Pegasystems Inc. (Form: 8-K)

CAMBRIDGE, Mass., February 24, 2005 – Pegasystems Inc. (NASDAQ: PEGA), a leader in rules-based business process management (BPM) software, today announced its fourth quarter and full year 2004 results, reporting revenue for 2004 of $96.5 million, pre-tax profits of $11.1 million, diluted earnings per share of $0.20 and positive cash flow from operations of $7.6 million.


Fourth Quarter and Full Year 2004 Financial Performance
(In millions, except per share data and percentages)	Quarter						Full Year
	Q4 2004			Q4 2003			2004			2003
Total Revenue	$	26.2		$	23.1		$	96.5		$	99.3
License Revenue	$	13.3		$	12.0		$	41.6		$	57.7
% of Total Revenue		51	%		52	%		43	%		58	%
Services Revenue	$	12.9		$	11.1		$	54.9		$	41.6
% of Total Revenue		49	%		48	%		57	%		42	%
Pre-tax Income	$	4.0		$	3.0		$	11.1		$	21.8
(Benefit) Provision for Income Taxes	$	1.1		$	(0.5	)	$	3.6		$	4.2
Net Income	$	2.9		$	3.5		$	7.6		$	17.7
Basic Earnings Per Share	$	0.08		$	0.10		$	0.21		$	0.51
Diluted Earnings Per Share	$	0.08		$	0.10		$	0.20		$	0.49

Alan Trefler, Chairman and Chief Executive Officer, commented, “2004’s results represent both successes and challenges. Total revenue was down 3% compared to last year. However, on a year-over-year basis, total revenue increased 9% excluding the anticipated $10.6 million reduction in revenue associated with the restructured First Data Resources agreement. This increase was the result of growing market enthusiasm for our rules-driven PegaRULES technology and our all-purpose BPM software, PegaRULES Process Commander (PRPC). We also experienced diminished demand for our pre-built applications and continued lengthy negotiations and delays closing deals.

“In 2004 we signed a record number of new license customers, more than double the number signed in 2003. These customers, representing a wide range of industries, serve as testaments to our technological leadership, which provides our customers agility for growth, productivity and compliance. New customers will be using Pegasystems rules-based BPM software to manage a variety of complex, changing business processes including: to optimize hotel reservations and pricing; to automate semiconductor product manufacturing cycles; to manage insurance policies and claims; to automate consulting proposal creation; and to manage best practices for mortgage lending customer service. Many of our new customers are working with our partner network to implement our software and extend its use.

“We are also pleased to report the continued recognition of our best-in-class technology including awards and accolades from magazines such as Fortune Small Business, Intelligent Enterprise and Waters; and from leading industry analysts including Gartner and META Group, all of whom have referenced the competitive differentiation we offer in the BPM market with our rules-based technology.

“Still, the fact that our best-in-class technology and brand leadership did not translate into the top line growth we planned for in 2004, has led us to reassess the strategies and tactics we are employing to establish Pegasystems as the leader in BPM software. In particular, we will be focusing more of our efforts on our rules-based BPM software, PegaRULES Process Commander (PRPC). Industry leaders across multiple industries have selected PRPC as a critical solution to automate key business processes and close the execution gap that results as strategy changes outpace the ability of operations and systems to respond.”

Chris Sullivan, CFO, commented, “For 2004, we reported a $16.1 million decrease in license revenue compared to 2003. This includes a $13.8 million, or 46%, reduction in term license revenue and the $10.6 million reduction in perpetual license revenue associated with the restructured First Data Resources agreement, partially offset by a $7.8 million, or 53%, increase in other perpetual license revenue.

“We reported a $13.3 million, or 32%, increase in services revenue as we continued to support new customer sales and implementations even as we deepened our relationships with system integration partners. Implementation, consulting and training revenue was up 30% year-over-year and maintenance revenue grew 38% primarily on the strength of a larger installed base. At the same time, we improved our services margins for 2004.

“For 2005, we anticipate full year revenue between $97 and $105 million with revenues and earnings weighted to the latter part of 2005. We expect license revenue growth to be driven primarily through sales of perpetual licenses. Any license revenue growth from term license renewals is likely to be modest. We are committed to becoming the leader in BPM software and are therefore planning to invest more heavily in sales and marketing in 2005 than 2004. We believe this investment will better position Pegasystems to achieve accelerated growth in future years, but we also anticipate it will result in lower profit before tax in 2005 compared to 2004. We expect earnings per diluted share to be between $0.05 and $0.15. Cash flow from operations is expected to be in the range of $4 to $8 million, depending primarily on the revenue achieved. Our incremental sales and marketing investment will begin in the first quarter of 2005. As a result, we expect our first quarter net income may be break-even or below.

