Pegasystems Inc (PEGA) 2003 Q3 法說會逐字稿

Good morning.

My name is Jeff and I will be your conference facilitator.

At this time I would like to welcome everyone to the Pegasystems third-quarter 2003 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to your host for today, Beth Lewis, Manager of Investor Relations.

Thank you.

Before we begin I would like to read our Safe Harbor statement.

Certain statements contained in this conference call may be considered forward-looking as defined in Private Securities Litigation Reform Act of 1995.

These statements 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 our license revenue recognition, our ability to develop new products, and involve existing products, interest rate market trends, the effect on our business of the ongoing consolidation of the financial services market, historically our core market, our ability to attract and retain key employees, reliance on key 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 today's forward-looking statements contained in this conference call is contained in the Company's most recent filings with the Securities and Exchange Commission.

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

The forward-looking statements we make on today's call are based on our beliefs and expectations as of today, October 24, 2003 only.

We do not undertake any obligation to revise or update publicly any forward-looking statements expressed in today's conference call.

With us today we have Alan Trefler, Chairman and CEO joining us from Australia;

Chris Sullivan, Chief Financial Officer; and Henry Ancona, President and COO.

Henry, would you like to begin.

Thank you, Beth, and good morning, everyone.

I will start with the review of the third-quarter and year-to-date financial results including the metrics laid out last quarter, following which Chris will provide a closer look at the financials and Alan with will give a strategic update.

As to the third-quarter, we are very satisfied with our results as we continue to execute on plan in respect to operations, customers and products.

On the strength of new license sales which in turn drive implementations, we saw success in our services revenue at $11.5 million; this is up significantly from the $8.7 million reported in the third-quarter of last year.

We maintained total revenue of $25.1 million, about even with the comparable quarter last year despite the known drop-off of $2.3 million in FDR license revenue.

We have repeatedly committed to a laser focus on operational discipline and you see the results.

Moving on to our nine-month results, as we have said in the past, given the fluctuations associated with our quarterly results, the bigger picture year-to-date results are a better indication of where we have been and where we are going.

As of September 30, we have maintained revenue, have strengthened margins and produced significantly higher pretax profitability.

Year-to-date through September 30, license revenue excluding FDR, is up 10 percent year-over-year.

Services revenues is up 26 percent, in part driven by new implementations and in conjunction with strong pricing discipline and a focus on cost-effectiveness and utilization.

Service margins are 33 percent, a substantial increase over last year.

For the nine months ending September 30, 2002, service margins were just eight percent.

Moving down the income statement, this focus of operations in turn has resulted in pretax income up 38 percent year-to-date.

In terms of new licenses, this quarter we signed a major mutual fund manager for whom we will be creating a unified front-end that aggregates customer information from multiple back-end applications and databases.

This will be based on our PegaRULES Process Commander technology and we're delighted to welcome them into the fold.

We also expanded a contract with EDS and Inland Revenue, the UK's taxing authority, comparable to our IRS.

We have talked a lot about the opportunities in our existing client base, and this is a great example.

In the second quarter of last year, we were selected by EDS to provide a platform for call centers in support of Inland Revenue's 30 million customers.

That deployment was completed by the end of the quarter, following which Pegasystems was again selected by EDS to provide the platform for call centers in support of the British Post Office card accounts rollout of electronic benefit payments.

That deployment was completed earlier this year.

Bottom line, we continue to win new license customers and we continue to earn the support of our existing customers.

I am also delighted to announce that our partner Agency Port made two sales of an industry solution built on our PegaRULES Process Commander platform.

By way of reminder, we talked about this partnership in our first-quarter call.

This partner developed an integrated agency portal solution that property and casualty insurance companies can use to help their agents.

For example, providing an easier way to submit risk data, a way to eliminate re-keying information, automatically populating forms, proposals and binders; and overall providing automated communication between the agency and the carrier.

Very importantly we completed two PegaRULES and process commander implementations this quarter.

These are two major installations.

One at a major insurance company and one at a major industrial manufacturer, where our platform is being used.

We are in active production in a live environment providing real benefits for real users.

