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Why Pegasystems Inc. Stock Dropped Today

What happened

Shares of Pegasystems Inc. (NASDAQ: PEGA) fell as much as 14.8% early Thursday, then partially recovered to trade down 9% as of 1 p.m. EST after the customer-engagement software specialist announced disappointing third-quarter 2017 results.

More specifically, Pegasystems' quarterly revenue declined 2% year over year to $179.8 million, which translated to a 68% decline in adjusted (non-GAAP) net income to $4.2 million, or $0.05 per diluted share. Both the top and bottom lines fell far short of investors' expectations for earnings of $0.18 per share on revenue of $201.4 million.

Image source: Pegasystems.

So what

To be fair, Pegasystems' annual contract value (ACV) climbed 17% year over year to $449 million, including a 23% increase in term license and cloud ACV to $200.2 million, and a 13% gain in maintenance ACV to $248.8 million. For that strength, the company credited an accelerating shift in mix toward recurring revenue sources.

Pegasystems CFO Ken Stillwell elaborated:

Our movement to recurring commitments further accelerated in the third quarter of 2017 with a significant increase in our cloud offering. [...] This faster than expected shift to recurring has led to a headwind of over $40 million in revenue and $0.33 in diluted EPS year to date. Nonetheless, we are pleased by this transition to recurring and that our clients are increasing their move to cloud and subscription licensing.

Now what

While it's hard to blame the market for reacting negatively to Pegasystems' quarterly shortfall relative to expectations, patient shareholders should be encouraged that the underlying reasons for the miss aren't indicative of a struggling business. Rather, as Pegasystems' sales continue to shift toward recurring sources, it should emerge stronger and with a more predictable revenue stream in the end. As such, I think now could be an attractive opportunity for long-term investors to open or add to their positions.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool recommends Pegasystems. The Motley Fool has a disclosure policy.