Pegasystems Inc. Posts Higher Sales and Expenses

Software company Pegasystems (PEGA 1.96%) posted first-quarter earnings results last night that got 2015 off to a quick start. Sales growth beat expectations as demand rose for the company's suite of strategic business applications; however, profits were weaker than expected thanks to fast-rising expenses.

Here's a look at how the headline numbers stacked up against the pros' models:

"Expected" is the average target of the 3 analysts that cover Pegasystems' stock.

Lumpy sales results
Sales jumped higher by 8%, compared to the 5% growth that Wall Street was expecting. In addition, Pegasystems' order backlog posted solid gains on both the licensing and cloud-based sides of the business. Overall backlog, which represents contracted but not yet billed sales, increased 12% to $374 million. "We're very pleased with this strong start to 2015," CEO Alan Trefler said in a press release.

Pegasystems is still working on expanding its customer base beyond just the huge, Fortune 500 companies that make up most of its client list. However, the quarter's growth was powered by a single new licensing contract that management described as "in excess of $10 million." Investors should keep in mind that big sales like these can add volatility to year-over-year sales growth figures. 

Profits and profitability
Meanwhile, profitability held steady overall, with gross profit remaining at 67% of sales. Breaking that down a step further, Pegasystems' licensing margin ticked up by a percentage point to 98%, while its servicing margin slipped to 7% from 8% a year ago. Management blamed a higher headcount, along with weaker results out of the European market, for that drop. 

Earnings per share slipped from $0.20 last year to $0.13 for the first quarter. There were two main drivers of that slump. First, operating expenses jumped higher by 15% as Pegasystems spent more on sales and marketing and research and development. Second, the company took a $3 million foreign currency exchange deduction tied to its significant international business. Altogether, net income plunged 40% from last year's result.

This year's outlook
Still, given this quarter's solid growth, it seems likely that Pegasystems will post double-digit sales gains in 2015. Wall Street is targeting a 10% revenue boost to roughly $655 million, though rising expenses and foreign currency translations should keep a lid on profit growth and analysts see the company posting only a 6% EPS gain this year.