Q2 2020 Pegasystems Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the Pegasystem second quarter 2020 earnings Conference call. At this time, we are getting additional participants in should begin in a couple of minutes. We appreciate your patience.
Thank you please remain on line.
[music].
Good day, ladies and gentlemen, and welcome to pick it systems second quarter 2020 earnings Conference call Today's conference is being recorded.
This time like turn the conference over to can still well. Please go ahead.
Thank you.
Good evening, ladies and gentlemen, welcome to Pegasystems Q2, 2020, Oregons call before we begin I'd like to read our safe Harbor statement.
Certain statements contained in his presentation may be construed as forward looking statements as defined in the private Securities Litigation reform.
Nike 95.
Awards expects anticipates intends plans believes well could should estimates may targets strategies intends to projects for cafs, not likely and usually or variations of such words when other civil works flush identify forward looking state.
That's which speak only as of a date stake that was made and are based on current expectations and assumptions because such statements deal with future events. They are subject to various risks and uncertainties.
Actual results for fiscal year, 2020, and beyond could differ materially from the company's college expectations.
Factors that could cause the company's results to differ materially from those expressed in forward looking statements contained in the company's press release announcing its Q2 2020 earnings and in the company's filings with Securities Exchange Commission. It couldn't get your annual report on form 10-K for the year ended December 31, 2019 and other.
Recent filings with the FCC.
She was a caution want 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 something like that may cause our views to change except as required by applicable law, we do not undertake specifically disclaim any obligation to publicly update or revise these forward looking statements where there was a result.
Inflammation future events or otherwise.
Yeah, I'll turn the call over to Alan Trefler, founder and CEO of Pegasystems.
Thank you Karen.
Let me Susan I'm pleased with all results.
It's actually given the global.
We are operating at a time on certain deals.
I'm deeply respectful of how <unk> team and our clients are engaging constructively and optimistically. Despite the many countries.
All results.
Well, what we said last quarter about how we talk dependent.
And our clients in the near term.
Our expectation the digital transformation, let me front and center, even during Kroger, that's held true future.
Oh business remains robust and your help.
Major trackers.
[noise] supercenters, although revenues predictable recurring.
The first now or total HCV.
Annual contract value.
We consider the indicator of our cash wasn't underlying business growth.
Increased by 21% year over year.
Over 90% of our new client arrangements all the Korean.
Well I, just cob business continues to grow above 50% year over year.
We are fortunate the digital transformation is more important than ever.
Slide energy is resonating with our clients and prospects.
Most of our clients or industries that are less adversely affected by the parent dinner.
Our ones like financial services insurance.
It's care government telecom instead of more heavily in areas like hospitality travel and consumer products.
Our clients tend to be large organizations. They can withstand the short term financial pressures of today's market, we have little exposure comparatively smaller organizations.
Really struggling the worst right now.
And with.
With more than half a billion dollars liquidity to help us weathered the storm and continue to invest where it makes sense for long term growth.
We have a stronger Brazilian team that is committed to the success of excellence and broker.
Good, though as I said last year, we've navigated maybe challenging times in our history.
We've always come out stronger on the upper end.
No in terms of our response to the pandemic based on what we see today digital transformation use on everyone's mind wasn't modernizing the customer experience or building automation connective tissue through the operations of the business.
No we've seen some opportunities put on hold what postponed other projects has accelerated and some new ones you've been in this year.
Types of challenges our clients faced a few months ago continued in some cases are accelerating.
Sample.
Managing avalanches and customer service inquiries supported remote workforces or adjusting to new government.
Policies, Oh, Oh, well supported by our technology.
While we help them in the immediate term, we also see their desire to build stronger businesses.
New future.
The new solutions, we introduced earlier it depends whether it's been well received and continue to open doors for us.
We continue to improve our software at its core.
Make it easier for clients to enhance the customer engagement boost their employee satisfaction improved their efficiency and would be spots.
For example, since we last spoke we launched the number interesting <unk>.
First wasn't ethical biased yet.
New capability in the Pega customer decision club that helps eliminate bonuses hidden in the artificial intelligence driving customer engagements.
We talked about the pega pastas fabric.
New cloud based software architecture design to radically streamline organizations like worker clause distributed enterprises, Recchi down technology silos to unify work across an enterprise and help improve user experiences.
We introduced the customer service unified messaging that there's.
A new SAS based application that helps customer service teams respond faster and more efficiently chew up customer who's flooding across this channels and do it through a single unified dashboard.
Most recently, we introduced a really cool capability called X Ray vision.
The streets for self healing robotic process automation capabilities able to detect and fix brokered box without human intervention.
Right clients with faster and more durable and easier to deploy robotic process automation.
It's continued to receive strong industry analyst attention since we last smoke blocker recognized Johnson their magic quadrant CRM customer engagement centered in the magic quadrant for multi channel marketing hubs.
Moving to new business, our new business. This quarter was particularly strong enough traditional areas of financial services government healthcare insurance and industries that are really a grew up long.
Hi.
We expected to be used to be more resilient through the during the pandemic and that's what it's turned out to be.
For example in health care, one of the largest use healthcare payer organizations recently merged with the leading pharmacy pharmacy benefit manager.
We're using pega to bridge there are multiple customer service environments.
