Pegasystems Inc. (PEGA) Earnings Call Transcript & Summary

Hello, everyone. My name is Peter Welburn, and I'm Vice President of Investor Relations for Pega, and I'd like to welcome you today to our 2020 Investor Briefing. I'm joined today by Ken Stillwell, our CFO. Ken, would you like to say good morning?

Good morning, everyone. Thanks for joining. Look forward to the discussion.

And I'm also joined by Don Schuerman, our CTO. Don, would you like to say good morning?

Good morning, everyone, from our satellite studio here.

All right, excellent. So I'm just going to put our safe harbor statement up. Certain statements contained in this presentation may be construed as forward-looking statements. So please refer to the safe harbor statement, and I will quickly walk through the agenda for today. So I'm going to start with an overview of Pega. I'll talk to you a little bit about our key differentiators. Then I'll pass over to Don, who's going to talk about Process Fabric. And then we'll move over to Ken Stillwell, who will go through a financial discussion with you. Now we encourage you during today's session to submit questions. We are live here today, right, Ken? So we'd love to get your questions and be able to answer them during the session. So at the bottom of your Zoom screen, you should be able to see where you submit those questions. Other people participating in today's session will not be able to see your questions. The only people that can see them would be myself and Ken and Don. All right. So let's jump into the solution overview. So I'm pleased today to give you an overview of Pega. Pega was founded 3 decades ago, but our mission, in many ways, remains the same. When we look at the way that business, in particular, sophisticated businesses, use and apply software, we see enormous opportunities for them to improve the way that they engage with customers and for them to improve their efficiency internally. And the fundamental vision, the idea behind Pega was that instead of writing code, what frankly was the old fashion way in the '80s, which is just way too complicated and way too manual, that we should come up instead with a model-driven approach, a way to literally transform the way that software is written. So it's actually written by computers as opposed to people typing strange commands into screens. Now it turns out that this is a very challenging vision and one that Pega has been working on for a long time. But it's absolutely central to things our customers are extremely interested in and central to the way that leading organizations are starting increasingly to think about their own digital transformation. Now it's great to have technology. But you need to make that technology real. It needs to be tangible. It needs to connect with buyers. So instead of talking generally about software that writes software, we've found 2 places where this can be brilliantly applied. The first is, how do you make your interaction points between an organization and its customers optimal? How do you improve that engagement? How do you make it so that the right conversation happens through the right channel at the exact right time? That's what we call the customer engagement space, and we have products around customer decisioning, customer engagement and customer service that fit perfectly into that space. But it's also critical, and we think this ebbs and flows a bit, but it's going to be more and more critical as time goes on for organizations to be able to handle that engagement from end-to-end. And that's what we refer to as intelligent automation, which sort of grew up out of the world of workflow, which is frankly what Pega called it when this company was first started. But a fundamental concept here is that the computer actually needs to participate in making that work easier. And it's when you link together intelligent automation and customer engagement that you can really help organizations to make their end-to-end processes much more efficient and much more effective. So in terms of today's presentation, when Ken and I were planning out for today's presentation, we thought it would be really helpful to go through our key differentiators. It's a question that Ken and I get quite a bit when we're out speaking with investors. So you can see them here at the bottom of the screen. And for those of you who may be listening who can't see the screen, I'll quickly read them. So the key differentiators are: real-time omnichannel artificial intelligence; end-to-end automation with robotics, a hot topic; micro journey-centric rapid delivery; the Situational Layer Cake; Software That Writes Your Software; and Cloud Choice. So let's go into the first key differentiator with just a fantastic case study. I also want to make it clear that all of the case studies I'm highlighting today are available on pega.com. You can watch the customers themselves talk about these tremendous benefits through PegaWorld videos that are posted. And in addition to that, there are press releases available and other materials like webinars. So you can actually hear from the customers themselves. I've just pulled these benefits from those presentations to share with you today. So years ago, CBA was last in customer satisfaction. Last of the 4 big banks in Australia. And for them, moving from the #4 position to the #1 position was a massive challenge. Just think about the size and scope of the largest bank in Australia. They have 10 million customers who interact with the bank through 18 different channels. They interact with the bank through 1,100 branches, through the multiple call centers that they have online and mobile. And the bank has 150 billion data points about their customers that they could potentially use to recommend the next best conversation to their customer to improve customer satisfaction. And they have 10,000 frontline employees who interact with those customers on a regular basis. So a really big challenge for them. So what was the solution that CBA put in place? They built something called a Customer Engagement Engine, which was part of their vision to enable customer relationship banking. They used artificial intelligence from Pega to better understand the key moments and key messages that really matter to customers by leveraging Pega's one-to-one customer engagement solution. And they used world-class technology from Pega to turn customer data into insight and action, to deliver that next best conversation in real time to each customer. Now the result, as you can see here, have just been fantastic. Customers love the personalized experience that they're getting. And believe it or not, at this point, CBA has delivered 50 million next-best conversations in person across their 1,100 branches and also through their call centers, to their customers. And as you can see here, they're now in the #1 position in terms of the 4 banks in Australia for customer satisfaction. They've posted phenomenal profits. They posted their most recent financial results earlier this month. And their CEO just talked about how technology, Pega technology, is just playing an enormous role in helping the bank to serve their customers better, especially over the last 6 months. So a pretty phenomenal case study to get started. So let's move next to the next key differentiator for Pegasystems, which is end-to-end automation and robotics. Now Siemens is also a global player, with 380,000 employees around the world, 280 factories spread across 200 companies -- 200 countries, excuse me. And they -- their challenge was to automate their processes across the different units, across the different business units they have, across the different systems and across the different regions. They had 12 workflow systems in place. And what they wanted to do was to create a master data management system, leveraging Pega technology so that they could provide much more streamlined operations and improve their efficiency. So they deployed that solution using the Pega platform, they created one workflow system to connect the dots between the various systems. And they've just had phenomenal results by rolling this application out. They've achieved cost savings and efficiency, they gained the ability to implement their solutions 10x faster at 1/10 the cost, and Siemens now has 35,000 employees from across the company that are using the Pega solution to achieve this goal. Very, very exciting. So let's move to the next key differentiator from Pega, which is micro journey-centric rapid delivery. Now COVID-19 has really impacted businesses from around the world, including Pegasystems. And as a result of these, it's really pressed for many companies to move faster when it comes to digital transformation. Now the Bavarian government, which includes the city of Munich, is the largest German state by land area. And they needed to develop and deploy an application really, really quickly in response to COVID-19 to help their businesses and help people with businesses to get through that pandemic. So they partner with Pegasystems. And in 5 days, they were able to roll out a new system to help replace a manual system that they had been using that really required in-person work by their 500 clerks who process claims and implemented a digital system to process that work. And now those 500 clerks can process work at home. So it's a great example of moving very, very quickly. And at Pega, we certainly want to help our companies and our customers to deploy solutions quickly and then expand from there. And this is a great example of micro journey-centric rapid delivery. So let's move to the next case study, which is Liberty Global. Liberty Global is also a global player, and they've taken advantage of a unique capability that Pega has called the Situational Layer Cake. Now you might ask yourself, what does Pega mean when they talk about this Situational Layer Cake? The concept here is that companies that are global, like Liberty Global, have multiple operating units, they're acquiring different companies on an ongoing basis. No, they're not really sure what the next challenge is going to be for that organization. And the great thing about the Pega Situational Layer Cake is it really allows them to have a foundation lever of -- or level of functionality. And then they can customize that solution for a particular geography or a particular business unit that has specific requirements. So when they're in country A and they speak English and they're in country B and they speak something else, they can make adjustments to that in order to fulfill those requirements. So the Situational Layer Cake is very, very powerful. The other point I wanted to make was that these benefits that I'm going through all of the companies that I'm talking about today and all companies that utilize the Pega platform, which is one unified platform, can take advantage of all of these benefits across the board. But the results for Liberty Global have also been very exciting. They've transformed the organization by leveraging the capabilities of Pega and the Situational Layer Cake. So I'm going to wrap up by talking about the last 2 differentiators. This next one, Software That Writes Your Software, really applies to Vodafone and frankly, all customers who use Pegasystems. As I mentioned at the beginning, the traditional approach to software development is really broken. It's slow, it's expensive, business people are forced to write down what they want, requirements documents that programmers can write code. It's really hard to collaborate. It's hard to innovate. It's hard to make changes. Not that way with Pegasystems. With Pega, engineers don't code apps, business and IT design solutions together using groundbreaking visual models from Pegasystem. Again, the idea here is that business and IT can get together, they can create a visual representation of a business process on a screen, hit a button, and then that Java code, as an example, is automatically generated on the back end. And this gives tremendous benefits to Pega's customers. Our analysis shows that you can develop and change applications 12x faster by using Pegasystems than traditional software development. Again, this is Software That Writes Your Software. And let me wrap up with the key differentiators with one of our other very exciting differentiators, which we call Cloud Choice. Now Scotiabank has 25 million customers worldwide and 97,000 employees. They've been a Pega customer for a long time, and they've actually deployed 60 applications working with Pega, and those were deployed on-premise, across various version levels. But what the bank wanted to do was they wanted to move from on-premise applications to cloud applications, and let me make it clear, they have a multi-cloud vision. In other words, they want to use Microsoft Azure, they want to be able to use Amazon and other cloud capabilities. And that's the fabulous thing with Pegasystems and our Cloud Choice capabilities. Whether you want us to manage your cloud solution for you, you can use Pega Cloud, which is running on Amazon, or you, as the customer, can make a choice to use Microsoft Azure and deploy Pega on the Microsoft platform or on Google or on Amazon. We give you complete flexibility in terms of cloud choice. I think Frank Guerrera and our cloud team have just done a fantastic job, especially over the last 18 to 24 months, bringing our cloud solution to the next level, which is why we see so much momentum right now in terms of Pega and Cloud Choice. So at this point, I'm going to wrap up my section, and I'll be passing over to Don Schuerman just here in 1 minute. I wanted to wrap up by just making the point that digital transformation right now is just critical for companies and organizations. And with the key elements that Pega has in its portfolio, around customer engagement and intelligent automation. When you bring those 2 things together, Ken, frankly, it's magic. So at this point, I'm going to pass it over to Don Schuerman, who's our CTO, and Don's going to talk about Process Fabric.

