Pegasystems Inc. (PEGA) Earnings Call Transcript & Summary

Great. Good morning. Good afternoon, everyone. This is Jared Weisfeld, U.S. technology sector specialist at Jefferies. It's my pleasure to have Ken Sinwell -- Stillwell, CFO of Pegasystems, join us today. Before we get started, I'd like to remind you all that you have the ability to ask questions via Zoom, and your questions will be directly e-mailed to me, so definitely feel free to ask. And I guess with that, we'll get started. And Ken, thanks so much for joining us today.

Thanks, Jared. How are you?

I'm doing well. Good morning. Thanks for joining us at this early hour as we kick this off here.

So maybe for those not as familiar with Pegasystems, maybe let's just start off with a little bit of a high level introduction and provide a brief overview of the company. I think that would be helpful.

Sure. So Pegasystems has been around as a software company for quite some time. We were founded in the 1980s, which is unusual for a software company. We -- at that time, we weren't really a software company. We did more custom development projects for our clients. But over time, we kind of were part of forming the space previously called business process management, which was -- the foundation of that was executing work across a series of steps in a process. So there -- it was sometimes referred to as a process engine, and that process engine used things like case management to contain, whatever that was, the events, the issue, the customer, et cetera, to execute certain steps through a workflow. In the -- in our first 25 years or so, we really focused on operational systems, things that sat in or around what may be kind of generically called the ERP environment, things that were executing work, maybe that certain out-of-the-box systems didn't execute and maybe even as you hopped across different applications within the operational environment, executing certain activities. We used to support a lot of what is commonly called the contact center, the call center. At the time, we didn't view that as CRM at that -- 10 years ago or so, CRM was really more customer record management and was viewed more as a sales automation-centric space. But over time, clients started to realize and the market started to recognize that there was a selling activity, there was a marketing activity, there was a customer service activity. And through time, and actually a very strategic acquisition we did that got us into the marketing automation space, we had a very big presence in the customer service automation and the marketing automation. And then we actually built a product to support the sales automation space. The thing that's different for us in the CRM space is that our applications sit on top of the Pega platform, which means that they are all integrated real time, the same taxonomy, the same reference or data set. And so that allows supporting things like real-time automation that really in a digital world which is becoming increasingly important. So about half of our business right now is what I would say is the kind of the historical process management, digital process automation space, and about half of our business is in the CRM space. So the problem we solve is a very similar problem, which is executing end-to-end work automation using robotics and AI and especially when you have disintegrated systems where you actually need to execute work across multiple systems.

That's helpful. That's perfect. Thank you for sizing the businesses across BPM and customer engagement. Maybe just digging in on that a little bit. Can you help -- I would assume the migration to CRM from a business standpoint was also predicated not only on the natural transition from a Pegasystems perspective, but also as you think about broadening up the TAM. So maybe help us size the markets when you think about the traditional BPM and the traditional CRM space. What are the respective growth rates and sort of how to think about the size of each addressable market?

Sure. So as we started to get broader into our clients and then also broader kind of -- or deepening of our customer logos that we acquired, it was pretty obvious that clients don't just look at digital process automation and CRM as separate things. They're really -- and most of our clients, and I would say, any client interacting with lots of consumers or customers, need to connect what is commonly called the front office to the back office. There are activities that happen that need to leverage the information that sits in your operational systems to drive decisions, to drive activity, to do validations to help execute the work. So it's really not -- in today's world, companies don't kind of bifurcate their applications with this just touches customers. And so we'll keep that separate, and this is just operational workflow, so we'll keep that separate. They really need to integrate them together. So part of the movement to CRM was just the natural evolution of people expanding the application footprint and understanding that the end-to-end work journey really does touch lots of different steps, both front and back office, within our clients. And so the movement to CRM, although at the beginning was more opportunistic, really became strategic because our clients can't live in a world where these 2 environments are disconnected. And so it was really just a natural evolution. Of course, it is a much bigger available market that we're in. It also allows us to really help our clients with true end-to-end work automation that touches both, which we couldn't otherwise do if we weren't actually in both of the segments.

