Exhibit 99.1
Pegasystems Announces Financial Results for Third Quarter and Nine Months of 2016
Total Revenue Growth Exceeds 15% For Nine Months of 2016
CAMBRIDGE, Mass.– November 2, 2016 –Pegasystems Inc. (NASDAQ: PEGA), the software company empowering customer engagement for the world’s leading enterprises, today announced results for its third quarter and nine months ended September 30, 2016.
“We’re pleased with our Q3 and year-to-date results,” said Alan Trefler, founder and CEO, Pegasystems. “We continue to focus on delivering the industry’s leading BPM and CRM applications to provide clients with dramatic business agility and positive business outcomes. We are delighted to see a growing number of leading organizations choosing our software to improve customer engagement and drive operational excellence.”
SELECTED GAAP & NON-GAAP RESULTS(1)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | | | | | | |
| ($ in thousands except per share amounts) | | 2016 | | | 2016 | | | 2015 | | | 2015 | | | % Increase (Decrease) | |
| | GAAP | | | Non-GAAP | | | GAAP | | | Non-GAAP | | | GAAP | | | Non-GAAP | |
| |
Total Revenue | | $ | 182,802 | | | $ | 183,460 | | | $ | 162,403 | | | $ | 162,403 | | | | 13% | | | | 13% | |
License Revenue | | $ | 68,833 | | | $ | 68,848 | | | $ | 58,948 | | | $ | 58,948 | | | | 17% | | | | 17% | |
Cloud Revenue | | $ | 10,873 | | | $ | 10,902 | | | $ | 8,244 | | | $ | 8,244 | | | | 32% | | | | 32% | |
Net Income | | $ | 2,418 | | | $ | 13,056 | | | $ | 6,325 | | | $ | 13,247 | | | | (62%) | | | | (1%) | |
Diluted Earnings per share | | $ | 0.03 | | | $ | 0.17 | | | $ | 0.08 | | | $ | 0.17 | | | | (63%) | | | | 0% | |
| | |
| | | Nine Months Ended September 30, | | | | |
| ($ in thousands except per share amounts) | | 2016 | | | 2016 | | | 2015 | | | 2015 | | | % Increase (Decrease) | |
| | GAAP | | | Non-GAAP | | | GAAP | | | Non-GAAP | | | GAAP | | | Non-GAAP | |
| |
Total Revenue | | $ | 550,656 | | | $ | 552,164 | | | $ | 478,340 | | | $ | 478,340 | | | | 15% | | | | 15% | |
License Revenue | | $ | 207,849 | | | $ | 207,878 | | | $ | 180,420 | | | $ | 180,420 | | | | 15% | | | | 15% | |
Cloud Revenue | | $ | 30,640 | | | $ | 30,764 | | | $ | 21,700 | | | $ | 21,700 | | | | 41% | | | | 42% | |
Net Income | | $ | 15,070 | | | $ | 45,504 | | | $ | 15,364 | | | $ | 34,378 | | | | (2%) | | | | 32% | |
Diluted Earnings per share | | $ | 0.19 | | | $ | 0.58 | | | $ | 0.19 | | | $ | 0.44 | | | | 0% | | | | 32% | |
(1) See a reconciliation of our GAAP to Non-GAAP measures contained in the financial schedules at the end of this release.
“We are pleased with our year-to-date results through the third quarter of 2016,” said Ken Stillwell, CFO, Pegasystems. “Our ability to grow GAAP and non-GAAP revenue by 15% in the face of currency headwinds and a significant shift to term license arrangements is a great indicator of our business momentum.”
Cash: Total cash, cash equivalents, and marketable securities at September 30, 2016 was $129.7 million, down 40.8% from 2015 year-end, primarily due to the cash payment of $48.8 million to acquire OpenSpan, Inc. (“OpenSpan”), net of cash acquired.
Cash generated from operations for the nine months of 2016 was $17.4 million.
1
License and Cloud Backlog: The Company computes license and cloud backlog by adding deferred license and cloud revenue as recorded on the Company’s balance sheet and license and cloud commitments, which are not yet billed and not recorded on its balance sheet.
| | | | | | | | | | | | |
| License and Cloud Backlog(1) | |
| | | September 30, | | | | |
| ($ in thousands) | | 2016 | | | 2015 | | | % Change | |
| |
Total deferred license and cloud revenue | | | 47,280 | | | | 55,370 | | | | (15%) | |
Total license and cloud commitments not on the balance sheet(2) | | | 372,532 | | | | 324,340 | | | | 15% | |
TOTAL LICENSE AND CLOUD BACKLOG | | | 419,812 | | | | 379,710 | | | | 11% | |
(1) See historical quarterly license and cloud backlog amounts in a separate schedule at the end of this release.
