Pegasystems Inc.
Q2 2014 Earnings Call Transcript

Published: 6 Aug 2014

[Operator:]

Greetings, and welcome to the Pegasystems Second Quarter Fiscal 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Rafe Brown, Chief Financial Officer of Pegasystems Inc.

[Rafeal E. Brown:]

Good evening, ladies and gentlemen. 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 anticipates, projects, expects, 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 for fiscal year 2014 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 earnings earlier today, 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, 2014, its annual report on Form 10-K for the year ended December 31, 2013, and other recent filings with the SEC. Although subsequent events may cause the company's views to change, the company undertakes no obligations to revise or update forward-looking statements, whether as a result of new information, future events or otherwise, since these statements may no longer be accurate or timely. And with that, I will turn the call over to Alan Trefler, Founder and CEO of Pegasystems Inc.

[Alan Trefler:]

Thanks, Rafe. Q2 was an outstanding quarter, leading to what has been a terrific first half for Pegasystems. For the quarter, we achieved non-GAAP license revenue growth, which we believe is the key metric for a successful software company, up 36% compared to Q2 2013, bringing the first half non-GAAP license revenue to $108 million, over 29% increase over the first half of 2013. Very impressively, we delivered this license revenue growth while also increasing license backlog. Typically, we've consumed backlog in the early quarters of the year and historically, achieved our annual backlog increases through a monster Q4. Being able to both make up the backlog we consumed in Q1 and achieve an overall increase in backlog year-to-date, makes our strong license revenue growth even sweeter. Of course, adding to the backlog is a short-term negative impact to EPS, because the sales efforts and expense is recorded in current periods, while the revenue will be recognized in future ones. Nonetheless, I think looking contemporaneously at the increase in both license revenue and backlog shows how strong our performance truly was in the first half. And our total non-GAAP revenue grew 22% year-over-year for the first half, powered by the increases in license and maintenance, and despite the continued strategy we have of engaging partners for the predominant share of services work, with Pega providing expert services to clients and partners. Now as we've discussed in the past, sales management has been taking a number of steps to try to mitigate the traditional lumpiness of our business and trying to smooth bookings throughout the year. While we still expect that the back half of the year, and in particular the fourth quarter, will be incredibly important to achieving our 2014 goals, we believe we're seeing some early fruits of our efforts in the strength of the first half. We see these financial results as indicative of the success our clients are having in adopting Pega technology. This was clearly visible in Q2, when we held our best-ever PegaWORLD user conference, with registrations up dramatically, with about 3,000 attendees coming for the first time in our history. For those of you who were there, you know that unlike many of our competitors' user conferences that tend to focus on their own speakers and their own product announcements, PegaWORLD focuses on our customers telling other customers and prospects about their transformational journeys, and the tremendous returns they are deriving by choosing Pega. At PegaWORLD, and as well with many ongoing customer interactions across industries and geographies, we are now engaged in conversations, not just about specific applications, but increasingly about our customers' needs to become so-called digital businesses. Many of these conversations occur because more and more organizations are recognizing that Pega software, its architecture, its solution products and its end-to-end capability, are the only ones able to successfully take them on this journey to becoming a digital business. And it's interesting, because our customers' customers are changing as well. Across nearly every type of industry, whether commercial or public sector, organizations are faced with dealing with client expectations that are now being set by an emerging generation of customers we refer to as Gen D. These are the successors to the so-called Gen C, the connected generation, the millennials we've gotten used to, and represent new risks and new opportunities for companies. This is because their expectations are elevated and their reactions can be virulent. The D stands for devour, because they will passionately engage and devour the brands they love. But the D can also stand for demonization, to business-busting, social media disruption, if the customers are disappointed. So our clients and prospects are cleanly aware -- keenly aware and they're telling us that they might -- must meet entirely new and different market criteria to remain competitive and grow and retain their customers. They know they must be market relevant to this new level of Gen D expectation. They know they must be world-class at customer engagement, across, not separately, but across every channel, and that their customers want to engage differently. They recognize they must drive organizational simplification, because they can't afford the non-value added cost and their customers, frankly, will simply not tolerate getting bounced around organizational silos. They'll just go find someone else to do business with. Finally, our customers are telling us they need to be increasingly agile, because these customer preferences and competitive offerings are changing faster than ever before. It's these types of conversations that are driving both the agenda for Pegasystems now and our plans going forward. And they're resulting in the terrific outcomes we saw in Q2. To dig into a couple of examples of what clients are doing, and how they talk to each other and to us, let me just draw on a few examples from PegaWORLD. I'll start by noting an interesting juxtaposition from 2 of our major financial services clients. One is BNY Mellon. They have been in business for over 200 years, undergoing major changes, major mergers, implementing lots of new products as they became such an important global force. And they're looking to be more effective while maintaining their reputation for top-tier client service. To quote their COO, Jeffrey Kuhn, "Bank of New York Mellon is seizing the opportunity with our friends at Pega, we're transforming our company into becoming the industry's recognized service, quality and productivity leader. Our aims are simple

