Pegasystems Inc. (PEGA) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Pegasystems 2012 Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today’s conference, Mr. Craig Dynes, Pegasystems' Chief Financial Officer. Sir, you may begin.

Good evening, and welcome to Pegasystems 2012 Q3 Earnings Conference Call. Alan Trefler, Pegasystems' Founder and CEO, is joining the call from Australia. Before I give this to Alan, I will start with our Safe Harbor statement and then provide my financial commentary. Certain statements contained in this presentation, including statements relating 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 anticipates, projects, expects, plans, intends, believes, estimates, targets, forecasting, could and other similar expression 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 2012 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 2012 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, 2011, its report on Form 10-Q for the quarter ended September 30, 2012, 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. Similar to our experience in Q3 of last year, Q3 bookings were suppressed by continued uncertainty about the economy. This is most evident in Europe where on a year-to-date basis, bookings were down almost 50% from the same period last year. There seems to be a lot of hesitation to sign contracts of significant size. The pattern looks very similar to last year, where larger deals were delayed until Q4, when the budget must be spent or lost once the year-end hits. In fact, similar to Q4 last year, we have already seen some larger-than-average-size deals close in this Q4, and we expect this trend to continue. So again, like last year, economic uncertainty has pushed us into a very back-end loaded year for new license bookings. Since Q4 of last year, the mix of term versus perpetual licenses has moved towards term. I hesitate to ever call this a trend. In fact, when I make any prediction as to the future mix, I am usually proven wrong. However, I do expect the movement towards term license will likely continue in Q4. A change in the mix has an immediate impact on revenue and earnings. Revenue from term licenses is generally recognized over 5 years, whereas perpetual licenses are usually recognized in the quarter that they were booked. While bookings were down for the first 9 months of 2012 as compared to 2011, our Q3 bookings were higher than Q3 of last year and our backlog has stayed very strong. Our off balance sheet backlog of signed non-cancelable licenses is up about $75 million from the end of Q3 last year. This increase is shown on Page 23 of the Q, which shows in detail that we are holding $195 million in license revenue backlog as compared to only $120.6 million at this time last year. The increase in term license bookings has dramatically increased the backlog and has a slow but strong cumulative impact on revenue, similar to a Software-as-a-Service model. For example, as detailed on last year's 10-Q, last year at this time, we were holding $29.5 million of 2012 term license revenue and backlog. That's committed revenue for the next fiscal year. This year, at the end of Q3, we are holding $42.8 million of 2013 term license revenue, an increase of about 45%. So our movement to term license bookings is piling up and will have us a strong impact on future license revenue in 2013 and beyond. Maintenance revenue is $32.3 million for the quarter, down from $34.5 million for Q2 due to the onetime $2 million revenue event in Q2. On a year-to-date basis, maintenance is up about 14% over last year. Similar to Q2, professional service revenue on a year-to-date basis is only up about 2% or $2.5 million for 2012 compared to the first 9 months of 2011. Partners and customers are increasingly becoming enabled and are therefore, doing the vast majority of the implementation work. This is a very positive development as it greatly expands the Pega ecosystem. An additional benefit is the increase in professional services margins. With our slower growth, we're spending less on recruiting, hiring and onboarding new consultants. Not only are we spending less, but with fewer new staff being trained, we have fewer people on the bench. So utilization rates are much higher, which has driven the improvement of margin. Overall, in spite of the current economic climate, revenue is still up $16.5 million or 5% for the first 9 months of the year. And with the revenue mix changing in favor of more license and maintenance as compared to professional services, gross profit is up $19.5 million as compared to last year. Operating expenses for the quarter of $63.6 million were virtually identical from Q1. Q2 operating expenses were higher than both Q3 and Q1, primarily due to an increase in marketing events and programs of which the lionshare was PegaWORLD. Given the back-end loaded nature of the year and the move to more term licenses, we will continue to tightly manage any growth in operating expenses, with the objective of hitting our earnings targets. Even at lower growth rates, we will still increase the sales organization to provide additional capacity for growth beyond 2012. We increased the sales and