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spk10: Good day and welcome to the PegaSystems fourth quarter and full year 2021 earnings results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ken Bilwell, Chief Operating Officer. Please go ahead, sir.
spk07: Thank you. Good evening, ladies and gentlemen, and welcome to PegaSystems Q4 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 or other similar expressions, identify forward-looking statements, which speak only as of the date the statement was made and are based on current expectations and assumptions. Because such statements deal with future events, they are subject to various risks and uncertainties. Actual results for fiscal year 2021, 22, and beyond could differ materially from the company's current expectations. materially from those expressed in forward-looking statements are contained in the company's press release announcing its Q4 2021 earnings and the company's filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2021, 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 a 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.
spk00: Thank you, Ken, and thank you to everyone who's joining today's call. I'm pleased that we ended the year with solid results. by staying focused and leveraging our strengths. We grew ACV, annual contract value, our most important metric, to over $1 billion for the first time ever. Our low-code software platform for workflow automation and AI-powered decisioning is, I think, unmatched in the industry. And the largest and most demanding enterprises and governments around the world choose us to address their most mission-critical challenges. Increasingly, we're being selected as the enterprise workflow standard for activity done at scale, from the simple to the most complex. With Pega, our clients don't need to sacrifice scale for speed. We support their digital transformation objectives with solutions that provide immediate value, And with the agility to tackle whatever challenges they may face in the future, we continue to enhance this innovative technology, which consistently receives some of the highest possible ratings from leading analyst firms like Forrester and Gartner, and drives significant and meaningful outcomes for our clients. We have a loyal client base that understands and values the power of what we offer. and is leveraging Pega to deliver inspiring results and continues to provide ample opportunity for expansion. We have a dedicated and deepening partner ecosystem that's helping us accelerate our growth and bring even more value to our clients. Our partners continue to focus on delivery excellence and are an essential element in ensuring successful adoption by our clients. We have a culture built on inclusivity, collaboration, accountability, innovation, and excellence, committed to giving back and making a difference in our communities. I'm really proud that we recently scored 95 out of 100 on the Human Rights Campaign Foundation's 2022 Corporate Equality Index. This is a globally recognized benchmark and represents our team members coming forward and doing the right things. And importantly, we have a team of more than 6,000 people around the world that are dedicated, passionate, and resilient, who make all of this possible and who make me proud every day. Now, in terms of market dynamics and competitive differentiation, let me just say that digital transformation continues to be central to our clients' successes, and is driving our business. Gartner is predicting continued growth in enterprise software spending, driven largely by organizations upgrading their software stack to software as a service and seeking continued flexibility and agility. And IDC is predicting investment in digital transformation software to grow about 25% every year from now through 2024. Though initially accelerated by the pandemic, it's clear to me this industry focus will continue, and we're in a great position to capitalize on this trend for years to come. I'm energized about the terrific market opportunity this represents for us and our ability to significantly help clients solve problems both today and for tomorrow. We are working to be the low-code software platform, the low-code software platform, for workflow automation and AI-powered decisioning. And these powerful capabilities allow us to crush business complexity so our clients can more easily make decisions, save time, and get work done. We differentiate on our architecture, which allows us to tackle mission-critical issues our clients have today and will have in an unpredictable future. Our cloud choice approach which allows clients to use our fully managed Pega Cloud services or to run our software on their cloud of choice, supports the growing trends we're seeing in multi-cloud environments. And our exceptionally powerful and adaptable software is scalable to provide maximum reuse while enabling collaboration between business and IT leaders for rapid innovation. I'm pleased that we're trusted by many of the world's largest and most demanding enterprises and governments, and that they're using us to fundamentally evolve their businesses and to improve how they engage with their clients by personalizing customer engagement to maximize customer value, streamlining customer service to increase customer satisfaction, retention, and agent productivity, and improving the efficiency of onboarding operations and exception workflows to save time and cost while increasing speed and agility. Now, over 2021, we continue to see the positive impact of our deep and profound client relationships and how they're able to drive outstanding results for our clients. We expanded our reach in many clients and key verticals, including communications, financial services, healthcare, insurance, and government. We also continue to make inroads into organizations that represent new growth opportunities in places like manufacturing, consumer services, and technology services. We continue to deepen relationships and see tremendous opportunity for growth within those existing clients. These clients become sustaining relationships that routinely renew year after year and set the standard for successful examples of significant digital transformation. Our clients continue to expand their use of Pega because we drive value today and we see how they can drive value in the future. That's why so many of our clients are willing and we're honored that they are to publicly talk about their work with us and they will this year again when we're once again holding PegaWorld virtually in May. Now, we're holding PegaWorld virtually this year, but we're excited to bring back in-person