Pegasystems Inc (PEGA) 2016 Q2 法說會逐字稿

Greetings and welcome to the Pegasystems' Second 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 remainder, this conference is being recorded.

It is now my pleasure to introduce your host, Ken Stillwell, Chief Financial Officer for Pegasystems. Thank you, Mr. Stillwell. You may begin.

Good evening, ladies and gentlemen, and welcome to Pegasystems' Q2 2016 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, targets, strategies, intends to, plan, belief, projects, forecast 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 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 its Q2 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 June 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 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. On our last call, I said we expected of our new CFO on this earnings call. And so, I'm pleased to introduce Ken Stillwell, we just heard from. Ken joined us on July 7 and you'll be hearing from him again later on this call. We have lots of good candidates. We ran a very disciplined and extensive process and we're thrill. We really feel we picked the best. Ken has held similar roles at companies include Dynatrace, SOVOS and PTC. He is got the right mix of financial leadership, operational skill, tech sector and public company experience to make him the right addition to our team. So, welcome aboard Ken, and thank you.

Thanks, Alan.

In terms of our results, I'd say, we had a solid first half. The first half non-GAAP license and

cloud revenue grew 18% year-over-year to about $159 million, and the first half non-GAAP total revenue grew 17% to $369 million. We have been seeing some anxiety from certain clients regarding Brexit and other elements of global uncertainty, some value loss on currency. It's too early to know what it may mean for the broader business impact, but we're being watchful and we don't anticipate more than a modest impact either short-term or long-term.

Now, regarding our strategy, we're continuing to execute on our strategy of delivering strategic applications for customer engagement on top of the world's leading platform (technical difficulty) and we're thrilled to see a large number of organizations who are choosing our strategic customer engagement apps, seeing the business outcomes that they can achieve from combining insight, action and the power to evolve in how they improve customer experience and save money.

We are seeing leading organizations and governments adopt Pega as a platform even beyond the apps to drive new initiatives. And we're also pleased and I'll talk later a bit about our initiatives to broaden our markets through digital marketing and through our expansion to the Global 3000.

To recall, the key element of what Pega does, we provide our clients with the unique ability to rapidly deliver strategic advantage in the areas of marketing, sales automation and customer service, to build their own applications on our platform while complement their existing technology to digitally transform or to leverage partner developed apps and we're the only architecture that really facilitates our clients moving seamlessly back and forth among our Pega Cloud, our clients own private cloud or traditional on-premise.

As we've talked about in the past, we're focused on four major initiatives two of which are product oriented and two of which are go to market. From a product perspective, we're continuing to deepen the capabilities of our engagement apps in marketing, sales automation, and customer service to make our solutions of greater value to our buyers and for speed of implementation, increased ease of use, and to support faster sales. Once again, this quarter, we gained important recognition for our leadership in customer relationship management.

This May, we were listed as a leader in the Gartner Magic Quadrant for the CRM customer engagement center, ahead of Microsoft, Oracle and SAP, and is one of the Top 3 thought leaders in the CRM industry. To quote from that report, Gartner reports that Pega has the best cost of value rating of any solution assessed for vendors in the leaders quadrant, unparalleled ability to handle complex cases, strongest ability in and receiving the highest scores from reference customers for modeling and predicting customers' behavior and for communicating the next best action to agents.

Furthermore, the strength of our out-of-the-box marketing application (inaudible) strong performer in Forrester's Cross-Channel Campaign Management Wave. It lists us as leading in what they call real-time interaction management, a critical requirement that brings the insight to the moment of truth when an agent is dealing with a customer or a customer is themselves engaging with the system.

We feel that no other provider is able to provide clients with a single unified platform to support complete end-to-end customer experience the way that we can. (inaudible) to some announcement at Pegaworld, we're seeing tremendous excitement from our clients and partners with the customer decision hub which we highlighted there, which offers the ability to unify insight and intelligence across marketing, sales and customer service applications. We're seeing a lot more momentum from other organizations interested in partnering to add value to their own offerings through our applications.

