PR Newswire | Feb 17, 2021 04:06PM EST

02/17 15:05 CST

Cloud Growth Drives Pega Through $1 Billion Milestone in 2020- Pega Cloud ACV grew more than 50% to $267 million- Total Backlog up 28% to over $1 billion- Total Revenue Exceeds $1 billion for the first time- 2021 Revenue Guidance of $1.25 billion CAMBRIDGE, Mass., Feb. 17, 2021

CAMBRIDGE, Mass., Feb. 17, 2021 /PRNewswire/ -- Pegasystems Inc. (NASDAQ: PEGA), the software company that crushes business complexity, released its financial results for the fourth quarter and full-year 2020.

"The last year has made it abundantly clear that organizations need to accelerate their digital transformation to compete and thrive in a world that is constantly changing," said Alan Trefler, founder and CEO, Pegasystems. "We have never been better positioned to support this need with our scalable low code solutions."

"Pega Cloud ACV grew more than 50 percent year over year, increasing to $267 million," said Ken Stillwell, CFO, Pegasystems. "And, at the same time, Pega Cloud gross margins expanded from 51 percent to 63 percent. We expect Pega Cloud revenue growth acceleration and gross margin expansion will be key contributors to drive future Pega profitability and growth."

Financial and performance metrics ^(1)

(Dollars in Three Months Ended Year Endedthousands, December 31, December 31,

except pershare 2020 2019 Change 2020 2019 Changeamounts)

Total revenue $ 298,600 $ 276,542 8 % $ 1,017,517 $ 911,383 12 %

Net income $ 4,006 $ 918 336 % $ (61,373) $ (90,433) 32 %(loss) - GAAP

Net income(loss) - $ 15,513 $ 15,682 (1) % $ (29,392) $ (35,082) 16 %Non-GAAP

Dilutedearnings $ 0.05 $ 0.01 400 % $ (0.76) $ (1.14) 33 %(loss) pershare - GAAP

Dilutedearnings(loss) per $ 0.18 $ 0.19 (5) % $ (0.37) $ (0.44) 16 %share -Non-GAAP

(1) A reconciliation of our Non-GAAP and GAAP measures is at the end of thisrelease.

(Dollars Three Months Ended Year Ended December 31, Change December 31, Change in thousands) 2020 2019 2020 2019

Pega Cloud $61,188 20 %$39,136 14 %$22,05256 %$208,268 20 %$133,74615 %$74,522 56 %

Maintenance 76,122 26 %73,174 27 %2,948 4 %296,709 30 %280,580 30 %16,129 6 %

Term license 95,897 32 %77,176 28 %18,721 24 %266,352 26 %199,433 22 %66,919 34 %

Subscription ^ 233,207 78 %189,486 69 %43,721 23 %771,329 76 %613,759 67 %157,570 26 %(2)

Perpetual 11,990 4 %36,729 13 %(24,739)(67)%28,558 3 %80,015 9 %(51,457) (64)%license

Consulting 53,403 18 %50,327 18 %3,076 6 %217,630 21 %217,609 24 %21 - %

Total revenue $298,600100%$276,542100%$22,0588 %$1,017,517100%$911,383100%$106,13412 %

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



2021 Guidance

As of February 17, 2021, we are providing the following guidance:

Year Ended December 31, 2021

(in millions, except per share amounts) GAAP Non-GAAP ^(1)

Revenue $ 1,250 $ 1,250

Net (loss) income $ (115.2) $ 21.5

Net (loss) income per share $ (1.44) $ 0.25

(1) A reconciliation of our GAAP and Non-GAAP guidance is contained in thefinancial schedules at the end of this release.

Quarterly conference callWe will conduct a conference call and audio-only webcast at 5:00 p.m. EST on February 17, 2021.

Members of the public and investors may join the call and participate in the question and answer session by dialing 1-866-548-4713 (domestic), 1-323-794-2093 (international), or via webcast ( http://public.viavid.com/index.php?id=143063) by logging onto www.pega.com at least five minutes before 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 measuresWe believe that supplementary non-GAAP financial measures provide useful information to allow investors to understand our core operating results and future prospects, without the effect of often-one-time charges and other items outside our normal operations, consistent with how management measures and forecasts the Company's performance. The supplementary non-GAAP financial measures included are not meant to be considered superior to or a substitute for results of operations prepared in accordance with U.S. GAAP.

A reconciliation of our Non-GAAP and GAAP measures is at the end of this release.

Forward-looking statementsIn this press release, certain statements 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, projects, forecasts, guidance, likely, and usually, or variations of such words and other similar expressions 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 relocation of our corporate headquarters; * 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; * our client retention rate; * management of our growth.

These risks and others that may 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, 2020, and other filings we make with the U.S. Securities and Exchange Commission ("SEC"). 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 February 17, 2021.

