Pegasystems Inc

NASDAQ:PEGA

Earnings Call Transcript 2019-Q1

[Operator]

Good day and welcome to the Pegasystems First Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ken Stillwell, Chief Financial Officer, Chief Administrative Officer and Senior Vice President. Please go ahead.

[Ken Stillwell]

Thank you. Good evening, ladies and gentlemen, and welcome to Pegasystems Q1 2019 earnings call. Before we begin, I'd like to read our Safe Harbor statement.

Certain statements contained in this presentation may be construed as forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The words expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, intends to, projects, forecasts, guidance, likely and usually or variations of such words and other similar expressions identify forward-looking statements, which speak only as of the date of the statement was made and are based on current expectations and assumptions.

Because such statements deal with future events, they are subject to various risks and uncertainties. Actual results for fiscal year 2019 and beyond could differ materially from the company's current expectations. Factors that could cause the company's results to differ materially from those expressed in forward-looking statements are contained in the company's press release announcing its Q1 2019 earnings and in the company's filings with the Securities and Exchange Commission including its annual report on Form 10-K for the year ended December 31, 2018 and other recent filings with the SEC.

Investors are cautioned not to place undue reliance on such forward-looking statements and there are no assurances that the matters contained in such statements will be achieved. Although, subsequent events may cause our view to change, except as required by applicable law, we do not undertake and specifically disclaim any obligation to publicly update or revise these forward-looking statements whether as a result of new information, future events or otherwise.

And with that, I'll turn the call over to Alan Trefler, Founder and CEO of Pegasystems.

[Alan Trefler, Founder and Chief Executive Officer]

Thank you Ken and thank you investors, I am pleased with our results in Q1. We're off to a solid start for 2019 and continue to be happy with how our strategy is playing out, especially around accelerating growth and continuing our shift to recurring revenue. This quarter's results demonstrate our strategy is working.

Pega Cloud represented 70% of our new business, far above the 50% we saw in Q1 2018 and had projected for 2019. This is great news, good news and frankly challenging news. The great news is that it validates our strategy is exceeding. The good news is it reflects the excellent underlying growth and breadth of this opportunity. And the challenging news is the optics of our reported financials. From an accounting perspective it requires just extra digging to really appreciate the health of our business.

Now we know that investors are positive about our trend to recurring, though we also know the transition to recurring revenue requires them to look harder to understand what's really going on because of the intermediate effect on revenue. That's why we've been focusing on ACV as our key financial measure. Highlighting the underlying strength of our business, we saw our total ACV growth of 20% year-over-year. A very positive measure of our performance and RPO backlog is up 38% year-over-year to about $633 million. This is especially remarkable when you know that we've only focused our sales team on ACV since the beginning of 2018.

So from a strategy and differentiators point of view, we continue to focus on delivering the best solutions for customer engagement also known as CRM and digital process automation, which you can think of as a modern and advanced form of what used to be called workflow.

In a nutshell, these two things mean we're really good at making decisions and then automating the work flows from them. And we're still the only provider with a top rated unified capability. Our software continues to be recognized in the major categories in which we play. Since we last spoke, we were named the leader in Forrester's Real-Time Interaction Management report. That evaluated a dozen companies. We received the highest scores possible in nine top-level criteria and it's particularly satisfying if you come to our website and look at the chart because there's no better place for our dock to be.

We're about as far to the top and the right as possible. We're also just named as Visionary in Gartner's Multichannel marketing Magic Quadrant involving 22 competitors. We were the only company listed as excelling in real-time and were praised for our ability to support the needs of large complex organizations.

These recent highlights compliment our long standing domination of the business process market. What we have for years been recognized as the industry leader, whether it's called BPM, workflow automation, intelligent business process management or digital process automation. Though we moved full board to cloud, frankly later than others in the industry, we've benefited significantly from an understanding of the importance of Cloud Choice for our clients and we've made this central to our strategy.

The strategy was formulated in response to feedback from clients who wanted an alternative from other vendors that locked them in to a single proprietary solution. And Cloud Choice means clients can take full advantage of our Pega Cloud managed service offering or choose to deploy on any private cloud of their choice, what we call client cloud. Today, over 90% of our business has been Cloud Choice either Pega Cloud or client cloud. And in fact we've offered the Cloud Choice concept for years and provided the industry's first Cloud Choice guarantee in 2017.

