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spk00: Good day, and welcome to the Pega Systems third quarter 2020 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ken Stilwell. Please go ahead.
spk03: Thank you. Good evening, ladies and gentlemen, and welcome to Pega Systems Q3 2020 earnings call. Before we begin, I'd like to read our safe harbor statements. Certain statements contained in this presentation may be construed as forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The words expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, intends to, projects, forecasts, guidance, likely, and usually, or variations of such words and 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 fiscal year 2020 and beyond could differ materially from the company's current expectations. Factors that could cause a company's results to differ materially from those expressed in forward-looking statements are contained in the company's press release announcing its Q3 2020 earnings and in the company's filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2019, and other recent filings with the SEC. Investors are cautioned not to place undue reliance on such forward-looking statements, and there are no assurances that the matters contained in such statements will be achieved. Although subsequent events may cause our view to change, except as required by applicable law, we do not undertake and specifically disclaim any obligation to publicly update or revise these forward-looking statements, whether as the result of new information, future events, or otherwise. And with that, I'll turn the call over to Alan Treffler, founder and CEO of Pegasystem.
spk01: Thank you, Ken. You know, the highlights were strong. Our results through Q3 demonstrate our ability to forge through and succeed during this challenging time. Our business continues to perform well due to several major factors. Digital transformation is existential for our clients. It is central to their continued existence and prosperity. And an increasing percentage of our revenue is predictable and recurring. Through Q3, our total ACV, which we consider the best indicator of our improving cash flows and underlying business growth, increased by 21% year-over-year in cost and currency, with two-thirds of our new business coming from private cloud in this quarter. We continue to extend our leadership in key markets that are less adversely affected by the pandemic, markets such as financial services, government, healthcare, and insurance, and telecom. And by working closely With large global organizations, we're agile to work with organizations that can withstand the short-term effects of today's market and, in fact, find their needs increased. As noted previously, we have a strong cash position to help us through this period of uncertainty so we can continue to invest for long-term growth. Now, we are now more than about halfway through the transition to recovery. And as we start to get closer to completing this transition, Unsurprisingly, our cash flow should and will start to improve. We anticipate that both cash and revenue will start to be a better reflection to help the business, notwithstanding the lumpiness of any. Our team remains strong, resilient, and committed to the success of our clients and Pega. And I remain deeply respectful of how they and our clients are engaging as we collectively navigate through this ongoing time of uncertainty. Now, in terms of client trends, our software is ideally suited for organizations that continue to face immediate challenges today, even as they know they need to transform for tomorrow. We have problems that, in many cases, no one else can solve, from visionary goals to quick fixes, and everything in between. Heather crushes business complexity in this well, complicated and ever-changing world. Our software is the engine that makes solutions clearer, relationships smoother, and helps our clients delight their customers and bring siloed teams together. We continue to improve our software to make it easier for clients to enhance customer engagement, boost their employee satisfaction, all while they increase efficiency and reduce costs. Now, key industry analysts continue to see Pega improving. And our Pega Infinity ratings is one of the important ways that we develop confidence that our significant R&D investments are successful. For example, since we've lost both, we are the undisputed overall leader in the just-published Forrester prestigious real-time interaction management wave. Ahead of 12 other players, including Salesforce and SaaS, The reality is that this idea of having a brain, a brain to drive and control and optimize interactions, really is resonating with organizations. We released our last version of our unified Pega Infinity product suite. And I want to give a big thank you to everyone across the Pega organization who put so much effort into planning, developing, and delivering the tremendous features and working so closely with our clients to make sure we were working on the right stuff. We launched Value Finder, a new AI-powered capability that helps organizations engage underserved customers with messages and offers designed for their specific needs. This is part of the Pega Customer Decision Hub and expands the power of our one-to-one customer engagement to ensure that all customers get personalized, high-empathy treatment, such as the premier customers that historically have typically gotten the most attention. And we were named the visionary in Gartner's magic quadrant for robotic process automation. Now, our new business continues to be strongest in our traditional areas of financial services, government, telecom, healthcare, insurance, and