PR Newswire | Apr 28, 2021 04:06PM EDT

04/28 15:05 CDT

Digital Transformation Demand Increases Pega Cloud Revenue 56 percent in Q1 2021- Total ACV grows 20 percent, powered by Pega Cloud Choice- Pega Cloud ACV jumps 55 percent to $282 million- Total Backlog increases 30 percent year over year CAMBRIDGE, Mass., April 28, 2021

CAMBRIDGE, Mass., April 28, 2021 /PRNewswire/ -- Pegasystems Inc. (NASDAQ: PEGA), the software company that crushes business complexity, released its financial results for the first quarter of 2021.

"The pandemic clearly reaffirmed that organizations need to accelerate their digital transformation initiatives with low-code solutions. Our clients see this as improving time-to-market, time-to-value, and overall agility," said Alan Trefler, founder and CEO, Pegasystems. "We expect clients will remain on their accelerated path, and we are well positioned to support those efforts. We're excited to showcase many of our clients' most recent digital transformation successes next week at PegaWorld."

"We've reached a point in our cloud transition where subscription revenue growth aligns with total ACV growth," said Ken Stillwell, COO and CFO, Pegasystems. "Total revenue grew 18 percent year over year and subscription revenue grew by 23 percent. This is a strong indication that our business strategy is working, and our cloud transition is progressing as planned."

Financial and performance metrics(1)

Three Months Ended (Dollars in thousands, except per share March 31, amounts) 2021 2020 Change

Total revenue $313,499$265,591 18 %

Net (loss) - GAAP $(6,617)$(25,372)74 %

Net income - Non-GAAP $22,113 $4,032 448 %

Diluted (loss) per share - GAAP $(0.08) $(0.32) 75 %

Diluted earnings per share - Non-GAAP $0.26 $0.05 420 %

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

Three Months Ended (Dollars March 31, Change in thousands) 2021 2020

Pega Cloud $67,858 22 %$43,466 16 %$24,39256 %

Maintenance 75,561 23 %73,695 28 %1,866 3 %

Term license 111,509 36 %90,257 34 %21,252 24 %

Subscription^(2) 254,928 81 %207,418 78 %47,510 23 %

Perpetual license5,452 2 %3,659 1 %1,793 49 %

Consulting 53,119 17 %54,514 21 %(1,395) (3)%

Total revenue $313,499100%$265,591100%$47,90818 %

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

Note: See the schedules at the end of this release for additional information.

Quarterly conference call

A conference call and audio-only webcast will be conducted at 5:00 p.m. EDT on April 28, 2021.

Members of the public and investors are invited to 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=144131) 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

We believe that non-GAAP financial measures help investors understand our core operating results and prospects, consistent with how management measures and forecasts the Company's performance without the effect of often one-time charges and other items outside our normal operations. The supplementary non-GAAP financial measures are not meant to be superior to, or a substitute for, results of operations prepared under U.S. GAAP.

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

Forward-looking statements

Certain statements 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, 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.

Forward-looking statements deal with future events and are subject to risks and uncertainties that are difficult to predict, including, but not limited to:

* our future financial performance and business plans; * the adequacy of our liquidity and capital resources; * the continued payment of our 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 covenants; * the potential impact of our convertible senior notes and 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 update or revise these forward-looking statements publicly, whether as the result of new information, future events, or otherwise.

The forward-looking statements in this press release represent our views as of April 28, 2021.

About Pegasystems

Pega delivers innovative software that crushes business complexity. From maximizing customer lifetime value to streamlining service to boosting efficiency, we help the world's leading brands solve problems fast and transform for tomorrow. Pega clients make better decisions and get work done with real-time AI and intelligent automation. And, since 1983, we've built our scalable architecture and low-code platform to stay ahead of rapid change. Our solutions save people time, so our clients' employees and customers can get back to what matters most. For more information on Pegasystems (NASDAQ: PEGA) visit www.pega.com.