Meanwhile, those who’ve built their businesses around a proprietary or single cloud option, some of which are now 20 years old, I think are going to be struggling to catch up. This is a case we're being a bit late to market. We'll work to our advantage.

Interestingly, Google, both a strategic partner and the client made an announcement a few weeks ago that perfectly complements our Cloud Choice vision and supports what we've been saying for years. Google's new major cloud offering Anthos allows businesses to use Google cloud or other third-party clouds, including some of their biggest competitors like AWS or Azure. Google called the ability for businesses to run on multiple clouds, a real game changer. And this is something we definitely agree with.

Also in the cloud world at the end of the quarter, Pega Cloud for government received FedRAMP authorization. Now while we have a very successful and growing government business, our FedRAMP authorization will make it even easier to sell Pega into the federal market. And we've already seen positive responses from prospects. We're continuing to increase sales capacity and drive marketing initiatives to what we see as an enormous market opportunity.

Client success is critical to us and ultimately it's our ability to attract and retain clients that is completely key to our success as a business. and that's always been based on our ability to help them achieve real tangible strategic business results. And we love it when clients choose to talk publicly about their work with us, it's a real privilege. For example, we were delighted recently see that our clients we’ve asked are meaningful Dutch insurance company, called out Pega actually in their annual report noting their”Made good progress with automation and cost reduction. Thanks to Pega”. And National Australia Bank was prominently featured in the media about how they're using Pega Natural Language Processing to read, categorize and respond to internal and client e-mails.

They call the capability as ”star” of the bank’s universal workflow system and commented, our original premise was we would get something in the region of about a 40% on a classification on the first half with the models we've built, but we hit literally 70% within three weeks, it was really, really impressive “. But there's no better place to hear more of these client success stories than by coming to PegaWorld. And in this year it's stacking up to be the biggest and best event ever. We're expecting about 5,000 attendees, including clients, prospects, partners, and industry influencers, with more than a hundred breakout sessions and keynotes. We once again have an aligned – terrific lineup of amazing customer stories. Like Air France showcasing their eye care application, which is built on Pega to improve loyalty and experience, the resulting productivity gains allowed their 1,000 agents to spend more time really engaging in customer interactions. Ford, supporting their Global Omnichannel customer and dealer network with Pega’s Customer Decision Hub using enhanced AI. GE Healthcare, showing how they're extending the foundation for their digital transformation to revolutionize order management and reducing overall cycle time by 80%. HSBC Australia using Pega create a unified digital experience for customers using real-time decisioning to acquire, retain and grow relationships. Scotiabank modernizing their global technology platforms and offering Pega Infinity on their cloud, as a service to internal partners across the enterprise. And UNUM, a Fortune 500 insurer, we will talk about how they improve their processes for issuing policies using Pega to create a full case management platform in just 12 weeks.

In addition our 100,000 square foot Tech Pavilion will showcase over 50 partners, 100s of live demos, hands-on app building. I expect to see lots of pictures on social media from the inside. And finally, we'll have some exciting product news to share as well. So in summary, we're off to a solid started in 2019, our strategy should drive stronger underlying growth while shifting to a more recurring revenue model is working. The uniqueness of our unified product offering combined with our cloud choice approach, we think of as a distinct competitive advantage. We continued to be very positive about how our software is being adopted and our long-term growth opportunities and I'm excited about how Pega will be shaping up, and I hope you'll join us for our Investor Meeting on Monday afternoon, June the 3rd, I’ll stay for the one republic concert Monday night and check out the rest of the content rich customer stories on Tuesday.

To provide more color on the financial results, I'm now going to turn this over to Ken Stillwell.

[Ken Stillwell]

Thanks, Alan. It's really exciting to see Pega becoming a much larger recurring business. For Q1 of 2019 as Alan mentioned, we experienced strong growth with Pega Cloud ACV increasing an impressive 76% from Q1 2018. In addition, total ACV, which includes Client Cloud increased 20% year-over-year to $591 million in Q1 of 2019 or increase of almost $100 million. Client Cloud is composed of term license and maintenance. These strong business results are further evidence that we are successfully executing on our strategy to transition Pega to a recurring business model.

In anticipation of this shift, we started reporting ACV in our financial results in the first quarter of 2017 to provide more clarity into our underlying growth trends, which are masked by this transition when you look at just reported revenue. Total ACV is a combination of annual commitments from Pega Cloud and Client Cloud, representing the annual recurring spend from our clients. Total ACV has grown significantly over the last few years and it's been 20% or more for each of the last four quarters year-over-year.

