Pegasystems Inc (PEGA) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pegasystems Inc. Q3 2009 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions).

I would now like to turn the conference over to your host today, Craig Dynes, CFO. Please begin.

Good morning, and welcome to the Pegasystems 2009 Q3 earnings conference call. This morning, I am in Cambridge, while Alan Trefler, Pegasystems' Chairman and CEO, is calling in from Brussels. Before I introduce Alan, I will start with our Safe Harbor statement and then provide my financial commentary.

Certain statements contained in this conference call may be construed as forward-looking statements as defined by 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 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 of demand and the difficulty in predicting the completion of product acceptance and other factors affecting the timing of our license revenue recognition; the mix of perpetual and term licenses and 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 on 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 the 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.

Q3 was another successful quarter. In addition to being our ninth consecutive quarter of record revenue, it was a great quarter in terms of bookings and backlog, and so it sets the scene for continued growth in 2010.

License revenue was $28.4 million, an increase of $10.4 million, or 58%, from Q3 last year. Through the first three quarters, license revenue is up an amazing 60%, or $30.8 million. Revenue-wise, it was a very strong quarter for term licenses. The accounting rules for term licenses dictate that if a customer prepays their term license, the prepayment is recognized as revenue at time of the payment, not over the term. It seems surprising that in this economy we had customers who prepaid their term license fees.

On page 24 of the Q, we provide an analysis of the term licenses that are not yet recorded on the financial statements. The balance now stands at $70.2 million, slightly down from $74.6 million at the end of Q3 2008. This balance moves up and down. Bookings increase the balance, while revenue decreases it. While our exceptionally high term license revenue brought the balance down, we did have a $4.3 million term license booking that closed in the second week of October, so it is not included in this quarter-end balance.

While the backlog of term licenses was slightly down, the balance of non-term licenses skyrocketed by $17.6 million from $28.2 million at the end of Q2 to $45.8 million at the end of Q3. This is also detailed on page 24. This $17.6 million jump, along with another quarter of record revenues, is a pretty good indicator that new license bookings were strong. In fact, through the first nine months, licensed bookings are up more than 30% compared to the same period last year. The increase is coming from North American market, as the recovery of the European economy seems to be lagging behind the US.

Maintenance revenue was $12.5 million for the quarter, $36.6 million for the first nine months of the year, an increase of $2.4 million, or 24%, over Q3 2008, and $7.6 million, or 26%, over the first nine months of 2008.

Our Q3 Professional Services revenue of $23.4 million was flat from both last year on a quarter-to-quarter and a year-to-date basis. The pro-serv business varies dramatically by geography. Demand is very strong in the US, where we work hard to staff assignments; while the opposite is true in Europe, where demand is weaker. We do, however, see signs of an improvement and expect revenues to increase in both Q4 and especially Q1 of next year. Lastly, we had no 10% revenue customers in the quarter.

Our overall gross profit was $40.8 million, up $8.6 million, or 27%, from Q3 '08. The largest component of the increase is the $10.5 million, or 58%, increase in license revenue, coupled with a $2.3 million increase in Maintenance gross profits. Our Professional Services gross profit was only $1.5 million for Q3, down by $4.2 million from Q3 '08.

The drop in pro-serv margins is a combination of three factors -- significant business and pricing pressures in Europe; our large investment in training of staff; and finally, a significant engagement where we recognized the cost of the Professional Services, but the revenue was deferred to future periods because it was bundled with a license where we are recognizing revenue on a subscription basis. When services are bundled with a subscription, the Professional Services revenue is recognized over the term of the subscription, which can be several years.

We have more partners doing Professional Services, and as customers become more enabled, we've started investing heavily in training our Professional Services staff to provide more expert services. This is a significant investment, as is it necessary to take people out of the field, bring them to a central location for an extended training program.

We are pleased with the results to date and therefore will continue to invest heavily in staff training throughout Q4. This investment could continue to have a negative impact on pro-serv margins for the short run, but it is already having a positive impact on our overall business. Approximately one third of our current pipeline is comprised of deals that are associated with partners.

