Pegasystems Inc.

Good evening. Welcome to the Pegasystems' 2011 Q4 Earnings Conference Call.

With me here at the Morgan Stanley Investor Conference in San Francisco is Alan Trefler, Pegasystems' Founder and CEO. Before I introduce Alan, I will start with our Safe Harbor statement and then provide my financial commentary.

Certain statements contained in this presentation may be construed as forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. The words anticipates, projects, expect, plans, intends, believes, estimates, targets, forecasts and could 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 from the 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 Q4 2011 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, 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.

On our Q3 call, we reminded everyone that our individual quarters can be lumpy, and down quarters are often followed by a significant annual growth. Our Q4 results showed this pattern to be true, with record Q4 bookings and revenue as well as record annual bookings and revenue.

Q4 license signings were the largest in our history. For the year, the aggregate value of license signings was up more than 75% as compared to 2010.

In addition to driving license revenue to $45.4 million for the quarter, our term and perpetual license backlog, as detailed on Page 32 of our 10-K, jumped to almost $210 million, an increase of 70% or $86.2 million from last year.

Covering more accounts from more of our folks, we

continue to dramatically grow our customer base. The aggregate value of licenses signed with new customers grew 145% from 2010.

At the end of 2011, we're holding total backlog of $359.8 million, an increase of 55% over the backlog at the end of 2010. This backlog does not include any portion of annual maintenance agreements and term license agreements that we expect to renew during 2012.

On every call, we also note that our financial revenue can be impacted by the mix between term and perpetual licenses. Last quarter, we noted that we saw a short-term pipeline that was leaning slightly towards term licenses, which, as compared to perpetual licenses, results in lower financial statement revenue in the immediate period.

Term license signings in Q4 were off the chart. Our backlog of noncancelable term licenses of $161.4 million is up $70.5 million or 77% from 12/31 of last year.

Term license revenue is $8.6 million for the fourth quarter and is $34.4 million for the year. The record value of term licenses that we signed in Q4 have little impact on the fourth quarter, but will have an impact in upcoming quarters as we recognize the revenue over the term of the license.

Page 32 of our 10-K details by year the revenue we expect from our term license backlog. Already, before we sign any new term licenses for 2012, we expect that 2012 term license revenue should approximate $37.7 million.

Perpetual license revenue for the quarter was $34.3 million, an increase of $13.8 million or 67% from Q4 of last year. Annual perpetual license revenue was $94.1 million, an increase of $15 million or 19% from last year.

The growth was driven by an increase in both the number of perpetual license arrangements and average deal size.

At the end of 2011, our backlog of perpetual license arrangements was $48.4 million, a $15.7 million or 48% increase from the balance of $32.7 million at 12/31 last year. Maintenance revenue was $31.7 million on a non-GAAP basis in Q4, an increase of $4.4 million or 16% over Q4 of 2010.

On an annual basis, maintenance revenue grew by 40% to $117.1 million.

Professional Services set a new record of $160.7 million in annual revenue, up 21% from 2010. The increase is due to new projects started as a result of strong license signings in the first half of 2011.

Now with the record Q4 bookings, demand for services will continue to be strong even though we are constraining the growth of our Professional Services since our partners are leading in a growing majority of new implementations. Partners also continue to be an important part of our bookings growth as they are associated with the majority of all active opportunities in the pipeline.

Training revenues were relatively flat in 2011 even though the volume of training days increased. In order to rapidly increase the population of trained Pega professionals, we will move to a more widely available online training methodology in 2012 called Pega Academy.

We are making this investment to drive faster training and successful implementations. While this drives growth in license revenue, it may hold or even reduce training revenues in 2012.

For the year, gross margin percentages are down slightly from last year partly because of the larger cost of license in our GAAP financial statement. This is due to the amortization of the software intangible asset created as part of purchase accounting.

This charge is added back as part of the GAAP to non-GAAP reconciliation.

Page 22 of our 10-K details the amortization of intangible assets. Professional Services gross profit margin is also down from last year.

In spite of the fact that our partners are the leader in most customer implementations, we've been hiring and training staff in order to fill demand created by the record Q4 license signings. Investing in the growth and support of our partners means hiring and training a large number of new employees, which reduces utilization and gross margin.

Operating expenses increased by $13.3 million from Q3 to $69 million. $2 million of the increase was in R&D, while the balance of $11.3 million was in sales and marketing.

While part of the increase in sales and marketing was headcount, the largest driver of the increase was commissions on a record Q4 license signings. In 2011, we increased sales and marketing headcount by 87 new employees, of which 72 were in sales.

We were able to accelerate sales hiring in the second half of the year where we hired 45 of the 72 new sales employees.

I'm often asked if this is it, have we hired all the sales people that we need? We've been steadily growing sales capacity since 2006 and we see more growth ahead of us.

