Greetings and welcome to the Pegasystems’ Third Quarter 2016 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. It is now my pleasure to introduce your host Ken Stillwell, CFO and Senior VP of Pegasystems. Please go ahead.

Thank you. Good evening, ladies and gentlemen, and welcome to Pegasystems’ Q3 2016 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 and are based on current expectations and assumptions. Because such statements deal with future events, they are subject to various risks and uncertainties. Actual results for the fiscal year 2016 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 the forward-looking statements are contained in the Company’s press release announcing its Q3 2016 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, 2016, 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. And with that, I’ll turn the call over to Alan Trefler, Founder and CEO of Pegasystems.

Thank you, Ken. I’m pleased it was a strong Q3, overall. Q3 is generally provide limited visibility given vacations and schedules especially in Europe. And I had spoken about Brexit on the last call and I’m pleased to say that concerns have not materialized with the exception of currency of course. And I’m pleased to see the continued progress we’re making towards having less lumpy quarters despite the inherent lumpiness of this business, even in the face of those currency headwinds. Those currency headwinds caught a couple of points off of our results. But nonetheless, our year-to-date non-GAAP license and cloud revenue grew 18% year-over-year to $239 million. And our year-to-date non-GAAP total revenue grew 15% to year-over-year about $552 million. While we continue to make investments to leverage growth opportunities, we are committed to improving operating leverage as we scale long-term. So – which brings us, I think, to a recapitulation of our strategy. To summarize, we continues – continuing on focusing on delivering the world’s leading business process management and customer relationship management software. Enabling our clients to realize dramatic business agility and positive business outcomes by combining insight, action and the ability to evolve that our software makes possible. We’re looking to broaden our market reach to both digital marketing and to our expansion to the Global 3000 and this continue to gain traction, as I’ll talk about. We focus on giving choice in how clients acquire and deploy our technology, which is a message that is resonating. And we provide value to clients whether they are in growth mode or efficiency mode depending on business and economic conditions. Our software can help customers retain and expand their customer base through our customer decision hub, and our case management to create differentiated experiences. And yet at the…

Thanks, Alan. Pega Q3 results reflect our momentum as we enter our busiest quarter of the year. Highlighted by strong year-over-year revenue, license and cloud growth, progress towards achieving our full year EPS guidance and backlog growth from quarter two of 2016, it is higher than any typical quarter that Pega sees in our Q3. Our strength in generating significant value for enterprise customers with evidence by two license arrangements that we call, whales in Q3. Both of these whales were term license agreements, which contributed to our backlog. To remind everyone our definition of a whale is a customer software commitment of greater than $10 million. Based on our current currency exchange rates and our anticipated revenue mix for fiscal 2016, we’re clarifying the approximate full year impact of currency fluctuations that we mentioned in our Q2. Our topline revenue should see currency headwinds of approximately 3% or $20 million to $25 million. We have an approximate 50% natural hedge in currency such as the pound and euro, as we do incur expenses in these currencies which help to offset revenue headwinds. Given the visibility we had to the currency headwinds, we’ve done a good job of managing our cost to help offset some of the earnings pressure that could occur from a currency headwind. Our year-to-date growth of non-GAAP fully diluted EPS of 32% is evidence that we’ve been successful in managing the bottom line impact of this currency headwind. At the end of Q2, we highlighted some concern around the short-term impact to Brexit and so far the impact has been limited to the currency impact mentioned as Alan said earlier. For the third quarter of 2016, we’re reporting both GAAP and non-GAAP results. A full reconciliation of our GAAP to non-GAAP measures is provided in the…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question today comes from Steve Koenig of Wedbush Securities. Please go ahead.

Hi, gentlemen. Thanks for taking my [indiscernible] for Q3. If I may, I’m curious to know your thoughts on – for the booking results, how does that translate into – relative to your guidance, which I know you don’t reiterate. But if we look forward kind of a higher probability of making that number for the full year, or kind of unchanged sort of view on chance of making that number up? How would you characterize that? And then I’d also just love to get a little bit of color on those whales what the industries and were any bookings related to the U.S. Census Steel instrumental in the quarter as well?

So I will talk about a couple of those things. So first of all, historically we pretty much hit in backlog and breakeven with backlog to the first three quarters, if you go back and just look at the last several years. And we’re pretty pleased that in Q3, we were able to actually makeup some of the shortfall we experienced in the first half. It still means the fourth quarter as this traditionally true is obviously very, very intense, but relative to sort of historical norms. We were pretty happy with the way Q3 looked. That doesn’t mean there is not an enormous amount to shop between now and the end of the year. In terms of the whales, we don’t normally go into a lot of detail about their composition. But they were I would say in some of our traditional spaces that you would expect and the census was not reflected in one of the whales.

