Good day, ladies and gentlemen, and welcome to the Pegasystems Q2 2012 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) And as a reminder, this conference call is being recorded. I would now like to introduce your host for today’s call, Craig Dynes, Chief Financial Officer. Please go ahead.

Good evening and welcome to the Pegasystems 2012 Q2 earnings conference call. With me here in Cambridge is Alan Trefler, Pegasystems’ Founder and CEO. Before I introduce Alan, I will 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, forecasting, could and other similar expressions identify forward-looking statements which speak only as of the date the statement is made. Because such statements deal with future events, they are subject to various risks and uncertainties. Actual results for fiscal year 2012 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 are contained in the company’s press release announcing its Q2 2012 earning and in the company’s filings with the Securities and Exchange Commission and including its reports on Form 10-K for the year ended December 31, 2011, its report on Form 10-Q for the quarter ended June 30, 2012, and other recent filings with the SEC. The company undertakes no obligation to revise or update forward-looking statements as a result of new information, since these statements may no longer be accurate or timely. Similar to our experience in Q3 of last year, Q2 bookings were suppressed by the increased uncertainties of economy. This is most evident in Europe where on a year-to-date basis bookings were down 61% from the same period last year. There seems to be a lot of trepidation to sign any contracts of significant size. In fact, we observed that some larger license arrangements splitted to a series of smaller projects, which are then scheduled…

Thank you Craig and good evening to those of you on the phone. For those of you who have followed us for some time you know that we've taken and continue to take a long-term view of our business, focusing on market leadership, customer success and profitable growth. The market opportunity for our software is enormous and we see more and more customer organizations experiencing the power and huge returns of using our model driven approach for business applications, instead of handcrafted coding or living with that process. We believe this long-term perspective has been proven to be in the best interest of our shareholders, our customers, our partners and our employees. And the long-term approach means that we invest in technology innovations in the following legacy technology trends. We have and continue to set the standard for what software should be able to do for business users, in optimizing the customer experience, and in automating operations. We continue to see validation of our differentiate approach as more and more leading organizations choose and implement Pega's Build for Change software, over traditional stack vendors or niche suppliers. This means we do not try to manage our business quarter-by-quarter but rather do business with our customers for long-term success. As a result, sometime business moves from one quarter to the next as it did in 2011 when our discipline business practices caused a number of bookings to move from Q3 to Q4. You will recall that 2011 ended with a blow out results with overall bookings up 75% from 2010. Because of this, sometimes our term licenses and professional licenses will vary and mix and all of this can make a difficult to forecast anything, with a great specificity. But on the long-term focusing on quality, smart businesses practices, enablement, certification…

(Operator Instructions) Our first question comes from Nathan Schneiderman from Roth Capital. Your line is open.

I just wanted to startup on a question about the big deal, the bigger deals and the pressure you felt. I was curious. Were you feeling pressure, would you say, across the board or was more in deals over a $1 million, over $5 million, over $10, just where was it that you felt the pressure?

I think that the pressure is more on the much larger deals and as Craig said, you know, it was a whale less quarter and usually, we are accustomed to getting whales or two here and there. The reality is when faced with some of the choices in difficult economies, I think software providers often end up getting squeezed to signing mid-size deals and giving up a tremendous amount of value as opposed to actually doing what we ended up doing which is we closed the number of pieces of businesses that would business that were described as entree pieces of business that have secondary and tertiary parts that we think we will get as we execute where the numbers have even been laid out. So you know, very low to just copy a value because they of course don’t have the budget that quarter we will much happier to match the available budget to a reasonable and rationale purchase for the customer and us. Its’ just that in this times of a lot of uncertainty, you know, we saw that happening more than we typically have in the last quarter or two

Craig, you shared with us that you had more deals, the number of deals in Q2 was greater than Q1 but the ASPs were down. Approximately what percent were they down?

