For information, contact: Chris Sullivan Chief Financial Officer Pegasystems Inc. (617) 374-9600, ext. 6020 chris.sullivan@pega.com
Beth Lewis Director, Public and Investor Relations Pegasystems Inc. (617) 374-9600, ext. 6077 beth.lewis@pega.com
Pegasystems Reports 2004 Results
$96.5 Million 2004 Revenue, $0.20 Full Year EPS
CAMBRIDGE, Mass., February 24, 2005 –Pegasystems Inc. (NASDAQ: PEGA), a leader in rules-based business process management (BPM) software, today announced its fourth quarter and full year 2004 results, reporting revenue for 2004 of $96.5 million, pre-tax profits of $11.1 million, diluted earnings per share of $0.20 and positive cash flow from operations of $7.6 million.
Fourth Quarter and Full Year 2004 Financial Performance
(In millions, except per share data and percentages)
Quarter
Full Year
Q4 2004
Q4 2003
2004
2003
Total Revenue
$
26.2
$
23.1
$
96.5
$
99.3
License Revenue
$
13.3
$
12.0
$
41.6
$
57.7
% of Total Revenue
51
%
52
%
43
%
58
%
Services Revenue
$
12.9
$
11.1
$
54.9
$
41.6
% of Total Revenue
49
%
48
%
57
%
42
%
Pre-tax Income
$
4.0
$
3.0
$
11.1
$
21.8
(Benefit) Provision for Income Taxes
$
1.1
$
(0.5
)
$
3.6
$
4.2
Net Income
$
2.9
$
3.5
$
7.6
$
17.7
Basic Earnings Per Share
$
0.08
$
0.10
$
0.21
$
0.51
Diluted Earnings Per Share
$
0.08
$
0.10
$
0.20
$
0.49
Alan Trefler, Chairman and Chief Executive Officer, commented, “2004’s results represent both successes and challenges. Total revenue was down 3% compared to last year. However, on a year-over-year basis, total revenue increased 9% excluding the anticipated $10.6 million reduction in revenue associated with the restructured First Data Resources agreement. This increase was the result of growing market enthusiasm for our rules-driven PegaRULES technology and our all-purpose BPM software, PegaRULES Process Commander (PRPC). We also experienced diminished demand for our pre-built applications and continued lengthy negotiations and delays closing deals.
“In 2004 we signed a record number of new license customers, more than double the number signed in 2003. These customers, representing a wide range of industries, serve as testaments to our technological leadership, which provides our customers agility for growth, productivity and compliance. New customers will be using Pegasystems rules-based BPM software to manage a variety of complex, changing business processes including: to optimize hotel reservations and pricing; to automate semiconductor product manufacturing cycles; to manage insurance policies and claims; to automate consulting proposal creation; and to manage best practices for mortgage lending customer service. Many of our new customers are working with our partner network to implement our software and extend its use.
“We are also pleased to report the continued recognition of our best-in-class technology including awards and accolades from magazines such asFortune Small Business, Intelligent Enterprise and Waters;and from leading industry analysts including Gartner and META Group, all of whom have referenced the competitive differentiation we offer in the BPM market with our rules-based technology.
“Still, the fact that our best-in-class technology and brand leadership did not translate into the top line growth we planned for in 2004, has led us to reassess the strategies and tactics we are employing to establish Pegasystems as the leader in BPM software. In particular, we will be focusing more of our efforts on our rules-based BPM software, PegaRULES Process Commander (PRPC). Industry leaders across multiple industries have selected PRPC as a critical solution to automate key business processes and close the execution gap that results as strategy changes outpace the ability of operations and systems to respond.”
Chris Sullivan, CFO, commented, “For 2004, we reported a $16.1 million decrease in license revenue compared to 2003. This includes a $13.8 million, or 46%, reduction in term license revenue and the $10.6 million reduction in perpetual license revenue associated with the restructured First Data Resources agreement, partially offset by a $7.8 million, or 53%, increase in other perpetual license revenue.
“We reported a $13.3 million, or 32%, increase in services revenue as we continued to support new customer sales and implementations even as we deepened our relationships with system integration partners. Implementation, consulting and training revenue was up 30% year-over-year and maintenance revenue grew 38% primarily on the strength of a larger installed base. At the same time, we improved our services margins for 2004.