With economic conditions the way they are, during the first half of the year, we had been rather cautious with operating expenses. However, our primary business objective is to drive revenue growth and be the dominant player in our market space. We are already by far the largest pure-play in the BPM space, but the stack vendors are very large companies, and so we are very intent on growing as fast as we can.

Growth like ours only comes from continued reinvestment in R&D to make our product even better than it already is, and in sales and marketing, to increase our footprint by covering more accounts and more geography.

We are giving initial guidance for more growth in 2010, and so in Q3, we started adding the resources to drive this growth. Sales and marketing expenses grew by $2.9 million from Q2. The largest component of the increase was an increase of more than $2 million in sales commissions.

An increase in sales commissions is a good thing. However, you should note that we pay most of our commissions when the new license is booked, and oftentimes the revenue associated with that license is deferred to the future. So the timing issue of higher commissions ahead of higher revenues can drive down net income in the short run. This is particularly true of the second half of the year. Typically, new license signings and significantly higher commissions hold down net income in Q3 and especially Q4.

This increase in sales and marketing costs is also the result of adding 15 people to the sales and marketing team in Q3. 11 of those adds were in sales. R&D costs grew by about $781,000 during Q3, as we added 17 people to our R&D team in India.

To drive our growth, we will continue to invest in additional sales and marketing staff, as well as increased R&D in Q4 and into next year. We consider both of these expenditures an investment, since they will have little impact on 2009 revenues, but we expect them to drive growth in 2010.

G&A expenses decreased in the quarter, a result of decreases in reserves such as bad debt and sales tax reserves. Our FAS 123(R) charge for stock-based compensation was $438,000 on an after-tax basis for the quarter as compared to $526,000 for Q3 of last year, as we refined our methodology with regard to our estimates on the forfeitures.

Interest income is still down in 2009 when compared to 2008. During last year's credit panic, we moved our cash and investments into very safe, pre-refunded municipal bonds, which are secure and liquid, but pay a lower tax-free rate. This change, coupled with an overall decline in rates, resulted in a reduction in interest income.

Exchange rates were more stable in Q3, and so we experienced an FX gain of only about $266,000 in the quarter.

Our overall effective tax rate for the second quarter was up slightly to 29.6%, as there was a discrete item in Q2 that temporarily decreased the rate.

Net income for the quarter was $6 million or $0.16 per share compared to $2.4 million or $0.06 per share in Q3 '08.

Our share count is flat from Q3 '08. This is one of the objectives of our buyback plan, so it looks like we are doing well in executing the plan. So far this year, we've purchased 606,231 shares at an average price of $16.32 per share, and at the end of Q3, we still have just under $3 million left in our share repurchase program.

Our accounts receivable balance at the end of the quarter was $27.7 million, down $15.1 million from $42.8 million at the end of the '08. We have had tremendous collections, which have resulted in a fantastic cash flow from operations of $38.8 million and an AR aging of an amazing 29.4 days.

High or very old receivables in the software business is a sign that customers are not happy or installations are not going well. We clearly do not have this problem.

Deferred revenue can move around from quarter to quarter, and the changes are pretty insignificant when compared to the amount of the off-balance-sheet future license payments, as detailed on page 24 of our 10-Q. You should note that deferred revenue generally moves down during the year due to deferred maintenance. Many customers set up maintenance contracts on a calendar basis to line up with budget periods, so as we move through the year, the deferred portion decreases.

The deferred maintenance portion of our deferred revenue hit a high water mark of $23.2 million at the end of Q1 after annual billings and is now down to just under $18 million.

We ended the quarter with $198.4 million in cash and investments, up by about $31.2 million from $167.2 million at the end of 2008.

In summary, Q3 was an excellent quarter. We increased all of bookings, backlog and revenue. During the quarter, we started investing for growth in 2010 and beyond by following a strategy which has been very successful for us.

