Good afternoon and welcome to the Pegasystems First Quarter 2022 Earnings Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Ken Stillwell, Chief Operating Officer and Chief Financial Officer. Please go ahead.

Thank you. Good evening, ladies and gentlemen and welcome to Pegasystems' Q1 2022 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 the fiscal year 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 Q1 2022 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 the 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.

Thank you, Ken, and thank you to everyone who has joined today's call. I'm pleased to kick off the year with solid results as we continue to stay focused and leverage our strengths. We grew ACV, annual contract value, which is our most important metric, by 21% year-over-year while improving margins. Our low-code software platform for AI-powered decisioning and workflow automation is unmatched in the industry and continues to be the choice of many of the world's leading organizations. We help the most demanding enterprises work smarter, unify experiences, and adapt instantly, so they can always be ready for whatever is next. Now, today, this is more important than ever. This is one of the most volatile environments I've seen in decades. Clients continue to face challenges related to the pandemic, and certainly, no one expected a war to break out in Europe, which is affecting both the world's economy and business requirements generally in ways we just didn't anticipate a few short months ago. Our clients and their customers are grappling with labor shortages, rising inflation, increased oil prices, supply chain interruptions, and economic insecurity. But Pega is built to help enterprises manage through uncertainty. Our solutions are as effective for clients whose businesses are under pressure as they are for those focused on growth and expansion. We understand, as a company, how to adjust our go-to-market approach to support clients equally well, regardless of which dynamic is driving their decision-making. Before we move on, I'd like to take a minute to address what's happening in Ukraine. We, as I think most of the world, are horrified by Putin's brutal actions and what's happening to the Ukrainian people and others being affected by the violence. In 2021, before Russia's invasion of Ukraine, we had already taken the action to wind down our Russian operation, which was an insignificant part of the company's business. As such, we stopped pursuing new Russian business, closed the regional office, and we have no remaining employees there. We do have a launch team in EMEA and specifically in Poland, who are being most directly affected given their physical proximity to the war. We also have staff around the world who are Ukrainian and Russian and have families and loved ones in harm's way. Our focus has been to support those most in need with financial and other needed resources. Our staff in Poland have helped those fleeing the violence with transportation from the border, temporary housing, food, and care packages. The teams around the world have raised additional money through a variety of other regional initiatives. I am proud of our employees who have demonstrated compassion and generosity by donating financially as well as through action to complement our corporate donations, and we are hoping for peace and an end to this horrific situation; our hearts go out to the Ukrainian people. Regarding the business, let me hit some highlights regarding what we are seeing. With the level of volatility in the world today, our clients are looking for solutions that can help them be more resilient while they prepare for whatever else may be coming. Efficiency is becoming an increasing focus right now, and our solutions are ideally suited to support organizations focused on productivity gains because it makes it possible for them to adjust readily as circumstances change. Many of our clients have their own customers who are experiencing financial hardship, where solutions that support compassionate collections can be very helpful. Our client StepChange, the U.K.'s largest debt charity, is a great example of the type of solution needed today. They leverage Pega to build a single unified system that's faster and easier to use and allows the organization to improve their customers' experience and streamline their operations. More generally, we continue to enhance our software to help our clients deploy apps faster, create smarter workflows, and create better total experiences for their customers and their staff. Towards that end, in Q1, we released the latest edition of our Pega Infinity software suite, which features new intelligent low-code capabilities for AI-powered decisioning and workflow automation. One of the coolest enhancements is new voice AI and messaging solutions for customer service agents that act as a copilot, providing hands-free capabilities during their live real-time interactions. The software listens and analyzes conversations as they happen, making suggestions to agents and helping them with time-consuming and error-prone manual data entry. There are also enhancements to Pega's Customer Decision Hub to improve engagement with customers through a better understanding of omnichannel interaction histories and by being able to create better insights on the success of next best action recommendations. We're excited to bring these capabilities to our clients. We're also very excited about PegaWorld, scheduled for a little less than a month from now on May 24 at 9 a.m. Eastern Daylight Time, and for those in Asia on May 25 at 10 a.m. AEST. We have some exciting news lined up for the morning of the show related to enhancements to our process mining capabilities and new enhancements to the Customer Decision Hub, as well as our Cloud Choice offerings. Last quarter, I mentioned a few of the clients who will be sharing their success story during PegaWorld. Since then, we've announced our keynotes, and they include some incredible brands with inspiring stories. These include Lloyds Banking Group, whose CTO will share their digital transformation journey. They are leveraging Pega to become a champion of adaptability and driving intelligent automation to ensure their business is ready for anything that's coming. T-Mobile, their Vice President of Customer Strategy and Planning, will reveal how they are achieving true relevance and excellent personalization by putting customers at the center of everything. They are leveraging Pega's decisioning capabilities to enable hyper-personalized customer experiences to deepen relationships with their customers and looking to create a mission-critical application for the organization's team of experts. Booking.com, their global innovation lead, will talk about their mission to create simplified and connected experiences. They are leveraging Pega to enable their frontline teams with a new system to make it easier for employees to support every customer and partner with any query the first time around. Be sure to check out the PegaWorld website to register and join us live to hear the latest news and inspirational client stories. Just go to pega.com and click on the link featured on the home page. Personally, I'm also delighted that I'm able to do more travel recently to see clients, and it's great to see that we're actually booking clients into our new briefing center in our Cambridge headquarters. I hope also our investors will join us there for our in-person investor meeting scheduled for June. Finally, I'm excited to say we launched our inaugural impact report, which provides a consolidated view of our current efforts in ESG, environment, social and governance, and corporate social responsibility. Talking about that across our business, I'm very proud of this report which showcases terrific work that Pega team members are accomplishing. We are focused on more efficient and sustainable business operations, building and supporting diverse teams who challenge each other to think differently, and helping our communities with needed support and resources while supporting the strong governance we have in place to keep our business focused on what matters. Our commitment to making a positive impact has never been stronger, and we're looking forward to keeping the momentum going. So in summary, we've gotten off to a good start in 2022. Our business and our people continue to demonstrate resilience in an increasingly volatile environment. The need for enterprise software that can help our clients navigate these challenging times has been a significant driver of our success. Our transition to a software business, which is now nearly 100% subscription, is paying off and enables us to shift our focus to balancing growth with profitability. We continue to be excited about the significant opportunity in front of us, and I have a lot of confidence in our team's ability to deliver on this opportunity. To provide more color on the financial results, I will turn it over to Pega's COO and CFO, Ken Stillwell. Ken?

