Pegasystems Posts Solid Results With Model Transition Raging; FVE Down to $120

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.