Pegasystems Inc (PEGA) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Pegasystems' third-quarter 2011 earnings conference call. At this time, all participants are in listen-only mode. Later we'll 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.

I would now like to hand the conference over to Mr. Craig Dynes, Pegasystems' Chief Financial Officer. Sir, you may begin.

Thank you. Good evening, and welcome to the Pegasystems' 2011 Q3 earnings conference call. With me here in Cambridge is Alan Trefler, Pegasystems' Founder and CEO. Before I introduce Alan, I will start with our Safe Harbor Statement, 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, target, forecasts and 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're subject to various risks and uncertainties. Actual results for 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 Q3 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 active or timely.

Q3 represents a one-quarter snapshot out of five-plus years at near 30% annual growth. And as we say on every call, our individual quarters can be lumpy. So, even though we're not quarterly focused, our Q3 new license signs were the slowest of the year. Business people were hesitant to commit budgets with the economic environment so unsettled. The theme was not -- we're not doing this project, instead sales cycles lengthened and deals slipped into Q4 from Q3. So, licensed deals slipped but were not lost. And in spite of the economic turmoil, our bookings are more than 40% ahead from where we were last year at the end of Q3.

In every SEC filing, we note that our financial revenue can be impacted between the term and perpetual license mix. Because the mix can impact financial revenue, our schedule of term license is an important indicator of our business. As shown on page 27 of the Q, our term license backlog of $84.5 million is almost $13 million higher than it was at the end of Q3 last year. This increase eventually hits the P&L's higher term license revenue. This quarter's term license revenue of $9 million is an increase of $2.1 million from the $6.9 million term license revenue as recognized in Q3 2010. However, the move to term licenses and slippage of deals shows up dramatically with Q3 total license revenue. Although we closed a lot of smaller deals, customers were hesitant to sign many large perpetual license in Q3, and this translates almost immediately to license revenue being down almost $10 million for the quarter, and flat on a year-to-date basis. Maintenance revenue was $30 million on a GAAP base in Q3, up about $1.7 million from Q2, but up 28% or $6 5 million from Q3 last year.

License revenue alone is not the only measure of the business that we attribute to our software. Just about all of our customers subscribe to and renew annual maintenance agreements because of the value the customers place on PRPC and the applications they build with it. So, our total revenue attributed to software, the total of maintenance and license revenue, has increased by 18% to $179 million for the first nine months of 2011 from $151 million for the same period in 2010, on a GAAP basis. I say GAAP because purchase accounting rules give a haircut to maintenance arrangements that are in deferred revenue at the time of an acquisition. This is why we provide supplementary information on non-GAAP revenues in order to allow investors to more accurately model our maintenance revenue run rates.

Professional service revenue of $40.2 million was relatively flat from Q2, but on a year-to-date basis it's up about $26.2 million, or 27% as compared to the first nine months of 2010. While partners are increasingly performing professional services for our license customers, new license signings have been very strong for the previous three quarters, and as a result, we have seen an increase in professional services work in support of our partners and our customers, and we expect professional services revenue to remain at this level. Demand for partner training continues to be very strong. Many of the training days were given to partners at significant discounts, which caused training revenue to be flat. This has been an investment in our partner organization in order to grow the overall Pega ecosystem.

For the first three quarters of the year, our gross margin percentages are down to 59% from 63% last year. This is due to the change in mix. Software license revenue, which generates margin of 95%, is flat as compared to growth in maintenance of professional service revenue, both of which have lower margin percentages. There is also a slight decrease in the licensed gross margin percentage due to the amortization of the software intangible asset created as part of purchase accounting. The amortization drops the year-to-date gross margin on software from 97% to 95% on a GAAP basis. This charge is added back as part of the GAAP to non-GAAP reconciliation. Page 22 of our 10-Q details the amortization of intangible assets.

Maintenance gross margins are up 2 percentage points to 89% for the first nine months due to the strong growth in maintenance revenue. Professional service margins continue to run slightly lower than they were last year. Utilization rates are generally lower in Q3 due to summer vacation time. In addition, we continue to make an investment in developing our professional services organization. The investments in advanced training and education are important in order for us to enable our partners, and move to a more expert service model. In fact, partners now lead the consulting services work on the majority of all new projects.

