Q1 2020 Earnings Call

Please standby I'd like to begin.

Good day, everyone and welcome to the Pegasystems first quarter 2020 earnings Conference call Today's conference is being recorded.

Hi, I'd like to turn the conference over to can still well CFO. Please go ahead Sir.

Thank you.

Evening, ladies and gentlemen, and welcome to take it systems Q1 2020 earnings calls.

Well, we begin I'd like to read our safe Harbor statement.

Certain statements contained in this presentation baby construe because forward looking statements as defined in the private Securities Litigation Reform Act like to 90 fives.

The warrants expects anticipates intends plans believes.

Oh I would.

Should estimates well may targets strategies, it tends to projects forecast guidance likely are usually or variations of such words or other similar expressions.

Such forward looking statements, which speak only as it pertains to the state level. They 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 2020, and beyond could differ materially from the company.

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 2020 earnings and then the Companys filings with the Securities and Exchange Commission, including its annual report on form 10-K. So does your I'd get December 31st 2009.

I mean, what other filings with the FCC 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 Buda change, except as required by applicable law, we do not undertaken specifically disclaim any obligation to publicly update or revise these forward looking statements whether as the result of new information.

That's for otherwise.

With that I will turn the call over to Alan Trefler founder and CEO Pegasystems.

So he can.

I'm pleased with our results for Q1, especially given the pandemic well results are indicative of the success of our strategy around accelerated growth continuing or shift to a recurring model or total HCV. The best indicator of our future revenue growth increased by 21% for the quarter year over year.

Sure.

95% about Q1 commitments were club, which more than 50% of them being Parker club.

No it's impossible to talk about Q1 earnings without acknowledging the unprecedented circumstances were good and the effect on our business as well as laws of billions of people around the world. This includes our stuff clients partners, but we are laser focused on taking serves and making sure they have what they need.

For us build for change isn't just a tad one you know together that we know the good it's very challenging times before I've always come out stronger have you ever so.

Our software and corporate culture, all about change that's sometimes that's about accommodating change and sometimes it's about driving church and sometimes it's both.

That's what we're seeing right now.

Well the client Saud requirement is levine into profound pool, and most businesses with avalanches of customer service calls.

Looking to support love Workforces adjusting to do government policies and simply figuring out how to three dogs, new and existing work.

Then on video calls nonstop.

Senior executives for many of the world's largest and most successful brands.

And I expect to they would be focused exclusively on their most pressing in immediate challenges.

Well most of mobilizing to solve the acute needs of here and now a large number also thinking beyond the nexmos understands. It's just it's time for a massive Republic is a catalyst to build stronger businesses look very different future 2021 or beyond.

Sample, we close the customer service deal in Q1 was a large <unk> airline and ATAC, who despite essentially being closed down understands that they will need a strong competitive customer engagement approach when travel opens up to them to win back and keep customers.

We're also responded with new solutions that can help clients with your immediate crisis.

While enabling them to support your long term business transformation initiatives and in many cases, we're doing it in leopards tone. For example, recently, we cleared a portfolio of 18 industry specific solutions to help organizations quickly adapt.

Corporate Nike.

While establishing the building on digital transformation efforts. These solutions are designed to deliver how your doctor. So we know what are more than quick fixes the could become technical depth later.

For example, the hoping skills are you didn't flux of applications took over 19 emergency laws, we developed a crisis small business lending weapons application it could be considered and just days and comes with rebuilt guidelines for example of silver flood, new U.S. and you carry.

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Rules, they can easily be customized the orchestra crisis loan programs to other countries.

And then just five days, we rolled out and developed.

Protections of the very government to help will provide sastre relief to the small and medium sized business is affected by gerbert merging and reduce the straight on admin staff and improve processing times. They were so proud of it but they themselves put out a press release budgeting Berger.

And in early April your drugs at one of the U.S. the government to help to address the slugs of unemployment applications coming into your legacy system or less than three weeks, we're able to stand up a new mobile friendly system to streamline the process well that shop off for additional support and that systems already collected more than 750000.

Applications.

Under the private sector several weeks ago, we help one of the largest U.S. health care companies many of our whose 200000 employees and volunteers a patient centric develop a cobot 19 call loving schedule here because it just 72 hours to better manage staffing and sketches requirements to support its patient population.

Sponsored the bar that work we developed an after this for you got all of our clients to help them track and manage over 19, <unk> employee exposure and helping make informed decisions, enabling them to keep employee said im thinking forward to when business is more broadly will reopen.

A lot of interest from both clients and partners and discussions with clients about implementing this free application have opened up new commercial opportunities with many.

And not related to the pandemic, but a when we're very proud of is a the internal revenue service, which are which close actually at April we're excited to share as opposed to was selected by the IRS. After a deep competitive review the power is there a new airports case management.

They did in their procurement pega was selected because of our ability to provide to secure and and integrated payment processing solution to improve operational efficiency streamline costs.

Thanks for your services in a highly configurable and flexible environment. The solution will provide authorized iris employees, you're really to see the entire range of issues or communications associated with your work and quickly resolved.