Thanks, Alan. To start, just a few highlights from the quarter. ACV grew 21% as reported and then were up about 2 percentage points of constant currency that went against us. So 23% constant currency was our result for ACV growth. Both current and total backlog increased 20% year-over-year. Our total revenue also grew 20% year-over-year. You're starting to see signs of the completion of the subscription transition and the improvements to margins. Although I have and will continue to focus on total ACV, I realize also that many of you pay much more attention to our Pega Cloud offering, which represented 67% of new client commitments in the quarter. The most important metric that we measure for success of our business during the subscription transition is growth in annual contract value, or ACV. Just as I mentioned, ACV grew 21% as reported and 23% in constant currency to $1.034 billion at the end of the first quarter, driven by continued demand for digital transformation. In the last several years, we've invested to accelerate our ACV growth rate and are increasing our focus now on ensuring we realize the benefit from those investments through improving sales productivity and prudent cost management. Although we're pleased with our ACV growth in Q1 of 2022, it's important when measuring the success of our business to look at a longer time horizon than one quarter. We focus on total ACV growth for the full year, and we are still early in our 2022 cycle. That said, our team has demonstrated that we can maintain strong ACV growth during uncertain times. A global pandemic, shifting to remote work, higher inflation and, as Alan mentioned, an unforeseen war in Europe are some choppy waters that our team has successfully navigated. We haven't missed a beat when it comes to maintaining our ACV growth rate, and that gives me confidence that we can continue to perform despite the uncertainties around us. We're very proud of our team, and I want to thank each and every Pega employee for their ongoing commitment to our clients. I'm excited that we're returning to some level of normalcy in the field. Our field teams have begun doing increasing levels of face-to-face work with clients, which is just awesome to see. We've also started to do in-person regional events to engage with clients and prospects. We are optimistic that client engagement in the second half of 2022 will look the most normal since 2019. Moving to backlog. Backlog increased 20% in the same period to $1.2 billion. Backlog that will convert to revenue in the next 12 months also grew 20% to $654 million. Turning to revenue. Revenue for the quarter was $376 million, a 20% increase year-over-year, powered by a 21% increase in total subscription revenue. Subscription revenue was $308 million in Q1, which is now about 82% of our total revenue. As I mentioned last quarter, we ended Q4 2021 with an unusually high term license backlog balance, which contributed significantly to the higher revenue performance in this quarter. Pega's reported revenue is typically strongest in Q1 and Q4 and softer in Q2 and Q3. We expect this trend to continue in 2022. It's also important to point out, as we discussed on our Q2 2021 earnings call, we had an unusually high mix of client cloud last year in the first half of 2021, which makes for a tougher quarterly revenue compare when thinking about the first half of 2022. When we started the year, we projected the 2022 Pega Cloud mix would be slightly more than 50%. As I mentioned earlier, in Q1 2022, Pega Cloud mix was 67%. If that trend continues in Q2, which my early view suggests is likely, it would also contribute to a lower amount of revenue in the first half of 2022 and have an impact on full year revenue of 2022. I've been consistent in saying that I care about total ACV, and that's not changed. But I thought that it would be helpful in terms of connecting the mix of Pega Cloud to the reported revenue in 2022. Now that we're in the final phase of our subscription transition, we're beginning to show signs of improving profitability. We're not fully complete with the transition yet, but our Q1 results are a good sign that we continue to move in the right direction. For example, total gross margin increased and improved in Q1, driven by Pega Cloud gross margin reaching almost 70% in the quarter, the highest level we've ever seen for Pega Cloud. In the current environment, our clients are really working on improving cost efficiency, and the use of Pega's low-code intelligent automation tools is one of the most effective ways to tackle this challenge. That's one of the reasons we feel confident in our ability to grow regardless of the economic environment. We provide mission-critical solutions that help clients increase revenue and decrease costs. We serve the world's largest enterprises, which tend to weather economic uncertainty better than smaller organizations. We've built a recurring revenue stream that features multiyear contracts with best-in-class renewal rates. As we get closer to the completion of the subscription transition, our emphasis increasingly shifts to managing growth and profitability as we had planned. I'm excited to see these improvements in managing profitability that indicate we're on track to become a Rule of 40 company. We're very focused on continuing to build a high-quality business that features profitable growth for the long term for all of our stakeholders. As we've explained in the past, we expect to complete the subscription transition in the middle of 2023. As Alan mentioned, our direct financial exposure to Ukraine, Russia and Belarus is not material. In 2021, before Russia's invasion of Ukraine, we made a business decision to stop pursuing new clients in Russia and we closed our local office. For the year ended December 31, 2021, revenue from clients located in Ukraine, Russia and Belarus was less than $4 million, and the region has never been a growth engine for us. As you heard earlier, PegaWorld is virtual again this year. I welcome you all to attend to hear the latest about our client success, Project fnx and our solution innovation. I'd also like to invite you to attend our annual investor session, which will be held at our new corporate headquarters in Cambridge, Massachusetts. The event is scheduled to start at 10 a.m. Eastern Daylight Time on Thursday, June 2 and end around noon. We will offer both an in-person option and a virtual option for attendees. To register for this event, please e-mail [email protected]. Speakers at our investor session will include our founder and CEO, Alan Trefler, as well as leaders from our go-to-market and product teams. And of course, I'll be there as well. And with that, operator, please open the call for questions.

