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spk01: Good day and welcome to the PegaSystems fourth quarter and fiscal year-end 2022 earnings results conference call.
spk00: Today's conference is being recorded. At this time, I would like to turn the conference over to Kenneth Stilwell. Please go ahead.
spk01: Thank you. Good evening, ladies and gentlemen, and welcome to PegaSystems Q4 and full year 2022 earnings call. Before we begin, I'd 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're subject to various risks and uncertainties. Actual results for 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 in the forward-looking statements are contained in the company's press release announcing its Q4 2022 and full-year 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, 2022, and other recent filings with the SEC. Investors are cautioned not to place undue reliance on such forward-looking statements, and there are no assurances that the matters contained in such statements will be achieved. Although subsequent events may cause our view to change, except as required by applicable law, We do not undertake and specifically disclaim any obligation to publicly update or revise these forward-looking statements, whether as the result of new information, future events, or otherwise. And with that, I will turn the call over to Alan Treffler, founder and CEO of Pegasystems.
spk02: Thank you, Ken, and thank you to everyone on today's call. I'm proud of how our team adapted, leveraged our strengths, and executed in 2022, demonstrating exceptional resiliency. We ended the year at 16% ACV growth, right where we said we were, despite multiple significant distractions and challenges. And we're making progress to become a Rule of 40 company, which will drive greater value for our shareholders and opportunities to further invest in our business, our technology, and our people. Our results reinforce the effectiveness of our strategy to target customers where we know we have tremendous opportunities for growth. Ken will discuss in more detail later in the call. You know, the market dynamics here, I think, are very positive for us in some key ways. Digital transformation continues to be a driving force for our clients, and we expect it to be even more important in 2023 given the economic indicators. In the type of uncertain environment we're in, and we're going to continue to be in, enterprise automation is top of mind for clients who are looking to optimize their investments, increase efficiency, and improve effectiveness. According to IDC's 2022 Worldwide CEO Survey, the number one skill CEOs think will be most critical to their success over the next three years is digital know-how. At the same time, there is a growing scarcity of developer skills, which helps drive increasing use of low-code and no-code solutions. According to the latest forecast from Gartner, the worldwide market for low-code development technologies is projected to total $27 billion in 2023, an increase of nearly 20% from 2022. And IDC projects that by 2025, 60% of all application developers worldwide will be low-code or no-code developers. This theme is consistent with what we're hearing from clients. I recently came back from Davos, where I met face-to-face with CEOs of some of our largest and most strategic customers. They told me they are focused on digital transformation as key to success, and it's going to be especially true in what they expect will be a challenging year. They know they need better and faster ways to do things, driven by the economic environment and scarcity of resources. And Pega is perfectly positioned to leverage these dynamics. We have a long history in this space and a clear strategy to focus us this year and beyond. Our strategy is very much vested in our technology. Pega technology provides the most powerful and scalable low-code platform for AI-powered decisioning and workflow automation. It's designed to help clients maximize value, simplify service, and boost efficiency, bringing them to adapt to change. Our product leadership is broadly recognized by industry analysts and has led to dramatic successes with many of the world's most recognized and sophisticated organizations and their partners. Hega Cloud innovation has accelerated adoption, And we've made tremendous progress on modernizing our clients who now more than ever are able to make use of our latest advancements. We are strengthening deep strategic relationships with our clients and their trusted partners. And we believe that they are more likely to consolidate their technology choices with proven and trusted providers in this uncertain environment. Providing accelerated value for these clients will translate directly to significant growth for us. And we are building a healthy, agile, and efficient organization so that we can work closely with our clients and inspire innovative ideas and creative solutions to their biggest challenges. Now, though I'm feeling good going into the year, we do expect it will be a tough year based on all the economic indicators. And we've taken steps and planned accordingly. As we announced in early January, That means having had to make some tough decisions to help set us up for both long-term and short-term success. These changes were focused on our go-to-market organization, where