Good day everyone and welcome to today’s Pegasystems Incorporated year end and fourth quarter earnings conference call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Craig Dynes. Please go ahead, sir.

Thank you. Good morning and welcome to the Pegasystems 2008 annual earnings conference call. With me here in Cambridge is Alan Trefler, Pegasystems Chairman and CEO. Before we introduce Alan, I’ll start with our Safe Harbor statement and then provide my financial commentary. Certain statements contained in this presentation may be construed as forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. The words anticipates, projects, expects, plans, intends, believes, estimates, targets, forecasts, could, and other similar expressions identify forward-looking statements which speak only as of date the statement was made. Because such statements deal with future events, they are subject to various risks and uncertainties. Actual results for fiscal year 2009 and beyond could differ materially from the company’s current expectations. Factors that could cause the company’s results to differ materially from those expressed in forward-looking statements include without limitation variation demand and the difficulty in predicting the completion of product acceptance and other factors affecting the timing of our license revenue recognition; the level of term license renewals; our ability to develop require new products and evolve the existing ones, the impact of our business of the recent financial crisis in the global capital markets and the negative global economic trends and the ongoing consolidation in the financial services and healthcare markets; our ability to attract and retain key personnel; reliance on key third-party relationships; management of the company’s growth; and other risks and uncertainties. Further information concerning factors that could cause actual results to differ materially from those projected is contained in the company’s filings with the Securities and Exchange Commission, including its report on Form 10-K for year ended December 31, 2008 and other recent filings with the SEC. The company undertakes no obligation to revise or update forward-looking statements as a…

Thank you so much, Craig. Despite the broad economic turmoil, Pega’s strong business growth continued in Q4 and we see positive indicators in our momentum as we enter the New Year. The numbers tell a lot of the story. Over $212 million in revenue, 31% year-over-year growth on back of a 29% growth from 2007 on top of 2006, and frankly phenomenal license revenue growth of 50%. We ended the year with $167 million of cash and we feel we’re in a terrific position to continue to build our leadership position in this wonderful BPM market, despite a lot of what we’re seeing out there. The reason we’re able to do this is Pegasystems Build for Change technology is very, very practically enabling customers to simultaneously reduce operating costs and improve customer service and loyalty. This value proposition resonates extremely well in today’s difficult pragmatic environment and we find that organizations can make decisions to buy our software, even if it’s not in the budget, because our software can get them benefits, in a quick enough payback period for them to decide to go forward. Our customers love the concept. They can use technology to connect customer interactions in the front office to the back office, being able to provide seamless fulfillment and an excellent client experience. Customers can make either a platform decision, as some have, to use our technology very broadly or they can say they want to start with a small point solution, obtaining that immediate return on investment and because of the architecture, we make it easy for them to expand and build on their initial decisions to select Pega software. Consistent with this value proposition, we’re seeing an increasing use in contact centers, customer call centers, who are buying our process oriented technology as a…

We have made some calculations and built that into our net income number for 2009; however I will tell you that it’s very difficult to predict the currency movements and to hedge against all of them. So it is a point where it’s not as accurate a forecast as we would like; certainly not as accurate as other aspects of the business, which we have under our control. Brian Murphy - Sidoti & Company: Okay and just looking at it, it looks like your revenue from continental Europe, almost tripled in 2008. Can you just give us an idea of what’s happening there? I mean did you take down some big deals this year or anything would be helpful?