They were actually; it is the year-to-date numbers that I gave. We’ve done more deals for six months than they were, than we did for the first six months of last year. I don’t really want to talk about percentage down. It's just as Alan said big deals will get chopped up in smaller deals and that tends to put the average selling price down when you don’t close a particularly big one.

Hey and final question for you Craig, you mentioned some deals with contingencies that caused delays in (inaudible) can you explain in more detail what was going on there. What specifically were the contingencies, were they future products or something else. Was it a macro related issue that caused the contingencies to get in and can you clarify I gather they are not in the off balance sheet backlog disclosures but can you go over that one more time and just more detail on what these contingencies are and whether you expect similar contingencies in Q3, Q4?

So first of all they are not in the financial statements. They are not in page 23 at all. If something has a contingency as far as we are concerned, it is not a booking. It doesn’t go on backlog and it certainly doesn’t count as revenue. As far as the reason for the contingencies they are all different, they depend on particular customer circumstances, I will defer to Alan. He was involved in some of these deals. I think there is a variety of reasons for the contingencies.

Yeah I think a lot of what Craig has described is contingencies, the situation I was talking about were a piece of business that a year ago we might have seen go in for say $7 million piece of business that involves a variety of things happening that perhaps would hold the customer for a year and a half now becomes something where they will say okay, well they are feeling some stress. We will take down 2 million, we will put the other 5 million in the agreement. We will maintain our price points which is what we care about. And when we get to the point where we are more comfortable or the date happens, we will make the decisions take down to that. So in those cases we would never consider any of that to have a place on financial statements, but it is the problem that you do all work to win the $7 million deal, it comes down to a couple of chunks. Did that answer your question?

I think so. It is really all about deals that were split into pieces, it is not future product agreements or

No there is no future products. If there was a future product you wouldn’t get any of the revenue because we don’t have these license and if it was the right to future products then it would accounted for as a subscription. So it was none of those situations. Whatever as well as is customers just need to fit this into their budgets and you know they are restricted and corporations when times are tough especially in Europe they just make it tough for them to buy things.

In Alan's example, the $7 million would you recognize the $2 million but the $5 million you are calling contingent and in the future or is it some thing different than that.

Yes it would be a specific date and a specific event that would happen in the future quarter and at that point in time, the contingency is waved and it becomes a booking and probably revenue.

Our next questions comes from Richard Davis from Canaccord.

So two questions one I guess for Alan. You hired a bunch of salesmen, so it sounds like you’ve got a bunch of stuff kind percolating at various labors. Is there from an outsider standpoint, is that a demarcation line that you would draw between kind of good and not good execution and where you there on this quarter in Europe and then the second one, we recently seen a company like ServiceNow go public and they've at least indicated that at some point they aspire to move forward to your space. Have you seen them now or do you expect to see ServiceNow in the future as a competitor. Thanks.

Relative to ServiceNow, to my knowledge we've never seen them. I don't expect to see them as a competitor frankly because we generally sell into sort of more customer oriented in line with these days and I don't think that, that actually is a game plan working strategy to do the sort of applications we have, but we are obviously a lot larger than they are as well. The question about the sales execution you know we closed as Craig said a lot of deals. This was a size problem and I think we need to take responsibility for making sure we are doing a good job to get clients and step up for the bigger numbers. We know how to do that, so a little bit of a whipsaw with the economy being better and worse, and better and worse because when the economy is worse we've really pinched the automation and the cost savings message. When it's better we pinch the sort of front office world class business like AMEX, user experience message and I think we can do and we all do and work to do a better job of making sure that particularly the new sales guys are all equipped with both messages at scale. So they can get big numbers from both. But I'm not fundamentally concerned and I think the business has everything it needs to meaningful at the year and meaningfully grow in the future.

And next question comes from [Evan Kenfield] from William Blair.

Turning to my question, can you talk about the vertical market, what you are seeing in financial services, banking versus insurance, oil and gas, in other words, is it across the board where people are cutting deals into smaller pieces. Are there verticals that are stronger than others? So just kind of a sense of the environment macro is difficult but where is it better and where is it worse.