Since 2005, we have driven market share and revenue growth by investing in sales and R&D resources to improve our product and widen our market. In 2005, our annual revenue barely broke $100 million, and next year, we expect that annual revenue will break the $300 million mark. We intend to continue this investment in order to be the largest and dominant player in our market.

Now, with more detail on Q3 achievements, I would now like to turn the call over to Pega's Chairman and CEO, Alan Trefler, in Brussels.

Thank you, Craig. And if there turns out to be any droppage of this line, it is as a result of a bit of a quirky phone situation, not because of anything I intend to say or any questions you might ask.

I will tell you it is obviously clear from Craig's report that Q3 was another very strong quarter for Pegasystems. Our orders are strong across financial services, insurance and health care. And we are also pleased at the number of clients this quarter who chose our technology for use in multichannel environments -- contact centers on the web and for improvements in the customer experience.

We are finding that this intent-driven process-based approach to customer service enables customers to simultaneously cut costs and improve the way that they serve their customers. And this customer experience focus is proving to be extremely compelling versus other alternatives.

Throughout the year, we have been increasing our focus on deepening the alliance partnerships that we have. We think this is an important channel for growth and for expanding our footprint and for client success. And the result are looking very good. In Q3, the number of partner staff who completed Pegasystems' enablement and certification programs was double the number in Q2.

We see continued demand from our partners to increase their Pega practices, and in Q4, the demand for training and certification is continuing at a strong pace. I would say that one of the things that we are most excited about is the introduction of a series of new partner programs that will actually have our partners agree to drive a certain component of business and allow us to continue and further our investment in them.

We continue to see clients who have implemented several projects using our Build for Change technology achieve staggering returns, and really show increases in agility by being able to bring new changes into their systems at ongoing and continuously rapid rates. These clients are increasing adoption of our technology, transforming their business in some bigger ways than we've ever seen before.

As a result, about two-thirds of our orders come from repeat purchasers, often, customers who are buying again and again and again as they are able to prove the cost-benefit of what they are doing and actually pay for things without them having to be budgeted, because they can return on the interested dollars so quickly.

Among these customers who purchased in Q3, we actually have some of the very, very large firms, some Fortune 50 firms, who are actually using the technology to bring agility across their businesses and across multiple areas of their operation. What we are pleased about is we invested quite a bit to make this technology scalable and capable of dealing with the sophisticated problems that we think business process management was destined to solve. And as organizations take these steps, they are validating that vision and that former investment.

A global bank purchased Pega SmartBPM to change the way that they do home lending fulfillment, a solution we call Borrowers Assist that is being used by thousands of operators to try to make sure that that organization can do an optimal job of dealing with the current regulatory environment and mandates.

A market-leading insurance company purchased a Pega system to reduce their costs and improve customer experience across multiple call-center channels and back office operations, something we call bridging the silos with BPM.

And several banks purchased the ability to handle exceptions in the back office and capabilities that are just so cost beneficial that we see them reducing their non-value-added back-office work by over 60%.

These types of purchases really range from organizations who are rolling us out for the first time to many organizations who are seeing that having had a success, they can continue to build on it.

We had 28 project go-lives in Q3, a 47% increase over Q2. And all of these solutions that I've talked about are all central to automation, improvement, customer service and increasing effectiveness, not just once, but making it so that agility becomes part of the way these organizations come to market.

We have been doing a lot of work around the enablement concept. Enabling our clients and our partners is key to our strategy. We want them to be able to use a technology independent of Pegasystems staff and using us in more of an expert services environment.

To make sure that this was being done well, we wanted to give our customers the ability to check and verify that our partners were certified and to offer additional levels of certification, both for our partners and for our clients and for our Pegasystems staff. As a result, we have introduced over the last three months a series of four additional certification exams that allow people to be certified in multiple dimensions of functionality, technical depth and also the methodology.

We are using these to both hold our own staff to the highest standards and create objective measures in the marketplace to show that, well, customers and partners have been through a level of training and are therefore more likely to be able to do the implementations in a way that will let people build for change.

