Greetings and welcome to the Pegasystems’ Fourth Quarter Fiscal 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Mr. Max Mayer, Chief Administrative Officer and Senior VP of Corporate Development. You may begin sir.

Good evening, ladies and gentlemen, and welcome to the Pegasystems’ Q4 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, 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 2015 year end 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, 2015, 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, Max. Let me just say that Q4 was a terrific quarter capping off a tremendous year of Pegasystems. We ended 2015 with record revenue, backlog and bookings and closed the year on a very strong position. For the full year we grew non-GAAP revenue to $683 million exceeding our original guidance of $653 million by $30 million, and increasing it 15% compared to 2014. Our full year non-GAAP license and cloud revenue was $306 million, up 22% over the prior year. And importantly, we did this while also increasing backlog by $55 million. And despite continued investments in growth, we exceeded EPS guidance by $0.03 achieving non-GAAP net income of nearly $64 million. Let me start with a bit of strategic overview to give some context for what we achieved and where we’re going. Today more and more companies are recognizing the strategic role software plays in their businesses and in many cases the limits your legacy systems put on the ability to evolve as quickly as needed and clamouring for lots of things and there's a lot of hype in this market, but Pegasystems offers technology that can really deliver what these organizations truly need. The pressure is complemented by the shifting regulatory environment, the volatility we all see in the global markets and rapidly changing customer demands that require to drive with digitization and require all organizations to adapt more quickly. Now to take advantage of this environment we saw unfolding, about two years ago we began to transition to leverage our world-class build for change technology and position PEGA to be the leader in software for strategic business application, with a focus on delivering sophisticated CRM applications. Now in both the areas of customer experience and operational improvement, clients are viewing and using these applications…

Thank you, Alan. For the fourth-quarter and full-year results for our fiscal year ended December 31, 2015 we are reporting both GAAP and non-GAAP results. A full reconciliation of all GAAP and 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. To provide the best look at how our business is performing, let me take you through our results on a full-year basis. We were very pleased to report that full-year 2015 non-GAAP total revenue was $683 million, up 15% year-over-year despite a stronger dollar that reduced our revenue denominated in foreign currencies. Our full year non-GAAP license and cloud revenue grew 22% to $306 million while we also added backlog of $55 million. From a mix of revenue perspective, we were pleased to see that for the full-year non-GAAP license, cloud and maintenance revenue continues to steadily increase and now represent 75% of total revenue, reflecting the continued emphasis on our software business. Looking at our geographic revenue split, the US produced full-year 2015 non-GAAP revenue of $380 million representing 56% of total revenue. Revenue from EMEA was approximately $184 million on a non-GAAP basis or 27% of total revenue, Asia-Pacific $61 million or 9% of total revenue and Americas international, Canada, Latin America $58 million or 8% of total. As we 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 software through our cloud offering. And as we discussed, although we are focused on smoothing the flow of our business, it can be impacted by the timing of a small number of large transactions as well as the mix of deal types. While in general we…

[Operator Instructions] Our first question comes from Steve Koenig with Wedbush.

This is Andrew Doupe on for Steve this afternoon. I, first off, just wanted to congratulate you guys on the strong finish to the year, and I wanted to bring up your guys’ long-term targets the $1 billion of revenue and the 20% operating margins. And I was wondering if any of that’s changed as far as the timeline or your thought process there and if you could also just provide some general kind of guidelines on how you plan to achieve that goal now?

I think to really understand the margins of the business and what happened, I think you need to do a little bit of math around the change in backlog that occurs. One of the downsides of a year like this or what we hope will be a year like next one is when we sell lots of business in the then current year, we really don't defer the commission typically even through the revenues are deferred. I think if you take a look at the jump in backlog we have and think about that, our margins actually look a lot better than the stated number, and I think that for an analyst that’s probably a healthier way to look at it. I believe that we have the opportunity to have almost any margin number we want. It’s all entirely about our posture towards investment, and I do believe as I said in the past for this company to cross the $1 billion mark they should be at or approaching sort of a 20% margin. So we’re not backing off of that conceptually. I will tell you though that a lot of it’s about what we see happening and when you take a look at what was an absolutely tremendous year like this one, we think that investing in the corporate markets, opening up from the 600 accounts to the 3000 accounts, these are things that will be crazy not to do and it makes good sense for the investors and it ultimately will pay off really well. So no, I haven’t backed off on that concept but we’re not bound to that based on what we see happening in the market, what we see happening is terrific.

And then I also just was wondering if you could provide some more detail with respect to color and size on some of your larger deals that you won in Q4. Did you win any over -- or how many did you win over 1 million, did you win any of over 5 million, etcetera? And if you could also, maybe provide a couple of anecdotes on the value proposition that Pega provided for some of those larger deals.