Okay, thanks. Alan. If I may do a follow-up, curious to know, kind of your view on the evolving competitive landscape in CRM, we know you’ve been bumping a little bit more into the multi-tenant SaaS vendor that is dominating kind of the package to stock base if you will. Is that trend continuing and how are you feeling in those competitions, is that normal if you guys bump into then? And more broadly speaking when it comes to CRM who are you competing with most?

Well. So look, if you think about what our strategy was a couple of years ago, we decided we would just take the business and very forcefully steered into the front office. By building out finished apps as opposed to complimenting what people did, which is historically what we’ve done. And I’ll tell you that we’ve steered into that front office pretty hard and going well. And I think we’re competing with the guys expect us to compete with Salesforce and Microsoft, and we routinely doing it. We’ve got a terrific story about a unified platform, about choice, about doing things that are good for the customer. The things that’s a miracle in the multi-tenant SaaS world is that these guys are such a brilliant marketers and frankly, they truly are. They convinced customers that are running a multi-tenant cloud environment is in the customer’s interest. Now that’s only true if the customer is like a 50 person company, because frankly that’s the only way they can afford it. But once you get up to having several hundred users of a system, there’s no real advantage, no advantage at all frankly to the client to being living in a world where his stuff can’t be personally encrypted, where it’s got a be in one of these multi-tenant databases with governors to prevent the tenants from crashing each other’s parties. So that story about the cloud as a virtual private cloud coupled with the story that you can bring this in-house we see as enormously powerful. And I think that ultimately it’s not just in-house, it’s really how the customer not become a slave to one particular SaaS based cloud provider, but have the choice to move to whatever cloud makes sense. I think we’ve got a really strong competitive story particularly since we’ve really only been hard in this business for a couple of years. So I’m really happy with our positioning, where we are, and we have reason to believe that we are on these other guys’ radar.

Hey, Steve, this is Ken. I wanted to add one piece of color on your first question, just so that you asked a question about should we feel more confident or less confident with our full year revenue guidance.

Yes.

I think the way to think about it is we don’t know what the mix of our deals are going to look like in Q4. What we do know is that our Q3 had a larger mix of term deals, which is really fantastic for the long-term of the business and we were still able to achieve a pretty respectable revenue number. Naturally, if a lot of our deals in Q4 go the way of term, I think that you all understand what that does to short-term results, and the way to look at that is to look at a combination of revenue and our backlog of course. And that’s the way to think about our business, so I would just point back to that. I’m sure most of you get that but just to highlight that point.

Yes, that’s very helpful. Okay, thanks guys, I’ll leave it at that.

Thanks, Steve.

The next question is from Mark Schappel of Benchmark. Please go ahead.

Hi, good evening. Thanks for taking my question. I start out by saying nice job in the quarter especially in the license line. A couple questions on OpenSpan. Ken starting with you, I just want to if you could give the contribution of OpenSpan in the quarter?

So we don’t report OpenSpan separately and quite frankly, it is integrated now as a product offering. However, we originally estimated that the contribution from OpenSpan will be approximately $20 million for the full year. And I think if anything we are seeing more demand for OpenSpan than less. So we feel confident that OpenSpan will be a nice contributor for the year.

Great, thank you. And then Alan another question on OpenSpan for you, but I think Ken may have answered it a little bit here. But I was wondering if you just talk in general terms about the kind of growth and demand you are seeing for the OpenSpan’s robotic automation technology.

Sure. You know it’s interesting, because robotics have become pretty hot, though if you actually think about it, a lot of folks are positioning things in a pretty weird way. Our positioning here is unique. If you go, take a look at the other market, the guys in the market. If you want a couple of standalone robots, they go and throwing some part of your operating. We can do that. However, now that OpenSpan is beautifully integrated and connected to our BPM in case management. Those robots can actually now has an audit trail that describes what they do. If they need to talk to some things to robotics, and just to folks know, robotics in a lot way is kind of simulating keystrokes kind of like a sort of – think of it is a fast non-human typist going into the front door of a system. Anything that’s pretty sophisticated is typically going to merge some of those robotic capabilities with things that you think of is more conventional system to system interfaces and to a multiple systems, you really want to make sure things are in sync. Typically you’re not just going from our excel spreadsheet into one system. Typically you’re going between systems and doing that sort of stuff. And that’s the scenario in which our BPM heritage and roots, and the OpenSpan technology just beautifully complementary. And so we’re seeing customers who are just looking for robots to try to make things go faster. Now understanding you’ll get a lot more leverage, if they think of their robots as being part of a process as opposed to standalone entity. So I think it’s turned out nicely strategically, I think the teams get along together really well and we’re really happy with it is a nice complement to what we had done historically.

