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spk06: Good afternoon, and welcome to the PegaSystems first quarter 2022 earnings results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Ken Stilwell, Chief Operating Officer and Chief Financial Officer. Please go ahead.
spk05: Thank you. Good evening, ladies and gentlemen, and welcome to Pegasystem's Q1 2022 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 the fiscal year 2022 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 and forward-looking statements are contained in the company's press release announcing its Q1 2022 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, 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 the result of new information, future events, or otherwise. And with that, I'll turn the call over to Alan Treffler, founder and CEO of Pegasystems.
spk03: Thank you, Ken. And thank you to everyone who's joined today's call. I'm pleased to kick off the year with solid results as we continue to stay focused and leverage our strengths. We grew ACV, annual contract value, which is our most important metric, by 21% year-over-year while improving margins. Our low-code software platform for AI-powered decisioning and workflow automation is unmatched in the industry. and continues to be the choice of many of the world's leading organizations. And we help the most demanding enterprises work smarter, unify experiences, and adapt instantly so they can always be ready for whatever's next. Now, today, this is more important than ever. This is one of the most volatile environments I've seen in decades. Clients continue to face challenges related to the pandemic, and certainly no one expected war to break out in Europe, which is affecting both the world's economy and business requirements generally in ways we just didn't anticipate a few short months ago. Our clients and their customers are grappling with labor shortages, rising inflation, increased oil prices, supply chain interruptions, and economic insecurity. But Pega is built to help enterprises manage through uncertainty. Our solutions are as effective for clients whose businesses are under pressure as they are for those focused on growth and expansion. We understand, as a company, how to adjust our go-to-market approach to support clients equally well. regardless of which dynamic is driving their decision making. Before we move on, I'd like to take a minute to address what's happening in Ukraine. We, as I think is most of the world, are horrified by Putin's brutal actions and what's happening to the Ukrainian people and others being affected by the violence. In 2021, before Russia's invasion of Ukraine, we had already taken the action to wind down our Russian operation, which was an insignificant part of the company's business. As such, we stopped pursuing new Russian business, closed the regional office, and we have no remaining employees there. We do have a large team in EMEA, and specifically in Poland, who are being most directly affected given their physical proximity to the war. We also have staff around the world who are Ukrainian and are Russian and have families and loved ones in harm's way. Our focus has been to support those most in need with financial and other needed resources. Our staff in Poland have helped those fleeing the violence with transportation from the border, temporary housing, food, care packages, and teams around the world have raised additional money through a variety of other regional initiatives. I am proud of our employees who have demonstrated compassion and generosity by donating financially as well as through action to complement our corporate donations. And we are hoping for peace and an end to this horrific situation. And our hearts go out to the Ukrainian people. Regarding the business, let me hit some highlights regarding what we are seeing. With the level of volatility in the world today, our clients are looking for solutions that can help them be more resilient while they prepare for whatever else may be coming. Efficiency is becoming an increasing focus right now. And our solutions are ideally suited to support organizations focused on productivity gains because it makes it possible for for them to adjust readily as circumstances change. And many of our clients have their own customers who are experiencing financial hardship, where solutions that support compassionate collections can be very helpful. Our client, StepChange, the UK's largest debt charity, is a great example of the type of solution needed today. They leverage Pega to build a single, unified system that's faster and easier to use, and it allows the organization to improve their customers' experience and streamline their operations. More generally, we continue to enhance our software to help our clients deploy apps faster, create smarter workflows, and create better total experiences for their customers and their staff. Towards that end, in Q1, we released the latest edition of our Pega Infinity software suite, which features new intelligent low-code capabilities for AI-powered decisioning and workflow automation. One of the coolest enhancements is new voice AI and messaging solutions for customer service agents that kind of act as a co-pilot, providing hands-free capabilities, during their live, real-time interactions. The software listens and analyzes conversations as they happen, making suggestions to agents, and helping them with time-consuming and error-prone manual data entry. There are also enhancements to Pega's customer decision app to improve engagement with customers through a better understanding of omnichannel interaction histories, and by being able to create better insights, on the success of next best action recommendations. We're excited to bring these capabilities to our clients. We're also very excited about Pegaworld, scheduled for a little less than a month from now, on May 24th at 9 a.m. Eastern Daylight Time, and for those in Asia, on May 25th, 10 a.m. AEST. We have some exciting news lined up for the morning of the show related to enhancements to our process mining capabilities and new enhancements to the