Greetings, and welcome to the Pegasystems’ Fourth Quarter 2014 Earnings Teleconference Call. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host, Rafe Brown, CFO of Pegasystems. Please proceed.

Good evening, ladies and gentlemen. Certain statements contained in this presentation, including but not limited to, statements related to future earnings, bookings, revenue and mix of license revenue, may be construed as forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The words expects, anticipates, intends, plans, believes, could, estimates, may, targets, strategies, intends to, projects, forecasts and guidance, 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 fiscal year 2015 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 fourth quarter and fiscal year 2014 earnings, and in the company's filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2014, and other recent filings with the SEC. Although subsequent events may cause the company's view to change, the company undertakes no obligations to revise or update forward-looking statements, whether as a result of new information, future events or otherwise, since statements may no longer be accurate or timely. And with that, I'll turn the call over to Alan Trefler, Founder and CEO of Pegasystems.

Q4 was a solid quarter capping off with a strong year for Pega. We exceeded our original full year non-GAAP revenue guidance of $580 million coming in at $593 million, a 16% increase over 2013, while also achieving our goal to increase our backlog. For the full year our non-GAAP license and cloud revenue was up 25% from the previous year. Our business in Europe improved in the past quarter and North America continues to be strong. Our strength in sales and on boarding, marketing, customer service and platforms is a driving business growth across the globe. And the ability of our software with the unifying operations in the customer lifecycle management area is particularly powerful in those markets where cost reduction and customer engagements are both important priorities. And we think we can do more, as we look at 2014 particularly the second half in 2015, we think that is some of the discussions we’ve had on these calls where we’ve talked about how we want to evolve our business going forward. Now in 2014, we made a lot of investments and I think made a lot of the right initial steps to fundamentally change where we go to market and make important changes in our business. We made significant progress in 2014 and will continue to focus in these areas in 2015 and we expect to see returns in the future. The initiatives that we’ve been working on are going to focus the business around accelerating growth and capturing more of the very large potential market, we think we’ve the ability to address. Now, we’ve discussed with you a number of times that our software address is a much larger opportunity then the one articulated traditionally as “VPM”. And in 2014, we developed and rolled out new messaging…

Thank you, Alan. For the fourth quarter and full year results of our fiscal year ended December 31, 2014, we are reporting both GAAP and non-GAAP results. A full reconciliation of our GAAP to non-GAAP measures is provided in the financial tables of the press release issued earlier today, and is available on the Investor Section of our website. As we have discussed in the past, quarter-to-quarter comparison do not necessarily reflect the underlying momentum of our business as the timing of small number of large transactions can significantly impact our results. To provide the best look at how our business is performing, let me run through the results on a full year basis. Full year, 2014 non-GAAP total revenue was $593 million up 16% year-over-year. Full year 2014 non-GAAP license revenue was $234 million up 22% year-over-year and non-GAAP cloud revenues stood at $17 million for the year, up 86% over the prior year. Thus total non-GAAP license and cloud revenue stood at $251 million, an increase of 25% over the prior year. As a percentage of full year non-GAAP revenue license, cloud and maintenance revenue stood at 74% of total revenue, up from 70% for the same period in 2013. This is a direct result of our higher margin revenue items growing faster than the growth of professional services and training. Looking at our results on a geographic basis, non-GAAP revenue in North America grew 21% to $363 million for the year and stands at 61% of total revenue. Revenue from EMEA was approximately $181 million on a non-GAAP basis or 9% year-over-year. 2014 Asia Pacific revenue was up 9% to a total of $49 million. Well, there remains room for improvement we were pleased to see European software sales improve in the fourth quarter compared to the…

Thank you. [Operator Instructions] And our first question comes from the line of Steve Koenig with Wedbush Securities. Please proceed with your question.

Hi guys. This is actually [Jay Cho] dialing in for Steve. There are few questions on Pega, first question is Pega has historically maintained a license [indiscernible] in the high teens. What’s your thinking around being able to maintain this rate of license growth, is it reflected in your guidance and your overall revenue growth is about 10% due to services team shifted rapidly to partners or how should we able to see this?

