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Pegasystems' Growth Pace Dips in the Second Quarter

Business management software specialist Pegasystems (NASDAQ: PEGA) announced fiscal second-quarter results this week that were marked by slowing sales gains that nevertheless kept the company on track to meet its full-year target.

Here's how the headline results stacked up against the prior-year quarter:

 Metric

Q2 2017

Q2 2016

Year-Over-Year Change

Revenue

$198 million

$189 million

5%

Net income

$11.4 million

$4.5 million

151%

Earnings per share

$0.14

$0.06

154%

Data source: Pegasystems' financial filings.

What happened this quarter?

The sales growth pace fell hard from the prior quarter's 25% surge. Pegasystems' short-term business can be lumpy due to the timing of a few large contracts, and that sensitivity hurt results this quarter while lifting them in the first quarter.

Image source: Pegasystems.

Here are a few key operating and financial highlights:

  • Perpetual license sales plunged 42% as clients continued to move toward subscription purchases, which jumped 63%.
  • Cloud revenue improved by 13% and maintenance grew 8%.
  • Rising costs, including increased staffing, sent operating margin lower for the quarter. But profitability has still risen for the year so far, up to 8% from 6%.
  • Operating cash flow for the past six months improved to $86 million, up from $12 million.
  • Gross profit margin for the first half of the year held steady at 68% of sales.
  • Backlog, representing contracted but not yet billed sales, jumped 32% to over $500 million.

What management had to say

Chief Financial Officer Ken Stillwell highlighted the company's strong gains in subscription sales that pressure short-term results while providing bigger benefits to the business over time. "We continued to see a higher than historical mix of recurring [revenue]," Stillwell said in a press release, "which increases our longer-term visibility and predictability, and contributed to a 32% increase in license and cloud backlog compared to a year ago."

In a subsequent conference call with analysts, executives pointed investors toward six-month operating results that they say better describe the business trends. "We're pleased where we are for the first half," CEO Alan Trefler said. "Now in midyear," he noted, "we're about 49% of our full year revenue guidance, which is higher than in the past" thanks in part to a rising proportion of recurring revenue.

Looking forward

That surprising tilt toward subscription sales could make it slightly more difficult for the company to meet its 2017 targets. Management didn't change their initial forecast, though, and still see sales rising by 15% to $860 million. That's the exact pace Pegasystems has managed over the past six months, and so it's not much of a stretch. It also represents a solid acceleration over the prior year's 10% increase.

Image source: Getty Images.

The company has a few major initiatives in the works aimed at differentiating its products in a crowded and competitive market. These include robotics and artificial intelligence capabilities, along with an enhanced mobile platform. At the same time, Pegasystems is committed to building up its development and sales infrastructure while expanding profitability. For the full year, management expects operating margin to improve by between 1.5 and 1.75 percentage points.

Finally, investors shouldn't be surprised to see Pegasystems announce another acquisition soon. Executives are happy with the results from their last big purchase, robotics specialist OpenSpan, and are hunting for similarly attractive deals right now. "Supplementing our organic growth with inorganic growth may be prudent," Stillwell told analysts in the quarterly conference call, "given the massive opportunity in front of us."

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Pegasystems. The Motley Fool has a disclosure policy.