We believe that our increase in license signings and revenues during this period is directly attributable to this investment, and we will continue to grow our sales capacity in order to cover new accounts, new geographies and new vertical markets.

Similar to the sales organization growth, during the second half of 2011, we added 100 new employees to our R&D organization, the majority of which were located in India. We will continue to invest in R&D to lengthen our lead over possible competitors and make improvements in the products which will drive license revenue growth.

G&A expenses increased by about 13% in the year. As we increase our international footprint, we incurred increased tax and professional fees along with the need for additional headcount.

Our FAS 123R charge for stock-based compensation for 2011 was about $9 million on a pretax basis. Note 15 to the financial statements details how those charges are allocated to the cost of revenue and operating expenses.

This chart is also shown as an adjustment on our GAAP to non-GAAP reconciliation that can be found on our earnings press release.

In spite of the wild ride on the currency markets, we recorded an FX loss of just less than $10 million. In fact, the actual net loss is less since we recovered most of it through offsetting gains on our hedging contracts, which are recorded as part of other income net.

Our low GAAP income tax rate is due to 2 factors. During the year, we recognized the benefit on certain tax positions for which the statute of limitations expired in Q3.

Previously, these benefits were considered uncertain tax positions and therefore unrecognized. In addition, our U.S.

taxable income is much higher than our book income. This generates a significant domestic production activities deduction, which is a permanent difference and therefore serves to lower our book tax rate.

In addition to the rate, the individual quarterly provisions for both Q3 and Q4 were very volatile. This is due to the tax provisions for each quarter being calculated based on the estimated annual tax provision.

Our estimate at the end of Q3 was based on the lower income estimate for the year. The lumpiness in our quarters dramatically impacts our estimated tax positions as demonstrated in Q4, where our record bookings and revenue increased net income from our Q3 estimate and caused us to go from recording a tax benefit in Q3 to an overall provision in Q4 based on our actual results.

On a GAAP basis, we earned $10.1 million of net income or 26% -- $0.26 per share on a diluted basis. On a non-GAAP pro forma basis, we generated $28.4 million or $0.72 per share of net income on a fully diluted basis.

We provided a non-GAAP reconciliation and supplemental information in order to compare results to analyst models. On this reconciliation, we've added back certain noncash charges such as our stock compensation or FAS 123R charge, as well as the amortization of intangible assets that are created by purchase accounting.

In addition, to present a more normalized or run rate view of earnings, we've added back any extraordinary or onetime charges, such as the cost of moving to our new offices in Cambridge. The lease term and lease payments on our existing offices end in 2013.

We have a pre-rent period on the new offices, so the lease payments begin as the old lease ends. This means that on a cash basis, we have no overlapping rent payments.

Payments on the new lease start and payments on the old lease end. However, GAAP accounting makes a straight line in new lease costs and results in double -- overlapping noncash rent expense for both offices in spite of our free rent term.

We've added back this overlapping noncash lease expense as well as the one-time cost of moving the offices. We're moving the offices in 2 stages.

Therefore, our GAAP to non-GAAP guidance reconciliation, we have forecasted the second stage of this nonrecurring moving expenses.

We had a fantastic billings and collections quarter. Our cash flow from operations jumped from $19.6 million at the end of Q3 to $39.8 million at the end of the year.

As a result, our cash position increased by $13.1 million in the quarter from $98.3 million at September 30 to $111.4 million at the end of the year.

Due to our record license signings, our trade accounts receivable balance increased by $16.8 million from $60.3 million at the end of Q3 to $77.1 million at the end of the year. In spite of the strong collections that fueled our cash flow, the record bookings caused our days billed outstanding, or DBOs, to increase slightly from 58.5 at the end of Q3 to 65.3 at year end.

During the year, we purchased 139,000 shares for $4.1 million at an average price of at about $35. Late in the year, our board voted to increase the balance available to repurchase our common stock to $15 million and extended the buyback period to December 31, 2012.

Therefore, at year end, we had a remaining balance of approximately $13.9 million available for future repurchases.

Our bookings record for Q4, our record backlog and strong pipeline at year end allows to provide guidance for 7th consecutive year of growth. 2012 will mean a new milestone as we estimate that revenue should exceed $500 million.

There is no significant difference between GAAP and non-GAAP revenue for 2012. We expect 2012, like 2011, to be a back-end loaded year.

This is annual guidance. We prefer not to give quarterly guidance for several reasons.

Our customers, not us, determine whether they will buy a term or perpetual license, and the change in the mix can make our quarters extremely lumpy. In addition, our quarters have annual, not quarterly, budgets to buy software and we don't give crazy discounts at the end of a quarter to make guidance numbers because our business is built on follow-on sales to existing accounts.

