Pegasystems Inc (PEGA) 2005 Q2 法說會逐字稿

Good morning.

My name is Jody and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Pegasystems Second Quarter Earnings Call.

[Operator Instructions].

At this time I would now like to turn the call over to your host Beth Lewis.

Please go ahead, ma'am.

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

Certain statements contained in this conference call may be concerned 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 in term software license renewal, customer acceptance of PegaRULES Process Commander technology, our ability to develop new products and involve existing products into straight market trends, the impact on our business or the on-going consolidation in the financial services and healthcare markets, our ability to attract and retain key employees, reliance on certain key third party relationships, management of Company's growth and other risks and uncertainties.

Further information regarding these and factors which could cause the Company's actual results to differ materially from any forward-looking statements contained in this conference call as 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 matter contained in these statements will be achieved.

The forward-looking statements we make on today's call are based on our beliefs and expectations as of today July 29, 2005 only.

We do not undertake any obligations 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.

Please note Alan will make brief opening remarks, Chris will provide financials, and then Alan will return with additional remarks following which we will open for questions and answers.

With that now Alan would you like to begin?

Yes, thank you, Beth, I would like to start by making a few comments and then turn I'll it over to Chris before I return.

Let me start over by saying that the management team as a whole is completely committed to building a great company, and we understand that the financial results that we are showing are not the results that are yet consistent with that.

But as I told you in February and we reiterated in April, we began this year implementing some very significant changes, and this is a year of transition.

When I return in a little while, I will explain to you the types of things we are doing to make that transition work, and work for the benefit of our shareholders.

With that, let me turn it over to Chris Sullivan for a finance update.

Thank you Alan, I will begin with a quick overview of the second quarter results and then provide a more detailed review of the first half results.

Total revenue in the second quarter was $23.8 million, down 1% compared to the second quarter of 2004.

License revenue was $8 million comprised of $6.6 million perpetual and $1.4 million term license revenue.

Services revenue was $15.8 million comprised of $10.6 million of consulting and $5.2 million of maintenance revenue.

Service revenue increased 28% compared to the prior year, with consulting up 25% from the second quarter of 2004 and maintenance up 33%.

The $3.7 million decrease in second quarter license revenue versus the prior year, was primarily responsible for the year-over-year decreases in gross margins and net income of 2.3 million and $1.8 million respectively.

License revenue in the first half of 2005 was $18.9 million compared to $21.3 million for the first half of 2004.

This $2.1 million decrease in license revenue includes $1.8 million decrease in perpetual and subscription licenses.

The decrease in perpetual license revenue even as our rate of new customer wins has increased, reflects our new BPM sales strategy of selling initial PegaRULES and Process Commander licenses with shorter implementations projects to large target accounts.

The successful implementation of the initial level license promotes opportunities for follow-on license sales of addition uses for PRPC.

Term license renewals were $0.7 million lower in the first half of 2005 as compared to 2004.

As a reminder, term license renewals scheduled for 2005 are modestly higher than actual renewals in 2004.

Services revenue in the first half of 2005 was $29.1 million compared to $27.4 million for the first half of 2004.

This $1.7 million increase in services revenue includes a $2.5 million or 35% increase in maintenance services due to the larger installed base of software and a higher proportion of perpetual licenses which include higher maintenance support revenue and new term licenses.

This increase was partially offset by a $800,000 decrease in implementation services revenue.

It is important to note that consulting services revenue in the first half of 2004 benefited significantly from the margin associated with 2 unusually large fixed price projects, which were completed in the first half.

In the first half of 2005, we signed 12 new license customer accounts compared to 11 new license customer accounts in the first half of 2004.

The value of total license signings in the first half of 2005 was significantly less than in the first half of 2004.

As noted in our 10-Q filings, we will need to increase the value of license signings during the third quarter of 2005 in order to achieve the higher end of our expected 2005 financial results.

Our average deal size over the past 8 quarters has ranged from about a $0.5 million to $1.2 million of license revenue.