Thank you, Peter. As Peter said, digital transformation is becoming increasingly important to our clients. And a key part of that digital transformation is the orchestration of work, of processes, of the decisions that drive customer value. In fact, you could argue that Pega has built our business on orchestrating the decisions like we do for Commonwealth Bank of Australia, orchestrating service processes, orchestrating the processes that drive the internals of business. And that orchestration is becoming increasingly more important. Peter, if you move to the next slide, the world has become increasingly distributed, right? Our employees are distributed, especially now. Peter mentioned the example of the Bavarian government where their workers processing claims are working from home and distributed. Our businesses are distributed into larger and larger ecosystems. I spend a lot of time talking with our banking clients. And especially in Europe, things like open banking mean that increasingly, their business involves selling products that are provided and serviced by their partners. That ecosystem landscape is meeting our businesses distributed beyond our enterprise walls. Developers are increasingly distributed. Peter talked about that power of Software That Writes Your Software. The industry has called this low-code. And in a low-code world, you're letting flowers bloom across the enterprise of apps, the different business teams or different agile groups or different design thinking teams are spinning up. And organizations need a way to pull all of that distributed development back together. And then finally, technology is more distributed. We see enterprises embracing microservices architectures. We see organizations like Scotiabank that have embraced a multi-cloud strategy, where they have the applications distributed across different clouds. So as we think about what orchestration will need to look like in this increasingly distributed world, and as we think of the vital role that this process orchestration and automation plays in the digital transformation that our clients are undergoing, we decided that it's really important to set a new vision for where that's going. And that, if you move to the next slide, is what we call Process Fabric. Process Fabric is about taking our business architecture, which during PegaWorld, Alan Trefler, our founder and CEO, described as being built from the center-out. That is, we want to be the engine at the center of the business that is orchestrating both the incoming communications through various channels that you deal with the customers as well as the back-end systems that store all of the core data. So that center-out business architecture that connects work across different systems, whether their Pega environments or whether they're working on other systems, like SAP or ServiceNow or Salesforce or even work that's being done outside of your enterprise walls, and allow you to operate in a way that is agile without sacrificing the application independence and that distributed way that IT departments and the architects want to build their future technology platforms. Process Fabric, if you move to the next slide, represents both the use of our core Pega platform capabilities today. Our ability to support what we call micro journeys, that small chunk of the larger customer journey that oftentimes we can deliver it as fast as a few days and bring live. Leveraging the investments we've made in a world-class API that we call the Digital Experience API, that allows us to plug Pega processes and Pega decisions into front ends, both built by Pega as well as other organizations. Cosmos, which is our design system, built on a modern user experience framework that is designed specifically to help people get work done in an efficient way. And then live data which is a layer that wrappers around the complexity of an enterprise and allows organizations like Siemens that have multiple back-end systems with data in a whole bunch of different places to actually insulate their users and their customers from that complexity, so the users and customers can focus on getting the work done. But we're also bringing our products forward, to add new capabilities that build on the technology that we already have. What we call the Interwoven Worklist, which allows users to see all of their work in one place, whether that work comes from different Pega environments or even applications and environments that are not Pega, say, Salesforce or ServiceNow. Cross app analytics and insights that help business experts see exactly where work is getting done and where the bottlenecks in processes live. The ability to fire work remotely. So if I'm, for example, a customer service agent, and I need to create a piece of work in another system to respond to a request, I don't have to tab over to another system to do that. I just have Process Fabric automatically manage that work for me. And the ability to ultimately orchestrate all of that work on an event-driven architecture, even again, as that work has to spawn across multiple systems. So what does this architecture actually look like? Well, if you move to the next slide, it's a combination of both centrally managed capabilities, what we call the Process Fabric hub, our ability to pull in and centrally understand things like this Interwoven Worklist. This customer with 1080, right? So not just a 360-degree view of the customer, but a view not just of their data, but of all of the work that needs to be done in order to make that customer whole. Intelligence that spawns across the apps, a cockpit for employees to see where all of their work is and where the bottlenecks might be as well as distributing capabilities. Leveraging APIs to fire work in different systems. Again, whether that work is in Pega or outside. And if you build this out one more time, Peter, we're going to focus a little bit and talk about some of the things that are coming in our ability, both with Interwoven Worklist and our ability to orchestrate that work. So if you move to the next slide, we can see a little bit of what this actually starts to work with the Interwoven Worklist. Now the Interwoven Worklist is going to be made available as an early adopter option in our 8.5 release, which is coming later. It's our -- going to be our next release. And it aggregates work both from Pega environments as well as environments outside of Pega. And it leverages this idea of get-next work, which is basically about using business rules and AI to figure out what the next most important piece of work a user needs to work on, even if that work is living in multiple systems. So it's actually using intelligence to dynamically prioritize and ensure that the most important tasks are getting done next. So if you move to the next slide, you can actually see this Interwoven Worklist with these pieces of work coming in from different systems. And the really powerful thing about this is that when a user clicks on a piece of work, right? When they select a piece of work off the Interwoven Worklist, if you build this forward, Peter. They are able to, directly from that screen, complete the task that has been assigned to them. They don't need to tab to another system. They don't need to go someplace else. They have that work right there. So from one place, from one Interwoven Worklist, the user can do everything they need to do to manage their day and that intelligence, that automatic prioritization ensures that they are always working on the next most important work that will have the best impact for the business. But in addition to empowering users, we're also providing insights that help management better understand how work is getting done. So if you move to the next slide, by pulling all this work together, we're able to push up these processed fabric insights to show where the bottlenecks are, what tasks are getting done in what systems, what needs to get pulled together in order to improve a process. So as organizations continue to expand their digital transformation efforts and continue to think about how they streamline how work gets done to automate it and orchestrate it across systems, we're serving up the data that the leadership of those organizations need to really understand how they're getting work done. We are very excited about Process Fabric. We think it represents a step change and a major move forward in how we think about orchestration and how we think about automation, not just today, but in the increasingly distributed digital world that is coming. Back to you, Peter.

Don, I just wanted to remind everyone that you can submit questions today, we are live here, and we'd love to get your questions. And Don, there actually is a question that came in about Process Fabric, and I'll read you the question now. Is it right to think of Process Fabric as a stop gap measure for companies that are ultimately looking for true end-to-end automation? If so, is the vision to use Process Fabric as a beachhead for driving BPM DPA engagements?

That's an interesting question. I don't necessarily think of Process Fabric as a stop gap measure. I think there are some stop gap measures out there. Robotic Process Automation or RPA is a great example of what I think is a stop gap measure. I think Process Fabric actually represents a long-term vision for what end-to-end automation will look like, and that end-to-end automation is not going to be a single monolithic BPM system that does it all. It's going to be a lightweight, API- and event-driven layer that pulls together work from the different systems that are out there, the multi-cloud that you talked about at Scotiabank or the distributed work environment that you talked about at Siemens. So I really think that not only is Process Fabric a great beachhead, and we see a lot of clients looking at it as a quick way to pull some work together from different systems. But it also -- when I talk to CTOs and architects and CIOs that are clients, they see it as a long-term vision of where their technology is headed in terms of maintaining the distributed systems and distributed clouds and microservices they want to build, but have that thread, that fabric that weaves it together into an end-to-end experience for their users and for their customers.

All right, Don, and I have one more question for you around Process Fabric. A little technical. I'm sure you're comfortable with that, Don. So is it fair to say that we extended Federated Case Management to now include all work from all systems containing work?

Yes, that's a very perceptive question. So just to educate folks, Federated Case Management is a capability that we've had for many years in the Pega platform and it allows multiple different Pega environments to operate seamlessly as one whole, to allow cases to be federated across different environments. And Process Fabric definitely builds on top of that Federated Case Management capability, and it brings a couple of new things to the table. One, as the questioner points out. It allows us to do it not just for Pega applications. But for work that lives outside of Pega, whether that's in SAP or Salesforce or another robot or some homegrown application that our clients may have. So that's the first distinction. The second distinction is, Process Fabric is built for the microservices architectures that our clients are building today. It starts with open APIs. It's built on an event-driven architecture, and it's built for the cloud. So it really takes that Federated Case Management capability that we have and opens it up to a much broader ecosystem and pushes it into the modern technology cloud space, which is where we are and our clients are going.

Excellent, Don. There aren't any more questions that have come in. So in a second, I'm going to pass this over to Ken Stillwell, our CFO, for the financial discussion. We do have some breaking news, since we're live here, which is our CEO and founder, Alan Trefler, is planning to join us for the Q&A session at the end today. So please go ahead, if you have questions for Alan, submit them, and I will ask them when we get to that point in the presentation. But at this point, we'll pass it over to Ken Stillwell for the financial discussion. And thank you, Don Schuerman, for joining us today. Great job.

