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…

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…

[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.