we're driving alignment to further improve our go-to-market operating model to drive role clarity and accountability, enable greater efficiency, and sharpen our client focus, especially where our historical investment outpaced our growth. Nearly all of the changes have been completed. So there are some markets that we're working through evaluations in inheritance to local regs and processes. Now, I know this is a challenging time for many whose roles are changing or being eliminated, as well as those saying goodbye to colleagues we care deeply for. And we're working to take great care to support those who leave Pega with transition support in keeping with our values. Like many other companies, We're planning for more conservative growth in 2023, which Ken will talk about more later in the call. Our overall approach and strengths will continue to serve us well as we go beyond this year and into future years where we will continue to adapt. And we're in a position where whether our clients are focused on rapid growth or whether our clients are focused on efficiency and cost cutting, we've got the technology and the approach to do either, as we've shown over the years. I'm also excited to see that our subscription transition is coming to completion, and you can see the related impact in our financial results and projections. Combined with the organizational changes we are making, we are well positioned to be a more significant cash generator over time, which gives us the flexibility to Now, Pega, I think, has always had a focus on innovation, and providing the most innovative and effective solutions for our clients has, I think, been central to our success. In 2022, we continued to enhance Pega Infinity to give clients the best low-code platform in the industry. Some of the highlights included launching a new version of Pega Infinity, which lets organizations develop apps faster, create smarter workflows, and improve experiences for customers and employees. We continue to focus on Pega Cloud and have significantly increased adoption. We're also finding that our Global Operations Center, which uses extensive workflows built on Pega Infinity, can bring automation, availability, reliability, and scale to our own cloud operations. And we're seeing this as a reason where clients are choosing HagerCloud over running on their own cloud because they can see how well we can do it. We introduced new low-code templates, courses, and services to help organizations improve productivity while reducing strain on IT teams, all while still maintaining good governance. With the demand for professional developers exceeding talent availabilities, Organizations want to be able to tap citizen developers to get work done. But citizen development can also create silos and increase risk and costs if there isn't proper governance or if the tools are not sanctioned or supported by enterprise IT. Many of the lower-end, low-code tools in the market today are contributing to that challenge. EGA's low-code factory approach empowers citizen developers while providing technology-supported governance to automate the enforcement of best practice, ensuring security, scalability, and maintainability. We've also enhanced our robotics capabilities to make it even easier for users of any skill level to quickly build robotic automations that help make business processes more efficient when robotics make sense. And we acquired Everflow, to add intuitive process mining capabilities to create what we believe is the industry's most complete hyper automation solution, enabling Pega clients to uncover and fix hidden process inefficiencies that would otherwise bog down an organization's operations. There's also a lot of interesting tech developments we're tracking. For example, we're looking carefully at the latest generative AI technologies and how they can position themselves inside our offering to make them better. We're looking at model-driven approaches that help pragmatically tackle business problems. And all of this, I think, plays on historical strengths of Pega. Pega is terrifically positioned to take advantage of these strengths. We see lots of potential to provide more value to our clients and enhance their relationship with customers. I expect we'll have some very exciting news to share at Pega World in June. as a result of this work. We also announced Pega Launchpad, a new cloud-based low-code application development platform designed to empower users to build and monetize new business-to-business SaaS applications. And this has the potential to provide new revenue streams and an interesting new market for us. Our goal was to sign up several early adopters during 2022 in anticipation of launching in 2023, and we're right on track with where we want to be. I'd like to touch on some client highlights, because ultimately that's what this is, from our point of view, all about for us to be successful and grow our business. We need to make sure our clients are successful. You know, innovation for innovation's sake has never been our strategy. Whether homegrown or acquired, we've always thought first about how any new feature or technology or product would support our clients' goals and contribute to their success. That's why we continue to see impressive results from our clients and why so many are willing