Pegasystems Inc. (PEGA) Q3 2015 Earnings Report, Transcript and Summary

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. With that being said, I’d now like to turn the 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, 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 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 September 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 obligation 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. And I’m pleased to say that Q2 was a solid quarter, building on our strong first half. Year-to-date we’ve had excellent revenue growth, while building backlog. That’s typically we’ve construed 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 Web site as well the channels. Building out of applications to make them easier to sell and deploy with a focus on the front office and addressing a broader market and reducing our dependents 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 -- the 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 to show 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 U.K. National Probation Service, which is using Pega Customer Service to transform the delivery of rehabilitation services and reduce the rate of re-offending, as well as British Gas, which is using Pega Marketing to better under its 10 million customers and by creating a personalized relevant and timely dialogue with them. We also in Europe increased business with existing clients, such as World 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 left, with new business from Common World 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 are 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 our 8,000 bankers, many of them very senior attending. And I had the privilege of speaking to many of our clients and prospects who are engaged or looking to more deeply engage 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 through execution, from one channel to another, all of which plays beautifully with our technology. And on the other side is 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 the sort of front to back connection, this end-to-end processing, and really improving the way they serve customers while saving money. Now we are going to continue to double down on this and we are going to continue to invest in our products, our talent, building of ecosystem, and marketing initiatives to be able to bring these solutions to a broader market. We believe that improving our brand awareness in 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 are encouraged that our applications are selling well, in particularly our marketing application rated highly by industry analysts, I'll talk about 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 decisive bank space and financial services companies face regulatory challenges. Now it's interesting, we are 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 new business with Victoria government, the New South Wales government and the Departments of Agriculture, Defense and Treasury. So what's nice also is we are seeing a number of these deals, increasingly source from partners, which we think is important in terms of building leverage into our business model. Go up, as the new programs we launched in Q1 to try to really race our brand name recognition are actually performing well. As those of you have been on the call before now, we really never did any paid advertising until March of this year. And I am really pleased that since we began doing this we have seen a 45% increase in new visits to our Web site and a 45% increase in page views. Now its planned in Q3, we relaunched our so called Pega Can campaign, extending it also into several countries in Europe, and the U.K. for the first time. And our corporate markets team which is focused on selling to that broader market, if you recall historically, we have really only sold to the Fortune 400 and what we decided to do in the last year was really is we said opened the aperture and begin both marketing and selling efforts to companies that were outside of our traditional verticals, and we are of a size that we would not in traditionally sold to. And we’ve scored great business with important companies like EMC, other companies like Computershare, end up really sort of being able to actually enter firms that we would not have historically talked to at all like benefits vision and benefits, 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 Web site. So we are very, very pleased with the sort of market focus is in the right direction. Though obviously some of these efforts like the corporate markets effort, that’s still early and we’re still working hard to develop. We continue to enhance our applications to make a 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 in channels. And you may recall, I mentioned earlier that we were named a leader or by this case Forrester for real-time interaction management. We are delighted to be recognized as having the strongest offering in this category in comparison with companies that include IBM, Oracle, and Salesforce. You can check it out on our Web site, if you want to get the downloads and see the picture. We believe that this core skill set 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 are also finding interestingly and not surprisingly that is markets are getting more competitive. For example the telco market were 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 to 100 days leading to actually publicly announce 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 and 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, Senior Link and CareFirst BlueCross BlueShield, all to try to make sure that they’re 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 effects to events processes and monitoring safety by firms such as GD Health and Pfizer and Telerx to deal with the increasing amount of information that needs to be collected, controlled, and processed. Central to the Pega culture is having clients be successful and we saw clearly important go lives across a wide variety in array of customers. British Airways for example brought Pega Marketing a lot across its contact centers to develop stronger customer relationships and generate stronger brand loyalty and increase revenue. Alliance 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 decrease average handle times, Delta Dental to bring case management in BPM up interestingly to its salesforce.com implementation where we pull multiple data out of multiple sources and really drive end-to-end processes and help ensure interdepartmental consistently -- and consistency. And Toyota was using our Pega cloud to help the company better track quality processes to suppliers and expedite issue resolution and report quality assurance as well. So it's terrific having these customers. The use cases are all resonating around client experience. The applications we’re building out are the right ones, making it easier for clients to understand what we do and to buy and as we look -- as we are pleased with our performance in Q3 2015, we see the increased adoption of the software with both existing and new clients that’s 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 have seen today demonstrate our strategy is working and gives us the confidence to continue to invest in the initiatives I have 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 issued earlier today and is available on the investors section of our Web site. 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’re 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 revenue stood at $202 million up 19% over the prior year. Equally important, we achieved these results by building license and cloud backlog on a year-to-date basis, which I’ll 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 purchasing 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 arraignments 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 and 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 service 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 margin have been running below our targets. To this end, there are a few detailed points to note. First, we’ve recently been seeing improvements in our professional service business in both North America and Europe. We’ve concluded two customer engagements, 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 stories 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 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’ve 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, so it impacts only our GAAP results, stock-based compensation on a year-to-date basis totaled $23 million compared to approximately $40 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 totaled $0.44 per share. Now, to discuss license and cloud backlog. We compute license and 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 unbilled. 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 $380 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’re 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’re 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 both engineering and sales. They reflect the confidence we’ve 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 will significantly influence our results for that period as the same deal fold is either a term or cloud arrangement as opposed to 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’ve a very busy Q4 ahead of us where we’re looking to build on our strong year-to-date performance. And with that operator, we’ll open the call to questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Steve Koenig at Wedbush Securities. Please proceed with your question.

