Greetings and welcome to the Pegasystems Second Quarter 2017 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. I would now like to turn the conference over to your host, Mr. Kenneth Stillwell, the CFO. Please proceed, sir.

Thank you. Good evening, ladies and gentlemen, and welcome to Pegasystems Q2 2017 earnings call. Before I begin, I would like to read our Safe Harbor statement. Certain statements contained in this presentation including, but not limited to, statements related to future earnings, bookings, revenue, and mix of license revenue, may be construed as forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. The words expects, anticipates, intends, plans, believes, could, should, estimates, may targets, strategies, intends to, projects, forecasts, guidance, likely, and usually, or variations of such words, or other similar expressions identify forward-looking statements, which speak only as of the date the statement was made and are based on current expectations and assumptions. Because such statements deal with future events, they are subject to various risks and uncertainties. Actual results for the fiscal year 2017 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 Q2 2017 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, 2017, its annual report on Form 10-K for the year ended December 31, 2016, 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. And with that, I’ll turn the call over to Alan Trefler, Founder and CEO of Pegasystems.

Thanks a lot Ken. I am pretty happy with where we are at this point of the year. We continue to see solid performance, as well as a good mix of business between our apps and our platform. We opened our last call with a comment about the quarter-to-quarter lumpiness of our business, as we believe the longer term trends are a more accurate and appropriate way to view how we’re doing. As such, as I always do, I’ll focus on our year-to-date results. Now, midyear, we’re about 49% of our full-year revenue guidance, which is higher than in the past, and I think reflects our moving toward increased contribution from recurring revenue. Ken will provide additional financial details later. Let’s talk a little about how we’re doing and differentiating ourselves in the market. As we discussed last quarter, foundational to our success is our ability to outpace the competition and have chosen to focus on firms like Salesforce.com by focusing our technology and our go-to-market on a couple of key areas. First, we’re the leader in real time AI for customer engagement. Secondly, we offer the only software platform that automates work across all customer channels through all corners of enterprise’s operations, including customer engagement, acquisition, sales, on-boarding, servicing and fulfillment, and we’re the only CRM providers that offers true cloud choice. Our unique capabilities allow us to build software that avoids the pitfalls many organizations face as they try to solve their customer engagement issues and work through the complexity of today’s enterprise. Many mistakenly focus on making individual channels smarter or dropping the newest technologies into their contact centers, thinking that will make their reps more productive. But instead, it routinely just adds complexity and confusion. Instead, our approach is to help clients think about the outcomes…

Thanks, Alan. I’m really pleased with our year-to-date performance. For the first half of 2017, we experienced a solid increase in new license and cloud commitments, revenue; we had great operating margin improvement, and significant operating cash flow. Year-to-date top line revenue grew by 15%, consistent with our long-term guidance. As most investors know, we look at our business over the long-term, so year-to-date or even trailing four quarters is the most relevant measure for management. You’ll note that we achieved approximately 49% of our full-year revenue guidance through the first half, as Alan mentioned, which is fantastic and really a sign of more balance of revenue between the first and the second half of 2017, under the current accounting standards. Our growth in new license and cloud commitments were achieved with just one whale in the first half of 2017. To remind everyone, our definition of whale is a client software commitment of greater than $10 million. Whale sized arrangements which just exaggerate the lumpiness and cause lower predictability are still likely in our business going forward. In fact, we are chasing lots of whale in the second half of 2017 and into 2018. Another factor that contributes to quarter-to-quarter variability is the timing of perpetual deals. For example, remember that we talked in Q1 about a $7 million perpetual deal move into Q1 from Q2. But even given this, we still grew backlog in Q2 by $5 million when it’s much more common to consumer backlog in the second quarter of the year. Our first half services revenue growth at 24% year-over-year exceeded our long-term growth expectations of 10% to 15%. We have a very small number of consulting services engagements where we’re playing a bigger role than originally anticipated. This is especially true in engagements that are…

Thank you. At this time, we’ll conduct a question-and-answer session. [Operator Instructions] Our first question comes from Steve Koenig with Wedbush Securities. Please proceed with your question.

I got one for Ken and then one for Alan. Starting with Ken. So, Ken, I realized you don’t guide to backlog or to bookings, but can you give us maybe some interpretation or color on both the Q2 results -- I calculate maybe bookings down about mid single digits year-on-year from a year ago. We know you pulled in that large deal into Q1, but maybe some commentary on that bookings result. We know you are lumpy but would love to understand a little bit about the quarter in that respect. And then, thinking on the year, you’ve got some really tough comps coming up in Q3 and Q4 because you had such a strong second half of last year. Should we be surprised that bookings are flattish for the remainder of the year because of those comps or how should we think about that?