customer decision hub, as well as our cloud choice offerings. Last quarter, I mentioned a few of the clients will be sharing their success stories during Pegaworld. Since then, we've announced our keynotes, and they include some incredible brands with inspiring stories. And these include Lloyd's Banking Group, their CTO will share their digital transformation journey. They are leveraging Pega to become a champion of adaptability and driving intelligent automation to ensure their business is ready for anything that's coming. T-Mobile, their vice president of customer strategy and planning will reveal how they are achieving true relevance and excellent personalization. by putting customers at the center of everything. They're leveraging Pega's decisioning capabilities to enable hyper-personalized customer experiences, to deepen relationships with their customers, and looking to create a mission-critical application for the organization's team of experts. And Booking.com, their global innovation lead, will talk about their mission create simplified and connected experiences. They are leveraging Pega to enable their frontline teams with a new system to make it easier for employees to support every customer and partner with any query a first time around. Be sure to check out the Pega World website to register and join us live to hear the latest news and inspirational client stories. Just go to Pega.com and click on the link featured on the homepage. Personally, by the way, I'm also delighted to being able to do more travel recently, to see clients, and it's great to see that we're actually booking clients into our new briefing center in our Cambridge headquarters. I hope also our investors will join us there for our in-person investor meeting scheduled for June. Finally, I'm excited to say we launched our inaugural impact report, which provides a consolidated view of our current efforts in ESG, environment, social, and governance, and corporate social responsibility. Talking about that across our business. I'm very proud of this report, which showcases terrific work that Pega team members are accomplishing. We are focused on more efficient and sustainable business operations, building and supporting diverse teams who challenge each other to think differently and helping our communities with needed support and resources and supporting the strong governance we have in place to keep our business focused on what matters. Our commitment to making a positive impact has never been stronger. And we're looking forward to keeping the momentum going. So in summary, we've gotten off to a good start in 2022. Our business and our people continue to demonstrate resilience in an increasingly volatile environment. The need for enterprise software that can help our clients navigate these challenging times has been a significant driver of our success. And our transition to a software business, which is now nearly 100% subscription, is paying off and enables us to shift our focus to balancing growth with profitability. And we continue to be excited about the significant opportunity in front of us. And I have a lot of confidence in our team's ability to deliver on this opportunity. To provide more color on the financial results, I will turn it over to Pega's COO and CFO, Ken Stilwell.
spk02: Ken? Thanks, Alan.
spk05: To start, just a few highlights from the quarter. ACV grew 21%, as reported, and there were about two percentage points of constant currency that went against us, so 23%. constant currency was our results for ACV growth. Both current and total backlog increased 20% year over year. Our total revenue also grew 20% year over year. And you're starting to see signs of the completion of the subscription transition and the improvements to margins. Although I have and will continue to focus on total ACV, I realize also that many of you paid much more attention to our Pega Cloud offering, which represented 67% of new client commitments in the quarter. The most important metric that we measure for success of our business during this subscription transition is growth in annual contract value, or ACV. Just as I mentioned, ACV grew 21% as reported and 23% in constant currency to $1,034,000,000 at the end of the first quarter. driven by continued demand for digital transformation. In the last several years, we've invested to accelerate our ACB growth rate and are increasing our focus now on ensuring we realize the benefit from those investments through improving sales productivity and prudent cost management. Although we're pleased with our ACB growth in Q1 of 2022, it's important when measuring success of our business to look at a longer time horizon than one quarter. We focus on total ACV growth for the full year, and we are still early in our 2022 cycle. That said, our team has demonstrated that we can maintain strong ACV growth during uncertain times. A global pandemic, shifting to remote work, higher inflation, and as Alan mentioned, an unforeseen war in Europe are some choppy waters that our team has successfully navigated. We haven't missed a beat when it comes to maintaining our ACB growth rate, and that gives me confidence that we can continue to perform despite the uncertainties around us. We're very proud of our team, and I want to thank each and every Pagan employee for their ongoing commitment to our clients. I'm excited that we're returning to some level of normalcy in the field. Our field teams have begun doing increasing levels of face-to-face work with clients, which is just awesome to see. And we've also started to do in-person regional events to engage with clients and prospects. We are optimistic that client engagement in the second half of 2022 will look the most normal since 2019. Moving to backlog. Backlog increased 20% in the same period to 1.2 billion. Backlog that will convert to revenue in the next 12 months also grew 20% to 654 million. Turning to revenue. Revenue for the quarter was $376 million, a 20% increase year over year, powered by a 21% increase in total subscription revenue. Subscription revenue was $308 million in Q1, which is now about 82% of our total