Pegasystems Inc. (PEGA) Earnings Call Transcript & Summary

I think we'll go ahead and get started here. I am Kevin Kumar. I'm part of the software team at Goldman. And with me, I have Ken Stillwell, CFO and COO of Pegasystems.

Hey, Kevin. Thanks a lot.

Great. Yes, maybe to start off, for folks that are maybe newer to the story and to level-set, could you maybe give a brief kind of intro on Pega, kind of the history and kind of the pain point that the platform is addressing.

Sure. So Pega originally started out as a more of an alternative to writing custom code for certain types of activities in the enterprise and enterprise clients. So it wasn't really architected early on to be a true low-code platform, but I would say that it helped you adopt things that were a little bit more standardized in terms of how you build applications. If you kind of fast forward maybe 10 or 15 years into our existence, we kind of had, I would say, kind of productized a certain set of features, things like managing kind of a container or a case of a workflow that would transact through a series of steps. We started to use deeper integrations to other applications where we could share data. But really, the context of it was there was this case, and the case contained information. And the case transacted across steps in an action workflow that would allow you to do a certain process without having to do it piecemealed in a bunch of different applications. If you kind of jump forward to the next evolution, we started to really think about the application being not just customized use cases, not just things that you couldn't do in another system, but things that you could commonly do in another system. So we -- and that was where -- as we started to enter into the CRM space. So this is kind of like the 2010 time frame. We started to realize a lot of our use cases were clustered around customer service and dealing with CSRs and call centers, et cetera. So we kind of -- that was like our next evolution into the contact center. We did an acquisition called Chordiant about -- this is probably about 10 or 11 years ago. And that acquisition gave us really strong, what we call, customer decisioning. Think of that as AI. But we had already had some AI embedded in the platform through the way that we created rules and kind of rule sets and logic that you could learn from different transactions. But the Customer Decision Hub was really like the next level of AI. So as we have that, we started to enter into marketing automation. So you kind of see how we started in like business process automation. We started to get into the contact center, started with use cases that touch the customer. Then went into really a full-service customer service use case. Then started to acquire things like AI and marketing automation. And then it kind of evolved as we got into social and we got into mobile and we bought a robotics platform. And we got a deeper kind of global search kind of native capability and reporting; and then got into messaging; and then most recently, process mining. So we've kind of -- we've done very selective and strategic smaller acquisitions to kind of, as you might call them, tuck-in technology, where we could integrate them into the platform. The reason why we've done it that way is because we believe the unified platform and being able to manage everything within the Pega platform is the difference maker. As opposed to having to have disparate applications, we're really solving that problem of how clients go out and buy one application for 50 different use cases. And then they kind of step back and say, "Well, wait. I have to get work done across all of those applications. How am I going to do that?" And historically, they would use a business process management tool. But the reason why you want to use Pega is you get the business process management, workflow and work automation. But you also get it with AI, with robotics, with real-time integration, with process mining, with messaging integration, the communication channels. So that's kind of where we are now. If you think about the most common use cases that we have are going to be in enterprise companies that have scale volume of transactions where you want to try to take humans and slowness of dealing with interactions with other systems. So that we -- I commonly call that orchestration, but it's really end-to-end work automation, right? Just being the engine that does that. We integrate with the Salesforces and the Adobes and the Microsofts and HubSpot. And any application that the client has, we become almost like the center force of the communication between all those applications. And we use that -- remember that case structure that I talked about? We use that container to really be the kind of the data around the transaction. And then -- and we're not the system of record, but we're kind of keeping all that intelligence to drive the transaction.

Great. That's great color. And obviously, the Pega platform has expanded quite a bit over the years. And I think recently, you announced Pega Launchpad. And so it sounds like that's kind of been in the works for a while as part of Project fnx. And so maybe talk about kind of that launch. I think it helps ISVs kind of build applications rapidly. Kind of where does that fit into the platform and kind of the market opportunity there?