Our first question is from Pinjalim Bora with JPMorgan.

Great. Congrats on a pretty solid ACV growth here. Alan, you characterized the environment as the most volatile environment you have seen in decades. Maybe help us understand what are you seeing in the field from a demand environment perspective, especially in the different theaters. And maybe if you can double-click on Europe, any indication that there is kind of a slight wind of change blowing? More scrutiny or any kind of signs maybe you're not seeing or you're seeing, would love to hear. And then, Ken, on that topic, I mean, I know you don't update guidance, but how are you feeling about hitting that ACV guide for the year at this point?

So in terms of what we're seeing, especially in Europe. I would say the anxiety level of clients is up. In some ways, that makes them more receptive to things that are going to improve their processes and automate. I think there's more question in the minds of clients. When I say in decades, having been around now for 25 years of being a public company and longer in the business, I can remember when inflation was at rates not only at this level but much higher. The entire level just goes up. It's just natural. When economic times are tough, we tend to shift our value props to be much more focused on, 'Hey, how do we make sure the customer is going to get a return in the 6, 12 months? How do you look to make it possible for them to both save money and, frankly, deal with the unavailability of staff, which can be addressed in terms of both the operational work we do and in providing low-code environments. Because I think you're going to find that finding programming staff is going to get harder and harder for our prospective clients. So there's a good market shift. I would say it is definitely tangible in Europe, but I think there is a level of global anxiety that we just need to acknowledge and use that in how we tune our go-to-market messaging and how we just work as a company. Having seen this stuff before, I have a high level of personal ability, I think, to hopefully provide useful advice, but it's there and it's real. And I don't think it's going to be just us. Ken?

