Pegasystems Inc. (PEGA) Earnings Call Transcript & Summary

Okay. Great. Thanks, everybody, for joining in today. For our next session, we have Pegasystems. We have Ken Stillwell, CFO and COO as well as Hayden Stafford, who is the President of Global Sales Operations. I apologize, if I have the title wrong there, Hayden.

That's perfect.

I want to thank you both for being here today as well as Peter; Peter being here as well. [Operator Instructions] So I want to thank you guys for being here today.

Maybe, Ken, just to start out, for those who might be a little bit newer to the Pega story, can you give us a little bit of overview of the company, kind of the key products that you focus on? And what markets you play in?

Sure, Steve. Good to see you. We are -- so we are -- I would say, just to keep it at a higher level, Pega fundamentally operates in 2 segments of the market. CRM segment and, what I would call, digital process automation, which incorporates what was previously known as BPM, it also pools things like robotics and low code and some other things into that. I'm kind of amalgamating a couple different kind of Gartner, Forrester quadrants kind of that go into digital process automation. We -- what that really means is that we're helping our clients do end-to-end work automation, whether that be on an actual operational task or whether that be a client engagement activity, like trying to figure out kind of offer up a piece of video to a client that's on a website or help them transact in a loan origination or actually execute some type of an exception process or activity in kind of an operational workflow. Those applications that we help our clients have typically integrate with lots of front and back office all the way back to ERP, even kind of databases and flat file format, kind of custom applications all the way up to your front-end engagement applications that everybody would know the brand names of and really becoming that kind of that center of how do you execute the work across front to back. That's why we kind of say there is no such thing as front and back office anymore and trying to draw the distinguished because you really don't have things that are just done in one, they typically kind of crossed that line a lot. We operate with a lot of kind of business to consumer industries because that's typically where you have lots of volumes of transactions, volumes of clients and really the need to have almost instantaneous or real-time transaction kind of purity. And that -- so if you think about those industries, banking, insurance, health care, consumer manufacturing, comms, public sector like constituent management and the government. So those are kind of the areas that we play in and what we do. And last point, our distribution of business activity is almost kind of stereotypical for enterprise software. We do about 60% from the Americas, 30% from EMEA and 10% from APAC. So pretty reasonable distribution for people selling to large enterprises. So that's kind of who we are.

Okay. Perfect. No, that's a great overview. Maybe for Hayden, you've been here for about a year now with Pega. I guess, how has it kind of been different versus what you expected? How is it kind of met expectations? And kind of what are your key takeaways here in your first year?

Yes. Just -- thank you for the question. And just to clarify kind of who I am and what I do. I did join back last year in June, came from Microsoft where I ran the global dynamics and Business Applications business. My responsibility here at Pega is I look after everything go to market, consulting, marketing, sales, technical presales, channel alliances, things of that nature, sales operations. So a couple of things. First of all, when I landed here, I've done my due diligence, I knew who Pega was. I competed against Pega, lost a number of my employees at Microsoft and Salesforce, where I also worked, to Pega. But I had no idea how big the opportunity really was. I traditionally like probably many of you and many of our clients, think of us in the BPM, business process management space, or in our intelligent automation space, I didn't realize the size and the magnitude of the opportunity. Front office, back office, middle office and so many industries. So the size of the opportunity really jumped out at me as I got into -- more and more into this business. And also, by the way, what that means for upside for us, the opportunity of expansion in our existing base as well as so much possibility in terms of new logos and growth within the enterprise space. The second piece that's kind of jumped out to me in all of this is how much work I have to do. We have to perform while we transform. This company has unbelievable legacy. It's got a great culture of teaming, collaboration, but it is still very much doing things the way that they had done in the past. And it's not a bad thing, but I don't think it's unlocking as much value for our shareholders and extended stakeholders as possible. So a lot of transformation, a lot of new faces that we brought in, a lot of new leadership, globalizing a number of roles. So that -- I didn't realize the magnitude of effort. And then the last piece was, of course, there's Alan Trefler, our owner Founder, CEO, 37 years of running this business. I didn't quite know how much the CEO would get involved into the business in terms of working on a contract for a deal to determining how we do a blueprint of landing new investments in the company. So the most micro of activities to the most macro of activities. And I'm also pleasantly surprised the amount of leeway that he's given. There's a lot of belief that Alan kind of controls a lot of things, and there's a lot of third rails. He's been very judicious with autonomy for Ken as well as for myself. So size of the opportunity, the amount of work that needed to be done and Alan's involvement in the business and also the leeway that he provides.