Drives service standards that a corporate level, they expect to significantly reduce operational costs, while magnifying the value of the worst operation choose their customer base.
Financial services, a large institution, serving our customer base and the tens of billions is experiencing it gets used the pentagon leveraging our base customer decision, though don't get into cloud customers with a one to one personalized experience across the entire enterprise and across multiple channels. The.
All this to transform currently disconnected experiences into one to one person wants conversation group consistency accelerated speed to market and provide ongoing works all about creating exceptional customer service.
We're also seeing a lot of traction the government throughout the World for example, her Majesty's revenue and customs.
Kinda like their IRS.
Spend that their use of parents to transform the desktop experience for their 30000 telephone advisors, who are expected to handle the 40 funding calls since you're running on Pega cloud. They are moving from a legacy your unit fiction multiple desktop applications through efficient solution that reduces hamlin kind of post call wrap up and will lead.
To better experience for both employees and the taxpayer constituents.
All while driving savings you could that's there.
New items over the life and big rolled out across the organization to terrific reviews.
No the IRS.
He was analog to the HMRC I was wondering I mentioned that we had just won in the last quarter, but we're very excited when this quarter they announced I actually just last week, a new enterprise digitalization in case management office. This new organization was created to spearhead their reference from power attached.
He retires employees to rapidly resolve issues in a simplified digital environment.
In the IRS press release outline their goal to stand up unconsolidated case management system overcoming the challenges of having case work done on 60, plus aging systems, most of which some talk to each other right now. They also noted that the first or at least with pega is already well underway.
Yeah.
And last quarter I mentioned, the stated Bavaria, Germany chose pega to help them provide faster relief to the small and medium sized business is impacted by cobot. This was a great example of how we're able to sell develop and watch caps in record time, even wood working remotely.
Based on the success of that initiative.
Our software last quarter was chosen for a much larger project to the German federal government.
Supported new reaching a program that will replace previous government programs. The new application will be used across all 16 states within the country.
These projects are great. Examples of how flexible are technology is well get booked a liver hyper quickly and be used for serious large scale transformation.
No as I mentioned last quarter, we pivoted quickly to function and nearly 100% remote workforce and have been operating effectively this way since March as you can see problem results. This new working situation has not had a material negative.
Our ability to sell a service our clients.
In many cases, we're seeing on precedented access to senior client executives.
So we can coordinate beatings much faster versus the old days.
Good everyone in the same place and traveling with such a hassle with so we feel we can effectively onboard new employees up even while being completely remote. So we continue to hire of course selectively and strategically and since we last spoke we help pegaworld virtually and this was a first Ross and it.
All to complete we imagination.
We weren't quite sure what to expect and we'll frankly blown away by the results.
42000 people registered you know this compared to a little over 6000, we might have gotten the in person event and more than 26000 attendant. Those are outstanding numbers for free virtual about where the industry standards about 25% diversion right we were over 60%.
We also know the event drug remarkable engagement as we set a record for page views on Pega Dot Com in April May and June.
More than 1300 questions through life to an egg during the event, we continue to draw large audiences to our archive presentations.
And we will see lots of positive feedback from the aforementioned contest that made it clear that we made the right decision to Gritten event. It was able to digital experience rather than try to move it you personally event online like a big whether you can trace you didnt. The 10, we'd love to hear your feedback and it's all available online and.
Converting all of our second half against the virtual and are deeper the process of working through all of those will look like incorporating what we learned here the first half.
No. We continue to believe that Ross our partners and our clients there will be no going back to business as usual.
We see and I work with clients and prospects that digital transformation initiatives are up enormous importance.
And I personally believe we've got some time to go before we reach any kind of new somewhat predictable more normal bump in the meantime, we're well positioned to help our clients adjust to uncertainty while planning from your long term successes.
We are confident we will do much more than just survived and spot prices will come out of stronger company in the long term.
Deeply gratified that the continued support of a snap clients and partners has been in a very high level. It's truly a times like this that we can see strong character.
Those we work with and we're committed to continue to support the greater Pega community and those around but some creates very real challenges as a result of this crisis. So in summary, I'm pleased with my first half results, especially in light of global crisis.
To provide more color on the financial results I'm trying to get over to our CFO can still well.
And it's yours.
Okay.
Thanks Alan.
I want to express my best wishes for everyone safety and well being during this unprecedented times I'm going to start my remarks today by sharing some insights on tickets response to covert 19, and if you observations on the impact of the pandemic on our clients our employees and our industry starting with our customers today.
The overwhelming majority of our clients and prospects digital transformation buying behavior has been largely unaffected by the pandemic, while our business is not being negatively impacted I get significant way we did see.
A couple of projects delayed or canceled due to shifting priorities up some client organizations. We also saw small number of our clients request additional flexibility with extended payment terms to help them walking away through this downturn.
Most of our clients and prospects are asking where they need sense of urgency and we thinking what they should do differently in the short term and in the long term to build a robust modern business architecture. As a result in many cases, our sales teams are getting more access to senior level executives than they ever happen in the past and they are having.
Very effective discussions with dozens and dozens of executives that it was quite frankly very difficult to coordinate those meetings with travel schedule and the historical biased towards face to face in office meetings with senior executives. The good news for US is it the increased level of executive engagement and solid execution by our sales and marketing teams right.