marketing organization by 10 in Q3, of which 8 were in sales. We will also continue to grow our R&D capabilities. During Q2, we opened our first office in Bangalore, which is allowing us to replace contractor R&D with employees as we find that we are more effective with our own people. The contractor replacement was the primary reason why R&D headcount increased by 114. So for the first 9 months, GAAP net income was $1.4 million or $0.04 a share. In order to provide a normalized run rate of financial information and to allow comparisons to those building and publishing financial models, we have provided supplemental information in our press release to reconcile to a non-GAAP model. Following the same format that was used when we provide guidance as our -- part of our Q1 earnings release, there are 3 reconciling items: FAS 123R charges for stock-based compensation for Q3 were about $1.9 million or $0.05 per share on a post-tax basis; the amortization expense of the intangible assets created by purchase accounting for our Chordiant acquisition was also approximately $1.9 million or $0.05 per share on an after-tax basis; and lastly, as we explained on our Q4 call, we built out a move to a new office in Q3. GAAP accounting rules make us accelerate depreciation straight line the new lease cost. This results in double or overlapping noncash rent expense for both offices, while in reality, we have free rent for the new office until the old office license term ends next May. As we did in Q4, Q1 and Q2, we've added back this overlapping noncash lease expense, as well as the onetime cost of moving the offices to present a more normalized or run rate model. In Q3, we recorded $1.6 million or $0.04 per share on an after-tax basis for these non-recurring expenses associated with the office move. The supplemental GAAP to non-GAAP reconciliation shows a non-GAAP EPS of $0.13 per share for the third quarter, $0.45 for the year-to-date. We had a great quarter for cash collections and ended with $111.3 million in cash, an increase of about $8.4 million from the $102.9 million in cash at the end of Q2. Our cash flow from operations is now a very strong $29 million at the end of Q3. Collections dropped accounts receivable from $92.5 million at the end of Q2 to $80.8 million at the end of Q3. The age of these receivables dropped from 54 to 50 days. At the end of Q2, we've noted that one customer represented 10% of our trade receivables. This receivable has now been collected in full, and there are no other 10% accounts. Through the first 3 quarters, we have purchased 127,583 shares for $3.9 million in cash at an average price of $30.64 per share. At quarter end, we had a balance remaining of approximately $10 million available for future repurchases. Overall, the year, through 3 quarters, it appears to be eerily similar to last year. But then, why shouldn't it be the same? Business conditions are virtually unchanged. Customers delay executing new agreements, especially ones for large projects from quarter-to-quarter due to their sense of uncertainty when it comes to the economy. This is especially true in Europe where several times a year there is a debt or currency crisis. While it is easy to delay from a Q2 to a Q3, it is a different situation when it comes to Q4. This is usually the end of the fiscal year. Last year, customers were not able to delay from one budget year to another. So in Q4, we had a fantastic bookings quarter driven by "use it or lose it" spending. Similar to last year, while customers are cautious and are delaying spending in this environment, we have not seen deals disappear or go to competitors. Our pipeline is very strong and so we work hard for the remainder of the year. Lastly, as I said in the press release, I will be leaving Pega next year after filing the 2012 10-K. I have now been here for more than 6 years. There have a lot of Qs, Ks and calls like these. It has been a great journey. Over the past 5 years, in the face of some of the worst economic conditions in recent history, we have more than tripled annual revenue. The company is really mature and looks a lot different than when I arrived 6 years ago. We just moved into beautiful new modern offices, and after we moved, I realized that I'd accomplished many of my objectives and Pega was now a different company. And as crazy as it sounds, I started thinking about starting all over again with some late-stage private company. So I feel extremely happy and satisfied with regard to all of our achievements over the last 6 years, and I'll leave confident that Pega will continue to do well in the future. It may seem hard to believe, but I have enjoyed my time talking with all the investors that I've met, even some of the crazy, speed-dating investor conferences. I thank you all for giving me the time to listen to me talk about this great software company. Lastly, I want to thank all of the Pega employees and especially, Alan, for all the laughs we've shared when we were supposed to be working serious issues. Thankfully, no one has thought of having too much fun on a day-to-day basis. So now, for the last time, I'd like to turn the call over to Pega's Founder and CEO, Alan Trefler.