Sure. So the thing that we struggled with over the years, and really even kind of the last few years, is we've done incredibly well with enterprise clients. Like if you think about the top 10 companies in every vertical, they're largely going to be Pega clients. But when you started to go past 300, 400, 500 organizations, you really -- you have to think about this. Is your application built for enterprise? Or is it built for broad application across every company? Our application was not built for broad app, it was built for enterprise. So what we -- but we really felt like there was a miss in the market. Like why can't we take this rich capability that we built and allow it to be accessible by lots of SMB and mid-market companies? We tried to first sell that way. The problem is it's very difficult to sell in a single-tenant environment an enterprise application that actually is quite powerful and try to use it for a defined kind of almost commercial off-the-shelf application and make it efficient at lower volume. So that was kind of the struggle we had, and we tried that a little bit and successfully over the last few years. But really, we were a little bit ahead of our -- of where the product was. The product, really what we did with Launchpad, which came out of our fnx initiative that we started 3 or 4 years ago, was Launchpad is really the manifestation of all of the Pega capabilities in a multi-tenant offering that can actually be sold to the masses. Now we're not going to sell it. We're going to actually go to ISVs and software companies that have their own use cases that they want to leverage our platform and build that use case on the Pega platform and use all the capabilities that I mentioned earlier as opposed to us creating like a different sales team and having to go and almost create each application and try to manage the product and have vertical expertise. We feel like that can be done better at scale through the ISVs.

Great. Maybe shifting gears. I wanted to talk about macro; obviously, kind of a key topic among investors. I guess you talked about it a little bit last earnings call, but kind of give us an update on kind of what you're seeing in terms of demand environment. I know you made some comments around Europe last quarter. So kind of maybe level-set kind of what you're seeing right now.

Sure. So I'll start with just maybe ground you what we've seen over the last few years, and then kind of fast forward into the last few months. The last few years, I think the Americas have held up pretty well, been pretty strong. I would say Europe, in general, has been a little sluggish, probably since probably -- honestly, probably in the last 5 years. If you go to APJ, it's been pockets of growth, pockets of sluggishness. But I would say, in general, stronger than Europe has been. So Europe has not been a particularly strong market from what we've seen for -- this isn't something new, right? This has been going on for a little while. If you go back to the last few months, I think that we -- what we've seen is there's been, in pockets of verticals like, for example, manufacturing, that's a little bit more exposed to the interest rate risk in a negative way. We've seen definitely some headwinds there in terms of spending activity. If you stay in the enterprise space and you stay in like financial services or insurance or health care or communications, those verticals that are our larger verticals, I would honestly say we haven't seen much in terms of negative activity in sales campaigns or customer spending. New logos, and anything where you start to go into the mid-market, I think, has definitely shown more question in terms of the health of those areas, which is why one of the reasons why we really decided to pivot stronger towards our existing logos in the enterprise clients, because quite frankly, that's where our product market fit is better. That's actually where we've done better. And that, in times of economic uncertainty, I think those are the companies that actually have a little bit more predictability in the multiyear spend. The thing that I think has been interesting is Europe has been -- parts of Europe, I think, are more impacted by what's going on there. A large concentration of our business is not in Eastern Europe, right? When I say Eastern Europe, I even mean Central like Germany. Most of our business centers around the U.K. and a little bit in the Nordics and some of the Benelux region. So I do think our European clients are not as financially impacted in the near term from what's happening there. But I do think, in general, Europe is lower.

Yes. and then in a more uncertain macro environment, Pega obviously provides a mission-critical service, very high retention rates. Can you maybe talk about the resiliency of the model? Obviously, last time we had a major kind of macro issue, Pega performed very nicely. So maybe give us the context of kind of the customer base, the resiliency of the customer base, and kind of how you weathered through kind of a more uncertain macro environment.

