PEGASYSTEMS INC Q1 FY2022 earnings

Pegasystems reported total revenue of $376.31 million for the quarter ended March 31, 2022, up 20 percent from $313.50 million in the prior-year quarter. Subscription revenue reached $307.57 million, up 21 percent, and now makes up the bulk of the business. Pega Cloud revenue grew 33 percent to $90.32 million. Subscription license revenue rose 23 percent to $137.53 million, maintenance revenue was $79.72 million, up 5 percent, and consulting revenue increased 15 percent to $61.30 million on higher billable hours in North America. Perpetual license revenue climbed 36 percent to $7.44 million after license rights tied to contracts signed in earlier years became effective. The company recognizes Pega Cloud and maintenance revenue over the contract term, while license revenue lands largely upfront, so the subscription transition still distorts year-over-year comparisons.

Profitability improved much faster than the top line. Gross profit was $288.11 million, up 24.7 percent, and gross margin reached 76.6 percent, up 2.9 percentage points from the prior-year quarter. Management credited the subscription transition, revenue growth, and cost efficiency as Pega Cloud scales. Operating income was $18.62 million, up from $1.60 million, and operating margin was 4.9 percent, up 4.4 percentage points. GAAP net loss narrowed to $0.38 million from $6.62 million. Diluted EPS was $0.00, compared with a loss of $0.08 per share a year earlier. Non-GAAP net income was $50.17 million, up 112 percent, and non-GAAP diluted EPS was $0.59, up 119 percent. The gap between the two measures is wide, and stock-based compensation of $28.23 million plus a $30.56 million loss on capped call transactions explain much of it.

Cost growth was uneven. General and administrative expense climbed the most, mainly on $15.4 million in legal fees and related expenses from proceedings outside the ordinary course of business, and management expects those costs to keep running through 2022. Selling and marketing and research and development also rose, driven by higher compensation and headcount. Cash generation slipped. Operating cash flow was $15.12 million, down 30.2 percent from $21.65 million, a decline the company tied to the subscription transition and heavier spending on Pega Cloud and go-to-market. Capital expenditures were $6.66 million, up from $1.78 million. The effective income tax benefit rate was 95 percent, against 73 percent, as discrete items landed on a smaller pre-tax loss.

Forward-looking metrics held up. Annual contract value was $1.03 billion at March 31, 2022, up 21 percent since March 31, 2021, although foreign currency moves were a 1 percent to 2 percent headwind to that growth. Pega Cloud ACV rose 42 percent to $401.75 million, subscription license ACV rose 17 percent to $313.20 million, and maintenance ACV was $318.86 million, up 5 percent. Remaining performance obligations, or backlog, reached $1.18 billion, up 20.1 percent from $979.81 million a year earlier. About 55 percent of backlog is due within a year. Deferred revenue was $297.48 million, up 18.2 percent from the prior-year quarter.

Liquidity remains adequate but is contracting. Cash, cash equivalents, and marketable securities totaled $332.17 million, down from $362.78 million at December 31, 2021. The company paid $2.45 million in dividends and spent $22.58 million on buybacks, which exhausted its repurchase authority as of March 31, 2022. It still intends to pay a quarterly dividend of $0.03 per share, subject to board discretion. The release carries no numeric guidance for the next quarter or the full fiscal year. Management instead frames the year around balancing growth and profitability to reach a Rule of 40 profile. The listed risks are broad: global economic and political uncertainty, the war in Ukraine, foreign exchange swings, reliance on third-party hosting providers, covenants tied to $600 million of convertible senior notes, capped call transactions, cyber-attacks, and client retention. Revenue from clients in Ukraine, Russia, and Belarus was less than $4.0 million for the year ended December 31, 2021, so direct exposure there is limited. Legal costs and the pace of the subscription transition look like the two items most likely to move results in the coming quarters.