No. That's helpful perspective. Is there -- I would assume, because you entered CRM subsequent to BPM, that your penetration or your share is lower. Is there a way to think about how large you are relative to that market opportunity set? And maybe along those lines as well, is it a similar customer base across BPM and CRM? Are you using that footprint within BPM to go ahead and expand and effectively solidify your moat there? Or is it completely tangential? Do you ever -- and do you ever lead with CRM and then backwards sort of go the other way from a BPM perspective? I think some help around that would be great.

Sure. So certainly, the CRM space is orders of magnitude greater than the digital process automation space. When we were just in BPM, the BPM market, we reasonably -- well, the Gartners and the Forresters of the world reasonably sized added somewhere north of $3 billion. So at that time, we had an excess of a 10% market share in that space. Now if you look at digital process automation today, it's a much bigger market because it includes things like robotic process, automation, et cetera. So our market share there would be less than that now just because the market is bigger. But when you jump to the CRM side, I mean we don't even have a 1% market share in the CRM space. I mean there's just a tremendous amount of opportunity to grow in that space. And if you look at the larger -- some of the larger players in the CRM space, many of them are actually reducing their market share, not growing their market share. So there's certainly a lot of opportunity for cannibalization for a participant like Pega. The way that we think about our markets -- or excuse me, our verticals -- are similar, whether we're selling into the operational buyer or selling into more of the customer-facing buyer, the CMO, the CTO, the COO. The reason why we focus on vertical is because the larger organizations that we sell to, the Global 3000, typically need the vertical domain expertise in the solutioning, and they have very unique challenges that are relevant for their vertical or for their business model. And it's really important that we not homogenize that across all the verticals because our solution is very differentiated depending on the actual vertical or the business model that we're in. So we think about selling vertical, we think about selling to both operational or digital process automation or customer-facing CRM to the same organization. Sometimes, we will start with an operational footprint, and that will allow us to gravitate into the CRM buyer. Sometimes, we'll start with the CRM buyer, and that will allow us to go back to more of the end-to-end work automation. And sometimes, we'll actually sit as an orchestration engine across applications and ultimately then allow ourselves to expand into some of those endpoint applications. The -- I think the beautiful thing about Pega is that we are built to actually evolve and change with the application landscape. And we don't believe that any client is going to be forced or have to buy one application footprint or even be able to have everything in cloud or not cloud. We believe that our clients have variability, and they need -- they actually do buy best-in-breed applications across lots of different solution providers, and they've got to weave that together. And the way to weave that together is to have something that connects that end-to-end automation in real time so that you can actually not have to build lots of redundant databases and data stores and business warehouses to be able to constantly be picking and moving pieces of data back and forth between systems. So Pega really helps to do that orchestration across the reality of the footprint of our clients, which involve many different applications for each of the different problems they're trying to solve.

I want to dig into that in a second because I think that's a critical point. As you think about Pega platform, it's almost the equivalent of a PaaS layer embedded within the architecture, and I think that's a critical differentiator. But before we get there, because you touched on this, can you just help us understand from a vertical standpoint what are the key verticals that you go ahead and target? And maybe -- and we'll get into this a little bit, but maybe if you want to touch on just initial COVID impacts and how you're thinking about that from a vertical standpoint.

