Q3 2021 Pegasystems Inc Earnings Call
[music].
Please standby we're about to begin.
Yeah.
Good day and welcome to the <unk> systems third quarter 2021 earnings results Conference call Today's conference is being recorded.
At this time I'd like to turn the conference over to Peg a system C O O and CFO Mr. Ken Stillwell. Please go ahead Sir.
Thank you.
Ladies and gentlemen, and welcome to Peg a systems Q3, 2021 earnings call before we begin I would like to read our safe Harbor statement.
Certain statements contained in this presentation may be construed as forward looking statements as defined in the private Securities Litigation Reform Act 1995.
The words expects anticipates intends plans believes will could should estimates there may targets strategies projects for guidance likely and usually or variations of such words and other similar expressions identify forward looking statements, which speak or.
As of the date of the statement was made and are based on current expectations and assumptions because such statements deal with future events. They are subject to various risks and uncertainties actual results for fiscal year 2021, and beyond could differ materially from the company's current expectations factors that could cause the company's results to differ materially from those expressed in <unk>.
Forward looking statements are contained in the company's press release announcing its Q3 2021 earnings.
And in the Companys filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31st 2020, and other recent filings with the SEC investors are cautioned not to place undue reliance on such forward looking statements and there are no assurances that the matters contained in such statements will be achieved although subsequent events.
May cause our view to change except as required by applicable law, we do not undertake and specifically disclaim any obligation to publicly update or revise these forward looking statements, whether as a result of new information future events or otherwise.
And with that I will turn the call over to Alan Trusler, founder and CEO of <unk> systems.
Thanks, Ken.
I'd like to say that I'm really pleased with our results year to date and we continue to see strong adoption of our low code digital transformation technology.
During Q3, our total annual contract value or <unk>.
Which we think is the best indicator of our performance.
Increased by 22% year over year notes.
Subscription revenue grew 32% year over year.
The benefits of a recurring revenue model are increasingly visible and we're happy with our progress.
Now to provide an update on the pandemic and some industry trends.
This is a pandemic still varies region to region, we are seeing the global economy recovering.
There are positive signs that the worst is behind us.
For digital transformation solutions continues to be strong and is expected to be one of the fastest growing enterprise software market in coming years.
The Army RBC reports that the market for digital transformation software is growing globally at about 19% CAGR.
And as expected to reach $619 billion by 2024.
We believe we're in a great position to benefit from the growth in this market.
Driven in large part by the challenges in the last 18 plus months organizations know they must adapt to today's needs while preparing for inevitable additional changes that will come tomorrow, and that's where it comes in in an unpredictable world we help our clients crush business complexity.
So they can work smarter simpler and faster.
Our tagline build for change.
Relevant as ever.
Given the imperatives that organizations established a technology and business architecture that empowers them to adapt and thrive and constantly changing markets.
The customer decision hub.
Real time, Decisioning engine helps customers predict their customers' needs personalized interactions and deliver across channels to deepen relationships and maximize value.
Customer service solutions, leveraging automation and AI, so reps can handle any engagement quickly and effectively ensuring customers get what they need and our intelligent automation solutions boost efficiency by streamlining any process.
Also in the most business critical sophisticated workflows that require a high degree of intelligence and automation.
And we continue to benefit from the operator offering our customers.
How choice, which we pioneered in 2017.
Osborn Cod alternatives plays perfectly to where we see the future gallon.
Historically organizations have thought of and implemented cloud is a collection of pilots and that's fine for many types of cloud usage. However.
Used as a strategic backbone for an organization.
Those cases clients will often want to we've got into and across their existing cloud infrastructure.
And that's what cloud choice does that become part of the fabric part of our clients' strategic future improving their effectiveness.
Fostering a longer term commitment to badger.
And it is going to what the <unk> are aggressively scaling up on cloud capabilities. This makes our cloud solutions more effective whether we're operating them.
Scientists.
It's good news for us and our client because we support both options and regardless of our clients deploy this.
Software is the same.
So they benefit from the same industry, leading software and all that comes with it.
Our center out approach that puts the outcomes they are achieving at the center of their solution.
As I am thinking it brings people and technology together to design and deploy innovative solutions in weeks or even days.
And the industry's only low code platform built with a prescriptive approach to business and collaboration.
We're proud of how central our software as to the strategic operations of our clients. Many of the most recognized and successful brands on the planet.
Most successful when we engage with the senior leaders in these large enterprises, where the focus is on strategic big bet initiatives that are crucial to their success.
That means the commitment on both sides can be very significant.
Once clients experienced the value, we bring we have tremendous opportunity to deepen and expand those relationships. For example on the commercial side of our business in this last quarter, we expanded our footprint with three of the world's largest telecommunications companies.
We are the world's largest financial services companies and three of the world's largest health care companies and just this past week, our client Lloyds banking group won a digital transformation of the year award for the work that they're doing with peg.
It really gives their employees and their customers the best experience at key moments of truth.
I'm very proud of the work that we're doing together.
Additionally, the government sector continues to drive significant business and we increased our presence in government clients in every region around the world Gov.
Government leaders know that the next few years are going to be challenging as it is.
Flood of service and program needs that we have experienced over the past year and a half will continue.
They know they have to deliver a wide portfolio of critical services and yet outdated systems inefficient processes and disconnected channels can slow down that surface.
Make it hard to keep pace with needs and changes we help government clients go live quickly and drive amazing outcomes, whether it started with one small critical application like we rolled out from the fed up of area.
Which by the way has led to new opportunities across a meal.
Or at massive scale, well I guess the U S census.
We've been wildly successful with our government clients over recent years to find the platform is built for change sophistication and scale.
Otherwise our outstanding work for the census is now documented in our recent video available on <unk> Dot com highlighting success as.
As Michael theme.
Census, assistant director two the Decennial program said quote everything worked as it was supposed or it was smooth I would almost call. It historically smooth.
And not just in this call.
Railyard software is being used by the department of home affairs to develop what they call their permissions capability platform as part of an overhaul of their visa processing system. They wanted it integrated enterprise scale workflow system capable of being used across the government.
They expect to roll out new digital incoming passenger cards, which will include vaccination status two airports around the country by the end of the year paving the way for border reopening.
The U K, our software is being used by the Royal Navy and Royal Air Force to develop new end to end recruiting platforms. The goal is to provide a better digital experience for the 180000 annual potential candidates.
Help reduce recruitment cycles.
Now as we emerge from the pandemic, we are gauging, our clients and partners comfort level of meeting in person and we're gradually bringing back in person events and getting our selling teams back on the road, where we can we continue to raise our visibility among our key clients and prospects with targeted selling and marketing approaches.
For example, you may have seen that we sponsored the Ryder Cup. This year, a new initiative for us to increase our visibility and it provided an excellent opportunity to connect with so many of our most senior strategic clients and partners.
We just held our inaugural executive partner Advisory Council meeting with senior context from some of our most strategic partner organizations.
Abroad, and deepen established relationships with many of our clients.
We're excited to be able to hold this meeting in person.
And our new streamlined partner program that was rolled out this summer is being well received and we will continue to focus on deepening these relationships to make it easier for partners to engage with us.
<unk> solution development co selling and client referrals.
As a result, we are seeing increases in partner engagement and partner source business.
We have plenty of opportunity to fully leverage we think a strong and growing partner network and feel very positive about the overall direction of our bedroom.
So in summary, I'm pleased with how we're executing on our strategy of how it's reflected in our results for Q3, we continue to make excellent progress on our transition transition to a recurring revenue model.
Our clients recognize the need for digital transformation solutions.
Can solve both their short term challenges and long term strategic needs.
We feel we are uniquely available and able to help them.
And we continue to focus our strategic investments to leverage this great opportunity, while thoughtfully managing margins.
So to provide more color on these results.
Now I'll turn it over to our C O M and CFO, Ken Stillwell take it away.
Yeah.
Thanks Alan.
Q3 was another strong quarter following on the heels of what was a very strong Q2 when it when it comes to our most important metric that we measure.
As our business success ACB.
It continues to be the most important metric and that's the growth in our annual contract value.
In fact, if you look at the combined Q2 and Q3 of 2021, we added an impressive net new ACD gains of $95 million, an increase of 45% year over year.
What's really nice to see such strong momentum through what is traditionally a slower ACB growth period for peg, which is the middle of the year. The Q2 and the Q3 time period as you know in late 2017, we started a multiyear cloud transition moving from a company that primarily sold perpetual.
Licenses, Joe Company, whose go to market motion is focused on selling subscription.
Today, almost all of our new client commitments, our cloud choice. These.
These clients are either subscribing to peg a cloud a cloud deployment that peg advantages or client cloud a cloud deployment that our clients manage on the cloud of their choice as a result, our total software revenue mix has shifted.
Just subscription in fact through the first nine months of 2021 more than 97% of our software revenue is in fact subscription.
Remade itself as a subscription software company over the over the last few years, a significant achievement that we're very proud of that.
During our transition to the subscription model there are two metrics that properly measure our success first and most important metric is growth an ACB as I mentioned earlier, which represents the annualized value of our active client contracts as of the measurement date Q3, ACD grew 22% as reported.
And 21% in constant currency from a year ago.
Since ACB growth had dipped below 20% constant currency earlier in 2021, I'm really excited to see total constant currency ACB growth accelerate back above 20% in Q3.