No. It's a business we're ourselves dealing with some of the same issues or core itself up having to adjust to immediate pandemic related needs, while ensuring we're making smart decisions and learning about what will make us a stronger company. That's what gives you. The courses are weve of course had to pivot nearly 100% too.

Remote workforce or the technology company. This work for us to minimum disruption as we've already had.

Workforce is working for the field Europeans employs tools for meetings and so on but nonetheless on fathered in class with our entire global team is not just adapted booking innovated was a incredible resiliency passion innovation across every function.

Sample or sales and client success teams with quickly become adept at running virtual schools operational walkers and design thinking workshops as a result, we've been able to continue to prospect and close mi business as well as serve over existing cars.

Our people team is quickly shifted so they could continue to recruit Herrera onboard new employees.

Virtual orientation program up and handling all the meetings and shipping of lumped jobs in ways that were consistent with making our team immediately productive.

Phrase that our business that are continuing to hire for key positions, what's up the purpose of activity well always on the look out for people, who can help accelerate our success. It's a real positive to be such a stable you had exciting employer of choice in this market and we're seeing tremendous interest in talent looking to join Pega.

To that point, we announced today that Hayden Stafford will be joining the company from a leadership position Microsoft.

New role as president of global client engagement.

After June 1st 2020, this will be reporting to me and this position will unify that is corporate strategy marketing and go to market functions and bring together the talented teams that Doug crop.

Client success International Tom libretto.

Head of marketing and CFO, Jeff Taylor head of business strategy and go to market operations.

Traveler.

I had success Americas.

Hayden brings tremendous experience and a robust record of success that Ernst and young RPM Salesforce Air Microsoft.

It over the last six years, he has grown and that's dynamics customer service and ERP, where it was 300% that has grown to go down as cloud products like over 40% every quarter since 2014.

We're excited that he has the potential to help that weve acceleration or growth as he did at Microsoft.

In our Rybinski them of course has shifted our most important pega, whether that's through a virtual former.

Really working to add new elements to take advantage of the virtual environment. Our first virtual customer engagements of it came together in just a few weeks I've had more than 4700 registers.

Pegaworld ours Marquee conference is now we're free open to wall to what a half hour virtual their blood in June 2nd and is shaping up to be terrific with client keynotes for Aflac, and Siemens and others and innovation hub with 25 demos of Pega solutions and was Q water.

Unlike other companies, who seem to be taking their physical events and simply transposing them through it all in one form that we decided to virtual reform that requires a complete with respect to make a tighter more engaging and what was while for the virtual at home or trying to do.

We will be postponing our analyst meeting to later in the year, but nonetheless, I hope, you'll Truman Pegaworld and watch the Europe.

And finally with project Phoenix were ready positioning or core architecture for the future to help our clients create a new generation with one Forbes.

We moved past the crisis.

But those capabilities will be more.

Ever.

I want it and by saying that for us and our clients there will be going though going back to business as it was like all wrote global crises that have come before this one two will bring profound change.

That's something were built to help adapt their lives, but for ourselves and for our clients. The changes we're going to see.

How people work other you'd probably transact other move goods procure supplies deliver services and engage with credit cards and they'll persist long after the crisis stabilizes.

We anticipate.

Those changes will require and benefit from new future proof design.

Integrations business architecture, which we think we're terrifically able to provide organizations loved to become a leaner faster and more adaptable than they thought they had to be digital transformation will be a mandate and business resiliency will require exceptional and scalable digital customer experiences that can quickly adapt to future changes.

Your volumes organizations will need to better understand to put in place to leave resilient suppliers and go to market channels.

Causes is forcing organizations to innovate and collaborate with 10 sense of urgency and they'll be much more pressure to get greater requirements for like investments something or model driven no poked at all if you suited to provide organizations will realize the risk involved with managing be won't data centers up there.

A lot wants to build everything themselves and this will mean, an accelerating moved to the cloud. We believe current organizations will walk the flexibility to use the cloud of their choice and switch as needed.

I'll choice already a differentiator for us we predict will become even more important.

Then all of these are attributes and reasons why clients it turned to cut in the past and what can turn to continue to turn it back in the future.

We know there is a very real and profound Lawson challenge right now more for some that for others.

I've always been an optimist by nature.

I believe in the resiliency and adaptability to human spirit.

Long term will emerge from the crisis.

Stronger it was great new ideas.

So in summary, we're off to a solid start in 2020, especially considering the current crisis or we will see impact some of the pandemic, but we also had a good position to weather the effects and see opportunity for us to their clients to come out stronger what was the crisis.

We're adjusting to both were short term and long term needs of our cars and we are finding the receptive.

To provide more color on the financial about results, although I'll turn this over to our CFO carbon steel mill circuit.

Thanks Al.

I want to start by echoing your opening comments that are number one priority right now it's taken care of our employees clients and partners.

The global spread of Cobot 19 has disrupted the lives of billions of people and we recognize the reality of much more challenging economic environment.

