Good day, ladies and gentlemen, and thank you for standing by. And welcome to the Pegasystems Fourth Quarter Fiscal Year 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference may be recorded. It is now my pleasure to turn the floor over to Craig Dynes, Chief Financial Officer. Sir, please go ahead.

Good evening, and welcome to the Pegasystems 2012 Q4 earnings conference call. Before I introduce Alan Trefler, Pegasystems' Founder and CEO, I will start with our Safe Harbor statement and then provide my financial commentary. Some 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, believe, estimates, targets, forecasting, could, and other similar expressions, identify forward-looking statements, which speak only as of the date the statement was made. Because such statements deal with future events, they are subject to various risks and uncertainties. Actual results for the fiscal year 2013 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 Q4 2012 earnings and in the company's filings with the Securities and Exchange Commission, including its report on Form 10-K for the year ended December 31, 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. Q4 was an outstanding finish to 2012. New license signings were off the chart, driving license revenue up 18% for the year, total revenue to a new record of $461.7 million and pushing license backlog to an all-time record level of $255 million. The fact that we were able to set these new records in this ongoing terrible economy is a testament to the value that our customers see and are achieving with PRPC. Throughout the year, we have noted that because of the economy, customers were unable to get deals done. Unlike last…

Thank you, Craig. Despite a difficult environment and a pretty tough start to the year, I'm pleased to reiterate that Q4 was a phenomenal quarter for Pega with the result that 2012 was a record year for the company: record in revenue, profits, transactions and backlog. And because we carefully managed our investments in light of economic uncertainty, we achieved record profits in 2012 and, as Craig mentioned, actually exceeded the guidance we had originally given a year ago. Our business was very strong in North America and Asia. And while Europe was very challenging, we really saw some nice wins in Q4. In terms of verticals, financial services was very strong across all geographies. Public Sector were strong in both North America and Europe, and our communication vertical was strong in Q4. Health care saw better performance than in the past 3 quarters as payors and pharmacy benefit managing firms began buying again with some of the health care political uncertainty behind them. In insurance, we broke into 2 of the world's top 5 insurers, a promising steppingstone into those companies as well as winning key deals for the new business underwriting, customer service in both property and casualty and life companies. Now I love engaging with clients to hear firsthand of their challenges and their opportunities. And it's great to see implementations of our software and hear what works well and what clients would like to see us work on. In Q4, perhaps the most common theme I heard is how challenging it is for these organizations to keep up with change: changing customer preferences, changing customer expectations of channel access, changing expectations to service quality, of being able to bring new offerings to markets quickly, changing work structures and, of course, changing government regulations. And when we…

[Operator Instructions] Our first question comes from the line of Nathan Schneiderman with Roth Capital.

Alan, I wanted to start off with a question for you. what [indiscernible] about [Technical Difficulty]

Nathan, you're breaking up a bit. Can you try to come a little closer to the microphone?

Last quarter, you made a comment about a desire [indiscernible] of your quarterly results. And I took that to mean that mix [indiscernible]. [Technical Difficulty]

Our next question will come from the line of Steve Koenig with Wedbush Securities.

I wanted to just clarify. And then maybe, if I could, one follow-up. On the whales, am I inferring correctly that you -- that the 4 deals you cited in the print, 2 with insurance and 2 with public sector, that those were 4 -- you had 4 whales, meaning over $5 million, and those were the deals? Or is that not correct? And can you provide any additional color?

No, that's not correct. In reality, the way -- when we break into an account -- you don't break into an account on the back of a whale. You've got to prove yourself. But just being able to get into places we've been trying to get in for a long time that already have incumbent solutions but, obviously, decided they were adequate, so that, from my point of view, was the exciting message about those particular deals. I think all of the whales actually did represent follow-on transformational sales, the customers that were already established customers, and we have just taken it up to the next level.

Okay, great. And Alan did you -- would you be able to say how many large megadeals -- whales there were?