So, let me touch on Q2. So, once again, I think we really need to look at the nature of our business when we think about any discreet quarter, and we’ve talked about this over the last year. We have deals that are big and actually can move from perpetual to term and it can also move from one quarter to another. We had one example of that that moved into Q1. So, we kind of always want to measure ourselves on a year-to-date and even a trailing 12-month; that’s what we look at. Naturally, Q2 was -- if you look at year-over-year, you are right. We didn’t have significant growth if you just look at a discreet quarter of Q2 in bookings because you guys can engineer that number. But when you look at our year-to-date -- if you look at the two quarters, which is really a better measure, you’ll see that our -- what you might call bookings growth is in excess of 20%, and that’s really the way we think about it. With respect to the second question that you asked about the backend of the year. Yes, we do have two strong quarters in Q3 and Q4 from a bookings standpoint that we had last year. However, our pipeline has grown nicely. We have a lot of deals in place. And we feel really good about our position in the market. So, although the comps are good in Q3 and Q4, we are not backing down from our plan to grow this business.

And then, if I can turn to you, Alan. With Pega’s broad range of capabilities, I think the challenge from a marketing perspective has always been to grow the market awareness and focus markets about what Pega can do. And you certainly have been making a big push in CRM -- can you share with us how has your -- do you have any metrics or any indications of how your market awareness has grown, either as it relates to lead-generation or sales cycle time? And then, related to that, how do you drive more awareness when it comes to back office initiatives as well?

So, anecdotally, the awareness is much, much higher. And you are absolutely right, a lot of folks that we now talk to, have said, boy, we didn’t really realize the Pega to do these things. And so, the types of things I see that tell me that awareness is up is for example I look at the amount of press we’re getting, which is up very, very dramatically. I’m actually pretty pleased. You can see a lot of it by going on to our website; we have links to it. And it’s up I would say meaningfully, year-over-year. The number of press interviews I’m doing, the types of things that are indicative that those organizations think that their customers will be interested in what we do. And I think that’s really quite meaningful. Our community, which is one of the things we also look at, to give us a feel of sense awareness, which consists of our followers on Twitter on LinkedIn is also up very, very significantly and we are continuing to push on that. So, I don’t have a formal estimate and frankly I’m not usually a fan of paying some ad agency to go and do one of those awareness surveys, which I think are often a little self-serving and unpredictable. But, it’s pretty clear to me that our awareness is meaningfully up. And we have a relatively new Chief Marketing Officer who I know has a lot of plans for the coming quarter.

Our next question comes from Greg McDowell with JMP Securities. Please proceed with your question.

I just hit the follow button on LinkedIn, so count me as one more follower on LinkedIn. I wanted to ask, I guess first for you Ken, the year-to-date recurring arrangements at 54%. And just doing the math of $3 million for every 1%, if I multiply 4 times 3, I get to $12 million. And I wonder if what you’re saying is that we should think about taking our full year numbers down slightly to account for not the 50-50 mix but maybe closer to a 54-46 mix for the full year?

So, I am going to draw parallel to something that happened last year, which was currency. And I think it’s always risky for a company to guess where you’re going to land at the end of the year when you have something like currency that you can’t control. And unfortunately, we don’t force customers to buy a certain way. So, there is some level of variability to that. So, given -- your assumption that if we had say a 55% or 60% mix to recurring, you’re absolutely right that the impact to that would be headwind to revenue, there is no doubt about it. We don’t know where we’re going to land. We actually kind of hope that we get more recurring arrangements, to be completely honest with you. But, I think it’s really hard for us to say anything about previous guidance, given that the fact that we could be guessing one way or the other and then end up with egg on our face. And I think I draw that correlation to currency as well last year. So, I think all your assumptions are right. I just don’t think we’re at a point in July or early August I should say to make a really big peg on how mix is going to land.

And I know this mix some of this perhaps a little more challenging for some of the analysts. So, it means it does require some analysis. That’s why we think that looking at the revenue number in concert with the changes in backlog which we disclosed in such agonizing detail, I mean we have the most detailed disclosures I know of by year of what the license and cloud backlog is. I think when you look at those in concert, the business is doing well and we expect this to continue to do well. If a little more comes in to term, then -- or subscription or cloud, what’s coming from subscription, as Ken said, we think that’s all good and will be good for future years. But, I am not expecting any massive swings; that seems to be trending a little bit more towards recurring this year….

And by the way just one follow-up to that point Greg, that’s why we show the ACV metric, right, because you can actually not only see the backlog change but you can also see the ACV so that you can see how that part of the business, the recurring part is growing. And hopefully that’s helpful to kind of connect the dots on the mix issue.

Absolutely. And as you pointed out terming cloud ACV is up 26% year-over-year, so that’s the number we’re tracking very closely. Here, I just want to be prudent with my full year numbers and hopefully the rest of the community can be prudent with their full year revenue numbers, accounting for the year-to-date recurring arrangements. One follow-up question, I guess Alan, this is specifically for you. I think whenever the analyst community hears words like or terms like retooling of the sales force, it makes our ears -- our hearing improves when we hear those words. So, I was hoping you can expand a little bit on what exactly you mean by that?