Sure you want to know about the impact of cobot 19 on our business.

Q1, we did not see any meaningful disruption to our financial results overall I'm pleased with how our business has responded prior to our prior to the pandemic, 30% to 40% of our employees regular we worked remotely and today almost all of our employees are working remotely and effectively I might add.

Our sales team continues to engage and acquire customers.

Our customer support and cloud teams continue to provide high levels support to our clients and partners.

The team continues to enhance again, putting our products.

Our business is resilient.

And I remain confident in our ability to live on the long term strategy. The leader in digital transformation, let me shed some light on why I feel this way.

We made some pretty significant decisions over the last few years, that's well you can choose to call that timing walk year smart.

Either way these things position us well in the current environment.

First we started our transition to a recurring business several years ago. As a result, most of our business. Just now of course, we're trying to be specific our business was about 50% recurring revenue.

Several years ago, it's about 75% recurring revenue today, which is supported by our very high net retention rates.

If you include Pega consulting revenue, which is highly predictable.

We have about 90% visibility into our 2020 revenue target the shift to business. That's largely recurring you talk quarterly revenue and billings should be much less vulnerable to short term disruptions from situations like the one we're seeing now that's because the business with a higher proportion of recurring revenue on a lower rate could customer churn like.

Cars, it's watchman, there's less reliance on new customer bookings to achieve its quarterly revenue and billings plan.

Second.

We decided to race 450 million of cash do a convertible debt offering in February of 2000, or 20 investor demand was oversubscribed by a significant number.

We decided to increase the size of the offering to 600 million to satisfy this tremendous demand I.

And he did the offering at a time when the economics for the transaction resulted in an effective conversion premium up almost $200 to share.

All of the liquidity provides us with financial strength and flexibility to successfully navigate the market for digital transformation solutions and make the white long term decisions no one knows exactly what's going to happen, but it's an important time to be well capitalized.

Third where members our core verticals, such as financial services insurance health care telecommunications.

And government are less directly exposed to the short term impact this pandemic in industries, such as airlines hotels restaurants in retail also our core clients or some of the world's largest and most well known and well respected branch and challenging economic times. Unfortunately small medium sized businesses are off.

And the ones that struggle the most in the near term when compared to larger enterprise. It did have strong financial profiles to withstand short terms shocks.

Given the number of large enterprise in federal government clients, we serve our business doesn't have the same level of exposure as a fund that primarily cells to small and medium sized businesses.

Stayed at the underlying strength of our large enterprise customer base is a core attribute of our business that helped us not only whether difficult economic times in the past, but also helped us grow revenue through those periods.

In the current period.

Finally, our digital transformation product portfolio features unique benefits that are critical to our clients our customer engagement suite helps our clients retain their customers are intelligent automation suite, which includes our industry, leading business process management software helps companies reduce costs.

Moving efficiency and effectiveness, our core value proposition that improvement importance to our clients, helping to continue to grow <unk> during the past downturns.

Other words head to provide strategic applications to many of the world's largest companies, which are critical to those firms ongoing success.

Yeah. So many of our healthcare clients are right now supporting the nurses and doctors who are treating people fighting the virus every day.

Given the mission critical nature of our applications and the fact that the cost effort and time required to play start solutions would be prohibitive, but note in most cases of course customer retention rates continued to be very strong as a result of these and other significant decisions. We built the business. It is very resilient.

So now, let's turn to our financial results for Q1 2020, especially for those of you are new to peg I'll start by providing a little more context regarding the evolution of our business model back in late 2017, we purposefully shifted pegas business model, starting the process of moving from a company that primarily sold its software.

Perpetual license basis to a much larger company that sells mostly honest subscription basis now that we passed the midpoint of our cloud transition you Wouldnt expect to see cash flow improve as we approach the under the transition in 2022 drilling our cloud transition. The two most important metrics, we've been tracking to measure the impact progress of our strategic.

Execution, our annual contract value for HCV and remaining plus hormones obligation RPL also referred to as backlog. Let me first talk about ACB totally CBS for some of recurring pega cloud and quite cloud commitments, representing the angle I spend from our clients for cloud term license and maintenance another reason.

CV growth is so important it's because it's the best leading indicator for future revenue growth.

We entered the year with a target of increasing total HCV by at least 20% in 2020.

And I'm pleased to report that totally C.D. slightly exceeded our expectations for Q1, increasing by 21% year over year on a constant currency basis at the end of Q1 are totally CD was $711 million up from 588 million in Q1 of 2019.

Holiday CV growth grew 43% from 127 million to 182 million in the same period.

CV growth continues to be our most important metric, reflecting a successful execution of our strategy.

Now, let's turn to remaining performance obligation also called backlog, which is another important metric.

Reflects quite commitments not recorded as revenue as of the period reported forgotten visibility into where a significant portion of our future revenue will come from and robust backlog is another benefit of our cloud transition.

Shortly much of our bookings were taken as revenue and the current period, causing variability in our quarterly results. These days the largest portion of our bookings our cloud.