So all downturns do not look the same, of course. But if you go back to the 2008 downturn, Pega grew through that. And admittedly, that was a pretty hard one because it was financial services were impacted, and that was our largest vertical. So I do think we did pretty well in that given that financial services was our largest vertical and they were hit pretty hard. Financial services is still our largest vertical. And quite frankly, in an increasing interest rate environment, I don't know that a high rates and a slower economy is net positive to financial services. But I don't -- they're not as impacted. They're a little bit hedged, right, between those 2 factors. I think the difference with us right now from where we were a few years ago is we had to go out and sell perpetual licenses to make up the gap each year, right? We don't have to do that anymore. And that's a big -- I think that's a big lever for us in terms of creating a level of insurance in uncertain times. In 2008, we had 50% of our business or more, we had to make up the gap of whatever we sold the year before. With our retention rates being close to 100% and our net retention rates being well above 110%, I think even in a downturn, you would not see people turning off enterprise applications. What they're using us for, like you mentioned, mission-critical. It takes a little bit of time to get it plugged in. The good thing -- that's a negative, right? But the good thing with that is, when it's in, it's highly sticky. So you have to balance that trade-off. So I do think we're a business now that's all recurring, with the exception of our professional services business. And even our professional service business is pretty predictable, and a portion of that is even recurring. So I think we're even better positioned now in terms of the verticals that will be affected right now and our reliance and the diversity of our business across customers, and the fact that we're all-recurring. So I mean, the data would suggest that we would be in better position than we were even in prior downturns.

Yes. I wanted to pivot to something you said earlier on kind of refocusing on your core customer base. And I know you talked about that a lot at Investor Day in June. And so maybe give us kind of an update on kind of what's changing in terms of the sales force and how they're refocusing on your core clients with the highest propensity to buy. What are the implications to maybe profitability and unit economics? Some color there would be helpful.

Sure. So let me start -- try to make this coherent. So selling to existing logos is more efficient than selling to new. I'm not sure I'm telling you guys anything that you don't already know because that's pretty common in any software company. We believe there is a tremendous amount of white space or upsell or expansion with our existing logos. So if you think about -- we're not -- even in our most penetrated clients, we're probably not 20% penetrated on what we can sell them. And if you looked across our top 300 or 400, I mean, we're probably like 3%, 4%, 5% penetrated. So there's years and years of runway. And admittedly, it's more efficient to sell into the people that already know you. So if you kind of -- and our retention rates are incredibly high. So if you put those 3 things together, we're going to have to work those clients anyway. Why not work them and up- and cross-sell them in an environment where it should be more efficient, right, because you get to leverage multiple activities that you're doing. So that's kind of this -- if you buy what I just said right there, which I certainly do, you would say, "Well, then why would you go after new logos until you run out of runway on your existing logos?" And I would say, "I agree. We probably shouldn't have went so hard at new logos." I don't want to make it sound like new logos don't matter, though, because, of course, they do, right? Of course, you have to win new logos because you have to have the continued expansion to your customers so you have more to sell to a broader customer base. But we really pivoted hard away from our existing clients the last couple of years into new logos, into new markets, into new use cases. Down market, which is inherently not only less efficient to sell, it's less efficient to run on Pega Cloud. Because we're a single tenant, there's a certain amount of fixed cost to run Pega Cloud. So if you have smaller deployments, it's going to be less profitable. So I think the combination of, here's our customer base, highly retention-ed, lots of room to sell, clearly more efficient. And we don't want to be selling small deals, right? And so new logos kind of are more like a nice to have as opposed to a critical to get to our growth targets over the next few years. So our goal is to basically put as much of our selling capacity on the existing logos, let's say like 80% to 90% of our selling capacity. Have a smaller part of our selling capacity go after very targeted new logos, like 50 of them, right? Not 5,000 of them. And go after companies, like if we sell to State Farm, but GEICO's not a customer, let's go after GEICO, right? Because we know all the use cases, and that's a company that would be able to spend tens of millions of dollars if we did it right. So we're really targeting new logos on companies that look just like the existing companies that we sell to.