Thanks, Craig. Let me start by thanking you again for 6 years of terrific accomplishments, helping us grow Pega over 300% during your tenure. I look forward to continuing to work together in the coming months, and we appreciate your commitment to a seamless transition. Thanks. I am joining you from Melbourne, Australia, where I'm completing 2 weeks of exciting meetings with clients and prospects. I'm going to have to be crisp today because I leave for a transpacific flight in about 0.5 hour. But Craig is available the rest of the week for questions. It's been a busy 2 weeks. First, I was in Japan at Sibos [ph], the largest commercial banking conference in the world, which we've attended every year since 1983. Leveraging the international nature of Sibos [ph] , I encountered clients from North America, Europe, Japan, APAC, Russia. Then I traveled to Singapore, Hong Kong, Sydney, and now I've been in Melbourne meeting with clients and prospects in a variety of industry: wholesale banking, retail banking, insurance, communications and public sector. I can tell you that the excitement and enthusiasm from these organizations about Pega software is palpable. The client feedback is that the returns they are achieving from the use of Pega were staggering, and that they have identified many new areas of their organizations where they are looking to implement our software. They tell me they are seeing faster time to market, increased customer retention, improved customer sales and dramatically higher operational productivity. I return from this trip as excited about Pega and the adoption of our software and the growth potential as I have ever been. At the same time, these organizations are all trying to manage through today's economic challenges and uncertainty. Much of this challenge translates to caution in decision-making. As Craig mentioned, it also translates into a higher preference for term licenses than our historical average and into somewhat longer sales cycles. We had a great set of customer wins in Q3 across all of our major industries and geographies: financial services, insurance, health care communications, life sciences manufacturing, energy and business process outsourcing. International services, we continue our strong momentum in the credit card servicing market, with several key wins at retail banking operations. We also continued our momentum in the communications industry, with key wins around our Next-Best-Action marketing and decisioning offerings. We won these deals in North America, western Europe, eastern Europe and for the first time, in Brazil. We were also winning significant business with the process-centric customer service, leveraging dynamic case management across a number of industries. In banking, we won an important complaints case management solution versus a number of competitors. We're pushing a number of regulatory opportunities around Know Your Customer, in that some of the regulations that are coming actually do offer the potential for improvement. So our mission is going forward, and our mission is customer success through the use of Pega software. And I'll tell you, as we take a look at the go-lives and customers reporting the success, we continue to be encouraged. Our customers know they can build applications and have a platform that start in one business unit and use most of the solution in other business units, increasing quality and speed to market. They achieved huge returns from what we call "6R Case Automation", and it's great to see. Consistent with our focus on customer success, we're very pleased with the continued growth in the partner-trained ecosystem. We've increased at about 22% 2012 year-to-date. We expect the number of partner-trained and certified staff to accelerate, with the rollout of our newly created pegaacademy.com self-study capability, which is being well received. I'm also pleased that in Q3, analysts from the industry continued to recognize Pega's product and technology leadership. In particular, Pega was recognized by Gartner, one of the industry's prominent analyst firms, in their latest business process Magic Quadrant. The market definition of BPM is continuing to advance and evolve, and Gartner signaled this by naming the latest BPM Magic Quadrant as iBPM or intelligent BPM. The quote from Gartner is that iBPM sets a new bar for the BPM market by evolving beyond process analysis toward systems that guide and recommend the next most effective action or decision. So this is right up our alley, and it's not surprising that Pega, when you look at the picture, is positioned as the clear leader, a testament to our innovation and representative of our commitment to continue to innovate. We were also named by Forrester Research as the leader in CRM suites for large organizations. As you know, Pega sales strategy is to sell and market to large organizations, so this is a particularly important and gratifying for us. The report ranked 17 vendors using an extensive vendor evaluation across a number of dimensions. And Pega was ranked among the top for all 3 of the primary components of CRM. As we've announced, we're also pleased that Larry Weber has joined the board of Pega in the past quarter. Larry is the Chairman of the W2 Group and has many years as a thought leader in branding and positioning, working with many leading technology companies. We look forward to Larry's contributions to Pega's marketing strategy, growth and differentiation. In Q3, we also announced our entry into Bangalore, with the facility opening -- our second facility in India. And it continues to be a terrific place for us to build and invest in growing our R&D, even as we continue to grow it in our other development centers. Now with regard to our year-to-date bookings performance. While our Q3 2012 bookings were much stronger than the year ago last quarter in the very challenging Q3 of 2011, we have still not made up for the smaller average deal size in the first half of 2012. While we have signed a comparable number of deals year-to-date, in 2012, we have yet to see a similar number of very large deals, sometimes referred to as whales. We continue to see a lot of business, including possible whales on the horizon. However, given the times and the inherent lumpiness of our business in even the best of times, it is difficult to know what whales will be landed and what sales will continue to be split into smaller pieces. We are working to be pragmatic about the economic uncertainty that our customers are operating in. Thus, we have been very diligent at managing investment and expenses, taking care of hiring and spending to balance of those on product and market leadership, with returns for our investors. As I mentioned on the last call, earlier this year, we saw the continued challenge and began to drive reductions in discretionary spending in G&A hiring. But given the huge opportunity in front of us, we have maintained a strong investment profile in R&D throughout the year and are continuing to modestly build sales capacity. Our experience in the great recession was that coming out of these recessions, you can have a huge payoff, and we believe the same will be the case now. Indeed, we continue to see the development and strong increases in our pipeline. And I continue to strongly encourage the team to push forward because we see the breadth of our opportunity. As I mentioned when I started my discussion, I remain very excited about our customers' enthusiasm and the real business returns that they are seeing in the form of new business, improved customer retention, increased productivity and just a whole better way of engaging with their clients and running their operations. This continues to be an outstanding opportunity that we are pursuing with great enthusiasm. And as we think about next year, we are modifying and adjusting our plans to figure out how we can take advantage of it and see what we can do to perhaps help mitigate some of the lumpiness of our business. We're excited about the future, working hard, and I look forward to taking any questions. Operator, will you please open the line for questions?

