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Pegasus Solutions Reports Fourth Quarter and Full Year 2003 Results; Company Reiterates 2004 Revenue Guidance and Provides Complete 2004 Financial Outlook

Pegasus Solutions Reports Fourth Quarter and Full Year 2003 Results; Company Reiterates 2004 Revenue Guidance and Provides Complete 2004 Financial Outlook

Business Editors/Travel Writers

DALLAS–(BUSINESS WIRE)–Feb. 3, 2004

Pegasus Solutions, Inc. (Nasdaq:PEGS):

— Q4 2003 revenues — $43.1 million

— Q4 2003 Diluted EPS (GAAP) — $0.02

— Q4 2003 Diluted EPS (Cash) — $0.06

— Estimated 2004 revenues — $192 million to $200 million

— Estimated 2004 diluted EPS (Cash) — $0.45 to $0.55

— Resolution of PegasusCentral(TM) related issues on track

— Unirez integration proceeding according to plan

Pegasus Solutions, Inc. (Nasdaq:PEGS), a leading global provider of hotel reservations-related services and technology, today reported its financial results for the fourth quarter and year ended Dec. 31, 2003. Revenues for the quarter topped $43 million, with Electronic Distribution service revenues up 17 percent from the fourth quarter of 2002.

“Despite the challenges we faced in 2003, our financial position allowed us to invest in strategic initiatives to improve our competitive position and support long-term growth and profitability,” said John F. Davis III, president, chief executive officer and chairman of Pegasus Solutions. Davis continued: “We are making progress with both our customer satisfaction and product development initiatives. We also remain committed to PegasusCentral. And finally, the integration of Unirez is proceeding as planned and will be substantially complete by midyear.”

PegasusCentral Update

Since the company first announced stability issues with its Web-based property management system PegasusCentral in late October, it has engaged IBM and Majoris, both leading global software consulting and service firms. A diagnostic review of the software has been completed as well as a detailed root-cause analysis. Pegasus has selected Majoris to lead the remediation efforts. Davis said, “We are pleased to report that Majoris has determined a small percentage of the problems within the code would correct a significant percentage of our customer issues. We selected Majoris to lead this effort based on successful experiences our new chief information officer John Cole has had with principals of Majoris.” Regarding the largest PegasusCentral customer, Davis added: “We have met with InterContinental Hotels Group and are currently working with them to establish a final timeline for remediation, acceptance testing and resuming installations.”

Fourth Quarter Financial Highlights

— Revenues were $43.1 million compared to $43.4 million in the

fourth quarter of 2002.

— On a GAAP basis, diluted net income (loss) per share was $0.02

compared to $(0.06) in the same quarter in 2002.

— Cash earnings were $0.06 per diluted share compared to $0.13

in the fourth quarter of 2002.

— EBITDA was $7.3 million, or 17 percent of revenues, compared

to $8.3 million, or 19 percent of revenues, in the year-ago

quarter. (See attached tables.)

— Adjusted EBITDA for the fourth quarter of 2003 was $9.7

million, or 22 percent of revenues. (See attached tables.)

— Cash flow from operating activities was $6.2 million compared

to $6.7 million in the fourth quarter of 2002.

— Pegasus completed the acquisition of Unirez, Inc. on Dec. 1,

2003.

Susan K. Cole, executive vice president and chief financial officer of Pegasus Solutions, said, “I am pleased to report fourth quarter revenues reached the high end of our previous revenue estimates. As part of our financial plan, we continually evaluate our cost structure in an effort to obtain optimal margins. As previously indicated and to give us a jump start on 2004, we increased our advertising and marketing spending during the fourth quarter, while staying within the guided cash earnings per share range.”

Full Year Financial Highlights

— Revenues were $172.7 million compared to $190.0 million in

2002.

— On a GAAP basis, diluted net loss per share was $(0.07)

compared to $(0.14) in 2002.

— Cash earnings were $0.33 per diluted share compared to $0.54

in 2002.

— EBITDA was $25.1 million, or 15 percent of revenues, compared

to $41.1 million, or 22 percent of revenues, in 2002. (See

attached tables.)

— Adjusted EBITDA was $34.8 million, or 20 percent of revenues,

compared to $37.6 million, or 20 percent of revenues, in 2002.

(See attached tables.)

— Cash flow from operating activities was $24.1 million compared

to $38.3 million in 2002.

— Cash and short-term investments at Dec. 31, 2003 was $63.0

million.

— Capital spending in 2003 was $19.4 million compared to $30.3

million in 2002.

