Is Pegasystems Going Down?

Pegasystems (NAS: PEGA) , the developer, marketer, and licensor of business process software, came out with third-quarter results that fell short of analyst expectations. The company also gave a lower-than-expected guidance for the full year. Unimpressed by the numbers and guidance, the Street hammered the company's stock. Let's take a Foolish look to see what happened to Pegasystems.

Into the numbers
The company's total revenue increased by 6% to $95.5 million, but that was disappointingly lower than the $111 million analysts were expecting. However, net income saw a 58% leap to $5 million mainly due to gains in the company's professional consultancy and maintenance services.

Pegasystems also gave lower-than-expected guidance for the full year's non-GAAP revenues at $410 million, against the Street's $443.3 million. This was mainly because of a shift in customers' preference from perpetual licenses to term licenses. And since term licenses have the tendency of deferring revenue to future periods, the company changed its guidance accordingly.

On a geographical basis, Pegasystems witnessed a relatively weak performance in its U.S. and U.K. operations, both of which saw revenue decline from the previous quarter. Europe and other regions saw revenues increase more than 60%. Industry peer TIBCO Software's (NAS: TIBX) third-quarter revenue from U.K. operations as well as other Americas operations (excluding the U.S.), were also down. TIBCO's revenues went up 24% to $229 million and net profits shot up 35% to $23.5 million.

Oracle (NAS: ORCL) saw revenue in its first quarter ending Aug. 31 increase 12% to $8.4 billion, while net profit zoomed by 36% to $1.8 billion on the back of double-digit growth in its high-end server business.

Pegasystems' gross margin declined by 490 basis points to 56.2% mainly due to higher costs relating to professional services. Operating margin was abysmal, at a negative of 2.3%, compared to a positive 2.7% in the previous year's same quarter. It shrank mainly due to higher selling and marketing expenses, which again was a result of increased headcount. Pegasystems' research and development expenses also came under pressure as the company had to ramp up hiring in India. As far as net income margin is concerned, taxes actually saved the day for Pegasystems. Contrasting against a tax expenditure of $1.1 million in the year-ago period, the company enjoyed a tax benefit worth $7.4 million.

More goodies
Pegasystems recently launched a slew of new products, including a new unified desktop customer relationship management solution specifically targeted at communications and media companies. The company also announced several enhancements to its customer process management platform that includes social media capabilities. Besides this, Pegasystems also unveiled a system that would allow energy companies to better manage incidents like industrial accidents, unplanned outages, and natural calamities like floods and hurricanes.

The Foolish bottom line
Given the dismal global economic environment coupled with stiff competition from other players, things could get tougher for Pegasystems should corporate spending take it in the chin. For that reason, I'm playing it safe and will observe how the coming quarters turn out for the company. To stay up to speed with Pegasystems, feel free to add it to your very own watchlist. It's free and helps you keep up with all the latest news and analysis for your favorite companies.

At the time thisarticle was published Fool contributor Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Motley Fool owns shares of Oracle. Motley Fool newsletter services have recommended buying shares of TIBCO Software and Pegasystems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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