Pegasystems Earnings: Encouraging Cloud Metrics Offset Headline Miss

No-moat Pegasystems reported first-quarter results below our expectations on the top line, while squeezing by with slightly better profitability than we had modelled as the firm continues its model transition, which has surely been rocky over the last five years. Now, however, the cloud transition is producing highlights, as the firm delivered nice metrics for Pega Cloud, which we believe to be the key to Pegasystems’ long-term growth prospects. Based on a shortfall relative to our model and caution on the macro conditions, we are modestly lowering our fair value estimate to $52 per share, from $55 previously. As Pegasystems continues to convert its customers to the cloud, we are more focused on annual contract value, or ACV, and backlog. Regarding both metrics, the firm delivered impressive results and we view Pegasystems’ go-to-market strategy realignment as the proper decision. We have seen evidence of high customer switching costs in the business and believe a focus on existing customers makes sense given the low penetration levels Pegasystems has within its customers. We view shares as undervalued but given the uncertainty around the legal matter with Appian, we would recommend investing in cleaner stories.