The fantastic ACV growth is even more impressive, given that we didn't change our sales model as Alan mentioned until the first quarter of 2018 from a total contract value, TCV-based compensation plan to an annual contract value, ACV-based plan. Shifting away from perpetual license arrangements to a large extent. Sales quickly embraced the new model, faster than expected. In quarters like Q1 2019, where we have a noticeable shift to Pega Cloud, there will be awkward optics on the revenue line because of the difference in accounting between Pega Cloud and Client Cloud revenue.

Let me take a few seconds to remind you of our business model evolution and why it's important. Since 2017 Pega has aggressively moved into selling recurring cloud, both Pega Cloud, which is our preference and Client Cloud. In the near-term, this transition replaces large upfront cash and revenue with cash and revenue that's received over multiple years, causing the lag between business we win and when the revenue is reported, that's a mismatch between revenue and cost.

The effect was even more pronounced in Q1 of 2019 as we close significantly more Pega Cloud business than anticipated. In Q1 2019 70%, that's right 70% of Pega’s new license bookings were Pega Cloud. 20% higher than we – 20 percentage points higher than we projected for the quarter. As a result, our revenue in Q1 was approximately $20 million lower than if it has been recognized upfront. For this year, Pega Cloud mix was expected to be 50% compared to the actual mix in Q1 2019, as I mentioned 70%, each 1% shift towards Pega Cloud could potentially reduce revenue by approximately $3.7 million for the full year.

This economic value is reflected in ACV growth, but not reflected in current period revenue when we booked Pega Cloud deals. Approximately 90% of our new client software commitments in the quarter were recurring arrangements, with perpetual license approximating 10%, although, we’re excited to see the 70% Pega Cloud mix in the first quarter, it's a little early in the year to call it a trend due to potential variability to this mix throughout 2019. You could see additional evidence of our transformation success by reviewing remaining performance obligations, which also is called backlog.

Pega Cloud backlog grew by $172 million, an amazing 96% year-over-year, highlighting the significant shift to Pega Cloud. Pega Cloud accounted for almost all of the total backlog increase. For the first quarter of 2019, we're reporting both GAAP and non-GAAP results and a full reconciliation of our non-GAAP to non-GAAP measures is provided in the financial tables in the press release issued earlier today and those are also available on the investor section of the website. From a profitability perspective removing large upfront revenue and replacing it with revenue that's recognized rateably over several years’ puts pressure on reported earnings in the short-term because operating expenses are largely unchanged.

As such, the impact of our large Pega Cloud shipped in Q1 results – resulted in negative non-GAAP EPS, where we otherwise would've had reported positive EPS. I want to stress that our ongoing transformation to a recurring cloud business has been deliberate and intentional, that's because in our view the long-term benefits of a recurring business model including a more predictable future revenue and cash flow stream far outweigh the short-term optics around reported revenue growth and the impact to EPS, margin and profitability in the short-term.

One of the other major benefits of a recurring business model is that ACV is highly correlated with more stable and predictable cash flows. We finished the period with total cash and marketable securities of $202 million, compared to $207 million at the end of Q4 with cash flow from operations of $22.7 million offset by share repurchases and dividends of approximately $25 million. Accounts receivable was down 25% due to increased cash collections of $293 million during the quarter and nearly $1 billion for the trailing 12 months, which is exciting.

On headcount, we finished the period with nearly 4,700 employees, up approximately 9% from March 31, 2018; more than half of our new hires were sales employees. Before I wrap up with my closing comments, I wanted to mention that we've introduced a new chart in our earnings release this quarter that breaks out Pega Cloud ACV growth as well as Client Cloud ACV growth. We felt that this view would be extremely helpful because now you can see the Pega Cloud ACV separate from Client Cloud ACV.

During the transformation, total ACV growth continues to be the most important measure of our business success. This information provides new insight into how customers are adopting Cloud Choice, which we view as one of our key differentiators. In summary, we're pleased with the solid start to the year and the progress towards meeting our goals in 2019 and beyond. While the near-term impact of the positive move to more rateable revenue will impact the optics of our financials. We're off to a good start in 2019. We continue to see solid demand from companies engaging in digital transformation to improve customer experience and streamline their business processes.

In closing, I want to remind everyone and invite you all to join us on Monday, June 3rd for Investor Day at PegaWorld 2019 in Las Vegas. If you haven't already signed up, please send an email to [e-mail].

Operator, please open the call for questions.

[Operator]

Thank you. [Operator Instructions] And we'll take our first question today from Steve Koenig with Wedbush Securities.

[Steve Koenig, Wedbush Securities]

Great. Hi, Alan; hi, Ken. Thanks for taking my questions.

[Alan Trefler, Founder and Chief Executive Officer]

Hey, Steve.

[Steve Koenig, Wedbush Securities]

If I can flip in – hey, if I can maybe flip in two in one, I'll try to do that here. So a lot – we're hearing more and more from the ecosystem about customer investments in digital transformation in the back office, it started in the front office now moving into back office. Maybe can you comment on this trend? And what you're seeing in the composition of your business? And then if you don't mind, I've got one follow-up.

[Alan Trefler, Founder and Chief Executive Officer]

Sure. I’d like to give you the follow-up as well. So we're seeing a pretty balanced picture, the way to think about it, is that to achieve true digital transformation, you really want end-to-end processes. You really want to bridge the traditional way of some people used to think of a front office, middle office, God forbid, and a back office. And when you have an end-to-end process that might go from the point that a customer touches something on the web or the mobile app, all the way through to fulfilment, I’m not sure whether I classify that as a front office, a back office or half of each end-to-end. But [indiscernible] for us because we're really extremely well qualified to both make the right decision about what to offer a customer, think of that is being on the front end. But then also drive that through the dun, think about that being back office. I'd say we're seeing our demand story are being very balanced.

[Steve Koenig, Wedbush Securities]

Terrific. Okay, great. And then for the follow-up, this one is about robotics. So the RPA – the pure play RPA vendors certainly have been making lot of noise and seeing some very good growth. When we talked to them in some ways, Pega has become kind of a straw man for those vendors. But it seems in many ways you don't compete, what you have is different. So maybe can you give us some color on what you're doing in robotics? Any color on what kind of growth you might be seeing there might expect to see? And how your focus might differ from those vendors? That would be helpful. Thanks a lot.

[Alan Trefler, Founder and Chief Executive Officer]

Sure. So I do think the noise in some of the valuations around some of the RPA vendors have been, I'll just say mind numbing here. And what I think is interesting is when you have a robot, when everything – when all you have is a hammer, everything looks like a nail. What they end up doing is they end up trying to build sophisticated business logic into a technology that grew up out of screen scraping. And we think that's just backward, you really need the end-to-end process where our philosophy is and we have a terrific robotics capability, is that, when the process hits something, that doesn't have an API, a program-to-program interface. Then we fire the robot up, whether it's working on the desktop in conjunction with a person or whether it's working sort of as a back office process hanging off, no human in the system. The robot in effect closes the gap at the end.

We saw something really interesting happening in financial services business, which might be familiar to you. Well years ago, we used to have all these companies who were doing quote robotics unquote to scrape for example, financial information from people's bank accounts and consolidate it. They'd go out to all your different bank accounts put them together; they were and are a number of like wealth management or financial management companies that did that. And these are all being replaced now with computer-to-computer APIs – programming interfaces because frankly they're more reliable, they're faster and they're better.

We think of robotics, it's just a great way to close that last mile and we've had a lot of success dealing with Fortune 200 companies, frankly getting them to change the way that they're thinking. I think a lot of these robotics fields that are being sold are basically being sold in as – like little departmental things and almost in many cases, rogue projects as opposed to something that really wants to be a sustained part of the architecture. So we feel good about our capability and I think you're going to see us increasingly position our robotics as we go forward over the next 12 months.

[Steve Koenig, Wedbush Securities]

Right. Well thanks very much guys.

[Alan Trefler, Founder and Chief Executive Officer]

Sure, Steve.

[Operator]

Next we'll hear from Rishi Jaluria with D.A. Davidson.

[Rishi Jaluria, D.A. Davidson]

Hey, thanks for taking my questions. Let me start off with the ACV metric. Just maybe can help us understand, it includes all recurring arrangements, right? And that would be maintenance associated with on premise perpetual license as well, correct?

[Ken Stillwell]

Our ACV metric includes – it is all recurring arrangements between us and our clients. That is correct.

