Pegasystems Inc. (PEGA) Earnings Call Transcript & Summary

Hello, everyone. Good morning. My name is Peter Welburn, I'm Vice President of Investor Relations for Pegasystems. Very excited to welcome you to our annual investor session here in Cambridge live and in person. Fantastic to see you all. Thank you very much for making the trip. Just wanted to start with our safe harbor statement. I'm going to give you a minute to read this. And certain statements in this presentation may be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. So please take that into consideration. For more information, please go to pega.com to our Investor Relations website where you can find the latest SEC filings from the organization. In terms of an agenda today, I'm going to have Alan kick it off with Ken and I in terms of a welcome. Then after that, Kerim Akgonul will do a product update. We'll have an update on go-to-market and customer success from Leon and John, and then we'll wrap up with Ken, who's going to go through the financial discussion. We're going to take questions today as well. We'll have questions during Alan's section at the end. So you can feel free to ask questions in the room. My colleague, Katie Jones, over there has a microphone. [Operator Instructions] So we'll take questions during Alan's section and then Ken's section at the end. So I think, Ken, you had a few opening statements.

Yes. Thanks, Peter. So welcome, everyone. For those that can't be here, we completely understand. There's -- not only do we have some situations of COVID and logistics, we also had a storm, and I understand like 4 or 5 flights from New York were canceled this morning. So kind of as expected. Alan is with us, but interestingly enough, he is a COVID survivor as well. So he is a few days into his jail time for COVID, so he wasn't able to be here live, but he will be here through the meeting and here to answer any questions. Afterwards, we'll have a reception for those of you that want to join us across the street and where some of us from the executive team will be there as well. We'll go for somewhere around 2 hours. We're not really time limited in terms of those of you that are here. If you have to leave beforehand, feel free to leave. And then one last thing. I understand that there's certainly a newsworthy event that happened a few weeks ago with the situation with the Appian lawsuit. I would just ask everyone to be respectful. We would like to talk about the business today. If people have questions about that, I'm happy to field those in one-on-one or afterwards, but we want to try to be tight on talking about what our strategy is and how we're going to capitalize on the opportunity in front of us. So we'd like to just stay to that today, if you could just be respectful to that. So with that, Alan, I'm going to kick it off to you to get us started.

Thanks, and I'm hoping all of you can hear me, if I can see a little nod or something, that would be good. Excellent. So I'll tell you, it's really frustrating that after 2.5 years of having avoided COVID that I go to Davos last week and then come back and test positive over the weekend. So the thing I'm really glad about -- well, I'm glad about two things: One is that I didn't get stranded in Switzerland, which could have happened. And the second thing that I'm glad about is that I'm actually feeling, all things considered, really pretty well. I have been quarantined to this room here, which is where I now spend all my time in a little solitary bedroom until my wife will let me back into the actual home. And obviously, I couldn't be there with you today, which is too bad, because I was really looking forward to being in person, though I think all of us are going to have to wrestle with this hybrid environment for quite some time longer here. Relative to what I saw when I was talking to dozens of clients and others at Davos or the other work that I've done in terms of dealing with customers and thinking about the market, we continue to be excited about the digital transformation market opportunity. I was reading some of Marc Benioff's comments from Salesforce. And I agree that there's enormous, enormous need. What I feel good about Pega is we go at this opportunity and this problem in ways that make it possible for organizations who have, what I would describe as, sophisticated customer bases, sophisticated problems to really address those in a way that I think is quite unique and is highly differentiated. And the feedback that we get is that our customers are increasingly seeing how we do things that are different from the other people who are in the digital transformation and workflow space. Not that anyone is going to own this entire market, I don't think anybody is. This is a market that's going to have a set of participants in it. We think we can be a very substantial and very strategic participant with our clients. And I'm seeing every reason to believe that, that is working and can continue to work. I think our Center-out approach, which I'm sure you'll hear more about later in a little bit, is -- I think that it's really resonating. It resonates with business people as well as with people who think from a more technical perspective. And I think all organizations are realizing that they need to think differently about their platforms and how they go to market in what's going to be a multi-cloud, multi-product, multi-supplier, multi-channel world. And we've really designed what we do for that set of points. And I think that seeing that resonate and I think seeing that increasingly resonate is one of the things that I find exciting about going to places like Davos, talking to customers or doing what we did last week, which was have, I think, a really spectacular PegaWorld, where we were really able to show that our low-code platform, and it's funny because low-code as a term has sort of caught on now. We've been doing -- we used to call it model driven, but this has been our heritage. And we have a deep understanding of how to bring together the low-code aspects of workflow with AI-powered decisioning and really be in a position to make that work. And at the PegaWorld meeting, we heard tremendous success stories from organizations like Lloyds Banking Group, T-Mobile, Booking.com. Replays are available on pega.com. And these showed really what's possible when organizations think about how they want to leverage existing platforms, do whole new things in a whole new ways and bring continuity and coherence across their channels and across their back ends. And being able to be the sort of central vehicle, by which front ends and channels on the front and back-end systems and multiple clouds on the back, our leverage is exactly what our low-code AI-driven architecture is capable of doing and designed to do. Some of what we were able to show at PegaWorld, I'll just highlight, and I know you'll hear more about this, is Process AI which is the ability to bring AI into process, get workflows and AI to really work intimately together, so you get the best of both. Being able to bring process mining in through a new acquisition we brought in, which also helps us open up new thinking to how you look at your processes and how you make them smarter. The new partnership with Google, which I'm extremely exciting about -- excited about, obviously, been working about that a very long time, but being able to allow customers to know that we're running Pega Cloud. Remember, we're providing a managed service here on GCP, but also making it possible for our clients to use their Google credits that they've signed up for in doing work with Pega going forward. I just think that's entirely consistent with our cloud choice strategy and was a great step forward. And the whole Project fnx, which I talked about, actually probably a little over 4 years ago, has really continued to bring momentum in terms of bringing the Pega platforms more power. So it's very exciting. Being back on the road and meeting with clients and partners and investors, I think, is just a terrific and highly reinforcing -- it's been a highly reinforcing vehicle for me. I will say, though, this is one of the most volatile, probably the most volatile environment I've seen in decades. And on one hand, I think that puts lots of pressures and it's going to put lots of pressures on lots of businesses. But this also is a place where Pega can really shine for and with our customers. And this allows us to work with our customers, really trying to make sure that they're -- to the extent that they're worried about getting value, that they're worried about trying to make their businesses more efficient because I think we're going to see that, that's just natural when businesses are in periods of uncertainty. I think we're very well positioned to do that for them with our customers. And as Ken and I were talking in our last earnings release and have been talking about as we entered the year, Pega is going to work to improve our efficiency and to internally be really, really an exemplar of how one can do well in difficult times. I think of Pega now at, God forbid, 39 years as a durable company that has gone through many technology and business shifts. And I think we have a deep understanding of where the current ones are going. I'm very excited about our value proposition and our ability to help clients, whether they're looking to increase revenue, decrease costs or frankly both. So it's been an interesting couple of weeks, particularly managed to get COVID. Ken, I'm glad I made it through this without losing my voice. That's one of the things I've been most cautious about. So I'll be mostly quiet during the rest of this. And let me turn it back over to you.

So why don't we pause here and see if anyone in the room has any questions for Alan. Katie, if you can bring the mic out? Raise your hand if you have a question for Alan anybody? Rishi, if you could just identify yourself and the firm you're with?

Alan, Rishi Jaluria, RBC. I really appreciate the time and hope you feel better and get back on the road and in front of people again. I guess two questions for you. First, maybe can you drill a little bit more into the Google partnership and what we can expect to see maybe longer term there? I know you talked about customers can use their Google credits, which is great. Do you think that there's any more potential for actual strategic partnerships, maybe getting Google salespeople involved? Just how should we think about that? And then I have a follow-up.

Yes. Google has expressed a lot of interest. And obviously, this is -- we've been working on making sure the technology works and we've now got our first applications running in a fully managed environment on the Google Cloud Platform. So we were ready to announce and ready to go forward. Thomas Kurian's team and the Google team have expressed a lot of really good interest in working with us. I think it's going to be very much around a strategic organization focus, but Google very much is going after the same type of organizations that we have historically wanted to go after and we'll be going after particularly in these times. I also will tell you that we've had and continue to have just a fantastic relationship with AWS, and I have the utmost respect for all the work that we're doing there. Pega Cloud, as you can see, has just been taking off, which is a real tribute to how great of a job they do and how good the Pega Cloud platform is. But we do have clients, particularly in certain industries like retail, which just won't run on AWS for a lot of what I would describe as political and competitive reasons, various statements that have been made to them by the firms they supply, which just say we don't want people to be using Amazon. It's not a secret that, that's said to a lot of suppliers. So this makes it so that we can really do a great job of those relationships, still with Pega Cloud, using and leveraging the same internal capabilities we have whether it happens to be running on Pega Cloud on AWS or Pega Cloud on Google. I think our team did a spectacular job of not just ramming that in, but really architecting it so that we've got a level of multi-cloud flexibility that I think is actually much better than anyone else I've seen.

Right. And then maybe a macro question. I think you called this the most volatile environment you've seen in decades. Obviously, you've been doing this business for almost 40 years now. Maybe how is that manifesting itself when you talk about the volatility? Do you see longer sales cycles, tightening of IT budgets? Or is it just kind of a -- there's a lot of uncertainty out there and maybe that's what's causing it? And maybe alongside that, if we are to head into a recession, hopefully a softer than a harder one, just how do you think about your sensitivity to a recessionary environment and how you can be coming out of that and then maybe why you might be more well positioned?

Sure. So I think that having survived a lot of economic cycles gives you a certain experience and understanding of what economic cycles are. And that, I think, can be -- that could be helpful in terms of understanding what to do. There is a lot of uncertainty, particularly, for example, in Europe. People in Switzerland never expected they'd have a land war nearby when we were just there. I think uncertainty does tend to make people a little more cautious. It tends to make them worry about shorter term benefits and it can breed a level of increased conservatism in -- even in large companies. In smaller companies, I think, frankly, uncertainty has even a worse effect because smaller companies are able to or less able to, I think, deal with some of the upside opportunities. We're fortunate that our historical focus has been on larger, sophisticated organizations. I think that positions us well. Relative to how we think about the different times, when times are great, everybody is pumping the revenue pedal 100%. I think that whether it's for our customers or for us, when things are tougher, people want to make sure that they're balanced, want to make sure that they are more worried about sustainability and margin. And all of those, I think, are things that we are well equipped to be able to deal with going forward. It's not shocking. I mean this is not the right time for us to go running into brand-new markets or running down market or other types of things, which you might do if, in fact, a rising tide was raising all ships. But as I said, I think we're unusually qualified to be able to go through a period like this.

Katie, there was a question -- can I grab the mic? Alan, there was a -- can you hear me? Okay. There was a question online from Pinjalim from JPMorgan. Just to maybe give your perspective on how you see process mining and our new acquisition kind of fitting in. And are you hearing that from clients? And how does that fit into our kind of the end-to-end work automation?

Yes. So I think process mining is beneficial to us because it gives people insight and it can provide a very rapid way for them to see what some of the opportunities are that would come from automation. And that's, I would say, even more our mainstream automation, the ability to do process automation with AI and case management, being able to find and mine processes that will fit into that. With some -- I think a lot of the people have gone after process mining, have done it from a RPA or robotic process automation point of view. We're doing it much more mainstream. We think the process mining applies generally to anything that's a process and is going to really, really, I think, augment and help our mainstream product. And I think it all fits beautifully into the concepts like Process Fabric that we talk about in terms of really being able to get kind of an overall vision of both the work in the business, but also what's going on with customers in the business, which is what that fabric concept is.

