Pegasystems Inc. (PEGA) Earnings Call Transcript & Summary

Hello, everyone. My name is Peter Welburn, I'm Vice President of Investor Relations for Pega, and I'm excited to introduce you today to our 2021 Investor Briefing. Very excited to be with you. I'm excited for 2 reasons. This is the first time we've actually been here altogether at Pega headquarters in a long time, haven't seen Alan face-to-face for over a year, just met him yesterday. So it's great for us to all be together today. In addition to that, I'm really excited about the agenda that we have today. So could you move forward to the agenda, Katie? Over the last several months, we've actually been working closely with several of our investors to talk to you about what you'd be really interested in hearing about today. So we really crafted the agenda to hit the topics you're really interested in. So certainly, everyone said they wanted to hear from Alan today, so Alan's going to be kicking us off. You wanted to hear about our low-code platform, what that was all about. So Stephanie is going to be talking about low-code and showing you the product live, which is very exciting. In addition to that, we have Hayden Stafford is here. Hayden was definitely the #1 requested executive that investors wanted to hear from. This will be Hayden's second time talking to investors for us. We're really excited about that. And then doing the cleanup for us today is the left hander for Pittsburgh, Ken Stillwell. He's going to be covering the financial update for us. Very excited to hear from him. And we'll wrap up today with a Q&A session. So Katie, let's go to the Q&A. [Operator Instructions] Alan can take a few questions. He'll be with us for about 15 minutes today. And then Hayden and Ken will take questions at the end of the session. So please feel free to submit questions during the session today. And we're very excited to have Alan come on up. So Katie, let's advance forward to Alan's side. Thank you.

Thank you, Peter, and I will say how exciting it is to see people in three dimensions. I'm so used to these little Chiclets and that's not good taking all that other sensibility and be fully vaccinated to be in a position where we could contemplate, at least domestically, return to normalcy. So I want to just spend a moment with you and talk a little bit about what some of the takeaways were from PegaWorld, which is really exciting about a month ago and talked a lot about our Infinity 8.6 platform that we were releasing. And Pega has such a long, I think, history and profound understanding of what really low-coded, no-coded model work is about, that we see that frankly, things that we've come to understand deeply, and we think are ultimately really important for organizations as they scale up, are ones where we have a profound advantage. And I will try to give you a sense of that. Because I think that's really key. The key is to not think of this as just kind of the next generation of Lotus Notes or Visual Basic or other kind of slap together at bits. But really thinking about how no-code and low-code and a real architecture can help an enterprise relatively fast, empower their business users and at the same time, create the right sort of standards that particularly in these security-conscious times are so absolutely critical and frankly, being ignored by a lot of the products, a lot of the capabilities to that. So we'll give you a flavor to that. I think one of the things that we really try to build on is how do we use this deep heritage to our advantage. Not to say that we're doing things like we would have done them 2 decades ago, but to say that we've learned from those experiences and that we can share with our customers and our partners, and our prospects how we can do this better, more pervasively and more powerfully. Our second major theme from PegaWorld has newer partners. And we really are envisioning a very, very partner-friendly, partner-centered partner leverage set of models to go-to-market. That's not just about this year. That's about how we are building out our products, building out our ecosystem, building out our support systems to be able to get partners to both support our customers as they implement. But also as we go forward, to really think about them being able to capture assets in a Pega architecture in a way that we frankly had not originally contemplated when we started, but now understand deeply what we need to do over the coming years. And it's always terrific, and I always get great excitement. I have seen our customers stand up and volunteer to talk about what they're doing. We often are not allowed to talk about what they're to do doing because so many of our customers frankly use our technology to compete against each other. But when you get companies like Wells Fargo or Pfizer, willing to talk about how they are changing the way they go to market, how are they changing the way that they contemplate internal to external processes, that's hugely exciting. And I was also really pleased to hear from StepChange, which is an example of how organizations were able to use Pega during the pandemic. In this case, to really provide forbearance to hundreds of thousands of people in the U.K. who are being crushed by how do they respond to the lending and legal and other requirements, how they make sense of it and really being able to do very pragmatic things to help and get them done right at the top. So those sort of customer stories, if you haven't seen them, they're all available at pegaworld.com, and I strongly recommend that you go and listen. Everything is short. We made a decision, we're going to keep things crisp, keep things to just a couple of minutes. I also firmly believe that anything on pega.com should have a speed-up button. So there, for some reason, we're not going quite as fast as you want. We got to bump it up 25% or 50%. I would tell you that the feedback I get is that time spent on these sites is very valuable, both from a prospect point of view, but also from an investor point of view to really understand key points of differentiation. And with that, I think we've got a terrific couple of hours planned. I've got some customer matters. I will be going after attending to. I know all the investors are always very happy when I'm doing that. But in the meantime, I'm happy to take a question or 2, if any have popped in, in this.

Yes. Alan, we've got a few. So the first one is, can you give us an update on Project fnx and Process Fabric?

Certainly. So Process Fabric, which we did talk about at PegaWorld is, I think is really central to this idea that you don't want to have one sort of monolithic approach to process, you really need to have a fabric where different applications, different needs, different customer segments can operate with a level of independence, but also in interdependence, so that you can see all the work you're doing for a customer that an individual can get the most important things delivered to them at just the right time. And that is the Process Fabric vision, which we introduced a year ago at PegaWorld. And we're really excited. We've got our early adopter customers now showing really the potential and power of the Process Fabric vision. Now Project fnx, which we actually announced about over 3 years ago, is the way that we have been using our model-driven low-code architecture majorly changing key elements of our technology, but bringing our customers along on that journey, making it possible for us to move to a true micro services-oriented, absolute state-of-the-art environment without having customers go through, "Oh my God, I've got all this technical data, I got to go change everything that I do." Clients of ours who operate in our guardrails who use our product in the way that we intend are very, very much insulated from, well, a technical change. And that's a critical element of having a highly sophisticated low-code, no-code system.

With all the changes to go-to-market, Alan, what are you spending your time on now?

Well, it's interesting. This has really been pretty cool for me. I spent my time on 2 major things. One, I love engaging one-on-one with our clients, and I've been able to actually dial that up and spend more time on one-on-one and maybe a little less time on some of the administration. I hate to talk about how we're doing a really good job with that. And the other is I continue to be and have actually deepened my involvement with what the next generations of our technology should look like. With the intersection of the brain and the muscle, the AI and the process need to look like as we think about not just the current and immediate generations of no-code, low-code, but as we think about where this will go, which we think is a lot of excitement for us.

Okay. Excellent. The next question is about the citizen developer. So we're hearing a lot about the citizen developer in the low-code and automation markets. Do you think that there will be time when platforms become accessible enough for knowledge workers to deliver on the citizen developer promise? And do you think the citizen developer model needs to work in order for you to sustain your revenue growth?

I think that citizen developers are already -- we already have people we call business architects, who are central to the way that our systems are evolved and developed. But I think this is an example where there is a major mental mistake. A lot of the people who play in the market, who mistake the idea of citizen developer with folks who just like do stuff in Excel. The reality is, we're here to help businesses create omnichannel intent processes fast, effectively and in the ways that the citizen developers can not just influence but kind of can tune, adjust and perfect. That requires an architecture, a dimensional architecture. And a lot of these RPA toys and a lot of these sort of point -- I got to call them little subpoint solutions just don't have a prayer of being able to deliver. So I think what you're going to see is a bifurcation between the false promises of citizen developers, the ones who actually can't deliver what they're signing up for, and what customers like our customers are able to achieve, which is to really bring citizen developers in. And I think that's increasingly important because businesses need to be able to own their outcomes, but they need to own it in a way that has maturity and security [ and civility ].

Next question is on RPA. So can you give us a refresher on your view on the overall RPA market and where Pega plays in the RPA market?

So Pega's acquired and has beautifully integrated our robotic process automation, RPA, set of capabilities. But our philosophy is quite different than that from the folks who say they're going to drop robots off every desktop and somehow that's going to make the organization to operate correctly. We think that's pretty lucrative, to tell you the truth. You need to think of robots as being participants in processes, but not themselves the driver of the process. That belongs to the system that has a grade, that belongs in a system that has a level of maturity and an audit trail and has the right controls. And I think you're going to see increasing shaking out in that market in the next couple of years. But clearly, that stuff there will continue, which is little toy stuff, which is okay. And the more fulsome uses, which is where it really becomes part of an end-to-end solution.

And we have one more question for you, Alan, which is on the topic that you said you're spending most -- a lot of your time on with just customers. So how have your customer conversations changed as a result of a pandemic?

