Pegasystems Inc (PEGA) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Pegasystems first quarter 2011 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded. And now, I would like turn the conference over to Mr. Craig Dynes, Chief Financial Officer.

Good evening, and welcome to the Pegasystems 2011 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 anticipate, project, expects, plans, intends, believes, estimates, believes, estimates, targets, forecasting, could, and other similar expressions identify forward-looking statements, which speak only of the date the statement was made. Because these statements deal with future events, they are subject to various risks and uncertainties. Actual results for the fiscal year 2011 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 are contained in the Company's press release announcing its Q1 2011 earnings, and in the Company's filings with the Securities and Exchange Commission, including its report on Form 10-K for the year ended December 31, 2010, 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 another landmark quarter for Pegasystems, and for the first time, revenue exceeded $100 million in a single quarter. To put some perspective on this achievement, in 2005, our annual revenue was only $100 million. Not only was this a great revenue quarter, our activity level and new license signings were stronger than in any Q1 in our history. It is normal in the enterprise software business to have a complete fall-off from Q4 to Q1. Most software companies have their annual sales kickoff in Q1, because there isn't much else going on, and although we also had our sales kickoff in January, our activity level didn't fall off much from Q4. This was the strongest Q1 for closing new business in our history, as Q1 license signings for bookings were approximately 85% over Q1 in 2010.

Every vertical saw an increase in bookings over Q1 last year. Europe had a fantastic quarter and as was the case last year, we continued to grow our customer base with a dramatic increase in bookings from new customers as partners bring us new accounts. While license signings and bookings were up almost 85% from Q1 of last year, license revenue on the P&L was up only 10%. Where did the bookings go? They show up in a couple places.

Note seven to the financial statements show that deferred revenue attributed to license increased by $6.2 from $7.6 million in December 31, to $13.8 million on March 31, while on page 22, our off-balance sheet backlog of term and perpetual license revenue dropped by only about $6.6 million. This means that in spite of recognizing $33.5 million of license revenue, our license backlog was virtually unchanged. Due to our record Q1 bookings, we replaced and therefore used almost no backlog. This is an amazing result for Q1, which is a quarter where you normally eat the backlog you have built in Q3 and Q4. On the strength of the Q1 license signings and bookings, perpetual license revenue was up by $6.6 million or 39% from $17 million in Q1, to $23.6 million in Q1 2011. Term license revenue decreased by about $1 million in Q1 2011 as compared to Q1 2010. This is due to some unusual large prepayments in Q1 last year.

Overall, our backlog of term license has been growing. As detailed on page 22, our backlog of term licenses is $85.8 million is up by approximately $17.8 million from Q1 of last year. Subscription revenue results from subscription accounting applied to perpetual licenses as a result of unique terms and a few license arrangements. Subscription revenue is a required accounting methodology, not software as a service. This revenue recognition method is limited by actual cash due or collected. As a result, the negotiated payments in these new arrangements, no subscription revenue was recognized in Q1. In Q2, we'll see subscription revenue return again as there are payments due on these few agreements.

Maintenance revenue was $28.7 million on a non-GAAP basis in Q1, up slightly from Q4, but almost double what it was in Q1 last year. $7.5 million of the $12.4 million increase is due to the amortization of deferred maintenance agreements acquired from Chordiant, while the balance of the increase, almost $5 million, is due to the continued growth in our customer install base. Just about all of our customers subscribe to and renew annual maintenance agreements. Purchase accounting rules give a haircut to maintenance arrangements that are in deferred revenue at the time of the acquisition. This is why we've provided supplementary information on a non-GAAP basis in order to allow investors to more accurately model our maintenance revenue run rates.

Professional service revenues set a new record of $41.4 million on a GAAP basis, up by about $4.6 million from Q4. The increase is a reflection of the growth in new license signings that we saw in Q3 and Q4 last year. Demand for services continues to be strong, and we expect professional service revenue to continue at this pace until the summer slowdown.

Demand for training continues to be very strong. The number of training days was up in Q1 2011 compared to Q1 2010, however, training revenues in Q1 2011 were down over the same period in 2010, as many of the training days were given to partners at significant discounts. This is an investment in our partner organization in order to grow the overall Pegasystems ecosystem. A record number of deals associated with partners were done in Q1, and a percentage of opportunities in our pipeline associated with partners has now grown to 40%.

