thousands, except percentages and per share amounts)

Three Months Ended
June 30,

Six Months Ended
June 30,

2019

2018

Change

2019

2018

Change

Total revenue - GAAP and Non-GAAP

$

205,592

$

196,779

4

%

$

418,138

$

431,961

(3)

%

Net (loss) income - GAAP

$

(32,296)

$

(10,409)

(210)

%

$

(61,013)

$

1,791

*

Amortization of intangible assets

1,656

2,836

4,592

5,673

Stock-based compensation ⁽²⁾

20,047

16,056

38,397

31,165

Foreign currency transaction gain (loss)

(2,105)

(1,244)

1,607

(159)

Income tax effects ⁽³⁾

(10,729)

(9,971)

(16,386)

(20,945)

Net (loss) income - Non-GAAP

$

(23,427)

$

(2,732)

(758)

%

$

(32,803)

$

17,525

*

Diluted (loss) earnings per share - GAAP

$

(0.41)

$

(0.13)

(215)

%

$

(0.77)

$

0.02

*

Non-GAAP adjustments

0.11

0.10

0.35

0.19

Diluted (loss) earnings per share - Non-GAAP

$

(0.30)

$

(0.03)

(900)

%

$

(0.42)

$

0.21

*

Diluted weighted-average number of
common shares outstanding - GAAP

78,987

78,635

?

%

78,787

83,247

(5)

%

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

78,987

78,635

?

%

78,787

83,247

(5)

%

*

not meaningful

⁽¹⁾

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:

• Amortization of intangible assets: We have excluded amortization of intangible assets from our non-GAAP operating expenses and profitability measures. Amortization of intangible assets fluctuates 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 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.

• Foreign currency transaction gain (loss): We have excluded foreign currency transaction gains and losses from our non-GAAP profitability measures. Foreign currency transaction gains and losses fluctuate in amount and frequency and are significantly affected by changes in foreign exchange market rates. Foreign currency transaction gains and losses will recur in future periods.

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.

⁽²⁾

Stock-based compensation was as follows:

Three Months Ended
June 30,

Six Months Ended
June 30,

(in thousands)

2019

2018

2019

2018

Cost of revenues

$

4,911

$

4,257

$

9,430

$

7,958

Selling and marketing

8,364

6,038

15,738

10,696

Research and development

4,572

3,802

9,132

7,439

General and administrative

2,200

1,959

4,097

5,072

$

20,047

$

16,056

$

38,397

$

31,165

Income tax benefit

$

(4,056)

$

(3,341)

$

(7,796)

$

(6,482)

⁽³⁾     Effective income tax rates were as follows:

Six Months Ended
June 30,

2019

2018

GAAP

30

%

113

%

Non-GAAP

22

%

25

%

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

June 30, 2019

December 31, 2018

Assets

Total cash, cash equivalents, and marketable securities

$

155,049

$

207,423

Total receivables (billed and unbilled)

422,408

504,765

Goodwill

79,037

72,858

Other assets

284,123

197,507

Total assets

$

940,617

$

982,553

Liabilities and stockholders' equity

Accrued expenses, including compensation and related expenses

$

113,252

$

130,177

Deferred revenue, current

169,009

185,145

Deferred income tax liabilities

6,918

6,939

Other liabilities

94,151

38,761

Stockholders' equity

557,287

621,531

Total liabilities and stockholders' equity

$

940,617

$

982,553

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Six Months Ended
June 30,

2019

2018

Operating activities:

Net (loss) income

$

(61,013)

$

1,791

Adjustments to reconcile net (loss) income to cash provided by operating activities

Non-cash items

73,562

51,081

Change in operating assets and liabilities, net

(4,829)

22,560

Cash provided by operating activities

7,720

75,432

Cash provided by (used in) investing activities

17,210

(46,369)

Cash (used in) financing activities

(44,367)

(45,825)

Effect of exchange rate changes on cash and cash equivalents

515

(1,226)

(18,922)

(17,988)

Cash and cash equivalents, beginning of period

114,422

162,279

Cash and cash equivalents, end of period

$

95,500

$

144,291