For example at the insurance company our platform is being used to assess policyholder information for 12 states and recommending marketing actions to hundreds of agents for follow-up.

The company wanted an open system that could aggregate and parse information from many sources.

They wanted a Java-based system.

They absolutely had to have a versioning capability, for example, where you can try sending offers based in a birthday three months ago and roll back to the original one month lag if desired.

Finally our product allows business users to control the rules.

You don't need entire IT departments to make rule changes.

Similarly at the large manufacturer, our platform is being used to manage a complex application while providing for personalized service.

PegaRULES and Process Commander is the platform for this manufacturer's worldwide production of complex invoice, creation, review and delivery.

We are seeing increasing acceptance in the marketplace of the idea of using rules to drive business processes, and that is a better way to manage complexity.

We have been cited by Gartner in the leader quadrants for both business rules engines and business process management.

We are being invited to more conferences, are appearing in more publications.

Publications such as American Banker and Collections and Credit Risk.

We have Cobalt, IBM and Bearing-Point joining us on a panel with Michael Hammer next week.

And in general we're seeing increasing interest in our simply smart BPM platform and product.

Moving on to products, we continue to develop and release packaged applications built on our PegaRULES and Process Commander platform.

During the quarter we released as promised a back office payments product called PegaPAYMENT Smart Adjust.

This is an enhancement or broadening of our ability to manage check processing as our new product can now accommodate additional payment types.

Similarly we released PegaCARD Smart Dispute, a packaged application for back-end credit card management.

Looking forward, you can expect to see an all-purpose back office exceptions management product, one that builds on Pegasystems' expertise in managing nonstandard events.

Remember we are not about transaction processing.

Rather, we are about what happens when something gets kicked out of existing systems.

Now you're talking about a problem or an exception, and managing the exceptions can be expensive and invite compliance risk, can invite customer satisfaction issues and in general open the door to inconsistencies in operational risk.

Pegasystems manages complexity, both the decisioning piece and the business process management piece.

We have had great success introducing this concept of simply smart BPM and I want to take a minute to summarize our client accomplishments the year-to-date.

We have had key client wins in health care.

We extended our footprint in the important Blue Cross Blue Shield market with the BCBS of Rhode Island, implementing our member services products.

One of the larger health plans in the country bought our claims processing product.

We have a strong presence in health care and look forward to future success.

In financial services, we saw success both domestically and internationally in larger and midsize institutions.

We extended our relationship with J.P.

Morgan Chase, both at the wholesale global transfers and the retail check operations.

At HypoVeriensbak, Germany's second largest private bank, we are deploying our investigations applications.

And at a domestic bank located in the Midwest, we will be providing the backbone for the bank retail check exception processing.

Going forward, we will continue to focus on customers, products and operations.

And with that, I will turn the call over to Chris for a discussion of our financial results.

Thank you, Henry.

Our financial performance in Q3, 2003 was solid.

Compared to the same quarter last year, total revenue was down slightly and profit before tax up slightly.

For the first nine months of 2003 total revenue is flat and profit before tax up 38 percent versus the first nine months of 2002.

In addition, we generated $6.4 million of cash from operations this quarter.

Total revenue in the third-quarter was $25.1 million, a two percent decrease versus Q3 of 2002.

License revenue decreased to $13.6 million versus $16.9 million for Q3 2002, primarily due to a $2.3 million reduction and the revenue related to restructured relationship with First-Data Resources.

The $3.3 million decrease in license revenue is partially offset by a $2.9 million increase in services revenue from implementation services associated with new license signings.

We have realized higher new license signings for the first nine months versus last year.

License revenue for the majority of these signings will be recognized only after the customer implementations are complete.

Accordingly the vast majority of our license revenue in Q3, 2003 was from existing customers who chose to renew, add-on to or extend their use of our software.

To amplify the earlier point on implementation services, of the $25.1 million in total revenue, $6.1 million, or 24 percent was from implementation services and license related to new customers, including our first license revenue for implementations of our PegaRULES and Process Commander product.

Our year-over-year improvement in profit before tax in Q3, 2003 was due in large part to services gross margin improvements of $2.8 million.