Press contact:Lisa PintchmanPegasystems 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 March 31,

2021 2020

Revenue

Software license $116,961$93,916

Maintenance 75,561 73,695

Pega Cloud 67,858 43,466

Consulting 53,119 54,514

Total revenue 313,499 265,591

Cost of revenue

Software license 650 684

Maintenance 5,786 5,576

Pega Cloud 22,557 17,533

Consulting 53,454 55,735

Total cost of revenue 82,447 79,528

Gross profit 231,052 186,063

Operating expenses

Selling and marketing 148,739 136,024

Research and development 62,442 58,727

General and administrative 18,270 15,630

Total operating expenses 229,451 210,381

Income (loss) from operations 1,601 (24,318)

Foreign currency transaction (loss) (5,098) (5,947)

Interest income 153 607

Interest expense (1,880) (2,306)

(Loss) on capped call transactions (19,117) (18,592)

Other income, net 106 1,374

(Loss) before (benefit from) income taxes (24,235) (49,182)

(Benefit from) income taxes (17,618) (23,810)

Net (loss) $(6,617)$(25,372)

(Loss) per share

Basic $(0.08) $(0.32)

Diluted $(0.08) $(0.32)

Weighted-average number of common shares outstanding

Basic 81,004 79,808

Diluted 81,004 79,808

PEGASYSTEMS INC.

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

(in thousands, except percentages and per share amounts)



Three Months Ended March 31,

2021 2020 Change

Net (loss) - GAAP $(6,617)$(25,372)74 %

Stock-based compensation^(2) 30,100 23,175

Capped call transactions 19,117 18,592

Convertible senior notes 673 1,719

Headquarters lease (3,417) -

Amortization of intangible assets 1,002 1,018

Foreign currency transaction loss 5,098 5,947

Other 12 3,899

Income tax effects^(3) (23,855) (24,946)

Net income - Non-GAAP $22,113 $4,032 448 %



Diluted (loss) per share - GAAP $(0.08) $(0.32) 75 %

Non-GAAP adjustments 0.34 0.37

Diluted earnings per share - Non-GAAP $0.26 $0.05 420 %



Diluted weighted-average number of common 81,004 79,808 1 %shares outstanding - GAAP

Non-GAAP Adjustments 5,129 4,337

Diluted weighted-average number of common 86,133 84,145 2 %shares outstanding - Non-GAAP

We believe that non-GAAP financial measures help investors understand our core operating results and prospects, consistent with how management(1) measures and forecasts the Company's performance without the effect of often one-time charges and other items outside our normal operations. The supplementary non-GAAP financial measures are not meant to be superior to, or a substitute for, results of operations prepared under U.S. GAAP.

Our Non-GAAP financial measures reflect the following adjustments:

* 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 related to our capped call transactions held at fair value under U.S. GAAP. The capped call transactions are generally expected to reduce common stock dilution and/or offset any potential cash payments the Company is required to make, other than for principal and interest, upon conversion of the Notes. 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. We reflect the effect of the capped call transactions on the weighted-average number of common shares outstanding in our non-GAAP financial measures as we believe it provides investors with useful information in evaluating our financial performance on a per-share basis. * Convertible senior notes: In February 2020, we issued convertible senior notes with an aggregate principal amount of $600 million, due March 1, 2025, in a private placement. Under U.S. GAAP in 2020, the conversion feature was recorded as a reduction of the debt instrument's book value which was amortized over the debt's life. After our adoption of Accounting Standards Update 2020-06 on January 1, 2021, the conversion feature is no longer recorded as a reduction of the debt instrument's book value which is amortized over the debt's life. See "Note 2. New Accounting Pronouncements" and "Note 8. Debt" in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 for additional information. In both periods, debt issuance costs reduce the debt instruments book value and are amortized over the debt's life. We believe excluding the debt discount amortization and issuance cost amortization provides a useful comparison of our operational performance in different periods. * Headquarters lease: In February 2021, the Company agreed to accelerate its exit from its Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from the Company's landlord of $18 million. We believe excluding the impact of the lease modification from our non-GAAP financial measures is useful to investors as the modified lease, including the $18 million payment, is not representative of our core business operations and ongoing operating performance. * 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 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. * Foreign currency transaction 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 and incremental fees incurred as a result of the cancellation of in-person sales and marketing events due to the COVID-19 pandemic, including the live event portion of our annual PegaWorld conference in 2020. 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:



Three Months Ended March 31,

(in thousands) 2021 2020

Cost of revenue $5,925 $5,152

Selling and marketing 13,720 9,718

Research and development 6,770 5,496

General and administrative3,685 2,809

$30,100 $23,175

Income tax benefit $(5,991) $(4,582)



(3) Effective income tax rates:



Three Months Ended March 31,

2021 2020

GAAP 73 %48 %

Non-GAAP 22 %22 %

Our GAAP effective income tax rate is subject to significant fluctuations due to various factors, including excess tax benefits generated by our stock-based compensation plans, gains and losses on our capped call transactions, 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 forecasted 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)



March 31, 2021December 31, 2020

Assets

Cash, cash equivalents, and marketable securities $442,358 $465,168

Accounts receivable 159,324 215,827

Unbilled receivables 228,603 207,155

Other current assets 91,868 88,760

Total current assets 922,153 976,910

Unbilled receivables 108,048 113,278

Goodwill 82,037 79,231

Other long-term assets 416,265 434,843

Total assets $1,528,503 $1,604,262

Liabilities and stockholders' equity

Accounts payable $24,426 $24,028

Accrued expenses, including compensation and related expenses119,255 182,273

Deferred revenue 244,170 232,865

Other current liabilities 16,599 20,969

Total current liabilities 404,450 460,135

Convertible senior notes, net 588,418 518,203

Operating lease liabilities 36,471 59,053

Other long-term liabilities 20,239 24,699

Total liabilities 1,049,578 1,062,090

Stockholders' equity 478,925 542,172

Total liabilities and stockholders' equity $1,528,503 $1,604,262

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



Three Months Ended March 31,

2021 2020

Net (loss) $(6,617)$(25,372)

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

Non-cash items 58,885 56,096

Change in operating assets and liabilities, net (30,618) (49,047)

Cash provided by (used in) operating activities 21,650 (18,323)

Cash provided by (used in) investing activities 15,489 (12,562)

Cash (used in) provided by financing activities (34,794) 502,174

Effect of exchange rate changes on cash and cash equivalents (1,536) (1,510)

Net increase in cash and cash equivalents 809 469,779

Cash and cash equivalents, beginning of period 171,899 68,363

Cash and cash equivalents, end of period $172,708$538,142

PEGASYSTEMS INC.ANNUAL CONTRACT VALUE ("ACV")(in thousands, except percentages)

Annual contract value ("ACV") (1) -ACV, as reported, represents the annualized value of our active contracts as of the measurement date. The contract's total value is divided by its duration in years to calculate ACV for term license and Pega Cloud contracts. Maintenance revenue for the quarter then ended is multiplied by four to calculate ACV for maintenance. Client Cloud ACV is composed of maintenance ACV and term license ACV. ACV is a performance measure that we believe provides useful information to our management and investors, particularly during our Cloud Transition. Reported amounts have not been adjusted for changes in foreign exchange rates.

March 31, 2021March 31, 2020Change

Maintenance $ 302,244 $ 294,780 $7,464 3 %

Term 267,931 234,361 33,570 14%

Client Cloud570,175 529,141 41,034 8 %

Pega Cloud 282,389 182,165 100,224 55%

Total $ 852,564 $ 711,306 $141,25820%

(1) Foreign currency exchange rate changes contributed 3% to total ACV growthin 2021.

PEGASYSTEMS INC.

BACKLOG

(in thousands, except percentages)



Remaining performance obligations ("Backlog") - Backlog represents expected future revenue on existing non-cancellable contracts.



March 31, 2021

Perpetual licenseTerm licenseMaintenancePega Cloud ConsultingTotal

1 year $ 9,649 $ 41,025 $220,100 $252,104 $21,068 $543,946 55 %or less

1-2 629 9,874 52,366 187,456 914 251,239 26 %years

2-3 - 7,055 33,337 91,861 1,756 134,009 14 %years

Greater than 3 - 377 16,834 32,895 510 50,616 5 %years

$ 10,278 $ 58,331 $322,637 $564,316 $24,248 $979,810 100%



Change in Backlog Since March 31, 2020

$ 4,115 $ 15,142 $52,914 $149,842 $3,971 $225,984

67 % 35 % 20 %36 %20 %30 %



March 31, 2020

Perpetual licenseTerm licenseMaintenancePega Cloud ConsultingTotal

1 year $ 3,995 $ 30,962 $205,083 $174,277 $18,945 $433,262 58 %or less

1-2 2,168 5,088 34,633 125,473 1,215 168,577 22 %years

2-3 - 6,504 19,411 81,187 107 107,209 14 %years

Greater than 3 - 635 10,596 33,537 10 44,778 6 %years

$ 6,163 $ 43,189 $269,723 $414,474 $20,277 $753,826 100%

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SOURCE Pegasystems Inc.