Thanks, Don. So I'm going to -- for the next discussion, I'm going to talk a little bit about some of the common and hot topics that all of you are interested in around our -- the strategy that we set upon a handful of years ago and how we're progressing against that strategy. But first, I'd like to just reinforce one thing that Don talked about earlier. I've talked to many of you about Pega being somewhat of an orchestration layer, an application environment that can actually help to connect all of the different applications and systems across our clients and really allowing them to achieve that end-to-end vision. And what Don just talked about with Process Fabric is really the manifestation of that vision kind of in terms of the user interaction, the experience that the individuals that interact with Pega can actually see and manage that orchestration. So it was really exciting to kind of see that realization really in terms of the actual experience, the place where users interact. Let me just remind everyone around why we kind of charted this course a handful of years ago. The market opportunity in front of Pega is massive. With the transition to cloud well underway to a high-growth recurring model that can actually then leverage margin expansion as we scale because as all of us know, a predictable and a model that is visible in terms of the amount of cash flow that comes on an annual basis allows you to leverage many of your infrastructure expenses in a business to be able to expand that margin as we become larger and larger. So we're really just excited about this opportunity, and we are directionally a little past halfway through this transition. And I'd like to -- at times in this presentation, I'll kind of show a little bit of where we said we were going, where we were trying to get to a few years ago and how we're actually charting on that course to kind of show the consistency of our execution against our strategy. First off, the market we're in is massive. The CRM market alone is both the largest and the fastest-growing enterprise application category. If you add the CRM space to the other areas that Pega competes in, we have well in excess of $80 billion. Remember, this $80 billion isn't really even the total available market of the sectors of the categories that Pega competes in. That number is well in excess of $100 billion. But $80 billion is really just our estimate of focusing on the verticals and the target organizations that we are engaging with as we attempt to grow from what was a reasonable team kind of grower to something that is well in excess of 20% and that is our strategy. The transition is, as I mentioned, well underway. We're past halfway through this transition. We're moving from what was a perpetual business that was less predictable that really made you resell your revenue each year to sometimes the same clients, sometimes different clients, but it is a model that has more, as we've said, a Pega lumpiness in it, right, because it is difficult to have very consistent execution in a perpetual model. It's just challenging. And it's not the way that clients want to buy. Clients do not want to buy in a model that doesn't have predictability, where they have to write significant checks and estimate the amount of usage that they may or may not have early on in the evolution of their digital transformation needs. And we're moving from that to what is a highly recurring, much more predictable model that allows us to achieve our Rule of 40 strategy. Some of the transition metrics that I've talked about and if you've looked at any of our earnings scripts or you've heard our earnings calls or you've listened to me or Alan or Peter, anybody talk about the things that we believe are the most important, it is all around ACV. Our Annual Contract Value growth is the single most important measure of our success of continuing to penetrate the markets that we execute in. Pega Cloud bookings, as a percentage of our overall new business activity, is a very important measure because it validates Pega's offering where we manage Pega for our clients. And that is such an increasing demand that we see with the market. And remaining performance obligation, we also refer to as backlog is another measure that is very important because it helps to validate the ACV growth. It also shows the amount of future commitments that our clients have made with Pega that have not yet represented themselves in the financial reporting that we do, and they haven't come into revenue yet. And that's why it's important to look at ACV growth as a leading indicator, RPO as a validating indicator. And those will -- those 2 measures will lead us in to recurring billings, which will then lead to recurring cash flow and allow us to leverage margin expansion. If we go back to 2016, our Pega Cloud bookings were approximately 11% of our overall new business activity. In 2020, that has been about 50% and that was approximately what we saw in 2019 as well. Our 2022 target that we've put out a few years ago was to see that number be noticeably higher. But with the amount of momentum that we've seen with Pega Cloud, we think that could be as much as 3/4 of our new bookings that are Pega Cloud. I mean it's not -- it wouldn't be a stretch goal for us to believe that more and more clients that used to buy in a Client Cloud environment may choose Pega Cloud. But regardless, we are just super excited about this momentum around our SaaS offering and our ability to manage and support our clients in a 24/7 follow-the-sun model where the clients can release their obligation to manage that infrastructure, that application, to Pega. And that's really where -- where we strive to -- what we strive to achieve, excuse me, a few years ago, we're well on that strategy, and we're progressing, what I would believe, even faster than what we originally thought when we started this in 2017. The transition to cloud, as I mentioned, well underway, and you can see it in our ACV growth year-over-year. Pega Cloud ACV, is growing in excess of 50%. And that's not just 1 quarter or 1 year. It has been growing in excess of 50% for numerous years. And if you look at the scale of this business being over $200 million in ACV, to be growing at 50% is quite an impressive achievement. Another important metric that I mentioned is our Remaining Performance Obligation, our RPO. And our RPO growth is actually a little bit faster than our ACV growth because in RPO, you can see the impact of Pega Cloud. Pega Cloud is a very large contributor to our RPO. That is our SaaS business. That is where -- Pega Cloud is where we manage our clients' environments. But Client Cloud is extremely important as well because we believe that our clients have very diverse needs, and they need the flexibility, not just initially, but over time, to choose the right cloud for them. Increasingly, they are choosing Pega Cloud, and we go-to-market with Pega Cloud as our primary offering, but we do appreciate that it's not that simple for our clients. Our clients do have very, very important desires to be able to manage certain environments, and we're here for them and we will continue to support them in their endeavors. So this is a great chart, which really just shows the consistency. Remember how I mentioned that in a perpetual business, you risk lumpiness. You risk inconsistency because you may perform -- you may have difficult compares quarter-over-quarter. You may have difficult compares year-over-year. The level of investment buy that clients do is not systematic in a perpetual model. It's more episodic. And so you're trying to manage that business, and it really creates a more difficult kind of steady growth curve that actually really demonstrates the consistent growth that we have as a business. This chart is our ACV growth. Remember, our most important measure. I went back to the beginning of 2018 in this chart, but you could go back to '17 or '16, and you would see a very similar trajectory where our ACV growth is continuing to grow at what I think is a very respectable pace, above 20%. We're investing in the business, and we believe that, that number can be higher. And we have strived to achieve that 20% to just be the starting point, not the ending point, in terms of accelerating our growth. And the reason why we believe that's possible is because of the market that we're in, the investments that we're making, the solution that we have and it's relevancy to our customers, the amount of momentum for digital transformation. We believe there's a great opportunity for us to continue this growth curve and even accelerate it higher than what we've seen. This is our cloud revenue growth curve -- Pega Cloud, excuse me. Our Pega Cloud revenue growth curve. This shows the starting point of when we began the Pega Cloud transition. In the fourth quarter of 2017 was when we really pushed hard to go-to-market with Pega Cloud as our primary offering that we show clients. That doesn't mean that we don't support Cloud Choice, because we absolutely do, but we really went with Pega Cloud really at the front of our client discussions. And you can see what's happened in the last few years, really impressive. This is a lagging indicator, of course, because ACV is growing at the same pace, but typically 1 to 3 quarters ahead of the revenue trajectory. What do we -- what is important is what this allows us to achieve in terms of margin expansion. The growth in Pega Cloud revenues allows us to drive Pega Cloud gross margin improvement. And what you see in the first half of 2020 is a fairly noticeable improvement over 2019. Now 2019, we did have a significant investment that we made in 2019 around our FedRAMP, Pega Cloud FedRAMP certification, which was an investment -- it was a strategic investment as we continue to penetrate the U.S. public sector, and that was an investment year, as you might say. But look at the margin improvement in the first half of '20, and you can see that trajectory to get up to that above 70% Pega Cloud gross margin that we once talked about 4 years ago when our Pega Cloud gross margins were under 50%. Remember, this is a business where our Pega Cloud gross margins in 2014 or 2015 was 30% or 40% and now we're up at 60%. So I think it really just highlights what scale can give you in terms of that operating leverage. This is a very important metric. Just like I mentioned, ACV is a critical metric, cloud gross margin is a very critical metric as well. Because if we can't achieve cloud gross margins at scale, ultimately, that will reduce our ability for margin expansion. If we can achieve these gross margins, which we fully believe we can, then that actually is an enabler as we scale to our operating margin improvement. This is an illustrative model. Many of you that I've talked to over the last few years and actually even internally at Pega and some of our partners that we've talked about, their question comes, what does it look like when you go through a cloud transition? This is a representative model of another company that actually went through a cloud transition, went from perpetual to cloud. In the first 2 years after that cloud transition, you will see flat to even negative revenue growth. And even when you get to year 3, in a cloud transition, you tend not to really see the true growth rate yet. You really need to get to the second half of the cloud transition, when you start to see the revenue growth fully representative of what's happening in the business. So then you might say, well, if you plotted Pega, what would Pega look like on this? This is actually the Pega revenue growth through our first few years of the transition. Now we are in year 3 and if you took our first 6 months of 2020, and you were to plot this, you would see that our revenue growth is in excess of what the model might suggest for year 3, our revenue growth is approaching 20%. So you're starting to see us have not even as deep a trough in the revenue transition, but -- in the cloud transition, but actually catching up to normal revenue growth even earlier than what a representative example might be. We believe that it will take us 5 years to fully transition the business to a recurring model. But the go-to-market aspect of that is completed. We are selling, remember, in excess of 90% of our new business in a recurring model. There's not much further to go if that number were to ever to get to 100%. But the revenue lag that occurs, there is a disconnect there. It does take time for that revenue to play out. And I think most of you are -- we're not -- Pega's not the first, we're not the fifth, we're not the tenth company to go through a cloud transition. So there are plenty of examples to validate what I'm saying. This is just one example of a software peer that went through it. So what does this mean? What does all this mean? Like where are we trying to get to? What is our -- where is our financial model? How is our financial model exit this transit? In the short term, we had some complicated and awkward optics and metrics in the first few years. Those are even starting to get better already in 2020. But what I really committed everyone to was, you need to focus on total ACV growth as the leading indicator. It is the only measure that makes any sense for a company going through a transition. And that's the reason why I so heavily focus us on it. You also want to look at RPO, primarily Pega Cloud backlog as the confirming metric to demonstrate that everything we're talking about in ACV really is manifesting itself, has increased client commitments from our clients. And the longer term, what that