revenue. As I mentioned last quarter, we ended Q4 2021 with an unusually high term license backlog balance. which contributed significantly to the higher revenue performance in this quarter. Pega's reported revenue is typically strongest in Q1 and Q4, and softer in Q2 and Q3. We expect this trend to continue in 2022. It's also important to point out, as we discussed on our Q2 2021 earnings call, we had an unusually high mix of client cloud last year in the first half of 2021, which makes for a tougher quarterly revenue compare when thinking about the first half of 2022. When we started the year, we projected the 2022 Pega Cloud mix would be slightly more than 50%. As I mentioned earlier, in Q1 2022, Pega Cloud mix was 67%. And if that trend continues in Q2, which my early view suggests is likely, It would also contribute to a lower amount of revenue in the first half of 2022 and have an impact to four-year revenue of 2022. I've been consistent with saying that I care about total ACV, and that's not changed. But I thought that it would be helpful in terms of connecting the mix of PegaCloud to the reported revenue in 2022. Now that we're in the final phase of our subscription transition, we're beginning to show signs of improving profitability. We're not fully complete with the transition yet, but our Q1 results are a good sign that we continue to move in the right direction. For example, total gross margin increased and improved in Q1, driven by Pega Cloud gross margin reaching almost 70% in the quarter, the highest level we've ever seen for Pega Cloud. In the current environment, our clients are really working on improving cost efficiency and the use of Pega's low code intelligent automation tools is one of the most effective ways to tackle this challenge. That's one of the reasons we feel confident in our ability to grow regardless of the economic environment. We provide mission critical solutions that help clients increase revenue and decrease costs. We serve the world's largest enterprises who tend to weather economic uncertainty better than smaller organizations. And we've built a recurring revenue stream that features multi-year contracts with best-in-class renewal rates. As we get closer to the completion of the subscription transition, our emphasis increasingly shifts to managing growth and profitability as we had planned. I'm excited to see these improvements in managing profitability that indicate we're on track to become a Rule 40 company. We're very focused on continuing to build a high quality business that features profitable growth for the long term for all of our stakeholders. As we've explained in the past, we expect to complete the subscription transition in the middle of 2023. As Alan mentioned, our direct financial exposure to Ukraine, Russia, and Belarus is not material. In 2021, before Russia's invasion of Ukraine, we made a business decision to stop pursuing new clients in Russia, and we closed our local office. For the year ended December 31, 2021, revenue from clients located in Ukraine, Russia, and Belarus was less than $4 million, and the region has never been a growth engine for us. As you heard earlier, PegaWorld is virtual again this year. I welcome you all to attend to hear the latest about our client success. Project Phoenix, and our solution innovation. I'd also like to invite you to attend our annual investor session, which will be held at our new corporate headquarters in Cambridge, Massachusetts. The event is scheduled to start at 10 a.m. Eastern Daylight Time on Thursday, June 2nd, and end around noon. We will offer both an in-person option and a virtual option for attendees. To register for this event, please email pegainvestorrelations at pega.com. Speakers at our investor session will include our founder and CEO, Alan Treffler, as well as leaders from our go-to-market and product teams. And, of course, I'll be there as well. And with that, operator, please open the call for questions.
spk06: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Penjalambora with J.P. Morgan. Please go ahead.
spk00: Great. Thank you for taking the question, and congrats on a pretty solid ACV growth here. Alan, you characterized the environment as the most volatile environment you have seen in decades. maybe help us understand what are you seeing in the field from a demand environment perspective, especially in the different theaters. And maybe if you can double click on Europe, any indication that there is kind of a slight wind of change blowing, more scrutiny or any kind of signs maybe you're not seeing or you're seeing, we'd love to hear. And then Ken, on that topic, I mean, I know you don't update guidance, but how are you feeling about hitting that ACV guide for the year at this point?
spk03: So in terms of what we're seeing, especially in Europe, I would say the anxiety level of clients is up. In some ways, that makes them more receptive to things that are going to improve their processes and automate. I think there's more question there. in the minds of clients. And by the way, when I say decades, I haven't been around now for 25 years of being a public company and longer in the business. I can remember when inflation was at rates not only at this level but much higher. The anxiety level just goes up. It's just natural. When economic times are tough, we tend to shift our value props to be much more focused on, hey, how do we make sure the customer is going to get a return in the six, 12 months? How do you look to make it possible for them to both save money and, frankly, deal with the unavailability of staff, which can be addressed in terms of both the operations work we do and in providing low-code environments. There's a go-to-market shift. I would say it is definitely tangible in Europe, but I think there is a level of global anxiety that we just need to acknowledge and use that in how we tune our go-to-market messaging and how we just work as a company. Having seen this stuff before, I have a high level of personal ability, I think, to hopefully provide useful advice, but it's there and it's real. And I don't think it's going to be just us. Ken?
