Pegasystems (NASDAQ:PEGA) announced fourth-quarter earnings this week that were highlighted by a return to robust sales growth. The business management software specialist posted a net loss as customers migrated toward its cloud and term-based services, but in exchange for the short-term earnings hit, that shift is creating a more profitable underlying business.

Here's how the headline results stacked up against the prior-year period:


Q4 2017

Q4 2016

Year-Over-Year Change


$240 million

$200 million


Net income

($3.7 million)

$8.7 million






Data source: Pegasystems' financial filings.

What happened this quarter?

Sales jumped back to growth after dipping slightly in the prior quarter. And profitability improved as the company's pipeline of contracts expanded at a healthy rate.

A tablet showing management metrics and charts.

Image source: Getty Images.

Here are the operating and financial highlights from the quarter:

  • Revenue jumped 20% to put Pegasystems at a 12% increase for the full year. That annual result was just below the 15% that management had originally targeted.
  • Gross profit margin improved to 69.1% of sales from 68.8% a year ago.
  • Modest expense growth led to a significant boost in bottom-line profitability as operating margin expanded to 8.3% from 5.9%. The reported net loss was driven by a spike in tax charges.
  • Backlog, representing contracted but not yet billed sales, rose 21% to $563 million. Nearly all of that backlog is made up of term licenses and cloud-based service contracts.

What management had to say

"Q4 was a record quarter, capping off a solid year for Pega," CEO Alan Trefler said in a press release. "We had solid revenue growth while also driving a strong increase in backlog."

The slight sales growth underperformance for the year was likely due to customers' snapping up term licenses and moving away from perpetual software purchases. "We are very pleased with our fourth quarter and full year results," CFO Ken Stillwell said, "especially considering the stronger than anticipated shift to recurring revenue during 2017."

Looking forward

One major benefit of that move toward recurring revenue is that it gives management added confidence in their sales, profit, and cash flow forecasts. For the year ahead, Trefler and his team believe they'll reach $950 million of revenue, which would translate into 13% growth, or a modest acceleration over this past year's 12% increase. Earnings are expected to stop at $0.53 per share compared to $0.40 per share in 2017.

Pegasystems' sales base is still small enough that success, or failure, to attract a few large contracts can significantly impact results in any given quarter. However, with the base of recurring revenue climbing as a proportion of the overall business, investors should expect to see revenue track more closely with management's projections, especially over longer periods.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Pegasystems. The Motley Fool has a disclosure policy.