EX-99.1 2 q42018_ex991.htm EXHIBIT 99.1 Exhibit
EXHIBIT 99.1

pegalogo.jpg
Cloud Drives Strong 2018 Performance and Year-Over-Year Growth

•
Total ACV of $570 million, up 23%
•
Term and Cloud ACV of $300 million, up 40% powered by Cloud Choice™
•
Full Year Pega Cloud revenue up 62%
•
2019 Guidance: Revenue of $965 million

CAMBRIDGE, Mass. — February 20, 2019 — Pegasystems Inc. (NASDAQ: PEGA), the software company empowering digital transformation at the world’s leading enterprises, released its financial results for the fourth quarter of 2018.
“We had a strong Q4 capping off a terrific year,” said Alan Trefler, founder and CEO, Pegasystems. “Our Cloud Choice offering is clearly resonating with clients and prospects who want the flexibility to run either on Pega Cloud or a Cloud of their choice.”
“The significant acceleration in the shift to subscription has propelled our total ACV to $570 million,” Ken Stillwell, CFO, said.  “This continued shift will increase the ongoing predictability of our revenue and cash flow.”
Financial metrics (1) (2) 
(Dollars in thousands, except per share amounts)
Three Months Ended  
December 31,
 
Year Ended 
December 31,
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Total revenue
$
256,357

 
$
254,605

 
1
 %
 
$
891,581

 
$
888,467

 
—
 %
Subscription revenue (3)
$
142,273

 
$
134,099

 
6
 %
 
$
524,758

 
$
499,828

 
5
 %
Net income (GAAP)
$
16,413

 
$
40,595

 
(60
)%
 
$
10,617

 
$
98,548

 
(89
)%
Net income (Non-GAAP)
$
30,155

 
$
37,489

 
(20
)%
 
$
53,302

 
$
103,462

 
(48
)%
Diluted earnings per share (GAAP)
$
0.20

 
$
0.49

 
(59
)%
 
$
0.13

 
$
1.19

 
(89
)%
Diluted earnings per share (Non-GAAP)
$
0.36

 
$
0.45

 
(20
)%
 
$
0.64

 
$
1.25

 
(49
)%
(1) On January 1, 2018, we adopted the ASC 606 revenue recognition standard and have adjusted prior periods to conform.
(2) A reconciliation of our GAAP measures to Non-GAAP measures is contained in the financial schedules at the end of this release.
(3) Subscription revenue reflects client arrangements (term license, cloud, and maintenance) which are subject to renewal.
Revenue streams (1) 
(Dollars in thousands)
Three Months Ended  
December 31,
 
Year Ended 
December 31,
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Cloud
$
24,660

10
%
 
$
14,890

6
%
 
$
9,770

66
 %
 
$
82,627

9
%
 
$
51,097

6
%
 
$
31,530

62
 %
Term license
50,186

20
%
 
56,838

22
%
 
(6,652
)
(12
)%
 
178,256

20
%
 
206,411

23
%
 
(28,155
)
(14
)%
Maintenance
67,427

25
%
 
62,371

25
%
 
5,056

8
 %
 
263,875

30
%
 
242,320

27
%
 
21,555

9
 %
Subscription
142,273

55
%
 
134,099

53
%
 
8,174

6
 %
 
524,758

59
%
 
499,828

56
%
 
24,930

5
 %
Perpetual license
53,034

21
%
 
51,064

20
%
 
1,970

4
 %
 
109,863

12
%
 
132,883

15
%
 
(23,020
)
(17
)%
Consulting
61,050

24
%
 
69,442

27
%
 
(8,392
)
(12
)%
 
256,960

29
%
 
255,756

29
%
 
1,204

—
 %
Total revenue
$
256,357

100
%
 
$
254,605

100
%
 
$
1,752

1
 %
 
$
891,581

100
%
 
$
888,467

100
%
 
$
3,114

—
 %
(1) On January 1, 2018, we adopted the ASC 606 revenue recognition standard and have adjusted prior periods to conform.