We are also seeing customers increasingly adopt our vision of creating what we call composite applications that integrate, as a composite, as a piece, of their existing desktops, integrate into their intranets and even integrate into their Internet sites. This lets them build the sort of highly-changeable, highly-flexible model into this multichannel world, and provides agility everywhere from the call center to directly on the web to the back office.

Our investment in trying to build market-leading technology continued in Q3. We released the latest version of our cloud-based business process management solution. Customers can now rapidly and easily create instances of our SmartBPM on the cloud for development and testing. A recent webinar highlighted how a new customer of ours used this ability to inexpensively provision our platform as a service environment in the Amazon Elastic Compute Cloud, letting them rapidly begin and conclude the development of their system.

One thing that is a bit unusual about our technology is that even our development environment is browser-based, so that our customers who are using us over the cloud can find from their browser, they are able to not just use the technology, but also enhance and build it. And I think that architectural decision we made a number of years ago is proving to be validated by the movement to cloud computing.

We have also placed our application profile capability, this ability to rapidly define requirements and get them into this Build for Change architecture, as a Software as a Service application on our Pegasystems' development network, enabling our clients and partners to quickly collaborate on their BPM projects and specifications over the web. We have a number of our clients who are using this in order to be able to plan out new and forward-looking projects.

So it has been a great quarter. Of course, we continue to worry about the depth of the economic issues and the speed of the eventual recovery. I would say that even in the best of times, selling software is a challenging, competitive business, with the potential for lumpy transactions and approval delays. Nonetheless, we have shown really strong performance, and I am really happy with the performance of our team as we've gone forward.

But we face a marketplace where the mood is tough and buyers are pragmatic. Despite this, as Craig said, we believe our business will be best served by continuing to invest in the potential the BPM space offers.

Pegasystems recently achieved a milestone in our growth. A few weeks ago, we crossed 1000 full-time Pega employees. And we are continuing to hire. We will be building out our sales capacity, both to enter new verticals and deepen our presence in the existing ones.

We are working to expand geographically. We have recently opened up new presence across Europe, and I can see the excitement here in Europe as I talk to customers who are really pleased to see that we've opened presences in Munich, in Zurich, and in the Netherlands.

We will be investing in R&D to expand the capability of our core technology and complement it with frameworks that are geared to make the technology easier to understand and implement. And we will be increasing our global support and service organization, because service and client success is critical to our business. We are now building out these organizations not just in North America, but also across Europe and in Asia, where we also recently opened an office in Singapore and expanded our presence in Hong Kong.

We believe that our investments over the last years have served the Company well, and are looking to take nothing for granted as we work to build our client base, our technology, our partnerships and our business.

I am making this call from Brussels, where we are hosting a banking exposition. It is part of a set of marketing programs we've been doing to bring an understanding of BPM to clients and prospects. And it has been a real pleasure to see over 100 of our clients and partners come to learn and share experiences. And I will say that I am blown away by the enthusiasm and benefits they see from other customers of ours, who are willing to stand up and present how they are using this technology to make significant change at some of the world's most meaningful organizations.

It is through these client successes that our staff gets its greatest satisfaction and motivation, and I will tell you that the energy level in the firm is high, and we are all working extremely hard on behalf of our investors.

With that, let me thank everyone and turn it back over to the moderator for questions.

(Operator Instructions) Laura Lederman.

Yes, I have a few questions. Thank you for taking my call, and good quarter. I wondered, given the strength of the bookings -- or what appear to be the strength of the bookings in the quarter -- can you give us a sense of the pipeline of business going forward? So I guess what I'm asking, was the pipeline drained at all by the good quarter?

And also, separately, can you talk a little bit about the economy? It seems to be getting better. What impact is that having on your business, if any? Because you held up really well when the economy wasn't good. What is sort of happening as the economy gets better?

Well, I will tell you that the pipeline continues to be strong. It is regional. Europe has been slower. The pipeline is great, but just transactions have been dragging. One of the things I am over here doing is seeing if I can help out a bit and sort of checking in. And we will do that again between now and the end of the year. So I would say that the growth has not been at the sacrifice of an unreasonable amount of pipeline here.