However, we will give a slightly more detailed outlook for the first half of 2012.

So with the caveat that we don't manage quarterly numbers and revenue recognition can result in lumpy results, we estimate revenue for the first half of the year to be approximately $225 million. As I said, this is due to both our strong pipeline of term licenses and our expectation that 2012, like 2011, will be back-end loaded.

We believe that a significant driver of our growth has been our investment in sales headcount. We increased our sales potential by not only covering more accounts in established verticals and geographies but by covering new verticals.

As an example, in 2011, we saw strong traction in the communications and media vertical, continued growth in this industry, as well as establishing our oil and gas vertical will help us achieve new bookings record in 2012. These are major drivers of our growth, so we will continue to invest both in sales and research and development throughout 2012.

Given this investment, we estimate that net income for 2012 will be $15 million or $0.37 per share on a GAAP basis or $36.5 million, $0.91 per share on a non-GAAP basis. Like 2011, we will invest early in the year, and so our profitability will be back-end loaded as we will have higher expenses and lower revenue in the first half of the year.

We held our Annual Sales Kickoff in Q1 and we will hold PegaWORLD in Q2. Both these events represent significant expenditures, which when combined with the back-end loaded revenue year, leads us to estimates that we will be break even on a GAAP basis but we'll have earnings per share of approximately $0.25 on a non-GAAP basis for the first half of 2012.

In estimating net income for 2012, we are forecasting FAS 123R charge of $12 million on a pretax basis, $7.9 million on an after-tax basis, and expect the amortization of intangible assets created from our acquisition to be $7.5 million on an after-tax basis. In addition, we're forecasting nonrecurring charges for accelerated depreciation, moving cost and abandoning our lease as part of our office move to approximately $6.1 million on an after-tax basis.

Lastly, I need to repeat that we do not manage the quarterly numbers. We are managing the company with a goal of growing rapidly and extending our leadership position in our space.

If this means taking the right decisions to grow the business rather than the quarterly numbers, we will make those decisions.

In summary, Q4 was a quarter of amazing growth and new records for bookings and revenue in very difficult financial conditions. With more detail on Q4 achievements, I would now like to turn the call over to Pega's Founder and CEO, Alan Trefler.

Thank you, Craig. And good evening to those of you on the phone.

Pega knocked the ball out of the park in Q4, yielding exceptional results for 2011 while setting the stage for continued growth. We set all-time company records for license bookings, revenue and license backlog.

We closed more deals and more verticals in more countries than ever before. It's exciting to see how the world's best brands and most respected companies are buying Pegasystems' technology to do things they never thought software could do for their businesses.

Our wins range from seamless multichannel customer experience initiatives to major Next-Best-Action decisioning and personalized retention and cross-sale programs. In light of the difficult economy, we adjusted our focus to highlight areas of traditional strength, helping our clients achieve significant operational productivity improvement and cost reductions.

It is incredibly exciting to see and hear clients talk about the uses of our technology and the staggering returns they are obtaining, and I will touch further on some specific examples in a few minutes.

PegaRULES Process Commander, our unified rules and Business Process Management platform; additionally, new versions of Customer Process Manager, our leading multichannel customer service solution; the industry's first fully unified decisioning and process management capability, what we call Decision Strategy Manager, combining predictive and adaptive analytics in a unified platform with rules and processes; and the market's most sophisticated and agile Next-Best-Action marketing solution for retention, cross-sell and upsell.

These offerings work to a common architecture to enable our client's agility and the unprecedented ability to improve customer centricity while saving money. We've also delivered numerous industry frameworks.

These helped organizations more rapidly and inexpensively achieve the benefits of Business Process Management solutions.

Examples include Order Management for telecommunications providers to more effectively and efficiently handle complex business-to-business orders and fulfillment; mortgage processing for banks to help them deal with our country's mortgage crisis; eligibility and enrollment for federal and state governments, enabling more accurate benefits processing for citizens at a lower cost of operation; our care management framework for healthcare payers and providers to improve results for those with chronic diseases; adverse event case management for improved speed and compliance at a lower cost for pharmaceutical corporations; collections of financial services, delivering unified decisioning to improve the customer experience for customers with better outcomes for the institution; incident management for energy companies enabling powerful case management of incidents across distributed organizations to provide control, tracking and response automation; as well as many other enhancement releases across all other industries.

Partners also continue to be a core element of our strategy. And in 2011, partner communities increased dramatically and really improved the level of capability and made great Pega investments.

The number of Pega-certified staff in our partners increased by over 80% more than 2010. And partners are now leading over 55% of Pega implementations.

Our license pipeline, generated in conjunction with partners, is now over $1 billion.