means is that you'll have a more predictable revenue and cash flow streams. Now in a business that sells some amount of Client Cloud and with the new accounting standard, ASC 606, which I know most of you, if not all of you are very familiar with, there isn't an exact predictability on the revenue reporting for what companies might call term licenses or for what we would refer to as our Client Cloud, where we are selling a recurring subscription model and the clients are managing it themselves, but the cash flows are very consistent and very level. And so the billings and the cash flows are very consistent. And the revenue is definitely more predictable. It's not as predictable necessarily or as straight-lined as it would be in a SaaS model. But still, it is very helpful and meaningful to think about revenue being a lagging indicator to the ACV growth. That connection is linked. So the 2 measures that we think of for this Rule of 40 goal is ACV growth and our free cash flow margin. The simple way to think about free cash flow margin is cash flow from operations, less capital expenditures, that total cash flow divided by revenue could be thought of as our free cash flow margin. So we believe that we want to achieve a Rule of 40 with a combination of those 2. When I first talked about this, I guess it was probably 4 years ago or so, there was a range of outcomes that we talked about. You'll see that we're executing toward the higher ACV growth outcome. And we -- and naturally, if you're growing faster, you have to invest in the business. And so as you grow faster, there is pressure on operating margin or free cash flow because you're investing for that higher growth. And so I do think that, that's why the Rule of 40 is a good balancing measure because it helps to connect 2 things that kind of sometimes work against each other, right? If you're trying to grow faster, you have to invest in the business, you can't produce this much margin. If you're growing slower, you actually should produce, you should be investing in the business less for a company that's growing slower and therefore, produce higher free cash flow. So that's why we believe the Rule of 40 is a -- it's a simple but yet important metric to be able to keep us accountable to the outcomes that we want to drive for ourselves and for our investors. This is one of my favorite charts, actually. In 2012, we had a business that was about 60%, what I would call, nonrecurring revenue, which meant when we started the year, we only had visibility in terms of commitments from our clients to about 40% of the future year revenue. Maybe a little bit more, maybe 50%, in terms of some of our professional services commitments and backlog. But it was certainly a lot of selling that we had to do just to refill the revenue. What you see is the steady movement to a recurring model, really accelerated even in the 2018 to 2019, and that really is related to the big movement to Pega Cloud in 2018. And you'll see that our 2020 target, which, by the way, is the same target that we actually talked about 4 years ago, which is 75% or more of our business will be related to ACV. Our consulting revenue is actually already coming down to close to 20% of our total business, and we're reserving some small amount of our revenue for those clients that for whatever reason, budgeting, compliance, et cetera or even their business model may need to buy perpetual licenses. We don't believe that, that is -- there are many companies out there that really have that requirement because as evolution happens, as digital transformation rolls out, more and more companies are moving away from perpetual because they see the advantage in cloud. But this is a framework of how you might think about our business as we exit the transition. So this is a slide that I showed in 2017 Investor Day. So I always think it's important to show what you said you were going to do and compare it to what we've actually done. This is a slide from 2017. And we actually said that we were going to need to grow from about $500 million in ACV to $1.3 billion in ACV. So just think about that, $500 million to $1.3 billion over the course of -- this is about 5 years. Let's just kind of directionally say, it's about 5 years. And so you might say, well, where are you now? Well, if we continue to grow our ACV by approximately 20% for the neck for -- through 2020, '21 and '22, at the end of 2022, we will be where we said we were going to be. And I think that's an important calibration. Now remember what I said earlier, 20% is not the achievement that we believe we can experience. We think we can grow faster than that. But if we grew at the same pace that we're growing right now, 21%, and we continued that through the end of 2022, we'll hit the exact target almost exactly in terms of what we had modeled 2.5 years back. So I think it's important to keep that in perspective. We are tracking exactly to pace with what we hoped to achieve on ACV. So then let's look at revenue. What do we say about revenue? Well, this was our revenue history that you see on this chart. This is the slide, the same slide from 2017 in the Investor Day presentation, and we said we believe we should be hitting somewhere around $1.6 billion in 2022, and that would be when we exit the transition. The importance of why I use 2022 in this was because of when we exit the transition. So you might say, well, what do you have to achieve to be able to see that $1.6 billion? Well, you can see the flatness in our revenue in '18 and '19 as we really increased the amount of Pega Cloud in our bookings mix because originally, when I model this out, I didn't believe at that time, this is 2017 now, that we would see 50% Pega Cloud. That wasn't an assumption that was part of my model. But you'll see that if we just grow from where we are now by approximately 20% per year for the next 3 years, we'll be at $1.6 billion. So if you said, what did we say Pega was going to do 3 years ago, almost 4 years ago and where are you now? In terms of ACV and revenue, we're right on track to hit that $1.3 billion of ACV and $1.6 billion of revenue. Now to be honest with you, I think I'd be disappointed if we actually landed at this number based on the investments we're making in the business, I'm sure all of you would not be disappointed, but we are striving to achieve accelerated growth above that 20%. The investments in the business, the digital transformation momentum, really just the amount of relationship coverage that we've increased with our -- with the best organizations in the world that would do business with Pega, we're really excited about the opportunity in front of us. Talk a little bit about the increasing sales productivity and there's a bunch of questions, and I thought that it would be helpful to talk about a slide that connected some of the initiatives that we have. Sales effectiveness is critical. We've got to make sure that we're properly covering the most important organizations and that we're effective at selling to them. We've got to make sure that when we deliver that there's delivery excellence. When we deliver, our partners deliver, our clients deliver, that there is just pristine delivery excellence and that we're not -- that clients can get value from the solutions in an accelerated pace, not the long waterfall-type development that happened in the old perpetual model for software companies that took years to deploy solutions. That's not the world we live in and that's not the world that we're going to be successful in nor any of our competitors or any other companies in software. We want to increasingly engage our partners because we understand that they're important. They're important as validations, important as helpful partners and important to give credibility to actually even help us to align with our clients' needs and that we really want this robust go-to-market motion. We want to make sure that the ecosystem, the amount of people that are certified on Pega, the amount of engagement that we have with the environment, the amount of digital engagement, digital marketing that is leveraged, especially in a world where physical events have become nonexistent in 2020, it really just highlights the needs that we have to engage with our clients are not dissimilar to the needs of our clients and engaging with their customers. And as we do this, we want to continue to hire and develop diversity across the company. It's a very important initiative for us to really have our Pega team represent the clients and the environments that we're selling into in the markets that we're in. So I think this is just kind of a summary of how we're thinking about that sales productivity improvement or push. This is a slide from 2017. And this was the original kind of conceptual targets that we had put out there of, revenue growth of 15% to 17%, with operating margin being 23% to 15%. If you see the math, it'll add to 40%. Our cloud revenue growth growing at 35%. And our Pega Cloud margin to achieve 70% in 2022. This was what we thought in 2017. So there is a slight change. On this slide, this is actually what we're looking at now for 2022 and 2023. The revenue growth of 20% to 25%, that's nothing more than looking at what our ACV growth has been and projecting that out through 2022 to 2023. And with that kind of growth, we would expect more investments to be made in the underlying business. And so therefore, operating margin would be lower because our growth rate is higher. Remember the Rule of 40 and one of the important -- 2 important changes -- and our Pega Cloud revenue growth is growing faster. Now our Pega Cloud revenue growth is actually growing over 50%. We believe that number, even at scale, would stay in the 40% to 50% range, that's a noticeable change over the 25% we were seeing in 2017, by the way, at a much smaller size or the 35% target that we originally thought would -- might be achievable in -- back in 2017. So because Pega Cloud is actually a bigger part of our bookings and growing faster, that does create some delay between the revenue that is recognized and the investments that are made in selling that recurring cloud -- Pega Cloud revenue stream. And the cloud margin now, we actually believe that 75% is more of a best-in-class measure for someone at our scale. And I would -- many times, I'm asked the question, well, why can't you get to 80% gross margin for Pega Cloud? Why can't you get to 85%? What I would challenge everyone is to look at the size of our Pega Cloud revenue and find a company that sells in the enterprise space of a solution anywhere close to Pega that saw a 70% gross margin for their cloud in under $500 million or $1 billion business. We're going to be at 70% or greater at likely under a $500 million run rate. I'm not sure that I've seen a company that's actually achieved that. And so I do think our gross margin growth and expansion is actually pretty impressive given the scale of Pega Cloud and how fast we went from what will be $50 million up to in the next few years, hopefully, $500 million of a business. So I'm going to pull this all back together. What does this all mean? I think one thing you should take away from this is that we said what we were -- that the course that we were charting in 2017. We set it around ACV. We set it around revenue. We set it around our longer-term targets. And if you look at where we are on that journey, I think we've delivered on executing against that journey. And I believe that many of you, and we thank you for it, have been very supportive of the company as we went through that. There were some hard years there, right? There were some flat revenue, very confusing times, difficult reporting, everything the companies see when you go through that transition. But we really feel like we've went through the harder part of actually the reporting headwind of revenue. And so we feel like we've demonstrated that. We're trying to sustain higher growth. We believe the market is large enough and our solutions are best-in-class and digital transformation is at the forefront of every one of our clients. There's no reason why we can't grow faster. With this transition to recurring, it allows us to get leverage in the selling motion. And what that does is then allows us to balance growth and margin, more connected within a 6- to 12-month period, meaning you don't have to invest and hope that you may get the return over many years. You can invest and see that flywheel, so to speak, turn into increased growth in the business and margin expansion in the business, really using Rule of 40 as kind of a balancing measure to think about around how we manage the business. It's not mathematically that it always has to be 40, but it is more of a philosophy, an approach to how we balance growth and margin and that will lead to increased shareholder value for all of us and increased ability for Pega to penetrate and drive success with our clients because that's -- at the end of the day, that's what we want to see. We want to see more and more clients engaging with Pega and seeing the value that we believe we can drive the numerous of our clients. Peter talked about some of the examples early on. They're all through our website of all the different clients that we've helped over the years. And I just think that's the exciting realization of our strategy is our clients and their ability to see their success and stay with Pega and continue to expand their investment with Pega. So with that, I know that we have some questions out there, Peter. And I know we have -- can we just do a quick check and make sure we have Alan on?

