Pegasystems Inc (PEGA) 2002 Q4 法說會逐字稿

Welcome to the Pegasystems fourth quarter year end 2002 conference call.

Your host, Beth Lewis, Manager of Investor Relations.

You may begin.

Before we begin I'd like to read the Safe Harbor Statement.

Certain statements may be considered forward-looking as defined in the Private Securities Litigation Reform Act of 1995.

These involve various risks and uncertainties that could cause the company’s actual results to differ from those expressed in such forward looking statements.

These risks and uncertainties include the impact of the volatility of our quarterly operating results, difficulty in predicting the completion of product implementation and consequently the timing of the license revenue recognition, the ability to develop new products and all existing products, interest market trends, the impact of the business in the financial services market, historically our core market, the ability to attract and retain key employees, reliance on certain third party relationships, management of the company’s growth, and other risks and uncertainties.

Further information regarding these and other factors which could cause the company's actual results to differ materially from any forward-looking statements contained in the conference call is contained in the company's most recent files with the S.E.C.

Investors are cautioned not to place undo reliance on the forward-looking statements and there are no assurances that the matters contained in the statements will be achieved.

They are based on our expectations as of today only.

We do not undertake any obligation to revise or update publicly any forward-looking statements.

With us we have Alan Trefler, chairman and CEO, Henry Ancona, President and COO, and Chris Sullivan, Chief Financial Officer.

We finished the year with revenue of $97.4m, up 2.5% over last year and earnings 43 cents per share up 16%.

Revenues for the fourth quarter were down, but this kind of fluctuation is not unusual for our business where we have a small number of large deals.

In spite of a lower fourth quarter, we worked hard over the year to grow the top line.

We also managed our operations more efficiently, and it brings me great pleasure to comment on those results.

Chris will comment in more detail on the financials, but there are a few metrics I want to bring to you attention.

We continue to improve gross profit, new customer license signings increased in the second half of the year, and we improved operating income.

For the year as a whole, we signed key big-name accounts, such as the Bank of New York, the U.K. inland revenue, Cobalt, the U.K. post office card account, and Allstate.

We are well known in financial services and in healthcare, and are focused on leveraging our strength.

During the year, we strengthened our management team with important new hires, a VP of marketing, a VP of the health cap business unit and a V.P. of department grow, and during the year we rolled out the number of products.

We commercialized PegaRules process commander.

We announced PegaCard services to support the reentry to the card market.

We upgraded the core applications technology with Pegasystems 8.1 and released an upgrade to the integrated investigations solution.

Now I'd like to walk through some of the quarter's accomplishments within the try tripod that I look at.

Clients, operations, and products.

During the quarter, we signed four new clients.

We signed Cobalt corporation, the Wisconsin-based Blue Cross Blue Shield, one of the four publicly traded blues, to automate claims acception processing.

They have a little more than 1m members and employ more than 3,000 people.

We won this deal based not only on the strength of the product, but on what they knew we did in Massachusetts.

We had a strong reference so strong that we made it into their earnings call.

Cobalt was asked how they would be improving efficiency, and they answered by referencing their contract with us and their expectation that we would have, I quote, "a very important impact," unquote, on the claims processing efficiency.

Cobalt needed to go with an established vendor, a vendor with healthcare customer referencing and a vendor who can provide the agility and productivity necessary for a publicly traded company.

And we are the company with the rules-based process management system which fits the bill.

We also signed a second Blue Cross Blue Shield organization for a quarter.

For them we will be supporting their call center operation.

This is a great win for us because, again, we were referred by another Blue Cross Blue Shield.

What we are seeing is that our healthcare clients are seeing results, and our story is are resonating.

Our third client is a premier financial services company.

We will be automating credit card disputes.

Our software will enable 2500 current users to automate dispute and chargeback processing worldwide.

We went through four months of capability demos and proof of concept.

This is validation not only of our reentry into the card market but also our ability to work with partners, as it is one of our partners who brought us into this deal.