The reality is that we have done, I think, quite well in difficult times. And I am sometimes asked if we are so countercyclical that when times get better, somehow we will do worse. I don't see that happening at all. We have been affected. I can point to dozens of pieces of business that were either delayed or, in some cases, indefinitely postponed or, in some cases, made much smaller as a result of the economy.

We think that as the economy picks up and as people are willing to spend more on customer service, what they are looking for may change. They may be looking for things that allow them to write new business, as opposed to things that have, as they did six months or nine months ago, had a real cost focus. But we see every evidence that clients are going to want to continue to take advantage of what this technology can do.

Final question, and then I will pass it on. Can you talk a little bit about updates on new vertical markets like telco? And when you mentioned you will be hiring people for new vertical markets, can you give us a sense of where you plan to go?

Yes, we've found that we've been successful in certain markets without having the sort of focus that has been the history of the Company. So for example, in telco we've actually signed up some of the largest telephony firms in the world, without having the sort of frameworks and other things that in other markets have given us greater reliability and allowed us to provide greater value.

We also, for example, have been successful in selling to four or five significant pharmaceutical firms, likewise, without having had that focus.

We think that being able to talk to customers in their own language with salespeople, with services people and also with frameworks that make BPM real just makes a lot of sense. And so you will see us investing in areas that do include pharmaceuticals. You will see it in telco. We are doing a lot of work to deepen the sort of cross-market call center attack, which is just a terrific use of business process management technology. And we are targeting a couple of other areas I am not ready to announce yet for next year.

Okay. Thank you.

Nathan Schneiderman.

Thanks very much, Alan and Craig, for taking my questions. Clearly, in the press release, you laid out some broad-brush parameters for 2010. What comments can you make about Q4?

And also, you've mentioned investment repeatedly. I was hoping you could share with us your thoughts on operating margin and whether to the degree that is going to have an impact on operating margin, do you see Q3 as the low point for operating margin, where you are going to improve sequentially from here, or do you think it gets worse than this level?

I'll let Craig answer the margin question. But let me just say we really have sort of a policy against quarterly guidance, because in any individual quarter, anything can happen in this business. And part of our commercial discipline is we don't give stuff away at the end of the quarter. And I think that thinking of things on a longer-term basis is the right way, though obviously we've done pretty well for the last nine quarters.

In terms of the margin question, Craig, do you want to answer?

Yes, as I said, there are three things that are impacting that margin. One is pricing and business pressures in the UK and Europe. I think that will continue for another quarter. The recovery is lagging there.

The second thing was the fact that we had a large license that we took the cost, but not the revenue, because it was associated with a subscription. That is kind of a one-time event, and that really took a shot at margin in Q3, and that is not a repeatable item. So you will see margin improve because of that in Q4.

And the -- lastly is the education. As Alan pointed out, it is extremely important to us. The educational costs will continue into Q3 -- or Q4. Some of it may creep into Q1, but these are all sort of temporary things. And we see increase in revenue in Q4 and increase in revenue in Q1 in the pro-serv business, which should restore the margins.

Okay. And then just the significant pre-payments, what was the dollar amount of that?

We generally don't give that level of detail out. We always have a couple of customers, one or two customers every quarter, that prepay their term license. We weren't really expecting that in this year, but it continues to happen.

And as I say, it sort of counterintuitive to -- counterintuitive to what you would think in terms of the economy, that people would want to prepay their term licenses, either for a couple of months or for a year or even longer.

Final question for you. If we look at the term backlog that you disclosed that was off the balance sheet, that backlog for 2011 and beyond actually declined a couple million sequentially. And I was confused by that, as I would have thought that is always growing until you get to 2011. Was that a function of these prepayments, or did some customers drop off, or what exactly happened there?

You are referring to the decrease in the term license column, correct?

In the term license for the years 2011 and beyond cumulatively.