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

Our average deal size for the second quarter of 2005 was just over $0.5 million of license revenue.

In general, we have found that the average deal size for our PRPC product is lower than that for our vertical applications.

However, as previously noted, we see a greater tendency for follow-on sales with PRPC customers.

In the first half of 2005, international revenue represented 30% of our total revenue.

Our international revenue may fluctuate in the future because such revenue is generally dependent on 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 first half of 2005, gross profit decreased to $32.3 million from $35.8 million in the first half of 2004.

The decrease was due to lower license gross margins and lower consulting growth margins only partially offset by increased maintenance gross margins.

Service gross margin was $13.5 million or 46% in the first half of 2005, compared to $14.7 million or 54% in the first half of 2004. $1.1 million decrease in service growth margin reflects the fact that cost of services was higher in the first half of 2005 than the same period last year.

In addition, as previously noted the first quarter of 2004 did benefit from the recognition of margin of the 2 unusually large service engagements.

R&D spending was down 400,000 versus the first half of 2004.

The decrease in R&D spending primarily due to reduced spending on outsourced R&D contractors.

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

Selling and marketing expenses as a percent of revenue increased to 35% in the first half of 2005 versus 32% in the first half of 2004.

The $1.2 million increase in spending is primarily due to the hiring of additional sales personnel, and increased marketing programs associated with the shift in strategic focus on the business process management or BPM.

G&A expenses were up $600,000 versus the first half of 2004 primarily due to increased spending on audit and compliance activities, associated with the requirements of Sarbanes-Oaxley and related regulations.

G&A expenses as a percent of revenue was 13% of revenue for the first half of 2005, versus 12% of the first half of '04.

Profit before tax was $700,000 in the first half of 2005, a $5.3 million decrease from the first half of 2004.

This decrease was driven by a $2.5 million decrease in license gross margin, $1.1 million decrease in services gross margin, a $1.2 million increase in selling and marketing expenses, and a $600,000 increase in G&A expenses partially offset by $400,000 decrease in research and development expenses.

Accounts receivable days bills outstanding as on June 30, 2005 was 56 days.

This is up from December 31, 2004 due to some outstanding amounts owed for annual license and maintenance billings.

Deferred revenues at June 30, 2005 primarily unearned maintenance fees and billed fees from arrangements for which acceptance of a software license or service milestone has not yet occurred, increased to $14.6 million from $9.1 million as of December 31, 2004.

The decrease is due in large part to the advance payment of annual maintenance fees -- rather the increase is due in large part to the advance payment of annual maintenance fees.

We generated $16 million in positive cash flow from operations during the first half of 2005, and ended the second quarter with $109.8 million in cash and marketable securities and $60.9 million in combined short and long-term license installment receivables.

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

Our new license signings improved somewhat from the first quarter, both in the number of new customers and in the total value of the license signings.

However, the aggregate value of our new license signings in the first half of 2005 was significantly less than in the first half of last year.

Accordingly, we now except full year revenue to be between 94 and a $105 million.

The broad range of our revenue estimates is attributable to a small number of large value license opportunities in the second half of the year.

Given that services revenue in the second half of 2005 is likely to be higher than the first half of 2005, we expect proportionate services revenue to be well above 50%.

We are committed to becoming the world leader in BPM software and as previously discussed, are increasing our investment in sales and marketing throughout 2005, we believe this investment will better position in Pegasystems to achieve accelerating growth in future years.

But we also anticipate results in lower profit before tax in 2005 as compared to 2004.

As a result, we now expect the full year 2005 earnings per diluted share to be between $0.01 and $0.15.

Cash flow from operations is expected to be in the range of 16 to $22 million.

As part of our report on controls for the quarter ending June 30, 2005, we reported a material weakness.

In early June 2005, our revenue accounting manager voluntarily resigned due to relocation and was not replaced till the middle of July 2005.

As a result, some of our processes remained in the accounting review and customer transactions did not operate as effectively as in the past.

Specifically, the status of one Q2 2005 customer transaction with unique acceptance circumstances involving revenue of approximately $1 million was not properly accounted for in our initial trial balance.

