Pegasystems Inc Q4 FY2021 Earnings Call

Good day, and welcome to the Pegasystems Fourth quarter and Full Year 2021 Earnings Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ken Stillwell, Chief Operating Officer. Go ahead, sir.

Thank you. Good evening, ladies and gentlemen, and welcome to Pegasystems Q4 2021 earnings call. Before we begin, I would 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, projects, forecasts, guidance, likely and usually or variations of such words or other similar expressions identify forward-looking statements, which speak only as of the date 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 2021, 2022 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 Q4 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, 2021, 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.

Thank you, Ken, and thank you to everyone who's joining today's call. I'm pleased that we ended the year with solid results by staying focused and leveraging our strengths. We grew ACV, Annual Contract Value, our most important metric to over $1 billion for the first time ever. Our low-code software platform for workflow automation and AI-powered decision-making is, I think, unmatched in the industry. The largest and most demanding enterprises and governments around the world choose us to address their most mission-critical challenges. Increasingly, we're being selected as the enterprise workflow standard for activity done at scale, from the simple to the most complex. With Pega, our clients don't need to sacrifice scale for speed. We support their digital transformation objectives with solutions that provide immediate value and with the agility to tackle whatever challenges they may face in the future. We continue to enhance this innovative technology, which consistently receives some of the highest possible ratings from leading analyst firms like Forrester and Gartner, and drive significant and meaningful outcomes for our clients. We have a loyal client base that understands and values the power of what we offer and is leveraging Pega to deliver inspiring results and continues to provide ample opportunity for expansion. We have a dedicated and deepening partner ecosystem that's helping us accelerate our growth and bring even more value to our clients. Our partners continue to focus on delivery excellence and are an essential element in ensuring successful adoption by our clients. We have a culture built on inclusivity, collaboration, accountability, innovation, and excellence, committed to giving back and making a difference in our communities. I'm really proud that we recently scored 95 out of 100 on the Human Rights Campaign Foundation's 2022 Corporate Equality Index. This is a globally recognized benchmark and represents our team members coming forward and doing the right things. And importantly, we have a team of more than 6,000 people around the world, that are dedicated, passionate, and resilient, who make all of this possible and who make me proud every day. Now, in terms of market dynamics and competitive differentiation, let me just say that digital transformation continues to be central to our clients' successes and is driving our business. Gartner is predicting continued growth in enterprise software spending, driven largely by organizations upgrading their software stack to Software-as-a-Service and seeking continued flexibility and agility. And IDC is predicting investment in digital transformation software to grow about 25% every year from now through 2024. Though initially accelerated by the pandemic, it's clear to me that industry focus will continue, and we're in a great position to capitalize on this trend for years to come. I'm energized about the terrific market opportunity this represents for us and our ability to significantly help clients solve problems both today and for tomorrow. We are working to be the low-code software platform, the low-code software platform for workflow automation and AI-powered decision-making. These powerful capabilities allow us to crush business complexity so our clients can more easily make decisions, save time and get work done. We differentiate on our architecture, which allows us to tackle mission-critical issues our clients have today and will have in an unpredictable future. Our Cloud Choice approach, which allows clients to use our fully-managed Pega Cloud services or to run our software on their cloud of choice, supports the growing trends we're seeing in multi-cloud environments. Our exceptionally powerful and adaptable software is scalable to provide maximum reuse while enabling collaboration between business and IT leaders for rapid innovation. I'm pleased that we're trusted by many of the world's largest and most demanding enterprises and governments and that they're using us to fundamentally evolve their businesses and to improve how they engage with their clients, by personalizing customer engagement to maximize customer value, streamlining customer service to increase customer satisfaction, retention, and agent productivity, and improving the efficiency of onboarding operations and exceptional workflows to save time and cost while increasing speed and agility. Over 