Pegasystems Inc (PEGA) 2008 Q2 法說會逐字稿

Welcome to Pegasystems' second-quarter 2008 earnings call. This call is being recorded. Today's speaker will be Mr. Craig Dynes. You may begin, Mr. Dynes.

Good morning and welcome to the Pegasystems 2008 Q2 earnings conference call. With me here in Cambridge is Alan Trefler, Pegasystems' Chairman and CEO. Before I introduce Alan I'll start with our Safe Harbor statement and then provide my financial commentary.

Certain statements contained in the presentations may be construed as forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. The words anticipates, projects, expects, plans, intends, believes, estimates, targets, forecasting, could and other similar expressions identify forward-looking statements which speak only as of the date the statement was made. Because such statements deal with future events they are subject to various risks and uncertainties. Actual results for the year 2008 and beyond could differ materially from the Company's current expectations.

Factors that could cause the Company's results to differ materially from those expressed in forward-looking statements include, without limitation -- variation demand and the difficulty in predicting the completion of product acceptance and other factors affecting the timing of our license revenue recognition; the level of term license renewals; or ability to develop new products and evolve existing ones; the impact on our business of the recent credit market turmoil and of the ongoing consolidation in the financial services and healthcare markets; our ability to attract or train key personnel; reliance on key third-party relationships; management of the Company's growth and other risks and uncertainties.

Further information concerning factors that could cause actual results to differ maturely from those projected is contained in the Company's filings with the Securities and Exchange Commission including its report on Form 10-K for the year ended December 31, 2007 and other recent filings with the SEC. The Company undertakes no obligation to revise or update forward-looking statements as a result of new information since these statements may no longer be accurate or timely.

Q2 revenue of $51.1 million represents a new milestone for the Company as this is the first time quarterly revenue has exceeded $50 million in PEGA's 25-year history. This is truly a remarkable achievement in light of difficult economic conditions. Overall we're very pleased with our results for the first half of the year. Revenue for the first six months grew by $26.4 million or 36% from $73 million to $99.6 million.

Our net income before taxes for the first six months of this year more than doubled from $2.6 million in '07 to $8.2 million and we generated $30.5 million in cash flow from operations to end the quarter with $176.8 million of cash and short-term investments. These results are outstanding given the current economic conditions.

As I noted in the press release, we, like other software companies, have noticed that purchasing decisions have been impacted by the economy. There are more levels of approvals, more signatures are required and the ability to predict when a deal will close has been reduced.

Fortunately for us customers view PEGA implementations as a way to reduce operating cost and improve customer service, which are still compelling business cases in this economy. But we, like all of you, still worry about what will happen to this economy over the next year.

In 2007 and 2006 revenues in Q2 were slightly down from Q1, that was not the case this year. So comparing this year's Q2 against last year's down quarter Q2 results in unusually high growth rates. The Q2 '08 revenue growth rate of 43% and six-month revenue growth rate of 36% are even more atypical in this difficult economy. We expect to grow throughout the rest of the year but not at 43% as this rate is unrealistic in the current economy.

On a year to date basis license revenue is up $10.9 million or 48% from 2007. Most of the increase was in term license revenue which was up by 120%. The mix of term versus perpetual license bookings can fluctuate from quarter to quarter which causes our backlog of term licenses to move up and down. We had an increase in term license bookings this quarter and as a result the total of our outstanding term licenses increased by $6.6 million from $66.9 million at March 31 to $73.5 million at June 30.

These are non-cancelable term licenses where we've fulfilled all the requirements to recognize revenue other than payment of the term license fees. This $73.5 million is not yet recorded on our financial statements but will hit our P&L in the future as payments become due. The details of when these licenses will become revenue are summarized on page 21 of our 10-Q.

Lastly you should note that these are true term licenses. At the end of the term the customer must either renew the license or stop using the software. In a limited number of arrangements we've granted license to unspecified future software releases. In these circumstances the arrangement is recognized as a subscription and this quarter we recognized approximately $1 million of subscription license revenue.