[Rafeal E. Brown:]

Thank you, Alan. For the second quarter of 2014, 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 release issued earlier today, and is available on the Investor section of our website. As we have 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 can significantly impact our results. What is important, from our point of view, is how our business performs on more of a trending, or year-to-date, basis. For the first half of 2014, non-GAAP revenues totaled $286 million, up 22% year-over-year. This includes a contribution of approximately $11 million from Antenna, which we acquired in the fourth quarter of last year. Non-GAAP license revenue was $108 million, up 29% year-over-year, which includes a contribution of approximately $4 million from Antenna. Year-to-date non-GAAP cloud revenue stood at $8 million, up 115% over the prior year, including a contribution from Antenna of approximately $3 million. As a percentage of year-to-date non-GAAP revenue, license, cloud and maintenance revenue stood at 72% of total revenue, up from 69% for the same period of 2013. In dollar terms, non-GAAP Professional Services and training revenues were $80 million in the first half of 2014, up approximately $8 million from the first half of 3013. As we have stated in prior quarters, we do expect Professional Services revenue will continue to grow, but at a slower pace than license, maintenance and cloud revenue, as our Professional Service partner ecosystem continues to grow. Looking at our results on a geographic basis, non-GAAP revenue in North America grew 17% to $164 million for the first half of 2014, and stands at 57% of total revenue. Our European business had a strong start to the year. Overall revenue from EMEA was approximately $104 million on a non-GAAP basis, up 33% year-over-year. Our first half Asia Pacific business was up 22% year-over-year. We have previously discussed the importance of our land-and-expand strategy, wherein we often begin with a smaller implementation, demonstrate our value proposition and earn the right to future transactions with the same client. As a result of a long and growing relationship with just one such client, we were pleased to close a large transaction in the second quarter in excess of $10 million. It is also important to note that this large transaction did not contribute to revenue in the second quarter, but rather the full value of the transaction is now in backlog, which we will discuss momentarily. Overall, over 80% of our bookings were from existing customers on a year-to-date basis. In terms of the mix of license revenue recognized during the first half of 2014, 46% of our revenue was recognized from term or subscription arrangements, up from 39% in the first half of 2013. For the first half of 2014, our non-GAAP gross margin was 69.6%, compared to 69.9% for the first half of 2013. While we are pleased overall gross margins have remained strong, Professional Service margins are currently impacted by investments we are making in Antenna implementations to ensure they meet Pega's high standards for customer success and satisfaction. Turning to the rest of the income statement, for the first half of 2014, we posted a non-GAAP operating margin of 12.4%, compared to 13.8% for the same period of 2013. First half non-GAAP operating expenses were approximately $164 million, up 25% from the first half of 2013. It is worth discussing a couple of key points that impacted expenses and operating profits during the first half of the year. The first is a very welcome item to discuss. We had a very strong quarter in terms of the sales teams' achievement. Not only did this result in strong revenue growth, but as we will discuss in a moment, backlog is up nicely. As we have previously discussed however, we expense a vast majority of commissions and other bookings related to variable compensation when a deal is signed, even if the associated revenue is deferred. And as a result of a sharp increase in bookings in the first of the year, variable compensation expense increased significantly. Second, as we discussed when we provided guidance for the year, Antenna operates at a loss and is expected to continue to impact earnings for the entirety of 2014, as we integrate their technology into Pega's core platform and invest in their customer base, which as Alan mentioned, has some terrifically valuable names. Turning now to earnings. We posted non-GAAP earnings totaling $23.7 million in the first half, an increase of 11% over the prior year. On a fully diluted EPS basis, this totals $0.30 per share and reflects approximately $0.025 of dilution from Antenna. Now to discuss license and cloud backlog. We compute license and cloud backlog by totaling 2 elements

[Operator:]

[Operator Instructions] Our first question comes from the line of Steve Koenig from Wedbush Securities.

