Q2 2022 Pegasystems Inc Earnings Call

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Good day and welcome to the Baker earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Mr. Kenneth Stillwell CFO . Please go ahead Sir.

Thank you.

Good evening, ladies and gentlemen, and welcome to Peg a systems Q2, 2022 earnings call before we begin I'd like to read our safe Harbor statement certain statements contained in this presentation may be construed as forward looking statements as defined in private Securities Litigation Reform Act of 1095, the words expects anticipates.

<unk> intends plans believes will should estimates may targets strategies for JAKKS forecast guidance likely.

And usually or variations of such words and other similar expressions identify forward looking statements, which speak only as of the date. The statement was made and are based on current expectations and assumptions because such statements deal with future events. They are subject to various risks and uncertainties actual results for fiscal year 2022, and beyond could differ materially.

From the Companys current expectations factors that could cause the company's results to differ materially from those expressed in forward looking statements are contained in the company's press release announcing its Q2 2022 earnings in the company's filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31 2002.

<unk>, one 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 them.

These forward looking statements, whether as a result of new information future events or otherwise.

With that I'll turn the call over to Alan traveler, founder and CEO of <unk>.

Systems.

Thank you Ken and thank you to everyone who has joined today's call.

This year has turned out to be an extremely volatile business environment.

Clients face challenges related to the pandemic labor shortages the war in Europe .

Everything is causing global disruptions.

Well as of course, rising inflation high oil prices supply chain challenges economic insecurity, most recently currency exchange headwinds.

All of these trends actually makes the need for our software even more pronounced.

In fact, we believe Pac is uniquely suited to help enterprises manage through such uncertainty.

However, it does impact the market and with the threat of recession looming.

We've pivoted to lean more heavily on our build for change messenger.

We've been updating our marketing and sales positioning, which you can see on echo dot com.

You have an environment, where efficiency and productivity are powerful.

Low code software platform.

High powered Decisioning and workflow automation.

Demanding enterprises work smart unifying experiences and adapt in store so they can attack cohort snacks.

Yes.

We're taking the volatility at the macro economic environment seriously.

We're making cost manage revenue as much of a priority for us as it is for our clients.

With us having a focus on operational efficiency.

Limiting increases to our cost structure.

We've taken steps to make sure we're staying close to our clients.

We're moving some of the layers that have crept in over the last few years.

By ensuring our talent is directly connected to clients, we believe will both improve outcomes.

Or long term relationships.

At the same time, we continue to focus on innovation to ensure we are able to provide the most advanced technology platform for our clients' needs today and into tomorrow.

Ted will talk about some of the financial impacts on our business in a few moments.

Now I'll turn to some highlights since we last spoke we've continued to enhance our software drive strategic partnerships.

Partnerships to make it easier for clients to be productive and address their customers' needs with our market leading infinity software.

For example, we launched an updated compounded that makes it easy to embed <unk> into salesforce environments to further automate customer service workflow.

Called tender process extender for Salesforce, it's now available on the Salesforce Appexchange. It allows organizations, an easy way to drag and drop contributing workflow automation and AI powered decisioning directly into existing Salesforce lightning deployments.

This makes the whole experience operate within users familiar salesforce desktop EBIT is hagar drives the business logic and workflows.

And we're also very excited about the low code App a factory concept, where we're pleased to see our clients adopt our government approach to low code development.

Goal is to have.

Yes, the benefits Youre collaboration capabilities all of our development platform.

While at the same time, ensuring they are building apps that can evolve scale and deliver value well into the future.

It's very important that there be governance capabilities because over the years people have often tried to draw.

Little systems to do or improvement here, an improvement there and frankly.

Large sophisticated organizations realize that that leaves suggests the next generation of technical debt and they find themselves trying to rip out all the Lotus notes apps or other sharepoint apps by us having a government approach we can share best practices.

And make sure that the right capabilities are baked into every low code project and have them all hang together with this purger factory concept.

<unk> business and IQ together and support.

Organization wide deployments.