Yes. I believe the question you asked was about our perspective on the ACV range we previously mentioned, which is around 20% to 22%. I would say there is risk in the market now that wasn't present six months ago. I agree that it's a valid concern. However, I don't think this alters the prospects for Pega, our solutions, our value proposition, or even the demand environment from our clients. I believe it doesn’t. As Alan pointed out, the challenge will be ensuring we allocate the right resources to the appropriate sectors and organizations to take advantage of opportunities. Despite inflation, I don't think our clients are looking to halt their investments in digital transformation. In fact, I think they need automation more than ever to address labor shortages and rising labor costs. So, I'm hopeful that this will work in our favor. That said, there is certainly some uncertainty in the market.

Understood. And one more for you, Ken. It seems a solid result in the Pega Cloud ACV growth rate into the 40s. But I wanted to ask you about the cloud backlog growth. When I look at the cloud backlog growth, that seems like it decelerated when ACV accelerated. Shouldn't those to be more typically directionally aligned? Is that maybe FX acting up on RPO?

FX impacts both ACV and RPO, presenting a couple of points of headwind for those figures. In an ideal scenario, RPO and ACV would move together. However, we don't have 25,000 clients to standardize the growth, leading us to be influenced by the timing of client renewals. Q1 was not a significant quarter for renewals, which is what you're observing. Your assumption is correct; they should typically align, but in some quarters, they diverge due to renewal timing.

The next question is from Steve Koenig with SMBC Nikko.

Congratulations on the quarter. I have a question for Ken and a follow-up for Alan. Ken, I have a multipart question that might be related. You've had a good mix in Pega Cloud for Q1, and it looks like a similar mix is appearing in Q2, with around 67% in Q1. What are your thoughts on the sustainability of that trend? Do you believe Pega will continue to progress? We initially thought it would move above 50 to 60, but last year it was more in the 50s. While I understand that predicting its future can be challenging and that there will always be some clients on the prem model for a while, do you expect this upward movement to be consistent moving forward? What are your thoughts?

I'll share my perspective, and then Alan can add his thoughts too. My comments about Q2 are based on the visibility I have regarding specific deals in the pipeline. As we look beyond the next quarter or two, the reliability of the pipeline tends to decrease, which is common for any company. I honestly can't predict marketplace trends. However, I can say that Q1 was a strong quarter for Pega Cloud, and Q2 appears to be on the same path. Even if there is a decline in Q3 and Q4, it will still affect revenue in 2022 since once those deals are booked, they can't be reversed. I don’t believe that client cloud will reach 70%, but I also can't confidently say that Pega Cloud's growth is guaranteed. I know everyone hopes for that, but I just don't have that insight.

Sure. Got it.

Yes. I believe that clients are responding well to Pega Cloud. The Cloud Choice message is outstanding and sets us apart from many companies, providing customers with a sense of intellectual freedom in making their choices. The fact that we're seeing a 2 to 1 ratio in favor of Pega Cloud, compared to my previous expectation of a one-to-one scenario, is fantastic. I also see this positive reception continuing in the short term. However, predicting its continuation into Q4 is challenging. Clients are experiencing success, and we have improved our margins, indicating our effectiveness in collaborating with them in these environments. Overall, this is a positive development. Additionally, clients transitioning to the cloud often require systems like Pega to help manage their other systems, which aligns with the Process Fabric concept we introduced at the last PegaWorld. Our approach focuses on a center-out interconnected architecture without relying on a single large infrastructure, which customers are moving away from. So yes, it's encouraging to see the 2:1 trend, and I would love for that to continue.

Got it. Got it. Okay. Great. And if I could ask a follow-up, so actually, Ken, I did want to ask you about your trajectory towards the Rule of 40. What are you thinking timing-wise? Just remind us. And then, Alan, I wanted to ask you. When it comes to low-code competition, if I were to characterize Pega's traditional reputation as being, I would have said the BMW on the autobahn; now I'll say the Tesla on the autobahn. Apologies to BMW. But some of the other low-code competitors being more like an MG and a road rally through the suburban streets. From a technology and product perspective, maybe give us an update on your intentions and your ability to compete in that road rally as opposed to the autobahn.

