Pegasystems Inc (PEGA) 2009 Q1 法說會逐字稿

Good day and welcome to today's Pegasystems Inc. first-quarter 2009 earnings conference call. Today's conference is being recorded.

At this time I'd like to turn the call over to Mr. Craig Dynes, Chief Financial Officer and Senior Vice President. Please go ahead, sir.

Thank you. Good morning and welcome to the Pegasystems 2009 Q1 earnings conference call. With me here in Cambridge is Alan Trefler, Pegasystems' Chairman and CEO. Before I introduce Alan, I will start with our Safe Harbor statement and then provide my financial commentary.

Certain statements contained in this presentation 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 the statements deal with future events, they are subject to various risk and uncertainties. Actual results for fiscal-year 2009 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 in demand and the difficulty in predicting the completion of product acceptance and other factors affecting the timing of license revenue recognition; the level of term license renewals; our ability to develop or acquire new products and evolve existing ones; the impact on our business of the recent financial crisis in the global capital markets; the negative global economic trends; and the ongoing consolidation in the financial services and healthcare markets; our ability to attract and retain 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 materially 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, 2008, 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.

Q1 was a great start to 2009. Our revenue of $62.4 million, a 29% increase from Q1 2008, is the seventh consecutive quarter in which we set new quarterly revenue records. Net income was almost 3 times what it was in Q1 2008, and cash flow from operations was $13.9 million.

These results would be good in any economy, but are outstanding in today's economic conditions.

License revenue was $28 million, an increase of $10.6 million or 60% from Q1 last year. The largest component of the increase was perpetual license revenue of $17.5 million, up from Q1 of last year by $7.6 million or 76%. Both the average size and number of perpetual licenses was up from Q1 2008.

Term license revenue increased by 32% or $2.3 million to $9.3 million for the quarter. The total of our outstanding term licenses now stands at $84.4 million, up from $66.9 million at the end of Q1 2008. These are non-cancelable term licenses where we have fulfilled all of the requirements to recognize revenue, other than receive payment of the term license fees.

This $84.4 million is not yet recorded in our financial statements but will be recognized as revenue in the future as payments become due. The details of when these licenses will become revenue are summarized on page 22 of our 10-Q

Historically, our license signings follow a common pattern of much higher bookings in the second half of the year as compared to the first half. So as expected, new license signings were smaller in Q1 than in Q4; but in spite of the economic conditions, new license signings were noticeably higher in Q1 of 2009 than they were in Q1 of 2008.

Maintenance revenue was $11.9 million for the quarter, an increase of $3 million or 34% from Q1 2008. As noted in our 10-Q, the increase in maintenance revenue is a function of the continued growth in the installed base of our software. The vast majority of our customers renew maintenance each year.

Revenue from professional services was $22.4 million for Q1, relatively equal to that of Q1 2008. The comparison between Q1 this year and last year is interesting. The total number of hours delivered this year was up by about 25%; but with the drop in the European currencies we lost any growth when it was translated to US dollars.

The exchange impact, coupled with pricing pressures in the United States which are caused by the current economy, resulted in services revenue being relatively flat. However, we are seeing stronger demand in the US for services and are therefore expecting an increase in service revenue for the remaining of the year.

Lastly, we had one 10% revenue customer in the quarter, as we did in Q1 2008, but not the same customer.

Our overall gross profit was $41.8 million, up $12.9 million or 45% from Q1 '08. The largest component of the increase is the $10.5 million or 60% increase in license revenue, coupled with a $2.8 million increase in maintenance gross profit.

Our professional services margin decreased to 15% in Q1 2009 from 17% in 2008. As I said with regard to revenue, professional services saw rate pressure and a continued slide in the value of European currencies. However, we are seeing stronger US demands, and we anticipate that professional services revenue and margin will improve as we progress through 2009.

Overall, total operating expenses for the quarter were $29.5 million, an increase of about $2.7 million or 10% from Q1 2008. Consistent with last year, Q1 '09 OpEx was down by about $2.7 million or 8% from Q4 2008. Part of the reason for lower OpEx is both lower commissions in Q1, the cost of our annual user conference in Q4, and the exchange rate. Just as the lower European currencies impacted our European revenues, they also reduced the rate of growth in operating expenses when we translate them into US dollars.

