Summary
Pegasystems posted second-quarter revenue of $298.27 million, up 8.7% from $274.34 million in the prior-year quarter. The first half tells a different story. Six-month revenue was $623.74 million, down 4.1% from $650.64 million. Mix explains most of the gap. Pega Cloud revenue reached $115.06 million and maintenance contributed $82.04 million. Subscription license revenue was $41.20 million, consulting revenue was $58.39 million, and perpetual license revenue was $1.58 million. Management attributed the drop in perpetual license revenue to its strategy of promoting subscription-based arrangements, and the consulting decline to lower realization rates.
Profitability moved the right way in the quarter. Gross profit rose 12.8% to $202.13 million, and gross margin was 67.8%, up from 65.3%. Pega Cloud gross margin expanded to 73%, which the company tied to increased cost efficiency, particularly in hosting services, as that business scales. The year-to-date picture is weaker. Gross profit of $429.67 million was down 8.1%, and the gross margin of 68.9% came in below the 71.8% reported a year earlier.
Cost discipline did the heavy lifting below the gross profit line. Selling and marketing expense was $143.86 million, general and administrative expense was $23.46 million, and research and development expense was $73.93 million. Legal fees tied to proceedings outside the ordinary course of business fell to $2.95 million in the first half from $26.44 million a year earlier, though management expects to keep incurring costs on those matters. Restructuring charges of $2.17 million in the quarter included $1.6 million for a U.S. go-to-market reorganization. The operating loss narrowed to $41.29 million from $85.04 million, and the operating margin improved to negative 13.8% from negative 31.0%. The net loss narrowed to $46.80 million, or $0.56 per diluted share, from $286.30 million, or $3.50 per diluted share. For the first half, the net loss was $67.58 million, or $0.82 per diluted share, against $286.68 million, or $3.51 per diluted share. Non-GAAP net income was $1.20 million in the quarter, with non-GAAP diluted earnings per share of $0.01.
Cash was the cleanest part of the release. Operating cash flow was $45.64 million in the quarter, versus a use of $20.18 million a year earlier. For the first half, operating cash flow was $113.75 million against a use of $5.07 million. Free cash flow, a non-GAAP measure, reached $122.54 million in the first half, up 928%, at a free cash flow margin of 20%. Capital expenditures were $2.45 million in the quarter, down 53.0%, and $13.93 million for the first half, up 17.4%. Annual contract value grew 13% to $1.16 billion. Remaining performance obligations were $1.27 billion, up 12.5%, and deferred revenue was $314.35 million, up 14.5%.
Cash, cash equivalents, and marketable securities totaled $312.81 million on June 30, 2023, up from $297.22 million at December 31, 2022. During the first half the company paid $89 million to repurchase $97.7 million in aggregate principal amount of convertible senior notes, leaving $502 million outstanding and due March 1, 2025. Management did not provide numeric guidance for either the third quarter or the full fiscal year. It said the company would look to further increase operating effectiveness with additional go-to-market alignment work in the second half of 2023. The board extended the share repurchase program to June 30, 2024 and increased the authorized amount to $60 million, and the company said it intends to keep paying a quarterly dividend of $0.03 per share. The risk list has not changed much. The Appian Corp. litigation keeps generating costs, the company absorbed a $3.29 million foreign currency transaction loss in the quarter, and it leans on third-party hosting providers. Demand among public sector clients remains variable, and a valuation allowance on U.S. and U.K. deferred tax assets continues to weigh on the tax line.
Forecast
No forward guidance in this quarter's filings.
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2023 | Q1 FY2023 | QoQ | Q2 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $298.3M | $325.5M | -8.4% | $274.3M | +8.7% |
| Gross profit | $202.1M | $227.5M | -11.2% | $179.2M | +12.8% |
| Gross margin | 67.8% | 69.9% | -2.1 pp | 65.3% | +2.4 pp |
| Research & development | $73.9M | $75.4M | -1.9% | $74.3M | -0.6% |
| Sales & marketing | $143.9M | $149.8M | -4.0% | $157.2M | -8.5% |
| General & administrative | $23.5M | $23.1M | +1.5% | $32.7M | -28.3% |
| Total operating expenses | $243.4M | $249.7M | -2.5% | $264.3M | -7.9% |
| Operating income (loss) | -$41.3M | -$22.2M | -85.9% | -$85.0M | +51.4% |
| Operating margin | -13.8% | -6.8% | -7.0 pp | -31.0% | +17.2 pp |
| Net income (loss) | -$46.8M | -$20.8M | -125.3% | -$286.3M | +83.7% |
| Net margin | -15.7% | -6.4% | -9.3 pp | -104.4% | +88.7 pp |
| Diluted EPS | -$0.56 | -$0.25 | -$0.31 | -$3.50 | +$2.94 |
Risks
The MD&A reiterates that the company expects to continue to incur additional costs for proceedings that originated outside the ordinary course of business, including its ongoing litigation with Appian Corp. Legal and related fees paid in the six months ended June 30, 2023 were $3.0 million, down from $26.4 million in the prior-year period, and general and administrative expense fell $23.6 million year to date largely on that decline.
Transition to a subscription model is compressing reported revenue: subscription license revenue decreased 30% to $125.7 million and perpetual license revenue decreased 80% to $2.0 million in the six months ended June 30, 2023, leaving total revenue down 4% to $623.7 million year to date even as Pega Cloud revenue grew 21% to $222.9 million.
Consulting revenue decreased 7% to $111.4 million in the six months ended June 30, 2023 due to lower consultant realization and utilization rates, and the consulting line reported a gross loss in the three months ended June 30, 2023, dragging on overall margins.
Restructuring expense of $17.5 million was recorded in the six months ended June 30, 2023 versus none in the prior-year period, tied to the optimization of the go-to-market organization in the U.S. and the closure of leased office space in Poland, with related headcount reductions in selling and marketing compensation of $26.4 million year to date.
The forward-looking statement list flags global economic and political conditions and uncertainty, including impacts from public health emergencies and the war in Ukraine, as well as variation in demand for products and services, including among public sector clients, and foreign currency exchange rate exposure tied to the company's U.K. subsidiary.
The company paid $89 million in the six months ended June 30, 2023 to repurchase $97.7 million of principal on its convertible senior notes, leaving $502 million outstanding and due March 1, 2025, with interest expense and capped call fair value adjustments continuing to move results.
The company relies on third-party service providers, including hosting providers, and Pega Cloud margin improvement was attributed to increased cost efficiency in hosting services, making cloud gross margin sensitive to third-party hosting pricing and performance.
SaaS KPIs
All quarters →Annual Contract Value (ACV)
Constant Currency Backlog
Constant Currency ACV
Remaining Performance Obligations (Backlog)
Pega Cloud gross margin
Remaining Performance Obligations (Backlog) 1 year or less
Summary, forecast, risks and KPIs are extracted from PEGASYSTEMS INC's SEC filings for Q2 FY2023 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 2, 2026.