As detailed on the press release schedules, total operating expenses for Q3 on a non-GAAP basis, that is, ignoring acquisition and amortization charges, were $52.4 million for the quarter, a decrease of about $4.6 million from Q2. Just about all of the OpEx decrease was in sales and marketing. During the quarter, we added 20 new employees to sales and marketing -- 16 in sales, 4 in marketing. While this should increase sales and marketing costs, sales commissions were down from Q2 as new license signings and bookings were down in Q3. This accounted for the large drop in the overall decrease in OpEx.

Since 2006, we've been investing heavily in R&D, as well as sales and marketing. We believe that both the record booking and activity level we've experienced so far this year are due to these investments. So, we plan to stay the course on this growth strategy. We will continue to grow our sales organization in order to cover more named accounts, geographies, verticals and partners.

While the incremental hires that we make in Q3 and Q4 will not add to bookings or revenue in 2011, they're an investment to drive revenue growth in 2012, for which we are providing initial guidance. We will continue to invest in R&D to lengthen our lead over possible competitors, and make improvements to the product that will drive license revenue growth. During Q3, we added 44 people to our R&D organization. Most of these employees are in India where we have completed an office expansion, allowing us to bring on this many new engineers. We prefer to have our own R&D team do our development work as opposed to subcontractors. Since we find that this model works best for us, we're expanding our Indian operations, and will transition the remaining subcontracted R&D work to a new office over the next few quarters. This will show up as an increase in R&D headcount.

G&A expenses increased slightly from Q2 due to a small increase in headcount. Our FAS 123-R charge for stock-based compensation for Q3 was about $2.3 million on a pretax basis. Note 12 to the financial statements details how this charge is allocated to cost of revenue and operating expenses. This charge is also shown as adjustment on our GAAP to non-GAAP reconciliation that can be found in our earnings press release.

Through the first nine months, our revenue from outside the US has grown from 39% to 47% as compared to the first nine months of 2010. This has created significant accounts receivable and cash balances in foreign currencies during a period of time when exchange rates have been on a roller coaster ride. Given how volatile foreign exchange rates have become, we've been entering into foreign exchange forward contracts to fix the exchange rates of many of these balances. As a result, we have a more covered or hedged position, which has taken some of the volatility out of our FX gains and losses.

In Q3, our P&L shows a $1 million FX loss. However, this was partially offset by a gain on forward contract of approximately $500,000, which is recorded in Other income, net. This slight net loss compares favorably to the $4.0 million loss in the first nine months of 2010. We continue to work on a tax and operational restructuring plan to further reduce our exposure to foreign exchange rates.

Our GAAP income tax provision looks very unusual this quarter. The primary reason for the benefit in the provisions are due to the reduction in Q3 bookings, and our current outlook that the license mix is moving towards term licenses. We revised our estimate for taxable income across our various geographies, and as a result, we expect to be able to realize the benefit from certain tax credits and other tax attributes generated in the period. In addition, certain tax statutes of limitations expired in the period, requiring us to release the reserves against those tax positions. This combination resulted in the large pick-up.

Overall, we've earned $0.15 per share on a non-GAAP basis, down $0.01 from Q2 2011. On the balance sheet, our accounts receivable balance decreased by $17.4 million to $79.1 million at September 30. This dropped the DSOs by about one day to 48.5 days. As a result, our cash from operations was $22.4 million for the quarter, $19.6 million for the first nine months, and we ended the quarter with $98.3 million in cash.

During the quarter, we purchased 38,654 shares for approximately $1.5 million at an average price of $38.22. Therefore, at quarter end, we have a balance remaining of approximately $9.7 million available for future repurchases. However, at a Board meeting subsequent to the quarter end, our Board voted to increase the balance available to repurchase our common stock to $15 million, and extend the buyback period to December 31, 2012.

Deferred revenue shows up in two places on our balance sheet -- short term and long term. The sum of the two, which is $83 million, is an increase of $8.4 million from the end of 2010.

On our 2010 Q4 conference call, we gave our annual guidance. We've always given only annual guidance, and followed a policy of not commenting on it through the year. We continue to see our objective as maintaining growth beyond 2011, so we are driven by our long-term growth objectives, not individual quarterly or even individual annual results. This being the norm, we have, however, updated guidance due to both the economic uncertainty and the movement in term versus perpetual license mix.