This is coupled with our hedge.

Process fabric.

That makes distributor workflow applications.

Together.

Create a single view of work that might be done for specific purpose or there might be related to a specific customer relationship.

The case study that Ford Motor Company presented at our recent Peg a world is a great example of this approach.

David Great best practices to deploy the second half factory, which enables citizens developers developers.

Great applications, while following governance guidelines with support from a coach.

<unk> created a center of excellence a shared platform teams have joined forces to deploy the factory apps.

Working with <unk> to develop best practices and alleviate IC backlog.

Now another exciting development is about <unk>.

Extending our cloud choice offering by expanding our multi faceted partnership with Google cloud.

To help our joint customers accelerate their digital transformation.

And we've also made the Google cloud environment available on Peg a cloud.

As a fully managed service offering.

We acquired ever flow and innovative process mining software company, whose intuitive software will enable pay required to uncover.

Given the process inefficiencies these often bogged down organizations and making the visible is key to improvement combined with <unk> market, leading AI powered decisioning, a workflow automation capabilities. This will evolve process mining.

Our traditional static modeling to deliver real time process optimization.

What we sometimes referred to as true hyper automation.

On an enterprise scale that will improve operational efficiency and customer experiences.

And finally, we continue to really received industry recognition from leading analyst firms.

You might may Forrester named.

A leader in the Forrester wave for real time interaction management.

This is how you use AI to make decisions to provide the next best action.

The customers in one of our clients.

Out of 14, the most significant players in this broad category.

We received top scores in the current offering and strategy categories and the highest score possible in 25 of 28 criteria.

<unk> the highest possible score in the market presence categories.

Forrester said quote echo sets the gold standard for sophisticated enterprise deployments.

It's value based approach and innovation track record earned peg a near perfect marks across our strategy criteria.

I'm also really pleased that just today Forrester released its core CRM solutions report.

Which <unk> received the top score in the current offering category as well as the highest score possible and 16 of 35 criteria.

Out of four companies that were considered leaders Tiger received top scores in categories, including CRM user productivity assistance guidance next best action digital sales customer success actionable insights at all.

Omni channel engagement.

The report States Packer system offers exceptional automation of process management within the CRM.

<unk> vision is one of them economist CRM, where automation off those repetitive work.

AI assist users increasing their efficiency.

And the customer experience.

<unk> uses real time customer context journey data to anticipate customer needs and proactively even preemptively engage.

Reference clients stated that <unk> provided a quote one shop stock for our frontline team embraced the products' configure ability.

I'm really pleased to hear that sort of assessment.

I'm also very proud of the work our team continues to do to ensure a CAGR is creating and maintaining a diverse and equitable culture.

Most recently, we were recognized as a best place to work for disability inclusion.

Scoring the highest possible score of 100 on the disability equality index, which is recognized as one of the most robust disability inclusion of assessment tools very proud of this recognition for our cargo supports its people and communities by providing a safe and inclusive work environment.

Congratulations to the many of the paragraph and around the world responsible for this recognition.

You may have noticed that we put out a second press release.

And I'll just talk for a moment about it.

We've noted interest in our technologies over the years from organizations inter.

Interested in leveraging our workflow capabilities.

Launched their own workflow based applications into the market.

And to address this need.

Today, we announced a new protocol watch back.

<unk> cloud based low code application development platform.

Power anywhere to efficiently build and launch VW software.

The software as a service application for commercialization.

This is a long term strategy that will be run as a separate commercialization unit given kind of new routes to market through an expanded third party ecosystem.

Without requires the involvement of our sales force.

We'll be working with a select group of early adopters for the remainder of 2022 as we prepare to roll out more generally in 2023.

Once the application providers of revenue could bring new products to market will work together through revenue sharing model we expect.

Now I'm going to circle back to peg oil for a moment I hope we were able to join cargo hold in May if you've missed it live I encourage you to watch the REIT players on Petrodelta com and there are terrific sessions available.

Especially the expiring client stories old in their own words through.