And we also signed a fortune 10 manufacturing company that will be using our PegaRules command solution to automate tax consideration Involved with contract proposals.

Our revenue growth strategy is not only to win new business, but also to delight and grow our existing clients.

And we've done that, too.

An extension of note was one of our Blue Cross Blue Shield's clients.

Five years ago, they implement you claims acception solution.

This past quarter they renewed and added member services.

Their support is a validation of our technology and service.

And it is a validation of our decision to focus more on the healthcare market.

We are starting to reap the benefits of a large and happy installed base.

Why now?

It's partly critical mass and partly our renewed commitment.

We've always had great products and great clients.

We are now focusing on our support to and from them, which brings us to internal operation.

The second leg of our tripod of clients, operations, and products.

In the area of operations, we have a laser focus on our sales efforts.

Part of that effort is visibility.

Last quarter, I told you that we were one of the best-kept secrets the software.

Well, we've engaged a hard-working PR firm, and this month we appeared in at least two “best of” lists.

We were featured as January's one to watch in Business Process Management’s top 40, which is the most accessed BPM solution website, and Aberdeen Who's Hot and Who’s Not CRM companies, we were the number three hot company there based on third-quarter financial.

We are actively reaching out to industry analysts and participating in more and more public events.

To give you an idea, this month, we are exhibiting at the card forum in London, we'll have a presence at the IBM transactions and messaging show in Las Vegas, an exhibit at IBM Partner World in New Orleans, and both exhibiting and speaking at the CRM Expo in Chicago.

And remember, these are just examples and just for the month of February.

So our focus on visibility is already working, and as I mentioned, the end goal is to support our sales efforts.

Which brings me to our partner strategy.

We've renewed our focus on partners, we're bringing them in earlier and bringing them in more often.

This year, for the first year, in fact, they were invited to our sales kickoff meeting in January, and we were delighted to have 40 representatives from Partners attend including Accenture, Bearing Point, IBM, and Sun.

As I mentioned two of our new clients this quarter were partner-assisted deals.

And finally, our sales effort is reflected in our pipeline.

Last quarter, I talked about a more disciplined evaluation methodology which resulted in the shake out of the applications pipeline at that time.

This quarter, I'm talking about growth in our pipeline, significant growth in our rules pipeline and meaningful growth in application.

The third and final leg of the tripod are our products, which I summarized earlier in this call.

We are committed to upgrades and continued product evolution.

Going forward, you can expect to see product announcements reflecting this commitment.

Our message is clear.

We provide simply smart Business Process Management.

The integration of rules and Business Process Management to enable our customers to automate processes that might otherwise involve complex and expensive manual processing.

Our solution is simple to use and simple to change and, most importantly, our systems both decide and do.

In some, we're keeping it simple: Clients, operations, products, and we're keeping it smart.

With that, I'll turn over the call to Chris for a discussion of the financial.

Chris.

Thank you, Henry.

Despite a challenging economic environment, our financial performance in 2002 was solid.

Total revenue in 2002 increased 2% due to increased license revenue.

The growth in license revenue was driven by an increase in perpetual license, primarily the perpetual license sale resulting from the restructuring of our relationship with FDR.

This restructured relationship also allowed us to enter the growing credit card market.

While we have stepped up efforts to sign new customers and license business, the vast majority of the license revenue in 2002 was from existing customers who chose to renew, to add on to, or extend their investment with us.

Service revenue declined sharply in '02 largely due to the fall off in new customer license signings in latter '01 and '02.

Net income in '02 grew 22% over '01, mainly because license revenue comprised a higher percentage of total revenue and as a result of our cost containment efforts.

We generated $27m in positive cash flow from operations and ended the year with a strong balance sheet including $63m in cash and marketable debt securities, and $81m in combined short and long-term license installments receivables.

Economic uncertainty remains a concern.

However, we did see some signs of improvement in the closing quarter of '02.

Improved bookings in the second half of the year and our pipeline growth in Q4 make us cautiously optimistic about license bookings for '03.