2021, we continue to see the positive impact of our deep and profound client relationships, and how they're able to drive outstanding results for our clients. We expanded our reach in many clients in key verticals, including communications, financial services, healthcare, insurance, and government. We also continue to make inroads into organizations that represent new growth opportunities in places like manufacturing, consumer services, and technology services. We continue to deepen relationships and see tremendous opportunity for growth within those existing clients. These clients become sustaining relationships that routinely renew year after year and set the standard for successful examples of significant digital transformation. Our clients continue to expand their use of Pega because we drive value today, and we see how they can drive value in the future. That's why so many of our clients are willing, and we're honored that they are, to publicly talk about their work with us, and they will this year again when we're once again holding PegaWorld virtually in May. Now we're holding PegaWorld virtually this year, but we're excited to bring back in-person events in the second half of this year. We'll be holding a variety of client and partner events around the world, including regional client engagement events and client and partner advisory boards. Going back to PegaWorld, one of the best parts of PegaWorld is hearing from our clients. This year, we'll once again feature incredible stories like Cigna, who is using Pega to process more than one million critical and complex healthcare transactions each day and address the needs of customers and patients in a highly personalized way. Ford has created a center of excellence using Pega as their enterprise low-code workflow automation capability to enable citizen developers to create Pega applications and alleviate IT backlogs. Highmark is leveraging Pega to deliver enterprise-wide healthcare consumer engagement and do it at scale across channels, focused on improving health outcomes, improving the member experience, and also reducing cost. The U.K. Royal Navy is using Pega to transform and modernize its recruitment process with a unified digital platform that provides candidates a better experience and the data that the Navy needs for meaningful insights. Verizon will showcase how they're using Pega's decision engine to influence and personalize customer relationships and increase sales velocity. Wells Fargo is using Pega to ensure that each of the 5 billion monthly interactions with customers is targeted and relevant to the individual regardless of which channel they choose to connect through. They just rolled out this new system in 5,000 U.S. branches within a year and published a new video featuring this work. You don't need to wait until PegaWorld to see their incredible story; just go to pega.com. I hope you'll check out the PegaWorld website, register and join us live. I was also delighted to recently hear from our clients at Commonwealth Bank of Australia that they've become the subject of a Harvard Business School case study as their work is being considered a global best practice. The case study is available online at the HBR store and is based largely on the work they're doing with Pega to drive what they call their Customer Engagement Engine, an AI-driven customer experience platform. As the case study says, 'Against the backdrop of a once-in-a-century global pandemic, CEE, their Customer Engagement Engine helped the group deliver a strong financial performance while also supporting customers with assistance packages designed in response to the coronavirus outbreak.' Before I conclude, I also want to provide an executive update. I want to let you know that Hayden Stafford, the President of Global Client Engagement, has decided to pursue an opportunity with a pre-IPO company and will be leaving Pega. In his 22 months with Pega, Hayden helped cultivate an extremely strong go-to-market operation, and we have an experienced and talented team. I am confident the team we have is well positioned to continue to deliver through 2022 and beyond. Collectively, we wish Hayden all the best in his next endeavor. In summary, I'm excited that as we enter 2022, we are clearly a subscription business. Nearly 100% of our software business is now subscription. You can see the significance of this transition in our full year financial results, which look much more like what you'd expect from a subscription-driven business and which Ken will take you through shortly. I'm especially excited to see that our revenue growth is now more closely aligned with our ACV growth, which, as I've said, we view as the critical measure. The need for enterprise software to support digital transformation initiatives in our client base continues to grow. We are in a great position to capitalize on that growth and provide solutions unmatched in the industry. We're really excited about the significant opportunity we have this year and beyond, and I believe we have the right team to deliver on these opportunities. To provide more color on the financial results, let me now turn this over to Pega's COO and CFO, Ken Stillwell. Ken?

