Pegasystems Inc (PEGA) 2004 Q4 法說會逐字稿

Good morning and welcome to the fourth-quarter and year-end 2004 conference call.

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

After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to Ms. Beth Lewis, Director of Public and Investor Relations.

Please go ahead.

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 the 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, the timing of term software license renewals, customer acceptance of our new PegaRULES Process Commander technology, our ability to develop new products that involve existing products, the impact on our business with the ongoing consolidation of the financial services and healthcare markets, our ability to attract and retain key employees, reliance on certain 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 any forward-looking statements contained in this call are contained in the Company's most recent filings with the SEC.

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

The forward-looking statements we make on today's call are based on our beliefs and expectations as of today, February 25, 2005, 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, and Chris Sullivan, Chief Financial Officer.

Alan, would you like to begin?

Thanks, Beth.

I'd like to start by recapping 2004, a year where we had some challenges and also, importantly, some successes, and then I'll talk about 2005, how we've refocused strategically and what we think it means tactically.

First, in 2004, from a financial perspective, we clearly did not achieve the financial goals we wanted to achieve, not in terms of topline revenue and it impacted bottom-line earnings as well.

From a product perspective, it's different.

In 2004, we actually equally weighted our efforts into 2 broad categories of product development.

One category was our heritage set of deep, IP-heavy, fully built-up applications in some very specific segments of the financial services and healthcare markets.

The second category was the core BPM solution, PegaRULES Process Commander, that represents the distillation of our thinking into a product capable of going across and beyond many markets and we felt giving us a lot more potential.

Well, we were half right.

The broad-based BPM did very well, and I'll get to that in a minute.

But the applications did not provide the expected ROI.

It turns out that, although these products give us great balance and are excellent examples of what BPM can do, a number of our applications were not in high-growth market segments.

They were part of finite markets, often chosen years ago as part of some of the original thinking we did.

There's a limited number of large financial institutions that need, every year, certain exception processing applications, and that was a factor.

But we also noticed that aspects of the market were changing, that customers were looking to become more agile and they were transitioning to be interested in lighter frameworks, frameworks that can leverage what we do well, that can understand service levels and facilitate their ability to built out and grow new products, enter new geographies and manage compliance.

But the customers wanted very much to complement our IP with their own and to really build on what we have and leverage a strategy that we call "building for change."

So, at the same time that we found our BPM products were getting some exciting return, we found that our heavier application products were delivering less than the expected ROI for us, not for our customers, frankly; many of them have had tremendous successes.

But, we looked overall at the business and we looked at some of the very exciting things that we felt were happening and decided that, well, perhaps it was time to make some adjustments.

Those of you who may know me for a number of years know that, for the past 20 years, I've been running PEGA, but during the past 24 months, I was focused on running a business within our business, literally a greenhouse that was designed to invest in and roll out this core PegaRULES Process Commander technology.

I think the team has done a tremendous job in distilling and responding to the opportunity here.

We had a version released in February, an update released in November, and I'm excited and believe it's a truly great product.

This has been evidenced the fact that we've sold to major, major companies, like GMAC that we've announced and AIG and UBS.

We've sold to companies far outside our traditional enclaves, like RS Medical and OTX and Vetcentric (ph) -- and that our partners like this product.

The Cognizant and (indiscernible) and Vertusa (ph) are building whole businesses around Peg PPC, Pega PRPC.

At the same time, we are working with IBM and Accenture and Bearing Point, CSC and EDS to get leverage, to get partner leverage as we go forward.

So, where we stood here is a situation where we saw that our heavier applications perhaps needed to be repositioned, needed to be reframed into lighter frameworks that could hit a different set of targets.

We found that our core PRPC -- PegaRULES Process Commander product, the award-winning product that really came out of our heritage, the marriage of rules and process, allowed organizations to consider and use our technology in many different ways.

This vision of making it easier for companies to align their objectives with business operations has struck us as being the center point of how we should move forward.

So, strategically, we have decided to organize our company around our BPM promise and to defer building fully built-out applications and instead to take the intellectual property we have, reposition them into solution frameworks and be in a position to add considerable value in many additional ways to our customer base.

In effect, we're going to be radiating the greenhouse that we proved successful throughout the Company, and that's the core of the strategic change for 2005.

So, looking forward to 2005, it's going to be about a full focus on BPM -- development, support, marketing and most importantly, the sales function, all organized to understand how to best bring the BPM promise to market.