(2) See the “Future Cash Receipts from License and Cloud Arrangements” table on page 23 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2016.
Quarterly Conference Call
Pegasystems will host a conference call and audio-only Webcast associated with this announcement at 5:00 p.m. EDT today. A live audio Webcast of the conference call, together with detailed financial information, can be accessed through the Company’s Website atwww.pega.com/about/investors. Dial-in information is as follows: 1-877-705-6003 (domestic) or 1-201-493-6725 (international). To listen to theWebcast, log ontowww.pega.com at least five minutes prior to the event’s broadcast and click on theWebcast icon in theInvestors section. A replay of the call will also be available onwww.pega.com by clicking theEarnings Calls link in the Investors section.
Discussion of Non-GAAP Financial Measures:
To supplement financial results presented in accordance with Generally Accepted Accounting Principles in the U.S. (“GAAP”), the Company provides non-GAAP measures, including in this release. Pegasystems’ management utilizes a number of different financial measures, both GAAP and non-GAAP, in analyzing and assessing the overall performance of the business, for making operating decisions, and for forecasting and planning for future periods. The Company’s annual financial plan is prepared both on a GAAP and non-GAAP basis, and both are approved by our board of directors. In addition and as a consequence of the importance of these measures in managing the business, the Company uses non-GAAP measures and financial performance results in the evaluation process to establish management’s compensation.
The non-GAAP measures exclude the effects of certain business combination accounting entries, stock-based compensation expense, amortization of acquired intangibles, acquisition-related and restructuring expenses, and certain other adjustments. The Company believes that these non-GAAP measures are helpful in understanding its past financial performance and its anticipated future results. These 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 the Company’s consolidated financial statements prepared in accordance with GAAP. A reconciliation of the Company’s GAAP to non-GAAP measures is included in the financial schedules at the end of this release.
2
Forward-Looking Statements
“Safe harbor” statement under the Private Securities Litigation Reform Act of 1995: Certain statements contained in this press release may be construed as “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “could,” “estimate,” “may,” “target,” “strategy,” “is intended to,” “project,” “guidance”, or variations of such words and similar expressions, among others, identify forward-looking statements, which speak only as of the date the statement was made. These statements are based on current expectations and assumptions and involve various risks and uncertainties, which could cause the Company’s actual results to differ from those expressed in such forward-looking statements. These risks and uncertainties include, among others, variation in demand for our products and services and the difficulty in predicting the completion of product acceptance and other factors affecting the timing of our license revenue recognition; the ongoing consolidation in the financial services, insurance, healthcare, and communications markets; reliance on third party relationships; the potential loss of vendor specific objective evidence for our time and materials professional services arrangements; the inherent risks associated with international operations and the continued weakness in international economies; foreign currency exchange rates; the financial impact of the Company’s past acquisitions, including the OpenSpan acquisition, and any future acquisitions; the potential legal and financial liabilities and reputation damage due to cyber-attacks and security breaches; and management of the Company’s growth. Further information regarding these and other factors which could cause the Company’s actual results to differ materially from any forward-looking statements contained in this press release is contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and other recent filings with the Securities and Exchange Commission. These documents are available on the Company’s website athttp://www.pega.com/about/investors. The forward-looking statements contained in this press release represent the Company’s views as of November 2, 2016. Investors are cautioned not to place undue reliance on such forward-looking statements and there are no assurances that the matters contained in such statements will be achieved. Although subsequent events may cause the Company’s view to change, except as required by applicable law, the Company does not undertake and specifically disclaims any obligation to publicly update or revise these forward-looking statements whether as the result of new information, future events or otherwise. The statements should therefore not be relied upon as representing the Company’s view as of any date subsequent to November 2, 2016.
About Pegasystems
Pegasystems Inc. (NASDAQ: PEGA) develops strategic applications for marketing, sales, service, and operations. Pega’s applications streamline critical business operations, connect enterprises to their customers seamlessly in real-time across channels, and adapt to meet rapidly changing requirements. Pega’s Global 3000 customers include many of the world’s most sophisticated and successful enterprises. Pega’s applications, available in the cloud or on-premises, are built on its unified Pega® 7 Platform, which uses visual tools to easily extend and change applications to meet clients’ strategic business needs. Pega’s clients report that Pega software gives them the fastest time to value, extremely rapid deployment, efficient re-use, and global scale. For more information, please visit us at www.pega.com.