Great. And then one final question here. And it has to do with your marketing initiatives, in the beginning of the year, the company made a conscious decision to kind of ramp up the marketing spend and what you’re doing in the marketing area. I was wondering if you could just talk again in general terms about how do you think those activities are going, and maybe just give a couple of examples of what you are doing in that area?

Sure. So I think that Tom is putting together the plan for next year, he has got a very good team. They are bringing their thoughts together for what we want to do. But there is no question in my mind that Pega historically was just meaningfully under marketed. If you think about it we were a company that really originally only sold to a couple dozen of the world’s largest firms growing that maybe 500 or 600. Now that we are talking to more firms and getting more visibility. We are seeing companies that we never would have talk to, I mean think of firms like Nielsen, and firms that absolutely have these needs. But they were not in one of our highly specific target markets. And so we’re going to continue to invest, and really work to get both more visibility but also make it easier for customers to digitally buy. What that means is that they need to be able to find the right stuff on the website. That we need to have the materials out there both directly and through our partners to make it so that the engagement that is now expected makes sense. So I think very rational folks that looking how we do this. But I am pleased that the commitment we’ve made to marketing was a wise one, and one that we want to continue.

Great, thank you.

The next question comes from Greg McDowell of JMP Securities. Please go ahead.

Great, thank you. And it’s wonderful to see backlog grow in that manner. Couple of questions. The first one, I guess with respect to Steve’s earlier question, I’ll push it a little bit harder on the whales. And if you could just I know you don’t want to get into too much detail on industry in such, but if you could just talk about whether these were sort of new logo wins or existing clients where they competitive wins, was it more BPM or CRM or case management focus. Just any additional sort of details you can provide would be helpful I think.

Well. So I think both of these would be characterizes being of combination something new and something old. And so it’s not uncommon for us to having had a success with the client to do a significant amount of follow-on business, follow-on business with them.

And then Ken, one for you, a lot of that’s are coming out some recent earnings calls, where there is some similar term license commentary and maybe more explicit fears on operating margin compressions as a result of moving to term licenses. And I was just wondering maybe longer-term how we should think about that mix in 2017 and 2018? And sort of – at least being somewhat careful with our models taking into account the mix shift to more term licenses and the impact on margins. Thanks.

Yes. So it’s a good question. So the simplest way that I can explain it Greg is that if you think about a company that’s going through a rapid shift from a perpetual to a term model is going to have margin compression in an extreme way. A company that is doing it in a slower manner, naturally, you probably may not see much margin compression are notice that. I think the thing that we’ve highlighted for the recent past is to really pay close attention to our backlog because it is difficult to connect the meaning of our non-GAAP operating margin without thinking about the amount of term license, and when that’s coming in. So I think what we’ve seen over the last few years is that our recurring revenue has grown from in the 40%s up now to 54%. And with that our margin has been – non-GAAP operating margin has been at that kind 15% range. And I think it’s easy maybe to speculate that’s a performance issue but the reality is – some of that is related to revenue not matching expense. So that naturally is probably something that you are commonly hearing. I think the important thing to think about is that, that as the term revenue continues to grow you get through that trough. And we have not seen a real trough in margin. We have not experienced that. What we’ve seen is margin that has not grown to the extent that the Street expects it to grow. But I think what’s important is the amount of recurring revenue that we have is growing, and I think that’s a really important thing for us to make sure that you understand because that’s part of the reason that our margin hasn’t expanded over the last few years. And I just don’t think we’ve done a tremendously good job of maybe being transparent or clarifying that to you.

Got it. Thank you, that’s helpful.

The next question is from Matthew Galinko of Sidoti. Please go ahead.

Hey, good afternoon, guys. Thanks for taking my question. First one on the Rabobank deal, Alan, you called out your strength and decisioning and being quite a bit more effective than who you are going up against there. So could you just maybe talk a little bit more about that when – why you ended up so far ahead of your decisioning competitors and maybe you just talk about more broadly I think you touched on this earlier, but a little more broadly in decisioning why you’re coming out ahead.