For the quarter, gross margin percentages are about the same as they were last year, other than the much larger cost of license in our GAAP financial statements. This is due to the amortization of software intangible asset created as a part of purchase accounting. This charge is added back as part of the GAAP to non-GAAP reconciliation, page 19 of our 10-Q details the amortization of all intangible assets. On a non-GAAP basis, total operating expenses for the quarter, other than the acquisition and restructuring charges, was $53.3 million, an increase of only $1 million from Q4. Sales and marketing expenses made up about $800,000 of the quarterly increase. Sales and marketing headcount increased by 13, of which 11 were in the sales organization. The increase in headcount, along with the cost of our annual sales kickoff, was offset with the smaller commission numbers in Q1, as compared to Q4. While bookings were great in Q1, they were still, as expected, less than Q4.

Since 2006, we've invested heavily in R&D as well as in sales and marketing. We plan to stay the course on this growth strategy. We believe that both the record bookings and activity level that we experienced in Q1 are due to these investments. While we added less capacity to the sales organization in Q1 2011 than we did in Q1 2010, we will work to catch up in the next couple of quarters. In order to cover more named accounts, geographies, verticals and partners, we need to increase our sales headcount. Marketing spend increased as we were supporting growth in new verticals. In Q2, we will hold PegaWORLD 2011 in Orlando, Florida. This is our largest marketing event of the year, and results in increased sales and marketing expenses in Q2.

During Q1, we added 14 people to our R&D organization, and we will continue to invest in R&D to lengthen our lead over possible competitors and make improvements in the product that will drive license revenue growth. G&A expenses increased slightly from Q4 as headcount increased by nine employees. Our FAS-123R chart for stock-based compensation for Q1 was about $2.5 million on a pre-tax basis. Note 11 to the financial statements details how this charge is allocated to cost of revenue and operating expenses. This charge is also shown as an adjustment on our GAAP to non-GAAP reconciliation, that can be found on our earnings press release. The weak US dollar resulted in an FX gain of about $1 million in Q1 2011, as compared to a loss of $3 million in Q1 2010. Translation gains and losses do not reflect any change in our business condition, and they are beyond our ability to control or forecast. We are in the process of implementing legal tax and organizational changes, where one of the effects would be to move FX gains and losses from the P&L to comprehensive income.

Our GAAP income tax provision is starting to look more normal compared to what it looked like last year, due to the new purchase accounting rules, where certain items were expensed for GAAP purposes, but were not deductible for tax purposes. On a GAAP basis, we show a provision of about 29% for the quarter, while our non-GAAP provision is approximately 31.9%. Both rates are down from last year, due to a significant increase in income in foreign jurisdictions, where there is lower tax rate. Our accounts receivable balance increased by $28.8 million, from $79.9 million at the end of Q4 to $108.7 million at the end of Q1. The increase was caused by three factors.

Record collections in Q4, strong Q1 bookings, as well as annual maintenance invoices. A large portion of our annual maintenance is invoiced in Q1. This hits our AR, but the majority of the invoice amounts are in deferred revenue. You can see from note seven to the financial statement that the balance of deferred maintenance revenue increased from December 31 by $12 million. Having the invoices in AR, but not in revenue, pushes the DSOs up to 66 days from 47 at December 31. The increase in AR, as well as paying out our annual corporate incentive plan in Q1, resulted in a drop in cash as operations used $8.1 million. Collections and cash flow in Q2 should be improved, as we collect the receivables. In fact, our Q2 collections to date already represent more than half of the March 31 AR balance.

During the quarter, we purchased 28,042 shares for $1 million at an average price of $36.09. At our November Board meeting, the Board voted to increase the balance available to repurchase our common stock to $15 million, and extended the buyback period to December 31, 2011. Therefore, at quarter-end, we had a balance remaining of approximately $12.2 million available for future repurchases. Deferred revenue shows up in two places on our balance sheet, short-term and long-term. The sum of the two, which is $92.3 million, is an increase of $17.6 million from the end of 2010. As I said, the increase is primarily due to significant Q1 license bookings that were not yet recognized as revenue in maintenance invoices, which will be recognized ratably over the year.

