Pegasystems Inc (PEGA) 2015 Q4 法說會逐字稿

Greetings and welcome to the Pegasystem's 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'd 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 Pegasystem's Q4 2015 earnings call. Before we begin, I would 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, target, 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 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 forward-looking statements are contained in the Company's press release announcing this 2015 year-end earnings and in the Company's filings with the Security 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 views 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 will 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 for 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 for 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 their legacy systems put on the ability to evolve as quickly as needed and they're clamoring for lots of things and there is a lot of hype in this market.

But Pegasystems offers technology that can really deliver what these organizations truly need. The pressure is complimented by the shifting regulatory environment, the volatility we all see in the global markets, and rapidly changing customer demands that require a drive towards 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 applications, 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 to gain competitive advantage, to better meet the needs of today's more digitally oriented customer and to provide seamless experiences across the organizations. To achieve this, clients have told us that the software must be able to do three things.

First provide a strong basis of the context that's needed in serving customers, which we deliver through our industry-leading case management technology. Secondly, provide deep analytics and decisioning, which we deliver through real-time interaction management as the intelligence behind how to best handle every decision and every interaction. And third, support sophisticated Business Process Management, which is the muscle behind automation and the efficiency of the interaction.

Sometimes, I like to draw this to a human analogy. To be highly effective, an individual needs context, needs memory, needs intellect, needs decisioning and needs muscle to be able to execute. Only Pega is the category leader in every one of those critical areas. We'll talk a little bit more about that later. Now in 2015, we were once again recognized as the category leader in these areas and we think this is a key competitive differentiator, but we're not resting on our laurels.

We're continuing to build and expand our capabilities to power the entire CRM and customer experience stack. As we think about the scale of this opportunity, we see it is conservatively sized as about $30 billion of software. However, we think it will be much larger and continue to grow over time. And we believe we're uniquely positioned to win in this market with both the unmet software that supports our clients and the terrific customer references we have of clients who are on this journey with us and continuing to grow with us as they work to improve their customer experience, while achieving operational excellence.

So Pega gives clients the unique option to buy applications from us or to build their own applications on our platforms to meet their goals. And you know it's interesting, because technology is central, but when we look at what our clients are doing, we see many of today's CRM solutions is running out of runway. They get customers started, they do a lot of fancy things upfront, but are ultimately unable to handle the complex needs of organizations as they try to move from a simple interaction in one channel or one operation to an omni-channel cross-functional world.

Additionally, clients increasingly want the capability to operate both on the Cloud and on-premise and to move back and forth between the two as their business and operations dictate. We think that Pega has a unique opportunity here to offer the world-class offerings in both areas that give customers a functionality and a convenience they will increasingly seek and need. Thus, only Pega provide the combination of case management decision in world-class BPM and scalability to let organizations deliver the CRM of the 21st century.

So recognizing this, we are setting our strategy to take advantage of this larger market with four key execution initiatives. First, we're going to continue to prioritize and extend the advantage of our unified architecture, Pega 7, with a significant focus on mobile, analytics and Cloud.

Second, we're going deepen our CRM applications; marketing, sales automation and customer service all built-on and getting the full power of the unified Pega 7 platform; to make it easier for clients to identify our solutions for speed of implementation and increased ease of use.

We're working to move to a more digital marketing our sales, consistent with the way that today's clients want to buy, coupled with awareness marketing to bring clients to our digital platform. In 2015, we did our first paid advertising ever and we're going to continue to push to become recognized by more clients who can take advantage.

And then, to benefit from that we're going to invest in broader market coverage both deeper within our enterprise accounts where we go to market vertically and with the addition of a geographic sales force focused on opportunities in the global 3000 accounts, what we call our corporate markets initiative. The record results we saw this year give us confidence that our strategy and execution are working and I'm going to take a moment to summarize some of the progress we've made over the year, as the results were saying.

In terms of platform, as I said, we continue to invest to extend our world-class Pega 7 platform. It's the foundation for our strategic applications and its industry leading, pretty much across the board. We've made significant enhancements in mobile decisioning and Cloud that also drive improvements to both our horizontal and vertical applications. And we launched Pega Express in the middle of the year, a new application design experience within the Pega 7 platform that radically accelerates the speed of building applications.

Pega Express helps customer's start quickly and simply while maintaining the ability to add sophistication using our existing application development tools and Pega Express is also getting extensive use as the basis for our free Cloud-based hands on experience to trial Pega software.