While I like term licenses because of the predictability and the greater value received for the license, a move in the mix has a big impact on near-term license revenue. Rather than recognize license revenue almost immediately on, say, a $5 million perpetual license, the revenue from a comparable term license is recognized monthly over the three- or five-year term. So, the delay in closing deals and the change in mix have a very short-term impact on license revenue, and because license revenue is 100% margin, our bottom line as well. So, as of September 30, our year-to-date license signings are up more than 40% over last year. Our pipeline increased from Q2 to Q3, and we have significantly increased our rate of partner participation to more than 50% of the pipeline.

Based on our analysis, we expect revenue for 2011 to be approximately $405 million on a GAAP basis, $410 million on a non-GAAP basis. We estimate that our 2011 GAAP diluted earnings per share will be approximately $0.15, $0.61 on a non-GAAP basis. We believe our business is strong, so looking ahead, we estimate revenue for 2012 to exceed $500 million. This is preliminary revenue-only guidance for 2012 that will be refined when we are able to evaluate business conditions at the end of 2011. There should be no meaningful difference between GAAP and non-GAAP revenue for 2012 because the remaining non-GAAP business combination adjustments for the acquired deferred revenue from the Chordiant acquisition are now very small.

We've been growing at approximately 30% for five years now. Our preliminary 2012 guidance represents a new milestone, in that we expect to surpass $500 million in annual revenue. We're committed to stay the path of sustained long-term growth.

With more detail on Q3, I would like to now turn the call over to Pega's Founder and CEO, Alan Trefler.

Thank you, Craig. Both the fundamentals of our business and our strategic direction are very strong. We see continued demand for the increased agility, improved customer centricity, and rapid cost reduction that is achieved by our products. These are long-term themes that will be important to our clients and prospects regardless of short-term volatility.

Regarding Q3, we were feeling great about the quarter until September. But it was like a lot of people came back from vacation, looked at the headlines, and either got more tentative or had additional internal review processes added. Nearly all of this business is still there, and some has already closed. However, the mood did cause some delays, and had some clients purchase in chunks, even when that meant that the ultimate roll-out would be at higher prices. This has resulted in an average deal size lower than what we saw in the first half, though it has not adversely impacted what we ultimately expect from these clients as we roll out our technology.

I'd like to remind listeners that we've been in this business since 1983, and are comfortable with our ability to do well in both good times and bad. We've had success with both transformational initiatives and with start-small-and-grow type relationships. In this latter model, customers make a smaller initial buy, implement that for rapid business benefit, and then buy more. Given some of the anxieties in September, we saw more of these types of sales, as well as a greater interest in term licenses. As I have consistently said, it's a lumpy business.

Q3 did show some significant wins in first-time buyers. We had several great wins in customer acquisition in on-boarding spaces across industries, including healthcare, insurance, and financial services. This is where Pega's BPM case management enables organizations to speed the acquisition of clients, improve cash flow by more rapidly on-boarding those clients, and doing it at a significantly reduced cost compared to traditional approaches. We also had a number of wins as the service desktop for customer experience improvements. Some other interesting wins include Pega being selected for lending process automation in a large North American bank. We won a key media distribution process automation deal for one of the world's largest entertainment firms. And we also won several claims automation solutions in both the healthcare and insurance verticals.

In Q3, despite the Summer, we had 17 go-lives, more than in Q2, which is key because when a customer goes live, they realize significant business benefit, which sets up future purchases. In Q3, a large life insurance company went live with a new customer service system, including web customer self-service that reduces cost, while improving the customer experience. A large healthcare payer went live with a Pega call center to improve member service at a lower cost. And a large UK insurance company went live with a new call center to increase customer satisfaction while improving productivity. And demonstrating our success in some of our newer industries, a global consumer products company went live with the customer service and product support call center in record time.

In Q3, and continuing through October, I spent considerable time with clients, prospects, and partners, traveling throughout North America, Europe, and Asia/Pacific. The enthusiasm that I consistently hear about the Pegasystems' value proposition, and the returns that clients are obtaining from our Build for Change software are both tremendous. This is reflected in the significant growth in our pipeline, which is at its highest level in our history, and which, in Q3, increased over $200 million from the end of Q2. And the activity level around finalizing negotiations is the highest I have ever seen. This activity and demand is reflected in the number of partner staff that have been trained and certified above our plan and with a growth rate that reflects a continued high interest and high adoption rate for our technology.