So while sales and marketing headcount grew by 35 heads or 21%, overall sales and marketing costs grew by only 5% from Q1 2008 and were down from Q4. Sales commissions were higher this Q1 compared to last Q1 due to greater new license signings, but down from Q4 2008 as bookings were -- as expected -- down from Q4 '08.

You should note that we will continue to grow our sales and marketing organization. There is a significant on-boarding time with new sales hires, so we will hire throughout 2009 to achieve 2010 revenue objectives.

Our new R&D office in India became operational in Q4 2008. As a result, all costs associated with the facility are now classified as R&D. In prior quarters, we were in a start-up phase and expenses were classified as G&A.

Until we get to Q4 2009, quarterly comparisons will be slightly apples-to-oranges for both the R&D expense line and the G&A line. As an example, R&D shows an increase of $2.1 million or 30%, while G&A shows a slight decrease. 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 was $1.1 million on an after-tax basis for the quarter, up from only $384,000 in Q1 2008. Note 8 to the financial statements details how this charge is allocated to each department.

Interest income was down in Q1 '09 compared to Q1 '08. During last year's credit panic, we moved our cash investment into pre-refunded municipal bonds, which are very safe but pay a lower tax-free rate. This change, coupled with an overall decline in rates, resulted in our interest income being about half of what it was in Q1 last year.

In addition, we have a smaller balance of installment receivables and therefore less interest income associated with that outstanding balance. This trend will continue in 2009 as installment receivables decline.

Exchange rates were slightly more stable in Q1, resulting in a loss of about $812,000.

Our overall effective tax rate for the first quarter was 30.4%, consistent with the 30% rate that we saw over the year in 2008. Net income for the quarter was $8.6 million or $0.24 a share, compared to $2.9 million or $0.08 per share in '08.

Our share count is down for the second consecutive quarter after climbing in 2008. Our shares outstanding decreased to 35.7 million from 36.1 million at the end of Q1 '08. Our share count is down for two reasons -- our buyback program and our change to a net settlement of employee options and restricted stock units.

Net settlement means that when an employee exercises options they only sell into the market the number of shares that represent the after-tax gain that they will retain. The option exercise price and the tax withholdings are not paid in cash. They are paid by returning shares to the Company based on the market value on the date of exercise.

In Q1, employees exercised 451,000 options, but only 247,000 shares were actually issued. The difference of 204,000 shares was surrendered back to the Company to pay for the exercise price and the tax withholding.

In addition to net settlement, we continued with our buyback program of $15 million which was approved by our Board in December 2008. During the quarter, we purchased 443,000 -- 387,000 shares at an average price of $14.66 leaving a balance of $6.4 million in the plan for further repurchases.

Q1 bookings increased our AR balance by $3.2 million from $42.8 million at the end of '08 to $46 million at the end of Q1. In spite of the increase, Accounts Receivable days billed outstanding calculated on a quarterly basis is at 47 days, down from 56 days at year-end.

For the first quarter, we generated $13.9 million in cash flow from operations, almost dead-on with what we did in Q1 2008. However, this quarter's cash flow from operations is different than that of last year. Last year, the biggest source of cash flow was the reduction of AR which was the result of great collections.

Our aging is now so low that reducing AR beyond this level is very difficult. In fact, in Q1 business activity pushed AR up by about $3.2 million.

Our strong Q1 cash flow is a result of our improved net income and billings, which increased our deferred revenue by $12 million. The increase of $12 million in deferred revenue was, as detailed in Note 6 to the financial statements, due to an increase of $4.6 million in deferred license revenue and an increase of $7.5 million in deferred maintenance revenue.

We ended the quarter with $173 million in cash and investments, up by about $5.8 million from $167.2 million at the end of 2008.

In summary, we think that in light current economic conditions, these are outstanding results for Q1. We know that the economy is difficult and that most software companies report how sales cycles are longer and more approvals are required for purchases. Accordingly, we're working hard on our pipeline to achieve further success in 2009 and beyond.

Lastly, let me explain the unusual timing of our earnings release. It's obvious that these are great results, and while we were preparing to release these results we became concerned about possible leaks, especially in light of the volatility in the price of our stock last week. Our audit committee meeting was already scheduled for Monday, and the decision was made at that meeting to immediately release earnings. Next quarter, however, we will return to our normal best practices of releasing earnings, filing our Q, and then immediately holding our call the next morning.