Okay. Great. Any other questions in the room? Okay. Alan, I got one other question yesterday via e-mail that I'll share with you. An investor was asking what you're seeing in terms of client activity, client interest? How have your interactions with clients been going? I know you recently got back on the road and you were at Davos. Can you give a little bit of color in terms of what you're seeing and hearing from customers and clients?

Yes, I would just tell you, I was on the road constantly even when I never left this room. It's just that now you're actually on the road physically, which obviously has different and, in some ways, much more enjoyable characteristics. Customers are very interested and very engaged around how they build their businesses to be more agile and more resilient. And I think the Build for Change message, I think a lot of our historical go-to-market approaches around low-code or model driven, as we used to call it, around being able to Build for Change, which, of course, is our registered trademark. Being able to do that is really resonating with clients, and they've reached, I think, a level of sophistication where some of the early things they did have sort of hit their boundaries, that they're looking for ways that a Pega can really complement our strategy that might involve even another competitor of ours. And I feel really good about the level and willingness of customers and prospects to engage at that level. So I think it's terrific, Peter.

Okay. Thank you very much, Alan. So let's move on. Our next speaker is going to be Kerim Akgonul, our Chief of Products. And I'm super excited about his presentation. I had a chance to see it yesterday. So I'll pass it over to Kerim.

Thank you, Peter. Hello, everyone. Hello. Thanks for joining. As Peter said, my name is Kerim. I'm responsible for the products here. I'm hoping that you guys are interested in the products. We don't go not too deep, but a little bit detail into what products actually we're bringing to market and how we're addressing them. And by the way, it is almost my 30th anniversary. So hopefully, if there's a party, you guys will come back and join me for that. So before we go deeper into the products, I just wanted to just quickly touch on some of the recent announcements. So as you guys just asked and saw, Everflow is the company that we just acquired, the technology that we just acquired, that does process mining, which is very complementary to our solutions. Kleber Stroeh comes with -- as the CEO of Everflow comes into our organization and part of the acquisition is that him and his team of data scientists and engineers actually remain a part of the organization for several years. And we're very, very excited to bring these technologies together with a -- very much a core focus on organizations, enterprises being able to identify where there is waste and where there's extra cost, where there's opportunities to apply Pega technology to automate directly into their organization. And that's what we're basically targeting with this new process mining capability, and we've already completed the initial phase of the integration with that. So that's a bit of the latest news. In our latest news are, of course, both the GCP and us being able to provide a managed service with GCP as well as being on the AWS marketplace for our cloud offering. And in case you haven't heard, 2 days after PegaWorld, Forrester Research published a Wave in what they call the RTIM, real-time interaction management, which is essentially a set of tooling targeted towards -- for large enterprises to be able to directly engage with their end customers and provided an extremely high ranking for our products, which we are extremely proud of our teams. We've been able to achieve this -- I think, for the last 5 years, we've been able to rank at this level. And when you look at the descriptions, some of the things that they've written sort of make me blush around what they say about our products, setting the gold standard and being able to actually have solutions where none of our competitors can even get close to. This is a quote directly from the reference customers that they communicated with directly and talking about somewhere to $150 million in net new revenue to in some excess of $500 million being generated through the use of the products, bringing real true value to our clients. And so we're pretty happy about these rankings. And this is, of course, very much targeted towards the companies, the types of organizations that we directly engage with, that we basically are primary customers. I'm guessing you all know that Pegasystems is directly working with large organizations, big enterprises, in many cases, multinationals, big public sector organizations. And they're all going through completely different, yet at the same time, very similar journeys around their digital transformation and move to the cloud and understanding their landscape and understanding how they engage with the people in their organizations. Both their end customers -- they're going through a digital transformation to change and alter and manage their -- how they interact with their end customers as well as their employees. And of course, what the employees and the end customers expect from these organizations have dramatically changed. They want experiences that are easy, that are fast, that are on their own terms, very much on demand. And they don't really care at all that the enterprises have to deliver those seamless experiences to these customers across an enterprise architecture that looks something like this. And whenever we discuss this type of a message with our customers, with our clients. And whenever, basically, I show this picture, I always get the same comment from all the CIOs. They all look at that diagram and they say, "Oh, ours is much more complicated than that." And that's consistent because we know these large organizations have lots of different solutions, lots of different products, from different generations, different generational CIOs, there's a lot that goes in there. And our products -- what differentiates our products in this market is that we are entirely focused on bringing solutions into these enterprises with these types of architectures and I want to touch on each one of them as to what they do and how they are differentiated. Now the first one is how we go to market in what we call the one-to-one customer engagement space around, that is the RTIM report, that is the real-time interaction management report around maximizing top line growth and being able to drive that engagement, that what we call the next best action engagement with the customers. And what our product does is it essentially understands all the places that it needs to gather data from about the journey of this customer and run all the models, machine learning, event-based models, be able to determine the next best action to take, specifically for this customer, specifically for the channel that they're in, specifically where they are in their journey and determine what is the best way to engage with this customer right now. Determine if the customer is a credit risk, determine if the customer is a collection risk, determine if there is a churn risk with this customer, determine if there are up-sell, cross-sell opportunities and actually pinpoint the best message and dramatically increase the success rates with the offers that are being presented to the customer at that point. And that is basically why we're ranked as that #1 solution against all those other competitors on that report. And this is our specialty. This is one of our most successful products, and we're very, basically, proud of the outcomes. And I think you've seen some of the sessions at PegaWorld that talk about this capability as well. Now this is very much in the front and this is very much around customers on the website, customers on the mobile app, customers on the -- walking into the branch, customers on the contact center directly engaging with that end customer. Now on the other side of the spectrum is what we talk about the intelligent automation. In intelligent automation, very much puts an emphasis on all the work that organizations have to do to service their clients. All the work around onboarding, all the work around disputes, all the work around exceptions, all the work around onboarding employees, processing customer requests. All the claims that people have to manage. All the processing that they do and they have to do this across dozens of systems and they have to have people jumping from one system to the next and process work in multiple different applications. And these processes take many, many steps. It takes a long time. It takes a lot of people to train. Now our specialty here is, one, being able to understand the process and the process mining stuff helps here, right? Being able to understand how the process actually goes across all these applications, goes across all these systems and be able to first orchestrate it directly from the Pega application. And then second, be able to actually understand the parts of that process can be just fully automated and actually change the number of steps, number of people, the number of minutes or hours that is spent on the process and drive that automation so we can take something that is, I don't know, 25 steps that takes someone 2 weeks to process and actually reduce it to 5 steps and make it 10 minutes, 20 minutes to actually get it done, which basically drives, of course, the value in faster time to get the work done, which is always helpful with the clients, right? You call them to your bank, your insurance company and something gets done quickly. Well, that's a good outcome. It dramatically reduces the errors because when people are jumping through system to system, a lot of mistakes are made, requires a lot of work to be redone. And also it dramatically reduces the time it takes to train new employees. A lot of companies, that is a tremendous amount of value. So now that's very much around processing the work with all the back office work, right? That's the intelligent automation. And the third solution that I'm going to basically -- I want to tell you about is our customer service solution. The customer service solution is exactly where the -- that intelligent automation that's directly engaging with the customers and the one-to-one customer engagement and the intelligent automation that's automating the processes come together and present themselves on the CSR's desktop. So CSR is the customer service representatives. You call in to 1-800 number and they take your phone. And as they answer your phone, on their desktop, they usually have this many icons on the screen. It's common for them to have 30, 40, 50 different icons on all these different systems that they have to jump through to be able to reply to your request, to be able to answer your questions. They had to jump into 5 different systems to be able to get the data they need, complete the process that they need. And what our customer service solution does, it actually brings those systems, brings different applications, brings all the different service cases that a CSR needs to be able to present to its customers into a single desktop, handles all that process automation that we saw from the intelligent automation, also be able to bring that next best action decision that is the right decision to make for this customer at this time when they're calling into the contact center and bring that experience all together directly to CSR, so they can, again, respond to the customer faster. But if you recall the customer service 1-800 number and the person says, oh my systems are running slow, they're not running slow. The person has to jump through 17 different windows to basically get to where they are. That's what they're doing. And that person is probably moving super fast through those screens, but that's sort of like how they sort of buy time to get through the process. This takes that away from that incredibly experienced CSR and automates it and makes it so that it's -- somebody new, somebody who isn't as experienced can actually respond to the customer, get the work done, make the right offers, engage with the customer at that right moment and bring the value of that AI in decisioning, in the process automation, the workflow automation directly into the customer service channel. Now in a couple of minutes, I'll talk about the Center-out approach, but this is exactly where the Center-out comes as well. As you define these next best actions and you define these process automations in the -- for the customer service channel, you also get to expose all of this interaction directly to every channel. And as we all know, you'll much rather just go into the website and take care of it rather than call the contact center. And this means that whether you call the contact center or whether you go to the website, the experience and the processes will be the same and it will be consistent. So our focus is very much around delivering the one-to-one customer engagement to maximize the top line growth, to be able to deliver the customer service to cut costs and streamline service. And at the core of it, eliminate costs and complexity with our intelligent automation solutions. And all of this technology, all of these products that would come to market, they are all entirely built on a low-code platform, right? It's the single architecture that we've been evolving for years. A local platform for AI-powered decisioning and workflow automation. And we'll leverage these core capabilities of our platform to be able to deliver those outcomes to our customers. All right. Now we're going to get a little deeper into the products, but not too deep, but we'll just touch on what these words really mean from our perspective and how we differentiate within these words in our markets. So we talk about low-code. And there are lots of companies that talk about low-code, and they had different focus and they had different set of functionalities. To me, low-code essentially -- in our definition, low-code means to be able to bring capabilities or application development, development of applications, specifically for enterprises without having to write code, without having to hire actual programmers to be able to deliver the outcomes while maintaining all the requirements around enterprise governance. So this is basically what our products look like. This is basically sort of a high-level view of different set of capabilities. We have an extremely prescriptive methodology that once we follow that methodology for implementing a solution, we have a straight path to successful outcomes. We have a high emphasis in a major set of patents around enterprise reuse to be able to define constructs in the applications that can be used across multiple applications. Like I'll give you one example. One of the things to do is to define what an account looks like, right? Any business is going to have lots of processes, lots of decisions around an account. Well, you don't want to define the account on a bunch of different applications. You don't want to have a variation of different accounts. Even when you do have variations, and you will have variations because you would have acquired different companies, to be able to understand what an account looks like and what are the differences of different accounts for different origins, to be able to define that at a level that can be reused and leveraged across the system and have the enterprise governance manage the data residency, the backup, the encryption, the security and all the authorization rules around that account to be shared across all the different applications. And our low-code approach, which is an approach to building applications, basically comes with out-of-the-box capabilities for case management, for user experience, for integration. The scale, the security and DevOps are all built in components of the applications. You follow the methodology and you build things in our low-code application, that just comes out of the box with it and it also lets it so that anything that you build in that application is directly available across all the different channels. So you don't have to build things specifically for a channel, you get to leverage what is built across different channels. So when you do make a change, when you do acquire new business, that changes basically can be done centrally and be available across all the channels. So this is essentially our low-code approach. And one of the core components of the low-code approach is what we call the AI-powered decisioning. Now there's been a lot of talk about AI, right? There's thousands of software companies -- actually now it is illegal to be a software company and not do AI, right? You have to be doing AI. But there's plenty of companies applying AI from Elon Musk down to everybody else. But everybody has a different outcome, different objectives. Our objectives are very much concentrated and focused on at the very beginning what we talked about, which is how does an organization use technology, in this case, AI technology, through low-code approach to directly engage with these customers and to be able to extend it to how we get work done. So our basically main initiatives has been around next best action, next best offer capabilities, having built-in machine learning capabilities and predictive analytics capabilities in the product, being able to have ability to detect events at large scale. And of course, we've just added the process mining capabilities with the Everflow acquisition. We've been working on process AI, which has been the extension of the capabilities that we use with next best action to the process world. And of course, voice AI is something that we added last year in the contact center to be able to analyze what the customer is actually saying and we've also been using in our e-mail bots. So these are some core capabilities that we actually apply our AI technology to be able to deliver the outcomes specific to those large organizations. And the process AI is one of the most obvious results. And what it does is, and we look to see if I have time, I have time, what it does is basically work go through systems. Work basically is going to start here, whether you did a claim, you're applying for something, you're looking to make a change to your account, you've basically been processing a loan, whatever it is. Work is going to go through a process, right? Everything will go through a process. And everybody hopes that it just goes through a linear path. It doesn't. Something goes wrong. And whenever something goes wrong, that costs more money to the organization. And then sometimes, when something goes wrong doing an onboarding process or a product sales process, they even lose the customer opportunity to make the business. What the process AI does is it can actually detect that something is going to go wrong way before it goes wrong and it can give you propensity calculations, probability calculations that something is going to go wrong three steps from here and that there's a, whatever, 87% likelihood that you're going to basically -- this process is going to trip itself up and allows you to take corrective action before it goes wrong, right? Most analytics products are going to tell you what we're wrong last quarter, right? And I'm sure you guys all received tremendous number of Tableau reports and other analyst reports that shows you, things didn't go well, so the last quarter, whatever gives you the data. This is about being able to actually see that something is going to go wrong and then take, in the lifecycle of the process, to take corrective action and change the course and actually reduce the number of things that will go wrong, reduce the number of things that will cost money, reduce the number of things that will cause customers not to be onboarded or be able to sell products. So that's essentially how we decided to apply machine learning, event detection, predictive analytics in the world of process automation. And of course, the world of process automation is very much our history. When we talk about workflow automation, we are entirely focused on understanding the workflows of large enterprises, multiple different systems, multiple different massive databases for accounts or customers or products and be able to understand how the work flows and be able to define a lifecycle for that work. What you see in the center is our case lifecycle capabilities and be able to eliminate the manual steps. When a work goes through an organization, when somebody is entering something and it's going to go through multiple screens, all it's really doing is it's just asking a human to do something that the system cannot automate, right? They're either gathering information, right, which, obviously, you can automate that. They're making policy decisions, which our business rules engine has been automating policy decisions for many decades, and we can automate it, or they're making a judgment call, which process AI can actually help, make judgment calls or at the very least make recommendations as to what the judgment calls are, or is trying to get data from another system. And we can basically -- our main differentiator is our ability to be able to automate as many steps as possible, drive cost out of the system, eliminate the errors, reduce the time to get people trained and improve the time to get the work done, being able to dynamically prioritizing the work, being able to collaborate it with building capabilities. When I talk about alt tab, elimination of alt tab, right? The alt tab is essentially multiple systems that people are using. If you ever walk into a contact center, and there are basically rows of dozens of people sitting down at their desk with their headphones, what you'll notice on each one of them is two things: One, they each have a yellow notepad with a pen next to it because they had to write down something from the screen so that they can key it into the next screen. Every single person will have it. And what you'll notice is they have Post-its around their monitors to tell them what to do if the customer asks about this obscure thing, right? And the great CSRs, the great agents will know what they can alt tab. They know how many times they have to alt tab to get to that system. We are great at automating that stuff and actually eliminating that notepad and eliminating those Post-its. And you guys -- I think most of you know that we had -- we did acquire a robotic solutions many years ago, like in 2016, 6 years ago, and that has been essentially just a core standard part of the application. So if doing a process, there is a step that there is no way to integrate through regular connections, system-to-system communication, because that other application is so old, we can just naturally put a robotic process in that step and automate that element as well. And Process Fabric is the capability that allows us to provide a system to the users, especially for the employees in our organization that are processing work for multiple different applications and be able to see data about a customer in multiple different applications and be able to actually have a single desktop, single view, single portal that allows them to do that work, instantiate that work and to be able to understand the customer from multiple different systems and multiple different applications. And our approach is the Center-out business architecture approach, which is the idea of having all the decisions that we're going to make about the customer, the best way to engage with that customer. All the processes that we're going to use in order to service this customer and the lifecycle of the work that we do for that customer in case management be able to be defined in the Pega product with built-in reuse, that enterprise reuse. And have that be able to serve them across all different channels, whether the work is going to be done in the back office or in the contact center or on the website or on a mobile device or somebody walks into a branch or if the work is going to be done in the salesforce.com application, still be able to bring that directly into those channels, but be able to share the consistent definition so that we're not basically building decision to process in the channels and be able to leverage all the different systems in the enterprise and be able to leverage all the data and all the different applications that still have to be in place, to be able to automate it. And this is essentially how we look at the approach of driving digital transformation to the organization with those solutions. And I would say our customers have gotten some great results using our technology. They basically have seen some solid results in mission-critical operations and -- whether it's basically from Vodafone in their engagement with clients, in Unilever who basically just automating more and more of their processes. Anthem has basically just reducing that average handle time in their customer engagement channel. We can talk a long time about the Census, but the Census overall for the scale of the operation was a great success for us. And of course, TD Bank, just getting those exceptions and getting them resolving them fast, resolving them with less people and reducing any fines that they would have to face when they don't get the exceptions done, which basically results in real outcomes for our clients. That's my not so quick update. I hope that was useful, and I'm sure we can chat later on.