So, the financial services markets unsurprisingly are choppier. It is not news and it's something that over a longer period of time, we’ve traditionally been able to do a good job of addressing. The healthcare markets came in strongly for us. I think that with an additional 40 million lives or 30 million lives coming online next couple of years, that market should continue to be very, very good for us. I think Telco was a real joy and we’re excited by the business we signed. It was a very, very expansive telco pipeline where we just got awesome references and they have got money to spend. So that’s how I sort of look at the verticals right now.

What about oil and gas that were a couple of big prospects? How is that market shaping up? Are those process holding off? What else are they doing?

Well, we got initial clients and that’s always great. And it's for us, it's still among the earliest verticals that we have gone into. So I would describe it as still young. We are also extremely encouraged. Once again to the market like that, there is just a tremendous number of opportunities and they are not as whipsaw from what I can see as the financial markets are and what goes on say in Europe.

If you look at the competitive environment, is there anybody in the margin you are seeing more of, anyone in the margin you are seeing less of.

I think the competitive environment is excellent. We have driven most of the pure play BPM players into the arms of large companies. Many of those implementations in those companies frankly haven't been going very well and they have had them. And we have a level of reference ability that I would say is a full factor of ten higher than the guys we see. So the routinely now are able to push people to place like PegaWORLD or the many references on our website and it gets comparisons from the other big stack vendors who have generally done this through acquisition and have lost a lot of the talent. So I feel very good about the competitive landscape.

And final question for me is that in the pipe and how big it is and how much it's grown. How much of -- there are a lot of whales out that, would you expect the whales to continue to be chunked or any of the wells expected or hoped to come in single big well like pieces instead of chopped up in the -- I hate to use the word chop, but smaller chopped up fish.

I'm not sure if whales actually go after chumps Laura. I think that's –

Whales go after plankton. I understand that but if whales are chopped up.

I understand the point. When we put ideas in the pipeline we don't generally put them in at whale proportions. We tend to put them in at modest promotions. It's not a common, first actually you raise what's in the pipeline as the deal goes into closure because we have taken sort of I wouldn't say conservative, but I would say something of a midpoint approach to the way we do that. So the pipeline growth is not because of it has whales in it. There are frankly still lots of whales out there. I do think that if things stabilize, the chopping will stop. But you know the phase between a decision of eroding our value of our relationship with the customer and then breaking it into some places so that they can be more comfortable. Our track record in implementation success is such that breaking it into pieces is a smart thing to do. I know as I said that our first half of last year was just a really, really hard compare. If you go back and take a look at the scripts we were having a nice whale of a time back then. I think they are going to be back and this isn't a secular change. I think it was more a change related to just particular peak and anxiety that we saw in the second quarter.

Our next question comes from Doherty & Company. Raghavan Sarathy - Dougherty & Company: So I want to go back to Alan your comment about you are expecting strong bookings in the second half of the year. Is that expectation predicated upon you sort of closing some of the deals and maybe expanding some of the deals that you already closed this quarter or you are anticipating not much improvement in the economy, so probably closing more volume of deals at the kind of ASP. What's driving your strong bookings expectations at the back half of the year?

Well you know we do. We do a lot of very detailed review of pipeline. So despite the fact that we've grown we are still small enough that we are able to have very, very specific understanding of all the deals globally of any size. I'm expecting the ASPs will head back up. I expect that we will get more whales in mid sized deals than the drought we saw in the first half, but we are not depending on just a couple of whales to have a stronger second half. The business is out there in the pipeline and we've got proposals and frankly a staggering amount of activity going on. So that's what gives me the level of confidence to say that I feel good about the second half. Raghavan Sarathy - Dougherty & Company: And then the second question is about sales capacity, so you know, it's kind of well understood that the bookings number is smooth all over the place. So one thing I did was I looked at the trailing 12 month in license signings. So the trend we have seen is that it was $150 million at the end of first quarter, crossed over $200 million, $230 million) actually by the end of fourth quarter, so it seems like some of the hiring you made back in 2010 paid off, now we are starting in a plateau. So I was kind of wondering how you are thinking about sales capacity, where is that today; it seem like you also have to protect the EPS in the meantime. And so I was kind of wondering how are you looking at the sales capacity investments in this?