“These estimates for 2005 do not include the impact of recent accounting pronouncements requiring the expensing of stock options as of July 1, 2005. We expect this will have a significant impact on our financial statements. However, the factors used to determine the exact impact are subject to significant changes prior to the effective date.”

The Company will be hosting a conference call and live Webcast associated with this announcement at 9:00 a.m. ET on Friday, February 25, 2005. Dial-in information is as follows: 800-250-4434 (domestic) or 706-634-0667 (international). A replay of the teleconference will be available at 800-642-1687 (domestic) or 706-645-9291 (international), passcode 3880756.

To listen to the Webcast, please log onto www.pega.com at least 5 minutes prior to the event’s broadcast, and click on the Webcast icon in the Investor Relations section.

About Pegasystems
Pegasystems Inc. (NASDAQ: PEGA) delivers rules-driven smart BPM software for automating complex and changing business processes. Only smart BPM gives customers the flexibility and agility to build for change, closing the execution gap between management decisions and business operations. Pegasystems offers award-winning Business Process and Business Rules capabilities complemented with best-practice solution frameworks that empower Fortune 500 companies in the financial service, insurance, healthcare and government markets. Pegasystems is headquartered in Cambridge, Mass., and has regional offices in North America, Europe and the Pacific Rim. For more information, visit www.pega.com.

Forward-Looking Statements
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 including without limitation our financial guidance with respect to 2005 revenue, net income, earnings per share, and cash flow from operations. The words “believe,” “expect,” “hope,” “anticipate,” “plan” and similar expressions, among others, identify forward-looking statements, which speak only as of the date the statement was made. The Company does not undertake and specifically disclaims any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 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 volatility of our quarterly operating results, difficulty in predicting the completion of product implementations and consequently the timing of our license revenue recognition, the timing of term software license renewals, customer acceptance of our new PegaRULES Process Commander technology, our ability to develop new products and evolve existing ones, the impact on our business of the ongoing consolidation in the financial services market, historically our core market, our ability to attract and retain key employees, reliance on certain key third-party relationships, and other risks and uncertainties. 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 most recent report on form 10-Q or 10-K and other recent filings on file with the Securities and Exchange Commission. The forward-looking statements contained in this press release represent the Company’s views as of February 24, 2005. 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, 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 February 24, 2005.


	December 31,
	2004			2003
ASSETS

Current assets:
Cash and cash equivalents	$	20,905		$	67,989
Short-term investments		76,455			19,946

Total cash and short-term investments		97,360			87,935
Trade accounts receivable, net of allowance for doubtful accounts of $365 in 2004 and 2003 .		15,528			9,602
Short-term license installments		31,358			28,565
Prepaid expenses and other current assets		1,236			727

Total current assets		145,482			126,829
Long-term license installments, net of unearned interest income		44,344			53,666
Equipment and improvements, net of accumulated depreciation and amortization		1,586			992
Acquired technology, net of accumulated amortization		379			729
Other assets		118			166
Goodwill		2,346			2,346

Total assets	$	194,255		$	184,728

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accrued payroll related expenses	$	7,888		$	8,886
Accounts payable and accrued expenses		9,502			7,784
Deferred revenue		9,114			14,180
Current portion of capital lease obligation		98			—

Total current liabilities		26,602			30,850
Long-term deferred income taxes		1,480			625
Capital lease obligation, net of current portion		165			—
Other long-term liabilities		808			81

Total liabilities		29,055			31,556

Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $.01 par value, 70,000,000 shares authorized; 36,076,649 shares and 35,212,505 shares issued and outstanding in 2004 and 2003, respectively		361			352
Additional paid-in capital		122,152			117,391
Stock warrant		249			374
Retained earnings		41,289			33,735
Accumulated other comprehensive income (loss):
Net unrealized loss on investments available-for-sale		(267	)		(9	)
Foreign currency translation adjustments		1,416			1,329

Total stockholders’ equity		165,200			153,172

Total liabilities and stockholders’ equity	$	194,255		$	184,728


	Years ended December 31,
	2004		2003		2002

Revenue:
Software license	$	41,563	$	57,695	$	63,922
Services		54,898		41,618		33,486