Press Contacts:
Lisa Pintchman
Pegasystems Inc.
lisa.pintchman@pega.com
(617) 866-6022
Twitter:@pega
Investor Contact:
Garo Toomajanian
ICR for Pegasystems
PegaInvestorRelations@pega.com
617-866-6077
All trademarks are the property of their respective owners.
3
Pegasystems Inc.
Unaudited Condensed Consolidated Statements of Operations
($ in thousands, except per share amounts)
| | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30, | | | September 30, | |
| | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Revenue: | | | | | | | | | | | | | | | | |
Software license | | $ | 68,833 | | | $ | 58,948 | | | $ | 207,849 | | | $ | 180,420 | |
Maintenance | | | 55,038 | | | | 52,285 | | | | 163,174 | | | | 150,366 | |
Services | | | 58,931 | | | | 51,170 | | | | 179,633 | | | | 147,554 | |
| | | | | | | | | | | | | | | | |
Total revenue | | | 182,802 | | | | 162,403 | | | | 550,656 | | | | 478,340 | |
| | | | | | | | | | | | | | | | |
Cost of revenue: | | | | | | | | | | | | | | | | |
Software license | | | 1,313 | | | | 1,000 | | | | 3,646 | | | | 3,106 | |
Maintenance | | | 6,659 | | | | 5,644 | | | | 18,889 | | | | 16,300 | |
Services | | | 52,465 | | | | 48,797 | | | | 154,512 | | | | 140,875 | |
| | | | | | | | | | | | | | | | |
Total cost of revenue(1) | | | 60,437 | | | | 55,441 | | | | 177,047 | | | | 160,281 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 122,365 | | | | 106,962 | | | | 373,609 | | | | 318,059 | |
| | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | |
Selling and marketing | | | 67,032 | | | | 53,640 | | | | 202,126 | | | | 169,764 | |
Research and development | | | 38,036 | | | | 33,032 | | | | 108,530 | | | | 94,248 | |
General and administrative | | | 11,725 | | | | 9,579 | | | | 34,067 | | | | 26,138 | |
Acquisition-related | | | 74 | | | | - | | | | 2,616 | | | | 39 | |
Restructuring | | | - | | | | - | | | | 287 | | | | - | |
| | | | | | | | | | | | | | | | |
Total operating expenses(1) | | | 116,867 | | | | 96,251 | | | | 347,626 | | | | 290,189 | |
| | | | | | | | | | | | | | | | |
Income from operations | | | 5,498 | | | | 10,711 | | | | 25,983 | | | | 27,870 | |
Foreign currency transaction gain (loss) | | | 1,082 | | | | (412) | | | | 2,764 | | | | (4,342) | |
Interest income, net | | | 172 | | | | 278 | | | | 650 | | | | 807 | |
Other expense, net | | | (1,237) | | | | (331) | | | | (4,891) | | | | (328) | |
| | | | | | | | | | | | | | | | |
Income before provision for income taxes | | | 5,515 | | | | 10,246 | | | | 24,506 | | | | 24,007 | |
Provision for income taxes | | | 3,097 | | | | 3,921 | | | | 9,436 | | | | 8,643 | |
| | | | | | | | | | | | | | | | |
Net income | | $ | 2,418 | | | $ | 6,325 | | | $ | 15,070 | | | $ | 15,364 | |
| | | | | | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.03 | | | $ | 0.08 | | | $ | 0.20 | | | $ | 0.20 | |
| | | | | | | | | | | | | | | | |
Diluted | | $ | 0.03 | | | $ | 0.08 | | | $ | 0.19 | | | $ | 0.19 | |
| | | | | | | | | | | | | | | | |
| | | | |
Weighted-average number of common shares outstanding: | | | | | | | | | | | | | | | | |
Basic | | | 76,278 | | | | 76,534 | | | | 76,323 | | | | 76,521 | |
Diluted | | | 79,082 | | | | 79,174 | | | | 78,976 | | | | 78,906 | |
| | | | | | | | | | | | | | | | |
Dividends declared per share | | | $0.03 | | | | $0.03 | | | | $0.09 | | | | $0.09 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
(1) Includes stock-based compensation as follows: | | | | | | | | | | | | | | | | |
Cost of revenue | | $ | 3,117 | | | $ | 2,285 | | | $ | 8,711 | | | $ | 6,519 | |
Operating expenses | | $ | 7,701 | | | $ | 5,806 | | | $ | 21,923 | | | $ | 16,486 | |
4
PEGASYSTEMS INC.