Tactically, what will it mean?

Well, we're going to be doing quite a bit of work to make sure that our sales force understands, gets the message, and can bring that out and bring that forward.

We're going to build a brand that has much more visibility as we go forward, because we think that the time for rules driven business process management is now.

We will continue to invest in R&D.

Remember that last year's BPM investment has paid off handsomely, and we will complement it with frameworks that leverage what we've built in the different verticals and make it possible for us to apply it much more effectively and much more broadly.

Of course, this core investment in sales and marketing is going to involve changes to how the Company thinks about itself.

You'll see us working hard and focused on being a sales and marketing-oriented company.

So let me talk a moment about how we're going to be running the Company in 2005 and how we're going to be leveraging our successes and making disciplined decisions.

I'm pleased to say that, over the past few years, we've hired some remarkable, best-in-class financial talent.

Our sales, service and support team I feel is expanding.

We've got a best-in-class CIO, a best in class compliance officer, and we've really strengthened middle management across the board.

I am confident we have a team that can deliver operational excellence in this exciting market.

On the operational side, our product strategy is what follows.

We've talked about our commitment to PegaRULES Process Commander, how we've had good successes with the initial rollout and we're going to be pushing this as the center point throughout the Company.

In the vertical markets, we're going to be investing in the solution frameworks, which are lighter layers of IP that leverage what we have.

To sort of give you a sense of how to think about it, let me maybe take a metaphor from the housing business.

You can kind of think of our heritage business as really fully built-out and completely furnished model homes, including in some cases the car in the driveway already there for the customer to use.

What we're going to be doing as we go forward is have our customers transition increasingly to recognizing that our core strength is that we give them the ability to build for change, that we give them the chance to really respond to markets.

So, as our new business progresses, we're going to have that terrific foundation, a flexible foundation that will let them grow.

We're going to give them the studs and the walls and perhaps let them influence how they're building what they've got from the ground up, letting them choose the carpeting and the kitchen cabinets and the furnishing and really make it possible for them to be able to go after business in insurance, in banking, in credit cards, in ways that we had not previously contemplated -- playing to our strengths.

So, what does this transition mean and what should you look for in terms of signs of success?

Well, the first thing I believe it means is that we are responding to the market and to our customers, that we've been alert, we're looking at what's going on, we are understanding the agility and on-demand philosophies are increasingly key.

We want to make sure that we are feeding that agility with key, key process management and rules software and lighter frameworks.

We're also going to be doing a lot of work to change the way that we organize and structure the sales force.

We've had a transition that we are working on to more rigorous targeted account selling; we are engaged in detail territory reviews, and we're focused on giving our sales team the support, the materials and the training they need to dominate the market.

We've seen successes here; we've been able to push into companies like GMAC and Visa, and also have had the pull from companies like Vetcentric (ph) and OTX.

It tells me that we are well-equipped here to place our increasing focus on this business.

So, in terms of signposts, we're measuring our successes by continued BPM evidenced customer wins and also perpetual license growth.

Make no mistake, through.

This is a significant change in what we do and how we think about ourselves.

We're going to take our broad strengths, the ability we've always had to build for change and we're going to be leveraging this now, both in our traditional markets and in additional one.

I will tell you that the team is excited; the team is engaged and incredibly competent.

With that, let me turn it over to Chris Sullivan and talk about the financials.

Thank you, Alan.

I will begin with a quick overview of the fourth quarter and then provide detail about our full-year results.

The total revenue in the fourth quarter was $26.2 million, up $3.1 million or 14 percent, compared to 23.1 million in the fourth quarter of 2003.

License revenue increased 11 percent to 13.3 million versus 12 million for the fourth quarter of '03.

Services revenue increased 1.8 million or 16 percent.

Consulting services grew 11 percent over the fourth quarter of the prior year, and maintenance services grew 26 percent over the fourth quarter of the prior year.

For the full year of 2004, total revenue decreased 3 percent to $96.5 million from $99.3 million in 2003.

License revenue was $41.6 million compared to 57.7 million in 2003.

This $16.1 million decrease in license revenue includes a $13.8 million or 46 percent reduction in term license revenue.

As a reminder, the amount of revenue associated with scheduled, term license renewals was lower entering 2004 than in 2003.

In addition, 2004 license revenue was impacted by an anticipated $10.6 million reduction in perpetual license revenue associated with the restructured First Data Resources agreement in 2002.

