PEGA

Pegasystems Inc. (PEGA)

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Pegasystems Inc. (PEGA)

Q2 2010 Earnings Call Transcript

August 10, 2010 9:00 am ET

Executives

Craig Dynes – SVP and CFO

Alan Trefler – Chairman and CEO

Analysts

Nathan Schneiderman – Roth Capital

Laura Lederman – William Blair

Raghavan Sarathy – Dougherty & Company

Steve Koenig – Longbow Research

Brian Murphy – Sidoti & Company

Derrick Wood – Wedbush Securities

Presentation

Operator

Good day ladies and gentlemen, and welcome to your Pegasystems Inc. Q2 2010 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions) As a reminder, today’s conference call is being recorded.

I would now like to introduce your host for today’s conference call, Mr. Craig Dynes. You may begin, sir.

Craig Dynes

Good morning and welcome to the Pegasystems 2010 Q2 earnings conference call. With me here in Cambridge is Alan Trefler, Pegasystems’ Chairman and CEO. Before introducing Alan, I will 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, forecasting, 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.

Q2 was a history-making quarter for Pegasystems. We worked hard on the largest acquisition in our history and at the same time reached a new milestone. For the first time, the company exceeded $80 million in revenue in a single quarter. A lot of work went into the integration of Chordiant, so let me give you an update.

We moved very quickly on integrating the two companies. The cash tender offer on April 21st, four days later, on April 25th, PegaWORLD our Annual User Conference started and we had Chordiant employees, customers and partners in attendance where we are already beginning with customers presenting initial product roadmap and demonstrating production integration. As of today, all of your organizations and systems are pretty much integrated. As an example, there is not a separate Chordiant sales organization. We have one sales team selling into their assigned accounts. It is a norm to see the sales team comprise of Pega and ex-Chordiant staff working together on opportunities we already seen deals with the customers’ life and mix of products. While this level of integration makes it very difficult to separate the deals and products, approximately $7.8 million of Q2 GAAP revenue can be directly attributed to Chordiant.

Most of the integration costs is reflected in the Q2 restructuring charge of $6 million. This charge is primarily for severance payments. We expect that there will be additional restructuring charges of approximately $1.7 million in Q3 as there are additional severance payments scheduled at the facility worked we have done. The restructuring charge is not a catch-off for our costs. There is still many Chordiant employees who are in transitional roles and whose salary costs are not in the restructuring charge.

So, in our Q2 financial statements, there is approximately $1 million of personnel costs in operating expense lines for staff who are employed on a temporary basis. During Q3, these transitional roles will wind down, and so we expect these OpEx costs to drop to about $400,000 in Q3 and be gone in Q4. In addition to the restructuring costs, during Q2, we recorded $3.4 million of acquisition-related expenses such as banker and legal fees, which are directly related to the transaction. This is in addition to $1.5 million of acquisition-related expenses that we recorded in Q1. In total, through the first six months, we recorded over $10 million in restructuring and acquisition expense.

Just to size the numbers and the impact they have on our GAAP bottom line, we have provided a non-GAAP financial information in our press release. Like other software companies, we have excluded these large acquisition costs, amortization of intangible assets created as a result of purchase accounting as well as FAS 123R charges. This allows us an easier comparison to other software companies as well as to analyst models who use these non-GAAP measures.

Lastly, we have provided guidance on a non-GAAP basis for easier comparisons. GAAP or non-GAAP, Q2 was our 12th consecutive quarter of record revenue. As I said, it’s also the first time in history that quarterly revenue has ever exceeded $80 million. License revenue on a GAAP basis was up $2.5 million, of $25.7 million in Q2 2009 to $28.2 million in Q2 of this year. Very little license revenues directly attributed to Chordiant. License revenue is slightly down from Q1 2010. This is a common trend for us. In fact, Q2 license revenue has been less than Q1 license revenue every year since 2004 as new license signings for bookings are typically much lower in Q1 and Q2.

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