Moving beyond the platform, we're going to materially deepen our CRM applications. We've already done a lot of work on Pega marketing, Pega sales automation and customer service. And we've developed a market-leading customer decision hub, which includes predictive analytics, next best action and real-time events consumption, all across our complete suite of CRM applications, adding contextual intelligence to all of marketing sales and service interactions across channels.

We improved Pega sales automation to provide deep support for both B2B, Business to Business, Business to Business to Consumer and Business to Consumer use cases. Enhance Pega marketing to improve personal customer engagement and launch a number of enhanced customer service apps for our target verticals. And earlier this month, we launched a new Pega field service application that brings our superior customer service capabilities to field agents and technicians in multiple industries with both online and offline mobile capabilities.

In 2015, we were recognized by both Gartner and Forrester as a leader in customer engagement, especially for large organization. And this focus on CRM is driving the majority of our sales.

Now regarding our marketing initiatives, as we've talked about -- historically Pega was a pure relationship focused business with very little marketing support. We made, several years ago, a conscious decision to begin to change this based on the way clients want to buy and what we saw was an opportunity in an extended market. Consequently, we've made significant improvements to our own digital platform, our website to make it easier for clients who engage with us and support the shift in how organizations want to explore and understand capabilities of a vendor.

And you'll see, if you go on to the site significantly improved organization, navigation and search across the platform and we're seeing substantial increases in site traffic and engagement. Our client testimonials are unmatched in the articulation of the tremendous returns and competitive advantage, clients are seeing from using Pega software. I urge you to go to pega.com and look at the newest customer videos from organizations like State of Maine, AIG, Xchanging, ANZ Bank.

And to show you how we're broadening our base, you can look at a little bank called ME Bank, Members Equity from Australia. This is an institution that used Pega to go from bricks-and-mortar to all digital and it shows how Pega can now work all the way from small institutions way up to the big [modelers] that we -- where we started with.

Now, in terms of broadening market coverage, that fourth area of focus this year has been looking to expand the addressable market. Now, this involves obviously product changes, go to market changes and being able to look, to support a different mode and different style of selling. Now we've had success in addition to this in existing accounts, winning both new logos in our target verticals and expanding our footprints.

For example; in financial services, we significantly increased our footprint in accounts like Scotiabank, American Express, JPMC, Bank of America, World Bank of Scotland, Deutsche Bank and Standard Chartered; but we also sold new financial services logo, like Fifth Third Bank and Mizuho in Japan and Moody's and Societe General which is using Pega's know your customer and on-boarding for financial services applications to meet the regulatory requirements and improve the global on-boarding process.

In communications, we materially increased our business in companies like Deutsche Telekom, Vodafone, Verizon and Telecom Italia; but during the year we also won great new logos such as T-Mobile, Plusnet, British Telecom, SingTel and Sprint. What's interesting, Sprint's initial implementation of Pega Marketing went live in 90 days and CEO Marcelo Claure told Fortune magazine, he is using Pega to improve overall customer satisfaction rates, reduce customer churn and improve new offer acceptance. It's a thrill to see that their last quarters have been materially better.

Manufacturing has become a significant growth business for us, and in 2015 we won terrific new business with companies including Navistar, Nissan and Toyota and grew our business with clients such as Ford, Cisco, and Siemens. Nissan bought Pega Customer Services as well as our platform to replace an aging warranty management system and improve customer service and reduce unnecessary dealer chargebacks.

And we're seeing increased traction in the public sector with new clients in 2015, including the Government of Canada, the Massachusetts Department of Revenue, several divisions of the Australian government as well as increased business including South Carolina Health and Human Services, The US Department of Treasury and Justice, The New Jersey Courts and other organizations that are using this to both improve service and drive efficiencies.

Interestingly, New Jersey's Courts is using it for a very sensitive area, trying to overhaul the state's probation system, which they think they can do a vastly better job at getting people home and making sure they're taking care of their citizens.

As I mentioned in 2015, our corporate markets initiatives now covers many, many more companies and that we're seeing great success with his team even though it's very early. We're able to support sales to clients we previously did not have remotely covered and that success is largely based on front office applications and most of the business is as a result of the Cloud really validating some of the investments work that we have previously done.

And interestingly and importantly, we're seeing sales cycle significantly shorter than in our traditional enterprise sales as well and we think this is further evidence that this will help us achieve our goals. At the same time, we are continuing to build out our ecosystem to ensure availability of the necessary resources to support the increasing demand for our software.

