Greetings, ladies and gentlemen and welcome to the Pegasystems’ First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Rafe Brown. Thank you sir. You may begin.

Thank you and hello everyone. Before we begin, I’d like to share our Safe Harbor statement. 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 by the Private Securities Litigation Reform Act of 1995. The words expects, anticipates, intends, planned, 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 these expressed in forward-looking statements are contained in the company’s press release announcing its Q1 2015 earnings, and in the company’s filings with the Securities and Exchange Commission, including its quarterly report on Form 10-Q for the quarter ended March 31, 2015, 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.

Thank you, Rafe. We kicked off 2015with a very strong Q1 and we’re very excited about the year. As we’ve talked about in the past, first quarters have often required us to consume backlog to achieve our license goals. This quarter sales performance yielded both strong license revenue and increased backlog. Our strategic applications are being well received by an increasing set of clients and our unified platform once again lauded this quarter by leading industry analysts, continues as a powerful competitive differentiator. We’re being successful addressing the most daunting challenges enterprises face today, to become more customer centric and to become digital. Our history in the market gives us the perspective to see the change is a constant and likewise, both our customers and us are continually being driven to change, to evolve, to meet the needs of our respective clients. As we’ve discussed in the past few quarters, we’ve embarked on an ambitious effort to bring our solutions to a broader market and we’re in the process of raising our name brand recognition with new audiences, instituting more repeatable and scalable sales models, packaging our capabilities as easier to deploy applications and addressing the critical needs our customers have to improve their engagement with their customers. We believe this strategy of increasing our visibility and moving to a broader market will lead to improved sales repeatability and long-term growth. To make this transition, we are continuing to invest in our products, our talent, our marketing and really looking to have PEGA be a tremendous growth business and we’re off to a great start in 2015. Now, this quarter, we’ve made some significant progress in communicating on new positioning that are focusing on strategic applications and we are seeing enthusiasm from clients and prospects. And we’re raising awareness among…

Thank you, Alan. For the first quarter of 2015, we are reporting both GAAP and non-GAAP results. A full reconciliation of all GAAP to non-GAAP measures is provided in the financial tables of the press release issued earlier today and is available on the Investors section of our website. First quarter 2015 non-GAAP total revenue was $154 million, up 8% year-over-year and that’s net of approximately 3% of FX headwind. First quarter 2015 non-GAAP total license and cloud revenue totaled $64 million, an increase of 12% over the prior year. As a percentage of first quarter non-GAAP revenue, total software related revenue, which is to say license, cloud and maintenance revenue, stood at 73% of total revenue compared to 72% for that same period in 2014. This is a result of our higher margin software-related revenue continuing to grow faster than professional services and training revenue. On a geographic basis, the Americas continued to be the growth driver for the Company with non-GAAP revenue growing 17% to $103 million for the quarter and standing at 67% of total revenue. Revenue from EMEA was approximately $39 million on a non-GAAP basis, which is down 14% year-over-year. And for the quarter, Asia-Pacific revenue was up 32% to a total of $12 million. As we’ve discussed in the past, we offer our customers a number of options when purchasing our software, including perpetual and term license arrangements, as well as the choice of installing the software on-premises or using our cloud offering. With this in mind, we track the blend of software bookings closely. For the first quarter of 2015, the contribution to non-GAAP license revenue recognized from term and license subscription arrangements was 62% of total license revenue compared to 56% in the first quarter of 2014. This change in relative contribution…

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

Hi. Thanks for taking my questions. So, maybe one or two quick follow-ups, if that’s okay.

Sure.

Alan, source of the outperformance in particular as it relates to whales, tunas or lots of minnows kind of any color there?

Well, we did have one whale in the quarter, but I think it didn’t actually contribute to revenue. And we’re seeing a couple of what I would describe as in the tuna, but we’re seeing a pretty good mix of deals. The deal size is consistent with what it’s been historically and I’m feeling pretty good about the sort of rhythm of the business. I feel very good about it everywhere, but Europe.

Well, very good performance in the smaller deal category, it sounds like, with some contribution from larger deals. If you had the kind of -- maybe think about how that -- attributing that to sustainable improvements from your marketing and application template initiatives that are beginning to take hold versus kind of - seasonally like Q1 that can have some variance, how would you attribute maybe the outperformance to those sources, maybe any color there?

One, I think the business, particularly in the Americas and Asia, has a nice rhythm to it [Indiscernible] we will have big deals when we deal with big customers, because if a large customer makes a commitment to a transformation or something significant it’s appropriate for them to pay a meaningful price. But I feel like the business is less dependent on the whales and big deals than it has been historically in terms of the way, frankly, we are managing. I’m happy that we’re managing to concepts like overall rhythm of pipeline to a greater level, as opposed to going and cherry-picking deals. So, like the feel of the pipeline and the feel of the sort of selling process.