events in the second half of this year. And we'll be holding a variety of client and partner events around the world, including regional client engagement events and client and partner advisory boards. Now, going back to PegaWorld, one of the best parts of PegaWorld is hearing from our clients. And this year will once again feature incredible stories, like Cigna, who is using Pega to process more than one million critical and complex healthcare transactions each day and address the needs of customers and patients in a highly personalized way. Ford, who has created a center of excellence using Pega as their enterprise low-code workflow automation capability to enable citizen developers to create Pega applications and alleviate IT backlogs. Highmark, who is leveraging Pega to deliver enterprise-wide healthcare consumer engagement and do it at scale across channels focused on improving health outcomes, improving the member experience, and also reducing cost. Or the UK Royal Navy, who is using Pega to transform and modernize its recruitment process with a unified digital platform that provides candidates a better experience and the data that the Navy needs for meaningful insights. Or Verizon, who will showcase how they're using Pega decisions engine to influence and personalize customer relationships and increase sales velocity. Or Wells Fargo, who is using Pega to ensure that each of their five billion monthly interactions with customers is targeted and relevant to the individual, regardless of which channel they choose to connect through. They've just rolled out this new system in 5,000 U.S. branches within a year. And they just published a new video that features this work, so you don't need to wait until PegaWorld to see their incredible story. Just go to Pega.com. I hope you'll check out the PegaWorld website, register, and join us live. I was also delighted to recently hear from our client at Commonwealth Bank of Australia that they've become the subject of a Harvard Business School case study, as their work is being considered a global best practice. The case study is available online at the HBR store and is based largely on the work they're doing with Pagoda Drive, what they call their customer engagement engine. an AI-driven customer experience platform. As the case study says, quote, against the backdrop of a once in a century global pandemic, CEE, their customer engagement engine, helped the group deliver a strong financial performance while also supporting customers with assistance packages designed in response to the coronavirus outbreak. Before I conclude, I also want to provide an executive update. I want to let you know that Hayden Stafford, the president of Global Client Engagement, has decided to pursue an opportunity with a pre-IPO company and will be leaving Pega. In his 22 months with Pega, Hayden helped cultivate an extremely strong go-to-market operation, and we have an experienced and talented team. I am confident the team we have is well positioned to continue to deliver through 2022 and beyond. Collectively, we wish Hayden all the best in his next endeavor. So in summary, I'm excited that as we enter 2022, we are clearly a subscription business. Nearly 100% of our software business is now a subscription business. You can see the significance of this transition in our full-year financial results, which look much more like what you'd expect from a subscription-driven business, and which Ken will take you through shortly. I'm especially excited to see that our revenue growth is now more closely aligned with our ACV growth, which, as I said, we view as the critical measure. And the need for enterprise software to support digital transformation initiatives in our client base continues to grow. And I think we're in a great position to capitalize on that growth and provide solutions unmatched in the industry. We're really excited about the significant opportunity we have this year and beyond. And I believe we have the right team to deliver on these opportunities. To provide more color on the financial results, let me now turn this over to Pega's COO and CFO, Ted Stilwell. Ted?
spk07: Thanks, Alan. To hit on a few highlights at the top of our business, annual contract value, ACV, grew just over 20% year over year, surpassing $1 billion, as Alan mentioned. Currency negatively affected our ACV growth by about 1%. So with constant currency, we would have been kind of in the 21% range. Total revenue reached $1.21 billion for the full year. Revenue would have been even higher if not for significant growth of 45% in our term license backlog. As many of you know, the timing of the revenue under our client cloud model can have some lumpiness between quarters and is not as predictable as our Pega Cloud revenue recognition. So it's important to look at revenue and backlog because it tells a complete story. Subscription revenue grew 24% year over year and made up almost 80% of our total revenue in 2021. We delivered the highest total gross margin that we've reported at 72%. Remaining performance obligation or RPO or backlog reached $1.3 billion, an increase of 25% year over year. And it's great to see us get back to full year profitability again as non-GAAP EPS reached $0.22. Now, let me put this all in context. 2021 was another important year in the transformation of our business as we are now largely complete with our subscription transition. Remember, we're a subscription software business, and we're almost... at the end of our financial model transition. When I first talked about this, I talked about us finishing the transition in 2022, going into the beginning of 2023. And we are still on that schedule. Now that we've wrapped up 2021, let's go back and refresh everyone on what I talked about in 2017 about how the subscription transition would evolve if we executed as planned. The first step was to change the way we sold software, moving away from selling perpetual licenses. Before we started the transition back in late 2017, over 50% of our new client commitments were perpetual arrangements. And for the last couple of years, almost 100% of our new client commitments are now subscription arrangements. Our sales team and our clients have clearly moved from a perpetual to a subscription buying and selling model, which is a very dramatic change in just a few years. It's also great to see that our revenue growth rate and our ACV growth rate have really converged closely. When we started the subscription transition, I talked about our revenue growth rate declining in the early years of the transition, which is exactly what happened. And as we moved away from selling perpetual licenses, where the