One of the significant investments we began in 2011, which we will fully rollout in 2012, is the creation of a broad, self-study enablement curriculum, an initiative we call Pega Academy. Self-study enables students to become knowledgeable on Pega implementations and solutions at their own pace and at the locations of their choosing.

Early results indicate we can reduce the time to train by up to 40% with equal or better certification results. Our partners are very excited about this program, and we believe will have a significant impact on increasing the size and capability of our ecosystem.

As Craig mentioned, our movement to self-study and our increased investment in enabling partners may have some short-term impact on our services margin. But our strategic vision is that broadening and strengthening the ecosystem will be the most effective and ultimately profitable way to grow the business.

And we are seeing enthusiastic endorsement and investment from our partners regarding our approach and their ability and willingness to grow their practices.

We will understand what we bring our clients, and our vision is not just to continue to grow but position ourselves to broadly help the world's best companies use agility as a weapon to improve their customer experience and save money through operational efficiencies. Pegasystems' growth is driven from the staggering results our clients achieve from the use of our Build for Change software, with numerous examples of 30% growth in revenue, 40% improvement in productivity and 5% point increases in customer retention.

For years, we've had a vision the computing capabilities have advanced to allow software become significantly smarter and to enable businesses to use software to automate manual work across operational silos; to offer seamless customer service across channels, channels like contact centers, branch, web, mobile, IVR and social; and to understand and personalize their interactions with their customers based on context; and to do most of the programming that in the past had to do manually by automating the very programming process itself.

We designed and built this technology, refined it during 4 complete rewrites over nearly 3 decades, and have a very differentiated approach and architecture. We call this offering our Build for Change software because it's about giving our clients results now while positioning them for success in the volatile future.

As you can see, customers are proving that it is faster and better to do business applications this way than traditional programming alternatives. This past quarter, we had wins across verticals that demonstrate the value of this approach, which is both large software vendors and niche application providers.

the end-to-end process from initial customer interaction through customer service fulfillment. These banks, in a time of increased regulations and increasing customer expectations, needed the capability to be seamless across all the channels that use their customer service, and that interact with them across all the different vehicles and in all the different ways that they need to operate.

They're using us to manage their work associated with servicing these customers across operational units and to automate much of this work. In each case, Pega technology won competitive battles versus major vendors and incumbents because our Build for Change technology was viewed as the only one that could meet their needs at scale and in an environment of continuous change.

This quarter, a large and growing insurance business process outsourcer chose Pega to rebuild their insurance platform. Only Pega could enable them to easily specialize by clients and in significantly less time and with less cost.

A top European life insurance company chose Pega as the basis for their customer experience transformation. Again, Pega's unique ability to provide the seamless multichannel experience, to automate complex cases and handle interactions across silos, is what made this highly cost-effective program able to go forward.

One of the world's largest and most respected telecommunications company purchased Pegasus software for Next-Best-Action marketing, enabling powerful, predictive and adaptive analytics capabilities for their agents and for their web channels to create better-tuned, more personalized customer offers.

Several state government organizations purchased Pega to improve citizen service while reducing cost. One state is replacing their legacy case management system to improve social services and another state is improving the retirement and pension benefit services, both at a lower cost to taxpayers.

We are proud to help the states meet their dual challenges of improved citizen service and reduced expense budget in these demanding economic times.

We're also very pleased with the uptake of our cloud offering. The fact that both our end user and our development environments running in a browser makes our architecture unusually well-suited for the cloud, as has been recognized by new and existing customers.

One of the world's top consumer product companies bought Pega customer service on the cloud to modernize and automate their international customer service call centers. A large healthcare company purchased and implemented Pega Cloud for new business management.

And a large manufacturing firm bought Pega Case Management on the Cloud for a major productivity improvement program. Our Cloud business exceeded our plan in 2011, and we look to significantly grow this business in 2012.

It is our ability to change the game at both ends of the spectrum simultaneously, both improving the customer experience while driving the cost reductions that rapidly pay for the implementation that continues to be central to our growth in these tough times.

Despite these and many other great wins, we believe we are still early in the stages of this market, and that adoption of our technology will continue and that we will continue to invest in increased sales coverage to achieve the potential of our vision. We see tremendous opportunities, both with our established clients and in areas we are yet to cover.

Our sales and partner coverage investments going forward are to double down on our traditional markets while also expanding in the newer verticals, where pipeline and early wins are showing great promise.

We will also continue to invest in R&D at a higher rate than most software companies in order to extend our leadership in the market and to continue to drive the vision of what Build for Change can deliver for our clients. We're in a great position of having both a terrific, distinctive, unified architecture and yet still seeing many important ways in which we can improve it.

This improves advancing not only our core business process platform, but also our winning business solution frameworks, like multichannel customer service and Next-Best-Action marketing, all complemented with our industry framework solutions that add industry best practices and processes on top of our Build for Change platform.

