PR Newswire | Jul 28, 2020 04:06PM EDT

07/28 15:05 CDT

Pega Cloud Revenue and ACV grow by more than 50%- Total ACV up 21% to $738 million, powered by Pega Cloud Choice- Pega Cloud ACV up 56% to $211 million- Pega Cloud Backlog grows by 26%; First Half Pega Cloud Revenue grows by 55% CAMBRIDGE, Mass., July 28, 2020

CAMBRIDGE, Mass., July 28, 2020 /PRNewswire/ -- Pegasystems Inc. (NASDAQ: PEGA), the software company empowering digital transformation at the world's leading enterprises, released its financial results for the second quarter of 2020.

"I'm pleased with our results through the first half of the year as we continue to demonstrate resiliency in our business throughout this global pandemic," said Alan Trefler, founder and CEO, Pegasystems. "Clients and prospects continue to see value in our solutions, both for their short-term crisis related needs and their longer-term digital transformation goals, and we remain confident in our long-term opportunity."

"Our subscription revenue grew 38 percent year over year in the first half of 2020, which reflects the impact of passing the midpoint of our cloud transition," said Ken Stillwell, CFO, Pegasystems. "This impressive result demonstrates the power of growing ACV by more than 20 percent quarter in and quarter out. With over $500 million of cash on the balance sheet and a notable portfolio of enterprise clients, Pega is in a strong position to capture an even greater share of the more than $50 billion market for digital transformation solutions."

Financial and performance metrics ^(1)



(Dollars in Three Months Ended Six Months Ended thousands,June 30, June 30, except pershare amounts) 2020 2019 Change2020 2019 Change

Total $227,375 $205,592 11 %$492,966 $418,138 18 %revenue

Net (loss)$(20,740)$(32,296)36 %$(46,112)$(61,013)24 %- GAAP

Net (loss)$(22,236)$(23,427)5 %$(18,204)$(32,803)45 %- Non-GAAP

Diluted (loss) per$(0.26) $(0.41) 37 %$(0.58) $(0.77) 25 %share - GAAP

Diluted (loss) per$(0.28) $(0.30) 7 %$(0.23) $(0.42) 45 %share - Non-GAAP



(1) A reconciliation of the GAAP measures to our Non-GAAP measures is contained in the financial schedules at the end of this release.

Three Months Ended Six Months Ended Change (Dollars in June 30, June 30, thousands) 2020 2019 Change 2020 2019

Pega Cloud $48,838 21 %$31,699 15 %$17,13954 %$92,304 19 %$59,457 14 %$32,84755 %

Maintenance 72,222 33 %69,329 34 %2,893 4 %145,917 30 %137,035 33 %8,882 6 %

Term license 44,266 19 %24,954 12 %19,312 77 %134,523 27 %73,268 18 %61,255 84 %

Subscription ^(2) 165,326 73 %125,982 61 %39,344 31 %372,744 76 %269,760 65 %102,984 38 %

Perpetual license 9,057 4 %19,320 9 %(10,263)(53)%12,716 3 %34,270 8 %(21,554)(63)%

Consulting 52,992 23 %60,290 30 %(7,298) (12)%107,506 21 %114,108 27 %(6,602) (6) %

Total revenue $227,375100%$205,592100%$21,78311 %$492,966100%$418,138100%$74,82818 %



(2) Reflects client arrangements (term license, Pega Cloud, and maintenance) that are subject to renewal.

Quarterly conference call

A conference call and audio-only webcast will be conducted at 5:00 p.m. EDT on July 28, 2020.

Members of the public and investors are invited to join the call and participate in the question and answer session by dialing 1-888-394-8218 (domestic), 1-323-701-0225 (international), or via webcast ( http://public.viavid.com/index.php?id=140614) 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 by clicking the Earnings Calls link in the Investors section.

Discussion of Non-GAAP financial measures

To supplement the financial results presented in accordance with generally accepted accounting principles in the U.S. ("GAAP"), we provide Non-GAAP measures, including in this release. We utilize several different financial measures, both GAAP and Non-GAAP, to analyze and assess the business' overall performance, make operating decisions, and forecast and plan for future periods. Our annual financial plan is prepared on both a GAAP and a Non-GAAP basis. We use Non-GAAP measures in the evaluation process to establish management's compensation because of the importance of these measures in managing the business.