RECONCILIATION OF SELECTED GAAP MEASURES TO NON-GAAP MEASURES(1)
($ in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | | % Increase (Decrease) |
| | | 2016 | | | | | | 2016 | | | 2015 | | | | | | 2015 | | | | | | | | | |
| | | GAAP | | | Adj. | | | Non-GAAP | | | GAAP | | | Adj. | | | Non-GAAP | | | GAAP | | | Non-GAAP | | | |
|
| TOTAL REVENUE | | $ | 182,802 | | | $ | 658 | | | $ | 183,460 | | | $ | 162,403 | | | $ | - | | | $ | 162,403 | | | | 13% | | | | 13% | | | |
Software license | | | 68,833 | | | | 15 | | | | 68,848 | | | | 58,948 | | | | - | | | | 58,948 | | | | 17% | | | | 17% | | | |
Maintenance | | | 55,038 | | | | 614 | | | | 55,652 | | | | 52,285 | | | | - | | | | 52,285 | | | | 5% | | | | 6% | | | |
Services | | | 58,931 | | | | 29 | | | | 58,960 | | | | 51,170 | | | | - | | | | 51,170 | | | | 15% | | | | 15% | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TOTAL COST OF REVENUE | | $ | 60,437 | | | $ | (4,759 | ) | | $ | 55,678 | | | $ | 55,441 | | | $ | (3,636 | ) | | $ | 51,805 | | | | 9% | | | | 7% | | | |
Amortization of intangible assets(2) | | | 1,642 | | | | (1,642 | ) | | | - | | | | 1,351 | | | | (1,351 | ) | | | - | | | | | | | | | | | |
Stock-based compensation | | | 3,117 | | | | (3,117 | ) | | | - | | | | 2,285 | | | | (2,285 | ) | | | - | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| GROSS MARGIN % | | | 67% | | | | | | | | 70% | | | | 66% | | | | | | | | 68% | | | | 108 | bp | | | 155 | | | bp |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TOTAL OPERATING EXPENSES(3) | | | 116,867 | | | | (9,742 | ) | | | 107,125 | | | | 96,251 | | | | (7,434 | ) | | | 88,817 | | | | 21% | | | | 21% | | | |
Amortization of intangible assets(2) | | | 1,957 | | | | (1,957 | ) | | | - | | | | 1,628 | | | | (1,628 | ) | | | - | | | | | | | | | | | |
Stock-based compensation | | | 7,701 | | | | (7,701 | ) | | | - | | | | 5,806 | | | | (5,806 | ) | | | - | | | | | | | | | | | |
Acquisition-related | | | 84 | | | | (84 | ) | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| INCOME FROM OPERATIONS | | $ | 5,498 | | | $ | 15,159 | | | $ | 20,657 | | | $ | 10,711 | | | $ | 11,070 | | | | 21,781 | | | | (49%) | | | | (5%) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| OPERATING MARGIN % | | | 3% | | | | | | | | 11% | | | | 7% | | | | | | | | 13% | | | | (359) | bp | | | (215) | | | bp |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| INCOME TAX EFFECTS(4) | | $ | 3,097 | | | $ | 4,521 | | | $ | 7,618 | | | $ | 3,921 | | | $ | 4,148 | | | $ | 8,069 | | | | (21%) | | | | (6%) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NET INCOME | | $ | 2,418 | | | $ | 10,638 | | | $ | 13,056 | | | $ | 6,325 | | | $ | 6,922 | | | $ | 13,247 | | | | (62%) | | | | (1%) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| DILUTED EARNINGS PER SHARE | | $ | 0.03 | | | $ | 0.14 | | | $ | 0.17 | | | $ | 0.08 | | | $ | 0.09 | | | $ | 0.17 | | | | (63%) | | | | 0% | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| DILUTED WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING | | | 79,082 | | | | - | | | | 79,082 | | | | 79,174 | | | | - | | | | 79,174 | | | | 0% | | | | 0% | | | |
5
PEGASYSTEMS INC.