At our 2010 conference call, we gave our annual guidance. We've always given only annual guidance, and followed a policy of not commenting on it throughout the year. For the first time, we also gave guidance for the first half of the year to provide visibility into the timing of our annual results, so as to provide additional milestones to chart our progress. Commenting further on this guidance would represent quarterly guidance, which is something we do not do for several reasons. First of all, we sell both term and perpetual licenses and the mix between the two can cause quarters to be lumpy and unpredictable.

Secondly, guidance pressures resulted in many software companies providing crazy discounts to meet their quarterly guidance numbers. You heard about the big stack vendors offering end-of-quarter discounts of 90%-plus. But our business model is to sell additional purpose-based licenses into our existing accounts. A big discount this quarter will set unreasonable customer expectations for the following quarters, when we're selling follow-on deals. As a result, we don't give quarterly guidance, and we are reluctant to even discuss any guidance during the year.

We continue to see our objective as maintaining the tremendous growth that has allowed us to grow from $100 million a year software company to a $100 million a quarter software company in five years. We continue be driven by our long-term growth objectives, and not individual quarterly results. So while we don't give or manage quarterly numbers, I would like to point out to those building models that historically, there have been quarters were revenues have not grown sequentially. In fact, in the high-growth years of both 2006 and 2007, we had down quarters during the year, but on an annual basis, still put up growth numbers of approximately 30%. In addition, due to vacation time in Europe, our professional services business slows in Q3, which depresses our pro serve revenue and gross profit.

Lastly, our profitability for the remainder of 2011 will be somewhat back-end loaded. As I said, we will continue to invest in our sales capacity, our partner ecosystem, and our R&D team. In addition, in Q2, we will hold PegaWORLD, which is the largest and most expensive marketing event of the year. In summary, Q1 was an exciting quarter for us. 2010 was an extremely back-end loaded year, so it is a lot more fun to jump out of the starting gates with an 85% increase in quarterly bookings. And on a non-GAAP basis, we recorded a 30% increase in revenue while not eating any backlog. This is a great way to start the year. With more detail on Q1 achievements, I would now like to turn the call over to Pegasystems Chairman and CEO, Alan Trefler.

Thank you, Craig. It's pretty clear the first quarter of 2011 was strong. I'd like to provide some color and the strategic background to what we saw happening in the market and what we're doing going forward. Before I get into the details, let me take a moment to thank our Board member Craig Conway, for his two years of service. For personal reasons, Chris has decided not to stand for reelection to our Board this year. Craig, we've appreciated your West Coast perspective, though I know the travel to our Board meetings was time-consuming and burdensome. Thanks for your counsel, Craig, and good luck in your many other endeavors.

Let me start my discussion of the quarter by talking about clients and competition. We had a great quarter. In insurance we added two large new name accounts headquartered in Europe, a leading property and casualty provider selected Pega over two major stack vendors, and will deploy our insurance framework in multiple business lines. Another leading multi-line insurance provider is using us to cross the silos in his numerous business to provide agility in the introduction of new products and create more efficient processes. And PRPC will be used to wrap and renew a number of legacy systems, including SAP. We increasingly see clients layering their traditional ERP systems as a strategy, to get agility without having to rip and replace the stack infrastructure.

We continue to radiate within Zurich North America, a long-standing insurance client. Zurich is expanding its use of PRPC to the cloud, after realizing a significant return on investment in its prior implementations of Pega. Implementations they described in their PegaWORLD conference presentation last year. We had our first cloud production win with a leader in the consumer packaged goods industry where we beat out the incumbent stack vendor, customer service call center agents will use Pega for case management and service. In healthcare we radiated further with companies like Amerigroup, who is extending its use from the call center to its claims operation, after seeing Pega improve Amerigroup's operations and first call resolution rates, and reduce average handle time by 15%. Amerigroup will also be telling the story at PegaWORLD in June.

And a highlight of financial services was a highly competitive win at Deutsche Bank. We always love it when clients are so pleased with their selection of Pega that they mention it at industry conferences. Deutsche Bank not only did this, but will be talking about their vision and execution at PegaWORLD as well. Now, it's great to win business, but the culture of Pega is rooted to seeing our technologies deployed. We achieved goal lines across our many verticals including insurance, banking, healthcare, and retail. ING, a leading global insurance provider went live on several engagements, spanning multiple operations. Including among these go-lives was the implementation of our recently-introduced framework for Know Your Customer processing, a very, very important set of banking processes, particularly in this age of regulation.

