Pegasus Solutions Reports Fourth Quarter and Fiscal Year 2004 Results

Pegasus Solutions Reports Fourth Quarter and Fiscal Year 2004 Results

    Business Editors/Technology Editors/Travel Editors

    DALLAS--(BUSINESS WIRE)--Feb. 8, 2005--

GAAP EPS Grew from ($0.07) in FY 2003 to $0.34 in FY 2004; Adjusted EPS Increased 55 Percent Year-Over-Year
    -- Revenues - Q4 2004 $45.3 million; FY 2004 $190.1 million

--	Diluted EPS (GAAP) - Q4 2004 $0.08; FY 2004 $0.34
--	Diluted EPS (adjusted) - Q4 2004 $0.14; FY 2004 $0.51
--	Estimated revenue - Q1 2005 $45 million to $47 million; FY 2005 $199 million to $207 million
--	Estimated diluted EPS (GAAP) - Q1 2005 $0.01 to $0.03; FY 2005 $0.27 to $0.37
--	Estimated diluted EPS (adjusted) - Q1 2005 $0.06 to $0.08; FY 2005 $0.55 to $0.65

    Pegasus Solutions, Inc. (Nasdaq:PEGS), a global leader in providing technology and services to hotels and travel distributors, today reported its financial results for the fourth quarter and year ended Dec. 31, 2004. Pegasus reported year-over-year revenue growth of 5 percent and 10 percent for the fourth quarter and fiscal year, respectively, and significant earnings per share growth year-over-year.
    "As I mentioned in December, we accomplished what we set out to do in 2004 -- focus and deliver," said John F. Davis III, president, chief executive officer and chairman of Pegasus Solutions. Davis continued: "We had leadership changes in key functions during 2004, and established or enhanced processes throughout the company with the goal of expediting the time to market on new products and improving customer satisfaction. During this transition, we still met our financial goals and made solid progress on product development priorities established at the beginning of the year."

    Fourth Quarter 2004 Financial Highlights (See tables included with this release for reconciliation of non-GAAP measures.)

    -- Revenues increased 5 percent to $45.3 million compared to
    $43.1 million in the fourth quarter of 2003.

    -- On a GAAP basis, net income per diluted share was $0.08
    compared to $0.02 in the same quarter in 2003.

    -- Adjusted net income per diluted share more than doubled from
    $0.06 in the fourth quarter of 2003 to $0.14.

    -- Net income was $1.8 million compared to $615,000 in the
    year-ago quarter.

    -- EBITDA was $8.4 million, or 19 percent of revenues, compared
    to EBITDA of $7.3 million, or 17 percent of revenues, in the
    year-ago quarter. Adjusted EBITDA margin was 19 percent,
    compared to 22 percent in the fourth quarter of 2003.

    -- Pegasus repurchased 661,000 shares of common stock at an
    aggregate cost of $7.7 million during the fourth quarter.

    -- Operating cash flows increased 57 percent to $9.7 million
    compared to $6.2 million in the fourth quarter of 2003.

    Fiscal Year 2004 Financial Highlights (See tables included with release for reconciliation of non-GAAP measures.)

    -- Revenues increased 10 percent to $190.1 million compared to
    $172.7 million in 2003.

    -- On a GAAP basis, net income per diluted share was $0.34
    compared to a net loss per share of $0.07 in 2003.

    -- Adjusted net income per diluted share increased 55 percent to
    $0.51 compared to $0.33 in 2003.

    -- Net income was $8.0 million in 2004 compared to a net loss of
    $1.8 million in 2003.

    -- EBITDA was $34.6 million, or 18 percent of revenues, compared
    to EBITDA of $25.1 million, or 15 percent of revenues in 2003.
    Adjusted EBITDA margin was 19 percent, compared to 20 percent
    in 2003.

    -- Pegasus repurchased 4.7 million shares of common stock at an
    aggregate cost of $55.7 million during 2004.

    -- Operating cash flows increased 22 percent to $29.4 million
    compared to $24.1 million in 2003.

    -- Pegasus sold its stake in Travelweb LLC for a $2.0 million
    gain, realizing a return on investment of more than 60
    percent.

    "In 2004, we consistently generated strong operating cash flow despite price competition and planned expense increases, primarily related to sales and marketing and other activities with a focus on increasing revenues," said Susan K. Cole, executive vice president and chief financial officer. "We utilized the cash through disciplined capital investment and a share repurchase program with the target to increase shareholder value."