RECONCILIATION OF SELECTED GAAP MEASURES TO NON-GAAP MEASURES(1)
($ in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Nine Months Ended September 30, | | | % Increase (Decrease) |
| | | 2016 | | | | | | 2016 | | | 2015 | | | | | | 2015 | | | | | | | | | | | |
| | | GAAP | | | Adj. | | | Non-GAAP | | | GAAP | | | Adj. | | | Non-GAAP | | | GAAP | | | | | Non-GAAP | | | |
|
| TOTAL REVENUE | | $ | 550,656 | | | $ | 1,508 | | | $ | 552,164 | | | $ | 478,340 | | | $ | - | | | $ | 478,340 | | | | 15% | | | | | | 15% | | | |
Software license | | | 207,849 | | | | 29 | | | | 207,878 | | | | 180,420 | | | | - | | | | 180,420 | | | | 15% | | | | | | 15% | | | |
Maintenance | | | 163,174 | | | | 1,343 | | | | 164,517 | | | | 150,366 | | | | - | | | | 150,366 | | | | 9% | | | | | | 9% | | | |
Services | | | 179,633 | | | | 136 | | | | 179,769 | | | | 147,554 | | | | - | | | | 147,554 | | | | 22% | | | | | | 22% | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TOTAL COST OF REVENUE | | $ | 177,047 | | | $ | (13,337) | | | $ | 163,710 | | | $ | 160,281 | | | $ | (10,485) | | | $ | 149,796 | | | | 10% | | | | | | 9% | | | |
Amortization of intangible assets(2) | | | 4,626 | | | | (4,626) | | | | - | | | | 4,041 | | | | (4,041) | | | | - | | | | | | | | | | | | | |
Stock-based compensation | | | 8,711 | | | | (8,711) | | | | - | | | | 6,519 | | | | (6,519) | | | | - | | | | | | | | | | | | | |
Other adjustments | | | - | | | | - | | | | - | | | | (75) | | | | 75 | | | | - | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| GROSS MARGIN % | | | 68% | | | | | | | | 70% | | | | 66% | | | | | | | | 69% | | | | 136 | | | bp | | | 167 | | | bp |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TOTAL OPERATING EXPENSES(3) | | $ | 347,626 | | | $ | (29,806) | | | $ | 317,820 | | | $ | 290,189 | | | $ | (17,865) | | | $ | 272,324 | | | | 20% | | | | | | 17% | | | |
Amortization of intangible assets(2) | | | 5,542 | | | | (5,542) | | | | - | | | | 5,195 | | | | (5,195) | | | | - | | | | | | | | | | | | | |
Stock-based compensation | | | 21,923 | | | | (21,923) | | | | - | | | | 16,486 | | | | (16,486) | | | | - | | | | | | | | | | | | | |
Other adjustments | | | (220) | | | | 220 | | | | - | | | | (3,855) | | | | 3,855 | | | | - | | | | | | | | | | | | | |
Acquisition-related | | | 2,274 | | | | (2,274) | | | | - | | | | 39 | | | | (39) | | | | - | | | | | | | | | | | | | |
Restructuring | | | 287 | | | | (287) | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| INCOME FROM OPERATIONS | | $ | 25,983 | | | $ | 44,651 | | | $ | 70,634 | | | $ | 27,870 | | | $ | 28,350 | | | $ | 56,220 | | | | (7%) | | | | | | 26% | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| OPERATING MARGIN % | | | 5% | | | | | | | | 13% | | | | 6% | | | | | | | | 12% | | | | (111) | | | bp | | | 104 | | | bp |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| INCOME TAX EFFECTS(4) | | $ | 9,436 | | | $ | 14,218 | | | $ | 23,654 | | | $ | 8,643 | | | $ | 9,336 | | | $ | 17,979 | | | | 9% | | | | | | 32% | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NET INCOME | | $ | 15,070 | | | $ | 30,434 | | | $ | 45,504 | | | $ | 15,364 | | | $ | 19,014 | | | $ | 34,378 | | | | (2%) | | | | | | 32% | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| DILUTED EARNINGS PER SHARE | | $ | 0.19 | | | $ | 0.39 | | | $ | 0.58 | | | $ | 0.19 | | | $ | 0.25 | | | $ | 0.44 | | | | 0% | | | | | | 32% | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| DILUTED WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING | | | 78,976 | | | | - | | | | 78,976 | | | | 78,906 | | | | - | | | | 78,906 | | | | 0% | | | | | | 0% | | | |
6
PEGASYSTEMS INC.
