Pegasystems Inc. (Form: 8-K)

Chris Sullivan
Chief Financial Officer
Pegasystems Inc.
(617) 866-6020
chris.sullivan@pega.com

Beth Lewis
Director, Public and Investor Relations
Pegasystems Inc.
(617) 866-6077
beth.lewis@pega.com

CAMBRIDGE, Mass., March 7, 2006 – Pegasystems Inc. (Nasdaq: PEGA) today announced its fourth quarter and full year 2005 results, reporting record revenue for 2005 of $102.0 million, pre-tax income of $4.6 million, diluted earnings per share of $0.13 and positive cash flow from operations of $25.3 million. Fourth quarter net income includes a $2.1 million benefit for income taxes.


Fourth Quarter and Full Year 2005 Financial Performance
	Quarter						Full Year
	Q4			Q4
(In millions, except per share data and percentages)	2005			2004			2005			2004
Total Revenue	$	27.1		$	26.2		$	102.0		$	96.5
License Revenue	$	10.3		$	13.3		$	40.8		$	41.6
% of Total Revenue		38	%		51	%		40	%		43	%
Services Revenue	$	16.8		$	12.9		$	61.2		$	54.9
% of Total Revenue		62	%		49	%		60	%		57	%
Pre-tax Income	$	0.8		$	4.0		$	4.6		$	11.1
(Benefit) Provision for Income Taxes	$	(2.1	)	$	1.1		$	(0.1	)	$	3.6
Net Income	$	2.9		$	2.9		$	4.7		$	7.6
Diluted Earnings Per Share	$	0.08		$	0.08		$	0.13		$	0.20

Alan Trefler, Chairman and Chief Executive Officer, commented, “Pegasystems’ 2005 results clearly demonstrate growing customer enthusiasm for our SmartBPM™ solutions. The world’s most sophisticated organizations are increasingly selecting Pegasystems software to power their competitive advantage and implement best processes across their enterprises.

“We continue to utilize our “quick value” sales strategy, which delivers customer benefit through accelerated implementation cycles and a smaller initial license. Once organizations achieve growth and productivity with successful initial implementations, we are seeing customers extend their Pegasystems relationships and diversify their use of our Build for Change™ technology.

“Our 51 new license signings in 2005 was a record; we signed 21 new customers and extended relationships with an additional 30. Our industry-leading customers are using Pegasystems software for everything from bringing insurance products to market more quickly, to Medicare Part D enrollment support to enterprise-wide BPM automation.

“More than 1,100 partners, customers and Pegasystems personnel were trained on our BPM technology in 2005, nearly double the number in 2004. We also continue to garner awards for our new class of BPM software, including recent industry analyst recognition for our strong market presence.”

Chris Sullivan, CFO, commented, “Fourth quarter 2005 revenue of $27.1 million represents another strong quarter for Pegasystems, resulting in record annual revenue and showing the strength of our business.

“In 2005 we reported a $6.3 million increase in service revenue, driven primarily by a 28% increase in maintenance revenue. Professional service margins remain pressured as we continue our service investments in advance of anticipated demand. These investments include expanding our internal pool of trained services personnel and investing in training for our partners and customers.

“As we enter 2006, we expect to structure most of our new term licenses and term license renewals in a manner that will result in revenue being recognized ratably over the term of the license, rather than based on the present value of future payments method we have historically used for the majority of our term licenses. This will reduce the up-front revenue associated with term licenses in favor of a stream of future recurring revenue. The estimated revenue associated with term licenses scheduled to renew in 2006 is approximately $10 million, the majority of which, assuming those licenses are renewed, is expected to be recorded ratably over the term of the agreements. Bearing this in mind, for 2006 we anticipate full year revenue between $105 and $115 million and profit (loss) before tax between $(3) million and $3 million. The expected results for 2006 reflect an anticipated cost of approximately $1 million associated with the expensing of stock options under the revised FAS123R rules. Cash flow from operations in 2006 is expected to be in the range of $12 to $20 million.”

In the 2005 10-K, Pegasystems disclosed material weaknesses in internal control over financial reporting relating to revenue recognition and income taxes as of December 31, 2005. The 2005 Form 10-K and previously reported financial results reflect the appropriate accounting. Additional information is contained in the 2005 Form 10-K.

The Company will be hosting a conference call and live Webcast associated with this announcement at 9:00 a.m. ET on Wednesday, March 8, 2006. 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 5544987.

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.

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 2006 revenue, profit before tax, stock option expense and cash flow from operations. The words “believe,” “expect,” “estimate,” “anticipate” 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 volatility of our quarterly operating results, difficulty in predicting the completion of product acceptance and consequently the timing of our license revenue recognition, the level of term software license renewals, our ability to develop new products and evolve existing ones, the impact on our business of the ongoing consolidation in the financial services and healthcare markets, 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 March 7, 2006. 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 March 7, 2006.

About Pegasystems
Pegasystems Inc. (NASDAQ: PEGA) provides software to automate complex, changing business processes. Pegasystems, the leader in unified process and rules technology, gives business people and IT departments the ability to use best processes across the enterprise and outperform their competition.

Our new class of Business Process Management (BPM) technology makes enterprise systems easy to use and easy to change. By automating policy manuals, system specifications and lines of manual coding with dynamically responsive updates, Pegasystems powers the world’s most sophisticated organizations to “build for change™.”

Pegasystems’ award-winning, standards-based BPM suite is complemented with best-practice solution frameworks to help leaders in the financial services, insurance, healthcare, manufacturing and government markets drive growth and productivity.

Headquartered in Cambridge, MA, Pegasystems has regional offices in North America, Europe and the Pacific Rim. For more information, visit www.pega.com.

PEGASYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share-related data)


	December 31,
	2005			2004
ASSETS


Current assets:
Cash and cash equivalents	$	21,314		$	20,905
Short-term investments		93,421			76,455

Total cash and short-term investments		114,735			97,360
Trade accounts receivable, net of allowance for doubtful accounts of $365 in 2005 and 2004.		25,486			15,528
Short-term license installments		26,537			31,358
Prepaid expenses and other current assets		1,953			1,236

Total current assets		168,711			145,482
Long-term license installments, net of unearned interest income		31,371			44,344
Equipment and improvements, net of accumulated depreciation and amortization		2,792			1,586
Acquired technology, net of accumulated amortization		29			379
Other assets		114			118
Goodwill		2,346			2,346

Total assets	$	205,363		$	194,255

LIABILITIES AND STOCKHOLDERS’ EQUITY


Current liabilities:
Accrued payroll related expenses	$	8,197		$	7,888
Accounts payable and accrued expense		10,769			9,502
Deferred revenue		18,749			9,114
Current portion of capital lease obligation		103			98

Total current liabilities		37,818			26,602
Long-term deferred income taxes		510			1,480
Capital lease obligation, net of current portion		63			165
Other long-term liabilities		1,171			808

Total liabilities		39,562			29,055

Commitments and contingencies (Note 5)

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; 35,565,918 shares and 36,076,649 shares issued and outstanding at December 31, 2005 and 2004, respectively		356			361
Additional paid-in capital		118,968			122,152
Stock warrants		107			249
Retained earnings		46,007			41,289
Accumulated other comprehensive income (loss):
Net unrealized loss on investments available-for-sale		(623	)		(267	)
Foreign currency translation adjustment		986			1,416

Total stockholders’ equity		165,801			165,200

Total liabilities and stockholders’ equity	$	205,363		$	194,255


	Years ended December 31,
	2005			2004		2003

Revenue:
Software license	$	40,791		$	41,563	$	57,695
Services		61,216			54,898		41,618

Total revenue		102,007			96,461		99,313


Cost of revenue:
Cost of software license		350			350		350
Cost of services		35,289			26,146		27,069

Total cost of revenue		35,639			26,496		27,419

Gross profit		66,368			69,965		71,894


Operating expenses:
Research and development		19,514			19,879		21,592
Selling and marketing		34,173			32,089		24,840
General and administrative		12,170			12,253		10,788

Total operating expenses		65,857			64,221		57,220

Income from operations		511			5,744		14,674
Installment receivable interest income		2,471			3,026		5,163
Other interest income, net		3,010			1,842		759
Other income (expense), net		(1,380	)		517		1,235

Income before provision (benefit) for income taxes		4,612			11,129		21,831
Provision (benefit) for income taxes		(106	)		3,575		4,150

Net income	$	4,718		$	7,554	$	17,681

Earnings per share, basic	$	0.13		$	0.21	$	0.51
Earnings per share, diluted	$	0.13		$	0.20	$	0.49
Weighted average number of common shares outstanding, basic		35,774			35,691		34,518
Weighted average number of common shares outstanding, diluted		36,462			37,043		35,757


	Years ended December 31,
	2005			2004			2003

Cash flows from operating activities:
Net income	$	4,718		$	7,554		$	17,681

Adjustment to reconcile net income to cash flows from operating activities:
Stock option income tax benefits		696			1,058			1,859
Deferred income taxes		(660	)		1,365			625
Issuance of common stock warrants		—			38			—
Depreciation and amortization		1,725			1,417			1,496
Reduction in provision for doubtful accounts		—			—			(146	)
Losses on disposal of equipment		17			—			—

Change in operating assets and liabilities:
Trade accounts receivable and license installments		7,815			651			(4,871	)
Prepaid expenses and other current assets		(740	)		(501	)		142
Accounts payable and accrued expenses		1,726			259			3,312
Deferred revenue		9,635			(5,066	)		905
Other long-term assets and liabilities		363			776			(34	)

Cash flows from operating activities		25,295			7,551			20,969


Cash flows from investing activities:
Purchase of investments		(44,427	)		(163,777	)		(46,226	)
Maturing and called investments		12,000			16,850			32,324
Sale of investments		14,475			89,753			—
Purchase of equipment and improvements		(2,236	)		(1,109	)		(382	)

Cash flows from investing activities		(20,188	)		(58,283	)		(14,284	)


Cash flows from financing activities:
Payments under capital lease obligation		(98	)		(39	)		—
Exercise of stock options		1,480			2,890			2,422
Proceeds from sale of stock under Employee Stock Purchase Plan		369			659			532
Repurchase of commons stock		(5,877	)		—			—

Cash flows from financing activities		(4,126	)		3,510			2,954

Effect of exchange rate on cash and cash equivalents		(572	)		138			957

Net increase (decrease) in cash and cash equivalents		409			(47,084	)		10,596
Cash and cash equivalents, beginning of year		20,905			67,989			57,393

Cash and cash equivalents, end of year	$	21,314		$	20,905		$	67,989


Supplemental disclosures of cash flow information:

Cash paid during the year for:
Interest	$	81		$	14		$	102
Income taxes	$	507		$	1,220		$	1,027

Non-cash financing activity:
Equipment acquired under capital lease	$	—		$	302		$	—
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.

March 7, 2006	By:	Shawn S. Hoyt

		Name: Shawn S. Hoyt
		Title: General Counsel and Secretary


Exhibit No.		Description

99.1		Press Release, dated March 7, 2006, issued by Pegasystems Inc.


Date of Report (Date of Earliest Event Reported):		March 7, 2006


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