Yes. And I wanted to touch on Pega Cloud mix. It's historically been around 50%. I think over the last year, 1.5 years, you've seen kind of a step function increase. I think the first half of this year was closer to 70%. So I guess maybe talk about the underlying drivers that are driving that increase. And then we can kind of dig into kind of the implications on the model.

Sure. So about 4 or 5 years ago, when I did an investor deck when we first started the cloud transition, and I had taken a stab, it was really an educated guess, on what the cloud mix would be, Pega Cloud mix would be. And I had said that I thought it might be 65% or so. Well, I was -- at that time, that was -- I really did feel like that would be where it would trend, but it didn't trend that way. For like 3 years, it was about 50%. And now in the last 2 quarters, it's jumped up to 70%. Now we have had quarters where it's been higher than 50%, but we've never had 2 quarters in a row that it's actually been 70%. And if you just look at our pipe and look at the momentum, you can see that it's 50% is -- it's probably not going to go back to 50%, right? It's probably going to stay somewhere above 50%. Whether it stays at 70% or goes higher, goes slightly lower, it's definitely -- I don't see it going back to 50%. So I think that -- then you say, well, why is that? Like what happened over the last 3 years versus what's happening now? Some of it is that our sales team is much more confident in selling it. A few years ago, it was the first time they were talking to clients about it. It was -- they were a little bit less certain. Clients were -- every year, clients continue to adopt more and more SaaS. You've got clients adopting more, into our space, the enterprise space, adopting more. Our salespeople being more confident. And now lots of our clients have at least 1 environment of Pega Cloud. So once they get one, that tends to be a really good push for them to get the second one or to even go and migrate existing workloads over, which we haven't done a lot of, but it's a good opportunity for us to move clients that have previously bought Client Cloud or even perpetual licenses years ago and move those workloads into Pega Cloud. That's an opportunity for us to -- we've started to think about that in 2022. We still haven't done much of it yet because we've been trying to focus on net new workloads. So I think it's a combination of our own confidence, the maturity of the product, the market. And then also clients, once they get through the hurdle of buying Pega Cloud once, it's a little bit more fluid in terms of that selling motion.

And so with that mix, obviously, there's some near-term kind of revenue recognition implications. Last quarter, I think you talked about revenue getting pushed out, about $80 million. I guess kind of where are we in terms of kind of the current kind of mix? How do you think that's shaking out? Any changes that you're seeing in terms of kind of where that lands for the end of the year?

So yes, just to clarify, the $80 million would be under the assumption that Pega Cloud was 70% for the full year. That would be like a kind of a rough estimate of the revenue impact that would get pushed kind of into backlog as opposed to current year revenue. There's nothing I'm seeing that would suggest that it's not going to be somewhere close to that number for the full year. We're heavily dependent on Q4s, as you probably know, like a lot of enterprise software companies. So the mix in Q4 will -- which I don't completely have full visibility to yet. So I'd say that's -- assuming that the momentum continues, I think the point about clients wanting to and liking to adopt Pega Cloud, we're in a different stage of that, right? We're at a point now where clients like really understand and kind of almost assume that Pega Cloud will be best-in-class. As opposed to a couple of years ago, we were really trying to convince clients that Pega Cloud was something that was a risk they should take. So I definitely think that dynamic will lead to a higher Pega Cloud mix just in general.

Yes. And we talked about the revenue dynamic, but if we take a step back and look at kind of unit economics of cloud versus non-cloud, I think you've talked about this in the past, but obviously, cloud has lower gross margins. But can you kind of walk through kind of the overall LTV to CAC or unit economic implications of cloud versus non-cloud?