the industries that I indicated are more resilient during the pandemic. And this quarter, our largest new business assessment worked with other divisions of existing clients, but we continue to score new logos as well. This is a good indication of our ability to continue to radiate to our excellent customer base, where there remains enormous potential, but also being able to find new clients to move into. We've been doubling down on our efforts to further penetrate our largest clients, particularly as we believe they will be least impacted by an ongoing pandemic. They have major strategic digital transformation needs that we can help with. For example, in terms of some of the recent work that we've done, In financial services, an existing banking client, CIBC, is making major use of the Pega Customer Decision Hub at the center of the bank's enterprise decisioning and servicing platform to really support their full-fledged modernization. A great example of the power of cloud choice, we're also working with the bank to migrate their Pega applications to Pega Cloud and double their capacity. This is for the system that will be used to support more than 11 million customers across 30,000 bank personnel. It will connect everything, all facets from onboarding to account servicing. In telecoms, our client Telefonica expanded their use on Pega Cloud to be able to have Pega orchestrate intelligent customer journeys across all engagement channels for their 25 million customers. Part of a broad digital transformation to reimagine their customer experience and consolidate technology. leading to a more effective marketing and service operation for customer satisfaction and growth. And in government, the Air Force, who has been a client since 2016, when they were looking for a solution that could truly scale and handle their modernization, has chosen Peggy to be a major part of their plans for the interim and future. And we're expanding our work with them with plans to expand from six applications to more than 100, supporting more than 10,000 users. This is a great example also of choice. And we continue to find that these government agencies have needs in the present and will have needs in the future, not just driven by the pandemic, but driven by a well-understood requirement to monitor that. I also want to take a minute to acknowledge our work with the U.S. Census Bureau. The census ended its 2020 decennial count on October 15th, and it was the largest peacetime mobilization in our country And, of course, the census is a cornerstone of our democracy. Our software was used in multiple ways throughout the project. Most importantly is the case management system processing every single survey response, regardless of whether it came in online, by phone, or through the mobile devices powered by our software. Now, it's clear that they were and continue to be lots of politics around this program. However, we're happy that our part worked at massive scales. supporting hundreds of thousands of concurrent mobile users. It was a tremendous technical success, one we're proud of, and that demonstrates that Pega Software and our team are capable of handling really critical and mission-critical projects. And finally, as a reminder, we can also support smaller organizations. We extended work this quarter with Water New South Wales, which manages a water allocation territory in a state roughly the size of Texas. Our software is being used to manage about 50,000 allocation licenses, and it's part of a modernization program designed to put their customers at the center of a new digitally-enabled and managed water network. So it's great to be able to have technologies that can both do sophisticated and capable and crush complexity there, and at the same time be able to handle the entirety. And that's what we are continuing to invest in and continuing to build. Well, I'm asked sometimes about the impact of COVID and our response. We continue to look at our response to the pandemic and adjust if necessary. And I'm frankly extremely pleased with our ability to operate effectively during this difficult and uncertain time. We continue to function successfully as a nearly 100% remote workforce and expect we will do so through the winter. re-evaluating how we work as a result of the pandemic and know our clients do as well, I actually think we're going to continue to see more interested in clients for profound digital transformation that is just being reinforced by what organizations are going through. We are confident in our ability to come out of this crisis a much stronger company in the long term, and we remain very grateful for the continued support of our staff, our clients, and our partners. and the strong commitment of those who have worked with us. We continue to support the greater Pega community and those who are particularly challenged by this crisis. In summary, our results through Q3, in particular our ACV growth and cloud momentum, demonstrate our ability to manage through this pandemic. It's terrific to see how industry analysts and prospects are viewing the power of what we do. We're focused on finishing up the year very strongly and driving business to really continue to move Peta forward. And I also want to mention that you may recall that we announced on June 1st that we had hired Hayden Stafford as president of Global Client Engagement. This is a new role to unify Peta's corporate strategy, marketing, go-to-market, and services functions. I'm really pleased how he has engaged with the team and clients during his first full quarter at Pega, and I'm very, very excited. So with this, and to provide more color on the financial results, Ken, let me turn it back to you. Thanks, Alan.
spk03: It's clear that our Pega Cloud business continues to expand at a rapid pace, reflecting the solid execution of our strategy to lead with Pega Cloud. It's also awesome to see the improvement in Pega Cloud gross margin, which have improved significantly year over year. For those of you who are newer to the Pega story, we accelerated our transition to Pega Cloud at the start of 2018, moving from a business that primarily sold perpetual software licenses to a business that primarily sells recurring cloud arrangements. A cloud transition typically takes a software company four to five years to complete. We estimate that we're about 60% of the way through our cloud transition. What this means is that customers have largely moved away from deploying Pega under perpetual licensing. Now almost all our new client commitments are cloud. These customers are either subscribing to PegaCloud, a cloud deployment that we manage, or ClientCloud, a cloud deployment that our clients manage on their cloud of choice. As a result, our total software revenue mix has shifted largely to recurring. In fact, through the first nine months of 2020, more than 90% of our software revenue is recurring. Pega is well on its way to remaking itself as a subscription software company. But this significance multi-year shift from perpetual to cloud arrangements has implications for our reported financial results, as I mention every quarter. It delays significant revenue recognition and cash collection in future periods, causing some odd optics for revenue, cash flow, and profitability. We expect that revenue growth, cash flow, and profitability will normalize as we finish our cloud transition in early 2023. However, we're confident that this move to a recurring revenue model and cloud computing will help us set up for the next phase of growth. As our cloud transition continues, the most important metric that reflects the successful execution of our strategy is growth in annual contract value, or ACV. ACV represents the annualized value of our active contract as of the reporting date. We're pleased to report that it's been over two years that we've reported year-over-year ACV growth of 20% or higher each and every quarter, which is a step up from the mid-teens growth in ACV that we delivered prior to our shift to cloud. As of September 30, 2020, ACV on a constant currency basis increased by 21% from the same period one year ago to $777 million. Although an increase of 21% is respectable, we aspire to further accelerate our ACB growth rate when we continue to add go-to-market capacity to pursue the massive and growing digital transformation market opportunity. From Q3 2019 to Q3 2020, Pega Cloud ACB grew by 57%, and Client Cloud ACB increased by 10%. Both of these growth rates are in constant currency. The second most important metric during the cloud transition is remaining performance obligation, RPO, also referred to as backlog. Backlog represents client contractual commitments for which revenue has yet been recognized. Our total backlog increased by 38% or $229 million to $838 million year over year. This $229 million increase backlog is the largest we've delivered since we started tracking it, a reflection of the commitments our clients are making in Pega Solutions. In fact, 66% of our new client commitments were Pega Cloud in Q3 2020, which is 16 percentage points higher than the approximately 50% we were tracking at through the first half of 2020. It's important to understand, especially during our cloud transition, that our booking mix of PegaCloud can vary quarter to quarter, which impacts our current period reported revenue. This is because the majority of the value from PegaCloud bookings goes into backlog and is recognized as revenue in future periods. In contrast, a majority of licensed revenue from perpetual client arrangements is recognized as revenue in the quarter when the deal is booked. We estimate that every annualized one percentage point change in a mix of mega cloud booking versus an annualized historical mix of 50% impacts reported revenue by about $4 million on an annual basis. To really understand the financials of this business during the cloud transition, it's very important to not just look at one measure. Instead, you have to look at ACV revenue and backlog. For example, If ACV goes up, but backlog goes down, well, we haven't done as good a job feeding ourselves for the future. And this is further compounded by the cloud transition, which has a deferral effect on reported revenue, which is why we're looking so much to ACV growth to measure our business momentum. Moving to margin, I think I'm equally excited about the improvement in Tega cloud margins. As Tega cloud growth margins increase an impressive 1,500 basis points, going from 49% in Q3 2019 to 64% in Q3 2020. Credit goes to our product development and cloud teams, where we've made noticeable improvement in the profitability of Pega Cloud. Operationally, I want to reiterate how pleased I am that Hayden Stafford joined Pega earlier this year as president of Global Client Engagement. Before joining Pega, Hayden helped grow his business unit as his last employer by over 300%, going from about $1 billion to over $3 billion in a relatively short period of time. Ironically, Hayden joined Sega as we approached $1 billion of angel revenue. Over the last two years, we've invested significantly in our go-to-market engine with a strong focus on adding sales capacity. We've begun to see the increased level of client engagement, which leads to building strong pipelines that, when converted, will drive further acceleration of our ACV growth. Especially given this investment, improving sales effectiveness remains a critical linchpin of our strategy for margin improvement, for which Hayden is highly committed and motivated to drive. So let's turn to a few other details. Now that I'm past the midpoint of our cloud transition, revenue and HDB growth percentages started to converge and will continue to do so during the remaining two years of our transition. In the first nine months, our success in closing new and expansion at the cloud and client cloud deals drove our growth in term license, cloud, and maintenance revenue, which makes up our recurring revenue sources. Total subscription revenue for the first nine months of 2020 increased by 27% year over year, soaring from $424 million to $538 million, an increase of over $100 million. Largely because of the convertible debt offering we completed in February, Pega finished the period with total cash and marketable securities at $468 million on September 30, 2020, compared to $512 million at the end of the prior quarter. During the first nine months, we returned about $84 million to shareholders comprised of dividends, buybacks, and net settlements and equity. We ended the quarter with over 5,700 employees worldwide, an increase of 13% from one year ago. In conclusion, we're looking forward to Q4 and closing out 2020, a year that's truly been like no other in the history of enterprise software. Like our peers, we always have quite a bit of wood to chop in a Q4 because it's a critically important sales quarter. We're focused on finishing the year strong, positioning our company to deliver even higher growth rates and margins in the future. Operator, please open the line for questions.
spk00: Thank you. And if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. If you find your question has been answered, you may remove yourself by pressing star 2. Again, it is star 1 if you would like to ask a question. And we'll take our first question from Chris Merwin from Goldman Sachs. Please go ahead.
spk04: Hi, this is Kevin on for Chris. Thanks for taking my question and congrats on the great quarter. I guess a question on cloud backlog, which accelerated nicely in the quarter. Can you talk maybe a bit more about the drivers of strength there? Are you seeing improvements to sales cycles and how is duration trending for deals?
spk03: So I'll take that first. Oh, go ahead, Alan. No, go ahead.
spk01: Go ahead, Kevin.
spk03: So what I was going to say is some of it is math. And the fact that we had such a big cloud mix in the quarter, 66%, you would expect that our revenue would be lower in the quarter and you would build more to backlog. But if that trend continues, naturally, you know, that PegaCloud backlog is the lifeline for our future revenue. So some of it is just the very strong momentum of PegaCloud that actually helps build that. And some of it is the fact that clients, when they look at, you know, Pega's offerings, our PegaCloud offering is now much more prominent and much more interesting for our clients than when we first started to talk about it three, four, five years ago. So some of it is the momentum of just the math of a quarter, but in general, we're seeing more and more clients engage with us around PegaCloud. So, sorry, Alan, go ahead.
spk01: I was going to say, we've seen a number of clients think that Pega is the best company to run Pega. Client cloud, I think, is very important. And when a customer is moving its entire data and infrastructure to an Azure or Google, they may want to have their Pega infrastructure, since we're so tied into their system, really as part of the way they think about their technology sector. But for lots of customers, they're saying, hey, we know that you'll be able to make it easier for us to tune, to grow, and to build. So I think it's just a maturation in the market of how we talk about it and our very strong successes.
spk04: Great. That's helpful. And then I guess one on cloud gross margins. Obviously, we saw a really nice sequential improvement there, more than we've seen typically. Anything to call out other than kind of general scale efficiencies that's helping that metric?
spk03: Yeah, so the great thing about, as I'm sure many of you know, the great thing about software is that it's highly leveraged at the margin line. The thing with SaaS is that it is also highly leveraged as you scale at the margin line if you have an efficient cloud operations or SaaS operations. When we were a smaller scale, we weren't as efficient. And now that we have more scale, there are technical tools that we can use, like Kubernetes, like hibernation, like things that we can do to actually become more efficient. But there's also just the natural operating leverage that the more clients you have, you become better and able to handle significant client capacity and get operating leverage out of the amount of people and technologies that actually support that. So we expected... our cloud to grow this year. I think we're doing even slightly better than we actually had hoped we'd be at this point. But remember, we still do. Our goal is not 64%. Our goal is into the mid-70s. So we're still on this journey, but we're very happy with where we are right now.
spk04: Great. Thanks for taking that question.
spk00: We'll now take our next question from Jack Andrews from Needham. Please go ahead.
spk03: Good afternoon. Thanks for taking my question. I was wondering if you're seeing perhaps a culture change around Pega and your modernization efforts as you continue to penetrate organizations, meaning that as you continue on your path, more software is getting developed in the hands of more functional users. Are people now waking up to really what is the art of the possible, I guess, with Pega and all the possibilities, or is there still some work to do on that front?
spk01: Well, it's organization by organization because you really need to be able to show people, I think, the great possibilities. But our customers are doing a good job, a very good job, of being able to show what's possible and being willing to talk publicly about it at considerable detail, not at the 30,000-foot level summaries, but really actually sharing talking about how, for example, the CEO of Comfort Bank of Australia attributed the fact that they outperformed all of their peers to what they call their customer engagement engine, which they've been very public in acknowledging as Pega. They just do a brilliant job with. So I think we are seeing that recognition that Pega can both help them materially change their game. And frankly, I'm getting lots of positive feedback on the architectural changes we've been doing as part of Project Phoenix, which is introducing a very microservices-oriented, very lighter approach to how Pega looks for our customers, particularly for those customers who are client cloud who tend to care about that more.
spk03: Right. No, I appreciate that. And just as a quick follow-up, when we talk about the divergence in growth rates between Pega Cloud versus client cloud, Do you expect that to continue, or should these growth rates perhaps converge over time? No, I think that PegaCloud will grow at a faster pace for some time because, one, it's a more prominent deployment, desired deployment model for clients. That's point one. Point two is you are starting Pega Cloud is slightly smaller than Client Cloud. And so you do get the advantage of having a more accelerated percentage growth. But I do see clients wanting both, wanting the option of having both. But I do think at least for the next couple of years, the math of the growth rate certainly would, I would think would skew more towards Pega Cloud. Got it. Thanks and congratulations on the results.
spk00: We'll now take our next question from Mark Murphy from J.P. Morgan. Please go ahead.
spk02: Yes, thank you.
spk03: Great job on the backlog piece. Alan, I think you had mentioned this focus on finishing up the year pretty strongly. I'm wondering if you could maybe just speak to the texture of the Q4 pipeline. In other words, is it lumpy or is it pretty well diversified?
spk02: And do you have any sense that there's a fairly normal or healthy Q4 budget flush environment, I guess, at least for the digital transformation projects that are out there?
spk01: Well, you know, because we're managing to ACV, right, which is a recurring, forward-looking way, I don't think for the last couple of years, frankly, budget flush has mattered as much as it did in the old perpetual days. The reality is, as Ken said, we have a lot of wood for chopping before. We always do. But I'm pretty comfortable that there's a lot of there to chop, you know, that the pipeline is strong and people are certainly working really hard. We are in an unpredictable environment, so not just the pandemic, but politically. But I'm really thrilled that we have been able to report such strength for Q1, Q2, and Q3. And I've got a lot of confidence in this team. We'll work it as hard as we can. Yeah, I understand. Okay.
spk03: And then, Ken, I wanted to ask you as well, just on the international piece of the business, are there any customer discussions or any pipeline in Europe that's seeing impact of the COVID flare-ups in this second wave of lockdowns, or is there any reason to expect some volatility in Europe? So it is a little early with the Germany and France situation. So, I mean, that's only really emerged in the last few days. What I would say, though, is – and there hasn't – none that I know of. But what I would also say is remember the lockdowns that we had back at the beginning part of the year. And our clients largely forged right through that period of time. And so given any lockdowns that you, at least what I read, any lockdowns that you see now are not going to be as dramatic as what we saw earlier in the year, I would think that it would be no worse than what we saw earlier in the year. And we did see some impact here and there, there's no doubt. But it didn't materialize into impacting our growth trajectory. So I wouldn't say that we're at a stage right now where that is something we're preparing for, which is massive spend reduction because of it. Anything can happen, but that's not something we're thinking about right now.
spk01: This is why we're advancing by who the customers are that have shown, if you think about it, when the lockdowns first happened, it was a little horrifying because nobody knew what to expect. If we go back to more lockdowns now, I was on the video chat with a major French organization today, and they understand that their digital transformation has to continue whatever happens.
spk03: Yeah, I see. Okay. Ken, one last quick one. Again, understanding the ACV piece and the backlog piece, very, very robust. And, you know, realizing term licenses are not the focus here. But can you just speak to that? You know, were there any particular reasons verticals or transactions on the term license side where that, you know, might have gone one way or the other in Q3 and just any feeling on maybe, is there anything we should be thinking through on that term license piece of it for Q4? Sure. So just to remind you that the second quarter and the third quarter are typically not big renewal quarters. Right. It's typically our biggest renewal quarter is Q4, as you can imagine, because that's when a lot of our historical bookings happen. And sometimes the renewals leak into Q1. So in terms of revenue from term licenses, which, as you know, come up front under 606, Q2 and Q3 typically do not have a significant amount of that. Q4 has some, and so does Q1. I think the bigger kind of behind your question a little bit is that I've been seeing And I'm very close to the deals at Pega, probably even more so than most CFOs because of some of the functions that report into me. But I'm very close to deals. And I will tell you, there are a lot of deals that start one way and go the other. You know, start term, go cloud, start cloud, go term. That happens all the time in a cloud choice model. I have been seeing more of a prominence of things landing at Pega Cloud over the last, you know, five or six months, and I do think that might be just the maturity of PegaCloud. So what that would mean to me is that the growth rate of PegaCloud could be sustainable and that term license and the variability of term licenses wouldn't be as big of a factor as we finish the cloud transition, if that's helpful.
spk06: Understood. Thank you very much.
spk01: Relatively to what Tim was just saying, the cloud operations, now reports it to Ken. So, he has a very close access to both implementing or helping implement and being aware and improving our cloud operations. So, he's been doing a great job with that.
spk04: Got it. Thank you.
spk00: And then, I'll take our next question from . Yes, from Barclays. Please go ahead.
spk03: Hey, guys. Thanks for taking my question. I'm from . Alan, I was just wondering, so Q3, obviously, a big federal quarter for everyone, and you did outline some key deals in that vertical.
spk02: But just can you give us more color as to how that business performed relative to your expectations and the pipeline that you had going into Q3? And what are the sort of, like, anything to call out in terms of the shape and form of deals, maybe the deal cycles? I just wanted to get more color on the federal performance.
spk01: I didn't hear the vertical you mentioned. Sorry, can you repeat it? Federal? Oh, federal. Yeah. Well, look, federal, I think it's not just U.S. federal, but governments globally. We've been seeing a lot of activity in everything from the U.K. government to the German government to obviously the U.S. government. And I mentioned the small Australia deal. The nature of that business, I think, was slowed by the pandemic a bit, but then really kicked in. And the pipeline there is all very, very nice and as we would hope and want. So I think that being able to make governments more efficient and able to handle some of what's clearly going to be a long-term sort of set of issues isn't going away. And I think we'll continue quite strong, I expect, next year as well.
spk02: And the follow-up question I have is on the Pegas Cloud. So, the new client commitment seems to be really, sort of, like, inflecting, as you saw this quarter. But just wondering, as you stick here, right, as you look towards Q4 and also for next year, how do you think about, sort of, like, maybe moving the maintenance customers over to TechCloud? Do you think that the time has come, sort of, like, to put more formal programs in place to do that, or do you think that should be a customer initiative rather than, sort of, like, a sales incentive-led initiative?
spk01: That's a good question. We're doing some, but unlike some companies, we'd much rather sell a new piece of business on Pegacloud than move an existing customer on Pegacloud, unless it's going to lead to much greater radiation. I know there are some other companies that have basically gone out and said, we want to get all our customers onto Pegacloud, and we're doing it more as It makes sense for that customer, as opposed to just trying to drive what, frankly, would risk being a short-term burst, you know, a year or two burst of booking. We really want to make it so we're growing that business as opposed to just converting it, if that makes sense. Thank you.
spk03: Yeah, and I'll add one clarification to that. Two years ago, we weren't ready to do that. We weren't as confident to take on all the new growth of Pegacloud and convert clients. That is no longer a gate. We feel very comfortable to move clients, but to Alan's point, we want to move them when they're looking at increasing their footprint with Pega, that's the opportune time to actually make that transition, not just go to clients that are perfectly comfortable in the environment and try to in some way force them or incent them to move unnecessarily. We're trying to do that in an orderly fashion.
spk00: And we'll now take our next question from Pat Walravens from JMP Securities. Please go ahead.
spk03: Hi, this is Mark on for Pat. Thank you so much for taking my question. So you mentioned in terms of the strength in the robotic process that statement. So I was wondering, have you seen any changes in that after the pandemic?
spk06: Thank you.
spk01: Sure. So it's interesting because people who are new to the story may not be aware. We view robotic process automation as very much an adjunct to end-to-end automation. You know, there's been a lot of talk about how dropping these robots in is going to just, you know, automatically revolutionize the way that companies work. And the reality is, as we entirely expected, organizations are finding that what they really want to do is hook their robots into a backbone where the backbone is in control as opposed to having all these little disjoint robots doing it. And we now support, with our recent releases, we support hooking into other brands of robots so they don't have to rip them out. But we've had some very large organizations that have said, boy, it's really clear that when you have a Pega end-to-end process you're automating and you're using a Pega robot, that everything works exactly in the right way and you're not biasing things like robotic desktops. It's not just getting better scores with analysts, which we love getting. We're seeing customers really starting to understand that more deeply. And that drives not just our robotic process automation part of our business, which is doing nicely, but it also drives the entire Pega Infinity and that story.