For example, we're pleased about the collaboration we have with Philips, announced in June to improve patient care through connected devices, cloud and analytics. The new partnership builds on an existing client relationship we have with Philips that lies at the intersection of IoT, Internet of Things and care management. Today, when somebody contacts with Philips Lifeline either with a question or because someone has fallen so their machine automatically calls, they're contacting a Pega software system. We're working with Philips to connect Pega Care management application, which does specialty functions in the area of optimizing population health with Philips HealthSuite Cloud platform. This going enable care teams to better leverage connected devices and health data to personalized care, increased adherence, improve health outcomes and lower costs.

We also announced an important partnership with Merkle, a state-of-the-art performance marketing agency, which earlier this year had brought Comet, a Pega centered systems integrator focused on customer engagement design, implementation and managed services. This partnership will enable businesses to connect advertising and marketing and across their customer service channels into the paid channel, to be able to drive more personalized, relevant and timely customer experience, whatever the customer engages with that time.

It unifies first party data from our customer engagement apps, which is collecting that happening in real-time on our sites and drives them through the decision hub to be able to support improvements to service across every channel. Also on the product side, we continue to enhance Pega 7, our unified model driven platform with a focus on mobile, analytics and cloud. Pega 7 is a foundational on which an applications are built a critical competitive differentiator in a platform for digital transformation.

For example, we launched the enhanced Pega exchange, a curated online marketplace where applications, on components and usefully utilities. This expansion provides business users and developers with access to over 90 apps and reusable components from our partners from Pega itself into the broader software delivery community. These can really help enhance Pega solutions easier and faster. It include software from companies such as (inaudible) and we will continue to actively extend this with new partners and generated content we got from users.

As you likely recall, we acquired OpenSpan this past April and are really pleased with how we brought together the Pega technology and the Pega marketing with this leading provider of robotics automation and workforce intelligence software. We show the integration of Pega 7 (inaudible), and are well down the path to installing this at clients.

The additional of case management and auditing controls to the robotics software add significant value to the clients interest in robotics and adding Robotics to the traditional Pega platform means that we can now get into any system, API or not and provide power and automation.

Now from a go-to-market perspective, we've been actively working to improve how people think about our products. We've introduced a new site called design.pega.com, which is a design platform that provides a resource for Pega user experience design and really helps set the standard for how people should create state-of-the-art and forward-looking systems, check it out.

And we are actively supporting the move to digital buying coupled with awareness marketing to bring prospects and clients to our digital platform. These programs continue to go on an interest and we are being able to leverage terrific new content from Pegaworld based on client key notes, breakout sessions. I hope you check them out, both to excite people who have come to our site and to help drive people to our site.

We're going to continue to use our cloud base trials of Pega 7 Express in campaign to drive interest and registrations. We're also investing in broader market coverage within enterprise accounts. We've seen a lot of momentum this year in the public sector around the world. It's such a terrific place for case management and for service efficiency. This includes some recent wins of companies or organizations like HMRC, Her Majesty's Revenue & Customs in the UK, which now has over 30,000 users, as well as the Justice, Commerce, Treasury and Veterans Affair Department in the US, and a number of divisions of the Australian government as well.

But one of the most notable wins this quarter was with the US Census. It's early days, but would like to highlight the process regardless to where we are and why we're so confident about our ability to drive excellence into even sophisticated and important programs. The Census bureau has a really incredible task in terms of -- as designated by the US Constitution counting everyone in the US, but more than doing that every 10 years, there's also a place where data is routinely collected for all sorts of other government agencies. And they really wanted to come up with a true state-of-the-art approach to both handle the upcoming sentences and do the work that lies between.