There was one question that came in, would you just want to answer one quick question? So I'm going to paraphrase the question from Hal Berry that came in, and it's on contact center consolidation. So it's a customer service question. Is the fact that customers are looking to consolidate the contact center and automate the contact center an opportunity for Pega because of automation? Or is it a threat to Pega because there are less -- fewer seats? Does that represent less opportunities? Maybe talk a little bit about the intersection of customer service and automation?

Yes. And I'm sure Leon can answer that as well. I think it's a great opportunity for Pega because Pegasystems' value is always around driving the savings directly into the customers. We see this a lot. We have a lot of clients -- lot of organizations. I mean you must have called someone. They say, oh, I'm going to have to transfer for you to some -- a different number. They're transferring to different physical location, to a different building because not everybody has access to the main systems. So the whole job of Pega system is to again to hide that complexity of the enterprise architecture and to be able to provide that CSR the access to be able to do all the different work that otherwise will take multiple contact centers to do.

Okay, Kerim. Thank you very much. All right. So...

This is the only question?

Sure. One question and then we'll move on. Rishi, just talk it at the mic, Rishi, if you could.

Rishi Jaluria, RBC, again. Maybe just one question I did want to ask. So you recently acquired Everflow. Maybe can you walk us through the process of integrating some of these acquisitions? You've obviously done that well with OpenSpan RPAs now barely integrated. And just kind of avoiding having that Frankenstein stack that we see all the time with Oracle and Salesforce for their buy companies, but don't really integrate them and I think the way that you tried it.

Yes. Thank you. It's a great question. So we don't do as many acquisitions as those guys do, right? We basically look for very strategic solutions and very much a technology solution that fits in to our architecture. Over the years, you've seen lots of different process mining companies we've acquired. We wanted to make sure that there was a technology that we can actually unify the architectures that fits into our offering that is not going to be a separate product, a separate solution. You've seen that -- I mean you've seen that with the robotics capabilities. All the robotics experiences right now are entirely from the low-code approach that we take for whether it's process automation or robotic automation or even managing the operations of the robots. Last year, we acquired a company that did a voice AI technology. And again, we don't -- we do not position as a separate product. It just becomes a very powerful capability of our customer service solution. And we're taking the exact same approach with the process mining capability. It is not a separate product, it is not a different technology, it is not -- it will not be a separate technology stack. It will be fully integrated to what we call our App Studio and the operational capabilities of our core process automation, and that will be a primary focus.

Thank you very much, Kerim. When Ken and I put together the program for today, we talked to many of you about the things that you wanted to hear about, things you wanted to talk about. So obviously, you wanted to talk to Alan, you wanted to hear the product update. The other big area of interest was around go-to-market. So we've got Leon Trefler here, who's running half a go-to-market. Leon will talk about his role and responsibilities. And then after Leon wraps up, we'll go to John Higgins. So Leon, take it away.