Most of which goes into backlog, creating a more predictable revenue and cash flow strains in the future.

<unk> backlog increased by 18% from 351 million as of March 31, 2019 to 414 billion as of March 31, 2020, total backlog increased by 19% from 633 million to 754 million during that same period.

We expect about 433 million or 58% of this backlog should be recognized as revenue in one year or last as of March 31 2020.

Turning to revenue total revenue for Q1, 2020 was 266 million an increase of 25% for total revenue of 213 million in Q1, 2019, driven by 57% increase in cloud revenue.

The 25% increasing totally quarter revenue was the fastest growth we've seen since we started the cloud transition.

For 2020, Pega cloud mix was expected to represent about half of our new quite commitments and our performance in Q1. It was fairly consistent with that we actually had slightly more than 50% being pega cloud.

In total approximately 95% of our new quiet commitments were either pega or client cloud and approximately 5% or perpetual license.

For the three months ended March 31, 2020 reported both GAAP and non-GAAP results and a full reconciliation the ball GAAP to non-GAAP measures I provided in the financial tables in the press release issued earlier today and those are available on the Investor Relations section of our website now.

Non-GAAP net income was five cents per share compared to net loss of 12 cents per share a year ago. Much like revenue net income was also impacted by the cloud transition that we're going through.

So now let's turn to a few other details largely because of the convertible debt offering we completed in February that gets finished the period with total cash and marketable securities a $538 million at the end of Q1 2020.

In the three months ended March 31st 2020, we returned about 31 million to shareholders I, probably said dividends buybacks and not settlements that equity we ended the quarter with just over 5300 employees worldwide and increase a 15% from one year ago.

Turning to our outlook for full year 2020, as you know, we don't provide quarterly guidance or uptake full year guidance during the year <unk>.

We acknowledge that there's increased uncertainty in this environment for all businesses, our business is well positioned to succeed let me show some color on what we've been doing to monitor for care and respond to the situation. We give you some perspectives our leadership team meets several times a week to monitor the brought effects.

Good night tea on our business is responding quickly to evolving events in times like these peg is really benefiting from having a founder CEO. He thinks about the long term and there is committed to pick a success not only the next 90 days, but also over the coming quarters in years as Alan said to me he's seen lots of disruptive, but I'd say over the.

<unk> antagonist really been resilient since its founding at 1983.

Well, we have not seen a meaningful impact to our reported financial results to date, it's hard to know how this all is going to end up we've seen it outpouring of new demand because intelligent automation. It digital transformation solutions are gonna be critical to the response from our clients and have the ability to transform adipose Tobin 19 world not only into me.

I'd like turn but the long term.

We've also seen clients change some of their spending priorities. Some projects are being delayed or in some cases cancel buying decisions will be pushed out to later periods, which could negatively impact year over year booking results in future periods. So more closely watching pipeline conversion rates.

The natural cost efficiency associated with the carbon pricing is such a reduction in travel expenses and some of them. Some thoughtful hiring through the year to offset some of the revenue pressure, we could experience if some companies delay spending decisions given the uncertain economic environment, we expect some of our.

Clients will need additional flexibility with terms as they work through work their way through this downturn.

We expect it it's going to be more difficult to acquire new logos in this environment. Its large enterprise clients are likely to concentrate future spat with their most important vendors. However in a typical year and more than two thirds of our new quite commitments come from expanding with our existing clients that means that pega is less reliance on <unk>.

Landing new large customers to plot heart bookings growth. It's also important to point out there, we're not even 20% penetrated in our largest clients, which means we've got a solid opportunity to drive TCV and backlog growth by selling into our installed base that many of the world's largest companies.

I would mention we believe so far that 90% of all pagan Pega active professional services engagements are largely unaffected by working remotely. We've also heard from our large system integrator partners like Accenture and Infosys and others that believes that they can do about 90% to 95% of their work remotely. However in some case.

Yes, there may be project delays that could negatively impact professional services revenue recognition.

Those impacts occur.

Despite these challenges I believe we can learn from history. One thing you might be curious about is how pega performed during the great recession of 2007, eight and nine.

Why it was and why wasn't that pega was able to grow revenue. During this period. One key reason our digital transformation solutions help companies reduce cost and streamline operations, which is a top priority for leaders, especially during difficult economic times in other words, the major economic disruptions that take place could actually.

Only be an accelerant to adoption at some of the solutions. If they match the same challenge as we saw with our clients in the last recession and customers increased exports to cut costs and automate processes.

In conclusion, I believe the resiliency of our business and I believe in the flexibility for us not only sell its clients are growing in acquiring new customers, but also when they're trying to optimize and automate processes in their business as I explained earlier.

Revenue was largely recurring our balance sheet, a strong our customers are stable and our value proposition, it's compelling now more than ever.

These are the key reasons why I remain confident in our ability to deliver on our long term strategy to be the leader and digital transformation.

Opening the call to questions I wanted to invite you to Pegaworld, our annual customer that which will be held on Tuesday December 2nd after virtual that as Alan mentioned earlier, you can registered they've asked for free.