spk03: Got it. Thank you so much.
spk00: We'll now take our next question from Young Kim from Luke Capital Partners. Please go ahead.
spk05: Thank you. So, hey, first, congrats on a very strong quarter, Alan and Ken. As you focus more on increasing your penetration within your large customer base, should we expect to see client cloud growth perhaps reaccelerate here from the current low teens to mid teens or even higher? Or do you expect those large existing customers to also to get to adapt Pegacloud more meaningfully for new projects, especially on larger-sized projects?
spk01: Well, it's interesting. We've seen some of those very large additional penetrations into Pegacloud, and that's been really quite gratifying. We have some enormous systems running on Pegacloud. So, you know, as Ken said earlier, A lot of times the decision as to which form of agreement they want ends up flipping back and forth right up to the very last moment. And so it's almost hard for me to give you guidance as to what that trend line is firmly going to be. But there's a lot of enthusiasm for that.
spk05: Okay, great.
spk03: One additional point on that. Just one additional question. So we get about 75%. In 2020, 75% of our new bookings are with our existing logos. So given that our cloud percentage is so high, I think you could do the math just quickly and know that our existing clients are buying Pegasat at a pretty hefty pace as well.
spk05: Okay, great. That sounds really good. It seems like there's a... you know, transition point coming up or already been there. But, Ken, on pickup cloud, you know, it sounds like, you know, obviously the new customer ad has been pretty consistently strong for that cloud business. But can you give us any sense on how the, you know, the velocity of the expansion or even really the, you know, the expansion rate has been trending for that business? Thanks.
spk03: Yeah, so I don't think there's a good metric I could disclose right now on that. Now, let me explain why. The common NRR or net retention rate or net expansion rate really applies to clients that have a deployment and they're increasing usage. If you look at the growth of PegaCloud for us, I would say most of it is coming actually from new client environments going on to PegaCloud as opposed to somebody starting off with 100 users and moving to 1,000. So I think at some point in the future, that'll be a more interesting metric. But right now, most of our PegaCloud growth is actually new client environments going on to PegaCloud, which then gives us the room to grow off of that initial footprint. So I think we're still early in PegaCloud in terms of that being the most meaningful metric.
spk05: Okay, great. Thank you so much. Yep.
spk00: We'll now take our next question from Steve Enders from KeyBank. Please go ahead.
spk03: Hi, great. Thanks for taking the question. I'm just wondering, now that we're six months into the pandemic and everyone working from home, have you seen any change in the mix of project use cases that customers are bringing into you?
spk01: Yeah, I think that they've gotten more strategic. In the early days, you had a lot of panic reaction, but the discussions we're having now are really consistent. If you want to get a real understanding of the vision that I think is resonating extremely well, I have my 16-minute keynote from Pegaworld in June. This concept of a center-out business architecture, to really think about the work and decisions your business is making, is really resonating. And those are more strategic initiatives, and there's a lot of time and a lot of attention at organizations being spent on those.
spk03: Okay, that's great. And then I guess just on the cloud side, I know you're saying that you think that Tech of the Cloud is, I guess, more ready for some of these customer use cases.
spk02: Should we expect, I guess from here, the mix of new business coming in to us? turn more towards the two-thirds cloud mix this quarter versus kind of the 50% expected? Or how should we kind of think about that from here?
spk01: I'm going to leave that crystal ball to Ken.
spk03: I mean, I think so specifically we're talking about PegaCloud. So your question was around PegaCloud growth rate. Sorry, I broke there for a second. It was about – I think it was the mix. Yeah. Yeah, the mix, the pagan clobber. Yeah, sorry. So I don't – I keep saying that the mix at 50% is something that we've seen more quarters than we haven't, as you know. But every once in a while, you know, a quarter jumps up a little bit. I don't know if that's a trend or if that just happens to be an anomaly of a quarter. But I'll tell you, the feeling I have is that PegaCloud has momentum. Let me just say it that way. But the mix could stay at 50. I just felt it's hard for me to guess. But I will say that I would be surprised if the percentage dropped well below 50 for a number of sequential quarters. I think that's not the way the business feels to me. Just a quick follow-up on that. Do you think there's anything related to work from home and
spk02: I guess, less ability to go into data centers that could be having an impact on that near-term mix?