license is largely recognized up front, and as you move to a radical subscription model, the revenue begins to reverse and normalize as you get closer to the exit of the transition. Pega's annual growth annual revenue growth was flat in 2018, for example, and only grew 2% in 2019, but ACV was growing by over 20% in both of those years. Now when you fast forward to 2021, Pega's revenue grew 19% in 2021, our subscription revenue grew 24% in 2021, and ACV grew just over 20%. So largely as we envision this playing out. We've also made progress in the normalization of cash flow and profitability. The final phase of the cloud transition, which we should complete in 2023, is when you begin to see that margin expansion and normalization. In a business like Pega, where we have very high retention rates, and a lot of operating leverage with high gross margins, you would expect cash flow to generation to increase significantly as you exit and normalize out of the cloud transition. In fact, in 2021, we delivered the highest gross margin since we started this transition, as I mentioned, at 72%. That strong improvement was powered by an increasing Pegacloud gross margin, which reached 67% for the full year of 2021. For the full year, non-GAAP EPS was $0.22, a significant improvement over last year, but really just a step in the process of getting back to significant free cash flow generation. Coming out of this subscription transition is the perfect time to remind people of the cash flow potential inherent in a subscription business with high retention rates like Pega. I believe we're starting to see that return to operating cash flow generation that is now inflecting upwards and will continue to in 2022 and beyond. We're confident that we can increase margins even further to achieve our free cash flow targets and accelerate our ACV growth at the same time. We continue to see a tremendous market opportunity for us in the digital transformation space. So we will continue to invest in sales and marketing to help accelerate our ACV growth. Our sales and marketing expenses are declining slightly as a percentage of total revenue, but we know we still have work to do there. We're making progress. We're not quite there yet, but we know we are going to continue to drive sales productivity improvements in 2022 and beyond. Moving to cloud choice. We clearly benefited from cloud choice differentiation. It's very clear to us that multi-cloud is a real trend. In January, Investment Bank RBC reported that 77% of IT decision makers used two or more cloud vendors, while 35% used three or more cloud vendors. And Gartner reported in September that 76% of firms use more than one cloud provider. Offering our clients cloud choice is critical. And by the way, we're excited that our subscription software is now available for purchase on the Amazon Marketplace, giving us another distribution channel. Well, on the topic of cloud choice, it's important to remind you that a dollar of incremental ACV is a dollar of incremental ACV. Whether the client purchases PegaCloud or ClientCloud, the long-term economics for us are very consistent as we cross and upsell to our largest organizations. Our solid performance for the year is also evident in our remaining performance obligation or backlog. Total backlog represents expected future revenue from existing contracts with our clients. Total backlog reached over $1.3 billion, an increase of 25% year over year. Our incremental backlog ad was almost 300 million year over year. Ultimately, a subscription software company's revenue growth rate, our ACV growth rate, and our backlog growth rate should all align. The fact that these three growth metrics are much closer in 2021 and even converging closer in 2022 and beyond is evidence that we've executed well in our subscription transition. Given the evolution of our business, you may notice we've updated the revenue categories in our financial statements to group our subscription revenue streams more clearly. These new revenue line items better reflect the fundamentals and trajectory of how we think of our business. Total revenue reached over $1.2 billion, as I mentioned earlier, representing growth of 19% year over year, and highlighting why it's very important to look at RPO and revenue growth together when evaluating our performance. One challenge of our compelling cloud choice strategy is that revenue recognition for our offerings is not always ratable. As you know, as I mentioned, in 2021, our term license backlog increased 45% or $53 million year over year, which is unusually strong and was significantly higher than the term license revenue growth of 26% for 2021. Normally, we would expect to see those growth metrics more in line with each other, but the higher RPO growth in 2021 just shows you that we have greater visibility into term license of revenue looking out in the future years. Cloud subscription revenue grew 24% year over year and made up 79% of total revenue. When you add our subscription revenue and our professional services revenue, it's in excess of 95% of the revenue in 2021. Turning to our fiscal year 2022 guidance, I want to remind you that it's our practice to provide annual guidance at the beginning of the year. We do not update annual guidance during the year unless we do a material acquisition. We expect total revenue of $1.46 to $1.49 billion, an increase of 20% to 23% year over year. And for the first time, we're providing ACV growth guidance, which we expect to grow 20% to 22% year over year in 2022. We've created a range, which we believe provides some level of visibility to the business and the growth of the business without the unnecessary predictability of guessing at an exact percentage number, which, as you know, is very hard to do. From a profitability perspective, we expect 2022 non-GAAP EPS of between $0.75 and $1, a solid improvement and a step in the right direction on the way to the Rule 40. we realized that there is tremendous leverage inherent in our operating model, and we plan to exhibit that leverage as the business scales and grows larger. We continue to see solid demand for digital transformation in both the front and the back office, and our product continues to be best in class with differentiated capabilities. Before opening the call for questions, I want to reiterate Alan's invitation to each of you to our annual client conference, Pega World Inspire, in May. We also plan to hold an annual investor conference sometime in June. More details to follow on that. We're hoping maybe that that investor conference can be live, but, you know, fingers crossed. And with that, operator, let's open the call to questions.