One thing to clarify with our ACD growth isn't it came about a little differently this quarter with a higher quiet cloud mix than in recent quarters.
We're not entirely surprised by this mix as we've seen our clients become increasingly sophisticated in adopting and managing their own quality environment for their most mission critical tightly integrated applications, we believe increasing adoption of quiet cloud reflects this dynamic going forward we can.
To believe that peg it cloud will be the faster growing component of HCV, but it's awesome to see our clients truly embracing cloud choice and interesting note is that almost half of our clients, who have ACB greater than $1 million per year.
Average, both tag of cloud and client cloud.
We view this as a validation of our cloud choice strategy in our view total ACB growth is what ultimately matters for our strategy. Let me explain why first unlike other enterprise software companies pay the peg a cloud and client cloud or in fact, the same underlying technology the only difference between.
The two offerings is who manages the solution and where those solutions are managed second we continue to view our strategy to provide customers with cloud choice.
A reminder, that the cloud choices the choice to deploy with tag a cloud or client cloud.
As a key differentiator for us often times, our clients tell us that cloud choice as a key differentiator for us in the enterprise space. These clients have needs that are complex, therefore clients require flexibility when deciding how and where to manage their enterprise solutions. Another important metric to measure our success during the cloud.
Transition is our growth in remaining performance obligation RP O. Sometimes called backlog total backlog represents clients contractual commitments that are expected to come into revenue in future periods total backlog increased by 23% from Q3 2020 to Q3 2021, increasing from eight.
<unk> hundred $38 million to just over 1 billion, it's tremendous to see total backlog increased by almost $200 million in 12 months, it's worth mentioning that maintenance backlog growth also accelerated through 2021, when a client cloud deal is booked a portion of that transaction is recognized as term.
<unk> subscription and a portion goes into maintenance backlog to be recognized in future periods. The strong growth in maintenance backlog is a direct result of our strong client cloud bookings during the last 12 months I've often advised investors not to get too hung up on the accounting.
Of ASC 606, but instead.
Think about combining term ACB and maintenance ACB as those together represent client cloud ACB turning to revenue total revenue through the first three quarters of 2021 increased 25% year over year. This increase was driven by peg a cloud revenue growth, which increased 49%.
Over the same period subscription revenue jumped by 32%, reaching $708 million through the first three quarters of 2021 over this period subscription revenue made up just under 80% of total revenue up from 75% of total revenue.
During the same period last year.
Our success in closing, new and expanded cloud and client club deals Grubhub drove our growth in term license cloud and maintenance revenue, which makes up our subscription revenue sources. There are several factors powering this subscription revenue growth, we've clearly expanded our total addressable market because of the pandemic companies are adopting modern software.
<unk> to automate manual business processes across all of our key industries financial services insurance Telecommunications health care manufacturing and the public sector. We are still in the early innings of digital transformation, which is accelerating across the globe and peg a systems is at the center of this opportunity.
Our software is clearly becoming more important post pandemic companies are embracing a hybrid workforce and that means more digital engagement between clients and their customers as well as their team members.
In conclusion, we delivered a great third quarter highlighted by solid total ACB growth and we're looking forward to closing out a record 2021 as always Q4 is a critically important sales quarter and we are laser focused on finishing the year strong and positioning our company to deliver the future.
Operator, please open the line for questions.
Thank you.
Like to ask a question. Please signal by pressing star one on your telephone keypad, if youre using a speakerphone. Please make sure that your mute function is turned off to allow you signaled to reach our equipment.
I suppose that you felt like what became once your line has been opened.
Once again Thats star one if you'd like to ask a question.
And we'll take our first question from Steve Koenig with S. N B C. Nikko. Please go ahead.
Hi, good afternoon, Thanks, Craig I'll do.
The one for.
Alan and one for Ken.
Alan could you give us an update on.
Where you are in terms of the journey you launched with Tiger Infinity I think it was two years ago now Covid has a sensitive time warped sometimes.
And where are you with multi tenancy micro services and the E. All the all the interesting stuff, you're adding to the platform and then I've got one follow up for Ken.
Yeah, Yeah, Steve it's a risk of really putting us all in a time warp it was actually over three years ago.
That we announced what we called project Phoenix, which was a very.
Very carefully crafted strategic way to build additional capabilities into infinity in a way that customers wouldn't have to wait until everything is done to take advantage of them and what I will tell you is that with our Oh six release, which has been in our customers' hands now for months and already got fiber lease we were actually able to put very.
Important capabilities in for example, most recently the ability to use what we call. The D X. A P is a digital experience API, which is now being used by numerous production customers to give them a real cross channel way.
