Pegasystems Inc (PEGA) 2015 Q3 法說會逐字稿

Greetings and welcome to the Pegasystems Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

That being said, I would now like to turn this conference over to your host, Rafe Brown. Thank you, Mr. Brown. You may begin.

Thank you, Tim. Good evening, ladies and gentlemen, and welcome to Pegasystems Q3 2015 earnings call. Before we begin, I'd like to read our Safe Harbor statement. Certain statements contained in this presentation, including but not limited to, statements related to future earnings, bookings, revenue and mix of license revenue, may be construed as forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

The words expects, anticipates, intends, plans, believes, could, estimates, may, targets, strategies, intends to, projects, forecasts and guidance, and other similar expressions, identify forward-looking statements, which speak only as of the date the statement was made. Because such statements deal with future events, they are subject to various risks and uncertainties. Actual results for fiscal year 2015 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 2015 earnings, and in the Company's filings with the Securities and Exchange Commission, including its Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, its Annual Report on Form 10-K for the year ended December 31, 2014, and other recent filings with the SEC.

Although subsequent events may cause the Company's view to change, the Company undertakes no obligations to revise or update forward-looking statements, whether as a result of new information, future events or otherwise, since these statements may no longer be accurate or timely.

And with that, I'll turn the call over to Alan Trefler, Founder and CEO of Pegasystems.

Thank you, Rafe. And I am pleased to say Q3 was a solid quarter, building on our strong first half. Year-to-date, we've had excellent revenue growth while building backlog. Now typically we've consumed backlog through the third quarter of the year. So we're pleased with these results.

We continue to focus on driving growth by first, creating more awareness of the Company, our solutions and the value we bring to clients through our marketing efforts, enabling the buying process through a variety of digital initiatives to make our products more accessible on our website as well as the channels, building out on applications to make them easier to show and deploy with a focus on the front office, and addressing a broader market and reducing our dependence on fewer very large deals.

Our year-to-date non-GAAP license and cloud revenue continues to grow at a very positive clip to $202 million, a 19% increase year-over-year. And year-to-date, our international business continues to make a strong contribution. Though Q3 is typically a slower quarter for Asia and EMEA, both regions performed well in building backlog. Europe has been a bit of a challenge so far this year, but for this quarter, Europe was on track with expectations. And we saw good traction with a variety of applications. Some new European logos that showed the breadth of engagement included of the French insurance provider, April, which is using Pega Customer Service as part of a strategic transformation to respond to increasing competition in the market. The UK National Probation Service, which is using Pega customer service to transform the delivery of rehabilitation services and reduce the rate of reoffending as well as British Gas, which is using Pega Marketing to better understand its 10 million customers and by creating a personalized relevant and timely dialog with them.

We also in Europe increased business with existing clients such as Royal Bank of Scotland which is using us to continue its journey to become the best bank for customer trust, advocacy and service, and Sainsbury's, which is also focused on improving customer service and vendor management as it pursues an aggressive growth strategy.

Now in APAC, Australia lead, with new business from Commonwealth Bank of Australia, which selected Pega Marketing to deepen its customer relationships and deliver seamless omnichannel customer experiences through state of the art marketing. The bank is leveraging our next best action capabilities across channels and has already put the system initially live.

And finally, Auckland Savings Bank, showing that how smaller banks are actually taking advantage of Pega technology, which selected us for our digital transformation. Relative to the international financial services business, I recently returned from Singapore where I attended SIBOS, one of the most important conferences for commercial banking industry which had over 8,000 bankers, many of them very senior attending. And I had the privilege of speaking too many of our clients and prospects who are engaged or looking to more deeply engaged in digital transformation. I find that they're focused on driving end to end experiences for their customers, being able to go from touch point to execution from one channel to another, all of which plays beautifully with our technology. And on the other side, as they look to deal with increasing regulatory pressures, they find that our core skills and core technologies build back in as well as they move forward.