spk10: Thank you. 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 It's turned off to allow the signal to reach our equipment. Again, please press star one to ask a question, and we'll pause for just a moment to allow an opportunity to signal for questions. And we'll take our first question from Rishi Solaria with RBC.
spk06: Wonderful. Hey, Alan, again, thanks so much for taking my question. Nice to see a little bit of acceleration in the business and appreciate the shout out for our recent CIO survey. I wanted to maybe drill down a little bit more into the guidance. So, you know, great that you're guiding for accelerating revenue growth and margin expansion, which is obviously a rare combination in software land. So really great to see that, you know, on the table. But Two things I wanted to drill into that. First is you're diving to about 300, 400 basis points of operating margin expansion. There's obviously puts and takes with the cloud transition and the Mars expansion side, but can you maybe let us know how should we be thinking about the prior targets you laid on the table for hitting the rule of 40, let's call it in 2023? Is that still on the table? Because that would be assuming, I think, some pretty dramatic margin expansion then in 2023. And then, you know, the ACV guidance, really appreciate that. That'll definitely help us all build our model. Just any thing that you can tell us in terms of what sort of FX assumptions are baked into that, and then I've got to follow up.
spk07: So let me touch on a couple of those. I'll maybe go back. So our FX assumptions are relatively muted in terms of the full-year impact. So we don't see a tremendous amount of FX impact, a slight amount of headwind on FX, Rishi, but we're not making any big or bold predictions on significant movement of the dollar one direction or the other. As you know, the currency moved around in the year. The dollar was weaker at the beginning of the year and then it was stronger at the end of the year. But overall, it's going to be a little bit of a headwind year over year on currency. In terms of margin expansion, I think it's probably worth highlighting that we can make you know, the margin of the business be, you know, quite frankly, what we want it to be by just de-investing in the business. Now, I know you're not proposing that, nor are we, but I think that the margin expansion trajectory that we're on will show an increased margin improvement in 2022, and it will show a noticeable increase in 23 and in 24. Will we be at the Rule of 40 in 2023? Probably not. Will we be well on our way there in terms of the balance? Absolutely. So I think that, you know, from that standpoint, we haven't seen the, I would say, the sales productivity kick in as fast as we had hoped. And I think, you know, COVID certainly wasn't helpful in that. And that's probably the one thing that's probably drug out our Rule of 40 achievement a little bit.
spk06: Got it. That's helpful. Thanks. I appreciate that. And then just on the PegaCloud side specifically, you know, look, we all understand the cloud choice. That's obviously a major competitive advantage for you. But it does look like there's a bit of a slowdown, especially on the cloud revenue side or, you know, even cloud CRPO. Can you maybe just let us know, you know, what's going on, any kind of factors, you know, that make that number a little wonky in terms of RevRec And how should we be thinking about the potential for Pega Cloud growth, you know, to accelerate maybe let's call it next year, 2023? Thanks.
spk07: Sure. So throughout 2021, I mean, all of you are aware that clients really are much more proficient at managing their own clouds, which actually has strengthened our client cloud growth in 2021. When we started the year or even started 2020, I don't think that it was as obvious to us how important it is for clients to be able to manage many of the solutions that they're buying from vendors like Pega. So that is certainly one difference in the last few years that we view as a positive because we really buy in to embracing that with clients. In terms of your question about Pega Cloud specifically, there isn't any RevRec issues. There's nothing unique going on. Pega Cloud is a very traditional SaaS subscription revenue recognition model. So nothing there on that side. But I think as the percentage of Pega Cloud and Client Cloud has stayed relatively steady, and our growth rate of ACV has stayed relatively steady, it wouldn't be unusual for the cloud growth rates to converge a little bit. And that's really what you're seeing happen as clients manage their own solutions on Pega at a little bit of a higher pace.
spk06: Got it. No, totally understand. And last one for me, and I'll jump back into the queue. Cloud gross margins, you know, obviously they've improved dramatically since you started on this cloud transition. I know in the past you've talked about getting a more SaaS-like gross margin, call it 70% plus. And, you know, understandably the single tenant architecture is always going to be a little bit of a drag there. But, you know, it's been relatively flat throughout the course of 2021. How should we be thinking about the potential for cloud gross margin expansion from here?
spk07: You should probably expect a few hundred basis points of cloud gross margin expansion each year for the next few years.
spk00: And I would say relative to architecture, we've been doing a lot of work, technology called Kubernetes, other types of things that I think provide in coming years some really good opportunities to achieve the types of things Ken is talking about in a pretty reliable way.
spk06: All right, wonderful. Thank you so much, guys.
spk07: Just to confirm one thing, because it's probably a question, so Rishi and others might have this. Our goal for Pega Cloud gross margins in the kind of timeless model have not – been reduced. If anything, I think some of the things that Alan mentioned and architectural improvements would give us opportunity to improve them. So we have plenty of scale of Pega Cloud. So we're not worried about our Pega Cloud gross margin targets that we talked about over the last few years.
spk10: And thank you. Next, we'll take our next question from Steve Enders with KeyBank.
spk05: Great. Thanks for taking the question. I guess I want to ask a little bit on what you're seeing from a demand function at this point and where the top of funnel activity stands. I think there's been concerns in the market around digital acceleration potentially causing a pull forward in demand into 2021. So just wondering what you're seeing on the demand front and how the top of funnel activity looks today and into calendar 2022 here.
spk00: I can take that. As we look at the first half of the year and what's going on, I think demand is still robust. People have profound needs. We're a real enterprise engagement organization, much more than what you describe as a broad lead gen, beat the bushes sort of organization. We really have focused on what I would describe as a target organization model. And that, I think, is a pretty reliable way to get demand compared on just trying to be exclusively pulsing for leads, which some companies or a lot of companies do. So we're seeing a tremendous amount of activity and interest in our customer base. And I don't want to take anything for granted that But I think that's going to persist, and I think the industry focus on transformation and on improving efficiencies and, frankly, some of the great resignation, which is putting pressure on customers to find better ways to deliver their systems, I think some of these actually have good long-term promise for us as well as the early part of this year.
spk05: Okay, great. That's, uh, that's helpful. And then just on the, um, on, uh, I guess, partially on the go to market front with, uh, with, with Hayden leaving, I guess, how does that kind of change, uh, how you're thinking about the leadership in, in, uh, in that area and the go to market organization has been a bigger focus on the partner, uh, in channel strategy. Um, is there gonna be any change on, on that front, uh, moving, moving forward?
spk00: No, the strategy we entered the year with is the strategy we're pursuing for the year. I'm pleased that we have a strong and deep team that's going to be able, I believe, to take some of the good work that Hayden did as he brought us some new insights and some new capabilities and some new talent and be able to continue to drive it and continue to grow it. So I believe we have in place a team that's going to be able to, you know, deliver this year, and that's what we're planning to execute on.
spk05: Okay, perfect. Thanks for asking. Just checking my questions.
spk11: I'll jump back into the queue. Thank you.
spk10: Thank you. We'll move on to Steve Koenig with SMBC-NICO.
spk02: Great. Thank you very much. Hi, gentlemen. So just building on Steve's question on the organization, Hayden's departure, and then I've got one follow-up that's a little bit more on the financial side. Are you all looking to replace his function, you know, that brought together a lot of the geo-focused activities with a single role or to go back to more of a geography-focused organization and functionally-focused organizations within the go-to-market? And then I've got one follow-up for you guys. Thanks.
spk00: No, we're not going to go back to the – for folks who didn't know, we used to have a pretty hard split between what we called Americas and international. And we are going to continue to have – obviously, people are deployed in regions, but we are not going to go back to that sort of highly bifurcated – regional sales and service organization. Having a singular sales organization and a singular services organization, having customer success management and partners also be thought of in a global context. We're happy with some of the things that that's brought for us, particularly since a lot of our clients are global as well, and absolutely not moving that off this year or any time in what I would say is the foreseeable future. So I think we're structured in a way that's good, and we're going to continue.
spk02: Great. Well, thanks for that, Alan. And then if I have a chance to give Ken a follow-up here, Ken, can you explain your commentary on how the heavy term activity negatively impacted RevRec and give us any color you can on the cloud mix of bookings? And then I'll just throw this out there, you know, total cloud bookings as we compute from the change in backlog and cloud revenue, it grew a whopping like 67%. It was actually really big. So where there's some big, you know, cloud contract, longer term cloud contracts out there. So, and that's it. Thanks very much.
spk07: Sure. See, so let me see if I can go and order there and get those right. So the first, the first thing is good question on, and it's, it is, it is difficult in a script to make this really crisp, but when you have arrangements that where the client commits in a period, but you don't get the revenue in the period, it goes to backlog, of course. It goes into the backlog. So what happened at the end of 21 is we always have term arrangements that go into backlog. It's just the nature of enterprise selling and the timing of when clients go live or when their effective dates start. So that's always going to be the case. But when you see such a big jump from the end of 20 to the end of 21, the first question you would say is, oh, that must have impacted revenue. Because if backlog grows, that means you really kind of had less revenue in the current period. So that's the connection that I was making there, which is revenue would have been bigger in Q4, but for... deals going into backlog that will then come into revenue in future periods. So that's the connection on the first piece of your question. The second one was around cloud growth. Yes, Pega cloud growth actually, the mix of our business is slightly more Pega cloud than client cloud. And I say slightly like, you know, 50, 55 percentage kind of in terms of the mix of the business activity. And that's fairly consistent over the last few years. as you know, because I've talked about that each quarter. But Q4 did have a robust Pega Cloud amount of activity. And to remind everyone, Q4s typically are not as strong Pega Cloud quarters. Q4s typically have a little bit more client cloud in terms of the mix. So you have that dynamic going on, but also Q4s, RPO, and I know when you talk about your calculating total contract value, which includes revenue and the change in RPO, you have to be careful. Just like I talk about in quarters that might look weaker, it may just be a poor renewal quarter. In quarters that look unusually strong, you could have seasonality of renewals as well. So just remember that is a factor as well. Although, Pega Cloud was stronger in Q4 of 21 versus Q4 of 20, for sure.
spk10: some timing of renewals in there so hopefully that hits the questions that you asked yes sir dad thanks ten thanks guys yep thank you and next we'll move on to pendulum bora with jp morgan oh great hey um hey everybody um thanks for taking our questions um
spk01: I wanted to ask about the sales reorganization as well. I mean, as you head into the new year now with the leadership change, is the plan already in motion? Have you made any kind of tweaks into the sales organization to drive rep focus at this point? And then given the tight labor market, I mean, were you able to end the year where you wanted to be in terms of sales capacity?
spk00: So we were already, as we entered the year, as we entered January, we had already done the sort of setup for 2022, as you would expect. There's a tremendous amount of work that goes into our sales kickoff in January to both get the salespeople structured so they can get off to a good start for the year. Most people do not change their focus, as you would expect. We want people who know these organizations and and are building sustaining relationships with them. But of course, there's always some tuning, some adjustments, some introduction here. I would say we probably didn't end the year exactly where we wanted to be from a sales staffing point of view. But we did, as you can see in our numbers, have very robust hiring. And, you know, I don't, We often set goals that we don't quite pick up to, so that's not really anything that I would view as surprising or concerning. But as a result of this change, there's no strategic change, no restructuring of kind of what the strategy is. The strategy that we worked out coming into the year is the one that we're executing on, and I feel good about that.
spk01: Got it. Thanks, Alan. One follow-up on the ACV guidance, and thank you for providing that. It's more of a quantification, I guess, but ACV growth of 22%, obviously, it's kind of a continuation of what you're doing, but seems like it's a tad below the IDC number that you highlighted of 25%, right? So my question is, what takes you there, right? What are the levels that take you to that 25% number or higher, and can we get there in the next couple of years?
spk11: So maybe I'll start, Alan, and then you can jump in.
spk07: So the primary level – so I think about the way you grow in three dimensions. It's pretty straightforward. One, what's the market opportunity growth? Two – How good is your solution to be able to capture some level of the market and cannibalize market share? And three, how much selling, productive selling capacity do you have to be able to get there? I'm not worried about the market. Knock on wood, right? I'm actually certainly not worried about our solution and where it is positioned and the strength of it in the market. And what we're really focusing on is trying to really improve our sales productivity as we increase and ramp our sales productivity. And that is, you know, that has not been an easy linear process for us, but that's what we're working really hard on is the third one. So, Alan, if you have other thoughts to add to that, but that's kind of how I think about it.
spk00: Yeah, and I think sales productivity has lots of elements. You know, it relates – to the effectiveness of our marketing messages. It relates to our ability to enable and bring new staff up the curve. It relates to the cadence that we use to manage the business on an ongoing basis and provide reinforcement. It relates, frankly, to our clients being successful and themselves wanting to become sort of enabled and engines of growth. And all of those are key elements that I think are part of being productive as a company. And we aspire, as Kenneth talked about, to be more productive as a company. And I think that there is every opportunity for us to do that. So that's where some of the goals around increasing margins come from there. We've hired a lot of people. We need to make sure that they become increasingly effective. We need to. I think we always can improve how we talk to the market, and we're going to be doing that, too.
spk11: Got it. Thank you.
spk10: Thank you. Next, we'll move on to Mark Chappell with Loop Capital.
spk09: Hi. Thank you for taking my question. Ken, starting with you, with respect to renewals in the coming year, is 2022 going to have more renewals than the prior year?
spk07: 2022 is – so the interesting thing, Mark, is just in general, now at our size, at this point in the subscription transition, we won't have years where there's a material difference between the renewal opportunities that we have, which is really, I think, the fundamental point you're asking. Is there a really, really big difference one year versus another? That said, 2022 is a healthy renewal year. which means it's certainly not lower than average in terms of the renewal year. But we don't have a big deviation. Like, if you think about, like, the standard deviation between a year for annulled, back three or four years ago, it could be 10%, 15% of a difference. When you actually look at it now, it's kind of like you might have a 5% difference one year or the other, but it's not as material.
spk09: Great, thanks. And then... one of Hayden's responsibilities was building up your partner programs, and that's been a big initiative over the past year or so. What percent of your deals are now influenced by partners? And maybe just give us a sense of where it was, say, a year or two ago.
spk00: So I would say the level of partner engagement has grown, and at this point is really very high. I don't have the stat in front of me, but I would say say that north of 75%, 80% of our deals are involved with partners, partner engaged, very actively partner supported. The nature of our deals is our customers want to talk to us, right? And so the reality is that we're involved. And I think the partner team has done a great job of deepening our relationship with the largest and most influential partners, and that's just going to continue. We're committed to that path. We think it's important, and my whole leadership team is completely bought into that.
spk07: And I'll add one additional flavor to that, Mark, which is just to be clear, partners are not closing in. and booking and closing deals and sending us the paperwork. Maybe someday that will be the case. I mean, that's certainly an efficient distribution model for many companies. But partner-influenced, which is what you mentioned, partners are involved in 60% to 80% of our deals, and we think that's very healthy to have them involved, especially with the organizations that we're selling to.
spk11: Thanks. Thank you.
spk10: Thank you. Next, we'll move on to Fred Hademeyer with McElroy.
spk12: Hey. I have a couple of questions. I think that, you know, many of them are another take on some of the ones that have been asked already. So, firstly, you know, I want to begin with just generally your go-to-market philosophy relative to what was described at your 2021 Analyst Day, just with, you know, Hayden's departure. So we understand that back during the analyst day, there was a roadmap that was laid out talking about a number of different changes and initiatives. I want to focus more on the productization side of things here. Is there any change to your strategy of offering more pre-built products or solutions or just items that could be offered off the shelf with any of these recent go-to-market changes, or is that still on the roadmap?
spk00: Well, I'm going to defer at the end of this to Ken because he was literally there, and so he can tell me if I missed anything. Yeah, there's not a strategic change in terms of where we're going if you look at any sort of horizon. The reality is I think we've had the right strategy for the last couple of years. I think this is very much around execution. And I am not expecting any shift or revision in that overall big picture strategy. Ken, do you want to say something more specific? Because I know you were in those sessions.
spk07: Yeah, I think so, Fred. I think you're referring to one aspect of it, which is what we call our engagement strategy, which is which is customer service, intelligent automation, and one-to-one customer engagement. No, those are still very core theme areas for us in terms of how we go to market, and certainly the solutions have a more – complete finish. I mean, they are not a build off of a platform from scratch, certainly the way BPM was years and years ago. So from that standpoint, no strategy change at all. I think maybe just to clarify one thing, we do not have shrink-wrapped software that is actually kind of a click-through, kind of like Microsoft Office or anything. That isn't our strategy, nor is that what we communicated at Investor Day. But in terms of the engagement strategies, and the solutions really being common use cases and being much more kind of finished, so to speak, and ready for, you know, faster time to value for our clients' deployment, that is absolutely consistent.
spk00: Well, and when you hear me talk or us talk, and I think very consistently, talking about, you know, making decisions, like you look at the Commonwealth Bank of Australia customer engagement engine, you know, for existence sort of concept. You talk about, you know, driving work to done or getting work done. That's the intelligent automation engagement strategy. That's really kind of, you can almost think about the next generation of, you know, workflow and low code in terms of being able to, like, do stuff, which, you know, I think has been a traditional strength. And then, you know, one of the core places you apply that, it's things that involve our client's, customer engagement. It's how our clients work with their customers across channels, across products, and how I think we very, very differentiatedly create a way for clients to create a holistic approach to their customers and to their products with some of the really unique architecture that we have around what we call the layer cake and around the things that give an organization the ability to be specific to different customers and customer segments, customer areas, but still get that leverage built in, which has been central. Those are very much those three what we call engagement strategies that Ken was referring to, and those are really what we're focusing on and what we're working with our partners on.
spk12: And thank you for the context on those engagement strategies. Around go-to-market again, I wanted to ask on the competitive landscape side of things. At this point, certainly there's a number of pure play, low-code, no-code vendors that are out there. And we're also, of course, seeing companies like ServiceNow really focus on and talk about low-code enterprise workflows and their abilities to facilitate that. So I wanted to ask, are you seeing any changes in your competitive landscape who you're typically going against or going head-to-head against in deals, and generally speaking, any sort of shift in use cases that customers are adopting Pega for.