Thank you, Peter. My name is Leon Trefler, and I'm our Chief of Clients and Markets. I am 1/2 of the team, in charge of sales, marketing and strategy. And my partner in arms, John Higgins, you'll hear from him shortly. He's in charge of making sure that clients that we sell to have a brilliant experience adopting our capabilities. But to give you an idea in terms of my background, I've been with Pega for 24 years. I joined Pega in 1998 as an entry-level account executive. So I was the most junior account executive we had in the company. Given my last name, my trajectory in the company was one where I had to earn my stripes. And so for my first few years at Pega, I actually sold quite a few deals, some of the largest deals in Pega's history. In 2001, I was asked to lead the commercialization of PegaRULES Process Commander, which is the precursor, is our entry into the low-code space. That ended up being phenomenally successful. And through the years, I got promoted to every position you could have within the sales organization, being Head of Worldwide Sales from 2010 to 2013. In 2013, I was asked to lead the Americas, which is our largest region. The largest percentage of our revenue comes from the Americas. And it gave me the opportunity to manage Pega Consulting, our Allianz's team, our CSM organization. And for the last few years, I've been working as our Chief Client Experience Officer, having an opportunity to work more with engineering and support to understand the client experience when -- to ensure that they actually achieve the outcomes that they were anticipating relative to their investments at Pega. The end result of all of this is that my experience at Pega has given me an end-to-end knowledge of every aspect of this business at a truly atomic level. But the reality of it is, although I've had to have the opportunity to manage many functions, I've often said that God put me on earth to sell enterprise software and that is truly what I'm best at. And given that I wrote our original sales enablement, given that I wrote our sales and management methodology, I think I'm uniquely positioned to give you an idea of what it takes to actually sell a Pega system. So it begins with deciding this particular organization is going to be a customer. And then we research that organization thoroughly. We get to know their needs, we get to know their strategies. And based upon our deep understanding of our unique capabilities and our understanding of their strategy, we come up with an approach and a plan for how we might have a conversation with that client. We then augment that approach with what is timing, happening in the moment. I'll give you a real-world example. So you may have heard that the Supreme Court may be considering a ruling on Roe v. Wade. Let's set politics completely aside, all right? If something were to happen, what does that do to health care payers and providers? Well, it introduces mayhem because they weren't expecting it. They're already struggling to staff the work that they were expected. Now all of a sudden this unplanned work is going to hit. What's covered, what's not. If somebody has care in a state where something is legal and then returns to a state where it isn't and has a complication, is that covered? Well, nobody really knows. So what we do is approach a partner and talk to them and say, "Hey, do you think that this is something may also be relevant to this particular [indiscernible]? And when they say yes, we approach that [indiscernible] and we open up the conversation. But we already have ideas in mind for how we may be able to uniquely solve a problem that they weren't expecting, they're not staffed for, they're not budgeted for. But we can hopefully provide them with solutions. When we're successful in convincing them to give us a track, we focus on the delivery and the light that buyer. We then leverage the relationship with that buyer to try to get higher in the organization, to try to get the most senior sponsor that we can. Then we talk to that senior sponsor about adjacent problems that we can solve. The problems that are adjacent to the success that we already have. And once we're successful,in continuing to be able to sell adjacent solutions to essentially the same happy buyer, we aspire to develop a backbone. So if I were to enter an organization by selling them a credit card dispute solution, my goal would be to become the exceptions backbone of that organization. And it's through this approach that we've actually had a great deal of success. This is just a handful of them of our premier clients. I had the privilege of actually participating in the selling effort for many of these. And I wanted to dig deeper into three of them that I'm especially proud of. So at the United States Census, I have to say that there's a very good chance that anyone that was an American citizen, in 2020, touched a Pega system. We were the enumeration system for the U.S. Census, and it is a brilliant example of how our Center-out architecture can be deployed. You see there was a single enumeration process that was delivered across multiple channels, some of which were Pega, but actually, some of which with third-party solutions. So if you call the contact center, Pega was on the desktop. The enumerators who were going door to door, they had Pega on their iPads and iPhones. But if you went to the website, well, the Department of Commerce had already built the site that they wanted. So that same enumeration process was equally delivered across a channel that was not Pega. So with Pega, you can build the journey once and truly deploy it everywhere. Talked a little bit about Google and the relationship with Google and GCP. I'm very pleased to say that I was a part of that. But one of the things that I really was happy about driving was the relationship with Google as a customer. At the end of last year, they made a significant purchase and have actually started to create what they call an innovation factory, an innovation factory to drive low-code at scale, Alphabet [ like ]. You see this innovation factory supports professional developers. Businesses bring their ideas to this innovation factory where design thinking helps them prototype what the solution might look like, creates the business case and the delivery plan. And as a result, you have hundreds of people, delivering many hundreds of applications at scale. Now for citizen developers, that same function provides them with the governance and guidance so that individuals are able to build the simple apps that they want for their departments or their needs. At T-Mobile, I want to encourage all of you, if you haven't, to listen to the keynote address from PegaWorld. T-Mobile described their experience with our one-to-one customer engagement solution, where they had an over $200 million ROI in their first year, and they only deployed us in the contact center. When they acquired Sprint, they were concerned about the Sprint customers leaving. We proved our retention capabilities. They were concerned about how they're able to cross-sell other products and we proved that as well. The system paid for itself within weeks and is a huge success story. So much so I'm going to say I have to wonder whether or not our one-to-one engagement solution could be the most valuable piece of software in software. Now in terms of our go-to-market today, there are some macro pressures that everybody is saying, it's -- I kind of want to like raise our altitude a bit. I mean we all know that the economy is like crazy. I mean none of us were expecting high inflation, not the ways that we are. In the United States, especially, people are struggling to find people in all roles, not just IT. In IT, the shortage is truly worldwide. Let's face it. The war in Europe, none of us were expecting that. And the disruption that it caused is still ongoing. We're still feeling it. And who knows when Shanghai is going to close again. The supply chains are all a mess. And as a result, our business models are under tremendous strain. So our clients are thinking about how they need to increase agility and reduce their reliance on people and lower the cost of innovation. And to understand the importance of all of this, let's kind of lower our altitude a bit. Let's think about the customers of our clients and what they're experiencing in real time. Before the pandemic, the average person around the world, well, they were struggling to make ends meet. But in the pandemic, I mean right now, the average person, if you think about it, the cost of housing is up like 40%, cost of gasoline is over 50%. The cost of food is approaching increases of 20%. The average person is having to decide, do I buy my prescriptions, pay for gas or eat? That's the pressures the average person is under. The Wall Street Journal last weekend spoke about how 80% of Americans are looking to cut back on spending. They've dipped into their savings. Now they're into their credit card debt. They're starting to cut back. So what do our clients do? Well, they've got to figure out how to manage inflation themselves. Their costs are rising. And can they pass those costs on to their customers? I don't know. Those customers have never been more price sensitive. If they do, maybe they'll stick with the brand, but buy less. Maybe they'll switch to a different brand or maybe they'll just do without it. But our clients are really struggling. They can't afford to absorb the costs and they're struggling to determine how much they can pass on because not every company in the space is going to take the same approach. In insurance, some auto companies are going to raise their rates. Some are going to take a look at what the others are doing and say, hey, this is an opportunity to grab market share. It's a tough position to be in, especially if you're in the business of trying to predict the future. How do you predict the future? Past models are no longer reliable. You don't really know, okay, when Shanghai might close. You don't really know if COVID is going to return. You're not really sure if people are going to return to the office. You don't know what the new patterns of living and working are going to be like. And of course, your customers are moving. I mean demographics are changing. Your customers who used to live in California are now living in Texas. The ones that used to live in New York and New Jersey are now living in Southern Florida, okay? Trying to figure out how to address these problems is difficult, so difficult that people have to change the way that they work. They have to change the way that they do business. Gartner predicts that by 2025, 5 million new applications will need to be written. The problem is there's a worldwide shortage of IT workers. So at the very moment when more applications need to be written, there's never been a bigger shortage of people to write them. That is why low-code, as a space, has finally arrived. Its time is now. You see before this shortage, when you used to go to IT departments and talk to them about low-code, they would look at you and say, "Oh, we get it. You're a faster way to write applications. Well, if we invest in you, then the company needs fewer of us. Not interested." But today, they have no choice. The worldwide shortage of IT workers is so great that people have to turn to low-code. Low-code for professional development and low-code for citizen development. But you see our competitors are essentially a faster way to write code. Pegasystems, however, has invented new ways to approach problems. We are a low-code platform for AI-powered decisioning and workflow automation, and we excel in driving automation and solutions in 5 major areas: Personalized engagement, acquisition and onboarding, service, operations and exceptions. And these inventions -- well, these inventions are so different from what anyone else can bring to our clients at this time that they create a level of value that can be, honestly, uncomparable. With our DX API, Pegasystems is the only low-code solution where you can write a client journey once and deploy it across any channel, channels that are ours. We can deploy in our competitors or even open source. Pega is the only low-code solution where you can write the journey once and deploy it everywhere. Process AI enables us to build self-optimizing workflows and self-optimizing applications. When you make a change, it just happens. Changes just happen with no incremental total cost of ownership. Whereas any other solution, if you want to make a change, you got to call in a systems integrator to do a walk-through, write an SOW with build, test and employ. And 6 months and $600,000 later, you have a solution. With Pega, it's instant. Process Fabric, well, we know through our process mining that the average user doesn't use a single application to finish their end-to-end work. Now they use 10, 12, 14 applications. And with Process Fabric, we are the only solution that can give the user a unified workplace of all the work and all of those applications prioritized by what's important, eliminating the ability to cherry pick the simple stuff and leaving the important stuff to miss SLAs. That has extraordinary value for our clients. And of course, voice AI. Anyone with a contact center is struggling to staff that kind in center. Pegasystems has a unique approach for lowering average handle time, improving first call resolution and shortening new agent training. We are the only ones that can do that. And our personalization solutions, like I told you, the one-to-one engagement solution, delivers a greater return on investment than anything I have ever seen. We are the only solution that operates in real time. Forrester -- Forrester provided the evidence, we are the best in the world when it comes to real-time interaction management. All of this puts together, well, it gives Pegasystems an extraordinary opportunity. 5 million new applications need to be written. Low-code is the solution and Pega is the most differentiated low-code provider out there. The world is full with a lot of headwinds and, God knows, Pegasystems has its share, but only Pegasystems has the tailwind of having unique best products that solve the problems that our clients have right now. Thank you.

Thank you very much, Leon. Next, we're going to hear from John Higgins, and I will go forward on that.

Good morning. Hi. My name is John Higgins. I'm looking forward to spending 10 or 15 minutes with you today to bring you through how we are setting up our clients and partners for success. You would have heard from my esteemed colleague, Leon Trefler, earlier, who would have kind of brought you through a number of our client success stories; Census, T-Mobile, Google. Really exciting opportunities that we're replicating with many other large brands that you all recognize. He spent some time going through kind of the overall macroeconomic environment, the economy geopolitical, what's happening in Ukraine, just heartbreaking, skill shortage and why there's never been a time for Pega to really monetize our potential. So we are fully charged. My role is -- I'm responsible for consulting global partners and client success. And if you zoom back, many of you will remember Hayden Stafford, but when Hayden left, Leon kind of picked up all of direct sales and marketing and then I picked up from point of sale all the way to renewal. So a little bit about myself. So I started my career with Bank of Ireland, a client of ours. So I kind of came up to the technical part. I left Bank of Ireland in 2000 after completing the Y2K program for them. And that really gave me my launch pad into consulting, which I have been on ever since. So in Australia, I kind of, again, doubled down into financial services, but then started to expand that into different regions. As a result of success there, I ended up picking up a global practices role, supporting a field of 1,700, that was based out of New York, did that for 4 years, and I picked up my first P&L, so my first kind of GM role. After CA, I joined a French systems integration business, where I looked after all international markets, so everything outside of France. And that was a great experience to kind of really walk a couple of miles in the shoes of what our partners go through. In 2012, I got a phone call to join a small CRM company, Salesforce. So I spent the last 8 and a bit years there. And really kind of helped shape and build the post sales function as they launched into the enterprise space. And as I did that, I kept coming across Pega. Pega was in every single one of those organizations. And I became really, really inquisitive as to why was I stumbling across this company all the time. And in February last year, I took the plunge and joined Alan on this mission, which I'm really, really excited about. So my mission, which I just mentioned, is really around ensuring that we're creating clients for life. And a family principle for that is making sure your clients trust you. If they're going to trust you, that means you're going to deliver what you sell. Whatever you promise, you've got to ensure that gets delivered. You need to be proactive, you need to be strategic, and you need to be working towards their priorities, not your priorities. So it's a fundamental shift in moving into a subscription business where you need to be focused on what is going to pull your demand through? How are you making sure that you are relevant? How do you make sure that your service has been finally tuned against what their priorities are? And when you're successful, that will show up through adoption and consumption of your service. And when you maximize what that looks like, it gives you up-sell and cross-sell opportunity. There's three different functional areas under my remit. So I look after consulting partners and client success. This is wonderful. When I say it's wonderful, for someone like me, it makes me jump out of bed in the morning. I have taken full advantage of the market starting to open up. I've spent a lot of time in the U.S. with some of our largest clients. I'm back from a week in Asia. I've also done a road trip down to Australia. And I'm hearing very, very consistently from all of our top clients that they want to do -- they value Pega, number one. And number two, they want to build on what they've got, and they've got greater ambitions that they need help executing on. So I couldn't be in a better spot right now in regards to taking that ambition and turning it into reality for our clients. Drilling into consulting. The job at hand when I arrived last February was really around ensuring that we met the financial obligations. So that was around trusting the numbers. So hitting the bookings target, hitting the billings target, getting [indiscernible] where it needs to get to and then concentrating your key talent in the markets and in the orgs that will have the greatest impact, and we're doing really well there, and that has shown up with some strong performance year-to-date and the momentum continues. On the partner side, and this is a bit of a Pega term, but it's all around source and influence. The source is when a partner finds an opportunity and goes, that's an opportunity for Pega. They let us know. Influence is when we work with them around an opportunity that we have found, and we work on that together. The second part of the partner strategy is around ecosystem growth. So driving up the number of certified resources that we've got in the market. This is super important. One of the things I consistently hear from our clients is, they're suffering from the same skill shortage as every organization is right now. They need to know that the ecosystem is thriving. They need to know their access to talent is open and they want to have options for when they need to deliver projects and programs. And then the final bit is around delivery excellence. Delivery excellence is ensuring that regardless of how the client is implementing, they get a consistent experience. So we did that around enablement, the client resources, the partner resources, but also the engaged models that we've got in support of that. Client success, a relatively new organization for us about 2 years old, which we've scaled up wonderfully, I'll bring it through a little bit more detail there. But that is a strategic investment that we're making as we transition as a business into full subscription. So this is an organization that jumps out of bed in the morning and is wholly focused on, is the client using everything that they bought? Are they getting maximum value from it? Are they ahead of what the releases are? Are the applications healthy? And is there a cadence in place to ensure that we're tuned in to each one of the top priorities for our clients. And those priorities are the ones that either get our clients promoted or in trouble, right? So we need to make sure that we're focused on the right kind. Consulting partners and client success, all of them are interlocked. It's a unified leadership team with a unified plan and it wraps around clients. So being client-centric as a subscription business is a prerequisite. [indiscernible] bring you through the evolution of the consulting revenue because historically, it has been a very sizable parts of the business. But as you will see, it is as a percentage of overall revenue slowly and very intentionally shrinking. Now that's as our bulk of business increases, so we are seeing growth within our consulting business. It's just not growing as fast as the license business, very, very intentional. The second thing that we've been really focused on is expanding the margin. And that, again, we've got good progress there. We had a big step up last year, and we're on track to continue that momentum this year. We will continue to ensure that we're driving fiscal responsibility into that. And then the final element is making sure that it's concentrated again around those most strategic orgs that I mentioned earlier. Right, engaging partner. So sales growth is one of the things that Hayden really brought to the company was how do we activate the market? How do we ensure that we're top of mind for our most strategic partners. The partners that we work with every single day, top three will be a Accenture, Capgemini and EY. These are global organizations well respected with a high level of overlap with our installed base. And the second part is around how do we expand our ecosystem. That ecosystem is not just with the global SIs, but it's also with some of the boutiques, but it's actually measured in regards to the number of resources that we've got available in each one of the markets to support our clients. And then the final bit of delivery excellence, which I've touched on earlier, is just ensuring that as a subscription business, we need to know our clients are having a good implementation experience, client success starts with a good implementation. So putting all of the systems, processes and support that is required to ensure that every journey is a successful one with the least amount of friction. Pleased to report, I mentioned successes of relatively new organization. We have, at this moment in time, all of our premier and key orgs covered by a success manager. That's probably the fastest ramping of a success function I've seen in my career, and I've been doing this for quite some time. There's no finish line in regards to how we do this, but the coverage is now in place. Our gross retention rate, which I'm sure is something that you pay attention to. One of the reasons I joined, right, there's very few subscription businesses out there that drive the renewal rates that the Pega does. And with that strong install base that healthier it is, the greater the opportunity. And to that end, and Ken would have mentioned this, is we are very, very focused on driving 75% of our growth from clients that we've already got. So making sure that we're focused on the value equation, we're helping our clients spread the assets, all kind of pushes us in the right direction there. And when we do our job well, right, we get opportunity. As I mentioned, I've spent a lot of time out in the market, a lot of time with our most strategic clients. I was with two earlier today. And sometimes, there's problems on the Pega side. We need to go fix stuff on our side and sometimes they've got problems on their side, whether it's integration, whether it's out of date versions, whether it skills, but they're all solvable problems. So it is yet to be a problem that has come our way that we haven't been able to solve with our clients and with our partners. Now what does that actually mean, right? So we have to really boil it down as to what is the opportunity. We have an amazing opportunity through existing applications that are live in production for our clients today, by introducing additional capabilities that are currently available, that may not have been available when they originally built those applications will drive more users and case volume. So more value from existing applications is how we introduce greater automation, more AI, more next best action so that case volume increases and our clients are sweating the assets and getting more value from that. The second area around expanding the footprint of existing applications. This is huge. Like this is every single CIO that I speak to, needs to prove a diminishing cost of new applications. So enterprise-grade reuse, which is what we do better than anybody else, decisioning and so forth, expanding that footprint is around componentizing that, driving that reuse, making sure that it's developed once we [indiscernible]. Again, that componentization is something that we're actively doing and supporting within our premier and key orgs. So premier and key orgs are our most strategic clients. And when you do greater value from existing applications and then you sweat the asset and take those applications to expand them more broadly across the enterprise, it's amazing how much new work comes your way, and that's new workloads, which is actually something Pega has consistently proven. If you look at kind of 20% growth year-over-year, a significant reason for that is because we've got a sales team that are fully engaged and able to go on and find those opportunities. So I'm giving you a whistle stop tour around the other side of the subscription business, and I hope this has been valuable for you. See you soon.

