Greetings and welcome to the Pegasystems’ Third 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. With that being said, I’d now like to turn the conference over to your host, Rafe Brown. Thank you. Mr. Brown, you may begin.

Thank you, Tim. Good evening, ladies and gentlemen, and welcome to Pegasystems’ Q3 2015 earnings call. Before we begin, I’d like to read 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 those expressed in forward-looking statements are contained in the Company’s press release announcing its Q3 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 September 30, 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 obligation to revise or update forward-looking statements, whether as a result of new information, future events or otherwise, since these statements may no longer be accurate or timely. With that, I’ll turn the call over to Alan Trefler, Founder and CEO of Pegasystems.

Thank you, Rafe. And I’m pleased to say that Q2 was a solid quarter, building on our strong first half. Year-to-date we’ve had excellent revenue growth, while building backlog. That’s typically we’ve construed backlog through the third quarter of the year. So we’re pleased with these results. We continue to focus on driving growth by first creating more awareness of the Company, our solutions, and the value we bring to clients through our marketing efforts, enabling the buying process through a variety of digital initiatives to make our products more accessible on our Web site as well the channels. Building out of applications to make them easier to sell and deploy with a focus on the front office and addressing a broader market and reducing our dependents on fewer very large deals. Our year-to-date non-GAAP license and cloud revenue continues to grow at a very positive clip to $202 million, a 19% increase year-over-year. And year-to-date our -- the international business continues to make a strong contribution. Though Q3 is typically a slower quarter for Asia and EMEA, both regions performed well in building backlog. Europe has been a bit of a challenge so far this year, but for this quarter Europe was on track with expectations and we saw good traction with a variety of applications. Some new European logos to show the breadth of engagement, included of the French insurance provider April, which is using Pega Customer Service as part of a strategic transformation to respond to increasing competition in the market. The U.K. National Probation Service, which is using Pega Customer Service to transform the delivery of rehabilitation services and reduce the rate of re-offending, as well as British Gas, which is using Pega Marketing to better under its 10 million customers and by creating a personalized…

Thank you, Alan. For the third 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 issued earlier today and is available on the investors section of our Web site. As we’ve discussed in the past, quarter-to-quarter comparisons do not necessarily reflect the underlying momentum of our business as the timing of a small number of large transactions and the mix of deal types can significantly impact our results. To provide the best look at how our business is performing, let me take you through our results on a year-to-date basis. We’re pleased to report that year-to-date non-GAAP total revenue was $478 million, up 13% year-over-year. Our year-to-date non-GAAP license and cloud revenue stood at $202 million up 19% over the prior year. Equally important, we achieved these results by building license and cloud backlog on a year-to-date basis, which I’ll discuss further in a few moments. From a mix of revenue perspective, we were pleased to see that for the first three quarters non-GAAP license and cloud and maintenance revenue stood at 74% of total revenue, up from 72% for the same period of 2014. This increase is a result of our stated strategy of growing our higher margin software revenue items faster than professional services and training. 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, or access to the software through our cloud offering. On a year-to-date basis, the proportion of revenue coming from perpetual license arraignments increased to 51% of the total license and cloud revenue versus 50% for the same period of 2014. Even with this in mind, when one combines…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Steve Koenig at Wedbush Securities. Please proceed with your question.

Hi gentlemen. Thanks for taking my questions. It will be great if you could give us some color on the strength of bookings in Q3, at least on a year-over-year basis they’re up pretty significantly. And you talked about some of the good things going on at Pega. Maybe parse those out for us relative to the bookings strength in Q3, maybe what factors were most important and maybe if I could ask you that kind of also comment on the sales management synergy you put in place to try to obtain more balanced first half, second half performance. How -- did those were fairly big factor last year in helping things more to the first half, as it looked like that you’re on track for the second half, potentially sort of be stronger this year despite those sales incentives, if that makes sense hopefully?

Yes, I think it’s a combination of things. Steve, the reality is that we did very consciously about year, two quarters ago, but creates an incentives, but also we doubled the management attention on trying to not be quite so insanely back end loaded into Q4. And I think last year we made some real progress on it and I think you’re seeing evidence that with the combination of about some incentives, but its mostly just getting the marriage is to focus on it and getting people to sign up, having Pega work despite the challenges are being reliable in this business. We try to work to be a little bit more reliable for the quarters. So I really think that a lot of it is good work by management. Our accounting executives or sales people understanding the quarter’s matter which is historically we to be candid really focus more on the year. And I think you’re seeing the results of that. Relative to the financial results for the -- the booking results for the quarter, it was really quite strong across the board if it wasn’t driven by and the year has not been driven by a bunch of wales which sometimes has costing for slush around, which we think is a good thing we love our wales, but we hope we want to be overly dependent on them as we go forward. We saw a nice performance across a variety of industries as I pick them off in my preamble, it was everything from our traditional financial services in banking and insurance, to some of the new industries like the telcos to names we never would have sold through before like British Airways for example and Virgin Media. And I felt really good about that sort of mix and I think a lot of it is that we’re making the product easier to sell and easier to understand by building out the applications and improving the marketing.