Well, we’ve made a decision; we were going to expand in the UK and Europe and I think that that has paid off. We’ve actually opened offices in Amsterdam, we’ve incorporated in Germany and Switzerland and so we’ve broadened our footprint, hired some additional staff and frankly paid some more attention to that area and are seeing some returns from that. We had a good mix of business. We did have a very large piece of business, but we also had a number of smaller ones, so I would say that it wasn’t one big thing, but we’re actually seeing good activity in Germany and Switzerland, in France, in Holland and some of that is actually percolating through other parts of Europe as well. So it’s really I think a response to some of the investment and additional attention. Relative to the question on exchange rates, we took a real beating. I think it was disclosed in the K that our total foreign exchange loss last year was over $4 million. At some point this has got to stop I would imagine. So, I don’t think we can predict exactly what’s going to happen, but I think we’re certainly hoping that the foreign exchange in 2009 will be less damaging than it was in 2008. Brian Murphy - Sidoti & Company: Craig, I think last year your guidance for cash flow from operations for 2008 was $25 million, you guys put up $38 million. When I look at guidance for 2009 it’s again $25 million; how should we interpret that? Is that just sort of your typical conservatism here?

No. Actually, if you look on our balance sheet, we’re starting 2009 with $13 million less of installment receivables and those installment receivables are from a long, long time ago when the company used to do MPV accounting and those things are dwindling down. So there’s $13 million less and that means $13 million less of cash to collect. Brian Murphy - Sidoti & Company: Okay and Alan, you mentioned that you were taking share in your space here. Just broadly, would you say that share take is coming at the expense of the stack vendors or some of the smaller guys in the pure place?

Well, I think some of the smaller and mid-sized guys are suffering because, frankly customers are wondering who is going to survive some of the shakeout and some of them haven’t had the depth of resource to really invest like we have. Figuring out the share of some of the stack vendors is frankly as individual vendors pretty confusing, because let’s just say stack vendors have been known to periodically reclassify what they’re selling, to sort of try to look the best in every market that they allegedly play in. So it’s a little hard sometimes to know whether Oracle, for example, thinks it’s BPM versus 75 other things that they might be selling there, but we are very comfortable that in the business that we are in. We are winning the sales that we’re in; we’re winning a very, very significant number of engagements that are closing. We’re of course seeing fewer things actually close as organizations are sometimes deferring things, but obviously we were able to overcome that to post the results that we were at that year. So, I think we’re actually gaining share against both. I can prove it a little more empirically against the smaller guys than we are kind of against some of the bigger ones.

Your next question comes from Edward Hemmelgarn - Shaker Investments.

Can you talk a little bit about two things; one is, are you finding any changes in the mix of your new orders coming from either your percentage from existing customers versus new customers; has that changed at all?

I think it’s been fairly consistent. As I mentioned, more than three quarters of our business came from organizations that we had a relationship with and part of what we’re seeing is that in this world of mergers and acquisitions, sometimes these companies are finding that they are, actually becoming much larger, in some cases spinning-off pieces. So, I think the existing relationships were really quite important in last year and the fact that we’re careful enough of trying to get clients to be successful, I think it was key. My prediction is that will be true for this year as well, although of course who knows what they’re looking forward.

In terms of the software, you keep making improvements to it, but do you have anything, any larger changes that you’re anticipating or improvements to your basic software, say over the next few years versus where it’s at right now?

Sure, I mean some of the changes are actually pretty material in terms of what they take to implement and what they do. So for example, this, what we call Internet Application Composer, allows us to really snap in to client’s existing infrastructure, either at their externally facing web portals or into some of their internal other types of applications. Being able to match the brand and the look and the feel of a client’s existing website or existing application environment actually was a pretty big addition and we’re seeing quite a bit of interest from organizations who see this as a way to sort of refresh and renew their legacy architectures, as opposed to trying to pull them out and rip them out. So, some of these, though under the umbrella from our perspective of BPM, really do represent pretty significant, new opportunities for us to broaden the product line and get greater customer applications. The other thing that we are going to be rolling out this year is our platform as a service offering, where we’ve actually implemented the ability for our technology to be used on a platform as a service basis and we think that this is going to be of interest to both large customers who want to create their own, what we call ‘my cloud,’ their own sort of private cloud for the organization to be able to facilitate them rolling out process management or in some cases being willing to do that over the web. Though, I’ll tell you, a lot of my customers are a little bit quirky about having data outside their fire wall. So, I think that the ‘my cloud’ piece is going to be pretty key. Getting our product to be able to work in that environment did take a fair amount of work for us and we’re looking forward to rolling out that set of technologies this year.

