Pegasystems (PEGA) 8-K Pegasystems Reports $26.8 Million Revenue In Third Quarter

For information, contact:
Chris Sullivan Chief Financial Officer Pegasystems Inc. (617) 866-6020	Beth Lewis Director, Investor and Public Relations Pegasystems Inc. (617) 866-6077

Pegasystems Reports $26.8 Million Revenue In Third Quarter

New Sales Strategy Results in 32 Engagements through First Nine Months

CAMBRIDGE, Mass., November 8, 2005 –Pegasystems today announced its 2005 third quarter results, reporting revenue of $26.8 million, pre-tax profits of $3.1 million and earnings per share of $0.04.

Financial Performance

Quarter
(In millions, except per share data and percentages)	Q3 2005					Q2 2005			Q3 2004
Total Revenue		$	26.8		$	23.8		$	21.5
License Revenue		$	11.6		$	8.0		$	6.9
% of Total Revenue			43	%		34	%		32	%
Services Revenue		$	15.2		$	15.8		$	14.6
% of Total Revenue			57	%		66	%		68	%
Pre-tax Income		$	3.1		$	0.5		$	1.1
Provision for income taxes		$	1.8		$	0.1		$	0.4
Net Income		$	1.4		$	0.4		$	0.7
Earnings Per Share, Basic and Diluted		$	0.04		$	0.01		$	0.02

Alan Trefler, CEO, commented, “Leading corporations are recognizing that Pegasystems’ SmartBPM™ software brings rapid value by better aligning their business systems with their business objectives. Thirteen customers in the third quarter chose our business process management (BPM) software to support a broad variety of processes ranging from enhanced call center customer service to more efficient billing.

“Four new customers selected Pegasystems included a leading North American insurer who will be using Pegasystems SmartBPM software to broadly manage business processes; a global insurance broker to support customer billing; and a provider of employee benefits to support the company’s sales and service throughout the U.S.”

Mr. Trefler continued, “Equally important were the nine existing customers who extended their relationships with Pegasystems, including two who bought their initial PegaRULES Process Commander (PRPC) licenses less than six months ago. One of the world’s largest banking organizations, and a long-time customer, selected Pegasystems’ PRPC platform as its global BPM standard. These sales are evidence that PRPC and our PRPC-based frameworks provide true business enablement with ‘build for change’ agility, function and scale.

“This quarter’s 13 license signings brings to 32 the number secured this year, compared to 22 through this time last year. We are delighted with this success and look forward to continuing to provide real value for our customers.”

Chris Sullivan, CFO, commented, “The value of our license signings during the third quarter was significantly higher than the previously reported weak license signings in the first and second quarters of 2005. While this included one large transaction, we are also encouraged by the number of new and existing customers who purchased licenses.

“We have increased our investment in expanding our pool of trained services personnel, including new Pegasystems staff and partners, to better meet anticipated demand associated with new license signings. This has resulted in lower service gross margins in the third quarter.

“We now expect 2005 full-year revenue to be between $97 and $105 million. The broad range of our revenue estimate is attributable to a small number of large value license opportunities in the fourth quarter. We continue to expect services revenue to be above 50% of total revenue for 2005. We are committed to being the leader in BPM software and have continued to invest in services delivery capacity as well as sales and marketing during the first three quarters of 2005. We expect to continue this investment during the fourth quarter of 2005 and believe this will better position Pegasystems to achieve accelerated growth in future years, but we also anticipate it will continue to result in lower profit before tax in 2005 compared to 2004. As a result, we now expect full-year 2005 earnings per diluted share to be between $0.03 and $0.15. Cash flow from operations in 2005 is now expected to be in the range of $18 to $22 million.”

The Company will be hosting a conference call and live Webcast associated with this announcement at 9:00 a.m. ET on Wednesday, November 9, 2005. Dial-in information is as follows: 800-250-4434 (domestic) or 706-634-0667 (international), passcode 1856609.

If interested in listening to the Webcast, log onto www.pega.com at least 5 minutes prior to the event’s broadcast, and click on the Webcast icon in the Investor Relations section. A replay of the call will also be available on www.pega.com in the Investor Relations section, Audio Archives link.

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, services revenue as a percentage of total revenue, profit before tax, earnings per diluted share and cash flow from operations. The words “believe,” “expect,” “anticipate” 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, changes in estimates, judgments, positions and assumptions relative to our income tax provisions, difficulty in predicting the completion of product implementations and consequently the timing of our license revenue recognition, 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 November 8, 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 November 8, 2005.

AboutPegasystems

Pegasystems Inc. (Nasdaq: PEGA) provides software to automate complex, changing business processes. Our Business Process Management (BPM) solutions provide organizations with the agility critical to managing growth, productivity and compliance. Our solution unifies pure-play BPM software with a sophisticated Business Rules Engine to drive business effectiveness. This patented technology enables organizations to “build for change” and overcome the execution gap that occurs as evolving business objectives outpace the ability of business systems to respond.

Pegasystems’ BPM suite offers standards-based technology built in a rapid-solution development environment. Our BPM solution combines the capability to solve a full range of business process challenges with the opportunity to leverage existing technology investments. By enabling business process responsiveness, Pegasystems makes it easier for people and systems to work together.