Well, it's pretty remarkable. In the last 48 hours, I've been in Singapore and Southeast Asia as well as being in Germany, Amsterdam and half a dozen U.S. states. So there has been a real, I think, set of positive developments out of the pandemic around accessibility and visibility. And I think a lot of that will not go away. We will go back to the in-person mediates. We will go back to working to organize our schedule, so we can be in a physical room. But boy, it's been nice to be able to do things quite as spontaneously as we've been able to do a lot of these. I'm going to turn it back to you, Peter. Thank you very much. Thank you to our investors. Just know we're working really hard on your behalf.

Thanks, Alan. Okay, let's move forward. So our next speaker today is going to be Stephanie Louis. Stephanie, you may recognize from past PegaWorlds, she's often on the main stage with Kerim. So when we heard you are interested in hearing an update on the low-code, we thought Stephanie was the perfect person to do that. So Stephanie, come on up.

Thank you, Peter. Hello, everyone. I wish I could see your beautiful faces, but I'm very happy to be here. As Peter mentioned, well, first of all, I'm a Senior Director in the product organization, and I have been in software industry for 20 years, and 10 of those, I've spent at Pega. So I'm very much a Pega fan. And as he mentioned, I've been on PegaWorld stage since 2014. I've spoken at and posted multiple CES events all the way from Australia to my own living room these past few years. So I'm really looking forward to getting back in person. But why I'm here today is to talk about our low-code solution. And I say solution very intentionally because we take innovative technology, and we couple that with both methodology and a prescriptive approach, which results in a truly differentiated solution unlike anything else in the market. So first -- oops, don't answer them. Sorry, Katie. So who is Pega? Well, we are the leader in digital transformation. What does that mean? Well, let's actually go from right to left, intelligent automation. So what we've done is we coupled the intelligence of robotic process automation and business process automation with our low-code platform, so that our clients can automate all of their business processes and achieve their business outcomes. But what's an automated business process without a great customer experience? And that's where the customer engagement solutions come in and really work together with that platform. Our customer engagement solutions allow our clients to deliver the best experience at the right time in the right place for their customers in a personalized way. Extremely powerful. But what we're going to concentrate on today is the low-code capabilities of our platform. So why does it low-code matter? So Gartner has done quite a bit of research in this area. And what we're really finding is that backlog of digital transformation projects are extremely large, and IT just can't keep up. So a great way to solve for that problem is what Alan was just talking about, citizen development also can be called low-code application solving. What this does is it puts the power of building applications in the business' hands. So they can take their business' subject matter expertise and put it directly into the application. It reduces friction between business and IT. It increases the speed to market. It increases the number of applications built. And really, as Alan mentioned, putting the ownership of those outcomes in the business. So why do I say low-code is finally here? Because Pega has been model-driven since our inception in the '80s. We have taken our model and always put it on top of the code of the day. It started way back in the day, and we've continued to evolve with the technology, always taking that model including that in the developer's hands, so they need to worry about technology changing underneath them. They don't need to go and learn the next Java or the next React or whatever happens to be. And they can't even change underneath them and they don't even know. So that really increases the number of people that can develop the applications. Again, they're just thinking about the business problem that they're trying to solve, not necessarily about the technology that's evolving or changing underneath them. And as Alan mentioned, Project fnx is just the next generation of this, taking advantage of the latest technology and extending it even further to embrace more, which is extremely, extremely exciting. So another thing that Alan mentioned and a huge differentiator of ours is our ability to scale. A lot of vendors in this space play on that lower left. They create simple applications like requesting a laptop, request time-off. These aren't transformational and aren't going to change their business. They become siloed, departmental apps that are governed, aren't maintained and don't really have that big of an impact. This is where our extremely powerful low-code capabilities take it to the next level, so that our customers can develop mission-critical and transformational applications. For example, Deutsche Bank started their dream. They automated one of their processes and sought 50% reduction in manual labor or manual time. So they decided to automate thousands of business processes. That was so mission-critical for them. Then we have Siemens who automated 80% of their common business processes, which resulted in a 65% reduction in the onboarding time for their customers. Now that really transformed their business, and they did it utilizing our low-code capabilities. Now you can see in the sub bullets, and this is also mentioned by Alan, he kind of stole my thunder, which he always does, is the co-development between business and IT, with the governance and the process and the approach. And we don't just talk about it. We've built it into everything that we do. And the approach starts with what we like to call the center-out business architecture. And as I mentioned at the beginning, it's not just about the capabilities, but it's using them in the right way where you're putting the customer first, thinking about that customer experience. And that's what we call center up. You start with the customer and what objective are they trying to achieve in that moment. And then the outcome that they're trying to get to, which really results not only in that customer experience, but really breathtaking agility for the applications to change as customer needs change. And again, as I said, we don't just talk about it, we built it into the product and what we call the Pega Express methodology is just that. What this does is this is a guided experience for the low-code app to offer, right? As we know, they're the business needs, but yes, they're in the tool and they're creating, which is awesome. Let's help them. Let's give them those best practices and guide them. Not only does this increase the speed in which development can be done, but it really ensures maintainability, scalability and governance so that all of the applications are utilizing these best practices. And so how it starts is first, as I mentioned, you define that outcome. What is the customer trying to achieve in that moment, we call this a micro journey or a case, which you'll see when we do the demo. And then you define who are all of the different types of personas, those customers that are going to be interacting with you and where are they going to be interacting with you. Those are the personas and channels and then the data interfaces -- data and interfaces. What data do they need to have access to? What interfaces do you need to hook up to, and all of this is through the data they experience built into the product. And with that, I'm sure you're all here. I am here to show you the product. So let's go ahead and dive right into the demo. And I'm going to take over the screen share to do that. Let me see. Okay. All right. Can everybody see that? Good to go? All right. Awesome. All right. Let's set the stage. So a lot of demos that you see are really fancy, and they show you the final screens and they're all pretty. I'm not going to do that. I'm actually going to start from scratch. So if you don't have anything defined and you're going in for the first time saying, "Hey, I know my customers want to do a balance transfer." So where do you start? I'm going to show you how easy it is. So this is what we call App Studio, which is our low-code environment that low-code developers were given to build their applications. So we are going to create a balance transfer. So again, as I mentioned, pretty blank, but this is how easy and that's the point. All right. So let's do the balance transfer. So when I dove in, the first thing that I saw was a create screen. So obviously, when you start a balance transfer, you want to create. So some of these things, as I mentioned, we provide very much a guided experience for these developers so they can focus on the problem that they are trying to solve. So create. That's the first thing that has to be done in the balance transfer. This is how easy it is to define the steps in which the customer needs to go through to create that balance transfer. These are the forms, these are the steps, you get the nice icons. You can easily see what you're creating as you go. Then obviously, once you've created it, it needs to be routed to someone in the back office for Google. Here, what I want to point out is this, these templates. And I'll run them in a second, you can see what I mean. But having these templates baked into what you get out of the box with the ability to extend ensures, again, that repeatability, the maintainability so that everything is created in the same way. So that template changes behind the scenes. It changes everywhere that it's used. That really provides that governance and central ownership and really agility -- ability to build retention. So for example, here, I'm going to choose approve/reject. Did you notice what happened on the bottom right there? The rejection was automatically created. Because obviously, if you have the option to approve, you need the option to reject. So we have built in the things that have to happen and the best practices so that a low-code developer can focus on those business problems and just fill out that template as they go along. Okay. Very easy to rename. So we can call this whatever we want, but we're still utilizing that template. Next, I want to go to the fulfillment stage to show you what we call smart shapes. And that's just a smart way of saying, the integrated intelligence that we have taken to the next level so they can create those mission-critical and transformational applications. This is where you could hook in that robotic process automation because it's not just about that robot off doing his own thing. You want to make sure that, that's integrated into the end-to-end outcome that the customer trying to achieve. So for example, I'm going to show in this case is send an e-mail, smart shape or integrated automation. And if you didn't have this smart shape as a low-code developer, you have to think about all of these words that you don't even know about, like your SMTP server that has to send it, you add address, you bounce back. You're going to have to think through all those details. But not in this case because all you need to do is put into that of AI, that's basically the automation that's baked in and fill in the parameters such as e-mail address, name, subject, compose and that's it. When this case runs, it will just work extremely, extremely powerful. Okay. So now that we have it defined, there's other things that you can do. But what I'm going to do is jump ahead because I have a little bit at time, and I don't -- Hayden and Ken have lots to say today. So I'm going to use that same App Studio in a very graphical interface like I just showed you to find the fields. So it's critical for all of those different forms that you understand the fields that you need to connect. I'm also going to define those personas and channels that we talked about with the Express methodology and then define the data and interfaces here, being able to hook up to that single source of truth for like a company and is so critical, and that's available right in our low-code platform. Okay, ready to go -- ready to roll. So what I'm going to do next is show you how real-time are our applications. So once you have that definition done is right. When I hit save and run, what's going to happen behind the scenes is Pega's going to generate the technology, the code for this to run based on that model that was justified and will be immediately available. So let's watch this magic. See them run, here we go. And then I brought into the interface, the out-of-the-box interface that I've created, we call this a portal though basically, it's a web page that you can use to create it. So the first thing that you're going to see is the ability to create the new balance transfer. And do you recognize, create, select offer, identify transfers, review transfers? Hope so. That's what we just defined 2 minutes ago, if I talk a lot. Here are the fields that I did create, even though I didn't show it. And the first thing being the account number. The next step is to process the first thing being account number. And what's critical here, as I mentioned, with the data integration is once I choose that account number because we're pulling from that source of truth, I'm pulling back all of that account information. So as soon as I select that account, I see the information associated with it. And you'll see that as we go along from these other fields is some of them are going to be filling the next one with the offer. The offer has some metadata associated with it, that's pulled into the platform. So again, it is taking advantage of the architecture behind the low-code platform, but delivering it in a low-code way that makes it easy to use for these citizen developers. Okay. And I mentioned some of these things, they're going to fill in. So these are all different field types. Just extremely easy to create. This is a simple process, but I really wanted to show you how easy it is to build from scratch. Now that, that's created, I think you get the idea of how you create an application for this. And then did you see the routing happen? It was really quick. But given I'm an admin, it gets routed to me. But this is the approval step. So that routing automatically happened because we set it to another stage. So that's the business processes that I mentioned with that. Okay. All right. So now I'm going to transition a little bit into what I call vignettes. So this is going to be a different use case, so don't focus on the fields and the balance transfers and the different uses cases. But I just wanted to show you some of the other functionality of the low-code platform. And the first thing I want to show you is the ability to change the layout or the looking field. All right. So you do the fields, you do the outline, but you don't really like how they look on the screen. Cool. You can change that. So I'm going to identify this section that I want to change. I want to change how these are laid out on the screen. So the first thing I'm going to point out is templates. Templates, templates, templates. But they are so important for that maintainability, the governance, again, one changes behind the scenes. All applications using that are changed. That really increases the agility, the ability to iterate and ensure because honestly, it impacts the customer experience because if you're looking at the screen, where things are laid out this way, and now the screen is laid out this way, you get this one too. So this ensures consistency across applications as well. Okay. In this case, I'm going to choose to go from 1 column to 3. So we make that change and immediately, those fields change their layout. And then when I'm done in my editing mode, real time, that takes effect. And see how those are from 1 column to 3. And it takes -- it actually works. So I can select the traffic signal and then it's takes a bridge, which is pretty cool. All right. Next vignette. Getting a different use case. But everything that we just created is ready to go for mobile. And you have the ability to see it within the low-code platform. So if you build -- so this is the desktop. You can see up here on the top, these are the different types of devices, what we call previews, that you can utilize. So you can go from desktop to tablet to mobile and immediately, everything that you just built automatically adjust and is ready to go on mobile device. You can change the mobile device. You can change the orientation, all those in right there, and then you can build your mobile app there. Last. Okay. So we did all of that. All of that also is readily available for you to extend to all of the different channels that your customers expect to interact with. And that is really how you take a simple application or like business transfer and make it truly transformational and improve your customer experience. So I hope you'll learn something from me today. I was very lucky to be here, and I'll leave you in some good hands.