Hi, good dotcom.

We decided not to hold the Investor day in June we're looking at other rescheduling dates in August and we'll provide more details as we finalize those plants and lastly, just wanted to congratulate tango one Hayden South Haven staff are joining.

I talked a number of times through the process and I, just think he's going to be terrific and can't wait to work with him.

Operator, please open the call for questions.

Thank you if you like task process time, please take less by pressing star one on your telephone keypad.

Are you, saying, Hey, speakerphone. Please make sure any assumption has turned off to like a signal to recast once again that star one ask a question.

Well take our first question Steve.

Securities.

Hi, gentlemen, Ah, hey, thanks, or opinion and and that's in the quarter.

HM So I've been telling you guys in the quarters that I know how your guidance approach works and you know I expect that you've got to stay consistent with it I'm looking though for maybe some color and.

Yes, when I think about it.

Given the transition that you've made to recurring revenue and now to cloud.

My thinking is you can you can still layer on additional HCV and grow that ACB lines pretty nicely.

Even if your new bookings were down substantially year on year and I, you know I I'd like to avoid yes, or no question, but am I thinking about that the right way, but but then beyond that can you guys give me any color and how you're thinking about.

The pace of sales achievement.

And how it could layer and you know over the year nobody can predict a pandemic, but how are you guys planning for internally as you said, you're you know you set your hiring if you adjust your call. It isn't there in your plan for the year. So any color there would be much appreciated.

Hi, Steve This is Ken I'll I'll I'll I'll take a stab at that they're gonna be some things when there's an impact that's the impact will be immediate for example in professional services engagements scaled down that well have an immediate impact your revenue in 2020, so that would be an example up something.

It is.

There is any impact it will impact revenue in the current period perpetual licenses, although we only yeah. We only had 5% of baar Baar baar, new a incremental commitments perpetual in Q1 perpetual naturally convert into revenue no haggle, new quite cloud deals that.

Our hobbies like Ah, Yes term licenses for example may have revenue in the current period, but if you think about the majority of our bookings being pega cloud you're right that those on a booking any booking impact would be tablets as much revenue impact in a recurring world. So even if you did have softness and.

Bookings there wouldn't be as direct out a correlation to revenue reduction like there would be if we were a perpetual business. So you are absolutely thinking about that aspect right and there is real real short term risk on professional services to the extent that you couldn't be execute some of the work and also any billable travel, but maybe as a component.

Professional services, which naturally some of that you know small nominal does become revenue people aren't traveling right. Now. So there are things that are real risks in revenue, but maybe think about a recurring business. The booking the booking trend tends to stay with you over multiple years as opposed to an immediate impact in quarters. So.

Even within the year, so that does insulate us someone is your recurring business because hopefully that helps.

It does if I could ask one follow up it would be would be financeable call up here, which is.

Thinking about.

Bookings potentially gets impacted what that what that would duty or ACB.

And you know the long term target 20, 20% you know even.

Even if that were still solid.

Yeah.

If you're if your bookings were down.

You know even if they were down significantly could you still grow it isn't possible to grow you double digits. This year for example, a if your your new and expansion bookings were or let's say on happened what they were last and then maybe an extreme scenario, but you know to the extent you can you can help us think about those numbers when you're talking.

He that would be helpful too and I thought house.

Congrats again on that strong Q1.

Thanks, Steve So let me take that one so I'm going to just too I'm Gonna do just a simple math, which is if we didnt book a dollar in a year theoretically our HCV would be flat, let's just assume that we had 100% retention, which which meant we don't have 100% retention, but we're very close so no.

Actually any bookings will help to grow the total HCV number. So you could see a haircut in bookings that was that was a reasonable per cent that still have a respectable ACB gravity.

But I, but I would not suggest that we would be we could grow ACB at 20 per cent per year with having a significant reduction in bookings at that helps but certainly there's some level of sensitivity that you can withstand she bookings shortfall and still stay above our long term target.

That does.

Jump in for a set that I think it's fair to say that the intensity and the continuation of the engagement with clients.

As has been very reassuring yeah, we're finding that customers are taking meetings, the spending time with us they're engaging them. So.

Personally not expecting any sort of catastrophic.

And particularly because we're in the business it making people more efficient.

Which is gonna be important and helping people work from home and helping you know it or.

An organization that has become does aggregated whether people are spread out more yeah. We now there's the flow of work in the automation of that works. So you know there it's not surprising to me actually the customers or prospects are still willing to engage I think that ken's comments about the characterization of or customers.

As being the stable ones were at a very different situations I think that if we have lots of.

FNB businesses are there were customers we have a couple but you know historically, we really have been very concentrated because I think you know in the special on a cup of organizations that are going to make it through those that are going to want to be workers.

That's great. Thanks, John Thanks, Ken.

Well my next to Rishi Jaluria with D.A. Davidson.

Alan cancellations for taking my questions are nice to see continued strength in the business <unk> well stay the same <unk> Ah you questions from me first wanted to came to that.