We continue to be comfortable that we are in an important growth business that will benefit from increasing our sales force to cover more accounts. We understand in this economic climate rapid operational cost reductions can be important as buying criteria. We've been here before through the years, and have great references across numerous industries showing how we pragmatically save money. To address possible future anxieties in the market, we are ensuring that our field organization is well armed to describe solutions that will rapidly reduce costs, along with those that increase customer centricity, and increase revenue for our clients.

And R&D will continue to be important as well, as we differentiate ourselves and look for strong growth. Based on our close collaboration with key clients, we are confident that the significant new capabilities we are adding to our products will be well received, and remain committed to continued investment in R&D. We've seen an increasing interest in our newly released core enhancements to our Business Process Management and case management technologies. And as we look to 2012, we are very excited about new products slated to be introduced in the first quarter of next year in conjunction with a number of new industry frameworks built on PRPC.

We will be shipping our next release of Pega's Unified Development Platform, PRPC, which will continue to reduce implementation time and cost for our clients far beyond traditional approaches, at the same time it improves agility, it improves the way that the business and technology teams at our customers work together. We've got many, many new features, and the clients have seen them and are excited. We'll also be bringing a new unified marketing platform for outbound marketing that is sort of a conjunction of campaign management and the decisioning next-best-action approach. We're excited that this will allow us to reengage with a number of the traditional Chordiant clients who have been looking for some new releases here, and we think it's going to actually be very successful as well.

So, with the upcoming new release of our platform, and the horizontal and vertical frameworks, a record pipeline, and the continued increase in our certified partner staff, we continue to think that we're on a path to really have a very strong growth business. This is augmented, of course, by clients who are showing staggering results, and are able to apply the technology to both pragmatically improve and transform their business, and gain efficiency, even as they improve customer service.

We continue to be positive about our business, and look forward to a strong Q4 and a record-setting 2012. As Craig indicated, we anticipate that we can break through the $500 million threshold in 2012. This is an important target for us, and we believe that our investments in our team, our products, our key partners will make it possible.

With that, thank you very much, and we can open the line for questions.

(Operator Instructions) Nathan Schneiderman from Roth Capital.

Hi, Alan and Craig, thanks a lot for taking my questions. Alan, I was hoping you could talk first about, clearly you guys had challenges with the large deals, which was an issue you referenced and is referenced in your Q as well. How many significant deals would you say slipped, any sense of the dollar value of that? And then how many of these have you closed so far during Q4 so far, October, November in Q4?

So I would say actually that several. There were a bunch of them that slipped. And a lot of cases it was like just some additional approval, one more meeting suddenly appeared, or in some cases they said, well, even though it's going to end up with a higher ultimate price point, I want to start a little bit smaller because that's more consistent with just, frankly, I think what the mood was. Several of them have already been signed thus far in the quarter, and so I think the quarter is off to a good start, and we've seen our average selling price rebound in the quarter. But a lot of what happened is September was just very tough, and we are chastened by that but certainly not going to over react. And it certainly isn't a reflection of what we think is going on in the core business.

Traditionally when you all have referenced large engagements, large deals like this, you generally have meant deals $5 million and above. Is that in the category that you're talking about here with these deals that you've signed?

No, I would say they're in the sort of $2 million to $5 million range more. We weren't counting on any mega deals for the quarter, we try not to. Though the occasional whale would certainly be appreciated and we think we may get some. But these are things that I would have expected would have happened and then several cases, there was just another round of review that we navigated through successfully. So it was just a very sort of awkward September, though as I said I don't think reflective of what really is going on in the business.

Okay and then my final question area for you, it looked like just in terms of the geographic mix that there were negative revenue comps in US and the UK. So I was wondering if you could address these areas in particular. Were there certain verticals or -- verticals that were especially weak, and do you need corrective action like Management changes or restructuring to take care of the problem? Thanks very much.