To address this issue going forward we have located the replacement for our revenue accounting manager and we will reinforce the protocol for dealing with these types of transactions.

The proper accounting for the customer transaction in question was fully resolved, and the related revenue deferred prior to the public release of our financial results of the second quarter of 2005 and does not affect any reported results.

That concludes our financial summary and I will hand it back to Alan now.

Thanks Chris, we all have a lot of respect at Pegasystems for you and your teams hard work, your commitment (inaudible) and quality.

Let me take a couple of moments and reflect on what's has been going on at Pegasystems.

As -- I think many of you know, we began the year with some very major changes.

And last quarter we talked about a more disciplined approach to targeting accounts and doing things that would offer the best both near-term and long-term opportunities as we engaged in a major transition in pursuit of becoming The BPM leader.

Clearly, we are doing some things right.

There are 9 new customers, there are new industries like Biotech and new uses like the Federal Drug Subsidy Program.

Clearly, there is a need for improvement, there is a slow financial start to the year.

Our quick value program is proving successful, but the changes as we have anticipated are going to take some time to bed down.

This has led to lower initial license revenue that has impacted the results in the first half of the year.

Since January, I have been in the head of operations role and this has been extremely interesting as I have taken a real hands on approach getting closer to the sales operations, to better understand and remediate what has been preventing us from capitalizing on what is clearly outstanding technology.

I am more convinced than ever that the product is terrific and that that value is seen by customers, and that improved sales execution is the key to becoming The leader in BPM.

Our rules-driven BPM technology gives us enormous power, and we see a lot of strong opportunities, and I am really looking forward to be able to turn these into financial results as we continue our current plan.

The wide range of sales we talk about is very important because it shows that the agility matters not just in our traditional industry and spaces but across the board.

The retirees drug subsidiary work is in supportive new federal legislation and it is going to have an impact on 16 million retirees and we see that as a place where we can continue to expand.

We have done great work with insurance companies, a leading national insurance company, a leading global insurance company and a leading Massachusetts insurer are all part of our customer group that joined us in the first half of the year.

And in Biotech, where we are going to be managing the process and data involved in clinical trials.

So, in many ways what we have seen so far is the adoption of the new approach to selling, taking our very talented sales resources and making some shifts that should allow us to get into target accounts using a quick value strategy.

This will lead to smaller initial licenses because there is going to be more limited scope, and it's also going to lead to a shorter implementation cycle and a more rational value proposition for our customers.

But we see this as an easier route for customers to see the power of what we have to offer and we see this leading over time to significant add-on sales.

We have (inaudible) on sales in this quarter, world leading custody services company, one of the worlds largest insurers, an overseas bank outsourcer and one of the great, great internet service providers and a number of other leading financial institutions, all have re-committed to Pegasystems in the first half of the year and 5 made meaningful additions to our business relationships with them.

So, more on what's working, I think we are directing our sales force better, we are making a transition to target accounts, we are doing a good job at sharing knowledge, we are establishing a new set of plays that will make us more effective in executing on this game plan.

I think that as a company we're also illustrating the power of what we do better.

This morning, we announced a release of an unprecedented performance test and validation of our technology done in the IBM innovation center and doing 87 million business operations representing 31,000 people working continuously for 8 hours.

This demonstrates the power of our open standard services oriented J2E architecture and let us show to world-class companies that we can meet their needs initially and we can grow with them.

I am extremely pleased that the team has been able to drive the open standards into levels of performance that frankly I have never seen before.

And I think this is indicative of the type of good work that has been happening.

In competitive situations against other organizations, we've been able to demonstrated the advantage of rules, unified with process.

We of course have a controversial position here.

Our controversial position is that we believe, that a business consists of both its processes and its rules.

And we've betting hard on that.

We've invested in it and we are in the process of trying to show to the world that this actually will revolutionize what has frankly traditionally been some what sleepy markets.

This is the mission, this is what we are doing.