1

Annual contract value (“ACV”) (1) 
The change in ACV measures the growth and predictability of future cash flows from committed term, cloud, and maintenance arrangements as of the end of the particular reporting period.
q418acvchart.jpg
(1) ACV, as of a given date, is the sum of the following two components:
•
The sum of the annual value of each term and cloud contract in effect on such date, with the annual value of a term or cloud contract being equal to the total value of the contract divided by the total number of years of the contract.
•
Maintenance revenue reported for the quarter ended on such date, multiplied by four.
Remaining performance obligations
Revenue for the remaining performance obligations on existing contracts is expected to be recognized as follows:
 
December 31, 2018
(Dollars in thousands)
Perpetual license

 
Term license
 
Maintenance
 
Cloud
 
Consulting
 
Total
1 year or less
$
14,665

 
$
72,378

 
$
192,274

 
$
103,354

 
$
17,235

 
$
399,906

63
%
1-2 years
2,343

 
10,355

 
10,436

 
80,214

 
2,810

 
106,158

17
%
2-3 years
1,661

 
1,414

 
3,644

 
61,906

 
940

 
69,565

11
%
Greater than 3 years
—

 
233

 
1,560

 
53,343

 
208

 
55,344

9
%
 
$
18,669

 
$
84,380

 
$
207,914

 
$
298,817

 
$
21,193

 
$
630,973

100
%
Guidance for 2019
As of February 20, 2019, we are providing the following guidance:
 
Year Ended December 31, 2019
(in millions, except per share amounts)
GAAP
 
Non-GAAP (1)
Revenue
$
965

 
$
965

Net Income
$
(17.5
)
 
$
42.1

Diluted Earnings Per Share
$
(0.22
)
 
$
0.50

(1) A reconciliation of our GAAP to Non-GAAP guidance is contained in the financial schedules at the end of this release.
Quarterly conference call
A conference call and audio-only webcast will be conducted at 5:00 p.m. EST on February 20, 2019.
Members of the public and investors are invited to join the call and participate in the question and answer session by dialing (800) 289-0438 (domestic), (323) 794-2423 (international), or via webcast by logging onto www.pega.com at least five minutes prior to the event's broadcast and clicking on the webcast icon in the investors section.
A replay of the call will also be available on www.pega.com/about/investors by clicking the earnings calls link in the investors section.

2

Discussion of non-GAAP financial measures
To supplement the financial results presented in accordance with generally accepted accounting principles in the U.S. (“GAAP”), the Company provides non-GAAP measures, including in this release. Pegasystems’ management utilizes a number of different financial measures, both GAAP and non-GAAP, in analyzing and assessing the overall performance of the business, for making operating decisions, and for forecasting and planning for future periods. The Company’s annual financial plan is prepared on both a GAAP and non-GAAP basis, and both are approved by our board of directors. In addition, because of the importance of these measures in managing the business, the Company uses non-GAAP measures and financial performance results in the evaluation process to establish management’s compensation.
The non-GAAP measures exclude the effects of certain business combination accounting entries, stock-based compensation expense, amortization of intangible assets, acquisition-related and restructuring expenses, certain other adjustments, and the related income tax effects. The Company believes these non-GAAP measures are helpful in understanding its past financial performance and its anticipated future results.
These non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with the Company’s consolidated financial statements prepared in accordance with GAAP.
A reconciliation of the Company’s GAAP measures to Non-GAAP measures is included in the financial schedules at the end of this release.
Forward-looking statements
Certain statements contained in this press release may be construed as “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on current expectations, estimates, forecasts, and projections about the industry and markets in which we operate, and management’s beliefs and assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “could,” “estimate,” “may,” “target,” “strategy,” “is intended to,” “project,” “guidance,” “likely,” “usually,” or variations of such words and similar expressions are intended to identify such forward-looking statements.
Important factors that could cause actual future activities and results to differ materially from those expressed in such forward-looking statements include, among others, variation in demand for our products and services; reliance on third party relationships; reliance on key personnel; the inherent risks associated with international operations and the continued uncertainties in the global economy; our continued effort to market and sell both domestically and internationally; foreign currency exchange rates; the potential legal and financial liabilities and reputation damage due to cyber-attacks and security breaches; and management of our growth. These risks and other factors that could cause actual results to differ materially from those expressed in such forward-looking statements are described more completely in Part I of our Annual Report on Form 10-K for the year ended December 31, 2018, as well as other filings we make with the U.S. Securities and Exchange Commission (“SEC”). These documents are available on the Company’s website at www.pega.com/about/investors.
The forward-looking statements contained in this press release represent the Company’s views as of February 20, 2019. Investors are cautioned not to place undue reliance on such forward-looking statements and there are no assurances that the results contained in such statements will be achieved. Although new information, future events, or risks may cause actual results to differ materially from future results expressed or implied by such forward-looking statements, except as required by applicable law, we do not undertake and specifically disclaim any obligation to publicly update or revise these forward-looking statements whether as the result of new information, future events, or otherwise.