[Operator Instructions] Our first question comes from Nathan Schneiderman from Roth Capital.

Alan, good luck -- or Craig, good luck to you in your new endeavor. Let me start off, Craig, you made a comment about closing some large deals already in Q4. And I wasn't sure if I heard right if you had said that you had closed record deals already or just large deals. So I was hoping you could drill into kind of the book of business already achieved.

My comment was that we have already closed some larger-than-average-size deals in Q4, and that's probably as much details I can give right now. The quarter is not over yet.

Okay. I wasn't sure if you said larger than ever or larger than average. So average, great. And Alan, last quarter, you guys laid out guidance of -- revised guidance of $475 million for the year. But I was wondering with this shortfall here and some mix shift towards term, do you feel that's an unrealistic target at this point or do you feel that it still looks pretty good.

Well, look, we don't provide quarterly guidance. But at this point, the year represents just 1 quarter. However, I think it's safe to say that, obviously, Q3 was challenging and it's a long road in Q4. And we're working hard. But it's certainly going to be tougher than we might have expected earlier in the year.

Got it. And hey, final question for you. I was just curious when you're engaging with customers now and just kind of thinking about the pricing environment and how that's changed, any comments you can make there. And specifically, have you moved away from or do you have any intention to move away from project-specific pricing?

Sure. We've -- actually, I would say have the majority of our deals that aren't project-specific. It's probably close to 50-50. We now have a lot of customers that are using our software actually broadly for dozens and dozens of projects, and that's something we encourage. The reality is that when the deals get smaller and frankly, more consistent with what people think, they might roll out in the next 6 to 9 months, the pricing actually tends to be better from our point of view. It's the promise of very large deals that some companies use to try to really put pressure on software vendors in terms of price reductions. So I think we're actually quite comfortable that we're not seeing a particular price pressure that we are forced to respond to. We've always, in many of our accounts, competed against free because lots of people just give this stuff away in one form or another. And historically, we've done fine against that. And I will tell you, we'll continue to be fine against that.

Our next question comes from Steve Koenig from Wedbush.

I'll just make it one question since it sounds like you're traveling here, Alan. Craig, I want to wish you the best of luck as well in your next endeavor. And I guess what I'd like to ask here is often times, it's darkest before things turn up, economically speaking. But I'm wondering, if we get into fiscal '13 and we find that the environment remains challenging for whatever reason, whether it's fiscal policy or whatnot, what would you all to terms of your expenses. Would you expect to keep growing the sales staff modestly and keep growing R&D? Or what kind of contingencies would you anticipate?