Well, we don't want to get into too much of a detail because all whales are also not of the same size or structure, et cetera. But I think as we talked about the first 9 months of the year, we talked about how customers were splitting things up, how one of the issues we'd had with the first couple of quarters is it was really just being a little tentative -- no, more than a little tentative, about doing something that might have been a big whale or maybe a midsize tuna, doing that and perhaps chopping it up into -- I'm not a fish guy, so I'm going to stop here. What we saw is that several of those clients, as we had hoped and kind of expected, did come back and make that bigger commitment. And it's especially refreshing in this world where there's so much disappointment with so many software companies when customers have success and choose to double down with you. That's one of the things that makes us as a company really proud.

Okay, great. And if I may ask one follow-up? Alan, I'm curious to get your view. As you move to providing more cloud, certainly testing and development and some deployment activity as well, how does that change the nature of the integration work that you or your partners have to do?

Well, for -- so we've got a lot of really terrific integration facilities built into our system that work whether you're on cloud or on premise. And part of our pitch to our clients is that sometimes it makes sense to be on the cloud, and sometimes it make sense to be on premise. One of the reasons that people often prefer to be on premise is when the integration is very heavy, when there's lots of systems, possibly lots of sensitive client data and just lots of traffic that it can be just more efficient to have the application running inside the firewall. So we're completely prepared for either one of those. And at this point, whether it's a cloud integration or an on-premise integration, I think we've got those all really quite nailed, and our partners are extremely experienced at making that work in both environments.

And Mr. Schneiderman has reconnected.

Alan, I wanted to start off. Last quarter, you made a comment about your desire to reduce the volatility of results. And I took that to mean that you might want to try to shift the business more towards smaller deals and in ratable deals. This quarter, you did not mention that at all. So I just want -- was hoping you could share your current thoughts on that and if there are some changes in the way you're going about deals going forward if you could articulate that.

So a couple -- it's a great question. And I think it's an important one to spend a minute or 2 on. So we understand how frustrating it must be for investors and analysts to have to deal with the volatility of the business. And whereas we've accepted it as being part of the business model, as our management team in the second half of last year put on its thinking caps and was thinking about our plans for 2013, we were asking what types of things can we do to decrease volatility? And we came up with a number of ideas. And on the previous call, I mentioned that we were going to begin to implement some management changes. We made some changes to some of the compensation system for some of our managers, in particular in sales. We can't really do it for individual reps because individual reps are always going to be lumpy. But we think that maybe, as we aggregate up the management chain, we can do some things to create -- to move from this sort of end-of-year event to something that might be much more first half-second half or even, God willing, closer to quarters. I really haven't spoken about it because frankly, we've rolled out some things. And we are excited, but this isn't going to be a change that's going to happen overnight. It's going to be something that will take a while. Relative to your question about smaller deals, I wonder if this has to do with customer preferences? If we're dealing with a top 5 insurance company and they decide -- or a top 5 bank or a huge telco -- if they decide that they want to really change the way they cross-sell outside [ph] customers or they want…

Okay. If I could sneak in a quick follow-up. You may have answered this to Steve's prior question. But in case you didn't, could you share the number of 8-figure deals in the quarter and the number of 5-figure deals and how that compared against the year-over-year periods?

Yes, so we don't give those specific numbers. But we did have 4 deals that we thought were really quite large, that fell into that transformational category. And some of those deals, frankly -- and we don't count this from a bookings point of view at all when this happens. Some of those deals actually have options for follow-on pieces of business. And if the customer continues to be happy, we'll lead and roll into more stuff. So I guess what I'll tell you is the big change we saw is the return of the transformational deals that we had seen at the end of last year. And you'll remember we got a couple of them last year. We talked about them last year. And that had been sort of missing the first 9 months of this year and now we're back, which I think is obviously a very good thing. It says good things about the product and the clients.

Our next question comes from Raghavan Sarathy with Dougherty & Company. Raghavan Sarathy - Dougherty & Company LLC, Research Division: I apologize that, well, I'm in a taxi. Hopefully, you can hear me. Two quick questions from my end. You may have given this figure. I might have missed it. What was the license signings in the fourth quarter?

