8-K

Pegasystems Announces Financial Results for Third Quarter and Nine Months of 2016

CAMBRIDGE, Mass. – November 2, 2016 – Pegasystems Inc. (NASDAQ: PEGA), the software company empowering customer engagement for the world’s leading enterprises, today announced results for its third quarter and nine months ended September 30, 2016.

“We’re pleased with our Q3 and year-to-date results,” said Alan Trefler, founder and CEO, Pegasystems. “We continue to focus on delivering the industry’s leading BPM and CRM applications to provide clients with dramatic business agility and positive business outcomes. We are delighted to see a growing number of leading organizations choosing our software to improve customer engagement and drive operational excellence.”

⁽¹⁾ See a reconciliation of our GAAP to Non-GAAP measures contained in the financial schedules at the end of this release.

“We are pleased with our year-to-date results through the third quarter of 2016,” said Ken Stillwell, CFO, Pegasystems. “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.”

Cash: Total cash, cash equivalents, and marketable securities at September 30, 2016 was $129.7 million, down 40.8% from 2015 year-end, primarily due to the cash payment of $48.8 million to acquire OpenSpan, Inc. (“OpenSpan”), net of cash acquired.

License and Cloud Backlog: The Company computes license and cloud backlog by adding deferred license and cloud revenue as recorded on the Company’s balance sheet and license and cloud commitments, which are not yet billed and not recorded on its balance sheet.

⁽¹⁾ See historical quarterly license and cloud backlog amounts in a separate schedule at the end of this release.

⁽²⁾ See the “Future Cash Receipts from License and Cloud Arrangements” table on page 23 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2016.

Pegasystems will host a conference call and audio-only Webcast associated with this announcement at 5:00 p.m. EDT today. A live audio Webcast of the conference call, together with detailed financial information, can be accessed through the Company’s Website at www.pega.com/about/investors. Dial-in information is as follows: 1-877-705-6003 (domestic) or 1-201-493-6725 (international). To listen to the Webcast, log onto www.pega.com at least five minutes prior to the event’s broadcast and click on the Webcast icon in the Investors section. A replay of the call will also be available on www.pega.com by clicking the Earnings Calls link in the Investors section.

To supplement financial results presented in accordance with Generally Accepted Accounting Principles in the U.S. (“GAAP”), the Company provides non-GAAP measures, including in this release. Pegasystems’ management utilizes a number of different financial measures, both GAAP and non-GAAP, in analyzing and assessing the overall performance of the business, for making operating decisions, and for forecasting and planning for future periods. The Company’s annual financial plan is prepared both on a GAAP and non-GAAP basis, and both are approved by our board of directors. In addition and as a consequence of the importance of these measures in managing the business, the Company uses non-GAAP measures and financial performance results in the evaluation process to establish management’s compensation.

The non-GAAP measures exclude the effects of certain business combination accounting entries, stock-based compensation expense, amortization of acquired intangibles, acquisition-related and restructuring expenses, and certain other adjustments. The Company believes that these non-GAAP measures are helpful in understanding its past financial performance and its anticipated future results. These non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with the Company’s consolidated financial statements prepared in accordance with GAAP. A reconciliation of the Company’s GAAP to non-GAAP measures is included in the financial schedules at the end of this release.

