PEGA

Pegasystems Inc. (PEGA)

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Pegasystems Inc. (PEGA)

Q1 2010 Earnings Call Transcript

April 23, 2010 9:00 am ET

Executives

Craig Dynes – SVP & CFO

Alan Trefler – Chairman and CEO

Analysts

Laura Lederman – William Blair

Nathan Schneiderman – Roth Capital Partners

Steve Koeing – Longbow Research

Raghavan Sarathy – Dougherty & Company

Greg Spiker – Moss Creek

Richard Davis – Needham & Company

Brian Murphy – Sidoti & Company

Presentation

Operator

Good day ladies and gentlemen, and welcome to Pegasystems Incorporated quarter one 2010 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator instructions) As a reminder, this is being recorded.

I would now like to introduce your host for today’s program, Mr. Craig Dynes. Please go ahead.

Craig Dynes

Good morning and welcome to Pegasystems 2010 Q1 earnings conference call. With me here in Cambridge is Alan Trefler, Pegasystems’ Chairman and CEO. Before introducing Alan, I’ll start with our Safe Harbor statement and then provide my commentary. You have to excuse me, I have a cold today. So, if I cough, that is what’s going to happen.

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 the 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 2010 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 among others variation and demand and the difficulty in predicting the completion of product acceptance and other factors affecting the timing of our license revenue recognition, the mix of perpetual and term licenses, and the level of term license renewals, our ability to develop or acquire new products and evolve existing ones, 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, the potential loss of vendor-specific objective evidence for our professional services, management of the company’s growth, our ability to successfully integrate our acquisition of Chordiant Software, 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 the year ended December 31, 2009 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.

Q1 was one of the most significant quarters in Pegasystems’s 25-plus year history. With our 11th consecutive quarter record revenue, we added more employees, especially more sales and marketing staff than in any other quarter in our history and we negotiated the largest acquisition in our history. These are meaningful milestones in our plans to become a $1 billion a year player in our space.

Revenue in Q1 was $75.1 million, up 20% or $12.7 million from Q1 2009. Revenue was also up by $2.1 million from Q4. Revenue growth from Q4 to Q1 is pretty rare in the enterprise software business, as Q1 is typically the weakest quarter in our industry. Q1 bookings are always down to the end-of-year budget spending that is often part of Q4 bookings. So, as a result enterprise software companies typically eat backlog in Q1. In our case, in comparison to Q1 2009, we actually grew our backlog and the consumption of backlog from Q4 to Q1 was less in this year’s Q1 than it was during last year’s Q1.

In Q1 2009, the aggregate of future payments for term and non-term license payments vis-à-vis off-balance sheet future payments that we detailed in this quarter on page 18. Decrease from Q4 2008 to Q1 2009 by 15.8, whereas in Q1 2010, the net backlog used was only 13.8 million. In addition, the total balance of these future payments grew from approximately $103 million at the end of Q1 2009 to $119.6 million at the end of Q1 2010, an increase of about 16%.

In Q1, our new license signings were up from Q1 2009 in both Europe and Asia-Pac. This appears to be an indication that the economy is improving in these regions. New license signings in the US in Q1 2010 were less than those in ’09, due to the anomaly of one deal. Q1 ’09 included one large deal, which was actually signed in the previous quarter that had a contingency that didn’t’ clear off until Q1. Given our conservative nature, we held the deal out of bookings until the contingency was cleared. If that deal had been carried in the previous quarter when it was actually signed, US bookings in Q1 2010 would have been up from ’09.

Looking at the verticals, all verticals with the exception of healthcare showed an increase in new license signings in Q1 2010 over 2009. Maintenance revenue was $15.1 million for Q1, an increase of $3.1 million or 26% from Q1 2009. As noted in our 10-K, the increase in maintenance revenue is a function of continued growth in installed base of our software. Our maintenance renewals exceed 95% as almost every customer renews each year.

Professional services revenue of $29.7 million was up about $4.1 million from $25.6 million in Q4 and was also up $5.7 million from Q3 2009. There are several reasons for this increase of last few quarters. Overall, demand for consulting services is higher. Demand for training seems to have really taken up. This might have been the biggest training quarter in our history. In addition, in Q1, we had two fixed price projects reach completion. When these projects finish, they tend to pull more revenue out of deferred revenue on the balance sheet. We expect the demand for professional services to remain at these levels for the foreseeable future. Lastly, we had no 10% revenue customers in the quarter.

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