Good day and welcome to the Pegasystems’ Fourth Quarter and Full-Year 2017 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Ken Stillwell, Chief Financial Officer, Chief Administrative Officer and Senior Vice President. Please go ahead.

Thank you. Good evening, ladies and gentlemen, and welcome to Pegasystems’ Q4 2017 earnings call. Before we begin, I’d like to read our Safe Harbor statement. Certain statements contained in this presentation 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, should, estimates, may, targets, strategies, intends to, projects, forecasts, guidance, likely, and usually or variations of such words or other similar expressions identify forward-looking statements, which speak only as of the date of 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 fiscal year 2017 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 that are contained in the company’s press release announcing its Q4 2017 earnings and in the company’s filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the quarter ended December 31, 2017, 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 and I’m pleased to say that Q4 was a record quarter capping off a solid year for Pega. Last quarter I mentioned some challenges related to changes in our approach to selling and customer engagement, and though we’re not near done, the changes we continue to make are bearing fruit and I’m excited about our progress. As evidenced from this quarter’s results, we had a strong finish to the year and I’m pleased how our sales teams and the organization as a whole are embracing our changed agenda. As I’ve often said, it’s important to look at our results in context, taking into account current revenue, changes to backlog and growth in our annual contract value. We had solid revenue growth, while also driving a strong increase in backlog and ACV. We ended the year with the largest license and cloud backlog we’ve had in the company history increasing 23% or $120 million. And as we discussed last quarter, our shift to recurring continues to accelerate consistent with our move to emphasize cloud and recurring based arrangements. We’ve deepened our management vouch to help drive efficiency and effectiveness across all selling regions and to help us meet our ambitions. And then for example to help us execute earlier this month, we announced the addition of Jeff Taylor in a new role of Senior Vice President of Strategy and Go-to-Market Operations. Jeff has a proven track record of helping organizations achieve go-to-market results, and we’re excited to have him on Board. While there’s always room for improvement, I’m very happy with our Q4 and overall 2017 performance and believe our momentum will carry into 2018. So, let’s talk a little bit about strategy. As we review 2017 and look to 2018, I want to provide a little context…

Thank you, Alan. Well, our finish to 17 – 2017 was certainly an exciting one. We once again experienced record license and cloud commitments and continued our trend to more recurring commitments. Our revenue growth accelerated in Q4 as did our growth in license and cloud ACV. Our backlog soared by over $100 million again in 2017 with much of that growth coming in Q4, which is not unusual. We had continued growth in recurring license and cloud ACV of 20%. Our recurring commitments were 65% of total license and cloud commitments for the full year 2017 and provided some headwind to our revenue growth as we've talked about throughout the year. For two consecutive years, we've seen the market and specifically our clients preferred to purchase under recurring contracts of term license and cloud. Similar to last year, we have three whales in Q4 of 2017 and four whales for the full year of 2017 compared to five whales for the full year of 2016. To remind everyone, our definition of a whale has been a customer software commitment of greater than $10 million. Our mix of licensing license cloud contractual commitments shifting toward more recurring arrangements has an incredibly positive long-term effect. The increase of recurring cash flows is fantastic for the predictability of the business but produced in near-term compression on the top line as you move through this shift. Therefore, please keep in mind that this move produced the reported revenue that we have otherwise experienced – we would have otherwise experienced have the mix shift not occurred, that said we still achieved $841 million in revenue with $240 million occurring in the fourth quarter. Additionally, new client deals increased by over 40% year-over-year, highlighting the excitement of lots of new clients joining the Pega community.…

Thank you, Mr. Stillwell. [Operator Instructions] And we’ll take our first question from Mark Schappel with Benchmark.

Hi, good evening and nice job on the quarter. Thanks for taking my question. Ken, starting off with you -- Ken, starting off with you in your prepared remarks you mentioned that recurring commitments were 65%, was that for full year 2017 or was that for the quarter?

That was for full year Mark, for full year 2017, we landed at recurring commitments of 65% and onetime at 35%. So, if you remember we started the -- through Q3 we were slightly below that. So our Q4 continued the trend if not a little bit greater in terms of recurring.