Okay. And Alan, we haven’t asked you about this in a while, but maybe can you give us an update on who are you competing with now most often, besides Java, which is probably their custom development still probably number one. But, who else are you seeing and any changes there?

I think the positioning that we’ve undertaken in the market here enables us to compete and frankly compete successfully with companies such as Salesforce and companies such as a Microsoft Dynamics, and of course the traditional folks who are doing the Java builds and the other types of things. We both can cooperate with those companies, our systems are very, very good at complementing the technologies with other front. But we also, as is often the case, compete with them as well. So the players we’re dealing with are large important, established players as IBM, who is always in the mix. There’s a lot of the software being given away for free these days from some of these large companies. But obviously we’re getting growth numbers that are vastly better than the IBMs and the Oracles in terms of the natural organic growth of the business.

Okay. And I’ll finish up with one question. I got to give to [Indiscernible]. So, actually either one of you can answer this, but any updates in terms of your thinking on the longer-term margin trajectory, certainly not guidance for next year, but when should we expect to see leverage kick in from the investments you’re making?

A lot of it -- So, I think it’s really understand the margins in the business. When I think about the business, I typically think about changes to both revenue and backlog in concert to the extent that it can make an enormous difference in the current margin environment, to whether a particular deal goes into a ratable recognition or whether it goes into the current quarter. And in reality from the strength of the business and from a commission expense and all the other expenses, it’s really not much of a difference from my perspective. I think if you considered the changes to backlog in concert with our revenue, you’d actually get what I would think is a much rosier picture in terms of what the margins are. As we grow, we have tremendous power to change the margin equation, but we see that it’s more important at this instant I think to invest in the things like the marketing etcetera, than to necessarily try to squeeze out a couple of additional points. As Rafe says, we’ve got some ideas about how we need to fix. We got some things that we do need some repair work in the professional services side and there is work underway to bolster that. But, relatively, we will, I expect long-term have industry-standard margins that was at 20%. I mean that’s really where a successful business of our type should be.

So I get all of it and leave at that and thank for taking my question.

Thank you. Ladies and gentlemen, our next question comes from the line of Mark Schappel with Benchmark. Please proceed with your question.

Hi. Good evening, thanks for taking my call. Rafe, starting with you, I was wondering if you could just review the factors that influenced cash flow from operations in the quarter. I know you touched on that during your prepared remarks, I was wondering if you could just go through that again.

Thank you. One of the keys was really in Q4 of 2013, there were some big transactions that all had really good payment terms and so that helped Q1 of 2014 have a really great start to the year. So I think long story short, we had a very tough compare for Q1 of this year and I think that really is largely the bottom line on things. We things. We’re obviously watching our cash numbers closely. Getting such a strong start to the year really helps us with our cash flow planning for the year, but it’s really a matter of a tough compare, I think, more than anything else.

I think it was interesting, because if if you go take a look at the term license revenue from 2014, you’ll see a real spike in the first quarter of like $6 million or $7 million more than it was the quarter before, the quarter after. The reason for that is sometimes we’ll get a prepayment on these things or something unusual will happen and term license tends to be a little bit more than probably you’d expect, fluid and smooth. So we had some things like. It was a really, I would say, sort of brutal compare. But you take a look at the accounts receivable, they were up about $50 million and we’re expecting to collect that all

Okay, great. Thank you. And then, unfortunately, I had to jump on the call a little bit late, Rafe wonder if you could just review one more time the impact that foreign currency had on the topline?

Sure. At the topline, it was about 3% of headwinds. So our total revenue growth was 8%, but that’s net of about 3% in FX headwind.

Okay, great. And then, Alan, over the past couple of quarters, the Company has been making some traction in, for lack of a better term, non-traditional verticals like manufacturing for the Company and I was wondering if that trend played out in the quarter or maybe you could talk a little bit about that.

Yes, we had a couple of really pretty exciting wins with a couple of new firms like Nissan and Toyota, which are real [Indiscernible]. And of course, the whole automotive business has a variety of ways in which we can help and we found that this is applicable to other manufacturing businesses with customers of ours like Cisco, for example. And the types of places that we tend to help them are of course in customer service and also in warranty, which you should think about as a perfect case management sort of application and we do a lot of that work, both for manufacturers and for other types of firms, but also in elements of this supply chain. And therefore, sort of order to cash, a lot of companies have found that as they go into more markets or as they’re actually trying to expand that they need to be more sophisticated about how they deal with the various channels they have. And our rules in process-based technology is extremely well suited, so let them do what they need to do to be competitive, which ultimately is what a strategic system is all about. So, I think that’s going to be a very exciting vertical. I think the emergence of things like the Internet of Things, for example, also promises to be very positive for us. We already did some fascinating things in that area. If you have a GM car, an OnStar service and your car got [Indiscernible] it crashed into a tree and the air bag deflates, it calls a Pegasystem. So, we’re connected to cars, we’re connected in some situations to tractors for diagnostics at Philips Lifeline, we’re connected to the pendants that people wear that if they fall, it calls a Pegasystem to make sure that the help is dispatched. So, I think manufacturing will be useful in a variety of ways, particularly as manufacturers increasingly think of what they’re doing is being related to a service as opposed to just selling a product out there, but tying it into the sort of longer-term relationships. That’s exactly what our technology is perfect for.