Great. So just a couple of logistic things real quick before I ask Ken to come up. After the session today, we're hosting reception right around the corner here, right up where Katie is, there are some directions is a quick walk. We're going to serve food, drinks, we'd love to have you guys all join. Those of you who are in the room and members of our management team will be there as well, so you get a chance to interact with them. Ken Stillwell, our Chief Operating Officer and CFO, will be our last speaker for today. I really encourage you all to ask questions of Ken. He really enjoys that. [Operator Instructions] So I've actually gotten some e-mails to say, hey, how do I submit a question? What do I do? [Operator Instructions] So at this point, I'll pass it over to Ken Stillwell, who will be our last speaker for today.

Thanks, Peter. Sound is good? Okay. So we've got about 45 minutes until we had originally scheduled. Like I said, we can go as long as people have questions. If you for some reason, need to leave because you have a commitment I won't be offended if you believe right now, I might be a little bit offended. But if you leave during that, and then hopefully, many of you are going to be around for a while that you can join us afterwards. So, once again, our safe harbor statement applies to everything that we're going to talk about here. This deck is actually filed as an 8-K as well, probably many of you already know that and have already looked at the deck if you got the indication that it was filed, but in case you want to refer back to this. My section is filed as an 8-K, just to be clear. So I was checking to see like if I had hit my 6-year anniversary, so I'm like 2 weeks away. So it's -- I've been here for 6 years. When I started at Pega, we were -- as many of you are aware, we were a largely perpetual business, not exclusively a perpetual business. We did have some term contracts. We also did have, I would say, a kind of a smaller Pega Cloud business. It was -- it was somewhere in the $25 million range of ACV at that time. We did not talk about ARR or ACV at that time. It wasn't that we thought it was unimportant, it's just -- the market was a little different 6 years ago, 10 years ago. And we made a really big kind of shift in the 2017 time frame. And that shift was to move to a subscription business. And that shift was painful from an optic standpoint, it was really not painful from a client interaction standpoint because our clients were already buying that way from other vendors. We did have to put a lot of investment into Pega Cloud because we wanted to -- as we started to sell subscription, we realized that more and more of our clients wanted to buy our Pega Cloud solution. And when we first started Pega Cloud, I mean it was not anywhere near the solution that we have now. So we had to really kind of knowing that we saw more and more clients wanting to buy that, we had to really shore that up. So we have this almost crazy large opportunity for Pega compared to our size, right? We -- if you just look at the companies that we're competing with in their size, we're in those markets, right? In many cases, we're one of the two or three companies that clients would pick from, and we're competing against very large companies. In some ways, you might say, well that's risky, but not really because we're so differentiated on our solution and every client wants to use multiple vendors. Nobody picks one vendor. I think all of you probably know that. That's why the space is always so kind of -- so distributed in terms of the spend. That actually works to our advantage because we become the orchestration, right? Or as we talked about the center out strategy, really, we become the connective tissue between those best-in-class front-end applications and the best-in-class back-end applications and allow us to streamline the workflow. We are -- I would say, underway is probably a little conservative statement, we are well through kind of being a cloud company. And we're in this kind of -- we've accelerated our growth as we've made that transition to the recurring model. And now is the time, right? And this is -- interestingly enough, I think you could listen to our discussion and you could say, it sounds like they're focusing on margin because that's what the market is thinking about. And I think that's a fair question to ask. We were talking about creating margin as we exited the cloud transition back in 2017. It was always part of how we thought this would play out. We're actually a little delayed in that because the cloud transition picked up so much steam, it actually extended out the time to get through the cloud transition by 6 to 9 months. But we're still largely on track, and you would expect to see that margin and free cash flow increase as we kind of get to the normal kind of recurring business that we're almost there. At the same time, certainly, the market wants to see a little bit more focus on profitability. So the timing is quite opportunistic for us. Huge market, as I said. I kind of look at this and I almost say, is it 50? Is it 65? Is it 100? Is it 150? It kind of doesn't matter, right? It's so big compared to us being a $1 billion-plus company that the opportunity is huge. This is something that I use often to just kind of summarize where we were and where we are, right? We started off as a largely perpetual that was -- we had to resell a large part of our revenue every year. Professional Services and perpetual was 75%, 80%, 85% of our business, and we had to go out and literally do the pick and shovel work every single year to sell new deals to replace. And that's what our sales team did. And they did that in a very productive manner because we're not selling to 50,000 clients, right? We're selling to a few hundred. But the reality is a lot of those relationships are recurring and extensions of previous relationships. So it really fits better in a recurring model, but the challenge with that is it's a costly model. The perpetual model is costly in a couple of ways. One, when you sell at scale, clients tend to buy what we would call shelf wear, right? And then you have to over discount and you end up with pressures on margin, and you only get 15%, 18%, 20%, 22% on the high end of the recurring revenue stream. So, now we're in a model where we're -- I'm going to say all recurring with the exception of professional services because our perpetual license is like small single digits. So let's just -- we are a recurring business now. And our retention rates, very predictable. And because, as you heard John mention earlier, a large percentage of our growth actually comes from existing clients, that is a lower -- it should be a lower cost of sale than actually selling to new logos. So if you're selling -- the majority of cost in an enterprise is to get your foot in the door, to get the organization, to get the organization at some minimum scale. Once you get them to scale and you have a very sticky product, you should be able to focus more on density and putting the right kind of team together, and that should work to be a more efficient model. And I think if you look -- if you kind of tore apart our business, you would see that, that is where we have the highest win rates, the most success and the most efficiency is actually selling with our largest and most well-known logos, where we've struggled with efficiency in our go-to market. Certainly over the last few years, it was going after new spaces, new logos, new areas that we've been really maybe didn't have the brand, didn't have the use case or the referencing because it might be a different vertical, it might be in a different geography. So you'll see us kind of shifting to really focus on where we know we can really kill it, which is with large organizations that understand our value that largely, we've done business with in the past or it could be in a vertical where it's very relevant to other use cases, meaning you can leverage a reference around a large bank to another large bank. So that's an example. Two metrics that are really important for us: Annual contract value growth. Some companies call that ARR. I think you should think about ARR and ACV now, largely interchangeable for us. We've just used the annual contract value acronym and remaining performance obligation. Now, remaining performance obligation can get a little bit -- it's not as consistently linear as you might think on ACV because RPO has timing of renewals that are not linear through a year -- even with multiyear contracts, you have some years where you might have a higher average duration of the years. So RPO is still a very meaningful metric. It's more of a confirmatory metric to the ACV. If you -- and for all of you that know our financials, I think we probably have the most robust disclosure for RPO that I've seen in software where we actually show each of the revenue lines in every single year. So if you really want to get the real confirming metric, you can always look at the next 12 months of RPO and the growth there will tie very closely to the ACV and is a leading indicator for revenue. So that's -- many of you already know that, but I figure I'll mention that for those that are not aware. So, we've had very consistent and steady growth at around 20% for the last 5 years, call it, right? And that growth rate of 20% is slightly more. Our growth rate before we move to the transition was kind of somewhere in the low teens, kind of in the 12% to 15% range. What's interesting about Pega is when I started at Pega, I actually went back and looked at from the time we were a $100 million company until the time we got to -- when I started, we were kind of a $500 million to $600 million business. And I looked at every single year an interesting piece of data, Pega grew every single year but never grew more than 22%. So in every single year, we grew like on the low end, like 7%, 8% and on the high end 22%. So it was really -- I'm not sure that -- really there might not be any software company that's had the level of like consistency of growing kind of between 10% and 15% for so many years. And we've actually made a kind of a slight inflection up, right, up to kind of 20%. And that's really -- we put a lot of investment in the business over the last couple of years to see if we could push that up higher, push that to 25%, push that to 30%. And admittedly, we've not been successful at getting that to that next tier. And so we've really thought about as we exit the cloud transition, and you'll hear more of this, that really we need to focus on making sure that we're running an operationally sound machine and getting our margins up and really keep our growth target at 20% in terms of thinking about that Rule of 40 balance, right? And I think that, that was -- we made an investment, we made a shot at. We realized that, that was a little bit more elusive than what we had hoped, and most importantly, with the backdrop of economic uncertainty, higher inflation, right, it's probably the time to really focus on profitability. If you look at remaining performance obligation, that has grown a little faster. Now just to make sure that we're not -- I don't want to mislead you with the difference there because sometimes when you see RPO growing faster, you would immediately go, oh, that must mean revenue is going to accelerate. RPO is growing faster because Pega Cloud is a bigger component of it, and Pega Cloud is growing faster. So RPO will kind of converge with ACV over time, and you will see those to be more in lockstep. It would be ACV, RPO revenue. As we kind of exit the cloud transition, you would expect the three of those to be largely kind of consistent in terms of the growth rate. We're just going through a little bit of almost like the kind of the insertion of a lot of Pega Cloud into our RPO over the last few years. Still a very impressive number. Duration has been relatively steady. I would say it's come down slightly over the last 5 years. Because when we first started, we used to sell more 4- and 5-year contracts and what we realized was that we were over-discounting to sell a 4- or 5-year contract, and at our gross retention rates we really weren't getting the value for that longer-term contract versus the discount. What we've kind of landed on is that the standard in the market seems to still be around 3 years. And so our standard is 3 years. We do have some contracts that are 1 year that are more -- that have more consumption components. We do have some that are longer than 3 years. And I would say our kind of our sweet spot seems to be around 3 years. And that's -- I think that's relatively consistent with other enterprise vendors. I've shown this slide, actually, I think to be fair to me, I think I've shown it from the very beginning of our cloud transition. This is what a competitor's movement through their subscription transition, their movement to cloud. And this is our trend. And if you look -- this is revenue now, just to be clear. If you look, our trend is pretty much on the same trajectory. And I think really validates that when you go through a transition, you lose revenue, you lose front-end billings because you're going from a perpetual model to a recurring model. And so in a perpetual model, you're billing upfront, you're going to start to build over time. In a perpetual model, you get the revenue upfront. In a subscription model, you're going to get the revenue over time. And so you're seeing us kind of track almost exactly the way, say, another sample company that went through a cloud transition -- and some of you probably know who this company is. But -- so this was kind of a benchmark that I used for my own sanity to say what is this going to look like and how we communicated to all of you and also how we communicated to our teams to set expectations? Thankfully, we're through the hardest part of that, which was 3 flat years of revenue, right, and actually using cash flow because you have to use cash flow to move to a subscription business. So now we think about, okay, we're wrapping up the subscription transition now. What should the business look like going forward? How should we manage the business going forward? Well, ACV is still the key metric. In any business, I believe, ACV growth or ARR growth is the key metric in a subscription business. And the next metric though, well, is how profitable is that, right? And it's really a kind of a growth adjusted profitability, right? If you think about it, if you're growing faster, you can expect lower profitability. If you're growing slower, you should expect higher profitability. That's why I used the Rule of 40 concept. I mean, Rule of 40 is just a phrase, right? It could be a Rule of 50, it could be Rule of 30. Some companies, some industries can't get to Rule of 40. Subscription software businesses should, right? And there's many subscription software businesses that get to much higher. For us, in enterprise software, we think Rule of 40 is a reasonable near-term target for us to shoot for. And we're not -- you can never predict these things, but we feel like a path to get there as kind of a 20-20 model, right? Does it end up being a 15-25, 20-20, 25-15, I've said this 3 or 4 years ago. It's hard to really gauge that like that's -- you might think that's a lot of variability in the business, it really isn't. It could just be economic cycles. It could be momentum that you might have over a 12- or 24-month period. But in general, we've been growing at 20% for 5 years now. And we should be able to expect that the business should generate 20% free cash flow margins. And and we will create a tremendous amount of value for shareholders because quite frankly, nobody believes we're going to do this right now, right? You can see that based on the feedback we're getting from consensus and you can see that in our share price, and that's fine because when we actually do execute this, we'll create a ton of value for shareholders. So what are the key levers? So, the interesting thing with our business is the levers are not numerous. In some businesses, you have to worry about high churn and you have to worry about lots of introducing new technology and you have to manage high G&A costs and variable costs from vendors and you have to manage sales and marketing and trying to manage like retention versus expansion. Our business is much more straightforward than that. We have to be efficient on sales and marketing spend compared to growth in ACV, that is sales efficiency, and we have to make sure our gross margins for the components of our business are as best-in-class as we can make them. So the key for us is Pega Cloud gross margin. When we started on this journey to move to Pega Cloud, we had a $25 million business doing about 35% gross margin in Pega Cloud. We now have a multiple hundred million dollar business, approaching 70% gross margin. 