The successes that we've had this year are a result of our commitment to customer satisfaction, the strength of our technology, and our employees attention to performance management and accountability.

Total revenues for '02 were $97.4m compared to $95.1m in '01, or a growth of 2.5%.

Within the range of our most recent guidance.

Total revenues for the quarter were $21m, a decline of 13% from $24.1m in '01 The year-over-year increase in revenue was driven by $19.9m or 45% growth in license revenue, offset by a 34% decrease in services revenue.

The growth in license revenue was driven primarily but a $17.6m year-over-year increase of revenues associated with our first data resources agreement.

In the fourth year to year-over-year total revenue declined $3.1m, comprised of $2.2m in license revenue reductions and $900,000 in services revenue.

As we have discussed in the past, quarterly fluctuations such as this are not unusual due to the fact that revenue recognition is dependent on, among other things, the timing of contract signings and the completion of implementation milestones.

We recognize the present value of multi-year term licenses by applying a discount rate that reflects the borrowing rate applicable to our customers at the time the revenue is recognized.

This applicable discount rate moves directly with the overall interest rate levels.

Up in $19.9m growth and license revenue for the year, approximately $1.2m resulted from the lower interest rates.

During Q4 '02, the effective lower interest rates versus prior year was favorable by approximately $32,000.

Our recent S.E.C. filings include more information on the composition of our revenues.

Service revenue for the fourth quarter was $9.3m compared to $8.7m in Q3 of '02, an increase of 8%.

This compares to $10.2m in Q4 of '01 or a decrease of 8%.

Service revenue for '02 decreased 34% to $33.5m from $51m in 2001.

As we have said in the past, our service revenue is largely driven by implementation services attributable to new license installations.

Consulting services revenue of $24.2m for '02 was down sharply compared to the $43m in 2001, a decrease of 44%.

The decrease in consulting services is due to fewer new license contracts over the past four to six quarters and customer's delayed spending as a result of the generally weak economy.

As renewals and extensions make up a larger portion of our revenue, there are fewer implementation services required.

While consulting services revenue was down year-over-year, the second half 2002 consulting services revenue of $13.1m was $2m or 18% higher than that of the first half of 2002.

While we saw an improvement in new license signings in the fourth quarter of 2002, services revenue growth will likely remain a challenge, at least through the first half of 2003.

Maintenance revenue for 2002 was $9.3m compared to $8m for '01.

An increase of 17% related to have growth and license revenue.

Revenues from customers outside the U.S. were 22% of our total 2002 revenues compared to 23% in '01.

As was the case in the previous quarters we were successful in leveraging relationships with existing customers.

We recognized $1.8m in revenues this quarter from 8 new customers.

Our average deal size over the past few years has ranged between $600,000 and $1.8m of licensed revenue.

Our average deal size for the fourth quarter was just under $1m of license revenue compared with $1.5m average reported for the third quarter of '02.

For the year gross profit improved to 67% versus 58% in '01.

This year-over-year increase in gross profit was due primarily to the higher proportion of license revenue relative to service revenue.

Cost of software reasons license includes the amortization associated with purchased software under an agreement with FDR and amortization of acquired technology we purchased in connection with the business acquisition in '02.

The amortization related to FDR completed in the fourth quarter of '02.

Cost of license for '02 decreased 13% to $2.7m from $3m in '01.

As a percentage of software license revenue, cost of software license revenue decreased to 4% for '02 from 7% of '01.

Cost of services consists primarily of the cost of providing implementation, consulting, maintenance, and training services.

Cost of services for '02 decreased 22% to $29.2m from $37.3m in '01, primarily due to reduced staff costs and reduced spending on consulting.

The cost of services is recognized as expenses are incurred.

Consistent with our accounting practice, we have not deferred to any material costs.

Service gross margins for 2002 were 13% compared to 27% in '01, and the decrease was driven by the drop in services revenue, offset partially with reductions in services headcount and related expenses.