Total revenue		96,461		99,313		97,408


Cost of revenue:
Cost of software license		350		350		2,661
Cost of services		26,146		27,069		29,207

Total cost of revenue		26,496		27,419		31,868

Gross profit		69,965		71,894		65,540


Operating expenses:
Research and development		19,879		21,592		21,284
Selling and marketing		32,089		24,840		23,308
General and administrative		12,253		10,788		9,472

Total operating expenses		64,221		57,220		54,064

Income from operations		5,744		14,674		11,476
Installment receivable interest income		3,026		5,163		5,774
Other interest income, net		1,842		759		760
Other income (expense), net		517		1,235		(813	)

Income before provision for income taxes		11,129		21,831		17,197
Provision for income taxes		3,575		4,150		1,900

Net income	$	7,554	$	17,681	$	15,297

Earnings per share, basic	$	0.21	$	0.51	$	0.45
Earnings per share, diluted	$	0.20	$	0.49	$	0.43
Weighted average number of common shares outstanding, basic		35,691		34,518		33,835
Weighted average number of common shares outstanding, diluted.		37,043		35,757		35,980


	Years ended December 31,
	2004			2003			2002

Cash flows from operating activities:
Net income....... ......	$	7,554		$	17,681		$	15,297

Adjustment to reconcile net income to cash flows from operating activities:
Stock option income tax benefits		1,058			1,859			1,559
Deferred income taxes		1,365			625			(1,000	)
Depreciation and amortization		1,417			1,496			4,992
Issuance of common stock warrants		38			—			—
Reduction in provision for doubtful accounts		—			(146	)		(353	)
Losses on disposal of fixed assets		—			—			83

Change in operating assets and liabilities:
Trade accounts receivable and license installments		651			(4,871	)		(2,248	)
Prepaid expenses and other current assets		(501)			142			1,525
Accounts payable and accrued expenses		259			3,312			204
Deferred revenue		(5,066	)		905			7,041
Other long-term assets and liabilities		776			(34)			157

Cash flows from operating activities		7,551			20,969			27,257


Cash flows from investing activities:
Purchase of investments		(163,777	)		(46,226	)		(6,053	)
Maturing and called investments		16,850			32,324			—
Sale of investments		89,753			—			—
Purchase of equipment, furniture and improvements		(1,109	)		(382	)		(1,006	)
Acquisition of 1mind		—			—			(573	)

Cash flows from investing activities		(58,283	)		(14,284	)		(7,632	)


Cash flows from financing activities:
Payments under capital lease obligations		(39	)		—			(81	)
Exercise of stock options		2,890			2,422			4,044
Proceeds from sale of stock under Employee Stock Purchase Plan		659			532			390

Cash flows from financing activities		3,510			2,954			4,353

Effect of exchange rate on cash and cash equivalents		138			957			398

Net (decrease) increase in cash and cash equivalents		(47,084	)		10,596			24,376
Cash and cash equivalents, beginning of year		67,989			57,393			33,017

Cash and cash equivalents, end of year	$	20,905		$	67,989		$	57,393


Supplemental disclosures of cash flow information:

Cash paid during the year for:
Interest Interest	$	14		$	102		$	2
Income taxes	$	1,220		$	1,027		$	724

Non-cash financing activity:
Equipment acquired under capital lease	$	302		$	—		$	—
Stock issued in business combination	$	—		$	—		$	3,669
Return of shares held in escrow related to business combination	$	—		$	901		$	—


Massachusetts	1-11859	04-2787865
_____________________ (State or other jurisdiction	_____________ (Commission	______________ (I.R.S. Employer
of incorporation)	File Number)	Identification No.)

101 Main Street, Cambridge, Massachusetts		02142
_________________________________ (Address of principal executive offices)		___________ (Zip Code)


	Pegasystems Inc.

February 24, 2005	By:	/s/ Christopher Sullivan

		Name: Christopher Sullivan
		Title: Chief Financial Officer


Exhibit No.		Description

99.1		Press Release, dated February 24, 2005, issued by Pegasystems Inc.


Date of Report (Date of Earliest Event Reported):		February 24, 2005


Registrant’s telephone number, including area code:		617-374-9600


*For information, contact:* Chris Sullivan Chief Financial Officer Pegasystems Inc. (617) 374-9600, ext. 6020 chris.sullivan@pega.com		Beth Lewis Director, Public and Investor Relations Pegasystems Inc. (617) 374-9600, ext. 6077 beth.lewis@pega.com