In financial services, JPMC went live in the client service organization of its securities division. Pega is going to be used to handle a large number of queries on a daily basis, and continue to help and assist in their awesome service. In Europe, a leading bank went live on payments customer service, a traditional business of ours, but this will be used by hundreds of branches. And a business unit of one of our major healthcare clients went live on a new Pega solution for its clinical businesses. Finally, retail was turning into an interesting business for us, a major retailer went live on a system which utilizes PRPC for merchandise planning. The solution will allow clients to shorten the duration of the planning process, and improve communication across departments, and an increase visibility and speed as they introduce products into their stores.

So it's obviously been a great quarter. I think the reason it was a good quarter was frankly, because we spent a lot of time and energy thinking through what our investment position should be. Our decision to invest last year to broaden sales coverage is clearly delivering results, and not only did we see additional business from our client base, but we attracted more new clients than we added in Q1 2010 or 2009. After the crash in 2008, we were appropriately concerned about the impact on our business, so we slowed our investments. But our business continued to perform very well, and at last year we accelerated the addition of new staff to add sales capacity.

As you may recall, our sales efforts focus on assigning salespeople to specific accounts, so they build deep relationships. We also go to market by vertical, so people can explain the principles of BPM in the context of real-life problems for the industry. This means we target our selling in a way that is different from how many software companies do, and that to add selling capacity, we need to hire salespeople and industry marketing support resources, to create industry-oriented solutions and value propositions. We will continue to invest in developing our sales and marketing team. We anticipate looking to hire at a rate that is consistent with our level of revenue growth, so that we can continue to build capacity.

We're also doubling down on our commitment to partners, working to help them build their practices. Their reaction has been enthusiastic, as they see what BPM can do for their clients. In particular, both Accenture and Capgemini have made major commitments to building broad teams and deep expertise. We think our work in support of these partners will be highly beneficial, as adoption of BPM becomes increasingly mainstream. We're also going to continue to develop our technology at an aggressive pace. We know we are highly rated, but we still see a lot of that we can do improve our product and increase the adoption of this technology.

This quarter, I spent a lot of time on the road visiting with clients and partners around the world, with trips to Australia, Western Europe, North America. One of the common threads I see across these visits is the growing awareness of what clients can achieve with Pega, particularly in comparison to the middleware-oriented BPM offered by stack vendors. Now, there are a lot of companies are calling what they do BPM. When you look at the actual products, you see very different things. These reflect some fundamentally different views about the role of BPM, and they make us feel good about how we are differentiated.

Now, we do see stack vendors trying to push their version of BPM into an organization, but it doesn't take long for clients to realize that a stack vendor's BPM is not the same as Pega. Clients have learned that vendor's PowerPoint slides are not a replacement for a coherent well-designed unified architecture. The business agility we deliver is real, faster growth, intent-driven client service and improvements in operational efficiency, often higher than 40%. And best of all, clients recognize that with Pega, they can have it their way. The tailored fit of custom-built software with the features and functionality of the finished application, all done at record speed, with software that is built for change.

Our base of leading organizations recognize that their enterprise systems can no longer be static. These systems must change and become more agile as the business environment changes and their organizations grow. When I talk to clients, they continue to reinforce that they buy from us for several reasons. One is the ability to directly capture objectives into the software, allowing business and IT collaboration at a much faster rate than traditional paper-based specifications, and there is no one-way exporting between environments. All those objectives are clearly visible in the system as it is delivered, enhanced and evolved. It's really a living design.

Our, what we call situational layer cake, allow companies to personalize their approach to each customer, while at the same time executing with the efficiencies of a production line. This personalization plus operational efficiency is a unique capability in the market, and it's amazing what business people can do with it. Now, finally, our work automation engine, what we call the six Rs of work automation, is where you really get the return on that investment. As I mentioned, clients say that they frequently see productivity gains of 40% or more. The powerful capabilities allow you to automate work, or if manual work is still involved, guide people through it.

Now, I think that we've also been very excited by our recent development efforts that have brought us so aggressively into the cloud. Our cloud offering is catching on. The architecture of the product is especially well-suited to the cloud, because it is different from our major competitors in a significant way. The products released by them require a fat, old-style development environment to be installed on local PCs for their products to be implemented. However, Pega allows everything, both end-user use, as well as product implementation to be done completely in a browser, and therefore, completely suitable for use on the cloud.