Okay. That's great to hear. And just wanted to stay on you for a second, Hayden. I think about the investments that you are making in the business and especially on the go-to-market side, I guess, what's kind of the big 3 things that you are focused on as you have been here for a year, you've seen how the operations are run. What are kind of the big 3 focus points that you have now for the go to market going forward?

Yes. I think if you were to speak to anybody here, they would really anchor on 3 things: modernize our sales approach. We were very, I wouldn't say olden days, but we were very AE centric. That AE, account executive, is the center of the universe. From doing the research and developing an opportunity, to identifying it, to owning it, to closing it and being involved through the delivery and ongoing success for the next sale. That takes a lot from productivity that takes away from doing things very well. You're an inch deep and a mile wide. So really thinking about modern selling and getting into specialization, driving a lot of activity through the channel, more integrated marketing into your sales programs. So modernizing our sales approach and expanding our sales approach to have a depth and breadth motion. Second piece is expanding our routes to market, our routes to revenue, if you will. Traditionally, for us, partners has been a delivery thought. We sell, they deliver and really in that sequence, bringing our partners in, developing our partners into the product through the planning and selling and execution of the delivery and then taking our consulting services, which is a big bit of our business and making them -- taking away the channel conflict and driving expert advisory and insurance services to our partners. So expanding new routes to revenue through our channel through breadth motions, scale motions beyond just the top Fortune 500, if you will. And the last piece is discipline; discipline, discipline, discipline. I believe that you can work with a small working set of pipeline or a great -- a huge working set. If you don't know how to get it closed in a timely fashion, it's very difficult to run an efficient business. So we brought a lot of management discipline, management cadence, rhythm of the business. We're bringing a lot of reporting and dashboarding of our business, and that's been a challenge for a lot of people here, feeling like big brothers looking down, and you're looking over your shoulder. That is not all the case. We want to run predictability, transparency and efficiency for Ken, for Alan and our shareholders.

Okay. No, that's great to hear. It definitely sounds like it's quite an undertaking. I guess, Ken, I want to touch on, Hayden mentioned something there around transformation of the business and what you've seen there for the past, I guess, what you've been doing there for the past few years, a big shift to the cloud and big shift to the subscription model. Can you just kind of give us an overview of how you're thinking about that subscription transformation going forward? Where we are today and how you're thinking about that over the next couple of years?

Sure. So I kind of think about this as like a 3-phased transformation, none of which are kind of sequential, they overlap. Like the first one is really getting the business system to sell recurring, right, to sell subscription. That's everything from enablement to comp plans, to positioning, to the way that we put the price list on the website. Things are like just building that culture of we're selling subscription. And I think we did a pretty good job of really kind of ripping the Band-Aid off so to speak within 1 or 2 years of really getting the business to sell subscription. So I would call that complete. I mean we have very few perpetual deals. Our business is almost exclusively recurring now with the exception of our professional services business. And I would say, I think we did a pretty good job of navigating that and even accelerating our growth through that exercise. The second one is the revenue normalization kind of stage, right, which is you go -- when you move to a subscription business, you've got the trough, right, where you give up all the front perpetual revenue and also billings on perpetual, and you actually have a cash flow trough and a revenue trough for a series of years until you get to kind of past the midway point, then your revenue starts to grow again. And even in the last few years of that, you actually have your revenue growth will accelerate above your ACV growth for a short period of time as it's kind of catching up. And you're seeing that happen right now. If you look at the first half of our year and you take out the large kind of shock deal that we did, you've got our subscription revenue growing something like 29% kind of without that onetime deal, it's even higher than that. I think it's 37% when you include that deal. And that's faster than our ACV, that's completely expected that, that would actually happen as you kind of normalize. So we probably have another probably 1.5 years or so of that second phase and we're already starting the third phase, which is the cash flow or margin normalization. So you really can't have that happen in full force until you're done with the full transition, you've replaced all the revenue that you lost through the series of stacking all of the subscription ACV that will come into revenue. And we're -- we'll be kind of done with that phase kind of in the like '23 time period. So the way kind of the 3 phases are, we finished the go-to-market phase. I'm going to call that we were done in like early 2019. And then we're really done with the revenue trough phase, probably done with that last year, starting to see kind of get to the end of that one. And now we're starting to normalize margin and free cash flow. So that's kind of how -- it's very predictable. It's the way every transition works. It's just that some go steeper and take longer, I think we buy kind of bit in the middle, where we didn't have a huge steep trough, and it's taken us -- it's going to end up taking us about 5 years, just kind of what I had anticipated it would.