So our strategy summary would say that our focus is continuing on helping our clients become more customer-centric by doing this sort of front to back connection, this end-to-end processing and really improving the way they serve customers while saving money.

Now, we're going to continue to double down on this and we're going to continue to invest in our products, our talent, building out the ecosystem and marketing initiatives to be able to bring these solutions to a broader market. We believe that improving our brand awareness and creating more repeatable sales models, as well as making better and easier to deploy applications is the right strategy for sustaining long-term growth.

And we're encouraged that our applications are selling well, and particularly our marketing application, rated highly by industry analysts, I'll talk about that more in a bit, as well as our customer service applications. And our customer life cycle/know your customer technology, which is very, very important, as I said, banks face and financial services companies face regulatory challenges.

Now, it's interesting, we're also seeing a very nice uptick in international public sector sales as governments are finding that they face many challenges analogous to those of the private sector. The need to become more citizen-focused, efficient and compliant, and so for example, just in Australia where I was recently, this quarter we saw a new business with the Victoria government, with the New South Wales government and Department of Agriculture Defense and Treasury. So what's nice also is we're seeing a number of these deals increasingly sourced through partners, which we think is important in terms of building leverage into our business model.

So as the new programs we launched in Q1 to try to really raise our brand name recognition, are actually performing well. As those of you who've been on the call before now, we really never did any paid advertising into March of this year, and I'm really pleased that since we've begun doing this, we've seen a 45% increase in new visits to our website and a 45% increase in page views.

Now as planned in Q3, we relaunched our so-called Pega Can campaign, extending it also into several countries in Europe and the UK for the first time. And our corporate markets team, which is focused on selling to that broader market, if you recall, historically, we've really only sold to the Fortune 400 and what we've decided to do in the last year was really as we said, open the aperture and begin both marketing and selling efforts to companies that were outside of our traditional verticals and were of a size that we would not have traditionally sold to. And we've scored great business with important companies like EMC, other companies like Computershare and really sort of being able to actually enter firms that we would not have historically talked to at all, like Benefitvision and Zenefits, some of these hot new tech companies, particularly using this co-browse facility that we have that lets service representatives have a shared dynamic experience with their customers if they run into issues, for example on the company's website.

So we're very, very pleased that the sort of market focus is in the right direction. Though, obviously some of these efforts like the corporate markets effort, are still early and we're still working hard to develop.

We continue to enhance our applications to make them more robust, easier to use and adopt and leveraging the unique and industry-leading capabilities of our Pega 7 platform. This quarter we announced the extension of our omnichannel predictive analytics capabilities across our entire CRM application portfolio, adding contextual intelligence to all marketing, sales and service interactions and channels.

And you may recall, I mentioned earlier that we were named a leader by, in this case Forrester, for real-time interaction management. We're delighted to be recognized as having the strongest offerings in this category, in comparison with companies that include IBM, Oracle and Salesforce. You can check it out on our website if you want to get the download and see the picture.

We believe that this core skillset in real-time analytics and decisioning is a strong differentiator and because we've always been committed to having a unified single architecture, unlike with other applications, people who want to use this technology in conjunction with the other aspects of Pega that they're using, don't have to get a multiple environment to do a lot of stitching together, it all just hangs together and works to the customer benefit.

Now, we also finding interestingly and not surprisingly, that as markets are getting more competitive, for example, the telco market, we're being used by leading companies around the world to compete and to try to reduce churn. And we see immediate, we see results in as little as 90 days to 100 days, leading to actually a publicly announced results that are better and attributed in many ways to the Pega technology.

In healthcare, which I think is also a very, very promising area, for being able to bring a new level of engagement to keep people healthy. We are finding that some of our software is being used by a wide variety of companies, as varied as United Health, the Singapore Ministry of Health, SeniorLink and CareFirst Blue Cross Blue Shield, all to try to make sure that they are improving patient outcomes, managing costs and treating patients as individuals. Once again, tying patient care into the vision and concept of CRM and decisioning and analytics.