Now with more detail on Q1 achievements, I would like to turn the call over to PEGA's Chairman and CEO, Alan Trefler.

Thanks, Craig. Q1 2009 continues the strong growth that PEGA has been experiencing over this past seven quarters. In addition to our revenue and profit growth, license signings were also strong in Q1. Customers in banking, insurance, healthcare, government, and business process outsourcing all saw the business benefit from improving agility and saw our Build for Change technology as key, therefore purchasing PEGA software in the past quarter.

We were pleased that despite the tightened budgets and the increased approval gates that all organizations are putting all purchases through, that we will be able to have strong results in both Q4, which was a tough time, and in Q1.

We saw a number of customers place orders in Q1 to improve their customer service, to adopt what we call an intent-driven process-led approach using our SmartBPM Suite. PEGA has increasingly become a leader in providing software to contact centers for customers who find the old, traditional, data-centric approaches to customer service ineffective both at improving customer experience and in reducing operational costs.

Customers also purchased PEGA technology in Q1 to reduce customer fulfillment expense. Increasingly, organizations are realizing that one of the most effective ways to reduce costs is to reduce the manual work that exists across operational silos or in back offices. They are seeing that PEGA technology can increase productivity by more than 40% when applied to these gaps.

We experienced wins at several leading financial services and healthcare organizations who purchased our Build for Change technology for cost reduction in operations. And we're in a position, we think, to continue to foster this lead we have in Business Process Management as we work to transition the vision of Business Process Management to one of business process automation, putting control in the hands of business people to incrementally and quickly improve the way their operations work and save money.

We are also seeing a lot of systems going live. We had over 14 go-lives in Q1. This included organizations that were implementing our PRPC technology for tracking and reducing fraud as part of ongoing operations. Other companies and groups that were trying to ensure that sensitive information was properly held. And of course, the mainstream work that we do of taking work out of operations by just plain automating.

The powerful business benefits and rapid time-to-market that are underpinned by this technology has been recognized again by a leading analyst in Q1. Nonetheless, we are not resting on our laurels. We think that there is still a lot that can and should and must be done to take full advantage of what the potential of this technology is.

Thus we continue to invest significantly in the innovation and research and development to enhance our lead. In Q1 we increased our investments in R&D to over 30% of Q1 a year ago. The increased investment over the past year has brought significant customer benefit in the areas of our core business technology, and we have been adding framework technology to make it easier for our clients to be able to implement our platforms.

We will be continuing to invest and grow and bringing forward the results of these efforts in future quarters and into next year, as we have new releases of our industry framework, new releases of our core product, and continue to build our emerging platform as a services capability.

We also expanded our investment in strategic alliance partners in Q1. We increasingly believe that building this ecosystem will pay off in the future, and having the world's leading thought leadership consulting firms understand and have the capability to implement Pegasystems technology is critically important.

There is a strong potential mutual benefit for our systems integration partners and for Pegasystems that should be able to grow business for both of us. And we are beginning to see excellent signs of how we are working with our partners. We will be continuing to push on this arena of using, frankly, the strong, strong demand for our technology as a lightning rod to have those partners want to come work with us and want to be a key part of the implementation.

Let's be clear. This is a difficult market in which to sell enterprise software. Even in good times enterprise software is a lumpy, difficult, tricky business. However, buyers of the technology are actually finding that our highly, highly effective and quick to cost return technology is the exception, the purchase that they are choosing to make in these difficult times.

They're increasingly pragmatic. They are looking for assured results and a quick payback. And we are pleased that our existing customers and new customers are both looking to the ability to do automation in record time, and seeing that that's a way for them to boost their shareholder value, and frankly also position themselves competitively for the future.

With that, operator, let me open it up for any questions that there might be.

(Operator Instructions) Nathan Schneiderman.

Roth Capital Partners.

Thanks very much. Hi, Alan. Hi, Craig. Thanks for taking my question. A few of them for you.

Just with the 12% customer, that was nearly $8 million of revenue. I was curious how that $8 million, almost $8 million of revenue distributed across your revenue line items.

You know, that is a combination of three things. It's a combination of license revenue, maintenance, and professional services. Most of it was in license revenue, but the rest of it was spread throughout the other two.