And that is a customer that has prepaid those term license payments, and so it drops off.

Okay, that is where it showed up. Thank you.

Brian Murphy.

Thanks for taking my question. Alan, you touched on the traction that you are getting in some new vertical markets, and it seems like you're sort of pushing out on multiple fronts here. Could you give us some updated commentary or color on how to think about the addressable market here, and how that might be expanding?

I think the addressable market here is very, very large. Even in our traditional financial services spaces, I take a look at the customer base and we are a fraction of what we could be doing for some of these customers.

Some of these organizations, even those that we think of as large customers, are just numbingly large. And I take a look at even sort of our top five financial services organizations. And we could grow in those accounts easily by a factor of three or four or more.

So I think in the existing market, we have been careful to do commercially reasonable deals that give us the potential to grow if we are doing a good job for the clients and the clients are getting more value.

And when we took a look at the Fortune 100, which was part of the exercise we went through to decide to significantly invest in the business further, we actually realized that we were only actively selling to less than a third of them, and leaving we talk to ourselves about being a company attacking the Fortune 100. But we came to realize there was an awful lot of whitespace.

So I guess there is a lot of addressable market here, even among the large companies. And as this catches on, which one day it will, I think there is the potential for the midmarket to join in. Though I think that the BPM space, on the revolution that BPM can provide, will in many ways be led by the largest companies.

Thanks. That's very helpful. And Craig, just looking at the expansion of sales and marketing headcount, it is up 25% year-over-year. Is that sort of a good ballpark sort of percentage increase to think about going forward in terms of sales and marketing headcount?

Well, my marketing guys would like to see it grow even more, but yes, I think it is a reasonable one. We are adding a lot of people in the sales organization, sales consulting organization, to widen our footprint, as Alan said, cover more accounts, fill up some of that whitespace.

And then in the vertical space, we need more marketing people. We need marketing people to develop frameworks and to develop programs to help them do well in each vertical.

We were pretty cautious, I think, in some of our growth over the last year or two. Not that we didn't grow the company, but the reality is you are seeing -- last year for the entire year we had 50% license growth. This year to date we had 60% license growth. And obviously, the sales and marketing headcount and expense has been growing more slowly.

So with the benefit of hindsight, I actually wish we had dialed up some of that investment even sooner, though I think we are going to try to be really prudent as we do it and just be very rational about trying to make sure we can hire people at a pace that we can actually train them and onboard them effectively.

And Craig, when I look at the expansion of R&D headcount, it looks like most of the incremental headcount that you are adding is in India. And when I just look at R&D expense per R&D head, it seems to have stepped down pretty significantly here the past couple of quarters. Is that in fact due to moving more of that R&D effort offshore, and is there any more room to see that number come down even a little further?

Yes, it is directly a result of hiring some excellent people in India. So far, we have been tremendously impressed with the talent that we've hired and the results that they have generated. So in Boston, it is still hard to hire technical people, but in India, there is a good pipeline of really, really solid people. So we will continue to grow there.

Just to be clear, though, to answer your question fully, we have not moved jobs from Cambridge to India. In fact, the Cambridge headcount has been growing, and I expect it will continue to grow.

What we are doing is basically just hiring in India at a faster rate than we are hiring in Cambridge.

Understand. I noticed that it was the incremental adds that seemed to be going that way. So also, Craig, if I could just get you to elaborate a little bit more on this training program. I think last quarter you mentioned that this program lasted nine weeks. Is that a one-time thing? Is this something you expect to do every year?

And also, is this nine-week program sort of on a rotating basis, where you pull a certain percentage of consultants out of the field and have them rotate for that nine-week program? Or is it -- anything would help. How much of that nine-week program occurred in the September quarter versus Q4?

Most of the expenses hit -- they started in Q2, and most of them hit in Q3 and will hit again in Q4. We will have trained quite a few of the people. They do come in in stages, so there is some overlap. And at the end of this initial program, we will reevaluate and see how we can improve the program and if we hit our objectives and make that decision for 2010.