We generated $17.1 million in positive cash flow during the first three-quarters of 2003 and ended the quarter with a strong balance sheet, including $82 million in cash and investments.

In addition we ended the third-quarter with $84.5 million in combined short and long-term license installments receivables.

As a reminder, these receivables are related to unbilled term licenses and are indicative of future payments.

Our average deal size over the past eight quarters has ranged between $600,000 and $1.9 million of license revenue.

The small number of large license deals causes fluctuation in the average deal value each quarter.

Our average deal size for the third-quarter was just over $1 million of license revenue.

Due to the nature of our revenue, comprised of a small number of large value deals, our international revenues can also fluctuate.

In the third-quarter, 36 percent of our revenue was from outside the U.S.

International revenues have historically been in the range of 20 to 25 percent our total revenue and we anticipate we will be in this range for the full year 2003.

Our recent SEC filings include more information on the composition of our revenues.

For the quarter, gross profit improved slightly to $17.6 million in Q3, 2003 from 17.5 million in Q3, 2002.

The year-over-year increase was due primarily to improved services margins and reduced license costs.

Service gross margin was $4.1 million or 36 percent for the third-quarter of 2003.

This represents a significant improvement compared to the gross margin of 1.3 million or 15 percent for the third-quarter of last year.

This improvement was driven by a $2.9 million increase in service revenue combined with no increase in cost of services versus Q3, 2002.

R&D spending as a percent of revenue remained flat with Q3, 2002 at 21 percent.

Selling and marketing expenses decreased 5 percent versus Q3, 2002, primarily due to decreased sales staff compensation.

We anticipate increased spending in R&D and selling and marketing for the balances of the year as we continue to invest in our business.

G&A expenses increased to 11 percent of revenue versus 7 percent in Q3, 2002.

Year-to-date our G&A is 8.2 million compared to 7.4 million for the first nine months of 2002.

The increases were due to higher employee compensation-related expenses and corporate governance programs and initiatives.

Our timeless model for G&A expenses is 10 percent.

Income from operations with $3.6 million in Q3, 2003, a $400,000 decrease over Q3, 2002.

The results were driven by a $2.8 million improvement in services gross margin offset by a $2.7 million increase in software license gross margin, and a $500,000 increase in operating expenses.

The provision for income tax was $1.8 million for the third-quarter of 2003 an increase from $300,000 for the third-quarter of 2002.

We expect our tax rate to level off at or near the statutory rate, somewhere between 30 and 40 percent for future periods.

We do have some remaining valuation allowances which, if reversed, may cause some fluctuations in quarterly rates.

For those interested in a more detailed reduction of our tax provision I will refer you to the 10-Q filed yesterday.

We will focus on profit before tax is an indicator of our business performance going forward.

As noted earlier, profit before tax is up 38 percent on a year-to-date basis.

Accounts receivable days billed outstanding as of September 30, 2003 was 41 days.

Deferred revenue at September 30, 2003, primarily new client license, and/or unearned service or maintenance fees, increased to $14.2 million from $12.1 million as of December 31, 2002 due to advance payment of software licenses and maintenance fees and an increase in the unearned portion of services revenue due to achieving milestones.

Looking ahead to the balance of 2003, we continue to expect revenues to be in line with 2002's $97.4 million, plus or minus 10 percent, despite the anticipated year-over-year decline in the revenues from FDR.

With the strong results year-to-date and continued confidence in our ability to generate cash, we're revising our 2003 guidance for annual cash from operations upward to $15 to $19 million.

We are maintaining our 2003 EPS expectation of 45 cents plus or minus 10 percent.

In addition, as previously indicated we continue to evaluate the possible reversal of an approximate $1.8 million in tax allowances, which would have the effect of adding five cents to our EPS.

That's concludes our financial summary.

I will turn the floor over to Alan.

Than you, Chris.

I'm calling in from Australia where I have been visiting customer and prospects as part of a difficult but very exciting around the world tour that I am on.

I have spent the last two weeks in Europe and Singapore.

Originally in Berlin, speaking at the European Tech conference, which is part of our initiative to be more outwardly focused and spread the word in what we can do in business process management and rules.

And this week I was just a speaker at the Sibos conference.