In which particular bucket of license revenue? Was it perpetual?

It was a perpetual license.

Do you feel that creates a tough sequential comp for Q2?

We had a 10% customer in Q1 last year. We had a different 10% customer in Q2 of last year. So it happens to us from time to time, and I don't think that it's overly unusual. They are not huge. Most of them are just barely over 10%.

Okay. Then I have a question on term backlog to be recognized during 2009. So you ended last year with $31 million. You ended this quarter with $20 million. But you recognized $9 million of term.

So I was a little confused why the term dropped $11 million against the $9 million of term that you recognized. Is some of this hitting different revenue buckets or is something else going on?

No, actually what happens is that the schedule on page 22 is a liquidity schedule and that shows when cash comes in; and oftentimes what happens is that cash comes in, but for some reason it may hit the deferred revenue line rather than the actual revenue line.

It also can be subject, I think, to significant variations around foreign exchange, which continues to bedevil us as I think it does (multiple speakers).

But that's where the difference was. The difference goes to deferred revenue.

Okay. Did you add a meaningful amount? I guess I'm just trying to sync up the term license fees with the decline in term. I guess they don't quite match, but there is a relationship there and I was -- did you add much in the way of term backlog? Because I would have expected it to decline a fair amount but then increase some for deals booked during the quarter. But I'm not sure that that happened. I'm just not quite sure.

If you look at the outer years, you can see that most of the outer years increased, which means that we did actually book new term licenses in the quarter.

Okay, great. Then on linearity versus recent quarters and typical Q1 patterns, can you help us understand? How did the revenue distribution flow month one, month two, and month three in terms of bookings? And how did that compare with typical patterns for Q1 and recent quarters?

Actually, Alan, correct me if I'm wrong, but I think we did significant business in the first --

Couple up -- yes, first couple of months. This was not an extremely back-end loaded quarter.

Okay, so there's much better linearity than typical?

Yes, I think it was, because we had that --

You know, though, I wouldn't draw too many conclusions from that. Because -- but yes, it actually was a pretty balanced quarter, a much more balanced quarter than average.

But I will just say as a matter of principle we don't allow ourselves to get squeezed by customers. A lot of customers have been trained by industry analysts and frankly other software companies that if they wait to the end of the quarter that they will get vastly better deals. We don't do that.

We think it's important to sell the products at the right prices and we will -- I think our past behavior with some customers has led them to believe that we don't have that bad habit, because frankly we don't. I think that is a very destructive thing long-term.

So talking about --

We don't give quarterly guidance, and as a result we are not pressured. The fact that our business model is we do so much of our business as resales to customers, we would only be shooting ourselves in the foot to go out there and at the last minute discount a particular opportunity.

Because guess what is going to happen two quarters later when we are selling our next transaction into that customer?

Alan, question for you on the environment, the selling environment you face, the macro environment. Do you feel it is getting easier now, harder, or just staying stable? And do you note any significant regional differences?

So I think that it is -- I would like to say I see glimmers of improvement, but it has been extremely hard for the last six or nine months. This has, to my mind, neither gotten particularly better or worse.

Our results with certain customers have made the uptake of our products easier for them to make decisions to continue to invest in. Europe, to my mind, has gotten tougher in the last six months. The US has been tough since earlier in the year.

And I haven't seen any major regional or industry changes. I mean the banking market has been brutal. The insurance market is extremely tough. Though as we pointed out in our commentary, we have had successes in both of those.

Okay, and final question for you, just -- I know you don't want to give guidance. But anything you can say that you feel would be helpful in thinking about the Q1 to Q2 seasonality, particularly with the 12% customer? Thanks very much.

No, we don't provide any commentary on guidance.

Though I think, per Craig's comment, I wouldn't overreact to the existence of a 12% or a 10% customer. That does happen; and you'll see if you go back to the record, you will see it is not that uncommon (multiple speakers).

Okay. Thanks very much.

Brian Murphy, Sidoti & Company.

Hi, thanks for taking my question. Just a follow-up on the 10% customer. Was that a new or existing customer?

It was an existing customer.

Yes, it was just a significant extension of an existing -- of a customer relationship that had already been in place.