To ensure the decision was effective and objective and resulted in the best technology that actually engage Carnegie-Mellon Software Engineering Institute. And they published a 122 page document about the process they went through and how they made the selection. It is actually the most rigorous and responsible selection that I've ever seen. Their initial market research started with formal responses, some 29 software vendors, and they didn't just read white papers, they actually studied with a provider. They've then down selected to five vendors from whom they actually bought software, brought it in-house and used it. They then down selected to two finalists, each of which was given 90 days to deliver an actual system, and to make sure that the competition was not intense, they competed those two against the whole in-house development team.

At the end of it, Page came out clearly victorious. They said that they had 98% of what they needed out of the box with Pega. That Pega has the superior mobile capabilities, that Page has the model driven architecture that would give them flexibility and that Pega would enable them to deliver this more reliably and at a more reasonable cost and with the greater abilities to change. Exactly the message proven at scale, very, very exciting and an example of something we can do, and I think other governmental agencies and I would invite others to take a look at this document it's really terrific.

We're also seeing great momentum in a number of our other target industries. For example, in the healthcare, we are really being able to show that we can actively influence the cost structure and the service structure of our clients. Two simple examples would be Express Scripts, which recently expanded their relationship with us and CareFirst using Pega 7 to drive healthcare claims processing efficiencies for the Federal Employees Health Plan.

Our manufacturing business has also been doing extremely well. We have Toyota now running Pega 7 on the cloud to automate and improve quality compliance management and accountability from their hundreds of third-party suppliers. And FedEx using our OpenSpan Technology to support first-call resolution by more than 5,000 agents or in the technology space, Siemens continuing to drive digital transformation across all their business lines in the globe and our corporate markets team, which is from my point of view that exciting new set of staff we brought on, a little over year-ago, continues to do well and has brought to us firms we never would have historically sold too.

Companies like Nielsen or the AICPA Accountants successfully sold and being delivered by the corporate markets team. So I'm pleased that from a selling perspective we've really got a business system that is working and that makes a lot of sense and that can do everything from the extremely large design win deals like we would do at a census to things that are going live in 90 days powered by Pega Cloud and by our out of the box applications, very much on the past that we described when we said we wanted to embarked on this strategy 1.5 years ago.

I'd like to take a few moments and just talk about Pegaworld. It was the highlight in Q2 and this year, didn't disappoint. Biggest in our history, about 3,500 attendees and it's a terrific venue for building business opportunities, shortening sales cycles, and importantly connecting clients, prospects and partners together, which makes them all much more efficient. We significantly increased the size of our technology pavilion and was busy throughout the conference, but especially of the robotics booth where the lines were consistently long waiting to see the demos. We showed some of our IoT technology with an actual -- bringing an actual (inaudible) on the floor to show clients how Pega is able to make decisions, manage complications, like warranty claims and even drive personalized marketing campaigns by leveraging the data from the vehicle, city and roads sensors, as well as real-time weather information.

We have excellent presentations from companies like CFAA, the California AAA, Cisco, GE Healthcare, Orange Business Services, Spirit, United Healthcare and Xerox. And over the last six weeks, we've seen clients really beginning to apply the lessons from Pegaworld. We're seeing clients who have been able to take back stories and messages and are thinking and talking differently about how they want to drive digital transformation, how they want to breakdown application and channel silence, integrate customer data and deliver a great customer experience and operational excellence. Glad to see so many that attended have come back to us and are deeply engaged with us now. So Vegas turned out to be a terrific venue, and we'll be back there for Pegaworld 2017 and I hope you'll join us there.

So, in summary, a good first half. Pleased with the continued progress to position Pega as the leader in strategic apps for customer engagement and the platform for digital transformation. We are positive about how our software is perceived and leveraged in the marketplace and we continue to be confident in our competitive differentiation and our long-term growth opportunities and initiatives. To provide more color on the financials, let me turn it over to Ken.

Thanks, Alan. I'm really excited and feel fortunate to have joined Pega at such an exciting time. The strategic CRM market that we're in is an incredible growth opportunity for managing connectivity for our customers in this ever-changing world.