I'm here, if you can hear me.

Yes, we can. Can you guys -- is the sound okay for Alan? Okay. Perfect. All right.

Okay.

So Peter, you want to throw some questions out there? And Alan, feel free to interject or if there's one, Peter, that you think is better for Alan, you could just tee it up to him?

Yes. I actually have a question here that's perfect for Alan, and the question is about Project FNX. Alan, can you give us an update on Project FNX? And for those who aren't familiar with what Project FNX is, maybe you could give them a little color on that initiative?

Sure. Several years ago, and we want to do a great deal of depth a year ago at PegaWorld when we had a special session for architects. We have begun a journey of being able to take our technology and move it to be light, agile, cloud-native, really move in the direction of the Process Fabric concept that Don was talking about. And this whole movement to what folks call microservices actually creates a huge opportunity for us because you need a brain in the middle to make the right decisions for your customers and you need the muscle of process automation to navigate and negotiate those different microservices. And we're seeing an incredible response from the customer base, both the architecture side of our customers who, frankly, traditionally didn't like us a lot. They tended to think we were vague and monolithic and like to do stuff themselves. We're getting very, very positive responses relative to these quite significant changes that we've made. But also from the business side, right up to the CEOs of large companies who realize that historically, they've made mistakes in putting business logic in the website and the mobile app that then ties them down. There's just too many places to make changes or realize that some of these big back-end transformation projects never come to fruition. So this idea of a Fabric, this idea of center-out that you hear Don talk about, which is really at the core of what FNX is and is about, is resonating. And every release, we've been able to incorporate major new ideas that improve our artificial intelligence, make the system way easy to use, way cheaper to implement and support. And I'm excited about the journey and where we're going to be as we enter next year.

All right. Excellent. I have another question for Alan. Alan, could you talk a little bit about areas that you view as very exciting? AI specifically as mentioned as a potential example, but we've got an investor who'd love to hear about that.

Certainly. So being able to make AI realizable, making it not just something that is a tag people put on things. But being able to tie the AI into actual business processes, I think, is hugely exciting. You mentioned, Peter, Commonwealth Bank of Australia. And they're certainly not one of our largest customers, but we love them because they're an example of somebody who really embraced Pega in an enormous way. And to have Matt Comyn, the CEO mention us literally at the top of every one of his conference calls and they've been very, very public about how, what they call their Customer Engagement Engine and how they use Pega to drive that, has really, well, frankly, changed the very footing of the bank. And to be able to report a 12% profit as they did last week, despite the ravages of COVID and attributing it to being able to use AI in a very practical way so it affects what the customer does, not just in the contact center or on the website or in the mobile app, but actually at the ATM. When the fires were burning in Australia, they got tremendous points and kudos because they reached out to their customers to make sure that their customers knew that they could withdraw money from the ATM even beyond what they would normally allowed to do and that they didn't have to worry about paying their credit card because 40,000 or 50,000 people were displaced from their homes. Having the power to do that, to be able to figure that out, make those engagements happen, respond in real time to the customer need of the problem is just an example of how we have lots of organizations applying AI concepts and process automation concepts broadly in their business. And we love them because they talk so openly about us. I've got other clients who don't want to tell the story at all because they see it as a competitive advantage. But in all cases, I'm just excited how the vision we have and the technology we have is, I believe, extremely well positioned for the next several years.

Excellent. And the next question is, with the introduction of Pega Process Fabric and other new things from Pega, do you expect that the average customer deal size is going to get larger and that they'll start to move more quickly in terms of cycles of deals?

Well, I think that Process Fabric has the chance to give us greater runway in existing customers. Suddenly, we can operate and interoperate with their existing technology more easily. And that, I think, will have a good potential to improve deal velocity. Relative to deal size, one of the things we've been trying to do as a company is to get the focus of our sellers away from the biggest deal possible. But really, how do you create incremental ACV? That's why when Ken talks about the transition, we -- January 1, 2018, which wasn't that long ago, we had like a drop-the-hammer change to our entire sales complex. In which we said, "Look, we're no longer going to focus on comping you on all of the big 5-year deal. What we really care about is the ACV." And it went off without a hitch. And actually, the sellers, I think, now feel much more aligned with the way the customers want to buy. So I think that where we're going, there will be an acceleration of deals. I don't think they're going to be tiny, but it wouldn't surprise me if some were smaller, but more repetitious and ultimately adding up to potentially a much larger number.

Excellent. The next question is for Ken on the Rule of 40. Ken, is there any reason that ACV growth and recurring revenue growth, excluding services and excluding perpetual license, should not be directionally similar over time? So a little bit of a modeling question there.

So yes. So let me -- the one caveat is that if because of some of the anomaly with ASC 606 and the accounting treatment for certain types of license arrangements not being completely straight line. But yes, the spirit of the question is, is ACV growth, a leading indicator for revenue growth over the intermediate term? Absolutely there is a connection there. And if you look over a 3-year period, which is typically the duration of a contract at Pega, somewhere around 3 years, then you should see that kind of the CAGR of both kind of converge to each other. You would -- another question that sometimes comes up is, well, how much of a lag is there between the two? There used to be a bigger lag when you were making a very big move to recurring away from a perpetual model. But now that we're past that, the connection should be much tighter as we go forward.

Okay. Excellent. There's been a lot of focus recently on digital transformation and potential digital acceleration with the onset of COVID. Have you seen demand for digital transformation accelerate with everyone now being remote?

Alan, do you want to take a stab at that?

Sure. Certainly, I think it was McKinsey that said, in the last 3 to 6 months, we've advanced 10 years in recognizing that what we used to think of as digital isn't going to cut it, and we are certainly seeing a great interest. What I'm excited about and have great interest in 2 ways. One, there are customers that have immediate practical problems that they want to solve and see Pega with our low-code capabilities and ability to get systems up super fast. They see Pega as a way to get some of those immediate systems done or where they hack something together just because they had to take applications from customers, to take something that was perhaps unreliable or just being held together with bailing wire and create something that is reliable and going to be able to help them for the next year or 3. So that's one dimension where we're seeing good continued demand, particularly around that second tier of systems where they kind of threw up a website, but they know they don't have the right processes and the right rules to operate that for the next year or 2, which they may have to. The second thing, which is even more exciting, though, is this whole conversation about moving your business to a center-out way of thinking, being able to think of stripping the business logic out of the individual channels and really understanding how to do things that are cross channel. But being able to do that incrementally. That is an enormously powerful way of thinking. And what I really like is that you're able to get business people to understand this. It's not just the technologists or the architects, the business people realize that they need to be a part of the way they describe how they want the business to run. And so this highly visual, what we call App Studio, which brings business working in collaboration with IT, is one that is really catching on, whether there's a short-term way to build things, but also as a long-term way for people to think of their business. And we implemented a program called Catalyst about 2 years ago, where we would take a number of folks who are really trained in what's called design thinking. And we pop them in to a customer for typically between 2 days and 2 weeks to be able to take an actual customer problem, work with business, work with IT and make something real in the course of those days to weeks. And it was really eye-opening for customers that they could think center-out, but they could also get things done fast in a way that was highly leveraged. The first 48 hours after the COVID closedown came, I was really worried about were we going to be able to do these sorts of catalyst sessions with our customers. Because historically, what would happen is they schedule 3 days or a week. They'd fly people from all over the business together, put them in a conference room and we would facilitate and lead a set of design-thinking sessions and then directly capture what the people were trying to accomplish into the technology. So it was immediately demonstrable and it was a very collaborative, very frankly, social way of going about brainstorming. I wasn't sure how that would translate to this world. It's actually gotten easier. The hardest part in the former settings was actually getting the customer to organize to fly their people in and to fly our people into a common location. Now we've made some changes to the format. We found some new tools to use to be able to do it, and we've shown we can do these Catalyst sessions with, frankly, less friction, because the customer and we don't have to end up in the same room to pull it off. So I think that the changes of COVID are having profound changes on what people expect from their systems and also how companies like us will deliver the technology and deliver the vision about how this can be achieved.