“Safe harbor” statement under the Private Securities Litigation Reform Act of 1995: Certain statements contained in this press release may be construed as “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “could,” “estimate,” “may,” “target,” “strategy,” “is intended to,” “project,” “guidance”, or variations of such words and similar expressions, among others, identify forward-looking statements, which speak only as of the date the statement was made. These statements are based on current expectations and assumptions and involve various risks and uncertainties, which could cause the Company’s actual results to differ from those expressed in such forward-looking statements. These risks and uncertainties include, among others, variation in demand for our products and services and the difficulty in predicting the completion of product acceptance and other factors affecting the timing of our license revenue recognition; the ongoing consolidation in the financial services, insurance, healthcare, and communications markets; reliance on third party relationships; the potential loss of vendor specific objective evidence for our time and materials professional services arrangements; the inherent risks associated with international operations and the continued weakness in international economies; foreign currency exchange rates; the financial impact of the Company’s past acquisitions, including the OpenSpan acquisition, and any future acquisitions; the potential legal and financial liabilities and reputation damage due to cyber-attacks and security breaches; and management of the Company’s growth. Further information regarding these and other factors which could cause the Company’s actual results to differ materially from any forward-looking statements contained in this press release is contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and other recent filings with the Securities and Exchange Commission. These documents are available on the Company’s website at http://www.pega.com/about/investors. The forward-looking statements contained in this press release represent the Company’s views as of November 2, 2016. Investors are cautioned not to place undue reliance on such forward-looking statements and there are no assurances that the matters contained in such statements will be achieved. Although subsequent events may cause the Company’s view to change, except as required by applicable law, the Company does not undertake and specifically disclaims any obligation to publicly update or revise these forward-looking statements whether as the result of new information, future events or otherwise. The statements should therefore not be relied upon as representing the Company’s view as of any date subsequent to November 2, 2016.

Pegasystems Inc. (NASDAQ: PEGA) develops strategic applications for marketing, sales, service, and operations. Pega’s applications streamline critical business operations, connect enterprises to their customers seamlessly in real-time across channels, and adapt to meet rapidly changing requirements. Pega’s Global 3000 customers include many of the world’s most sophisticated and successful enterprises. Pega’s applications, available in the cloud or on-premises, are built on its unified Pega^® 7 Platform, which uses visual tools to easily extend and change applications to meet clients’ strategic business needs. Pega’s clients report that Pega software gives them the fastest time to value, extremely rapid deployment, efficient re-use, and global scale. For more information, please visit us at www.pega.com.

Revenue: Business combination accounting rules require that we determine the fair value of the deferred revenue liability for contractual obligations assumed from our acquisition of OpenSpan in April 2016. In post-acquisition reporting periods, we recognize revenue for the fair value of these contracts, when all the revenue recognition criteria are satisfied, instead of the revenue that would have been recognized by OpenSpan as an independent company. We add back the effect of the deferred revenue fair value adjustment in non-GAAP revenue to reflect the full amount of these revenues to provide a more complete comparison of the revenue guidance to peer companies. No adjustments were made to revenue for 2015.

Amortization of intangible assets: We have excluded the amortization expense of intangible assets from our non-GAAP operating expenses and net earnings measures. Amortization of intangible assets is inconsistent in amount and frequency and is significantly affected by the timing and size of our acquisitions. Investors should note that the use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. Amortization of intangible assets will recur in future periods.

Stock-based compensation expense: We have excluded stock-based compensation expense from our non-GAAP operating expenses and net earnings measures. Although stock-based compensation is a key incentive offered to our employees, and we believe such compensation contributed to the revenues earned during the periods presented and will contribute to the generation of future period revenues, we continue to evaluate our business performance excluding stock-based compensation expense.

Acquisition-related and restructuring expenses: We have excluded the effect of acquisition-related and restructuring expenses from our non-GAAP operating expenses and net earnings measures. We incurred direct and incremental expenses associated primarily with the OpenSpan acquisition. These acquisition-related expenses were primarily professional fees to affect the acquisition. We have also incurred restructuring expenses for one-time employee termination benefits related to the closure of one of our domestic offices, which we generally would not have otherwise incurred in the periods presented as a part of our continuing operations. We believe it is useful for investors to understand the effects of these items on our total operating expenses.

Other adjustments: We reached an agreement with the former shareholders of Antenna Software, Inc., which we acquired in October 2013 (“Antenna”), to release a portion of the funds held in escrow as security for their indemnification obligations to us in settlement of the outstanding indemnification claims. The settlement resulted in a benefit to cost of revenue and operating expenses in the first quarter of 2015. In addition, we favorably settled indirect tax liabilities related to the Antenna acquisition, which resulted in a benefit to operating expenses in the first quarter of 2015. In the second quarter of 2016, we reduced our estimate of the additional cash consideration payable to the selling shareholders of one of the three companies acquired in 2014 based on the achievement of certain milestones. We believe the benefits associated with these items are not representative of our ongoing business, and we have excluded the effects of these items from our non-GAAP operating results and net earnings measures.