Well, we don't give a specific license signings number. But we did note that from the point of view of our bookings, from the point of view of the things that we compensate our sales force on, it actually was slightly higher than the completely remarkable 2011. So we had a brutal compare, if you actually look year-over-year. Some of the numbers were up 75%. And the fact that we were able to get back over that number after the first 3 disappointing quarters I think really is a testament to a lot of the work of the whole team who pulled that off. But no, we're not going to give the specific bookings number. Raghavan Sarathy - Dougherty & Company LLC, Research Division: Okay. And my second question is, in the last call, Alan, you mentioned that the license signings in Europe were down 50% through 9 months. Can you give us some color around how Europe did from a license signings perspective year-over-year in the fourth quarter? And likewise, North America in the fourth quarter and then for the whole year?

Yes, sure. So Europe was markedly better in Q4. And it pulled up that massive decline through 9 months down to what I would describe as only a modest disappointment. North America was strong, and APAC was great.

Our next question comes from line of Kevin Buttigieg with Longbow Research.

First, I was just wondering if you could provide an update on the search for a Chief Financial Officer, whether you were looking internally, externally, when you thought you might be ready to announce a decision in that regard?

Yes, sure. So we've begun the process, and we've been seeing actually a fair number of people, though I'd say we're still just in the middle of the process. I don't think we're anywhere close to coming to the end of it. What I will tell you is there is a lot of people who are interested in the business and interested in joining our company in our current condition and situation, particularly when they understand what some of the growth prospects and the potential of the technology can be. So I'm actually pretty pleased that we are going to be able to make a really, really good selection to fill Craig's big shoes. The reality is, it will take what it takes. I'd love to not be the guy giving guidance on the first quarter earnings call, and I would take that as sort of a personal goal. But we're not -- these are very important positions. The finance group at Pega is, from my perspective, extremely strong, and I have complete confidence in the numbers and the way we run the business. So we're moving fast but not in a hurry is the way I would say that.

Okay. And then just one follow-up, if I could. I mean, you mentioned the significant influence that partners have had on deals in 2012. How has that affected other aspects of the business in terms of your visibility to transactions or your ability to close deals? Does that sort of diminish that in a sense that it may be counter to some of the efforts that you're taking now to try to diminish the lumpiness in your business? Or does it not have any sort of influence on that at this point?

So first, I'll tell you we have excellent visibility to the deals with our partners and our resellers. So when they engage with one of the large companies that we're doing business with, our sales and Pega Consulting team are engaged with the partner to make sure that the right solution is scoped and the right sort of things are understood. So there's no visibility issue. Working with partners is something that is complicated. And it's one of the things we're putting a lot of effort into to try to make sure it doesn't slow things down. I can think of some that it has slowed down, and I can think of some that it has speeded up. But we're pretty confident that this should be a part of our strategy just given what we think could happen in the business in the coming years.

Our next question comes from Brian Murphy with Sidoti & Company. Brian Murphy - Sidoti & Company, LLC: Alan, you mentioned that the public sector was strong, and you gave us a little bit of color there. Could you go into a little bit more detail into what kind of runway you see there? It seems like that's an area sort of ripe for automation. And also, have you been adding to the sales force in that vertical?

No, we have. If you go back 3 years, I was very frustrated with the challenges and the problems we had getting traction in the public sector. And we've had a remarkable change. We -- this year had meaningful wins in state and local government, which I had not fully appreciated both how badly some of these states need automation and how you can actually take the same solution with a partner from state to state. And some of them like each other enough to give each other references. The Federal Government has been great. We are -- we've moved into a record number of new agencies and doing meaningful things, all of which are in places that have growth. And as I mentioned, a major European government chose us to help run their unemployment system. So -- or to be the technology that -- we're not running it -- that sits underneath their case management for unemployment. So I'm feeling great about government. We're expanding it quite rapidly. It's still obviously much smaller than financial services and some of our other more established verticals. But I think it's going to be an important growth market for us so long as the government doesn't completely melt down in the coming weeks. Brian Murphy - Sidoti & Company, LLC: And with the continued changes in the services organization, should we continue to look for the service gross margin to climb from here?