Okay. Great. And then for the revenue guidance for next year, what is your assumption for the recurring to perpetual mix?

We are assuming that we will have approximately the same mix of about 65% to 70% recurring versus the difference being perpetual. Just to be clear though, its recurring commitments think of cash flow Mark, because the term is not actually recurring any more on revenue. But I think you were asking the question just between perpetual and term and cloud, so you should think about it kind of a two-thirds, one-third kind of mix.

Okay. Great. Thank you. And then under 605, where would your revenue have come out if you just didn’t account for the accounting change?

You're talking about for guidance?

Yes, yes.

It's an interesting question and what I would say is that it wouldn't -- our estimate is that, it wouldn't have been largely deferred than what we -- than what we’re guiding, because we would have the offset of a little bit accelerated revenue under 606 for term against the kind of the headwind of less duration, if you follow my math there. And those two factors would largely offset each other. So we feel like we would have been kind of into a similar range.

Okay. Great. Thanks. I'll let you go here, Ken, but the question for you Alan, in your prepared remarks, you mentioned that you added AI capabilities -- excuse me, AI transparency control, I think that was the phrase you used to your AI offering set. And I was wondering if you just go into a little bit deeper dive a little more detail on what exactly that is?

Sure. Well, and I think folks know and if you want to see a really terrific half hour presentation on this, one of our -- one of our luminaries this guy your name Dr. Rob Walker gave a presentation on the Tuesday at PegaWorld is one of the best I've ever seen on this exact topic. And in a nutshell, a lot of these machine learning algorithms which we're also able to take advantage of and we have elements of machine learning in what we do, that a lot machine learning algorithms really run serious risks of violating regulations. They can find correlations that actually violate, for example, fair lending laws. And if an organization follows that for either qualification or even for pricing, there's some serious potential exposure. So with this transparency switch, we give organizations a chance to say hey, this is the type of offer that I want to do with pure adaptive machine learning. I don't have to worry about regulations at all. I don't have to explain how I made the decision, I can just let the machine optimize, which is what machine learning is really frankly very good for, or in other situations I can say well this is perhaps a fraud area, this is a place where we need to be transparent, we need to explain why we made a particular decision and so I want to use the power of machine intelligence, but I need to do it in a much more structured and responsive way. That's what the transparency switch does. And frankly, I think we're in a staggeringly better position than the folks who have just adopted machine learning and neural networks helter-skelter you know because frankly you need to be able to weave good judgment into how you apply this technology and I think that's going to be true even more in the future. Does that make sense?

It does. Thank you. That's very helpful and then one final question here. Alan, could you just run through just some of the meaningful changes to the sales org that you introduced in the coming year in 2018?

I can give you a flavor, I’ll tell you that some of these were introduced in 2017 as well. As I think I’ve mentioned, I think we introduced a bunch of changes in 2016, we began heading in a certain direction, because you’re here in a second, we’ve really just sort of began heading in the direction and I think one of the problems of our business is a quarters can be lumpy. And it's really dangerous for I think either investors or even us to over focus on a given quarter. So, in a really good Q4 of 2016, we had a really good Q1 of 2017 and to be honest I think we thought we’re a little further along that in hindsight we really were. We quickly realized that and have redoubled out some of the changes in terms of what they are, for example, we moved the entire sales force 100% of it to an ACV model. From a model that previously based on total contract value and that's more than just a little mathematical calculation and that includes really rethinking educating getting everybody up to speed. Frankly, it's gone from my point of view from what I've seen extraordinarily well given any time we try to change things with the sales force that’s always a little bit potentially fraught, but as of Jan 1, we flip that switch completely and we're really having the entire organization thinking about annual contract value, thinking about recurring, as sort of a primary, not exclusive the primary wave going to market, we adopted what we call the challenger sales methodology, which is really moving people for more relationships selling to really actually saying hey! you’re just like we have with transparency as it relates to AI. We’ve got some things, where we got a position, the challenges some of the conventional thinking and that involves a tremendous amount of sale enablement and actually in some cases new salespeople and new sales managers who are really able to do that sort of differentiated, I would say, presentation and thinking. We've uplifted not just the frontline team, but a lot of support team to be able to be better able to talk to folks, we didn't used to talk to as much, people like Chief Marketing Officers or Heads of Sales Operations. So extensive changes in terms of both the operations and the orientation of the sales and the marketing organization and the whole business that sits behind it, these things all need to work in some alignment. So, I don't want to pretend we’ve done, but in terms of being along this journey, we've made a lot of progress and I'm happy that that progress is heading in the absolute right direction.