These declines were partially offset by a 7.8 million or 53 percent increase in other perpetual license revenue.

It should be noted that most new customer license sales for Pegasystems are sold as perpetual licenses rather than as term licenses.

Services revenue was $54.9 million compared to $41.6 million in '03.

This $13.3 million increase in services revenue includes an $8.9 million or 30 percent increase in consulting services associated with new license implementations and a $4.4 million or 38 percent increase in maintenance services, due to a larger installed base of software and improved pricing for our maintenance support.

In 2004, new customers accounted for $28 million or 29 percent of our total revenue.

Over half of our license revenue in 2004 is attributable to our PegaRULES and Process Commander technology.

We realized higher new license signings for 2004 versus 2003.

License revenue for the majority of these signings was recognized during 2004.

Our average deal side over the past 8 quarters has ranged from 0.5 million to $1.9 million of license revenue.

The small number of license deals each quarter can cause fluctuations in the average deal value in a quarter.

Our average deal size for the fourth quarter was just over $0.8 million of license revenue.

This is reflective of the smaller average deal size associated with implementations of PegaRULES and Process Commander.

As revenue for PegaRULES and Process Commander becomes a larger percentage of total license revenue, we expect average deal size to be in the low end of our historical range.

International revenues have historically been in the range of 15 to 25 percent of total revenue.

In 2004, international revenue represented 32 percent of total revenue.

This spike was driven by some 3 large European customers who renewed licenses and/or purchased additional new software.

Our international revenue may fluctuate in the future because such revenue is generally dependent upon a small number of license transactions during any given period.

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

For the year 2004, gross profit decreased to 70.0 million from $71.9 million in 2003.

The year-over-year decrease was due primarily to lower license revenue, partially offset by significantly improved service gross margins.

Service gross margins was $28.8 million or 52 percent for 2004.

This represents a $14.2 million improvement compared to 2003.

This improvement was driven by a $13.3 million increase in service revenue, improved effectiveness and by a decrease in our cost of services versus 2003.

The 2004 services margin improvement also benefited from large projects coming to completion in 2004 for which significant margin was deferred from prior periods, as well as higher-than-desired utilization of our services consultants.

R&D spending was down $1.7 million versus 2003.

R&D spending as a percent of revenue decreased to 21 percent in 2004 versus 22 percent in 2003.

The year-over-year decrease in R&D spending is primarily due to reduced staff and staff-related expenses, as well as reduced spending on outsourced R&D contractors.

We expect to competitively invest in R&D, although our spending levels will occasionally increase or decrease depending on new product-development schedules.

Selling and Marketing expenses as a percent of revenue increased to 33 percent in 2004 versus 25 percent in 2003.

The $7.2 million year-over-year increase in spending is primarily due to the hiring of additional sales personnel and increased sales commissions associated with higher new license bookings.

G&A expenses were up $1.5 million versus 2003, primarily due to increased spending on audit and compliance activities associated with the requirements of the Sarbanes-Oxley Act of 2002 and related regulations as well as increased staff costs.

G&A expenses as a percent of revenue was 13 percent in 2004 versus 11 percent in 2003.

Profit before tax was $11.1 million in 2004. a $10.7 million decrease from 2003.

This decrease was driven by lower license revenue and higher selling expenses, partially offset by a $14.2 million improvement in services gross margin.

The 2004 provision for income tax was $3.6 million compared with $4.2 million in '03.

Our effective tax rate was 32 percent in '04 compared with 19 percent last year.

This increase in effective rate was due to lower benefits from the recognition of loss and credit carryforwards in 2004 compared with 2003.

We expect our tax rate to approximate the statutory rate, somewhere between 35 and 40 percent, for future periods.

Because the tax rate for 2004 is substantially higher than it was for 2003, we focused primarily on profit before tax as an indicator of 2004 business performance.

Accounts Receivable Days Billed (ph) Outstanding as of December 31, 2004 was 36 days.

This is strong versus industry standards but is -- and is up slightly from December 31, 2003 due to the consulting services revenue contract, which tends to have a higher days billed (ph) outstanding than does license revenue.

Deferred revenue at December 31, 2004, which is primarily unearned maintenance fees and the build fees from arrangements for which acceptance of the software license or service milestones have not occurred, decreased to $9.1 million from $14.2 million as of December 31, '03.

The decrease is primarily due to the recognition of revenue on the completion of several large projects in 2004.

This is partially offset by an increase in advance payment of maintenance fees.