So some of it, of course, is situational. And you need to look at the situations rationally and make whatever decisions look like the right decisions at the time. But I think, I'll just share a couple of things. One, we've been around a long time and we've been successful and we've been able to grow, even grow much faster in both difficult times, as well as good times. And we were already tuning some of our messages much more about cost reduction, which is frankly, a traditional strength of ours, sort of to complement where we have been going, which was, I think, consistent with a little more optimistic reading of the economy and people being a little more exuberant about trying to increase their top lines. We find that when things are tense, you get more reliable business and sometimes more dramatic business by transforming the expense base, as opposed to the revenue base. So when things start to turn up, you want to be in a good position to jump on the revenue bandwagon. And we're in the process of tuning our messages, and I think we'll be a good position next year, frankly, even if it's a tough year. We're going to look at Q4, and we're going to calibrate our expenditures consistent with what we see happening in the market. We do have a lot of latitude. We've hired a lot of people. We definitely have the opportunity to work on getting the effectiveness of our staff up, which comes with additional training and additional sort of inculcation into the mainstream. So I think we can continue to build productivity, whether we hire aggressively or not. We're going to keep a very close eye on the customers, which, frankly, is one reason I'm spending sometime in the field to be able to gauge that personally.

Our next question comes from Brian Murphy from Sidoti & Company. Brian Murphy - Sidoti & Company, LLC: Alan, so you're referencing sort of macroeconomic weakness as maybe the reason why bookings are a little soft here. You guys have grown very strongly in the past through much worse economic conditions. Can you help us understand maybe what's different about this economic slowdown as it relates to your business? Is it that maybe your deal sizes are a lot bigger than they were 3 or 4 years ago? Kind of -- could you help us -- give us some color there.

Well, a couple of things. One, while some companies have grown throughout the recession, a lot of companies fell back and then posted the improvements as a result of relatively easy compares. We never fell back. We've been growing year-over-year through this. So that's not an excuse, but it's just a reality when you take a look at what's happened in some other businesses. I think that we have a lot of control on how we respond to the economic crisis. And as you pointed out, we've done this before. Perhaps, we were just not as forceful as we should have been in terms of anticipating the depth of some, in particular the European issues. What we have found is we have begun to recalibrate and we are in the process of making some very significant changes to our marketing messages, to facilitate this recalibration, as we recalibrate to explain to customers how much money we can save them. We're seeing a level of enthusiasm that, frankly, we stopped getting fairly quickly around some of the more euphoric messages around business growth. So the business growth message is still there. We're actually quite happy to be in that market. But we're going to pinch what we do as much around cost savings, which, frankly, is how we grew in the previous recessions. So we are taking steps. I actually believe we're not entirely or even largely a victim of this market. I think there are execution things we can do and we must do that will improve our performance next year regardless of the economy. Brian Murphy - Sidoti & Company, LLC: Okay. And if my calculations are right, the third quarter bookings were way up over sort of an easy comp last year. But year-to-date, bookings are still down about 14%. It sounds like that this year is even more back-end loaded than it was last year. And you guys put up a pretty big bookings number in Q4. I mean, could we be seeing that sort of scenario here? I mean, could we see sort of flattish bookings for 2012 or maybe even some growth over 2011?

Yes. No, we haven't, by any stretch of the imagination, given up on this being a growth year. Though obviously more modest growth. And I think, as Craig points out, we're seeing that it is hard to statistically be confident, but we are definitely seeing what seems like a sort of a visual shift to some additional terms. So you may see some things come into backlog instead of revenue. But we're not pessimistic about the way the year is going to end. Obviously, this year has been much tougher than we expected when we entered into it. And last year, we just blew the doors out of Q4. It feels like we might be able to do that as well. But as I said, we had actually a very, very strong beginning of the year, a miserable Q3 last year. And so on average, it's hard to gauge how it's going to turn out. But we're not pessimistic. We just have a lot of work to do. Brian Murphy - Sidoti & Company, LLC: Okay. And Craig, a quick one for you on the service gross margin. I mean, at least over the past 3 years, in the September quarter, it tends to come in pretty low, sort of a single-digit service gross margin there. This year is, obviously, much stronger. Is there anything different happening with the ProServ organization?