3

About Pegasystems
Pegasystems Inc. is the leader in software for customer engagement and operational excellence. Pega’s adaptive, cloud-architected software - built on its unified Pega Platform™ - empowers people to rapidly deploy, and easily extend and change applications to meet strategic business needs. Over its 35-year history, Pega has delivered award-winning capabilities in CRM and digital process automation (DPA), powered by advanced artificial intelligence and robotic automation, to help the world’s leading brands achieve breakthrough business results.
For more information on Pegasystems (NASDAQ: PEGA) visit www.pega.com.
Press contact:
Lisa Pintchman                
Pegasystems Inc.                
lisa.pintchman@pega.com
(617) 866-6022            
Twitter: @pega
Investor contact:            
Garo Toomajanian                
ICR for Pegasystems    
pegainvestorrelations@pega.com
(617) 866-6077

All trademarks are the property of their respective owners.

4

PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (1) 
(in thousands, except per share amounts)

 
Three Months Ended  
December 31,
 
Year Ended 
December 31,
 
2018
 
2017
 
2018
 
2017
Revenue
 
 
 
 
 
 
 
Software license
$
103,220

 
$
107,902

 
$
288,119

 
$
339,294

Maintenance
67,427

 
62,371

 
263,875

 
242,320

Services
85,710

 
84,332

 
339,587

 
306,853

Total revenue
256,357

 
254,605

 
891,581

 
888,467

Cost of revenue
 
 
 
 
 
 
 
Software license
1,397

 
1,259

 
5,169

 
5,085

Maintenance
6,530

 
6,960

 
24,565

 
27,905

Services
69,984

 
65,758

 
272,031

 
246,683

Total cost of revenue
77,911

 
73,977

 
301,765

 
279,673

Gross profit
178,446

 
180,628

 
589,816

 
608,794

Operating expenses
 
 
 
 
 
 
 
Selling and marketing
103,650

 
86,334

 
373,495

 
300,578

Research and development
46,449

 
41,797

 
181,710

 
162,886

General and administrative
12,894

 
13,979

 
51,643

 
52,153

Total operating expenses
162,993

 
142,110

 
606,848

 
515,617

Income (loss) from operations
15,453

 
38,518

 
(17,032
)
 
93,177

Foreign currency transaction gain (loss)
1,863

 
136

 
2,421

 
(6,413
)
Interest income, net
629

 
315

 
2,705

 
862

Other (expense) income, net
—

 
(1,678
)
 
363

 
(1,391
)
Income (loss) before provision (benefit) from income taxes
17,945

 
37,291

 
(11,543
)
 
86,235

Provision (benefit) from income taxes
1,532

 
(3,304
)
 
(22,160
)
 
(12,313
)
Net income
$
16,413

 
$
40,595

 
$
10,617

 
$
98,548

Earnings per share
 
 
 
 
 
 
 
Basic
$
0.21

 
$
0.52

 
$
0.14

 
$
1.27

Diluted
$
0.20

 
$
0.49

 
$
0.13

 
$
1.19

Weighted-average number of common shares outstanding
 
 
 
 
 
 
 
Basic
78,680

 
77,944

 
78,564

 
77,431

Diluted
82,536

 
83,168

 
83,064

 
82,832

(1) On January 1, 2018, we adopted the ASC 606 revenue recognition standard and have adjusted prior periods to conform.