So I'm not sure that it will climb. We're going to try to protect the gross margin. But the service business is undergoing a pretty significant conceptual change. There's the training that needs to be done, there's reeducation. As we move, if you want to think about it visually, most service delivery firms fashion themselves on a model of a pyramid. They have a relatively small number of senior people, and then they have legions of folks who will go and do the grunt work at hourly rates and drive the solutions. Our Pega Consulting model ends up looking much more like a diamond. We will have some people capable of doing limited implementations because we never want to lose that as a capability. It's pretty important. But we are working to increase the level of thought leadership, to increase the way that our consulting people engage so that they're not seen as just the people who do the implementation, but they're increasingly seen as people who can have judgment and opinion about how customers can use the technology to really improve the business. I'll think of it more as the front end of the implementation. So my belief is that we can -- we obviously did a good job of managing margins this year overall. We're going to work to manage the margins. But that's a pretty big transition that we're going through, particularly this year. Brian Murphy - Sidoti & Company, LLC: Got it. And one more quick one on the regional segment breakout. The -- your other bucket was up 56% in 2012. Can you give us a breakdown on what's going on there?

I bet that was all APAC. I would... Brian Murphy - Sidoti & Company, LLC: Okay.

Yes. Oh, okay. And -- oh, this was the industry segment. Yes, we've actually had some very happy success in manufacturing, which we think actually could be an awesome industry for us. And we've now got a number of clients using us for front-ending the SAP systems that they've got, doing warranty processing. And the way we think about it is we incubate industries, and then when they hit some level, we break them out and frankly [ph] give them the full swathe of overhead that comes with that. So we don't want to do that prematurely. But over time, you will expect to see me talk about more industries. Brian Murphy - Sidoti & Company, LLC: Okay, glad to hear that. I was actually talking about the regional breakout. And so it sounds like the strength in 2012 was Asia. I mean, is Canada in that other bucket? Or just wondering if you're getting that growth from penetrating sort of new areas. Or what's behind the strength there?

Yes, I might ask one last question of Craig. Is Canada -- Canada is...

Yes, Canada is in the other. We are very strong with the Canadian banks, and the Canadian banks have been doing really well the last couple of years.

Our next question comes from Edward Hemmelgarn with Shaker Investments.

Okay, a couple of questions and then one comment. The -- one question. And this is maybe for you, Craig. Are there going to be any more duplicate expenses for headquarters in the numbers in 2013?

No, that's done. We're moved. We've moved into great offices. Everybody loves the offices. I think it's done a lot for communications and for morale. So that's all done.

Okay, great. Alan, I'm trying to get a little bit of a perspective on where you're going in terms of operating expenses in the future. Over the last few years, you've been doing a lot of investment spending to get into companies that you haven't been in. So I guess one of my questions is what's the percentage of the global 100 largest companies or global 500 that are your current clients?

So it's well under half.

For both? Or, I mean, are you more penetrated in the top 100 or...

We're a little more penetrated in the top -- in the global 500, it's probably 25%, 35%. And in the global 100, it would be -- I'm just sort of eyeballing my customer list again. I would say it's definitely under 50% at this stage. The other thing is some of these customers that we talk about, when you sell to one division of one of these companies, the other divisions of GE and whatever, do you kind of consider that one customer or do you consider them separate? They really make, in a lot of cases, reasonably autonomous decisions about what they consider strategic. And I'm not even including that. So we've got a lot of -- there's a lot of growth capability. One of the reasons we invested a bunch in the last 18 months is that we took a look at the top 10, and we realized that we weren't even calling the majority of them. And we've been in the process of fixing that.

What -- and I guess as a follow-up then, what's the percentage of your targeted companies, in other words, where you've assigned a sales person or multiple that you're currently penetrated? I mean, is it -- I mean, how many are you still like doing the groundwork and haven't -- you're spending money but not even getting anything? Is it 50%? Is it 60%?

Oh, no, it would be -- of the targeted companies -- because the targeted companies does go into the global 500 that you were talking about. No, we exclude certain industries and certain areas and certain businesses that we don't think would make as good uses of our technology. I mean, we're -- as I mentioned, we're only 25% or 35% penetrated in those firms.