Yes, there is. Partners and customers are becoming more enabled and their leading in the vast majority of projects. So -- and that's a good thing. I mean, we want the ecosystem. We want them to be more confident and to grow with their capabilities. So as a result, we're not as focused on growth as we were in the past. So that means that we have fewer people we have to hire and train and onboard. So we save those expenses, but more than just that. Because we have fewer newbies onboard that are sitting on the bench, our utilization rates are much higher. And in that business, it's utilization rate that drives the gross profit.

I would add, we've talked, I would say, 9 or 12 months ago, about moving the mission of services at Pega from being kind of a full service delivery model to much more of a consultative model with our customers and our partners. And so the slowing of the rapid onboarding of junior staff is very consistent with that strategy and we continue to believe it's the absolute right strategy.

Yes, and that reflects itself in the realization rates, which are up as well. If you could provide expert services, you get higher rates. Brian Murphy - Sidoti & Company, LLC: I mean, is that sustainable in the high-teens or 20% range?

We're not in the business to really -- we're not running a ProServ business. We're running a software business. It's nice that it's more profitable. But we really want to have customer success. And if that involves investing in customers, we'll do that because customer success drives more license revenue.

Our next question comes from Richard Davis from Canaccord.

Are you guys seeing any changes in the competitive environment?

Yes, I would actually say that a number of the smaller competitors have dropped out of the market. Guys like Savvion have just disappeared. A number of their customers who are experimenting with them are no longer interested. So I would say, for the pure plays, we are in much, much stronger shape. I'd also tell you that for the stack vendors, we are seeing failure after failure of their systems. On this trip, I spoke to 3 major customers who are in the process of throwing out significant stack vendors. They're little freebie experiments that haven't worked out. So our referenceable customer base is extremely, extremely powerful. And to be blunt, there's not a single stack vendor that, from what I can see, has any sustainable credibility in this space.

Our next question comes from Raghavan Sarathy from Dougherty & Company. Raghavan Sarathy - Dougherty & Company LLC, Research Division: I think, Craig, you mentioned that you closed larger-than-average-size deals in the fourth quarter. Are these deals perpetual license deals or term license deals?

A mix of both. Raghavan Sarathy - Dougherty & Company LLC, Research Division: Is the mix skewed towards perpetual or term?

It's too small of a population to really comment on. As I said, we have noticed that the needle has moved towards more term licenses, and I believe that it will stay that way in Q4. Raghavan Sarathy - Dougherty & Company LLC, Research Division: Okay. And then in terms of bookings, I think, Alan, you made the comment that the bookings from Europe were down 30%, year-on-year, or year-to-date. I can't recall which one it is. But can you talk about the environment here in North America?

Yes, so I think the environment in North America is obviously better than it is in Europe. But people are keeping sort of a watchful eye on Europe. So I would describe it as conservative. But obviously, we did have a good -- a much better Q3 than we did a year ago, so they are buying. But the conservatism reflects itself in the lack of whales, which to be blunt, long term, is okay. I mean, that's one of the vehicles that will help reduce some of the volatility that we're going to be working to try to reduce in this system here. Raghavan Sarathy - Dougherty & Company LLC, Research Division: And then, in terms of sort of your premises that you are still optimistic. You're expecting modest growth in bookings for the year. Are you assuming the situation in Europe would improve? And as we look at North America, what are some of the assumptions in your sort of optimism?

So the optimism and/or at least the positive feeling. It's hard to feel optimistic. The mildly positive feeling, I would say, is based on, frankly, deal-by-deal analysis and having spent time with customers where we had meaningful business on the table. So I would describe it as less of a macroeconomic view than sort of a micro analysis is what actually gives me greater comfort. The basic assumption is that we're not going to have a disaster. If we have a disaster, who knows what's going to happen. But we are not assuming that there's going to be some magical rejuvenation of either the European or the North American fiscal anxieties. Raghavan Sarathy - Dougherty & Company LLC, Research Division: Just one final question. So when you looked at the verticals, also the composition of the bookings, existing versus new, what are you seeing? I mean, is there certain verticals that may be doing a little bit better than other ones? And also, the deals that are closing, are they more skewed towards newer customers since they seem like smaller deals?