spk05: Yes, I think the question that you asked, Benjamin, was, you know, how do we feel about the ACV range that we had talked about about a quarter ago, which was kind of 20% to 22% is what we had said before. And I would say, you know, there is, you know, at the scale of our business, you know, a percentage point is about $10 million of ACV growth. I mean, you know, the math's pretty easy at a billion dollars or so. So, you know, do I think that there is, you know, risk that's in the market now that wasn't there six months ago? Yeah, I think that's a fair point. Do I think that that changes the prospects for Pega or the solutions that we have or the value proposition or, quite frankly, even the demand environment of our clients? I don't think it does, actually. I definitely think there will be, like Alan mentioned, the trick will be making sure we put the right capacity on the right verticals and the right organizations to capitalize. But I think with inflation, I don't think our clients are looking to stop investing in digital transformation. I actually think they need automation to deal with the labor shortage and the cost of labor issues that are in those markets. So I'm optimistic that that will work in our favor. But yes, there is definitely uncertainty in the market.
spk00: Understood. Thanks for that thoughtful answer. And one more for you, Ken. It seems a solid result in the Pega Cloud ACV growth rate into the 40s. But I wanted to ask you about the cloud backlog growth. When I look at the cloud backlog growth, that seems like decelerated while ACV accelerated. Shouldn't those to be more typically directionally aligned? Is that maybe FX acting up on RPO?
spk05: So FX actually hits ACV and RPO. So FX is definitely a couple points above headwind on both of those numbers. But no, I think the point you're on, I would, in a perfect world, RPO and ACV go in lockstep. But unfortunately, we don't have 25,000 clients to kind of, like, kind of normalized growth. So we are subject to when renewals happen for certain clients. And Q2 was just not, I mean, excuse me, Q1 was just not a big renewal quarter. That's really what you're seeing. It's not, it's your, your assumption is right. They should connect, but some quarters, they just, they, they diverge because of that, the timing of renewals.
spk00: Got it. Very clear. Thank you for taking the questions and congrats.
spk05: Yep. Thank you.
spk06: The next question is from Steve Koenig with SMBC NICO. Please go ahead.
spk09: Thank you. Hi, gentlemen. Congrats on the quarter. Maybe just a question for Ken and then a follow-up for Alan. Ken, maybe a multi-part question that could be related. So good Pega Cloud mix in Q1, and you're seeing signs of a similar mix, you know, 67%, I think, in Q1 was what it was. But you're seeing signs of a similar percent in Q2. What is your thinking on kind of the durability of that trend? Do you think PEG is going to keep moving up from, you know, it's been kind of we thought it was going to go about 50 to 60, and then it was kind of more in the 50s last year. And I know that it's hard to predict where it's going to end up, and there will always be, you know, prem clients for a while. But is that going to be sustained, you know, a sustained upward move from here? What is your thinking? Okay.
spk05: So I'll give you my thoughts, and then Alan can give his as well. So my comment about Q2 is really based on the visibility I have of Q2, which is driven by specific deals in pipe. If you go out past a quarter or two, naturally, in any company, pipeline starts to become less credible when you're two, three, four quarters out, as we all know. I don't know. I honestly don't know where the trends will happen in the marketplace. What I do know is Q1 – was a pretty strong Pega Cloud quarter, and Q2 looks to be the same. And even if the Q3 and Q4 revert back, it still will have an impact for revenue in 2022. You can't kind of reverse once you actually book those deals. Now, do I think that it will go the other direction, like client cloud will be 70%? I don't see that happening. But I don't really have a great crystal ball to say Pega Cloud is like here to stay, and it's going to be continuing to grow higher. I know everybody wants that to happen, but just being honest, I just don't know. Alex?
spk09: Got it.
spk03: So I would say that the client receptivity to PegaCloud, as opposed to, look, the message of cloud choice, I think, is a terrific company message to have. It's differentiated from a lot of companies, and I think it gives customers confidence and will in the future give customers a level of sort of intellectual freedom that they're making something that they'll have further choices of. Having said that, the fact that we were kind of like two to one, you know, getting in on Pegaclap, when historically I kind of thought of it as kind of a one-to-one sort of thing, you know, that's great. And I'm seeing that level of receptivity increase. in the short term as well. Whether it's going to continue to Q4, I mean, a lot of these things are hard to know. But the clients are being very successful. I think we increased our margins here, which shows that we're being increasingly effective at being able to work with our clients in these environments. I view that as kind of all good. And to be honest, clients moving to the cloud in general I think triggers a lot of need for a system like Pega to help them coordinate, in some cases, their other systems, which is a big part of the process fabric concept that we introduced at last Pega World, and we'll be talking about more this year, is all about. It's the idea of being able to have a center-out interconnected architecture without putting everything on one big infrastructure, which I can guarantee you, It's great. It's great to be two to one. I'd love to see that continue.