So I'll add one thing that -- Alan's talked about this. I get -- it might have even been 2 PegaWorlds to go, in terms of the concept of that consumers see channel list, right? They don't see actually -- they don't think like, oh, I'm going into this channel or I'm going into that channel and it's a different application. I'm going to a distributor. They just think I'm trying to get something accomplished, and I'm trying to get to my vendor. And I think that what COVID has done is interesting because it's thrown that kind of manifestation of the consumer right in front of us now because we're all living it, right? Because we actually expect that our banks will figure out how to make it better for us when we actually can't get through a branch, right? And I do think that, that's something that's made, that's brought this digital transformation just front and center, right? Which is, look, there's lots of ways a customer can come to you. And now there is less predictability on how that would be even than before. And so I do think our -- the -- and I think we talked about that a few years ago, I mean, many years ago, but it's like COVID is -- unfortunately, COVID has actually made that front and center for all of our customers.

All right. Next question. New President of Global Client Engagement, Hayden Stafford joined a couple of months ago, how has his ramp gone so far? And what are the areas that Hayden is focusing on in his first year?

I'll let Alan start and then I'll...

Yes. And then if you can jump in, Ken, with your observations. So when you're hiring somebody, particularly in these crazy times where we actually met and hired Hayden without ever having met him face-to-face. It makes one even worry a little bit more than typically about what one's going to get. And what we were looking at when we were looking at Hayden, was somebody who had a really, really strong sense of character. Who would be assertive and would be able to drive the sort of discipline in the organization, but wouldn't be one of those -- frankly, you see lots of go-to-market heads who are just kind of arrogant jerks, and wouldn't have the characteristics that would let him fit into Pega and really address the customer focus we have. But frankly, to be able to organize the go-to-market in a more structured and in a more concentrated way than I had been able to. So we gave him the selling, the marketing, the sales operations functions globally. And I think he has done a fabulous job from an onboarding point of view. The -- our HR team and our operations team put together a really good immersion plan. And as of July 1, he's really taken that over full-time from me, and I love what I'm seeing. And I think he's both going to implement quite material change in the mechanics of how we go-to-market, in terms of making sure that a level of, frankly, attention to detail and follow-up that I was not in a position to be able to do with my other responsibilities or perhaps even inclinations that he brings that, but brings that with a real sense of teamwork and character. So I'm thrilled with what I'm seeing, and I think he's been a masterful engager with the rest of the team.

Yes. So I mean I agree with everything Alan said. My perspective, I'll take a slightly different angle to this. When we were talking to Hayden early on, for me, it was interesting to see someone that had seen maybe a business at the scale that we're driving towards, right? Something that was growing at a faster pace that had actually seen a business that was a few times larger than Pega is right now in terms of the business that he was managing before he joined us. That was an important dimension that I think is very relevant actually in our space, right? In the place where we -- with the same types of organizations and the same -- so that was one very interesting congruency. The second was, Alan may have mentioned it, his level of engagement, his level of passion, accountability for actually executing and getting things done and really driving that culture of like just aggressiveness and winning and really be -- but yet, the last point, just being a good person to work with, someone that you want to work with, someone that's fun to work with, right? I mean the great thing about Pega, and actually companies of Pega's size that many companies lose this as they get larger, is it becomes bureaucratic, it becomes administrative. It's not as -- it can become not fun to work with your peers and really drive towards a common goal. And I really was excited about that aspect of Hayden as well, which is someone that we would all just enjoy working with and engaging with and someone that really wants to win, and we all want to win, right? So naturally, you want to be in that environment. So I just think that's really a great match for Pega's culture.

Okay. Excellent. The next question has to do with the government vertical. So the government vertical sounded like it had a lot of activity in the past couple of quarters with wins at the U.S. census in the United States and the IRS in the United States and also the win in the state of Bavaria in Germany. How are you seeing this vertical as an area of investment?

Well, I think we're seeing it as an area of good return. We have made investments, and there are special investments that you need to be able to be successful in the government vertical. For example, FedRAMP in the U.S., something called iRAMP -- IRAP in Australia. There's something called G-Cloud in England. Being able to compete in these markets typically does require some upfront cost. But we're seeing strong engagement. Not just from the U.S. where you mentioned enormous transformational wins like the IRS, which was publicly announced a couple of months ago. But also with a variety of European and U.K. and Australia and Singaporean entities. And I think this business is going to continue to be very strong for us. Because they really need digital transformation, and there's a lot of greenfield there. Ken, do you have anything to add?

Yes. I think it's interesting. So as Alan mentioned, it's -- we've already seen the returns, right? I mean it is -- percentage-wise, it's the fastest-growing vertical that we've seen over the last couple of years. And it's still not even to the scale of some of our other verticals. So I believe that there's a great opportunity there. The thing that I think about with the public sector or with government in general is the purpose, and I know I may be a little bit philosophic on this. The purpose of a government is to do what? It's to serve the constituents of that government. That is customer service in its core, right? And if you think about the amount of use cases and applications that are customer service-driven and the relevancy of Pega in the customer service arena, there's a lot of consistency there with that strategy. So I'm actually excited because I think it's a perfect place for Pega to win because a lot of the use cases are very similar to customer service use cases that are in commercial. And so -- and as Alan mentioned, the governments are in need of digital transformation, right? I mean they are not at the forefront of being advanced on that. And so there's a lot of opportunity for us to help them.

All right. This next question is a little long, but I actually think it's a really good question, so I'm going to go through it here. So can you talk about new and existing customer mix? And any trend you are seeing between the 2 since COVID? Is the initial consumption trend for new customers -- does it differ meaningfully from existing customers? And as a follow-up, is there any difference in the go-to-market approach for Pega Process Fabric to new versus existing customers? So a lot in that question.

So let me take the first one, Alan, and then I'll hand off to you. So the first thing is, typically, we would get about 2/3 of our new growth from existing clients. Now I know that's not a -- it's not a perfect definition of what is an existing client. But because clients can be subsidiaries or related. But just think about that directionally, about 2/3 of our growth comes from existing clients. So we definitely have more of a land-and-expand model, right, because there's a lot of up-selling, cross-selling to our existing logos, so to speak. So that's the first point I would make. In the last 6 months, the percentage of bookings coming from existing clients has been slightly higher than that, not 90%, but just a little bit on the higher end of still probably within one standard deviation, so to speak, but a little bit higher than the 67%. So I do think you skew sometimes in times like we're in or even the economic question that we maybe saw in Q2 in the market, you do tend to see a little bit more business go to existing vendors in that environment, but we haven't seen a material move. I would just say it's been a slight tick move. And then I'll hand it to you, Alan, in terms of our go-to-market and any differences there around Process Fabric.

Yes. I mean -- so when we talk about buyers, we talk about there being sort of 2 broad class of buyers. There are improvement buyers who have an immediate problem, and they're trying to solve. And that immediate problem might be related to how do they handle forbearance claims associated with COVID or that immediate problem might be some new regulation that's come out or they might see a business opportunity in this current environment and want to be able to link a couple of products together so they can be more effective at selling or retaining customers. So those are what we would call improvement buyers. We are thrilled, and we are really able to go in and do a very significant project for one of those improvement buyers and make it -- so that is a first step in a journey to becoming much more of a Process Fabric type backbone for that enterprise. But we also have buyers who say, I really love this vision, but we want to be able to do it kind of a piece at a time, so it pays for itself over time. I would say that we are seeing both of those, which is very reassuring to me because I had worried that many businesses would just become so shortsighted that they would not be thinking about what they needed to do. The ability to sell Process Fabric from a go-to-market point of view, therefore, I think, applies both to brand-new clients as a vision but also to existing customers. I will say that from a go-to-market point of view, we are advantaged in that. Historically, really small companies, were not our target base. And a lot of those companies, we know, have been extremely damaged by what's been going on. So being able to, I think, sell into existing firms, given how low our penetration is at even what we would consider our biggest customers. I think you're going to see that at least for the next 6 to 12 months, be a stronger place for us to get reliable and, in some cases, very significant business. You could argue that some of these big companies, where we've done a very small system to start, an improvement system, but then we become a real part of an enterprise fabric. We would often classify that as not being a new customer. But the whole usage and the whole approach to usage is new. So I think just given how big some of our large customers are and how many divisions they have, I just assure you that even in the organizations we're in, we don't have more than a handful of organizations where we're more than 20% penetrated. So there's a lot of opportunity in the places where we know the people and have had success.

All right. Next question. Has the shift to work from home and greater access to the C-suite created any different deal or competitive dynamics?

Well, I will tell you that it is awesome to be able to meet with folks from Germany and from Australia and from Texas on the same day. Having that sort of access has been terrific, and I've found it to be really, really easy to have meetings that historically might have taken 6 months or 9 months to arrange. So certainly, the dynamic of interaction and contact and easy digital follow-up has changed things very much for the better. And I'm hoping that post-COVID, we will continue to meet in person like we used to, but we'll be able to complement that with more digital check-ins, which I think will support the whole principle we have of customer engagement. Relative to the deal dynamics, I would say that this has made certain people more available. But in some cases, some of the stuff we really loved, which was to get into a room and to be able to talk and whiteboard, et cetera. There are tools, and we've learned how to do that, but I could honestly tell you that it's not the same. However, I think we've mastered these tools well. And you can see we're closing business in this environment and expect that to continue.

