Pegasystems Inc. Posts Steady Growth Despite Industry Volatility

By Markets Fool.com

Image source: Getty Images.

Continue Reading Below

Business management software specialist Pegasystems (NASDAQ: PEGA) announced second-quarter results on Wednesday that showed hefty sales and profit growth powered by strong demand for its cloud offerings. However, a weak backlog figure pointed to volatility around orders in the coming months.

Here's how the big-picture results stacked up against the prior year:

Metric

Q2 2016 Actuals

Q2 2015 Actuals

Growth (YOY)

Revenue

$189 million

$162 million

16%

Net income

$3.6 million

$3.1 million

17%

Earnings per share

$0.05

$0.04

25%

YOY = year over year. Data source: Pega's financial filings.

What happened this quarter?

Continue Reading Below

Sales rose by 16% for the quarter and for the first six months of 2016. PEGA also managed to boost profitability thanks to especially strong growth in high-margin cloud and consulting services.

Highlights of the quarter included:

  • Cloud revenue rose by 55% and license revenue improved by 11%. Together these segments account for 43% of sales.
  • Services demand jumped by 28%.
  • Gross margin improved to 68% of sales from 66% last year.
  • A 23% spike in sales and marketing expenses held operating profits down. Operating margin didn't budge from the prior year's 3% rate.
  • Order backlog was unchanged compared to a 4% uptick last quarter and a 15% jump in the final quarter of 2015.
  • Cash on hand dove by 37% to $137 million after the company paid out nearly $50 million to acquire robotic process automation specialist, OpenSpan.

What management had to say

"We are pleased with our results for the first half of 2016," CEO Alan Trefler said in a press release. "An increasing number of organizations are choosing Pega applications to improve their business outcomes," he explained. "We continue to see the world's leading organizations and governments adopt the Pega 7 Platform as the engine to drive their digital transformation."

Chief Financial Officer Ken Stillwell noted that growth remained on track despite plenty of challenges in the industry this year such as exchange rate swings and the Brexit vote. "It was good to see strength in the first half of 2016 despite global volatility and adverse currency shifts," Stillwell explained.

Executives reiterated that the timing of a few large orders can make for volatile swings in growth rates from quarter to quarter, but that the bigger-picture trend is positive. "While our openness to licensing to clients through term, cloud, or perpetual can lead to quarterly variations, we are excited by our long-term growth trend as a true value measure."

Looking forward

Investors shouldn't read too much into the flat backlog figure, as it can be subject to seasonal swings. Order demand is typically lower in the first half of the year before building as year-end license signings spike.

That said, there are good reasons besides backlog to expect volatility around PEGA's next few quarterly earnings results. Signing -- or not signing -- a major client can significantly impact figures over the short term. The Brexit vote, meanwhile, has injected uncertainty into its European operations even as the falling British pound pinches reported results.

Meanwhile, Trefler and his executive team continue to work at assembling a more complete customer relationship management software suite. They believe the recent OpenSpan purchase advances that goal and should help PEGA sign up additional global business giants as licensing clients.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Pegasystems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.