Okay, and it's in a strong Q2, especially given the environment that were and he's well results are exciting to see.
Clearly many leaders are prioritizing digital transformation projects in a new way given the structural changes and the way that people are working remotely from home and interacting through digital channels. We could you give me very optimistic about our ability to accelerate our growth based on our increased based on increased urgency digital transformation.
Our employees have done an incredible job transitioning to working remotely they've been working diligently with our partners and clients and continuing to execute our strategy. It's been somewhat amazing to see how well our employees worldwide and transition to just new way of working as Alan mentioned I don't think things will ever be the way they were.
And that's there's a lot of positive in that.
Our field teams have been engaging and closing deals with customers virtually intentionally only time will tell but what we saw in Q2 may represent the spark of a new way of enterprise software selling even after this is long behind US we will continue to see a mix of virtual as well as on site sales activity lastly regarding our employees.
We are focused on supporting our employees to be as productive as possible when they're working remotely and we're thinking about the most safe efficient and effective way, but aren't waste cannot access to physical office offices whatnots appropriate.
Next I'm going to share a few thoughts on the impact in the pandemic on our industry enterprise software industry is growing through yet another major disruption for the last decade, the rise of subscription software reshape the enterprise software industry in the first half of 2020, we saw clear indications that the pandemic well accelerate the footprint the Sims.
Option software given the growth of working remotely and they increased pace of digital transformation.
During our last earnings call I explain about how our business is resilient and I remain confident in our ability to deliver on our long term strategy the leader and digital transformation.
You why I feel that way first we've been transitioning our business from a largely perpetual software license model to a recurring license model for several years in the first half more than 90% of our software revenue is occurring which is supported by our very high net retention rates and the great trade up our subscription revenue accelerated didnt.
Yep.
We continue to move away from professional services that they keep revenue contributor as mean gauge more and more and more partners to support our clients implementing and driving value from our solutions.
They should do recurring revenue is especially important in times like these the ship means our quarterly revenue and billings should be much less vulnerable to short term disruption from situations like the 1.11, we're seeing now that's because the business with a higher proportion of recurring revenue in a lower rate the customer churn like pega, it's less resilient.
Excuse me less reliant on new business bookings to achieve its quarterly revenue and billings plant.
Second the key verticals that we serve financial services insurance health care Telecommunications manufacturing government are less exposed to the direct impact that pandemic than other industries, such as airlines hotels, and restaurants and retail many of these clients and even in even some into more challenge industry.
Now see the need for digital transformation like never before in Q2, we saw solid demand from clients in many industry in fact financial services insurance and healthcare and government made up approximately 80% of our new license bookings for the quarter also our existing and pardon.
Why is the world's largest customer 10 brands.
Many of the girls. Many these global 3000 enterprises are better equipped to whether a down certainly small and medium sized businesses small medium sized businesses are often the one but unfortunately struggle most when compared to large enterprises, but have strong balance sheet to withstand any short term economic shocks simply stated the underlying strength of our large enterprise customer base.
It's a core attribute of our business that's helped us not only whether difficult economic times in the past, but has also helped us grow revenue three those periods, our large clients, especially in North America, where major contributors to our growth in Q2 third we have the liquidity necessary to weather. The crisis earlier. This year, you raised more than 500 million.
And through a convertible debt offering and as I've said before whether whether we were lucky or there was just you know really good timing and Smartpost Smart planning February was the perfect tried to raise capital you billable liquidity provides us with the financial strength and flexibility to successfully navigate the market forget.
The old transformation solution and make the right long term decisions finally, our digital transformation solutions continue to be mission critical to our customers 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 by.
Improving efficiency and effectiveness, our digital transformation solutions are even more relevant trying times like these because businesses like on a bus digital infrastructure is quickly adapt.
From an operations to remote <unk> to support remote workforces and remote operations.
Let's turn to our financial results for the first half in 2020, especially for those who are new to peg, though I'll start by providing a little more context regarding the evolution of our business model during our cloud transition. The two most important metrics that we used to crack the progress of our strategic execution, our annual contract value for HCV.
And remaining performance obligation or RPL. She's also known as backlog I'm going to start with a CD total HCV as the some of her occurring pega cloud and quite cloud commitments, representing the annualized spend from our clients for cloud some license and maintenance.
Increasing ACB is critical because it's the best leading indicator for our future revenue growth.
I'm happy to report that ACB increase year over year by 21% on a constant currency basis.
The end of Q2, our total ACB was 738 million up from 611 million at the end of Q2 2019 and increased I've been impressed at $127 million. The majority of our you see the increase was driven by ticket cloud, which increased by 56% from 135 million.
In a year ago to 211 million in Q2 of this year in constant currency, it's exciting to see the pega cloud portion of our business exceed 200 million and they see me for the first time in our history nearly doubling in size nobody 18 months.
Quite caught increased by 11% from June 32019.
He be continues to be our most important metric, reflecting a successful execution of our strategy and while 21% increase is strong ACB growth. We believe there's an opportunity to continue to accelerate our ACB growth in the future, we're investing and go to market resources to capture an increasing share of our clients.
Bad for digital transformation.