And the software is also being used by companies in the pharmacovigilance area to be able to improve how life sciences firms are managing things such as adverse events processes and monitoring safety, by firms such as GE Health and Pfizer and (inaudible) to deal with the increasing amount of information that needs to be collected, controlled and processed.

Central to the Pega culture is helping clients to be successful. And we saw really important go-lives across a wide variety and array of customers. British Airways, for example, brought Pega Marketing live across its contact centers to develop stronger customer relationships and generate stronger brand loyalty and increase revenue.

Allianz bought our sales automation for insurance technology to better manage its sales processes; New York Life to improve customer satisfaction and improve first-call resolution and decreased average handle times; Delta Dental to bring case management and BPM, interestingly to its Salesforce.com implementation where we pull multiple data -- data out of multiple sources, and really drive end-to-end processes and help ensure inter-departmental consistency. And Toyota who is using Pega Cloud to help the company better track quality processes with its suppliers and expedite issue resolution and report quality assurance as well.

So it's terrific having these customers. The used cases are all resonating around client experience. The applications we're building out are the right ones and are making it easier for clients to understand what we do and to buy. And as we look -- as we are pleased with our performance through Q3 of 2015, we see the increased adoption of the software with both existing a new clients as really helping us both deepen our existing markets and broaden our market per our goals of the target expansion we began earlier this year.

So we think the results we've seen to-date demonstrate our strategy is working and gives us the confidence to continue to invest in the initiatives I've discussed today and in recent calls.

To provide more detail on the financial results, let me now turn it back to Rafe, for some additional discussion. Thanks, Rafe.

Thank you, Alan. For the third quarter of 2015, we are reporting both GAAP and non-GAAP results, a full reconciliation of all GAAP to non-GAAP measures is provided in the financial tables of the press release issued earlier today and is available on the Investor section of our website.

As we've discussed in the past, quarter-to-quarter comparisons do not necessarily reflect the underlying momentum of our business as the timing of a small number of large transactions and the mix of deal types can significantly impact our results. To provide the best look at how our business is performing, let me take you through our results on a year-to-date basis. We are pleased to report that year-to-date non-GAAP total revenue was $478 million, up 13% year-over-year.

Our year-to-date non-GAAP license and cloud revenues stood at $202 million, up 19% over the prior year. Equally important, we achieved these results while building license and cloud backlog on a year-to-date basis, which I will discuss further in a few moments.

From a mix of revenue perspective, we were pleased to see that for the first three quarters, non-GAAP license and cloud and maintenance revenue stood at 74% of total revenue, up from 72% for the same period of 2014. This increase is a result of our stated strategy of growing our higher margin software revenue items faster than professional services and training.

As we've discussed in the past, we offer our customers a number of options when purchase in our software, including perpetual and term license arrangements or access to the software through our cloud offering. On a year-to-date basis, the proportion of revenue coming from perpetual license arrangements increased to 51% of the total license and cloud revenue versus 50% for the same period of 2014. Even with this in mind, when one combines our recurring revenue items term, subscription, cloud and maintenance revenue, you will note that we had over 52% of our revenue coming from recurring sources on a year-to-date basis.

Non-GAAP professional services revenues for the first three quarters of 2015 were $122 million, an increase of approximately 7% over the prior year.

Looking at our revenue on a geographic basis, the Americas produced year-to-date non-GAAP revenue of $314 million, representing 66% of total revenue. Revenues from Europe were approximately $116 million on a non-GAAP basis, representing 24% of total revenue and year-to-date Asia-Pacific revenue totaled $48 million or 10% of the total.

Turning now to our non-GAAP gross margin. Our year-to-date gross margin was 68.7% compared to 69.3% for 2014. As we've been discussing throughout the year, our services margins have been running below our target. To this end, there are few detailed points to note. First, we have recently been seeing improvement in our professional business in both North America and Europe. We have concluded two customer engagements that were requiring investments and European realization and utilization rates have shown some recent improvement. Thus we believe the underlying fundamentals of our services business are gradually improving.