The value of new license signings increased in Q2 from Q1, but is still less than Q4. This is an expected trend and consistent with prior years as bookings in our industry are historically greater in the third and fourth quarters than they are in the first two quarters. Last quarter we expanded our financial statement presentation to show maintenance revenue on the face of the income statement.

Some companies group maintenance and professional services together into one category, usually just called services. However, professional services, comprised of consulting and education, is a lot different than maintenance revenue. Maintenance is a function of the strength of our growing user base who renew maintenance contracts on an annual basis because of the value that they place on their PEGA applications.

Maintenance revenue was $19 million for the first half of 2008, an increase of 32% from last year. Revenue from professional services, now comprised only of training and consulting, was $47.3 million for the first six months of '08, an increase of 30% from '07. Consulting revenue was up $10.1 million or 30% from the first six months of last year while training revenue was up about $800,000 or 41%.

On last quarter's call I said that we had one service arrangement where the contract terms require that we defer both the revenue and the cost. This project finished in Q2 and the accumulated revenue and costs were recognized. This caused an unusual uptick in Q2 services revenue and since we have no other arrangements of this type it's not repeatable. As a result, we expect services revenue to be only slightly higher to flat in Q3 as we return to our normal but still growing run rate type business.

Our overall gross profit for the first half of the year was $59.3 million, up $16 million or 37% from the first half of '07. The largest component of the increase is the $10.9 million increase in license revenue coupled with a $4.3 million increase in maintenance gross profits. Our professional services margin increased from 17% in Q1 to 23% in Q2.

Q1 margins were unusually low due to a larger than normal number of unplanned work orders at the end of the quarter. Q1 margins were also lower than normal due to the costs associated with our first worldwide professional services training session held here in Boston.

Total operating expenses for the quarter were $27.8 million, an increase of about $1 million from Q1. The increase was split between R&D which grew by about $800,000 and G&A which increased by about $200,000. Both of these increases were headcount related. We continue to add staff to R&D in both Cambridge and India. As well we added staff in HR and IT and the G&A grew.

Headcount was also up in sales and marketing, but the costs were flat. While we had greater headcount related costs in Q2, in Q1 we had the costs associated with our annual sales kickoff event. You should note that we will continue to grow our sales and marketing organization. There is a significant onboarding time with new sales hires, so we will hire throughout this year in order to drive next year's revenue growth.

We've signed a lease for office space in India and our buildout has started. At the present time the Indian R&D operation is considered in the start-up stage and as such costs are included in G&A. Later this year we will be out of the start-up stage and there will be increased R&D expenses associated with this new facility. We believe that continued investment in R&D is necessary to maintain and expand our leadership position in the BPM space.

Our FAS 123R charge for stock-based compensation increased to $1.1 million on a before tax basis, up from a modest $603,000 in Q1. Page 10 of the 10-Q details how this charge is allocated to each department. During Q4 we completed an equity incentive grant to certain employees; that grant, along with options that will be granted to new employees in 2008, should increase this charge as we progress throughout the year.

Our interest income was slightly down in the quarter. Because of the uncertainty in the financial markets we've been moving our cash investments into pre-refunded municipal bonds. These bonds, which are secured by escrow investments and treasury bills, are very secure. And while they provide a lower pretax yield, they provide good after-tax return. So while on a pretax basis our interest income is down, our overall effective tax rate has decreased 29.2% for the quarter, 29.5% for the year compared to 36.8% for the first six months of 2007.

In addition to the municipal bonds, the lower tax or is also due to changes in the geographic mix of income. The main component of that change is that we receive a letter of approval for SEZ, or special economic zone tax holiday status, under the Indian income tax laws for the next 15 years. For 2008 we estimate our overall tax rate to increase slightly from Q2 due to additional discrete items that we anticipate booking throughout the year.

