Shares of Pegasystems (NASDAQ: PEGA) took a wild ride on Thursday. The maker of cloud-based customer-relations management software reported second-quarter results on Wednesday night, and investors didn't quite know what to do with them. Pegasystems shares rose as much as 2.7% early on, but then turned downward for a steady slide throughout the day. At the end of the day, the stock closed 10.8% below Wednesday's closing prices.
Second-quarter sales rose 5% year over year, landing at $198 million. Pegasystems' GAAP earnings per share more than doubled from $0.06 to $0.14, but adjusted earnings fell from $0.19 to $0.15 per share instead. That disconnect between GAAP and non-GAAP results probably played a large part in Pegasystems' erratic stock chart on Thursday. For what it's worth, analysts were looking for adjusted earnings of $0.17 per share on revenues near $206 million.
The unusual pair of earnings figures in the second quarter of 2016 should not have come as a surprise, because Pegasystems reported them a year ago. There were no large last-minute restatements of the year-ago period's results.
Non-GAAP adjustments to this report's earnings added back $17 million of non-cash costs related to stock-based compensation and amortization of intangible assets, balanced against a $16.2 million income tax benefit. A year ago, the tax effect was a much smaller $6.3 million.
Pegasystems is also knee deep in transition between two different software-sales models. A year ago, 63% of the company's deferred revenues came from sales of perpetual software licenses and only 37% accounted for long-term license deals and renewable cloud-service subscriptions. Today, that balance has nearly reached parity, with 45% subscriptions and 55% one-time license sales.
All things considered, Pegasystems remains an interesting growth stock on a solid financial foundation. Share prices have still nearly doubled year over year, even after Thursday's sharp drop. At least three analyst firms latched onto this drop to recommend buying shares at any weakness. That's not a bad idea.
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