    Service Line Review

    The following table presents service line revenues for the fourth quarter and fiscal year 2004 as well as the percentage change from the respective period in 2003 (dollars in thousands):

Q4 2004 % Change FY 2004 % Change -------- --------- --------- --------- Representation $17,458 13.8% $71,855 25.2% Reservation 9,481 7.6% 37,275 -2.8% Financial 7,995 6.8% 33,699 11.4% Distribution 5,805 -11.7% 27,329 -5.0% Property 847 -49.3% 4,707 -27.3% -------- --------- --------- --------- Service revenues 41,586 4.3% 174,865 8.4% Customer reimbursements 3,704 14.2% 15,253 32.8% -------- --------- --------- --------- Total revenues $45,290 5.0% $190,118 10.1% ======== ========= ========= =========

--	The company's December 2003 acquisition of Unirez, Inc. continued to favorably impact representation services revenues. The Unirez by Pegasus(TM) service, a high-tech reservation and distribution toolkit for independent hotels, provided incremental revenues of $2.5 million and $13.9 million for the fourth quarter and fiscal year 2004, respectively. Service revenues from Utell by Pegasus(TM), which includes additional marketing and revenue management, experienced a 3 percent decline for the quarter and a 1 percent increase for the year. Increased reservation volume and average daily room rates were offset by a decrease in non-reservation revenues and the average commission earned percentage.
--	Net reservations for the company's central reservation service increased 4 percent and 6 percent for the fourth quarter and fiscal year 2004, respectively. Pegasus has been successful at renewing central reservation system (CRS) contracts in a competitive marketplace and did not lose an existing CRS customer in 2004. However, lower unit pricing on contract renewals negatively impacted year-over-year revenue comparisons during 2004. Concurrent with the completion of a contract, Pegasus recognized approximately $700,000 of revenue in the fourth quarter that was deferred earlier in the year. This resulted in a positive year-over-year variance for the quarter.
--	Pegasus reached a milestone for its commission processing service by processing more than half a billion dollars in commissions during 2004. The company's financial services revenues continued to benefit from improved average daily room rates.
--	For Pegasus' distribution services, GDS transactions increased 5 percent and 10 percent for the fourth quarter and fiscal year 2004, respectively. However, fourth quarter Internet transactions decreased 9 percent. For fiscal year 2004, Internet transactions were flat year-over-year. Internet transaction volumes reflect an increase in the percentage of Internet bookings made at hotel companies' proprietary Web sites; these transactions do not utilize Pegasus' Internet distribution service. In addition, reduced pricing resulting from priceline.com's purchase of Travelweb LLC negatively affected year-over-year comparisons beginning in the third quarter 2004, as expected.
--	Property services revenues were negatively impacted by the lack of revenues from PegasusCentral(TM) and declining revenues from an acquired property management system, which Pegasus plans to sunset in 2005. The company remains committed to bringing PegasusCentral back on line and expects to resume billing the InterContinental Hotel Group properties currently using PegasusCentral in the next few months.

    Financial Outlook

    -- Estimated revenue - Q1 2005 $45 million to $47 million; FY
    2005 $199 million to $207 million

    -- Estimated diluted EPS (GAAP) - Q1 2005 $0.01 to $0.03; FY 2005
    $0.27 to $0.37 (includes approximately $0.10 of estimated
    stock option expense associated with a new accounting
    pronouncement expected to take effect in the third quarter of
    2005)

    -- Estimated diluted EPS (adjusted) - Q1 2005 $0.06 to $0.08; FY
    2005 $0.55 to $0.65

    -- The company does not anticipate any dilutive impact to full
    year 2005 GAAP or adjusted EPS as a result of accounting
    changes applicable to its convertible debt.

    Davis concluded: "Building on the progress we made in 2004, we remain committed to our focus on activities and investments that will deliver value to our customers and shareholders."

    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 "Investor." The online archive of the webcast will be available two hours after the call for 30 days.

    About Pegasus Solutions, Inc.

