Pegasystems’ Management sizes the market at $50 billion, which includes both customer engagement and BPM

Business Strategy and Outlook

It is alleged Pegasystems is well established in the business process management, or BPM, software niche and further benefits from related customer engagement applications. It is anticipated 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. It is held that, 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.

BPM software allows customers to streamline operations by automating business processes. Pegasystems’ no- and low-code platform allows the business user, rather than a software engineer, to automate the workflow in a way that matches the business need. There are a variety of templates for common uses that customers can draw from to further expedite the automation. Users can also draw from any previous work their company has done on the platform, employing chunks of code many times over. This allows for common processes to be written once and used repeatedly, thereby lowering costs and decreasing the time between process or application updates. The software was initially used in call centres. While customer engagement more broadly remains the primary driver, a wide variety of uses involving many complicated business processes have been brought into the fold. Lastly, the software allows for users to “build for change,” meaning once software-driven processes are in place, they can be changed quickly on the fly so that all similar uses are also updated.

Pegasystems has long been considered a leader in BPM and a contender in other niches. Management sizes the market at $50 billion, which includes both customer engagement and BPM. It is renowned, that the Pega platform is a high-end solution that larger enterprises with a high level of customer interactions would undertake.

Financial Strength

It is probable Pegasystems is financially sound, perhaps with a negative bias in the short term. The model transition to the cloud is now near the halfway point, suggesting that margins either bottomed in 2021 or perhaps will bottom in 2022 and will recover from there, while revenue growth will similarly accelerate and remain more robust for the next several years. It is foreseen by now software investors have had a chance to observe this pattern many times and recognize it for the better model that it is. It is likely, margins will expand and growth will accelerate and return to a more fully formed financial model in 2024. Management, customers, and investors alike all prefer the predictable subscription model over the lumpy perpetual license model. That said, it is accredited that the uncertainty inherent in reinventing the business. As of Dec. 31, 2021, Pegasystems had $363 million in cash and equivalents, with $600 million in face value convertible notes. It is anticipated free cash flow margins will bottom in 2022 and will improve steadily over the next several years. At the heart of this is the familiar transition to a subscription model. No reason can be seen why operating margin will not expand to at least 20% over time, driving free cash flow margins higher as well. It is likely, that it is possible the company will need to complete a nominal capital raise—less than 1% of the market cap, within the next several years as the model normalizes. In terms of capital deployment, Pegasystems pays a dividend and occasionally makes acquisitions. Acquisitions are typically small technology-driven deals. The company pays a $0.03 per share quarterly dividend which totalled approximately $10 million in both 2020 and 2021. It is renowned it is unusual for a smaller publicly traded software company to pay a dividend. Management has repeatedly reiterated it is committed to paying the dividend.

Bulls Say’s

The company has long been a leader in BPM, where uses are proliferating in an effort to increase productivity and lower costs.
Pegasystems has a differentiated product with a rule’s engine, process templates, a low-code development platform, robotics, and integrated customer engagement applications.
Moving to a cloud-driven solution should allow for a yearslong path of margin improvement and much better revenue visibility.

Company Profile

Founded in 1983, Pegasystems provides a suite of solutions for customer engagement and business process automation. The company’s key offering is the Pega Infinity platform, which combines business process automation with customer engagement applications.

(Source: MorningStar)

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