So, part of the shift to challenger really involves finding folks who have the ability to expand their skill set of which we have many or being able to bring people on with a different skill set. One of the things that I’m really excited about is that we’re -- and this actually relates to the previous visibility question. We’re seeing since the beginning of this year -- we’ve been seeing streams of incredibly talented people from the sales and marketing perspective coming through our doors wanting to work here. I’ve actually never seen anything remotely close to that. I think some of that is actually frankly evidence of our improved visibility, just more good sales people as heard of us, but also frankly to the fact that we’re beating some pretty meaningful players in the field. We had one senior manager for our CRM cloud company, I won’t mention the name to be polite and he said you’re the only guys who beat me, and he’s really interested. We’re seeing a lot of that. And I don’t think it would be correct to take a retooling to comment in the sort of negative vein. I think it’s really making sure that we’re optimizing the team and growing the team and addressing places, and there’ll places when you change your methodology, where some folks will find that transition difficult but also bringing in a lot of talent, and you’re going to see us working very hard on that for the remainder of this year. So, we wouldn’t have an ACV that went up like you just noted, if we weren’t actually being successful selling.

And if I can have just one more follow-up for you, Ken. One thing that really stood out to me is just the cash generation in the quarter. I mean, if you look at first half 2017 compared to first half 2016, meaningful, meaningful improvement in cash flow from operations. Can you just touch on maybe what specifically happened in Q2? I think there was a big change in AR, would just love some more detail on that.

Well, so we -- you may remember, last year, we talked about we were not happy with where our DSO was and our AR balances last year. And we just really have put a full-court press on really trying to manage that in a more active way. Quite frankly, it may be interesting for the audience to know that we actually implemented a Pega tool in-house to actually help with our collection process. And so, we’re just more on top of it. by the way, I don’t think our AR number where it is now is actually a number I’m happy with. So, I think there’s even more room to try to squeeze some cash out of our working capital. So that’s kind of my goal. So that AR number is not where I want it to be, so I think there’s even more opportunity to increase some additional operating cash flows through better leverage of working capital. But, we’re happy with where we’re but there’s still work to do.

[Operator Instructions] Our next question comes from Mark Schappel with The Benchmark Company. Please proceed with your question.

Ken or Alan, I’ll leave this up to either one of you to answer. But on the professional services front, professional services growth remains exceptionally strong here; it’s actually outpacing license growth over the last several quarters. And I was wondering if one of you could address why that it is. I know addressed or touched on an initiative that you have going forward to kind of -- even move that needle a little bit further. But why are we seeing such a good professional services growth over the last couple of quarters here?

Well, our customer base has expanded a lot and that creates demand in the market. And we really are working hard to not compete with our partners; we really want a vibrant partner ecosystem. But, there are times when the customer really, really wants Pega to be involved and to deliver it. We’ve got a couple of very large projects where they’ve really wanted us. And I’m not thrilled frankly with the rate of professional services growth. I would not expect that as we go forward in traditional years that we would necessarily want to continue at that pace. But, given the importance of some of these clients and the enormously strategic things we’re doing, I can actually appreciate why they want to make sure that certain project are actually delivered by us. Hopefully the Pega Services Ventures will create a whole cadre of additional services firms that can either fulfill this need and allow us to grow at a different rate going forward or frankly be bought by larger firm, as is happened a couple of times. We’ve seen Accenture and Ernst & Young buy companies that had 100, 200-person Pega practices and use that to kind of see more of their depth. So that’s not something I think you should view as a long-term trend But, we decided to move and support these clients and I don’t regret.

Great. Thank you. And then, Alan, it’s been several quarters since you’ve made an acquisition, and I know you touched on this a little bit in your prepared remarks. I have to believe that you continue to be on the lookout for just interested capabilities in companies. And with that said, maybe you can just touch on some of the technologies that are grabbing your attention these days that maybe of interest to you.

Yes. We do look at a number of firms on an ongoing basis and we do have an active corporate -- a corporate development function. We are pretty happy with where we are in AI but were always thinking to look at new approaches to machine learning, both because to make sure that we know what’s going on in the market and it would also potentially lead to us being able to bring in and some technologies that would be faster. I think the whole AI space continues to be one where we’re going to see a lot of change and a lot of evolution. So, I would say that’s kind of higher on the list.

Thank you. At this time, I would like to turn the call back over to management for closing comments.

So, let me thank all the listeners, especially any of you who came to PegaWorld, I want to thank you and let you guys now that we are doing well and we are excited about what we are going to be able to accomplish this year. Thank you very much.

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.