Okay. Also just a follow-up on the guidance. Your typically seasonally weak March quarter results alone get you halfway to your annual guidance in terms of net income and cash flow from operations. I know you guys typically don't update this early in the year, but I mean just looking back to that guidance, do you think you guys were too conservative? Or were you surprised by the strength in the quarter?

You know, I think that at the beginning of this year when we announced that we expected to go from $212 million, surpass $250 million, I would hardly characterize that as conservative in light of what's going on in the industry and the market.

You know, I think we were really quite pleased with the way that Q1 turned out. It was certainly stronger than I might have thought it might be earlier in the year. But frankly, the business is doing extremely well, and at its core that's what's happening.

There may be quarterly variations. Once again, we don't manage the business to quarters in that sense. But I think the core message is that both from a revenue point of view and from a new signings perspective the first quarter was strong.

Fair enough. Alan, you pointed out that bookings are typically much stronger in the back half of the year. Can you just give us a ballpark idea of how that skews? Would you say that it is more than 60% of bookings in the back half of the year?

Yes, think most software companies probably see a kind of one-third, two-third front-half to back -half. The back half of the year is typically, from my experience, about twice as good as the front half of the year. It's even a little worse than 60/40.

Obviously, getting off to a good start just makes us feel better about just overall macro risk relative to our guidance.

Right. There is a lot of volatility in terms of term license bookings, and that seems to have come down sequentially. But just backing into some numbers here, I get that your perpetual license bookings were actually up sequentially versus the December quarter. Is that right?

We don't provide that level of detail with bookings.

Okay. Let's see. Just, Alan or Craig, how is the pipeline right now? You mentioned that it was a strong bookings quarter. Any change in close rates during the quarter? What is your visibility into the back half of the year at this point?

Well, the pipeline has actually increased, and I'm feeling that the pipeline is improving. I don't think that's because the macro conditions are better. We did a lot of hiring last year. We have a lot of sales training and sales management training that we are going through to try to improve the effectiveness of the sales force.

So I'm actually feeling pretty good about the pipeline and some of our efforts here. So you know, we didn't get these results by draining down the pipeline. In fact, the pipeline is up in most areas.

Okay. You guys seem to be carving out a pretty attractive niche here in the market. Alan, what gives you confidence that this is sort of terrain that you can defend against the big guys?

If you could just touch on maybe the product side, any functionality advantages that you have. I think you mentioned earlier in your commentary that you have a lead in BPM, if you could just speak a little bit to that. And also on the account side, if there are any switching costs, etc.

Well, I think from a competitive perspective, the technology we have is a different approach than most of the big stack vendors. I actually think that with some of the recent acquisitions, things like the growth of Oracle and some of the other consolidation that we're seeing, frankly a lot of customers see that as a two-edged sword. There is no question that it means that we will be competing more with larger companies. But on the other hand, a lot of companies are very, very reluctant to put what they would think of as differentiating technology in the hands of the enormous stack vendors.

So I think that from both a just pragmatic, what the product does and how it does it, and also a strategic -- do we really think we need to differentiate ourselves from the company up the street -- that organizations see our technology as being really solid.

I will also tell you that the fact that we are doing well from a business point of view is a great, great comfort to our customers. The fact that we are really, really committed to independence and driving this is making that key. I get a lot of questions about -- is PEGA going to continue as an independent company for customers and accounts? And we are committed to pushing forward here, and a lot of customers find that really, really satisfying.

There are very high switching costs on this technology. But at the end of the day, our goal is not to keep customers because there is high switching costs; it's to keep them because they find that they want to increase their footprint with the technology.

And that's really what's happening. Our growth is very materially based on existing customers in one way or the other seeing our new stuff and saying, boy, this would make a big difference.

Okay, thanks. I'll jump back in the queue.

Gregg Speicher, Moss Creek.

Hey, guys. Good morning. We've talked a little bit about the new business in the past. Has that changed in the last couple quarters, percent of revenues from new customers?

This quarter was pretty consistent with the last few quarters. No big change.

Okay. How about those efforts in the government vertical? I keep hearing that that vertical is picking up.

We're putting a lot of effort into it. I don't think we have done what we can do in government, broadly. We are still very much emerging there. You are going to continue to see us pushing on that vertical because I think it should be a much, much bigger area for us.

Okay. All right.

That's the US government. We do well overseas.