Terrific. Terrific. Thanks Alan. And if I could get into one follow-up, it would be great.

Sure.

Could you just comment on the stock comp being up and above your expectations, what is driving that?

So -- Steve thanks for that. It's a combination of we did our annual refresh went out earlier this year and the job markets competitive out there so we wanted to make sure we had a fair grants for everyone to make sure we are retaining our top employees. And we do really focus on giving that equity to select employees. So that -- so its part of the numbers. The other part of it is just the stock has done a little bit better this year, so the stock has been issued at a higher number. And then the last leg of the store is just the fact that we have been continuing to grow headcount and so that too plays into it.

Got it. Okay, great. Thanks Rafe. Thanks, Alan and congrats on the good quarter.

Thank you.

Thank you, Steve.

Our next question comes from the line of Mark Schappel at Benchmark. Please proceed with your question.

Hi. Thanks for taking my call. Rafe, just starting with you on cash flow from operations, it was negative in the quarter if my math is correct, if not, please correct me. But I’m just wondering if you just go through why that is and maybe why, or maybe just remind us why it’s so strong last year at this time, is that a one-time thing last year that is strong?

Yes. So first of all, it is positive -- cash flow from ops is positive so far, but it is down from where it was last year. Last year was driven by -- we had a well transaction in the second quarter that drove very nice collections in the third quarter. So it was really just the billing terms. Most notably of that one deal, but obviously some general fluctuations that are in there as well, but that’s really what drove the change when you compare year-over-year.

Okay, great. And then Alan, moving over to you, I know you have been ramping up your marketing initiatives this year and I think you made the comment in your prepared remarks that March is the first time you guys did the ad campaign. I just wonder if you can just go a little bit more into that and there is some of the other market initiatives that you’re working on at the moment?

Sure. We are doing a whole collection of things and we have made pretty massive changes in the last 18 months to our marketing department. You may recall that a year and half ago we brought in [indiscernible] Robert Tas who is the head of Digital for JP Morgan Chase and he had a lot of bank and other sort of technology sectors as well. And what we really decided was that if we wanted to open the aperture on our business, we wanted to become a company that people actually had a little bit of recognition to, we really intend to change our posture in a variety of important ways. You may remember historically we were pure target accounts. So what would mean as we take a sales person, we assign them to an organization and their mission in life was to go and meet the senior people, understand the needs and map what our technology could do. It was really selling very much hand to hand combat, very -- virtually no ground, air cover by intend. And we also were not very aggressive about putting a lot of our product capabilities and demos for instance, on the Web site. We wanted people to work with our salespeople in our solution consultants. But now that we really think there's a chance in coming years to open up this aperture and bring our technology to many companies, if you hear some of the companies I mentioned, we are obviously able to operate extremely effectively, well outside the Fortune 400. Now with that as a vision particularly driven by our client technology, we really want to change that posture, we need people to have some understanding what Pega does. We need to create more of an application orientation as opposed to…

Great. Thank you. And just one final question for Rafe. May be you mentioned this somewhere on your prepared remarks Rafe, I missed it, but the foreign exchange impact on revenue in the quarter do you have that handy?

Yes, so there is $3 million of that shows up in OI&E, which is the -- and that’s a charge decreasing our earnings. And that’s relative to the balance sheet fluctuations. For the quarter, revenue faced about a $2 million headwind and then just the impact on the operating costs it really -- we are kind of -- the natural hedges it pretty much equalize the impact. That makes sense?

It does. Thank you.

Our next question comes from the line of Greg McDowell at JMP Securities. Mr. McDowell, please proceed with your question.

Great. Thank you very much and I watched a lot of those videos on your Web site before I picked up coverage. So, thank you for putting all those videos out there. My first question has to do with a comment that peaked my interest and that with the comment you made Rafe about accelerating investments. I was just wondering how we should think about, maybe how quickly you’ve accelerated those investments and the potential impact to operating margins for this year and maybe the first half of next year? Thanks.

Yes. Well, I have to stick to -- with my comments about the rest of this year since we wont be rolling our guidance for the beginning in next year, but it seems like that Pega Can campaign where we’re pushing it in Europe, we’re seeing early indication that we’re getting some very positive results as Alan indicated. So we’re maintaining -- well that we’ve relaunched as Alan said, as well as on the engineering and sales side we’re really just continuing to hire into those spaces. If you look on our Web site you will see quite a number of open position. There is of course it takes time to hire people and ramp that up, but we want to make sure we’re going into 2016 certainly with momentum, especially on hiring sales people, hiring key engineers in great roles. So we’re -- this year has been a good year of investment for us and we’re seeing positive things come out of it, so we want to make sure we keep driving that, because we think that will help in the long-term with our growth prospects.