Our net income for the quarter was $2.9 million, a change of only $100,000 from Q1 2008, but an increase of $2.2 million from Q2 '07. For the first six months we have now generated a remarkable $30.5 million in cash flow from operations. Our strong collections in Q1 and Q2 are a direct result of significant license signings in Q3 and Q4 of last year and the renewal of annual maintenance agreements early in this year.

But as we've said before, in our industry license signings are smaller in Q1 and Q2 so collections start to fall off after the Q3 and Q4 deals are collected. This can be seen in our accounts receivable balance which has fallen from $46 million at December 31 to $35 million at March 31 to $32 million at June 30. As a result there is less to collect and our cash flow from operations will look a lot different in the second half of the year.

As a result of this trend in accounts receivable days billed outstanding, calculated on a quarterly basis, decreased to 35 days from 48 days at March 31 and 63 days at December 31. We ended the quarter with $176.8 million in cash and investments. The increased investment in pre-funded municipal bonds demonstrates that we are very conservative with our investment portfolio.

We have no auction rate securities or mortgage-backed securities. The only risk we have to the subprime crisis is indirect and limited to our investments in corporate bonds of financial institutions that could be hurt by this crisis. As of today we're not aware of any downgrades.

Deferred revenue decreased slightly by about $1.6 million in the quarter from $41.9 million to $40.3 million. The slight decrease was due to recognizing both one professional services engagement that we've been deferring and one larger than normal license, partially offset by new license billings in the quarter. It is worth noting that deferred revenue is still higher than it was at December 31 and more than $18 million higher than at June 30, 2007.

On June 4, 2007 we announced that our Board of Directors approved a third $10 million stock repurchase program beginning in July 1, 2007 and ending on June 30, 2008. On February 14 we announced an extension to the program, an additional $15 million that would extend until December 31, 2008. During the quarter we repurchased 339,138 shares for a total of about $4 million. This represents an activity level which is about 50% higher than it was in Q1. There is a balance remaining of approximately $10 million available for repurchases in the remainder of 2008.

In summary, this was an outstanding and record-setting quarter. Q2 of '07, just like Q2 of '06 were down quarters, and so the growth rates that result from quarterly comparisons are somewhat misleading, especially in light of the current economy. We expect continued growth in the second half of 2008, but not at the quarter-to-quarter growth rate of 43% that shows up in his quarters MD&A.

To date our value proposition has stood up well in a challenging economy. With more detail on Q2 achievements I would now like to turn the call over to PEGA's Chairman and CEO, Alan Trefler.

Thank you very much, Craig. Before I begin making the comments, let me take a moment to recognize a sad event that happened in July. Board member, Alex d'Arbeloff, the former Chairman of MIT and founder of Teradyne, passed away. He had been on our Board for [eight] years and had been a terrific mentor, advisor and somebody who really understood the transformational nature of what we were looking to do and he will be missed.

The reason we've been able to achieve strong results is that because clients are able to very pragmatically apply our technology. They do this in four areas. They do this to try to boost new business, to do customer relationship management, to handle exposure to risk, fraud and compliance issues and to build service backbones.

What we find is that as economies get tight organizations are very much looking for quick returns, they're looking for cost reduction, they're looking for greater assurance that they can retain customers. And a servicing backbone provides a terrific, terrific opportunity for organizations to integrate the different parts of their back office, bring together different parts of their business, connect customers with the folks who actually are doing the work and both save tremendous amounts of money and improve service.

We're uniquely positioned as a technology that does these sorts of servicing backbones and we're seeing a very, very strong demand for them. Our process technology bridges gaps across business and operational silos and it prevents organizations from being locked in and it enables organizations to respond. It enables them to move the work to wherever makes the most sense and frankly, and most importantly, to automate it. We're seeing a real pickup in the demand for these technologies across the sectors in which we do business and it's really quite exciting.

We have continued to enhance and grow our products and we think that it's a wonderful time actually to invest when we suspect that a lot of our competitors are struggling. And we made a couple of very important announcements in Q2. We announced improved technology in the case management area, in particular for AML and fraud investigations, something that's very central to organizations and financial institutions as they think about how they want to protect their shareholders and live up to government regulations.