	Three Months Ended September 30,
	2016						2016		2015						2015
(in thousands)	GAAP			Adj.			Non-GAAP		GAAP			Adj.			Non-GAAP

Selling and marketing	$	67,032		$	(5,335	)	$	61,697	$	53,640		$	(3,942	)	$	49,698
Amortization of intangible assets		1,867			(1,867	)		-		1,537			(1,537	)		-
Stock-based compensation		3,468			(3,468	)		-		2,405			(2,405	)		-
Research and development	$	38,036		$	(2,260	)	$	35,776	$	33,032		$	(2,047	)	$	30,985
Stock-based compensation		2,260			(2,260	)		-		2,047			(2,047	)		-
General and administrative	$	11,725		$	(2,073	)	$	9,652	$	9,579		$	(1,445	)	$	8,134
Amortization of intangible assets		90			(90	)		-		91			(91	)		-
Stock-based compensation		1,983			(1,983	)		-		1,354			(1,354	)		-
Acquisition-related	$	74		$	(74	)	$	-	$	-		$	-		$	-
Stock-based compensation		(10	)		10			-		-			-			-
Acquisition-related		84			(84	)		-		-			-			-
TOTAL OPERATING EXPENSES	$	116,867		$	(9,742	)	$	107,125	$	96,251		$	(7,434	)	$	88,817

	Nine Months Ended September 30,
	2016						2016		2015						2015
(in thousands)	GAAP			Adj.			Non-GAAP		GAAP			Adj.			Non-GAAP

Selling and marketing	$	202,126		$	(14,449	)	$	187,677	$	169,764		$	(10,878	)	$	158,886
Amortization of intangible assets		5,274			(5,274	)		-		4,602			(4,602	)		-
Stock-based compensation		9,395			(9,395	)		-		6,283			(6,283	)		-
Other adjustments		(220	)		220			-		(7	)		7			-
Research and development	$	108,530		$	(7,480	)	$	101,050	$	94,248		$	(5,738	)	$	88,510
Stock-based compensation		7,480			(7,480	)		-		6,178			(6,178	)		-
Other adjustments		-			-			-		(440	)		440			-
General and administrative	$	34,067		$	(4,974	)	$	29,093	$	26,138		$	(1,210	)	$	24,928
Amortization of intangible assets		268			(268	)		-		593			(593	)		-
Stock-based compensation		4,706			(4,706	)		-		4,025			(4,025	)		-
Other adjustments		-			-			-		(3,408	)		3,408			-
Acquisition-related	$	2,616		$	(2,616	)	$	-	$	39		$	(39	)	$	-
Stock-based compensation		342			(342	)		-		-			-			-
Acquisition-related		2,274			(2,274	)		-		39			(39	)		-
Restructuring	$	287		$	(287	)	$	-	$	-		$	-		$	-
TOTAL OPERATING EXPENSES	$	347,626		$	(29,806	)	$	317,820	$	290,189		$	(17,865	)	$	272,324

The GAAP income tax effects were calculated using an effective GAAP tax rate of 38.5% and 36.0% for the nine months of 2016 and 2015, respectively. The non-GAAP income tax effects were calculated using an effective non-GAAP tax rate of 34.2% and 34.3% for the nine months of 2016 and 2015, respectively.

The differences between our GAAP and non-GAAP effective tax rates in the third quarter and nine months of 2016 and 2015 primarily relate to the impact of unfavorable foreign stock compensation adjustments on our GAAP effective tax rate.


		Pegasystems Inc.