Yes. So from a gross margin percentage, Pega Cloud, of course, has a lower gross margin percentage because there's cost to run it. It has a higher revenue, has a lower gross margin percentage. At 75% gross margin of Pega Cloud, the gross margin dollars between the 2 offerings are pretty close. They're not identical, but they're close enough that you could call them identical. The interesting thing is, Pega Cloud right now is, let's just say, approaching -- we're about 70% gross margin right now, getting to 75%. Given that when we started this, we were 50% and we're 70% now, I don't think it's a stretch to see us getting to 75% in the next 2 years as we had said we would. I think that 75% isn't the end point, right? As we continue to get more scale, as the product leverages, Kubernetes and a lot of things start moving to multi-tenancy, you'll see that margin kind of go up higher. That would make the unit economics flip a little bit in favor of Pega Cloud. Right now, it's more in favor of Client Cloud because we're not at scale to get the gross margins, but we're almost there. But you'll see that starting to tip. I think the thing that is -- that we haven't talked about a lot that I think is something that we're recognizing, is that the selling activity, the supporting activity for Pega Cloud is more efficient than Client Cloud, right? Because with Client Cloud, you have to work with the client to make sure they're upgraded. You have to make sure that they stay current. You have to -- now it's very sticky, and it's -- and there's lots of opportunity to upsell and expand. But if we can get more clients on to Pega Cloud, it will become a little bit more like a flywheel in terms of the accretion on the margin side. As we move more to multi-tenancy, clients will adopt more on their own. There's an automatic currency that happens with the versioning. So that definitely is where we want to get to. We've been very cautious with trying to force clients to move there. And if you didn't hear me say this in the past, it's really because our clients have told us they're not ready to move there in a way. And we feel like we would lose use cases and potentially not be supporting our clients when they need kind of hybrid environments. I do think people are moving more to Pega Cloud, but there's still going to be use cases where they're not ready. And I think if we do this right, we can kind of be on that journey with our clients together as they move more to cloud.

Yes. On Pega Cloud, I think historically, you've used Amazon Web Services. And -- but recently, you announced you're including Google as part of that. Maybe talk about kind of why you're bringing more optionality to customers and kind of the pros and cons or benefits of that.

Sure. So originally, we were a one-cloud kind of back end for Pega, which was AWS, which as Kevin mentioned. A couple of years ago, I don't think we really -- I think we're fine with that, right? You get 1 vendor. You get scale. You try to force discounts with the vendor. You try to -- like it was really trying to get as efficient as you can. We started to see, about a year ago this divergence in the market where clients were picking clouds. They were saying, "Well, I'm not going to use AWS. I'm a Google shop. I'm an Azure shop. Or I'm an AWS shop." Then what happened was the marketplace transactions started happening. So Google started to say, "Well, we have a Google Marketplace." And then they would go to clients, they would say, "Commit $500 million a year to Google." And clients want to buy Pega, but they want to also reduce their spending commitments with whatever cloud they've chosen, whether it's Google, AWS or even Azure. Google was the most aggressive on that, right? Google has got -- especially in Europe, Google is going hard to large clients and say -- and basically getting clients to commit hundreds of millions of dollars to spend through the Google Marketplace. So when we started and we started to see clients saying, "Well, I want to buy Pega Cloud, but I want to run it on Google." And we said, "Well, why do you care what it runs on?" And they said, "We don't really care what it runs on. We just want to use our Google spending credits that we need to use." So as we started to see that, we're like, well, let's look at the economics. Is it any more -- is it any less efficient to run it on Google? No. What type of scale of clients would you need to cover the small amount of fixed cost of running like the ops console, et cetera? Now maybe $25 million or something. It's not a lot of revenue that you would have to go through until the margins could be. So as we started to look through that, it was really about which cloud was next, right? And Google had approached us. Microsoft had approached us and said, everybody is -- because we have a reasonably scaled business now, $0.5 billion Pega Cloud. So naturally, they would want a piece of our back end. And we just decided that we felt like Google was the best next partner. Now clients run on Azure, right? Either Azure Cloud or Azure BareMetal. So we support any cloud environment. But in terms of our back end, we will have Google, we will have AWS. A question that clients sometimes ask is, will you have a third one? Will you have a fourth one? Maybe. I wouldn't rule it out, right? But I would say, it's got to make sense for our clients and then we've got to make sure we can be economically efficient. And we felt like we could with Google. So now what we've got is we've got Amazon Marketplace, Google Marketplace. Pega Cloud will be on both. Clients can pick how they want to spend with whatever vendor. They can buy Pega. And largely, we're indifferent to which one. It's just a contracting exercise to pick whichever marketplace they buy through. So that's kind of how we landed in GCP.