Sure. We have in the course of the year three whales which for us is not a particularly large number, you get a couple and we don't push for the whales. The whales we described in the past is a piece of license business over $10 million in revenue. The way they develop and the way these develop is we would typically go into an organization with something that was somewhat smaller out of success and then in the case of some of these organizations have to make a massive commitment to the use of the technology. Well, frankly that whale does not represent what we ultimately expect to sell to this customer, just what we would expect to sell over the next couple of years. And so you have institutions like – I’ll think of an example of what people might not think of one of our biggest institutions but was one of the companies that made that sort of commitment to us, the Scotiabank, and Scotiabank was an organization we went in, they’ve been a customer for a while, we did some new work with the Pega 7 platform, they just loved Pega 7, they saw exactly what we have been building and trying to do. They had a quick success earlier in the year and they decided that they wanted to rethink the organization around this sort of miracle of case management, real-time decisioning and process. And that’s actually pretty much the characteristics of all these large deals. We generally build on success which is why it's so exciting to have so many new customers that we now have the chance to be successful.

It’s just that we had a very strong working set – is what we call sort of the active opportunities in our pipeline and that continued strong. And we had deals -- multiple deals over $1 million in each of our application areas and in each of our verticals that we target.

Thank you. Our next question comes from Mark Schappel with Benchmark.

Alan, starting with you, based on the guidance it appears that any operating margin leverage is being reinvested back into the business and would it be fair to assume that most of that reinvestment will go right back into sales?

I think a big chunk of it will go into sales, a big chunk will go into marketing. One of the interesting things we have is we historically have not invested in marketing more consistently with firms of our size. And so we're being very thoughtful I think about where and how we’re investing in marketing but we’re going to make sure that we get the word out about Pega through a whole combination of initiatives that range from public relations to improving our digital presence to some of the first paid advertising that we’ve done, all of which we are managing very very tightly. A lot of it will be going into sales as well both in the mainstream sales force but also in the corporate markets group. And in terms of engineering, we expect that to grow at a slower rate, because we’ve built the software already really, really good here in the states. So we’re really looking to find greater distribution but we will continue to invest in that. We’re at a point now where things like our cloud presence is taking off and it’s really causing us that to want to drive, for example, more automation and other types of things into the way that we deploy and manage that environment. You guys may remember we do that on top of AWS. So we don’t actually do the underlying infrastructure and we do it quite a bit of work with AWS to make sure that we’re bringing additional benefits to that. Those I think will lead to margin expansion and much greater efficiency in 2017 that will require some additional work this year. So definitely more in the sales and marketing realm, that’s definitely where you see most of the growth, and we’re seeing a pay-off of it.

And then could you also talk about what you saw geography wise during the quarter? I note that earlier in the year, you saw some challenges in Europe, I was wondering if you're still experiencing challenges?

We actually have a very strong quarter in Europe in Q4 and we did have weakness in the geography earlier in the year but they really had a terrific Q4 and overcame whatever headwinds there are in the macro macroeconomics of the region. We also had a very very strong year in Asia-Pacific and quite honestly the US consistent with I guess its overall economic growth was also very strong for us.

That wasn’t carried by any one vertical, any one geography.

And then professional services the last couple of quarters had some very strong quarters year-over-year particularly this quarter, how should we think about modeling professional services going forward? So, this quarter and last quarter, just a little bit of abnormality or it’s just the normal.

Well some of it is a function of the lumpiness if you will in our booking. We’re modeling professional services next year at kind of a 7%, 8% growth. Remember our strategy is primarily to have partners do the professional services so we can focus on the software business. Obviously we have to build a strong professional services capabilities in terms of our expertise. But you're right, we did see as a result of some of the very strong bookings in the US earlier in the year, we saw some really good growth in professional services in the latter part of the year.

And then finally the foreign exchange impact on revenue, did I catch that correctly, it was a negative $4 million.

It was a $4 million impact, yes, on our bottom-line earnings, it was about a $7 million impact on our revenue.

I assume that’s a negative impact.

Yes.

[Operator Instructions] Our next question comes from Greg McDowell with JMP Securities.

Hi, thank you very much. Hi Alan and Max, it's great to see a strong end of the year. I guess my first question is just based on your tone and your revenue guidance it would seem – it doesn't feel like there is any slowdown in IT spending out there just based on what I've heard so far and we heard a lot of companies in this earning season talk about sales cycles elongating and you're talking about sales cycles shortening. So I was just wondering like, is it just feeling good for you guys out there or are you seeing any sense of any slowdown or changing customer behavior out there. Maybe, I'll just start there.

I spend a tremendous amount of time out in the field as you might imagine. And I think depending on company, you're either seeing a big slowdown or even negative versus what we’re seeing. And these investments we’ve been making are entirely about not just trying to maintain but working to accelerate growth. A lot of companies I think cheat in some ways because if you go out and you buy a technology with another company, where you go and create a little venture fund, fund stuff that a couple years down the road you buy, you’re able to avoid the expense for a lot of years. This is true of almost entirely organic growth and the investments I think are enormously paying off, and the customers see a difference. We have clients who have dabbled with some of the other new cloud solutions and have decided that they really do see a big difference with Pega and are either weaving us into those other previous purchase and in some cases completely replacing them. So now there is no sense of doom gloom or fear here, though I do want you to know we do spend with our money with caution and we do try to make sure that we’re going to get our return for it. But we’re really quite bullish that we can grow and 780 is a big number. It's within spitting distance of a billion.