Date:	November 2, 2016	By:	/s/ KENNETH STILLWELL
			Kenneth Stillwell
			Chief Financial Officer and Chief Administrative Officer
			(Principal Financial Officer)


Exhibit No.		Description

EX-99.1		Press Release issued by Pegasystems Inc. on November 2, 2016


	Three Months Ended September 30,
($ in thousands except per share amounts)	2016		2016		2015		2015		% Increase (Decrease)
($ in thousands except per share amounts)	GAAP		Non-GAAP		GAAP		Non-GAAP		GAAP		Non-GAAP

Total Revenue	$	182,802	$	183,460	$	162,403	$	162,403		13%		13%
License Revenue	$	68,833	$	68,848	$	58,948	$	58,948		17%		17%
Cloud Revenue	$	10,873	$	10,902	$	8,244	$	8,244		32%		32%
Net Income	$	2,418	$	13,056	$	6,325	$	13,247		(62%)		(1%)
Diluted Earnings per share	$	0.03	$	0.17	$	0.08	$	0.17		(63%)		0%

	Nine Months Ended September 30,
($ in thousands except per share amounts)	2016		2016		2015		2015		% Increase (Decrease)
($ in thousands except per share amounts)	GAAP		Non-GAAP		GAAP		Non-GAAP		GAAP		Non-GAAP

Total Revenue	$	550,656	$	552,164	$	478,340	$	478,340		15%		15%
License Revenue	$	207,849	$	207,878	$	180,420	$	180,420		15%		15%
Cloud Revenue	$	30,640	$	30,764	$	21,700	$	21,700		41%		42%
Net Income	$	15,070	$	45,504	$	15,364	$	34,378		(2%)		32%
Diluted Earnings per share	$	0.19	$	0.58	$	0.19	$	0.44		0%		32%


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Revenue:
Software license	$	68,833	$	58,948	$	207,849	$	180,420
Maintenance		55,038		52,285		163,174		150,366
Services		58,931		51,170		179,633		147,554

Total revenue		182,802		162,403		550,656		478,340

Cost of revenue:
Software license		1,313		1,000		3,646		3,106
Maintenance		6,659		5,644		18,889		16,300
Services		52,465		48,797		154,512		140,875

Total cost of revenue ⁽¹⁾		60,437		55,441		177,047		160,281

Gross profit		122,365		106,962		373,609		318,059

Operating expenses:
Selling and marketing		67,032		53,640		202,126		169,764
Research and development		38,036		33,032		108,530		94,248
General and administrative		11,725		9,579		34,067		26,138
Acquisition-related		74		-		2,616		39
Restructuring		-		-		287		-

Total operating expenses ⁽¹⁾		116,867		96,251		347,626		290,189

Income from operations		5,498		10,711		25,983		27,870
Foreign currency transaction gain (loss)		1,082		(412)		2,764		(4,342)
Interest income, net		172		278		650		807
Other expense, net		(1,237)		(331)		(4,891)		(328)

Income before provision for income taxes		5,515		10,246		24,506		24,007
Provision for income taxes		3,097		3,921		9,436		8,643

Net income	$	2,418	$	6,325	$	15,070	$	15,364

Earnings per share:
Basic	$	0.03	$	0.08	$	0.20	$	0.20

Diluted	$	0.03	$	0.08	$	0.19	$	0.19


Weighted-average number of common shares outstanding:
Basic		76,278		76,534		76,323		76,521
Diluted		79,082		79,174		78,976		78,906

Dividends declared per share		$0.03		$0.03		$0.09		$0.09


(1) Includes stock-based compensation as follows:
Cost of revenue	$	3,117	$	2,285	$	8,711	$	6,519
Operating expenses	$	7,701	$	5,806	$	21,923	$	16,486


	Three Months Ended September 30,														% Increase (Decrease)
	2016					2016		2015					2015
	GAAP		Adj.			Non-GAAP		GAAP		Adj.			Non-GAAP		GAAP			Non-GAAP

TOTAL REVENUE	$	182,802	$	658		$	183,460	$	162,403	$	-		$	162,403		13%			13%
Software license		68,833		15			68,848		58,948		-			58,948		17%			17%
Maintenance		55,038		614			55,652		52,285		-			52,285		5%			6%
Services		58,931		29			58,960		51,170		-			51,170		15%			15%