Customers are looking for something like extended payment terms or there just isn't <unk> work with them I think makes a ton of sounds just wanted to get maybe a little more I'm wrong on model in terms of deals are you seeing customers asking for something more like himself restructuring doing things like that you know ramp.

Well, one multi well pads I call them I do a much smaller than we wanted them hobbled ramp up year to year three and then maybe just the financial impact if there is something like walking systems on the public cloud side is that something that you would normalize for when giving us not probably the C.D. numbers.

Getting up actually such and such that theoretically a swap that ramp them on bank deals like that.

So we keep on a couple couple of parts of your question. There. The first one as well which types of clients would ask for say delayed payment terms zaniboni, he's very low percentage of our traditional customers in our verticals are going to be in that situation.

It does happen, we're not insulated from that but if you think about the types of clients that we have we are not in the most susceptible vertical so it does happen it is not a widespread occurrence.

And it was up at this point I wouldn't stop it it would be unless there is some massive change to the economic.

Climate, even worse than what we're looking at now so I I think thats 0.12nd point is we have had very little discussions over the years with our clients asking to cancel or restructure contracts.

Within the contract carried but quite frankly, even at the end of the contract period and that I don't stacked or I've, not seen noticeable or discussions with clients, suggesting that that's different now and that question that you asked about clients wanting to ramp deals or have certain accommodations not real.

In independent Cobot, Nike or actually.

Our next cycle that is a reasonable request for clients as they implement the system and start to see value over time that that truly they increased the usage over time to make stuff to pay you know increasing amounts over time, so that that particular phenomenon not unique to the situation right now that is cargo.

Being it kind of a recurring business. The one thing that does help us in this environment that Alan kind of touched on a little bit what the SMB comment a second ago that because our average duration of a contract as multiple years, we don't sell saying month by month quarter to quarter, but small businesses.

Those are the most vulnerable relationships you know anything that can be cancelled within a month or quarter and since most of our clients start thinking about us and using us for very strategic long term projects Weve <unk>, Yeah, We hope and we have not seen a significant change in their relationships are quiet problem.

So we are yeah. We believe we are resiliency well will help us a lot there.

Okay. That's helpful.

When I wanted to ask about from a gross margin so.

60% Mark.

For the since my Smugness fancy personal wash.

One of you can give us a little bit more color on you know what you're seeing on on the cloud gross margin side outside of just due to timing treating a bump of having problems such a load on itself.

Well, if you remember last year I talked about how when you build a cloud infrastructure quite frankly, any technology infrastructure. The I guess needs to happen in kind of stair steps, it's not a linear progression and we were we were ramping cloud infrastructure and quite frankly still not completely in New York yet at this point completely.

Optimized or what the put the pega cloud infrastructure, but we're getting better and I stick, what you're starting to see now it's you're starting to see taught us really get some about operating leverage as we get a larger pega cloud business. So I think it's I think really quite frankly, as we had planned for it to be we thought we would add.

Actually do battery, you're going to 19, but we always had mentioned because of the significant investments with proper way up and other initiatives in 2019, it's kind of thing that DUC backlog, but operating margin expansion I'm really is being pushed into 20. So this was part of what we had hoped and expected to see into March and offer cloud.

That's a that's going to buy them and then just.

That sounds quite for weather impact on the contact center I think when Oh.

I don't even caught us and as I've working remotely working from home.

They maybe help US understand you know how is paying off that are enabling a those parts than ours.

To work remotely and I'm, especially and even when things start to open up its probably not going to happen all at once and nothing some on all of that that's a little bit longer lasting maybe alongside that with all the rise in remote work and people working from home.

I think that maybe accelerating the pipeline or inbound interest.

[music].

Well, we're seeing good pull the trigger clauses, we as we talked about and Oh I think that's exciting Oh, you know should be able to let us continue to grow that business, which obviously is a huge source of value for up for us and our investors the the.

Think about working at home Yeah, We've had contact center workers work using pega for their homes for a decade. So this this is not a new fund all of them for many of our customers a lot of our customers historically have wanted or even if they had a large contact center, which of course many of them do they want to do for example, overflow work at home.

So that.

They can tap up or group of part time workers are people, who are staying home with children, who can work a couple of hours a day and help take the load at a peak cards. So we're very well equipped to be able to support that the things of is appealing I think to our cars into our prospects is that because we do a better job.

Rob of automating the the business processes.

Oh and building that literally into the system itself. It just makes it easier to train new workers and to tap into a new workforce and at all so frankly make them more efficient. So I think all of those are going to be could pull for us going forward.

Outside of this immediate window as well.

I thought last month, the mom and I'll hop off, but I'll live without putting some more bombs or anything like that so just wanted to get a sense or anything else environment. While it would make you changed your thought process.

2022 times it sounds like you've laid out over the past couple of years 1.2 billion when they see the 1.6 fold them by them.

Yes, it's as you.

I think they know it's it's never been our practice to update our guidance during the year I think that quarterly guidance can crop companies to.

Really short term thinking.

