Analyst Note| Dan Romanoff, CPA |
Narrow-moat Pegasystems reported an excellent second quarter with revenue and profitability exceeding our expectations by a wide margin. While much of the outperformance was driven by one $30 million deal, the company reported good results even excluding this sale. Both annual contract value, or ACV, and remaining performance obligation, or RPO, were solid, up 22% to $899 million and 26% to $1.03 billion, respectively. ACV and RPO serve as the best measures of business momentum during the cloud transition. We share management’s optimism that customers will look to streamline their processes in order to navigate the uncertainty from the pandemic, which bodes well for the firm’s digital transformation solutions. We are likewise confident in the company’s go-to-market strategy and cross-selling potential, as evidenced by the aforementioned deal--which, while a renewal from an existing customer--was extended in term and expanded in usage. We are holding our fair value estimate steady at $157 per share and view shares as undervalued.