The Non-GAAP measures exclude the effects of stock-based compensation expense, amortization of intangible assets, foreign currency transaction gains and losses, costs arising in connection with the issuance of our convertible senior notes and the related capped call transactions, gains and losses arising from our venture investments, gains and losses from our capped call transactions, gains and losses arising in connection with the change in the format of PegaWorld, and related income tax effects. We believe these Non-GAAP measures are helpful in understanding our past financial performance and our anticipated future results.

These Non-GAAP financial measures should not be considered in isolation or as a substitute for comparable GAAP measures. They should only be read in conjunction with our consolidated financial statements prepared in accordance with GAAP.

A reconciliation of the GAAP measures to our Non-GAAP measures is contained in the financial schedules at the end of this release.

Forward-looking statements

Certain statements contained in this press release may be "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995.

Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, intends to, projects, forecasts, guidance, likely, and usually, or variations of such words and other similar expressions are intended to identify forward-looking statements, which are based on current expectations and assumptions.

These forward-looking statements deal with future events, and are subject to various risks and uncertainties that are difficult to predict, including, but not limited to, statements about our future financial performance and business plans, the adequacy of our liquidity and capital resources, the continued payment of quarterly dividends, the timing of revenue recognition, management of our transition to a more subscription-based business model, variation in demand for our products and services, including among clients in the public sector, the impact of actual or threatened public health emergencies, such as the Coronavirus (COVID-19), reliance on third-party service providers, compliance with our debt obligations and debt covenants, the potential impact of our convertible senior notes and related Capped Call Transactions, reliance on key personnel, the continued uncertainties in the global economy, foreign currency exchange rates, the potential legal and financial liabilities and reputation damage due to cyber-attacks, security breaches and security flaws, our ability to protect our intellectual property rights and costs associated with defending such rights, maintenance of our client retention rate, 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 further in Part I of our Annual Report on Form 10-K for the year ended December 31, 2019, and other filings we make with the U.S. Securities and Exchange Commission ("SEC"). These documents are available on our website at www.pega.com/about/investors.

Except as required by applicable law, we do not undertake and expressly disclaim any obligation to publicly update or revise these forward-looking statements whether as the result of new information, future events, or otherwise.

The forward-looking statements contained in this press release represent our views as of July 28, 2020.

About Pegasystems

Pega is the leader in cloud software for customer engagement and operational excellence. The world's most recognized and successful brands rely on Pega's AI-powered software to optimize every customer interaction on any channel while ensuring their brand promises are kept. Pega's low-code application development platform allows enterprises to quickly build and evolve apps to meet their customer and employee needs and drive digital transformation on a global scale. For more than 35 years, Pega has enabled higher customer satisfaction, lower costs, and increased customer lifetime value.

Press contact:Lisa Pintchman Pegasystems Inc. lisa.pintchman@pega.com(617) 866-6022 Twitter: @pega

Investor contact:Garo Toomajanian ICR for Pegasystems Inc. pegainvestorrelations@pega.com(617) 866-6077

All trademarks are the property of their respective owners.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)



Three Months Ended Six Months Ended June 30, June 30,

2020 2019 2020 2019

Revenue

Software license $53,323 $44,274 $147,239 $107,538

Maintenance 72,222 69,329 145,917 137,035

Pega Cloud 48,838 31,699 92,304 59,457

Consulting 52,992 60,290 107,506 114,108

Total revenue 227,375 205,592 492,966 418,138

Cost of revenue

Software license 979 928 1,663 2,306

Maintenance 5,591 6,292 11,167 12,627

Pega Cloud 18,988 16,647 36,521 29,945

Consulting 51,133 53,213 106,868 106,639

Total cost of revenue 76,691 77,080 156,219 151,517

Gross profit 150,684 128,512 336,747 266,621

Operating expenses

Selling and marketing 127,607 116,962 263,631 225,827

Research and development 58,869 49,714 117,596 100,310

General and administrative15,655 14,174 31,285 26,850

Total operating expenses 202,131 180,850 412,512 352,987

(Loss) from operations (51,447) (52,338) (75,765) (86,366)

Foreign currency 4,256 2,105 (1,691) (1,607) transaction gain (loss)

Interest income 242 544 849 1,267

Interest expense (5,529) - (7,835) -

Gain on capped call 19,419 - 827 - transactions

Other income, net - 55 1,374 55

(Loss) before (benefit (33,059) (49,634) (82,241) (86,651) from) income taxes

(Benefit from) income (12,319) (17,338) (36,129) (25,638) taxes

Net (loss) $(20,740)$(32,296)$(46,112)$(61,013)

(Loss) per share

Basic $(0.26) $(0.41) $(0.58) $(0.77)

Diluted $(0.26) $(0.41) $(0.58) $(0.77)

Weighted-average number of common shares outstanding

Basic 80,224 78,987 80,016 78,787

Diluted 80,224 78,987 80,016 78,787

PEGASYSTEMS INC.