Thanks, Alan. To hit on a few highlights at the top of our business, Annual Contract Value, ACV grew just over 20% year-over-year, surpassing $1 billion, as Alan mentioned. Currency negatively affected our ACV growth by about 1%. So in constant currency, we would have been in the 21% range. Total revenue reached $1.21 billion for the full year. Revenue would have been even higher if not for significant growth of 45% in our term license backlog. As many of you know, the timing of the revenue under our client cloud model can have some lumpiness between quarters and it's not as predictable as our Pega Cloud revenue recognition. So it's important to look at revenue and backlog because it tells a complete story. Subscription revenue grew 24% year-over-year and made up almost 80% of our total revenue in 2021. We delivered the highest total gross margin that we've reported at 72%. Remaining Performance Obligation, or RPO, or backlog reached $1.3 billion, an increase of 25% year-over-year. It's great to see us get back to full year profitability, as non-GAAP EPS reached $0.22. Now let me put this all in context. 2021 was another important year in the transformation of our business as we are now largely complete with our subscription transition. Remember, we're a subscription software business. We're almost at the end of our financial model transition. When I first talked about this, I mentioned finishing the transition in 2022 going into the beginning of 2023. We are still on that schedule. Now that we've wrapped up 2021, let's go back and refresh everyone on what I discussed in 2017 about how the subscription transition would evolve if we executed it as planned. The first step was to change the way we sold software, moving away from selling perpetual licenses. Before we started the transition back in late 2017, over 50% of our new client commitments were perpetual arrangements. For the last couple of years, almost 100% of our new client commitments are now subscription arrangements. Our sales team and our clients have clearly transitioned from a perpetual to a subscription buying and selling model, which is a very dramatic change in just a few years. It's also great to see that our revenue growth rate and our ACV growth rate have really converged closely. When we started the subscription transition, I mentioned our revenue growth rate declining in the early years of the transition, which is exactly what happened. As we moved away from selling perpetual licenses, where the license is largely recognized upfront, the revenue begins to reverse and normalize as you get closer to the exit of the transition. Pega's annual revenue growth was flat in 2018, for example, and only grew 2% in 2019, but ACV was growing by over 20% in both of those years. Fast forward to 2021, Pega's revenue grew 19% in 2021, our subscription revenue grew 24%, and ACV grew just over 20%. We have also made progress in the normalization of cash flow and profitability. The final phase of the cloud transition, which we should complete in 2023, is when you begin to see that margin expansion and normalization in a business like Pega. With our very high retention rates and operating leverage with high gross margins, we expect cash flow generation to increase significantly as we exit and normalize out of the cloud transition. In 2021, we delivered the highest gross margin since we started this transition, as I mentioned, at 72%. That strong improvement was powered by an increasing Pega Cloud gross margin, which reached 67% for the full year of 2021. For the full year, non-GAAP EPS was $0.22, a significant improvement over last year, but really just a step in the process of getting back to significant free cash flow generation. Coming out of the subscription transition is a perfect time to remind people of cash flow potential inherent in a subscription business with high retention rates like Pega. I believe we're starting to see that return to operating cash flow generation and it's now inflecting upwards and will continue to in 2022 and beyond. We're confident that we can increase margins even further to achieve our free cash flow targets and accelerate our ACV growth at the same time. We continue to see a tremendous market opportunity for us in the digital transformation space, so we will continue to invest in sales and marketing to help accelerate our ACV growth. Our sales and marketing expenses are declining slightly as a percentage of total revenue, but we know we still have work to do. We're making progress; we're not quite there yet, but we are going to continue to drive sales productivity improvements in 2022 and beyond. Moving to Cloud Choice, we clearly benefited from Cloud Choice differentiation. It's clear to us that multi-cloud is a real trend. In January, Investment Bank RBC reported that 77% of IT decision-makers use two or more cloud vendors, while 35% use three or more cloud vendors. Gartner reported in September that 76% of firms use more than one cloud provider, which makes offering our clients' Cloud Choice critical. We're excited that our subscription software is now available for purchase on the Amazon marketplace, giving us another distribution channel. It's important to remind you that $1 of incremental ACV is a $1 of incremental ACV. When a client purchases Pega Cloud or Client Cloud, the long-term economics for us are very consistent as we cross and upsell to our largest organizations. Our solid performance for the year is also evident in our remaining performance obligation or backlog. Total backlog represents expected future revenue from existing contracts with our clients. Total backlog reached over $1.3 billion, an increase of 25% year-over-year. Our incremental backlog add was almost $300 million year-over-year. Ultimately, for a subscription software company's revenue growth rate, our ACV growth rate, and our backlog growth rate should all align. The fact that these three growth metrics are much closer in 2021 and converging closer in 2022 and beyond is evidence that we've executed well on our subscription transition. Given the evolution of our business, you may notice we've updated the revenue categories in our financial statements to group our subscription revenue streams more clearly. These new revenue line items better reflect the fundamentals of how we think of our business. Total revenue reached over $1.2 billion, as I mentioned earlier, representing growth of 19% year-over-year, highlighting why it's very important to look at RPO and revenue growth together when evaluating our performance. One challenge of our compelling Cloud Choice strategy is the revenue recognition for our offerings is not always ratable. In 2021, our term license backlog increased 45% year-over-year, which is unusually strong and was significantly higher than the term license revenue growth of 26% for 2021. Normally, we would expect to see those growth metrics more in line with each other. The higher RPO growth in 2021 just shows you that we have greater visibility into term license and revenue looking out in future years. Cloud subscription revenue grew 24% year-over-year and made up 79% of total revenue. When you add our subscription revenue and our professional services revenue, it exceeds 95% of the revenue in 2021. Turning to our fiscal year 2022 guidance, I want to remind you that it's our practice to provide annual guidance at the beginning of the year. We do not update annual guidance during the year unless we make a material acquisition. We expect total revenue of $1.46 billion to $1.49 billion, an increase of 20% to 23% year-over-year. For the first time, we're providing ACV growth guidance, which we expect to grow 20% to 22% year-over-year in 2022. We've created a range, which we believe provides some level of visibility to the business and the growth of the business without the unnecessary predictability of guessing an exact percentage number, which, as you know, is very hard to do. From a profitability perspective, we expect 2022 non-GAAP EPS of between $0.75 and $1, a solid improvement and a step in the right direction towards the Rule of 40. We realize there is tremendous leverage inherent in our operating model, and we plan to exhibit that leverage as the business scales and grows larger. We continue to see solid demand for digital transformation in both the front and back office, and our product continues to be best-in-class with differentiated capabilities. Before opening the call for questions, I want to reiterate Alan's invitation to each of you to our Annual Client Conference, PegaWorld iNspire in May. We also plan to hold an annual investor conference sometime in June. More details to follow on that. We're hoping that the investor conference can be live, but fingers crossed. With that, operator, let's open the call to questions.