FOOTNOTES FOR RECONCILIATON OF
SELECTED GAAP MEASURES TO NON-GAAP MEASURES
| (1) | This presentation includes non-GAAP measures. Our non-GAAP 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. For a detailed explanation of the adjustments made to comparable 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 disclosure under Discussion of Non-GAAP Financial Measures included earlier in this release and below. Our non-GAAP financial measures reflect adjustments based on the following items, as well as the related income tax effects: |
Revenue: Business combination accounting rules require that we determine the fair value of the deferred revenue liability for contractual obligations assumed from our acquisition of OpenSpan in April 2016. In post-acquisition reporting periods, we recognize revenue for the fair value of these contracts, when all the revenue recognition criteria are satisfied, instead of the revenue that would have been recognized by OpenSpan as an independent company. We add back the effect of the deferred revenue fair value adjustment in non-GAAP revenue to reflect the full amount of these revenues to provide a more complete comparison of the revenue guidance to peer companies. No adjustments were made to revenue for 2015.
Amortization of intangible assets: We have excluded the amortization expense of intangible assets from our non-GAAP operating expenses and net earnings 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 earned during the periods presented and will contribute to our future period revenues as well. Amortization of intangible assets will recur in future periods.
Stock-based compensation expense: We have excluded stock-based compensation expense from our non-GAAP operating expenses and net earnings measures. Although stock-based compensation is a key incentive offered to our employees, and we believe such compensation contributed to the revenues earned during the periods presented and will contribute to the generation of future period revenues, we continue to evaluate our business performance excluding stock-based compensation expense.
Acquisition-related and restructuring expenses: We have excluded the effect of acquisition-related and restructuring expenses from our non-GAAP operating expenses and net earnings measures. We incurred direct and incremental expenses associated primarily with the OpenSpan acquisition. These acquisition-related expenses were primarily professional fees to affect the acquisition. We have also incurred restructuring expenses for one-time employee termination benefits related to the closure of one of our domestic offices, which we generally would not have otherwise incurred in the periods presented as a part of our continuing operations. We believe it is useful for investors to understand the effects of these items on our total operating expenses.
Other adjustments: We reached an agreement with the former shareholders of Antenna Software, Inc., which we acquired in October 2013 (“Antenna”), to release a portion of the funds held in escrow as security for their indemnification obligations to us in settlement of the outstanding indemnification claims. The settlement resulted in a benefit to cost of revenue and operating expenses in the first quarter of 2015. In addition, we favorably settled indirect tax liabilities related to the Antenna acquisition, which resulted in a benefit to operating expenses in the first quarter of 2015. In the second quarter of 2016, we reduced our estimate of the additional cash consideration payable to the selling shareholders of one of the three companies acquired in 2014 based on the achievement of certain milestones. We believe the benefits associated with these items are not representative of our ongoing business, and we have excluded the effects of these items from our non-GAAP operating results and net earnings measures.
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| (2) | Estimated future annual amortization expense related to intangible assets as of September 30, 2016 is as follows: |
| | | | |
| (in thousands) | | | | |
| Remainder of 2016 | | $ | 3,267 | |
| 2017 | | | 12,335 | |
| 2018 | | | 11,335 | |
| 2019 | | | 5,543 | |
| 2020 | | | 2,647 | |
| 2021 and thereafter | | | 12,335 | |
| | | | |
Total intangible assets subject to amortization | | $ | 47,462 | |