About PegasystemsPega delivers innovative software that crushes business complexity so our clients can make better decisions and get work done. We help the world's leading brands solve their biggest business challenges: maximizing customer lifetime value, streamlining customer service, and boosting operational efficiency. Pega technology is powered by real-time AI and intelligent automation, while our scalable architecture and low-code platform help enterprises adapt to rapid change and transform for tomorrow.

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

Investor contact:Garo ToomajanianICR 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 Year Ended December 31, December 31,

2020 2019 2020 2019

Revenue

Software license $ 107,887 $ 113,905 $ 294,910 $ 279,448

Maintenance 76,122 73,174 296,709 280,580

Pega Cloud 61,188 39,136 208,268 133,746

Consulting 53,403 50,327 217,630 217,609

Total revenue 298,600 276,542 1,017,517 911,383

Cost of revenue

Software license 574 674 2,928 3,656

Maintenance 5,666 6,341 22,311 25,656

Pega Cloud 20,337 18,059 76,575 65,828

Consulting 50,318 52,533 209,099 214,882

Total cost of revenue 76,895 77,607 310,913 310,022

Gross profit 221,705 198,935 706,604 601,361

Operating expenses

Selling and marketing 150,009 133,395 545,693 474,459

Research and development 59,366 52,408 236,986 205,210

General and administrative 18,260 14,877 67,452 56,570

Total operating expenses 227,635 200,680 850,131 736,239

(Loss) from operations (5,930) (1,745) (143,527) (134,878)

Foreign currency transaction 1,159 1,242 3,704 (2,335)gain (loss)

Interest income 131 129 1,223 2,020

Interest expense (5,565) (144) (19,356) (212)

Gain on capped call 11,881 - 31,697 -transactions

Other (loss) income, net (4) 181 1,370 559

Income (loss) before (benefit 1,672 (337) (124,889) (134,846)from) income taxes

(Benefit from) income taxes (2,334) (1,255) (63,516) (44,413)

Net income (loss) $ 4,006 $ 918 $ (61,373) $ (90,433)

Earnings (loss) per share

Basic $ 0.05 $ 0.01 $ (0.76) $ (1.14)

Diluted $ 0.05 $ 0.01 $ (0.76) $ (1.14)

Weighted-average number ofcommon shares outstanding

Basic 80,770 79,430 80,336 79,055

Diluted 86,080 83,624 80,336 79,055

PEGASYSTEMS INC.

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

(in thousands, except percentages and per share amounts)

Year Ended Three Months Ended December 31, December 31,

2020 2019 Change 2020 2019 Change

Net income $ 4,006 $ 918 336 % $ (61,373) $ (90,433) 32 %(loss) - GAAP

Stock-basedcompensation ^ 26,313 20,666 103,068 80,909(2)

Capped call (11,881) - (31,697) -transactions

Convertible debt 4,408 - 14,813 -

Amortization ofintangible 919 1,018 3,970 6,625assets

Foreign currencytransaction (1,159) (1,242) (3,704) 2,335(gain) loss

Other (384) - 757 -

Income tax (6,709) (5,678) (55,226) (34,518)effects ^(3)

Net income(loss) - $ 15,513 $ 15,682 (1) % $ (29,392) $ (35,082) 16 %Non-GAAP

Diluted earnings(loss) per share $ 0.05 $ 0.01 400 % $ (0.76) $ (1.14) 33 %- GAAP

Non-GAAP 0.13 0.18 0.39 0.70adjustments

Diluted earnings(loss) per share $ 0.18 $ 0.19 (5) % $ (0.37) $ (0.44) 16 %- Non-GAAP

Dilutedweighted-averagenumber of common 86,080 83,624 3 % 80,336 79,055 2 %sharesoutstanding -GAAP

Dilutedweighted-averagenumber of common 86,080 83,624 3 % 80,336 79,055 2 %sharesoutstanding -Non-GAAP

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

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.

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.

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. Debt discount and issuance costs are amortized as interest expense over the debt's life 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.

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 our acquisitions' timing and size. 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.

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 foreign exchange market rates. Foreign currency transaction gains and losses are likely to recur in future periods.

Other: We have excluded gains and losses on our venture investments, incremental fees incurred due to the cancellation of the live event portion? of our annual PegaWorld conference due to the COVID-19 pandemic, and incremental expenses incurred from the integration of acquisitions. 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.