Sibos is the premier international financial payment services conference that had about 4000 bankers from all over the world come to Singapore to spend the week digging into what is really going on in financial services and wholesale banking.

It was a terrific opportunity for us to get visibility in front of the conference and for us to demo some of our wares on the partner floor, where we had a chance to really show up close and personal a number of customers and prospects what we have been up to.

We have had I think tremendous validation for these travels for our strategic direction and putting our Simply smart BPM message into the marketplace is resonating and our simply smart BPM products, the applications we're building and the core technology is clearly getting the right sort of interest.

I will tell you that, though the buying environment remains tough, we have had a lot of great meetings of customers and prospects.

You may have seen our announcement about creating a quality umbrella that allows us to exception management to take the business process management initiatives we've been working on and use them to materially improve the way that organizations respond to their customers.

This ties together a lot of the things that we have typically done in individual silo (ph) lines of business and it's getting quite a bit of interest as organizations look how they can unify their operations.

It gives us a lot of opportunity in our existing customers to broaden our scope.

This is a comprehensive new initiative and it is very consistent with the whole message of quality in exception processing which is getting a continuing amount of attention.

At Sibos, we had the option to demo this and review the (inaudible) with a number of customers and prospects and have terrific validation of what we have been doing.

Additionally I spoke a panel with HypoVeriensbank of Germany and Bank of New York on how best to deliver the straight through processing value proposition and how exceptions could really be a key of managing cost and insuring levels of quality.

It was a terrific opportunity to get the right sort of visibility with our customers in a key industry environment.

So we are continuing to move forward on the themes, the theme of business process management, the theme of rules enablement, the theme of quality and how you can bring that to your exceptions.

And that is what PEGA has always been about, being able to use BPM to drive mainstream processes and being able to drive high-value returns by providing quality through exception management.

Our rules driven BPM processes are really getting good validation about how they can provide agility and ROI to organizations allowing them to biuild for change, allowing them to empower businesses, allowing them to handle exceptions, which by definition are constantly changing the process that can involve significant risk and have a great impact on customer relationships.

This is all going to be about driving quality, allowing operating efficiency, improving loyalty, and gaining competitive advantage and we are continuing to work hard showing our customers what we can do and have done and what we're working on and trying to build until the time the economy is a little more robust and we can really continue to build on the successes that we've had.

At Sibos, we did have a chance to go through what we have been up to with a number of our key customers, the world's largest banks, organizations like J.P.

Morgan Chase, UBS, HypoVeriensbank, Citibank, Bank of New York and it is gratifying to see how senior executives are resonating with these messages.

So I would say that based on the work in London, Berlin, Sydney, Melbourne, which has made for a busy two weeks, the message of rules-based BPM is resonating with customers and prospects and also resonating with partners that we had our increasingly working towards.

Not just the organizations like Agency Port and the resellers of our technology, but also the systems integrators that we're making increasingly aggressive advances with to try to get them to understand and to train staff to be able to deliver our technology themselves and to bring it into the marketplace.

So we are excited about where we are.

I think we are doing the exact right sorts of things.

ROI enabling software that lets organizations drive change we think is going to be increasingly important and there is real customer interest and we're doing I think a good job of involving our customers and prospects in our plans so we can make sure that we're building the right things for the releases that we're going to be coming out with at the end of the year in early next year in application support technology.

So with that, let me turn it over to questions that folks might have and tell you that I am glad to be on the road and glad to be able to check this out in the field, which is of course the best way to know that you are doing the right thing.

(OPERATOR INSTRUCTIONS) Richard Davis of Needham & Co.

So taking a bigger picture view of the things you are doing, what I'm trying to work out in my mind at least is you have seen an uptick in services, which would indicate future license revenues, which I think is a good thing.

You saw deferred revenues decline year-over-year 18 percent, so one short-term question is that -- would it be in bookings that we don't see why you would have confidence that the software would pick up?

And secondly, more importantly really, is thinking about ‘04; you have done frankly a great job so far in getting the business running nicely profitable and setting up a lot of opportunities to grow.