We introduced some important new capabilities for insurance, in particular what we call our customer process manager. You think of this as sort of the ultimate call center system that really lets organizations drive processes under the control of business people through the organization.

We added a claims servicing backbone. This is very, very useful in terms of both helping organizations save money and make sure they're processing claims well, but also frankly just really being able to handle the ebbs and flows of businesses better.

And perhaps one of the most exciting, what we call the Internet Application Composer. What we've been doing at PEGA is taking this BPM technology and showing how it can be deployed throughout an organization. What this does is it actually enables that Internet technology to be deployed directly on the Web as part of a non-Pegasystems website, fitting seamlessly into how an organization goes to market, but still allowing businesspeople their unprecedented control to make changes in the way that products are offered and service is delivered.

It's a very exciting combination of new offers and we are going to continue to build, invest and announce new technologies as we go through the remainder of the year.

The reason that we're in business of course is to make sure that our clients can successfully use this technology. And we had a record 19 go lives this quarter which was really terrific and exciting. All over the world organizations applying the technology in everything from call centers to offering new business in the telco business to their clients to countries in which we had breakthrough implementations, major new deliveries in Spain as well as the US and sales all the way down to Australia and Asia Pacific.

It is actually gratifying that we can be a global business and that we can work with our clients in the different regions and enable them to create these backbones that add tremendous value. I think this is one of the reasons why, despite the market conditions, we've been able to show strong results since the second half of last year and we've been able to show them broadly.

I will tell you that we are actually continuing to sell into the financial services business and that's purely based on the fact that organizations see a fast return and a reliable return from us as a company.

One of the things that we have talked about in the past and I'd like to report on is our work with partners. We are really seeing an excellent set of results from the strategic relationships that we have formed with partners. As you may recall, as we entered this year we talked about how in addition to the traditional partners that we had worked with, Indian firms that are brilliant such as Satyam and Cognizant.

We had wanted to create strategic more sort of CEO-oriented relationships and we have done that and we have seen business come from it. Organizations like, well Cap Gemini for example, which has done work with us, significant work with us in both Europe and the United States. IBM Global Services which is in the same situation. Accenture also doing work with us around the world and really helping us drive business.

We're adding to this strategic mix PricewaterhouseCoopers and we're being very selective. What I'm pleased about is that we're seeing these organizations invest to build benches and practices that understand how PEGA technology is different and how it can be applied. Of course supporting partners in building this technology does require meaningful investment.

We're also doing quite a bit of hiring and we think that this is a wonderful time because frankly the consolidation and some of the mergers and acquisitions that we've seen both in our business and in related businesses have served from our perspective to put a lot of folks on the street or make a lot of folks interested in, frankly, leaving these acquiring companies which are not known for their culture of innovation. And we're finding just terrific outreaches from staff who are actually coming to us because we are clearly the leader in this very exciting BPM segment.

We intend to continue to invest and, as Craig said, continue to look to the future as we grow the Company. We're putting a lot of effort into enablement, we've completely revamped our curriculum so that our clients and our partners will be able to make best use of our technology.

We've put a lot of effort into training our own staff; we think that's very important both for new hires and on an ongoing basis, and we're building with more than 10 clients, centers of excellence where they themselves are actually creating internal operations that will enable them to understand how PEGA technology can be percolated across a large multinational organization and how they can build on this rhythm of change that our technology enables. I'll tell you now more than ever that build for change message resonates and is really being reinforced as we go forward to market here.

So it has been an exciting time. I'd like to pass along before I close a personal note. It turns out that my wife and I, after quite a bit of looking, think we're on the verge of actually finding our dream house. So I just wanted folks to not be surprised if we sell or margin a few percent of our holdings in the next couple of quarters. I assure you it will (technical difficulty) meaningful (technical difficulty) or say anything. But we'd have to say that we're optimistic about (technical difficulty) continue to grow and develop.