Of having the brains and the process from the center out architecture for Martha got severe where they run their business drive their front dads and we have numerous clients who are using it and we're now actually able to use that also to generate state of the art react based desktops, which is.
Available in their clients on early adopter status at eight six and go to be broadly available in itself, it's a very very substantial.
Functional and compelling improvements from a micro services point of view, we are very substantially taken the packer system and subdivided it into key micro services and into key recurring services and concepts like multi tenancy.
Our ones that are also building built in in a variety of ways, but and I think very capable wise, we will continue to be able to offer a.
Certain clients.
The ability to run as their own as it says is set of tenants, whereas I would expect that you know looking out a year a little more you'll be able to see us offering software to a perhaps new cadre of clients that you always really the right way to enter certain sectors and segments of the market is.
As we.
Look ahead, so very pleased with our project our project Phoenix progress and you can see it in reality paying off today and arranging for us to pay off even more of them in the future.
Terrific. Thanks for that Alan and then quickly for you can I.
I think you mentioned that cloud was.
A really big part of new bookings.
I think last quarter might've been 60% it sounds like it was even higher this quarter could you give us some color on that and then just to add to that.
Any color.
How sales productivity is trending after all the hiring you've been doing and how it's been impacted by the go to market changes that Hayden is Matt that's all I have thanks very much.
Sure Steve So yeah, let me clarify one thing so.
Our overall <unk>.
<unk> choice is accelerating growth for.
For the year Peg a cloud to client cloud was still for the year about 50 50 in terms of the percentage mix between the two of them. So nothing real noticeable their client cloud has been was a stronger was stronger in Q3, and then peg a cloud just slightly whereas last quarter.
They were they were close last quarter I think peg a cloud was maybe a little stronger than they were they're they've been pretty equivalent we've seen good balance there. So just to clarify what what youll see in the financials on the on the sales productivity what's interesting is.
Because of the significant growth that we had in Q2 and Q3 the sales productivity for just for Q2 and Q3 certainly as has has strengthened Q1 I would say was.
Not as strong of a quarter.
In terms of overall ACB growth for Q2, and Q3, we certainly been moving in the right direction.
Yeah.
Alright, Thanks, a lot.
Thank you, we'll now take our next question from Jack Andrews with Needham.
Well good afternoon, and thanks for taking my question I was wondering if you could provide more details just on your partner progress. There is there a way to frame just what proportion of your opportunities are now influenced by by partners. These days.
I didn't talk to us a significant majority of our opportunity to have a very meaningful partner engagement.
Yeah, I would I would actually say, it's north of 80%, where a partner is meaningfully engaged and you know this has been a key part of our strategy and something that patent has been advocating and we're very excited about so.
Yeah, Theres a lot more opportunity here frankly, as we continue to work going forward, but we believe our strategy needs to be extremely partner friendly and that will only continue.
Jack I'll add one other qualification on to what Alan said just to be so although partners that Alan is right partners are very involved in many of our campaigns I would still say there is a lot of upside in terms of the deals the deal so to speak that partners are bringing us we're still sourcing the deals and.
Our traditional fashion and partners are starting to refer more to us, but we're still in the early stages of that if that's the other angle on that question.
Got it that's helpful. Thank you and maybe just as a quick follow up Alan you mentioned that your most successful.
When you've got senior.
Leadership engagement I was wondering is there a way to frame it.
It hasn't been like a change in either the frequency or intensity of C level conversations that you're having these days.
I I think we've been able to meaningfully increase that as we've added ourselves more senior people who are comfortable dealing at the.
<unk>, so even CEO level of those those conversations have increased I would also tell you that bizarrely in some ways. The spec has been helpful. Because you no longer have to struggle as much frankly to get schedules perfectly aligned you know people kind of are stuck.
So you just need to be able to find the right windows certainly I'm on a pretty continuous basis are involved with clients and that's also true for a lot of the other senior people.
Hayden the executives who run our different regions and the people who are responsible for both our products. The gms of our our one to one of our customer service and our intelligent automation and also of our industries are all very involved with the senior customer discussions.
Great Congratulations on the results.
Thank you.
Yeah.
Thank you, we'll hear next from Steve Enders with Keybanc.
Okay, great. Thanks for thanks for taking the questions.
And just wanted to get a better sense I think we hear a lot of the news around.
You know great relocations and people worried about a potential hiring out there.
But I guess when you go back to your customers and your clients and how are those conversations is there an increased focus from from then and around investing in their own automation initiatives given these potential potential challenges, they're seeing within their own potential employee base.
So I think that's a really good question and as we think about the next several years.
Yeah, we believe that as a code that Reits are software write software and I think organizations, who wanted to have a lot of control over the destiny. So they don't just want to.