Service gross margin improved significantly in '02 to 20% from 4% in the first half of '02.

This increase is due to higher maintenance and consulting services revenue combined with reductions in service headcount related expenses.

Research and development expenses for '02 increased 2% to $21.3m from $20.8m in 2001.

As a percentage of total revenue, research and development expenses remain flat at 22%.

The increase in spending was primarily due to increased compensation and staff-related expenses as well as continued investment in the payrolls business.

Selling and marketing expenses in '02 increased 33% to $22.3m from $17.5m in '01.

As a percentage of total revenue, selling add marketing expenses increased 24% in '02 from 18% in '01.

These increases were due to increased staff and marketing program spending in our applications business and investment in our emerging PegaRules business.

G&A expenses for '02 decreased 3%, $9.5m from $9.8m for '01 due to reduced employee compensation expense and a reduction in our allowance for doubtful accounts of $400,000 to reflect better collections experience.

As a percentage of total revenue, G&A expenses remained about 10% for '02.

Income from operations was $11.5m in '02 compared to $6.5m in '01, a 76% increase.

A $5m improvement was due to the $20.3m improvement in software license gross margins, increased revenues, offset by a $9.5m reduction in service gross margins due to the low service revenues and increased operating expenses of $5.9m.

Installment receivable interest income for '02, which consists of the portion of all license fees under long-term software license agreements that is attributable to the value of money decreased 6% to $5.8m from $6.2m in 2001.

The decrease was due to a lower average discount rate for our portfolio of term software licenses.

Other income and expense net which consists primarily of currency exchange losses and resale and development funds received from third-party vendors of computer hardware products decreased to $800,000 expense for '02 compared to a $15,000 income for 2001.

The decrease was due to greater currency exchange losses and lower resale and development funds received.

The provision for income tax was $1.9m in 2002, an increase from $1m in 2001.

The 2001 tax provision consists primarily of foreign subsidiary income tax.

The increase in provision was due primarily to increased stock option exercises, an adjustment from review of estimates in '02.

Accounts receivable days billed outstanding as of December 31, '02, was 20 days.

This level of DBO is unusually low, reflecting reduced service billings.

Historically DBO for service billings is higher than that for license billings.

Deferred revenue for December 31, 2002 consisted primarily of billed fees, for which acceptance of the software license or service milestones have not occurred.

The unearned portion of service revenue and advanced payment of maintenance fees.

The deferred revenue balances increased to $12.1m as of December 31st, 2002, from $6.2m as of December 31st, 2001.

Due to payments of software licenses in advance of customer acceptance and advanced payment of maintenance fees.

Cash and cash give equivalents as of December 31st, 2002, increased to $57.4m.

Net cash provided from operation for '02 $27.1m compared with $15.9m for '01 The increase was primarily due to $4.8m from increased deferred revenue, $3.5m from improved collections of accounts receivable primarily from perpetual licenses and $2.8m in improved profitability.

Although we've been successful in reducing receivables to a collection activity, it is reasonable to expect that our collection experience may return to more normal level during 2003.

Looking ahead for 2003, we expect to achieve revenue and EPS results in line with '02, plus or minus 10%.

Despite the anticipated year-over-year decline in revenues from our FDR agreement.

We are also expecting to generate $5m to $15m in positive cash flow from operations during '03.

And that concludes our financial surgery.

I turn the floor over to Alan.

Thanks, Chris.

Last quarter we talked about dialing up external focus.

There's been a real focus on commercialization.

Henry talked about our simply smart BPM message.

And the smart BPM part is something we feel we are uniquely qualified to provide.

We've got products that can both decide and do, do real work.

And we've got the ability to do that in an environment that's simple in way that's simple to use and simple to change.

This message works in our segments that we've targeted in healthcare and natural services and it also works broadly on a horizontal realm, and as a result we feel we have a message that can both resume resonate and be positively received in both the vertical segment and the horizontal world.

The rules message which we’ve been touting for a while is something people have spoken about in the past, and to be frank, we feel we bring a tremendous richness out of our 20 years of experience.