In 2015, our ecosystem grew by 30% including certified partners, customers and independent developers. Today, we offer more than 200 interactive self-paced online courses at our Pega academy site and to-date have delivered more than 2.8 million lessons to nearly 35,000 students around the world. And just last month, we introduced a new university program to train and certify Pega resources.

We have four universities across North America and India with more than 600 students enrolled who will graduate with Pega certifications and is the beginning of what I think will be a major influx of additional resources into the ecosystem. We expect to expand this program to additional universities in North America, India, Europe and APAC, allowing us to really build just a new feeder system for both our clients, our partners, and ourselves.

So in summary, looking at 2016 and beyond, 2015 was a record year for Pega. We continued to invest and execute against our long-term goals. We continue to believe that the key to a sustaining long-term revenue growth will be executing on the strategic initiatives we've been discussing; specifically building out the applications to better match the problems our customers want to solve, dramatically improving our own digital engagement to support how clients want to buy and broadening our coverage to better serve the larger addressable market.

We continue to be very positive about how the value proposition is being received and as the pace of change in organizations is increasing, we think the need for these strategic, scalable in both technical and functional means, CRM applications will drive organizations, even those that made other choices to come to Pega so that they can truly deliver Build For Change results and true value to their clients. We think we're uniquely positioned and very excited by what's going.

And with that, let me now turn this over to Max Mayer to give you some more of the details.

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 to non-GAAP measures is provided in the financial tables of the press release issued earlier today and is available on the Investor 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 licensing 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 represents 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'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 software through our Cloud offering. And as we've discussed, although we are focused and 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 expect the shift in our business will be away from perpetual licenses towards a recurring revenue stream.

This year there was a slight increase of perpetual license revenue as a percent of total revenue from 23% in 2014 to 24% in 2015, due to one large contract. Our recurring revenue line items; term, subscription, Cloud, and maintenance revenue for the full year accounted for over 50% of our non-GAAP revenue in 2015. Additionally, the backlog for term, subscription and Cloud significantly increased as a percent of overall backlog. Non-GAAP professional services revenue for the full year 2015 was $168 million, an increase of approximately 12% over the prior year.

Turning to our non-GAAP gross margin; even with significant investment in our Cloud and pressure on professional services margins in 2015, our full-year gross margin was 71% for both 2015 and 2014. We saw improvement in our professional services margins in the fourth quarter as utilizations in Europe improved and strong demand in Americas and Asia continued. We anticipate that our professional services margins will continue to be somewhat volatile quarter to quarter, but we do see opportunities for improvement over the course of 2016.

Turning to the rest of the income statement, despite significant investments we made in 2015 in our growth drivers, as Alan articulated, we maintained a full year non-GAAP operating margin of 15% consistent and flat with 2014. Full-year operating expenses totaled $381 million on a non-GAAP basis. In reviewing our operating expenses, there are few points I'd like to note.

This year, we increased sales and marketing headcount by 89 net new employees, 66 of these were in sales and resulted in increased compensation expense. We are very pleased with the progress we are making to add sales capacity, consistent with our broader coverage, as Alan has mentioned, and we will continue this growth to cover new accounts, new geographies and new vertical markets in 2016.

Our strong Q4 bookings drove sales commission expenses and other variable compensation expenses significantly higher this year. As a reminder, Pega does not defer most of the commission expense even when they're booking results in delayed revenue recognition. Also, as we've been discussing throughout the year, we have been investing heavily in marketing initiatives.

Our Pega Can brand awareness and lead generation campaigns ran in major markets around the world, throughout the year. As the early returns on these have been positive, we expect we will continue our increased investments in similar marketing initiatives in the upcoming year.

Our continued focus on enhancing our differentiated CRM strategic applications and our leading platform capabilities led to increased R&D investments in both 2014 and 2015. Currently running at about 17% of revenue, we plan to continue investing at this rate in 2016. As a reminder, we do not capitalize R&D expenses.

Finally, though it impacts only our GAAP results, stock-based compensation on a full year basis totaled $30 million compared to approximately $19 million for the same period of 2014. This was due to both a higher number of awards and a higher value of the equity grants awarded to attract and retain top talent. Our continued success will further increase this expense in 2016.

Turning then to earnings for the full year, we posted non-GAAP earnings totaling $64 million after a non-GAAP tax rate of 35%. On a per share basis, our non-GAAP fully diluted earnings were $0.81 compared to $0.74 per share in 2014 and compared to our guidance of $0.78 per share. It should be noted that our full 2015 earnings were reduced by an FX charge of approximately $4 million or roughly $0.03 of diluted earnings per share.