[Steven R. Koenig:]

Let's see, I'd like to -- I'll do one and one follow-up, if you don't mind. So there's clearly a lot of things going right, going well for Pega right now, and a lot of things that you talked about that had helped you in the quarter and in the half. And you talked about big deals, potentially less seasonality, the product cycle, the partner ecosystem. I guess 2 things I'd like to zero in on for more color. One would be how is the Pega 7 product cycle helping you? And secondly, maybe a little bit on specific new marketing initiatives that may have already been bearing fruit in the first half and what might be important in the second half?

[Alan Trefler:]

Sure. So I'll tell you there is -- the feedback on Pega 7 has been terrific, both in terms of a lot of the core capabilities that we put in, where we actually invested about 1 million hours of engineering effort in the Pega 7 initiative, and I'll tell you, we've gotten a lot of good results from that. But also some of the other things that we've done to either, I think, get on the front foot or otherwise position ourselves well in areas such as the collaboration and the co-browsing and some of the social aspects, which historically we had not put as much energy in. We've really brought ourselves, we feel, to superiority, not just parity, in these areas. And the continued product cycle of Pega 7 is going to, I think, really, really push us much more aggressively into mobile on the back of what we've done with Antenna. And the level of excitement in the firm is palpable, and that comes from dealing with clients who are finding the technology really, really appealing. Relative to marketing, we brought on a new CMO in February, and he's busily working to, I think, try to improve our marketing. He's been making a number of staff and organizational changes. We've been upgrading our website, which is much better since he came and has a lot of big changes planned in the Q4 range. So I think that we've kicked that off, but it's going to take us, I believe, through the end of the year to get to where we want to get, but we're planning to do a big push as we enter 2015.

[Steven R. Koenig:]

Okay, that's great. And Alan, if I may ask one follow-up. I know that Pega has a presence in the cloud, and you have rolled out some SaaS applications as well. But beyond what you've rolled out in these SaaS applications and your current presence in the cloud, can you elaborate a little bit more on your vision for Pega in the cloud, down the road here? And then maybe, either for Rafe or Alan, what would this do to subscriptions in your mix over time? And how quickly will they grow?

[Alan Trefler:]

Sure. So I think conceptually, we've always believed that the cloud was going to be very important. And one of the actual differences between us and a lot of the other players in the various spaces in which we work, is that from Day 1, for this generation, we built it so the entire configuration environment, the whole way you define the systems, was actually done through a web browser. Which today, people are saying, "Well, yes, that makes sense," but I guarantee you, when we began rolling this stuff out in the, this generation out in the 2005, 2006 range, people we're just coming and telling us we were out and out wrong. And this gives us, I think, a long heritage and a deep understanding of how to build systems of this sophistication in the cloud. Historically, the cloud was not a prime focus, simply because the public cloud was of less interest to some of the really large companies. The folks at JPMC will tell you, that they have a private cloud. They basically created their own cloud, which is running Pega. They've got about 40, 50 instances of Pega running on it, and they believe that they can do that with greater security and cost-effectiveness compared to some of the other ones out there. So we do find that even large companies now are sort of softening up a bit. But what we've seen, as we want to work more flexibly with clients, and as we want to move to a broader penetration of the market, we think cloud can be tremendously valuable. And now, we have dozens of production cloud customers. We've done a big investment and we'll continue to invest in deepening our cloud infrastructure and staff, building out a world-class, 24/7 network operations center, which we've now rolled out. It's operating both out of North America and out of India both, so we can support our clients well. And we see that as a big part of our go-forward strategy, to really, as I said, open the aperture on who we market to and who we sell to. Was that helpful, Steve?

[Steven R. Koenig:]

Yes, it is helpful. I'm just wondering if you could comment maybe on how soon do we see does that begin to impact your revenue mix, with subscriptions becoming a much bigger part of the mix, or impacting your financials because of the ratability of subscriptions?