And we’ll take our first question from Rishi Jaluria with RBC.

It's good to see some acceleration in the business, and I appreciate the mention of our recent sales survey. I wanted to delve deeper into the guidance you've provided. It's great that you're forecasting accelerating revenue growth and margin expansion, which is a unique combination in the software sector. I have two specific points to discuss. First, you're projecting an operating margin expansion of about 300 to 400 basis points. There are clearly challenges and opportunities with the cloud transition impacting margin expansion. Can you clarify how we should view the previous targets you set for achieving the Rule of 40 in 2023? Is that still achievable? That would imply significant margin expansion this year. Secondly, I appreciate the ACV guidance, as it will certainly aid us in building our models. Could you share what foreign exchange assumptions are included in that guidance? I have a follow-up as well.

Let me address a couple of those points. Our FX assumptions for the full year are relatively muted, and we do not anticipate a significant impact from currency fluctuations. There may be a slight headwind from FX, but we are not making bold predictions about substantial movements in the dollar. Throughout the year, the dollar experienced some volatility, starting weaker and strengthening towards the end. Overall, it is expected to be a slight headwind year-over-year due to currency changes. Regarding margin expansion, it’s important to note that we could adjust the business's margin by reducing our investments, though that is not our intention. The margin expansion trend we are experiencing is expected to show increased improvement in 2022 with noticeable growth in 2023 and 2024. We may not fully reach the Rule of 40 in 2023, but we will be on the right path towards that balance. We have not seen sales productivity increase as quickly as we had anticipated, and the impact of COVID has contributed to the delay in achieving the Rule of 40.