For further color on our current momentum of our business, let me turn to a view of our license and Cloud backlog. We compute license and Cloud backlog by totaling two elements. The deferred licensing Cloud revenue as posted on our balance sheet and licensing Cloud contractual commitments that are signed, but not yet recorded on our balance sheet.

As a reminder, you can find details of both elements in our 10-K on page 34 and a summary table in our press release, both of which we filed earlier today. We finished the year with $420 million of total license and Cloud backlog, an increase of $55 million or 15% over the prior year. And at year-end, the current portion of backlog stood at $187 million, an increase of 23% over the prior year.

Turning to cash flow; for the year, after the strong sales results in the fourth quarter, the Company produced $63 million of operating cash flow, while our accounts receivable increased by $62 million. The majority of this AR increase will be collected in the early part of 2016. We finished the year with total cash and marketable securities of $219 million on our balance sheet, an increase of 4% over the prior year.

And for the year, the Company repurchased approximately 952,000 shares for $23 million. As of year-end, we had a balance of $41 million available for repurchase for the coming year. On head count, we finished the year with approximately 3,300 employees, up 10% from last year.

Now to guidance for 2016; as disclosed in the press release issued earlier today, we provided revenue and EPS guidance for fiscal year 2016. We expect both GAAP and non-GAAP revenue for the full year 2016 to be approximately $780 million. Consistent with prior years, we expect our revenue will be somewhat back-end loaded and our best estimate of first half revenue is approximately $360 million.

Also, as in the past few years, in 2016, we expect license and Cloud revenue to grow faster than total revenue, while professional services revenues are likely to continue growing at a slower pace. While we work to balance the mix of deal types, our customer preferences ultimately determine how individual deals are structured, thus creating potential for variability in our financial results.

For the full year of 2016, we expect to earn approximately $0.95 per diluted share on a non-GAAP basis, based on an expected non-GAAP tax rate of 34%. GAAP earnings per diluted share for the full year 2016 are expected to be approximately $0.50, primarily due to increased stock-based compensation expense associated with an increase on the aggregate value in number of equity awards to attract and retain top talent on an expected GAAP tax rate of 35%.

We are continuing to make every effort to position the Company to accelerate achievement of our longer term objectives. In 2016, we are continuing to make investments to support key corporate strategic initiatives to lead the platform market for strategic business applications with a focus on mobile, analytics and Cloud; to continue to grow market share with our leading differentiated CRM applications; marketing, sales and on boarding and customer service; execution of new market growth initiatives further expanding coverage within the Global 3000; and the build out of our digital marketing platform and awareness marketing to support the way clients want to buy.

In summary, we are very pleased with the Company's performance for the year ended December 31, 2015. We made meaningful achievements from both the sales and product development perspective including advancing with our Pega 7 technology and enhancing our capabilities in strategic applications. Given these achievements, we plan to sustain slightly elevated rate of investment in our research and development and marketing efforts in 2016.

We look forward to sharing more as we continue introducing a number of new products and implementing key new initiatives throughout 2016. Before I conclude, I would like to remind our analysts and investors to save the dates for PegaWORLD June 5 through June 8 at the MGM Grand in Las Vegas. With an investor focused session on June 6. For more information, please email us at pegainvestorrelations @pega.com.

And with that, operator, we will open the call to questions.

(Operator Instructions) Steve Koenig, Wedbush.

This is Andrew Doupe on for Steve this afternoon. First off, just wanted to congratulate you guys on the strong finish to the year and I wanted to bring up you guy's long-term targets, the $1 billion in 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?

So, I think you really understand the margins of the business and what happens 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 into then current year, we really don't defer the commission typically, even though the revenue is quite deferred.

So I think if you take a look at the jump in backlog we having 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, that this Company has crossed the billion-dollar 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, well if it was an absolute 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 would 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 in concept, but we're not bound to that based on what we see happening in the market and 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 of some of your larger deals that you won in Q4 and did you win any of or how many did you win over $1 million? Did you win any 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. Thanks a lot.

Yeah, sure. I mean, we have in the course of the year three wales, which for us is not a particularly large number. You get a couple, and we don't push for the wales. A wale is, as we've 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 have a success, and then in the case of some of these organizations, have them make a massive commitment to the use of the technology where frankly, that wales does not represent what we ultimately expect to sell to this customer just what we'd expect to sell over the next couple of years. And so, you have institutions like, I'll think of an example of or people might not think of one of our biggest institutions but was one of the companies that made that sort of commitment to us was Scotiabank.