spk09: Got it. Got it. Okay, great. And if I could ask a follow-up. So, actually, Ken, I did want to ask you about your trajectory towards the Rule of 40. You know, what are you thinking timing-wise? Just remind us. And then, Alan, I wanted to ask you, when it comes to low-code competition, you know, if I were to characterize, you know, PEGA's traditional reputation as being, you I would have said the BMW on the Autobahn. I'll say the Tesla on the Autobahn. Apologies to BMW. But some of the other low-code competitors being more like an MG and a road rally through the suburban streets. From a technology and product perspective, maybe give us an update on your intentions and your ability to compete in that road rally as opposed to the Autobahn, in addition to the Autobahn. Thanks very much.
spk03: So, you know, I've always, you know, in the days before electric cars, I've always preferred the Mack truck analogy to the auto analogy. We want to be the company that is capable to let our customers do the lifting they need to do as opposed to, you know, getting started and running on a runway. You know, the low-code space, it's full of lots of companies. I would say that... a lot of the competition that I would describe as the kind of very low end is not actually, I don't believe, going to compete with what our core value prop is, which is to be able to help organizations that are working with multiple product lines, multiple types of customers, multiple geographies. We've got, even for companies that aren't enormous, we've got a very unique and differentiated approach to thinking about that And we are doing everything we can to continue to make that more accessible, easier to use. The cloud helps a lot. And we're going to continue to push on that. But I think the movement to low-code or model-driven, as I've always liked to talk about it, is you won't find another company that has been more in that lane and I think has a greater understanding of what that means than I think Pega. And I see that some of the competitors that are coming in, and I see companies like Microsoft start to talk about this, robotics companies took a spin at it. I don't think it's worked out spectacularly for them. I think we are still highly distinguished, and we are doing everything we can to, well, think about opening that aperture with those large companies and over time smaller ones.
spk05: And taking the first part of your question, Steve, I didn't intentionally be coy on this answer, but I'll be much more specific now. We are not going to be a Rule 40 company in 2022. We are not going to be a Rule 40 company in 2023 because we are just finishing the subscription transition. In 2024, we will be a Rule 40 company. It may be a few quarters before the end of 2024. So think about us hitting it like middle of 24 to the end of 24. And you may say, well, I thought you said the subscription transition was ending in the middle of 23. It will. But you wouldn't really be a rule of 40 company until the next 12 months after it ends. So I'm kind of targeting, instead of playing around with quarters, I'm just going to say 2024, we should be a rule of 40 company. If we're not... then we have work to do. That's on us, but that's our target.
spk06: Great. Thanks so much, guys.
spk05: Yep. Thanks, Steve.
spk06: The next question is from Rishi Jaluria with RBC. Please go ahead.
spk10: Oh, wonderful. Thanks, guys, for taking my questions. Really good to see Pega Cloud accelerate from last quarter. One multi-part question for Ken, just on better understanding the cloud dynamics, and then I have a follow-up for Alan. So, Ken, on the cloud ACV side, I want to maybe expand on an answer that you gave earlier on the cloud ACV growth versus cloud RPO growth. Part one, can you maybe remind us the dynamics or waterfall of Pega cloud ACV accelerating to when that translates to Pega cloud revenue growth accelerating? Because that line did not pick up this quarter. And then maybe alongside that, if we look at current cloud RPO, that actually ticked down sequentially for what I believe is the first time ever, at least as far as you've been going down this cloud transition. I know there's Some FX headwinds there. Is that purely, putting the FX jump aside, is that purely just deal timing and there's maybe a lag from when it gets signed as ACV so you can recognize it as RPO under GAAP? Or is there something else there that we should understand? And then I've got to follow up around.
spk05: Yeah, so I'm going to start with your RPO one. No, there's no timing. When we book a deal, Rishi, it goes into ACV, it goes into RPO. There's no acceptance clauses or anything like that. If there was, it wouldn't go in either, meaning you wouldn't even see it. It wouldn't be in RPO. It's purely the timing of renewals. That's the only variability that happens with RPO. There's two. It's duration. It's contract duration. We are not booking shorter contract duration. But there is the dynamic of renewal timing. And next quarter, we could have the complete opposite happen. That's a hypothetical comment. But, like, absolutely. So don't even – for me, I would say RPO is a confirming indicator. It is not – There's nothing messy in there. It's just renewal timing. On your first point around when will PegaCloud ACV convert to revenue at that growth rate, whatever is in PegaCloud ACV right now will be the next 12 months of revenue. That's the way to think about it. So whenever you see an ACV, and I understand currency messes with this a little bit, but we should be able to predict that that will be a kind of revenue compare. So whenever we ended PegaCloud ACV at the end of Q1 2021 compared to Q1 2022, if that grew 42%, that would be a very good directional indicator of the next 12 months of PegaCloud revenue compared to the last 12 months. So that's the way to think about it.