I didn't mean to be evasive, so let me clarify. We will not be a Rule of 40 company in 2022, nor in 2023, as we are in the process of completing the subscription transition. By 2024, we aim to be a Rule of 40 company, possibly in the middle to the end of the year. You might wonder why I mentioned the subscription transition ending in the middle of 2023. It will, but we won’t truly be a Rule of 40 company until twelve months after that. Rather than getting into specifics about quarters, I’ll simply say that we expect to reach this goal in 2024. If we don't achieve it, that will indicate we have work to do, but that's our objective.

It's great to see Pega Cloud accelerate compared to last quarter. I have a multipart question for Ken to better understand the cloud dynamics, and then a follow-up for Alan. Ken, regarding the cloud ACV, I want to expand on your earlier response about the growth of cloud ACV versus cloud RPO growth. First, can you remind us how the acceleration of Pega Cloud ACV translates into Pega Cloud revenue growth, since we didn't see that increase this quarter? Additionally, the current cloud RPO actually declined sequentially for what I believe is the first time during this cloud transition. I understand there are some FX headwinds affecting this. Putting aside FX, is this decline purely due to deal timing, and is there a delay between when a deal is signed at ACV and when it is recognized as RPO under GAAP? Or is there something else we should be aware of? I also have a follow-up question.

I'm going to start with your question about RPO. There's no specific timing involved. When we secure a deal, it is recorded as ACV and RPO without any acceptance clauses. If acceptance clauses were in place, those deals wouldn't be included at all. The only variability in RPO comes from the timing of renewals. While we are not booking shorter contract durations, the dynamics of renewal timing can vary. It's possible that next quarter we may see the opposite situation, but that's just hypothetical. For me, RPO serves as a reliable indicator, with no complications—it simply reflects renewal timing. Regarding when Pega Cloud revenue ACV will convert into revenue at the expected growth rate, the current Pega Cloud ACV will correlate with the revenue over the next 12 months. Whenever you view an ACV figure, despite the impact of currency fluctuations, this can help in predicting future revenue. So, if we compare Pega Cloud ACV at the end of Q1 '21 to Q1 '22 and it shows a 42% growth, that will strongly indicate the expected revenue for the next 12 months in comparison to the previous year. This is the framework to keep in mind.

Got it. Okay. That's really helpful. And then, Alan, I want to build on some comments you had kind of made earlier. I was just thinking about the macro environment but one of the pieces that you didn't touch on as much is just a tough hiring environment out there. A few of your peers that also deal with automation in different ways, so not competitors but more adjacent, talk about how the labor shortage out there is actually serving as a tailwind for them, right, that there is more importance on making your existing employees more effective and more productive and that's serving as a talent for demand. Is that something you're seeing outside of your own hiring? How are you thinking about how you may be benefiting or how the labor shortage is maybe impacting the demand environment for you?

I think that the shortage of labor is positively impacting how people are receptive to what we do. The increased volatility of the workforce, the whole Great Resignation and people worried about the ability to retain people means that you need to be able to have in the operations realm better processes because you're going to be dealing with people who might not have quite the depth of experience. In the technical realm, you need to, frankly, require less deep technical expertise because retaining some of the technical expertise is harder and more expensive to boot. Both of those, I would say, are structurally very positive, and that's not going to go away. I do think you have businesses trying to figure out what the current inflation levels mean. That just naturally in any business is going to have some adverse effects. It's going to make them worry about the size of the commitments they should make; other types of things of that type. But the positive, and I think it's structurally positive, the other questions will get answered. I think it's ultimately very, very positive for our business.

I recall that last quarter you mentioned sales productivity was slightly below 50%. Could you clarify how you define sales productivity and what that figure looks like now, as well as your expectations for it at the end of 2022?

Let me clarify, Joe. What I mentioned was that slightly less than 50% of our sales representatives were fully ramped, meaning they had enough tenure to be at a level of productivity we consider normal. This percentage remains below 50% as of the end of Q1. That's what I was referring to. We view productivity differently across their first, second, and third years, as we expect varying levels of output in those stages. If you'd like to explore this further, I wanted to make that clear.