I use -- it's anecdotal, but it is real. In terms of engagement, and I may have mentioned this to some of you, I actually -- there was an investor conference where, in the same call, I had an investor, prospective investor from New York, London and Singapore, all in the same call, right? I mean like where could you have really pulled that off unless everyone flew to the conference in New York? So there is an accessibility, which we have to watch because we can't burn people out in terms of the amount of time that people will be online, like Alan mentioned being on with Germany at 8 in the morning and Australia, 9 at night, like that does -- that can't wear on people. But I do think it's an interesting opportunity for us to learn from that and to actually use that as part of our digital engagement. But I think from that standpoint, I missed -- look, I've told all of you, like I missed getting in front of people. I missed being at the conferences. I know Alan does. I know you do, Peter. But you have to think about how this can -- how much productivity we can get by being more balanced around our interactions going forward. And I do think executives at companies and the peers that I've talked to are definitely thinking about that, like how will I like leverage this when we're "back to normal", which will be different than the normal before.

All right. Excellent. [Operator Instructions] The next question is regarding the industry evolution. Could you provide some color on the industry, which, in some respects, seems to be evolving quite quickly?

When -- I'm a little confused by the question. So if the person who asked wants to ask a qualifying one, if I don't get it quite right. We have been going to market by industry by identifying capabilities on an industry basis that our technology is really good for. And in some cases, building out pieces of it to help people get started, things like care management and health care. The -- however, the core capabilities of Pega is this really powerful horizontal engine that brings together intelligence in the brain as we like to describe it, with process automation and wraps it in case management. So you've got an ironclad record of what you did for a customer, when you did it and why you did it and you can actually go talk to an auditor or a regulator 2 years later. That is a horizontal capability that empowers all of our industry products. So you'll see us, even though we are working in multiple industries, we tend to do things exclusively that play to that strength of process automation and play to the strength of making great decisions. So that's true whether we're driving retention at a large multiproduct, multichannel bank. That's true whether we're helping one of the largest health care payers or providers, create their credentialing of physicians, how they build their roster of doctors and physicians in the health care space. That's true at places like Ford, where we drive their global warranty system around the world. And it's also true at much smaller companies like that Bavarian government system that went in, in 5 days, where we can use the power of the design aspects of the technology to get stuff done fast. But let customers know that frankly, unlike a lot of our competitors that they're going to be able to take that system and grow it to whatever scale they require to really become enterprise engaged. And I think that being able to make it so you can get both a combination of speed and power and evolution is one of the -- I think it's a false compromise that many other companies push on their customer base to say, you kind of be one or the other. I think we've amply demonstrated that with the Pega approach, we can offer both. Ken, do you have anything to add on that?

Yes. I think I was going to take the other angle of that, and maybe I might hand this back to Alan on -- I don't know if the -- also the question may have been related to the digital transformation as an industry. But I'll just -- I'll take a little stab at that, and if you have any thoughts on that aspect, Alan, I think that's another angle on this. So what I have seen, and I've been in and around companies that have been considering digital evolution for a number of years. And I think the thing that is different around digital transformation right now is that it is being driven by the end consumer at a much faster pace than it ever has been. And I think companies like Amazon moving to virtual retail, those things certainly helped that momentum. But I think that people are getting more comfortable of working remotely, getting more comfortable of living remotely, of buying remotely, of interacting digitally, of interacting across geographical lines, meaning from countries. So I definitely think that the companies that are thinking about digital transformation, there's the aspect of the buyer, right, the actual end consumer and their digital transformation journey. And then there's a -- almost a parallel one, which is I've got all this old stuff that I actually need to modernize, and I need to get to -- I need to make this digitally relevant, not just for my consumer but to automate my own internal operations because I want to get efficiency from my own workforce. I want to get automation. I want to get robotics. I want to get things that are -- so I feel like those 2 things are converging right now around digital transformation, like I have not seen it before, right? And I think that, that is the one thing that is a noticeable change. It's not just lip service. This is real. Alan?

Yes. So I would agree, and I think that's the other way to have interpreted the word industry. The digital transformation industry is, frankly, full of more hype than ever before, but the demand and the need is more profound than ever. And this is a great position to be in. I kind of feel that we've spent our last 35 years getting ready for the upcoming battles and I'm enormously excited about what I believe you'll see coming from Pega. First, from the FNX technology, which is architecturally very exciting and also from this transition to cloud. And as companies transition to cloud, they need a Process Fabric more than ever. Because what a lot of folks are now realizing is just because you push everything on a whole bunch of different clouds or even a company who offers a "cloud" it's really sets it down to 20 different things, like some of our competitors. That when you push stuff there, you really need to weave that together into a coherent way to deal with customers and staff. And that center-out approach is, I think, more relevant today as a result of COVID than ever at a faster pace.

Okay. Excellent. How is Pega connecting its micro journey capabilities with its go-to-market motion in terms of sales enablement, quota, incentives, organization, lead gen and hiring?

So we've very consciously, and I think very well come up with integrated selling programs where for each industry, we've picked a couple of just brilliant examples, and you can go to our websites and you can see them. And put in place a program to both teach and certify that with the sales force, so that they have a set of things that are really coherent and hold together with an industry flavor to it. For example, when somebody goes to talk to a bank or a telco about doing what Commonwealth Bank of Australia did. Back when they did it, it was a much more theoretical conversation. Now we can walk in and say, "Hey, look, we've identified 260 pieces of data that can be relevant to very quickly driving outcomes and results. If you can give us half of that, with our adaptive learning, we can immediately begin putting a micro journey up that maybe will improve service on your website and in your mobile app and do it in a coherent and completely connected way. And then you can roll that into the contact center, you can roll it everywhere you got -- you go." So these integrated selling programs, which is the basis for how we are working to enable our sales force, I believe really puts the links, put the dots together in a far better way than we would have done several years ago. And I'm very excited that we've been growing at a pretty fast rate even before bringing on Hayden with the hope that he will help us grow at a faster rate. And in growing at that rate, obviously, we've had to get better at enabling the sales force. Because you would expect a brand-new seller would not be as effective as your average seller. And so a lot of the work that we've been doing around enablement, around organizational effectiveness, around being able to target the right customers, I think continues to improve, and I'm looking for it to improve even more as we enter 2021.

All right. The person who asked the earlier question that Alan suggested write a follow-up has written a follow-up. So I guess as a clarification follow-up, I was partly trying to get at competition versus discrete point solutions, such as RPA providers or low-code stand-alone providers versus more end-to-end process automation across an enterprise. Is Pega's peer set, competitive set changing as a result going up against broader players versus more point solution players?

Well, it's always -- what's changing in that, I think, is the point I would like to address, which is we've always had to deal with people who were the often incumbents, but larger, broader players, the question specifically mentions companies like Microsoft ServiceNow or Salesforce. Used to be Oracle and Siebel or everywhere and respected. We've always dealt there but also dealt with point players. I think a lot of this RPA code, low-code stuff, it's really interesting because we're seeing customers play with it. But if you do any math on some of these RPA players and you take their revenue and divide it by the number of customers they have, they're basically dealing with a lot of experimentation. And in terms of Pega, we've been able to turn those experiments, which we're willing to do as well into very large pervasive sales and then sales that move from one part of an organization to another, to another part of the organization. So we've always competed, I'd say, as both people who come in with a grand promise, we're going to make all your customers love you, which is proving to actually require our technology to be able to fulfill. And small players who are going to come in. Remember Lotus Notes years ago? There's a lot of customers who are creating little Lotus Notes systems. But ultimately, those aren't the ones that have the reliability or the ability to scale up. I think our positioning of being able to play at both ends of that spectrum, really quite uniquely serves us, particularly since we can do it in a business-engaged model-driven way. So I don't see huge shifts in the competitive positioning, and we like where we are.

I'll add one kind of maybe humorous analogy that someone said to me, maybe about 6 months to a year ago that I actually think is a good -- candles that you light in your home provide light and some level of heat. But the way that you heat your home or light your home is you don't light a bunch of candles and spread them around your house, right? I mean it's not really the most efficient way to solve an enterprise problem like -- and so although candles are sold and they are sometimes -- they're not something that would ever scale to be able to solve a different problem, which is something like I need to light my home, I need to have end-to-end automation. So it's not to throw candles out, it's more to just know the place for how they're used. And someone used that example to me and it just -- it was -- it really hit with the difference between a point solution that tries to argue for enterprise relevancy versus a point solution that actually is just a point solution, right? And so I think that's the way I think about some of the confusing messages that some of the competitors put in the marketplace.

All right. Next question, can you talk about your progress of partnering with the global system integrators? Are they investing in building out Pega practices?

So we are, I think, partnering extremely well with a number of the global integrators who have built and are building practices. We've recently hired a very senior woman to come work actually directly for Hayden and really double down and focus on our systems integration practices, and we have a whole set of plans about how we are going to even further cultivate and grow that as, frankly, both a vehicle for delivering systems but also a channel for delivering the vision of the Pega platform to customers that we can't expect to touch all directly. So I'll tell you that Hayden is very partner-friendly and that you have our -- ready -- or will see a Pega, a real increase in the focus and energy beyond what we've already done, which is, I think, frankly, been pretty good.