Yes, sure. I think that the pattern was frankly much more of no pattern. I would tell that you financial services actually did pretty well in the US, and as did healthcare. So-- and we're not planning any major radical changes or shifts. We are going back to the sales force and reminding them that unlike earlier in the year when people were a little cheerier, when things are tougher, we don't just want to talk about customer centricity and the importance of customer experience and service, we also want to make sure we're stressing to the clients the short-term pay back in the R, sometimes this does end up leading to smaller initial deals. But what I was kind of excited about is we signed more new name customers this quarter than I think we ever have, actually. And so we were closing new business, and these are with primarily very large companies where there will be good follow ons, as per that tradition of ours.

Laura Lederman from William Blair.

Yes thank you for take my questions, and following up on Nate's line of questioning, when you talk about things improving in terms of ASPs rebounding and some deals that slipped last quarter closing this quarter, looks like this week we're in a tough market again with Italy and with the market declines we saw today. So I guess what I'm worried about is that you'll see deal slippages again this quarter, and until maybe we end up in a better economic environment, and so how comfortable are with your 20% revenue guidance for next year if bookings remain flat this quarter and remain flat in Q1 and Q2, what would your revenue growth look like for next year?

Well I haven't done that math.

How do you know things won't get bad again?

We're certainly not expecting that they'll be flat. The thing I'll remind everybody is that during the darkest days of 2008 and 2009, which were pretty incredibly dark, when you're doing a lot of work selling things to banks and insurance companies, we were able to put up, I think, very strong, though not always consistent on a quarterly basis, but very strong performance in all of those years. And I think what really caught us in September was that there was really a very sort of speedy shift of negative news, and there just wasn't time in that short month to circle back and reinforce some of the core value propositions to get people to buy this stuff anyway. We were able to, as I said, rectify that in several important pieces of business in October and early November.

There can be no certainty that there won't be further slips, but as I said, I think we're pretty experienced and we went through a whole collection of scenarios looking at what our expectations were for next year, and in deciding we were going to actually talk about what I think is a very significant mark which is targeting $0.5 billion that we did that very carefully, very consciously, and without the expectation that there's going to be any dancing in the streets any time soon.

I guess a related question to that, is this is sort of eerily similar to what we saw last year, it's very similar to what you saw in Q1 and Q2 of last year, and so can you compare and contrast that? So it feels like when you have whales, you have good quarters. When there are no whales, the quarter is not good. And it seems like in this type of tougher economy, maybe whales are harder to find than they've been in the past.

So a couple of things. One, I think the learning to take is that there is a lumpiness to the business. I mean we have quarters that are great quarters, we have quarters that are not as good. Over time, I think we've been able to show really very, very strong performance. I mentioned we signed a record number of new extremely good important clients, even though some of the ASPs were lower. I think that that's consistent with, frankly, what I'm hoping is going to happen with the business as it continues to grow, which is as we have a statistically greater number of sales and customers, we would expect that the performance will become somewhat more predictable. Certainly the bigger you are, the less you are dependent on any small number of events closing. Frankly, that's worked to our advantage thus far, though obviously not as much as we wanted to in the past quarter. So we're not in the whale dependent mode. There are actually a bunch of whales that are swimming out around there. But we've put up good quarters in the past as we've talked about where there have been no whales, and we don't run our business that way because I just don't think it's a very good way to run the business.

We also don't run the business quarter to quarter, we don't obsess with each quarter. And, Laura, I will point out there is a big difference between Q4 and Q3, and that is that Q4 for most companies ends the budget year, and you do have this -- maybe the customers aren't compelled to do something in Q3, but by the time Q4 rolls around there is a compelling factor in that if they don't use their budget, they lose it forever.

That's a good point. One more question from me, and then I'll pass it on, which is Q1 of last year was difficult for you and then Q2 was difficult again. If you compare how things feel now besides obviously Q4 tends to be seasonally strong, was it similar in Q1 to Q2 last year that the pipeline was really strong?

No, it really wasn't, because if you recall the previous quarter going into the year, we had just had a blow-out. And I think what really happened was we came into Q1, and the activity level was not as high for a variety of reasons, right, and what we see now is frankly an activity level that's almost too high. It's very, very high, and very, very intense, which is great, and actually very exciting. Now we need to turn that activity level into signed business. And as I think Craig said, we're also seeing several customers swing back to term licenses, which I happen to think is just fine. I actually think the term model really helps us build a business that is both economically more reliable and actually has good sustaining value. But obviously that also does affect short-term revenue even though will you be able to see how successful we are because we do publish what those term backlogs are. But I do think you need to think of those as being sort of a revenue alternative, they're in effect almost in deferred.