And you know I think one of the things that’s tricky about our business is as we’ve talked about routinely is that we can have a spectacular quarter and if a bunch of it goes into backlog, it affects the current revenue and current EPS radically differently than it just happens to go into sort of current period booking of revenue in the same period. And we try to encourage our clients to do more of a ratable work whether its subscription or whether it’s a term license. But the reality is that the customers have different views at different points in time and they’re getting such poor return on their money given the low interest rates in some parts of the world that there seems to be an interest -- more of an interest than one might expect. In perpetual that can flip at any moment. And all of those things could impact on of course the revenue in the quarter, if you don’t consider backlog, which you should and it can also obviously have impact on the earnings in a particular period as does the currency headwind etcetera. I think the point is that given the strong results so far this year, we’ve decided that its worth pushing, because we do want to enter next year strongly and we’re comfortable that the things we’re spending on are going to drive the right results. So we’ve decided to go forward and pull a little bit of more that into Q4 than I think we would normally would have.

Great, thank you. One quick follow-up, you guys seem to be bucking the trend of what we’ve seen from other software companies so far this earnings season and that trend has been sort of a significant downtick in professional services and it just feels like that that professional services revenue line has accelerated four quarters in a row now and is probably one of the fastest growing professional services organizations in the entire software industry. So just wondering if you could talk through what’s going on there? I know you mentioned a lot of go lives, I know you mentioned even had $4 million in RevRec delays, but is that -- is that a trend we could sort of expect to continue and why that business is strong?

I wonder that business is driven by the need to support our partner ecosystem. We are not trying to really compete with our partners. We think that having a strong environment ecosystem is actually -- the ultimately the best way, but as the amount of business that’s going on increases in aggregate and the other thing that’s happening is a lot of our existing customers are continuing to roll out Pegasystem after Pegasystem as we’re sort of radiating internally. Sometimes that leads to revenue, sometimes it doesn’t depending on what’s -- what was the nature of the roll out. We are seeing a lot of demand and do think that that will continue to increase. What’s in the percentage increase year-to-date?

I think its well on a year-to-date basis, that’s up 9%.

So I would not go look to put it into double-digits, but it wouldn’t shock me if there continues to be some pretty, if -- we don’t want -- we want to be a very significantly high growth machine in license and cloud, but we do need enough professional services that we can continue to cover those projects, our customers want to do it ourselves and actually helping and working with our partners.

7%.

7%, I don’t think -- I know a lot of folks if it downturns, the 7% would have been consistent with kind of what we thought [indiscernible].

Great. Thank you.

[Operator Instructions] Our next question comes from the line of Edward Hemmelgarn at Shaker Investments. Please proceed with your question.

Yes, I Just had one question regarding your Cloud backlog. How big of an influence is the Cloud backlog relative to the term backlog? I mean you’ve got some kind of lumped together and I’m just curious. Then you kind of show cloud also in deferred revenue, in current deferred revenue, but its -- and its there no cloud in the long-term deferred or …?

Yes, thank you for that question. So certainly in the long-term -- excuse me, let me just in the op balance sheet portion of backlog which are license commitments that they haven’t been build yet. So we disclose those in our 10-Q. Cloud is mixed as part of that. So it sounds like we’re aligned there. And then the deferred just represents what’s been build. So there tends to be very little long-term build cloud revenue that’s out over 12 months period of time. I think that explains what you’re seeing there. We lump them together really think of backlog as a single unit of both license and cloud backlog largely because when we’re going to market, our customers very often -- they’re first just deciding if they want to choose Pega. When they decide they want to use Pega, they then decide whether they want to have the offering on-premise or in the cloud. So we don’t want to put too much emphasis on one bucket or the other, because it could frankly shift just because of the way that particular customer. We look to …

And they shift during the -- one of the things we offer our clients is which we think is very, very valuable is the flexibility to change their mind and go either one way or the other way depending on there is a variety of business and technical reasons why one might be better or than the other in a particular period of time. So I think -- we really think of those term licenses and cloud licenses as more of a unit I would say. Obviously the cloud business is newer for us than our term business, that has been growing at a very pretty nice rate.

Well, the only difference is that you kind of have cloud revenue and in service revenue and term in perpetual. So it’s kind of the one issue is, you’re lumping apples and oranges together in that one 10-Q disclosure of backlog there?

I think if you [multiple speakers] if we were in charge of how all these things are reported, we probably just have one category that’s a software revenue. But the rules require us to call on-premise either term or perpetual a license and the cloud a service is just -- we just accept the rules that they’re in that regard. They [indiscernible].

Well, I just have one other quick question. The profit dynamics for cloud pretty similar to what it is for perpetual?

Well, kind of it is service aspect. So when you sell a perpetual license, you don’t have any ongoing services that go along with it and somebody buys our cloud, we provide a lot of ongoing care feedback maintenance other stuff of that type. That is done very differently, some by our staff in many cases as opposed to the customer staff. So it has a more very combination of license in service flavor. I’d say its probably closer to the dynamics of a complete project, we do a complete project to our customer that has a combination of perpetual license and service and maintenance. We are actually doing the math, that would feel to be a little closer in some ways and maybe not complete, but the service elements that obviously operate with service margins. All right?

Thank you.

Thank you, Ed.

Thank you.

At this time there are no further questions in the audio portion of this conference. I’d now like to turn the conference back over to management for closing remarks.

Well, thank you very much and I appreciate the investors who joined us on this call. We are working hard and I think we’re getting very, very positive results, right Rafe.

Yes. Thank you very much.

Take care and have a great evening.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful rest of your day.