Thank you very much, Stephanie. Great job making -- to see you create a low-code app during our investor presentation. Amazing. Excellent. So I'm super excited about our next speaker, Hayden Stafford. His energy and enthusiasm is infectious, and the work that he's been able to do already with our partner program has just been phenomenal to see him in action. I won't steal his thunder because he's going to go through his amazing background and experience. But Hayden Stafford, welcome to the investor session.

Thank you, Peter. Thanks a lot. And Stephanie, thank you. I think you did a really good job showcasing in 5 minutes what our clients are actually going through. She really just was the tip of the iceberg, and I'll give you an example of the power of Pega and what we can do. We have so many clients, be it the largest banks in the United States responding to COVID PPP programs, or those health care providers responding to vaccinations, governments in Europe, building applications to deal with the pandemic. It's just amazing what our clients are doing in days and weeks, not months and years. So I think that was a good showcase. So I want to start with a little bit about my background before I speak to this actual chart. I think if you probably did a little bit of research on me or did any background checks, there are a couple of things that I think that you might find. First of all, I am extremely passionate about clients and spending a tremendous amount of time with clients. I am not a -- sitting in the office every time managed by spreadsheet, in the trenches with the team, building relationships with clients and staying committed after the sale. The easiest sale is the sale after the first sale. So those client relationships are critical. Nothing gets me more excited in building robust, successful partners. Relationships with partners for me are -- is everything. So the -- whether they're small, regional or local systems integrators and ISVs to the largest global systems integrators, the relationships that we have there is absolutely critical. You'll also probably have heard, I'm not a micromanager, though I'd like to be in the field, and I like to be in the trenches with the team, I believe in 3 very important characteristics or leadership principles. Clarity, empowerment and accountability. If you are very clear on what you want to do and you empower your teams to do what they need to do in their own form, in their own region, but it's against the very clear directive, you hold them accountable. Those individuals are extremely accountable. With those 3 principles, I don't believe in micro management, empower great leaders to go do great things. And then finally, it is about structure and design and sticking to the details. You might -- my very first career out of college was the Navy. I was a U.S. naval aviator. And that was all about structure, that was all about discipline, chain of commands and really respecting the rules. And I think that has really been a great grounding for me as I grew through my professional career. So I'd like to actually talk about that professional career. And I'm going to work backwards from my most recent job, give you a sample of kind of what I did, what I experienced and how it's germane to what we're doing here at Pega. So you see on the left-hand side is my experience. And then as I went through my first 45 to 60 days, really applying those experiences to what I call levers of growth, taking the goodness and the not-so-goodness from each one of those companies and applying them here to kind of a greenfield white site of what we could do here to drive significant growth. So if you think about Microsoft and what happened in the time that I was there, I joined shortly after Satya. Well, I would like to claim the growth and the success at Microsoft as -- when I started 2 weeks after Satya took over as CEO. It was an amazing period of transformation, how that happened. It goes back to the leadership principles that I talked about and has clarity. He was ultra clear on what was important: one Microsoft, culture, vision, set that and reinforce it in everything you do. And then it was a lot about partners. He just, and he quoted in an article a couple of weeks ago, talked about 95% of the revenue that Microsoft drives is touched by partner in one way or another. So very partner-centric. You build an at-scale ecosystem of partners that are in developing products with you, building new go-to-market models, selling together with you and delivering together with you. It's a very powerful message to the partners, to your clients and frankly, to your employees. So it's not just about delivery. As Alan said, it's about going to market together. The other thing that I talked about was the vision, having a unified mission, vision and execution framework. If you're all on the same page, if you're all rolling to the same beat, if you're all seeing from the same -- whatever the case may be, good things happen. And it also limit standard deviations. Standard deviations drives variability. Variability drives up costs and low productivity. So getting very, very focused on what you want to do as a business translates into the individual and what they need to do before that. Before that -- so that was about 6 years. Before that, I was at Salesforce. And Salesforce was -- this was 2011, '12 going through 2014. This was a hyperscale period for Salesforce. I could say, probably the last 10 years has been a hyperscale period for them. But prior to me joining, it was a very -- it was a democratic business model, where it was not industry-aligned, democratized software for every industry. It was a period of time where I helped to build the industry go-to-market model, both the industry data models and industry product, but the industry go-to-market teams. It is very, very important to not coming with the generic or democratized piece of software. As you go into a point of view about how I can help you impact and change your business, whether you're banking, airlines, telcos having that point of view with expertise and product that matches, absolutely critical. But another thing that Salesforce did very, very well, was they had a depth and breadth motion. So Pega is a very enterprise direct sales model. I think there is an opportunity for Pega as well as many companies, especially post pandemic to move into a digital, a velocity sales model to expand beyond just direct engagement, direct one-to-one and move more through digital marketing, digital engagement inside sales, et cetera. So a very powerful scale motion along with the depth motion. If you look at my days at IBM, that was all about discipline. That was all about management structure. That was all about cadence. That was all about forecasting. This was -- this is a period of time where I shaped my management acumen. I think much like you might have seen at companies like GE and IBM really turned out a lot of great management acumen. That's what I would say hallmarked that period of time. But also, I was the Chief of Staff or the Global Head of Sales, had a lot of experience of seeing the good, the bad, the ugly of management style. And I was in the high potential programs. So I had a lot of access and spent a lot of time on Wall Street, working directly with Ginni and Sam Palmisano and all the other leaders and seeing what worked and what didn't work and disciplined sales effectiveness, which is really been needed to run an at-scale business. And you're growing significantly. You want to have boundary conditions. You want to have management that is really dialed into what's happening. And that's something that we're bringing here as well. And then finally, my years at Ernst & Young, that was about delivering, consulting, delivering the sale after the sale as well as international experience, having lived overseas, stepping out of the American, the centric point of view and understanding your global clients, consultative selling, learning by listening and focusing on delivery excellence so that you can come back, have a happy customer and expand your base. So this background for me provided a wonderful opportunity to take the best in learnings of each one of those and bring them to Pega. And for me, which I worked with the Board in my first 45 days was the 5 levers of growth. If you can drive management discipline and you can drive sales effectiveness, everyone gets on the same page sheet of music. If you derive -- drive delivery excellence, quick delivery means quick time to value, means happy customer, opportunity to grow. You partner-centric brings you an opportunity to scale and have a force multiplier, et cetera, et cetera. So bringing that into the business here, those are all foundational elements of what we're doing. I want to give you a sense for kind of the pathway to growth that we're applying these 5 levers into our thinking about our go-to-market. Well, first of all, a modernized approach, where it's not just about an AE. AE is not the superhero or Superman that does everything, right? It's -- our model typically was an AE and an SC for all of our products. What Stephanie talked about with low-code. We also have one-on-one customer engagement. Contact center specialists are very important to go in and speak the language of the contact center. Business values. Business value and client innovation. Building the business cases, the ROI, forward ready documentation beyond just the sale, so bringing in client innovation specialists, bringing in our customer service -- our customer success teams, integrating that with your consulting teams so that you've got a maniacal focus on the sale -- after the sale. So modernizing our sales approach, expanding our routes to market, right? The force multiplier of sales in a SaaS world is a vibrant ecosystem. Typically in a world of direct sales with an AE, you can only handle so many opportunities at one time. And I think the graphic on this chart really shows the idea of us embracing local systems integrators, global systems integrators, partnering to co-sell with ISVs and ultimately developing on our platform with ISVs as a chance to force-multiply our revenue in our out-to-market. And then finally, I think one of the most important things here is drive sales efficiency through repeatability, through scale motions. We were a company that were very dependent on large deals. Our pipeline was made up of very large deals, and we do, do very large deals. But getting that run rate business where you can get wedge plates, entry plates that are repeatable, not necessarily packaged solutions, that's not really who we are, but patterns that resonate, patterns that we can replicate with our clients. And our partners can do that as well. That means we can get in quicker. We can have, to a certain degree, more run rate revenue. And then work on the wells to really put us above and beyond our targets and our goals. When you bring a modernized approach, you expand your routes to revenue and you drive sales efficiency through repeatable programs, repeatable offerings, and bringing that sales discipline, you've got a real opportunity to drive growth, growth beyond what we're seeing today. So if we go to the next page. I want to share with you kind of -- so what is our journey for our market teams. I want to talk a little bit about our organization and structure, what we had to do in order to implement, but I talked about with the 5 levers of growth as well as that kind of the high-level routes to growth that I just talked about. Talk about our priorities. Before I said clarity, clarity on what our objectives are. We have to all be aligned, whether you're in consulting or the partner organization, on sales, aligning around a common set of priorities. And then where we're going after 2023 and beyond. So let's focus on the organizational structure first, if you can click one more time. There's a lot of faces and names on here. But really what I want you to anchor on is we are very sensitive to the culture of this business and building on the foundation of this business. And a good portion of my management team that was from the foundation and historical background here is -- still remains, but we've also brought a lot of scale leadership, a lot of diversity. And I don't mean diversity just in gender, but in geographic diversity and diversity from an experience standpoint. So if you look at these names and the faces here, every one of these names that you're seeing, including myself, are new within the last year, by the way. But this week is my 1-year anniversary here at the company. And everyone on this chart is 1 year or less. And this represents our go-to-market field organization. Again, backed by a lot of proven leadership that we have within the business. But along each one of these leaders, I want to anchor you in, this isn't a wholesale change of the business. The bolded names below each one of these leaders are newer leaders as well. We had to do some cleaning of the house in terms of lower performance in some of our regions, and we did that quickly. But I want to anchor on is the amount of time we took to select these leaders. Culture, experience, and discipline were so important to me and identifying that they also understood that clarity, empowerment and accountability is a way to run business at scale. And the interview processes, [ Rajan ], on this chart here is new this week. We spent a lot of time. In the case of John Higgins, 20, 30, 40 interviews, making sure the fit was right to drive the scale that we need. And I'm delighted to say we are in a very good position with a new leadership team. I have, as of this week, no more key leadership roles to fill within this business. We took the first 4 to 6 months about learning and listening about the company, taking the values and understanding what's the core of Pega, and then the last 6 months really behind bringing on board scale leadership so that we can drive this clarity, empowerment and accountability. The other thing that's really important here is a lot feedback for a Boston-based corporate culture company. I wanted to put leaders in the regions with their team. So how about the idea of having a leader leading Asia, living in Asia? A leader leading EMEA, living in Europe? And John Higgins, we brought together our consulting and our customer success teams, one lives in the U.K. So it's really important to me to be able to represent the gender, geographic and employment diversity of this team. One of the things that's very important. As I said earlier, standard deviation and variability is the vein of growth. So we globalized a lot of these functions. We had a lot of kind of bifurcated, disseminated leadership around the world regionally, which created some overlap and rolls, some lack of productivity. We centralized and globalized a lot of these functions to create functional excellence. That way, we have the proverbial one part to choke or one back to pack from the standpoint of excellence in consulting, excellence in partners, excellence in sales. So a major shift, but the onboarding has been robust. I know. I just went through it. We applied my onboarding, which was excellent to each one of these leaders and already the folks who've been here for 4 to 6 months, Judy, Joaquin, [ Carol ] and John are already ramping and having a huge impact on the business. If we look at our priorities and focus, this is getting into kind of the outline of what we've laid for this year. And everything we do now is around what I call the big 5 priorities. Big 5 priorities are on the left-hand side. So let's start with one Pega. What does that mean? That means we operate as one team. That means even though you are a leader of our consulting business, it is aligned to the strategy of the company and our sales teams and our consulting teams work together, for example, as well as expanding with our partner teams. This is all about having leadership that is aligned, that are finishing each other's sentences and understand what success looks like and what family looks like. Business systems. Driving businesses -- by the way, on one Pega, I feel we've made great progress here. Alignment with legacy leaders like Ken and Alan and Adriana, our people team and Kerim, our product team, together with all these new faces, it is important that we're all acting as one not just within the go-to-market organization. I think we're making huge progress, as you can see. I think we're 3 quarters of the way there now. We have moved from forming and storming and norming, now moving into performing together. And of course, for me, the KPI here is diversity. As a father of 3 daughters and brother of 5 sisters, I understand that our clients also bind with a global perspective, and we're making a disciplined and concerted effort to reflect our client base. The business systems is about working together across functions and alignment and go-to-market around 3 main solution areas, 3 main places. So instead of bespoke one-offs, go into what you can do with your clients and see what comes back, it is very disciplined about where we go-to-market around 3 solution areas. And everything we do to support that, whether you're in marketing, your enablement for your partners or your sales place, sales enablement. We are aligned together as one business around 3 solution areas. This really drives productivity. You're not reinventing the wheel every time. You're going in together, knowing exactly what we need to go sell. I think we're making great progress here, a long way to go, but right progress. Disciplined execution. This is our sales management cadence. Variability is the bane of growth. I said that before. But if we're speaking the same language in our weekly forecast, our monthly forecast, our quarterly business reviews, going up the management chain and back down the management chain, we're all very clear on what needs to be done. I will say we had a high degree of variability in the past. We don't have that now. I think if you were to do any asks within Pega, you would quickly find out that our SMC, our sales management cadence, is tattooed to everyone's brain, and we are now very much operating towards a predictable, reliable process, whether you're an individual contributor or right up to myself. Partner centric, I don't need to speak too much more about that. What I can tell you is we had globalized that function. We brought the partner team up to the senior leadership table to be in the strategy and development. We've significantly invested in our partner enablement, partner development as well as our go-to-market activities, partner selling, partner development. Many of these were new roles. But our partners need to understand we're there with them from the idea of the deal to the delivery of the deal, not just the delivery of the deal. So we're looking at partner-sourced bookings, total partner impact, et cetera. And I just want to say about partner centric. I've got it there at half. I will tell you, across the company, perhaps we've overpivoted a bit on what partner centric means. So we -- the message has gotten across. But these things take time, shifting from a pure direct sales mindset to a partner co-selling, partner impact business, this takes time. This is an 18- to 24-month process. So I know there'll be some changes and there'll be some variability. But when you get the point across the team about what our strategy is with partners, not only do we get it, but they get it. And doing little things, like bringing partners into their own SKOs, sales kickoff, and having a sales kickoff for partners, that never happened before. That's happening now. We launched our partner program at PegaWorld, very significant progress in how we think about partners. And as we move forward, starting to bring these teams together, right? Our SKO, sales kickoff, bringing it together where our partners are integrated with our sellers. I refer to our partners is P-sellers. They're just an extension of our teams. So I need our teams to be thinking like that. And then finally, the last piece, it may seem banal and simple but make the number. This is not about an annual number. This is not about a quarterly number. This is about a monthly number, committed to the business, and we commit to you to give you that empowerment to go execute. And this is not just a license sales standpoint. We're bringing this discipline into consulting of our bookings, which obviously leads to revenue. We're bringing it into the partner team around what it means to make their number, what it means for our marketing teams to make their number. This is going to take a little bit of time, but I do see green shoots that are starting to appear quite good in terms of accountability from our teams around that consistent thought of making the number. Finally, I want to close on future and growth. If you build a business around repeatability and you know what we're going to sell, what we sell with our 3 solution areas, and doing it with scale functions and force multipliers, right, the repeatability, being able to get others to help us do the heavy lifting. Partners are that force multiplier for us. They are selling beyond -- we are selling beyond the Pega practice. That was an immediately important thing, not just dealing with partner practice by working with the industry leaders, the global leaders, the practice leaders, giving the client account leads at Accenture or EY or even the smaller teams, getting that going is very, very important. Not allowing standard deviations and having world-class rigor and discipline. That is, for me, that goes back 15 years in my experience. But that really builds high-performing teams. Finally, when we do all of this and we have an eye towards hiring global thought leaders, brand naming companies and diverse candidates, I want to be the employer of choice, the destination location for the top talent, top 25 talent -- 25% talent around the world. So I'll just conclude by saying we've made tremendous progress. There are parts of the business that may be unrecognizable from a year ago. But I can assure all of you, we are all aligned around the values and culture of Pega. And the teams are extremely excited by the transformation that's happening. And I look forward to being back with you a year from now and talking about some of those successes. So with that, Peter, back over to you.