Pegasystems’ award-winning BPM suite is complemented with best-practice solution frameworks based on more than 20 years of experience helping Fortune 500 and other leading corporations in the financial services, insurance, healthcare, manufacturing and government markets.

Headquartered in Cambridge, MA, Pegasystems has regional offices in North America, Europe and the Pacific Rim. For more information, visit www.pega.com.

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PEGASYSTEMS INC.
Condensed Consolidated Balance Sheets
(in thousands, except share-related data)

	September 30,			December 31,
	2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	18,464		$	20,905
Short-term investments		90,165			76,455
Total cash and short-term investments		108,629			97,360
Trade accounts receivable, net of allowance for doubtful accounts of $365 in 2005 and 2004 .		25,029			15,528
Short-term license installments		26,758			31,358
Prepaid expenses and other current assets		1,881			1,236
Total current assets		162,297			145,482
Long-term license installments, net of unearned interest income		31,851			44,344
Equipment and improvements, net of accumulated depreciation and amortization		2,118			1,586
Acquired technology, net of accumulated amortization		117			379
Other assets		112			118
Goodwill		2,346			2,346
Total assets	$	198,841		$	194,255
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accrued payroll related expenses	$	7,072		$	7,888
Accounts payable and accrued expenses		9,781			9,502
Deferred revenue		16,154			9,114
Current portion of capital lease obligation		101			98
Total current liabilities		33,108			26,602
Long-term deferred income taxes		2,190			1,480
Capital lease obligation, net of current portion		89			165
Other long-term liabilities		1,099			808
Total liabilities		36,486			29,055
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; 35,457,085 shares and 36,076,649 shares issued and outstanding in 2005 and 2004, respectively		355			361
Additional paid-in capital		118,220			122,152
Stock warrant		249			249
Retained earnings		43,088			41,289
Accumulated other comprehensive income (loss):
Net unrealized loss on investments available-for-sale		(616	)		(267	)
Foreign currency translation adjustments		1,059			1,416
Total stockholders’ equity		162,355			165,200
Total liabilities and stockholders’ equity	$	198,841		$	194,255

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PEGASYSTEMS INC.
Condensed Consolidated Statements of Income
(in thousands, except per share amounts)

	Three months ended September 30,							Nine months ended September 30,
	2005			2004			2005		2004
Revenue:
Software license	$	11,637		$	6,883		$30,521		$	28,223
Services		15,209			14,645		44,343			42,002
Total revenue		26,846			21,528		74,864			70,225
Cost of revenue:
Cost of software license		87			88		262			262
Cost of services		9,289			6,441		24,881			19,121
Total cost of revenue		9,376			6,529		25,143			19,383
Gross profit		17,470			14,999		49,721			50,842
Operating expenses:
Research and development		4,952			5,078		14,854			15,388
Selling and marketing		7,811			7,243		24,664			22,900
General and administrative		2,880			2,999		9,207			8,688
Total operating expenses		15,643			15,320		48,725			46,976
Income (loss) from operations		1,827			(321	)	996			3,866
Installment receivable interest income		632			856		1,763			2,243
Other interest income, net		808			511		2,177			1,280
Other income (expense), net		(128	)		95		(1,144)			(284	)
Income before provision for income taxes		3,139			1,141		3,792			7,105
Provision for income taxes		1,768			400		1,993			2,500
Net income	$	1,371		$	741		$1,799		$	4,605
Earnings per share:
Basic	$	0.04		$	0.02		$0.05		$	0.13
Diluted	$	0.04		$	0.02		$0.05		$	0.12
Weighted average number of common shares outstanding, basic		35,675			35,786		35,865			35,610
Weighted average number of common shares outstanding, diluted.		36,362			36,723		36,550			36,941

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PEGASYSTEMS INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)

	Nine months ended September 30,
	2005			2004
Cash flows from operating activities:
Net income....... ......	$	1,799		$	4,605
Adjustment to reconcile net income to cash flows from operating activities:
Stock option income tax benefits		91			721
Deferred income taxes		1,256			1,150
Depreciation, amortization and other non-cash items		1,286			1,053
Issuance of common stock warrants		—			38
Loss on disposal of fixed assets		15			—
Change in operating assets and liabilities:
Trade accounts receivable and license installments		7,571			5,188
Prepaid expenses and other current assets		(666	)		(714)
Accounts payable and accrued expenses		(679	)		(948)
Deferred revenue		7,040			(4,817	)
Other long-term assets and liabilities		295			49
Cash flows from operating activities		18,008			6,325
Cash flows from investing activities:
Purchase of investments		(38,065	)		(151,248	)
Maturing and called investments		9,018			13,350
Sale of investments		14,475			83,053
Purchase of equipment and improvements		(1,304	)		(782	)
Cash flows from investing activities		(15,876	)		(55,627	)
Cash flows from financing activities:
Payments under capital lease obligations		(73	)		(16	)
Proceeds from sale of stock under Employee Stock Purchase Plan		240			329
Exercise of stock options		521			2,457
Repurchase of common stock		(4,791	)		—
Cash flows from financing activities		(4,103	)		2,770
Effect of exchange rate on cash and cash equivalents		(470	)		(66	)
Net decrease in cash and cash equivalents		(2,441	)		(46,598	)
Cash and cash equivalents, beginning of period		20,905			67,989
Cash and cash equivalents, end of period	$	18,464		$	21,391

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