Our world-class customers, our world-class implementations, and the sort of refinement that goes in to actually understanding how to deliver those in a serious and scalable manner The scalability is key because, at the end of the day, one of the important reasons that people choose our solutions is that we have solutions that scale.

We heard that with some of our recent healthcare customers, and we've heard that throughout our history as we talk about organizations that are large, and we talk about organizations that need to not just address the problems of today, but know they'll be able to evolve to address the problems of tomorrow.

In terms of the marketplace, we've been ability marry this unique approach with an understanding that customers today, our clients, want a company that has financial stability.

And this is where looking at a company that's solid, that has been battle-tested is very important and speaks loudly when it comes to responding to proposals.

We've been talking about our customers for a while, now, and last year at this time, we said we really wanted to dial up our attention to customers, really work at making customer service a priority.

And we have done an excellent job of working within the customer base and, in these tough economic times, being able to work with them to allow us to continue our growth and continue our traction.

But I'll also tell you that we've had terrific results as we've been dialing up our commercialization efforts, getting traction on the outside and being able to, now, work at winning new customers and getting out there broadly in the market and dealing with the analysts.

Our customers have seen a return on the investment for some time and now as we go forward they're in a position to act as references for us to help us in side the organizations we deal with and also act -- well, two points, as we go out broadly into the market.

Going forward you're going to see us continue to focus on customer service and getting our customers increasingly involved in the partnership, not just providing recommendations and references, but also working with us to make sure we're building the right things and moving in the right direction.

So what do I take -- what do I see when I look at the company?

I see, well, some excellent license signing of big-named customers, real traction in the healthcare market and continued penetration in financial services, and I see growing demand nor horizontal rules driven BPM platform.

So in closing let me leave you with some observations from our customers that I've encountered in a couple of months that validate our technology and the promise of our business.

At Blue Cross Blue Shield of Massachusetts, the CSR's are happier, and their call for a new ID card can also handle a question about insurance information and also drive that right through the processing, not just recording information or presenting endless screens for CSR to look like.

These, we think, are important factors in helping our customers be successful and important differentiators because they stress how our customers themselves can control their environment using our technology.

We talked about being simple to change, and that is one to have the great appeals for an organization.

It is an appeal to organizations aggressive in the market and those who have long histories.

We signed up the Bank of New York which is a Bank who is renowned for their commitment to service and wanting to do an excellent job.

They saw how our technology can assist them in that.

That is a tribute to our technology and how they want to invest in making sure their customers are well cared for.

In terms of systems that do real work, the Federal Reserve Bank which is not traditionally known as a wild and crazy bunch, selected our system for the ability to improve efficiency, reduce cost, and standardize services across all 12 districts.

We're privileged to be the first system that was rolled out to give them leverage and improved productivity.

What this is all about is smart BPM message.

Agility, productivity, quality, able to make our customers able to delight their customers.

And we think, at the end of the day, that's why we've been able to pull off a strong year and we feel, at the end of the day, it bodes well for our future on a long-term basis.

So let me end by giving a couple of thank yous.

First I'd like to thank the team, partners and the customers.

Because in a very, very tough and brutal environment, they were able to pull off some pretty remarkable things, to increase revenue at a time when most of our competitors and other companies were shrinking, being able to be profitable, significantly increase cash flow, all point to the fact that I think we've got a great team and systems with impact that can make a big difference.

And I'd also like to thank the investors, and I'd like you to know we'll be working hard for you in '03.

And with that, let me throw it open for any questions.

Thank you, sir.

Ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone.

If your question has been answered or you wish to remove your question of law from the queue, please press the pound key.

Once again, if you have a question, please press the one key.

One moment for our first question.

Our first question comes from Gideon Cory (ph) of Roth Capital Partners.

Hello.

I have a bunch of questions, but I'll try to be short.

And the first one is about the Government market opportunity.

Is it still available for you?

Is it too late because the budgets have been finalized and the bids closed?