Great.

Thank you, everybody.

Thank you very much, Hayden. As I mentioned earlier, we are going to be accepting questions today. [Operator Instructions] Hayden will be staying for the Q&A session at the end. Ken Stillwell will be participating in that as well. So I'm going to bring in Ken Stillwell up next. He's our Chief Financial Officer; and now he's also our Chief Operating Officer, which is pretty amazing to get promoted when you're working on your basement inside your home. So Ken?

Thanks, Peter. Welcome, everyone. Hopefully, this is the last time that we have to do Investor Day virtually. I've seen very few of you live. I look forward to seeing everyone in the very near future. I will tell you on my drive into Boston, I can assure you that lots of people are going to the office because I think traffic was worse than what I remember prepandemic. But I am very happy to be able to come into the office on a semi regular basis. Now we're not fully open yet in terms of welcoming everyone back at Pega, but we're starting to have people sprinkle in. And I imagine this as the summer hits and as we get through the summer, we'll probably kind of back to some sense of repeatability, at least here in North America. But we are still -- although we're kind of benefiting from maybe being ahead on vaccinations. And then quite frankly, the natural immunity rates here in North America. We've got a lot of our offices that are really struggling, specifically India. We have about 1/3 of our employees in India. And I think we're starting to hopefully see the light at the end of the tunnel for them, but we've been doing everything we can to support them. And quite frankly, they've done an amazing job of minimizing any disruption to the business even during these crazy times that they're dealing with. So our thoughts and prayers are with all of our employees around the world. One interesting thing, I'm going to touch on this real quick. There's a safe harbor statement. We've actually filed an 8-K this morning for those of you that aren't aware, safe harbor statement is actually in that as well. So if you can read that, you'll see the standard disclosures. I want to touch on one thing very quickly around Hayden. So I've worked for -- so by the way, I'm actually coming up with my 5-year anniversary. I can't believe that Hayden called me legacy. It's okay, I guess I'm legacy now. But -- so 5 years go fast. In fact, I think even after maybe like next year, this -- I couldn't be at Pega longer than anywhere else that have worked at my career. It's just kind of scary to think about how fast that time just went by. But one of the things that's interesting is, when you have a sales leader, they tend to skew on one side or the other of a style, right? And that -- and to me, that's always been a problem. You have sales leaders that are hyper-focused on growth. Like, just they are growth machines. They're growing at 50%, 100%. The challenge with some of those go-to-market leaders is that they are not necessarily operationally focused. Because they're just thinking about the growth, and they're kind of assuming that someone else will figure out that kind of making sure that the bolts are tightened in that. So you end up with this car going really fast, but kind of like shaky, right? And so what does that mean? It means some optimal scalability for go-to-market, it means you're actually kicking the can down of how they are fixing an operational problem. The other extreme of go-to-market leaders are the deep operational leaders that don't take the necessary calculated risks in growing the business. And so -- and that would be like, say, I would say, I would probably be skewed more towards the operational side of that just because of my background. So the challenge with either one of those is you either get a deeply operational person that doesn't really challenge the growth equation, or you get someone that's focused on growth but really doesn't know to how to scale a business profitably. And when we went through this process of thinking about bringing someone in like Hayden, Alan and I and the Board talked about, we really do need someone that can do both. We needed someone that's seen both at another company. We needed someone that appreciates the balance of the trade-off of a scarcity of being able to make investment decisions across different options and not just think that there's an unlimited amount of funding or, quite frankly, they're only focused on productivity and they risk the growth on capturing new markets. I think that's kind of just an interesting summary of why we thought of Hayden as being a really good fit for us, which was someone that had -- and you looked at his experience and you heard him talk, you can kind of tell it's been on the growth machine. He's also highly operationally focused. So what are we going to talk about today? What am I going to talk about today? So I'm going to do a bunch of things here. And some of this is kind of updates from what I've talked about before, and some of it is a little bit kind of a different angle and view on how we've looked at our performance. So we'll talk about the market opportunity briefly that we see in front of us. I'm going to talk a little bit about the transition to cloud, which I've been talking to all of you about since I started, and we're kind of getting to the point now where we're finally kind at the end of this, and we're starting to see our numbers kind of normalize. And then I'm going to talk a little bit about why, just to reinforce the anchor of why this model makes sense, not just from a valuation standpoint but just from an overall health of the business and the addressable market. And then I want to update my views on our longer-term model that I first populated with everyone back in 2017. Next slide, please. So the market that we're in is massive. And maybe we'll -- I don't know that I need to go a lot further on this slide, right? We are in a market that is so materially bigger than the size of our company that I kind of sometimes dismiss this. When someone says, "Well, how big is your addressable market?" I kind of go, "Bigger than we can tackle," right? I mean, there's so many opportunities here. But I do think it's important to kind of directionally connect. We believe our market size and what we're showing in this slide is about 50% to 60% of the overall market size for platform and CRM. You want to say, well, why is that? Well, we're not in every vertical and we're not in every organization. So we -- and if you look at a pyramid of top companies in terms of size down to mid-market and smaller organizations, the overwhelming amount of spend tends to concentrate towards the top 1/3 of that pyramid, which is largely where we're focused. So big market, massive market. You might see these numbers and think, well, your competitors showed $200 million in the market. That's true. We don't actually play in all of the verticals and all the regions and all of the customers that some of our competitors do, but it's still a massive market. Here's an interesting realization that came upon me just a few weeks ago, which is I looked at the IDC report that was published. And they predict that all of the new spend in technology, all of it, in fact, they actually -- this chart is probably not even fully true because they actually -- non-digital transformation spend is actually predicted to decline slightly. I show it here as a kind of a flat line, legacy software, non-digital transformation software, there's no investment for it. There's no incremental investment for it. All of the spend that clients are making in enterprise is digital transformation. So we're well positioned. Huge market where everybody is shifting their spend and growing at double digits. So I think that we couldn't be in a better position in terms of the market that we're in, the solutions, where we sit with kind of with the Gartners and the Forresters in terms of how they rank our solutions and then where clients want to spend their money. Just to kind of hit that high level. Why did we do this transition? If it isn't obvious to all of you, we went from a perpetual business where you are much less predictable, much more sensitive to fluctuations of big deal, not big deal. 2 big deals, now 1 big deal. The quarter-over-quarter, the year-over-year, really difficult to predict the business. Very difficult to predict productivity, very sensitive to economic cycles. And what that means is that -- and Hayden actually touched on this. It means you're less efficient. It means that you have more costs to deliver the same amount of revenue. When we move in toward a business that is I would say exclusively recurring, but I would say other than professional services, we're pretty much there, where we're all recurring ACV, which makes you predictable in our retention rates and quite frankly, the enterprise software retention rates are 90% plus, and our retention rates are well over 95%. So we're very predictable. And being able to now manage using that predictable model, to be able to drive a balance of efficiency. What I did was just show the time line here. And what it shows is that if we started this in 2017 and we ended as we enter 2023, we're a little bit further than halfway through this whole transition. Next slide, please. So what are some of the key metrics? Now these are key metrics that I have specifically talked about at the beginning of the transition, but these are key metrics that survived the transition. Annual contract value growth, ACV growth, many companies refer to that as ARR. Think of ARR and ACV as being interchangeable. They