And we are doing things in ways, I think, allow us to deploy the intellectual capital we have better.

We've been building solution frameworks that allow us to address both, broad industries, insurance banking etc.

And some specific additional functions in appeals and grievances in managing the sales processes and managing the customer interaction processes across channels.

We are seeing excellent response and interestingly we are also seeing our customers, our partners, beginning to look at how they can leverage, their framework that they themselves build using our technology.

We continue to deliver training to customers and prospects over 400 since the start of the year and we have a new and very rigorous certification program that we have implemented and we have had literally hundreds of exams scheduled and over 200 people now who have taken the certification path.

These partnerships are extending with key organizations like Satyam into Asia, we've worked extensively with Oracle in their global financial services organization in a number of summits.

And, we also have done tremendous work with IBM where we continue to invest, where we have continued to show that we can support the IBM technology staff where we have actually done joined bids at several institutions, and where we are working diligently to demonstrate how we can turn this relationship I think, into a good leverage point.

One of the most exciting things actually from the quarter was a very successful user conference that we had in the UK, and it was thrilling to be able to see IBM present and show their commitment to Pega, JP Morgan Chase and Vodafone all come public and in the case of the latter 2, be able to describe the real importance of smart BPM to their organizations.

So, there is a lot in process though.

We need to do a lot for our sales force, we need to make sure we are targeting the right accounts and helping penetrate those accounts.

We also need more salespeople, our goal is to hire an additional 20 or more over the next 5 quarters.

And we continue to develop and polish the products.

We have a suite of investigations frameworks going to e rolling out and we have frameworks for the retail, insurance, banking, health payer, and other industries, either implemented or in queue.

So, we've been working diligently, we have a lot of things that are correct.

I'm really quiet pleased with how the team has come together around our strategy revisions, that were quiet significant and that we've talked about having implemented since the beginning of the year.

We're are also going to work upon fine tuning our messaging.

We've consolidated a couple of the groups inside the Company to be able to try to be a more affective marketing organization.

And to make sure that every single prospect understands the power of smart BPM, understands how they can take better control of their businesses, how IT can deliver better solutions faster and how across the enterprise this convergence of rules and process really can help organizations massively change the game.

You are going to see us putting a very significant effort into trying to drive this message in he market, unifying the way we talk about our products, but the way we talk about how customers can achieve benefit.

So, what to expect and what to look for?

Well, we're going to continue the focus on BPM wins, rules drives BPM, we think is a critical differentiator, to both new customers and expanding existing accounts.

You know it's interesting -- there were times when 9 new names, would we more that we would get in a year or a year and a half.

Wasn't that long ago.

I'm thrilled at the way the team has come together on this new strategy, lot of work to do but we are making progress and frankly that progress is visible, though not yet on the bottom line.

We also want to continue to part -- penetrate our target markets.

Financial services, health care, we've seen great opportunities in the government sector and are continuing to pursue that and we are going to deepen our involvement and we are going to make sure that we leverage the potential of this space.

So in summary, I'd guess I'd say that we have early signs of success with this evolving BPM strategy, we've had definitive progress on that strategy, we're focussed on leveraging our technical capabilities and successes and turning them into a long term financial result.

We are going to continue to invest.

We are confident that we are onto something good and important and we are going to continue to push forward hard and I'll tell you that I think we have a strong team that is incredibly on message as we have adopted this new strategy and as regards to the second half of the year.

And with that, let me turn it back over to questions.

Operator we are ready for questions.

[Operator Instructions].

Your first question comes from the line of Richard Davis from Needham & Company.

Yes hi, this is Sean Hannon on behalf of Richard Davis.

Just wanted to follow-up on some comments you had in the March call.

Alan, you seemed to comment on the process of hiring and training a best-in-class sales force and wanted to see if I could get some comments around how this is progressing and what the nature of this effort is?

Sure, I'd be glad to.

Addressing the selling and marketing issues, has been paramount in what I've been focussing on since I came in, in January.

And I'll tell you, I think that we really do have on the ground a number of absolutely terrific sales people.

