Greetings and welcome to the Pegasystems’ Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Rafe Brown. Thank you, sir. You may begin.

Good evening, ladies and gentlemen, and welcome to Pegasystems’ second quarter 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, planned, 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 second quarter 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. With that, I’ll turn the call over to Alan Trefler, Founder and CEO of Pegasystems.

Thank you, Rafe. Q2 was a very strong quarter making for the excellent first half. We exceeded our revenue goals while building backlog demonstrating strong execution throughout the organization. Our first half non-GAAP license and cloud revenue grew $135 million, a 16% increase year-over-year and over a pretty tough compare with the previous first half. North America showed very strong performance and Asia performed well. There is still room for improvement in Europe but it performed much better this quarter. My recent visit made me optimistic for continued improvement in the second half. So given those summer sales, vacation season, it may be more in Q4 than Q3. We continue to focus on helping our clients become more customer-centric and that they connect their front-end customer facing applications to their backend operations. This enables clients to go end-to-end from engagement to fulfillment, something we feel uniquely qualified to do. And as we’ve been discussing, we’re working to mitigate the intrinsic lumpiness of our business and our strong first half is an indication that we’re making some progress on this goal. To give you some context, as we’ve discussed for the past several quarters, Pega is embarking on some ambitious efforts to more deeply build out our strategic applications and to bring our solutions to a broader market. This includes new programs we launched in Q1 to raise our name recognition with both existing and new audiences and to start to institute what we thought was a more repeatable sales model. And this also includes packaging our capabilities as easier to deploy application that address the critical needs our clients have to improve their responsiveness and engagement with their customers. And overall, we’re very pleased with the results to-date and believe we’re seeing early signs that this progress is taking hold.…

Thank you, Alan. For the second 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 issued earlier today and is available on the investors section of our Web site. As we’ve discussed in the past, quarter-to-quarter comparison do not necessarily reflect the underlying momentum of our business as the timing of a small number of large transactions and the mix of license types can significantly impact our results. To provide the best look at how our business is performing, let me run through our results on a year-to-date basis. We’re pleased to report that year-to-date non-GAAP total revenue was $316 million, up 10% year-over-year. Equally important, we achieved these results by building backlog which I’ll discuss in a few moments. Our year-to-date non-GAAP license and cloud revenue stood at $135 million up 16% over the prior year. From a mix of revenue perspective, we were pleased to see that for the first half non-GAAP license, 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 purchasing our software including perpetual and term license arrangements, as well as the choice of installing the software on-premise or using our cloud offering. In an effort to improve revenue visibility, our sales compensation programs encourage the sale of term and cloud arrangements as they drive revenue recognition over a period of time. To this end, when one combines term, subscription and cloud and maintenance revenue for the…

Thank you. [Operator Instructions] Our first question comes from the line of Brian Murphy with Merriman Capital. Please go ahead with your question.

Alan, when I look at the performance on a geographic basis, what really stands out is your other Americas bucket. Could you just give us some color about what’s going on there, is that Canadian banks or is that something else?

Well it’s interesting because we’ve had really a pretty amazing set of successes in Brazil. And the interesting thing is it’s been done entirely with partners and also Canada has been very-very strong. We’ve had some very good business in Canada last year, some of which just came into revenue this year. I think it’s been a little bit of South America so far, I think there’s going to be more of that coming. And Canada continues to just be a terrific place for us.

I guess that was where I was going with this is, do you see South America is having a lot more runway going forward? And if so what are you doing in terms of sort of building out sales and marketing infrastructure down there?

Thus far it’s a virgin territory for us. We’ve really been doing it in conjunction with a couple of our very, very large and successful strategic partners with large presences there. But I think inevitably we’re going to come up with a strategy to implement in 2016, just going to have to look at that and figure out where that wants to go. But right now we have not been building our infrastructure though. It’s actually [indiscernible] you should. Canada of course we have an infrastructure and we have success in everything from the banking, the insurance businesses, we have Dow [ph] Canada as a customer, we have Canadian government actually recently decided to budget from. So we’re pretty broadly distributed there.

And in Europe, I know the third quarter is typically pretty soft due to vacations in August et cetera, but I’m curious what particular made you optimistic on your recent trip that things might sort of bounce back a little bit in the fourth quarter?

We’ve made some -- there have been a number of management changes to that organization. They have happened over the last six to nine months, and we saw Société Générale which is obviously just a terrific brand name, signup and make a material purchase with us. And when I go to the customers, some of it is a bit suggestive, I get the sense that there’re now just more ready to move, but they’re almost sick of waiting in a malaise state. And I think the issue with the third quarter is that it’s really in parts of Europe, a one month selling quarter because it’s really September. So that’s what makes it a little less predictable. But once again, I’m feeling more optimistic about Europe than I have the last few years really.

Just one more and I’ll hop in the queue. And I don’t know if this is for Rafe, but how do we think about the service gross margin in the second half; is it more sort of -- is this a good run rate or are we back to sort of high-single digit expectations?

As we’ve been discussing in some of the recent calls, we are doing a number of things to help build up margins. I do think we’ll see an uptick from where we are, certainly that’s our internal plan, we need to go ahead and execute against that. We have, there’s been a couple headwind elements out there that we’re working through and I think we’re making real progress. It is going to take us a number of quarters to get back to the margins we really want to have but I think we’ll be a on a better trajectory soon.

[Operator Instructions] Our next question comes from the line of Steve Koenig with Wedbush Securities. Please go ahead with your question.

This is actually Jay, [ph] dialing in for Steve. You mentioned that your routable ratable mix was 50% for the quarter were pretty year-to-date, how do you expect this changing going forward? Is it still at 50% or you expect a mix shift going forward?