Second, it should be noted that third quarter services revenue were adversely impacted by approximately $4 million in accounting related revenue recognition delays. Such delays are not uncommon and we anticipate that this revenue will be recognized in the coming few quarters.

Turning now to the rest of the income statement, we posted a year-to-date non-GAAP operating margin of 11.8%, essentially flat with the same period for 2014. Year-to-date operating expenses totaled $272 million on a non-GAAP basis, an increase of 12% over the prior year.

In reviewing our operating expenses, there are few points I'd like to walk through. As we've been discussing throughout the year, we have been investing in sales and marketing, growing sales headcount as well as funding the Pega Can advertising campaign Alan mentioned earlier. These efforts have increased and will continue to increase our sales and marketing expense throughout the year.

In addition, our continued focus on developing our strategic applications has increased R&D as a percentage of revenue on a year-to-date basis. We do expect this trend will continue through the fourth quarter.

Finally, though impacts only our GAAP results, stock-based compensation on a year-to-date basis totaled $23 million compared to approximately $14 million for the same period of 2014, which is higher than we had originally expected.

Turning then to earnings. On a year-to-date basis, we posted non-GAAP earnings totaling $34 million net of approximately $3 million in charges related to foreign currency fluctuations. On a non-GAAP fully diluted EPS basis, this totals $0.44 per share.

Now to discuss license and cloud backlog. We compute license cloud backlog by totaling two elements, deferred license and cloud revenue as posted on our balance sheet and off balance sheet license and cloud contractual commitments that are signed, but as yet unbuilt. As a reminder, you can find detail of both elements in our 10-Q and a summary table in our press release, both of which were filed earlier today.

We finished the quarter with $318 million of total license and cloud backlog, an increase from this point last year of $46 million or 14%.

Turning to cash flow, year-to-date the Company produced $55 million of operating cash flow and free cash flow, which we define as operating cash flow less CapEx was $45 million. We finished the quarter with total cash and marketable securities of $224 million on our balance sheet.

In summary, we are quite pleased with the Company's performance for the first three quarters of 2015 from both a product and a sales perspective. Given this, we are continuing to invest and even accelerating some of our 2016 investments. In particular, the launch of our marketing campaign in Europe and continuation of that campaign in North America as well as continuing to push hiring in both engineering and sales, [they'd] reflect the confidence we have in Pega's long-term prospects for growth.

Finally, as we look ahead, it is important to remember that Q4 is typically our largest quarter in terms of bookings, revenue and earnings. It is worth recalling that the mix of deal types in the fourth quarter was significantly influenced our results for that period as the same deal (inaudible) either term or cloud arrangement as opposed to a perpetual license arrangement typically bring substantially less revenue and less earnings into the quarter.

While we work to balance the mix of deal types, our customer preferences ultimately determine how individual deals are structured, thus creating the potential for variability in our financial results.

With this said, we have a very busy Q4 ahead of us where we are looking to build on our strong year-to-date performance.

And with that operator, we'll open the call to questions.

(Operator instructions). Steve Koenig, Wedbush Securities.

It will be great if you could give us some color on the strength of bookings in Q3, at least on a year-over-year basis, they are up pretty significantly. You talked about some of the good things going on at Pega. Maybe parse those out for us relative to the booking strength in Q3, maybe what factors were most important.

And maybe if I could ask you to also comment on the sales management incentives you put in place to try to obtain more balanced first half, second half performance. How -- those were fairly big factor last year in helping things more to the first half, as it looks like that you're on track for the second half, potentially to be stronger this year despite those sales incentives, if that make sense, hopefully?

Yes. So I think it's a combination of things. Steve, the reality is that we did it very consciously about a year or three quarters ago, but create incentives, but also we doubled the management attention on trying to not be quite so insanely backend loaded into Q4. And I think last year we made some real progress on it and I think you're seeing evidence that with a combination of some incentives, but it's mostly just getting the managers to focus on it and getting people to sign up, having Pega work despite the challenges of being a reliable in this business, you try to work to be a little bit more reliable for the quarters.