[Rafeal E. Brown:]

Steve, I think one of the great things about cloud is that they help you build backlog, but it also, of course, takes longer for that to start peeling off into revenue. But we do see it increasing. As I talked about the cloud subscription numbers, as opposed to the license subscription, just to be clear, is growing nicely. We got a boost from Antenna in that respect. But even breaking that out, you can see it's a very fast line item of growth for us. And the other thing that's really part of that is in Q1 we started including cloud backlog in our overall backlog metrics, because we're seeing really nice growth there of people coming to us and wanting to go with Pega Cloud. So I think it's going to continue to grow and grow quickly, and we're investing to make sure that happens and moves along, even faster if we can.

[Operator:]

Our next question comes from the line of Mark Schappel from Benchmark.

[Mark W. Schappel:]

Alan, just starting off with you. I was wondering if you could just talk about, a little bit about some of the -- a very good license quarter, wondering if maybe there's a little -- it's a few deals that have come in a little bit earlier than planned than maybe you had anticipated?

[Alan Trefler:]

Well, I think the quarter was a very well executed quarter. And I'll tell you, as we entered this year, we sort of resolved that we were going to try not to save it all for Q4. On the basis -- and we actually talked about that, and we talked about some changes to both how we just talked to the sales force and how we really managed day-to-day, and also some small incentives that we put in, to try to move things up a bit in the year. I can't tell you on the back of 2 quarters whether I'm sure that, that's working or this is just the vagaries of statistics, but it sure felt good. And I really do feel like that we weren't relying on any miracle to make the revenue number for the quarter. We were able to, as I think Rafe mentioned, we did book one whale in the quarter, but it didn't impact revenues. So it all went to backlog. So we really feel good about having actually gotten positive backlog for the first half. That's not a normal state of affairs for us. So we'll see to what extent this becomes a permanent pattern. But I think we actually executed well pretty much across the board and you're seeing the results.

[Mark W. Schappel:]

Okay, great. And then with respect to that large deal, just a little more color, if you could provide for us, that would be helpful, like what industry it was in or maybe use case?

[Alan Trefler:]

Yes, it was a large financial services company that has been doing business with us for more than 5 years, had really adopted us as part of their multinational strategy. They were large clients, became much larger clients. Really wanted to have -- use us for everything from how they on-boarded their customers in the lending setting, to being able to provide customer service, to being able to really do what we're really big on, this end-to-end digital concept, where you can actually go from touch point to a customer all the way through to execution, and really put the control of that much more in the hands of the business. So a really good example of where they used both technical teams from IT, but business people involved in doing the bids, working with partners. So I think it's just a culmination of a large strategic relationship. And the thing I love about these sorts of relationships is they're not one and done. We expect that we will continue to get money from this customer in the future as they continue to further roll out the Pega technology.

[Mark W. Schappel:]

Okay, great. And then Rafe, did currency play a role in the quarter at all, on either the top or bottom line?

[Rafeal E. Brown:]

So on a year-over-year basis, we've gotten, I think the currencies that work to help the top line, but also to bring up the expenses with them. I think we've had pretty parity from an EPS perspective on that. And obviously, a bit of a mixed bag going from currency to currency. But overall, there's been a little bit of an uplift from that, but not huge.

[Operator:]

Our next question comes from the line of Jeremy Benatar with Sidoti & Company.

[Jeremy Benatar:]

Can you maybe talk about what you're seeing in EMEA and APAC? Is there anything specific that's working well out there?

[Alan Trefler:]

Yes, EMEA was -- so I think that, in general, we're seeing good activity across the board. I think we're seeing the financial services sector come back in both areas. APAC, we're still hoping for a big end to the year. It was not as quick in the uptake in the first half, but I don't think that, that's meaningful in any particular way, it's just that some of the normal vagaries that we get. Japan is turning into a very significant success story for us, in terms of both signing some really, really key marquee names and also being able to start to generate some meaningful business. It's a long -- it's been a long time coming. But as we said last year, we really thought we had begun a breakthrough. And it looks to me like that's going to continue and accelerate.

[Jeremy Benatar:]

Okay, great. And can you also give us a little more color on the different verticals overall in the quarter? Were there any surprises there?