    Dallas-based Pegasus Solutions, Inc. (Nasdaq:PEGS) is a global leader in providing technology and services to hotels and travel distributors. Founded in 1989, Pegasus' customers include a majority of the world's travel agencies and more than 60,000 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 by Pegasus and Unirez by Pegasus, are used by nearly 8,000 member hotels in 140 countries, making Pegasus the hotel industry's largest third-party marketing and reservations provider. Pegasus has 17 offices in 12 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, the level of product and price competition from existing and new competitors, 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 Annual Report on Form 10-K for the year ended Dec. 31, 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 "Investor."

    Use of Non-GAAP Financial Measures

    Pegasus provides financial measures and terms not calculated in accordance with generally accepted accounting principles in the United States (GAAP). We believe that presentation of non-GAAP measures such as adjusted net income per share, EBITDA and adjusted EBITDA provide investors with an alternative method for assessing our operating results in a manner that enables investors to more thoroughly evaluate our current performance as compared to past performance. We also believe these non-GAAP measures provide investors with a better baseline for assessing the company's future earnings expectations. Our management uses these non-GAAP measures for the same purpose. The non-GAAP measures included in this release are provided to give investors access to the types of measures that we use in analyzing our results.
    Adjusted net income per share consists of GAAP net income (loss) per share adjusted for the items included in the accompanying reconciliation. We believe this measure enables management and investors to more thoroughly evaluate our current performance as compared to past performance and provides a better baseline for assessing the company's future earnings expectations. However, adjusted net income per share does not provide a complete picture of our operations. Therefore net income per share on both a non-GAAP basis and GAAP basis may need to be considered to get a comprehensive view of our results.
    EBITDA consists of GAAP net income (loss) adjusted for the items included in the accompanying reconciliation. We believe that EBITDA provides useful information to investors about the company's performance because it eliminates the effects of period to period changes in taxes, cost associated with capital investments and interest income (expense). Adjusted EBITDA consists of EBITDA adjusted for the items included in the accompanying reconciliation. EBITDA and adjusted EBITDA do not give effect to the cash the company must use to service its debt or pay its income taxes and thus do not reflect the funds generated from operations or actually available for capital expenditures.
    Pegasus' calculation of adjusted net income per share, EBITDA and adjusted EBITDA is not necessarily comparable to similarly titled measures reported by other companies. These non-GAAP measures may be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. Schedules that reconcile adjusted net income per share, EBITDA and adjusted EBITDA to GAAP net income (loss) per share 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 Ended Year Ended December 31, December 31, -------------------- ------------------- 2004 2003 2004 2003 ---------- --------- --------- ---------

Revenues: Service revenues $41,586 $39,883 $174,865 $161,245 Customer reimbursements 3,704 3,243 15,253 11,485 ---------- --------- --------- --------- Total revenues 45,290 43,126 190,118 172,730 ---------- --------- --------- ---------

Costs of services (exclusive of depreciation and amortization shown separately below): Cost of services 21,682 20,924 92,693 85,207 Customer reimbursements 3,704 3,243 15,253 11,485 ---------- --------- --------- --------- Total costs of services 25,386 24,167 107,946 96,692 ---------- --------- --------- ---------

Research and development 737 1,654 4,026 5,199 General and administrative expenses 5,655 5,423 23,948 23,348 Marketing and promotion expenses 5,109 4,538 19,618 16,484 Depreciation and amortization 5,285 5,570 22,362 28,029 Restructure costs -- -- -- 5,949 ---------- --------- --------- --------- Operating income (loss) 3,118 1,774 12,218 (2,971)

Other income (expense): Gain on sale -- -- 1,961 -- Interest expense, net (339) (475) (1,862) (129) Other 948 93 814 363 ---------- --------- --------- --------- Income (loss) before income taxes 3,727 1,392 13,131 (2,737)

Income tax benefit (expense) (1,952) (777) (5,146) 905 ---------- --------- --------- ---------

Net income (loss) $1,775 $615 $7,985 $(1,832) ========== ========= ========= =========

Net income (loss) per share: Basic $0.08 $0.02 $0.35 $(0.07) ========== ========= ========= ========= Diluted $0.08 $0.02 $0.34 $(0.07) ========== ========= ========= =========

Weighted average shares outstanding: Basic 21,556 25,044 22,903 24,864 ========== ========= ========= ========= Diluted 21,830 25,404 23,215 24,864 ========== ========= ========= =========

PEGASUS SOLUTIONS, INC. RECONCILIATION OF GAAP EARNINGS PER SHARE TO ADJUSTED EARNINGS PER SHARE (In thousands, except per share amounts) (Unaudited)