Service Line Review

— Fourth quarter Electronic Distribution service revenues were

$6.6 million, an increase of 17 percent year-over-year. For

2003, Electronic Distribution service revenues were $28.8

million, an increase of 20 percent from 2002. The increases in

Electronic Distribution revenues for the fourth quarter and

full year 2003 were primarily due to increases in Internet

transactions of 22 percent and 32 percent, respectively.

— Financial Services revenues for the fourth quarter increased 2

percent to $7.5 million compared to the fourth quarter of

2002. Full year revenues for Financial Services were $30.2

million, up 1 percent from 2002 despite the negative impact of

lower average daily room rates in 2003.

— Fourth quarter Central Reservation System (CRS) service

revenues were $8.8 million, down 22 percent on a

year-over-year basis. CRS service revenues for 2003 were $38.3

million, a 24 percent decrease from 2002, excluding a $3.5

million non-recurring customer termination fee in 2002. The

decrease in CRS revenues was primarily due to the lost

contract with Prime Hospitality and pricing pressure on

contract renewals.

— Property Systems revenues were $1.7 million in the fourth

quarter compared to $1.5 million in the fourth quarter of

2002. For 2003, Property Systems revenues were $6.5 million,

which is essentially flat with 2002.

— Service revenues for Representation Services were $15.3

million in the fourth quarter and $57.4 million for 2003. Both

fourth quarter and 2003 amounts include $874,000, which

represents one month of revenues, for the company’s new

connectivity service Unirez by Pegasus(TM). On a

year-over-year basis, service revenues from the company’s full

service offering Utell by Pegasus(TM) were down 3 percent for

the fourth quarter and 12 percent for the full year. The

decrease in Utell revenues was primarily due to a reduction in

the number of hotels in the Utell portfolio and the continued

weakness in trans-Atlantic travel.

Outlook for 2004

— Q1 2004 revenues estimated to range from $43 million to $45

million

— Q1 2004 cash earnings estimated to range from $0.03 to $0.05

per diluted share

“As we developed our 2004 budget, we remained committed to customer satisfaction, product development, advertising, marketing and our employees, who did not receive merit increases or bonuses in 2003,” Cole said. She added: “Due to our post-integration cost structure, I believe we will be able to absorb these incremental costs, which are essential to our long-term growth, while maintaining an EBITDA margin in excess of 20 percent. We expect our cost structure will give us the ability to continue focusing on our goals and investing in our future. Additionally, our board of directors recently approved a corporate 10b5-1 stock repurchase plan, which will allow us to continually repurchase shares even during blackout periods. This further highlights our confidence in the company as we put our excess capital to good use.”

Davis concluded: “As we enter 2004, I am confident we have taken the necessary steps to improve our business. Our reinvigorated sales force and technology organization — along with the recent management additions — are all aligned for solid performance. By focusing on critical product development priorities and executing our multi-tiered strategy to serve the independent and small hotel company market, we’re poised for success.”

Reconciliation of Non-GAAP Financial Measures

Reconciling items between GAAP net income (loss) and cash earnings primarily consist of purchase accounting amortization and restructure costs. Schedules that reconcile GAAP amounts to cash earnings, EBITDA and adjusted EBITDA are included with this release, as well as the presentation accompanying the company’s conference call Webcast. Reconciling items between EBITDA and adjusted EBITDA consist of restructure charges and other non-recurring items.

In addition to the types of reconciling items included in the attached tables, first quarter 2004 GAAP net income may include the cumulative effect of adopting Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). FASB Staff Position 46-6 delayed the effective date of FIN 46, and it will be effective for Pegasus on March 31, 2004. As a result, a GAAP net income estimate is not currently available, but you can find more information on how FIN 46 will affect Pegasus in the company’s Form 10-Q, which was filed with the Securities and Exchange Commission on August 14, 2003.

Conference Call

Pegasus will host a conference call today at 5:00 p.m. Eastern Time and will simultaneously broadcast it live over the Internet. To access the Webcast, go to www.pegs.com and click on “Investor.” The online archive of the Webcast will be available two hours after the call for 30 days.

Company Information

Dallas-based Pegasus Solutions, Inc. (Nasdaq:PEGS) is a leading global provider of hotel reservations-related services and technology. Founded in 1989, Pegasus’ customers include a majority of the world’s travel agencies and more than 50,000 hotel properties around the globe. Pegasus’ services include central reservation systems, electronic distribution services, commission processing and payment services, property management systems, and marketing representation services. The company’s representation services, including Utell, are used by nearly 7,000 member hotels in 140 countries, making Pegasus the hotel industry’s largest third-party marketing and reservations provider. Pegasus has 18 offices in 11 countries, including regional hubs in London, Scottsdale and Singapore. For more information, please visit www.pegs.com.