We generated $7.6 million in positive cash flow from operations during 2004 and ended the year with $97.4 million in cash and marketable securities and $75.7 million in combined short and long-term license installment receivables.

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

For 2005, we anticipate full-year revenue between 97 and $105 million with revenue and earnings weighted to the latter part of 2005.

We expect license revenue growth to be driven primarily through sales of perpetual licenses.

Any license revenue growth from term license renewals is likely to be modest.

We have committed to becoming a leader in BPM software and are therefore planning to invest more heavily in sales and marketing in 2005 than we did in 2004.

We believe this investment will better position Pegasystems to achieve accelerated growth in future years, but we also anticipate it will result in lower net income in 2005 compared to 2004.

We expect earnings per diluted share to be between 5 and 15 cents.

Cash flow from operations for the full year of 2005 -- cash flow from operations is expected to be in the range of 4 to $8 million, depending primarily on the revenue achieved.

Our incremental sales and marketing investment will begin in the first quarter of 2005.

As a result, we expect our first-quarter net income may be breakeven or below.

Finally, the 10-K we filed last evening includes our first-ever certification under Sarbanes-Oxley Section 404.

This was a grueling but oftentimes enlightening process.

The results reflect our disciplined attention to maintaining an environment of effective internal controls.

I want to thank and commend the many people who worked so hard to meet the requirements.

That includes our financial summary.

Operator, we will open the call to questions now.

(OPERATOR INSTRUCTIONS).

Joseph Halpern.

I just want to get maybe a better idea of your OpEx spend, if you could break that up for 2005.

It sounds like you are just going to increase marketing and sales maybe pretty much compared to Q4, '04 and leave everything else relatively flat, or --?

Yes, I think the OpEx is largely going to grow as a result of investment in sales and marketing.

We think the change in G&A will be immaterial.

We think the change in R&D will be immaterial.

The other thing affecting our profitability in '05 is that we do expect that the service margins in '04, which were benefited, as I mentioned, from a completion of some large projects early in the year, is not necessarily the level of margin we would expect to sustain.

We still think we'll have best-in-class service margins but perhaps not at the level we saw in '04.

I think Q4 '04 looked like it was around 45 percent margins.

Is that more of a consistent number to go forward with?

With services?

Yes.

It will fluctuate again because volumes do fluctuate, but that is probably in the range, in the 40 to 45 percent range overall.

But we expect that we will see spikes where we will occasionally be in the higher 40s.

But the 52 percent that we saw in '04 is, I think, not something we would expect to sustain.

Okay.

It seemed like -- maybe you could give me some clarity on this -- I know you were kind of building out a partnership program.

I know you have a partnership with IBM and the thought was that servicing revenues might decline at some point as licensing increased, as your partners kind of took that segment.

Now, just kind of looking at the BPM focus and the focus of maybe not putting together full-blown applications but working I guess more closely with some of your clients, do you expect servicing to kind of grow in line with licensing, or how do you think those two kind of mix?

Yes, we've talked all along about the long-term impact of the partnership program which we're building.

I think, overall, we've talked to and we continue to believe that the growth in services revenue that we have seen is probably going to be significantly less, based on the continued involvement of partners.

We will continue to sell our services.

We do expect that, depending upon how successful we are on the license growth, that it will -- is continuing to have the drag effect on our services, but it will be less growth, we expect, in '05 than '04.

But in terms of the overall partner program, I'll let Alan speak to where we are in that.

Well, a couple of thoughts -- one, we have put quite a bit of work into some of the partnerships and we are continuing to do that.

We actually are (indiscernible) IMB partner world in a big way and we actually had our sales kick-off 2 weeks ago, where we had quite a few partners in evidence and I think they were quite excited they got to see presentations from some of our key new wins, companies like Visa and GMAC as well as some of our more traditional companies like UBF (ph).

So, I think we're seeing that the partner program is beginning to take root and frankly, I think it's absolutely essential to the future because the goal here is to be a company that drives significant license revenue in a segment that we think is an exciting segment, the rule-driven BPM segment.

So you're going to see us continue to have resources able to deliver for those customers that want us to deliver.

You're going to see us being able to work I think with a whole variety of customers in different industries, as evidenced by the fact that we've been able to broaden some of what we do.

I think you're going to -- if we are successful -- see a very different rate of license revenue growth than service revenue growth in terms of how we do a lot, going forward.

Of course, our maintenance revenues are growing actually quite nicely as a result of the significant perpetual sales we've had.

