Pegasystems Inc. Maintains Sales Momentum

By Markets Fool.com

Image source: Pegasystems.

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Business management software specialist Pegasystems (NASDAQ: PEGA)announced third-quarter results this week that included only a slight slowdown in its growth pace.

But executives were happy with the company's performance in the face of industry shifts toward term-based licensing purchases.

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

Metric

Q3 2016 Actuals

Q3 2015 Actuals

Growth (YOY)

Revenue

$183 million

$162 million

13%

Net income

$2.4 million

$6.3 million

(61%)

EPS

$0.03

$0.08

(63%)

Data source: Pegasystems' financial filings.YOY = Year-over-year.

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What happened this quarter?

Sales improved by 13%, marking a decrease from the prior quarter's 16% gain. As usual, cloud and license revenue both led the way higher, with 17% and 32% gains, respectively.

Highlights of the quarter included:

  • Cloud and license sales ticked up to 43% of the business from 42% last quarter.
  • Services demand rose by 8%.
  • Gross margin improved to 67% of sales from 66% last year.
  • Operating expenses grew faster than sales as the company dedicated significant resources to sales and marketing and research and development. As a result, operating income was nearly cut in half to $5.5 million from $10.7 million.
  • Order backlog was up 11% ahead of what's traditionally one of Pegasystems' biggest sales quarters.
  • Cash balances were down 41% due to the company's $50 million purchase of process automation specialist OpenSpan.

What management had to say

CEO Alan Trefler and his executive team were happy with Pegasystems' overall performance. "We're pleased with our Q3 and year-to-date results," Trefler said in a press release. For the first three quarters of the year, Pegaysystems has managed 15% higher sales and a 2% uptick in GAAP net income. "We're delighted to see a growing number of leading organizations choosing our software to improve customer engagement and drive operational excellence," Trefler said.

Executives implied that the growth slowdown was due to a mix of exchange rate swings and the move away from outright software purchases toward term licenses. "Our ability to grow GAAP and non-GAAP revenue by 15% in the face of currency headwinds and a significant shift to term license arrangements is a great indicator of our business momentum," Chief Financial Officer Ken Stillwell said.

Looking forward

The year-end tends to be a busy time for Pegasystems' sales team, which might be one reason why the company spent freely to bulk up that division this quarter. Large enterprise clients often make their budgeting commitments for the coming year in the fourth quarter, and so Pegasystems wants to be ready to take full advantage of that budgeting process.

Image source: Getty Images.

That said, the company is still small enough that the timing of a few major deals can swing quarterly results in one direction or the other. That's why it can help for investors to focus on the longer-term trend.

Sales are up 15% over the last nine months, which puts the company right on pace with the 16% growth it managed in both fiscal 2015 and 2014.

Pegasystems is also remaining profitable on a GAAP basis despite heavy investments in building out its sales infrastructure, improving its core management services, and making complementary acquisitions aimed at strengthening its hold on the industry.

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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.