Some statements made in this press release are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements regarding future events, financial projections, estimated transaction volumes and expected average daily room rates, as well as management’s expectations, beliefs, hopes, intentions or strategies regarding the future. Because such statements deal with future events, they are subject to various risks and uncertainties, and actual results could differ materially from current expectations. Factors that could cause or contribute to such difference include, but are not limited to, terrorist acts or war, global health epidemics, variation in demand for and acceptance of the company’s products and services and timing of sales, general economic conditions including a slowdown in technology spending by the company’s current and prospective customers, failure to maintain successful relationships with and to establish new relationships with customers, the success of the company’s international operations, the level of product and price competition from existing and new competitors, changes in the company’s level of operating expenses and its ability to control costs, delays in developing, marketing and deploying new products and services, as well as other risks identified in the company’s Securities and Exchange Commission filings, including those appearing under the caption Risk Factors in the company’s 2002 Annual Report on Form 10-K and Form S-3, as amended, declared effective in November 2003.

The conference call may include other forward-looking statements related to transaction volume and average daily room rates. Such information can be found in the presentation accompanying the conference call Webcast. To access the Webcast, go to www.pegs.com and click on “Investor.”

Management believes that presentation of non-GAAP financial measures such as cash earnings per share, EBITDA and adjusted EBITDA is useful because it allows investors and management to evaluate and compare the company’s core cash-based operating results from ongoing operations from period to period in a more meaningful and consistent manner than relying exclusively on GAAP financial measures. Non-GAAP financial measures however should not be considered in isolation or as an alternative to financial measures calculated and presented in accordance with GAAP. In addition, Pegasus’ calculation of cash earning per share, EBITDA and adjusted EBITDA is not necessarily comparable to similarly titled measures reported by other companies. Schedules that reconcile cash earnings per share, EBITDA and adjusted EBITDA to the most directly comparable GAAP amounts are included with this release and the presentation accompanying the company’s conference call Webcast.

PEGASUS SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

Three Months Year

Ended Ended

December 31, December 31,

—————– ——————-

2003 2002 2003 2002

——– ——– ——— ———

Revenues:

Service revenues $39,883 $40,664 $161,245 $178,769

Customer reimbursements 3,243 2,780 11,485 11,181

——– ——– ——— ———

Total revenues 43,126 43,444 172,730 189,950

——– ——– ——— ———

Costs of services:

Cost of services 20,924 19,941 85,207 88,717

Customer reimbursements 3,243 2,780 11,485 11,181

——– ——– ——— ———

Total costs of services 24,167 22,721 96,692 99,898

——– ——– ——— ———

Research and development 1,654 1,317 5,199 5,821

General and administrative

expenses 5,423 6,468 23,348 25,146

Marketing and promotion expenses 4,538 4,620 16,484 17,998

Depreciation and amortization 5,570 11,623 28,029 48,075

Restructure costs — — 5,949 —

——– ——– ——— ———

Operating income (loss) 1,774 (3,305) (2,971) (6,988)

Other income (expense):

Interest income (expense), net (475) 307 (129) 1,224

Other 93 535 363 130

——– ——– ——— ———

Income (loss) before income

taxes 1,392 (2,463) (2,737) (5,634)

Income tax benefit (expense) (777) 991 905 2,115

——– ——– ——— ———

Net income (loss) $615 $(1,472) $(1,832) $(3,519)

======== ======== ========= =========

Basic and diluted net income

(loss) per share $0.02 $(0.06) $(0.07) $(0.14)

======== ======== ========= =========

Weighted average shares

outstanding:

Basic 25,044 24,822 24,864 24,818

======== ======== ========= =========

Diluted 25,404 24,822 24,864 24,818

======== ======== ========= =========

PEGASUS SOLUTIONS, INC.

RECONCILIATION OF CASH EARNINGS

(In thousands, except per share amounts)

(Unaudited)

Three Months Ended

December 31, 2003

———————————-

Cash

As Earnings Cash

Reported Adjustments Earnings

——— ———– ———

Revenues:

Service revenues $39,883 $– $39,883

Customer reimbursements 3,243 — 3,243

——— ———– ———

Total revenues 43,126 — 43,126

——— ———– ———

Costs of services:

Cost of services 20,924 — 20,924

Customer reimbursements 3,243 — 3,243

——— ———– ———

Total costs of services 24,167 — 24,167

——— ———– ———

Research and development 1,654 — 1,654

General and administrative expenses 5,423 — 5,423

Marketing and promotion expenses 4,538 — 4,538

Depreciation and amortization 5,570 (1,005)(1) 4,565

——— ———– ———

Operating income 1,774 1,005 2,779

Other income (expense):