So I think it appears the services question as it happened in the past I think services growth would be very modest so that single digits are type of growth because partners are central to the strategy that we’re pursuing and we are also working hard to try to drive services out of the applications and I think it’s an important part of our strategy. When we think about revenue growth here, there is a lot of things that I’m very excited about but it is the year of transition for the firm and we are trying and expecting for example a lot of these new customers we’re pursuing and moving our efforts in energy storage are going to be very, very likely cloud based customers. We are seeing the evidence of that type of interest and of course the cloud deal gets revenue very, very differently than a perpetual deal. Having said that we think that we can be very successful in this part of the market and that’s why we are going to be making this investment etcetera. If we can figure out how to boost our growth rate over the next two or three years, our view that we have not been successful as a management team. So, we are not looking for decelerating growth we are doing this very, very significant if you are advertizing in other type of work and I think very meaningful driven, increasing due to the cloud to frankly increasing and significantly accelerate our growth if you look at couple of years.

Okay. That’s helpful. And just to sort of clarify is the cloud revenue that you’ve broken out part of the license line on the income statement?

No, cloud revenue is in the services section and you can find details about in the K, we break that out, but the accounting rules treat cloud as a service and so for those of you have the fresh 10-K on hand, go to page 24 and you can see the detail of the cloud revenue and its growth.

Okay. Thank you.

Thank you. And our next question comes from the line of Mark Schappel with Benchmark. Please proceed with your question.

Hi, good evening. Rafe starting with you, I wondered if you could just talk about the foreign exchange impact in the top line you had, you mentioned that on the call if I missed it?

Yes, so and to be clear for 2014 the FX I mentioned there was not a top line FX number but that was down in other income and expense that’s actual losses that were derived from transactions and intercompany balances and things of that nature. For the year on FX out in the top line we actually ended up relatively flat as a result of FX, we benefited during the majority of the early part of the year, just a tiny bit in the fourth quarter obviously FX rates moved the other way and there was some headwind on Q4 and really in the second half. The other thing to be understood in that is that a number of our transactions even outside the U.S. are billed in U.S. dollars so that’s mutes it a little bit. So, launched very short for 2014 we didn’t see a whole lot of impact on the top line. However, when we look to 2015 there is definitely some headwinds using current rates that we baked into the guidance we gave approximately $10 million of headwind.

And how about for the quarter, do you have the quarter number, I mentioned that in the quarter.

Yes, we did.

Yes, we did and so for the quarter there was about $2 million of headwind that impacting revenue.

Okay, great. And then, moving on cash flow from operations came in a lot less than expected, could you just talk more about some of the accounting around that?

Sure, and I think the biggest reason for the cash flow, the bookings in Q3 weren’t really where we wanted them to be and particularly in Europe we talked about that on the last call. So that did delay cash that we would normally would have gotten in Q4, and so I think that is probably what impacted your model.

Okay. And then for 2015, what can we expect on the tax rate for modeling purposes?

On the tax rate, so it is going to jump up a little bit just because the R&D credit has once again expired. So we built our model out on the 34% non-GAAP tax rate.

Okay, great. And then Alan moving over to you, I think on the - on prior calls, you discussed how your technology is extending into or maybe moving outside of financial services, insurance the core traditional markets and moving into different areas like supply chain and the internet of things, any news report on that front this quarter?

Yes, I mean it is very clear to us that now the greatest growth in the future I think frankly is likely to come from these new verticals that we have entered. With the telecommunications business I think it is extremely strong one where we have had great successes with some of the largest telcos in the world and are continuing lots of good and repeat and follow on business that is for example in things ranging from the front office, customer service and next best action marketing to order management helping complicated, sophisticated business-to-business orders get processed and I think that is a tremendous business. And the healthcare business continues to be strong and it is going to I believe very materially continue to be a good business for us. Being able to do what is called care management, which is where you use a combination of rules and process and other sorts of facilities built very much into our core technology to be able to take care of people with chronic diseases, diabetes et cetera is one huge area, and then there is a whole additional population of people needing healthcare that are entering the system and we think that is going to continue to drive to demands on the health care, insurance, as well as the providers. The reality is I think those markets are going to be very strong. Having said that we are growing our historical financial services market even though we have only really sold to the very, very biggest ones of them. As part of this opening the aperture there are lots of banks that would have frankly $30 billion in revenue that wouldn’t use to make [Indiscernible]. We just wouldn’t talk to them where we have tremendous experience, tremendous references and I think that that business is going to be very positive as well as we make this transition, and there we are seeing increasingly that those organizations are also open to the Cloud. So I’m very happy that we are well positioned for the next couple of years.