And Scotiabank was an organization we went in. They have 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 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 know have the change to be successful.

I'd just add, we have a very strong working set, is what we call sort of the active opportunities in our pipeline and that continues strong and we had deals or multiple deals over $1 million in each of our application areas and in each of our verticals that we target.

Mark Schappel, Benchmark.

Hi, good evening. Nice job on the quarter and thank you for taking my question. 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 when 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 the software is already really -- very good here at this stage. So we're really looking to find greater distribution. But we'll continue to invest in that. We're at a point now where things like our Cloud presence is taking off and is really causing us 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. But we're doing 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 expansions and much greater efficiency in 2017, but require some additional work this year. So definitely more in the sales and marketing realm. That's definitely where you'll see most of the growth and we are seeing a payoff from it

Great, thank you. 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 those challenges.

So we actually had a very strong quarter in Europe in Q4 and we did have weakness in that geography earlier in the year, but they really had terrific Q4 and overcame whatever headwinds there are in the 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.

So this wasn't carried by any one vertical or any one geography (inaudible).

And then, professional services, in the last couple quarters have 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 an abnormality or is just the new normal.

Well, some of it is a function of the lumpiness if you will, in our bookings. We're modeling professional services next year kind of 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.

Thank you. 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.

Negative? I assume that's a negative impact.

Yes, it's negative. Sorry, I didn't catch the end of your question.

(Operator Instructions) Greg McDowell, JMP Securities.

Hi, thank you very much. Hi Alan and Max, it's great to a strong end of the year. I guess my first question is just based on your tone and your revenue guidance it was same there. 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 change in customer behavior out there. Maybe, I'll just start there.

Yes, I spend a tremendous amount of time out in the field, as you might imagine and I think depending on company you are 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 technology with another company, right, or you go and create a little venture 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 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 purchases or in some cases, completely replacing them.

So no, there is no sense of doom gloom or fear here. Thought I do want you to know we do spend our money with caution and we do try to make sure we're going to get a return for it. But we're really quite bullish that we can grow. And $780 million is a big number. It's within spitting distance of $1 billion.

I would just add to that that the volatility and the environment that's going on is actually a benefit for us in our tagline Built 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 mean, I don't think we're actually in the S market. Some of it depends on (multiple speaker) M market. Now It's funny, we get these interesting things starting to happen. So in the last quarter, we won a piece of business, piece of Cloud business with Stanford, which their engineering group, which is right in Salesforce's backyard. So, it's a real privilege for them to pick our Cloud solution.

And it's an example of a much faster sales cycles, very much driven by the client being able to go online, access to the software and that's an example of where the investments in things like Pega Express. Yes, it's going to take a while for that to pay off as we open the aperture because no question in 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 you're in 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 into doing computer programing 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 out of runway, that they're not having the technical 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, workless [epitope] guys.

Okay, great guys. Thank you very much.

Matthew Galinko, 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 these applications. So I'm wondering if you could start to quantify how different you might think we'll that going forward or just what's the difference that you think we'll see between the traditional BPM sale and some of the new 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 when 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 a third of the items on that list.

But if you think about it, it was very much a design win sort of sale. When we now walk in with a world-class CRM solution, you have targeted a financial services, a target at the other verticals that we're in and we can actually show them real live examples that drive improved service to reducing cost 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 at 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 applications, the fact that they can extend them with all that power into the other parts of the organization and across their business, those are huge differentiators for us but I'm 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.

Got it, and then I guess on the BMP side as well, what do you think [compares with you] in that market, anything different in the recent quarter or two?

Yes, So I think of the BPM, if you're asking about the dynamics in the traditional BPM market we've been, I think just pretty much seeing IBM continue to fall away. They lost a lot of the ratings in some of the last -- they really fell off in some of the last 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 move to dominate that market and particularly it's a place that we want to play which is, we're uniquely suited if you want to understand why if you go to our website to this tab 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 our mash-up architecture that just really far outpace anybody in that sort of space, coupled with the fact that we've got case management and decisioning that is just part of the same architecture and platform.

But we think it all works best when you can go end-to-end and you can go from that whole customer service touch point right through to execution and we've been pulling a lot of these BPM clients whether they're new ones or older ones and allowing them to pull off, I'd say, into the front office. And that's where we think that these application and the BPM strategies are really synergistic.

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'll be both presenting and doing exclusive one-on-ones.

So with that, thank you very much everyone.

Thank you and good evening.

Thank you. This does conclude our teleconference. You may disconnect your lines this time and have a great day.