Alan, you talked about it, but when you are going out there, is it prospects that you're seeing or are you actually seeing the pipeline expand or something like that, because one of the questions you get is -- fine company, but how fast does this thing grow over the intermediate-term and I know you have a lot of irons in the fire, but that is really the question.

It's not so much guidance it is just notionally what you're thinking for some of the longer-term prospects?

Let me just address the first couple points and I will let Henry follow up.

The services uptick, which you have seen, is the reflection of increased service implementations associated with new customer license.

I alluded to the fact that overall our new license, new customer license bookings are up versus last year and that is one of the indicators you can gauge it by.

As for deferred revenue, it fluctuates year-to-year.

It is up quarter to quarter.

It does have fluctuations as major milestones, for instance, are recognized in the revenue stream.

Those come out of deferred revenues typically, so there are ups-and-downs, but overall, the bookings and the services are the better indicator of the new license activity.

As for '04, we're probably in a better position in a few weeks or a couple months at best to be able to give guidance, more fulsome guidance on 2004.

We are in the middle of our planning process right now, but in general we are putting a plan together that will allow us to have the kind of growth ex-FDR maybe even in excess of what we're seeing this year.

But we are in the middle of the planning process, so it is premature to say that.

As you recall and others who have modeled, we have another $11 million decline in FDR next year that we have to overcome to establish top-line real growth.

That said, we really are hopeful that will be able to put a plan in place that has at least the level of growth we saw in license revenues excluding FDR this year.

Okay.

And Alan, that would be driven because of all the folks that you're seeing out there and the demand and interest of the flexibility that you can provide.

Is that correct?

It's a lot more than me that's out there.

I think we're seeing a message that resonates really well.

The other thing that is happening which on one hand has been a bit of a distraction, but on the other hand I think is ultimately very positive is we've been doing a lot of work to move our applications products to integrate well and in some cases be based on our newest technology, which on one hand causes us to work harder on R&D but on the other hand I think bodes well for what those products released into next year are going to be able to do for us.

We are pretty happy that we're doing the right things and that there is message about the convergence of rules and processes and one that is going to resonate.

And the other question, someone else will probably ask it, but just competitive environment, everyone talks about vaguely getting into financial services in the broadest sense in health care, but have you seen any changes in the folks with whom you compete?

The competitive environment is clearly tough, but frankly the most significant competition right now is "do nothing" as opposed to other competitors.

We are still seeing projects being delayed, but I would not tell you at this point that we're seeing particularly in financial services or health care, increased competition from other people.

It is very active out there.

But we have significant competitors that are very active.

But the most significant issue affecting our business is the speed at which the customers make decisions.

Our pipeline is up.

It continues to grow.

But the key thing is to is get I think the economy to the point for people are comfortable making buying decisions more easily.

Okay.

That's all I had, thanks.

Philip Rueppel of America's Growth Capital.

You talked a little bit about strength in financial services.

One, is that both in the revenue you booked this quarter and continuing on, the new customers and as part of that are you seeing any activity in card customers now that the FDR exclusive arrangement is behind you?

Yes, the strength we're seeing is actually not only in financial services but also in health care, as well as increasing acceptance of smart BPM platform on the PegaRULES Process Commander all of those we are seeing increasing acceptance which we expect overtime will turn into a growth in bookings.

As far as the FDR question is concerned, as you may recall, we restructured our FDR agreement last year to allow us -- it had been an exclusive arrangement with them in the credit card market and we restructured it to allow us to re-enter the credit card market ourselves.

Approximately 60 percent of card issuers use in-house solutions and our clients there include Citi and Household.

The other 40 percent are outsourced and FDR is one of the two big players in that market.

And frankly in the outsource market we have a relationship with both of the top players.

With the exclusivity gone from the FDR distribution agreement, we are now marketing directly to the top issuers and we're seeing quite a bit of acceptance and a significant pipeline of credit card opportunities.

The second question does revolve around PegaRULES Commander.

You announced that you're booked a license revenue and -- just a clarification.

Was that just from AgencyPort or was there another installation there?

And second of all, as that rolls out over time, how should we think about its effect on ASP's and the blend?

It obviously would be more licensed versus service, but how should we think about the rolling out as we look over the next six quarters are so?

