Pegasystems (PEGA) Stock Gains On Q1 Earnings & Revenue Beat

Pegasystems Inc. (NASDAQ:PEGA) reported earnings (including stock-based compensation) of 34 cents per share in first-quarter 2017, comfortably surpassing the Zacks Consensus Estimate by 19 cents.

Earnings (excluding stock-based compensation) soared 77.3% to 39 cents in the reported quarter. The results benefited from the signing of a perpetual license contract worth $7 million as well as from higher services revenues and improving margins.

Revenues surged 24.8% from the year-ago quarter to $223.2 million much better than the Zacks Consensus Estimate of $204 million. Recurring revenue, which includes maintenance, cloud and term license, was 55.3% of total revenue as compared with 64.7% in the year-ago quarter.

Following the results, shares increased 10.41% to close at $52.50 on May 11. We note that Pegasystems has outperformed the Zacks Computer Software industry on a year-to-date basis. While the stock gained almost 46%, the industry witnessed an advance of roughly 16.3%.

Top-line Details

Software License revenues increased 35.2% from the year-ago quarter to $92.4 million. Maintenance revenues increased 11.3% to almost $59 million, while services advanced almost 25% to $71.9 million. Consulting Services revenue increased almost 26% from the year-ago quarter to $59 million.

Geographically, the Americas (including the U.S., Canada and Latin America), produced 65% of total revenue. Non-Americas (international) generated the remaining 35%. Approximately 14% of the company’s total revenue came from the U.K.

Total license (term and perpetual) and cloud backlog increased 32% from the year-ago quarter to $513.1 million. This is significantly positive as we note that the company didn’t have any Whales – customers with license and cloud commitment of greater than $10 million – in the quarter.

Most recently, market research firm Gartner named Pegasystems a leader in Gartner’s Magic Quadrant for CRM Customer Engagement Center for the eighth consecutive year.

We note that adoption for Pegasystems solutions continues to improve in the domestic as well as international markets. As noted by the company, Australia-based cable company Foxtel selected Pega Sales and Pega Marketing products over salesforce.com (NYSE:CRM) , which has significant presence in the country.

The company’s solutions were chosen by the likes of Bank Mandir – Indonesia's largest bank and a large P&C insurance company in Japan during the quarter.

Existing clients like Vodafone (NASDAQ:VOD) , HSBC, Scotiabank, Transavia, and Lloyds Banking Group (LON:LLOY) continued to expand relationships with Pegasystems in the quarter.

Operating Details

Gross margin expanded 90 basis points (bps) to 70.1% in the reported quarter.

Reported operating expenses as percentage of revenues soared 430 bps to 55.5%, primarily due to lower selling & marketing (S&M), research & development (R&D) and general & administrative (G&A) expenses, which decreased 220 bps, 150 bps and 70 bps, respectively.

Operating margin expanded 460 bps from the year-ago quarter to 15.4%. Unfavorable foreign currency headwinds and mix shift towards recurring revenues impacted margins by 4% (almost $35 million).

Balance Sheet & Cash Flow

Cash, cash equivalents, and marketable securities were $147.8 million as of Mar 31, 2017 as compared with $133.8 million as of Dec 31, 2016. Cash flow from operating activities was $32.4 million as compared with $19 million in the previous quarter.

Guidance

For full-year 2017, revenues are still projected to be approximately $860 million, up 15% over full-year 2016. Non-GAAP earnings are anticipated to be approximately $1.00 per share.

Zacks Rank & Key Picks

Currently, Pegasystems carries a Zacks Rank #3 (Hold). DST Systems (NYSE:DST) sporting a Zacks Rank #1 (Strong Buy) is a better-ranked stock in the sector. You can see the complete list of today’s Zacks #1 Rank stocks here.

DST’s long-term earnings growth rate is currently pegged at 10%.

Sell These Stocks. Now.

Just released, today's 220 Zacks Rank #5 Strong Sells demand urgent attention. If any are lurking in your portfolio or Watch List, they should be removed immediately. These are sinister companies because many appear to be sound investments. However, from 1988 through 2016, stocks from our Strong Sell list have actually performed 6X worse than the S&P 500. See today's Zacks "Strong Sells" absolutely free >>.