Interest income (expense), net (475) — (475)

Other 93 — 93

——— ———– ———

Income before income taxes 1,392 1,005 2,397

Income tax expense (777) (134)(2) (911)

——— ———– ———

Net income $615 $871 $1,486

========= =========== =========

Diluted net income per share $0.02 $0.04 $0.06

========= =========== =========

Diluted weighted average shares

outstanding 25,404 — 25,404

========= =========== =========

Notes:

———————————-

(1) To adjust for amortization of purchased identifiable intangible

assets.

(2) To adjust income tax expense for assumed 38% tax rate for cash

earnings.

PEGASUS SOLUTIONS, INC.

RECONCILIATION OF CASH EARNINGS

(In thousands, except per share amounts)

(Unaudited)

Three Months Ended

December 31, 2002

———————————-

Cash

As Earnings Cash

Reported Adjustments Earnings

——— ———– ———

Revenues:

Service revenues $40,664 $– $40,664

Customer reimbursements 2,780 — 2,780

——— ———– ———

Total revenues 43,444 — 43,444

——— ———– ———

Costs of services:

Cost of services 19,941 — 19,941

Customer reimbursements 2,780 — 2,780

——— ———– ———

Total costs of services 22,721 — 22,721

——— ———– ———

Research and development 1,317 — 1,317

General and administrative expenses 6,468 — 6,468

Marketing and promotion expenses 4,620 — 4,620

Depreciation and amortization 11,623 (7,803)(1) 3,820

——— ———– ———

Operating income (loss) (3,305) 7,803 4,498

Other income (expense):

Interest income, net 307 — 307

Other 535 — 535

——— ———– ———

Income (loss) before income taxes (2,463) 7,803 5,340

Income tax benefit (expense) 991 (3,020)(2) (2,029)

——— ———– ———

Net income (loss) $(1,472) $4,783 $3,311

========= =========== =========

Diluted net income (loss) per share $(0.06) $0.19 $0.13

========= =========== =========

Diluted weighted average shares

outstanding 24,822 443 25,265

========= =========== =========

Notes:

———————————-

(1) To adjust for amortization of purchased identifiable intangible

assets.

(2) To adjust income tax benefit (expense) for assumed 38% tax rate

for cash earnings.

PEGASUS SOLUTIONS, INC.

RECONCILIATION OF CASH EARNINGS

(In thousands, except per share amounts)

(Unaudited)

Year Ended December 31, 2003

———————————-

Cash

As Earnings Cash

Reported Adjustments Earnings

——— ———– ———

Revenues:

Service revenues $161,245 $– $161,245

Customer reimbursements 11,485 — 11,485

——— ———– ———

Total revenues 172,730 — 172,730

——— ———– ———

Costs of services:

Cost of services 85,207 — 85,207

Customer reimbursements 11,485 — 11,485

——— ———– ———

Total costs of services 96,692 — 96,692

——— ———– ———

Research and development 5,199 — 5,199

General and administrative expenses 23,348 — 23,348

Marketing and promotion expenses 16,484 — 16,484

Depreciation and amortization 28,029 (10,429)(1) 17,600

Restructure costs 5,949 (5,949)(2) —

——— ———– ———

Operating income (loss) (2,971) 16,378 13,407

Other income (expense):

Interest income (expense), net (129) — (129)

Other 363 — 363

——— ———– ———

Income (loss) before income taxes (2,737) 16,378 13,641

Income tax benefit (expense) 905 (6,089)(3) (5,184)

——— ———– ———

Net income (loss) $(1,832) $10,289 $8,457

========= =========== =========

Diluted net income (loss) per share $(0.07) $0.40 $0.33

========= =========== =========

Diluted weighted average shares

outstanding 24,864 522 25,386

========= =========== =========

Notes:

———————————-

(1) To adjust for amortization of purchased identifiable intangible

assets.

(2) To adjust for non-recurring restructure costs related to the

company’s strategic integration.

(3) To adjust income tax benefit (expense) for assumed 38% tax rate

for cash earnings.

PEGASUS SOLUTIONS, INC.