It's Chris.

A couple of things, the license revenue from PR-PC is actually related to the two implementations that we previously announced.

As you probably recall, our revenue recognition, is we don't recognize the license until it is implemented.

In the case of these two, these were implementations sold shortly after the product was released.

But we've gone through the cycle, the customer acceptance has occurred and the product now is recognized as revenue and licensed for the first time.

The AgencyPort revenue is not specifically underlying the license revenue for it.

And second question on ASP, it is too early to really know.

Our sense is that this PR-PC is going to be a very effective tool with our current customer, typical customer base now but it will also allow us to go down market to other customers, and so our expectation over the long haul is that the ASP will be lower than our applications ASP has been, which hovers around $1 million per transaction of license value.

But it will be sometime before we are able to see if that is real.

But I think we do expect -- Alan, if you want to provide any additional color?

I think we do expect it, particularly as we start to move to implementations that are done in phases, preferably led by other organizations systems integrators, because we are working very hard to get systems integrators to leave these implementations and to be more involved in aspects of the selling process.

It is my expectation that that will give us a lot more leverage.

It will free us from some of the traditional issues we've had with systems when we have implemented them.

And it will cause at least the initial ASPs to be lower, and we have talked in the past about it, probably drifting down close to half a million bucks from what we've seen.

And I think that the evidence we're getting in the market is consistent with that.

I think we believe the long-term relationships we have with the customers, particularly the large customers, could continue to get very, very big as the customers roll the technology out into multiple areas.

And we have already have customers that have come back for a second dip based on their success with some of the initial PRPC work.

Great, thanks very much.

(OPERATOR INSTRUCTIONS) Gideon Kory of Roth Capital Partners.

Good morning.

The first question regarding PegaRULES Commander, and if you can tell us how many total deals you announced and maybe a little bit about a pipeline?

I understand two deals have been implemented, another three which have been signed.

Is there anything beyond that that has been announced?

Gideon, this is Chris.

We have not begun yet to segment our reporting to disclose the actual dollar value of PR-PC.

We did want to make it clear that the first couple of implementations now have been completed and licensed revenues are now on the books.

A couple things are happening.

We do have a number of transactions, implementations with PR-PC.

We have identified the ones that AgencyPort is also doing on our behalf, so we are seeing some traction there.

The more interesting thing, though, is that in addition to the pure PR and PC sales that we are having, we are seeing now a real value from a customer's perspective of building applications such as Smart Adjust on the PRPC platform.

So one of the other reasons that we have not yet chosen to segment our revenue reporting is that because over time there is going to be a blur between the PRPC pure packaged revenue sales and the PRPC based applications that we're selling.

That's a very positive thing in terms of our ability to address our installed base.

It is very positive thing in terms of leveraging the technology, much the way we expect our partners will leverage the PR and PC technology to build their own applications on the platform.

So I guess the bottom line is that the attraction is beginning to show, and that we are going to see the revenue from PRPC underlying both our applications success as well as our stand-alone PR and PC success.

And up to this moment, the implementation that has been done on PRPC was done by PEGA?

Yes, today the implementation model continues to use our partners, but at this point we're still assisting some of the early implementations in some form, either as a supporting set of resources.

We are, though, right out of the box utilizing service integration partners in our early implementations.

We actually have the situation now with one of our customers where they are independent of us rolling this into numerous other areas of their operation, which is exactly what we want, and where one of the Indian firms has actually trained a group of their staffs to be able to drive it deeply into this customer and then respectively into others.

So I think the reality is that Chris is very conservative as he looks at the way that we want to recognize revenue, particularly around products that are new.

But I am pretty happy that we have been able to get the beginnings of a sort of partner enablement that we're looking at, but I think we still have a lot of wood to chop.

Okay.

I'm looking at the customers for this quarter, and there have been two customers that you mentioned in the queue that represent 22 percent and 15 percent of total revenue.

Can you tell us about these customers?

One of the large ones obviously is FDR.

We have been pretty extensive in our disclosure so as much information as you would be able to find in the 10-Q that we just released last night.

And the other one is we had a significant sale to EDS did with us with Inland Revenue and those are the two large sales.