That's a part of services growth that I think of a little differently than the rest of services.

Does that answer your question?

Yes, it does.

Thank you.

Just the last question on the sales and marketing side -- are you adding sales, or is that more push-out marketing sort of stuff or --?

Yes, I think the transitions that we initiated in 2004, where we did some investment, as you know, in sales -- frankly, I think a number of them did not pan out or survive this transition.

So, the sales force is down a little bit from where we have -- more than a little bit in some cases -- from where we had wanted to be, and we're going to dive in and we have already started two very aggressively staff that up.

That's central to the strategy.

Once again, we are excited about the rules-driven BPM part of the business; we're going to push on that.

(OPERATOR INSTRUCTIONS).

Andy Schopick.

Thank you and good morning.

A few questions, if I might?

I wonder if, at this time, you can give us a breakdown of the revenues by principle target markets.

For example, in previous presentations, you've given out the breakouts by commercial banking, card services, healthcare, retail financial services.

Those are the 4 principle ones.

How did revenues break out in 2004 in those categories?

We did see, as we expected to see, growth in the nontraditional, as a relative percentage of our revenues.

So, where we saw growth in revenues is in healthcare versus financial services; we saw growth as well in the area of insurance and in the government sector.

Then we saw, quite frankly, the most dramatic growth in what we would just deem as other, where we had folks who were buying the BPM capability who were in services -- in companies outside of any of those 4 verticals.

So we did see, as expected, the pie chart shift in terms of its weighting towards -- away from financial services and into new verticals entirely, as well as increased percentages near healthcare and government and insurance.

I was just wondering whether you could give us any kind of more specific percentage break-out.

That's something that I probably will provide going forward in the presentation but don't have the specific numbers right now.

Okay.

With respect to channels and IBM, IBM has what's called a premier level.

What has to be -- how does a company achieve premier-level status?

Is it something that you're seeking to do with IBM?

We are working quite hard to deepen the relationship with IBM.

We were named, in the second half of last year, one of IBM's strategic partners in banking, which is something we're very excited about.

We actually have a number of engagements that working currently with IBM.

It takes a lot of work to get one of these partnerships to take off, and we're putting the effort into it and we are hopeful that it's going to work out well for both organizations.

In terms of the specific levels that we are seeking, I think that the strategic partnership in banking we would like to complement with strategic partnerships in various other healthcare and insurance areas.

I am particularly excited that the insurance business has turned into just a really terrific one for us in the last couple of years, both in terms of business we've closed and business that we are actively engaged in.

It's frankly reinforced the sense that we can create solution frameworks and take them into industries and be successful in industries without having gone as deep as we viewed the world years ago.

Alan, Chris I want to challenge you a little bit here on some prior guidance and commentary you had given us.

About a year ago, you wanted us to measure the Company more on pretax income because of the distortion relating from the taxes that we have seen.

However, in reality, pretax income was down 49 percent 2004 over 2003; you are signaling that it could be down 50 percent or more in 2005.

Clearly, this does not appear to be the measure you really want us to use right now.

Can we step back, take a look at what's happened, why the pretax income trends at the Company are what they are, and what you're going to really have to do now to reverse these margin trends?

Yes, I think it was the appropriate measure in '04 and as Alan started the conversation with this morning, it is something that -- we were not satisfied with the results in '04.

But the underlying reasons for that is we knew, going into the year, we had a challenge in terms of the term license renewal revenue opportunity that we are facing.

We made a conscious investment in sales and marketing that did, to a reasonable degree, pay off in terms of the success of BPM sales and perpetual licenses.

The fact of the matter is the success in that area was not sufficient to offset the challenge we were facing around our term license revenue in '04.

The result is our revenue was down, the mix of revenue in terms of service, which has a lower margin to license, was down and the PBT (ph) was disappointing.

So there's no getting around that fact and it was the appropriate measure for '04.

You might imagine that, after 20 years of consecutive revenue growth through horrible times, you know, and recessions and whatever, that for us to have had the first dip was a pretty, pretty disappointing thing.

So no one is here telling you that we were pleased and frankly, we're telling you that we've made some adjustments.

Yes, and I think, again, it just raises some additional concerns about the investments that are necessary at this stage, given the outlook you are signaling for 2005 in terms of performance.

So, it raises the question, in my mind, whether or not the Company is strategically looking at other related areas.