Thanks for the question. Obviously the numbers I gave were year to date and any one quarter things can move around a bit just due to revenue recognition of when some perpetual licenses come in. But I think the underlying trend we’re seeing is a gradual increase that has been going on for some period of time now and we’re up over the 50% threshold which we thought was noteworthy. So, we’re making an effort to continue to build up the ratable side of the business. Now obviously maintenance has always been part of that even off our perpetual licenses. But the focus on term and cloud and the fact that our sales team is rewarded for selling cloud and term a little bit better is driving the behavior that we think is better for our visibility going forward. So, I think that’s the best way to think about that.

And also you mentioned that you got two well deals on year-to-date. I’m guessing that one previous quarter and one this quarter. How has that impacted or how’s that reflected in Q2?

So the one of it was Q1, yes as you noted and then the second one is in Q2, which brought some revenue into the current quarter but also added some to backlog. So, it’s impacted, we did benefit from that second well in Q2, but so to backlog.

And not uncommon for wells to have a backlog effect, they almost always do because often there are sort of multiple chunks and stuff that are for the customer.

Thank you. [Operator Instructions]

Moderator, do we have any more questions?

No, sir. Ladies and gentlemen, there are no further questions at this time. I would now like to turn the floor back over to management for closing remarks.

Moderator, it does look like there is a couple of question that popped up on our screen.

Our next question comes from the line of Hal Barry with Graham Partners. Please go ahead with your question.

Great results here. You made a comment about the timeframe to close deals shrinking, which is interesting. And Alan, is that a function of smaller deals that you’re seeing or is it just a function of greater recognition in the market or peak more business? Is there any other color you can add to that comment?

I think, we’re making some changes to become a little more effective from the selling point of view. And that’s still going to mean that some deals take forever, particularly the very large companies but we go through extremely formal processes but we’ve seen some better dynamics. These deals are not super big ones but they are meaningful. I mean our average deal size has crept up year-over-year by couple of hundred K which is nice. But there will tend to be on the smallest size but still pretty material.

And then lastly just if you could give a little more color around, you mentioned partners accelerating growth and Pega certified architects that they employ. And quite frankly at PegaWORLD, pulling a lot of these folks, the growth rates that they were seeing in their fleet of Pega implementers were considerably higher than the growth rate that you’ve shown on your license software. And I’m just curious, is that a leading indicator or are there other projects that people are getting put on that won’t necessarily show up in your license growth or is this still a function of you pushing more deals their way versus focusing internally on that?

We think it’s actually a leading indicator because in reality, we cannot like massively over sell our customers these crazy enterprise licenses, where if they tripled their deployment, they don’t pay any more because they’ve already pre-bought. A lot of those end up being really disappointments to customers because frankly they end up buying software they don’t deploy which is not great for long-term relationships. So as you see our partners staffing up, I think it’s a reasonable assumption that that’s going to be in conjunction with either projects that are finished. And with the new projects or new business that will be highly correlated to our license growth. So we’re also excited that several partners have gone out and actually bought smaller partners, as we view as powerful because when you get companies like Accenture and other, Ernst & Young going out and buying small 100% Pega practices and using that to jump start their own, they’d only do that as they saw it as a leading indicator for a lot more business down the road.

And maybe just one last one, thanks for that, on for Rafe. For revenue growth, is there any kind of bucket, how much of that was from traditional implementation services versus how much of that is starting to see cloud revenue come through that line item?

It is worth noting, the professional services breakout, you can find it in our Q and so you can actually see the exact breakout of how was coming from consulting services revenue. We have started to breaking that out, you can find it out on page 19 of the Q. So the growth in services revenue I gave out is indeed the professional services revenue.

Our next question comes from the line of Edward Hemmelgarn with Shaker Investments. Please go ahead with your question.

You talked the last few quarters, or you’ve talked about trying to expand to kind of package your offering so that you can go after a smaller customer than the Fortune 300 that you in effect targeted in the past. How is that going? I mean I know you’ve upped your spending on R&D and so forth, I mean is that your starting to see any progress in that area?

Yes, great response from a prospect perspective. We’ve only really dialed that up. We only really started making the selling that way happen at the end of first quarter. So we’re four, months five months into it. But the pipeline is great; there is huge enthusiasm in that team. We’re focusing on especially the North America, so we can see that perfect the process and then we look to bring it more international. But we just went through a little two-day strategy review with extended leadership team here. And there is great enthusiasm about this. And the additional features we’re adding, things like this Pega Express, enhancements to distribution application, really play very, very well for that market. So I think it’s going to be something we can be very successful on. And we’ve already got a lot of history, even companies doing couple of hundred million of revenue can be successful with our technology and maybe very, very effective. Typically that’s common when somebody has left AIG or some other big company and goes to a smaller insurer and then says well we really need this Pega, that’s been the vehicle. Now we’re actually being able to do much more of a formal program. So, we’re going to keep it spill over the couple of billion plus in the Fortune 3000 is the way we’re thinking of it.

Have you been able to see an increase in the percentage of your revenue coming from the largest -- or from the non-largest companies or is that…?

That’s little of premature. I think that that would be more something we’re looking to see in 2016.

Ladies and gentlemen, there are no further questions at this time. I would now like to turn the floor back over to management for closing remarks.

Thank you everybody. We’re all working hard here. I think the team is doing the right things and we’re seeing strong results. We are excited about where we’re and where we’re going. And if it’s convenient, feel free to tune into Squawk Box on Friday morning. Have a great day.

Thank you ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect.