Pegasystems Inc

NASDAQ:PEGA

Earnings Call Transcript 2021-Q1

[Operator]

Good day everyone, and welcome to the Pegasystems First Quarter 2021 Earnings Results Conference Call. Please note that today's call is being recorded. And at this time, I would like to turn things over to Ken Stillwell, COO and CFO. Please go ahead.

[Ken Stillwell, COO and CFO]

Thank you. Good evening, ladies and gentlemen, and welcome to Pegasystems first quarter 2021 earnings call. Before we begin, I would like to read our Safe Harbor statements. 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, projects, forecast, guidance, likely and usually are variations of such words and other similar expressions identified 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 the fiscal year 2021 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 2021 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, 2020 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 will turn the call over to Alan Trefler, Founder and CEO of Pegasystems.

[Alan Trefler, Founder and CEO]

Thank you, Ken, and thank you to all our investors. Our Q1 results demonstrate the continued progress we're making and our shift to a recurring revenue model. Our total ACV, the best indicator, we think of our future revenue growth increased by 20% for the quarter year over year, while revenue grew 18%.

We continue to accelerate Pega Cloud growth with Pega Cloud ACV, up 55% year over year. In addition, more than 50% of our new commitments in Q1 were Pega Cloud. Now, last year at this time, we were at the very beginning of the global pandemic and the transition to remote work was less than two months old. Though, we realized we'd be in the situation for some time, I don't think anyone then would have predicted we still be in it more than a year later. And we're still unclear as to when it will really end.

That said, I continue to be pleased and proud of how our entire global team adapted to conduct business virtually. And we continue to see clients and prospects accelerating their digital transformation initiatives. We expect this acceleration to continue irrespective of when we reach a new normal, whatever that may look like.

Our clients recognize that your needs are getting more complex, not less. And as we've proven, we believe we're uniquely positioned to help organizations crush their business complexity. Accordingly, the demand for scalable low code solutions can solve the problems of business complexity, bound for the future, continues to drive our business.

Now, most organizations have moved beyond solving the acute needs of the up to now the pandemic and we've seen this crisis as a catalyst to get organizations to build stronger businesses for a very different future in 2021 and beyond. No one wants to be caught unprepared when the next crisis hits, whatever that might look like.

In response, we continue to focus our efforts on building solutions and an ecosystem to support the evolving needs of our clients, improving efficiency, usability, accessibility, and time to value. For example, since we last spoke, we delivered enhancements for low code development that enables anyone to deploy powerful apps with just clicks.

New Features makes it easier and faster for both professional and citizen developers to create seamless apps from any desktop application using an intuitive low code interface and new offering enhancements. We've also enhanced the software to add the industry's first capability that uses AI to deliver self-optimizing process automation.

Pega process AI intelligently triages incoming customer requests and other events in near real time and enables fast and efficient event resolutions while helping to lower operating cost, and simplify staff and customer experiences. It helps organizations drive greater process efficiency and effectiveness at enterprise scale. We continue to focus on enhancing our enterprise grade Intelligent Automation capabilities, leveraging robotics as part of a holistic approach to go beyond incremental improvements and drive true transformation.

Intelligent Automation needs to do more than simply automate repetitive tasks on the desktop. It needs to be part of a center out approach that puts the customer at the center of the business architecture and helps drive customer journeys or as we call them micro journeys. This approach brings task automation, process automation and case management together to create a consistent experience for both customers and employees across all channels, from the front office all the way to the back office all the way to other clouds.

At PegaWorld iNspire next week, on May 4, we'll be showcasing the next major release of Pega Infinity, as well as a reimagined partner program that will provide clients with a deeper portfolio of expertise, and also provide our partners additional opportunities to expand their business and drive more revenue.

The set of new capabilities in PegaInfinity reflects the ongoing evolution of our underlying architecture. We've made tremendous progress in evolving the runtime architecture to allow for increased service isolation, supportive cloud native technologies, such as Kubernetes, and the use of leading-edge technologies for caching search and data storage.

Throughout history, Pega has provided modern next generation solutions. Technological leadership is key, we believe to accelerating Pega's growth and we're excited to showcase these advancements next week. I hope you'll join us for this 2.5 hour virtual event, which I guarantee will be engaging and informative. You can go to our website to register or reach out to Ken's office if you need assistance.

Now we built on our successes from last year to make this year's event even better, with live product demos, interactive Q&A's, digital transformation best practices, and success stories from industry leading organizations. And Pega World is always an opportunity for us and our clients to share clients' success stories. This year is no exception.

For example, Giles Richardson the new Head of Personalization at Wells Fargo will talk about how the bank is using Pega to create a scalable, intuitive solution with powerful AI decision and its heart to improve customer engagement and increase conversion rates. Erin Petty, Portfolio Manager at Pfizer will share how the company's bold digital transformation efforts, including how they're using Pega to improve accuracy and increase operational efficiency is helping their drug development process.

And Jason Barbrow, Senior Vice President, Head of Customer Retention at Sirius XM will talk about how the use of Pega customer decision up for customer retention to identify the right one on one experience enables them to balance churn and revenue across 34 million global customers, supported by 10 call centers around the globe.

And [indiscernible] a Technical Program Manager at Google will discuss how they are using Pega to automate tedious and manual interactions to optimize resource efficiency so they can scale sites, access and dispatch what's in their data center. This is a great example of cloud choice as they run their system on the Google Cloud Platform and much, much more.

Now, we're finding more and more opportunities to attract talent with strong relevant experience and their relationship from peers and competitors, including Salesforce, ServiceNow and Microsoft. We continue to invest selectively hiring to build out our senior management bench and our sales capacity. You may recall we brought in Hayden Stafford last year in a new role as President of Global Customer Engagement.

Hayden has made and will continue to make additions to the senior leadership team bringing in talent from high growth organizations. And I believe these changes credit foundation for accelerated growth and will support a sales and partner ecosystem that will help us worldwide, bring our market execution to the next level. We're excited about these investments and the impact we expect to have in the second half and beyond.

We're also investing more on brand awareness. For example, you may have seen our logo on the clothing a few very promising golfers, Mel Reed and Marc Leishman will be sponsoring them over the next few years. It was very exciting to see Mark finish in the top five at the masters and win Zurich Classic over the last weekend. And we'll have some exciting news related to branding coming up in the weeks after PegaWorld.

So, in summary, we're executing on a strategy, and are optimistic about 2021 and future years. Our transition to a recurring revenue model is continuing to pace. We have the right solutions to help our clients address both the short term and long-term effects of the pandemic, while they build for the future, whatever that may bring and when we have the right go to market strategy, structure and team to meet our goals.

We'll continue to make necessary investments required to scale while carefully considering margins. And we continue to see significant upside among both our existing clients and new opportunities. To provide more color on the financial results, let me now turn this over to our Chief Operating Officer and CFO, Ken Stillwell.

[Ken Stillwell, COO and CFO]

Thanks, Alan. Today I'll talk a little bit about our Q1 results, and also provide insight into the revenue growth acceleration phase of our cloud transition. Remembering late 2017, we started on migration from selling perpetual licenses to selling subscription licenses. Our expectation is that we will wrap up our cloud transition in late 2022 or early 2023. The two most important metrics to measure our business momentum as a cloud company or annual contract value, and remaining performance obligation or call backlog.

Let's talk about ACV growth first. In the first quarter, total ACV grew 20% year over year, reaching $853 million. FX continues to be a few percent tailwind to our results. Our ACV growth was powered by Pega Cloud ACV growth of 55% year over year. Pega Cloud is our software as a service offering. It represents client commitments where Pega fully manages the solution for our clients.

Our other subscription offering is Client Cloud. Client Cloud deployments are managed by the client on the cloud of their choice. It's important to note that Pega Cloud ACV reached $282 million in Q1, increasing more than $100 million year over year. It's quite amazing to remember that business as being a $30 million or $40 million business just five years ago, when I joined Pega. It's really exciting.

Moving the backlog, which represents client commitments that are booked but have not yet been taken into revenue. Total backlog increased by an amazing $226 million or 30% year over year, and Pega Cloud backlog increased by 36% in the same period. Our multiyear cloud transition was strategic and very deliberate. We believe that a subscription-based software company generates more predictable revenue and cash flows.

A cloud transition typically takes an enterprise software company five years as I've mentioned previously, to complete and includes three major phases. The first phase is where the company transitions from selling perpetual licenses to subscription licenses. When we started our cloud transition, about two-thirds of our new client commitments were perpetual.

In the first quarter of 2021, over 95% of our new client commitments were subscription arrangement, pretty much in line with our expectations. Clearly, this first phase of our trend while transition is complete. The second phase of the cloud transition is the revenue growth transition. During this second phase revenue growth rates decline, especially in the first few years.

This is because the business is moving away from selling perpetual licenses, where most of the revenue is recognized upfront to selling cloud arrangements where most of the revenue is recognized over time. For example, our revenue growth rate dropped from the mid-teens before we started the cloud transition to low single-digits for a few years.

And now that Pega has passed the midpoint to the cloud transition, our total revenue growth is accelerating, approaching the growth rate in ACV as expected. In the first quarter, Pega's total revenue grew 18% year over year and subscription revenue outpaced ACV and grew at 23%. Pega Cloud revenue grew 56%, almost identical to the Pega Cloud ACV growth rate of 55% in the same period.

These results represent an important inflection point in our cloud transition, and are another example of Pega keeping its promises along the way to becoming a cloud company. Our subscription revenue growth of 23% year over year, powered our total revenue growth in Q1. Total subscription revenue includes cloud, term and maintenance agreements.

It is also very exciting to see the evolution of our business model continue to progress as expected. In the quarter, the company subscription revenue reached 81% of total revenue up from around 50% when we started the cloud transition in the fourth quarter of 2017. The final phase of the cloud transition is the cash flow transition.

During this final phase, billing and cash collections improve and normalize. In other words, the company has completed the transition of moving from a company that collected most of its cash billings from new client commitments upfront to a business that builds and collects its cash billings from clients consistently over time. In Q1, we continue to make solid progress on our efforts to improve our cash flow. We're reinventing the way we develop, go to market and service our products and solutions.

You can see the payoff in our margin improvement, positioning the company to produce stronger free cash flow in the future. We still have work to do on this front. But we feel like we're making good progress. In the first quarter total gross profit margin increased by 4 percentage points year over year, and Pega Cloud gross margin increased by 7 percentage points, going from approximately 60% gross margin to 67% gross margin in the same period.

Our non-GAAP earnings for the quarter were $22 million, or $0.26 per share. One of our key goals is to achieve the Rule of 40 after we complete our cloud transition in late 2022, or early 2023. And to remind you, we define the Rule 40 is a combination of our ACV growth rate plus our free cash flow margin. We believe growth and profitability go hand in hand when it comes to business success, especially now that we're nearing the end of the cloud transition.

As we work with our clients, we are very focused and helping them as we hopefully come to a conclusion of this pandemic that we've been all dealing with. And we're really, really excited and around the efforts of our employees, and our work that we've done with our clients and partners.

Before opening the call for questions, I'd like to invite each of you to our Annual Customer Conference, as Alan mentioned earlier, PegaWorld iNspire on Tuesday, May 4, starts at 9 AM and will conclude around 11:30 AM. The event unfortunately is virtual again. But we're super excited to share incredible stories from over 40 clients and partners and features keynotes from a number of really, really important clients where we're doing great work.

To learn about the latest with Pega technology and to see how we're driving these incredible outcomes for our clients, I encourage you to register at pegaworld.com. Our Annual Investor Session is on Thursday, June 3, with a start time of 10 AM Eastern Time. We'd love to have you all join us. And to register, please send an email to [e-mail]. Or you can send a note to Peter Welborn, or myself.

And with that operator, please open the call to questions

[Operator]

Certainly. [Operator Instructions] And we'll go first to Mark Murphy of JP Morgan.

[Mark Murphy, JP Morgan]

Yes. Thank you very much. Alan, what are the spending intentions that you're picking up on from some of your key verticals like financial services for 2021 as a whole, just in terms of IT budgets, how they're looking at that? And I'm wondering, are you sensing any on-prem bounce back? Or do you think that the viewpoint is going to be more structurally tilted toward public cloud this year?

[Alan Trefler, Founder and CEO]

Yeah, so it's interesting. I think some organizations are not related to Pega projects. They have experienced a little bit of sticker shock on some of their cloud experiments. And, there is, I think a real question about how that growth is going to go. But relative to our clients, we're seeing a lot of enthusiasm about moving new business and even some of their existing systems onto Pega Cloud.

The real advantage is not a cost advantage on hardware or OpEx, it really is with Pega Cloud, we've really mastered a lot of the ability to keep our customers much more covered, and let them take advantage of the new things we're putting into our technology faster. So, I think the appetite in all industries, I think is going to continue to be strong.

We're fortunate that we were not heavily exposed to some of the industries that were most badly hit. But we are now seeing interest in places like airlines and retail, as well as our traditional markets around the financial services, healthcare and insurance.

[Mark Murphy, JP Morgan]

Okay, and Allan, I guess, since you made that last comment on the heavily hit industries, I wanted to actually ask Ken, how did you feel about maintenance renewals during Q1 and understanding your exposure there is low end, you've actually seen some positive demand there. Was there anything there that might have held back maintenance renewals or renewal rates at all? Or maybe just any timing differences as that push some of that into April or May?

[Ken Stillwell, COO and CFO]

Yeah, that's a great question Mark. So, two comments on the maintenance line specifically. So first, no retention rates, we're not seeing renewal rates, retention rates not seeing any softness or weakness that maybe would have been a risk from the pandemic. So, we haven't nothing there.

You may, I'll remind everyone, but this is a little nuance, but the way that we calculate our ACV for maintenance is that we take the quarterly revenue and we multiply it by 4, it's a little bit different than the way that it's directionally the same in spirit of ACV. But the mass of it does can cause slight variances between quarters in that particular number.

And so, and also to make another comment on that Q1 was not a very big renewal quarter in general for Pega. That isn't a big surprise. Renewals tend to be more toward the back end loaded in terms of the timing of renewals. But Q1 of 2021 was not a terribly strong, strong meaning a lot of activity and renewals that tends to be more back end loaded for 2021.

So, nothing, nothing at all in the in terms of the strength of the business Mark, but there are some timings around the way the calculation for maintenance ACV works quarter to quarter, and that can change the ACV numbers slightly within any one quarter for maintenance.

[Mark Murphy, JP Morgan]

I understand. Yeah. Thank you for shedding light on that, Ken. That's very clear. Thank you.

[Operator]

Our next question will come from Steve Koenig of SMBC Nikko.

[Steve Koenig, SMBC Nikko]

Hey. Thanks very much, maybe one multi-part and one follow up for you guys. So, on ACV grew 20% with a little bit of a tailwind from currency. Just decomposing the numbers, it looks like term ACV didn't increase that much quarter to quarter. And so, and more, I guess more generally, the question is what needs to happen to accelerate ACV? And I'll kind of throw in that as well.

Maybe talk a little bit because it's maybe relevant about 2021 sales changes that Hayden has made or is making and the hiring that you're doing. We noticed some key hires, but total hiring accelerating sharply as well. And I've got one quick follow up for you as well.

[Ken Stillwell, COO and CFO]

So let me take the first part of that and then Alan, maybe you might want to talk about the sales hiring the ramping and I'll remind Steve on something that I said last quarter, because sometimes these little nuances, it's helpful to just reinforce that I wasn't expecting - or I was expecting, excuse me, 2021 bookings to lean even more towards the back end of the year than a typical year.

So, I didn't expect ACV growth to accelerate in Q1, or quite frankly, even in Q2. So, the fact that ACV constant currency or as reported kind of dip slightly in Q1 by about a percentage point, wasn't a surprise to me in terms of what I thought the year would play out. Second point on that, you asked the question about how does ACV accelerate? It's really, it's significantly impacted by the booking momentum through the year.

So, when you do have a year that starts out a little bit slower than and we kind of we thought that all along then a typical year, you will see the ACV, you'll need more of the ACV growth towards the middle to the back of the year to get back growth rate up.

[Alan Trefler, Founder and CEO]

And relative to some of the sales changes. Now, if you look on LinkedIn in terms of Pega's recent hires over the, I would say, in the last three or four months, you'll see we've brought in some really extraordinary talent. We have a new Head of Europe, who I think is off to a terrific start. We've brought in some very senior people in the Americas.

And I think we're pretty close to done with any material changes. And now we need to bet it down and turn it into accelerated revenue growth, and accelerated ACV growth.

[Steve Koenig, SMBC Nikko]

Great, thanks Alan and thanks, Ken. And maybe a quick follow up. So, Alan, I was intrigued by your comments about how organizations are looking at Cloud migrations and seeing sticker shock in some circumstances, obviously, not impacting Pega if you just look at the numbers. I'm wondering, do you see that in relation to cloud native competitors in your space? Or are you seeing that more generally, and just kind of wondering about maybe some color about behind that comment?

[Alan Trefler, Founder and CEO]

Well, I think it's more generally, one of the things about the efficiency of running on the cloud, is if you've got a group of engineers, it's really easy for them to spin up many systems, then the bill comes due. So, I think it was really I was just making a general comment on the industry.

The reasons to go to cloud, frankly, are not to achieve data center savings. Because, it's hard to close down a data center. I think the real reasons to go to cloud is for the acceleration of revenue, abilities change faster, ability to just be more agile than in the alternatives. And I think that will continue. I just expect that fewer people are going to obsess about the data center cost reduction. But who knows, it's hard to predict that. In any case, I don't think it's going to affect us at all.

[Steve Koenig, SMBC Nikko]

Yeah. Okay. Great. Thanks for the color. Thanks, guys.

[Operator]

And now we'll go to Chris Merwin of Goldman Sachs.

[Chris Merwin, Goldman Sachs]

Thanks so much for taking my question. I just wanted to ask a bit about the margins in the quarter, obviously, a really strong number there, I know, you're investing in the business. And that's going to be driving faster growth as we go through the year. But can you talk a bit about what drove that beat and anything you can share about how you're trending so far this year relative to the full year guidance that you provided? Thank you.

[Ken Stillwell, COO and CFO]

Sure, Chris. So, the beauty of a subscription model when you're done with the transition, is that the revenue isn't as dependent on your performance in individual quarter. Now, with ticks and six in the screwing us of the way the accounting and around that, and us having client cloud, which means that some of the accounting is under the term accounting model, we still do have a little bit more movement in the quarters than if we were 100% Pega Cloud.

But I think the growth rate that we kind of thought for the year when we originally started the year, we didn't expect that to be kind of flat all year. And then a huge hockey stick in Q4, like it used to be when we were a perpetual business. So, I think seeing that steady growth rate is really encouraging to me just to, kind of just to confirm something that I knew would happen, which is as you exit the transition, the revenue starts to really kind of get matched up against the ACV.

And I think Q1 is kind of a good indication that we're kind of hitting that stage now. So that's exciting. In terms of the cost, Chris, we've sometimes, the timing of hiring and the timing of events, through the year will sprinkle things between quarters. We have marketing spend, we have travel spend, which certainly is low under COVID.

And we have just the timing of when new hires that as we're growing the organization start. Some of those things can kind of just flip between quarters a little bit. So, I think I'm happy that we started off strong on APS, but I don't think that that just that the margin profile is different than what we originally thought when we talked about 2021. It's just sometimes it's just the timing is a little different between the quarters.

[Chris Merwin, Goldman Sachs]

Okay, perfect. That being said, maybe a follow up, as it relates to the ACV target in fiscal '22 I mean, in terms of just looking at this in the past, I imagine as cloud becomes a bigger percentage of the next, I mean, the overall ACV growth is going to track more closely to that.

Should we think of that as a primary driver of the overall acceleration in ACV growth as we head towards the end of 2022 or just wondering what else either was being contemplated there, whether it's improvement in the demand environment, or whether that's not even necessary, just to think that you can impact some of those drivers and how you're progressing against them would be helpful. Thanks.

[Ken Stillwell, COO and CFO]

So, in order to accelerate ACV, a couple things need to happen. One, naturally, the investments that we've made in sales and marketing will come to fruition, right. And, as Alan just mentioned, a few moments ago, we've had a lot of change in the organization for the good. But that change naturally needs to anchor.

And I think that we have plenty of opportunity to meet or to achieve or beat any of our ACV growth targets that we have. It's really about us executing and executing consistently to be able to expand our relationships with the most important companies in the industries that we serve. How will that ACV growth play out?

Naturally, ACV growth tends to be a little bit softer in the first, second, third quarter, tends to normalize in the fourth quarter, because the timing of our bookings. And I think the biggest and most important factor for our ACV growth is Pega Cloud. Pega Cloud adoption is growing above 50%, quite frankly, longer than I thought it would stay above 50%. And I think that has been a really important factor to our success.

And we expect that growth rate to stay very high. And that is the key lever, I believe, for us expanding and growing our client base and also accelerating our ACV.

[Chris Merwin, Goldman Sachs]

Thanks very much.

[Operator]

And now we will go to Steve Enders of KeyBanc Capital Markets.

[Steve Enders, KeyBanc Capital Markets]

Great, thanks for taking my question. I just wanted to chat a little bit about the investments that you're making in the partner community and the channel community and how those investments attracting and kind of how we should think about those going forward in terms of ACV growth and potential [ph] bricks already in that?

[Alan Trefler, Founder and CEO]

Could you repeat the first part of that question, it was kind of a glitch on my line?

[Steve Enders, KeyBanc Capital Markets]

Sure, yeah, I was asking about the partner community and the channel and the investments you're making there, and the ability for that to accelerate growth going forward.

[Alan Trefler, Founder and CEO]

Yeah, I think it's going to be very, very promising particularly in future years. We've already very dramatically increased our partner staff to really be able to enable the partners to understand Pega more and put it in more bids. And we're seeing that happening.

Hayden is a big proponent of using partners extensively. And I would say that we have a record number of deals that have partners involved in a couple of different ways. So, I think that's going to be key. And that is a place where we've already hired a significant number of people to be able to deepen that this year and next.

[Steve Enders, KeyBanc Capital Markets]

Okay, great. And then just a quick follow up, just want to get a better sense of some of the deals kind of came together in the quarter. It seems like there's a bit more focus on what you're talking about on the local side, at least in the past couple quarterly, but wondering how those kinds of translating over to the CRM side of the business and supporting those initiatives?

[Alan Trefler, Founder and CEO]

We're seeing activity on all three fronts that we really tried to go to market. And we do a lot of work in customer service, a lot of those are really sort of your antenna workflows that snap into a variety of channels and front ends. We have what we call the next best action capability that's used by some of the world's largest companies to really optimize the response to customers.

And we have the Intelligent Automation, which is your think of that as being the same sort of workflows, power and customer service, but being able to do it in lots and lots of different settings. We've been low code in all three of those, practically going back many decades since we've been around. We've always believed in a Model Driven architecture, which frankly is I think what no code or a low code is truly intended to be.

And I'm pretty pleased. And I think we're being effectively serving our customers, how we have a depth and sophistication, so that they don't have to just use low code for sort of crappy little systems like, think back to Lotus Notes applications. That's what all these low code folks are doing.

But they can use some, a common platform to do those, but also to do things that are truly enterprise scale, and may have 10s of 1000s of concurrent users across an enterprise Pentagon. And that breadth I think is unique to us. But we're using the low code concept and term, really to power us across all the markets we go into.

[Steve Enders, KeyBanc Capital Markets]

Okay, great. Thanks for taking my questions.

[Operator]

And now we will take our next question from Jack Andrews of Needham.

[Jack Andrews, Needham]

Good afternoon. Thanks for taking my question. I was wondering if we could dig a little bit deeper into the partner side of things that you hinted at this reimagine partner program coming out on May 4. So, I'm just wondering, I mean, have you reached the point where partners are effectively committing to a go-to-market strategy with you? And or, I mean, could you just talk about maybe somehow the partner deals that you're involved with right now are maybe comparing in terms of either size, or just other characteristics relative to what you've historically seen with your direct sales efforts?

[Alan Trefler, Founder and CEO]

So, I think there are two parts one that's really good, and one that introduces from our point of view of some potential timing questions. So, we've already been able to get major commitments from extremely large top tier partners, that they're going to build hiring material practices in Pega.

And it's interesting, we're seeing things where organizations are actually willing to buy small companies on the comp, recently bought a significant backup partner to really beef up its efforts, as it's going to market dealing the whole sort of advertising arena. And so I think, the partners really, really provide enormous leverage.

And we have seen a real reciprocation from them as we have been investing more and bringing new people into to really drive those relationships. That's the difference, I think, between partner driven sales and sales that our sales organization is driving is that, you have a little less visibility and control into exactly where things are.

You can't run around your partner, even if the partner brought you in someplace, you've got to really respect that. And that can just lead to a little less clarity on exactly where the deal is. But I like what I'm saying. And we're going to continue to double down on it.

[Jack Andrews, Needham]

Appreciate that. Just to sort of follow up with a broader question. And maybe just talk about what are your expectations for new logo growth here in 2021? Are you expecting sort of an acceleration of new customer ads coming out of the pandemic?

[Alan Trefler, Founder and CEO]

Well, I think we're driving the pandemic. And everybody's sort of back, it will be easier to achieve new logo growth. But we are not at all limited in our existing logos. We are as I've said before in when you think about our top 10 customers, we're on average, no more than 20% penetrated, compared to what we think we're able to do with those customers in those dams.

But we are scoring new logos, including some pretty impressive names. But yeah, let's face it, in a pandemic, people are more likely to work with the people that they already know. And so, I think we're going to see that pick up as we end this year, enter '22.

[Jack Andrews, Needham]

Got it. Thanks for the color.

[Operator]

And next we have Dan Ives of Wedbush.

[Dan Ives, Wedbush]

Yes. Thanks. First, congrats on the Leishman sponsorship. So, could you maybe hit on from a marketing perspective, in terms of sort of the go-to-market strategy here? Are you going to see more and more partnerships as well as just building out some of the channel? Can you just talk about that especially given the broaden offerings?

[Alan Trefler, Founder and CEO]

Yeah, so we're definitely going to see partners as being increasingly important to our go-to-market and that's an area that we've as I said, already made commitments to hired people and gone forward. So that's going to be quite material quite bigger and I think it's a real force multiplier as Hayden likes to say.

And regarding marketing the Golf, who could know that my CMO was going to turn out to be so brilliant at selecting people for us to sponsor. I brought in slews of text that I am after Leishman appeared, literally winning the Zurich this past weekend, and they are being kept in the master. So yeah, I think, he's doing sort of an outsize job. And we're pleased that we've been able to do the sponsorship with him.

[Dan Ives, Wedbush]

Great, maybe let us know who he picks again and we could use DraftKings before that.

[Alan Trefler, Founder and CEO]

I've been asking him if he can give me a Superbowl recommendation, but we haven't got that.

[Dan Ives, Wedbush]

Exactly. Okay. Could you just hit on M&A appetite as an increased, just given the strength that you're seeing? Thanks.

[Alan Trefler, Founder and CEO]

Well, we will continue to look for technology or other sorts of things that would complement or tuck in to our value proposition. Yeah, we're not a company, we and I think this is going to become increasingly important in the future, are very focused on making sure we don't destroy our architecture by buying your revenue that doesn't fit together.

And so in fact, we're much more likely to buy companies that are either early in revenue, or in some cases pre revenue, but that have very, very creative visions that would fit in to this concept and to center up work management. So, we've got the resources to do it. I would say that we're very selective.

And I'm already hearing from a lot of customers, who've worked with other organizations to create what we call Franken stacks, that they're really thinking that that technical debt is hurting them, even if it's running on the cloud, they really end up suffering with the seams. So, we have an appetite. You're not going to see us going and trying to make frankly a dis-economic purchase, which there's lots of purchases out there that I just think are a little crazy.

[Dan Ives, Wedbush]

Great. Thanks.

[Operator]

And now we'll go to Mark Schappel of Benchmark.

[Mark Schappel, Benchmark]

Hi, thank you for taking my question. Just one question here. Most others have been answered. With respect to Process Fabric, Alan it's been about a year or so now since the introduction of the solution. And I know last year was pretty much all about building pipeline for the product. Just wondering if you just address a little bit what your outlook is for a Process Fabric with respect to being a meaningful contributor revenue this year?

[Alan Trefler, Founder and CEO]

Well, I think Process Fabric is a meaningful contributor in a couple of ways. One is, it itself is a source of some revenue. But the best thing is that it lets you hook together lots of applications. So, I find it a way that you can create a single fabric as opposed to trying to either create some massive single system, which isn't the way we want to do things in the cloud world, or have stuff that has to be manually cobbled together.

So, the fabric is really sort of an out of the box way. And we introduced it last year, and it was quite new, it's now been adopted by several clients. And I think it's going to be a very important part of our go-forward both in terms of itself, allowing us to generate revenue, but more making it easier to drop in Pegasystems, or talk to other systems, even if they're distributed.

[Mark Schappel, Benchmark]

Okay, thank you.

[Operator]

Next, we have Fred Havemeyer of Macquarie.

[Fred Havemeyer, Macquarie]

All right, thank you very much for taking my question. So, I'm curious to ask questions actually around your pre-configured product portfolio here. So, I'd like to ask how generally do you see yourself landing across your portfolio pre-configured solutions? And where are you seeing the most customer traction there?

[Alan Trefler, Founder and CEO]

So, there's a lot of - I'm sorry, excuse me let me get off mute. Yeah, there's I would say a lot of customer attraction in areas that involve things like onboarding. Yeah, because people are really worried in some industries about fraud, and also being able to manage claims, because we've had some organizations that have had forbearance claims, other types of thing's spike, and that's just something we're really extremely good at.

So, for example, a lot of our customer prepackaged solution or some of our onboarding capabilities are things that we're seeing quite a bit of interest from and particularly from banks.

[Fred Havemeyer, Macquarie]

Thank you. That's helpful there. And then as a follow up as Hayden is taking the reins across the sales organization, are there areas that you think that he'd be interested in or Pega generally would be interested in adding to their pre-configured or pre-built product portfolio? And perhaps also leveraging some of your experience with customer implementations that could really help to accelerate that go to market?

[Alan Trefler, Founder and CEO]

So, I think there are areas but as part of our new push with partners, and you'll see then these solutions coming to market, we're really looking to get sort of one or a couple partners in each vertical, who themselves specialize and have their own out of the box things.

Because the reason partners like that is if they're bringing IP to the table, when they're getting on a customer piece of business, even your pet is going to be the underpinnings because they're bringing IP to the table, then that, frankly makes them more competitive. So that's a good way I think, for us to get this done without going through all of the expense of ability to build it all ourselves. Yeah.

[Fred Havemeyer, Macquarie]

Great, thank you very much for that. That makes sense.

[Operator]

And now we'll go to Yun Kim of Loop Capital Partners.

[Yun Kim, Loop Capital Partners]

Thank you. Hey, Ken, going back to Steve's earlier question on the client cloud business. Are you expecting a big renewal year for that business this year which obviously could potentially provide tailwind for the year? Or are you expecting some of the Client Cloud customers to start moving over to the Pega Cloud, which obviously could limit some of the client cloud ACV growth?

[Ken Stillwell, COO and CFO]

So, good question Yun, I'm glad you asked, because it's probably good for anybody listening so that I can clarify that. So, renewals wouldn't - large renewal years, let me clarify wouldn't impact ACV positively or negatively unless we up sold or radiated with that client. If Yun, a client moved from Client Cloud to Pega Cloud during a renewal cycle, or even in the middle of it, that absolutely would reduce one and add to the other.

We don't have much of that going on right now, we have a little bit and we certainly would like to see more. But we didn't think about 2021 is being a massive shift of people moving from Client Cloud to PegaCloud. Although we would love to see it. I think clients saw that will happen for some clients over time. What it does impact, the renewal cycle impact is revenue for term license, because if you know under 606, the revenue comes in when a renewal is essentially executed.

So, renewals tend to be more backend loaded. And we do have a I think a fairly, I would say, I'm going to use the word normal, but a fairly kind of typical year for renewals around Client Cloud. So, we do have some revenue assumptions, typically coming more towards the back end of the year. But we don't anticipate renewals impacting ACV directly, because our retention rates are very high.

And if we did actually have clients that decided to move on to Pega Cloud from Client Cloud, that would certainly would reduce Client Cloud ACV, but it would increase Pega Cloud ACV by a larger amount. So, I think that that would be a good outcome if that did happen. But renewals are not a big factor in ACV, specifically.

[Yun Kim, Loop Capital Partners]

Okay. But typically, when customers renew the, I'm hoping that they renew at a much larger - they would expand their current deployment. So that's the question I find that particularly,

[Ken Stillwell, COO and CFO]

That is true. And that's why I had mentioned that our renewals tend to be more backend loaded. And our bookings tend to be more backend loaded because we do radiate with lots of our existing clients. Our renewal is an opportunity, it is a compelling event to sell more. So, you're absolutely right there.

[Alan Trefler, Founder and CEO]

But I don't think it's sensible for us to wait for renewals to upsell the customer. Yeah, typically in our agreements, if we're able to work with the customer find greater usage, there's typically a pricing schedule where you'll see the ACV increase independent of the renewal.

[Yun Kim, Loop Capital Partners]

Okay, great.

[Ken Stillwell, COO and CFO]

Let me do a modification to an existing contract, Yun, is what Alan is saying and that happens all the time at Pega.

[Yun Kim, Loop Capital Partners]

Yep. That makes sense. So, on the Pega Cloud side of the business, can you at least qualitatively give us how much of that business is driven by the expansion rate and how that's been trending versus new customer ads?

[Ken Stillwell, COO and CFO]

The Pega Cloud from a dollar standpoint, the overwhelming majority of our ACV growth is from clients growing their spend with Pega, existing Pega clients growing their spend with Pega. So, we do not, we are not growing Pega Cloud with getting tons of brand-new logos that have never done business with Pega.

I think the number that we've had is somewhere north of 75% of our bookings of our client business is actually business with existing clients and Pega Cloud has probably a similar I don't know, I've not dissected it at that level, but Pega Cloud, I would tell you would probably have a similar profile to that use. So, it is it is largely expansion with logos that Pega has.

[Alan Trefler, Founder and CEO]

So those expansion might be a new division, a new department, new projects, those types of things. And, from my point of view, those are very reliable projects, because the customer already has a good experience with Pega. And so, they're just - maybe they're just amping up the number of cases per year they do. Or maybe were adding on, for example, decision angle or next best action to a customer who is a work management customer.

[Yun Kim, Loop Capital Partners]

Okay, great. That's it for me. Thank you so much.

[Operator]

And now we will go to Pat Walravens of JMP Securities.

[Joey Marincek, JMP Securities]

Hello, great. Thank you. This is Joey Marincek on for Pat, just one for us. I want to go back to those sales investments and maybe, how are you tracking from a sales productivity standpoint? And then just qualitatively, how are you thinking about the pipeline for 2021? Thank you.

[Alan Trefler, Founder and CEO]

Well, I think what's been very positive is with the introduction of Hayden and some of the other new sales management that we have, we've really internally been able to create a much more disciplined cadence. So that, yeah, we're really, I think getting frankly a better observability of not just what's closing, but the bill is in the pipeline and making sure things are properly categorized, and making sure that offer us a thought of the right way.

So, I think I'm encouraged that starting Jan 1, some of these changes have really only happened in the last three, four months. Starting Jan 1, I think we've got a much better selling discipline, as a result of not just Hayden but some of the other team members that he's brought in. So that makes me feel, A, we will have good visibility into the productivity as we go through the year. And B, I do very much like what I say about this improved management to seller engagement.

[Ken Stillwell, COO and CFO]

And just to add one, just one little color on another part of your question. Our pipeline not only is growing at a healthy clip year over year, but to Alan's point, we also believe the quality of our pipe is better now. And so the combination of higher quality and growth in pipe really creates an environment to see that sales productivity improvement in the future.

[Joey Marincek, JMP Securities]

Awesome. Thank you so much, guys.

[Operator]

And this does conclude today's question-and-answer session. I would like to turn the call back to Alan Trefler for any additional closing comments.

[Alan Trefler, Founder and CEO]

Thank you. I hope you all get a chance to visit PegaWorld iNspire next week. It's going to be a terrific show. And I think there's a lot that's going on. And I think people would find that really interesting. Relative to our investors, I want you guys to know that we're all working really hard. And I think the team is energized about where we are. So, thank you all. And look forward to talking to you in the Q&A at PegaWorld. Bye everyone.

[Operator]

And this does conclude today's call. We'd like to thank you again for your participation. You may now disconnect.