Enterprise workflow software provider Pegasystems (NASDAQ:PEGA) reported Q4 CY2024 results topping the market’s revenue expectations, with sales up 3.5% year on year to $490.8 million. The company’s full-year revenue guidance of $1.6 billion at the midpoint came in 1.1% above analysts’ estimates. Its non-GAAP profit of $1.61 per share was 9.8% above analysts’ consensus estimates.
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Pegasystems (PEGA) Q4 CY2024 Highlights:
- Revenue: $490.8 million vs analyst estimates of $469.9 million (3.5% year-on-year growth, 4.4% beat)
- Adjusted EPS: $1.61 vs analyst estimates of $1.47 (9.8% beat)
- Management’s revenue guidance for the upcoming financial year 2025 is $1.6 billion at the midpoint, beating analyst estimates by 1.1% and implying 6.9% growth (vs 5% in FY2024)
- Adjusted EPS guidance for the upcoming financial year 2025 is $3.10 at the midpoint, missing analyst estimates by 4.4%
- Operating Margin: 29.1%, down from 32.7% in the same quarter last year
- Free Cash Flow Margin: 18.8%, up from 8.4% in the previous quarter
- Market Capitalization: $8.86 billion
Company Overview
Founded by Alan Trefler in 1983, Pegasystems (NASDAQ:PEGA) offers a software-as-a-service platform to automate and optimize workflows in customer service and engagement.
Automation Software
The whole purpose of software is to automate tasks to increase productivity. Today, innovative new software techniques, often involving AI and machine learning, are finally allowing automation that has graduated from simple one- or two-step workflows to more complex processes integral to enterprises. The result is surging demand for modern automation software.
Sales Growth
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last three years, Pegasystems grew its sales at a weak 7.3% compounded annual growth rate. This was below our standard for the software sector and is a poor baseline for our analysis.
This quarter, Pegasystems reported modest year-on-year revenue growth of 3.5% but beat Wall Street’s estimates by 4.4%.
Looking ahead, sell-side analysts expect revenue to grow 5.6% over the next 12 months, a slight deceleration versus the last three years. This projection doesn't excite us and implies its products and services will face some demand challenges.
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Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.
Pegasystems has shown robust cash profitability, driven by its attractive business model and cost-effective customer acquisition strategy that enable it to invest in new products and services rather than sales and marketing. The company’s free cash flow margin averaged 22.6% over the last year, quite impressive for a software business.
Pegasystems’s free cash flow clocked in at $92.44 million in Q4, equivalent to a 18.8% margin. This result was good as its margin was 2.5 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends carry greater meaning.
Over the next year, analysts predict Pegasystems’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 22.6% for the last 12 months will increase to 25.1%, giving it more flexibility for investments, share buybacks, and dividends.
Key Takeaways from Pegasystems’s Q4 Results
It was great to see Pegasystems outperform Wall Street’s revenue and EPS estimates this quarter. On the other hand, its full-year EPS guidance missed significantly, causing the stock to trade down 5.1% to $100.61 immediately following the results.
Is Pegasystems an attractive investment opportunity at the current price? What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock. We cover that in our actionable full research report which you can read here, it’s free.