Over the last year, we've had dozens of clients use our Pega cloud offerings for their development and testing. This quarter we signed our first cloud production deal to a Fortune 50 company in the consumer goods market, and we're really excited by the interest we're continuing to see in this set of offerings.

In decision management, we've continued to make significant progress, and are working very hard to made some big announcements as we enter PegaWORLD, showing the initial work that we've done in the integration of the Chordiant assets with our core Pega philosophy. One of the major reasons we bought Chordiant was for their decision management technology and expertise, and this technology allows companies to analyze the data of their businesses, to optimize what they offer to customers, and we continue to see interest in the existing Chordiant product line, and a lot of interest in where we might go as we allow BPM and decision management to complement each other.

Before I wrap up, let me share a story about one of our clients that was recently released by an industry analyst, and can be found on our website. When we talk about our emerging industries, the majority of the business that we do still comes from our established verticals of financial services, healthcare, and insurance. However, as we've grown and broadened our footprint, we find our software is being used for some pretty amazing things. For example, the case study tells the story of Pega at Heathrow Airport. After the Terminal Five debacle several years ago, the company that operates the airport decided to use BPM as a way to completely rethink and transform the management of ground operations at Heathrow.

The just-released case study credits Pega BPM as being central to how they have improved airport ground operations, yielding an improvement of their on-time departure rate from 60% to 85%. Think for a moment of the savings of millions of gallons of fuel and customer service improvement. As we continue to enter new industries, I look forward to being able to bring you stories of innovative and pragmatic use of BPM. With that, let me open it up for questions.

Thank you. (Operator Instructions). Our first question comes from Richard Davis from Canaccord.

Hi, thanks very much. Hopefully you can hear me here, but some companies, frankly large and small, would say that the market for BPM has evolved to the point where buyers don't really need the technology, they just want a broad portfolio of functions, now look, you had a great quarter and that kind of answers the question, but where do you think we are in that scenario, or is that just if I'm a big platform vendor, I'm just like look, I don't have the technology, I have to argue that I have breadth as opposed quality and then the second question would be, where are you guys really getting traction when you going to sell? Are you selling to the business people, or is this more of an IT sale? I'm just trying to and gauge where we are the adoption curve of this market.

So the answer the second question first, we've always liked talking to the business. We find that being able to speak to the business in the language of business really gets us plugged in. And actually does a better job when we work with IT as well. What I'm seeing is interesting, is an increasing number of IT people are really sort of embracing this as a new way of thinking, which I actually think is pretty exciting.

In terms of where we are, of course the big stack guys, who have large boring arrays of products, want to claim that there is no difference between these products and that they are inevitably going to win. But in reality, BPM is very distinctive in its implementations by the different vendors. There is really a situation here where different philosophies have been undertaken, and different bets have been taken. And we're very happy with our differentiation, and I think for those of you who go to PegaWORLD, you'll see many customers who really understand that a very coherent architecture, which is one of the things we offer and the stack vendors don't. And a business person-oriented approach is very, very different.

Got it. Thank you very much. That's helpful.

Thank you. Our next question comes from Laura Lederman from William Blair.

Congratulations on a nice quarter. Can you talk a little bit about the opportunities in new verticals? In the call you mentioned a retail customer, you mentioned one in CPG, and maybe we can talk a little bit about the opportunities out of insurance, financial services in general, where you see the business in five years, how much will be in the traditional two verticals versus new ones that you might enter?

The new lines of business are showing really exciting and promising results, being able to actually have retailers being able to break out into whole new operations like Heathrow ground operations, I think really shows the breadth of applicability. So I think that increasingly, we're going to be able to diversify and broaden our portfolio, which is a great thing. I mean, we've signed up our first manufacturers for example, which has really opened up to us that there's a lot of opportunity in those areas, energy, oil, and gas. We had a major set of wins with GE Energy around oil and gas billing and proposing, which was frankly an area that a couple of years ago, we never would've pursued. So we're quite excited that the new verticals are going to continue to provide a place for us to expand our sales force and our coverage even as we deepen our coverage in our existing verticals, because we're miles from being sold out in any of them.

Speaking of the competition, can you talk a little bit about who you're seeing in deals, in other words, what percentage of the time are you uncontested and the new customer, not an existing one, obviously, and also is it mainly the stack vendors you see, and which ones are you seeing more or less of?

Well, sure. I'm trying to think if I've actually ever seen an uncontested deal.