Got it. That's helpful. I appreciate that. And then just on the Pega Cloud side specifically, look, we all understand the Cloud Choice, and that's obviously a major competitive advantage for you. But it does seem like there's a bit of a slog on, especially on the cloud revenue side or even cloud CRPO. Can you maybe just let us know what's going on? Any kind of factors that make that number a little wonky in terms of rev rec? And how should we be thinking about the potential for Pega Cloud growth to accelerate, maybe, let's call it, next year 2023?

Sure. Throughout 2021, I mean all of you are aware that our clients really are much more proficient at managing their own cloud, which actually has strengthened our Client Cloud growth in 2021. When we started the year or even started 2020, I don't think that it was as obvious to us how important it is for clients to be able to manage many of the solutions that they're buying from vendors like Pega. That is certainly one difference in the last few years; we view it as a positive because we really buy into clients embracing that. In terms of your question about Pega Cloud specifically, there aren't any rev rec issues. There's nothing unique going on. Pega Cloud is a very traditional SaaS subscription revenue recognition model. So nothing there on that side. I think as the percentage of Pega Cloud and Client Cloud has stayed relatively steady, and our growth rate of ACV has stayed relatively steady, it wouldn't be unusual for the cloud growth rates to converge a little bit. And that's really what you're seeing happen as clients manage their own solutions on Pega at a little bit of a higher pace.

Got it. I totally understand. And last one for me, and I'll jump back into the queue. Cloud gross margins, obviously, they've improved dramatically since you started on this cloud transition. I know in the past, you've talked about getting a more SaaS-like gross margins, call it, 70% plus. Understandably, the single-tenant architecture is always going to be a little bit of a drag there. But it's been relatively flat throughout the course of 2021. How should we be thinking about the potential for cloud gross margin expansion from here?

You should probably expect a few hundred basis points of cloud gross margin expansion each year for the next few years.

I would say relative to architecture. We've been doing a lot of work, technology called Kubernetes, other types of things that I think provide in coming years some really good opportunities to achieve the types of things Ken is talking about in a pretty reliable way.

Just to confirm one thing because it’s probably a question that may arise and others might have this. Our goal for Pega Cloud gross margins in the kind of timeless model has not been reduced. If anything, I think something that Alan mentioned in architectural improvement would give us the opportunity to improve them. We have plenty of scale of Pega Cloud. So we're not worried about our Pega Cloud gross margin targets that we've discussed over the last few years.

Next, we’ll take our next question from Steve Enders with KeyBanc.

Great. I guess I want to ask a little bit on what you're seeing from a demand function at this point and where the top of funnel activity stands? I think there's been concerns in the market around digital transformation potentially causing a pull-forward in demand into 2020 and 2021. So just wondering what you're seeing on the demand front and how the top of funnel activity looks today and into calendar 2022 here?

So I can take that. As we look at the first half of the year and what's going on, I think the demand is still robust. People have profound needs, and we are a real enterprise engagement organization much more than what you described as kind of a lead or a broad lead-gen beat the bushes sort of organization. We really have focused on what I would describe as a target organization model. I think that's a pretty reliable way to get demand compared to just trying to be exclusively focused on leads, as some companies do. We’re seeing a tremendous amount of activity and interest in our customer base. I don't want to take anything for granted, but I think that's going to persist. The industry focus on transformation and improving efficiencies and frankly, some of the great resignation is putting pressure on customers to find better ways to deliver their systems. I think some of these actually have good long-term promise for us as well as the early part of this year.

Okay. Great. That's helpful. And then just on the go-to-market front with Hayden leaving. I guess, how does that kind of change how you're thinking about the leadership in that area and the go-to-market organization? Has there been a bigger focus on the partner and channel strategy? Is there going to be any change on that front moving forward?

No. The strategy we entered the year with is the strategy we're pursuing for the year. I'm pleased that we have a strong and deep team that’s going to be able to take some of the good work that Hayden did as he brought us new insights, capabilities, and talent, and be able to continue to drive it and continue to grow it. I believe we have a team that’s positioned to deliver this year, and that’s what we're planning to execute on.

We'll move on to Steve Koenig with SMBC Nikko.