Is that something you expect in the first half or the second half of the year?

We’re already experimenting with it, with a number of sort of what I would describe as select early adopter sites and I would hope that we’ll be able to roll that out sometime in the second quarter.

As far as new industries, I mean obviously you talked about the deal or contract you had with, I’m assuming Ford Motor, but are there any industries that you’re seeing now that are becoming interested or that you didn’t see a year ago?

Well, Teleco which we knew a year ago I think has actually shown increased promise and we’re actually winning business and frankly looking to invest in improving our domain knowledge in the telecommunications area. I think that the travel business, Expedia recently went live with a contact center that was talked about by their CEO in one of their conference calls, and being able to work with state-of-the-art companies like that has been pretty exciting for us over the last year. This airport opportunity, it’s a whole world around actually facilitating the mechanics of travel and saving those organizations a lot of money in helping them for example to run airports and that’s just another place where we think we can take examples of success and move them forward. So yes, we’re seeing some of these very, very interesting pockets and actually we’re hopeful that our increased focus on partners will bring us into more deals of this type and give us some more leverage.

Your next question comes from the line of Gregg Speicher - Moss Creek.

This maybe somewhat similar to the previous question, I’m not sure, but in looking at these pipelines versus last year for each vertical, you said each vertical was approximately the same. Would you say that is still true or have some moved ahead and some lagged?

That number represented the new license bookings for 2008 in the year. It’s an annual number. That number bounces around from quarter-to-quarter. Certain industries buy at different times of the year, so we sort of look at it on an annual basis.

Okay, but do you see any of them really just coming to you wanting more and more or some starting to suffer a little bit or not?

Well, I think the tenor of the business is pretty balanced between those verticals. Years ago we used to be almost exclusively in banking and given what’s been going on in banking, we’re actually quite glad that a couple of years ago we very consciously sort of broadened our footprint and broadened our focus there. Though, we are still seeing business coming from the banking industry here as well, I would say that if the crisis had not occurred, we would have seen a meaningfully more growth in both banking and insurance. Both of those pipelines were clearly impacted by what went on, but we were able to grow through it and even in those industries we were able to get customers to sign up.

Okay and what was interesting in talking with customers at your user conference and kind of what you just highlighted here is just sort of the growing waves in different processes that customers are using this. I mean how much of a factor in your growth is that? It gets in there in one section and they go, ‘hey, we can do it for this, we can do it for that,’ I mean does that just keep going until they, basically have a new platform or what do you think about that?

Well, I don’t want to make you think that the sales guys don’t have to do a lot of work, but the customers are realizing the breadth and the applicability of the technology and frankly as we are doing our technology investments and we’re now in the position and we’re able to I think pretty wisely invest quite a bit of money, we’re listening very carefully to the types of things that would facilitate them doing exactly what you’re talking about and really broaden the footprint. Some of that is subtle, but it is very central to what our strategy is; we call it sort of a radiation strategy in our clients.

Okay and last question, tell me if I’m doing this right, but when I adjust the final ‘08 cash flow and then the ‘09 guidance cash flow and I take out the installment payments, it does look like that net cash flow may actually be guided down just slightly for ‘09. Is that fair or is that the right way to look at it?

It should be pretty consistent once you take those installment payments out.

Okay, somewhere in the same area?

Yes, it should be pretty close to $25 million.

Your next question comes from Geoff Hulme - Porter Orlin.

Alan, I was curious what your two or three organizational goals are, top goals for ‘09, kind of away from the numbers, just what you would like to see Pega accomplish this year?