70% is not the end point. We've talked about getting to 75%. We're on pace to see that number. There's no reason why with movement to multi-tenancy on some of the components of Pega Cloud and Kubernetes and other technologies and just, quite frankly, operating leverage from scale that number can't be higher than 75%. 75% is simply a target that we've set for ourselves to get to in a fixed period of time. So if we get to our Pega Cloud gross margins, the rest of the business -- the gross margin of the rest of the business is where we needed to be. John mentioned earlier, professional service is becoming a slightly lower percentage of revenue because it's growing at a slower pace. And there's -- in our business, it's really hard to get professional services to what Accenture might be able to get because that's just not our business model. We're not going out and just doing every single services engagement. We don't want to do that. We want our partners to do that. They're built to do that. We want to be selective with the clients that we engage with on professional services. And so I think our margins there were kind of in the 15 percentage kind of range on professional services, but we want to grow our partner ecosystem revenue as we grow our ACV. So, I think that's an important reason why we believe professional services will grow at a slower pace. So our levers are quite straightforward. I'm not saying they're easy, but they're quite straightforward. And so it requires a lot of discipline and a lot of execution. So the margin expansion, I think, is really this slide kind of helps frame to me like where we were, right? 2016 was the year I think we were $25 million or $30 million. We're now over $300 million of revenue, right? ACV is much higher than that because ACV, of course, leads revenue. But look at our gross margin expansion, right? We were doing -- if you go back, I don't have '16 on this chart, but if you went back to '16, we were probably doing $15 million of gross margin. Now we're doing $220 million of gross margin. Some of that is operating leverage scale. Some of that is us actually building a much better Pega Cloud offering and all the support around it. And some of that is, quite frankly, efficiency that we've put in -- to the way that we operate as we actually scale more clients into new regions, et cetera. And as you can imagine, the first client in the new region, the margin is not as good as the tenth client, right? So there's even operating leverage as you go to each country and to each region. Now, you might ask the question, what will this Google relationship? Well, you have to start this all over again, right? No, we don't believe so. We will probably have some lower margin as we scale GCP into Pega Cloud, just till we get some minimum scale. But we have such leverage across the different cloud platforms in terms of how we do security, how we manage the network operation center, how we manage security operations, then we'll be able to leverage that across multiple clouds. And by the way, Google and AWS, they're just our first two. There's no reason why Pega can't operate on every single cloud. They just -- this is just a prioritization of where the demand is coming from. And quite frankly, the partners that want to work with us the most. And Google has been a great partner so far in terms of giving us engineering resources to help accelerate. Because there's a lot we need to learn about GCP as we went through that and really to be almost a subject matter expert even for our clients when they choose to deploy maybe on client cloud on GCP. So as we think about exiting the transition, we kind of go away from -- like we're going to go to these complicated revenue optics to a less complicated. I don't want to say no complication because we still do have ASC 606, and we do still have some client cloud bookings to deal with, where you don't actually get the really clean linearity of the recurring revenue stream. We've always focused on ACV growth that has been -- it's been the last 5 years, and it will continue to be the most important indicator. And we now have Pega Cloud really being kind of built up in our backlog and something that helps that predictability of kind of seeing how much of our commitments stagger out multiple years. Now we've got to really focus on the revenue kind of becoming less disconnected to ACV. Remember, the last 5 years, it was fairly disconnected. That will not be the case and really to then now start generating free cash flow margins that we expected to generate as we exit the cloud transition. So I have a model in here. I have done this 3 or 4 times. I started this in 2017. I think this has been helpful to start to at least paint a picture of where we think we might be in the future. This is -- by any stretch, just remember the -- our disclosure at the beginning, the safe harbor, like this is a view of how we think about the business. I would love to be able to say that I have 100% certainty that this will happen. But unfortunately, I can't say that at this stage, but we are working towards this model. I put 2025 as a target, just to clarify one thing. It doesn't -- this is not a change from us shooting for Rule of 40 in 2024. So I don't want to clarify. I don't want you to think I moved it out a year. I didn't -- I just wanted to go out 4 years because I've typically went out 4 years when we've actually changed our model. And it just gives us -- it's kind of -- like it gives me like this year in 3 more years to be able to set the target. So we picked 2025. A couple of things to think about. We've created a range, right, of a 15% to 22% ACV growth. We've kind of -- you'll see our gross margin does not have a lot of variability in terms of our gross margin target at that time. And we've kind of shown at the bottom a little bit of kind of how we will try to manage our way back to getting as close to Rule of 40 as we can. Naturally, if our revenue growth reverts to 15%, Rule of 40 will be harder to achieve, certainly not impossible to achieve, but harder to achieve. If our growth rate stays somewhere just in that 15% to 22% range, I think Rule of 40 is very much in sight. And I don't -- I wouldn't say easy, but I would say very achievable. As the growth rate slows, naturally, you have to really change the structure of the business to get to Rule of 40. So growth rate is an important component of this. And then you'll see at the bottom, I put a number that kind of -- it's an important metric that I think about, which is the sales and marketing cost compared to the net growth in ACV, and you'll kind of see that in an upside case, we get to $2.20 of sales and marketing dollars for each dollar of ACV growth. $2.20 is not best in class, right? That's -- I would say that's getting close to like normal, right, in terms of what you would expect. $3.50 in 2021 is not something we're proud of, right? So we need to -- we -- that's a very big lever point for us. We need to be in that kind of $2 to $2.50 range, which we think is very reasonable for an enterprise seller that does have a significant amount of ACV that you're retaining. Remember, a lot of our sales and marketing costs are account management, customer success to manage the ACV base. But we think that we still like that metric because it's not perfect to disintegrate like the sales and marketing into like growth versus retention because you're selling to the same clients. So, we think we want to be somewhere between that $2 and $2.50 range. And we think if we can run a sustainable business at that, you can see -- and this still shows growth in R&D. It still expands growth in G&A. It really doesn't hit a gross margin target that I believe is a crazy target for us to hit. But it does kind of give you a framework of how we think about how Rule of 40 might be achieved over the next few years. One interesting point on this slide is that in 2025, Pega Cloud ACV will be more than client cloud ACV. It might happen in '24, but it's going to happen somewhere in that time frame. That's -- it's a pretty amazing shift considering it was $30 million in 2016. So now I want to give a little bit of a calibration on '22 because I think there is -- and innocently, I think there is a misunderstanding of how revenue flows in Pega through the quarters in a year. And so I just wanted to give a little bit of history. On the left, is the net ACV add percentages for 2018 to 2020. On the right, is 2021. What you will see is that in '21, we had a much more linear ACV add between Q2, Q3, Q4, 28%, 29%, 33%. That's a percentage of the full year. In the last 3 years, you can see that we had a much more of a tipped ACV growth into Q4. The reason why this is important, this is the first step up. I worry sometimes that when analysts buy or sell model, they look at the last year, and they use the last year distribution to model the current year. And I'm just cautioning everyone, you should take into context 2018 to 2020, which is more representative of the way that an enterprise business with scale. Why do you think that happened? Well, we actually had some deals, and I talked about this last year that came into Q2 and Q3 that might have otherwise come in later in the year. So I just wanted -- that's just -- there's a couple kind of points I want to make. This is one. The next one is because of that ACV, skewing to the Q2 and Q3 and began higher percentage of client cloud in those quarters. And for those of you that aren't aware of how that connects Client Cloud needs more in-period revenue, Pega Cloud needs more revenue over time, meaning less in-period revenue. You first have a skewing of where ACV was. You also -- if you look at the revenue, in a typical year, we have about 47% of our revenue in the first half of the year. Last year, we had 53%. It was flipped, right? And so if you think about that, you've got higher ACV in 2021 spread earlier in the year, and you have higher client cloud spread earlier in the year. Pega Cloud for the first quarter was 67% of our booking. My visibility -- I've said this in the last quarter, my visibility into Q2 would suggest Pega Cloud will be high again in Q2. So if you think about those factors, ACV, I think just not -- everyone has to model the business the way that you model it, but I'm just trying to help explain a couple of points that I think may be misunderstood: One, look at the linearity of ACV bookings; two, consider the impact of Pega Cloud versus Client Cloud within the periods because that does actually have an impact with current period revenue. In addition to those two observations, I wanted to highlight that we're at 67% for Q1. It's one quarter. I've told you before, I have no idea what next quarter is going to be like for the full year. I can only tell you that, that's an unusual start to a year and Q4 of 2021 was a higher Pega cloud quarter as well. And Q2, based on my visibility now, looks like a higher Pega cloud quarter. That could be three quarters in a row if it comes in, where Pega Cloud tends to be shifting up. Now I've told you I don't care. Pega Cloud, Client Cloud. I just want ACV growth. And I still stand by that. But in terms of thinking about the business and modeling the business, you do have to factor that in. You might say, why is Pega Cloud? Explain why you have three quarters of -- the only thing I can explain is that I think our sales team and our clients are much more comfortable buying Pega Cloud. Pega Cloud is not in its first or second or even third year. I think there's a lot more references, clients have experienced Pega Cloud. And quite frankly, we have a much better offering now than we did when we first started. So I think those may be factors. Once again, not a prediction, just some insight. This gives you -- this slide gives you a little bit of the sensitivity. If we had kind of guided earlier in the year a low 50% Pega Cloud. If we were to jump that by 20%, meaning in the low 70s. It would be an $80 million impact in revenue for the year. It would be about $0.74 of GAAP and -- someone want to hit that. Thank you. I guess that means stop talking. And the change in non-GAAP would be about $0.72 to $0.74, $0.74 cap. So we are committed, though, that we're going to manage the profitability of the business such that if this happens, we're going to do everything we can to make up that EPS, meaning we're going to underspend on cost even if the headwind for revenue is just related to mix. And I think if that happens, it would actually be a great thing in terms of maintaining our margin targets, but actually having more revenue in the future would actually set us up to have a much better model in '23 and beyond. So I'm not -- I know there's a lot of information here, but I'm just trying to give you some color on different things to think about. Wrapping up, what does this all mean? We want to sustain our higher growth. We went from 13-ish percent up to 20%. We want to maintain that. And that's through the transition. We're almost done, right? We're on the other side of the transition. While driving this margin leverage increase, which we said we were going to do in 2017, right, this was not something that was new and that will help drive significant shareholder value. One, because the numbers -- the economics of the business are very much driven by a balance of profitability and growth. We know that. They were less balanced on that as we went through the transition. It was much more just around the ACV growth. And so we're now at a point where all of you and us expect to see the yield from the subscription transition. And so we have some time, and I'll check the room first, Rishi, and then we'll see you online as well.