Dumped their systems in the hands of some off the shelf thing so they they want that level of control, but they realize it's increasingly hard in this world where youre.
Frankly, the technology is complicated security is an increasingly large issue and so the market places were demanding agility. Yeah. We think that are pretty unique ability to do this low code implementation work with you know very sophisticated TARP.
Customers, who have multiple regions multiple products multiple.
Multiple types of customers that we work with we think that that actually strategically plays really well to our low code strategy, but low code for sophisticated organizations and for organizations with complexity, which we can help them you know Russia. So.
They're really interested a lot of them are much more open minded about doing it somewhere differently because they realize how hard it is to build the team and keep it around so they need frankly, new ways of doing it I think that's going to be increasingly important over the next 24 36 months.
Okay perfect.
It's great to hear and then Ken maybe just a just a housekeeping question good to see ACD growth come in.
22% again, just wondering what the constant currency growth was there if there's any FX impact in the quarter here.
Yeah constant currency was around 21 seat. So there was a there wasn't as much of a currency.
Tailwind in Q3, it's kind of a dollar starting to kind of get back to where it was towards the end of the year. So we actually had in constant currency growth, we had a pretty reasonable acceleration in Q3.
Okay perfect that's great to hear thanks for taking my questions.
Sure.
Thank you we'll hear next from pendulum borrow with J P. Morgan.
Oh, Great Hey, guys. Thanks for taking my question.
Canada, the mix shift to client cloud versus peg a cloud I just wanted to double click on that.
Is that impacted by more regulatory industry is it this quarter, who wants to just manage their own infrastructure or any particular use cases that you're seeing that's kind of informing that.
This can lead to take in house versus using private cloud and then on the other side I mean, I think you said cloud because cloud growth.
It picked back up.
Are you, suggesting that we are kind of hitting a trough on the mega cloud growth.
At this point.
Can I jump interest yes.
Sure.
I think it's.
I think it's really important to understand how we're talking about cloud you know Ken mentioned, it and I'll just try to be a little.
More transparent.
At the end of the day, that's just the start of the day, what we're interested in is cloud solutions. We're all in on cloud solutions, whether that cloud is operated by a customer because they want to put it in effect woven in to their full backbone and the other 40.
So if they routinely hookers into or whether they choose to have us be oh.
You're running on the peg a cloud.
World, where we're operating yet, but those integrations need to go across all of them just like it would for anybody they need to go across sort of standard industry standard rest or other types of interfaces. That's really an architectural choice, they're often reflects how the customer is.
Thinking about it the state because the great news is the customers are thinking of us as an integral part of their technology architecture. The technology state. So we do not draw a distinction in.
Are you know and how we compensate our salespeople and how we.
Think about it and judge ourselves internally about whether a dollar comes in from peg or cloud or whether it is a dollar that comes in from client cloud. Unfortunately, the accountants account for them differently, which I you know.
I want to offer my personal my personal opinion actually is that that's really suboptimal. So you have to look at it from an accounting point of view, but from our point of view. It's the same technology, it's really about what makes the most sense for this key strategic customer. So I just want to be clear because a lot of other companies and we're not one of them.
Hum like completely different product lines from their cloud version versus there.
They're their clients version.
We don't so think of it all is being about a C V.
And you'll at least be looking at it more closely to how we think about cloud HCV, which we think about it as more homogenous, even if the accounting ends up being at least.
Short term only but in the short term the Chinese little weird, but I think Ken works really hard to try to make that transparent does that makes sense. Because you know we do get this question because other companies arent likes us.
No, yes that does.
It certainly makes sense.
One quick follow up.
So the pendulum can I ask can I answer the back part of it can I just take the back part of your question now so everything that Alan just said so if you think about it.
Would be more likely to buy client cloud well use cases do play into it but if you have larger organizations and using peg is centrally.
Inside their tightly integrated mission critical environments some of that they want to manage that themselves right that would be client cloud what what I said in my script, which actually is the second part of your question that you mentioned, which is.
It's not that it don't think about an acceleration or deceleration what I. What I had mentioned was the peg a cloud will still be the fastest growing from a percentage standpoint, because even if we end up with this scenario, where it's 50 50, 50% client cloud, 50% pegged o'clock peg a cloud will still be an accelerated grower for us.
Some period of time in terms of the percentage.
Understood understood. Thanks for the clarification.
Okay, and just one more for you in terms of the cash flow side I think.
It seems like Oh, well, we're just just help us understand the timeframe on the normalization aspect of cash flow as we end this year and next year.
So think about operating cash flow connecting to what we call non-GAAP income right. So just think about it that way were non-GAAP income is very consistent with operating cash flow. The actual cash balance of course is impacted by other things like stock buybacks.