spk00: So there are lots of competitors in this market. I mean, to be candid, anything that is an alternative, you know, as a competitor, ranging from what you would call traditional programming to, to companies like ServiceNow in the last 18 months or so have really been talking about workflows, et cetera, which I find kind of ironic given our long and storied history and all the different things this stuff has been called during its evolution. There's no shortage of competitors. The things that we do, I think we do very differently. than our competitors. Very simple things. There are competitors ranging from programming all the way to the app sheet people in terms of that. The part of the market we, I think, are uniquely good at is the ones where they've got to be fast. They have to deliver something now. They have to deliver something soon. But they need to be able to do it in a way that's going to be able to grow and evolve and support ultimate enterprise needs. And we can get customers to understand what we do that's special in that area. We have an enormously strong competitive message. That's one reason why I think having an engaged enterprise sales force is important to the way we're going to market. And I think it's important to our clients and customers. You know, that's why that's been the strategy. That's what the strategy is going forward. And I'm excited that, you know, we're going to continue to build these broader and deeper relationships with customers, which are key, and have partners who really know how to help us leverage this, you know, in the evolving world. So sleuths of competitors out there, you know, it's nice being differentiated. It's our job to make that difference visible.
spk12: Thank you there. And then I think one final question for Ken on the financial side of things. Your commentary about the timing of deals just being shifted into backlog rather than revenue, thank you for that context earlier. I wanted to ask if there's any read into, say, essentially whether these deals would just be recognized as Q1 revenue on the term license line, or just generally any commentary or context you could provide around how to understand the timing of these deals relative to seasonality in 2022 is helpful. Thank you.
spk07: Yeah, it's a good question, Fred. So I'm going to give – so it's not always possible to exactly predict on these things because there are some things that are – that can move between quarters. That said, when you have backlog growth that's unusually high in one quarter – There is some impact, positive or negative, let's say that it grew, then you would have some impact in the next quarter in a positive way. So there's definitely a correlation between backlog growth being slower or faster in one quarter to the next quarter or two. So certainly a strong, robust term backlog at the end of the year will have a, you know, a better impact on 2022. And it will impact probably Q1 a little bit, but I don't think we should, I don't want to get too precise on that to suggest, because there are some variables there.
spk11: Understood. Thank you all. Yep. Sure. I think we have time for maybe one more quick question.
spk10: We'll take our last question today from Remo Lenshow with Barclays.
spk03: Hi, this is Vinod for Remo. Just two quick follow-ups. I think last year you said your percentage of your sales force that was fully ramped was just under 50. Can you give us a sense of where that is now? And then secondly, as you expand, you know, your relationships with your partners, is there an opportunity to maybe move down market a little bit, focus on the D2K instead of just the top, you know, 500 to, uh, thousand companies. Thanks. Thanks so much.
spk07: Sure. I'll take the first one, Alan. Maybe you can take the second one. So our percentage of salespeople that are what I would call reasonably ramped, fully is a tough word. I know I've used it before, but I'll just say ramped in a reasonable way is still just slightly under 50%. So I would say fairly consistent. Naturally, the number is higher, but I would say fairly consistent with the last year or so. And, Alan, do you want to take the one on going more down market through partners?
spk00: Yeah, I think that the strategy for this year was and is to, of course, take advantage of where partners have existing relationships, but there is so much, I mean, massive, massive upside in the large customers that, in many cases, we and our partners have meaningful relationships with, but they're just doing a fraction of of what they're capable of doing with us. But that's really where I see our focus continuing for this year. And that's, I think, a very beneficial and highly, I actually think, really productive area for us to work in. And particularly when everyone's a little less sure what's going on with the economy more and more broadly. one of the things that haven't been around for a very long time is we have a good idea, I think, of what it takes to do well in boom times and bad times both. And I'm very comfortable that we're thinking about this the right way, particularly when we're all looking at all the unpredictability in the market. We know the people that we're selling to with our partners are the ones who are going to keep buying and at least our view. So that's, I think, unchanged in terms of a focus than we probably talked about you at the Analyst Conference or the Analyst Day last year, what we were focused on going into this year. And what I've seen happen, you know, with the Fed and some of the other stuff thus far this year just makes me feel really good that we made some of those decisions the right way.
spk03: Got it. Appreciate it. Thank you.
spk00: Thank you. And let me just wrap up by saying thanks, everyone, for joining our call today. You know, we delivered a solid performance in 2021, I think both in terms of extending our leadership in the product and the market and financially just awesome to have crossed that $1 billion mark. I think we're well positioned for another strong year in 2022 and look forward to updating you. You guys should all know that we're all working hard for you. So thank you. Very much. Be well. And look forward to talking, who knows, maybe meeting in person someday soon. Have a great evening.
spk10: Thank you. And that does conclude today's teleconference. We do appreciate your participation. You may now disconnect.
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