Rishi, RBC. I want to go to the Rule of 40 and the target models. Maybe, I guess, piece number one, just to confirm, you're not backing off what you said on the last earnings call, which is by Q4 of 2024, you should be able to hit the rule of 40, right?

That is correct.

Just wanted to confirm that. And then maybe alongside that, two follow-ups there. First, when we think about your ACV growth targets, you're actually talking in your base case sub-20%. And I know obviously, the aspiration is to be above 20%. And -- but I think the tone has always been, hey, we're going to be 20% growth for several years. Is this a change? Or is this more conservatism or what?

I think -- I wouldn't -- I would say 19%, 20%, and 21% to me, are all like kind of just slight degrees of separation. We wanted to model with a 19% to really show ourselves what we would need to do to get to 21% free cash flow margin, right? So we've run into a trap in the past around shooting for higher growth and then slightly having it be a little lower than we thought and then basically still having the investment cost in the business. And so we wanted to kind of change that dynamic. So I would say the change is more of a change of us focusing on profitability than it is acknowledging that we tend to grow -- we aspire to grow lower.

Okay. Fair enough. And then you talked about Pega Cloud ACV larger than Client Cloud ACV at that target. How should we be thinking -- and I know the metrics, obviously, change quarter-to-quarter. But like long term, especially given the incentives you're giving your sales force, some of these partnerships, obviously, the way the industry is going, how should you aspirationally be thinking about that mix between Client Cloud and Pega Cloud?

Yes, that's a good question. So it's -- the way that we've thought about the modeling of that is that Pega Cloud would -- there would be more bookings of Pega Cloud than Client Cloud. And we -- a couple of years ago, I kind of thought that we might get Pega Cloud up into the 65% to 70% range of bookings. And then I think the people, when they saw that it was 50%, I think some people thought, well, that's disappointing because you want Pega Cloud. I'm not exactly sure why we do, but I'm just not going to dispute that anymore. We want Pega Cloud. I would say what we're seeing now is maybe that will happen now in the next few years. And for whatever reason, it didn't. Now naturally being on the Google Cloud Marketplace and the Amazon marketplace help a lot because those are actually all going to be Pega Cloud solution. So that might be 1 catalyst that might actually help to move that out. So I would say, I think maybe thinking about that 2/3 of our bookings kind of being Pega Cloud, probably a good way to think about how we think about it.

Okay. Last one, I promise, I'll give up the mic now. But going away from the target model, it seems throughout the course of the presentation today. There seems to be this kind of doubling down on enterprise customers and really the largest organizations in the world. It seems like the solutions do have very broad applicability going beyond just the G2K or Fortune 500 or whatever you want to measure. Why not maybe target a little bit more down market, especially customers that might be down market now, but that can grow up to become G2K companies over time?

So that's a great question. And I think it comes down to focus. If I had to pick one word, I would use that word. We tried to do that over the last few years. And I think what happened was, we got more focused on the down market clients and less focused on the enterprise. And I think that we have to be really careful because if we're not fully committed and focused on those G1K maybe even like organizations, we risk not expanding in them as much as our competitors. And so although I would love to do everything, I think we have to pick where our primary focus is and where our secondary focus. And I do think over the last few years, we've been a little bit kind of balanced, which I don't think actually helps us. I think we need to be focused on. These organizations already love us, already see the value, need more of us and our competitors are going to go in and sell the solution if we don't. So I think I would say more, we want to make sure that, that's adequately productive and shored up, but there's no reason why the second part, what you said is not applicable, is just we have to be careful, we don't distract ourselves from where the low-hanging fruit is, in my opinion. So Alan, I don't know if you heard that question, if you had anything to add to that.

Can you guys hear me?

Yes.

Look, it's not like we won't get pieces of business brought to us, Rishi, from [indiscernible] and that there are partners and others who might be interested in engaging us. But in terms of what we're going to put our controlled effort over the next 12 months to try to make sure that we're taking control of our destiny, and we're building the efficiencies that Ken was talking about. We see those most profoundly and most reliably in the sector that brought us to the $1 billion plus that we are, which has enormous, enormous upside and, frankly, need us more than ever given what's going on. So a lot of this is, I think, exactly getting a focus as opposed to letting 10,000 flowers grow, which were -- is simply candidly not the right strategy for these economic times, regardless of what's going on, I would say.

Hey Alex, can you just identify yourself?

[Alex Rossgen from LCG]. Just a quick question on the Rule of 40. Given again that 2024 is what you guys have said, I think, sort of back half of 2024 to reach Rule of 40. I would expect, as you go forward, like, i.e., into 2025, you would see an expansion of Rule of 40 to a Rule of 42 or it should be sort of a linear increase. So as you get more and more efficient, like you said, you get Pega Cloud gross margins above the 75%. So I just want to step back to the 2025 target, you kind of kept that at 40 as a base case and just wanted any sort of comment on once you hit Rule of 40, what would be the cadence of getting to be a Rule of 41, 41.5 something like that?

Yes, that's a totally fair question. So I -- when we modeled 2025, Alex, we did not show incremental operating leverage or efficiency getting from like the back half of '24 into '25. We just modeled it as staying kind of steady. But to answer your question, that is the assumption that 40 is some endpoint or the best that we can do, that is not our belief nor would we be happy to be able to continue to scale the business and be kind of kind of "stuck at 40." I think where we are right now and where we have been in getting to 40, we think is quite a bit of value creation and some improvement in sales and marketing efficiency that we have not done in the past, that we just really didn't feel comfortable starting to set pegs past that right now. But I think your question is absolutely, I agree with you. There's no reason we shouldn't be able to go. Each $500 million of revenue or whatever, you should be able to take it up another point or two until you hit kind of some efficient frontier where you're like, okay, I'm at 45 or I'm at 47, and that's really -- we're not a business that can do much better than that, whatever that number is.

Yes. And just -- I guess, I'll just -- I guess I'll ask maybe more pointed question, but you guys have basically zero churn, you grow -- you know 16% of your 20% growth is from your existing clients, you're dealing with large organizations. Why aren't you already much higher. I mean why are you not already best in class? It's rare to have a software business with essentially zero churn that's still kind of operating at lower metrics than a lot of their peers. Understanding, you have to get out of the cloud transition, but even adjusting for that.

Yes. So adjusting for the cloud transition, we're probably back to like kind of a rule of 30 or something like that, if you actually like gave us credit for being out of the cloud transition. So your question is, why aren't you 10 points better? So -- and those really are the two key drivers, which is we're not at operating scale yet to get Pega Cloud margins up above 75% yet. That actually has a factor. I mean that's a few of the points right there, right? And then the second one is, we made a significant investment in our go-to-market that we have to kind of address, which is we bifurcated our focus from enterprise to all other orgs. And we're in the process of addressing that, Alex. If we had never done that, we would have been -- we might have grown at a slightly slower pace, to be fair, but we would have had less sales and marketing costs in the system, and we would have probably been much closer on the optimization of sales and marketing. So it's just those two components. And there's no reason why we shouldn't be there except we made a very strategic bet to try to invest to grow faster in markets that were not our core markets, and that did not work, and we admit that, and we need to address that. The second one is we're not an operating scale yet for Pega Cloud. I think -- look, our gross margin of Pega Cloud is 70%, way higher than ServiceNow or Salesforce or anybody else was at the size of the business, right? When they were at $400 million, they weren't anywhere near 70% gross margin. I mean I think ServiceNow took to almost $2 billion in revenue to get above 70% gross margin. So I think we're respectable in terms of where we are. But that's totally -- I don't -- that's a very fair question. It's just those two components are misleading, so to speak, in terms of decisions we've made.

But the short answer is we think we can do better, and that's what we are working on.

Any other questions in the room?

Tom Blakey with KeyBanc. It might be related to the prior gentleman's question on margins. I'd be interested to know about your SI build-out. You mentioned ServiceNow and other companies have moved away as these SIs build out. Teams and centers of excellence at their respective SIs. And I was wondering if you can give an update there, maybe if that could have a positive impact on your long-term Pega margins? And maybe if you could, why haven't these big SIs done this in the past? It seems like that connective fabric thing seems like it's right up the alley in terms of creating billable hours.