5

PEGASYSTEMS INC.
UNAUDITED RECONCILIATION OF SELECTED GAAP MEASURES TO NON-GAAP MEASURES (1)(2) 
(in thousands, except percentages and per share amounts)
 
Three Months Ended  
December 31,
 
Year Ended 
December 31,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Total revenue (GAAP and Non-GAAP)
$
256,357

 
$
254,605

 
1
 %
 
$
891,581

 
$
888,467

 
—
 %
 














 
 
Gross profit (GAAP)
$
178,446

 
$
180,628

 
(1
)%
 
$
589,816

 
$
608,794

 
(3
)%
Amortization of intangible assets
1,332

 
1,232

 
 
 
5,027

 
5,103

 
 
Stock-based compensation (3)
4,585

 
3,661

 
 
 
16,862

 
14,573

 
 
Gross profit (Non-GAAP)
$
184,363

 
$
185,521

 
(1
)%
 
$
611,705

 
$
628,470

 
(3
)%
 














 
 
Income (loss) from operations (GAAP)
$
15,453

 
$
38,518

 
(60
)%
 
$
(17,032
)
 
$
93,177

 
*

Amortization of intangible assets
2,935

 
2,859

 
 
 
11,443

 
12,338

 
 
Stock-based compensation (3)
16,289

 
13,384

 
 
 
63,862

 
53,313

 
 
Income from operations (Non-GAAP)
$
34,677

 
$
54,761

 
(37
)%
 
$
58,273

 
$
158,828

 
(63
)%
 
 
 
 
 
 
 
 
 
 
 
 
Net income (GAAP)
$
16,413

 
$
40,595

 
(60
)%
 
$
10,617

 
$
98,548

 
(89
)%
Amortization of intangible assets
2,935

 
2,859

 
 
 
11,443

 
12,338

 
 
Stock-based compensation (3)
16,289

 
13,384

 
 
 
63,862

 
53,313

 
 
Other
—

 
1,678

 
 
 
—

 
1,678

 
 
Income tax effects (4)
(5,482
)
 
(21,027
)
 
 
 
(32,620
)
 
(62,415
)
 
 
Net income (Non-GAAP)
$
30,155

 
$
37,489

 
(20
)%
 
$
53,302

 
$
103,462

 
(48
)%
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share (GAAP)
$
0.20

 
$
0.49

 
(59
)%
 
$
0.13

 
$
1.19

 
(89
)%
Amortization of intangible assets
0.04

 
0.03

 


 
0.14

 
0.15

 
 
Stock-based compensation (3)
0.20


0.16





0.77


0.64

 
 
Other
0.00

 
0.02

 
 
 
0.00

 
0.02

 
 
Income tax effects (4)
(0.08
)
 
(0.25
)
 


 
(0.40
)
 
(0.75
)
 
 
Diluted earnings per share (Non-GAAP)
$
0.36

 
$
0.45

 
(20
)%
 
$
0.64

 
$
1.25

 
(49
)%
Diluted weighted-average number of common shares outstanding
(GAAP and Non-GAAP)
82,536

 
83,168

 
(1
)%
 
83,064

 
82,832

 
—
 %
* not meaningful
(1) On January 1, 2018, we adopted the ASC 606 revenue recognition standard and have adjusted prior periods to conform.
(2) Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.
Our non-GAAP financial measures reflect adjustments based on the following items, as well as the related income tax effects:
•
Amortization of intangible assets: We have excluded the amortization expense of intangible assets from our non-GAAP operating expenses and profitability measures. Amortization of intangible assets is inconsistent in amount and frequency and is significantly affected by the timing and size of our acquisitions. Investors should note that the use of intangible assets contributed to our revenues recognized during the periods presented and is expected to contribute to our future period revenues as well. Amortization of intangible assets is likely to recur in future periods.
•
Stock-based compensation: We have excluded stock-based compensation expense from our non-GAAP operating expenses and profitability measures. Although stock-based compensation is a key incentive offered to our employees, and we believe such compensation contributed to our revenues recognized during the periods presented and is expected to contribute to our future period revenues, we continue to evaluate our business performance excluding stock-based compensation expense.
•
Other: We have excluded the effect of capital advisory expenses, which are primarily for investment banking and professional fees, from our non-GAAP expenses and profitability measures. Capital advisory expenses are

6

inconsistent in amount and frequency and we continue to evaluate our business performance excluding capital advisory expenses.
For additional information about our use of Non-GAAP measures, the reasons why management uses these measures, the usefulness of these measures, and the material limitations on the usefulness of these measures, see “Discussion of non-GAAP financial measures” included earlier in this release and below.