Three Months Ended December 31, 2004 --------------------------------

As Adjustments Adjusted Reported --------- ----------- --------

Revenues: Service revenues $41,586 $-- $41,586 Customer reimbursements 3,704 -- 3,704 --------- ----------- -------- Total revenues 45,290 -- 45,290 --------- ----------- --------

Costs of services (exclusive of depreciation and amortization shown separately below): Cost of services 21,682 -- 21,682 Customer reimbursements 3,704 -- 3,704 --------- ----------- -------- Total costs of services 25,386 -- 25,386 --------- ----------- --------

Research and development 737 -- 737 General and administrative expenses 5,655 -- 5,655 Marketing and promotion expenses 5,109 -- 5,109 Depreciation and amortization 5,285 (1,369)(1) 3,916 --------- ----------- -------- Operating income 3,118 1,369 4,487

Other income (expense): Gain on sale -- -- -- Interest expense, net (339) -- (339) Other 948 -- 948 --------- ----------- -------- Income before income taxes 3,727 1,369 5,096

Income tax benefit (expense) (1,952) 16 (2) (1,936) --------- ----------- --------

Net income $1,775 $1,385 $3,160 ========= =========== ========

Diluted net income per share $0.08 $0.06 $0.14 ========= =========== ========

Diluted weighted average shares outstanding 21,830 -- 21,830 ========= =========== ========

Notes: ------------------------------------- (1)To adjust for amortization of software and identifiable intangible assets obtained through acquisitions. (2)To adjust income tax benefit (expense) for assumed 38% tax rate.

PEGASUS SOLUTIONS, INC. RECONCILIATION OF GAAP EARNINGS PER SHARE TO ADJUSTED EARNINGS PER SHARE (In thousands, except per share amounts) (Unaudited)

Three Months Ended December 31, 2003 --------------------------------

As Adjustments Adjusted Reported --------- ----------- --------

Revenues: Service revenues $39,883 $-- $39,883 Customer reimbursements 3,243 -- 3,243 --------- ----------- -------- Total revenues 43,126 -- 43,126 --------- ----------- --------

Costs of services (exclusive of depreciation and amortization shown separately below): 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 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 software and identifiable intangible assets obtained through acquisitions. (2)To adjust income tax expense for assumed 38% tax rate.

PEGASUS SOLUTIONS, INC. RECONCILIATION OF GAAP EARNINGS PER SHARE TO ADJUSTED EARNINGS PER SHARE (In thousands, except per share amounts) (Unaudited)

Year Ended December 31, 2004 ---------------------------------

As Adjustments Adjusted Reported --------- ----------- ---------

Revenues: Service revenues $174,865 $-- $174,865 Customer reimbursements 15,253 -- 15,253 --------- ----------- --------- Total revenues 190,118 -- 190,118 --------- ----------- ---------

Costs of services (exclusive of depreciation and amortization shown separately below): Cost of services 92,693 (1,915)(1) 90,778 Customer reimbursements 15,253 -- 15,253 --------- ----------- --------- Total costs of services 107,946 (1,915) 106,031 --------- ----------- ---------

Research and development 4,026 -- 4,026 General and administrative expenses 23,948 (465)(1) 23,483 Marketing and promotion expenses 19,618 -- 19,618 Depreciation and amortization 22,362 (5,549)(2) 16,813 --------- ----------- --------- Operating income 12,218 7,929 20,147

Other income (expense): Gain on sale 1,961 (1,961)(3) -- Interest expense, net (1,862) -- (1,862) Other 814 -- 814 --------- ----------- --------- Income before income taxes 13,131 5,968 19,099

Income tax expense (5,146) (2,112)(4) (7,258) --------- ----------- ---------

Net income $7,985 $3,856 $11,841 ========= =========== =========

Diluted net income per share $0.34 $0.16 $0.51 ========= =========== =========

Diluted weighted average shares outstanding 23,215 -- 23,215 ========= =========== =========

Notes: ------------------------------------ (1)To adjust for severance and other costs related to the company's information technology organization. (2)To adjust for amortization of software and identifiable intangible assets obtained through acquisitions. (3)To adjust for gain on sale of Travelweb LLC. (4)To adjust income tax expense for assumed 38% tax rate.