Well, you never know.

At the end of the day, customers have choices, and BPM represents a choice. At a minimum, there's a choice between buying a package, building it some other way, and using BPM as a way to jump start. Relative to the stack vendors, certainly IBM and Oracle are ubiquitous, tiptoes around a lot. It's the usual suspects. There's really no surprises and nothing that I would think would be particularly shocking.

And the CRM uses of the product, where we apply business process management in the call center, inevitably, you've got Siebel bouncing around, which is of course the big incumbent. So we're not seeing anything that is surprising or what I would view as a shocking or concerning change the market. I think the result of the consolidation last year, the number of actual different solutions that an organization can consider has gone down. And I think that actually is in our interest more than against us.

And switching to sales headcount, you mentioned that you didn't add many this quarter, and that you'd be adding more aggressively as we move through the year or this year forward. Can you talk a little bit about the end of the year, what you think your sales headcount, and you can make it in the sales and marketing, whatever number are willing to talk about, what type of percentage increase we would see year-over-year as you exit the year?

I think that when I look back on the last couple of years, the fact that we sort of hesitated in 2008 is something that I now look back at with a little bit of regret, though obviously we did terrifically in 2008 and 2009. We've had to catch up some ground at capacity. I'd like to see our sales and marketing in aggregate headcount grow order of magnitude 30, 35%. I think that would be consistent with the opportunity. And if the business continues to perform well, that's what I suspect we will be targeting --

Okay. Final question, could you talk about whether you've signed big whales in the quarter? I know last quarter you signed a big one, a $20 million one, can you talk about if you signed any whales in the quarter and also the kind of whales in the pipeline and then I'll pass it on? Thank you so much.

Our bookings in the quarter were pretty well distributed. There was no, what you'd call whales in the quarter. We do a pretty wide range of deals, but nothing extreme in Q1.

Yes, nothing extreme.

Pretty unusual to be a large, large deal in Q1, anyways.

Thank you. Our next question comes from Raghavan Sarathy from Dougherty & Company.

Hi, good afternoon. Thanks for taking my questions. If I can follow up on the last question, if I look back on the last year's commentary of Alan, a number of times you talked about you adding a large number of new customers, but ASPs were lower in the first quarter, based on life and signing, can you give us some color from the perspective of ASP versus number of new customers, so that we can understand the dynamics here?

I actually think the ASPs strengthened a little this quarter. The ASPs move around a lot because our deals are very -- frankly, they're often asymmetrical. It's really specific to what the customer's needs are. But our ASPs have, I think, consistent with the range that they been for the last couple of years. Craig, do you have any?

Yes, they were a little bit in Q1. Usually what happens into Q4 or Q3, you get a lot of customers using budget to buy call-offs or options and so you might get a lot smaller deals, they're trying to make every dime count of their budget. So they have an option to buy more seats at a certain price, so you see a lot of that in Q3, Q4. And you don't see that in Q1, so it's not unusual to see ASPs a little higher in Q1, and that's what we experienced.

So just so we're clear, higher in Q1 versus Q1 of last year or versus Q4 of last year?

It's higher than it was in Q1 of last year.

Okay. And then in terms of the sales force productivity, can you give us some color, and you hired a lot of people last year based on the number, it seems like they are productive. Can you give us some color on what percentage of them are productive and how far they have to go?

Well, I think we still have some distance to go. But obviously, having good numbers with no whales mentioned that we got production from a meaningful number of our salespeople, and we've been doing a lot of work to try to improve the overall quality of the sales force, make sure that we are attentive to the people who are going to be able to be successful. We introduced some new approaches towards both hiring and evaluating the salespeople, and I will tell you I think they're showing good signs of working. But I don't know of any CEO who is happy with the sales force. I think there's still a lot of work that we can do, and we're doing it. We're trying to provide better materials, the partner work, we think is going to be useful in making more of our salespeople more effective, and that's a big set of investments for us. And then as we get more experience in these new verticals, it's going to be easier for people in those verticals to get the same performance rates that people in existing verticals do. But a lot of that just comes with experience, which we're going fast.

One final question before I pass this on. So the services are pretty strong year-over-year, looking through your Q, it seemed like you had a very strong performance of Europe. In general, Craig how should we think about these 40% year on growth? Seems like extreme. I would imagine, you're handing a lot of the stuff off to partners. Can you help us understand directionally how to think about it?