to talk publicly about how they are leveraging our software. For example, a number of our banking clients recently won awards for their use of Pega software, including NatWest, the best banking tech provider for their use of Know Your Customer and Pega customer lifecycle management solutions, and Lloyd's Banking Group, awarded best use of IT and retail banking for its automation and streamlining of processes for customer credit cards, all built on Pega Cloud. And more than 40 clients have signed up to share their success stories at Pega World Inspire this year in June, including Roche, Wells Fargo, Virgin Media, and the FDA, just to name a few. We're so excited to be going back to Las Vegas for our first in-person Pega World in four years, In addition to the many clients, we look forward to joining us there. There are already more than 30 major partners signed up as sponsors, including Accenture, EY, Capgemini, and others. And they'll be demonstrating their services and solutions along with our latest technology in our Innovation Hub. Please check out the PegaWorld website, register, and join us live to hear these stories and see the amazing technology firsthand. I'd also like to note that it's been really exciting in this new in-person world again to see a steady stream of our clients coming from Amsterdam to from Australia visit our new Executive Briefing Center in Cambridge for in-depth, highly strategic conversations. So in summary, I think we've again shown our resiliency and ability to execute in challenging times I'm excited to see our transition to a subscription business coming to completion and the positive effects it's having on our results. And we are on pace to be a Rule of 40 company as we exit 2024. We're in the right space with the right heritage and the right capabilities and the right strategy and at the right time to leverage a significant opportunity in front of us. And we have the right team to deliver on that opportunity. To provide more color on the financial results, Let me turn it back to you, Kevin.
spk01: Thanks, Alan. Nothing brings more stability to revenue, profitability and cash flow than our recurring business model, especially in times of economic uncertainty. That's the major reason we embarked on our subscription transition five years ago, and our execution has been strong thanks to the hard work and resiliency of our team in close collaboration with our clients and our partners. Over this five-year transition period, we've achieved a nearly 250% increase in our annual contract value and more than doubled our subscription revenue, which in 2022, I'm happy to say, topped $1 billion. And now the subscription revenue represents 81% of Pega's total revenue, up from just around 50% a few years ago, with the majority of the remaining revenue coming from professional services. Our subscription model helps us build a more resilient business and improve profitability and scale through operating leverage, especially with our high client retention rates and massive client expansion opportunities. Growth in annual contract value is the key growth metric to measure our business momentum. During the transition, we almost exclusively focused on ACB because of its critical importance. So let's talk about our ACB results. In Q4 2022, annual contract value increased 16% year-over-year in constant currency and 13% as reported, reaching $1.1 billion. Our ACV growth was driven by our go-to-market strategy where we focus heavily on cross-selling and up-selling to our existing clients. Pega Cloud ACV reached $455 million, an increase of over $90 million. Our 60%, over 60% of our new client commitments were from Pega Cloud deals in 2022. Another important metric to measure our success during our subscription transition is growth and remaining performance obligation or backlog. Total backlog reached 1.36 billion as reported. As we highlighted last year in our earnings call in Q4 of 2021, our subscription license backlog was unusually high. resulting in a tough compare this year. Focusing just on subscription services, which includes Pega Cloud and maintenance, backlog grew 13% year over year, in line with our reported ACV growth rate. We are currently in the final months of our subscription transition, and our 2022 results demonstrate that we exited the year with improved profitability as we expected we would. Let me give you a few examples. First, our non-GAAP EPS reached $0.72, an increase of over 200% year-over-year. Our non-GAAP EPS performance was primarily driven by more disciplined expense management, especially in sales and marketing. In fact, total sales and marketing costs were down slightly year-over-year. You'll hear a little later that we expect to see another significant increase in profitability in 2023. Second, Haga Cloud gross margin decreased. improved approximately 300 basis points to 70%. The improvement in Pega Cloud gross margin was driven by increased scale as well as innovation in our cloud architecture that helped increase automation and further drive efficiency. When the subscription transition is complete, free cash flow generation will start to normalize a critical step on our path to becoming
spk00: Ladies and gentlemen, please stand by while we work to reconnect our presenter.
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