Et cetera, which we actually have a decent amount of stock buybacks that we do through the course of the year. So just think about non-GAAP EPS or non-GAAP income, which interestingly enough is a penny as kind of a million dollars. If you kind of do the math quickly are simply so that's kind of the way to think about non-GAAP EPS is a <unk>.
Very close proxy to free cash flow to opt for that is just kind of a simple way to think about it.
Got it I get that that's why my question was more around you.
The normalization of cash flow.
Sensus is modeling a big uptick in Q4 and next year I think you were a little short on the cash flows or side. This quarter. So I'm just trying to think is that normalization timeframe pushed out.
Or are we still.
No. We're still we're still under the same timeframe, what we had is because depending on the way the structure of the deal and when the billings come in sometimes you do have some things shift between the quarters, but Q4 is typically Q4 and Q1 are typically our stronger billing collection quarters, just as a as a general rule.
Because of the amount of activity that happens and people are not just new deals, but also renewals that happen so that tends to be that tends to be the.
The more kind of seasonally adjusted period.
Understood. Thank you so much.
Yes sure.
Thank you, we'll now take our next question from Rishi Jill area with RBC.
Hey, Thanks, it's actually Philip Rigby on for Rishi, Thanks for taking the question.
The deceleration in cloud revenue is that really all just the mix too.
Just trying to think through the disconnect between the deceleration cloud revenue and the acceleration total ACB.
Yeah any color there would be really helpful.
It is just a mix issue. So so if you are so so.
Depending on the mix.
I'll I'll I'll I'll just I'll answer your question on ACB cause HCV is a little bit more connected revenue has some kind of a little bit of weirdness around 606, but grey CV.
If you actually had total HCV accelerating but the mix shifts in ACD naturally you'll have one accelerate and one decelerate you know in terms of the speed. So you're absolutely right. There just there that we look at it as total HCV at the end of the day.
Although although we see peg a cloud being a critical part of our growth at the end of the day total ACB growth is really what matters and we need that number to be accelerating and growing.
Got it that makes a lot of sense and then any changes to what you're seeing in the new logo environment.
Okay.
Uh huh.
Yeah, Yeah sure Yeah, we are continuing to to get new logos and we love. It of course, when we get new customers. We're also getting in I don't know if it's counted in your mind as a logo or not but we're seeing a lot of what I would describe new businesses or for example.
The new parts of the Australian government in parts of the German government and new agencies in the U S. Government that are coming on board based on our successes. There you can affect each one tends to have its own logo, but they're really all part of a of a theme of continuing to do good work for us.
Some of these very very large institutions and organizations and in being able to continue to grow and frankly I think that's a very reliable way for us to really build our footprint and build the extremely extremely high retention.
So we have with our clients.
Got it thanks, so much.
Thank you, we'll now take our next question from Fred Meyer with Macquarie.
Hi, Thank you very much so I wanted to ask firstly.
<unk> been progressing with the new go to market update vision and the organizational changes that Hayden laid out at your analyst day.
Kind of pleased with the progress and where that standing or or do you see areas, where you think there's more work that can be done.
So I'm I'm very impressed by the talent that we've found and been able to attract.
Under his leadership in the last six months and nine months I don't want to offend anybody, particularly get off the official timeframe.
And you can actually see what's coming on board if you go onto linked in.
And take a look you'll see very very impressive people with terrific background backgrounds and experience who are joining us from <unk>.
Competitors and there's a lot of appetite from people to take advantage of I think what's broadly perceived as a much better technology, which they can bring their selling skills and selling experience too. So I'm extremely pleased by that having said that you know the team is all really know.
And we're still in the process of pulling together et cetera.
I think a really important event for us that we're all looking forward to is the beginning of January our sales kick off what I believe will be able to take this team, which is my point of view largely assembled and really be able to launch them as a as a unit that we have been developing so I'm really excited as we think about going into next year.
<unk>, what we will be able to what we'll be able to accomplish but if you just take a look at the people. This is public domain because you can find the AUM linked to its a very impressive collection of talent.
Thank you for that Alan I guess out of you on Linkedin and I'll start adding more people. So.
It will be felt a lot of talent progression there [laughter].
So Ken I'm not.
You go to the company page the peg a page in his insights as a tab. This is insight it actuarial list for you Oh recent senior hires and.
It's it's.
Obviously it sounds like.
Absolutely and we've been tracking that part so Ken.
Again, not to ignore you bet Alan I have another question that I think might be more more in your direction here kind of architectural we've been hearing more about the importance of event driven architectures, you know not just for building scalable infrastructure in an enterprise environment, but.
Even for workflow systems. So I'd just like to ask how would you consider a peg us capabilities to take advantage of more like event streaming technologies are essentially event driven automation and workflows.