Through our virtual Paygo world events, we have been successful over the last several years. Nonetheless, I'm very excited to bring our live event in Las Vegas.

Back in play next year as we get back to a more normal cadence in person meetings with clients and prospects.

There's been a lot of change on that front.

<unk> hundred Davos. This past may person was able to see many of our most senior client contacts in person.

You mentioned, the new briefing center being built on our last call.

Now some of you saw that on our Investor deck. It's now fully open and has been booked with client and prospect meetings and has gotten a great reception and we're excited about the customers coming to visit us.

So in summary.

We're operating in an environment of significant volatility.

One that our software is uniquely suited to address.

But one that obviously with lots of pressure on lots of businesses.

We continue to structure, our business and evolve our software to both address the needs of our clients to maximize our ability to respond quickly to changes in the Walker.

Our transition to a subscription business and our loyal and stable client base are meaningful contributors to our ability to remain successful in today's business climate.

We continue to be very excited about the significant opportunity in front of us and confident.

Our team to deliver on that opportunity.

To provide more color on the financial results, let me turn it over to Ken Stillwell.

Thanks Alan to.

To begin a few reflections on our first half results and our outlook for the rest of the year.

Hey, good cloud mix and the strengthening of the U S. Dollar negatively impacted our reported revenue and earnings per share as a result, I'll speak a little more about currency this call than usual as the U S. Dollar gets stronger our recurring annual contract value ACB.

And our backlog balance.

Denominated in other currencies decreases in value when translated into U S dollars and revenue from other countries to become smaller as well.

A very big highlight for the quarter is peg a cloud <unk> cloud continues to be extremely popular as a result, the peg a cloud mix was much higher than planned impacting our reported revenue and our earnings per share peg a cloud mix in the first half of 2022 was the highest its ever been.

For the first half of the year Peg a cloud with 70% of new client commitments were.

Focusing on operating leverage with an even greater amount of discipline to ensure our rule of 40 target is achieved in 2024 as you review our financial results, you'll see that we've clearly been making progress on operating leverage primarily by slowing overall head count growth in 2022.

No.

Although our constant currency ACB growth was 19% in Q2, we expect the economic headwinds and crosswinds to negatively impact ACB growth for the full year.

During our subscription transition the most important metric to measure our success continues to be growth in ACB.

<unk> grew 19% in constant currency at.

At 14% as reported year over year to $1 billion and $28 million the strength of the U S dollar significantly impacted year over year ACB growth as reported from Q2 2021 to Q2 2022, the currency impact of that year over year.

Strengthening of the dollar on our ECB was approximately $40 million with the majority of that impact hitting in Q2 of 2022.

In fact, the dollar strengthened so much that our recurring ACB balance decreased from two <unk> Q1, 2022 to 2020, Q2, 2022, and as reported basis solely due to the strengthening U S. Dollar it's important when measuring our business to look at a longer time horizon.

And then one quarter.

We said we focus on total ACB growth for a full year and we're really early in the 2022 cycle that said to date. Our team has demonstrated over our history that it can produce ACB growth during difficult and uncertain times.

Important to point out that we do see economic uncertainty, which could reduce incremental ACB growth in 2022, and we're managing the business accordingly.

More on that later.

Moving to backlog, we ended the quarter with $1 billion $126 million of backlog the strength of the U S. Dollar was approximately 57 million dollar impact on our total backlog balanced when looking at year over year growth.

Turning to revenue revenue for the first half of 2020 to reach $651 million total subscription revenue reached $521 million subscription revenue is about 80% of our total revenue for the first half of 2022 heck of cloud revenue.

As our fastest grower and reach just under $184 million for the first half of 2022.

Total revenue growth in the first half of 'twenty two does face a tough compare as many of you are aware you may recall that we recognized over $30 million of revenue from one large deal in the first half of 2021 and the peg a cloud mix was 15 percentage points lower.

Therefore year over year revenue comparisons are not as meaningful for the first half of 2022 because of those two items.

