Pegasystems Inc Earnings Show Accelerating Sales Growth

Pegasystems (NASDAQ:PEGA) last week posted second-quarter earnings results that sent the stock to a fresh all-time high. Wall Street was pleasantly surprised by robust earnings and sales growth from the business management software giant:

*Expected is the average forecast of the three analysts who cover the stock. Source: Yahoo! Finance and Pegasystems' financial filing.

A 13% revenue jump was impressive, as it improved on the prior quarter's 8% gain. But there was plenty more to like in this earnings report than just straight revenue growth. For one, Pegasystems boosted its high-margin licensing and cloud sales at a faster rate than its professional services and training sales. Cloud revenue was the real standout, nearly doubling from the prior year to reach $7 million. Together, licensing and cloud sales now make up 74% of the business, up from 72% a year ago. That shift is making the company fundamentally more profitable.

CEO Alan Trefler at this year's PegaWORLD conference. Source: Pegasystems.

Second, Pegasystems' strong sales growth came at the same time as significant order backlog growth. Backlog represents contracted but not yet billed sales, and it rose by 11%. That improvement suggests this quarter's growth rebound wasn't just a function of the timing of one or two large contracts. Instead, it likely reflects a broader increase in demand for Pegasystems' products.

"We are delighted with our strong performance in the first half of 2015, which we believe reflects our unique ability to help clients manage customer engagement on a global scale and rapidly adapt to change," Founder and CEO Alan Trefler said in a press release.

Expenses grew at a slightly slower pace than revenue, which helped profitability improve by a full percentage point to 68% of sales. Pegasystems booked a drop in profits from its professional services sales, but that slip was outweighed by gains on the licensing and cloud side of the business. All told, the company earned $11 million in net income this quarter, up from $8 million in the prior-year period.

The surprisingly strong results through the first six months of 2015 gave management confidence to raise their full-year sales outlook. Chief Financial Officer Rafe Brown said the team now expects to "modestly exceed" their target of 10% sales growth, or $653 million in revenue this year. Wall Street reacted negatively when that 10% sales improvement outlook was first issued in February.  As for profits, Brown kept his forecast unchanged at $0.78 per share, up from $0.74 per share in 2014.

So last week's stock bounce reflects investors' changing expectations that Pegasystems is headed for faster, more sustainable growth. In fact, the pros are now modeling 2015 revenue of $670 million, or a 14% improvement over last year's result.