In closing I'd like to bring folks' attention to the 2008 PEGA World Conference that's going to be held in Washington on October 20 and 21. We have an awesome group of (technical difficulty) that will be presenting -- Blue Cross Blue Shield of Minnesota, (technical difficulty) MasterCard, Prudential Insurance. It's going to be (technical difficulty) will present how they have pragmatically improved customer service and frankly and saved money and added business (technical difficulty) this technology.

We've also got some terrific keynotes that will be presenting (technical difficulty) as well. And perhaps most interesting (technical difficulty) a number of our banking clients is that we have a (technical difficulty) services committee one of our (technical difficulty) financial services (technical difficulty). With that, operator, can we open the line to any questions that there might be?

(OPERATOR INSTRUCTIONS). Kevin Buttigieg, Stanford Group.

Good morning. The line was breaking up a little bit at the end of the call on my side, so hopefully you can hear me okay. I wanted to ask about how you felt the economy might be affecting the big deal pipeline as you move towards the second half of the year. Obviously you've done very well so far. You talked a little bit about how you might be seeing a little bit of delayed approval levels, but just as the pipeline goes do you continue to see sort of the large purchase levels that you've seen the last couple of quarters now?

There are a couple of important and interesting factors. First, we do see a lot of interest in big deals and our vision has always been to sell clients things that they can actually use. So we actually don't particularly encourage big deals. We want customers to buy and deploy on an ongoing basis.

But there is demand for big deals because we're able to offer our software in effect on a subscription like term basis because we actually will sign a customer (technical difficulty) when we're frankly (technical difficulty). (technical difficulty) even more lumpy than ever (technical difficulty) actually closes business in any particular quarter (technical difficulty). I am not terribly concerned about that in principle (technical difficulty) that ability to offer term deals as well.

Okay. And then the large deal that you recognized as revenues this quarter, could you provide a little bit more color around that, what sort of industry that might have been in? Was that the deal that was signed this quarter or I assume it was signed in a previous quarter and went live this quarter?

(technical difficulty) that was a situation with a client who actually (technical difficulty) multiple times. And (technical difficulty) new area of the organization (technical difficulty) and it was sold in the latter half of this year and (technical difficulty).

Okay. As I look at your services partnerships, how should I think about how that works out over time? Over time is that sort going to keep your services business, your services revenues on a more modest level as partners take more services engagements or is it the services partnerships really designed more to drive more of your product sales and kind of your mix of product and services revenues stays consistent with where it is today?

(technical difficulty) applied in many situations and as clients get excited about (technical difficulty) partners to bring maintenance (technical difficulty) the customers (technical difficulty). So we're very (technical difficulty) ultimately (technical difficulty) not grow the services business (technical difficulty) if we didn't do that. On the other hand (technical difficulty) modeling our behavior after several companies (technical difficulty) very, very large service relationships that (technical difficulty) tremendously (technical difficulty).

Can I interrupt a minute? I'm getting a report than there's (technical difficulty). Is that the case (technical difficulty)?

Yes, I'm having a difficult time hearing you. It's kind of coming in and out on my end as well.

Operator, is there anything you can fix at your end?

I'm not sure. Give me just one moment.

We're going to hang up and dial right back in from a neighboring office. So we'll be back in -- terribly sorry -- we'll be back in in 30 seconds if for some reason that's what's causing it. (technical difficulty)

We apologize for that. After all, we are a software company and this really looks like a hardware problem to us.

But we do take total responsibility for the ultimate solution though. As I was saying if folks heard on the wrap up, the services business we think is a very important business, clients want us to have one. But our ultimate strategy is to increasingly involve partners and I will tell you that that's working. We have actually gotten meaningful business from every one of those strategic partner relationships in the last six months and we think that's going to continue and accelerate. Moderator, are there other questions?

Gregg Speicher, Moss Creek.

Good morning. Could you go into sort of the geographical outlook or performance for us?

I think that it was interesting, we had good performance in all geographies this quarter. Europe has been extremely strong for us, but we also did have both go lives and new business close in the US and in Asia Pacific. So I would say that we're seeing a lot of interest from clients around the world. The mood is worse in the US I would say, but we have been able to close business there nonetheless.