Pega is well-positioned to leverage our offerings and expertise to deliver on the promise of enabling better customer engagement. I've been here for a month or so and the team here at Pega is just awesome. I saw some of that in the interview process and my view has been confirmed now that I'm in mix. I'm excited to help contribute to shaping and driving our customers' success as Pega scales.

For the second quarter of 2016, we're 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.

As we discussed in the past, quarter-to-quarter comparisons do not necessarily reflect the underlying momentum of our business as the timing of a small number of large transactions and the mix of license types can significantly impact our results. In our view, year-to-date results provide the most meaningful look at how our business is performing. We're very pleased to report that year-to-date non-GAAP total revenue was $369 million, up 70% year-over-year. Foreign currency fluctuations as a result of Brexit were not material to our first half results because Brexit occurred so late in our Q2. Depending on future developments of Brexit, fluctuations primarily of the British pound and the euro could affect revenue results of future periods.

Our year-to-date non-GAAP license and cloud revenue was $159 million, up 18% year-over-year despite two large license deals recognized as revenue in the second quarter of 2015. From a revenue mix perspective, during the first half of 2016, non-GAAP license, cloud and maintenance revenue was 73% of total revenue compared to 74% during the first half of 2015. We do expect to see continued improvement in our software to services mix, which we mean by that the software portion of revenue relative to our consulting services.

During the first half of 2016, non-GAAP recurring revenue which includes maintenance, cloud and term license was 55% of total revenue compared to 54% for the same period of 2015. As we've discussed in the past, we offer our customers a number of options when licensing our software including perpetual term and cloud arrangements. We continue to expect that our business will shift away from perpetual licenses toward recurring license revenue streams of term and cloud, although the timing of a smaller number of larger value perpetual transactions would continue to impact license mixed results in the foreseeable future.

Non-GAAP consulting services revenue for the first half of 2016 was $98 million, an increase of approximately 21% over the prior year. This growth appears high because of a comparatively weak first quarter 2015 services revenue. We expect to continue growing our consulting services business at high-single to low-double digit rates consistent with our strategy to have customers and partners deliver the majority of our implementation services.

Looking at our geographic non-GAAP revenue split for the first half of 2016, the Americas inclusive of the United States, Canada and Latin America produced 65% of total revenue, while non-Americas international generated the remaining 35%. Approximately 15% of our total revenue is generated from the UK. The Brexit vote has created some uncertainty and volatility in global markets, which may affect customer purchasing patterns and demand for our products and services in future periods.

Turning to our non-GAAP gross margin, we finished the first half of 2016 with a gross margin of 71%, up from 69% in the prior year. Consulting services margins for the first half of 2016 were 14% up from 7% during the same period in 2015. The margin in the first half of 2016 benefited primarily from two large projects which all or a significant portion of the associated costs were incurred in the prior year. If we adjusted for this timing difference, our consulting services margin would have been approximately 11%, consistent with our expected run rate of 10% for 2016.

Our year-to-date 2016 operating expenses totaled $211 million on a non-GAAP basis, an increase of 15% over the prior year. Our year-to-date non-GAAP operating margin improved to 14% compared to 11% for the same period of 2015. This improvement occurred despite our continued investments in building our strategic applications, improving digital engagement for our customers and expenses related to the significantly increased attendance at our annual Pegaworld user conference.

In terms of some other non-GAAP operating expenses, we increased sales and marketing headcount by 177 people year-over-year, the majority of which were in sales. We're very pleased with the continued progress we're making to add sales and marketing capacity to expand our market coverage. R&D costs continued to run at about 18% of revenue. We expect this rate of investment to continue through the remainder of 2016, as we continue to enhance our leading Pega 7 platform and expand our strategic application offerings.

Turning to earnings, on a year-to-date basis, we posted $32 million of non-GAAP earnings. On a per share basis, our non-GAAP fully diluted earnings were $0.41 per share compared to $0.27 per share for the first half of 2015. Any future earnings impact from currency fluctuations as a result of Brexit or other market events would be partially mitigated by the expenses in that currency which create a natural hedge for us.