spk10: Got it. Okay, that's really helpful. And then, Alan, I want to build on some comments you had kind of made earlier, which was just thinking about the macro environment. But one of the pieces that you didn't touch on as much is just the tough hiring environment out there. And, you know, a few of your peers that also deal with automation in different ways, so not competitors, but more adjacent. Talk about how the labor shortage out there is actually serving as a tailwind for them, right? That there is more importance on making your existing employees more more effective and more productive, and that's about serving as a tailwind for demand. Is that something you're seeing, you know, outside of your own hiring? How are you thinking about, you know, how you may be benefiting or how the labor shortage is maybe impacting the demand environment for you? Thanks.
spk03: I think that the shortage of labor is positively impacting how people are receptive to what we do, and the To be blunt, the increased volatility of the workforce, the whole great resignation, and people worried about the ability to retain people means that you need to be able to have, in the operations realm, better processes because you're going to be dealing with people who might not have quite the depth of experience. And in the technical realm, You need to, frankly, require less deep technical expertise because retaining some of that technical expertise is, to me, harder and more expensive to boot. So both of those, I would say, are structurally very positive, and that's not going to go away. I do think you have this. what the current inflation levels mean. And that just naturally in any business is going to have some adverse effects. It's going to make them worry about the size of the commitments they should make, other types of things of that type. But the positive, and I think it's structurally positive, whether it's the other questions we'll get answered, I think is ultimately very, very positive for our business.
spk06: All right, wonderful. Thank you, guys. The next question is from Joseph Mears with Truist. Please go ahead.
spk12: Hey, thanks for taking the question. I appreciate it. I believe last quarter you noted that sales productivity was slightly below 50%. Can you just remind us how you define sales productivity and then what you think that number – or what that number looks like today and what you think it could be exiting 2022?
spk05: So, yeah, let me clarify, Joe. What I said was – and I know we all in industry use different terms, so I might have confused. What I said was that we had slightly less than 50% of our sales reps that were at a fully ramped stage, which means that they had tenure greater. They had tenure in a cycle where we felt like they would be kind of more normally productive, and that number is still below 50% as of the end of Q1. That was what I was talking about. In terms of we use productivity measures a little different because we expect different productivity in their first year, in their second year, in their third year. So if you want to drill into that question, I just wanted to clarify.
spk12: Yeah, do you have an expectation for what that will be by the end of 22? And then just as a follow-up question, if you guys never added another logo, what's the current revenue opportunity within the current customer base? Like what's the – maybe the percentage penetration from a revenue perspective of the current customer base. Thanks so much.
spk05: Yep. So let me touch on your first question, and I'll give you a perspective on the second question, and then Alan can chime in on the second part of your question too. So the first question was you asked where do we think we'll be at the end of 2022. Just like I don't want to predict, I didn't want to predict the end of COVID, I'm a little cautious on predicting the end of high attrition, but I would say that that every statistic that you see in the market would suggest that the attrition is not getting worse in Q1 and Q2 than it was last year. So that's a good sign for us, because naturally, we're going to see attrition, too, and then it's hard to get... So I would hope that by the end of 2022, we would be no worse off than we are now, and hopefully... slightly better in terms of the percentage of sales reps that would be getting kind of into that productivity. We have a lot of salespeople that are in that one to two-year period, so we're hoping many of those kind of shift over that into the two years. It's not magic, but it certainly does help the statistical productivity. The second question, Alan, do you want to give a perspective on the second part of this question?
spk03: Yeah. So, you know, in terms of how I think of, you know, productivity, which I think is what the... Could you repeat the second part of your question again?
spk12: Yeah, yeah, sure. The question was, if you never added another logo, what sort of revenue opportunity do we have?
spk03: We have an enormous amount of white space in our customers. I would tell you that if you looked at our top you have 20, 25 customers, and asked how thoroughly penetrated we were in those, you would conclude that we were under 25% penetrated. We could grow easily several hundred percent without adding a single logo. Which doesn't mean we don't want to add the occasional logo. I mean, I think adding new logos is good. But I'm really focused, I think, at this time about trying to make sure we're cultivating our relationships these marquee organizations that, in my view, are going to do the best in this more difficult and uncertain time in the next two years. So we have a tremendous amount of white space in our current organizations. And that gives me a lot of, well, it gives me some reassurance, frankly, in a time of uncertainty.