Also, we invested in a program called the Pega Ventures, Pega Service Ventures program, where we made some very selective partnership investments in some firms that showed a desire to grow their Pega practices. And actually even one of those was recently part of a transaction with TeleTech, a large partner of ours now. And so even some of the smaller kind of partnering that we did can actually be kind of a germination into some of the larger SIs that we may not actually have that same level of penetration.

And just to be clear on that, we just made a conscious decision. This wasn't like trying to make a lot of money. This basically said, look, we're going to find small companies that know Pega and offer them on favorable terms capital for them to build a material practice that then can be bought by a larger consultant or SI, who is more interested in buying a practice like that than necessarily spending years creating it themselves. And I think that's going to prove to be a very exciting program for us that we started several years ago. And we've seen these companies really be able to jump-start what the large systems integrator can do.

All right. Excellent. There are several questions here about sales and marketing capacity. So I'll try to summarize. Maybe, Ken, this would be a good one for you. I know this has been coming up quite a bit with investors, both on the phone and when we were out meeting with them face-to-face prior to COVID. Can you give us an update on how you're thinking about your sales and marketing capacity and hiring needs?

So let me start, and I'll hand over to Alan for his thoughts as well. So when we're growing at the pace that we are growing at and the pace that we strive to grow at, which is higher than the pace we're growing at right now, it requires incremental investment in sales and marketing. I want to make sure that, that's -- that sometimes that is a statement that you need to make because it may not be obvious to every investor. The business has to be able to have the fuel for the continued growth in the business. And that -- and at our scale, we are, in many times, outmatched against the number of people that our large competitors have in some of these organizations. And so we need to make sure that we have some adequate coverage of the battlegrounds of actually selling into the large enterprise. So that's the first point that I would make. The second one is there is a ramping lead time connection to those investments and how that actually materially impacts ACV. You started to see our ACV -- kind of if you consider the normalization for the perpetual move, our ACV is growing faster in the last 24 months than it was in the previous 24 months. So certainly, some of that is being driven by the increased capacity and investment that we're making in selling and marketing. That doesn't mean that we are satisfied or done with the sales productivity move that we want to make. So certainly, we have work to do, and we will continue to drive, as Alan mentioned earlier, under Hayden's leadership, that execution of sales efficiency as well as continuing to scale to a higher growth target. So that's kind of the way I think about it. Alan, any thoughts you want to add about selling and marketing investment pace?

Yes. I think -- look, we've demonstrated that we can onboard selling resources and grow ACV. And so I think that Pega now is a place that's seen, frankly, by top sellers, as a pretty good place to work. And we have an opportunity to, I think, hire some terrific people, and we have been hiring terrific people and be able to put them to work and continue to grow the business. So over time, of course, we expect improved leverage in those sorts of places. But this is a great time for us to be cherry-picking some of the great talent that's out there.

All right. And here's a little modeling question, Ken, as a follow-up to your part of the presentation. The question is, apologies if I missed this but your target is 75% for recurring, it used to be 70%. And for professional services it's now 20%, used to be 25%. Can you talk a little bit about this change and add a little color as to why you have adjusted those?

Sure. So the first thing is our Pega Cloud has been growing faster than what we -- what I had originally modeled back in 2017. So that certainly helps for that recurring base to be higher. The second point is, we've just had so much more focus on enabling partners and making sure that our partners continue to be a really important part of our ecosystem. And with that, it has given us the ability to actually leverage a higher ACV growth and Pega Cloud but not feeling that obligation to do all of the work ourselves, right? And that's a really important inflection point that software companies get to, which is when you can actually acknowledge that your ecosystem can handle the volume and that you don't need to personally have to grow your internal resources to support all client needs. That's a really important aspect of leverage as you scale. So I think both of those things are happening consistently. We still will do professional services with our clients because many times, our clients want us to be involved, and we need to be involved in some of our earlier solutions in maturity life cycle. But I think the fact that we can accelerate ACV through Pega Cloud and allow our partners to be able to be part of that in a bigger way is a win-win for everybody.

Yes. And I would say that what you're seeing is really quite strategic. The other part that's an element here is our very significant work to simplify implementations so that they don't require huge amounts of professional services. I find it sometimes ironic to look at other firms who are -- claim that their stuff is easy and simple, but have increasing or very large percentages of professional services as a part of it. I think it's great that our simplification efforts of our product have made it so that customers can do a lot more of this themselves, especially if we take the technical burden off of them by supporting their implementations with Pega Cloud and give them an easier and easier design environment for them to put their decisions, their workflows, their processes, their cases in a way that they can build for check as opposed to making it so they have to ask somebody else. So I think it's the partner ecosystem. I think it's simplification. And from my point of view, it's all good.

All right. Another modeling question, Ken. So what is -- what happens with ACV if a customer migrates from Client Cloud to Pega Cloud? Can you give a little bit of visibility into that dynamic?

Sure. So we haven't had, as you can tell, with our Client Cloud growth, that our strategy has been primarily focused on selling Pega Cloud to new -- for new opportunities, but we are also encouraging our clients to be able to move to Pega Cloud as that opportunity presents itself. But when that happens, you would actually have a certain ACV stream that could be converted, whether that be term or maintenance, would be converted from Client Cloud to Pega Cloud with some increased uplift over that. There will be some because we are managing that. We're managing the infrastructure. We're managing the environments. We're managing the upgrades, 24/7 support. There's a whole offering surrounding that. So you would have an uptick in ACV. The amount of the uptick or the uplift really depends on the contractual relationship that we have with the clients before and the contractual relationship with the clients after. They may buy new capabilities. They may move only parts of their -- it depends on the need. So I can't throw a multiplier on it, but I would say that there is an uplift for sure. Alan, any thoughts on that one?

Yes. I think that some companies they have very, very conscious programs to move existing clients to their "cloud", and we're willing to do that. We actually have said we do not want a conscious program to do that in 2020 because we'd much rather get not an existing system moved, we'd much rather get for a new or existing client, a new system put on that truly represents pure business. So we're at -- there will be some that move. The fact that we can do this and don't have to kind of raid the existing Client Cloud or perpetual base, I think, shows the strength of our offering at this time. We will eventually go after that base, but I'd like to do it in an organized fashion over several years as opposed to use it to just kind of push the numbers around.

I want to add one additional thought on this because Alan touched on a really important point about other companies' transitions to the cloud. It's different for Pega. There's a couple of dimensions that are different. One, we're growing. A lot of companies that do a cloud transition are not growing. They're trying to take their installed base, and they're trying to force an uplift to another environment as a way to maybe get incremental ACV or incremental revenue or incremental margin from their clients. I'm not disputing that strategy for each company, but that's not our strategy. Our strategy was to sell Pega Cloud for new -- to be able to help growth, and we're growing. The second aspect of that is that a lot of companies do something that we are not doing, which is they stop all product innovation for the noncloud version, and they force clients to move. They basically say, this is all you can get. If you want any of the new features, you must buy cloud. That is not consistent with our cloud choice approach. That's not consistent with what our cloud needs are -- client needs are, excuse me. So I think that that's a -- those 2 dimensions that some companies do and that's their right to do that, that -- neither of those have been part of our strategy. And that's the reason why Alan said what he said a second ago.

All right. Excellent. At this point, we don't have any additional questions. Thank you all for submitting the questions today. They were fantastic. And at this point, maybe Alan, you could offer a few comments before we wrap. And then, Ken, maybe you could close out.

Sure.

So we're obviously all in a pretty amazing time. The way I've had it described to me is that we're all in the same storm, but both as companies and individuals, we're in very different boats. I think that our staff has really stepped up to make sure we could deliver for our clients at this extremely difficult time. People are wrestling with lots of personal pressures from kids being at home, all the lack of certainty that exists. And I'll just tell you that this team has made me very proud in terms of how they've been able to both hold it together and continue to really advance the agenda as individuals and as people. As a company, I think this is reflected in what we've been able to accomplish in these difficult times, and how we've been able to continue and actually increase client engagement and continue our innovation, which I will tell you is going at a terrific pace. So I'm just very thankful that we're in the cadre of companies that will come through this and actually apply the learnings that we all are learning here. But be able to do it in a way that will help us leverage this business, both in terms of being sustainable in terms of being financially successful and in terms of doing the right things for and with our clients. So it really is a very privileged and humbling sort of moment for us, and it's not one that we take for granted. Ken?

So I would -- I mean I -- well said. I won't hit that point, but I will hit one point, which is Pega has offered our strategy to the market over the last few years. And I think we've largely executed in line with what we hoped we would be able to do over the last couple of years. And now what's in front of us, is the ability to further accelerate our growth, to further increase value for our customers, our employees, our investors. And that's an exciting part of this transition that we're going through. And I think that -- I think the market is ripe there for us to take advantage of that. And the thing that I would last close with, I would say, I appreciate everyone's support and patience and interactions and virtual -- this event, and I know it's been well attended. And I think that if we just continue to forge through this, we'll be better for it. And as Alan mentioned, we're all in it together. And when we get to the other side of this, we'll learn a lot from what we've had to endure. And -- but we will -- and there's no doubt in my mind we will all learn something and be better for it. And hopefully, have another tool in the toolbox, so to speak, in terms of how to deal with adversity. So thank you, everyone, for your time and attention and support. We look forward to seeing you in -- on the virtual road here in the coming quarters.

And hopefully, in person at some point. Thank you, everyone.

Thanks, everyone.

Thank you.