Company Reports

We maintain our $65 fair value estimate for no-moat Pegasystems after the firm reported first-quarter results below both our own expectations and FactSet consensus. While weak term license sales weighed on top-line growth in the quarter, we are encouraged with the strong momentum in Pega Cloud. We think the firm's artificial intelligence investments will enable long-term growth by creating more use-cases and thereby greater customer adoption for the Pega platform. Management made no changes to its 2024 outlook, leaving our near-term estimates intact. We see some upside to shares but continue to prefer our wide-moat names with less controversy.

We believe Pegasystems is well established in the business process management, or BPM, software niche and further benefits from related customer relationship management, or CRM, applications. We expect the company to remain a leading provider for enterprise users in the coming years as it moves customers to its new Pega Infinity platform, which unifies customer engagement with automation. The company’s revenue model transition was messy at times but is largely complete and we expect Pegasystems to emerge leaner and more focused. With that said, we still believe that Pegasystems demonstrates high customer switching costs as evidenced by its long customer relationships and strong annual contract value, or ACV, metrics.

No-moat Pegasystems reported fourth-quarter results significantly above our expectations for revenue and profitability. Its flagship product, Pega Cloud, achieved strong growth in annual contract value, or ACV, along with margin growth beginning to show as the firm’s subscription model transition wraps up. The two headcount reductions that Pegasystems undertook during the year have clearly been effective as gross margin was ahead of our expectations while operating expenses were well below. Management credits bringing its sales and client success teams together and placing an emphasis on cross-selling and upselling existing customers. We think the firm's outstanding quarter indicates a strong product and appropriate strategy decisions, and believe this can be the beginning of a new chapter for Pegasystems as financial results normalize upon the completion of its model transition.

No-moat Pegasystems reported third-quarter results above our estimates on the top and bottom line as the firm had outsize subscription revenue along with improved operating efficiency as a result of headcount reductions and restructuring earlier in the year. Management noted high customer interest in generative AI, and we view Pegasystems as well positioned to benefit due to its history with integrating AI into its platform and natural fit with process automation. Our model adjustments are minor given the results, and we maintain our fair value estimate of $52 per share. Shares are trading near $40 and we view the stock as undervalued. However, due to heightened uncertainty arising from its ongoing litigation with Appian, we prefer other software names in our coverage with less overhang.

We believe Pegasystems is well established in the business process management, or BPM, software niche and further benefits from related customer relationship management, or CRM, applications. We expect the company to remain a leading provider for BPM in the coming years as it moves customers to its new Pega Infinity platform, which unifies customer engagement with automation. However, the company’s revenue model transition has been complicated and elongated, leading to dampened financial results and an increased uncertainty that its core business has improved from before the transition. With that said, we still believe that Pegasystems demonstrates high customer switching costs as evidenced by its long customer relationships and strong annual contract value, or ACV, metrics.

No-moat Pegasystems was in line with our top-line expectations for the second quarter, primarily driven by the strength of its Cloud business. Shares are down on the report given the sequential decline in annual contract value, or ACV, for which we struggle to recall a precedent throughout our experience. Management pointed to various contract changes, types of new contracts signed, and client churn as driving this anomaly. We consider this a red flag that can be removed next quarter with a return to normal linear progression in ACV. On the flip side, the company generated substantial free cash flow during the quarter which, once sequential ACV growth resumes, we assume investors will applaud. We maintain our fair value estimate of $52 per share given no material guidance update, macro headwinds fueled by uncertainty in customer budgets, and the ongoing litigation process with Appian. After the selloff, we view shares as fairly valued.

At Pegasystems’ investor day, the main areas of focus were generative AI, sales strategy, Pega Infinity, Pega Launchpad, and a reiterated commitment to the rule of 40, which in this case is growth in annual contract value plus free cash flow margin. While we are pleased that Pegasystems’ model transition is nearly complete and the firm has a clear direction, we see no changes to our long-term thinking and maintain our fair value estimate of $52 for the no-moat name. If Pegasystems were to meet its three- to five-year operating targets, we see material upside to our estimates, particularly on profitability, due to cost reductions. Along with our other software names, shares of Pegasystems have performed well midway through the year. We view shares as fairly valued but would prefer to invest in cleaner and wide-moat software names, such as ServiceNow and Salesforce.

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.

We believe Pegasystems is well established in the business process management, or BPM, software niche and further benefits from related customer relationship management, or CRM, applications. We expect the company to remain a leading provider for BPM in the coming years as it moves customers to its new Pega Infinity platform, which unifies customer engagement with automation. However, the company’s revenue model transition has been complicated and elongated, leading to dampened financial results and an increased uncertainty that its core business has improved from before the transition. With that said, we still believe that Pegasystems demonstrates high customer switching costs as evidenced by its long customer relationships and strong annual contract value, or ACV, metrics.

Pegasystems reported strong fourth-quarter results and provided investors with healthy first-quarter guidance. However, we have reassessed the company’s moat rating and are downgrading Pegasystems to a no-moat rating from narrow, as we remain concerned about potential value destruction arising from the outstanding $2 billion legal judgment awarded to Appian. Litigation aside, our long-term outlook for Pegasystems’ products has not changed, as we still see strong evidence of high customer switching costs and view it as a potential candidate for a moat reconsideration hinging on the final settlement of the legal affair with Appian. Despite our moat downgrade, we are maintaining our $55 fair value estimate per share on the back of the strong results and guidance. With shares trading up to $45 per share after hours, we view shares as slightly undervalued but would prefer to invest in cleaner stories given the uncertainty involved.