[Rishi Jaluria, D.A. Davidson]

Okay. Got it. So if we were to just kind of do back of the envelope to maybe say how comparable it this to determine cloud ACV metric that we used to focus on in the past? It seems like this was relatively in line with maybe what you saw in the back half of the year and maybe an acceleration from the first half of the year? Is that directionally the right way to think about it? Are there any wrinkles we need to consider when doing those calculations?

[Alan Trefler, Founder and Chief Executive Officer]

No, the 20% growth is pretty consistent with what we saw throughout the – through all 2018, yes. That is an – and you have now with ACV is you have the ability to see cloud ACV, you also have the ability to see maintenance ACV and term ACV because the maintenance revenue on the financial statements is essentially a good proxy for maintenance ACV. And then naturally you're able to get the three pieces. Whereas in the past, we used to lump term and cloud together and you couldn't see cloud broken out. So that's why we wanted to provide another element to this than a lot of people were very interested in, which is what's the cloud ACV on its own.

[Ken Stillwell]

And also breaking now to the RPO, the backlog by every one of these categories. We understand that the numbers from – look, we're going to get through this transition 18, 24 months from now, we won't have any complex explanations to give, but we understand it's complex now. So we want to be try to be as clear and absolute transparent as possible.

[Rishi Jaluria, D.A. Davidson]

Yes, absolutely. And I definitely appreciate the level of details that you gave us, especially in the Q. So speaking on RPO, I mean we saw a big spike in RPO on the cloud side as we talk about in the prepared remarks. And really if it was on a sequential basis, it was really biggest on kind of the longer-term, the greater than three years side. Just wondering to understand, is there a change in duration on your cloud deals? Or was there something else that led to that? And maybe help us square that away?

[Alan Trefler, Founder and Chief Executive Officer]

That’s a good question. No, we have not seen a noticeable shift in cloud duration from – Q1 compared to the back half of 2018. We're still kind of having that cloud duration be somewhere between, we goes as high as sometimes five years. We typically don't do cloud deals under three years and we kind of hovering that three to four year. Now, sometimes the buckets of RPO will refresh so to speak based on the timing of the renewal cycle. So that can actually skew the percentages ever so slightly to that. But there's nothing noticeably different in the way we're running the business. And we still kind of target three years as being kind of our go in. But some clients like to engage us in longer commitment periods than that. And we certainly will accept that, so long as we’re not giving kind of pricing away to get those extra years.

[Ken Stillwell]

Yes. If you look at the detailed chart, that’s under the pretty graph that compares the – in the appeals section, it compares our cloud RPO change from 2018 to now. And you'll actually see that the cloud RPO and aggregate grew 96% or nearly double over the years. And the actual one year or less duration grew faster than the greater than three year duration. So – we're not seeing any massive shift in the durations.

[Rishi Jaluria, D.A. Davidson]

Okay. Got it. That's really helpful. And then just Ken in your prepared remarks and in the press release you talked about the 70% cloud of new sales was about a $20 million CAGR. And can you just walk us through the math? Is the impact of cloud as a percent of new sales consistent with, I think what you've guided us to in the past or is it greater? That would be really helpful?

[Ken Stillwell]

So – yes, so the impact of one – so this is a simple way to think about it. In the previous year we, – I have mentioned that a 1% shift away from our kind of targeted, so to speak cloud mix would be a little over $3 million, you may remember that reference from last year. And now I've mentioned in my prepared remarks that it's about $3.7 million. And you might say, well, why is it different? It's because our booking level was noticeably higher, and so naturally 1% of a higher bookings level, a higher new client arrangements level will actually yield more impact from a dollar standpoint.

So we believe that number to be kind of – it's kind of depending on when that happens in the year it could be as much as for $4 million. And so the way to think about it is that if you have a shift that gets you 20% or greater of a cloud movement, you've got – for the full year you could be in the $70 million to $100 million range of revenue impact, it just depends on the timing, it depends on – in your – kind of your new business commitment level.

[Alan Trefler, Founder and Chief Executive Officer]

But $3.7 million annual impact is pretty consistent with what you talked about with the quarterly impact being about $1 million for percentage point and with the 20% range – yes, that’s all I think pretty wide.

[Ken Stillwell]

Yes.