I would just add to that, that, the volatility in the environment that’s going on is actually a benefit for us and our tagline Build for Change and Alan talked about it numerous times. Clients are really struggling to keep up with complexity and volatility and change. And so we have a value proposition that enables them to do something that a lot of people can't do.

It's great to hear. I guess my second question has to do with momentum of Pega 7 Express and maybe what you're seeing as you guys go more and more into the SMB market, any update there would be helpful. Thank you.

I don’t think we’re actually in the S market – it depends on the M market. Now it’s funny we get these interesting things starting to happen. So in last quarter we won a piece of business, this cloud business, with Stanford, which is their engineering group, which is right in sales force backyard, it’s real privilege for them to pick our cloud solution. And it’s an example of a much faster sales cycle very much driven by the client being able to get online access to the software. And that’s an example of where the investments and things like Pega Express, yes, it’s going to take a while for that to pay off as we open the aperture but there is no question on our mind that it really makes our technology much more accessible. But what I love about that, unlike some of our competitors who have all these frankenstack products that are glued together and you’re kind of in one product with another. With Pega Express you’re actually in the Pega application, it’s just really an easier guided experience that works regardless of the size of the firm, and then as you need to do things that are getting more complicated, it’s not like you have to drop in to doing computer programming or writing strange code. You get to actually just use the entire model driven environment and have the computer write the code both the simpler code and the more complicated code. And what we hear from clients is a lot of them are worried that their current sort of quick fixes they've picked are going to run on a runway, that they are not having this ethical integrity. And as we get that message out, we think we can challenge, actually we proved, we can challenge both some of the sexy new players as well as I think really take a bite out of the older legacy stack, the Oracle, SAP that have got.

Thank you. Our next question comes from Matthew Galinko with Sidoti.

Hey good afternoon guys. Quick question in terms of the sale cycles I think you mentioned in the prepared remarks that it came in a little bit in regards to the applications. So I'm wondering if you could start to quantify how different you might think we'll see that going forward or just what's the difference that you think we'll see between the traditional BPM sales and some of the newer application sales?

So the traditional BPM sale particularly at these large target organizations, was a sale where we go in and basically say, hey, show us your product list – project list. Show us the projects you’re trying to do and if we could develop a good relationship with the client, where they share that list with us, it’d be pretty common for business process management and case management to be able to help them materially address a quarter or third of the items on that list. But if you think about it was very much, think of a design win sort of sale. When we now walk in with a world-class CRM solution, targeted at financial services, targeted at the other verticals that we’re in and we can actually show them real life examples that drive improved service, reducing costs or that drive selling strategies or that drive churn reduction in the telco. That sales and implementation cycle get much much faster because instead of operating it’s kind of this high conceptual level, we’re at a much more tangible level. Now some of our clients do want to still do the more strategic things and frankly for the customers who are buying the application, the fact that they can extend it up with all that power into the other parts of the organization and across their business, those are huge differentiators for us. But I am optimistic that the sales cycle will continue to shorten as we go through this year because frankly the applications and products just really continue getting better.

And then I guess on the BMP side as well, what do you think competitively in that market, anything different in the recent quarter or two?

So I think in the BPM if you are asking about the dynamics in the traditional BPM market, we’ve been just pretty much seeing IBM continue to fall away. They lost a lot of their ratings in some of the labs, they really fell off in some of the labs analyst reports. And in the field I frankly find – it’s wonderful to give one of our BPM customers dozens of highly referenceable clients and have them ask IBM to give anything similar. So we’re seeing just I think a real – I think we’ve really moved to dominate that market and -- particularly it’s the place that we want to play which is where we’re uniquely suited if you want to understand why, if you go to our website to this tap called insights, we have something called the Whiteboard videos which are these little two-minute videos, examples of where we put out I think really well received marketing information, where you can actually see things like what we call our layer cake or mashup architecture, that just really far outpace anybody in that sort of space, coupled with the fact that we’ve got case management and decisioning, they’re just part of the same architecture and platform. But we think it all works best when we can go to end to end and you can go from that whole customer service touch point right through the execution and we’ve been pulling a lot of these BPM clients whether new ones, older ones, it’s allowing them to pull of, I’d say, into the front office. And that’s why we think that these applications and the BPM strategies are really synergistic. End of Q&A

Thank you. At this time I would like to turn the call back over to management for closing comments.

Thank you for joining us today and we look forward to seeing many of you in San Francisco next week at the JMP Securities Technology Conference on Tuesday and at the Morgan Stanley Technology Media and Telecom Conference on Wednesday where we will be both presenting and doing exclusive one-on-one. So with that, thank you very much everyone.

Thank you.

This does conclude today’s teleconference. You may disconnect your lines at this time. And have a great day.