Yes. Do we have an expectation for what that will be by the end of '22? And then just as a follow-up question, if you guys never added another logo, what's the current revenue opportunity within the current customer base? Like what's the maybe the percentage penetration from a revenue perspective of the current customer base?

Let me address your first question and provide some insights on your second question as well. Regarding where we think we’ll be at the end of 2022, I want to be cautious in making predictions, just as I wouldn’t predict the end of COVID. However, all market statistics indicate that attrition isn't worsening in the first and second quarters compared to last year. This is a positive sign for us, as we expect some level of attrition. I hope that by the end of 2022, we will at least maintain our current position and possibly see a slight improvement in the percentage of sales representatives reaching productivity. Many of our salespeople are in their first couple of years, and we’re optimistic that many will transition into their second year, which positively affects overall productivity. Alan, would you like to share your thoughts on the second part of the question?

Yes. In terms of how I think of productivity, could you repeat the second part of your question again?

Yes. Yes, sure. The question was, if you never added another logo, what's the revenue opportunity?

Yes, we have an enormous amount of whitespace in our customers. I would tell you that if you looked at our top 20 or 25 customers and asked how thoroughly penetrated we were in those, you would conclude that we were under 25% down trade. We could grow easily several hundred percent without adding a single logo, which doesn't mean we don't want to add the occasional logo. I think adding new logos is good, but I'm really focused now on trying to make sure we're cultivating our relationships with these marquee organizations that, in my view, are going to do the best in this more difficult and uncertain time in the next 2 years. So we have a tremendous amount of whitespace in our current organizations. That gives me a lot of reassurance, frankly, in a time of uncertainty.

We have approximately 800 clients, with fewer than 200 spending $1 million with us. Many of these clients have the potential to spend up to $20 million, $25 million, or even $30 million, and some could invest $100 million or more. If you do the math, we essentially have years of booking potential ahead of us, likely over five years, to grow within these 800 clients. While growing our client base is important, we have a lot of opportunities within our existing customer base and don’t need to venture into new regions or acquire new clients as urgently. There's significant potential within our current relationships.

The next question is from Vinod Srinivasaraghavan from Barclays.

Not too bad on the pronunciation. You guys had mentioned some of the Pega Infinity features in your later release. I thought the service industry workflows look pretty interesting. Just to clarify, are these bundled packages? And are you able to monetize them at higher prices?

There are two ways to generate revenue. One involves costs associated with some technology, add-ons, and additional features. The other aspect relates to our pricing model, which suggests that the more a customer uses the Pega system, the more they should pay. This increased usage can lead to additional workloads from our customers, creating further opportunities for expansion as we deepen our engagement with them. While there are some incremental revenue possibilities, the most significant value arises from the ability to unlock new opportunities. When customers realize they need to implement some of the solutions we offer, it can lead to entirely new functions that we may not yet be providing to many of our 800 customers.

Got it. And you guys have mentioned kind of NRR in the mid-teens from time to time. Is it fair to say that it's still kind of in that range? Or have you seen any kind of movements in either direction?

Our net retention rate has been increasing slightly over the last few years. Part of this can be attributed to COVID, as we have managed to sell to our existing clients. It's a bit challenging to determine if this is purely a trend linked to virtual selling, but we still maintain a mid-teens rate.

The next question is from Mark Schappel with Loop Capital.

Nice job on the ACV front. Alan, a question for you starting off. Building up your partner programs has been a big initiative at the company over the past few years, especially building up your global SI practices. Can you just discuss as much as you can how much of a role your partner programs contributed to the good ACV print this quarter?

Well, I think partners are super important for us. Being able to work with our partners, particularly to make sure that our footprints are expanding in those key organizations that we've identified, is something that's absolutely central. Our level of partner attach is extremely high. I would say it contributed to the results this quarter. It contributed to some of the results last year as well. That's not all brand new, but we're going to continue it. I think that we've got deeper and broader relationships with partners than ever before.

Mark, I want to clarify something that often comes up in discussions with investors. For some companies, partners represent entirely new distribution channels, meaning you establish a partnership and define markets like the U.S. and Latin America. For us, partners are less relevant in that context. Instead, they play a role in the largest organizations. We aim to collaborate closely with our partners who serve these significant clients. Sometimes there's confusion about our approach, with people thinking we're moving down market or exploring new regions or clients. However, our focus is really on working closely with our partners to support the specific clients we both want to target.