Let's turn to remaining performance obligation also called backlog, which is another important metric backlog reflects the quite commitments not recorded as revenue as of the period reported Friday visibility into where a significant portion of our future revenue and billings will come from a robust backlog is another benefit of our cloud.
Transition historically each of our bookings were taken as revenue in the current period, which causes variability in our quarterly results. These days the largest portion of our bookings are cloud most of which goes into backlog, creating a more predictable revenue and cash flow stream in the future.
Club backlog increased 26%.
Got it and 62 million as of June 32019 to 457 million as of June 32020, and total backlog increased by 30% from 628 million.
Last June nine 2019 to 870 million adds up the end of Q2, 2020 increases, especially impressive because our backlog tends to grow at a slower pace during the middle part of our financial year due to higher concentration of business activity. It typically occurs in the fourth quarter.
The year for software, a French or by software companies turning to revenue total revenue for the first half a 2020 was 493 million an increase of 18% from total revenue in the first half of 2019 and that was driven by 55% increase that pega cloud.
As we were in a cloud transition the impact to the cloud shift on revenue growth is really important understand we've been moving away from perpetual license bookings were placing large upfront cash in revenue with cashing revenue will be received been recognized over many years. During the first half of our cloud transition revenue growth was a lagging indicator because.
<unk> revenue is recognized over time versus perpetual license revenue, which is recognized upfront given that since 2017, we focused on ACB growth, which is that leading indicator of successfully executing our strategy.
Now that we passed the midpoint of our cloud transition revenue in HCV growth have started to converge then we continue to do so drying and we'll continue to do so drink. The remaining two years of our transition in the first half our success in closing new and expansion Pega cloud and quite club deals drove our growth and term license quality maintenance.
Revenue, which make up our recurring revenue sources total subscription revenue for the first half of 2020 increased by 38% year over year soaring from 270 million to 373 million a leap up $103 million professional services revenue declined about 6%.
Or just under 7 million for the first half of 2019 compared to the first half of 2020, it's important to note that more than half of this decrease nearly all of the decrease for the quarter, which due to the reduction in Reimbursable billable expenses for travel as our service teams are executing project work at our clients location.
Additionally, a few of our press professional services engagements were not able to be done remotely which has impacted our professional services revenue.
In the first half of 2020, Pega cloud mix was about half of our new quite commitments consistent with our expectation in total over 90% of our new quite commitments were either pega cloud or client cloud.
With the remaining being perpetual license arrangements for the three months ended June 32020, we reported GAAP and non-GAAP results and a full reconciliation of all GAAP to non-GAAP measures of provider in the financial tables in the press release that we issued earlier today and those numbers are also available on the Investor Relations section of our website.
Non-GAAP net loss was 28 cents per share compared to what got lost 30 cents per share a year ago. Much like revenue net income will be less impacted as we exit the cloud transition over the next couple of years. We were we remain very confident that the long term benefits of recurring business model, including a more forget.
A couple future revenue and cash flow stream far outweigh the skewed short term optics around reported revenue and the impact of near term cash flow and with 40 bps. So let's turn to a few other details you may recall that we had a successful convertible offering in the first quarter.
I get finished the period second quarter with total cash and marketable securities of 512 million on June 32020, compared to 538 million at the ended the first quarter. During the first quarter. We return during the first half excuse me, we returned about 48 million to shareholders comprise the dividend.
Buybacks and net settlements that equity we ended the quarter with just over 5500 employees worldwide, an increase of about 13% from one year ago.
We're very disappointed that we couldn't provide a strategy upgrade drying pegaworld, but we have decided to hold a book so investor briefing on Tuesday August 25, as you can probably imagine it's well be virtual and it will be an update on the progress of our transition to be as a service business if you're interested in joining that session.
Please email pega investor relations at ticket dotcom.
In conclusion at the midpoint of the year, we're very pleased with the way our business is performing as we look ahead, we acknowledge that there's increased uncertainty and the current environment for all businesses and we are starting to face obstacles tomorrow. However, we believe that pega remains unusually well position to continue delivering on.
The strategy to be the leader in digital transformation and with that operator.
Well take questions.
Thank you, ladies and gentlemen, if you'd like to ask a question and we do sell by pressing star one on your telephone keypad. Please make sure. They meet function on your phone is turned off so the signal can be red bar equipment.
Start went for questions, we'll pause a moment to assemble the queue.
Well take our first question from Rishi Jaluria.
D.A. Davidson. Please go ahead.
Hey, guys. Thanks for taking my questions and a nice to see some continued to strengthen the business.
Well I just started off with maybe if you had any updates on on some of the hiring plans, especially when it comes to new sales Robson I'm on a long solve that problem, but sales reps. So.
You have little hiring them over the past year to year was just how are you feeling now in terms of of sales coverage.
You know those sales reps.
Well I can I can answer about you blanked out a little bit, but if I understood your correction.
You are asking how we're feeling about the sales reps and.
Tenure, and and we were hired.
No I think that's the increase salesforce.
It's been able to do two things one I think its given us greater reliability, which proved really to be extremely hopeful there just pandemic because you have a lot more what I would describe as sort of a kind of engagement.
And sort of trying to bounce off.