Moving on to backlog and the balance sheet, we compute license and cloud backlog by totaling two components; deferred license in cloud revenue is posted on our balance sheet and licensing cloud contractual commitments that are signed but have not yet been recorded on our balance sheet. As a reminder, you can find detail of both elements in our 10-Q and in summary table in our press release, both of which we filed earlier today.

We finished the first half of 2016 with $393 million of total license and cloud backlog. Backlog remains stable as compared to the first half of 2015 and the first quarter of 2016 despite a $4 million reduction caused by an abrupt decline of the pound and the euro as a result of Brexit.

Consistent with many software companies and with our experience, in most of the last five years, we've consumed backlog in the first half of the year and have built backlog towards year-end when license signings tend to be stronger. We continue to focus our efforts on converting our strong pipeline to backlog, while growing our revenue.

From a cash flow perspective, year-to-date, the Company produced $9 million of operating cash flow compared to $39 million for the first half of 2015. This variance is primarily due to the timing of our billings. We finished the period with total cash and marketable securities of $138 million. Cash was lower this quarter as compared to last quarter, primarily due to the cash payment of $49 million to acquire OpenSpan, which is net of the cash acquired.

During the first half of 2016, we repurchased approximately 795,000 shares for $19 million. At June 30, we had a balance of $47 million available for repurchase through June of 2017 and this was inclusive of an increase of $26 million of a repurchase amount approved by our Board in May of 2016. On headcount, we finished the period was approximately 3,700 employees, up 21% from June 30, 2015.

In summary, we had strong first half revenue, earnings and pipeline, while still maintaining backlog and seeing compelling progress in developing our strategic applications. We remain focused on achieving our 2016 targets with the power of our strategic applications and the momentum of Pegaworld helping to drive continued growth in the business through the second half of 2016.

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

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Steve Koenig, Wedbush Securities.

I'm going to ask a -- maybe a multi-part question so I can squeeze another one in [as] follow-up if that's okay. So you all talked quite a bit about how Brexit might affect you, so -- but I would like to ask in terms of the first half performance and particularly Q2 was -- looked very strong in terms of the bookings against a really tough comp, a great Q2 last year. Can you talk a little bit about what drove the strength in Q2? Do you still have the sales accelerators for first half performance did that help at all over there, other market factors or product factors, big deals, et cetera. And then, on the Brexit issue, given that you've mentioned it several times, are you signaling that we should expect any variance from guidance to be more likely to skew down now, is that the interpretation and why should the impact be large? And then I do have one quick follow-up if you guys will indulge me.

Sure. So there were no -- as people may know from our nomenclature, we refer to Wales as being $10 million plus piece of the business. We achieved our first half in Q2 without Wales. So we felt good about that. We had a healthy number of (inaudible), those being the $5 million to $10 million ones as well. So it was -- I think it was just a generally pretty strong performance. Frankly, we wanted to do even better, but we were happy with what had come in.

Relative to the whole Brexit and I take a look at some of the turmoil that going to world, Turkey where we have a couple of banks is obviously in a bit of stresses. It's hard to predict what's going to happen. I think that the world has become somewhat less friendly to international work business and certainly some of our large clients, which are the banks are really wondering exactly what Brexit is going to do to them. And it would be entirely natural for there to be some level of either the fall or taking more modest steps as a result of that level of uncertainty with the financial institutions in particular that are pretty big.

So, we don't issue quarterly guidance and we don't update guidance in the course of the year, but certainly looking at those things, anybody rational, anybody looking at the currency effects that have already happened and will happen can realize that we've got some natural hedges from the fact that we are globally -- we have expenses globally, but from a revenue perspective, it wouldn't be shocking to expect more volatility than we would have as we enter the year. And that volatility is more likely to be -- more likely to be negative than positives.

Yes. Okay, that's helpful, Alan. So my one quick follow-up, maybe more about the product and market. So given that we're seeing the market and your customers as well focus more on digital business transformation, can you talk a little bit about how Pega is being used specifically where the form factor is mobile, are you sometimes doing the front end and sometimes just integrating Pega with other tools and tenant being used, maybe just update us on where you are with mobile form factor and how that relates to digital business transformation?