are the same thing. They're the annual recurring spend that our clients commit to solutions with Pega. The growth in that number, because our retention rates are so high, the growth in that number is really all net new spend with our clients. Sometimes, that's a new application. Sometimes, that's an expansion of an existing application. To us, both important. Sometimes it's new logos, sometimes it's an increased spend with our existing clients, very critical to have a balance of that. We probably can skew a little bit high over the last few years on the amount of bookings that come from our existing clients. I think the partner initiative and actually, quite frankly, some of the expansion of the organizations that we cover will help the balance our focus on kind of that land-and-expand model to make sure we do have enough new logo growth to create fertile ground for continued expansion. Pega Cloud bookings as a percentage of our overall new business. When we started this transition, I thought maybe Pega Cloud might be 30%, 35% of our new bookings. That number has been over 50% pretty much for every quarter for the last 3 years or so. So clearly, Pega Cloud is desired by our clients. Our sales teams are incented to sell it. Our product teams are focused on enabling it. I think we're really at a point now where Pega Cloud really has this momentum in this growth trajectory that could continue and should continue for years into the future. And then remaining performance obligation, commonly called backlog. It's a confirmatory metric, right? What it shows you is that the nature of ACV, the nature of the business is healthy and the duration of commitments from our clients is stable. So that's kind of -- these are 3 primary metrics for growth. Well, you've maybe seen this. Our total ACV growth is around 20%. It's been about 20% for approximately, maybe slightly north of 20% for the last 3, 4 years. We do aspire to have this grow faster. Hayden talked about this push for trying to accelerate ACV growth and I think all the things that we're doing to try to make that happen. What's really interesting about this slide is the dark blue. Hopefully, it's dark blue on your monitor. But the dark blue, which is the Pega Cloud growth, and I'm going to talk a little bit about that in the future. But that number is really becoming significant as a percentage of our business, and it is a growth engine for us. That's our SaaS product. Pega Cloud is our fully managed SaaS product. This shows where Pega Cloud bookings were as a percentage of our business and where we think they will grow toward. I think the only thing holding us back from Pega Cloud being a bigger percentage of our business is that we are flexible with our clients. We allow them to choose whether they deploy on Pega Cloud or what we call client cloud, which is where they manage the Pega solution on their cloud of choice. Pega Cloud is where we manage that solution on Pega Cloud. We've made a strategic decision to not force our clients to only buy Pega on Pega Cloud. If we did that, Pega Cloud could be 100% of our bookings. But we do believe at this point in time, we would give up market wins if we actually force our clients to only buy under that model. I think naturally, clients are moving in the direction to want to buy Pega Cloud at an increasing pace. I don't think we have to force that. I think it will happen naturally. Next slide. I talked about remaining performance obligation or backlog. It is growing. And it's growing faster than our ACV. But quite frankly, you would expect that because more of our remaining performance obligation, it's growing. The Pega Cloud percentage of that continues to become an increasing, a relevant piece of RPO. And because it is and because it's growing at 50%-plus, it's actually -- our RPO is kind of growing in between total ACV and our Pega Cloud ACV. Next slide. I think what this slide highlights to me, this is kind of a -- this is a great slide but a frustrating slide at the same time, right? The great part of this slide is we are consistently growing every quarter, quarter-over-quarter, year-over-year in the 20% range. That's respectable. We're growing Pega Cloud 50% or so, actually a little bit more to that. But it's just pretty impressive, but it could be higher. And that's the frustrating part, right? The frustrating part is why can't Pega Cloud be growing 100%? Why can't total ACV be growing 30%-plus? It certainly can be. It's eluded us. We are trying to do the activities to help -- to unleash some of that acceleration of growth. It does take some time as we invest in go-to-market. We invest in the resources. We invest and partner and the ecosystem to be able to help accelerate that. So I would view this slide as like I'm proud of it in some place because we're consistently producing. But I will tell you we can do better than this. That's not a guarantee, as I told all of you. I mean we do need to execute, right? And we do. And sometimes, you need even a little bit of luck to execute and try to accelerate the growth at growth levels like this. But we are completely focused on increasing the capture rate of the addressable market that we have. It is -- the opportunity is right in front of us. And so we will continue to push to accelerate this ACV growth number. Next slide. Here's an interesting slide that I don't think I've ever visualized in this way. The numbers are all there, but this is our ACV components. Maintenance term which collectively are client cloud and payment cloud. And what you're seeing is that Pega Cloud ACV is now bigger than our term license ACV for the first time. And if you go back to even 2017, look at the relationship of Pega Cloud to our total ACV, we're going to be -- our Pega Cloud ACV is going to be bigger than maintenance within -- certainly within 2021. Who knows next quarter or 2, we might pass that number. And that, to me, is really kind of that next inflection point of where Pega Cloud is bigger than any ACV channel that we have. Remember that our maintenance ACV still has a significant amount of legacy perpetual maintenance in that number. So that's a lot of business that was sold through perpetual channels years ago. So just to think about Pega Cloud becoming that big of a component of our ACV. And by the way, one of the questions that I sometimes get asked is if Pega Cloud continues to grow, becomes a bigger percentage of ACV, isn't that a lever to accelerate your total ACV growth? It absolutely is. That is the trick. The trick is that Pega Cloud continue to grow and outpace the overall growth rate of other and have it become a bigger part of the pie. Therefore, our overall ACV growth will accelerate. Next slide, please. What's another thing to reinforce. When we first started talking about this, or I should say, when I first started talking about this 4 years ago or so, I don't think Pega Cloud was going to be growing at the pace that it's growing. If you go back and look at the data that I had, I actually said I thought it would grow 35%. It's been growing about 60%. So it's really kind of difficult to think about the ramifications of that unless you're as close to it as I am. But there are certain implications to that. First off, it's great long term. But there are some short-term optics of having more of your business go SaaS. With Saas, you have less revenue recognized upfront, more revenue over time, your backlog will grow a little faster because more of your commitments are actually going into backlog. You may actually -- because you're growing faster, you may have costs that are actually a little bit mismatched with your revenue growth, with your revenue you -- with your recorded revenue and your revenue growth. But overall, this is a tremendous positive for the business. The fact that Pega Cloud is growing at almost twice the rate of what we thought it would be, I mean, that far exceeds our expectations. But we do think there's a practicality of how that impacts the result and in what time frame we see the benefits of that. Next slide. Pega Cloud margin expansion. So one of the things that I would say I was a little nervous about, I will fully admit back in the 2018, 2019 time frame was, what are the levers and how much operating leverage are we going to get as we grow Pega Cloud to be able to get our margins up closer to that 70% number, which is originally kind of that target that I had set. Well, now we think the target should be higher than that. We actually think our Pega Cloud margin should be closer to 75% in the future. So that's a -- so the way to think about this is Pega Cloud growing faster; revenue delayed somewhat; because Pega Cloud is higher gives us a better chance to get more operating leverage around Pega Cloud, which should drive our gross margin up for Pega Cloud. And because this is such a big component of our business, Pega Cloud margins are higher. Naturally, it will be materially impactful to our overall gross margin. The other interesting thing that's happening is, at the same time, more of our partners are supporting our clients around Pega Cloud, which means our professional services revenue doesn't need to grow as fast as maybe it did under the perpetual model. So we have a bunch of things kind of moving generally in positive directions for us. We have lower service mix. We have higher Pega Cloud, higher Pega Cloud gross margins, potentially helping to accelerate our growth rate above what we thought it would be over the last few years. Now naturally, the optics of how that plays out for 2022 and 2023 will be slightly different than what we originally modeled when we thought Pega