Great. So just building on Steve's question on the organization of Hayden's departure. And then I've got one follow-up. Is the plan already in motion? Have you made any kind of tweaks into the sales organization to drive rep focus at this point? Given the tight labor market, were you able to end the year where you wanted it to be in terms of sales capacity?

As we entered January, we had already done the sort of setup for 2022, as you would expect. There’s a tremendous amount of work that goes into our sales kickoff in January to both get the salespeople structured so they can get off to a good start for the year. Most people do not change their focus, as you would expect. We want people who know these organizations and build sustaining relationships with them. There’s always some tuning, adjustments, and introductions here. I would say we probably didn’t end the year exactly where we wanted to be from a sales staffing point of view. But we did, as you can see in our numbers, have very robust hiring. I don't think we’re entirely there, but that’s not something that I would view as surprising or concerning. As a result of this change, there is no strategic change, no restructuring of what the strategy is. The strategy that we worked out coming into the year is the one that we’re executing on, and I feel good about that.

Great. And then if I have a chance to give Ken a follow-up here. Ken, can you explain your commentary on how the heavy term activity negatively impacted revenue recognition? Give us any color you can on the cloud mix of bookings. Total cloud bookings as we compute from the change in backlog in cloud revenue grew a whopping 67%. It was actually really big. So were there some big cloud longer-term cloud contracts out there?

Sure, Steve. Let me address your questions in order. First, it's important to understand that when clients commit during a period but the revenue is recognized later, it gets categorized as backlog. At the end of 2021, we had several term arrangements that went into backlog, which is typical in enterprise sales due to the timing of client go-lives. This means that although we saw a significant increase in backlog from the end of 2020 to the end of 2021, it also indicated a potential impact on revenue. Essentially, if our backlog increases, it suggests that we had less revenue during the current period. Specifically, revenue would have been higher in Q4, but certain Ford deals were added to the backlog and will contribute to future revenue. Regarding cloud growth, Pega Cloud has actually surpassed Client Cloud by a margin of about 50-55%. However, Q4 typically sees less activity in Pega Cloud, as it tends to be stronger for Client Cloud. When considering the total contract value that includes revenue and the change in remaining performance obligations (RPO), one must be cautious. A quarter that appears weak might simply be due to poor renewals, while a strong quarter might reflect seasonal renewal patterns. It's worth noting that Pega Cloud performed better in Q4 of 2021 compared to Q4 of 2020, though timing of renewals played a role as well. I hope this clarifies your questions.

Next, we’ll move on to Pinjalim Bora with JPMorgan.

I wanted to ask about the sales organization as well. As you head into the new year now with the leadership change, is the plan already in motion? Have you made any kind of tweaks into the sales organization to drive rep focus at this point? Given the tight labor market, were you able to end the year where you wanted it to be in terms of sales capacity?

We were prepared as we entered the year, having set everything up for 2022 as expected. A lot goes into our sales kickoff in January, and typically, people maintain their focus. However, there are always tweaks and adjustments needed. We might not have finished the year exactly where we hoped regarding sales staffing, but we did significant hiring, as reflected in our numbers. It’s common for us to set goals that we don’t fully achieve, which isn’t surprising or a cause for concern. Even with this change, there’s no shift in strategy or restructuring; we are still focused on the strategy we developed, and I am confident in it.

Got it. One follow-up on the ACV guidance and thank you for providing that. ACV growth of 20% to 22% obviously seems to be below the IDC number that you highlighted of 25%. So what takes you there? What are the levels that take you to that 25% number or higher? Can we get there in the next couple of years?

The primary lever I consider for growth involves three dimensions. First, the market opportunity for growth; second, how effective your solution is at capturing market share; and third, the productive selling capacity you have to achieve that. I’m not concerned about the market situation. I'm also confident in our solution and its strength in the market. Our main focus is on enhancing our sales productivity as we work to scale it. This has not been an easy or straightforward process for us, but it is our key area of focus.

Sales productivity has many elements: the effectiveness of our marketing messages; our ability to enable and bring new staff up to speed; the cadence that we use to manage the business on an ongoing basis and provide reinforcement; our clients being successful themselves and wanting to become engines of growth. All of these are key elements that I think are part of being productive as a company. There’s every opportunity for us to do that.

