PEGA

Pegasystems Inc. (PEGA)

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Exchange: NASDAQ
Industry: Technology
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Pegasystems Inc. (PEGA)

Q4 2008 Earnings Call

March 10, 2009; 9:00 am ET

Executives

Alan Trefler - Chairman & Chief Executive Officer

Craig Dynes - Chief Financial Officer

Analysts

Edward Hemmelgarn - Shaker Investments

Brian Murphy - Sidoti & Company

Gregg Speicher - Moss Creek

Geoff Hulme - Porter Orlin

Presentation

Operator

Good day everyone and welcome to today’s Pegasystems Incorporated year end and fourth quarter earnings conference call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Craig Dynes. Please go ahead, sir.

Craig Dynes

Thank you. Good morning and welcome to the Pegasystems 2008 annual earnings conference call. With me here in Cambridge is Alan Trefler, Pegasystems Chairman and CEO. Before we introduce Alan, I’ll start with our Safe Harbor statement and then provide my financial commentary.

Certain statements contained in this presentation may be construed as forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. The words anticipates, projects, expects, plans, intends, believes, estimates, targets, forecasts, could, and other similar expressions identify forward-looking statements which speak only as of date the statement was made.

Because such statements deal with future events, they are subject to various risks and uncertainties. Actual results for fiscal year 2009 and beyond could differ materially from the company’s current expectations.

Factors that could cause the company’s results to differ materially from those expressed in forward-looking statements include without limitation variation demand and the difficulty in predicting the completion of product acceptance and other factors affecting the timing of our license revenue recognition; the level of term license renewals; our ability to develop require new products and evolve the existing ones, the impact of our business of the recent financial crisis in the global capital markets and the negative global economic trends and the ongoing consolidation in the financial services and healthcare markets; our ability to attract and retain key personnel; reliance on key third-party relationships; management of the company’s growth; and other risks and uncertainties.

Further information concerning factors that could cause actual results to differ materially from those projected is contained in the company’s filings with the Securities and Exchange Commission, including its report on Form 10-K for year ended December 31, 2008 and other recent filings with the SEC. The company undertakes no obligation to revise or update forward-looking statements as a result of new information since these statements may no longer be accurate or timely.

The overwhelming weight of the economic news can make it difficult to comprehend the financial success that we’ve seen this year. Not only did we achieve record revenues for the year, we set new quarterly revenue records in all four quarters. New license signings for Q4 were the highest in our history, and we finished 2008 with a record backlog. We believe our success is due to the way we work with our customers to find business solutions that can help them during these painful economic times.

During Q4, we closed a meaningful licensing arrangement with a big three auto maker during one of the worst quarters for car sales in recent history. This was not Q4 budgets spend; this deal closed because of the value proportion of saving millions by automating a complex business process with the Pega application that will incrementally rollout starting in six months.

The value proposition generated by automated business processes in months rather than years drove our revenue to $212 million in 2008, an increase of $50 million or 31% from 2007. The largest component of this increase is term license revenues, which increased by 94% during the year.

The total of our outstanding term licenses now stands at $88.5 million, these are non-cancelable term licenses were we filed all the requirements to recognize revenue, other than received payment of the term license fees. This $88.5 million does not yet record in our financial statements, but will be recognized as revenue in the future as payments become due.

The details of when these licenses will become revenue are summarized on page 32 of our 10-K. This summary shows that as of the year end we expect that $31 million of this balance will be recognized as revenue in 2009. This is an increase of 45% over the comparable number at the end of 2007 which was $21.3 million.

As I said, new license signings in Q4 were the largest in our history. During 2008, license signings were almost equally split between our four verticals; financial services, insurance, health care payers, and other large institutions such as governments. Historically our license signings follow a pattern of much higher booking in the second half of the year compared to the first. These second half booking build backlog and AR.

Maintenance revenue was $40.1 million for 2008, an increase of $8.9 million or 29% from 2007. As noted in our 10-K, the increase in maintenance revenue is the function of the continued growth in the installed based of our software. Almost every customer renews maintenance each year.

Revenue from professional services, comprised only of training and consulting services was $95 million for 2008, an increase of 19% from 2007. While we’ve seen a significant increase in demand for professional services in Europe, the dramatic drop in the Euro and the British pound against the dollar offset this growth when we translate into US dollars.

This currency movement along with the Q4 holidays in the US resulted in a decrease in services revenue in Q4 as compared to Q3. However, driven by our Q3 and Q4 license signings, we expect services revenue to increase in 2009, but at a rate less than license revenue as more of our services work is being done by our partners and by our customers as they both become enabled to create applications.

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