Got it. And just one last housekeeping question. What is a good tax rate to use for Q4?

You can probably use the Q3 tax rate. As I said, Q2 was done a little bit because we had a discrete item that took it down.

Thanks very much.

Raghavan Sarathy.

Thanks for taking my questions. I have a couple of questions for Craig. First, let me start off with the 2010.

Craig, you made the comment that you are expecting total revenues to exceed $300 million next [year]. I am wondering if I can get some color around sort of the revenue mix that you are seeing in your pipeline. For example, this year, perpetual license kind of decelerated through the course of the year, which [is] anticipated. But then if I look at the backlog of other license, as you pointed out, there is a big jump in the other license payment backlog.

So I was wondering what you are seeing in terms of the license deals in your pipeline and how should we think about the rate of growth of perpetual system in your 2010 guidance?

Well, in the first six months of this year, it seemed rather counterintuitive, but we did more perpetual license deals than we did term. And as I say, it is counterintuitive, because you would expect in a bad economy people would want to do a lot of term licenses.

The pipeline right now, we are seeing quite a few more term licenses, and we expect that over time it will return to sort of the average split between the two. We did not provide the details yet of the components of the individual revenue. We will see what we can book in Q4, seeing which backlog we have at the end of Q4, and perhaps be able to provide more details and more color on the revenue guidance at that time.

All right. And then in terms of sort of the margin for the next two years, I know you are going to hire about -- just looking at the website, you seem to be going to be hiring a lot of sales and marketing people, also in the IT area as well, and R&D. So could you give us some color on broader terms, where we should expect leverage to come from in your model?

Well, as we said, our primary objective is to grow revenue to really dominate our space. As far as pure-play BPM companies, we are probably as large as -- I don't know -- most of the other guys combined. We are certainly the largest pure-play.

The stack players are very, very big companies. So for us to compete effectively, we must really grow, and that is our number one objective. We are looking at capturing our market, being the dominant player. So we are more focused on revenue, but certainly, at the end of Q4, we will give guidance on net income.

Then just one final question. I know you said you normally don't comment on the quarterly revenues. But if you just look at the fourth quarter, your original guidance was total revenue to exceed $250 million. This could imply that fourth-quarter revenues could decline sequentially, but it can still meet the original revenue guidance.

Could you help us understand what to expect, at least in terms of total revenue, for the fourth quarter?

As Alan said, we don't like to give quarterly guidance. This is a lumpy business. We don't play the quarterly games that a lot of other software companies play, which results in bad business decisions by discounting license to crazy levels to make the guidance number.

We are more concerned about the long-term growth of this business, and therefore, we thought that it would be more important for investors to understand where we think we are going in 2010, rather than where we think we are going with only one quarter left in 2009.

But we are not doing anything to telegraph an expectation that Q4 will be down. We are trying to stay disciplined about not falling into, frankly, what is a quarterly trap for companies in this particular industry.

Right. Yes, I understand that. We have just left maybe two months. That is the reason I asked. But your original guidance, total revenue to exceed $250 million, still holds -- for the full year.

We don't think it's meaningful for investors to talk about 2009 guidance anymore. 2010 is really probably more important for them to look at this company.

Okay, great. Thank you. Appreciate it.

Kevin Buttigieg.

Thank you. Craig, you mentioned the shift from term licenses to more perpetual licenses. Just sort of wondering if you look at those, what characteristics might be different between the two? You'd certainly imagine that perpetual licenses might be larger than the term licenses. Is that in fact the case, and what do you think is driving customers more towards perpetual licenses right now?

It's not actually the case. We have some term licenses that when you add up payments over three to five years can be larger than perpetual licenses. It is really a business decision that is made by the customer. It could be made for a variety of reasons. It could be made for CapEx, rules and regulations they have in their company.

Or the nature of the application. Some applications lend themselves to term licenses. Something where you are generating new revenue, creating a new business, you might want to have a term license that matches those payments as you ramp up revenue in that new business.