TOTAL COST OF REVENUE	$	60,437	$	(4,759	)	$	55,678	$	55,441	$	(3,636	)	$	51,805		9%			7%
Amortization of intangible assets ⁽²⁾		1,642		(1,642	)		-		1,351		(1,351	)		-
Stock-based compensation		3,117		(3,117	)		-		2,285		(2,285	)		-

GROSS MARGIN %		67%					70%		66%					68%		108	bp		155	bp

TOTAL OPERATING EXPENSES ⁽³⁾		116,867		(9,742	)		107,125		96,251		(7,434	)		88,817		21%			21%
Amortization of intangible assets ⁽²⁾		1,957		(1,957	)		-		1,628		(1,628	)		-
Stock-based compensation		7,701		(7,701	)		-		5,806		(5,806	)		-
Acquisition-related		84		(84	)		-		-		-			-

INCOME FROM OPERATIONS	$	5,498	$	15,159		$	20,657	$	10,711	$	11,070			21,781		(49%)			(5%)

OPERATING MARGIN %		3%					11%		7%					13%		(359)	bp		(215)	bp

INCOME TAX EFFECTS ⁽⁴⁾	$	3,097	$	4,521		$	7,618	$	3,921	$	4,148		$	8,069		(21%)			(6%)

NET INCOME	$	2,418	$	10,638		$	13,056	$	6,325	$	6,922		$	13,247		(62%)			(1%)

DILUTED EARNINGS PER SHARE	$	0.03	$	0.14		$	0.17	$	0.08	$	0.09		$	0.17		(63%)			0%

DILUTED WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING		79,082		-			79,082		79,174		-			79,174		0%			0%


(in thousands)
Remainder of 2016	$	3,267
2017		12,335
2018		11,335
2019		5,543
2020		2,647
2021 and thereafter		12,335

Total intangible assets subject to amortization	$	47,462


	As of		As of
	September 30, 2016		December 31, 2015
Assets:
Cash, cash equivalents, and marketable securities	$	129,730	$	219,078
Trade accounts receivable, net		208,562		211,846
Property and equipment, net		39,343		31,319
Long-term deferred income taxes		53,905		53,350
Goodwill and Intangible assets, net		121,333		80,194
Other assets		44,122		31,971

Total assets	$	596,995	$	627,758


Liabilities and Stockholders’ Equity:
Accrued expenses, including compensation and related expenses		88,440		98,640
Deferred revenue		150,686		171,678
Other liabilities		30,449		34,581
Stockholders’ equity		327,420		322,859

Total liabilities and stockholders’ equity	$	596,995	$	627,758


	Nine Months Ended
	September 30,
	2016		2015
Operating activities:
Net income	$	15,070	$	15,364
Adjustments to reconcile net income to cash provided by operating activities:
Excess tax benefits from equity awards and deferred income taxes		(6,001)		(7,550)
Depreciation, amortization, foreign currency transaction (gain) loss, and other non-cash items		15,285		23,041
Stock-based compensation expense		30,634		23,005
Change in operating assets and liabilities, net		(37,592)		1,068

Cash provided by operating activities		17,396		54,928

Cash used in investing activities		(2,859)		(42,736)

Cash used in financing activities		(39,871)		(25,662)

Effect of exchange rates on cash and cash equivalents		(1,309)		(3,837)

Net decrease in cash and cash equivalents		(26,643)		(17,307)
Cash and cash equivalents, beginning of period		93,026		114,585

Cash and cash equivalents, end of period	$	66,383	$	97,278



	2016		2016		2016		2015		2015		2015		2015		2014
	Q3		Q2		Q1		Q4		Q3		Q2		Q1		Q4

Total deferred license and cloud revenue		47,280		51,855		57,790		63,412		55,370		61,339		79,639		63,048

Total license and cloud commitments not on the balance sheet		372,532		340,777		331,870		356,388		324,340		330,043		294,412		301,409

TOTAL LICENSE AND CLOUD BACKLOG	$	419,812	$	392,632	$	389,660	$	419,800	$	379,710	$	391,382	$	374,051	$	364,457