Sure. So our verticals -- because we have end-to-end automation and because the real-time and the digital response time in driving AI is very relevant for our clients that have very large customer bases, verticals that have a higher business to consumer, a B2C model, is actually very relevant for something like the solution that Pega provides. So financial services, insurance, health care, telecommunications, what I call consumer manufacturing, things like automotive and also the government, the public sector, really are very relevant. If you think about all those verticals, they have millions of prospects and customers. They have billions of transactions. Things are happening in digital channels. It's omnichannel, through distributors. They need to respond at a website within milliseconds to make a decision to put an offer in front of a client, to be able to route things across the different channels that you interact. So that's really where our verticals are most relevant. Now when you jump to the COVID impact, although our clients are certainly dealing with this interesting work world that we all live in right now, a lot of our verticals are not as in the kind of the heart of the impact of COVID. If you think about hospitality and retail and travel, the things that have really been impacted in the first wave have not -- are not significant concentrations of our customer base. Now certainly, we have manufacturers. And actually, we do have some clients that sit in those verticals. But it's -- I would say, proportionate to our business, we have probably a smaller percentage of our clients that have been -- have this material impact in their business model because they had to shut down. The amazing thing that I've observed, first of all, with Pega employees, I mean we've just -- our employees have completely stepped up in terms of really just embracing the remote kind of challenge, but also focusing on our clients and focusing on making sure our clients, who, in many cases, are mission-critical: banks, hospitals, health care providers, insurers, communication, cell phone providers communicate. So they're really just governments. They're like the backbone of what's helping us work through this. So it's our -- it's important for us to make sure we keep those clients operational and that we support them. So I think our employees have really stepped up. We went from having something like 4,000 employees working in offices to, I don't know, having less than 100 yesterday, working in offices. So we've been disrupted that way. But I think the -- just the amazing resiliency of our workforce -- and by the way, that is true of all of our clients, and quite frankly, all of our peers as well, right? I mean people of the whole industry has really stepped up for the challenge and said, listen, we are going to forge through this. We're going to work together. We're going to keep our clients operational because that's the way we're going to work our way through this. And now 90 days or so later, I think you're seeing just the amount of resiliency that we've actually been able to execute in this remote model. So I -- certainly, things are -- it's certainly a little bit more awkward to sell virtually because sometimes you're used to being in front of clients. It's awkward to do an investor conference virtually because you're used to being in front of people. I mean these things are -- we learn through these experiences. But one thing I will say is that the amount of access to individuals in a digital world is much greater. The ability to get people at all hours of the day at all day -- like the accessibility to get to buyers is much easier actually in a virtual world than it was in the traditional scheduling a meeting, everyone flying to a city, coordinating calendars, flight delays, et cetera. So I think from that standpoint, it is actually more efficient in some ways. It's just something we're learning how to deal with.

No. For sure, it's the same from my perspective as well in terms of just the increased efficiency and -- at some point. And sometimes, it turns into 24-hour workdays because the office is very close to the bedroom, for sure. Maybe...

Yes. That's the one thing you have to watch is the mental drain for individuals. And I think the amount of empathy that you have to have for your employees and your customers is really important because you have to understand, people sometimes just need to -- they need to step away. And it's hard to step away when the computers are right in front of you all the time.

Yes. I agree. And I keep trying to tell myself that, for sure. When you think about -- so just going back to the Pega platform and thinking about that as a competitive differentiator because I think that's really critical, can you talk about some of the advantages of having one unified code base across the company from any vantage point that you see? And also, talk about that from a financial endpoint -- financial perspective as well in terms of how the unified platform could potentially help or does help from an R&D perspective.

So if you think about an environment where you have -- where you want to buy the best-in-breed applications, you have to deal with a lot of issues, right? First, you have to build APIs between them. And by the way, that isn't always as easy as it sounds to say and as easy as I just said it. Secondly, you've got data models to reconcile. You have to deal with master data and systems of record, and you have to deal with lag times. Then you have to deal with -- sometimes you need to install RPA tools or screen scraping tools to move data between things like Excel files and databases that you can't actually even build an efficient API to. And then you've got user experience issues where you've got lags and delays in time, where things don't update, where somebody changes an address in one system, goes to another website, and it might take a day to get that address change reflected. The amount of drain on consumers -- because they don't understand. They think if they go to one of your digital properties and they change something, it should be immediately refreshed in another one. But it isn't that simple when these large companies have these very complex application footprints. So the beauty of Pega is that, one, you mentioned kind of us sitting at the middle layer, at the center of the actual operation of connecting these applications in a way that allows them to have a common context. So the process engine, executing the work, the common context, the case management structure, the automation, the speed of automating, robotics and the ability to drive decisions, to be able to use that automation and our decision engine, to be able to skip steps, reverse, pass through a manual approval, change the -- learn from the actual execution of previous activities to be able to optimize that workflow and be able to drive end-to-end automation across applications seamlessly in real time is really, I would say, unmatched in terms of other companies that try to solve that kind of work engine workflow-type activity because some have pieces of it, but some -- but most don't -- aren't able to execute all of those. And nobody can execute all of them in real time while still allowing the activity to sit in the endpoint application.

That's great. And I think that could help serve as a segue in terms of just touching on the competitive landscape, maybe across BPM and CRM, as you think about the Pega platform serving as a differentiator versus your competition. Maybe help -- just give some perspective when you think about the 2 main segments. Who are your traditional competitors? Who are your emerging competitors? And how does the Pega platform help differentiate to go ahead and ensure that you can help solidify your moat?