Great. And then as a follow-up, Alan, a question on staffing. The company has always had relatively aggressive hiring targets. So I was wondering if you could just give us a sense of whether you're on plan hiring-wise this year so far. I know it's still early in the year, or whether you're a little bit behind. And then also along those lines, are you having to raise comp more so than normal just to stay competitive?

I'll address the second question first. It's clear that as a hiring organization, we are facing challenges, and our team has worked hard to understand what is necessary to maintain our competitiveness in terms of compensation. We've observed significant salary increases for certain roles, which prompts us to reassess our overall staffing strategy. If you had asked me a year ago where we would stand at the end of this year, I would have anticipated a larger headcount than what we are likely to have now. We are committed to being financially responsible; if we are increasing compensation, we must ensure we are hiring high-quality talent and getting significant value from them. Retaining our outstanding talent is costing more, which will influence our staffing targets and, I believe, will be a trend across all companies. This could ultimately benefit productivity software, creating a positive outcome. I hope that clarifies things.

The next question is from Joey Marincek from JMP Securities.

Great. Earlier, Ken, you mentioned about making sure you're putting the right capacity in the right verticals. So from a vertical perspective, where do you feel like you have the most room to run within the current client base? And then separately, how do you think about your ability to move down market over time, just given the work you're doing with Project fnx?

I'll let Alan address the second part regarding Project fnx. Our two largest verticals are the public sector and financial services, which are significantly sizable. While we have other large verticals, the market data shows that these two are particularly prominent for automation and for companies like Pega. To clarify, we are not looking at new verticals due to feeling saturated in our existing markets or because we can't expand further within them. Many of the verticals we are involved in will share similar automation challenges due to labor costs and access issues, especially in 2022 and beyond. The automation use case is more of a horizontal issue rather than being specific to any one vertical. In fact, there's a broad opportunity, as all companies are facing labor constraints and inflation. Our goal is to assist them in becoming more efficient, which is extremely relevant right now. Thus, I see this as more of a horizontal challenge that can be applied across various verticals.

Yes. Regarding Project fnx, I believe you can see the positive results in our improved cloud margins. Project fnx benefits our entire client base, including our large customers who prioritize having modern architecture and it also opens up potential market opportunities for us moving forward. From my perspective, during times of great uncertainty, it is not wise to aggressively target lower market segments. I believe we should focus elsewhere for the remainder of this year. Let's discuss next year instead, as it’s beneficial to consider other options. However, Project fnx has enhanced our overall offerings, and you can clearly see this reflected in our improved margin figures.

The next question is from Fred Havemeyer with Macquarie.

I really just wanted to check in on Europe from 2 different points here. Firstly, I wanted to just check and ask, are you seeing any impacts in terms of your partners' ability to be able to work on and deliver applications because of some of the disruption to Eastern European outsourcers and systems integrators? And then secondly, looking at some of the EMEA results here. Obviously, there's a lot going on and the world is quite anxious. Just wondering if you could kind of contextualize regionally where you're seeing the pockets of strength or weakness within Europe.

I will address the first part of your question, and then Alan can follow up. Our partners and clients do not have a significant concentration of process outsourcing in Eastern Europe; it is more prevalent in Asia Pacific. From this perspective, we have not encountered any major issues. Aside from the emotional impact since everyone knows someone affected by the situation, we have not had any large clients with significant operations in those regions that are unable to function. This has not presented a challenge for us.

I don't think you'll see much impact from our partners. The partners we work with don’t have significant technology operations in Ukraine like some other companies do, so we feel fortunate. As a firm, we are very aware of the situation in Poland. However, our team there has been handling everything exceptionally well, addressing humanitarian issues while remaining highly effective, which makes me quite pleased. Regarding the business environment, it's unpredictable. Germany, being a strong economy, is still trying to determine the implications of the current situation. As I mentioned earlier, we are in a period of great uncertainty. Countries closer to Russia seem to be facing more uncertainty. Our exposure to various European countries and to Russia itself is minimal, so we aren't directly affected by it. However, we're all speculating about what might happen in the next 60 days and trying to be honest about those uncertainties.

This concludes our question-and-answer session. I would like to turn the conference back over to Alan Trefler for any closing remarks.

That's got, I know what we're turning out just waiting for that invite. So thank you very much, everyone. I'd like to make sure that in closing, that all of you have on your radar PegaWorld. Go to the website, register. It's going to be a very exciting 2.5 hours. I promise you that. Thank you very much, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.