(3) Stock-based compensation was as follows:
 
Year Ended 
December 31,
(in thousands)
2018
 
2017
 
2016
Cost of revenues
$
16,862

 
$
14,573

 
$
11,459

Selling and marketing
23,237

 
15,720

 
12,464

Research and development
15,274

 
13,618

 
10,043

General and administrative
8,489

 
9,402

 
6,513

Acquisition-related
—

 
—

 
342

 
$
63,862

 
$
53,313

 
$
40,821

Income tax benefit
$
(13,383
)
 
$
(12,113
)
 
$
(12,198
)

(4) Effective income tax rates were as follows:
 
Year Ended 
December 31,
 
2018
 
2017
GAAP
192
%
 
(14
)%
Non-GAAP
16
%
 
33
 %
The difference between our GAAP and non-GAAP effective income tax rates for the year ended December 31, 2018 and 2017 primarily related to the impact of the following items on our GAAP effective income tax rate:
•
Excess tax benefits generated by our stock-based compensation plans;
•
Tax credits for stock-based compensation awards to research and development employees; and
•
Unfavorable foreign stock-based compensation adjustments.


7


PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (1) 
(in thousands)
 
December 31, 2018
 
December 31, 2017
Assets
 
 
 
Total cash, cash equivalents, and marketable securities
$
207,423

 
$
223,748

Total receivables (billed and unbilled)
504,765

 
543,527

Goodwill
72,858

 
72,952

Other assets
197,507

 
172,526

Total assets
$
982,553

 
$
1,012,753

 
 
 
 
Liabilities and stockholders’ equity
 
 
 
Accrued expenses, including compensation and related expenses
$
130,177

 
$
111,548

Short-term deferred revenue
185,145

 
165,850

Deferred income tax liabilities
6,939

 
38,463

Other liabilities
38,761


41,022

Stockholders’ equity
621,531

 
655,870

Total liabilities and stockholders’ equity
$
982,553

 
$
1,012,753

(1) On January 1, 2018, we adopted the ASC 606 revenue recognition standard and have adjusted prior periods to conform.


PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (1) 
(in thousands)
 
Year Ended 
December 31,
 
2018
 
2017
Operating activities:
 
 
 
Net income
$
10,617

 
$
98,548

Adjustment to reconcile net income to cash provided by operating activities:
 
 
 
Change in operating assets and liabilities, net
20,712

 
(34,076
)
Stock-based compensation expense
63,862

 
53,313

Amortization of intangible assets and depreciation
25,295

 
24,713

Amortization of deferred contract costs
17,271

 
12,106

Other non-cash
(33,401
)
 
3,631

Cash provided by operating activities
104,356

 
158,235

Cash used in investing activities
(48,196
)
 
(14,759
)
Cash used in financing activities
(101,460
)
 
(54,229
)
Effect of exchange rates on cash and cash equivalents
(2,557
)
 
2,438

Net (decrease) increase in cash and cash equivalents
(47,857
)
 
91,685

Cash and cash equivalents, beginning of period
162,279

 
70,594

Cash and cash equivalents, end of period
$
114,422

 
$
162,279

(1) On January 1, 2018, we adopted the ASC 606 revenue recognition standard and have adjusted prior periods to conform.

8

PEGASYSTEMS INC.
Reconciliation of Forward-Looking Guidance
(in millions, except per share amounts)
 
Year Ended 
December 31,
 
2019
Net loss (GAAP)
$
(17.5
)
Amortization of intangible assets
5.9

Stock-based compensation
80.8

Income tax effects
(27.1
)
Net loss (Non-GAAP)
$
42.1

 
 
Diluted loss per share (GAAP)
$
(0.22
)
Amortization of intangible assets
0.07

Stock-based compensation
1.03

Income tax effects
(0.34
)
Incremental dilutive shares for non-GAAP
(0.04
)
Diluted earnings per share (Non-GAAP)
$
0.50

 
 
Diluted weighted-average number of common shares outstanding (GAAP)
78.8

Incremental dilutive shares for non-GAAP
5

Diluted weighted-average number of common shares outstanding (Non-GAAP)
83.8



9