Yes. Services were very strong, and I would attribute the strong services to the large license bookings we did in Q3 and Q4. I expect that services will continue at this level in the near future. However, we always have the impact of summer and vacations in Q3, so in Q3, there's a lot of people, especially in Europe, that go on vacations and a lot of clients go on vacations and the business does slow down. That's been a pretty well-known trend for us. So that would be the near-term trend I could give you.

But from a long-term point of view, it is definitely our strategy to constrain the growth of services, service is primarily an expert services assistance facility, and use the opportunity that comes from doing that to feed the partner ecosystem. We are very excited about some of the new partners, both the ones I mentioned, Accenture and Cap, and the traditional ones like [Hagans] and Tata, et cetera, that are building very significant practices, and we want these people to all be very successful, and we don't want to have a services arm that is ultimately competitive with them.

Thank you.

Thank you. Our next question comes from Brian Murphy from Sidoti & Company.

Hi. Thanks for taking my question. I think you've made it pretty clear that you reject the whole stack vendor bundling philosophy, but you picked up some complementary functionality around decision management and predictive analytics with Chordiant. Are there any other interesting areas out there in terms of complimentary functionality around BPM that you see right now, complex event processing, anything like that?

So, we've -- and some of this is obviously facilitated by having experts in data analysis and predictive analytics on staff now from Chordiant. We've actually been adding event processing capabilities to our core PRPC platform. We see that as being an important, frankly set of features at BPM. Now, that's different than the complex event processing that you would do if you were trying to do algorithmic stock trading. That's not the business we're in, we're in the business of making it so that if you've got work you're trying to do as an ordinary business person, that you have everything that you need to take a business centric and customer centric multi-channel view of it.

In terms of other things that we're excited about that we think are going to be compliments, we are very interested in mobile and are doing quite a bit of work to make our mobile strategy part of where BPM is going, and we have for a while been working very hard on a true multi-channel strategy, where we have clients who can simultaneously have processes that run in a call center, self-service on the Web, in a set of branches, and that's actually frankly, one of the things that's leading our clients to buy our CRM capabilities, is that whole multi-channel BPM and for structure that we built in. So does that give you some color?

No. That's very helpful, thank you. And maybe one quick one for you Craig, were you surprised at the strength of the bookings in the quarter, and was there any unusual sort of back-end loaded linearity to the quarter? And giving the strength of the bookings, do you think that the year is going to be as back-end loaded as you initially thought?

What really surprised us was the level of activity. As I said in my script, usually Q1, especially January is just dead, and we had a lot of activity while we were doing our sales kickoff. It didn't really seem that things slowed down much from Q4, so that really surprised us, how active we were. The strength of the pipeline is something that surprised us. Usually, after Q4 when you have record bookings, you expect the pipeline to take a hit, but it didn't. We're really surprised by those two things.

As far as, front-end loaded, back-end loaded, pretty hard to say. Q1 is just a snapshot of the year. We've got three quarters to go, and it's pretty hard to say that this is going to be indicative of the year.

In reality for us to do what we set out to at the beginning of the year, we have a lot of salespeople we brought on who we don't really expect will be highly effective until the second half of the year. And some of that's just timing of bringing folks on. So I wouldn't get irrationally exuberant, though obviously, we're really quite excited that we're off to a good start.

Okay. Thanks very much.

Thank you. (Operator Instructions). Our next question comes from Steve Koenig from Longbow Research.

Hi, guys. Thanks for taking my question. I've been dropping out a little bit, so forgive me if I'm repeating a previously-asked question, But I'd be curious to know if you could comment on the composition of deals, particularly related to size of the deals, how many $1 million deals or what was the largest deal, and were there any held-over deals from Q4 that closed early in the quarter that got you off to a good start?

Yes. So I wouldn't classify anything is really a holdover. Because we had a great Q4. There was nothing that approached whale territory of $10 million. Most of these deals were in the sort of normal sort of ranges for us. Which means we can have a couple of $5 million scale deals, but the significant majority of them are in the $500,000 to $1.5 million, $2 million sort of range is were they mostly came in. So it was what I would describe as a whale-free quarter.

And that's the target range for us, because people get deals done in that price range.

Living on whales is very disconcerting.

Great. Well, congrats on the quarter. It was a good whale-free quarter.

Thanks.