I believe that we like a lot of companies though, didn't really structure ourselves and didn't really educate and train them as to how best pursue certain customers and what we are looking to do now is to very, very vigorously change that.

We have had some additions to the staff, we've have more that half a dozen, sort of new sales people that we've added since the first of this year.

We've been able to train some of those folks fresh from the beginning and we've done a lot of work with the existing team.

Let em tell you a little bit about the types of things that we doing.

We have situations where frankly sales people had literally dozens and dozens in some cases close to 100 accounts that they were covering.

The reality is that a sales organization that is covering that many accounts really can't build the sort of relationships.

All you can do is chase opportunities.

What we decided as an organization is that we got some terrific customers, some terrific prospects and we are going to focus on them, and we are going to flesh out the sales force making sure we can spend enough time and that we can create affinities between the people and the accounts they run.

The other thing we are doing, is that if you look back frankly, into last year, we were basically entirely located entirely in North America in the Cambridge area.

Very, very few people in the sales organization or in the support organization were located outside of Boston.

That's just not consistent long term with a customer intimacy relationship management strategy and so, we've been very aggressive about hiring outside of Boston.

We've got some great, great talent and we are going to make sure they are fully deployed.

But as we talk about adding, the you know, the numbers that I talked about, you're seeing us add them remotely and we are already seeing that we can tap into existing affinities that people have with customers and regions where they are previously sold to.

So, we've been doing a number of things about both how we both assign people to accounts, how we address, which account they are focussed on and we now have a very vigorous quarterly process where we go through and we coach the sales managers and the sales reps about types of things that we can be selling to these customers and making sure that they all get the absolute best thinking from our marketing and our development staff.

So, a lot of very, very significant change.

So, we're narrowing the number of accounts we're working with on a per rep basis

Yes, absolutely.

If you would have heard previously frankly about there would have been some discussion of target account strategies.

But you cannot have a target account strategy if you've got -- really work, I mean, if you say you do but in terms of having a target account strategy, you can't really do that, if you have end up having somebody with 90 accounts that they are supposed to pursue.

And this has been an interesting process, it has actually given us the chance to make sure that the reps are focussing on accounts they can do best with.

And, we are actually involved in a very collaborative process with the reps, in which we are really asking them and signing them up to deliver results in a way that just hasn't been done before.

Got you.

Thank you.

If I could just follow-up with a second question real quick.

This is actually getting at your partners, is there any way to give some sort of a -- something of a little bit more quantifiable in terms of your partner contributions to the quarter.

Yes.

I can think of 3 deals, 3 transactions that were brought to us in the quarter by partners.

And once again, we going to take responsibility for driving out bound.

But, I've actually seen since the beginning of this year when we made some changes that the partner yield is actually visibly increasing.

In addition, I will tell you that the partners are now significantly involved in more than 50% of all the opportunities that we are succeeding in and that we are delivering on.

So, big changes.

Great.

Thanks very much.

Thank you.

Your next question come from Joe Halpern with Halpern Capital

Hi guys.

Two quick questions.

First, how many shares did you buy back in the quarter?

Hi Joe, it's Chris.

In the quarter we purchased about 250 -- just around 250,000 shares to date, a little over 400,000 for -- around $2.5 million in the buy back thus far for the first half of the year.

Okay.

And do you have an average pricing on those?

I know that it's in the 5 to $6 range is the average pricing, it is in the Q.

Okay.

I'll look it up.

And then, just on the marketing and selling I know -- looks like it was down $1 million in the quarter even though you are adding some sales people to it.

Just kind of looking forward, not sure how fast you are going to be adding these additional 20 plus, but how should we be modeling the marketing and sales?

It's been a little...

...

I think we'll see the sales component in sales and marketing growing steadily over the next 5 quarters, we hope to have a pretty steady influx of new sales people and in particularly, sales people that are geographically distributed and well suited to the BPM selling strategy that we have adopted.

But, that -- you should assume is going to be pretty steady over the next 5 quarters.