We believe Pegasystems is well established in the business process management, or BPM, software niche and further benefits from related customer relationship management, or CRM, applications. We expect the company to remain a leading provider for BPM in the coming years as it moves customers to its new Pega Infinity platform, which unifies customer engagement with automation. However, the company’s revenue model transition has been complicated and elongated, leading to dampened financial results and an increased uncertainty that its core business has improved from before the transition. With that said, we still believe that Pegasystems demonstrates high customer switching costs as evidenced by its long customer relationships and strong annual contract value, or ACV, metrics.

Narrow-moat Pegasystems reported third-quarter results that fell short of our revenue and profitability expectations as it continues to face material currency headwinds and the rapid adoption of Pega Cloud. When considering these factors, we remain confident in our view that Pegasystems’ long-term growth is rooted in the cloud transition and are encouraged by its cloud metrics in the quarter. Bears would point to poor top- and bottom-line performance and macroeconomic factors out of Pegasystems’ control. Bulls would focus on longer-term factors such as sacrificing revenue now due to increased Pega Cloud adoption for growth and stable revenue once the model transition is complete. We have lowered our growth and profitability estimates for the next couple of years, which drives our fair value estimate down to $55 per share from $74. While we see upside to the stock, we would prefer to invest in cleaner stories in this environment.

We believe Pegasystems is well established in the business process management, or BPM, software niche and further benefits from related customer engagement applications. We expect the company to remain a leading provider in the coming years as it moves customers to its new Pega Infinity platform, which unifies customer engagement with automation. We think the model transition was complicated in the early going, but it is moving to the scaling phase where Pegasystems’ financials should begin to improve going forward. High retention and long customer relationships are testament to the company’s switching-cost-driven narrow moat.

Narrow-moat Pegasystems reported disappointing second-quarter results which fell well short of our revenue and profitability expectations, as they endure a highly turbulent macro environment involving currency headwinds, inflationary pressure, and accelerating adoption of Pega cloud. With the consideration of these macro factors, the material shortfall this quarter, the heightened ramp of the cloud transition, and the lowered outlook, we have reassessed our model and are lowering our fair value estimate to $74 per share from $104. We are encouraged by Pegasystems’ resilience and hold our long-term view that the cloud transition is paving a runway for longer-term growth. We see Pegasystems as playing in an attractive space and think the firm flies under the radar of its larger automation peers such as ServiceNow and Salesforce. While we see meaningful upside for the stock from here, the significant miss and lumpy model transition gives us pause.

We believe Pegasystems is well established in the business process management, or BPM, software niche and further benefits from related customer engagement applications. We expect the company to remain a leading provider in the coming years as it moves customers to its new Pega Infinity platform, which unifies customer engagement with automation. We think the model transition was complicated in the early going, but it is moving to the scaling phase where Pegasystems’ financials should begin to improve going forward. High retention and long customer relationships are testament to the company’s switching-cost-driven narrow moat.

At Pegasystems' investor day, key topics discussed included the current environment, product portfolio, sales strategy, sales partners, and the company's financial evolution according to the rule of 40. Purposefully absent from the event was a discussion of the recent legal decision that went against the company and awarded $2 billion to Appian. We see no changes to our long-term thinking and thus maintain our fair value estimate of $104 per share for this narrow moat name. Should the firm hit its new operating targets for 2025, we see material upside to our estimates. That said, given the selloff in software stocks, including Pegasystems, we view shares as attractive but would prefer ServiceNow and Salesforce at these levels.

We are lowering our fair value estimate for Pegasystems to $104 per share, from $120 previously, as a circuit court for Fairfax County, Virginia ruled against narrow-moat Pegasystems and awarded Appian $2.036 billion in damages for trade secret misappropriation in an ongoing legal dispute brought by Appian in 2020. In an 8-K filing, Pegasystems stated it strongly disagrees with the verdict and will appeal, which we believe can take years to reach a resolution. Our new fair value is based on an assumed payout of $1 billion in 2024 financed entirely by an equity raise, as we think it is possible that the appeal could reduce the damages to be paid out by Pegasystems. We acknowledge that there is a high degree of uncertainty around our loss assumptions, and we intend to update our estimates over time as we gather new information.

We believe Pegasystems is well established in the business process management, or BPM, software niche and further benefits from related customer engagement applications. We expect the company to remain a leading provider in the coming years as it moves customers to its new Pega Infinity platform, which unifies customer engagement with automation. We think the model transition was complicated in the early going, but it is moving to the scaling phase where Pegasystems’ financials should begin to improve going forward. High retention and long customer relationships are testament to the company’s switching-cost-driven narrow moat.

Narrow-moat Pegasystems reported solid first-quarter results from a revenue and profitability perspective. However, as we reassess our growth expectations—which were probably a little too aggressive in the near term—and adjust our estimates for results, we are lowering our fair value estimate to $120 per share from $130. Nonetheless, we view results constructively, especially the strong profitability. While we may have fine-tuned our model lower and highlight uneven results during the model transition, we view the shares as attractive, along with most of our enterprise software names. We see Pegasystems as playing in a particularly attractive area and think it flies under the radar of larger automation peers like ServiceNow. Indeed, management highlighted that of its approximately 800 customers, not even 200 spend $1 million or more annually, so the opportunity to drive deeper penetration is substantial. On the other hand, the firm's model transition has been uneven, so patience will likely be required, which is consistent with our high uncertainty rating.

We believe Pegasystems is well established in the business process management, or BPM, software niche and further benefits from related customer engagement applications. We expect the company to remain a leading provider in the coming years as it moves customers to its new Pega Infinity platform, which unifies customer engagement with automation. We think the model transition was complicated in the early going, but it is moving to the scaling phase where Pegasystems’ financials should begin to improve going forward. High retention and long customer relationships are testament to the company’s switching-cost-driven narrow moat.