Okay, thank you. I'm going pass that, I appreciate your answering my questions.

Sure, Laura, thanks.

Steve Koenig from Longbow Research.

Hi, gentlemen, thanks for taking my question. I just wanted to dig for a second into the large deals again. The ones that were delayed, the $2 million to $5 million type deals, were they mostly term deals, and how many -- could you say like approximately how many were delayed? Are we talking 12, on that order?

I'd say it was order of magnitude about six. And as I said, several of them have already closed, and we've got new ones of course that were never projected for Q3 that are in the pipeline going forward. So it wasn't a massive number. But there was a really lousy mood, and frankly very little time to react. And when customers come to you and they say, look, I've been asked to take this through one more set of reviews, we don't go and put a gun to the heads of our customers, that's not the basis of the way we do the relationships. And we walk through and we're seeing the stuff we wanted to close, close, which is good.

And Alan would you say when you look at Q4 today, are you ahead of your normal linearity so far kind of what you would expect, or how are things shaping up?

And so I'm very skeptical about drawing any sort of statistical inference from data sets that don't justify it. I think in terms of Q4, our close rate is fine. I think in terms of Q4 our activity rate, as I said, is extremely, extremely intense.

Pipeline is high.

Pipeline is $200 million, meaningfully higher than it was, and the pipeline is increasing. The partners are proving increasingly helpful. So I think that strategy is really continuing to grow and continuing to bear fruit. So we're not crawling into a hole here. We think that it may be a fairly tough economy. We think we will meet with our clients to stress once again the cost savings, because that helps them forward the good customer centricity stuff. And frankly, if the headlines had been bad in August instead of really getting bad in September, we might have been able to recover much better, I would say, in that quarter.

Okay. And then last question from me, in talking a little bit about reinforcing the cost savings in that part of your value proposition with the sales force, does that leave you-- is that primarily a different slant than your marketing message? A different emphasis in tone? Or does it also lead to you different use cases in terms of the type of deals that might close and/or mix differences in terms of verticals that might be more responsive to that message?

That's a great question. It's more of a change in emphasis than a shift in terms of the deals, because in reality, the economy has not been frothy for quite some time. And all the business that we're pushing is business that is cost justified and effective. But the deck looks different. The proposal you submit ends up looking different when the opening statements are this is going to have a payback in 5.5 months, you'll make X million dollars a year by having putting this in. Every month you delay means you're losing $100,000 or $200,000, or sometimes much more than that. Because the difference between leading with that one of the messages versus the other message which says being able to up-sell your customers is going to be key to growing your business. It's the difference between the top line pitch and the other pitch. We almost always do both, so I think it's really a little bit of an order shift, a little bit of an emphasis shift, and we've already put that into effect. It's pretty painless for us, we do that all the time.

Yes, similar to what we do in 2009. If you look at how we did a license revenue in that, sort of the first full year of this troubled economy, we did very well.

Great. Thanks for taking my questions.

Sure.

Brian Murphy from Sidoti & Company.

Hi, thanks for taking my question. I don't know whether this is for Alan or Craig, but some of your competitors had some pretty positive commentary and called out some pretty impressive growth rates around their BPM businesses in the quarter. I'm just curious if you saw any change in the competitive environment or win rates in the quarter?

So we're still very happy with our win rates. I think that what we've seen over the last couple of years is a consolidation of most of the other products, and to sort of, frankly, a mediocrity. So our win rates are doing just fine and actually in many cases increasing. So I'm pretty happy with the current competitive environment, and that was not related to anything that happened here at all.

Okay. And it looks like the sales and marketing headcount is up about 14% year over year and I know you added some in the quarter. Alan, where do you expect to end the year in terms of the sales and marking headcount?

I think we're hoping to add a similar number in Q4 as we did in Q3. We-- obviously we look at the model we have, and I think that some people who are newer to the story may not realize that unlike a traditional sort of software company that's geographically focused, we assign target accounts for 80% of our sales force. And we have a lot of accounts, still, that are under covered or in some cases uncovered even when they're in the Fortune 200. So we really think in the verticals that we're strong in, our continuing to broaden that coverage is pretty much a no brainer. And in some of our newer verticals where we're seeing a lot of really exciting things happening, we want to also broaden the coverage there, places like Telco which are really turning into great businesses for us.