So I really think that a lot of it is just good work by management. Our accounting executives and sales people understanding that quarters matter because historically we, to be candid, had really focused more on the year and I think you're seeing the results of that.

Relative to the financial results for the -- the booking results for the quarter, it was really quite strong across the board. It wasn't driven by -- and the year has not been driven by like a bunch of whales which sometimes is causing to slush around, which we think is a good thing, we love our whales, but we don't want to be overly dependent on them as we go forward.

We saw a nice performance across a variety of industries. As I ticked them off in my preamble, it was everything from our traditional financial services, in banking and insurance to some of the new industries like the telcos to names we never would have sold to before like, British Airways, for example and the Virgin Media. And I felt really good about that sort of mix. And I think a lot of it is that we're making the product easier to sell and easier to understand by building out the applications and improving the marketing.

If I could get in one follow-up, it will be great. May be you all could just comment on the stock comp being up and above your expectations, what is driving that?

So Steve, thanks for that. It's a combination of -- we did -- our annual refresh went out earlier this year and the job market is competitive out there. So we wanted to make sure we had fair grants for everyone to make sure we're retaining our top employees. And we do really focus on giving that equity to select employees, so that is part of the numbers. The other part of it is just that the stock has done a little bit better this year. So the stock's been issued at a higher number. And then the last leg of the stool is just the fact that we have been continuing to grow headcount and so that too plays into it.

Mark Schappel, Benchmark.

Rafe, just starting with you on cash flow from operations, it looks like it was negative in the quarter, if my math is correct, if not, please correct me. But I was wondering if could you just go through why that is and maybe why -- can you maybe just remind us why it was so strong last year at this time, was there a one-time thing last year that made it so strong?

First of all, it is positive, cash flow from ops is positive so far. But it is down from where it was last year. Last year it was driven by, we had a [well-transaction] in the second quarter that drove very nice collections in the third quarter. So it was really just the billing terms, most notably of that one deal, but obviously some general fluctuations that are in there as well. But that's really what drove the change when you compare year-over-year.

And then, Alan, moving over to you. I know you've been ramping up your marketing initiatives this year and I think you made the comment in you prepared remarks that March is the first time you guys did an ad campaign. Just wondering if you could just go a little bit more into that and may be some of the other market initiatives that you are working on at the moment?

Sure. We're doing a whole collection of things and we've made pretty massive changes in the last 18 months to our marketing department. You may recall that a year and a half ago, we brought in (inaudible) Robert Tas, who is the Head of Digital for JPMorgan Chase and had a lot of bank and other sort of technology sectors as well. And what we really decided was that if we wanted to open the aperture on our business, we wanted to become a company that people actually had a little bit of recognition to, we really [intend to] change our posture in a variety of important ways.

You may remember, historically, we were pure target accounts so what that would mean is we'd take a sales person, we assign them to an organization and their mission in life was to go and meet the senior people, understand the needs and map what our technology could do. It was really selling very much campaign and combat, virtually no ground -- air cover by intend. And we also were not very aggressive about putting a lot of our product capabilities and demos, for instance, on the website. We wanted people to work with our sales people and our solution consultants.

But now that we really think there's a chance in coming years to open up this aperture and bring our technology to many companies, if you hear some of the companies I mentioned, we are obviously able to operate extremely effectively well outside the Fortune 400. And now with that as vision, particularly driven by our cloud technology, we really want to take that posture, we need people to have some understanding what Pega does. We need to create more of an application orientation as opposed to talking as much about the core platform, which of course empowers our applications, but it's a little more abstract to tell you the truth, and (inaudible) you want to be able to help people reduce churn in a telco or help people up -- make sure that their sales will go up by certain percentage for an insurance company, examples of application results.