spk05: And I'll give you more of a statistical answer to that, Joe. We have about 800 logos, ballpark, 800 clients. Less than 200 of those spend $1 million with us, and many of them could spend $20, $25, $30 million with us. Some of them could spend $100 million or more with us. If you just do the math, it works out that you probably have years and years of actually booking potential for us, like more than five years, maybe 10 years. of runway to be able to just grow those 800 logos. That's not to say that's our goal. We do want to grow logos as well, but I just think it's important from a perspective. We have so many fish in the ponds that we've already kind of caught fish in. We don't need to go and go into new regions and new logos. It's helpful to get new logos, of course, but I do think there's a lot in our core customer base.
spk12: That's great. Thanks so much.
spk06: The next question is from, and please excuse any mispronunciation, Vinod Srini Vasaragavan from Barclays. Please go ahead.
spk01: Thanks for the question, and not too bad on my pronunciation. Thank you. You guys had mentioned some of the Pega Infinity features in your later release, and I thought the service industry workflows looked pretty interesting. Just to clarify, are these bundled packages, and are you able to monetize them at higher prices?
spk03: Well, there are two ways you monetize these. One, there are some add-on costs for some of the add-ons and additional capabilities that we have. And the other is all of these drive – the way our pricing works, the way we think about it, is the more work a customer does using a Pago system, the more they should pay. And so to the extent these also drive additional workloads from our customers – potential as you continue to spread out in these customers. So there's both some incremental, but I think the greatest value comes from being able to open up new opportunities. When customers decide they need compassionate collections and they do some of the types of things that we've been doing, well, that opens up whole new functions that we might not be in in many of those 800 customers, for example, that Ken was talking about.
spk01: Got it. And, you know, you guys have mentioned kind of NRR and the big teams from time to time. Is it fair to say that it's still kind of in that range, or have we seen any kind of movement in either direction?
spk05: Our net retention rate has actually been going up slightly over the last few years. And a little bit of that is COVID, right, because we actually have sold to existing logos. So I'm not sure that that's It's a little hard to say whether that's, like, the actual just the trend of, like, virtual selling or whether that's something. But, yeah, but with mid-teens is kind of where we still sit.
spk01: Got it. Thank you.
spk06: The next question is from Mark Chappelle with Loop Capital. Please go ahead. Hi.
spk07: Thanks for taking my question, and nice job on the ACV printing. Hey, Alan, question for you starting off. You know, building up your partner programs has been a big initiative at the company over the past few years, especially building up your global SI practices. Can you just discuss as much as you can how much of a role your partner programs contributed to the good ACV print this quarter?
spk03: Well, I think partners are super important for us, and being able to work with our partners and particularly to make sure that our footprints are expanding in those key organizations that we've identified, is something that's absolutely central. Our level of partner attach is extremely high, and I would say it's contributed to the results this quarter. I also think it contributed to some of the results last year as well. So it's not all brand new. But we're going to continue it. And I think that we've got deeper and broader relationship with partners than ever before.
spk05: So, Mark, one clarification, because I get this sometimes in investor discussions. Partners for some companies are completely new distribution channel, which means you go set up a partner and you say, you go sell in Latin America for us. Partners, I would say, are less relevant for us there than they are in the actual largest organizations like that. We want to go arm in arm with our partners in the larger, because they're the largest clients for our partners as well. So that's where it's really, and I know sometimes people get confused about thinking about us going down market or going into new territories or new regions or new logos. It's less that than really working arm in arm with our partners on exactly the logos that we both want to support.
spk07: Great, thanks. And then as a follow-up, Alan, the question on staffing, you know, the company has always had, you know, relatively aggressive hiring targets. I was wondering if you'd just give us a sense of whether you're on plan hiring-wise this year so far. I know it's still early in the year, but whether you're a little bit behind. And then also along those lines, you know, are you having to raise comp more so than normal just to stay competitive?
spk03: Well, I'll answer the second question first. There's just no question that, that us as a hiring organization is subject and has been subject, and we've done quite a bit of work with our team to understand what we need to do to make sure that we stay competitive from a compensation point of view. And we're seeing, particularly for some roles, some pretty material increases, and we're thinking about how this affects our overall staffing plan. So I think if you asked me a year ago where we would be at the end of this year, so thinking more than a 12-month period, I would have expected that we'd probably have more staff than I believe at the end of this year we're going to end up having. Because we are trying, per Ken's commentary on trying to make sure we're being financially responsible, if we are in fact raising comp, we need to make sure we're getting You know, we're hiring absolutely top-notch people, getting tremendous value from them, retaining, we have a lot of great talent, retaining that great talent. And if that costs more, that will, to my mind unquestionably, influence the end-of-year staffing numbers that we end up targeting and that, frankly, all companies will end up targeting, which, by the way, I think can be good for productivity software. So, you know, that does have a virtuous sort of back end to it. Does that make sense?