We've had a very big bucks success in the U.K. government as you probably heard with England Revenue which is a project we did with EDS.

We are optimistic that we can leverage that success into other successes in other governmental institutions.

And, specifically in the U.S?

To date, we have nothing to announce in that area.

Okay.

The products that decide and do, does it mean that [inaudible] right now, does more analysis on the decide side?

We don't consider ourselves to be in analysis realm in terms of people who are in the business intelligence market who sit around sifting vast quantities of data.

That's not what we bring to the party.

What we bring to the party is when a business manager wants an organization of a couple hundred or thousand people to operate in a consistent manner, we let business management put rules into a system that helps with folks dealing in a call center, face to face, or even people coming in over a website experience decisions consistent with the will of management and that make the system much more a partner with the user to kind of help the user along.

Those decisions are much more about after the analysis is complete and you think, perhaps, you've set a strategy as company, you want to go out to the middle market more, you want to go out to a particular area, then how do you operationalize that decision?

We're entirely on the decide side of making things operational which, from a market point of view, frankly, touches a lot more people than the relatively smaller group of people who are involved in the analysis.

The do side, once you've made a decision and want to offer somebody a loan at a particular rate, how do you, then, drive that loan to the various business processes.

That makes it clear.

Your intimacy with the customers that you're developing now, will it translate in the near future in transactional revenue streams for the company?

In transactional revenue streams, what do you mean?

Beyond selling a license and a service, you also will be generating revenue stream from the processing itself.

If we're talking about healthcare industry, if it's a claims processing, you will get a fee for every claim processed or something similar?

That's not a business, going back historically, that we've been in, unless Henry’s looking to do something in the future.

No we're not.

The FDR relationship and after restructuring, does it present additional opportunities for FDR reselling your solutions?

Yeah, the FDR relationships still allows FDR to resell into the majority of their credit card accounts without being able to receive additional fees.

And also, from our prospective an important step, makes it that we're really independent of FDR in the market and we can do into the market on our own which, historically the credit card market was actually one of our best markets if not the best, if you go back to before the FDR relationship, and we're very excited about being in it and have already seen some, you know, significant opportunity come our way.

So there is potential for incremental revenue from FDR based on reselling into their base, but the primary opportunities looking out a couple of years in the credit card space will be from the work we do on our own much as we did years ago.

You will be targeting third-party processes directly?

Or banks themselves that want to be able to use our technology to offer improved service for their customers, like we do for Fleet or Citibank.

The next question from Richard Davis of Needham.

You may proceed.

With regard to the business rules side of the equation, you talked about the pipeline being interesting.

One of the things that you need to do this year to convert those prospects, those pipelines into, you know, tangible and significant revenues for that to happen?

Well, I think what needs to happen is the hard work of ensuring that we provide value to our customers.

The pipeline is extremely -- as grown very significantly as I mentioned in my remarks, and it's now a function of making sure that we explain the benefits of our solution adequately to those prospects and close those deals.

So it's just an explanation as getting on the phone and flying over there?

Is that it?

And they'll just sign up and --

No, no, it's part of the an entire sales process which obviously includes proof of concept, sometimes includes other elements to convince the customer of the value of our solution.

But I think that our product is pretty good.

It has been improving with new versions that are coming out during this year, one about to come out in the next few weeks and, therefore, just a matter of sales execution at this point.

Okay.

Thank you.

Thank you, sir.

Our next question comes from Dana Thurman (ph) of JHC Capital.

A couple of questions, one financial, one general.

The financial question involves the projection of cash flow from operations, and just curious why that declines -- why the projection for '03 declines so much from what you generated in '02.

The primary difference is going to be the way that the FDR deal was structured, there was significant cash in '02 that was attributable to the FDR.

We know, based on the FDR structure, that that declining cash is already anticipated, so that the primary difference is the cash flow from that particular transaction.

Otherwise, we see the operating -- the cash flow from operations to be consistent with the prior year.

Gotcha.