It is pretty unpredictable. Some companies go all term. Some go all perpetual. And other ones switch back and forth. And as I said, it seemed kind of counterintuitive, where you would have expected that we would have been seeing a lot of term licenses, given the economy, but it didn't happen.

So I have kind of given up trying to predict what it is in the short run. But over the long run, I think we have a pretty good model on the mix. And as I said at the end of Q2, we see in our pipeline quite a few more term licenses in the pipeline.

Does it mean that the revenues might be a bit more lumpy as those perpetual licenses come from the balance sheet -- or off balance sheet, that is, over onto the income statement?

Our revenue can always be lumpy, and I don't know that it is necessarily caused by those ones coming in from off balance sheet. It could be that, lo and behold, somebody comes with a big perpetual license.

Okay. And then as you push into more new markets, particularly in Western Europe, sort of outside the UK region, what is kind of the biggest obstacle that you face there? Is it merely a staffing decision? Is it sort of a proof of concept when it comes to BPM in those areas? Is it the economy? Just kind of trying to get an idea about how the sales process might be as you move into some of those markets that you hadn't had coverage before.

I think making it easy to sort of get customers to envision what BPM can do for them is always a challenge when you move into a new market. They don't have as many immediate reference points, though they often can find reference points from other industries that are useful.

As you move into some of these countries, there are of course other challenges of language, etc., and that is one reason we've committed to hiring local speakers to be a key part of the sales force.

And I also think that partners can be very, very helpful in overcoming the language and even some of the example pieces. I expect as we move into new regions, we will probably end up having to do more proof of concepts to make things a little more real, something we don't like doing, but sometimes will end up having to do.

And I think that the marketing investment will be more significant because you have to translate things and you have to translate them into both languages and also into different business functions, as things might be different.

So it adds complexity. We've done it in the past, so it's not brand-new to us, but we do think it is a lot of work.

But the software is written for the local languages in those Western European countries now, is it not?

The software is entirely doubled-byted, actually, written so it can be used. We actually have customers who are deploying in not just European languages, but also other languages, in Asia, for example.

Okay, great. And then as you continue to build this cash, any new ideas for what you might be able to do with it now?

So we do look at opportunities for acquisition, and we are open to that. Obviously, we are going to spend some of the cash in terms of continuing to invest in the company, though it is coming at even at a faster rate, so that is unlikely to be a major stress on it.

We are looking for ways that we could in fact penetrate some additional markets and speed that up. We are just really excited with the uptake of what we've seen in BPM, and think that there is just a tremendous opportunity to go after more of the Global 200, more after the Fortune 100, because many of them we're not even calling on at this stage.

Great. Thank you very much.

Edward Hemmelgarn.

A couple questions. One is how is the progress coming with the warranty product? I think you were talking about making that more of a real product to sell.

What I would call it is a -- so we've called it a framework. We've actually begun a campaign to go and call on other organizations that do warranty work. We have a number of important new references and some nice business in the pipeline, I think, that could be an excellent source of business for us over the next 12 months.

Do you have any other frameworks that you are working on right now, other than like the warranty, that you think will provide growth opportunities in the future?

Yes, we have whole series of them. I don't know like to talk generally about unannounced frameworks for a variety of reasons. But we've actually begun the development of a series of new frameworks, both to support our attack on these new markets, and also some areas which we've talked about in the past, where deepening, for example in the areas of financial crime or in the area of helping to further automate the relationship between bank and corporate customers.

We've done an interesting piece of work with Swift, the international telecommunications group, that pretty much all the big banks use, and Bank of New York Mellon to really demonstrate an approach and a framework for letting corporate customers just completely change the way they manage accounts at their various banks.

So there are a number of areas that we are pushing on quite hard. And we also have done some additional work to support the call centers generally. And I think you are going to find us really pursuing that market very, very aggressively in 2010.

I am not showing any other questions in the queue at this time, sir.

Well, thank you, everybody. We will look forward to holding our next call, which would be on release of our K sometime in late February.

Talk to you soon. Bye bye.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.