I'll add one thing to that Mark that that kind of gives you another flavor of this. We have support functions that support our selling teams, and it's really important that the point of why we moved ACV was not to reduce things like commission costs, because quite frankly, we have higher commission costs in that environment, it was to speed up the velocity of how we transacted deal, so that we could get more things through the pipe. And so, we need to talk to our supporting functions around sales to make sure that they're following that lead as well and that we're focusing on speeding up where appropriate so that we don't think about sales cycles in terms of years, we think about sales cycles in the enterprise software in terms of how can we get this customer value. And I think that that's a cultural change. It's not just sales, but it’s the entire organization. So that’s – it’s further reaching to just say a comp plan change, because that might be the simple way people think about it.

Much more. Yeah.

Great. Thank you very much.

Thanks, Mark.

[Operator Instructions] We’ll now hear from Joseph Winn with Wedbush Securities.

Hey guys. Thanks for taking my question and congrats on the quarter. My first question is just on Pega Robotics. We continue to hear about accelerating proof-of-concepts in the field. And I was just wondering, I guess, Alan, this one would be for you. Can you give any color on what you're seeing from customers that are still kicking the tires in any adjustments you might be making in the sales process? Also, I guess, as a standalone technology versus integrated BPM, any demand trends you’re seeing there? Thank you.

Sure. So, one of the things when we’ve historically done acquisitions, which we've obviously been very selective about is we've tried to do a lot of work to unify the technology into the rest of our platform. So, you don't have a bunch of things that are common products in name only, but we really want to make things work together. And we see a natural connection between being able to run a process and being able to then use robotics to handle those pieces of process that tend not to have really good interfaces. And that's a big deal, because so many of these other robotic competitors really start with the robot. They don't think about the journey, they don’t think about the process, they put these little robots in. And frankly, we're seeing customers starting to realize that that's going to run out of runway. I mean, you can use it in some situations, but generally the purpose of the automation should not be around the task that robot is doing. And by the way, the worst of all possible worlds and we just had a very major client flip to our technology for this reason is when a customer has done this a little bit, realizes that they’ve created all these little robotic silos, it’s by putting business intelligence into the robots. These disconnected robots can hang together. So, we can do the disconnected stuff. But our whole pitch this year, especially is it's really about being able to think of the robot as augmenting a customer outcome. And if a step in that outcome is best done with what’s called the web service, why we should do that. And if a step needs a robot, we should do that. But there going to be a rain, that's holding all of it together and that's where the Pega architecture and I think if you get to our website, you'll see we actually have a lot of good stuff on this. I think that's where we're highly differentiated in ways that I believe this year customers will increasingly appreciate. Does that make sense?

Yeah, that's great. Thank you. Actually, Mark covered my second question, so thanks, guys. Congratulations.

Great. Thank you.

Thank you.

That will conclude today's question-and-answer session. I will now turn the conference over to Mr. Trefler for any additional or closing remarks.

Thank you. We're working hard, we're doing lots of things. But I'm pleased that the company has a change agenda this broadly adopted and there's a lot of enthusiasm in the firm, though a recognition that we've got a lot of work to do. If you want to see a terrific example of what we're about and where we're going, I can think of no better place to experience that then Pega world on the fourth and fifth of June. We do have an investor set of sessions that will be on Monday June 4th this year and for those of you might be interested, please don't hesitate to reach out to Ken. We'd love to see you there. And with that, thank you very much everyone.

That does conclude today's conference call. Thank you for your participation. You may now disconnect.