Yes. So we believe that we are the perfect solution for SIs to build a very fast-growing market. And I believe they think that, too. I do think the one thing if -- not to say there's only one thing, that's unfair. But one thing that was very differentiated in the last 2 years that Hayden helped a lot, was really helping us rebrand ourselves with our SI partners, right? I think our SI partners were a little nervous that we would compete with them on professional services, and that we would bring them in too late and that we were a little bit more like we created a wall, like that wasn't intentional. I think that was just -- we did a lot of professional services. I mean 5, 10 years ago, we had 35%, 40% of our business was professional services. So it was a meaningful part of our business. As we move to subscription and we really downplayed that, we probably didn't do some of that early work with bringing the SIs in and saying, this is the work you should be doing, like we -- so you need to build out your certification, like we want you to take this work. We've done a very good job of that in the last 18 months to 2 years. So that is something that was like it wasn't a conscious change. It was probably maybe more of us not realizing that, that perception existed with the SIs. But the first part of your question is a little bit of a different angle on that, which is why -- how do we like actually strategically partner with specific SIs where we're almost building an experience where they are, say, an expert or they're the tip of the spear, so to speak, in terms of clients coming in. We've actually done some of that already. We've actually -- we partnered on a robotics lab with our SI partner. We've actually -- we've done a lot of co-marketing events. We're actually starting to do actually events together with SIs. So, I think that there will be a lot more. That will be a very big focus to make sure that not just those three big ones that John mentioned, but any of the big SIs, we want them to have flourishing growth practices because we expect to grow faster and it kind of becomes the chicken or the egg, right? Like we're going to grow fast, but if there's not skilled people in the market, how do you deploy it? If there are skilled people in the market, you have to grow faster. So I think they're really -- they need to be married together. And so I think that's something that I think we're doing much better in 2022 and we just have to be careful that, that does not mean go out to every single partner and let anybody that doesn't even have Pega certification sell. Like that's not our strategy. Someday it might be, but that's not our strategy now. Our strategy now is the density on the largest org -- and by the way, all those SIs are completely embedded in every single one of our -- the logos that Leon showed on the one slide, right? They know the clients better than us in many cases, right? Because they're in there as the strategic SI partner. So I think we've got to leverage that.

Any other questions?

Questions from the Zoom. So the first question is a follow-up for [Alan Bernard] from Barclays who is asking. Following up on the process mining question that was answered earlier, Alan, how does this acquisition that you've done of a process mining firm, help you compete in the market with other players like ServiceNow and Microsoft?

So can you hear me?

Yes.

So look, I think this makes sure that we've got a fully rounded out platform that makes it possible for us to go and say, hey, look, there's nothing missing. We -- I think, are a much stronger platform, of course, in many of the core elements as it relates to the real-time decisioning, look at that brilliant Forrester report that just came out in the last week there. Being able to put that sort of AI and being able to put the process in. Not having the process mining, process discovery was a place other people could say that they had something we didn't. Now they can't, and actually I think it's going to fit in. As Kerim said, when we bring on a technology, we always do it with an eye to how we avoid that Frankenstack, I think Rishi was talking about. So I think it just makes sure that we continue to be, in our view, by far, the most fulsome, but also the most effective at scale platform that's out there. So I think it's helpful in making sure our bases are covered and giving us some new ways of offering.

So if it's okay with everyone, I think we're going to take a few more questions online. And I know we're a little bit over, but we'll try not to take you too far over, but just to hit a couple more. So the next question is from Steve Koenig from SMBC, so this is a question for Ken. Ken, can you remind -- Steve says, can you remind us what assumptions you are making about deal cycles, so sales cycle times and the sizes of sales, so deal sizes through the remainder of the year? And how do those assumptions reflect any recent changes in the overall demand environment? So, you're seeing an impact on sales cycles and deal sizes?

Got it. So our deal cycles, they're a little bit different depending on if it's an expansion deal with an existing customer versus a net new customer versus a customer that's a new application. With an existing customer, it is naturally expansion of usage kind of on an existing app is a very quick turn, right? Those can many times happen within a quarter. Sometimes they happen in less than 30 days because you're really just talking about the client putting more workloads there, it may not require significant selling cycle, a new logo can take some time, right? Sometimes it happens in a quarter, sometimes it's a 1- or 2-year process, right, to be able to demonstrate to do a pilot, et cetera. But if you really look at kind of like the trunk of the tree, so to speak, of transactions, we're typically in the couple quarter kind of range in terms of deal cycles. I have not seen that change over the last few years. I've not seen the people we compete with, the way that clients make decisions, or, quite frankly, the selling process materially change. Now the issues that are relevant in the marketplace change, of course, because as Leon mentioned before, there's always situational, environmental reasons why people do things. But I would say, in general, there's not -- I don't think there's much materiality -- much of a material change in that. And I would say that our win rates are higher with existing logos than they are new, but that shouldn't surprise anybody.

Next question is from Joey from JMP. So Ken, how do you think about measuring sales efficiency internally at Pega? And can you provide any color on how sales efficiency has been trending?

So I think the easiest sales efficiency measure is sales and marketing expense compared to net ACV growth. And we can dissect that further between the components of renew versus up-sell. But I just think because we're selling a lot to our existing logos, it's probably a science project that's not helpful in terms of analyzing that. So I think we want to think about sales and marketing expense compared to net ACV growth. That number, we were more efficient in 2016, '17, '18 and '19 than we were in '20 and '21 -- excuse me, in '21 and the beginning part of '22. We would aspire to get back to the productivity levels that we saw a few years ago, which, quite frankly, we're not best-in-class. So it's not like we're trying to get to some number that's been elusive to us. We actually were more productive in '17 and '18 on selling. We made a very big investment in go-to-market as you know, that lags in terms of productivity because you have ramping, you have sales cycle. We're going into new logos, et cetera. So -- and that didn't yield. So some of those costs really are related to bookings that will quite frankly never happened. So I think just think about sales -- that's the best sales productivity measure I can think of. It's analogous LTV to CAC, right? It's just in an enterprise space. And the second part of that is, I think we aspire to get back to slightly better than we saw in '17 and '18. And as Alex kind of alluded to earlier, the business will be twice the size. So we actually should be able to be at least, if not more, effective at a higher scale.

And candidly, the reason that's a good measure is that's a measure that Ken has very openly discussed inside Pega with our team because we can point to it. We can point to different parts of the business and discuss what different parts of the business may be better or worse with the right puts and takes. And we can also compare it to the external world without doing -- I mean, it's really easy to go and pick that off of the income statement. So I think thinking about that and reassessing how we regain some efficiency and how we then bring that efficiency to a larger scale. I think that where we are, it's just a very pragmatic and a very practical way to get lots of people with the company to understand it. And I think a lot are really starting to understand that. Because I'll tell you, the ability of organizations to want to spend money, as we know, is insatiable, right, because that's just the way it works. People are trying to do good things, trying to help. Understanding what the governors are and understanding how we're going to measure ourselves I think, ideally, we'll traverse the organization and just make everyone smarter.

And I think, Alan, just one last point on that. Alan touched on something that we have to do internally, which is making sure we can allocate the productivity of the spend inside sales and marketing to subsegments of the inside Pega world, so that we can actually attribute everyone's effort to yield, whether that be North America, whether that be a product line, et cetera, that gives us more visibility to actually show where we may be kind of over or under our targets of where we want to be as opposed to just a macro level measure. But for all of you, I think a macro level measure is the most simple.

So this next question is for Alan. It's also from Bernard from Barclays. So Alan, can you give us an update on Project Fnx? Where are you with Project Fnx? When do you expect Project Fnx to be completed? And what's the impact that we should expect to see from Fnx? And what have you been learning as you've been rolling Phoenix out from the clients who have been picking it up?

Well, Fnx is a change to parts of our technology that really modernizes the stack, modernizes Pega, it gives us new options and ways to go. All of the elements to create Pega as a microservices-enabled technology, which we've been able to roll out -- continue to roll out, but have already brought those pieces in. Those are things that, frankly, were enormously helpful in enabling us over the last 12 months to move to a technology called Kubernetes, which is one of those very state-of-the-art ways of running environments. All of our new cloud customers are brought up in a complete Kubernetes environment. Our customers on -- client cloud customers can use that, too. That was one of the things that really helped facilitate our ability to bring on the Google Cloud Platform in the way that we've just announced. So Fnx is in the present and we have an ongoing stream of capabilities, some incremental, some were dramatic that people are going to see. So I think that's -- I think we've gone through a very successful revitalization and -- with Fnx, they sort of rise from the ashes. I don't know that we actually had to burn anything down, but I think we've been able to rise from what we did and bring our clients along with us. And the feedback has been very enthusiastic.

And to add to that, some of the margin improvement that we've seen in Pega Cloud in the past year and in the future are related to some of the architectural changes that Alan just mentioned, which allow us to operate more efficiently in any cloud. And that helps our clients even when they're on client cloud as well, right?

All right. We're going to wrap up with two more. So we have a question from [Steve Wenders] who was at KeyBanc, who's now at Citi. Ken, can you talk a little bit about sales efficiency? What is it going to take strategically to drive more efficiency from sales and marketing? And how do you get that down to a more best-in-class number?

I think it's a focus on the organizations that have the highest propensity to buy from Pega. I think it's putting a team structure together on those organizations so that as many individuals that we have in the sales org are actually driving pipe and driving deals, right? The trap that companies have, and I've been in a lot of software companies, either as an adviser or an executive. The trap that companies have is building organizations that function as overlays that aren't close to the client that don't actually drive pipe or deal closure, but thinking that they help. And they actually probably do, but it's really hard to measure. The more that you actually can measure it and the more that you're focused on where the clients have a high propensity to buy, to me, that will that will absolutely yield better productivity. Now it might -- the trade-off is you got to look at growth, right? Because that could also mean you're not covering enough works. You've got to balance that. But right now, where we need to skew back towards productivity and focus on the orgs that matter.

All right. Great. And we'll wrap up today with a question from Goldman Sachs from Kevin Kumar. Ken, can you provide an update on the progress being made to -- with partners and partner enablement since the investor session last year? Is the number of deals that's being sourced by the partner channel, where you would like it to be at this point or not? Can you provide a little color on partners what's happening there?

Yes. Let me reiterate one thing on partners because I think there's a little bit of misunderstanding on that. So we are not building a partner ecosystem so they will go sell the product independent to Pega. That is not what we're doing with partners. However, we do believe that our largest, most relevant partners, like in Accenture, like Cognizant, like a CapGemini, like an Ernst & Young, will see deals, see opportunities and help either bring them to Pega or certainly make us aware of them, and also kind of co-sell with us to help the client realize the value. And that is where we're focused, whether you call that a sourced deal or whether you call that an influence deal, those are kind of like operational terms that companies use, that is where our strategy is. And I would say we have -- it feels anecdotally, but when you look at the data, you would suggest that this confirms it, that our partners have never been more in step with Pega on the selling process than they've been in the last 12 months, 18 months. And I think that, that will -- we will only become more engaged with those partners, but we're not looking at just randomly signing up partners. We're not selling -- we're not staple selling shrink-wrap software, right? That's not who we are. So we need people that are enabled, that are focused on a market, that are focused on a vertical, that are differentiated, that are all in on Pega. And there are lots of partners like that, and that's who we want. And so that's where our focus is. All right.

So to wrap up, Alan, do you want to make a closing comment or two, and then we'll conclude. And again, please join us for the reception after for the folks that are in the room there. Directions here and it's right around the corner. Quick walk.

Thanks, Peter. And thanks for the team. I hope the job that we did was informative here. Assuming we're trying to be very transparent. And I just want to thank everybody who's working so hard as we go through. It's going to be a really interesting year in so many dimensions. So we're working hard, and we're here. I want to do a great job for our investors. And I frankly, wish for those of you in Cambridge that was able to join you in person, which I don't think is quite in line with the health codes here, but have a wonderful lunch, and all of you glad to talk to you guys.

Thanks so much, Alan. And I just wanted to wrap up today. Thank you all for coming. This is the first event we've done in our new executive briefing center and everything worked technically, which is fantastic, very, very excited about that. And I'm looking forward to talking to you either at the reception today after this or on the road as we move forward. So thank you all very much. Take care.