Sure. In CRM, the people that we see are typically probably not going to surprise you. They're the largest market share, the Salesforces, the Microsofts of the world. Sometimes, we do see ERP providers in there as well if they have a -- if the CRM has a tight connection to ERP. When you get into verticals, in each of the verticals, there are typically companies that focus on one vertical, so you would -- you tend to see some of the vertical CRM providers. I would say, most commonly, our most common company that we see is Salesforce and second is Microsoft, and we see both of them in the front CRM as well as in digital process automation. I mean both of them do sell a platform, both of them do sell operational platforms. They don't only sell in the front office. They're very -- they're -- and they're both very big brands and have had a lot of success. We have a tremendous amount of respect for both of them. But we do compete with them, I would say, primarily. And then the vertical providers, when you get into the digital process automation or what was formerly called BPM, you have a -- it's a little bit of a hodgepodge of vendors. You've got some of the RPA vendors you might see for a point solution, you've got some vertical players, you do see even legacy providers, like ERP providers or an IBM or someone like that. And you might see -- in certain segments, you'll see competitors be a little bit stronger in certain verticals or certain geographies. But I would say the bigger brand names are typically the ones that we see in our campaigns because their presence is across every organization, and they have -- they -- typically, they already exist in each one of these organizations. Our key is to sell our differentiator to help our clients augment their environments and to make sure we operate well with all of the different application providers that are out there. We don't -- we believe in open environments so that all of us can kind of work together is actually much better for our clients, because at the end of the day, nobody's going to buy just one application across their entire infrastructure. And I think that, that's important for all of us to continue to work together. Even though we do compete fiercely, we also need to stop and help our clients when they need to integrate us with each other.

I think that's actually an important point because I've come across this on diligence as well. And I mean can you talk a little bit of -- do you coexist in certain environments with other platforms where a client can choose CRM and they'll also -- they'll choose Salesforce and they'll also choose Pega, just sort of depending on the application? Are there traditional or more applications that your product is best designed for? I know you talked about earlier some fast response times where customers need to make decisions in potentially milliseconds. So maybe talk a little bit about that. And maybe that's also a good segue to think about the R&D that's gone into your intelligence and real-time AI capabilities. I know Salesforce talks a lot about Einstein. But how much of that is just them marketing with a great term as opposed to actual implementation of analytical capabilities that can be done on your platform as a unified code base?

So we -- yes. So I would say that there isn't a client that I can think of that we're not integrating with one or more of those other names that you just mentioned. I mean I think that's just the way -- I mean that's one of the value drivers that we have. So I think that's absolutely true. I would say, from an R&D investment standpoint, I mean, naturally, the 2 biggest differentiators of late for us has been our kind of advancement of our customer decision over our AI platform as well as robotics, with our purchase of OpenSpan and really inserting robotics into our capabilities. Our process engine and our case management has been best-in-class for years, and we continue to invest in those. But I would say we're disproportionately investing in the CRM applications and the use of customer decisioning and AI and actually the manifestation of our robotics to be able to automate across the workflow and across applications. So it's certainly where a lot of our kind of incremental investments are going. If you think about the areas where we really shine, it's where you need that real time end-to-end. It's where you actually need to be able to transact across applications with speed, with perfection, in real time to be able to drive certain activities and offer an action of an image refresh, whatever that might be in the digital environment. So you typically see in the customer service area or in one-to-one customer engagement, like marketing automation, we are very strong in those 2, and it's certainly connecting those into digital transformation and digital process automation. Those are kind of areas that you'll see us connect and help our clients. Do we sell pipeline management software? Absolutely. We use our own sales automation to manage our own sales force at Pega. But I wouldn't say we're not trying to go in and sell stand-alone applications in mass, in the mid-market or smaller organizations around sales automation. So that should -- although we do have a solution that could compete there very well, it's not really our kind of our go-to-market motion. Our go-to-market motion is really around helping the largest and best brands in the world solve this digital transformation and this digital engagement challenge by being able to serve things up in digital channels, in stores, at resellers, on mobile devices, so that our clients -- their clients, excuse me, they are customers of our clients, are able to get the most relevant message or compelling kind of message or marketing to them at that point in time. So the decisioning aspect is an interesting one, the AI. I mean in today's world, I think AI is kind of commonly defined as anything that can make a computer smarter, right? I mean it's not -- you can kind of define AI. AI can be line regression, AI can be advanced analytics, or AI can be really a multidimensional millisecond decision using a very sophisticated model to calculate using predictive analytics. Pega is more on that latter description than it is just something that's going to do a line regression on a chart. But I do think AI gets described as a very broad, kind of a broad net. We're not suggesting that there isn't value in some of that advanced analytics kind of capability, but we're more using our AI to drive the next best action, the next best offer. We're using ours to predict the future, not necessarily show the past. And sometimes, AI shows the past and predicts out kind of using that regression kind of example. And that is helpful, but it is not going to solve the issue of being able to run thousands of decisions per second in a digital channel, to predict whether you should offer someone a rewards credit card, a low interest credit card, an auto loan, a refinance of their mortgage or a referral to a wealth manager. And that needs to take into account lots of different data points that you may or may not know about that visitor to a digital property. And that's a level of decisioning or AI that Pega is far advanced over our competitors.