Yes, so one of the things that we do which is interesting. And by the way one of this relates to one of the whales where we got a major follow-on piece of business. That sometimes we end up being in a head-to-head match against with decisioning. And I think that’s good. I think the fact that our real-time decisioning is rated by Forrester as absolutely best-in-class in terms of capability. The fact that if we’ve got a client who just wants to figure out what the right product is to be most suitable or most appropriate for customer and we’re absolutely best-in-class and then I think that’s fabulous. But the stuff really comes together when you don’t just want to make a good decision. You actually want to operationalize it. You actually want to fulfill it. You actually want to be able to take the loan application make an initial decision in the system. But then run that through some loan committee and actually take some steps. And then on Board a customer, that’s where the decisioning really marries up with case and process. Because the decisioning wants to lead to an outcome like case [indiscernible]. And the process is how do you execute this, how do you do it in conjunction with the customer system. We are I think differentiated purely in decisioning because the engine is so powerful. But if you actually want to move beyond intellect, to actually put some muscle into it, that’s where you’ve got to go put some Frankenstack together with the other guys. You got to do it only in their environment as opposed to being able to make it work both in a cloud environment in which your systems up close and personal. That’s where we really shine. And I think that’s a pretty significant and sustained differentiator for us.

Excellent. And then in terms of the whales you closed the pipeline here, can you comment at all what the sales cycle is like, what you would have expected it to be before or is it picking up a little bit?

I think the sales cycles in Q3 is a hard to gauge. Because Q3’s are just weird, it’s like until September nothing much is happening in many ways. So I don’t think that the sales cycles have really particularly worsened, though I don’t have a statistical basis, that’s just kind of being out there in the field. I will tell you there’s a lot of activity going on for Q4. It’s going to be frantically busy, which is – I think we think that’s a good thing, right, Ken?

So Matt, to touching on that as well, to your specific point to whales, I don’t think that we anticipate that – it closing a whale is any less or more intense in terms of the sales cycle. Those are big transactions. And so as you can imagine they involve an adequate amount of sales activity. So I think our time to close on those is probably unchanged from history.

Historically, so…

Fair enough, right. Maybe one last one for you, if you didn’t call out government as nice sector for you – with some wins this quarter. Do you see any incremental investments you’ll need to make in the coming quarter or year or so to get deeper into government, do you feel comfortable with where you are? Do you see any need for investment, I guess on the engineering side and product side, or on the sales effort [indiscernible]

There is some things that are incremental investment. For example, in the federal government space there is something called FedRAMP, there are some called GovCloud. There is some additional investment that we have been making to be able to support government specific environments and practices. There also some either government specific or government mandated audits that can cause hundreds of thousands of dollars to get done to demonstrate things. But frankly, it’s not enough I think to really significantly move the cost needle unreasonably. The core product itself turns out to be extremely well suited to the government space. I think years ago people would ask me what I was unhappy about it. One thing I said is, I really don’t think we’re doing a very good job getting into government. I was very candid about that. I am obviously feeling a lot better now about that the national that’s federal and the state of local levels. So we’re pretty pleased. We just have to share – the State of California is a government client of ours. And one of the things that they did fairly recently is the California Franchise Tax Board, which is what does all of the corporate taxes put in a Pegasystem with one of our partners to really help run a lot of the govs of the tax calculations. And we’re so thrilled with the results that they hosted an event on their premises of 250 other workers from other government agencies. To show off what they did. And we had some of the other government agencies talking about what they accomplished. And what I like about this is unlike some of the other vendors where if you actually listen to the presentations it’s not actually clear what they did. Our customers when they talk about it tend to be really very specific and very tangible. I think we’re starting to see really happy critical mass gathering in terms of these government organization.

One additional comment, Matt. That if you think about our partner ecosystem that’s very congruent with public sector as well, right. A lot of our partners actually have good public sector practices, et cetera. So the actual execution of engagement is really our ecosystem supports that vertical or that sector as much as any.

Got it. All right. Thanks, guys.

Thanks, Matt.

There are no further questions at this time. I’ll now turn the floor back over to Alan Trefler for any closing remarks.

Certainly. Well, thank you, everyone. We’re really pleased with the quarter and that the year is moving ahead really solidly and it’s trilling to be able to report those customer wins and also importantly customer successes. I want you guys to know that we got a lot of work to do and we are working hard on your behalf. So thank you very much everybody and all the best from me and Ken. Bye, bye.

Thanks, guys.

This concludes today’s teleconference. You may now disconnect your lines. Thank you for your participation.