PEGASUS SOLUTIONS, INC. RECONCILIATION OF GAAP EARNINGS PER SHARE TO ADJUSTED EARNINGS PER SHARE (In thousands, except per share amounts) (Unaudited)

Year Ended December 31, 2003 ---------------------------------

As Adjustments Adjusted Reported --------- ----------- ---------

Revenues: Service revenues $161,245 $-- $161,245 Customer reimbursements 11,485 -- 11,485 --------- ----------- --------- Total revenues 172,730 -- 172,730 --------- ----------- ---------

Costs of services (exclusive of depreciation and amortization shown separately below): 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 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 (4) 25,386 ========= =========== =========

Notes: ------------------------------------ (1)To adjust for amortization of software and identifiable intangible assets obtained through acquisitions. (2)To adjust for restructure costs. (3)To adjust income tax benefit (expense) for assumed 38% tax rate. (4)Represents shares issuable upon the exercise of stock options.

PEGASUS SOLUTIONS, INC. RECONCILIATION OF EBITDA AND ADJUSTED EBITDA (In thousands) (Unaudited)

Three Months Ended December 31, --------------------- 2004 2003 --------- ---------

Total revenues $45,290 $43,126 ========= =========

Net income 1,775 615 Reconciling items: Income tax expense 1,952 777 Interest expense, net 339 475 Other income (948) (93) Depreciation and amortization 5,285 5,570 --------- ---------

EBITDA $8,403 $7,344 ========= =========

EBITDA margin 19% 17%

Adjustments: Other -- 2,343 (1) --------- ---------

Adjusted EBITDA $8,403 $9,687 ========= =========

Adjusted EBITDA margin 19% 22%

Year Ended December 31, --------------------- 2004 2003 --------- ---------

Total revenues $190,118 $172,730 ========= =========

Net income (loss) 7,985 (1,832) Reconciling items: Gain on sale (1,961) -- Income tax benefit (expense) 5,146 (905) Interest expense, net 1,862 129 Other income (814) (363) Depreciation and amortization 22,362 28,029 --------- ---------

EBITDA $34,580 $25,058 ========= =========

EBITDA margin 18% 15%

Adjustments: Restructure costs -- 5,949 Other 2,380 (2) 3,771 (1), (3), (4) --------- ---------

Adjusted EBITDA $36,960 $34,778 ========= =========

Adjusted EBITDA margin 19% 20%

(1)Amount represents severance and expenses related to PegasusCentral, the company's information technology organization and product management inititatives. (2)Amount represents severance and other costs related to changes in the company's information technology organization. (3)Amount includes 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. (4)Amount includes costs related to moving the company's Phoenix facilities.

PEGASUS SOLUTIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited)

December December 31, 31, 2004 2003 ---------- --------- ASSETS

Cash and cash equivalents $23,249 $58,983 Short-term investments 6,001 4,046 Accounts receivable, net 28,551 22,298 Other current assets 9,061 11,092 ---------- --------- Total current assets 66,862 96,419

Goodwill, net 163,585 164,120 Intangible assets, net 5,827 7,831 Property and equipment, net 80,326 75,474 Other noncurrent assets 12,614 22,716 ---------- --------- Total assets $329,214 $366,560 ========== =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable and accrued liabilities $29,531 $24,672 Unearned income 6,763 7,213 Other current liabilities 5,621 5,477 ---------- --------- Total current liabilities 41,915 37,362

Noncurrent uncleared commission checks 5,576 4,545 Other noncurrent liabilities 19,407 20,997 Convertible debt 75,000 75,000

Commitments and contingencies

Stockholders' equity: Common stock 211 251 Additional paid-in capital 242,112 290,828 Unearned compensation (408) -- Accumulated other comprehensive loss (995) (834) Accumulated deficit (53,604) (61,589) ---------- --------- Total stockholders' equity 187,316 228,656 ---------- --------- Total liabilities and stockholders' equity $329,214 $366,560 ========== =========

--30--BD/da*

CONTACT: Pegasus Solutions, Inc., Dallas Marcie Hyder, 214-234-4120 or Press: Cindy Foor, 214-234-4129

KEYWORD: ARIZONA TEXAS SINGAPORE INTERNATIONAL ASIA PACIFIC INDUSTRY KEYWORD: TRANSPORTATION TRAVEL SOFTWARE INTERNET E-COMMERCE CONFERENCE CALLS EARNINGS SOURCE: Pegasus Solutions, Inc.

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