[Rishi Jaluria, D.A. Davidson]

Got it. Okay. And then the last one for me and I'll jump off. Just want to maybe understand as we think about customers who are deploying Pega in kind of their own private cloud or doing kind of a self hosted versus a Pega hosted. I’m just wondering if you've done any kind of surveys or any insight you can give into of your non-Pega Cloud customers or Client Cloud customers. How many of them are actually running Pega in a cloud environment and maybe that can help us understand the directionality of cloud adoption, which I imagine is a lot bigger than the actual Pega Cloud ACV number. Thanks.

[Alan Trefler, Founder and Chief Executive Officer]

Yes, it is a lot bigger. Today I'm seeing almost every customer who is a new client, so they don't have an installed infrastructure, choosing to run in one form or another of public cloud. And just today we had a – I'm sorry, yesterday we had a visit from one of the largest banks in Australia and they were talking about how they want to move all their stuff to the public clouds that the regulator, they will let them do. So, I would say that in terms of actual deployment, what we would have thought of as a traditional on-premise deployment only is happening when it's a follow-on purchase by an existing customer that hasn't made the transition yet. All the new stuff is going on to AWS, Azure and Google.

[Ken Stillwell]

And Rishi, anecdotally, if you look at a lot of our clients support interactions that we have, it's obvious that even some of our clients that have traditionally bought on premise are looking at moving a lot of their workloads to private clouds because as they're talking to us about questions about interoperability, things like Azure, you can feel what’s happening kind of everywhere.

[Rishi Jaluria, D.A. Davidson]

Got it. That's really helpful. Alright, thank you guys.

[Operator]

Next we'll hear from Mark Schappel with Benchmark.

[Mark Schappel, Benchmark]

Hi, good afternoon. Thanks for taking my question. Alan, let me just start saying congrats on the federal government authorization for Pega Cloud. And on that front, the government sector has been an increasing focus of the company, I was wondering if you could just review some of the other efforts that are going on to boost or punch up your government sector efforts.

[Alan Trefler, Founder and Chief Executive Officer]

Yes, just about two weeks ago I was in Washington for a day and was visiting with a variety of just overall federal executives as well as some existing customers, and the customers are really excited by what we're offering. We held an event towards the end of last year called Government Empowered in Washington and had basically close to 100% increase in attendees. I didn't actually attend that one, but I understand it was north of 700 people from the government who showed up. And there's a huge amount of enthusiasm until we got this authorization, we did actually have government customers who were running us on, for example, AWS. But now we can offer it as a fully managed service and I think that's going to be very positive to a lot of them.

[Mark Schappel, Benchmark]

Okay. Great, thank you. And then, Alan with respect to the first quarter being just reported, I was wondering if you could just talk about any meaningful changes that were made in the salesforce this year, so for example, I think a year or so ago the company made the big shift from ACVs, from ACV metric – to an ACV metric from a TCV model, I was just wondering if there are any similar big changes that were made to the salesforce in this quarter.

[Alan Trefler, Founder and Chief Executive Officer]

Well, I'd say that we went pretty well, not necessarily making violent changes to a big part of the organization, but we went terrific like, we've been continuing to really work to deepen our bench. For example, we just hired a terrific new guy to run our government business nationally. We've been continuing to be pleased that very strong talent from other companies, other competitors see us in the field and think we'd be a good company to work for and sell for. So we're continuing to grow the salesforce. We've also introduced a new, what we call validation program where we're really doubling down on making sure, that particularly for some of the newer folks that they've really internalized the messages with a series of live interviews that get videoed and a pretty strict grading rubric to make sure that people are internalizing the messages and the differentiators and how to do it. So you're going to see us providing a lot of, what I'll describe as go-to market discipline and really focusing on covering the organization's recovering well.

[Mark Schappel, Benchmark]

Okay, great. Thanks. And then Ken one for you, non-GAAP operating margins would those have been – if it wasn't for the transition here and the big shift to the Cloud this quarter.

[Ken Stillwell]

Yes, that's a little bit difficult one because – what I can tell you Mark, is that you could drop that revenue impact right to the bottom line. And that's probably a simple way to think about the impact just moving to the 70% just that piece. There's still a lot of headwind in year two of the cloud transition. So we would – I believe Mark, our non-GAAP operating margins, if we would have never went to the cloud would be better than what they were historically, but it's just all as messed up in moving from what was a 20% cloud business and now, if you want a 70% cloud business.

But I think the simple way to get, may be you might have – what we might have thought about early on for the full year would be the drop that revenue impact to the bottom line for Q1.

[Mark Schappel, Benchmark]

Okay, great. Thanks.

[Ken Stillwell]

You're welcome.