Got it negotiations with customers. So we just we just don't do that so nothing to position to really comment on that I couldn't tell you that the tenor of the business is strong.

And obviously there are disruptions you know Ken said something interesting, which is obviously the but the part of services revenue that.

It is you know billable expenses, which you know kind of being makes you put into revenue for some reason up your that's obviously not going to happen if people want transport.

But that's better for the customers actually it makes it easier for them to take advantage of it but I I don't think we're prepared to make any specific updates.

I want to thank you. Thanks, guys appreciate it.

Well I can see dinners with keybanc.

Hi, guys. Thanks for taking the question.

And now Berlin, saying the same thing that the credit environment I, just want to get a better sense of.

Has a pipeline is shaping up now and now that you mentioned some deals getting delayed and gives me and I can't just kind of wondering now.

How you see that kind of shake not for the rest of the year and how much new pipeline currently being generated.

So I can tell because a lot of new pipeline being generated in the year over year pipeline is it was up quite materially.

Obviously all of that has to be risk rather than be considered but we've been through a part of that process and you know there's lots of new opportunities that are being recorded at a very very up.

I would say, hence cadence of activity between whatsoever.

But so it's a mess right I mean, so who knows exactly what's going to happen but.

We we see a lot of energy because of what our software does and because of the value has declined.

Okay, Great and Steve I would add I would add one just quick comment on that the thing that I think it's been most interesting and I'm sure that I'm sure that you you I'm sure that many of you on the call can attest to that but the amount of activity and business that continues to move on three this remark work remote.

It's quite frankly shocking like I mean, I'm surprised that we're able to do it take I'm surprised that you guys are able to do it. So I mean not is it is really promising to see people really just kind of tracking along three that's in in a big way and that that's that's really encouraging quite frankly to see the infrastructure hold up you know the.

The networks hold up and that people really you know a continuing to move on what their businesses and so that's that's what that's that's one promising thing that that we've seen through <unk>.

Okay, that's gotten here and I just want to ask about no free and paid and what are kind of the key initiatives that are still being kind of tack on as they get get trained up and whereas kinda them as was the job to a kind of transformed the business.

Well I think he's got a lot of experience up growing their business in the sectors that we operate in and Im turning it into a more than 3 billion dollar business up you know it and in doing that at a pace. So it's up I forgot to be terrific to work with.

There's a lot, it's frankly quite amazing to hire somebody you've never actually physically Beth.

We've spent an awful lot of tied together I think he's going to work terrifically ever teams all met him and our I'm anticipating that you'll hit the ground running and really you help us accelerate our go to market, which is what this is all about.

Okay, great. Thank you.

Just a reminder, triumphs, Taiwan piano question or comment at this time that's star.

Well, if next to Yung Kim with Rosenblatt Securities.

Thank you hi, Alan and can congrats on a good quarter. Since like you guys are doing a lot better than most out there I'm you know he sounds like some of your parts of your business.

Actually benefiting from the current environment.

Alan.

Just just trying to better understand where you're seeing some of the positive in your business.

Can you describe.

Well that smaller incremental projects in deals that you're seeing some of those deals were making progress some of those though any closing the month of April I guess with existing customers I get part of a.

Part of a multiyear project that's ongoing and just the next phase of that probably didn't that's got signed just trying to get a better sense of which parts of your business. That's that's tracking well versus you know obviously there are other parts, that's probably not being as well. Thanks.

Well you know if you think about it if there were used cases that are immediate.

And that people are really tried to get something done to help them as in some of the examples that I gave up with with some of the governments and you know some of the large companies that are trying to actually to respond to the to the issues that are at hand, and so those obviously couldn't really close at pace and and they're happening but.

I've been the.

Actually pleasantly almost surprised a little by two things one the willingness of senior leaders to frankly make themselves available you know what are the things that I found it interesting is my productivity Arctic is sort of hard work. There goes up a couple of quick productivity goes up because I no longer have to coordinate meetings with senior people's in different countries up.

You know that very very open and I think hopefully that that's going to that's worked to continue even after we are able to travel.

So.

There's a real receptivity to talking about what the right business architecture for the future. As you know this has put some pressure on their businesses I think people don't realize that they were gonna have to think differently about things I think some organizations are frustrated bug enough it's been about IP.

And they realize that they're not going to be able to program their way out of up.

Whether they are into additional we transformed environment and a lot of organizations or are realizing that they're gonna have to remarket and.

Recapture customers some of whom.

They may not be able to continue doing business with them. So we're seeing a lot of energy in what I would describe as a business architecture discussion.

And one of the things that I think is cool relative to the team's ability to adapt is up we used to do these design thinking sessions like I mentioned in my script and called catalyst that can be very effective in either a couple of days or two weeks to get organizations to think completely differently, we've been able to completely virtualized that which.

I had thought would be quite difficult, but have been doing and giving a lot of receptivity of catalyst sessions.

It's actually easier to set up in some ways because all of those customers don't have to travel to the second place.

To be disappear, so there's a huge amount of.