And relative to the steep ramp you are on with the sales force, do you think you're taking your foot off the gas a little bit in terms of ramping up the sales force given the cloudy economic environment?

Not this year. We don't have any reason -- when we've got Fortune 10 customers who are clear candidates and we don't have them all covered, that's, I think, sort of a pretty clear opportunity for us to do things that I think will return to reliable business in 2012.

And we want to step back and look at the big picture here. On a year-to-date basis, our bookings are up more than 40% from last year, and part of that growth is due to partners, but part of the growth is due to the expansion that we've made in the sales force. As Alan said, covering new verticals, covering new accounts that we didn't cover before.

And deepening the coverage. Being able to put a level of coverage on some of the major international organizations that they deserve so that we can really engage around the right types of project. BPM is still something you need to explain to people. I don't think it's a well understood concept, and certainly the way we do it is quite a bit different than the way the competitors do it. So that's why the market has not yet turned to pole, it's still very much-- you got to go in there and explain itself.

Okay, just one more question. Alan, I think you had-- you made some comments on new customers. In the past I think you've put some metrics around that, could you help us quantify where you stand sort of maybe on a year over year basis in terms of new customer wins?

Yes, it was over 12. And talking the about the new names here, and that would be meaningfully higher than it was a year ago.

Okay, thanks very much.

It continues to grow almost every quarter.

Which we feel good about.

Which is a direct reflection of covering more accounts.

Great.

Richard Davis from Canaccord.

Hi, thanks, I was able to sneak in. Alan, what percentage of the old Canaccord-- Chordiant business is the kind of application layer and call centers and stuff and more directly, how much does that compete with right now, and I guess to a lesser degree, sales force at that layer? Because as I recall, back in the day Chordiant had kind of moved up the stack a bit in addition to having kind of an analytics functionality.

Yes, so we were very attracted to Chordiant as you know because of their excellent analytics, and we're finding we very much got what we thought we were going to get when we bought them, which is great. Chordiant is on a lot of desktops, and we've been able to, I think, take advantage of that to sell those customers additional things. The technology that is now the competitive technology from Pega on the desktop is in fact our PRPC, Pega-based technology, that is extremely strong, extremely successful. And what I'm really pleased about is that even very large, established salesforce.com customers for example like Deutsche Bank recently made the decision when they wanted to move into mission critical customer service to do it with Pega. So we're seeing that at places where good, important mission critical customer service is required, the fact that our stuff has really process driven is very, very technically rich, really, really good at being implemented and is available both on premise and on the cloud, has actually swayed quite a bit of business in our direction in that regard. So we don't go running after the market in the way that they do, but in our customers where we do bump up against each other, our win rate is very high.

Great, thanks.

[David Hodge] from Canaccord.

Hi, thanks, guys, didn't know Richard was going to be able to get in. I'd like to know, the deals that are getting done, are they skewed more towards the sales reps who have been on board with you for a longer duration of time? And the corollary to that would be, are the new reps that you're hiring scaling to productivity as quickly as you had hoped and what are you doing to ensure that that happens?

Well we do a lot of education, and there's a lot of work that goes on to bring the new reps up and to provide them some additional support. I'll tell you in the quarter, one of our new reps in France scored an important win with a new name, just in the teeth of all of that. We had a big Asia/Pacific bank with a new rep also make -- that was one of the deals that had slipped out but then subsequently got signed in October. So I think we're seeing a mix, and there isn't a distinct trend like the new guys are missing, but the experienced guys are doing it. Obviously the more experienced people do deliver more reliably, but I think we're happy, or we wouldn't be increasing the sales force, frankly.

Got it. And then maybe one for Craig. Craig, if we look at kind of the sequential draw down on the license revenue and backlog, and then the draw down in the license portion of deferred revenues, we get kind of an implied bookings number that's below the perpetual licenses in the quarter, is that possible and does that imply that the perpetual license is a portion that we'll recognize in the quarter are from deals signed previously?

Yes, some of it comes out of backlog. If you look at the non-term piece of backlog, which would be mostly perpetual licenses that actually did drop in the quarter so some of that did get recognized. As you know, we don't give bookings numbers because we're very conservative in how we count and commission bookings, but I do know the calculations that some people do.

