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spk01: And at this time, I would like to turn things over to Ken Stilwell, COO and CFO. Please go ahead.
spk13: Thank you. Good evening, ladies and gentlemen, and welcome to Pegasystem's first quarter 2021 earnings call. Before we begin, I would like to read our safe harbor statement. 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, 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 the fiscal year 2021 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 Q1 2021 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, 2020, 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 will turn the call over to Alan Treffler, founder and CEO of Pegasystems.
spk05: Thank you, Ken, and thank you to all our investors. Our Q1 results demonstrate the continued progress we're making in our shift to a recurring revenue model. Our total ACV, the best indicator we think of our future revenue growth, increased by 20% for the quarter year-over-year, while revenue grew 18%. We continue to accelerate PegaCloud growth with PegaCloud ACV up 55% year-over-year. In addition, more than 50% of our new commitments in Q1 were pegaclap. Now, last year at this time, we were at the very beginning of a global pandemic, and the transition to remote work was less than two months old. Though we realized we'd be in the situation for some time, I don't think anyone then would have predicted we'd still be in it more than a year later, and are still unclear as to when it will really end. That said, I continue to be pleased and proud of how our entire global team adapted to conduct business virtually. And we continue to see clients and prospects accelerating their digital transformation initiatives. We expect this acceleration to continue irrespective of when we reach a new normal, whatever that may look like. Our clients recognize that their needs are getting more complex, not less. And as we've proven, we believe we're uniquely positioned to help organizations crush their business complexity. Accordingly, the demand for scalable, low-code solutions can solve the problems of business complexity now and for the future continues to drive our business. Now, most organizations have moved beyond solving the acute needs of the here and now of the pandemic. And we've seen this crisis as a catalyst to get organizations to build stronger businesses for a very different future in 2021 and beyond. No one wants to be caught unprepared when the next crisis hits, whatever that might look like. In response, we continue to focus our efforts on building solutions and an ecosystem to support the evolving needs of our clients. improving efficiency, usability, accessibility, and time to value. For example, since we last spoke, we delivered enhancements for low-code development that enables anyone to deploy powerful apps with just clicks. New features makes it easier and faster for both professional and citizen developers to create seamless apps from any desktop application using an intuitive low-code interface and new authoring enhancements. We've also enhanced our software to add the industry's first capability that uses AI to deliver self-optimizing process automation. Pega Process AI intelligently triages incoming customer requests and other events in near real time and enables fast and efficient event resolutions while helping to lower operating costs and simplify staff and customer experiences. It helps organizations drive greater process efficiency and effectiveness at enterprise scale. We continue to focus on enhancing our enterprise-grade intelligent automation capabilities, leveraging robotics as part of a holistic approach to go beyond incremental improvements and drive true transformation. Intelligent automation needs to do more than simply automate repetitive tasks on a desktop. It needs to be part of a center-out approach, that puts the customer at the center of the business architecture and helps drive customer journeys, or as we call them, micro journeys. This approach brings task automation, process automation, and case management together to create a consistent experience for both customers and employees across all channels, from the front office all the way to the back office, all the way to other clouds. At PegaWorld Inspire next week, on May 4, we'll be showcasing the next major release of Pega Infinity, as well as a reimagined partner program that will provide clients with a deeper portfolio of expertise and also provide our partners additional opportunities to expand their business and drive more revenue. The set of new capabilities in Pega Infinity reflects the ongoing evolution of our underlying architecture, We've made tremendous progress in evolving the runtime architecture to allow for increased service isolation, support of cloud-native technologies such as Kubernetes, and the use of leading-edge technologies for caching, search, and data storage. Throughout its history, Pega has provided modern, next-generation solutions. Technological leadership is key, we believe, to accelerating Pega's growth, and we're excited to showcase these advancements next week. I hope you'll join us for this two and a half hour virtual event, which I guarantee will be engaging and informative. You can go to our website to register, or reach out to Ken's office if you need assistance. Now, we've built on our successes from last year to make this year's event even better, with live product demos, interactive Q&As, digital transformation best practices, and success stories, from industry-leading organizations. And PegaWorld is always an opportunity for us and our clients to share client success stories. This year is no exception. For example, Jules Richardson, the new head of personalization at Wells Fargo, will talk about how the bank is using Pega to create a scalable, intuitive solution with powerful AI decisioning at its heart to improve customer engagement and increase conversion rates. Aaron Penny, Portfolio Manager at Pfizer, will share how the company's bold digital transformation efforts, including how they are using Pega to improve accuracy and increase operational efficiency, is helping their drug development process. And Jason Brabrau, Senior Vice President, Head of Customer Retention at SiriusXM, will talk about how the use of Pega Customer Decision Hub for customer retention to identify the right one-on-one experience enables them to balance churn and revenue across 34 million global customers, supported by 10 call centers around the globe. And Edith Din, a technical program manager at Google, will discuss how they're using Paga to automate tedious and manual interactions to optimize research efficiency so they can scale sites, access, and dispatch requests in their data centers. This is a great example of cloud choice as they run their system on the Google Cloud Platform. And much, much more. Now, we're finding more and more opportunities to attract talent with strong, relevant experience and their relationship from peers and competitors, including Salesforce, ServiceNow, and Microsoft. We continue to invest selectively in hiring to build out our senior management bench and our sales capacity. You may recall we brought in Hayden Stafford last year in a new role as President of Global Customer Engagement. Hayden has made and will continue to make additions to the senior leadership team, bringing in talent from high-growth organizations. And I believe these changes create a foundation for accelerated growth and will support a sales and partner ecosystem that will help us worldwide bring our market execution to the next level. We're excited about these investments and the impact we expect they'll have in the second half and beyond. We're also investing more in brand awareness. For example, you may have seen our logo on the clothing of two very promising golfers, Mel Reed and Mark Leishman. And we'll be sponsoring them over the next two years. It was very exciting to see Mark finish in the top five at the Masters and win the Zurich Classic over the last weekend. And we'll have some additional exciting news related to branding coming up in the weeks after Pegaworld. So... In summary, we're executing on a strategy and are optimistic about 2021 and future years. Our transition to a recurring revenue model is continuing apace. We have the right solutions to help our clients address both the short-term and long-term effects of the pandemic while they build for the future, whatever that may bring. And we have the right go-to-market strategy, structure, and team to meet our goals. We'll continue to make necessary investments required to scale while carefully considering margins. And we continue to see significant upside among both our existing clients and new opportunities. To provide more color on the financial results, let me now turn this over to our Chief Operating Officer and CFO, Ken Stilwell. Thanks, Alan.
spk13: Today I'll talk a little bit about our Q1 results and also provide insight into the revenue growth acceleration phase of our cloud transition. You'll remember in late 2017, we started on migration from selling perpetual licenses to selling subscription licenses. Our expectation is that we will wrap up our cloud transition in late 2022 or early 2023. The two most important metrics to measure our business momentum as a cloud company are annual contract value and remaining performance obligation, or called backlog. Let's talk about ACV growth first. In the first quarter, total ACV grew 20% year over year, reaching $853 million. FX continues to be a few percent tailwind to our results. Our ACV growth was powered by Pega Cloud ACV growth of 55% year over year. Pega Cloud is our software as a service offering. It represents client commitments where Pega fully manages the solution for our clients. Our other subscription offering is Client Cloud. Client Cloud deployments are managed by the client on the cloud of their choice. It's important to note that Pega Cloud ACV reached $282 million in Q1, increasing more than $100 million year over year. Quite amazing to remember that business as being a $30 or $40 million business just five years ago when I joined Pega. It's really exciting. Moving to backlog, which represents client commitments that are booked but have not yet been taken into revenue. Total backlog increased by an amazing $226 million or 30% year over year. And PegaCloud backlog increased by 36%. in the same period. Our multi-year cloud transition was strategic and very deliberate. We believe that a subscription-based software company generates more predictable revenue and cash flows. A cloud transition typically takes an enterprise software company five years, as I've mentioned previously, to complete and includes three major phases. The first phase is where the company transitions from selling perpetual licenses to subscription licenses. When we started our cloud transition, about two-thirds of our new client commitments were perpetual. In the first quarter of 2021, over 95% of our new client commitments were subscription arrangements, pretty much in line with our expectations. Clearly, this first phase of our cloud transition is complete. The second phase of the cloud transition is the revenue growth transition. During this second phase, revenue growth rates decline, especially in the first few years. This is because the business is moving away from selling perpetual licenses, where most of the revenue is recognized up front, to selling cloud arrangements, where most of the revenue is recognized over time. For example, our revenue growth rate dropped from the mid-teens, before we started the cloud transition, to low single digits for a few years. And now that Pega has passed the midpoint of the cloud transition, our total revenue growth is accelerating, approaching the growth rate in ACV as expected. In the first quarter, Pega's total revenue grew 18% year over year, and subscription revenue outpaced ACV and grew at 23%. Pega Cloud revenue grew 56%, almost identical to the Pega Cloud ACV growth rate of 55% in the same period. These results represent an important inflection point in our cloud transition and are another example of Pega keeping its promises along the way to becoming a cloud company. Our subscription revenue growth of 23% year over year powered our total revenue growth in Q1. Total subscription revenue includes cloud, term, and maintenance agreements. It was also very exciting to see the evolution of our business model continue to progress as expected. In the quarter, the company's subscription revenue reached 81% of total revenue, up from around 50% when we started the cloud transition in the fourth quarter of 2017. The final phase of the cloud transition is the cash flow transition. During this final phase, billing and cash collections improve and normalize. In other words, the company has completed the transition of moving from a company that collected most of its cash billings from new client commitments up front to a business that bills and collects its cash billings from clients consistently over time. In Q1, we continue to make solid progress on our efforts to improve our cash flow. We're reinventing the way we develop, go to market, and service our products and solutions. You can see the payoff in our margin improvement, positioning the company to pursue stronger free cash flow in the future. We still have work to do on this front, but we feel like we're making good progress. In the first quarter, total gross profit margin increased by four percentage points year over year, and Pega Cloud gross margin increased by seven percentage points, going from approximately 60% gross margin to 67% gross margin in the same period. Our non-GAAP earnings for the quarter were $22 million, or 26 cents per share. One of our key goals is to achieve the Rule 40 after we complete our cloud transition in late 2022 or early 2023. And to remind you, we define the Rule 40 as a combination of our ACV growth rate plus our free cash flow margin. We believe growth and profitability go hand-in-hand when it comes to business success, especially now that we're nearing the end of the cloud transition. As we work with our clients, we are very focused on helping them as we hopefully come to a conclusion of this pandemic that we've been all dealing with. And we're really, really excited around the efforts of our employees and our work that we've done with our clients and partners. Before opening the call for questions, I'd like to invite each of you to our annual customer conference, as Alan mentioned earlier, PegaWorld Inspire, on Tuesday, May 4th. It starts at 9 a.m. and will conclude around 11.30 a.m. The event, unfortunately, is virtual again, but we're super excited to share incredible stories from over 40 clients and partners and features, keynotes from a number of really, really important clients where we're doing great work. To learn about the latest with Pega technology and to see how we're driving these incredible outcomes for our clients, I encourage you to register at Pegaworld.com. Our annual investor session is on Thursday, June 3rd, with a start time of 10 a.m. Eastern time. We'd love to have you all join us. To register, please send an email to PegaInvestorRelations at Pega.com, or you can send a note to Peter Welburn or myself. And with that, operator, please open the call to questions.
spk01: Certainly. And everyone, to ask a question, that is star 1 on your telephone keypad. Please note that if you're on a speakerphone, to pick up your handset or depress your mute function to allow that signal to reach our system. Again, that is star 1 to ask a question. And we'll go first to Mark Murphy of J.P. Morgan.
spk09: Yes, thank you very much. Alan, what are the spending intentions that you're picking up on from some of your key verticals like financial services for 2021 as a whole, just in terms of IT budgets, how they're looking at that? And I'm wondering, are you sensing any on-prem bounce back, or do you think that the viewpoint is going to be more structurally tilted toward public cloud this year?
spk05: You know, so it's interesting. I think some organizations, not related to Pega projects they have, have experienced a little bit of sticker shock on some of their cloud experiments. And, you know, there is, I think, a real question about how that growth is going to go. But relative to our clients, we're seeing a lot of enthusiasm about moving forward. new business and even some of their existing systems onto PegaCloud. You know, the real advantage is not a cost advantage on, you know, hardware or OpEx. It really is with PegaCloud, we've really mastered a lot of the ability to, you know, keep our customers much more current and let them take advantage of the new things we're putting into our technology faster. So I think the appetite in all industries, I think, is going to continue to be strong. We were fortunate that we were not heavily exposed to some of the industries that were most badly hit, but we are now seeing interest in places like airlines and retail, as well as our traditional markets around financial services, healthcare, and insurances.
spk09: Okay. And, Ellen, I guess since you made that last comment on the heavily hit industries, I wanted to actually ask Ken, you know, how did you feel about maintenance renewals during Q1? Understanding your exposure there is low and you've actually seen some positive demand there, was there anything there that might have held back maintenance renewals or renewal rates at all or maybe just any timing differences that pushed some of that into April or May?
spk13: Yeah, that's a great question, Mark. So two comments on the maintenance line specifically. So first, no, retention rates, we're not seeing renewal rates, retention rates, not seeing any softness or weakness that maybe would have been a risk from the pandemic. So we have nothing there. I'll remind everyone, but this is a little nuanced, but the way that we calculate maintenance Our ACV for maintenance is that we take the quarterly revenue and we multiply it by four. It's a little bit different than the way that it's directionally the same in spirit of ACV. But the math of it can cause slight variances between quarters in that particular number. And also to make another comment on that, Q1 was not a very big renewal quarter in general for Pega. That isn't a big surprise. Renewals tend to be more toward the back end loaded in terms of the timing of renewals. But Q1 of 2021 was not a terribly strong meaning, a lot of activity in renewals. That tends to be more back end loaded for 2021. So nothing at all in terms of the strength of the business, Mark, but there are some timings around the way the calculation for maintenance ACV works quarter to quarter, and that can change the ACV number slightly within any one quarter for maintenance.
spk09: I understand. Yeah, thank you for shedding light on that, Ken. That's very clear. Thank you.
spk01: Yep. Our next question will come from Steve Coyne of SMBC NICO.
spk03: Great. Thanks very much. Maybe one multi-part and one follow-up for you guys. So on ACV, grew 20% with a little bit of a tailwind from currency. Just in decomposing the numbers, it looks like term ACV didn't increase that much quarter to quarter. And so... And I guess more generally the question is what needs to happen to accelerate ACV? And I'll kind of throw in that as well. Maybe talk a little bit, because this may be relevant, about 2021 sales changes that Hayden has made or is making and the hiring that you're doing. You know, we noticed some key hires, but total hiring is accelerating sharply as well. And I've got one quick follow-up for you as well.
spk13: So let me take the first part of that, and then, Alan, maybe you might want to talk about the sales hiring, the ramping. And I'll remind Steve on – Something that I said last quarter because, you know, sometimes these little nuances, it's helpful to just reinforce it. I wasn't expecting or I was expecting, excuse me, 2021 bookings to lean even more towards the back end of the year than a typical year. So I didn't expect ACV growth to accelerate in Q1 2021. or quite frankly, even in Q2. So the fact that ACV constant currency, or as reported, kind of dipped slightly in Q1 by about a percentage point wasn't a surprise to me in terms of how I thought the year would play out. Second point on that, you asked a question about how does ACV, how will ACV accelerate? It's really, it's significantly impacted by the booking momentum through the year. So when you do have, you know, a year that starts out a little bit slower than, and we kind of, we thought that all along, than a typical year, you will see the ACV, you'll need more of the ACV growth towards the middle to the back of the year to get that growth rate up.
spk05: And relative to some of the sales changes, you know, if you look on LinkedIn in terms of Pega's recent growth, hires over, I would say, the last three, four months, you'll see we've brought in some really extraordinary talent. We have a new head of Europe who I think is off to a terrific start. We've brought in some very senior people in the Americas. And I think we're pretty close to done with any material changes. And now we need to bed it down and turn it into accelerated revenue growth and accelerated ACV growth growth.
spk03: Great. Thanks, Alan, and thanks, Ken. And maybe a quick follow-up. So, Alan, I was intrigued by your comments about how organizations are looking at cloud migrations and seeing sticker shock in some circumstances, obviously not impacting Pega, if you just look at the numbers. I'm wondering, you know, do you see that in relation to, you know, cloud-native competitors in your space? or are you seeing that more generally? I'm just kind of wondering about maybe some color behind that comment.
spk05: Well, I think it's more generally. One of the things about the efficiency of running on the cloud is if you've got a group of engineers, it's really easy for them to spin up many systems than the build comes due. So I think it was really I was just making a general comment. on the industry. The reasons to go to cloud, frankly, are not to achieve data center savings because it's hard to close down a data center. I think the real reasons to go to cloud is for the acceleration of revenue, ability to change faster, ability to just be more agile. than, you know, in the alternatives. And I think that will continue. I just expect that fewer people are going to obsess about the data center cost reduction. But who knows? You know, it's hard to predict that. In any case, I don't think it's going to affect us at all.
spk03: Yeah. Okay, great. Thanks for that, Collar. Thanks, guys.
spk01: And now we'll go to Chris Merwin of Goldman Sachs.
spk11: Thanks so much for taking my question. I just wanted to ask a bit about the margins in the quarter. Obviously, a really strong number there. I know you're investing in the business, and that's going to be driving faster growth as we go through the year. But can you talk a bit about what drove that beat and anything you can share about how you're trending so far this year relative to the full-year guidance that you provided? Thank you.
spk13: Sure, Chris. So, The beauty of a subscription model when you're done with the transition is that the revenue isn't as dependent on your performance in an individual quarter. Now, with 606 and the screwiness of the way the accounting is around that and us having client cloud, which means that some of the accounting is under the term accounting model, we still do have a little bit more movement in the quarters than if we were 100% PegaCloud. But I think the growth rate that we kind of thought for the year when we originally started the year, we didn't expect that to be kind of flat all year and then a huge hockey stick in Q4 like it used to be when we were a perpetual business. So I think seeing that steady growth rate is really encouraging to me just to kind of just to confirm something that I knew would happen, which is as you exit the transition, the revenue starts to really kind of get matched up against the ACV. And I think Q1 is kind of a good indication that we're kind of hitting that stage now. So that's exciting. In terms of the cost, Chris, sometimes the timing of hiring and the timing of events through the year will sprinkle things between quarters. You know, we have marketing spend, we have travel spend, which certainly is low under COVID. And we have just the timing of when new hires that were as we're growing the organization start. Some of those things can kind of just flip between quarters a little bit. So I think I'm happy that we started off strong on EPS, but I don't think that that's just that the margin profile is different than what we originally thought when we talked about 2021. It's just sometimes it's just the timing is a little different between the quarters.
spk11: Okay, perfect. That makes sense. Then maybe we'll follow up, you know, as it relates to the ACV target and fiscal 22. I mean, You know, in terms of, you know, you've spoken to this in the past, but, yeah, I imagine as cloud becomes a bigger percentage of the mix, I mean, the overall ACV growth is going to track more closely to that. Should we think of that as a primary, you know, driver of the overall acceleration in ACV growth as we head towards the end of 2022? Or, you know, just wondering what else, you know, is being contemplated there, you know, whether it's an improvement in the demand environment or whether that's not even necessary? just to the extent that you can unpack some of those drivers and how you're progressing against them would be helpful.
spk13: So in order to accelerate ACV, a couple things need to happen. One, you know, naturally the investments that we've made in sales and marketing will come to fruition, right? And as Alan just mentioned a few moments ago, you know, we've had a lot of change in the organization for the good, but that change, you know, naturally needs to anchor. And I think that we have plenty of opportunity to to meet or achieve or beat any of our ACV growth targets that we have. It's really about us executing and executing consistently to be able to expand our relationships with the most important companies in the industries that we serve. How will that ACV growth play out? Naturally, ACV growth tends to be a little bit softer in the first, second, third quarter, tends to normalize in the fourth quarter because of the timing of our bookings. And I think the biggest and most important factor for our ACV growth is PegaCloud. PegaCloud adoption is growing above 50%, quite frankly, longer than I thought it would stay, above 50%. And I think that has been a really important factor to our success. And we expect that growth rate, you know, to stay very high. And that is the key lever, I believe, for us expanding and growing our client base and also accelerating our ACB.
spk11: Thanks very much.
spk01: And now we will go to Steve Enders of KeyBank Capital Markets.
spk10: Great. Thanks for taking my question. I just wanted to talk a little bit about the investments that you're making in the partner community and the channel community and how those investments are tracking and kind of how we should think about those going forward in terms of ACV growth and potential for accelerating that.
spk05: I'm sorry, could you repeat the first part of that question? It was kind of a glitch on my line.
spk10: Sure, yeah, I was asking about the partner community and the channel and the investments you're making there and the ability for that to accelerate growth going forward.
spk05: Yeah, I think it's going to be very, very promising, you know, particularly in future years. We've already very dramatically increased our partner staff to really be able to enable the partners to understand Pega more and put it in more bids, and we're seeing that happening. Hayden is a big proponent of using partners extensively, and I would say that we have a record number of deals that have partners using involved in a couple of different ways. So I think that's going to be key, and that is a place where we've already hired a significant number of people to be able to deepen that this year and next.
spk10: Okay, great. And then just a quick follow-up. I just want to get a better sense of how some of the deals kind of came together in the It seems like there's a bit more focus on what you're talking about on the local side, at least in the past couple of quarters. I'm wondering how that's kind of translating over to the CRM side of the business and supporting those initiatives.
spk05: Well, we're seeing activity on all three fronts that we really try to go to market in. You know, we do a lot of work in customer service. A lot of those are really sort of, you know, end-to-end workflows that snap into a variety of channels and front ends. You know, we have what we call the next best action capability that's used by some of the world's largest companies to really optimize the response to customers. And we have the intelligent automation, which is, you know, think of that as being the same sort of workflows powering customer service, but being able to do it in lots and lots of different settings. We've been low code in all three of those, frankly, going back many decades. since we've been around. We've always believed in a model-driven architecture, which, frankly, is, I think, what low-code is truly intended to be. And I'm pretty pleased, and I think we're being effective in showing our customers how we have a depth and sophistication so that they don't have to just use low-code for sort of crappy little systems. like, you know, think back to Lotus Notes applications. That's what a lot of these low-code folks are doing. But they can use some, you know, a common platform to do those, but also to do things that are truly enterprise scale and may have tens of thousands of concurrent users across an enterprise pounding on. And that breadth, I think, is unique to us. But we're using the low-code concept and term really to power us across all the platforms. all the markets we go into.
spk10: Okay, great. Thanks for taking my questions.
spk05: Sure.
spk01: And now we will take our next question from Jack Andrews of Needham.
spk12: Good afternoon. Thanks for taking my question. I was wondering if we could dig a little bit deeper into the partner side of things. You hinted at this reimagined partner program coming out on May 4th. I'm just wondering, I mean, have you reached a point where, you know, partners are effectively committing to, you know, a go-to-market strategy with you and or, I mean, could you just talk about maybe somehow how the partner deals that you're involved with right now are maybe comparing in terms of either size or just other characteristics relative to what you've historically seen with your direct sales efforts?
spk05: So I think there are two parts, one that's really good and one that introduces, you know, from our point of view, some potential timing questions. So we've already been able to get major commitments from, you know, extremely large top tier partners that they're going to build highly material practices in Pega. And, you know, it's interesting, you know, we're seeing things where organizations are actually willing to buy small companies, Omnicom, recently bought a significant PECA partner to really beef up its effort as it's going to market in the whole sort of advertising arena. And so I think the partners really, really provide enormous leverage, and we have seen a real reciprocation from them as we have been investing more and bringing new people in to really drive those relationships. The difference, I think, between partner-driven sales and sales that our sales organization is driving is that you have a little less visibility and control into exactly where things are. You know, you can't run around your partner. If the partner brought you in someplace, you've got to really, you know, respect that. And, you know, that can just lead to a little less clarity on exactly where a deal is. But I like what I'm saying, and we're going to continue to double down on it.
spk12: I appreciate that. Just to sort of follow up with the broader question, Can you maybe just talk about what are your expectations for new logo growth here in 2021? Are you expecting sort of an acceleration of new customer ads coming out of the pandemic?
spk05: Well, I think once we're out of the pandemic and everybody's sort of back, it will be easier to achieve new logo growth. But we are not at all limited in our existing logos. We are, you know, as I've said before, in what you think about our top 10 customers, we're on average no more than 20% penetrated compared to what we think we're able to do with those customers and those stamps. But we are scoring new logos, including some pretty impressive names. But let's face it, in a pandemic, people are more likely to work with the people that they already know. And so I think we're going to see that pick up as we end this year, enter 2022.
spk12: Got it. Thanks for the color. Sure.
spk01: And next we have Dan Eyes of Wedbush.
spk07: Yeah, thanks. First, congrats on the Leishman sponsorship. So could you maybe hit on, you know, from a marketing perspective in terms of sort of the go-to-market strategy here? Are you going to see more and more partnerships as well as just building out some of the channel? Can you talk about that, especially given the broadened offerings?
spk05: Yeah, so we're definitely going to see partners as being increasingly important to our go-to-market, and that's an area that we've, as I said, already made commitments to, hired people to. and gone forward. So that's going to be quite material, quite bigger, and I think is a real force multiplier, you know, as Hayden likes to say. And, you know, regarding marketing the golf, who could know that my CMO was going to turn out to be so brilliant at selecting people for us to sponsor? I've gotten slews of texts at IMs, you know, after Leishman appeared, literally, you know, the Zurich this past weekend, and, you know, being fifth in the Masters. So, you know, I think, you know, he's doing sort of an outsized job, and, you know, we're pleased that we've been able to do the sponsorship with him.
spk07: Great. Maybe let us know who he picks again, and we could use DraftKings before that.
spk05: I've been asking him if he gave me Super Bowl recommendations, but we haven't gotten any. Exactly.
spk07: Okay. Could you just hit on... M&A, appetite has increased, just given the strength that you're seeing. Thanks.
spk05: Well, we continue to look for technology or other sorts of things that would complement or tuck in to our value proposition. We're not a company – we, and I think this is going to become increasingly important in the future, are very focused on making sure that We don't destroy our architecture by buying revenue that doesn't fit together. And so, in fact, we're much more likely to buy companies that are either early in revenue or, in some cases, pre-revenue, but that have very, very creative visions that would fit in to this concept of end-to-end center-out work management. So, you know, we've got the resources to do it. I would say that we're very selective, and I'm already hearing from a lot of customers saying, who've worked with other organizations that create what we call Frankenstacks, that they're really thinking that that technical debt is hurting them. Even if it's running on the cloud, they really end up suffering with the seams. So we have an appetite. You're not going to see us going and trying to make, frankly, a diseconomic purchase, which there's lots of purchases out there that I just think are a little crazy. Great. Thanks.
spk01: And now we'll go to Mark Chubble of Benchmark.
spk06: Hi. Thank you for taking my question. Just one question here. Most others have been answered. With respect to process fabric, Alan, it's been about a year or so now since the introduction of the solution. And I know last year was pretty much all about building pipeline for the product. I was wondering if you could just address a little bit what your outlook is for Process Fabric with respect to being a meaningful contributor to revenue this year.
spk05: Well, I think Process Fabric is a meaningful contributor in a couple of ways. One is it itself is a source of some revenue, but the best thing is that it lets you hook together lots of applications. So I find it a way that you can create a single fabric as opposed to trying to either create some massive single system, which isn't the way we want to do things in the cloud world, or have stuff that has to be manually cobbled together. So the fabric is really sort of an out-of-the-box way. And, you know, we introduced it last year, and it was quite new. It's now been adopted by several clients, and I think it's going to be a very important part of our growth forward. both in terms of itself, allowing us to generate revenue, but more making it easier to drop in Pegasystems or talk to other systems, even if they're distributed.
spk06: All right, great. Thank you.
spk01: And next we have Fred Havenmeyer of Macquarie.
spk02: Hi. Thank you very much for taking my question. So, you know, I'm curious to ask a couple of questions, actually, around your pre-configured product portfolio here. So I'd like to ask, how generally do you see yourself landing across your portfolio of pre-configured solutions, and where are you seeing the most customer traction there?
spk05: So there's a lot of – I'm sorry, it's just a moment to get off mute. Yeah, there's, I would say, a lot of customer traction there. In areas that involve things like onboarding, you know, because people are really worried, particularly in some industries, about fraud. And, you know, also being able to manage claims because we've had some organizations, you know, that have had forbearance claims, other types of things spike. And, you know, that's just something we're really extremely good at. So, for example, I don't know your customer repackage solution or some of our onboarding capabilities are things that we're seeing quite a bit of interest from, you know, in particular from banks.
spk02: Thank you. That's helpful there. And then as a follow-up, as Hayden is taking the reins across the sales organization, are there areas that you think that he would be interested in or Pega generally would be interested in adding to their pre-configured or pre-built product portfolio and perhaps also leveraging some of your experience with customer implementation that could really help to accelerate that go-to-market?
spk05: So I think there are areas, but as part of our new push with partners, and you'll see these solutions coming to market, we're really looking to get sort of one or a couple partners in each vertical who themselves specialize and have their own out-of-the-box things. Because the reason partners like that is if they're bringing IP to the table when they're bidding on a customer piece of business, Even, you know, PEC is going to be the underpinnings, but if they're bringing IP to the table, then that, frankly, makes them more competitive. So that's a good way, I think, for us to get this done without going through all of the expense of having to build it all ourselves.
spk02: Great. Thank you very much for that. That makes sense.
spk01: And now we'll go to Yoon Kim of Loop Capital Markets.
spk00: Thank you. Hey, Ken, going back to Steve's earlier question on the client cloud business, are you expecting a big renewal year for that business this year, which obviously could potentially provide tailwind for the year, or are you expecting some of the client cloud customers to start moving over to the Pega cloud, which obviously could limit some of the client cloud ACV growth?
spk13: So good question, Yoon, and I'm glad you asked because it's probably good for anybody listening so that I can clarify this. So renewals wouldn't – large renewal years, let me clarify, wouldn't impact a CEV positively or negatively unless we upsold or radiated with that client. If a client moved from client cloud to PegaCloud during a renewal cycle – or even in the middle of it, that absolutely would reduce one and add to the other. We don't have much of that going on right now. We have it a little bit, and we certainly would like to see more, but we didn't think about 2021 as being a massive shift of people moving from client cloud to pega cloud, although we would love to see it. I think that will happen for some clients over time. What it does impact, the renewal cycle impacts, is revenue for term license. Because if you know under 606, the revenue comes in when a renewal is essentially executed. So renewals tend to be more back-end loaded. We do have, I think, a fairly... I would say I'm going to use the word normal, but a fairly kind of typical year for renewals around client cloud. So we do have some revenue assumptions typically coming more towards the back end of the year, but we don't anticipate renewals. renewals impacting ACV directly because our retention rates are very high. And if we did actually have clients that decided to move on to Pega Cloud from Client Cloud, that certainly would reduce Client Cloud ACV, but it would increase Pega Cloud ACV by a larger amount. So I think that that would be a good outcome if that did happen. But renewals are not a big factor in ACV specifically.
spk00: Okay, but typically when the customers renew, I'm hoping that they renew at a much larger, they would expand their current deployment, so that's the That's the question behind that.
spk13: That is true, and that's why I had mentioned that our renewals tend to be more back-end loaded and our bookings tend to be more back-end loaded because we do radiate with lots of our existing clients. A renewal is an opportunity. It is a compelling event to sell more. So you're absolutely right there.
spk05: But I don't think it's sensible for... you know, us to wait for renewals to upsell the customer. You know, typically in our agreements, if we're able to work with the customer, find greater usage, there's typically a pricing schedule where you'll see the ACV increase independent of the renewal. Okay, great.
spk13: We'll do a modification to an existing contract, Ian, is what Alan's saying, and that happens all the time at Pega.
spk00: Yep, yep. That makes sense. So on the PegaCloud side of the business, can you at least qualitatively give us how much of that business is driven by the expansion rate and how that's been trending versus new customer ads?
spk13: The PegaCloud, from a dollar standpoint, the overwhelming majority of our ACV growth is from clients growing their spend with Pega, existing Pega clients growing their spend with Pega. So we do not, we are not growing Pega cloud with getting tons of brand new logos that have never done business with Pega. I think the number that we've, we've had is somewhere North of 75% of our bookings of our client business is actually business with existing clients. And Pega cloud has, probably a similar, I don't know, I've not dissected it at that level, but Pega Cloud, I would tell you, would probably have a similar profile to that. So it is largely expansion with logos that Pega has.
spk05: So those expansions might be a new division, a new department, new projects, those types of things. And from my point of view, those are very reliable projects because the customer already has a good experience with Pega. and so maybe they're just amping up the number of cases per year they do, or maybe we're adding on, for example, decisioning or next best action to a customer who was a work management customer.
spk00: Okay, great. That's it for me. Thank you so much.
spk08: Thank you.
spk01: And now we will go to Pat Walravens of JMP Securities.
spk08: Oh, great. Thank you. This is Joey Marincic on for Pat. Just one for us. I want to go back to those sales investments and maybe how are you tracking from a sales productivity standpoint? And then just qualitatively, how are you thinking about the pipeline for 2021? Thank you.
spk05: Well, I think one of the things that has been very positive is with the introduction of Hayden and some of the other new sales management that we have, we've really internally been able to create a much more disciplined cadence so that we're really, I think, getting, frankly, a better observability of not just what's closing, but the build and the pipeline and making sure things are properly categorized and making sure that offers are thought of the right way. So I think I'm encouraged that starting Jan 1, you know, so some of these you know, changes have really only happened in the last, you know, three, four months. Starting Jan 1, I think we've got a much better selling discipline as a result of not just Hayden, but some of the other team members that he's brought in. So that makes me feel, you know, A, we will have good visibility into the productivity as we go through the year, and B, I do very much like what I see about this improved, you know, management to seller engagement.
spk13: And just to add a little color on another part of your question, our pipeline not only is growing in a healthy clip year over year, but to Alan's point, we also believe the quality of our pipe is better now. And so the combination of higher quality and growth in pipe you know, really creates an environment to see that sales productivity improvement in the future.
spk08: Awesome. Thank you so much, guys. Thank you.
spk01: And this does conclude today's question and answer session. I would like to turn the call back to Alan Treffler for any additional closing comments.
spk05: Thank you. I hope you all get a chance to visit Pegaworld Inspire. next week it's going to be a terrific show and I think there's a lot that's going on and I think people would find that really interesting relative to our investors I want you guys to know that we're all working really hard and I think the team is energized about where we are so thank you all and look forward to talking to you
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