We see having the best technical capability as one of the most leveraged things we can do to improve, grow and take advantage of the business opportunity in front of us. At the same time, we are prudent and practical business people and are committed to being diligent about managing discretionary spending.

Our business perspective is to spend wisely, investing to ultimately obtain a return commensurate with the huge opportunity we see in front of us. 2011 was a great step forward in this journey, and we are even more excited about 2012.

With that, let's open the line for questions.

Alan, one thing, two parts. One, you kind of touched on a little bit but just you mentioned you're dealing with some of the social media guys.

Is it more about customer experience and things like that? Kind of just if you could elaborate a little bit on that.

And then second, as I've been out talking to companies, some of these new tools companies in San Diego and several in San Francisco, and so their models tend to be very low-entry prices, a lot of digital fulfillment, which then translate to the high gross margins. Sales and marketing in many cases at these firms are 15% of revenues, R&D is 35% of revenues.

They do spend a lot, but they get a roughly 30% operating margin. So nobody complains about your growth because it's very good, but they do whine about the margins.

Can or do you see your margins higher either through business model or scale at some point? Maybe it's not 2012.

But is this a business that should be -- can generate 25% margins? I mean you're at $0.5 billion of revenues, so a lot of companies of that size do those kind of things.

So philosophical on the second one, technical on the first one.

Sure. So tactically, we're doing a number of very interesting things around social media.

It's been an important initiative set for us. We've got these brilliant integrations, for example, that allows somebody to just pop Pega right into their Facebook environment of their corporation and really engage with their customers in the multichannel where the customer can start on Facebook, call the call center and then pop into the web to finish something.

We've also done some very interesting work in conjunction with a variety of partners around mining the social media streams from, for example, Twitter, to be able to make customers better served and part of a true multichannel experience. So we put quite a bit of work into that.

I'm actually very happy with the way that that's working. Regardless sort of theoretical margins, look, we've made a decision that we're going to invest both in R&D and in selling and the sales force.

I think there's no question that this can be a 25-plus point profit business at scale. It's just that where we are now, we really think that there's so much uncovered territory, both in terms of, frankly, organizations that we're in but aren't fully covered, and organizations that we have yet to touch but is still in the Fortune 200.

But it makes sense to accelerate the growth and, frankly, one of the considerations we have for 2012 is we are going to accelerate that growth, which is why I think the margins will be lower. But if we chosen to, we could have definitely had higher margin numbers.

The issue would have been how rapidly can we grow in 2013 and '14. I think this business at some point is going to explode.

We need to be positioned to take advantage of it.

I was just curious, Alan. When you're looking at the business and thinking about the success this quarter and then in comparison to what happened last quarter, can you give us your perspective on this?

Were there -- was this just the -- do you feel the idiosyncrasy of a lumpy, inherently lumpy business? Or are there certain problems that you identified that you put corrective actions in place and that have a positive impact?

I think the main driver is the lumpiness of the business. And we talked about it, I think it's nice to see that lumps can be extremely, extremely positive as well as, obviously, we took a hit in Q3.

I think as I said in the Q3 call, that we were a little surprised by the mood having flipped as rapidly as it did from customer acquisition to "Oh, my God, let's save money." We normally play with the foot in both in camps.

We did some re-weighting in Q4 as, we are doing going into Q1, to really emphasize projects and uses of our technology that drive more immediate returns. And I think that was important in Q4 as the economy is tough, I think that will continue to be important.

But we're also continuing to push with the other foot, as it were. So it's not like we did a major shift, we just did some recalibrating to emphasize cost benefit.

And Alan, you possibly said this during your presentation, I was -- for some reason I didn't hear you very clearly on my line, though. But what did -- I thought I heard you referenced pipeline growth, but I didn't actually hear the number.

But how much was pipeline up year-over-year?

The pipeline was up year-over-year, I'd say from memory, over 20%.

Okay. Great.

And then...

Maybe more than...

35%.

35%, all right. Craig [indiscernible].

Okay. Great.

Final question for you. I was just curious on the big deal front, if you could share with us the number of deals exceeding $5 million and the number of deals exceeding $10 million?

Yes, sure. Not being a fisherman, it's kind of odd that we've chosen to use aquatic life to sort of categorize our deal.

But in the quarter, we got 2, what I would call whale-ish deals. Those are things we would normally think of as being 15 or more.

We got a couple of -- a number of tunas that I would think of as being in the sort of 8 to 15 range. And just a good collection of business along the entire rest of the spectrum, some smaller deals with introductory customers, some nice follow-up pieces of business in the 2 to 4 range.

Which those are some of my most favorite deals because they're part of what builds reliability when you've got more of those and some of the huge ones that swing in and out.

This is Justin in for Laura. I guess maybe to start just sort of following up on the pipeline commentary.