Okay. So you acquired -- I believe the name of the company was Focus.

Yes, Focus Technologies.

So did that lead to some business in the quarter?

No, it did not. That was actually an acquisition of some intellectual property in the area of fraud and compliance. It did not contribute to revenue in the quarter, but we think that they'll be very helpful as we introduce new product in the second half of the year.

And then they provide more consulting and some intellectual property, is that correct?

That's correct.

I think that's it for now. Thank you.

Ed Hemmelgarn, Shaker Investments.

Just a couple of questions. Congratulations on another very good quarter. But one is your -- Craig, your subscription revenue dropped by a fair amount -- or not subscription but the term license revenue did -- from quarter to quarter and I understand there's always going to be variations. But can you just explain what might cause that kind of a drop just in helping to try to model going forward?

Sure, in the Q we give an analysis of how that revenue is going to come in over the year, but often times the quarters can be choppy. And the reason for that is that the rule on recognizing that revenue is you take it as payments become due and some customers are on an annual payment plan where others are on quarterly. So what can happen is in Q1 you could have a couple annual payments come in and that knocks that number up for Q1 and then for the rest of the year you're on people that are on quarterly payments.

Okay, that's great. What about in Q1 you had a fairly large I think subscription order or you've had several orders or whatever. Did you have any in Q2?

No, we did not have any in Q2. The difference in the revenue between Q2 and Q1 was in Q2 we recognized a full quarter of that subscription, whereas in Q1 we were only able to recognize a partial quarter.

Okay. And then lastly, your maintenance revenue jumped a lot, and I realize that's also a function of just when these things start. But we shouldn't be forecasting a similar type of jump in Q3, should we?

No, you're absolutely right. Maintenance when they renew, they renew at various times in the year. A great proportion of them renew earlier in the year. On a lot of our maintenance contracts we have escalation, so when a bunch of people renew there could be CPI type of escalation and that could push it up in a particular quarter.

Okay, thanks.

(OPERATOR INSTRUCTIONS). Geoff Hulme, Porter Inc.

Thanks for the performance again. On page 34 of the Q you talk about significant customers. So I guess there was a greater than 10% customer this quarter?

Yes.

Okay. And was that related? Unfortunately Alan was cutting out about the large deal. Was that customer related to the one large deal or if you could just tell that story again quickly?

Sure. The client that was involved in that had been an existing PEGA client who's done quite a few projects with us in the past who decided to expand their relationship into another part of the business, and that was the basis of that sale. So it's really the model we like where customers have success and then build on top of that. And as you'll see if you take a look at the charts, when we do have a 10% customer it's generally not the same customer very often. In a given quarter we'll have one, but then if there is a major customer there will typically be another one in another quarter.

I know that's the strategy. When you talk about into another part of the business, you mean into like another business line at the same customer?

Yes, that's exactly it. Some of these organizations are staggeringly large and they really have a whole variety of business entities. So one of our strategies is to be able to get a client to be internally referenceable and then use that as a vehicle to have technology move to other parts of the broader business. So a new buying entity with an existing client.

Okay. And I know it's a little early, but as you think about expense budgeting or resource budgeting or allocation going forward -- I mean, so far the investments have definitely paid off. I'm just curious what your philosophy might be from here forward. Is it still more people, is it a mix of people and marketing? Has BPM reached any new different stage that you think calls for different tactics? And then of course I'm hinting at kind of a longer-term margin question, but I just wanted to take a mark of where we are right now?

I think we try to look soberly at what's going on in the business and make sure that when we're investing we're doing it with a level of effectiveness that's, I believe, a standard. From a technology investment point of view, we still think there are a number of highly differentiated capabilities that we can continue to flesh out. We're looking to make sure we do that on a cost-effective business and, frankly, have the good fortune of having a very, very experienced staff who understands BPM extremely well helping to drive that.