Sure. So, one of the things that we believe is we need to be able to fit into a variety of architectures. So if somebody's got a mobility platform that they love and they just want to call us a service, we let them do that. However, one of the things that's kind of cool about of Pega is its model-driven architecture enables you to design kind of how you want your business to work, and then we generate the code in the HTML appropriate to form factor.

So we'll generate it for desktop, we'll generate it for tablet, we'll generate it for Android iOS and Windows Phone as it makes sense, and as you get on to Pega Express, one of the cool things you can do there, you can build your app and then hit this little button and the system will show you exactly what it would look like on all those different form factors.

Now that's based on the (inaudible) technology that we bought. We bought the (inaudible) technology, we took a lot of the goodies from there, the sort of shell that lives natively on the individual phones and then we augmented it with capabilities from our model to be able to do that and if you want to see a really cool video, a little four minute customer video from the Swedish unemployment office and Swedish unemployment thought it was very important to people not only be able to come into the office but be able to see the unemployment benefits on their various phones and they build a gorgeous system to really help people keep track of that and the great thing about it is, [we have to] think about the layer cakes that once you build things once and reuse it enormously.

If you look at it and use the layer cake because there is actually I think close to two dozen flavors of Swedish unemployment each of which offers something a little bit different, there is a different look and feel, people are allowed to sign up with their own employment agencies as it where and they are able to use a single Pega platform to create a mobile driven personalized experience that works across the board here and then also enables them to handle the back-end of others parts as well.

But my final comment on mobile is, the Census is in 2020 if all goes well is going to be by far the world's largest ever mobile field service application. On its peak day, there will be over 400,000 what they call mobile enumerators, people out in the field with tablets going and getting names, addresses, all the other sorts of things they need to complete the census. So for Pega to have as powerfully as we did won that business on top of our model driven architecture I think shows how far we've come in mobile and how our vision of mobile as not being a separate think but being core to actually having an effective application I think is going to be increasingly strategically beneficial as we go forward.

Greg McDowell, JMP Securities.

I'm not sure I heard, did you guys reiterate the full year plan of $800 million in revenue and $0.95 in EPS. And I guess, part B of that question is, if you could help us think a little bit about seasonality between Q3 and Q4, I guess in the second half of the year and if we should think about it any differently compared to sort of historic seasonality in light of Brexit, that's my first question?

Yes, so as I think you and others who listen well know that the only times we ever do anything that becomes close to updating guidance is in the light of an acquisition that we might do. And we did not talk about and nor would it be a practice to talk about previously the discussed revenue or EPS guidance.

I think we've alluded to the possibility that there is going to be more volatility in the second half and it's just harder to now, and certainly we didn't expect Brexit, for example, and we didn't expect some of the other stuff we've seen going on, when we put those original plans together or when we updated them at the end of Q1 when we talked about the impact of OpenSpan, the world frankly from my point of view was different there.

Historically, we've seen a lot of volatility in Q3s and Q4 has tended to be very heavy and we tended year-over-year to be very dependent on them. That's certainly not going to be any different this year. In reality with some of the tension that you see in the marketplace coupled with the fact that Q3s are always a crapshoot because large parts of the world are not available, except for a couple of weeks in September, I expect we'll continue to see a very Q4 heavy pattern, but we're kind of built for that and we are excited by the uptick in the software and the marketplace. Our internal pipelines are good and up and so we still feel good about the year but Q3s, we'll tell you are always a crapshoot.

Yes, okay, that's fair, thank you, and that's helpful. Since you brought up OpenSpan and again I'm not asking you to update guidance, but Max had talked about maybe around the $25 million revenue contribution in 2016 with $20 millionish coming in the second half of the year. So I guess just a broad question is how is OpenSpan trending so far in virtually your first full quarter of OpenSpan as a business and is it meeting your expectation so far?

