Pegasystems sinks to Q1 net loss

Source: Pegasystems

Pegasystems Inc. (Nasdaq: PEGA) today announced its first quarter 2006 results.

Total revenue for the quarter was $27.1 million, reflecting growth of 12% from the first quarter of 2005. Compared to the first quarter of 2005, professional services revenue was up $5.5 million, primarily due to new license implementations, while maintenance revenue grew $1.4 million. License revenue decreased $4.0 million from the first quarter of 2005, but deferred revenue increased by $8.3 million to $24.1 million over this period, due to an increase in deferred license revenue.

The first quarter net loss of ($1.3) million was due to continued investments to support growth in service and sales and stock option expense related to the adoption of FAS123R. Total expenses in the first quarter of 2006 increased by $2.9 million from the fourth quarter of 2005, driven primarily by the normal fourth quarter to first quarter increase in employee benefit costs. Cash flow from operations in the first quarter was $3.1 million.

Alan Trefler, Chairman and CEO commented, "The first quarter of 2006 showed improvement in license signings and total revenue over the comparable quarter last year. We are increasing our sales to new customers and extending relationships with existing customers. During the quarter Pegasystems' SmartBPM was selected for use by 17 customers including an international bank, a leading investment and insurance company, two Blue Cross Blue Shield organizations, a global investment banking firm and one of the largest insurance and financial services companies in the world.

"Customers are using Pegasystems' new class of BPM software to manage, automate and optimize a wide range of business processes including procurement and disbursement requests, enterprise-wide healthcare claims, disease management and call center support, financial product development, pricing and management and worldwide insurance underwriting.

"Organizations increasingly understand the imperative that BPM not only provides a solution to today's business processes challenges, but also next month's and next year's challenges. Pegasystems SmartBPM provides business and IT with a unified environment, allowing organizations the competitive advantage to build for change."

Chris Sullivan, CFO, commented, "Customer license signings in the first quarter of 2006 increased significantly from the first quarter of 2005. Though first quarter license revenue is down year over year, we are succeeding in licensing additional software to existing customers. Sometimes multiple licenses to a single customer are deemed a single bundled arrangement, delaying the recognition of revenue until all elements are complete. This is reflected in the $8.3 million year-over-year increase in deferred revenue.

"Services revenue continues to benefit from more implementations and maintenance contracts. As a result of the larger customer base, maintenance revenue increased 30% over the first quarter of 2005. Services margins remain under pressure as we continue to invest in resources. We are fine-tuning our implementation methodology to better align with our sales success including more tightly defined project scope and enhanced project governance."

As disclosed previously, Pegasystems expects to structure most 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 historically used. This will reduce the up-front revenue associated with term licenses in favor of a stream of future recurring revenue. Term licenses scheduled to renew in 2006 have a present value of approximately $10 million, the majority of which, assuming those licenses are renewed, is expected to be recorded ratably over the term of the agreements. Approximately $1 million in term license signings and renewals which occurred during the first quarter of 2006 will be recognized as revenue over the term of the agreements.

The Company is updating its guidance for 2006. It is increasing its full year revenue estimate to between $107 and $117 million. This increase is driven primarily by an anticipated increase in customer reimbursed expenses related to professional service engagements. The incremental revenue related to these expenses generates no incremental margin and therefore the company's expectation for profit (loss) before tax remains 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.

Pegasystems also announced that Chris Sullivan is resigning from his position of Chief Financial Officer, effective June 1, 2006, to join one of the largest privately held investment companies as a senior finance executive. While a search is conducted for his replacement, Shawn Hoyt, the Company's Vice President and General Counsel, will assume the role of interim CFO. James Reilly, the Company's Vice President, Finance, is being promoted to the role of Chief Accounting Officer.

"Chris has contributed greatly to Pegasystems over the past five years and leaves having established a strong finance department and solid financial position. We wish him all the best," said Alan Trefler.Download the document now 39.4 kb (Adobe Acrobat Document)

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