Urging the selling motion and we just need to work hard to see if we can convert them for all the business we would like to have is here.

Great.

Alan on you mentioned in your prepared remarks, and also regarding the set of.

I see specific solutions.

You got any changes.

Or into my what has been the response, so far and it's just kind of a blueprint on how you mean navigate I'm just go to market at least in the near term.

Yeah were it it's certainly has caused a those those teams by industry teams in particular, but also your my horizontal teams to think differently about how they want to bring their thinking and thought leadership to market and this will definitely have that approach. The the teams rallied together with it.

Literally blessed with a week.

Good pull together the framework for how we wanted to bring solutions to market, how we'd evaluate them and Oh I'm, just really impressed with the work of utilities and food pulled off and you could go check them out on the Pega Dot Com you know its its something thats generating interest from customers.

Interestingly not just in those areas, but also in other areas. Once you because they're having a discussion about how do you or your create truly a virtual organization, which our customers understand there no need to be.

Great and they can intensive the crime not a transition.

We live in love uncertainty out there.

Is there any variables in the model that we should take note.

You know just because of a you know because of the on uncertainty that we're going to I mean targets you're doing like over 19.

For instance, you know.

Do you expect like a cloud bookings mix.

Got it comes in much higher this year would that actually impact youre a our.

[music].

For instance.

Yeah. So the just the way to think about the business.

Is the first is I think we you know I've mentioned, a few times that I think there's probably some risk on fully delivering the amount of professional services through the year that we would have hoped just just I'm. Just you know just tried to be.

Practical about the fact that you cannot do everything remote even though you could get most of that.

While the majority there's still some impact there and I think on the picked used to be assuming that the cloud mix. It's the same no I think that you know I wouldn't think that there would be most companies in software would think that there was in the current environment more kind of downside pressure on their bookings plan.

Upside opportunity I would say in the short term I think that's a reasonable thing that we're hearing in the market, but if you think about the cloud mix could we move more to cloud because the environmental is more can do said she kept pega cloud I think that's a great opportunity for us and certainly if that happened you know winters.

Every 1% a movement to pega cloud away from a cut about 50% is what we actually talked about the beginning of the year has about a 3.7 million dollar impact in short term revenue. So I think some yeah, you're thinking about the revenue pressure from probably more cloud or what should be good.

In the long term I definitely think there's there's something there in terms of ACB growth, whether it be able books pega cloud or quiet cloud, there's not a a significant change in the ace CV growth based on you know a few percentage points difference within the year that is not a mature.

Real component of HCV growth.

Thanks for that clarification. Thanks, Ken.

Sure.

Well I have before the next question I just wanted to clarify I. It was maybe that was made aware that I mentioned pegaworld as December 2nd and I made an error I apologize I said the separate I met Julie second so we welcome you to join US on June 2nd offer free registration that Pega dot com, So I apologize for like this but the misstep there.

Yeah.

Well Miss on next turn next question Mchugh from Mark Schappel benchmark.

Hi, Thanks for taking my question and or are saying, a good way to start off the year and so good to drop in the quarter and one question for you could you just provide some additional details around the IRS deal that you mentioned in your prepared remarks for instance, you know maybe how long of deals was Parker.

Putting in a pipeline and no he's just pick a cloud deal.

Well, our government government deals up tend to go on for quite some time [laughter] too. If you may go up. So this has been this has been going on there's been a highly competitive as you can imagine the transformation of the out of the IRS and it's obviously going to come into revenue over years is.

No that pega cloud deal, we're expecting that it will be a client club.

The implementation.

You know lots of these folks really want to up.

Move their entire data centers to the cloud and if it makes sense for us to be a part of that to be able to get the right interfaces to her right systems easily then that's.

From our point of view just fine.

Okay, Great and then.

The healthcare vertical is a vertical that the company has increasingly focused on here and you mentioned that your prepared remarks.

And.

In the headlines were seeing a word about the move to tele health as being one of the healthcare technology trends. That's not increase captured recent pension I was just wondering if there's ways are tapping into their trends.

Maybe just to speak to somebody other trends, you're seeing health care that you're able to ER to enable.

Yeah, we've we've shown for actually are.

A couple of years ago, we we showed how pet care management solution.

You can work.

Roughly with a view of the Cisco video environment, and as well as others. It so I think that.

Yeah, frankly, tele health is going to require more systems to coordinate in marriage and so it's going to be our.

Ultimately, it's gonna be quite good for us when we go through the other edifice.

Okay, Great. That's all from your thinking could jump in the corner.

And I think we've run to the top of the hour.

So I think perhaps it's up time for us to thank you and say goodbye.

No we are working extremely hard.

And I think we're doing all the right stuff so with that thank you very much everybody and evergreen either.

Thank you. Thank you very much for your participation today that does conclude our call you may now disconnect.

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Yeah.

Oh.

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Mm Hmm.

Mm Hmm.

Oh.

Uh huh.

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Once again, everyone not conference class claims today, we do thank you for your participation you may disconnect your line.

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