PEGASYSTEMS INC Q3 FY2023 earnings

Pegasystems reported fiscal 2023 third quarter revenue of $334.6 million, up 23.6% from $270.7 million in the prior-year quarter. For the nine months, revenue was $958.4 million, up 4.0% from $921.4 million. Gross profit rose 35.6% to $240.9 million in the quarter, and gross margin expanded to 72.0% from 65.6%. Year to date, gross margin was 70.0%, flat with the same period a year earlier. The operating loss narrowed to $10.8 million from $77.2 million. The net loss narrowed to $7.3 million from $93.5 million, and the diluted loss per share narrowed to $0.09 from $1.14. Operating margin improved to -3.2% from -28.5%. Subscription revenue made up 82% of the quarter's total, continuing the shift away from perpetual licenses.

Cash flow was the standout. Operating cash flow was $24.2 million in the quarter, up from negative $8.4 million a year earlier. For the nine months, operating cash flow reached $137.9 million, versus negative $13.4 million in the prior-year period. Capital expenditures fell to $0.3 million in the quarter from $10.4 million. For the nine months, capital expenditures were $14.3 million, down from $22.3 million. Non-GAAP free cash flow was $123.6 million for the nine months, up from negative $35.7 million, which the company described as record free cash flow for the first three quarters. "Balancing growth and free cash flow is critical to achieving lasting value," CFO Ken Stillwell said.

Forward-looking indicators held up. Deferred revenue rose 20.3% to $299.7 million from $249.1 million. Remaining performance obligations were $1.27 billion, up 10.2% from $1.15 billion. ACV, a non-GAAP metric, grew 12% to $1,169 million from $1,040 million. Constant currency ACV increased 10% to $1,147 million, and constant currency backlog rose 7% to $1,232 million. Pega Cloud gross margin reached 74% through the first nine months, helped by better hosting cost efficiency. The company also revised its ACV methodology in 2023 to value maintenance and short contracts as total contract value divided by duration, a change it says better matches comparable companies.

Management continued to reshape the cost base, with restructuring tied to the go-to-market reorganization and lower selling and marketing spending. Legal fees from proceedings outside the ordinary course of business, including the Appian litigation, remained a drag, and the company expects to keep incurring those costs. The nine-month GAAP tax rate was negative, driven by a valuation allowance on U.S. and U.K. deferred tax assets and projected U.S. taxable income. On a non-GAAP basis, net income was $37.6 million, or $0.44 per diluted share, versus a net loss of $27.5 million, or $0.34 per share, a year earlier. Non-GAAP results exclude stock-based compensation, capped call losses, legal fees, restructuring, and related tax effects.

The quarter carried familiar risks. The company lists the Appian litigation, foreign exchange swings, reliance on third-party hosting providers, cyber security threats, public sector demand variability, and the impact of its convertible notes and capped call transactions as material uncertainties. Pegasystems repurchased $97.7 million in principal amount of convertible notes during the nine months and had $502 million outstanding at September 30, 2023, maturing March 1, 2025. It pays a quarterly dividend of $0.03 per share and had $60 million of share repurchase authorization remaining. Management launched Pega Infinity 23 with generative AI features and argued that building enterprise-class workflows in seconds is game-changing for clients. Whether growth in ACV and backlog outpaces perpetual license declines will determine if the cash flow momentum continues, and constant currency backlog growth of 7% leaves room for execution risk.