Customers. If you don't have enough reps with what we cover them and on top of that I think we've demonstrated that we've been able to growth.
As a result of hiring new sales reps. So lifting I'm pleased about is that I believe our onboarding and our education.
Really moved extremely effectively.
This remote environment, both where our sales teams and for the other folks that were hiring so I think we're going to continue to be able to develop productivity and effectiveness as we grow the salesforce and also looking to make the sales force we have more effective.
Okay. Great. That's that's helpful. And then just wanted to get a sense as they look at strong HCV grow, but we've been putting up so far this year Oh no sense hot here any anything from a customer is that that indicates that there's been some calling for.
Uh huh.
Of the ITC projects pop in the back office here in the first time or it's just been kind of trends relative to plan pipeline for for the back half of the year looks solid strong focus and so far this year.
I haven't seen a lot of evidence that people are are going to sacrifice their second half of their first though I actually see more that people canceled things that they didnt think were critical just throughout the year. So that they could maintain their focus on things that are critical and who is the digital transformation stuff.
We do I think tends to fall during the critical bucket.
Both you'd be just stuff that we can do to get somebody off the ground, but also the fact that we can offer people a path to Oh, well architected long term.
Sector solution, so I, I know basis to evaluate us or to see.
The second half problem watching what Youre hypothesize.
Great well pop on lots something then I'll jump off.
Kind of your prepared remarks I you did mention there there were some services projects that can't be done remotely can you give us a little bit more color on on what what is pulling off from happening.
Maybe some color around <unk>.
What does that mean right does that mean that this is for deals that were already closed on it's just all the time until the customer goes live I, you know shifts out and does that mean Rev. Rec for all the close deals last maybe just a little more color on my colleague helpful. Thanks.
Sure Rishi, So I would see I would say that just to clarify it is very rare that we will see a client not be able to support a remote professional services work I mean, it does happen I mentioned that because in full disclosure it will happen.
Now and again, but it is not something that has commented it certainly is not happening in any big way, but and I would even tell you that I actually I'm surprised at how well people are able to work remotely. So I would say in general I think the environment is I'm quite frankly.
Better in terms of Wow kinda effectiveness than I would've anticipated back in March but that said some clients are not as comfortable don't have the technical infrastructure culturally may not be is affected that working remotely and quite frankly those are many times the cline.
Once that actually are the most didnt need for digital transformation. So I do think it does happen and I feel like you know it just didn't the interest of full disclosure, we should've mentioned that it can happen, but it's certainly not something that's happening often.
I think that's a good question I mean, it's not just us that needs to be able to work remotely, which I think we've demonstrated we can do it scale up the client participants in those projects also need to be able to and need to be comfortable.
Working remotely, but it's kinda said this is not a material part of the business.
Wonderful that's helpful. Thanks again.
Well take our next question from Chris Merwin with Goldman Sachs. Please go ahead.
Okay, great. Thanks, much for taking my questions I wanted to ask a bit about the use cases for their products as the deals you're winning or even those that are in the pipeline are you starting to see some different use cases for through the local platform and particularly in light of how many customers seemingly are looking to digitally transform p. systems, where that internet incidents might know.
I have been in place before she just curious if there's been any evolution there the chip that you've seen more recently.
Well I think you evolution has been that.
As encouraging is that a number of organizations have have realized that even the things that they didn't think were problems actually our problems and so you're able to have more.
Engaged conversations we've seen your people about how they actually create a digital transformation strategy, whereas a lot of times I think before.
There was a little less of a strategic focus so being able to both do the low code high speed deliveries, but also have those strategic conversations.
I think puts us in a pretty advantaged.
Position you have to think about how we described what we do.
We do you are basically customer engagement to work involving expert systems and artificial intelligence. So generally to help make good decisions. We provide process automation to drive that were done and then we provide an environment that makes that work across channels and across different back end systems.
<unk> is up a recipe that is.
Strongly beneficial.
Randy organization tried to do a transformation.
Okay, that's great and just one other question if I could get it looks like the backlog actually accelerated from 20% growth last quarter, I think 30% growth. This quarter can you talk a bit about what caused that big step up and any other color you can share, but the cadence and bookings as you move through the second quarter any of it into the.
After July so far.
Yeah. So Chris wants a couple of couple of things that are interesting. The first thing that's interesting is.
That adds we hire more account executives and actually get into a a stronger Kate winslet bar with our clients around around faster deal cycles, and really getting started with pega cloud and an accelerating off of that kind of that.
And that minimum lovable product as you might call it to be able to not and reduce the kind of the deployment cycle of our clients out there and cloud what do you see as you see more business activity moving throughout the year, meaning everything is set to Q4 deal. That's really large is a whale that gets kind of log jam that we ended the year.
So that's one promising thing around this Q2 this was by far the strongest Q2 that we never had now you would expect that as we are growing but it was a very solid Q2 second, especially given cobot second thing is it's a demonstration of our duration of contract length, holding up which is really a sign that quiet.
So we're continuing to think about their investments and pega aren't very long term basis now we're not we actually are not encouraging our sales teams to extend the life of contracts, but I think it there was some there's always some.