Okay. No, that's great to hear. And Hayden, I want to go back to you for a second. In your response before, you talked a lot about the shift to partners and getting them more involved in both the product and the go-to-market. I guess how do you kind of think about the opportunity with partners? And how are they key to accelerating the growth opportunity with Pega?

Yes. Look, I mean, Pega has great partnerships and relationships with the largest GSIs, a number of smaller ISVs, but it's largely very centralized to what I would call the Pega practice, people who wake up every day, who live and breathe Pega as opposed to folks who are transforming clients, advising clients on what they need to be doing to be competitive in the market. For me, what I've learned quite a bit from my days, I've worked at Salesforce, and I worked at Microsoft is that the channel can be a great advocate for not only delivering, but can also be there to drive a significant amount of net new revenue through identifying opportunities, through advising clients on our capabilities and ultimately delivering for us. So for me, it really is about being a force multiplier, getting beyond the Pega practice and working with the CEO of any one of the big 4, big 3, big 5, whatever you want to call them these days, the Indian service providers, the large GSIs, working with CEOs, working with the practice leaders, the area leadership, the Vice Chairs of an EY as an example. These folks are in the C-suite. They're influencing strategy. They're influencing change. And if we're not top of mind with these partners, they're not bringing Pega up as these clients are going through digital transformation efforts or major strategic shifts in their business. We're starting to see that. We're starting to see top of mind with these key influencers at the largest of companies and at the smallest. As an example, we just had a partner town hall last week. We held 4 of these now quarterly. We had our first-ever partner sales kickoff in conjunction with -- on the heels of our sales kickoff. We're bringing them into our business and seeing thousands of partners joining us in these activities. They did not exist before. And as a result, we're seeing our sourced pipeline, opportunities coming from our partners starting to get baked in. And these partners are building offerings and solutions together with Pega as well as other ISVs. So building managed services and solutions with Pega plus other software providers to solve early problems like modern client engagement. So that's what's really important for us, this force multiplier, this increase in sales, but there's another piece to this that is really important, and it's a major lever of growth for us. And that is quicker time to value and the delivery of our projects. Largely in the past, Pega, as I mentioned earlier with the AE being the center of the universe in terms of engagement with clients of the quarter back to use English football parlance, we would sell the deal and then give it to a partner and then they'd have to kind of decode some of what was sold and deliver it. If you're working together with your partner upfront, together with Pega Professional services, providing that expertise that really is the cherry on top, you get quicker time to value, quicker delivery, fewer escalations and issues, that way, quicker time to satisfaction for our clients, quicker time to business value realization. And importantly, for us, quicker opportunity to get in and upsell, radiate, grow. We have 3 very different product areas, solution areas and for us, so much of our business comes from radiation growth within our existing accounts. That piece of quicker time to value needs quicker time for us to get to sell.

Sure. No that sounds great. And that raises a question that we just had come in from one of the clients on the line. I'm talking about when do you expect the changes you are making in the go-to-market to start leading to accelerating growth. And kind of what's, I think you touched on this a little bit, but what's the evidence of these changes you are making that gets you excited about the opportunity there?