Enterprise workflow software provider Pegasystems (NASDAQ:PEGA) reported Q4 FY2023 results exceeding Wall Street analysts' expectations, with revenue up 19.6% year on year to $474.2 million. It made a non-GAAP profit of $1.77 per share, improving from its profit of $0.82 per share in the same quarter last year.
Pegasystems (PEGA) Q4 FY2023 Highlights:
- Revenue: $474.2 million vs analyst estimates of $415.1 million (14.2% beat)
- EPS (non-GAAP): $1.77 vs analyst estimates of $1.00 (77.6% beat)
- Gross Margin (GAAP): 80.9%, up from 76.7% in the same quarter last year
- Market Capitalization: $4.04 billion
Founded by Alan Trefler in 1983, Pegasystems (NASDAQ:PEGA) offers a software-as-a-service platform to automate and optimize workflows in customer service and engagement.
Founded to offer business process management (BPM), the company originally analyzed workflows and implemented changes to increase quality and reduce inefficiencies. Over time and with technological advances, Pegasystems began offering broader software products to enable automation of the business processes the company once improved. Low-code application building was then added to the platform to empower a customer’s non-technical workers.
A customer problem that Pegasystems solves is how to manage customer interactions across multiple channels. With Pegasystems' software, businesses can create a unified view of customer interactions across email, phone, and social media. This enables businesses to provide more personalized and effective service, which can lead to happier customers. Pegasystems’ flagship product, Pega Platform, is a low-code platform that allows businesses to build custom applications. Whether it is a customer-facing healthcare portal to manage doctors appointments or a back office application for reconciling customer bank balances, this platform allows those who cannot write code to build functional applications.
Pegasystems generates revenue through the sale of software licenses and professional services to ensure customer success. The company’s customers include financial institutions, healthcare providers, and government agencies whose business processes tend to be complex and sometimes regulated.
Automation Software
The whole purpose of software is to automate tasks to increase productivity. Today, innovative new software techniques, often involving AI and machine learning, are finally allowing automation that has graduated from simple one- or two-step workflows to more complex processes integral to enterprises. The result is surging demand for modern automation software.
Competitors in productivity and automation software include ServiceNow (NYSE:NOW), salesforce.com (NYSE:CRM), and private company BMC.Sales Growth
As you can see below, Pegasystems's revenue growth has been unremarkable over the last two years, growing from $316.2 million in Q4 FY2021 to $474.2 million this quarter.
This quarter, Pegasystems's quarterly revenue was up 19.6% year on year, above the company's historical trend. We can see that Pegasystems's revenue increased by $139.6 million quarter on quarter, which is a solid improvement from the $36.38 million increase in Q3 2023. Shareholders should applaud the re-acceleration of growth.
Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Pegasystems's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 80.9% in Q4.
That means that for every $1 in revenue the company had $0.81 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, Pegasystems's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.
Key Takeaways from Pegasystems's Q4 Results
We were impressed by Pegasystems's strong gross margin improvement this quarter. We were also excited its revenue outperformed Wall Street's estimates, driven by outperformance in its subscription license segment ($207.6 million of revenue vs estimates of $146.7 million). Its revenue, EPS, and free cash flow guidance for full-year 2024 also beat expectations (specifically, free cash flow is projected to be $350 million in 2024 vs estimates of $258 million), with the company forecasting 11% annual contract value growth. Zooming out, we think this was a fantastic beat-and-raise quarter that should have shareholders cheering. The stock is up 5.5% after reporting and currently trades at $53.5 per share.
Is Now The Time?
Pegasystems may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We cheer for everyone who's making the lives of others easier through technology, but in case of Pegasystems, we'll be cheering from the sidelines. Its , and analysts expect growth to deteriorate from here. And while its strong gross margins suggest it can operate profitably and sustainably, unfortunately, its customer acquisition is less efficient than many comparable companies.
Pegasystems's price-to-sales ratio based on the next 12 months is 3.0x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.
Wall Street analysts covering the company had a one-year price target of $54.09 per share right before these results (compared to the current share price of $53.50).
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