Okay surround when you sell fast when you sell cloud that duration can compress and therefore, you know cause a less efficient selling cycle, what's your selling one year versus say three here, but I think what you're seeing is that not only as the business activity out because the durations are holding very steady and specifically around pega cloud. So it's just a really.
Great fine of our retention rates, the continued investment and the momentum of Pega cloud.
Great. Thanks very much.
Thanks, Chris.
Well take our next question from Steve Anderson with Keybanc.
Great. Thanks for taking my question guys I just wanted to check on thinking over the last quarter that a pipeline was up another strong year over year I'm, just wondering where pipeline stands today and how the a top of funnel performed as you as he moves to the a the corner.
No one is still strong.
Do you know the pipeline, we have doesn't we're going round out much during the quarter you know too if you think about it but.
We still we still see you know plenty of opportunities primarily with customers. We've had some contact with other whether they're large customers a small kind of customers because you know this environment here.
Makes it much harder to go slamming into lots of small businesses, but we have walks and lots of runway.
Are you going to top 10 customers have enormous amounts.
Additional AC the opportunity if we continue to perform well so though.
So the pipeline is not a concern at all.
Okay got you that's a that's helpful or just let me check can be hearing from some other vendors who reported so far about incumbency being a real differentiator in the quarter and ability to a ticket deals just wondering how you're saying the environment today to either capture new customers or to take Inc.
Our mental opportunities, but then you're at current customer base.
So I think incumbency is helpful.
And incumbency in very large organizations that are well suited to what we do is definitely helpful. You know I think if you're selling your product.
So if you're certainly going to ensure our system or something where they can only by one obviously, it's come but so you can be a limitation. There's so many ways that these organizations can continue to apply what we do.
That we're having and I would actually say the strategic conversations have accelerated.
In the last four five months in terms of where we want to go together and go in partnership So incumbency definitely helps I'm asked sometimes we worried but we're going to up sell.
Sell out the world's because companies that were in.
The answer to that as you have not remotely [laughter]. So much looks like it because we've never been a company to sell these stupid enterprise licenses so lot of client without it being reasonable, let's just never been an idea now so we have real upside as we continue to perform it's really.
The company want us to do that.
I would have no pizza.
Another piece of color on that Steve the if he thinks about do you think about Pegas business traditionally about two thirds to 75% of our bookings each and every year come from our existing clients. So certainly incumbency has led to lots of pega growth over time, but it is.
Now the balance you have really cover those incumbent organization. So pega can continue to further penetrate the alan's point, but that said we generated a lot of new logo growth as well first half and so I don't think that you did all of the businesses jumps going to get the incumbent so I do think that that is.
Certainly it would you incumbent he and the time of a you know and at time of Bob any economic pressure or stretch, but I do think our opportunity to both continue to enrich their relationships that we out with our existing clients, but also gather very large had significant logos as we add.
Actually build kind of new fertile ground to continue to expand I think the opportunity for digital transformation really provides that so we've always been dependent on continuing to sell to our clients, but I I think that we've also generate lots of new relationships in the first half as well.
Great that's very helpful I'll pass it on.
Well take our next question from Mohit.
Good idea with Barclays. Please go ahead.
Hey, guys. Thanks for taking my question then I'll offer my congratulations on the sold or despite dependent.
My first question is why then.
So one of them dig more into the federal work Dequincy you guys took their distributors coast that being a bigger focess wanted to get lost in all of the see some impressive being a you have outlined a cooler plus tough so wanted to see what is looking whether they'd like I mean, if things stay competitive landscape.
Uh-huh, but just in this looks like it was of course, the m., but also in the border into high sulfur with a lot of Red Lake. So just wanted a big initiative. What is working then and whether you can use the stable from maybe a slight increase has been commission and piece of good fixing some of the cold weather and then I've a follow up question.
Let me make sure I understood what vertical you were asking about because it's sort of cut out.
Could you just deal with Oh.
Good.
The federal vertical JASO luck.
No we were not very deep incredible if you go back five years and you know it's been absolutely terrific Andy its to my mind only getting better yeah. It was not just the recently announced your big IRS. When do you can imagine the or sort of competitive environment around some of that is key.
But if you think about all the other parts of the government that we're working with from defense to a you know being be the system. The.
Yes, marshals chose to modernize.
The desire to digitize to try to create efficiency that's.
You didn't we're sitting here not just in the government of the U.S., but we're also seeing it in places like Australia.
I'll start earlier.
As I mentioned that we talked earlier about the UK so that is.
Excellent vertical for us and we are doubling down on its a great place to be able to ER to put additional selling resources and also the builds a REIT partnerships because those are so important.
When selling to government, so I would throw them and even in places I mentioned the German government. For example, another example of a new logo for US and also worked with the government in France, So well see a lot of something on the place.
Thank you. So the follow up question. So Ken. So you you alluded to that August 21%. If you could go with them and despite dependent gets pretty strong.
Some of the other vendor for putting some of the heat from Cowen 19, but he also alluded to that there is an opportunity a windfall to maybe accelerate W. Equals right. So I was wondering if you can dig into something but those that have taken card maybe into in the near them make them are more important when when it comes to opportunity to accelerate back I think you mentioned.
Total d. it could be growth rather than new bookings come from existing clients. So I would see expansion rate an upward trajectory for extension, which maybe it's one of the crew, but im wondering if you can bring into the different metrics and things like.