Got it. Okay thanks, guys.

Edward Hemmelgarn from Shaker Investments.

Yes, thanks. Just kind of as a follow up to other questions, it's-- other software companies, including into your space have not really commented that economic conditions were a major impediment to signing deals in the quarter. In some of the numbers are pretty strong that other companies had. How much would you say is, given that you said you're pipeline is up a lot more, how much is just-- would you assign to just poor execution on the part of the sales force?

So a couple of things. I think if you actually want to really look at some of the numbers from some of the other firms, you've got to go back two years and see to what extent they're doing things on the back of weak compares. I think there has been some trumpeting off of companies who had taken a pretty serious dip in the 2009, early 2010 period, and of course we didn't. All our compares tend to be pretty tough because, as they should be, we're in a growing business and we expect to grow.

I think the execution of the sales force is not something that keeps me up at night. I think it's actually being very tightly managed. There's a really good cadence of both forecast calls and check ins. I'm really quite happy with the sales process. I will tell you that in our engagement with our customers, we do not drive the sales teams as rigorously around quarters as other companies do. We like to get stuff done in the quarter. Any time you have an incentive to get something signed, that's great. But we don't have -- I know there are other companies where it's really very, very much more about the quarter. And in our Company, the way the comp plan is working and all the other bits, it is about the year. So that's caused to us to I think maybe lose some of the intensity that you would have, but I think we marry that up by trying to make sure we're engaging around customers in terms of a long-term relationship with them.

And I understand that. And I certainly want to talk to some of your providers, your other people or companies that are working with you, they all speak highly of Pega and the product. It's just the-- you try to cite the number of-- that you're really focused on trying to sign smaller deals, but there's been some wild variability in your license orders from quarter to quarter, and it's a little puzzling. But I understand you're trying to not have a -- or to be pushing the client so much, is that you're there to serve. I must say that--

Edward, as we often say, we're not overly fixated on the quarter, we really have a longer term outlook. And this is one quarter. Reality is, we have 5 plus years of 30% growth and just gave some very preliminary guidance for next year for more growth. That sitting on a bookings number that's up 40% from last year is another indicator that we take a longer term outlook.

Okay. Thanks.

Laura Lederman from William Blair.

Thank you, my follow-up questions. I guess one would be to make your Q4 numbers, are you assuming any whales get signed or just the $2 million to $5 million type deals that slipped? And then a final question would be, if the economic environment remains difficult and bookings remain flat to down, would you hold back on hiring or would you continue to hire?

So I think relative to your first question, we're not dependent on any of those big fluffy whales for us to succeed this year. We wouldn't mind a couple, but we're -- we don't sit around planning on whales, I would tell you. And relative to the economic environment, we watch it closely, and I think part of having, as I said, been doing this for a long time in a variety of environments, and also frankly been a Company that boot-straps itself. We are very sensitive, but we're in a position where the technology is good, it pays for itself with the clients. It's highly differentiated. And there are great accounts that still need covering. So what I would tell you is that what we would do I think is continue to grow sales capacity. We do need to make sure our technology is competitive. Obviously if the economy is really, really tough you don't spend as much on things that you think people won't pay as much attention to like the (inaudible) and marketing types of things and other types of events might get cut back. But I don't think that short of a complete melt down, we'd plan to stand back from growing the business because we see the potential, and we see, as I said, that active pipeline, which is a genuine, really well scrubbed pipeline, I would say, in this Company. And we also see the level of actual activity around closing. So that gives us the confidence to be able to move forward.

Laura, as I said, bookings are up year to date are up 40%, and I attribute a lot of that to better coverage and a lot of new accounts resulting from that coverage. And if we're going to grow 40% in bookings next year, then we're going to have to continue to expand the coverage model. And to do that, we're going to cover more verticals, we're going to cover more deeper into each existing vertical, and we're going to cover more partners. So that all requires us to stay on the path of driving growth like we have in the last 5.5 years.

Thank you.

Thank you, Laura. So I think that is it then for the questions. Let me tell everybody that the team here is working hard, we're energized. We think that this is going to be a year that we can close strongly. And we look forward to being able to tell you how we closed the year and hopefully report a really exciting entree into next year when we report after January. Thank you, everyone.

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