Alan, you mentioned it's up I think 35%. Can you talk a little bit about, I guess, maturity, and then maybe pipeline coverage today versus where it was a year ago?

One of the things we're very happy about that I mentioned was that I think we're doing a much better job this year and over the last 18 months around engaging with partners, which is, I think, a key element of our strategy as we think about how we want to grow this business. We think that's going to be key.

So we have a very, very material increase in the work with partners that was around either cultivating the pipeline or driving it forward. And I think that's very healthy, and it represents a maturation in the business.

I'll also tell you that the pipeline grew nicely pretty much across the board where we saw good, solid growth in both new and traditional sectors. Which is important because part of what's led to the expense investments, is we place meaningful bets in some verticals beyond our traditional ones.

Verticals like, for example, the government; verticals like life sciences, oil and gas, energy. These verticals I think have been showing excellent, excellent opportunity.

We saw, for example, market improvement in our federal vertical. Most exciting, though, is our telecommunications vertical has just really broken out to be, from my perspective, now a fully mainstream vertical with the scale and the opportunity to build momentum as a result of wins all around the globe.

So I'd say the pipeline was healthy and not concentrated, which is very much what we're trying to do with the business.

Okay. And then in terms of the competitive environment, I mean any -- who are you seeing the most in competitive situations?

Any material change over the last quarter? Just a general update there would be helpful.

Yes, we see the seller stack guys, the guys like IBM and Oracle. Most of the people we sell to already have 2 or 3 things, like call BPM, sitting on the shelf.

The thing that I've seen that's been really helpful is we've had a number of clients who've tried something else and are now returning to us, many of whom are referenceable about that change of experience. And I view that as very positive.

I think the unified architecture we have continues to get a highly differentiated assessment with our customers, which is key. So it continues to be competitive, but we obviously are able to differentiate ourselves, as you can see from the results.

Okay. And then just one last one, if I may.

Craig, on the $500 million guide for '12, if you sort of think about it in terms of license versus maintenance versus pro services, obviously, the last couple of years, the services and maintenance have been sort of above the license side of things. Do you expect that dynamic to play out in '12, particularly given the fact that you've seen material increases in near-term piece of the business?

No. The trend is going to be a little different going forward.

We're really making a conscious effort to sort of more slow growth our Professional Services organization just because we have so much more partner involvement now. Partners actually lead in the vast majority of all implementations.

So that doesn't mean we're going to be out of the services business. We're going to be in it, but we really encourage them to take the lead in these projects.

But we're still going to hire up, and we're still going to grow services because partners often need help and we want to fill in where they need that help.

So the composition of our services staff I expect will become more senior and more -- the way we're referring to it internally now is we're calling it Pega Consulting. So we will still have the capacity to do the occasional project if a customer demands it, but our real goal is to empower our customers and our partners to really be able to drive this engine.

So over time, you should expect our mixes to change to reflect that.

Okay. So is it reasonable to think of license growth in the sort of 20% range for 2012?

Well, we didn't give specific guidance on total revenue. But the license has to grow around 20% at least to get to the number, possibly more than that.

Our maintenance business is pretty steady, but that grow is sort of a little lagging but in lockstep with the license revenue growth.

I want to ask you about annual and quarterly achievement, and let me start with the annual side. I don't want to sound snide in this question but I do want to ask it, so I'll just put it out there.

And the question really is on your guidance now, you've missed your initial guidance on both the top line and the bottom line, for 2 consecutive years. And so I'm wondering, what makes you feel better about this year's guidance?

Is there anything different systematically, or were those things just -- were those onetime anomalies? What can give us some comfort with the guidance you put out for the year?

So I think you can get some comfort from looking at the specific license backlog that we disclosed, looking at the momentum of the business. And the fact that we disclosed an awful lot of information about what is in deferred and what is in our term and perpetual license backlog.

And I think those can provide a level of comfort. The reality is that Q4 was just an enormous, enormous quarter.

But a lot of it went into backlog, which we're really not at all unhappy about. If some more of it have gone into the current period, it would've changed the numbers.

Part of that is the lumpiness. And I do believe this is going to be an extremely powerful growth business.

I think we've demonstrated things that should create a level of confidence. But the reason we talk about lumpiness is we don't want investors who are going to overreact to the fact it is lumpy to at all be surprised.

So I mean the key metric for us is the bookings growth. And as I said in the script, it was up 75%.

In this economy, that's a fantastic achievement, so we're pretty pleased with the performance.

Okay. Great.

So I think that's kind of a good lead in for my next question. I realize -- I think it's prudent for you to condition investors to expect lumpiness given the back-end loading and given the fact that you don't encourage end-of-quarter discounting, which I think that's a good thing in terms of your NPV.