^(2) Stock-based compensation was:

Three Months Ended December 31, Year Ended December 31,

(in thousands) 2020 2019 2020 2019

Cost of revenue $ 5,160 $ 4,605 $ 20,796 $ 18,822

Selling and marketing 12,315 8,610 46,283 32,665

Research and development 5,819 4,948 22,885 18,938

General and administrative 3,019 2,503 13,104 10,484

$ 26,313 $ 20,666 $ 103,068 $ 80,909

Income tax benefit $ (5,171) $ (4,166) $ (20,464) $ (16,392)

^(3) Effective income tax rates were:

Year Ended December 31,

2020 2019

GAAP 51 % 33 %

Non-GAAP 22 % 22 %

Our effective income tax rate under GAAP is subject to significant fluctuations due to various 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)

December 31, 2020 December 31, 2019

Assets

Cash, cash equivalents, and marketable $ 465,168 $ 68,363securities

Receivables (billed and unbilled) 536,260 501,675

Goodwill 79,231 79,039

Other assets 523,603 335,735

Total assets $ 1,604,262 $ 984,812

Liabilities and stockholders' equity

Accrued expenses, including compensation $ 182,273 $ 152,127and related expenses

Deferred revenue, current 232,865 190,080

Convertible senior notes, net 518,203 -

Other liabilities 128,749 103,595

Stockholders' equity 542,172 539,010

Total liabilities and stockholders' equity $ 1,604,262 $ 984,812

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Year Ended December 31,

2020 2019

Net (loss) $ (61,373) $ (90,433)

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

Non-cash items 93,795 99,251

Change in operating assets and liabilities, net (32,985) (50,983)

Cash (used in) operating activities (563) (42,165)

Cash (used in) provided by investing activities (321,683) 70,074

Cash provided by (used in) financing activities 423,448 (74,258)

Effect of exchange rate changes on cash and cash 2,334 290equivalents

Net increase (decrease) in cash and cash equivalents 103,536 (46,059)

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

Cash and cash equivalents, end of period $ 171,899 $ 68,363

PEGASYSTEMS INC.

ANNUAL CONTRACT VALUE ("ACV")

(in thousands, except percentages)

Annual contract value ("ACV") ^(1) - ACV, as reported, represents theannualized value of our active contracts as of the measurement date. Thecontract's total value is divided by its duration in years to calculate ACV forterm license and Pega Cloud contracts. Maintenance revenue for the quarter thenended is multiplied by four to calculate ACV for maintenance. Client Cloud ACVis composed of maintenance ACV and ACV from term license contracts. ACV is aperformance measure that we believe provides useful information to ourmanagement and investors, particularly during our Cloud Transition. Reportedamounts have not been adjusted for changes in foreign exchange rates.

December 31, 2020 December 31, 2019 Change

Maintenance $ 304,488 $ 292,696 $ 11,792 4 %

Term 264,346 231,267 33,079 14 %

Client Cloud 568,834 523,963 44,871 9 %

Pega Cloud 266,642 169,329 97,313 57 %

Total $ 835,476 $ 693,292 $ 142,184 21 %

(1) Foreign currency contributed 1%-2% to ACV growth in 2020.

PEGASYSTEMS INC.

BACKLOG

(in thousands, except percentages)

Remaining performance obligations ("Backlog") - Backlog represents contractedrevenue that has not yet been recognized and includes deferred revenue andnon-cancellable amounts expected to be invoiced and recognized as revenue infuture periods.

December 31, 2020

Perpetual license Term license Maintenance Pega Cloud Consulting Total

1 year $ 11,514 $ 105,920 $ 227,803 $ 248,223 $ 19,226 $ 612,686 57 %or less

1-2 395 7,962 54,509 193,064 346 256,276 24 %years

2-3 - 4,928 28,320 104,542 851 138,641 13 %years

Greaterthan 3 - 4 19,283 44,308 1,189 64,784 6 %years

$ 11,909 $ 118,814 $ 329,915 $ 590,137 $ 21,612 $ 1,072,387 100 %

Change in Backlog Since December 31,2019

$ 7,425 $ 1,981 $ 61,621 $ 167,967 $ (2,750) $ 236,244

166 % 2 % 23 % 40 % (11) % 28 %

December 31, 2019

Perpetual licenseTerm licenseMaintenancePega CloudConsultingTotal

1 year or$ 2,305 $97,826 $206,882 $165,571$20,798 $493,38258 %less

1-2 years2,179 12,014 30,291 128,109 1,439 174,032 21 %

2-3 years- 3,132 17,844 84,788 132 105,896 13 %

Greater than 3 - 3,861 13,277 43,702 1,993 62,833 8 %years

$ 4,484 $116,833 $268,294 $422,170$24,362 $836,143100%

PEGASYSTEMS INC.

RECONCILIATION OF FORWARD-LOOKING GUIDANCE

(in millions, except per share amounts)

Year Ended December 31, 2021

Revenue (GAAP and Non-GAAP) $ 1,250

Net loss (GAAP) $ (115.2)

Stock-based compensation 125.3

Convertible debt 18.4

Amortization of intangible assets 3.7

Foreign currency transaction (gain) loss (2.0)

Income tax effects (8.7)

Net Income (Non-GAAP) $ 21.5

Diluted (loss) per share - GAAP $ (1.44)

Non-GAAP adjustments 1.69

Diluted earnings per share - Non-GAAP $ 0.25

Diluted weighted-average number of common shares 80.0outstanding - GAAP

Incremental dilutive shares for Non-GAAP 5.0

Diluted weighted-average number of common shares 85.0outstanding - Non-GAAP

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SOURCE Pegasystems Inc.