Cloud will be a smaller proportion of our business, but it's all good. It's exactly what we had hoped would happen. So I think I want to just talk to the next few slides about how that will play out. Next slide. So this is a competitor's journey. I'm not going to tell you who this was. You can probably guess. This is a large software company that went through a perpetual to cloud transition, starting in about 2010 or 2011. They did an excellent job of moving through the transition. They're almost a poster child for how you would want to transition to happen. And if you jump to the next slide, this is our transition. So we actually didn't quite have the steep decline of the transition, and we're kind of tracking in a very similar fashion. And so I show this not to say that I'm guaranteeing that we will continue on that path, the way that the competitor's grow. I'm just showing this is how cloud transitions work, right? It's just accounting. The numbers don't play out differently depending on the company. You will actually have a drop in your growth rate as you go from perpetual revenue to SaaS revenue. And that will take a few years to get through. What you're seeing now, year 4 for us would be 2021. And you'll see it -- our growth rate is already starting to accelerate even above that 16%, certainly for Q1. So I'm really excited about just the way this model is playing out and how close it is to what I originally anticipated the kind of that path would be. Next slide. This is -- maybe this is an obvious thing. It's something that I wanted to reinforce though, valuations for companies that are cloud versus perpetual are dramatically different, right? Three to 4x higher in terms of enterprise value to revenue at the same growth rates. Why is that? It's for exactly the reasons that I talked about earlier, the predictability. The fact that it's even in a perpetual model, it's impossible to have consistent predictability quarter in and quarter out. When you actually have a SaaS model, your bookings get kind of averaged more. You have the ability to actually build business in a more kind of fluid way that doesn't actually show significant volatility in revenue, EPS and cost and backlog and an ACV growth. And even though our business does have linearity built into it and we don't have all of our business as SaaS, some of it is still client cloud, which is subject to ASC 606 in terms of the revenue being a little bit lumpier, it's not nearly as dramatic as it was 5, 6, 10 years ago for Pega, where we would have one deal. When I started, 1 deal could completely change a year, maybe even -- excuse me, a quarter, maybe even a year. That's not the case now. Our results are much more connected to our performance over multiple years. And that's where the valuation comes in because there's this predictability, certainly in growth companies, which we would consider ourselves to be in that category of a growth software company. Next slide. So what does this mean? Well, near term, you still have a little bit of awkward revenue, optics is a little bit of the -- kind of the accounting isn't quite there yet, but we're in way better shape than we were a couple of years ago, where I would put up -- we would put up 22% ACV growth and our revenue would decline, right? And people would say, what's going on? If you've seen this movie, you know the way this plays out. Our focus is still going to be on total ACV growth. We believe looking at only one element of it is misleading. And we believe now that the kind of the mix of our business and the perpetual proponent of -- proportion of our new growth is very, very small, almost approaching 0, we believe it's -- our total ACV growth is really kind of an apples-to-apples compared -- as you compare it quarter-over-quarter, year-over-year. Pega Cloud backlog growth, once again, will be a confirming metric. Longer term, cash flows, revenue, billings, ACV, bookings, they will all closely correlate. We're not very far away from that. Even in '21, you'll see some of that correlation. Certainly, when you get to '22 and '23, you're going to see this normalization. You'll see us kind of really starting to be much more predictable than we were in the past in terms of connecting ACV to revenue growth. Just to confirm, when I talk about Rule of 40, what I'm referring to is free cash flow margin, which is our operating margin minus capital expenditures and our ACV growth. The combination of those 2 -- and thinking about that being a measure for Rule of 40. Rule of 40, just to confirm, I use it as simply a guidepost of what a best-in-class company would operate as a Rule of 40. Meaning, the combination of these 2 factors would be 40 or above. Historically, Pega has been around 30, 31, 32 in terms of that Rule of 40. Some of our competitors, some companies in technology operate in a Rule of 50, Rule of 55. I mean that's really that significant performance for companies that are able to do that. The average for technology is around 32 to 33. So before we make this transition, we were slightly worse than average. We aspire to be much better than average. And that's kind of where we're moving towards this Rule of 40 concept. Next slide. This is a slide from 2018, where I kind of gave up maybe to guess, so to speak, of our long-term targets, how I thought this would play out. I thought our growth rate would be in that 15% to 17% range. I thought our non-GAAP operating margin would get us to where we added the 2 together and we were kind of directionally close to that Rule of 40. And I thought it would be 35% cloud revenue growth and our cloud margin is going to be 70%. These were -- this was the best information that I had in terms of long-term targets back in that time period. If you fast forward to today, I think our growth rate is going to be higher. Our growth rates, as we approach 2023 -- and in 2023, our growth rate is going to be in the low 20s. Our free cash flow margin, you'll see -- I've inserted free cash flow margin there because non-GAAP operating margin is a challenging thing to measure. And it's sometimes for me, anyway, EBITDA non-GAAP operating margin was more of a proxy to get close to free cash flow margin. So I think from now on, let's just think about free cash flow margin as being a more representative connection point. I think we'll be in around the 15% range. That's lower. Then adding those up, you won't get to Rule of 40. You'll get to 36 to 38. The main thing that is driving that is the delay in the revenue recognition from the higher percentage of our SaaS business, which is Pega Cloud. And there's a little bit of a lag there. Typically, revenue lags for SaaS business about 6 months or so, right, in terms of that timing. Our cloud revenue growth, we're growing at better than 50%. I'm projecting that we will be somewhere in that 45% range for the next few years. We might stay above 50%. I hope we do. I'm just kind of -- the way the model works and the law of bigger numbers, that average growth rate will kind of normalize a little bit down to kind of that 45-ish percent rate, still much faster than what we were showing originally. And now I think our cloud margin will be above 70%. 75% is achievable. Certainly, 72% is right in line of sight. So I'm thinking we're going to be somewhere in that kind of low to mid-70 range gross margin. Remember, if you look at our business as approaching $500 million ACV business, which is if you just do the math, which is where we'll be in a couple of years or even 1.5 years or so, no software company saw the kind of gross margins that we are showing at only $500 million in our growth rates. If you go back and look at some of our competitors, and I won't name them, but you can do the math. We have competitors of ours that were $1 billion, $2 billion in revenue, growing at 30% to 40% of their business, and their margins weren't 70%. So I think that getting -- it's a respectable margin. That's not to say that, that's the best we can do. We can actually -- when we actually -- when Project fnx, when we have more multi-tenancy, when we're using ISVs, I certainly think that margin number can go higher, but this is kind of our view of where we're striving to get to over -- in the next few years. What does this all mean? The key for us is to sustain higher growth. The way to do that is via recurring SaaS business. What does that allow us to do? It allows us to build efficiency into our model to drive higher margins. And if we drive higher growth with an exclusively recurring business, it's going to give us the ability to get operating leverage, and shareholder value will be the outcome. The way that we measure that shareholder value calibration is, can we get to a point where our growth rate and our free cash flow margin equals 40 or above. We're going to get pretty close when we enter 2023 and into 2023. It's just a matter of letting that SaaS business normalize in terms of the revenue production, and we'll be there. And so I'm really excited about this journey we started, which, quite frankly, I think many of you were supportive, but certainly watching to see how it played out. And now when you fast forward a few years, it's played out pretty close to the way that we thought it would. And so we really appreciate all of your support. I look forward -- we'll have some time where we have some questions here in a second, but I look forward to seeing everyone live. And thank you for the great questions, the great feedback and great support over the years. It's actually been really helpful for us to calibrate our discussions with everyone. So with that, Peter, I'm going to hand it back to Peter.