Okay. How about, is there any pricing pressure on new deals? Or is the only pricing pressure you're seeing on the service side right now, or is it hitting other areas as well?

I think there is pricing pressure across the board. Customers are very, very pragmatic and there is pricing pressure. There is pressure to defer payments on certain things, to try to move certain costs out to next year.

Frankly, with over $170 million on the balance sheet, we do have the luxury to be able -- and we do use the fact that we're not desperate for cash in the next three to six months -- to give customers options, to sometimes trade off pricing pressure for payment terms and things of that type.

Okay. Can you give us any sense how important -- you mentioned the contact center product which you highlighted as at the user conference last year. How important has that been as a percent of revenues? Is that just growing materially, or is it you are just winning a few deals here and there?

What we're finding is that our contact center technology is quite different because we don't think it is just for the contact center. We think it's really -- a lot of this technology actually is really usable in parts of the back office to give them some better tools there as well.

So this product we have, which we call CPM, Customer Process Manager, which is our version of customer relationship management, is I would say significantly in the deals. I would say that it is involved in more than a third, maybe as much as half of our business right now.

Not always the driving factor, though in some cases it is, but as an important add-on that customers use to improve their productivity.

Okay, great. Thank you very much.

Edward Hemmelgarn, Shaker Investments.

Yes, thanks. Thanks for another great quarter. A couple of questions. Just one, Alan -- or Craig, I guess, this would be. What -- can you quantify a little bit, I mean, about the foreign exchange impact on the number you're reporting for the term license installments you have to be paid? How big of a swing does that factor in, in the first quarter?

Well, we had a foreign exchange translation loss of about $800,000, just over $800,000 in the quarter, which was significantly less than in prior quarters. We're taking some steps to mitigate that going forward. It's enough. I mean, $800,000 is significant.

But that was off the revenue line.

Yes.

Yes, this is -- it wouldn't impact your -- the foreign exchange loss wouldn't impact what future term license installment payments? I was just curious about how much of an impact it might have had in the drop from $87 million to $84 million.

It wasn't too much of an impact there. The biggest impact in the slight decrease was just the normal pattern of bookings being higher in the second half of the year as compared to the first half of the year. So we fully expect that number to go down a little bit in Q1 and Q2, and then in Q3 and Q4 we build that number back up.

Okay. In the deferred revenue, the software line, how much -- how does that break out? How much of that was term and how much of it is just prepayments on perpetual?

Most of it is perpetual. We do have some strange term licenses due to an accounting treatment on certain arrangements, where things do hit deferred and then we take them ratably over the year. But it's not significant.

So the increase that you saw on the deferred revenue and software license was also just another indication of the strength in the software bookings?

You could say that, yes.

Okay. Alan, can you give us any color on some new apps that you -- were occurring, I mean, from customers?

Yes, we've gone to market recently with a number of interesting new add-ons. Some of them are around the ability for the system to self-monitor. As our clients are using this technology more and more, and we have clients with thousands of tens of thousands of concurrent users on this technology, we've actually found we can turn the technology on itself and come up with ways to do what's called autonomic monitoring, where actually the system itself is able to both diagnose and recommend improvements to how it and other related systems are running, which is sort of interesting. We are now working with a number of customers in that space.

We also introduced something late last year called the Internet Application Composer which allows us to plug directly into existing client portals and really be part of a non-PEGA desktop in a very, very sort of cool fashion. We're seeing a lot of customer interest in that.

We've also implemented an add-on that allows us to really interoperate extremely well with data warehouses and other client data repositories. So some of this business is add-on business.

We have also come out with some very interesting things in the area of financial crimes. Our technology, which has both rules and process in it, can we think be very powerful in helping organizations create an enterprise view of financial crime and making it easy to both diagnose, get rid of false positives, and investigate better.

So those are some of the most interesting what I would describe as framework-type applications that we've been doing.

Okay. Lastly then on the government business, US government business, are you -- have you set up a sales organization or sales group dedicated to the US government? Or are you working more closely with some of the consulting firms on it?

We're trying to do both. So we have both deepened our alliance team to make it so that our alliance team has just more depth in terms of dealing with the large systems integrators which are frankly important not just to government work but a lot of different work.