| | | | |
| (3) | Below is a reconciliation of non-GAAP operating expenses: |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | |
| | | 2016 | | | | | | 2016 | | | 2015 | | | | | | 2015 | |
| (in thousands) | | GAAP | | | Adj. | | | Non-GAAP | | | GAAP | | | Adj. | | | Non-GAAP | |
| |
Selling and marketing | | $ | 67,032 | | | $ | (5,335 | ) | | $ | 61,697 | | | $ | 53,640 | | | $ | (3,942 | ) | | $ | 49,698 | |
Amortization of intangible assets | | | 1,867 | | | | (1,867 | ) | | | - | | | | 1,537 | | | | (1,537 | ) | | | - | |
Stock-based compensation | | | 3,468 | | | | (3,468 | ) | | | - | | | | 2,405 | | | | (2,405 | ) | | | - | |
Research and development | | $ | 38,036 | | | $ | (2,260 | ) | | $ | 35,776 | | | $ | 33,032 | | | $ | (2,047 | ) | | $ | 30,985 | |
Stock-based compensation | | | 2,260 | | | | (2,260 | ) | | | - | | | | 2,047 | | | | (2,047 | ) | | | - | |
General and administrative | | $ | 11,725 | | | $ | (2,073 | ) | | $ | 9,652 | | | $ | 9,579 | | | $ | (1,445 | ) | | $ | 8,134 | |
Amortization of intangible assets | | | 90 | | | | (90 | ) | | | - | | | | 91 | | | | (91 | ) | | | - | |
Stock-based compensation | | | 1,983 | | | | (1,983 | ) | | | - | | | | 1,354 | | | | (1,354 | ) | | | - | |
Acquisition-related | | $ | 74 | | | $ | (74 | ) | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Stock-based compensation | | | (10 | ) | | | 10 | | | | - | | | | - | | | | - | | | | - | |
Acquisition-related | | | 84 | | | | (84 | ) | | | - | | | | - | | | | - | | | | - | |
TOTAL OPERATING EXPENSES | | $ | 116,867 | | | $ | (9,742 | ) | | $ | 107,125 | | | $ | 96,251 | | | $ | (7,434 | ) | | $ | 88,817 | |
| |
| | | Nine Months Ended September 30, | |
| | | 2016 | | | | | | 2016 | | | 2015 | | | | | | 2015 | |
| (in thousands) | | GAAP | | | Adj. | | | Non-GAAP | | | GAAP | | | Adj. | | | Non-GAAP | |
| |
Selling and marketing | | $ | 202,126 | | | $ | (14,449 | ) | | $ | 187,677 | | | $ | 169,764 | | | $ | (10,878 | ) | | $ | 158,886 | |
Amortization of intangible assets | | | 5,274 | | | | (5,274 | ) | | | - | | | | 4,602 | | | | (4,602 | ) | | | - | |
Stock-based compensation | | | 9,395 | | | | (9,395 | ) | | | - | | | | 6,283 | | | | (6,283 | ) | | | - | |
Other adjustments | | | (220 | ) | | | 220 | | | | - | | | | (7 | ) | | | 7 | | | | - | |
Research and development | | $ | 108,530 | | | $ | (7,480 | ) | | $ | 101,050 | | | $ | 94,248 | | | $ | (5,738 | ) | | $ | 88,510 | |
Stock-based compensation | | | 7,480 | | | | (7,480 | ) | | | - | | | | 6,178 | | | | (6,178 | ) | | | - | |
Other adjustments | | | - | | | | - | | | | - | | | | (440 | ) | | | 440 | | | | - | |
General and administrative | | $ | 34,067 | | | $ | (4,974 | ) | | $ | 29,093 | | | $ | 26,138 | | | $ | (1,210 | ) | | $ | 24,928 | |
Amortization of intangible assets | | | 268 | | | | (268 | ) | | | - | | | | 593 | | | | (593 | ) | | | - | |
Stock-based compensation | | | 4,706 | | | | (4,706 | ) | | | - | | | | 4,025 | | | | (4,025 | ) | | | - | |
Other adjustments | | | - | | | | - | | | | - | | | | (3,408 | ) | | | 3,408 | | | | - | |
Acquisition-related | | $ | 2,616 | | | $ | (2,616 | ) | | $ | - | | | $ | 39 | | | $ | (39 | ) | | $ | - | |
Stock-based compensation | | | 342 | | | | (342 | ) | | | - | | | | - | | | | - | | | | - | |
Acquisition-related | | | 2,274 | | | | (2,274 | ) | | | - | | | | 39 | | | | (39 | ) | | | - | |
Restructuring | | $ | 287 | | | $ | (287 | ) | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
TOTAL OPERATING EXPENSES | | $ | 347,626 | | | $ | (29,806 | ) | | $ | 317,820 | | | $ | 290,189 | | | $ | (17,865 | ) | | $ | 272,324 | |
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| (4) | The GAAP income tax effects were calculated using an effective GAAP tax rate of 56.2% and 38.3% for the third quarter of 2016 and 2015, respectively. The non-GAAP income tax effects were calculated using an effective non-GAAP tax rate of 36.9% and 37.9% for the third quarter of 2016 and 2015, respectively. |
The GAAP income tax effects were calculated using an effective GAAP tax rate of 38.5% and 36.0% for the nine months of 2016 and 2015, respectively. The non-GAAP income tax effects were calculated using an effective non-GAAP tax rate of 34.2% and 34.3% for the nine months of 2016 and 2015, respectively.