[Operator]

We'll now here from Stephen Bersey with MUFG.

[Stephen Bersey, MUFG]

Thank you guys, thanks for taking my question. Ken, when you're looking at the backdrop of a customer's infrastructure in those discussions and looking at their needs, can you comment maybe on where they're coming from? Are these mostly greenfield deployments that are just getting into the digitization or replacement, old homegrown stuff or are they ripping out maybe failed tries with a variety of other vendors, what are you seeing?

[Ken Stillwell]

I tell you it's a whole mix. So there are still a lot of companies including ones that are writing material business with us. They are trying to overcome the historical cBOL legacy where those systems have now I should say they're very, very old and not very scalable. We're also finding that a lot of customers that are putting in even in some of these fancy new comp systems and finding that they can't do the heavy lifting but they need, that's really something that we're super good at, being able to drive the work to done, make the decisions, execute the work. So I’d say it's a full mix.

None of the orgs we’re dealing with, I shouldn't say none, like almost none or what you would call greenfield in the sense of the startups, they all have existing infrastructure. We specialize in companies that have a level of sophistication. So we have had a couple of very small companies, come on Pega Cloud, but 99% of our business is with organizations that have some form of frankly brownfield that they need to work with whether, that's some ancient system that they bought or something that they built.

[Stephen Bersey, MUFG]

Got it. And I know there has been a pretty high percentage of [indiscernible] that were less than 12 months kind of with the firm. Just wondering, how things are ramping up on that? Where does the salesforce stand and especially in light of your recent hiring as well?

[Alan Trefler, Founder and Chief Executive Officer]

Well, you can see the growth in the sales and marketing numbers as we report. I think the salesforce is really quite enthused, in January we had our annual sales kickoff. There's just an enormous amount of excitement in the field. We're putting a lot of work into care and feeding, around making sure that we can get them to internalize the messages, they feel comfortable, giving them, doing some work to create sometimes what we call paws, where a couple of salespeople will share and work on a single or a set of organizations and like a lot of what we're seeing.

We're also finding that some of the work we did over the last two years, hiring a couple of more junior sales folks who sometimes really get the stuff really well and then now easing them in to be full time high-end enterprise reps, account execs, there is also I think a strategy is that we're going to continue to do it because we like what we were seeing. So I would say in general, the sales force is more professional and better trained than it's ever been.

[Stephen Bersey, MUFG]

Great. And maybe just one last one as far as your ability to kind of plan expense. When you're having customer interactions varying the deal, how far long is it before you get a sense of whether that deal once that go to either Pega Cloud versus a private cloud? Is it right out of the gate, is it last minute, they say, “by the way, how does it work” typically?

[Alan Trefler, Founder and Chief Executive Officer]

Well, if you recall, since we positioned Cloud Choice as being – you have to take a look at our website, we talked about PegaWorld last year as one of the six critical massive differentiators. We're going to be talking to them about the concept of Cloud Choice running out of the game. So it's in the air, right which has been discussed. The actual decision is often made pretty close to the end, which I think is fine. Because sometimes they'll think, well we definitely want Pega Cloud, but then they'll discover that they want to co-located, which for instance, for example, stuff that they're putting up themselves on Amazon.

So even though it's in a public cloud, it's an effect behind their firewall as it were. As opposed to integrating it through services and other times they'll say, we just want the convenience of having you just run this as a service for us, so we don't have to have anybody trained in databases or anything techie. We can really focus much more on the business aspects so it can happen reasonably late and they can change, which frankly makes it a little difficult to forecast. But I liked the message customers like the message, we're really happy seeing even companies like Google now adopt their concept of Cloud Choice it's going to be right.

[Stephen Bersey, MUFG]

Hey, that’s helpful .Thanks guys.

[Ken Stillwell]

Thanks Stephen.

[Operator]

That will conclude today's question and answer session. At this time I'd like to turn the conference over to Mr. Trefler for any additional or closing remarks.

[Alan Trefler, Founder and Chief Executive Officer]

Thank you very much. I just like everybody to know that we are working very hard on your behalf. And once again, welcome those who can to come to PegaWorld, the June 3, Investor Day. I think we will be really exciting in more than just an investor day, you can also get to hear from some absolutely terrific customers talking about real and tangible things that they're doing. So thank you very much and look forward to seeing you there.

[Operator]

That will conclude today's conference call. Thank you for your participation.