RECONCILIATION OF CASH EARNINGS

(In thousands, except per share amounts)

(Unaudited)

Year Ended December 31, 2002

———————————-

Cash

As Earnings Cash

Reported Adjustments Earnings

——— ———– ———

Revenues:

Service revenues $178,769 $(3,534)(1) $175,235

Customer reimbursements 11,181 — 11,181

——— ———– ———

Total revenues 189,950 (3,534) 186,416

——— ———– ———

Costs of services:

Cost of services 88,717 — 88,717

Customer reimbursements 11,181 — 11,181

——— ———– ———

Total costs of services 99,898 — 99,898

——— ———– ———

Research and development 5,821 — 5,821

General and administrative expenses 25,146 — 25,146

Marketing and promotion expenses 17,998 — 17,998

Depreciation and amortization 48,075 (31,495)(2) 16,580

——— ———– ———

Operating income (loss) (6,988) 27,961 20,973

Other income (expense):

Interest income (expense), net 1,224 — 1,224

Other 130 — 130

——— ———– ———

Income (loss) before income taxes (5,634) 27,961 22,327

Income tax benefit (expense) 2,115 (10,599)(3) (8,484)

——— ———– ———

Net income (loss) $(3,519) $17,362 $13,843

========= =========== =========

Diluted net income (loss) per share $(0.14) $0.68 $0.54

========= =========== =========

Diluted weighted average shares

outstanding 24,818 734 25,552

========= =========== =========

Notes:

———————————-

(1) To adjust for non-recurring customer termination fee.

(2) To adjust for amortization of purchased identifiable intangible

assets.

(3) To adjust income tax benefit (expense) for assumed 38% tax rate

for cash earnings.

PEGASUS SOLUTIONS, INC.

RECONCILIATION OF EBITDA AND ADJUSTED EBITDA

(In thousands)

(Unaudited)

Three Months Ended

———————————–

December 31, December 31,

2003 2002

———— ————

Total revenues $43,126 $43,444

============ ============

Operating income (loss) (1) 1,774 (3,305)

Add: depreciation and amortization 5,570 11,623

———— ————

EBITDA $7,344 $8,318

============ ============

EBITDA margin 17% 19%

Non-recurring items 2,343 (2) —

———— ————

Adjusted EBITDA $9,687 $8,318

============ ============

Adjusted EBITDA margin 22% 19%

Year Ended

———————————–

December 31, December 31,

2003 2002

———— ————

Total revenues $172,730 $189,950

Less: non-recurring customer

termination fee — (3,534)(3)

———— ————

Adjusted revenues $172,730 $186,416

============ ============

Operating loss (1) (2,971) (6,988)

Add: depreciation and

amortization 28,029 48,075

———— ————

EBITDA $25,058 $41,087

============ ============

EBITDA margin 15% 22%

Adjustments:

Restructure costs 5,949 —

Non-recurring customer termination

fee — (3,534)(3)

Other non-recurring items 3,771 (2),(4) —

———— ————

Adjusted EBITDA $34,778 $37,553

============ ============

Adjusted EBITDA margin 20% 20%

(1) For reconciling items between operating income (loss) and net

income (loss), see the Condensed Consolidated Statements of

Operations included in this release.

(2) Amount represents non-recurring expenses primarily for severance

and expenses related to PegasusCentral, the company’s IT organization

and product management initiatives.

(3) Amount represents non-recurring customer termination fee.

(4) Amount includes costs related to moving the company’s Phoenix

facilities and transition-related activities resulting from the

company’s strategic integration. These costs cannot be classified as

restructure costs because they provide some future benefit to ongoing

operations.

PEGASUS SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

December December

31, 31,

2003 2002

——— ———

ASSETS

Cash and cash equivalents $58,983 $19,893

Short-term investments 4,046 4,033

Accounts receivable, net 22,298 25,886

Other current assets 11,092 8,368

——— ———

Total current assets 96,419 58,180

Goodwill, net 164,120 139,533

Intangible assets, net 7,831 6,013

Property and equipment, net 75,474 71,442

Other noncurrent assets 22,716 12,927

——— ———

Total assets $366,560 $288,095

========= =========

LIABILITIES AND STOCKHOLDERS’ EQUITY

Accounts payable and accrued liabilities $24,672 $26,574

Unearned income 7,213 7,812

Other current liabilities 5,477 6,799

——— ———

Total current liabilities 37,362 41,185

Noncurrent uncleared commission checks 4,545 4,641

Other noncurrent liabilities 20,997 16,379

Convertible debt 75,000 —

Commitments and contingencies

Stockholders’ equity:

Common stock 251 247

Additional paid-in capital 290,828 287,676

Unearned compensation — (571)

Accumulated other comprehensive loss (834) (1,705)

Accumulated deficit (61,589) (59,757)

——— ———

Total stockholders’ equity 228,656 225,890

——— ———

Total liabilities and stockholders’ equity $366,560 $288,095

========= =========

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