For example, business service management -- I realize you have a focus, you have an expertise and that you have demonstrated, over a period of time, that you can run this company very profitably and that it is a successful company by certain measures.

But in terms of a growth or consistency, that's lacking right now.

Is what you are doing enough to really grow this company, or will it require expansion into new, related areas of software?

Well, I believe that the strategic focus we've picked -- and I want you to know that we've gone through a lot of very diligent thinking, soul-searching, both objective analysis and also frankly taking a look at what really seems to be working and what seems to be working at some significant scale.

I think that the change is significant and it is absolutely intended to build a company that can grow and become a brand leader in a space that we think is very, very exciting.

So we don't believe we have to do anything more radical or different than the set of paths that we've chosen here.

Having said that, there was a lot of execution and if we execute well, the market we are in -- that people talk about as being a 600 or $700 million license market in 2005 -- that is a tremendous opportunity.

So the team here I think is energized and believes that if we can become a key player, the key player in this market, it's going to be a big deal.

So, the reality is we have made some changes, we weren't happy with the results, and you're going to see us, I think, with a real clarity and focus on what we're doing.

But I don't think we have to do anything unnatural here.

We need to pick the target -- very, very focused, get externally focused -- and make it so that we drive the successes that we've seen in some of these world-class customers into both a traditional basis and some new markets.

Finally, I would like to ask 1 question about the expected level of insider selling pursuant to 10-B-51 (ph) and I know I've discussed this with Beth and I'd really -- because of the frequency with which we see these on almost a weekly basis, whether you can give us any guidance in terms of, under the current 10-B-51 (ph) programs that are in effect, what the range of activity is likely to be in terms of stock being offered in calendar 2005.

I think that, you know, it's difficult to comment on these sorts of things because of course they can change as people introduce new plans.

I personally believe that the 10-B-5 (ph) plant selling has the really unfortunate optical effect of showering lots of lines and lots of announcements of individual sales --.

You are right.

So frankly, it doesn't reinforce to me that they are well-intentioned.

I think this creates the need for people to actually look in and see how much is actually being sold and understand whether it's new selling or a different program that was put in place a while ago and is continuing to sell through.

The insider holdings in this company continue to be very strong, and I can tell you that the insiders that I know who hold a lot of the stock actually I think are quite excited about our prospects.

So, that's really all I feel comfortable setting.

But I understand; and the optics look lousy.

But I think, if you actually look of at the numbers, they are not, at the end of the day, very material.

I hear all the time we need less insider holdings, not more!

(OPERATOR INSTRUCTIONS).

At this time, there are no further questions.

I do apologize.

We have 1 question from John Perra (ph).

Okay, we will take this one last.

Thanks.

Good morning.

I'm just curious.

Who are the competitors you run into?

How often do you find yourself in competitive situations?

Well, you know, these days, everything is a competitive situation; customers always have a tremendous number of choices.

In our BPM markets that we're dealing with, we run into, of course, organizations like FileNet and Staffware -- more recently (indiscernible).

We are also having still a remarkable number of organizations that like to experiment and build things up on their own.

So, you actually find us both in BPM and rules, where we run into the folks like -- remember ILOG most prevalently.

You'll find us actually I think competing mostly with the folks who end up in the Gartner match of quadrants, where of course we are a leader in both of those magic quadrants and it's not surprisingly that we would frame that.

In the applications business, we run into whole states of folks and it tends to be more vertically focused, frankly, than the sort of horizontal detailed focus.

Okay, are you running into Cordiant and Epiphany a lot?

We run into both of those some.

We've actually had some good wins and frankly, they are strong competitors and we lose some, too.

The other organizations -- we sometimes cross with Siebel on occasion.

We ended up complementing them in lots of different places.

If you're talking about sort of the more application-focuses, we've ended up competing in a case against PeopleSoft as well.

Once again, it's a very, very sophisticated software buyer that's about there these days, so nobody I think just jumps in (inaudible).

Thanks very much.

With that, I'd like to thank everybody.

I think it has been a very exciting 2 months, I can say.

It's been an incredibly busy 2 months since we've made some of the decisions that we've made in terms of setting out strategy.

But I believe the strategy has a clarity.

You are going to see it in how we position our brand, how we come to market, and how we can seek to become a growth company, which is the center point of what we're looking to do.

So with that, let me thank everyone, and I look forward to talking to you again soon.

Thank you, operator.

That concludes our call.

This concludes today's fourth-quarter and year-end 2004 conference call.

You may now disconnect.