Yes. I wanted to talk about ACV growth. That's an important metric for Pega. Historically, you've been pretty close to that 20% range. How do you think about the sustainability of ACV? I know there was a little bit of a dip last quarter. Do you view that as kind of maybe a bump in the road? Certain distractions the first half of the year? Maybe walk us through that growth algorithm. You talked about maybe expansion being more -- a bigger component of that. So just maybe breaking out that kind of longer-term ACV trajectory.

Yes. I think as I reflect on what happened in the first half of the year, there's -- you can never get the -- you can never kind of get this down to where it's a science and you know exactly why things happen. But I think there's a correlation between our performance in the first half of the year and our shift away from enterprise clients that really picked up into 2021. I think we were chasing the wrong opportunities, the wrong organizations. I think we were organized in a way that wasn't capitalizing on the exact organizations that want to buy Pega. And I think that caught up with us in the first half of the year, right? Our selling cycles are 6 to 12 months. So naturally, changes that you make, you're not really going to see -- even in pipe, you're not going to see it right away. So I think looking back now, even in the last few months I've reflected on that. And I think what happened in the first half of the year, a component of what happened in the first half of the year was this almost like this course correction that we had to address, about going too far into new logos, trying to sell in use cases that had lower win rates, that weren't clients that knew us, and not really capitalizing on the ones that do. And then on top of that, we actually had our head of sales, head of go-to-market, move on. And I think him moving on probably was his realization, right, that the strategy that he was trying to execute really wasn't as relevant for Pega, and quite frankly, not really the way that he wanted to build a go-to-market. Great guy. Just -- I just think that there was like a little bit of a culture difference there in terms of what he had done at Microsoft, with a 50% of the business going through the channel, with a lot of the products not being enterprise, with -- so I think the combination of probably defocusing us away from where our opportunity was, disruption of a change in a leader, the first half was the first half. I think when we looked at that, I don't believe that, that changes at all where we sit with our product, the markets that we're in, the clients that we have, the white space that exists with those clients, none of that has changed based on our performance in the first half of the year. So I think it was really around correcting that. And that's, I think, where we are with the back half of the year, which is moving our capacity where it should be. Quite frankly, some capacity doesn't need to be in the business because we should be more efficient selling into enterprise, the new logos. I mean, selling into enterprise at Pega is at least 50% more efficient, right, if not 75% more efficient to sell into an existing logo versus a new. So not only should we be able to get back to our growth levels, we should be able to get back to our growth levels with less sales and marketing spend than we would have otherwise had if we were a two-pronged approach. But that's going to -- that takes a little time to get there, and that's really what 2022 looks like to us.

Yes. So on that point, maybe talking about Rule of 40, and that's, for you, ACV plus free cash flow margin.

Yes.

You kind of touched on it, but I think since Investor Day, you laid out kind of a framework for that. And there's, to your point, been a couple of moving pieces since then. So maybe kind of give us an update on kind of how that -- is that trajectory still intact? And then what are the kind of major moving pieces or assumptions that may kind of bring upside or downside to that Rule of 40.