Well, I think we need to do a much better job at marketing. We actually have a search opened for somebody to run our marketing function. The Elmen work is being done by a fellow who is standing in on a temporary basis. So, if anybody knows anybody, we’re always glad to get resumes and I think that part of what our mission needs to be is to get the message out better and make sure that we are working to build a brand. So I would put that very, very significantly on the list of organizational goals. I think that client success is so central; we’re making major, major changes to the way we think of enablement and training. We spent a lot of money training our new staff that we hire and we’re putting a lot of work into training customers and partners. We believe that that can be more efficiently done and we’ll try both in a product perspective and our educational perspective to improve that. I would say that the sort of third sort of organizational thing is we’re going to be implementing a lot of certification programs to be able to get both our organization, our services people, certified at multiple levels of expertise and then opening those up to our partners and our customers to see if we can broaden the ecosystem of folks who really are expert in and promote Pegasystems. So, I’d have to say that those were three of probably seven or eight pretty significant things we’re trying to do.

(Operator Instructions) Your next question comes from Brian Murphy - Sidoti & Company. Brian Murphy - Sidoti & Company: Craig, not to harp on this cash flow from operations guidance, but you guys are guiding for net income up 50% next year and it looks like adjusting for installment receivables, cash flow is going to be flat. Is there a working capital investment or what’s happening there?

Well, there may be a working capital investment as we go through the year. Certainly some of our accounts are hurting, budgets are restricted and oftentimes we can solve some of their problems by taking licenses and instead of allowing them to have the one big time buy to sort of trench that out during the year, so that they can take the license in smaller bites and that will impact our cash flow as well. Brian Murphy - Sidoti & Company: It looks like last year you got sort of a good bump in cash flow from the increase in the deferred revenue balance and it looks like this year that’s flat. Is that part of the difference there?

It’s a little bit of a difference. The primary increase between Q3 and Q4 deferred revenue was in maintenance and that maintenance piece will turnover into revenue into 2009.

One insight of our cash flow can be found by taking a look at the liquidity section, where we show these pretty much hell or high water contracts, where customers are going to pay us on a subscription basis. Subscription is very fashionable these days, that’s what the whole software’s and service movement is about. We’re allowing customers to take subscriptions as well, even when they install the software internally. The affect of that though, is that we take all of the expense around the sale. The pre-sales work, the selling work, the commissions to the sales people, we take that meaningfully up front even if the cash flow and revenue comes in over two, three, four, five years. So, one of the things I tend to look at when I try to judge how the company is doing is the delta in that balance as well, which frankly in some ways could have been cash, but reflects an asset, logically an asset. It’s not on the balance sheet as an asset.

Yes, I mean if you use the $88.5 million worth of term licenses we built up, we received no cash back, yet we’ve spent all the marketing cost to get those customers informed, we spent the sales closing costs then we spent the commissions and we have yet to collect the license revenue and the cash. Brian Murphy - Sidoti & Company: Got it and sort of kind of staying on that thread. Alan, your subscription revenue is growing from pretty much nothing, sequentially now at sort of a $6 million run rate. I mean, should we continue to expect that to grow sequentially in ‘09?

When you say subscriptions, do you mean the term licenses or the one line item says subscriptions? Brian Murphy - Sidoti & Company: Yes, the line item that you’re breaking out under license revenue.

Yes, subscriptions are pretty unusual. All it takes is one minor little change to the terms of the contract that drives the disclosure into subscription. They’re rather unusual, but we do like that model because it’s very, very similar to a term license. To us there’s no difference, it’s just a disclosure on the P&L, but I just do want to point out that a subscription doesn’t mean hosted. We don’t host the software even though it’s a subscription. Brian Murphy - Sidoti & Company: Could you guys talk about just what you’re seeing in terms of trends with deal sizes?

So, what was interesting is our deal size floated up a little in 2008, not necessarily that every deal was up a little higher, but the deal size actually rose to be a little closer to $1 million up from about, I would have said 700 K. So it drifted up a touch.