I am wondering, though, is there anything that you can do or are doing to reduce just the extreme rollercoaster ride that investors have to take quarter-to-quarter to invest in Pega in terms of either -- go ahead.

A lot of it changes with our ability to achieve greater scale. So frankly, we are much less lumpy with the $500 million target than we were when we were back -- it wasn't that long ago that we did $162 million, and I guarantee you, we were lumpier then than we are now.

So some of it is as we get past $750 million, which we're going to try to get past as fast as possible, you're going to see, I expect, the lumpiness to materially decline. The second thing is as we improve our coverage so that we've got deeper coverage in multiple industries, some of the secular trends that affect one industry more than another will also, frankly, be much better.

And as we increase our client base so that we're doing more radiation, we're inside the customer, we're selling out into other areas as opposed to penetrating, we find that radiation is far more reliable as you would expect as it relates to lumpiness than when you're just trying to get that first-time buyer and a client to trust you for the first time and to step up. So we do have very specific things that we're working on to attempt to reduce the lumpiness, and to improve the channel to the partners and the other sorts of things we're looking to do to reduce our cost of delivery and our cost of going in.

But I think we need to be candid, and we're not going to let the fact that we're lumpy allow us to miss what we think is a spectacular opportunity here, which I guarantee you we're all very focused on.

I just wanted to follow up on the guidance and the margin questions. Alan, is it fair to assume that -- or I guess I should say, does the guidance assume that license revenue will start to outpace service revenue in 2012?

From a growth rate point of view, we absolutely expect it will. But from an absolute number point of view, we have, I think -- it's going to take more than one year to close that gap, I would expect.

Craig, what would you think?

Yes, regardless of when you look at the profitability, that the guidance we're giving on non-GAAP EPS is up 26% from this year. We also are focused, as I said, on backlog.

We're also focused on cash flow, and we did almost $50 million operating cash flow in the year. So there's a bunch of other metrics as well.

But margin is important, we realize it, and I think it's a scale thing for us.

And can you guys just talk about expectations for sales force productivity in 2012?

Just want me talk in general, or do you have a specific question?

Well, no, I mean just general commentary would be helpful. But, and if you could, tie it in with kind of sales and marketing as a percentage of sales, should we continue to expect that to go up in 2012?

So I think we're really trying to hold that fairly constant, I would say. Because the challenge you have is, and we're going to do quite a bit of hiring in this plan around our sales force expansion in anticipation of 2013.

The reality is it does take really 6 months for somebody to begin to really start to engage with the clients the way we need around the opportunity. It's the nature of the business.

So one of the challenges we've had is over the last 3 years, we've increased the sales force quite a bit, and of course that really takes the average tenure of the sales force down. So we're looking to perhaps slightly increase sales force productivity this year in light of the fact that the sales force is still going to be growing quite a bit.

So it should be a lot, but not massively.

That's very helpful. And just one last question, did you close any warrants deals in the oil and gas vertical this quarter?

No. There weren't any -- nothing large in that vertical.

The pipeline is great, though.

There was one what I would describe as mahi-mahi as opposed to perhaps a tuna or whale.

A couple of questions for Alan and then a few for Craig. Just in terms of the backlog composition, I'm surprised that you're signing more term licenses now than when you did during the recession.

In the recession, you were signing a lot of perpetual license when we thought you'd be signing term licenses. So I was kind of wondering, can you give us some color on what's driving customers to choose more term licenses now when supposedly economy has improved?

Are some other factors, business decisions driving them to choose term license or maybe even technology reasons?

I would tell you that I'm a little surprised as well. So I'm not going to say that -- I'm unprepared to draw any major conclusions, other than to say that the decision about how a client buys, be it term or perpetual, is one that appears to be very, very situational.

And sometimes we go in thinking the best arrangement with the customer will be a term, and they suddenly decide that they have some latitude in their capital budget. I think one of the things that has been happening is that a lot of the financial services organizations, which is a meaningful part of our business still, a lot of them are sensitive to capital these days.

And the term license allows them to run as an operating expense, so that's fine. But we're happy either way.

We think that, frankly, there's a certain volatility reducing impact the term licenses have that actually make me rather happy.

And then Craig, if -- I'm sorry, Alan, if I heard you right, you said the license pipeline generated with partners is over $1 billion. That's just like a huge number.

Can you clarify what kind of -- is that well-qualified, or help us understand that figure.

So that would be a number, wouldn't be generated by partners, that would either be generated by partners or deals in which we are working in conjunction with the partner.

Associated with the partner.

Associated with the partner, so where the partner is playing an active role. We're trying to get our partners to generate pipeline, and some of them are actually doing a pretty good job of it now.

But that's not anywhere close to $1 billion at this stage. And for it to be considered pipeline as we discussed it, it's got to be pretty well-qualified.