So we’re going to continue to increase our capacity. We have undergone a study of the level of coverage we’ve had on accounts in our major established verticals and there are some very large companies that are just frankly grossly under-covered, you know, some of the world’s largest insurers and financial institutions that have a quarter of a percent if that makes sense whatsoever; some very, very large telecommunications companies that aren’t covered at all despite our success in this business. Remember, we are not a lead-generation model. We are target account vertical penetration model. So we’re going to continue investments in sales judiciously and we’re going to continue investment in R&D, also judiciously, and I don’t feel like we’re making any major compromises that could affect our future, should things pick up as we do well. Raghavan Sarathy - Dougherty & Company: And then just one final question for Craig, so your guidance implies $0.60 roughly EPS in the back half, that’s much more backend loaded than the previous years. Can you talk a little bit of the linearity in the EPS and then if I recall correctly your previous guidance assumed 20% license revenue growth with that asset to the topline how should we be thinking about license revenue growth?

Well as I said you know we are managing expenses to sort of reflect the reality of the economy that’s out there right now so we are still increasing sales, still increasing our R&D organization, but I think we are doing it very carefully and mindful of the economy. So it is very backend loaded, the non GAAP full year guidance and we are above where we thought we would be at the midpoint of year, so we always thought it was going to be very backend loaded year. So know it all comes with license revenue; it’s 100% margin and we expect that to be dramatically larger bookings going forward and all of that falls on the bottomline. Raghavan Sarathy - Dougherty & Company: So how should we think of license only growth with the haircut for revenue?

Well, you know if were to achieve about 95% of our target, we had originally laid out $500 million as revenue target and we are so working towards that target, but we’ll end the business at about a 95% of that given the economic situation, so you know that would represent I think just over 15% revenue growth year-over-year. Now we are running at basis; we are still running the business and the sales organization is still working hard to hit our annual bookings targets and that’s what’s more important to us; a lot of the difference in 95% versus 100% is a move to term licenses. The most important thing is to close the business and then if the deal is off the table win the deals and whether we take it as a term or perpetual, we are pretty indifferent.

Our next question comes from Steve Koenig from Wedbush. Your line is open.

Just two, and actually maybe they are kind of related, so let me put them both out there. One is maybe just additional color on traction with CPM and unified marketing campaign as well and with your SaaS efforts? And the other question is just kind of more about longer term vision and strategy. I would love your commentary on how your competitive positioning is evolving overtime as large competitors are aggressively going to market with their acquired product footprint in tandem with some of their products they already have?

So to answer those questions in order, the new unified marketing capabilities and some of the new key pieces we added are actually very, very new, but we've already sold a number of them to customers that are getting just enthusiastic feedback. So we are fortunate there that we have an installed base of formally Chordiant customers many of whom from pieces of that product line have not really received a refresh of product update for over a decade as a result of Chordiant having bought a product they have not really come out with really any sort of meaningful subsequent changes to it. So we have two ways, we've got a lot of very exciting new customers including for example some of these Telcos that we are talking about which are just tremendous opportunities for this and we've got a replacement business as we go into next year where I think we will be able to upgrade a lot of those customers and get some revenue up as a result of that. You know vis-à-vis the competition we have an unprecedented number of absolute world-class references. If you want to understand what's the different between us and our required competition you can see the movie. If you go to our website, anybody is actually interested in understanding our business. There is a four minute video about two customers. One about OCBC, which is Overseas Chinese Banking Corporate, which is rated by Bloomberg as number one bank in the world as a very innovative bank, the recommendation that they were prepared to give us publicly, on how they used us to completely change their business is frankly not like anything you will see on any other site. Similarly, for another video of our Heathrow Airport, which is using us. So we got I think just a tremendous advantage both in the technology and the willingness of customers to talk about it. Do it what we do, everyone of our competitors, you know, these big companies needs to stitch together, with dozen products and I think customers are seeing that that’s just too hard, too difficult and frankly not leading to the same store reference successes that we got 100 of, did that answer your question?