Marketing on the other hand, there has been a decrease in some of the total dollar value of marketing programs.

But we've increased dramatically our focus of our marketing programs on the BPM strategy, whereas before there was a focus equally on vertical application so there was a significant industry and vertical component to our marketing programs.

We are much more focussed on the BPM opportunity, so the actual dollars are being driven primarily by that in the marketing space.

Yes I think we weren't necessarily getting the maximum yield from some of the marketing dollars, we're committed to marketing.

You are going to find us doing much more targeted programs as we go forward.

Okay.

And then, on the partnership side.

Can you talk just a little about what's going on there?

Are you getting any of the guys trying to go a little -- I guess to bad for you or you know, any opportunities for deals coming in through a partner?

Well yes, As I said I can think off the top of 3 deals that were literally brought to us by partners.

And we 're seeing a lot more partner activity since the first of the year we've been very, very forceful in terms of going after that.

We made a significant set of reorgs as part of the big changes in January.

We made some very significant reorgs to the leadership of our partnership group and it's actually I think, turning out terrifically at this point.

So, we've never had a quarter where we've had partners bring us -- literally bring us high quality pieces of business, like we've seen in the last quarter.

Okay.

Great.

Thank you very much guys.

Thanks

[Operator Instructions].

Your next question comes from Geoff Hulme with Porter Orlin.

Hello, I was wondering if you could give us some idea, you mentioned the ASP was $500,000.

I was wondering if you could give us some idea of how the ASP differs between these initial sales of PRPC and the add-on sales or is it pretty much -- it is pretty similar?

No, actually what we're finding is the add-on sales tend to be significantly larger.

What we've been successful in doing is getting customers to think in terms of an initial that we called sliver or quick win.

But they can actually get some value.

But frankly, they might spend only a couple of hundred thousand dollars in some cases with us, though we have had organizations that decide to jump and then over the million range.

Frankly, some of it depends on the size of the organization you are dealing with and their willingness to commit.

We've actually had a good track record of then following these up with great interest in being able to drive this across a department or across a broader area, which would on average, from my experience I think lead to results larger that our traditional ASP, which was 750.

So, that's kind of a mental model we are going through.

That we are going to have a smaller initial deal.

And then in a more civilized fashion, I think software is often sold to customers, the ability for the customer to actually acquire additional value and additional benefit from buying one.

Well Jeff, this is Chris following on that.

In the quarter we did have a couple of deals that were well over the million dollar level.

So, it was within the quarter we are seeing some of these initial quick hit deals and then the follow on deals also contributing to the ASP.

Okay so maybe can you see, in the near term how the quick-hit and the bigger add-on could average?

It's hard to go on to create a trend from just about a year and a little over a years worth of activity.

What we must look at is we have a couple of customers already who have done exactly what we've described, where they have come in and bought an initial and then bought 1, 2 or 3 follow on licenses and their aggregate license value is well over the million dollar level that we've seen in the past for the average.

I think as we see some of the -- and remember this is a strategy we've been pushing extra hard since the beginning of this year.

As we see some of the deals unfold over the next -- the follow months unfold over the next 2 to 3 quarters, maybe we will be able to get a better sense of that statistically how it's going to come out.

Okay, thanks and then on the buyback.

So it looks like you than you have about $8 million plus left on the authorization?

Yes.

The regional authorization was about 10 million, so we have about 7.5 million left, as you are aware we also have a 10b51 plan in place that allows us to buy through out -- when the window is closed as well.

So, that authorization has about 7.5 million remaining.

Okay.

And so, in the second half of the year is there any way to characterize the pace of buy backs or what -?

The volume constraints under the 10b-18 rules will be a significant factor in that, but we will be buying through out the second half of the year in all likelihood both under the plan and when the windows open perhaps in addition to that.

Okay.

Thank you.

Your next question comes from Hal Berry with Graham Partners.

Thanks.

Looking at the Q it looks like there was 70% or about a $4 million customer in the quarter.

Can you give a color around that transaction, was it the traditional finances services vertical or the churn more in the services line item this quarter or just any color you can give around that?