But we do think that there will be further return from technology investment and our clients are telling us that they're interested in more and different things. We've now got a large population of them that we can I think make sure that we're calibrating those investments carefully. Margin in professional services is to some degree driven by the fact that we're investing so much, both training our own staff, but also working with partners.

The partner commitment is an expensive commitment in a lot of different parts of the organization. But strategically we think it's exactly right for where BPM is. BPM is transformational and it can use organizations who can engage at a thought leadership level with some of these key strategic partners. And we're very pleased that we've now been able to get their attention because of our growth rate and because of client adoption and demand of the technology.

Obviously as software businesses grow, if they are effective margins always improve, but when you grow very fast and, as Craig has pointed out -- as you put as much of that growth -- we're so willing to put that growth into the term licenses, the subscription like licenses that I think you need to add those back in to really get a sense of what our revenue growth is and to understand our cost better.

All right. Thank you.

Ed Hemmelgarn, Shaker Investments.

(technical difficulty) is it all in mix of competition or competitors?

I'm sorry, Edward, could you repeat that?

Have you seen any changes in your competition?

Yes, sure. There's been quite a bit of consolidation in the last several months. For example, Oracle bought BEA which I actually think ultimately is going to be really terrific for us because what ends up happening when Oracle buys BEA, when IBM bought FinalNet, as they did a year or so ago, what you find is that a lot of the thought leadership and a lot of the energy that comes out of these smaller scrappier customers -- or companies I mean -- sort of gets lost in the mix of miscellaneous products that these organizations have.

It's very hard for these organizations to maintain progress and, frankly, make the hard decisions about product lines. So I think that it's taken some noise and I think further consolidations will continue to take noise out of the market and will play better to our innovation.

And lastly, have you seen or is there any area of potential new customer concentration or application that you're seeing that you might not have been seeing six months ago or something like that that you think might prove to be a growth area down the road?

Well, this whole what people will sometimes refer to as the multi-channel contact center or the whole business around automating call centers seems to be one that's picking up. There's a large replacement cycle from aging Siebel implementations and, frankly, there has not been a lot of innovation.

We've won a number of very, very hotly contested call center bids in a variety of industries ranging from healthcare to insurance to financial services, and I think that that has the potential to be a tremendous market which is one of the reasons we just released our newest version of our CPM product for insurance, our Customer Process Manager.

Think of it as a multi-channel contact center capability and we're continuing to invest heavily in that because we think, frankly, that it will pay off with a really, really good use of BPM. So that's a change that I'm seeing in the market that I think is very, very key.

Okay, thanks.

(OPERATOR INSTRUCTIONS).

I think at this point, moderator, we will just bring the conference -- if there are no more questions we'll bring the conference to a close.

Gregg Speicher, Moss Creek.

I would actually like to follow up on that CRM comment there. When I went to the user conference there was a lot of excitement from some of the people I talked to. As you get out there and start talking to people, who is going after that Siebel business? Are you getting a whole different type of vendor you're going up against, all trying to sell some sort of CRM solution to replace that Siebel implementation?

There are a number of other vendors that sell those systems, including of course Oracle itself. But none of them have the process orientation and ability to build for change that our technology has. And so we're doing extremely well in proof of concepts and other opportunities to show this off to the point that actually our win rate as we've gone head to head in very, very hotly contested organizations is I'm certain better than 75% or 80%.

So it's actually I think going to continue to be contested by the incumbents and you can think of Oracle as being obviously the biggest one having acquired Siebel. But frankly, there hasn't been a lot of innovation in most companies for the last five, six years in those areas. And customers are looking for things that are both proven and at the same time new. So we think it will be strong for us.

Okay, thank you very much.

Well, with that I think we will bring the conference to a close. Allow me to apologize for the technical difficulties; I think we will stick with the hardware explanation. And I want you to know that all of us here at PEGA are working extremely hard to try to make sure that we're doing a quality job for our clients and for our shareholders. With that thank you very much and have a good day.

This concludes today's conference. We thank you for your participation. You may now disconnect.