That's great. Thank you for the thorough explanation of that. That's extremely helpful. Maybe I definitely want to dig into some of the financials and the cloud transition. But before we get there, just to finish up on these topics. I think examples are sometimes helpful to put things in context. Can you talk a little bit about the recent win with the U.S. census, given that I think we're all going through that right now? And I think that's just a good real-time example of some of the differentiation that you provided. And maybe help explain how you were able to win that versus some of your competitors in the RFP.

Sure. So as you can imagine, most of these larger campaigns really try to do a proof of concept or a benchmark on the technology against the problem. And so I think that the fact that we won that against 29 vendors and we actually got down selected down to us and another vendor and we actually had to compete against the internal development inside of the agency, as you can imagine, that's a fairly competitive environment. So I think the fact that we won that and also our recent win with the IRS really kind of highlights the fact that we're really viewed as a solution that has -- that is best-in-class that can actually drive very significant transformations. The challenge with the census, as I understand it, was -- which is pretty well-discussed, was they had a very big issue around data collection and how to take that data collection in real time and how to actually properly staff numerators out in the field based on what they knew and so -- what they know. So I think the start of that was this self-service, like getting more and more people to come in and fill out the form online. The second one was being able to use that information and run it through the Pega application that -- to be able to really kind of predict coverage rates and different zones that you needed to put people in the field to be able to make that more efficient. Because remember, the census is a massive undertaking of actually trying to get enough statistical coverage by city and make it relevant. I mean you want to knock -- you want to make sure you're talking to the resident. You don't just want to guess by looking at the number of cars in the driveway or trying to speculate based on the last census and assuming that it's the same. You got to really try to make it as accurate as possible because, for those in the U.S. or those that may -- don't know this and those outside, the census drives representation, actually political representation, right? Because based on the number of population, it determines your state and your state representatives. And so that's really an important exercise to go through to make sure that people are getting proper representation for their districts. So the key for us was automate as much as possible on the front end, use our engine to be able to drive the predictive analytics to get to speculate and predict where do we want to go for those counts, to be able to have the field enumerations on mobile devices, be able to capture that information and basically report that back in to keep a constant updated model of where coverage was -- met the certain thresholds of the statistical coverage. So it's really a complex web: mobile device, database, mail, call center, right? It's almost your perfect example of omnichannel, right, in terms of that intake and running that through a process engine and being able to drive analytics and AI to be able to predict the next kind of staffing exercise or the next best action.

Great. So maybe I want to dig into a few big themes here. Let's start on the transition to the cloud. I think it's an interesting topic because it sort of depends on the organization that you're talking to. I think the technical software companies, for instance, on the other side of the spectrum have been on a much slower migration just given the processing requirements. We talked to PTC yesterday, and they're still very early on. The EDA vendors are still very early on. And then you've obviously got startups that are born in the cloud. So maybe talk about the transition that you've been on from a cloud perspective, where we are in that journey and the benefits to you and your customers as a starting point.