UNAUDITED RECONCILIATION OF SELECTED GAAP MEASURES TO NON-GAAP MEASURES ^(1)

(in thousands, except percentages and per share amounts)



Three Months Ended Six Months Ended June 30, June 30,

2020 2019 Change2020 2019 Change

Net (loss) - $(20,740)$(32,296)36 %$(46,112)$(61,013)24 %GAAP

Amortization of intangible 1,017 1,656 2,034 4,592 assets

Stock-based compensation ^ 25,655 20,047 48,831 38,397 (2)

Foreign currency transaction (4,256) (2,105) 1,691 1,607 (gain) loss

Convertible 4,315 - 6,033 - senior notes

Capped call (19,419) - (827) - transactions

Venture - - (1,374) - investments

PegaWorld (2,758) - 2,515 -

Income tax (6,050) (10,729) (30,995) (16,386) effects ^(3)

Net (loss) - $(22,236)$(23,427)5 %$(18,204)$(32,803)45 %Non-GAAP



Diluted (loss) $(0.26) $(0.41) 37 %$(0.58) $(0.77) 25 %per share - GAAP

Non-GAAP (0.02) 0.11 0.35 0.35 adjustments

Diluted (loss) per share - $(0.28) $(0.30) 7 %$(0.23) $(0.42) 45 %Non-GAAP



Diluted weighted-average number of common80,224 78,987 2 %80,016 78,787 2 %shares outstanding - GAAP

Diluted weighted-average number of common80,224 78,987 2 %80,016 78,787 2 %shares outstanding - Non-GAAP



^ Our Non-GAAP financial measures reflect adjustments based on the (1)following items:



Amortization of intangible assets: We have excluded the amortization of intangible assets from our Non-GAAP operating expenses and profitability measures. Amortization of intangible assets fluctuates 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. Amortization of intangible assets is likely to recur in future periods.



Stock-based compensation: We have excluded stock-based compensation 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.



Foreign currency transaction (gain) loss: We have excluded foreign currency transaction gains and losses from our Non-GAAP profitability ? measures. Foreign currency transaction gains and losses fluctuate in amount and frequency and are significantly affected by changes in foreign exchange market rates. Foreign currency transaction gains and losses are likely to recur in future periods.



Convertible senior notes: In February 2020, we issued $600 million of convertible senior notes, which bear interest at an annual fixed rate of 0.75%. A debt discount resulting from the conversion feature and debt ? issuance costs reduced the convertible debt instrument's carrying value. The debt discount and issuance costs are amortized as interest expense over the life of the debt based upon an effective interest rate of 4.31%. We believe excluding these amounts provides a more useful comparison of our operational performance in different periods.



Capped call transactions: We have excluded gains and losses from our privately negotiated capped call transactions entered into concurrent with our issuance of the convertible senior notes to reduce potential dilution to our common stock upon any conversion of the convertible senior notes and/or offset any cash payments we are required to make in ? excess of the principal amount of convertible senior notes that may be converted, with such reduction and/or offset subject to a cap. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the types of events giving rise to them are not representative of our core business operations and ongoing operating performance.



Venture investments: We have excluded gains and losses from our venture investments. We believe excluding these amounts from our non-GAAP ? financial measures is useful to investors as the types of events giving rise to them are not representative of our core business operations and ongoing operating performance.



PegaWorld: Due to the global COVID-19 pandemic, to help ensure the health and safety of attendees and employees, we converted our annual PegaWorld conference from a multi-day live event to a free virtual event. We have ? excluded the incremental fees we incurred due to the cancellation of the live event from our Non-GAAP operating expenses and profitability measures. The three months ended June 30, 2020 include a reduction of expenses of $2.8 million due to the favorable settlement of cancellation fees owed to vendors of the live event portion.



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.