Hi gentlemen. Thanks for taking my questions. 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’re up pretty significantly. And you talked about some of the good things going on at Pega. Maybe parse those out for us relative to the bookings strength in Q3, maybe what factors were most important and maybe if I could ask you that kind of also comment on the sales management synergy you put in place to try to obtain more balanced first half, second half performance. How -- did those were fairly big factor last year in helping things more to the first half, as it looked like that you’re on track for the second half, potentially sort of be stronger this year despite those sales incentives, if that makes sense hopefully?

Yes, I think it’s a combination of things. Steve, the reality is that we did very consciously about year, two quarters ago, but creates an incentives, but also we doubled the management attention on trying to not be quite so insanely back end loaded into Q4. And I think last year we made some real progress on it and I think you’re seeing evidence that with the combination of about some incentives, but its mostly just getting the marriage is to focus on it and getting people to sign up, having Pega work despite the challenges are being reliable in this business. We try to work to be a little bit more reliable for the quarters. So I really think that a lot of it is good work by management. Our accounting executives or sales people understanding the quarter’s matter which is historically we to be candid really focus 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 if it wasn’t driven by and the year has not been driven by a bunch of wales which sometimes has costing for slush around, which we think is a good thing we love our wales, but we hope we want to be overly dependent on them as we go forward. We saw a nice performance across a variety of industries as I pick 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 through before like British Airways for example and 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.

Terrific. Terrific. Thanks Alan. And if I could get into one follow-up, it would be great.

Sure.

Could you 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 markets competitive out there so we wanted to make sure we had a fair grants for everyone to make sure we are retaining our top employees. And we do really focus on giving that equity to select employees. So that -- so its part of the numbers. The other part of it is just the stock has done a little bit better this year, so the stock has been issued at a higher number. And then the last leg of the store is just the fact that we have been continuing to grow headcount and so that too plays into it.

Got it. Okay, great. Thanks Rafe. Thanks, Alan and congrats on the good quarter.

Thank you.

Thank you, Steve.

Our next question comes from the line of Mark Schappel at Benchmark. Please proceed with your question.

Hi. Thanks for taking my call. Rafe, just starting with you on cash flow from operations, it was negative in the quarter if my math is correct, if not, please correct me. But I’m just wondering if you just go through why that is and maybe why, or maybe just remind us why it’s so strong last year at this time, is that a one-time thing last year that is strong?

Yes. So 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 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.

Okay, great. And then Alan, moving over to you, I know you have been ramping up your marketing initiatives this year and I think you made the comment in your prepared remarks that March is the first time you guys did the ad campaign. I just wonder if you can just go a little bit more into that and there is some of the other market initiatives that you’re working on at the moment?

Sure. We are doing a whole collection of things and we have made pretty massive changes in the last 18 months to our marketing department. You may recall that a year and half ago we brought in [indiscernible] Robert Tas who is the head of Digital for JP Morgan Chase and he 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 would mean as we 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 hand to hand combat, very -- 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 Web site. We wanted people to work with our salespeople in 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. Now with that as a vision particularly driven by our client technology, we really want to change 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 is a little more abstract to tell you the truth and explaining you want to be able to help people reduce churn in the telco or help people make sure that their sales were up by a certain percentage for insurance company, examples of application results. And so building out those applications and building out marketing around those applications was actually critical. We increased our visibility in the press. If you actually take a look, we had mentioned many, many more times now and that’s beneficial not just in the U.S., but also around the world. So traditional sort of you think of PR, a lot of work around branding and you can see the results of that publicly in our Web site. We now have over 22 detailed demo videos on that site where people can actually get a taste for our products without having to go call the sales person and really supporting buying. And of course, as I mentioned, spending money first in the U.S and now more recently broadening that to a number of international market, 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, that 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 makes our systems fall short in a lot of cases and there are 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 have been doing. We have really completely rebuilt largely rebuilt the team, in a lot of the key roles and I think we are really hitting on all the cylinders here.