Next, we move on to Mark Schappel with Loop Capital.

Ken, starting with you, with respect to renewals in the coming year, is 2022 going to have more renewals than the prior year?

In general, now at our size at this point in the subscription transition, we won't have years where there’s a material difference between the renewal opportunities that we have, which is really the fundamental point you're asking is, is there a big difference one year versus another. That said, 2022 is a healthy renewal year, which means it’s certainly not lower than average in terms of the renewal year. We don’t have a big deviation like back three or four years ago, it could be 10%, 15% difference. When you actually look at it now, you might have a 5% difference one year or the other; but it's not as material.

Great. One of Hayden's responsibilities was building up your partner programs, and that's been a big initiative over the past year or so. What percent of your deals are now influenced by partners? And maybe just give us a sense of where it was a year or two ago?

I would say the level of partner engagement has grown and is really very high. I don't have the stat in front of me, but I would say that north of 75%, 80% of our deals are involved with partners, partner engaged, very actively partner supported. Our customers want to talk to us. We're involved. I think the partner team has done a great job of deepening our relationship with the largest and most influential partners. That’s just going to continue; we’re committed to that path.

And just to clarify, partners are not closing deals, not booking and closing deals and sending us the paperwork. That’s certainly an efficient distribution model, but that's not our case. Partner influence, which is what you mentioned, has been in 60% to 80% of our deals, and we think that’s very healthy.

Next, we’ll move on to Fred Havemeyer with Macquarie.

I have a couple of questions. Many of them are another take on some of the ones that have been asked already. Firstly, I want to begin with just generally your go-to-market philosophy relative to what was described at your 2021 Analyst Day, just with Hayden's departure. We understand back during the Analyst Day, there was a roadmap that was laid out talking about a number of different changes and initiatives. I want to focus more on the productization side of things here. Is there any change to your strategy of offering more prebuilt products or solutions or just items that could be offered off the shelf with any of these recent go-to-market changes? Or is that still on the roadmap?

There's not a strategic change in terms of where we're going. If you look at any sort of horizon, I think we've had the right strategy for the last couple of years. This is about execution. I'm not expecting any shift or revision in that overall big picture strategy.

The engagement strategy is still a core area for us in terms of how we go-to-market. The solutions have a more complete finish; they are not built off a platform from scratch like BPM was years ago. From that standpoint, no strategic change.

When we talk about intelligent automation engagement strategies, you can think about the next generation of workflow and low-code in terms of being able to get work done; that’s a traditional strength. A core place to apply that is in how our clients work with their customers across channels and products.

Thank you for the context on those engagement strategies. Around go-to-market again, I wanted to ask on the competitive landscape side of things. At this point, certainly, there are a number of pure-play low-code no-code vendors that are out there. We're also seeing companies like ServiceNow focusing on low-code enterprise workflows. Are you seeing any changes in your competitive landscape? Who you're typically going against or going head to head against in deals? Typically, any sort of shift in use cases that customers are adopting Pega for?

There are lots of competitors in this market. Anything that is an alternative is a competitor; that ranges from traditional programming to companies like ServiceNow in the last 18 months or so really talking about workflows. The challenge we face is the ones where clients need to be quick; they want to deliver something now but also be able to scale. Our differentiated capability allows us to get our customers to understand this; that’s why an engaged enterprise sales force is vital to our market approach.

One final question for Ken on the financial side of things. Your commentary on the timing of deals just being shifted into backlog rather than revenue. Thank you for that context earlier. I wanted to ask if there's any read-in to essentially whether these deals would just be recognized as Q1 revenue on the term license line? Any commentary on how to understand the timing of these deals relative to seasonality in 2022 would be helpful.

It's a good question. It's not always possible to predict these things because there are variables. There’s definitely a correlation between backlog growth being slower or faster in one quarter to the next two. A strong backlog in one quarter will translate positively to 2022; it will likely impact Q1 a little bit. I don’t want to get too precise as there are some variables.

That concludes today’s teleconference. We appreciate your participation. You may now disconnect.