And so building out those applications and building up a marketing around those applications was absolutely critical. We increased our visibility in the press. If you actually take a look, we're mentioned many, many more times now and that's beneficial not just in the US, but also around the world. So traditional sort if you think of PR, a lot of work around branding and you can see the results of that (inaudible) our website. We now have over 22 detailed demo videos on that site where people can actually get a real taste for our products without having to go call the sales person really supporting buying. And of course, as I mentioned, spending money first in the US and now more recently broadening that to a number of international markets around doing some digital media buying and other things to support this idea of Pega Can.

Then the Pega Can idea in a nutshell is that it's easy for people to listen to the hype of lots of the companies out there. You install this cloud system or this on-premise system and miracles will happen to your customer service, but actually trying to enumerate the things that frankly make those systems fall short in a lot of cases. And the technology and the application capabilities in our products, that mean that Pega can deliver on those outcomes for you. And now it's been a very well received campaign at this stage and one that we are doubling down on.

So that's sort of a brief summary of some of the marketing initiatives we've been doing. We've really completely rebuilt or largely rebuilt the team, a lot of key roles. And I think we're really hitting on all the cylinders here.

Yes. So there is $3 million of it that shows up in OI&E, which is the -- and that's a charge decreasing our earnings and that's relative to the balance sheet fluctuations. For the quarter, revenue faced about a $2 million headwind and then just the impact on the operating cost, it really -- we're kind of -- the natural hedges pretty much equalized the impact. That makes sense?

Greg McDowell, JMP Securities.

I watched a lot of those videos on your website before I picked up coverage. So thank you for putting all those videos out there. My first question has to do with a comment that piqued my interest and that was a comment you made, Rafe about accelerating investments. I was just wondering how we should think about, maybe how quickly you've accelerated those investments and the potential impact to operating margins for this year and maybe the first half of next year?

Well, I have to stick to my comments about the rest of this year since we won't be rolling our guidance for the beginning of next year. But things like the Pega Can campaign where we're pushing it in Europe, we're seeing early indications that we're getting some very positive results as Alan indicated. So we are maintaining -- that we've re-launched it, as Alan said. As well as on the engineering and sales side, we're really just continuing to hire into those spaces. If you look on our website, you'll see quite a number of open positions. There is of course it takes time to hire people and ramp that up, but we want to make sure we're going into 2016 certainly with momentum especially around hiring sales people and hiring key engineers in great roles. So this year has been a good deal of investment for us and we're seeing positive things come out of it. So we want to make sure we keep driving that because we think that will help in the long term with our growth prospects.

I think one of the things that's tricky about our business is as we've talked about routinely, is that we can have a spectacular quarter and if a bunch of it goes into backlog, it affects the current revenue and current EPS radically differently than if it just happens to go into sort of current period booking revenue in the same period. And we try to encourage our clients to do more of a (inaudible) work whether it's subscription or whether it's a term license.

But the reality is that the customers have different views at different points in time and they're getting such poor return on their money given the low interest rates in some parts of the world, there seems to be more of an interest than one might expect. In perpetual, though that can flip at any moment, and all of those things can have impact on of course the revenue in the quarter, if you don't consider backlog, which you should and it can also obviously have impact on the earnings in a particular period as does the currency headwind, et cetera. I think the point is that given the strong result so far this year, we've decided that it's worth pushing because we do want to enter the next year strongly and we're comfortable that the things we're spending on are going to drive the right results. So we've decided to go forward and pull a little bit of more about into Q4 than I think we would normally would have.

One quick follow-up, you guys seem to be bucking the trend of what we've seen from other software companies so far this earnings season and that trend has been sort of a significant downtick in professional services and it just feels like that that professional services revenue line has accelerated four quarters in a row now and it's probably one of the fastest growing professional services organizations in the entire software industry. So just wondering if you could talk through what's going on there, I know you mentioned a lot of go lives, I know you mentioned you even had $4 million in RevRec delays, but is that a trend we could sort of expect to continue? And why is that business so strong?