Yes. So I think in terms of the verticals, what we've seen is our financial services has been, as I think, been good. Telco continues to be one this year that is strong, and we're really glad that we've put some additional oomph into that. I think health care has been a little sluggish, partially because people were waiting to see who is going to win the election. With Obama winning the election, a lot of our products that are involved with onboarding and increasing population roles of patients, we expect, will get a boost. But my perception was for the last 3 to 6 months, that's been a little bit in limbo. So that would be what I would describe as the one I would expect to change the most based on at least the electoral results.

Our next question comes from Edward Hemmelgarn from Shaker Investments.

Just had a couple of questions. One, did you talk at all about the pipeline? I think at the end of Q2, you said it was around 50% larger than it had been at the same time in 2011? Where is it at right now?

So the pipeline continues to grow and I think continues to be of meaningful quality. It rose another several percent quarter -- from quarter 2 to quarter 3. And as I said, we've been spending a lot of time on the sort of microeconomics of looking at individual deals. And I would think -- I actually think the quality and the integrity of the pipeline is quite good.

How does it compare with, say, last year at this time?

I would -- it's higher than it's ever been. And I would guess it would be easier -- Craig can actually go look that up. But I would guess it's in the order of magnitude 20% higher than it was.

I think it's even higher in comparison.

Okay, great. And then, can you talk a little bit about -- Alan, I mean, it's -- you've discussed the enthusiasm that you're seeing from customers. It's a bit puzzling at times, I mean, the struggle that you get just to close some of the things in a more, I guess, consistent fashion. I'm aware of it. I mean, people wait until the end of the year. But I always thought that the plan had been more of a land and expand as where once you got into a place, then it would just be more consistent levels of deals in companies. So maybe you could elaborate.

I think that's true. You need to understand that sometimes, expands can be very big. Usually, when we got a whale, it was as a result of having had some initial successes and then they say, "Boy, we'd really like to blow this out." When-- you asked me the question, which is how is it possible to reconcile the enthusiasm I'm seeing with some of the slowness of execution relative to business cycle, and there's actually very logical explanation for it. We're talking to the SVP of operations. We're talking to the people in service. We're talking to the senior executives in IT. But what happened, particularly in the last couple of years, is most organizations have put in additional approval processes, frankly, just to slow stuff down and to create additional gates. And so the enthusiasm is from the people who are going to be the buyers. But the sluggishness comes from sometimes, things need to go through 1 or 2 extra rounds of analysis before they actually put pen to paper. And when they do, a lot of times, they're saying "Well, even if the price is a little higher, we'll chop it up into a couple of chunks." And that's especially true with customers who, frankly, have tried a competitor and haven't have such a good outcome. So that's one of the things, ultimately. I think it is going to be just fine for a business, but it doesn't bring in the whales that we have seen in previous years

Okay. And then lastly, Craig, I wish you best of luck in your..

Thank you, Edward. We'll be -- maybe we'll meet again.

Our next question comes from Mark Schappel from Benchmark Company.

And Alan, just wondering if you could just speak to your government business and how well it did in the quarter. And in particular, if you could just speak to any kind of mix shift you saw with respect to your business, the federal business versus the state and local business.

Yes, sure. I mean the government business, as I've spoken about earlier, continues to be happy and really quite encouraging. We went live this past quarter with a sale to the U.S. patent office. We've got business with the USDA that we've recently signed up. We're into a couple of other agencies that I'm not at liberty to mention. So we're getting both extensions to existing business and new business. It's -- once again, it's tending to come in at smaller pieces. But as I said, I think that's just fine. We're developing momentum and referenceability relative to state business. Some of the states we're in, like Texas, have just started almost self-radiating. We had a little Texas user conference that was predominantly driven by state folks. And we had over 200 people from a dozen agencies show up, and many of them were talking to each other about how well they were doing. You can actually go on to our website. There's this terrific self-produced video by the Texas Department of Transportation. And those sorts of things are actually helping us very much in the state business. So building momentum, an increased number of deals, particularly year-to-date, but also in the quarter. And all in all, very, very positive across a number of agencies.

And with that, I'm going to have the call this show and run for the ticket counter. But I'd like to thank everybody. And once again, Craig will continue to be available. And I'm always glad to talk to all of you. Thank you and take care. And once again, thank you, Craig. We're going to obviously continue to work together through many, many more months. Bye-bye, everyone.

Thank you, all. And that sort of concludes our call.

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