What Happened?
Shares of enterprise workflow software provider Pegasystems (NASDAQ:PEGA) jumped 12.6% in the morning session after the company reported third-quarter earnings. While both ACV (annual contract value) and RPO (remaining performance obligations - leading revenue indicator) were ahead, revenue missed slightly. ACV and RPO tend to get more attention than reported revenue, given the nuances in Pegasystems contracts and how it sells its software. Adjusted EPS also beat. Overall, this was a mixed quarter, with some key KPIs coming in ahead of expectations.
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What The Market Is Telling Us
Pegasystems’s shares are not very volatile and have only had 6 moves greater than 5% over the last year. Moves this big are rare for Pegasystems and indicate this news significantly impacted the market’s perception of the business.
The biggest move we wrote about over the last year was 8 months ago when the stock gained 33.2% on the news that the company reported fourth-quarter results with revenue exceeding Wall Street's estimates, driven by outperformance in its subscription license segment ($207.6 million of revenue vs estimates of $146.7 million). Gross margin also improved significantly during the quarter.
Looking ahead, 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. Pegasystems reiterated its goal of exiting the year (Q4 2024) having achieved the Rule of 40 (revenue growth plus free cash flow margin greater than or equal to 40%).
Zooming out, this was a strong quarter that should have shareholders cheering. There has been skepticism in the last few years around how good the Pegasystems platform is technologically compared to competitors, and these results put a dent in the theory that the company's demand is weak and its business model is broken. One quarter won't tell you everything, but it's certainly a good start to a change in the narrative around the company.
Pegasystems is up 67.2% since the beginning of the year, and at $78.38 per share, has set a new 52-week high. Investors who bought $1,000 worth of Pegasystems’s shares 5 years ago would now be looking at an investment worth $1,052.
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