We are currently in the final phase of our subscription transition, which we expect to complete in 2023 with our financial results normalizing for the full year of 2024, our Q2 results like our Q1 results showed additional signs of improving operating leverage and management of cost.

Total gross margin was 72% for the first half of 2022 as I mentioned, a few minutes ago, we plan to focus on cost management, ensuring that we reached our rule of 40 target in 2024.

Like all enterprise software companies, we're navigating through a high inflation environment, a global pandemic or in Europe , and growing concerns of a global recession.

In the face of these challenges we've continued to grow ACB at a respectable pace to date.

However, given the significant and unpredictable macroeconomic factors that I just outlined we're going to provide a little more clarity on our view for the second half of 2022, we believe ACB growth for the full year will slow to around 16% in constant currency about 5% less.

Than we had planned for the full year, we want to make it clear this adjustment is to our 2022 outlook only.

Moving to our revenue outlook, we see three key factors negatively impacting our revenue growth for the full year of 2022 first as we described at our Investor session. In June our plan assumed peg a cloud would represent a little more than half of our new client commitments in 2022, However, pegged.

Cloud is represented 70% of new client commitments in the first half of 2000 2022, I know many of you will view this mix shift positively, but as we've said, 20% or so increase in peg a cloud cause lower 2022 revenue by $80 million.

A higher than expected peg a cloud mix would also cause ACB growth and revenue growth to diverge in 2022 notes because peg a cloud revenue is recognized ratably typically over the contract period, which.

[noise] approximates three years.

Second the strength of the U S. Dollar is expected to negatively impact our full year revenues revenue results and third we anticipate that the increasing economic uncertainty may license sales cycles and pushed some deals into 2023, if ACB growth slows as a result of this dynamic to the 16% as I mentioned in class.

In currency in 2022 that would have an impact on total revenue as well.

In total we believe these three factors taken together could negatively impact full year revenue by approximately $120 million to $130 million.

And we do not expect a proportionate impact on earnings per share due to the cost saving initiatives that I spoke about when we expect to mitigate the revenue we had passed up by over $100 million of that revenue shortfall by achieving significant cost savings naturally there are a lot of moving parts in what I just said.

Which make it hard to forecast precisely.

So what are we doing to respond through all this.

We will manage the business in a way to address the potential ACB growth slow down and make up for more than half of the impact of Ortega cloud mix shift and that's I think that's a pretty impressive statement that we're making that we actually are going to end up being more efficient with the business.

On the revenue and the ACB and we will achieve let me explain what I mean, we don't need to grow the size of the organization at the pace that we have in the last few years. We've added some pretty significant go to market capacity in 2000, 22021, and 2022 and we're going to focus the rest of 2022.

On execution. We think this is the right time for us to reap the benefits of the significant investments we've made in hiring over the last few years.

To remind everyone. We're targeting the rule of 40 in 2024, and we will attempt to achieve the highest growth rate possible and getting the rule of 40, our business is resilient and I remain confident in our ability to deliver on our long term strategy to be the leader in digital transformation, Let me remind you some of the <unk>.

Reasons that I feel that way first about 80% of our revenue is now subscription thanks to our successful execution of the ongoing and near completion of the subscription transition. Our recurring revenue was supported by very high net retention rates.

If you look back to 2000 <unk> grown through every recession.

Before including some.

Some tough ones and we've seen what clients stick with and what they invest in.

Third we serve the world's largest clients in core vertical such as financial services insurance health care telecommunications and government in challenging economic times, Unfortunately, small and medium sized medium sized businesses are often the ones that struggle. The most in the near term when compared to larger enterprises that have strong financial profiles to withstand.

Short term shocks last our digital transformation solutions feature unique capabilities and provide benefits that are critical to our clients going through transformation.

Our core value proposition has proven important to our clients and has helped sky got to grow through uncertain economic times in summary, we built a resilient business and we will continue to provide best in class solutions to the world's largest clients even during tougher times, despite the uncertain global economic.

Ohmic outlook.

It's an exciting time in <unk> history.