Sure. So the cloud migration really started in a large way about 2 years ago. We started to move to a recurring model away from perpetual because our clients were really asking for it, right? I mean our clients really wanted the ability to surge as their capacity changes, their needs change. And they didn't want to have to deal with this very large unknown investment on the front end that is made in the perpetual world, right, a lot of cash outlay, which not every company can do. So that was kind of -- this was being driven by the market. What -- in the middle of that, or actually about a year into that, we realized that moving to recurring wasn't enough. We really needed to give our clients Cloud Choice because our clients were trying to move from what were heavy infrastructure environments that they needed to manage into a more agile, dynamic, kind of virtual and scalable cloud environment. Now it's important to understand that there's -- cloud means different things to our clients. They want public cloud, meaning Pega Cloud, which is our full service offering where we manage the currency of the product, we manage the infrastructure. It's a full managed offering. So they don't need to worry about anything except operating the system. But some clients have environments where they want to be able to manage it. They want to buy the technology or lease or rent the technology, put it into a virtual environment because they may be managing their own virtual private cloud. So it's important for our clients that we allow them that flexibility and also the ability where they may need to move between those environments over time. But what we saw is more and more clients are looking for Pega to manage that environment. They're looking for Pega to -- and so that provides certain economic benefits for our clients because they have massive infrastructures and cross charges from their internal IT groups, very significant burdens to be able to manage these legacy applications that they may have built. They may be a homegrown system that they built years ago. And in addition to that, they don't want to have to manage the continual upgrading that may be required when something is not a managed service, what is not on a cloud. So we can provide them efficiency on managing their environment and also keeping the application current and in compliance, certification requirements, et cetera. And so that's what the client gets. What Pega gets is we get the ability to scale the profitability of this offering as it gets larger, right? Because when you first -- when you're smaller as a SaaS provider, you have a lot of infrastructure, a lot of fixed costs to be able to build the model. But over time, your margin is able to scale as you're able to do this work more efficiently than clients can. And I think that's the important like kind of recipe is helping our clients reduce costs so they can deploy their resources more efficiently, and we get scale. And with that scale leverage, we're able to make that make sense for us as a vendor, which is where I think really where cloud just makes a ton of sense.

Yes. No, that's so true, and we see it in so many examples in terms of just like-for-like margin expansion as you gain scale. It's certainly evident. Maybe along those lines, when you think about your cloud business, what are the key metrics that you're looking at to make sure that your sales investments are working? How do you think about upsells and expansions tracking versus what you expect and maybe incremental use cases that are opening up by transitioning to the cloud that didn't exist prior?

So we looked at our sales efficiency as what do we have to spend in sales and marketing to grow another dollar of ACV, right, to expand the dollar of ACV. Because ACV is our key measure, annual contract value. It's the recurring spend that our clients pay us each year over time. And so naturally, the measure of our growth is the measure of that spend. The way that -- so that's -- so we're connecting our sales and marketing investments to match that growth in spend because our retention rates are extremely high, and so much of our growth in ACV is all predicated on that kind of expanding or net new logos. Now when you look at how does that growth happen? About 2/3 of our growth typically comes from the existing installed base, a traditional land and expand model. If you think about a land and expand model and then tie it to SaaS, it makes complete sense, right? Clients can get started small, they can actually get value, they can expand over time, they can expand into new use cases, but also the density of the existing use case. They can also feel more comfortable that somebody is managing that environment for them. But they also have the flexibility, if they wanted to, to move that into their own virtual private environment where that's -- where I think Pega really differentiates because we support clients in whatever environment they want their application to be managed, whether they want to manage in a third party or Pega. We prefer Pega because we know what the service level that we can give. And we also know that, that scalability of our cloud offering allows us to get incrementally profitable and ultimately pass on some of that savings to the market as we actually expand. So that's kind of how we're thinking about that dimension.

That's a great segue. My next question was sort of along those lines. The company has made significant investments in sales capacity, with headcount, I believe, nearly doubling. Are these ramping as you expected from an investment standpoint? And where do you think incremental go-to-market investments will be placed?

So we have been increasing our investment over the last, call it, 1.5 years to 2 years. We really -- what we've seen is this tremendous market opportunity and tremendous need for what Pega offers, and we just didn't feel like we had enough capacity to be able to accelerate our growth rate. And we think the ability for us to accelerate our growth rate is very significant. Now we've already proven to accelerate the growth rate in some way because we were traditionally a 12% to 14% grower. And now if you look at our ACV, we've been above 20% now for almost -- I guess it's almost even coming up on 3 years. And then the last year, that was independent of any shift from perpetual license. That was with about the same percentage of recurring. So we've actually seen this big move up in our growth rate. We believe that continuing to invest in go-to-market can help us accelerate that growth rate even further. And at our scale, we think that there's no reason in the world why we couldn't be a 30% or a 40% grower. Now we have not been and we have to prove that to ourselves and to the market, and that's why we've managed our investment increases in a thoughtful way to make sure that we can achieve that efficiency of -- our selling efficiency as well. Where we're putting those investments are in the traditional verticals that we've always been successful and that we feel like we're very underpenetrated. So we're putting -- so I wouldn't say that it is exclusively in those verticals, but I would say it is materially in that direction. And we're focused on making sure we have adequate coverage on the very largest organizations that already are large customers of Pega. It could be even larger. So we're balancing that. We're not going into brand new verticals in a large way or brand new geographies in a large way. We do test investments there. But I would say that it's -- we're largely putting more density on where we know we've been successful and where we know there's tremendous opportunity.

And I think that's an important point that you mentioned. So I just wanted to go back on that for those that are maybe less familiar with the transition. You talked about ACV growth greater than 20%, independent on any shift for perpetual. So you're talking about, basically, on a like-for-like basis, because actually ACV will get a tailwind as the migration to the cloud -- or the migration to recurring goes ahead and accelerates. But you're saying, on a like-for-like basis, you're sustaining at 20% growth. That's obviously pre-COVID, but just to help put in context.

Yes, sure. So if you look at our ACV growth over the last 3 years or so, it actually went from like 24% to 23% to 22%. But that's because in those first 2 years, we actually were shifting perpetual. If you actually look at our growth, our growth in the adjusted ACV, if you adjust for that, was more like 15% to 16% and then 18% and then 22%. So we've actually seen an acceleration if you adjust for, that the artificial tailwind that any company will have when they actually shift from perpetual and start measuring in ACV measure. It's exactly the reason why you lose revenue when you go through that as well because you lose the perpetual revenue upfront and you go to a recurring revenue model, but you also get a little bit of a tailwind on the ACV growth. 2019 was the first year where our recurring percentage stayed consistent, meaning it was about 90% recurring for 2 consecutive years, which that's one gauge you could use to kind of show that the normalization of the ACV growth rate happened. And that was -- we grew 22% last year. In Q1, that growth rate slowed to about 21%, but still north of 20%. Our goal would be not just to keep that above 20%, but to have that even accelerate further because we're making investments in the go-to-market that should drive that.

That's perfect. So maybe on that point, as you think about impacts to the financials, I think you talked about some puts and takes in response to COVID, but I don't believe you changed your guidance for the full year. So maybe help us think about that. And I think that clearly speaks to the recurring nature of most of your revenue, but any kind of perspective there would be helpful.

Sure. So it's worth reiterating for those that are -- that have not followed Pega is we guide -- we give revenue guidance at the beginning of the year, and we do not update that guidance nor do we reaffirm that nor do we give quarterly guidance. We did give guidance at the end of our year-end. We have not commented on that, and we typically do not comment unless we have an acquisition of size or something that would change it. What we did do though is we did give some qualitative information around how COVID could impact a company like Pega. One, most of our bookings, 2/3 are with existing organizations. That kind of activity is a little bit easier in a virtual world than new logos. The second thing is our verticals are not the verticals that are going to be the most largely impacted, right? So that actually helps us as well. Digital transformation is now accelerated because of COVID. So that actually could work in our favor to offset any of the other kind of slowness that could exist just based on what the recession that COVID put the world into. Another aspect of this that I think is important to think about is our professional services. Not all implementations can be done remotely, but we've been estimating about 85% to 90% of them can. Not all selling activity can be efficiently done remotely, but most of it can, right, above 90%. So when you kind of use some of that information, I think that color is provided to help our investors to kind of gauge where we might be now versus where we thought we would be at the beginning of the year. But I do think it's not something that a company like Pega that's thinking about a multiyear journey. Guidance within a quarter or sometimes even within a year is not really our goal. Our goal isn't to measure ourselves in the next 90 days or, quite frankly, even 9 months. Our goal is to measure the progress against that multiyear journey, which is we have to really focus on our ACV staying above 20%. That's the key for us. Because if that stays above 20% and accelerates up, even through COVID, we are well on our journey to be able to get to our kind of our longer-term targets.