Yes. So let's go back to 2017 for a second, too, because it's an important framing. When I first -- when we first talked about going through the cloud transition, we talked about ending the cloud transition at the end of '22, kind of like where 2023 was going to be the first year. That was what we originally talked about. I talked about that in a 15% to 25%. What I meant by that was we were going to be Rule of 40, and the growth could be anywhere between 15% and 25%. And we would conversely have the margin be the inverse to that. If we were growing at 15%, we would have margin at 25%. So when you kind of look at where we are now, it's kind of funny, but we're kind of back to the 20%, 20%. So we're not -- 20% ACV growth, 20% free cash flow. But we are a year delayed on that because the cloud transition kind of took a little longer and has -- with a little bit of more acceleration in Pega Cloud, it elongates that accounting transition. But we'll be done with -- well, 2024 will be a year where we're done with the cloud transition. Now you say, what are the moving parts? What needs to happen? Well, certainly, we have to maintain a growth rate of ACV of 20%, right, because that's a critical part of it. How does that happen? Well, it happens from what I said before. It happens by selling in to the base that we are, on average, 5% to 10% penetrated into our clients, of which there's probably $5 billion to $10 billion of ACV opportunity just in the largest 200 to 250 organizations. So massive opportunity there. Clients that have 100% retention rates that have bought from Pega many times over the years. So that's the growth algorithm. That has to happen. There has to be a percentage of Pega Cloud that's more than 50% of our booking. It doesn't need to be 70%. It's got to be more than 50% because I need Pega Cloud grow at scale because that helps with the gross margin algorithm, right? A little bit of operating leverage there. So gross margins need to be 75%-ish in 2024. We need to keep R&D at kind of a very similar to slightly more efficient spend on revenue. We need professional services to not increase, to slightly decrease as a percent of our overall business. We need G&A to kind of stay about where it is, which is kind of like 5-ish percent of revenue, which is pretty reasonable or actually pretty low probably for, I guess, our peers. And the big lever is sales and marketing. And so sales and marketing, what we need to do is we need to get the efficiency in sales and marketing to really, where our selling capacity right now in 2022 shouldn't be any higher than it is right now in 2024. Now it will be different people in different areas. But in terms of the total heads and spend, we have plenty of capacity right now in sales to do '22, '23 and '24. We don't -- if there's any incremental investment that we make in sales and marketing, it won't be to hit our 2024 year. It would be to build for 2025, '26 and '27. And quite frankly, if our growth rate is accelerating over 20%, I'm supportive of making that incremental investment. But we don't need to make it to actually be a 20% grower, at least through the next couple of years. So that's kind of the way I'm seeing the model kind of play out.

Yes. That's really helpful. And you talked about efficiency or sales productivity. And part of that, you said was more of a shift to expansion. Maybe touch on kind of where partners kind of fit into this and kind of the investments in the partner ecosystem and how critical they are to maybe bringing in new deal flow.

So we were a little -- I think we were probably a little bit confusing on our partner messaging to all of you. I don't think we were confused internally, but we probably could have confused our partners a little bit, too. So let me clarify what we are doing with our partners, and let me clarify what we're not doing with our partners that may have been unfortunately implied in some of the things that we said that was not the case. Partners are critical to sell with for Pega. Companies like Accenture and Ernst & Young and Cognizant and Capgemini, they have unbelievably strong relationships with our clients. They have tons of Pega-certified people. There's a mutual beneficial interest for them to find opportunities for us to help us win those opportunities so they can then do the professional services. So there's absolutely no confusion there. In the past, we used to work against our partners, almost by design. It's a shame, but we're not proud of that. But we would go out and sell the deal, and we would tell partners, "Stay out of the client. We'll let you know when we won." And then when we won, we'd say, "Okay, go ahead. You can go ahead and give proposal." They were completely disconnected. Clients didn't like that because clients were using -- I'm going to use Accenture. Clients were using Accenture on other projects and maybe talking to the Accenture people saying, "Why aren't you involved in this discussion?" But we were just so myopically focused on like closing the license deal that we kind of boxed partners out. In addition, we have some professional services. So we almost looked like it was a little bit threatening to our partners, right? Like well, maybe Pega will get the professional services and at the expense of the partners. So we have cured that issue. Like, well, at least we've told our partners like we know that's not the right way. We've given partners even incentives where, if we close a deal, they will get a small percentage to help with their business development. We want them to be sole-sourced on the professional services, or they can manage the subcontractors. So that is 100% intact. That's what we said 2 years ago, and we're still kind of fully aligned with that. What people thought we meant by partners also, which we're not doing and we didn't, is we're just going to go out and find random partners to go into new markets and to basically go close any Pega deals they can for any use case, et cetera. And that happened a little bit because partners came in and said, "Well, I'd like to go into state and local town government." And we started to see deals that were $10,000 a year on Pega Cloud, we were like, "It costs more on AWS to run it than to book a $10,000 deal." So that was a little bit of poor communication on our part. That was not our strategy, is not our strategy. And we are not -- that is not the business for any partners. We're in a sell-with, not a sell-through business. Launchpad is different. Launchpad is a sell-through. We give them the platform and those ISVs sell it. But in our enterprise, we're a sell-with model.

