PEGASYSTEMS INC Q3 FY2022 earnings

Pegasystems posted top-line growth in FY2022 Q3 but weaker margins. Revenue was $270.73 million, up 5.6% from the prior-year quarter, and year-to-date revenue reached $921.38 million, up 2.9%. Gross profit was $177.68 million in the quarter, up 3.3%, while year-to-date gross profit was $645.01 million, flat at 0.1%. Gross margin slipped 1.5 percentage points to 65.6% in the quarter. Year-to-date gross margin was 70.0%, down 1.9 percentage points. Management tied the revenue pattern to the subscription transition and said a stronger U.S. dollar reduced total revenue growth by approximately 5 percent in both the three and nine months ended September 30, 2022. Annual contract value was $1,040.244 million, up 10%, or 16% in constant currency. Pega Cloud ACV was $416.030 million, up 30%, or 39% in constant currency. Backlog, reported as remaining performance obligations, was $1.15 billion, up 11.0%; constant currency backlog was $1,222 million, up 18%.

Profitability deteriorated sharply on a GAAP basis. The operating loss was $77.22 million in the quarter, and the loss widened 18.2% from the prior-year quarter. Year-to-date operating loss was $143.64 million, a loss that widened 129.7%. Operating margin was -28.5% in the quarter, down 3.0 percentage points. Year-to-date operating margin was -15.6%, down 8.6 percentage points. Net loss was $93.52 million in the quarter, a loss that widened 65.6%. Year-to-date net loss was $380.20 million, a loss that widened 1374.0%. Diluted loss per share was $1.14 in the quarter, down 65.2%. Year-to-date diluted loss per share was $4.65, down 1353.1%. Non-GAAP results were less severe: the non-GAAP net loss was $27.5 million, an improvement of 7%, and non-GAAP diluted loss per share was $0.34, an improvement of 6%.

Cash generation remained negative. Operating cash flow was -$8.38 million in the quarter, an improvement of 66.1% from the prior-year quarter. Year-to-date operating cash flow was -$13.45 million, down 152.7%. Capital expenditures were $10.42 million in the quarter, up 255.9%, and $22.28 million year to date, up 214.4%. Deferred revenue was $249.10 million, up 6.1% from the prior-year quarter. The 10-Q says cash used in operating activities in the nine months was primarily due to the subscription transition and increased research and development investment, partly offset by strong client collections. It also flags litigation fees outside the ordinary course and says additional expenses are expected.

Guidance remains thin. The earnings release did not provide numerical revenue or earnings guidance for the next quarter or the full fiscal year. Management repeated a longer-term goal to achieve the Rule of 40 as the company exits 2024. The main risks are familiar from the 10-Q: the subscription transition, which management expects to complete in 2023; foreign exchange headwinds; litigation and related expenses outside the ordinary course; global economic and political uncertainty, including COVID-19 and the war in Ukraine; reliance on third-party hosting providers; debt covenants; the convertible senior notes and capped call transactions; foreign currency rates; cyber-attacks and security breaches; intellectual property protection; client retention; and management of growth. The 10-Q also says direct financial exposure to Ukraine, Russia, and Belarus is not material. It notes a valuation allowance on U.S. and U.K. deferred tax assets and says the company is no longer recording income tax benefits on U.S. and U.K. losses. Liquidity commentary says current cash, cash flow from operations, borrowing capacity, and capital market access should fund operations, stock repurchases, and quarterly dividends for at least the next 12 months.