Okay then finally on the prior call there is a lot of concern - notable concern as slowdown in Europe, it seems like obviously this quarter Europe looks a little bit, maybe you just talk a little bit about your longer term outlook there?

We are feeling better about Europe. But I think declaring victory is premature. There is a lot of activity, which is good. But there is also a lot of anxiety and nervousness in the buyers, which will tend to make the activity be somewhat smaller than it would otherwise. But having said that I have been to Europe already once this quarter and going again in March, and I am seeing a lot of interest, particularly in the UK, Germany I believe is going to continue to be strong. Switzerland is also very strong as well and interestingly enough we are seeing a lot of activity even in Italy. So we think it is going to be a selective recovery. We think it is going to be better, and the reality is a lot of these companies are now having to face, here in the case of some of the organizations really, really tough agendas around cost reduction, which our technology is really good at. And for the traditional banking customers, we have been making a lot of hay with this thing called the client life cycle management. You can think of it as sort of how do you onboard corporate customers, in particular, it is retail customers [Indiscernible], how do you onboard corporate customers in a way that is not going to get you in trouble with the regulators, how do you do that know your customer, how do you select processes, how do you check them year-after-year to make sure that there are some sanction list et cetera. And our technology is very well regarded in that area and that was frankly some of the nice selling we did in Europe in the fourth quarter as well.

Okay, great. Thank you.

Thank you, and our next question comes from the line of Brian Murphy with Merriman Capital. Please proceed with your question.

Hi, thanks for taking my question. Alan, as part of your attempts to broaden the addressable market here, will there be any major modifications to the sales coverage model, I mean are you guys going to - may we have name to account model? And also, how should we think about the growth in the sales headcount in 2015 sort of similar to what we saw in 2014 or maybe more consistent with prior years when you were more aggressive?

Well, I would like to I think we are going to see how the model unfolds in the first couple of quarters. And on a back-end loaded basis I would like to be more aggressive towards the end we’re just exercising it. We have just named the management team that is responsible for it. We are not going to - we are going to work hard to not screw up, our big account, high end business. We will involve some of the folks in the new model, but we have set up a separate in the Americas to start so that we are not rolling this out contemporaneously as quickly in Europe. And the first half of the year is going to be really about getting this model to work in the way that we want to, and then we will roll it out in Asia and Europe so that it is global. But the key is to maintain as we see it. For the very large accounts, the target model, we are going to make some adjustments to that for accounts that need more account management than active selling, and we think that will also allow us to reutilize some of our sales resources more effectively. So I think we would like to see the growth in the second half, especially the way we prepare for 2016, but you will see growth throughout the year, which is one area we are continuing to invest.

Okay, thanks very much.

Thank you. There are no other questions in the queue at this time. I would now turn the floor back over to management for any closing comments.

So, let me say on behalf of Rafe and myself that we are excited about the pivot we are engaged with. I feel a lot about where we are sort of an interesting comparison to where we were in 2005, 2006 when we made the pivot that caused us to go from a company that was sort of in the $100 million range to a company who has now grown many times that. I think that the market definitely has the need to what we are doing. We have product that is still highly, highly differentiated and the need of organizations to apply good technology strategically is one that I think is going to persist and increase, especially as it finds some of the quick fixes that they have sort of tried to do are going to need some bolstering, which is a really important part of what we’re seeing. So we look forward to what is going to be I think a very, very important year in the company in a year where we can do well, and I think that [Indiscernible] for folks to come to PegaWORLD in June, I think in particular June 8, which is a Monday, is one that a lot of you should look into, go to our website, check out PegaWORLD 15, it is under events, and it is going to be a spectacular conference with great customer stories and traditionally a lot of good product actually showing up. Thank you very much everyone.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and we thank all of you for your participation.