No, that's great clarification. I'll just pause to see if any questions from the audience. A few more. Maybe shifting gears on competition. Low code generally has much more awareness now. You've seen more point solutions. Obviously, Pega focuses on the high end of the market. So maybe just give us a rundown on competitive dynamics. And then a question I've been getting more recently is, how frequently do you compete with like an Appian? Or is it more kind of you're going against replacing custom work and things like that. So maybe give us a little color on that.

So -- yes. So it is very much differs depending on the geography, the vertical and the use case. So let me start there. If it is a CRM use case, if it's anything involving a customer -- when I say CRM, just to be clear, I mean sales automation, I mean anything where there's a customer workflow, just generally put that as CRM. We would see Salesforce as our primary competitor. And we would see, as probably our secondary competitor, Microsoft. And then if you went to the third one, it would probably be more homegrown things, right? You may see a little bit of Adobe in there, but it's largely concentrated to the leader in sales automation, which I would consider to be Salesforce; the leader in marketing automation, which I would consider to be Adobe. And the leader in service automation is more fragmented. And I would say we -- so that's kind of -- even though Salesforce has a big service cloud, I think that's a much more fragmented market. So that's who we would see in CRM. Yes, do we see Guidewire in insurance? Do we see Veeva? Yes, we see some of those players as well. Then if you go on to the kind of not CRM but more low-code digital process automation, the biggest person you see there is actually Salesforce as well. And you see -- you'll start -- you don't -- so it's interesting. We hear about them, and we probably will and should see them more, but we don't see them as much as ServiceNow. Like they're the closest thing to us. Like if you try to compare a company, they have a workflow message. They're not a dissimilar business model to us. But they have sold to a different set of use cases historically than the ones that we've sold to. So maybe that's why we don't see them as much. But they're in our clients all the time. If you think about like an Appian, we would see them like in the government space, right? Because they can't -- they're -- I don't know what their strategy is, but I would say they tend to sit a little bit more down-market. And they're in some verticals, but they're typically not in verticals touching CRM or doing orchestration. They're typically doing kind of process work. So we would see them. I try to think about the percentages of like more than 50% of our campaigns, we're seeing Salesforce. If you said, how often do you see Microsoft? I'd say, I don't know, maybe like 25% of the time. How much do you see Appian? I'd say, I don't know, maybe 10% to 20% of the time. In some verticals, it's like 80% of the time, like government. But in other ones, you never see them. So it's kind of -- that's kind of the -- it's kind of funny because, if you went back about 5 years, I'm not sure the competitive landscape would really be any different now than it is there. There's all these new names, like UiPath. Everybody was worried about UiPath. I said from the very beginning, it's a completely different solution than process. But I do think that the major competitors are really largely the same ones as in the past.

Great. I think we're out of time. Ken, thank you so much for joining us today.

Thanks, Kevin.

Thanks.