We still target deals in the 500,000 to $1 million range, but occasionally one of our well known partners will invite us to a party that we normally wouldn’t even know about and when they do that, typically those transactions are larger than what we would target. Brian Murphy - Sidoti & Company: That was actually my next question. I mean so as you gain traction with these tier one service partners, not only are they helping you with the service business and you get a nice sort of mix shift there, but they’re also bringing you into larger deals right?

Yes, their deals are typically larger than what we would target on our own and they have the clout to get those deals done.

The trade off for that is frankly there’s less predictability about when those big lumpy deals actually close, because the tradeoff you get for working with one of those service partners is generally where we have a little less control over the mechanics of the transaction than when we’re driving the bus ourselves. Brian Murphy - Sidoti & Company: Would you say that they’re adding head count to their practices, their Pega practices?

Absolutely; we’ve gotten meaningful commitments from partners to add head count.

One of our partners was at our sales kickoff and he gave a speech to the sales organization. He was definitely pumped up about growth in the year.

Your next question comes from Edward Hemmelgarn - Shaker Investments.

Yes, just a couple of more questions. One, Craig regarding the services, with the increased or rebound in business in the U.S. in the first half of the year, do you expect to see margins get back to more normalized levels?

They may increase, but as I said it’s not our primary objective. We’re spending more of our time, we’re willing to spend more of our hours in making sure that customer is extremely successful in five or six or seven months. On top of that, we want to spend the time to enable the customer and that’s the time that you often can’t get billed for. So, doing that knowledge transfer to a customer and beyond that doing knowledge transfer to partners. When you work with partners, oftentimes they’re not as familiar with the product and we invest the time to enable those partners, so that they can do more work on their own.

Again I’d understand that it’s never going to be a big profit generator for you, but there was just I think a 7% increase in your or I guess it actually was 8% in your cost of sales in Q4 versus Q3. So I’m just trying to get some idea if that’s going to be the run rate or do you think that that’s going to at least improve a little bit?

I would say that we’re targeting 20 and slightly above margin on professional services. Now mind you, in our case though, professional services does not include maintenance, we break maintenance out.

Okay and Alan the other question I just had is, as you do these deals with partners do you get any more pressure or desire on the part of your customers to do broader site licenses as opposed to individual kind of like usage license?

Brain I think one of the reasons that we’re around and frankly a lot of the smaller or mid-sized competitors have either died or been driven into the arms of acquirers, which is a different way of dying frankly for most of them, is that we strongly resist the traditional irrational pricing model of software companies. We think customers should pay a reasonable price for using some software and, if they use it more broadly and are getting value from it, that they should pay a reasonable price for that additional use and we have walked away from deals and pieces of business where the sort of site license insanity, I think would have been adopted by other customers. So, there’s no new pressure. Customers have always asked for it, they’ve been trained to ask for it and I think frankly for customers where that’s a prime goal, they will probably find that they need to buy something else.

Site licenses are hard to get done these days. I mean, it’s much easier to sell series $1 million licenses that are purpose based in solving particular problems than it is to go in there and try to sign a $20 million.

Software deal?

Yes or IT and that’s typically who could buy those.

Your next question comes from Gregg Speicher - Moss Creek.

One last question, you mentioned some of the newer products that you introduced around last year’s conference; would you say the new product uptake has been ahead of plan or about on target or you just want to put them out there and see how it went?

I think that there’s been a lot of interest in particularly some of the new products. When we do something that we think is a little bit sort of radical, we tend to roll it out to a select number of customers first and make sure that we’re comfortable and frankly get that client feedback and we’ve been doing that and that’s our plan for the first half of this year on some of those new products. So, I think that was always our intent and we’re seeing interest that supports that. So, I guess I would have to say that was pretty much as we would have expected.

There are no further questions at this time. I’d like to turn things back to our speakers for any closing remarks.

Thank you very much everyone. We look forward to talking to you again at the end of Q1, which is not that far away.

Bye-bye.

Thank you everyone. That does conclude today’s conference. You may now disconnect.