Wrapping up our subscription transition that we started in late 2017, and we're ready in our next phase of growth as a company as we wrap up the transition in the next year or so we're confident that we will exit the transition is a much stronger business with more predictable revenue and back to cash flow levels that are even in excess of <unk>.

What we achieved before the transition and as a rule of 40 company will be capable of generating free cash flow.

Each and every year because of the dependency in the reliability of the relationships that we have with our clients winning companies invest time and resources into re imagining their business models to unlock higher growth and greater profitability the.

The best companies successfully execute to make that imagination reality now I'm really proud of the work our team and our over 6000 employees have done over the last five years transport Peg us business and unlock our company's potential.

Thank you to everyone at Pentagon.

As always I'll be on the road and excited to see everyone face to face at a number of conferences over the next 45 days herself I Hope you get a chance to see many of you during the upcoming events.

And.

One one additional point very excited to reiterate what Alan said, which is can't wait to see everyone had pegged a worldwide next year, it's been too long and with that operator. Please open the call for questions.

Thank you, ladies and gentlemen, if you would like to ask a question. Please state your by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure you'll be as much as can also like I said notes, which all the equipment, we'll pause for just a moment to allow everyone an opportunity to seek no full question.

Well now take our first question from Rishi <unk> from RBC. Your line is open. Please go ahead.

Oh wonderful Hey, Alan again, thanks, so much for taking my questions.

Maybe a few here to clarify and then and you know appreciate all the details, especially around <unk>.

Facts and what Youre seeing maybe you don't want to start by talking about macro and in a two parter here you know number one we would love to know what what are you assuming Ken when you were talking about getting to 16% ACB growth.

Exiting the year you know are you assuming macro stable with what you're seeing right. Now are you assuming some level of deterioration further from from what things you're seeing and then maybe the second part of that.

There's obviously a macro impact was already.

I think so.

Because the currency from Q1 to Q4 on the HCV side.

Some of your large cap peers that have already kind of could you sort of intact without them accurately.

Could you repeat your last slide.

10 seconds.

Broke up a little bit reshaped.

Oh, I I apologize, let me, let me get off that okay.

Yeah I was just maybe just starting with the macro side right. What do you see what what are you assuming in terms of further macro deterioration or is it can be stable in the second part you know given the the diesel we've seen on the ACB side in constant currency as a result of macro that you've seen so far can you maybe.

Be a little bit more specific about how it's manifesting itself.

Be that in longer sales cycles smaller ACB lands pushed out deals anything like that and they've got a I've got a follow up.

Sure I'll take the first part of that and and then Alan you can add some color to that so so we are not assuming that something that the market will stay exactly as we've seen in the first half we are assuming that that sales cycles will elongate from where they are that the buying cycles.

B tire we are assuming that as you get closer to the end of the year that companies will be responding to cost management initiatives, some of which will help us because we can be a solution some of which may put pressure on just general buying patterns. So I wouldn't suggest that we think everything is going to stay as it is now we do see that there is some further decline.

And the economic landscape between now and the end of the year. We're also not seeing this as a elongated process, but we don't you know we don't know what to expect through the end of the year as people start budgeting for next year. So that's why that's why we thought about.

Providing a little bit more clarity around what we think is at risk, which is our ACB growth for the full year ACB growth dropping from one last point about ACB growth declining from 21% to 16% just to kind of give you directionally what that means it kind of means that our AC or incremental ECB growth year over year.

In dollars would be somewhat flat year over year, meaning the growth in incremental <unk> dollars.

Would be relatively consistent with what we grew in 2021 still growth, but as you can imagine growth on a bigger number as well as a slightly smaller percentage. So that's kind of how we see it manifesting itself through the year our thoughts on some of the discussions that he mentioned about customer buying yeah. So I think that's right there is some.

Elongation of sales cycles, but also I think a lot of this the impact I believe is and will continue to be scrapped.

She never really related to the company's you were dealing with are the types of companies you're dealing with you know the.