spk07: It does. Thank you. Appreciate it. That's all for me.
spk03: Thanks, Mark.
spk06: The next question is from Joey Marinchak from JMP Securities. Please go ahead.
spk11: Great. Thank you so much for the question. Earlier, Ken, you mentioned about making sure you're putting the right capacity in the right verticals. So from a vertical perspective, where do you feel like you have the most room to run within the current client base? And then separately, how do you think about your ability to move down market over time just given the work you're doing with Project Phoenix. Thank you so much.
spk05: I'll let Alan take the second part of that about going with Project Phoenix. Look, our verticals, the two that are clearly immense in size are certainly public sector and financial services. Our other verticals are private. Very large as well, but I think those two, just if you go and look at the market data, it would suggest that those two are very large for automation and certainly platform companies like Pega. But I think we're not, to clarify, we're not looking at new verticals. in a way that we're saying we think we're sold out in our existing verticals or that we somehow cannot expand in those verticals or we have to go too far down market. So if you think about the verticals that we're in, many of those verticals are going to have the same use case of trying to manage automation because cost of labor and accessibility to labor is very challenging in 22 and beyond. And so the use case, it's kind of a horizontal use case really around automation. So in kind of an interesting way, it's actually not really as much vertical specific in terms of the problem that you're solving. It's more of a horizontal solution. And so with that, I just think there's almost opportunity everywhere. Because every single company is dealing with labor. Every single company is dealing with inflation. And what we aim to do is help them with that. At least one angle that we take on our solutions is certainly to help them be more efficient. and that is very relevant now. So I kind of view it as almost more of a horizontal problem that gets verticalized.
spk03: Yeah, and relative to Project Phoenix, I mean, I think you're seeing the evidence of the results of Project Phoenix in our improved cloud margins. Project Phoenix helps the entire client base, and that includes both some of our very large customers who want to make sure that our architecture is extremely current and care about that, as well as offering us the potential for other market choices as we go forward. I will just tell you, based on my experience, times of enormous, enormous uncertainty are not the right moments to make a wholesale push, quote, down market. And regardless of the readiness of our technology, that's not the right place that we should be focusing, in my view, in 2020. to be candid, probably for the rest of this year. I mean, I put the, let's talk about next year on that, and it's great to be able to have other things to think about there. But Phoenix has helped the whole line. I think you can see some of the results very clearly in some of the improved margin numbers.
spk11: That's super helpful. Thank you so much, and congrats.
spk02: Thanks, Jordan.
spk06: The next question is from Fred Havenmeyer with Macquarie. Please go ahead.
spk08: I hope everyone's well. I really just wanted to check in on Europe from two different points here. Firstly, I wanted to just check and ask, are you seeing any impacts in terms of your partner's ability to be able to work on and deliver applications because of some of the disruption to Eastern European outsourcers and systems integrators? And then secondly, looking at some of the EMEA results here, obviously there's a lot going on and the world is quite anxious. Just wondering if you could kind of contextualize regionally where you're seeing either pockets of strength or weakness within Europe. Thank you.
spk05: So I'll take the first part of that, and then, Alan, you can talk. So we don't have, you know, our partners and our clients don't have a tremendous concentration of process outsourcing happening in Eastern Europe, Asia Pacific more so. So from that standpoint, there hasn't, we have not seen, you know, other than just the emotional distraction of everybody knows someone that's affected by this situation, there's not large clients of ours that had huge centers in those regions that are not able to operate. So that has not been an issue.
spk03: I also think you were asking about partners. And the partners that we happen to have don't have large, for example, Ukrainian, you know, of technology operations like some companies do. So we're just happening to be fortunate. Obviously, we individually as a firm are very sensitive to what goes on in Poland, but that team has just frankly been doing remarkably on every front, on both the dealing with humanitarian issues as well as continuing to be a highly effective team. So I'm pretty pleased there. You're asking about the business environment. You know, it's unpredictable. Germany, which is such a powerful economy there, they're still trying to figure out what this is all going to mean. And so I think, as I said earlier, it's just a time of enormous uncertainty, and I think the closer countries are physically to Russia, the more uncertain it is for them. From a business perspective, our exposure to both those
spk02: I think we're all guessing exactly what's going to happen there over the next 60 days, and just trying to be candid about it. I think that was okay.
spk06: This concludes our question and answer session. Let's turn the conference back over to Alan Teffler for any closing remarks.
spk03: That's good. I knew we were timing out, just waiting for that invite. So thank you very much, everyone. I'd like to make sure that in closing that all of you have on your radar Pegaworld. Go to the website, register. It's going to be a very exciting two and a half hours. I promise you that. Thank you very much, everyone.
spk06: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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