A lot of that business is driven by the need to support our partner ecosystem. Now we're not trying to really compete with our partners. We think that having a strong and vibrant ecosystem is good, actually ultimately the best way, but as the amount of business that's going on increases in aggregate and the other thing that's happening is a lot of our existing customers are continuing to roll out Pegasystems after Pegasystem as we're sort of radiating internally, sometimes that leads to revenue, sometimes it doesn't depending on what's -- the nature of the roll out. We're seeing a lot of demand and do think that that will continue to increase. What's been the percentage increase year-to-date?

I think it's -- well, on a year-to-date basis, that's up 9%.

Look, I would not -- going to look to put it into double digits. But it wouldn't shock me if there continues to be some pretty, if we don't want -- we want to be a very significantly high growth machine in license and cloud, but we do need enough professional services that we can continue to cover those projects or customers want to do it ourselves and actually helping and working with our partners.

It's 7%.

I don't think -- I know a lot of folks if it downturns, the 7% would have been consistent with kind of what we would have thought (technical difficulty).

(Operator Instructions) Edward Hemmelgarn, Shaker Investments.

I Just had one question regarding your cloud backlog. How big of an influence is the cloud backlog relative to the term backlog? I mean you've got them kind of lumped together and I'm just curious. And then you show cloud also in deferred revenue, in current deferred revenue, but it's -- and is there no cloud in the long term deferred?

Yes. Thank you for that question. So certainly in the long term -- in the off-balance sheet portion of backlog, which our license commitments that they haven't been build yet, so we disclose those in our 10-Q. Cloud is mixed as part of that. So it sounds like we're aligned there.

And then the deferred just represents what's been built, so there tends to be very little long-term build cloud revenue that's out over a 12-month period of time. I think that explains what you're seeing there.

We lump them together, really, think of backlog as a single unit of both license and cloud backlog largely because we were going to market our customers very often. They're first just deciding if they want to choose Pega, when they decided they want to use Pega, they then decide whether they want to have the offering on-premise or in the cloud. So we didn't want to put too much emphasis on one buck or to the other because it could frankly shift just because of the way that particular customer wants.

And they shift -- one of the things we offer our clients is, which we think is very, very valuable, is the flexibility to change their mind and go either one way or the other way depending on, there's a variety of business and technical reasons why one might be better or than the other in a particular period of time. So I think we really think of those term licenses and cloud licenses as more of a unit, I would say. Obviously, cloud businesses is newer for us than our term business, but it'sbeen growing at a very, very nice rate.

The only difference is that you have cloud revenue in service revenue and term in perpetual. So it's kind of one-one issue is, you're kind of lumping apples and oranges together in that one 10-Q disclosure of backlog there?

If we were in charge of how all these things are reported, we'd probably just have one category that says software revenue. But the rules require us to call on-premise either term or perpetual license and cloud services just -- we just accept the rules of as they are in that regard, I guess.

Well, I just have one other quick question. The profit dynamics for cloud, pretty similar to what it is for perpetual?

Well, kind of a service aspect. So when you sell in perpetual license, you don't have any ongoing services that go along with it. When somebody buys our cloud, we provide a lot of ongoing care, feedback, maintenance, other stuff of that type, that is done very differently, it's done by our staff in many cases as opposed to the customer staff. So it has more of a combination of license and service flavor. I would say it's probably closer to the dynamics of a complete project, if we do a complete project for a customer that has a combination of perpetual license and service and maintenance without actually doing the math, that would feel to be a little closer in some ways, maybe not completely, but there is the service element to it that obviously operates its service margins. All right?

At this time there are no further questions in the audio portion of this conference. I would now like to turn the conference back over to management for closing remarks.

Well, thank you very much and I appreciate the investors who joined us on this call. We're working hard and I think we're getting very, very positive results, right Rafe?

Yes. Thank you very much.

Take care and have a great evening.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful rest of your day.