Yes. I'm feeling quite good about the enthusiasm we got from OpenSpan. We as a company like to make sure that we don't just kind of blue wash the marketing materials, but actually make sure the software is really integrated. So we did take a chunk of the second quarter and try to make sure that we have the product hooked up to way we wanted to show to Pegaworld.

And subject to all, the OpenSpan technology is subject to all the sorts of vagaries of the standard Pega technology in terms of attention units and other things in terms of what's going on. But on quality and coverage at OpenSpan is going to be a very successful part of the long-term Pega story.

And by the way, we've been able to keep all the senior folks in there. Our retention has been terrific in terms of people we wanted. And that's also very much the way we go about bringing other firms into the fold. So it feels good.

(Operator Instructions) Matthew Galinko, Sidoti.

You touched on digital marketing and digital buying in the script. So I was hoping you could expand on that strategy a little bit, and I guess, more probably as we think about the strategic applications, are you seeing impact on the sales cycle coming down at all?

Yes. So, couple of things. One is that, we're definitely seeing much better web traffic, people coming to our sites, monitoring who is looking at our materials and I think that's part of supporting digital buying that we're very excited about.

Our PR in the first half was just spectacular. We got mentions in dozens of magazines internationally and lots of publications and periodicals. You can actually see excerpt of those of you come to our website. So I think the idea that we're supporting people other than knocking on their door, which is, of course, the way we traditionally sold is continuing to be well underway and is something that is obviously central to our future.

One thing that I'm excited about is, we put our Pega Express software online and it basically allows people, need to realize what a radical change this is from where we were three or four years ago. We actually had allow people to register and to go and for 30 days play with the software, which says a couple of things. One, it says we've really gotten to be a lot easier to use, because it doesn't require the traditional weeks of training to really understand it. And we've got that experience to be a very positive experience with thousands of people doing it.

One thing I've noticed is that a lot of the deals that closed more quickly had people who went online and played with it, and we're going to continue to double down on this. You're going to see us put some of our additional products online with the same sort of triad that we've done with now Pega Express.

I don't think, and when we talk about going to the corporate markets, we're not talking about going to companies that might have 30 users. We're still a company where -- we're designed for people who want to differentiate themselves and that means there's typically going to be somewhat larger firms, but the corporate markets team in particular finds it hugely beneficial to direct clients to just try it and you'll see us put more products out in the second half of the year in that same way beyond what we currently have on Pega Express.

Got it, thanks. And then on the sales side of the equation, you've added very significant sales heads over the past year. So I was hoping you could give a little bit more color on whether you're still pushing ahead on hires or are those predominantly quota carrier or a support which is kind of a mix and if you're satisfied with how quick you're on-boarding and bringing at least prototype hires to productive use?

Yes, we're really are trying to hire a greater proportion of people who actually carry quotas. Now in the corporate markets group, which is selling to the smaller firms, those quotas will be somewhat smaller which you would expect if you're not selling to the Fortune 400 but they're still meaningful and we're really trying to not increase what we call internally the tail, which is the number of people who kind of follow a sales person around.

We think that with strong product and better product, with excellent digital marketing and with the ability of people to try things and the videos we've now got online that show demos, we're actually looking to make it so that we can increase the sales force without having to proportionally increase the supporting infrastructure, which is one of the basis that Ken is driving us to improving margins in coming years, which I know (inaudible).

One additional comment for color as well as the candidates in the profiles that we're looking for primarily in the corporate markets area, the recruiting time is much shorter because there's a lot more candidates in the market and so we've had a lot of success with bringing those candidates on and on-boarding them and getting them out in the field to be productive much faster.

Thank you. There are no further questions at this time. I'd like to turn the floor over to Alan for closing comments.

I'd like to thank all of you who came to Pegaworld and let you know we like to see you again there next year. We're going to make sure we have a great show for you, and for all of you who have listened and for all of our stockholders, thank you for your interest and support and know that we're working very hard on your behalf. Have a great day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.