PEGA

Pegasystems Inc. (PEGA)

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

Q4 2007 Earnings Call

March 7, 2008 8:30 am ET

Executives

Craig Dynes - CFO

Alan Trefler - Chairman and CEO

Presentation

Operator

Good day, everyone, and welcome to Pegasystems' 2007 annual earnings conference. Today's conference is being recorded. At this time, I'd turn the call over to Mr. Craig Dynes, Chief Financial Officer. Please go ahead, sir.

Craig Dynes

Good morning and welcome to the Pegasystems 2007 annual conference call. With me here in Cambridge is Alan Trefler, Pegasystems’ Chairman and CEO.

Before I introduce 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, forecast, could and other similar expressions identify forward-looking statements, which speak only as of the date the statement is made. Because such statements deal with future events they're subject to various risks and uncertainties, actual results for fiscal year 2008 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 in demand and the difficulty in predicting the completion of product acceptance and consequently, the timing of our license revenue recognition; the level of term license renewals; our ability to develop new products and evolve existing ones; the impacts of our business on the recent credit market turmoil 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 it's report on Form 10-Q for the quarter ended September 30, 2007. 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.

2007 was another record year for the company. Our revenue of $162 million represents our second year of solid growth, an increase of 29% over 2006 and an increase of 62% over 2005. In addition to increasing revenue, we improved net income by a factor of three to $6.6 million, generated $25.3 million of cash from operations and ended the year with $150 million in cash and investments.

License revenue increased by 44% to $51.1 million for the year. Perpetual license revenue was $37.9 million, an increase of 39% from last year. Term license revenue was $13.2 million, an increase of 61% from 2006. Not only is term license revenue up dramatically, but we continue to build an inventory of non-cancelable term licenses, which are not yet recorded in this financial statements.

We now hold $71.4 million of term license arrangements, which will be recognized as revenue in future periods. This is more than double of $33.9 million that we had on our hand at the end of Q3 and more than five times the $14.2 million that we had on hand at the end of 2006. This is a major contributor to revenue.

The details of how this inventory of term licenses will hit at our P&L, the revenue and future periods is provided on page 33 of the 10-K, which we expect to file on Monday. This analysis shows that we already have on hand term licenses to support $21.3 million of term license revenue in 2008. This is already an increase of 61% over our 2007 term license revenue, up $13.2 million even before we had any new 2008 bookings.

Despite the unstable economy, for us Q4 was a strong finish for the year. Q4 bookings were higher than Q3 and you can see the impact of the bookings in the financial statement. Q4 license revenue was almost 9% higher than Q3. Deferred revenue increased by almost $15 million in the quarter and accounts receivable increased by $12.5 million.

Service revenue was $110.8 million for the year, up 22% or $20.2 million from 2006. Of this, professional services and training were $79.7 million, up $14.3 million or 22% from last year. Maintenance revenue grew 23% in 2007 to $31.1 million from $25.2 million in 2006. Q3 gross profit was $96.7 million, up $24.4 million or 34% from 2006.

The largest component of the increase is comprised of a $15.7 million increase in license revenue. The balance of this increase in gross profits is due to our success in increasing services revenue by 22% and holding the professional services gross margin constant at 41% even while incurring the high cost of recruiting, hiring and training 42% more professional services employees in a single year. We anticipate that the strong demand for services will continue into 2008.

Total operating expenses for the year increased $15.4 million or 19% from 2006 to $94.8 million. The largest increase was in sales and marketing, which increased $7.8 million or 18% to $51.7 million. We will continue to grow sales and marketing, especially where it's necessary to provide more account coverage, where we are seeing increased sales radiation in named accounts or if it involves increased accounts by geographic coverage.

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