That makes a lot of sense. Getting a question here from the audience. So the question is if you have an on-prem customer paying maintenance, how should we think about the potential revenue uplift to Pega if the customer chooses to move to Pega Cloud?

Great question. So the simplest way to think about that is the unit economics of selling a perpetual license versus a term license. Let's just use that as an example. You typically get about twice the annuity stream for a term license than you would for maintenance. Because the breakeven -- the unit economics that are breakeven period is typically around 5 years. So that's just kind of a rule of thumb. The cloud, the Pega Cloud gets actually a little bit more than a term license because we're managing the infrastructure, we're actually -- we actually provide the infrastructure. So you would see, if you were ever moving from maintenance to a cloud offering, you would typically see an uplift that may involve something like a 2 to a 3x uplift over what a client may pay because, remember, they are paying maintenance, but they're also paying 2, 3, 4, 5x that amount in all of their infrastructure, in their administration, in their management of that application. So you would see that uplift. We are not focused on massively moving our clients from their existing environments to Pega Cloud at this time. We're really focused on the new logos, the new projects, the new growth. And clients are moving to the cloud as they elect to at this point kind of consistent with our Cloud Choice. But that just gives you an idea in the event that somebody moved. It typically would be a -- and I think that's a pretty traditional kind of uplift that you may have heard other companies talk about in the transition.

Perfect. Yes. No, that certainly makes a lot of sense. I want to be cognizant of the time here. It looks like we probably have time for one more. And I think this is a good question in the context of how you drive your business. Obviously, you're focused on the long term. You're focused on ACV growth. So I think you've got a long-term model going out to the 2022-2023 time frame. Maybe talk about the commitments -- the company's commitment to the Rule of 40. And maybe for those less familiar, help give some perspective on the Rule of 40. I know companies also have different definitions of Rule of 40. So some thoughts there would certainly be helpful as we close out.

Sure. So for those of you that don't know, I spent a number of years in private equity, and we really embraced this concept of Rule of 40 as really being a balance of accountability. If you're going to grow faster, then you can actually kind of -- we can allow an organization to produce less free cash flow because you're investing in the future growth. But if you're going to grow slower, you need to be accountable to shareholders and you need to actually produce a higher level of free cash flow. The Rule of 40 is the combination of your revenue growth or, in our case, our ACV growth, and your free cash flow margin. That's -- some companies use EBITDA. For a software company, free cash flow margin and EBITDA largely converge because we don't have a lot of capital-intensive expenditures. But if you think about the 2 of those, add them together, that's the Rule of 40. So what we've talked about is if our growth rate in ACV is staying at 20%, we would shoot for kind of a timeless model of 20% free cash flow margin. If our growth rate goes up to 25%, then we would accept maybe a 15%, right, adding to 40%. If our growth rate went to 30%, we might accept 10% now -- of free cash flow. But the most important point in all of that is that the faster that you grow, the bigger the organization is, the more leverage you have to take it to the Rule of 42, the Rule of 45. So it gives you more opportunity to be able to expand margin versus a smaller organization that has some level of fixed cost. It's harder. So I think that growth, although in the short term may result in lower free cash flow, it does give you the opportunity in a SaaS business to actually expand and even shoot for something more than the Rule of 40. So that's kind of the benefit of growing faster.

That's great. I think that's very helpful. Any closing remarks here as we come to the end of our time here?

No. I just -- I really appreciate the opportunity to talk to everybody. And I would say that let's stay together through these interesting times that we have. I think we've done a really good job as an industry over the last 90 days. So I think we just need to keep forging ahead. And hopefully, I'll be able to see everyone live soon.

Great. Ken, thank you. Thank you so much for your time. Thank you, everyone, who are joining us this morning and afternoon over in London and Europe. Have a great day, everyone. Thanks again.

Thanks, Jared. Bye.