Great. Thank you. And just one final question for Rafe. May be you mentioned this somewhere on your prepared remarks Rafe, I missed it, but the foreign exchange impact on revenue in the quarter do you have that handy?

Yes, so there is $3 million of 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 costs it really -- we are kind of -- the natural hedges it pretty much equalize the impact. That makes sense?

It does. Thank you.

Our next question comes from the line of Greg McDowell at JMP Securities. Mr. McDowell, please proceed with your question.

Great. Thank you very much and I watched a lot of those videos on your Web site 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 peaked my interest and that with the 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? Thanks.

Yes. Well, I have to stick to -- with my comments about the rest of this year since we wont be rolling our guidance for the beginning in next year, but it seems like that Pega Can campaign where we’re pushing it in Europe, we’re seeing early indication that we’re getting some very positive results as Alan indicated. So we’re maintaining -- well that we’ve relaunched 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 Web site you will see quite a number of open position. 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 on hiring sales people, hiring key engineers in great roles. So we’re -- this year has been a good year 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.

And you know 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 it just happens to go into sort of current period booking of revenue in the same period. And we try to encourage our clients to do more of a ratable work whether its 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 that there seems to be an interest -- more of an interest than one might expect. In perpetual that can flip at any moment. And all of those things could 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 etcetera. I think the point is that given the strong results so far this year, we’ve decided that its worth pushing, because we do want to enter 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 that into Q4 than I think we would normally would have.

Great, thank you. 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 is 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 even had $4 million in RevRec delays, but is that -- is that a trend we could sort of expect to continue and why that business is strong?

I wonder that business is driven by the need to support our partner ecosystem. We are not trying to really compete with our partners. We think that having a strong environment ecosystem is actually -- the 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 Pegasystem after Pegasystem as we’re sort of radiating internally. Sometimes that leads to revenue, sometimes it doesn’t depending on what’s -- what was the nature of the roll out. We are seeing a lot of demand and do think that that will continue to increase. What’s in the percentage increase year-to-date?

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

So I would not go 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, our customers want to do it ourselves and actually helping and working with our partners.

7%.

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 thought [indiscernible].

Great. Thank you.

[Operator Instructions] Our next question comes from the line of Edward Hemmelgarn at Shaker Investments. Please proceed with your question.

Yes, 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 some kind of lumped together and I’m just curious. Then you kind of show cloud also in deferred revenue, in current deferred revenue, but its -- and its there no cloud in the long-term deferred or …?

Yes, thank you for that question. So certainly in the long-term -- excuse me, let me just in the op balance sheet portion of backlog which are 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 build. So there tends to be very little long-term build cloud revenue that’s out over 12 months 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 when we’re going to market, our customers very often -- they’re first just deciding if they want to choose Pega. When they decide they want to use Pega, they then decide whether they want to have the offering on-premise or in the cloud. So we don’t want to put too much emphasis on one bucket or the other, because it could frankly shift just because of the way that particular customer. We look to …

And they shift during the -- 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 is 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 the cloud business is newer for us than our term business, that has been growing at a very pretty nice rate.

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

I think if you [multiple speakers] if we were in charge of how all these things are reported, we probably just have one category that’s a software revenue. But the rules require us to call on-premise either term or perpetual a license and the cloud a service is just -- we just accept the rules that they’re in that regard. They [indiscernible].

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

Well, kind of it is service aspect. So when you sell a perpetual license, you don’t have any ongoing services that go along with it and somebody buys our cloud, we provide a lot of ongoing care feedback maintenance other stuff of that type. That is done very differently, some by our staff in many cases as opposed to the customer staff. So it has a more very combination of license in service flavor. I’d say its probably closer to the dynamics of a complete project, we do a complete project to our customer that has a combination of perpetual license and service and maintenance. We are actually doing the math, that would feel to be a little closer in some ways and maybe not complete, but the service elements that obviously operate with service margins. All right?

Thank you.

Thank you, Ed.

Thank you.

At this time there are no further questions in the audio portion of this conference. I’d 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 are 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.