Pegasystems, Inc. (PEGA) reported very strong 3Q results last night, beating our $40 million license estimate by 12% and driving total revenue 4% above our lowered forecast. EPS beat our number by $0.13 and the consensus by $0.15. The revenue upside was driven by a strong shift towards perpetual licenses, though there were no “transformational” deals, indicating solid sales execution in a category demonstrating good vitality despite a choppy IT spending climate. Despite the upside, management left its full year revenue outlook intact and trimmed EPS expectations for the acquisition of Attenna Software.

Because of the structural volatility in PEGA’s business model (i.e., perpetual licenses, large deals, financial services concentration), we continue to believe the best time to buy the stock is shortly after an earnings miss or an unrelated macro event (i.e., China) when prospects seem dire. That’s clearly not the case after last night. Despite our cautious view, we think trading-oriented investors could play the stock for short-term trade going into the seasonally strong December quarter given the company’s conventional license model and large deal exposure that can take advantage of an aboveaverage use-it-or-lose-it IT spending environment, that we believe could be in the making.

For us to turn more positive on the stock longer-term, we’d like to see management address its lumpy business model, trim its above-average exposure to blockbuster deals, accelerate product bookings consistently (not just one quarter) and raise operating margins to comparable levels of peer enterprise software companies.

PEGA delivered total revenue and non- GAAP EPS of $122 million (+20% y/y) and $0.33 compared to our/consensus estimates of $117.5 million/$116.5 million and $0.20/$0.18. License revenue grew 57% to $44.8 million against modest comps driven by solid execution and by a strong mix shift towards perpetual licenses. License backlog accelerated 20% annually and 1% sequentially to $203.6 million while product bookings grew 79% y/y and 10% sequentially. Year-to-date, product bookings are up 22% y/y. EPS benefited $0.03 from a lower tax rate.

Consistent with past practices, management didn’t update its annual revenue guidance, which currently stands at $510 million, though it trimmed its full year non-GAAP EPS outlook $0.03-$0.05 from the former $1.20 number due to the Antenna Software acquisition. While we’re leaving our 4Q revenue estimate unchanged, we’ve trimmed our EPS estimate $0.07 to $1.19 above guidance to reflect a more cautious ramp in expenses.