I guess, the only follow-up would be, you know, they will keep trying and you know, sooner or later they will make progress you'll have evolved as well and I am just, curious, what's thoughts you have about how you will evolve kind of longer term, to stay ahead of competition?

Well, you noticed that we are continuing to invest in R&D. we think that we cannot take for granted that our competitors will be ineffectual. I am pleased with your lack of progress so far but we're not counting on that and the good news is that we see many tangible ways so we can continue to push the envelope here and ultimately that will lead to more prime success and greater adoption. There are still things we can do to make this technology easier to adopt, easier to use, more verticalization and all of that is going to b very, very powerful going forward and we are seeing customers respond very well to the types of things we are doing. So we are not taking anything for granted, but I will tell you there is an increasingly large difference between your product and our competitors and that does make me feel a little bit.

Our next question comes from Brian Murphy of Sidoti & Company. Your line is open. Brian Murphy - Sidoti & Company: Craig I think you said you still expect to hit your annual bookings goal for the year and it sounds like you have the pipeline to do that just curious did that original bookings goal imply growth over 2011?

Yes, yeah.

Very significant growth. And look I think we are being candid about where we are but the team has not backed up we did our complete reset at the end of Q2 and we had all the members of team go through and take a look and actually lay out what they thought they could do and percentage handicap that on specific known business in the pipeline of for long in the pipeline and they told us not to back off of that as a target, but it is an increasingly tough target of course but we haven’t backed up. Brian Murphy - Sidoti & Company: I think to just be flat with bookings versus last year you need about $170 million in license bookings and that would be up 15% second half over the second half of last year, so that just to be flat I mean it hit sort of significant growth number I am just curious what would the book-to-bill kind of look like because I think that would imply sort of book-to-bill like two-to-one?

Well traditionally we do about one-third of the term licenses that sort of the long-term history that we've established. But as I have said, it moves around quarter-to-quarter, it's just based on the handful of deals at the margin that you are closing each quarter. So and Q4 was dramatically term and Q1 was perpetual and then term again. So even though we are a lot of history about one third of the deals being termed, it can change around. I think when you look at home much business we booked in Q4 last year. Its pretty good indicators years came backend loaded and we can, we can do a lot of business anyone one quarter, two quarters. Brian Murphy - Sidoti & Company: Okay, so we shouldn’t consider that bookings level that you did in Q4 '11 as some of anomaly.

I think it was unusually high; it was actual blow out quarter on the back of what had been frankly a Q3 was much worse than this quarter was. So I mean that's, I think looking at any single quarter if you average Q3 and Q4 of last year, you are going to get much more rational but it still really, really awesome number compared to just looking at Q4 and that fact that Q3 was is great and half of what this quarter was. So this appears to be the nature of our business at this point in time. (Inaudible) becomes predictable but…

You have to keep in mind that our customers have annual budgets, they don’t have quarterly budgets and so for them whether they sign something in the last year week of June or the first week in July it doesn’t make any difference. But that’s been the way they budget and that’s what they spend. Brian Murphy - Sidoti & Company: Okay and you are buying back stock I think you said at an average price of $33 a share in the quarter, any thoughts about being more aggressive here.

We buy a pursuant to 10B51 plan. So we can buy right back through quiet periods and at the present time the plan is still in effect.

Our next question comes from Edward Hemmelgarn from Shaker Investments.

Can you talk a little bit, I think you mentioned Alan that the pipeline was now at about $1.7 billion, at least I thought I got that number right.

Yeah, that's about where it is.