The large sophisticated traditional buyers that for many years, where our only buyers.

Yeah, let us grow.

20% ACB growth rate I think that those are much less susceptible.

To the many pressures and a willingness to go forward the company's you'd think of as mid size smaller was and so we have an opportunity and we are recalibrating, our energies to really focus on those those deep in RA.

Really important relationships with organizations, who perished on everything that I've seen are going to be looking to themselves save money and improve their workflows continue to invest and I think that that smokers makes it easier for us.

To operate within some of the spend envelopes that Gary was talking about which we're taking very very seriously. Good frankly, when we were trying to really jump up our growth rate to some degree regardless of costs, where we're not in that business, but the effect of efficacy.

Here going forward, because Oh, you know.

Frankly, I think the market.

We'll respond exactly what we're doing we have a big jumps to influence what happens we're not just subject to what's going on in the macro.

Yeah.

Alright, great. That's really helpful and then on on the.

Business, maybe I wanted to drill specifically into cloud C. R. P. L. So we saw that decelerate from 31% growth in Q1 14.

Two and you know, even if we add back in that mix.

Six points of FX.

All the FX that still gets us from a diesel 31% to 20% maybe can you walk us through what is typically on cloud C. R. P O and maybe why we shouldnt be worried about that too much as as a leading indicator of future cloud growth slowing down and then one more follow up and I promise that's it.

Sure. So the one thing the one thing that we are seeing and we've seen it we've seen it probably for a couple of quarters, but I think it started we're starting to realize that clients really are transitioning into a more leaning more towards consumption based buying patter.

Right, which means that you know, they're looking at like kind of almost rishi like a minimum commit with variable usage as they drive additional usage and what that does lead to is it does lead to the net effect of that is a slight decline in the duration of our cloud RP O just a.

Slight not like going from say three years, then maybe to satisfy some of the optics of RP O is driven by that you can you can kind of you can kind of see that if you look over the last few quarters I've also to add to that you. We in 2020 to the first half of the year was not a big renewal year right in.

Terms of Peg a cloud contract renewals then it tends to be it tends to be towards the back end of the year in general every once in a while youll have a quarter, where you may have a few clients. So those two factors I think make the optics look a little bit confusing to your question. Some of it is just buying patterns people were guys clients or not.

Committing necessarily a three or five year contracts all the time they might be committing to a three year contract with a with a slightly lower minimum and then having consumption buying patterns above that and that results in less going into RPI always some of those contracts that if you follow me.

Got it got it and then last one just on the cloud gross margin obviously been on a nice upward trajectory for the past really two years, but this is the first time, we've seen a decline like this sequential you know anything in a meaningful way.

You too right going from 70% of that.

Little bit up 7% I guess was it was that FX or were there other factors that led to cloud gross margin declining sequentially and how should we think about that going forward. Thank you.

Yeah. That's a great question, that's because the majority of our costs for peg a cloud or in the U S. In U S dollars and so there is so you do have currency you have more currency impact on the top line than you do on the bottom line in a lot of the other aspects of our business. We have natural hedges because we have the cost in the currency where the Dod.

Are we are more we are our costs are more skewed to the U S. Because our AWS contract is in U S dollars.

Got it that's really helpful. All right. Thank you so much guys.

Yep.

We'll take our next question from Steve Cohen from NBC Nicole Your line is open. Please go ahead.

Hey, guys. Thanks for taking my questions I'll stick to one question and one follow up here.

I wanted to by the way Congrats congratulate you on the Forrester evaluated and sounds like a great validation of the technology leadership.

So first question on the financial side.

A couple of moving parts here and maybe it relates to your prior answer but on public cloud revenue.

The sequential revenue growth in cloud was very light and so I'm wondering if you can square that with the higher cloud mix and then maybe also related to that more broadly or P. O bookings were down pretty hard year on year and I'm wondering like how much of that was you know.

Surprise in terms of weakness in new client commitments relative to your internal expectations and how much of that was a lighter renewal schedule. If you could just parse that out and then just one follow up for Alan Thanks.