Thank you. Our next question comes from Edward Hemmelgarn from Shaker Investments.

Just a couple of questions. Given that you hired so many people that started last year at the beginning of the year, I'm curious, what's been your attrition rate so far? For that group of people that you brought in?

It's actually been pretty good. The attrition rate for the new staff we brought on has only been, I would say, slightly higher than the attrition rate for our existing staff. And that makes me feel pretty good about the recruiting process. I will tell you that at the same time, that we began ramping up the hiring, we began a number of practices to try to make sure that we understood what made, for example, a salesperson successful at Pega, and doing work with a variety of what are called predictive indexes to really help us align skills with people, and being extremely rigorous about the whole hiring process.

I will also tell you that as part of both last year and entering into this year, for folks who have been somewhat or materially underperforming, we've gotten much more assertive about either figuring out how to fix that or addressing this as an issue where maybe this isn't the place they need to work. So there's a certain appeal to being as successful as we have been, and I think that's letting us really attract very talented people.

I might add, Edward, that as you start a hiring process where you're hiring a lot more people, you get better at it. I think our people do a much better job. You seem to get better people and do a better job of interviewing and screening and hiring people when you're hiring a lot, rather than just trying to get a handful.

So you mean back when we hired you, we weren't doing as well?

You just got lucky.

What is your typical in the sales force? What kind of attrition rate do you have on a yearly basis, is it 20%? 25%?

No, it's not -- it's not that high, but we don't reveal those numbers, but we're well within industry standards, if anything I think we're lower.

Okay. The other question I had, is you mentioned or in the past, you've had some product announcements related to the whole mortgage service area and mortgage origination. Given the problems that are constantly in the headlines, have you had any significant wins in that area where you've had -- you've got some large customers in this area. They've been using your -- Pega to really change the way that they automate the process and improve the presence?

We had a couple of customers that are using us to really overcome some as you know, very, very serious process and regulatory issues there. And we have some meaningful implementations that are already in place, and we have a number of others that are in the process of going live and rolling out. Those clients usually prefer that we don't mention who they are.

I understand.

No one wants more press around this, but you can imagine, given who our client base is, who some of those might be.

Okay. Great. Thanks.

Thank you. Our next question comes from Laura Lederman from William Blair.

Thanks, guys. I was wondering as you look at Q1 momentum --

Laura, we can't hear you. Can you speak more directly into the --

Yes. Can you hear me better now?

Yes, a little bit.

Sorry. I'm at event -- anyway, my question relates to why you think Q1 remained relatively strong, is it more effective salespeople, is it better economy? In other words when you stand back and you say wow, we were surprised by the strength of the quarter, especially since it was Q1. What do you think the factors underlying it are? I realize it --

I think it was a convergence of a number of things. One, I think frankly, the pipeline was stronger going to Q1 that it's often been, because the very, very strong Q4, didn't sort of wipe it out like it has in the past on occasion. So I think it was in the pipeline. I think the economy is picking up a bit.

People are thinking about growing their businesses now, which is helpful, and obviously, having the bigger sales force and, selling into industries and winning business in industries where we never would've been was also helpful, so I think it was a conjunction of a number of things. Also frankly, our product is getting better. And as customers see it, we're finding a continued level of enthusiasm.

And partners are having a really positive impact on our business. There's more deals every quarter were partners are introducing us into new accounts and recommending us, and as I said, earlier, that when I look at our pipeline, the number of deals associated with partners in the pipeline is up to 40% now.

Thank you.

Thank you. This concludes our question-and-answer session for today. I would now like to turn the constants back over for any closing remarks.

So in closing, let me extend an invitation for you to join us in Orlando in early June for the largest BPM conference on the planet, PegaWORLD. We're going to be bringing together over 1,500 professionals from across over 200 companies to this year's event, and we have presentations from some of the world's leading companies, including JPMC, TD Bank, Deutsche Bank, Blue Cross-Blue Shield of Tennessee, Lloyds, Aegis, Vodafone, and Cox Communication, among many others. We will be demonstrating some of the newest capabilities in the next version of our PegaRULES Process Commander platform, along with demonstrating some of the market-leading frameworks, such as case management, customer process manager for call centers, decisioning, Know Your Customer, collections, care management, and claims management.

The conference begins on June 5 in Orlando, and we would love to see you there. You can find information our website. Until then, you should know that we're working hard and making progress. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day.