^(2) Stock-based compensation was:



Three Months Ended Six Months Ended June 30, June 30,

(in thousands) 2020 2019 2020 2019

Cost of revenues $5,384 $4,911 $10,536 $9,430

Selling and marketing 11,592 8,364 21,310 15,738

Research and development 5,805 4,572 11,302 9,132

General and administrative2,874 2,200 5,683 4,097

$25,655 $20,047 $48,831 $38,397

Income tax benefit $(5,107)$(4,056)$(9,689)$(7,796)

^(3) Effective income tax rates were:



Six Months Ended June 30,

2020 2019

GAAP 44 % 30 %

Non-GAAP 22 % 22 %

Our effective income tax rate under GAAP is subject to significant fluctuations due to a variety of factors, including 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. We determine our Non-GAAP income tax rate by using applicable rates in taxing jurisdictions and assessing certain factors, including our historical and forecast earnings by jurisdiction, discrete items, and our ability to realize tax assets. We believe it is beneficial for our management to review our Non-GAAP results consistent with the effective income tax rate in our annual plan as established at the beginning of each year given this tax rate volatility.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)



June 30, 2020December 31, 2019

Assets

Cash and cash equivalents $ 512,111 $68,363

Receivables (billed and unbilled) 489,247 501,675

Goodwill 78,675 79,039

Other assets 416,252 335,735

Total assets $ 1,496,285$984,812

Liabilities and stockholders' equity

Accrued expenses, including compensation and$ 123,062 $152,127 related expenses

Deferred revenue, current 195,996 190,080

Convertible senior notes, net 509,423 -

Other liabilities 111,522 103,595

Stockholders' equity 556,282 539,010

Total liabilities and stockholders' equity $ 1,496,285$984,812

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



Six Months Ended June 30,

2020 2019

Net (loss) $(46,112)$(61,013)

Adjustments to reconcile net (loss) to cash (used in) provided by operating activities

Non-cash items 69,969 73,562

Change in operating assets and liabilities, net (45,056) (4,829)

Cash (used in) provided by operating activities (21,199) 7,720

Cash (used in) provided by investing activities (19,404) 17,210

Cash provided by (used in) financing activities 485,293 (44,367)

Effect of exchange rate changes on cash and cash (942) 515 equivalents

Net increase (decrease) in cash and cash equivalents443,748 (18,922)

Cash and cash equivalents, beginning of period 68,363 114,422

Cash and cash equivalents, end of period $512,111 $95,500

PEGASYSTEMS INC.

ANNUAL CONTRACT VALUE ("ACV")

(in millions, except percentages)



Annual contract value ("ACV") - ACV represents the annualized value of our active contracts as of the measurement date. ACV for term license and Pega Cloud contracts is calculated by dividing the contract's total value by the duration of the contract in years. ACV for maintenance is calculated as maintenance revenue for the quarter then ended multiplied by four. Client Cloud ACV is composed of maintenance ACV and ACV from term license contracts.We believe the presentation of ACV on a constant currency basis enhances the understanding of our results, as it provides visibility into the impact of changes in foreign currency exchange rates, which are outside of our control.All periods shown reflect foreign currency exchange rates as of June 30, 2020.



June 30, 2020 June 30, 2019 Change

Maintenance $ 289 $ 277 $ 12 4 %

Term 238 199 39 20 %

Client Cloud 527 476 51 11 %

Pega Cloud 211 135 76 56 %

Total $ 738 $ 611 $ 127 21 %

PEGASYSTEMS INC.

BACKLOG

(in thousands, except percentages)



Remaining performance obligations ("Backlog") - Backlog represents contracted revenue that has not yet been recognized and includes deferred revenue and non-cancellable amounts that are expected to be invoiced and recognized as revenue in future periods.



June 30, 2020

Perpetual Term MaintenancePega Cloud ConsultingTotal license license

1 year $8,120 $53,550 $186,618 $191,187 $21,923 $461,398 57 %or less

1-2 1,700 6,187 40,153 140,860 1,986 190,886 23 %years

2-3 - 6,460 20,671 88,273 631 116,035 14 %years

Greater than 3 - 646 10,517 37,071 626 48,860 6 %years

$9,820 $66,843 $257,959 $457,391 $25,166 $817,179 100%



Change in Backlog Since June 30, 2019

$(830) $23,259 $63,395 $95,328 $7,738 $188,890

(8) %53 %33 %26 %44 %30 %





June 30, 2019

Perpetual Term MaintenancePega Cloud ConsultingTotal license license

1 year $8,429 $38,080 $173,421 $124,134 $16,259 $360,323 57 %or less

1-2 915 4,678 12,530 98,842 942 117,907 19 %years

2-3 1,306 641 5,801 75,828 227 83,803 13 %years

Greater than 3 - 185 2,812 63,259 - 66,256 11 %years

$10,650 $43,584 $194,564 $362,063 $17,428 $628,289 100%

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SOURCE Pegasystems Inc.