Yeah sure. It's all mentioned a couple of things that I think are interesting. The first thing is if you look at our net retention rate. If you kind of Riverchase reverse engineer, our net retention rate did and 21% ACB growth or not retention rate somewhere in the 113, the 116% kind of range. So if you just think about that at 113.
116% net retention or net expansion on your every year for for our existing clients. If you take that percentage and you think about the impact that digital transformation and the fact that we'll even in our largest clients, we're not even 10 or 20% penetrated on what we could sell them.
That really ties to our strategy a route density of hiring account executives and really well either creating relationship kind of our equity a round the largest organizations, making sure that we're covering the different buyers a different business units and further penetrate that's a tremendous opportunity.
The next another example of an opportunity is what you just asked about early the federal state even just looking at the U.S. federal space that vertical so relevant for pega, they're going through digital transformation. The government is looking at cloud first which isn't that much more relevant for pega now with our should with our strategy over the last.
Few years, I'm really pushing as cloud being our primary go to market that there that that vertical is one of the emerging and fastest growing but still not 10% pega specifics yet. So we think about that as an opportunity and ignore new logos in all of the other opportunities across the business we could accelerate.
At our ACB just on those two dimensions noticeably so I think that that's what's exciting is we have so much opportunity with our existing installed base our existing client base and then we have these verticals like up like a federal vertical that's just one country. It's just one buyer really within that country and I think there's just a tremendous.
I'm out of opportunity our wins, if the census, our wins that Iraq really just demonstrating how credible we are in that in that space, even with being.
Ted we you know that being a relatively less mature vertical in terms of the growth rate. So I think I think that theres just opportunity like that in all the countries and other verticals, but I'm just giving you a sense out you know why we believe that we can accelerate our growth rate and we want to continue to invest it in that.
It takes place.
We'll take our next question from Yung Kim with Rosenblatt. Please go ahead.
Thank you hi, Alan and can congrats on a very solid quarter, obviously up pega cloud had a spectacular quarter sequentially TV, Florida business I believe was up a regular now and I'm just want to talk more about the trends that you're seeing in that particular business.
What are the trends around the deal size, our customers nicklin, because commitment or whats the fans driven by higher deal volume on any trends that you're seeing between new and existing customers.
For the pick a crop business. Thank you.
Ken I'll, let you answer statistically, but viscerally, the but the business is coming across the entire continuing.
So it wasn't driven by you know a couple of monster deals. This was exactly like you want it like I said can give some more specific yeah, Oh I can give you one measure that will answer answer your catsix venture question. Your it's the average deal size of Pega cloud versus the average.
You will sized quiet cloud was largely the same for the first half of the year, so that might that probably gotten that certain probably answers. Your question, we're not doing lots and lots of small clients and we're not doing just a small number of very large one it's really down the middle Pega cloud.
I remember that between Pega cloud and client class.
That's over 90% of our of our revenue so.
That's really that's the business you know the leftover bits of perpetual from old contracts.
Aren't aren't.
As they shouldn't aren't driving our business. If you can see that is the percentage of revenue in perpetual going down which is what we like.
No problem and the recurring revenue and recurring commitments going up.
That makes sense.
And Alan I'm, you know, obviously he used to kind of formation.
Secular trend is that that funny resonating with your business can you update us on traction with the large global system integrators are obviously have to cause they all seem pretty digital transformation and.
Okay.
Oh, Yeah, I think there there are definitely extremely interested we are engaging with them and sell them. The relationships are really deep and I will point out that in just the last.
Three four months, we've actually gone in or a new head of Peggy ecosystem are very experienced woman, who brings tremendous background in terms of being able to build those relationships with those sorts of particularly the larger size and the new leader of our go to market, which we announced.
Just started June one.
Hayden Socrate also has a tremendous background working with both Salesforce and Microsoft dynamics CRM in building extremely material relationships with partner organizations. So we are committed to the partners I think you're going to see that big and increasing area of emphasis and I think because a lot of leveraged.
For that as well.
Great good to hear Com for you can.
In terms of the trend current model transition, we are seeing pega cloud accelerate assisted Klein cloud would that affect margin at least in the near term and also.
How should we think about margin benefit coming from the total revenues now you know dotted line is going to start going faster given that the monetization has passed a midpoint.
So they pega cloud as as Pega cloud continues to accelerate you do have some variable costs, what pega cloud, but you get a much bigger operating leverage or operating leverage as pega cloud gets larger so net net of that change.
The combination of those two factors I think what will not impact to our margins positively or negatively as pega caught a little bit more variable cost, but also better operating leverage and an operating scale efficiencies. What's your second part of your question, which is what should what should you know what should happen over the next couple of years look when you get through a cloud trends.
Fishing, you wash away all your perpetual revenue at the beginning in Q a series of years to build that back in the business. It. So normally when you start a cloud transition and you end the cloud transition or start a recurring transition end that your margin profiles look similar when you started you add because once you ended that's when the.
Yeah, that's when the operating leverage can really be exhibited aren't a business model and so we will we will exit this transition in 2022, so between now and 2022 and beyond what you will see improvement in our operating margin each and every year. So we kind of get come more of that timeless model, which will still be out in like say that too.