Could you compare that to where it was a year ago and talk about it in terms of -- give us some kind of ideas about number of companies that were involved in the pipeline then or are involved in the pipeline now, things like that just to give us a little bit of better perspective.

Yeah, so I say it's about a good order mix to 15% to 20% up over the last year from a number point of view. I don't have the number and for the number of companies that it represents but I will tell you that the document I look at which has all the items of the pipeline when we do the periodic reviews. It feels about 50% chubbier than it was a year ago. So the number of companies is also going meaningfully up. If you think about allocating more sales people to more areas you would expect that.

And is it any one vertical or its up a lot more than last year.

You know some verticals we are seeing a real push in but I think it's pretty nicely up across all of the verticals at the stage. There's no vertical that is a particular laggard that I can think of.

Can you talk a little bit about, last, I guess the last time, I think maybe it was back in 2008 I think. You know, when there was a pretty significant crisis in the world, you had pretty good bookings for orders, especially in Europe, but this year it appears as if you know, that is really causing you some challenges. Can you talk a little bit about that?

You know, I think historically, you know, part of having been around for as long as we have and we have seen a lot of tough times as well, as well good times. Historically we actually do pretty well, certainly much better than our competitors, many from (inaudible) in 2008, you know, 2009. You know, we continue to grow at a terrific rate organically during those years and part of the challenge for us is the education of the salesforce around how you sell in difficult times. It is actually a little different than the educational sales force where you are selling for revenue increases. The difficult times almost always really need to be about automation efficiency and the key element and so we’re actually, we have been actually refactoring a lot of you education training and we’re about to roll out our whole new marketing approach in the next basically 30 to 60 days that we will become visible. That’s actually much more akin to really automating operations as been even more prevalent theme than it is if you took a look at our website today. It's there but it hasn’t been highlighted. So I think we know how to go back in and get the messages of customers that want to buy. But once again, Q2 was a pretty ugly quarter in Europe and a lot of folks either hesitated or split things and I am not surprised. I don’t think that will continue but we can’t be sure.

Our next question comes from Mark Schappel from Benchmark. Your line is open.

Most of my questions have been answered but just one here Alan for you. With respect to your government business just wondering what your outlook is for your government sector business heading into the seasonally strong quarter for federal agencies?

Yeah so those are government pipeline is up as I told folks last year. We really felt a lot better about the state and local government business as well as the federal government business last year. We are seeing some really, really good things start to develop. I won’t say we have cracked the code, but we are clearly in a very different place than two, three years ago when we were openly concerned that we haven’t gotten the level of government business. So we are feeling much, much better about that pipeline and as you said we are coming into a season where some of the stuff closes.

We have one more question from Raghavan Sarathy from Dougherty & Company. Your line is open. Raghavan Sarathy - Dougherty & Company: So just quick question on the mix of pipeline. So Craig I was wondering if you can comment on the mix of the deals in the pipeline. Whether it's more weighted towards term or perpetual this year compared to last year?

It’s really hard to determine what the mix is as the pipeline goes out in time. And actual fact the pipeline you talked to a customer or a project you worked towards closing that project and beating competition and it’s only in the very late stages of the pipeline, do you actually find out if they are going to buy term versus perpetual. So it’s pretty heavy beyond you know from the next quarter we have really got an idea, the quarter after we have somewhat of an idea looking at the accounts knowing that the accounts are. But beyond that I think it's really hazy.

We don't code the opportunities early in the pipeline as being in one category or the other because as Craig pointed out very often it evolves late in the field cycle. Raghavan Sarathy - Dougherty & Company: And Craig can you at least talk about the third quarter, whether it will be weighted towards perpetual term?

I would say this really. As I said we don't actually have all the codings. Visually I would say that you know compared to last year is going to be a little more weighted towards term but once again not enough to drop major conclusions over it. Thank you and with that thank you everybody for sticking with us here. We appreciate your attendance and you should now we are working hard for you. With that operator our call is done.

Ladies and gentlemen, thanks for participating in today's program. This concludes the program, you may all disconnect.