It's got to be an opportunity that's specific and we could put a dollar amount on where we're identifying the locus of buying activity and they have a bona fide need. So we don't consider the front-end garbage of the pipeline to be part of it.

We have categories for that, that we leave out of our pipeline discussion.

Did you mention a figure? Maybe I misheard.

Yes, I mentioned, I believe, $1 billion.

That would be of total pipeline.

Okay. That's pretty big.

And then question for Craig, I think there was some question around license revenue growth. But the one thing I noticed that you were -- yes, you had a pretty strong license revenue growth.

But if I look at the perpetual license growth or the backlog for the 2012, that's only $22 million, $23 million. Obviously, that's a big driver in terms of your EPS.

And I was wondering, how should we think about your perpetual license revenue and overall mix?

Well, as you said earlier, Ragh, the customers decision to buy term or perpetual is up to them, and it's pretty unpredictable. Perpetual license revenue definitely hits the P&L faster than term license.

It can swing at any point in time in the year, as we amended our guidance at the end of last year because of the term license pipeline. And just like you said earlier, in 2009, we were expecting people go to term licenses, and they did, and they went to perpetual.

So it's highly unpredictable. And I also, like Alan said, we don't like to make predictions because as soon as we do, we're proven wrong.

But you have non-GAAP EPS of $0.91. That assumes, obviously, some significant tick up in perpetual license for the back half of the year...

Oh, yes, definitely.

But Craig base s those estimates on what we see happening in the market in the last couple of quarters. So we bake in sort of current...

Yes, we look in a historical model and then we look at the pipeline and we, in the short term, the shorter term, we can see which way the licenses are going to go. In the longer term, it's often difficult to look at a license out in Q3 and Q4 and figure out whether it's going to be term or perpetual.

And then 2 quick questions. So maybe I missed, did you mention what is the tax rate assumption in your non-GAAP EPS guidance, and then...

Yes. It's about 32%, 33% going forward.

It should be much more normalized than the 2011 rate was.

And then in terms of the difference between GAAP and non-GAAP EPS, is this only amortization of intangibles, or there's going to be other onetime items like we saw in the last quarter?

There's basically 3 items. The amortization of intangible, the FAS 123R charge, and the last one is the noncash duplicate rent that the accounting generates and one-time moving charges so that we can get to a more run rate, or more normalized financial statement.

Okay. Great.

That was $6.1 million, is that right?

Yes. There's a reconciliation on the press release.

Most of my questions have been answered, but just one question, Alan. Based on the quarter's good results, is it fair to assume that you captured all the large deals that failed to close at the end of the September quarter?

No. I'm sorry, did you ask if we captured all the large deals in the September quarter?

That failed to close in September, yes.

Failed to close in September. I don't think we actually -- so I thought you asked if we had closed all the large deals that we had hoped in Q4, and actually there was some more that we could have closed in Q4, things that we're still working on.

The Q3 ones, I don't think we were really depending on it. It was just -- there was sort of a sluggishness across the board.

So we actually did an excellent job of closing the Q3 ones. But we weren't counting on any major deal in Q3.

We just saw slowness, I think, across the board in a couple of geographies in Q3, largely especially driven by Europe, frankly, where folks came back at the end of August into September and there was just a malaise. Thankfully, in Q4, we were able to break through that and actually get some of that business to close, and some of it is still being pursued into this year.

All right. Well, we're in an interesting situation here where we need to bring this to a close because we're actually at the Morgan Stanley Technology Conference.

And Craig and I are about to go downstairs and do our fireside chat interview in front of the audience, so we wanted to make sure we did that in light of actually having our financial results announced, so we couldn't probably have said anything at that point in time.

I will tell you that we're working hard. We're thinking that there is tremendous opportunity in this business, which is why we're continuing to invest.

And if you want to see an interesting example of how clients are getting real, tangible benefit from this, there's a 4-minute video on our website or that you can YouTube, that is Pegasystems at BAA, the British Airport Authority. They're the guys who run Heathrow.

And basically, this includes the CEO of BAA and their customers talking about how our technology has just completely changed the way that they run ground operations. So we're not doing air traffic control, but a lot of the work on the ground around making sure the planes are effective and gates are done properly, et cetera, is now being driven by Pega software.

And they do a nice job, I think, of describing a sort of really interesting and unusual use of our software, and they attribute a double-digit gain in on-time departures, which is huge in terms of fuel and customer satisfaction, directly to what our software has done on their environment. So if you really want to get a sense of that, that might be of interest.

And of course, if you want a deeper sense, we're having our PegaWORLD conference, which I think is going to be a blow-out this year, the end of the 1st week of June in Dallas.

Once again, we will be talking to you before then. Thank you very much for your support, and look forward to talking again soon.

Bye now.