Pegasystems Inc.'s Growth Hits High Gear

Business management software company Pegasystems (PEGA -0.71%) this week posted its third-quarter earnings results. And the big-picture numbers showed an acceleration of the impressive growth trend that has pushed Pega's stock to new all-time highs recently.

Pegasystems' results: The raw numbers

Source: Yahoo! Finance.

What happened with Pegasystems this quarter?
Sales growth improved for the second straight quarter, as revenue spiked higher by 18%, compared to a 13% rise last quarter, and an 8% gain in the first quarter of the year. Earnings rose even faster, thanks to lower operating costs and fast-growing license and cloud revenue.

Here are a few key highlights from the third-quarter results:

• License revenue rose 21%, and cloud revenue spiked higher by 78%.
• Together, the more profitable license and cloud sales accounted for 42% of Pega's business, up from 40% a year ago.
• Operating expenses fell to 59% of sales from 63%.
• As a result, operating margin improved to 7% of sales from 4% a year ago.
• Cash balance rose 6%, to $224 million.
• Backlog, representing contracted sales that aren't yet billed, rose by 14% compared to 11% in the second quarter.

What management had to say
"We are very pleased with our strong performance this quarter and through the first nine months of 2015," said CEO Alan Trefler. So far this year, sales are up 14%, including a 70% gain in cloud revenue.

Image source: Pegasystems.

The best indicator of future growth likely is the healthy 14% backlog gain in what's normally a slow quarter for Pegasystems. That jump suggests the company is seeing broad-based demand growth. "Our results to date demonstrate continued strong execution toward our financial goals and evidence of transaction in the market across our product offerings," Chief Financial Officer Rafe Brown explained.

Management believes that its recent spending on sales and marketing initiatives is paying off. And given the stronger-than-expected results, it plans to double down on these investments in the fourth quarter and beyond. "Our strategy to reach a broader target base is bearing fruit, and we are seeing an increase in the number and size of deals from new logos, while continuing to expand our business with existing clients," Trefler said.

Looking forward
Pegasystems did not change its full-year guidance that calls for double-digit sales growth, to "modestly above" $653 million. The 14% improvement through the first three quarters, combined with a strong backlog heading into the final quarter, make that number seem easily achievable.

However, the holiday quarter is the company's largest in terms of revenue, profit, and bookings. And the timing of a handful of big deals could have a major impact -- positive or negative -- on quarterly results. That's why management cautioned in a conference call with investors about "the potential for variability in our financial results" for the current quarter. Still, it's clear that Pegasystems has the wind at its back right now. "We have a very busy Q4 ahead of us and we're looking to build on our strong year-to-date performance," Brown said in this week's conference call.