And on a more general level, I guess I'm trying to get a sense if you're projecting essentially flat results for '03, you know, plus or minus 10%.

In the absence, you know, of an IT spending rebound on a macro level, does that imply that you basically require a turnaround in IT spending, generally, for you to essentially outgrow the industry or generate substantially positive growth or more positive growth than you're projecting on an ongoing basis, or can you simply separate from the industry.

The guidance on revenue, particularly, we have one known factor, which is a year-over-year decline in FDR revenue we have to overcome.

We're looking at our activity in the pipeline and the improvement in signings that we saw in the second half of the year as indicators that we believe we can offset much or all of that the FDR decline in revenue.

That doesn't in and of itself require a rebound in general, but, obviously, that's something that would benefit us as well.

From a product perspective, though, as you think about what we do, there is not a fundamental reason why an overall IT rebound is at all a prerequisite to us doing well.

All boats are lifted by a rising tide of course, and we would love the tide to come in and we, like other organizations, are proceeding with the expectations that the tide may not be in the immediate future, but when we take a look at what we do, we give tangible ROI to organizations.

We have some important new products entering the pipeline in the '03 timeframe, but for the long-term perspective, we don't see any reason at all why we are tied to the overall mood of IT because we offer things that are revolutionary in what they can do and because we save money for organizations.

So if we can scale up our business due to sales things Henry is putting in place.

Build the partnership, get the analyst visibility and some of the other things you're going to see us working very, very hard on this year, we think we can distance ourselves from the IT averages, and we'd love it if they improve.

To the extent you could help us going forward, maybe, get more of an apples-to-apples comparison in the absence of FDR revenue, that might be helpful.

In other words, to get a sense of growth ex-FDR.

The contract itself lays out pretty clearly – the cash and the revenue flow from the deal.

And some of the folks who have been watching us have developed models without FDR in the modeling.

And lastly I'll be available to follow up with you or anyone else who wish to gain insight to the with or without view.

Thanks a lot.

Once again, ladies and gentlemen, if you have a question, please press the one key.

Our next question comes from Brendan McCabe of CIBC World Markets.

Do you know what the headcount finished up at?

For the year the headcount was down as a result of the reduction in October.

Our headcount we're showing is about 410 or 412?

And of those, how many of those are quota carrying sales reps?

We have about 22 bag-carrying salesman or 20 to 22 bag-carrying salesman.

And what was CAPEX for 2002?

CAPEX for '02, I think, was below $1m, but I need to double-check that number.

And are we expecting something similar for '03 when we're modeling out?

Yeah, we've done a look ahead and believe there's modest technology but we have in place technology to support '03 opens.

Great.

Thanks a lot guys.

Once again, if you have a question, press the one key.

And next question is a follow up question from Gideon Cory .

About average contract, I understand has been around historically five years, what is it now and what do you expect it to be?

We have, again, the term licenses that we renew are maintaining an average length of around five years, but also want to make sure people are aware that most of our new sales to new customers in the perpetual licenses.

Okay.

So the renewed year, it's actually a year contract?

No, typically, again, they can very ray.

But they have typically a five-year contract, some shorter, some longer.

But they typically review in the time frame of their renewals, give or take a few months, given the timing it takes to renew a contract of this magnitude.

But usually every four or five years there's a renewal for those contracts.

There appear to be no further questions.

At this time I'll turn the program back over to management.

Thank you very much, operator.

In '02, we had a successful year in tough times.

Our plan of '03 is very simple: We are focused on our customers, on our products, and on our operations.

At Pegasystems, we've always had smart products that deliver I jilt and productivity for our customers.

We're now focused on the processes necessary to continue to grow our customer base.

Again, thank you for joining us this morning, and please note we will be hosting PegaVision, a forum for customers and partners on May 18th through 20th in Boston, and we look forward to seeing you there.

Thank you, operator.

That concludes our remarks.

Thank you for your participation in today's conference.

This concludes the program, you may now disconnect.

Everyone have a great day.--- 0