We've also brought our alliance team organizationally to be reporting to the same manager as our domestic government practice. Because we think that by bringing those together it will make our government sales force more effective. But to be candid, we haven't cracked the code on that one yet. And one of my goals over the next couple of quarters is to see that we do and we're able to actually report broader results from the government, because frankly I think we should be able to.

Okay, thanks.

(Operator Instructions) Gideon Kory, Freedom Investors.

I have a couple, so tell me if I am running out of time. The first one is, now that a company transitions from PegaWORKS to PRPC, when do you believe that it will translate into higher market share? Based on your latest presentation that BPM is growing at 25% a year, and you were in line with that segment growth, when do you believe there will be a turning point when you begin to capture much bigger market share?

I think we are capturing much bigger market share, Gideon. I think the real test for a software company is when its overall revenue growth -- because frankly we've been artificially constraining our services revenue because we are creating opportunities for partners. I think, Gideon, if you just look at the rate of license growth increase, last year for the entire 2008 our license revenue increased 50%. That was way over the amount of license sales in the BPM market, which arguably was in the 20% range.

So we are clearly gaining share, I think without question. And I think it's a wonderful time to be a strong company when others are struggling.

Okay. What is the revenue mix today in terms of different segments? I think you divide it by financial, healthcare, insurance, that's kind of the major components, and the [cross] industry. What is the mix today, what it presents, how is growth opportunity, and what is your target mix in 12 months?

This is Craig. Last year, we reported on our K call that the mix between the four verticals -- financial services, insurance, healthcare, and other large government organizations -- was almost equal. It wasn't exactly equal; some were 23%, some were 26%. But it was pretty equal.

The only meaningful time you can look at that mix is basically on an annual basis, because certain of those industries have different buying behaviors throughout the year. So as I say, it was pretty consistent the last year, and we will report on that at the end of this year.

Okay, so you have had much more penetration in the last couple years in new segments that you were focusing on beyond financials?

Yes, over the last couple of years our business has increased other sectors, other than financial services. Just logically because we grew up in financial services and are now moving into other things, I would expect that over the next couple of years to increase in our business. There is nothing that ties our business to financial services, and we are seeing a lot of interest outside of it.

The last question was -- 14 projects going live in Q1 that you mentioned. How much of the Q1 result on the revenue line was recognized as a result of purchase decisions that were made by your customers in 2008?

And kind of follow-up, are you keeping the same guidance? Are you upgrading your annual guidance?

I don't think we're talking any further about annual guidance. And in general, we are able to offer customers -- and a lot of customers take advantage -- of the ability to go live with this technology in three, four, five months. So I would say that that's fairly typical.

Of course, being in the licensed software business, we are not generally dependent on a customer going live to recognize revenue usually. There is a standard product [also]. It's additional product of something they've already bought. So the revenue and the live dates are not connected in the way you may have thought.

I just think it's interesting that we're seeing so much uptake from our customers; and at the end of the day, we get real satisfaction about people going live and using our product.

Thank you.

Brian Murphy.

Hi, guys. Sorry if I missed this in your remarks, Craig, but can you just talk about the sort of sharp year-over-year and sequential sort of falloff in sales and marketing expenses as a percentage of sales, and where we might expect that to be for the balance of the year?

Both this year and last year, sales and marketing expenses went down in Q1 from Q4. That is primarily a function of lower sales commissions from lower bookings; as we expect, bookings are lower in Q1 than they are, obviously, in Q4.

And the fact that usually in Q4 for the last couple years we've had our annual user conference, which is an expensive event and that hits in Q4. So those two things combined with sales expenses dropping off from Q4 to Q1, and that has been a kind of consistent trend.

But as I said, we will continue to invest in sales and marketing throughout the rest of the year. So you will see that number increase based on headcount. And then as bookings pick up in Q3 and Q4, you will then see the impact of commissions paid out on those bookings as well.

Thanks very much.

Well, with that, I think that -- are there any other questions, operator?

We have no further questions at this time.

All right. I would like to thank everybody. I would like to think in particular on behalf of all of us here at Pegasystems the many customers and partners who continue to put their confidence. And I want folks to know that we are working hard. We're not taking anything for granted, and we think that this is an exciting time for us to push forward and gain share.

So with that, thank you, everybody, and we will talk to you at the end of next quarter.

Ladies and gentlemen, that does conclude today's conference. We appreciate your participation.