Again it is going to be fairly common in any given quarter that one or two customers will rise to the threshold of above 10 percent simply because of the small number of large transactions that populate the revenue stream in any quarter.

I see.

And that is what actually constitutes the significant jump in revenue from the UK that you had?

Exactly. 36 of percent of revenue from non U.S. is driven by the EDS transaction.

I see.

The breakouts between perpetual and subscription license and term renewal license this quarter, it looks like its 3.3 million in term renewals and about 10.3 million in perpetual?

Yes, add-ons and renewals together are about 3.3 million and perpetual and subscription -- we do have a small number of customers who are still recognized on subscription, but in combination with perpetual it is about 10.3 million, that is correct.

It looks like this is the biggest number ever in any given quarter on perpetual and subscription license.

Right.

Does it mean that this is a result of your shift to a perpetual subscription license model, or there is any other reason for this mix?

It is largely a result of the trend that we have talked about over the last couple years, our focus on selling.

We will on occasion sell term licenses.

We have not sold near-term licenses to new customers, and so you are going to see this trend continue.

Just as a word of caution though you'll see fluctuations quarter-to-quarter but the trend should be continuing and is reflective of our selling strategy.

And based on the significant number for the UK deal and the fact that this number is represented in perpetual license, we can assume that UK deal with Inland was for perpetual license?

It was.

The G&A that you mentioned and where you will be with G&A and all the corporate governance programs and initiatives, is this one time or is it a continuous program?

Year-over-year impact, the change in the quarter is a onetime phenomenon.

We have in our compensation schemes, we have variable compensation accruals that occur each quarter and last year in the third quarter there was a onetime adjustment that was significant and reduced the G&A.

That is why I wanted to direct you really to the nine months.

Nine months we're sitting at around 10 to 11 percent G&A.

Long-term models we want to be 10 or slightly under 10 percent on G&A.

But there was a onetime adjustment associated with third-quarter last year which caused the number to be lower than our typical quarter.

And this year we have compounding that some increase in our governance costs.

I have another question regarding PegaRULES Commander and if you can show does the implementation that has been done what was the initial number of seats rolled out at the implementation, if you can share with us or ballpark?

If you have it, Alan, otherwise and I can take it offline and follow-up.

I think both implementations are going to end up influencing hundreds and ultimately I believe thousands of people as the rollouts continue.

Right now we are in the hundreds range.

The expectations are that after first implementation there will be continuous penetration and expansion of number or seats in the product?

That's correct.

We think with both of these customers there is good upside as we go forward.

And of course the bad news now is both of these customers that we're talking about were actually brand-new names and from this point forward they won't be.

And Alan said earlier, one of the customers is already in the middle of follow-on implementations separate from the revenue recognized in the quarter.

Quality improvement through exception management, the new initiative that you've started, when do you expect it to be rolled out and when do you expect it to generate revenue?

We have already started talking about this to some of our more important customers.

They are terribly excited about it.

There's pretty good traction with that product.

I would expect that product to be available in the early part of next year.

Great, that's it.

Thank you.

George Melas of Lord Abbett.

Quick question on -- you said 24 percent of revenue came from new customers both service and license.

That seems like a very good number.

Can you compare that to previous quarters?

It is higher than our previous quarters.

I don't have the numbers here but it is one our stronger quarters of recent history -- the last one was about 18 percent in Q1.

And do you know what Q2 was?

I'm sorry, last Q2 was 18 percent.

And that was driven both by the two PR PC deals that were recognized as well as increasing service revenues?

As well as some apps revenue, application revenues.

But just a clarification, Q1 was 14 percent, Q2 was 18 percent.

And a quick thing, I don't know if you can say.

Inland revenue, was that all license or did that include some services as well?

Inland Revenue was predominately license, rather, it was exclusively license.

Thank you very much.

At this time, there are no further questions.

Thank you very much for your time.

Please note we will be at the AEA conference in California next week and at the Gartner Tech Investor Summit in New York on November 11.

We look forward to seeing you at all these events.

Thank you, operator.

That concludes our remarks.

This concludes today's conference call.

You may now disconnect.