The differences between our GAAP and non-GAAP effective tax rates in the third quarter and nine months of 2016 and 2015 primarily relate to the impact of unfavorable foreign stock compensation adjustments on our GAAP effective tax rate.
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Pegasystems Inc.
Unaudited Condensed Consolidated Balance Sheets
(in thousands)
| | | | | | | | |
| | | As of | | | As of | |
| | | September 30, 2016 | | | December 31, 2015 | |
Assets: | | | | | | | | |
Cash, cash equivalents, and marketable securities | | $ | 129,730 | | | $ | 219,078 | |
Trade accounts receivable, net | | | 208,562 | | | | 211,846 | |
Property and equipment, net | | | 39,343 | | | | 31,319 | |
Long-term deferred income taxes | | | 53,905 | | | | 53,350 | |
Goodwill and Intangible assets, net | | | 121,333 | | | | 80,194 | |
Other assets | | | 44,122 | | | | 31,971 | |
| | | | | | | | |
Total assets | | $ | 596,995 | | | $ | 627,758 | |
| | | | | | | | |
| | | | | | | | |
Liabilities and Stockholders’ Equity: | | | | | | | | |
Accrued expenses, including compensation and related expenses | | | 88,440 | | | | 98,640 | |
Deferred revenue | | | 150,686 | | | | 171,678 | |
Other liabilities | | | 30,449 | | | | 34,581 | |
Stockholders’ equity | | | 327,420 | | | | 322,859 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 596,995 | | | $ | 627,758 | |
| | | | | | | | |
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Pegasystems Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
| | | | | | | | |
| | | Nine Months Ended | |
| | | September 30, | |
| | | 2016 | | | 2015 | |
Operating activities: | | | | | | | | |
Net income | | $ | 15,070 | | | $ | 15,364 | |
Adjustments to reconcile net income to cash provided by operating activities: | | | | | | | | |
Excess tax benefits from equity awards and deferred income taxes | | | (6,001) | | | | (7,550) | |
Depreciation, amortization, foreign currency transaction (gain) loss, and other non-cash items | | | 15,285 | | | | 23,041 | |
Stock-based compensation expense | | | 30,634 | | | | 23,005 | |
Change in operating assets and liabilities, net | | | (37,592) | | | | 1,068 | |
| | | | | | | | |
Cash provided by operating activities | | | 17,396 | | | | 54,928 | |
| | | | | | | | |
Cash used in investing activities | | | (2,859) | | | | (42,736) | |
| | | | | | | | |
Cash used in financing activities | | | (39,871) | | | | (25,662) | |
| | | | | | | | |
| Effect of exchange rates on cash and cash equivalents | | | (1,309) | | | | (3,837) | |
| | | | | | | | |
| Net decrease in cash and cash equivalents | | | (26,643) | | | | (17,307) | |
| Cash and cash equivalents, beginning of period | | | 93,026 | | | | 114,585 | |
| | | | | | | | |
| Cash and cash equivalents, end of period | | $ | 66,383 | | | $ | 97,278 | |
| | | | | | | | |
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Pegasystems Inc.
Historical License and Cloud Backlog
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | 2016 | | | 2016 | | | 2016 | | | 2015 | | | 2015 | | | 2015 | | | 2015 | | | 2014 | |
| | | Q3 | | | Q2 | | | Q1 | | | Q4 | | | Q3 | | | Q2 | | | Q1 | | | Q4 | |
| |
Total deferred license and cloud revenue | | | 47,280 | | | | 51,855 | | | | 57,790 | | | | 63,412 | | | | 55,370 | | | | 61,339 | | | | 79,639 | | | | 63,048 | |
| | | | |
Total license and cloud commitments not on the balance sheet | | | 372,532 | | | | 340,777 | | | | 331,870 | | | | 356,388 | | | | 324,340 | | | | 330,043 | | | | 294,412 | | | | 301,409 | |
| | | | |
TOTAL LICENSE AND CLOUD BACKLOG | | $ | 419,812 | | | $ | 392,632 | | | $ | 389,660 | | | $ | 419,800 | | | $ | 379,710 | | | $ | 391,382 | | | $ | 374,051 | | | $ | 364,457 | |
| | | | |
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