I guess my question then is, what -- when you look at where you've assigned a specific salesperson where they're spending time and they're calling on them, is it -- where you are in effect doing investment spending. Is that -- how does that mix change? Are you doing more investment spending? In other words, that you still have a lot of companies out there where you've got salespeople assigned and you haven't sold anything. Or is that kind of increasing? I mean, is where your percentage of penetration is getting better? And then how do you decide how much longer do you keep on -- how much rope do you give a sales effort? I mean, how many -- you do it for 3 years and then if you can't get anything, get out? Or what's the story?

How much rope you give a what? I didn't get that.

You give your sales organization. In other words, how long will you put up without making any penetration?

Well, I mean, if somebody isn't making progress engaging with customers, having the right meetings, being able to demonstrate that they can get the attention and get in front of the right people, they don't get much rope at all. We have a program we call 30-60-90 where we look to evaluate every new hire, not just in sales, across the entire company, to try to get early warnings about just things that were misfits. We can be patient. I mean, there are some customers -- I mentioned breaking into 2 of the world's largest -- 5 largest insurers. We had pursued those companies in different geographies and in different places, I would say, for 4 or 5 years. Not necessarily always with the same person and changing our strategy as we went. So if we think a customer, an organization, is right for this technology, we believe that part of having a relationship sales model is actually to build that relationship. And we got to be prepared to be sticky. Now that sales person may not make their quota or be successful with that client. But in that case, we might give them another one to work on kind of in the meantime so that they can have more success. But we're very analytical, I would say, in terms of looking specifically at the strategy and asking, is it working? And that's a pretty deep part of the culture.

Okay. So it sounds like you still have a lot of like what one would describe as investment spending there or -- and room to go for quite a few years then?

Yes, I mean, we're not running out of either opportunities to sell or opportunities to build deeper and broader relationships.

And we do have time for one final question. Our final question will come from the line of Raghavan Sarathy. Raghavan Sarathy - Dougherty & Company LLC, Research Division: Two quick follow-ups. Alan, can you talk about the pipeline exiting 2012? How much is probably up year-on-year? And the conversation, to the extent you can give us color, whales versus tunas. And the second question is, what is it -- have you seen any sort of improvement in Europe since the beginning of this year? And so what is your expectation from that region for this year?

So a couple of things. We don't let people put early-stage whales into a pipeline. You can't go and put in -- the typical, what I would describe as early or mid-stage opportunity, generally falls into the size of our average sales are actually smaller when you look at the pipeline. Because otherwise, we might unduly color what's going on. Obviously, once things get into the decision of legal phase, we will uplift them to what we think the deal is going to really come in as. What I would say is the pipeline between 2013 -- January 2013 compared to January 1, 2012, I would say it's up nicely. It's up consistent with the size of the increase of the sales force, which is what we would want to look at. And so, we feel pretty good about the pipeline. It was pretty sobering to deal with the unpredictable size problem last year. And I think it is premature to figure out exactly how that's going to go. But it's -- once again, it was very, very encouraging to see what happened in Q4, and it wasn't a onetime flush. These people were doing real stuff, and they felt they had to do it. They didn't have money they had to spend. They decided they had to make transformational, in some cases, other changes. Relative to England and Europe, I'm feeling a little better. But I'm actually leaving next week. I'm going to spend the whole week in Europe, and I think we'll have a better assessment then. As I said, Europe improved in the fourth quarter meaningfully. And I'm hoping it's going to stay at that level, which would still make us a little bit modest about covering some of the extra accounts there but would cause us to actually continue to invest in Europe because we think that there are major, major companies that we don't have coverage on, and we think we need to fix that. Well with that, I guess that was the last question, Doug. Let me just end by saying that I'm going to offer that you guys go to pega.com and take a quick look at our PegaWORLD Conference 3 months away. It's June 9 to 11 in Orlando. It's just an awesome opportunity to actually see firsthand what clients are doing. If you go to our website, we actually have some nice 4-minute videos that talk about some of the most remarkable transformations in systems and approaches that I've ever seen in companies like ING and a whole variety of firms. And I would recommend you look at those, but there's nothing like coming and seeing it in person. So put that on your calendars, June 9 to 11. And we look forward to talking to you again soon.

Thank you, gentlemen. Ladies and gentlemen, again, this does conclude today's conference. Thank you for your participation, and have a wonderful day. Attendees, you may log off at this time.