Pegasystems' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Pegasystems Inc. (PEGA)

Q2 2012 Earnings Call

August 09, 2012, 06:00 pm ET

Executives

Craig Dynes - SVP & CFO

Alan Trefler - Chairman & CEO

Analysts

Nathan Schneiderman - Roth Capital

Richard Davis - Canaccord

Laura Lederman -William Blair

Raghavan Sarathy - Dougherty & Company

Steve Koenig - Wedbush

Brian Murphy - Sidoti & Company

Edward Hemmelgarn - Shaker Investments

Mark Schappel - Benchmark

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Pegasystems Q2 2012 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) And as a reminder, this conference call is being recorded.

I would now like to introduce your host for today’s call, Craig Dynes, Chief Financial Officer. Please go ahead.

Craig Dynes

Good evening and welcome to the Pegasystems 2012 Q2 earnings conference call. With me here in Cambridge is Alan Trefler, Pegasystems’ Founder and CEO. Before I introduce Alan, I will start with our Safe Harbor statement and then provide my financial commentary.

Certain statements contained in this presentation may be construed as forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. The words anticipates, projects, expects, plans, intends, believes, estimates, targets, forecasting, could and other similar expressions identify forward-looking statements which speak only as of the date the statement is made. Because such statements deal with future events, they are subject to various risks and uncertainties. Actual results for fiscal year 2012 and beyond could differ materially from the company’s current expectations.

Factors that could cause the company’s results to differ materially from those expressed in forward-looking statements are contained in the company’s press release announcing its Q2 2012 earning and in the company’s filings with the Securities and Exchange Commission and including its reports on Form 10-K for the year ended December 31, 2011, its report on Form 10-Q for the quarter ended June 30, 2012, and other recent filings with the SEC.

The company undertakes no obligation to revise or update forward-looking statements as a result of new information, since these statements may no longer be accurate or timely.

Similar to our experience in Q3 of last year, Q2 bookings were suppressed by the increased uncertainties of economy. This is most evident in Europe where on a year-to-date basis bookings were down 61% from the same period last year. There seems to be a lot of trepidation to sign any contracts of significant size. In fact, we observed that some larger license arrangements splitted to a series of smaller projects, which are then scheduled throughout the year, with only a portion called in Q2.

The second, third and fourth stages of these now segment of larger projects have been moved out into each quarters. As a result, we are actual closed more license arrangements in Q2 than in Q1 and more towards the first half of this year than we did in the first half of last year, but the average deal size is greatly reduced.

In addition to larger deals being split into series of small ones, customer uncertainty and budget constraints have also shown up in some larger contingent license arrangement. In a couple of cases we find reasonably large license arrangements, but we have only recognized as a booking or as revenue, but first usually smaller portion of the license while the remaining piece will not be recorded until a future specified date when contingencies expired.

Arrangements with contingencies are not in our backlog as detailed on page 33 of our 10-Q since these analysis we only include non-cancelable arrangement. The net result like last year is a very backend loaded year for new license bookings.

Lastly, there was a significant swing towards term licenses in the quarter. A change in the mix has a medium impact on revenue and earnings, since revenues and term licenses is generally recognize over the five years, where perpetual licenses are usually recognized in the quarter that they report.

Our move to more term licenses combined with a more backend loaded years means that we will have fewer quarters than 2012 to recognize term license. As a result, it will be very difficult to receive $500 million in revenue, even if as we expect, we hit organic reporting score.

In spite of the influence of US healthcare, primarily US based (inaudible) both communications and life sciences were up on a year-to-date basis compared to last year. While bookings were down for the first six months in 2012 as compared to 2011, our backlog has been very strong.

Our off balance sheet backlog have signed non-cancelable licenses get down on $2.1 million from December 31st and backlog is up $77.2 million from $130.6 million at June 30, 2011 to $207.8 million at June 30, 2012; $73 million of the $77.2 million increase is in term licenses; the details as how we will take this backlog to the P&L in future periods is shown on page 33 of our 10-Q. In addition to the increase in term license backlog on page 33, the impact of this quarter is changing our next quarter’s more term licenses showed on the financial statement.

As I said, term license revenue generally recognized over five years, so increase in term license booking take a while to go to P&L. The move the term licenses in Q4 and again in Q2 resulted in term license revenue for the first six months being up $6 million as compared to 2011. However, the mix change shows up immediately with perpetual licenses as revenues down by $10.8 million on year-to-date basis from last year.

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