“For 2005, we anticipate full year revenue between $97 and $105 million with revenues and earnings weighted to the latter part of 2005. We expect license revenue growth to be driven primarily through sales of perpetual licenses. Any license revenue growth from term license renewals is likely to be modest. We are committed to becoming the leader in BPM software and are therefore planning to invest more heavily in sales and marketing in 2005 than 2004. We believe this investment will better position Pegasystems to achieve accelerated growth in future years, but we also anticipate it will result in lower profit before tax in 2005 compared to 2004. We expect earnings per diluted share to be between $0.05 and $0.15. Cash flow from operations is expected to be in the range of $4 to $8 million, depending primarily on the revenue achieved. Our incremental sales and marketing investment will begin in the first quarter of 2005. As a result, we expect our first quarter net income may be break-even or below.
“These estimates for 2005 do not include the impact of recent accounting pronouncements requiring the expensing of stock options as of July 1, 2005.We expect this will have a significant impact on our financial statements. However, the factors used to determine the exact impact are subject to significant changes prior to the effective date.”
The Company will be hosting a conference call and live Webcast associated with this announcement at 9:00 a.m. ET on Friday, February 25, 2005. Dial-in information is as follows: 800-250-4434 (domestic) or 706-634-0667 (international). A replay of the teleconference will be available at 800-642-1687 (domestic) or 706-645-9291 (international), passcode 3880756.
To listen to the Webcast, please log ontowww.pega.com at least 5 minutes prior to the event’s broadcast, and click on the Webcast icon in the Investor Relations section.
About Pegasystems Pegasystems Inc. (NASDAQ: PEGA) delivers rules-driven smart BPM software for automating complex and changing business processes. Only smart BPM gives customers the flexibility and agility to build for change, closing the execution gap between management decisions and business operations. Pegasystems offers award-winning Business Process and Business Rules capabilities complemented with best-practice solution frameworks that empower Fortune 500 companies in the financial service, insurance, healthcare and government markets. Pegasystems is headquartered in Cambridge, Mass., and has regional offices in North America, Europe and the Pacific Rim. For more information, visit www.pega.com.
Forward-Looking Statements 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 including without limitation our financial guidance with respect to 2005 revenue, net income, earnings per share, and cash flow from operations. The words “believe,” “expect,” “hope,” “anticipate,” “plan” and similar expressions, among others, identify forward-looking statements, which speak only as of the date the statement was made. The Company does not undertake and specifically disclaims any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 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 volatility of our quarterly operating results, difficulty in predicting the completion of product implementations and consequently the timing of our license revenue recognition, the timing of term software license renewals, customer acceptance of our new PegaRULES Process Commander technology, our ability to develop new products and evolve existing ones, the impact on our business of the ongoing consolidation in the financial services market, historically our core market, our ability to attract and retain key employees, reliance on certain key third-party relationships, and other risks and uncertainties. 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 most recent report on form 10-Q or 10-K and other recent filings on file with the Securities and Exchange Commission. The forward-looking statements contained in this press release represent the Company’s views as of February 24, 2005. 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, 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 February 24, 2005.
###
1
PEGASYSTEMS INC.
CONSOLIDATED BALANCE SHEETS (in thousands, except share-related data)
December 31,
2004
2003
ASSETS
Current assets:
Cash and cash equivalents
$
20,905
$
67,989
Short-term investments
76,455
19,946
Total cash and short-term investments
97,360
87,935
Trade accounts receivable, net of allowance for doubtful accounts of $365 in 2004 and 2003 .
15,528
9,602
Short-term license installments
31,358
28,565
Prepaid expenses and other current assets
1,236
727
Total current assets
145,482
126,829
Long-term license installments, net of unearned interest income
44,344
53,666
Equipment and improvements, net of accumulated depreciation and amortization
1,586
992
Acquired technology, net of accumulated amortization
379
729
Other assets
118
166
Goodwill
2,346
2,346
Total assets
$
194,255
$
184,728
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accrued payroll related expenses
$
7,888
$
8,886
Accounts payable and accrued expenses
9,502
7,784
Deferred revenue
9,114
14,180
Current portion of capital lease obligation
98
—
Total current liabilities
26,602
30,850
Long-term deferred income taxes
1,480
625
Capital lease obligation, net of current portion
165
—
Other long-term liabilities
808
81
Total liabilities
29,055
31,556
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized; no shares issued and outstanding
—
—
Common stock, $.01 par value, 70,000,000 shares authorized; 36,076,649 shares and 35,212,505 shares issued and outstanding in 2004 and 2003, respectively
361
352
Additional paid-in capital
122,152
117,391
Stock warrant
249
374
Retained earnings
41,289
33,735
Accumulated other comprehensive income (loss):
Net unrealized loss on investments available-for-sale
(267
)
(9
)
Foreign currency translation adjustments
1,416
1,329
Total stockholders’ equity
165,200
153,172
Total liabilities and stockholders’ equity
$
194,255
$
184,728
2
PEGASYSTEMS INC.
CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts)
Years ended December 31,
2004
2003
2002
Revenue:
Software license
$
41,563
$
57,695
$
63,922
Services
54,898
41,618
33,486
Total revenue
96,461
99,313
97,408
Cost of revenue:
Cost of software license
350
350
2,661
Cost of services
26,146
27,069
29,207
Total cost of revenue
26,496
27,419
31,868
Gross profit
69,965
71,894
65,540
Operating expenses:
Research and development
19,879
21,592
21,284
Selling and marketing
32,089
24,840
23,308
General and administrative
12,253
10,788
9,472
Total operating expenses
64,221
57,220
54,064
Income from operations
5,744
14,674
11,476
Installment receivable interest income
3,026
5,163
5,774
Other interest income, net
1,842
759
760
Other income (expense), net
517
1,235
(813
)
Income before provision for income taxes
11,129
21,831
17,197
Provision for income taxes
3,575
4,150
1,900
Net income
$
7,554
$
17,681
$
15,297
Earnings per share, basic
$
0.21
$
0.51
$
0.45
Earnings per share, diluted
$
0.20
$
0.49
$
0.43
Weighted average number of common shares outstanding, basic
35,691
34,518
33,835
Weighted average number of common shares outstanding, diluted.
37,043
35,757
35,980
3
PEGASYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years ended December 31,
2004
2003
2002
Cash flows from operating activities:
Net income....... ......
$
7,554
$
17,681
$
15,297
Adjustment to reconcile net income to cash flows from operating activities:
Stock option income tax benefits
1,058
1,859
1,559
Deferred income taxes
1,365
625
(1,000
)
Depreciation and amortization
1,417
1,496
4,992
Issuance of common stock warrants
38
—
—
Reduction in provision for doubtful accounts
—
(146
)
(353
)
Losses on disposal of fixed assets
—
—
83
Change in operating assets and liabilities:
Trade accounts receivable and license installments
651
(4,871
)
(2,248
)
Prepaid expenses and other current assets
(501)
142
1,525
Accounts payable and accrued expenses
259
3,312
204
Deferred revenue
(5,066
)
905
7,041
Other long-term assets and liabilities
776
(34)
157
Cash flows from operating activities
7,551
20,969
27,257
Cash flows from investing activities:
Purchase of investments
(163,777
)
(46,226
)
(6,053
)
Maturing and called investments
16,850
32,324
—
Sale of investments
89,753
—
—
Purchase of equipment, furniture and improvements
(1,109
)
(382
)
(1,006
)
Acquisition of 1mind
—
—
(573
)
Cash flows from investing activities
(58,283
)
(14,284
)
(7,632
)
Cash flows from financing activities:
Payments under capital lease obligations
(39
)
—
(81
)
Exercise of stock options
2,890
2,422
4,044
Proceeds from sale of stock under Employee Stock Purchase Plan
659
532
390
Cash flows from financing activities
3,510
2,954
4,353
Effect of exchange rate on cash and cash equivalents
138
957
398
Net (decrease) increase in cash and cash equivalents
��
(47,084
)
10,596
24,376
Cash and cash equivalents, beginning of year
67,989
57,393
33,017
Cash and cash equivalents, end of year
$
20,905
$
67,989
$
57,393
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest Interest
$
14
$
102
$
2
Income taxes
$
1,220
$
1,027
$
724
Non-cash financing activity:
Equipment acquired under capital lease
$
302
$
—
$
—
Stock issued in business combination
$
—
$
—
$
3,669
Return of shares held in escrow related to business combination
$
—
$
901
$
—
4
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