spk03: Oh, yeah, absolutely. That has a factor. I mean, there's no doubt. I mean, clients, companies in general, pretty much everybody you talk to is reimagining the workplace, reimagining the work location. And they realize that if they have call centers, that call center doesn't need to be everybody going into an actual building together. And so if you just use call center as just one of the use cases, I definitely think people are going to move to, you know, more browser-based interactions, and they're going to need to have people in different locations, and that plays right into digital transformation, Pega, and also Pega Cloud. All right, great. Thanks. Thanks. Really appreciate the questions.
spk00: We'll now take our next question from Mark Schipel from Benchmark. Please go ahead.
spk02: Hi. Thank you for taking my question. Alan, starting with you, just building on one of the prior questions on your federal business, which has been building quite nicely over the past few years, the government sector is a very large space, especially the federal sector. I was wondering if you could just review the type of government use cases where you believe Pega is particularly strong.
spk01: So one of the things that Pega is extremely strong at is process automation and case management, which is at the heart of our business. And if you look at government, it is full. of what you refer to as case management, whether it's actually processing applications, licensing of businesses, handling requests for help or assistance. All of these fit perfectly into the model. And if you go to our website and you'll watch my keynote, you'll see something that when government people see this, they say, boy, this was really designed for the type of work that we're doing. So it's an awesome fit for modernizations. And they know they need to monitor.
spk02: Great. Thank you. And then, Ken, one for you. A question on extended payment terms. Last quarter you mentioned that you were seeing some customers requesting extended payment terms. I was wondering if you saw some customers ask for that.
spk03: So it does happen – it does happen – infrequently, but it does happen. I'll use a better metric for that. Mark, it is DSO. If you look at day sales outstanding, are day sales outstanding at the end of Q3? Have they peaked in Q2, and they've now come back to Q4 and Q1 levels of last year. So I think what happened was in Q2 of this year, our Q2, June 30, you did see some people dragging out payments a little bit. That seems to have corrected at the end of Q3.
spk04: Great. Thank you. That's all. Thanks.
spk00: We'll now take our next question from Rishi Jaluria from DA Davidson. Please go ahead.
spk03: Hey, Alan, thanks so much for taking my question. I wanted to start by going back to new logo land. It sounds like it's healthy and definitely from your end sounds better than at the beginning of the pandemic or even last quarter. Can you speak a little bit to why are you seeing better traction with new logo landings? Is that just customers deeper into the pandemic and out of triage motor more willing to have these conversations? Is it better sales execution and better adapting to the current selling environment? Is it investments in product that you may be paying off? Maybe help us understand that.
spk01: Sure. And sadly, I think this is going to have to be the last question because we're only five minutes late for another call. But I would say that a lot of it is changes in our behavior in terms of stepping back, thinking about how we need to reach out differently, being more focused. I actually think a lot of this is in our hands and also being more selective about where we go. Because some of the folks who you would have perhaps marketed to in January as new logos are clearly not the right places to go now. Though we have had buys. I think I mentioned on the previous earnings call. about how, you know, Cathay, the airline, decided to thank you to us to help them get out of, you know, the current problems and put controls on. So we do find these odd exceptions. But I think we're trying to be more selective and smarter about where we are. Okay, great. That's helpful. We'll talk again, Rishi. Thank you.
spk03: Yeah, I'll save the rest of my questions for our callback. Thanks.
spk01: So, Opera, I'll just close it out right now. If it were, I'd just like to thank all of our investors and the analysts and everybody who joined us and the Pega staff and customers who would be on the call. Thank you very much, everybody. We have a lot of work to do, but we're working really hard, and we're feeling like we're all in the same boat. We're all in the same storm, but we're in very different boats, and thankfully our boat is one that has made it through these first three quarters, I think, in If you look at ACV growth and if you look at backlog, which are the two things we think are the critical ways to judge how a business is done, how our business is done, it's been terrific. So thank you, everybody. Thank you, everyone, for your support and look forward to talking to you at the end of the next quarter. Bye, everybody.
spk00: And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.
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