Why Pegasystems Inc. Rose 13% in October

By Demitrios KalogeropoulosFool.com

What: Business-management software company Pegasystems saw its stock rise 13% during the month of October, according toS&P Capital IQdata. The bounce pushed shares to a new all-time high, and Pegasystems has significantly outperformed the market by rising 40% so far in 2015.

PEGA data by YCharts.

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So what: The stock rode the broader market higher last month; indexes logged an 8% gain in October. But Pega really spiked at the end of the month after posting strong third-quarter earnings results.

Image source: Pegasystems.

The company logged its second straight quarter of accelerating sales gains. Third-quarter revenue rose by 18%, compared to 13% in the second quarter and 8% in the first quarter. The improvement was again led by profitable licensing and cloud sales, which have grown to nearly half of Pega's software applications business. That shift, combined with sharply lower operating costs, resulted in a huge profitability gain: Operating margin nearly doubled to 7% of sales.

Investors also cheered the fact that Pegasystems' backlog, which represents contracted but not yet billed orders, rose by 14%. That suggests positive business momentum heading into the fourth quarter. "We are very pleased with our strong performance this quarter and through the first nine months of 2015," CEO Alan Trefler said in a press release.

Now what: Since the timing of a few large deals can cause big swings in results from quarter to quarter, management frequently stresses to investors that they shouldn't read too much into quarterly growth figures. Yet over the longer term, management's encouraged by the company's 13% sales growth year to date, as well as the cash it has generated.

That cash is funding heavy investments in research and development, new sales staff, and higher marketing spending. In fact, a big marketing campaign in Europe and in North America, along with ramped-up sales and engineer hiring, "reflects the confidence we have in Pega's long term prospects for growth," Chief Financial Officer Rafe Brown said in a conference call.

The fourth quarter is generally Pega's biggest in terms of orders, revenue, and earnings, which magnifies the potential for lumpy quarterly results. But the longer-term trend shows solid sales improvements and increasing confidence on the part of management that the company's products are finding traction in the market for business software.

The article Why Pegasystems Inc. Rose 13% in October originally appeared on Fool.com.

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.

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