I I think what state of the art. So we've built in as part of project Phoenix one of the things that we did early on was make it. So our system was a minimal amenable to events and made it completely natural that events are a first class citizen.
We plugged into cough got numerous customers consuming events and applying a combination of real time, Decisioning rules process, AI and our workflows, which of course are our core so that plays enormously strongly and frankly.
A lot of stuff that's out there isn't very good I'm really proud of what our team has been able to build in that area as well.
Great. Thank you.
Thank you, we'll hear next from Mark Schappell with capital.
Hi, Thank you for taking my question and one question for you historically M&A has played.
Somewhat of a modest role at the company and I was wondering with the business model.
Transition winding down whether you see M&A, playing a larger role.
Well you know, we keep an open mind the the.
The challenge as we've discussed in the past is.
When we go to market and this is gonna be true I believe going forward a critical element that we tell our clients is that we're not a franklin stack.
We have bought things, but where we have like we recently brought in the real time speech and text analytics.
US a small technology company, we buckled curious.
Absolutely brilliant and being released to early adopters actually this quarter that sort of thing we believe needs to be woven into our consolidated architecture, not just something that looks good on the Powerpoint that's something that really is reflective of good what I would call technology. So.
That does.
It means that we're not expecting to be a company that has like a lot of our euro frankly competitors that have been financially quite successful you know, they're basically buying revenue or buying revenue streams, but at the end of the day, they're customers get what we sometimes refer to as our Franklin stuck.
We're so central to the architectures of our clients I think that's going to be increasing that we would not want to lose that that technical integrity. So that doesn't mean, we have to build everything ourselves really open minded about being able to find.
It's technology.
Technology and talent that we can that we can bring in so as we complete the the evolution I would say in the next 12 to 24 months, we could become more amenable to M&A, but we're always looking so if you know something that we should look at it we're glad to put glad to talk to them.
Great. Thanks, and then Ken a question for you I know a few years ago. The company embraced the rule of 40 as a guiding principle too to balance ACB growth in cash flow margins, what is the right way that.
Investors should be thinking about HCV growth versus profitability over time here.
So yeah. So go I'll point back I think this is where your question is kind of going Mark.
I think if you if you had to.
If we had to look at.
A mix of rule 40 that would be more in line with the way that the investments that we've made in the business are trending we've kind of said it would be kind of more in that 25% ACB growth, 15% margin now naturally we're not through the cloud through the subscription transition completely and we're not at <unk>.
5% ACB growth right now where we are.
22, now, but I think if you kind of think about that I think that that's no.
A way to think about the investments that we're making in the business and where you might see that you know if we were able to achieve rule of 40, how it might look we're not going to be.
Although I would wish we were or were not likely to be a 40 10 excuse me a 40 zero kind of mix, 40% growth zero percent.
Yes, when we certainly don't you know we're not investing in the business in a way to think about ACB growth decelerating. So that's kind of the way I think about it.
Okay, great. Thanks.
Sure.
Thank you, we'll now take our next question from Ben <unk> Sirona Ragavan.
Hi, Thanks for taking my question just a quick housekeeping question first on did you disclose the breakdown in that cloud <unk> this quarter.
Yeah, yes, the break down between up between between PE Peg, a cloud and client cloud.
I mean, unless there's any sorry, the breakdown for our client that between that time and maintenance.
Yes, there is.
There is a an AC the table if you want to get the specifics theres, an ACB table that is.
It's actually going to be in our MDA MD&A I will I will verify where that is but.
The the ACB, we're trying to we're trying to take a view of of client cloud being both together in terms of AC D. Because the two numbers as you can imagine become confusing if you look at them individually, so, but I I will I'll get back to you.
Where that is in the MD&A.
Okay, great. Thank you and then I just wanted to touch on the selling medicine for a public cloud.
How do you incentivize our sales force to sell it or client cloud and new.
Partners play a role in selling at Tiger climate as well.
Yup partners can be a source, we do have partners that actually bring us.
You know Patrick cloud deals.
We generally though not always but almost always the client ends up wanting to sign the contract with us even if it's brought by a partner just because they like having that sort of relationship with their cloud provider, but we have done some indirect as well on on Tiger on peg or cloud.
We we do not specifically.
Extra incent, one type of cloud versus another because we think that choice should be based on what the client needs and I.
I do think we have to.
Get people oriented around the fact that you know client cloud as is no less stickies integra cloud arguably more sticky than clinton than the bigger clubs because typically people who are using client cloud are doing it because it's really deeply woven into their infrastructure.
So many interfaces they want to run it with the rest of their stuff.
So yep.
I think that we are disadvantaged because lots of other software companies end up having very different software product lines kind of your new stuff in their old stuff and that's how they talk about cloud because that's just not us.