Was it -- it was a deal that was previously sold and fully implemented.

The implementation completed this quarter and so, the bulk of the revenue was recognized as license but there was service dollars associated with that as well.

Okay.

So the bulk that was on the perpetual side?

That was a perpetual license, that particular one.

Yes.

The term license revenue number was pretty light.

Would you expect -- did the pipeline for term license (ph) renewals pick up in the back half of the year?

Chris Sullivan The timings for renewals is going to be the principal factor on that in any given quarter so you will see the bounce -- up and down from that.

But yes, that will be the principle driver.

As we see coming into the year, the scheduled renewals for this year had a value associated pretty much in line with last year's.

And whether or not we renew all of that, less or more of that really depends on the customers' timing as much as anything.

A question on sales force, when you back attrition out of the I guess, the 6 new salesmen you said we added.

Do you have more quota-bearing sales, today, than we had the end of March or at the beginning of the year?

The number at the beginning of the year is actually net 7 adds since first of the year.

Okay.

Got it.

And I guess just lastly, if I can, you mentioned you need to increase signings in Q3 to achieve the higher end of the range.

Any qualitative comments you could give about the pipeline?

Or what kind of coverage ratios you are looking for in order to actually achieve that, would be great?

Thanks.

Yes.

The pipe is actually up both year over year and since the end of last year, it's in part, I think, attributable to the focus, that Alan spoke to, where we are looking at accounts and really digesting free capacity of each of our target accounts and their appetite for IT purchases, so we are quantifying that better and also additional heads, obviously while they are not fully effective are allowing us to address more in terms of the total pipes.

So we are seeing we have seen an increase in the total value of pipes in 1st half of this year.

Okay.

Thanks a lot.

[Operator Instructions].

Your next question comes from Geoff Hulme with Porter Orlin.

Yes, hi.

Thanks.

Just following up on the last question.

Is there any help you can give us on the numbers you'd need in the second half of the year, either license growth rates from here or because you -- have a pretty good idea what the services are I think, in the second half?

So its helpful that its in the press release, but -- or also just trying to get some feeling for what horse power you need to kind of make the numbers come in?

As we enter any given quarter we have -- the maintenance number above $5 million is pretty well established.

The service number as I said is professional services, the good news is that with the number of implementations we have, we are expecting the professional service dollars will be up, half 2 over half 1.

The licenses is as always that the highest variable item in revenue queue.

We have a combination of renewals and new license bookings that have to be done in the second quarter and third and fourth quarter in order to achieve the range.

And that is heavily dependant upon our new license bookings and that is why we pointed out that we need to see an increase in the second half to be up in the upper end of the guidance range.

But specific color is difficult to give, because each of these transactions there are some handful of transactions that are binary with fairly large dollars attributable to them so we can get all or nothing in those cases.

The interesting dynamic I would add is, I think a lot of this has to do with significant number of additional names that we're involved in, is that even though our services numbers are going up, our partners involvement in services is way up.

And so, consistent with the strategy, I'm, not -- on a long term basis, I am not at all happy with the sort of ratios between licenses and services we're showing, because for us to be truly successful we are going to have to continue the grow from the first and the second quarter very significantly both into the end of next year.

And that ultimately is what is going to take to really shift this, but I do want to make it clear that our partners are actually doing vastly more services work in our technology than they were doing 3, 6 or 9 months ago, despite the fact our services lines have gone up, frankly at a slow right from there.

Okay.

Thank you.

Ladies and gentlemen, at this time there are no further questions.

Are there any closing remarks?

Thank you operator.

I do want to say that the team here is working very diligently.

The transition which began at the beginning of the year was a important one and a significant one.

We are working hard to be able to transfer the investments to the bottom line.

We have got a lot of confidence we will keep making those investments, and we are committed to being a company that can show good license growth in our future and that is what we are heading towards with these investments.

So with that, let me thank everybody and tell you I look forward to reporting again next quarter.

Thank you, operator.

That concludes our call.