[Alan Trefler:]

I think the traditional verticals were -- I think the traditional verticals actually really did quite well. We saw financial services, insurance, health care were up nicely year-over-year. One of our new verticals, energy, performed well, but it's small. So on a percentage basis, that makes it easier. But it wasn't a single vertical.

[Operator:]

Our next question comes from the line of Brian Murphy from Merriman Capital.

[Brian Murphy:]

Alan, can you talk a little bit about your partners, and how if it all, the concentration of business is changing? For instance, are you guys still working as much with IBM Global Services as you have in the past?

[Alan Trefler:]

Well, I would say that we have not been seriously working with IBM Global Services for the last, I'd say, 3 or 4 years. An interesting thing has happened with IBM. When they started, they really prided themselves on being objective. But I think if you surveyed the customer base, that's long gone. And IBM Services is largely there to promote IBM products, not exclusively, but for the lion's share. So we've decided that, that service relationship, which years ago, had been a pretty important one, was one that has really, I think, been deemphasized in recent years, though we still do projects with them that go well. The interesting thing that we're seeing is some new companies who you'd think of as more strategic in terms of their positioning, really taking very high level of interest. And we have companies like McKinsey. McKinsey actually did a couple of sessions at PegaWORLD, which were extremely well-received, really linking us into their sort of transformational agenda. Accenture has been tremendous, they actually published a whole paper, which you can get off the website, about how they see Pega being central to transformative initiatives. And Ernst & Young, for instance, which earlier this year did the interesting thing of actually buying a small Pega-only consultancy, to be able to jump-start the way that they came to market. So we're seeing some interest from what I would think of as these extremely well-established strategic firms, as well as seeing some of our other more Indian and other types of partners working themselves to try to become more strategic and seeing Pega as a capability that can really, really help them do that. So I think we're very well-positioned for where the partner ecosystem is trying and working to move, as they look to differentiate themselves further going forward.

[Brian Murphy:]

Are they developing their own -- I don't want to say package, but more standardized applications on your platform?

[Alan Trefler:]

Yes, actually they are. At PegaWORLD, if you went around, there were dozens of partners -- there were a couple of dozen partners who had built Pega frameworks or applications to go to market, to try to differentiate themselves. Some of which were capability-based to sort of horizontal in terms of being able to help people build systems in general and some of which were vertical and offer actually industry-specific solutions to be able to go to market. So I think this is a really interesting trend and we're going to see more of it going forward, as the partners are looking to be able to show prospects that they really get it.

[Operator:]

Our next question comes from the line of Noah Steinberg with G2 Investment Partners.

[Noah Steinberg:]

I had question for you. First off, just -- this is the first time -- I've been following the company for a while, this is the first time the company has changed and raised its guidance. Not -- you've lowered in the past, but this is the first time I remember the company raising their guidance or alluding to beating the guidance. I just want to understand what gave you the confidence to do that.

[Alan Trefler:]

Well, I think the performance in the first half, through the combination of the revenue that was achieved in the first half and the visible backlog additions, which you can see in the schedules, meant that we didn't feel with a straight face, we could say nothing. It is not our [indiscernible].

[Noah Steinberg:]

You could exceed it by a little bit, though?

[Alan Trefler:]

Well, we still have a lot of work to do to complete the year. So if you've been listening to calls for a long time, as I know you have, this is certainly the strongest first half that we've seen.

[Noah Steinberg:]

Right. And then on the large deal that you guys did, and it went into backlog and it wasn't recognized as revenue, was that -- did that show up in the off-balance sheet, perpetual license to recognize by end of 2014? Or will that be recognized? Because that number was fairly high in the footnotes in the 10-Qs, so just curious whether that's going to show up this year? Or that will be spread over many years or a few years? And secondly, if you do any other big deals in the back half of the year, will we see them -- are you going to try to put those into backlog as well, as opposed to recognizing them on the income statement?

[Rafeal E. Brown:]

Yes, Noah, the backlog from that particular deal will be spread over the remainder of this year and the vast majority of next year.

[Alan Trefler:]

And relative to -- it's not like we have control over what deals come in as term, which would end up in backlog, or what deals would come in perpetual. We ultimately work to try to make sure we do something rational with our clients. But I would tell you, it is sort of my preference and I think I alluded to it in my various statements, that it's our goal to try to enter next year with meaningful increases in backlog. I mean, that's one way in which we can become more revenue predictable on at least the half basis, if not on a consistent quarter basis. So we're really putting our sort of heads and hearts into figuring out what we can do to achieve that, all of which frankly gets easier with scale, because the law of large numbers helps you.