Great. Thank you. That’s all from me.

Thank you. [Operator Instructions] we do have really another question from the line of Steve Koenig with Wedbush. Please proceed with your question.

Hi, gentlemen. I’ll lob in another one here.

Just made it under the wire, Steve

Yes. Could you guys give us an update on kind of what you’re seeing in cloud? You’re used for production deployments, as well as any color on revenue contribution, significant yet, or when might it be significant? So anything there you can give us would be great.

So, it’s interesting because if you go back a couple of years, our primary use of cloud and the primary sort of revenue everything else from it would have been in the development and test space. And that’s completely reversed in the last, I’d say 12 months, where we’re seeing a real push from clients. Some clients used to suggest test and some clients who are coming in through the gate are using us for production cloud ; it’s an enormous area of growth for us and we’re investing heavily to be able to make sure that, I think we can ramp this up tremendously. In terms of its contribution, it’s relatively small, if you take a look at it, order of magnitude 10% of the license revenue, the sort of line that we get. But, it’s growing at a very fast pace. What was the growth rate on that, Rafe?

60% on a GAAP basis, 45% on a non-GAAP basis.

Yes. So it’s growing and I think that the rate of growth is actually going to increase as we go into this year and next year.

Okay. And maybe one more, since it appears we have some time. Wanted to ask about the repeatable sales motion that you all are building, both through your go-to-market changes, your marketing and your R&D. What kinds of metrics would you look at internally to measure that? And can you give us any color in terms of how that’s trending or how we should expect that to go in the near term or longer term?

So a couple of interesting things there. The traditional way that we would have sold, if you think about what we were doing when we were really talking about ourselves as a case in Business Process Management Company is our sales force would engage with the customers and talk about what their project list was. They basically go try to discern, what were the top things of the client was trying to do? And typically, we find that, good 25%, 35% of the stuff on their project list was perfectly fit to Pega software and then we would basically do -- work with them to be able to close a piece of business around their particular need. We can still do that of course, and we have clients for whom we still do that, both existing clients and new clients, but this move around repeatability, for example, is very much going in and saying, hey, we have absolute leadership in world-class capability in customer engagement centers, customer service, in multi-channel selling, and being able to do this next best action marketing capability, which can help you both retain customers and upsell them. And the metric if you want to understand the practical metrics, in that first set of instances, inevitably, we’d have to put together a very sort of sophisticated custom demo or do some form of proof of concept with the client. So, when you walk in around a strategic application, the demos in the product, the ability to engage with the customer around something that is tangible, that they can just buy and really start using sooner, is much, much more visible. So, when we talk about repeatability, that’s really central to it that it’s awesome, for example, that we’ve chosen and we currently automate ground operations at Heathrow Airport. But that was something that truly was built from the ground- up. When we go into a client and offer them a next-best-action solution to be able to help them make recommendations for telephones, for example, or banking products or helping them to make credit recommendations, that’s something where we’ve got a lot of IP now, out of the box, that can both make it easier to sell and frankly make it more effective to implement. So, we’ve added this whole new wing of capability around the strategic application and we are now managing the organization to make sure they are going and pitching those and have that actually be the majority of the work they’re doing. And so that’s going to -- we’re tracking, for example, how the pipeline is moving, from what I would describe as the platform-oriented sales of yesteryears to the now more application-oriented sales where you can ask different questions of the sales force and frankly give them better tools. Does that make sense?

Yes, absolutely. That’s great color.

One..

Yes, no, go ahead. Sorry.

One number that was just popped in front of me, apparently, acquired business has now moved, so that it’s 80% production cloud. Just to give you a sense of how that’s really completely flipped in the most recent quarter.

Great. Okay. Well, I’ll leave it at that. And congratulations on a very good start to your year.

Thank you, very much.

Thank you. Ladies and gentlemen, at this time, there are no further questions. I’d like to turn the call back to Alan Trefler for closing comments.

Thank you very much. We’ve been working hard and we’re excited about where we are. Well, we have a lot hard work to do. I hope to see many of you at PegaWORLD. Thank you.

Thank you.

Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.