The Tiger cloud versus client for US is sometimes a decision that gets made very late in the selling cycle based on strategic.
Reasons and I.
I don't think it would be appropriate frankly to.
The extra and sent one versus the other.
Got it that's helpful and I guess the last question for me can you just talk about I guess quantitatively some of the benefits of project Fenix.
Specifically on kind of your longer term gross margin profile.
Yeah, I can I can talk to that a little bit. So project Phoenix has already brought us on to the.
Kubernetes platform for new customers you were running in production with what we sometimes internally called cloud Kay.
As you know.
Our broker clients.
Clients, our clients have been able to run on kubernetes for a while we're now running Petro cloud on kubernetes that obviously gives us some additional savings and.
Other elements of project Phoenix will give us for certain use cases, the ability to do a what.
What you might describe as a co mingled Michael multi tenancy.
Kubernetes gives you a form of multi tenancy, but theres not co mingled between organizations, we will have the ability to do co mingled multi tenancy as this continues to to.
To develop over the next I'd say a year or so.
Yeah. Once again, we were thinking about how we commercialize that with our customers.
Because we also like a lot of of what the sort of at least client specific separations.
Can provide it really provides a very powerful.
Options as it relates to things like encryption and other elements of how you do these things so Phoenix and this whole movement are definitely contributing to you know I think you're seeing margin improvements.
As we move along and they're not done we're continuing to build on that.
So just adding one other piece.
Adding one other piece of information to that so if you think about the best in class kind of multi currency gross margins versus the best in class kind of single tenancy gross margin.
Things that we're doing is trying to kind of.
To have our margins kind of.
Move in the direction of multi tenancy by getting some of the efficiency by still having the flexibility of that.
Some of the benefits of you know of.
Some of the single tenant benefit. So that's kind of just think about it is we're trying to kind of gravitate higher margin by almost stimulating multi tenancy with some of the some of the things Alan mentioned like Kubernetes for example.
Got it thank you.
Thank you, we'll now take our next question from Pat Walraven with JMP Securities.
Hey, guys, it's a gallium rancic on for Pat. Thank you for taking the questions. A few quick ones for Ken here, you know first I wanted to talk about the 2023 update you laid out during the investor briefing in June.
Hi fan about those targets and then maybe how should we think about the trajectory and shape of getting to those targets and then second can you walk us through how you're thinking about the key levers to drive continued growth and possible acceleration in total HCV. Thank you.
Sure.
So.
The targets that we talked about in the Investor day, probably the only one that is.
Yes, I still feel I still feel good about all of them, but there's the one that is kind of the under.
I've known a little bit.
Is what's the mix of client cloud versus peg, a cloud and as we talked about earlier from a business standpoint.
We quite frankly really don't care that much because they are both valuable we just really need to hit the growth number but the mix of how their book.
Book, So to speak the way the client buys that.
That solution does impact some of the detailed lines that we talked about like peg a cloud ACB growth peg a cloud revenue client cloud revenue, but it doesn't impact subscription total subscription and total ACB. So I would say substantively nothing is we don't feel really any different than what we talked about back in the <unk>.
Spring, but it is the the way the ACD and the revenue comes in is it's certainly Ah Yeah. We don't have a crystal ball on knowing whether it's gonna be client cloud versus peg at clubs, but that again at the end of the day, we just need total ACB growth continue to accelerate.
I'm, sorry remind me on the second part of your question, Yeah, just going off of that you know totally see ACB growth accelerating how do you think about the key levers there in order to drive that.
ACB growth acceleration I think is is look we have we have plenty of addressable market I don't think anybody would dispute that we have a best in class solution set and I don't think anybody would dispute that we have marquee clients I'm not sure anybody would dispute that.
The focus for us is to leverage those relationships that we have because we haven't even scratched the surface on the penetration that we can have with.
You know our largest than even some of our emerging clients. So I think there's just a tremendous opportunity to accelerate ACB growth with you know with the few the few hundred up the largest clients that we've built really good relationships both in peg a cloud and client cloud as I mentioned I think that that is going to be the key lever.
For us to accelerate ACB growth, it's it's to deepen those relationships expanding use cases like like the like those clients want to do with with companies like Paypal.
That's super helpful. Thank you so much.
Sure.
Thank you and that does conclude today's question and answer session I'd like to turn the conference back over to Mr. Tetlow for any additional or closing remarks.
Thank you and signs you draw all of our investors and analysts are we are working hard on your behalf I just want you all to know that.
Please stay healthy and I look forward to being able to see you all in person again at some point hopefully in the near future so be well everybody talk to you again soon.
Thank you and that does conclude today's conference. We do thank you all for your participation you may now disconnect.
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