[Noah Steinberg:]

Right. And last question -- sorry for a bunch here, but the sales and marketing expenses are up quarter-on-quarter, and I'm guessing a bunch had to do with PegaWORLD, and you said commissions as well. Was it mostly PegaWORLD? Or was it commissions? Because I see on the headcount on the sales and marketing side, it wasn't up tremendously, so just curious, or maybe you're giving more money to your CMO to spend?

[Rafeal E. Brown:]

We'll keep the last one private, but you can imagine how that's going. The answer is, I think in truth, it was both, right? PegaWORLD was a lot bigger this year than it has been in prior years, and of course, that requires additional investment to put on something that big and that impressive. So that's a key piece of it. But then also, as we talked about in the call or in the script itself, we had a good, great performance from the sales team and that does drive variable comps. So both of those items have been combined and showing up there.

[Alan Trefler:]

And of course, the irony is that the way we -- since we don't defer the comp expense to match with when the revenue comes in, because we're more conservative than that, it's sort of ironic that a spectacular bookings quarter can lead to in-quarter EPS pressures to a degree. But frankly, from a business perspective, we'll take that all day.

[Operator:]

Our next question comes from the line of Jim Gentrup from Val Vista Capital Management.

[Jim Gentrup:]

Just one, actually one quick follow-up, because most of my questions have been answered. But on the sales and marketing in the second half of the year, should we then expect a little better leverage because of the -- just because of the ways it's rolling off and the fact that you had already incurred the expenses for the whale deal, the commission expenses. Should we expect a little more tempering, a little better leverage in the second half?

[Alan Trefler:]

Well, the things that work towards leverage are just our scale. The things that work against them is that we're working hard to become a much better marketing organization. Historically, that has not been a strength. And so we are, actually, bringing on staff with deeper and broader experience, thinking about how we create our web presence and what we need to do to be able to become a very effective digital marketing organization, and that's going to add to expense. The other thing, of course, is that we're going to be hiring salespeople to be able to, in the traditional way, continue to build our business. And finally, I'd hate to convey to you that I believed that, that was going to be our only whale for the year. And so, that doesn't mean I have any whales guaranteed, but we see a couple in the harbor, and we'd be glad to land them and have them hit either revenue and backlog. So I wouldn't be quick to assume that.

[Jim Gentrup:]

Okay, all right, fair enough. And then on Antenna, just your thoughts, again, I didn't hear all the comments on Antenna. I guess you said it's operating at a loss, and can you just give us a little better idea of when you can fully integrate that, as well as and kind of turn profitable in that area.

[Alan Trefler:]

Yes, I think the turning point for that is going to be early next year. I think through the rest of this year, we got some great customers with Antenna, and I think we just decided they deserve a high level of attention. And that's what we're doing and I think it's going to lead to some very nice cross-sell opportunities of some of the BPM and other technologies that we have. That's part of what requires us to invest.

[Jim Gentrup:]

So Alan, I'm sorry to interrupt, but that then sounds like that's more of a function of revenue growth from Antenna than is opposed to cost-cutting in that area then?

[Alan Trefler:]

We're not intending -- we're going to grow the revenue. We don't see -- it's not like we're contemplating any sort of cutback in the mobile-related expense. If anything, I think that, that will continue to grow. But we think that, that's going to become better on the top line and that's the way to address that shortfall.

[Jim Gentrup:]

And the last question I have is just the spending environment. It sounds like Europe is coming back and APAC wants to invest more in this area, or that's what I'm assuming or inferring, correct me if I'm wrong. But can you just talk a little bit more about the propensity for companies to spend a little bit in this environment, loosening up. Is it -- what are you seeing out there?

[Alan Trefler:]

I'm seeing it loosening up some. I mean, they're still spending carefully, but companies have gone through pretty extended periods of austerity. And we're actually seeing some of the financial services companies, in particular, as I mentioned, we had a very, very good first half to the year. I think after just years of suffering and years of just trying to cut back, they've decided that this technology can really help them do a couple of things

[Operator:]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.