I was at 23 time period, so you'll see you should see operating margin improvement at operating cash flow improvement that gets kind of better each year that you go through it now that we're past the hardest point.
Great. Thank you so much.
Well take our next.
Oh I'm sorry go ahead.
Okay. All right now one quick question, Okay, sorry about that well take your next question for Mark Schappel with benchmark. Please go ahead.
Hi, Good afternoon. Thank you for taking my question and I started on a quarter very nice job. So that was starting with you in your prepared remarks, you touched on your new messaging solution and the Rpj extremism. So visibly solution aggrieved I was wondering if you're just going to a little more details on those two products them.
And how they differ from other solutions in the marketplace.
Sure I didn't hear the first one once again my lines a little dropped <unk> what was the first with the two U.S.
So in your prepared remarks, you touched on your your new solution one within your messaging solution I thought or <unk>.
Okay RPX X revision I was wondering if you just start just go into a little bit more detail John I got to think here just wanted to make sure record properly. So yeah, we selectively acquire companies and bring them into the mix and and Weve them in what would be a cogent solution for clients and both.
So last year, we bought a company called in the chat, which gone very or they're very very sophisticated messaging technology and also actually brought up a great leader.
Who is the the GM general manager now of our customer service business.
Into the company and this represents the the rolling out of that technology as part of the platform and it. It really is a perfect example of where communications technology and process automation technology really go hand in hand, together and it demos beautifully and there's a lovely augmentation to the system you may remember since.
Two years ago, we brought him about its player.
The company called Openspan, and Weve integrated robotics into what Pega offers and frankly, a completely different ways of the robot first type people, who I think of it was interesting Gartner put robotics into the trial.
Solution, but a couple of months ago, because robotics Brook robotics projects.
To be incredibly fragile, particularly when people start putting lots of business logic in the robust, but we're able to do with our solution is to be able to make the way less gradual but keeping the business launch it where it belongs on the robotic channel, but in an omni channel sort of position the in the center of their business and then just using the robot when you.
I have to go the last bid if there's not an automated enterprise and there's there's.
Great capability actually takes that architecture, which we already established it makes a tremendously less fragile tremendously more able to sell fuel even if the backend systems change doesn't break the robots robots actually understand how to find the right data and do the right things and I just think.
Another example of bringing great technology, Sun, but making it even better I really gets you to up to a service back Ronan I backbone does that make sense.
Great. Thank you helpful.
And we'll take our final question from Steve going with it.
M.B.C. Nico.
Hey, Thanks for squeezing me in zone, and I'll add my congratulations on the corner.
Just one financial question and one follow up.
10, maybe can you just help connect the dots on how the numbers on get I'm looking at.
Cloud percentage of new commitments was 50% for the first half in total I think it ran maybe a little high in Q1, some maybe a little lower in Q2, but cloud ACB accelerated sharply.
So just maybe help help me understand that and then I've got one more you know substitute a question for you guys.
Yeah. So the the cloud ACB did not accelerate because of a mix shift which is you're right. You got your I see where you're going what the question. So you're right. It was just the.
The bookings were strong in Q2, which actually and that percentage of Pega cloud was high enough such that it led to an acceleration.
Okay. That's helpful can and then just for my my last question.
I'm curious maybe just on you know you're on your initiative.
Big embarked on a couple of years ago now to you know improved deal velocity and Alan you made reference to some of the low co deals earlier.
How is that coming you know I I hear you that duration and steady and that's a good thing, but wondering about deal velocity and then I'll just add as well any any color on any major competitive bake offs and in the quarter as well and that's it for me.
Sure so well we work in a highly competitive world. So every piece of business, we're winning somebody else's moving [laughter]. It's just the way that's just the way it goes and we show very well competitively.
Your particularly on the sweet spots, which I think our view on low code goes all the way back to our original vision of being a model driven platform of the places where we just see pretty solidly when he was when the company does not want to adopt low code as a series of little stay.
Handling islands Little Department things, but they'd like to get those department of the business users the power to be able to drive change well. The same time, having something that can you know scale to the enterprise and really support the right sort of standards and security and other sorts of things you might remember years ago Lotus notes, we've kind of the low.
Code system of it today. It was all of those systems are either long dead or consider just dreadful technical debt, that's where we would somebody remembers those stories where knows about those stores. That's when we consistently I think or are there.
Highly highly successful so Oh God you have the low code out factory for business.
So there's not a bunch of triangle systems hanging around but it's really a way to think about the enterprise. That's when we are enormously advantage and frankly, I think more and more enterprises are understood that.
Sorry, I understand one last question.
Yeah, I don't know dark loves we've gone beyond words, let me just a wrap up by saying. Thank you Tom told investors that have been interested in Austin stood by us as we've gone through these incredibly hard times you know the pega team.
His is working extremely diligent way I think we're working well with our clients I think we all need to have a level of care in patients.
To make sure we're getting through all of this and I'm I'm thrilled that this is I think tested our team in may and showed it to be extremely strong and whatever happens in the future we need to continue to build on that strength and we'll be working hard on your behalf. So with that let me say, thank you and have a great.
Ladies and gentlemen, this concludes todays conference. We appreciate your participation you may now disconnect.
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