Okay. Super. Thank you very much, Ken. So as said at the outset, we are going to be taking questions next. So Ken, if you could grab that middle seat there. And [ Kate ], why don't we go forward on slide? [Operator Instructions] We have gotten a bunch of questions for you guys. So actually, I know the first question. So the first question is actually for Hayden. Hayden, could you give us an update on the partner program that was announced at last PegaWorld? How is it going?

Yes. We're really excited about this partner program. In my opinion, it's a mature. It's obviously early days in it. We just announced it, but it's a sign of maturity of our thinking. There are 3 highlights. I'd like to highlight about it. First of all is we now have a single one-stop shop location with our partner program portal, Pega partner program portal, a lot of Ps there. And it's a one-stop for our partners to come for information, for us to track delivery health, for them to understand incentives, our enablement, complete transparency for our partners and our clients to be able to see what they need to see to make decisions. That's number one. Number two is the tiering, much more logical. I've never been a big fan of platinum, gold, silver, bronze. What do those things really mean? It's really 2, right? It's authorized and specialized. And within specialized, we have elite, but it's authorized and specialized. Authorized means you've got a Pega practice. You are capable, you've got a certain amount of head count and license practitioners. But as you get into specialized, you are very good in 1 of our 3 solution areas. Remember, I talked about our 3 solution areas being delivered around going to market around 3 areas. We want to be able to showcase partners that have a great practice and not just delivery, sales. These are -- they have selling capacity, selling excellence and delivery excellence. So when someone is specialized and they have really demonstrated excellence, they are elite specialized. So that's the number two is the tiering. Number three is the incentives. We have rolled out new incentives that are not just oriented around delivery, but now are on co-selling. So we have the MDF that is focused around reselling sourced revenue, co-selling and, of course, our standard recognition for delivery. So I think it's those 3 examples that really showcase the program. Again, it's a month old. But we're putting a lot behind it and continue to make investments in this program.

I'll add one point to that. So many of you have given me feedback from discussions that you've had through channel checks with partners. And one of the things -- one of the common things I've heard -- so I'll repeat it not because I've heard it from our partners or from Hayden because I've actually heard it from all of you, is that our partners viewed us as somewhat of a combination of partnering and also competition. And the reason why that happened was, historically, we had kind of mouths to feed, so to speak, in our professional services organization and we would worry about billing. And we have people incented on that, a pipeline, backlog and utilization rates. And we actually like to do certain work for certain clients. And our partners viewed that as a little bit contradictory to actually a true partner relationship. Now we still do have all of those -- we do need to have our services team be utilized. We do need to make sure that those are not -- that's not a kind of an orphaned cost center within the company. But we have to balance that with the fact that our partners have a business being in the services business. Services is not our business. It is simply something that we have to have to be successful in software. Software is the business that we're in. Services is an enabler for us helping our clients with that. And we need to be respectful of our partners. And I think our partners are seeing and hearing from the new engagement and really optimism. And they're willing to make investments in Pega, where in the past, they may have been a little bit more timid to make those investments.

If I could just add one more thing. It's a really good point. I know a lot of our partners have said, "So what's different? We've seen this before. We've heard this before." First of all, the role that I'm in is accountable across all the different parts of go-to-market, cross-sales, solution consulting, consulting partners, et cetera, unification of a strategy that is not bifurcated across multiple leaders. That's one point. Number two is a very important point you said. We hired John Higgins from Salesforce. He ran international consulting for Salesforce. We are building a business in our consulting around enabling our partners, not necessarily competing, more advisory services, more expert services, more embedded technical architects. Yes, we will do consulting, and I mean implementation is end-to-end, but more of the higher-end advisory services and package solutions.

All right. Great. The next question is for Ken. Ken, it's on RPA. You and I have seen evolved quite a bit over the last several years since we acquired OpenSpan back in April 2016. But the question around RPA is as follows: There's a lot going on in the RPA market today. Does Pega think of itself as a contender in the core RPA market or as more of an integration and orchestration layer that sits over-the-top of other automation point solutions?

So I think what Pega -- what we are -- this isn't aspirational. What we do is we allow clients to do both, right? We have an RPA solution, a traditional robotic process automation solution where clients can actually use it to patch together systems that don't talk to each other, files, Excel files, databases, places where you -- even scraping information off of an e-mail, being able to kind of use that as a way to scrape information and populate it in another place in an application or solution environment. When clients need to do that, we have a solution. About 10% or so of our business at Pega is directly or indirectly tied to that robotic aspect of what our clients do. When you actually think -- now jump over to orchestration, which is where we think the real enterprise value is, which is clients trying to robotically automate inside of a workflow or inside of an integration between applications. Because even though 2 applications talk to each other, there's still a lot of robotic automation that can be done to enable those systems. So we think the trick is to do both. Clients are going to have those orphan use cases where they have to do -- where they're moving data between Excel files and it's terribly inefficient and they have data center capacity issues because they're doing data processing and they need to be able to handle it a faster way. That won't go away. But what we really view as the opportunity is this orchestration and making it automated when you're actually dealing with enterprise applications. Important -- maybe like another kind of nail in this discussion is we don't believe that enterprise clients are looking at the traditional scraping of data and populating between Excel files and orphan databases as a strategic way that they want to move forward. That is a reality of their environments and how they're trying to patch things together. So we also know that you can't snap your figures and everybody's digitally transform. But we also know that people aren't consciously going out saying, let's not build systems, let's continue to keep things fractured. So we think it's important, but really is not the way people would like to do business. And that's why we think we need to have both.

Excellent. Okay. The next question is for Hayden. It's on large global systems integrators. So the question is, any update on go-to-market with large global system -- the large global system integrator channel?

Yes. I've put a tremendous amount of time into building relationships, already have a lot of great relationships with these large GSIs. But really getting our teams to extend beyond the Pega practice. We have robust that -- we already had robust Pega practices within the likes of EY, Capgemini, Accenture and others. But it was largely limited to us selling and then handing the opportunity over to deliver with those Pega practices. We are spending a tremendous amount of time at Vice Chair levels, practice leader levels and driving enablement and training with these SIs in order to build skills, capability and knowledge,within their account teams and their practice leads. So not only am I meeting, for instance, the Vice Chair of a large SI on a monthly basis and, by the way, running regular quarterly business reviews, monthly business reviews, but we are doing the engagement and the legwork with those client account teams, making them aware, too. So we have a number of new roles of these partner go-to-market executives that are building the relationships with the account execs that matter in those accounts. The other thing that I would add to that, Peter, is we are doing a lot more marketing to and with these partners. So for the first time ever, we've invested within our marketing team. Tom Libretto runs our marketing team. We have a partner marketing team that markets to, through and with these partners to build awareness not just in the market for our clients that we're in it to win it with our partners, but also marketing to our partners. We met with the Head of Sales for all of Europe about 6 months ago. He said, "You need to get our teams aware of who Pega is. They don't know that they use Pega every day and that Pega is in these largest accounts. You need to market to them." So it's a selling go-to-market effort as well as a marketing effort to them as well.

Okay. Great. So the next question is for Ken. Ken, can you elaborate on how the Pega financials will be impacted if term customers started converting existing deployments to Pega Cloud in greater numbers?

Sure. And I will love that between term and legacy perpetual together because I think it's kind of implied in the question. So we're not -- this is a little bit customer-specific because we don't know why people would want to pick one or the other. We know what they tell us. We know what we hear in the marketplace. It's kind of -- some of it's obvious around use cases, et cetera. But I'll just talk about the numbers. If we took -- if all of our business right now, all of our client cloud business immediately flip to Pega Cloud, right, so we had -- I'm using rough numbers, but we have something like $575 million, I believe, of client cloud ACV. If you just immediately flipped all of that to Pega Cloud, you'd have probably at least a 50% uplift over that number. It would -- naturally, if it's maintenance, it would be 2 to 3x. If it's classic term, it was just purchased in the last few years, it might be closer to about 25% to 30%. So let's just say it was 50%. That's about $300 million of incremental ACV that we could get just by becoming a 100% SaaS business. That is not a prediction that will be 100% SaaS. That's not a -- that's not guidance, but that just gives you kind of an order of magnitude. If we got a 2x multiplier, that will be $500 million -- $600 million, actually, of uplift. So certainly, there's some number that's greater than 0 and less than $1 billion of uplift around moving our clients there. I would say realistically, it's probably in the couple of hundred million dollar range, if we're able to and successfully convince our clients that their best interest would be to move to Pega Cloud. And I do think clients will move more and more as time goes on. So it's a pretty big number that we could achieve in the coming years.

Okay, great. Hayden, you've talked about this a little bit already today, but I do think it's a question that investors are really interested in. Could you provide a little bit more color on what you're doing differently with channel partners now that you're here versus what Pega had done in the past? The investors are just looking for a little bit more color on that.