Yeah, Q2 was a very light renewal schedule.

And and Peg a cloud the mix of peg a cloud was impacted by currency by approximately the same as our overall revenue. So the mix of revenue the mix of revenue by geography isn't exact but but directionally close to our overall revenue in terms of the currency impact.

RP O currency impact on our P O pour a lower renewal quarter in Q2 in the first half, but also our net ACB growth in Q2 was not as strong as well so that so the combination of net and you know our ACB growth in Q2 was was not as strong as Q1, not a big renewal quarter plus currency.

That's kind of what's happening in RPM.

Okay.

Okay.

Sounds good thanks for the color I will follow up a little bit more on the call back Alan.

Got launched that so that's really interesting and I know you've been you've been working on a lot of the stuff for some time as part of the Phoenix initiative I'm wondering if you could give us some color on.

Well you know what are the kind of the milestones, but maybe technically and business wise.

Establishing a vibrant third party marketplace, you know any thoughts on monetization peg a pricing need to become more transparent are there any early alpha customers or partners. You can talk about thanks, very much and that concludes my questions.

Sure. So we have been working on a lot of these pieces for for some time as part of a Phoenix initiative.

Which obviously feeds a lot of the technology that we bring forward and bring to market.

Here.

The.

Once the concept is that we know that there are organizations that themselves want to develop IP bring it to market that have sort of a workflow flavor to them.

And to be candid the platforms that we saw out there, we're not remotely well suited to being able to do that we've thought and we've talked to a number of.

People, who are companies about that we wanted to begin having discussions on this.

And what's the best way to do that would suggest publicly say yep. We got this we're going to begin talking with early adopters, but I'll be able to answer those questions with much greater clarity and specificity.

After we are another 90 or 120 days into this.

So I'm going to pick up a little pass on that but it's not for lack of enthusiasm I think this is a very exciting place to be.

Great. Thanks, Scott.

We will now take the next question from Julien <unk> from J P. Morgan. Your line is open. Please go ahead.

Hi, This is Noah on for pendulum and thank you for taking the question can you explain what youre seeing in terms of demand from public sector customers and just any color on the rate of new engagements within public sector would be helpful. Thanks.

Yeah, I can talk to that I think that up you're a public sector has been pretty shaken by the pandemic.

And a lot of the.

Solutions that have gone into public sector, just make them work, particularly with some of the large organizations are governmental organizations. We do business with you know are widely seen to be Scotts tape and bailing wire. So there is a I think a healthy appetite in large agents.

CS to continue and even accelerate.

The workflow automation that we already do for a number of them are going forward. So I think the demand in public sector will continue to be strong having said that as we all know public sector is not a.

So that tends to buy rapidly and they tend to want to buy very much on a consumption basis. So you don't get the big multi year deals with lots of things sort of on the comp based on expert visuals. It really is a line of business.

I describe it as sort of building an engine of success. There as you go when you as you develop.

Competence with greater footprint it builds on itself.

The market opportunity. There is huge we are very much going to focus.

What I would describe as federal large states.

Sure.

It plays to our strength of that also plays to the people will be buying.

Thank you.

We will now take the next question from Lee Sweeney Wildfowl Barclays. Your line is open. Please go ahead.

I am Ken Thanks for taking my questions I just want to.

Maybe you look to the past a little bit talk about buying patterns going into you know couldn't until the period in the second quarter of 2020 I'm just wanted to get a sense of you know our thing is kind of a similar band right now versus back then and tenant at what point did you see sales cycles improve and customers, we engage more meaningfully than in <unk>.

Are you seeing any early signals of that where maybe a similar pattern might play out.

So just so I can I can start on that one so because I.

Hi.

Unfortunately, remember those days well.

I think the difference between Q2 2020 in Q2 of 2022.

Is it noticeable because of the following when we were in Q2 of 2020, we didn't know what the future looks like I think there was a question about we're just gonna be like the shutdown of world economies, We're gonna Pete remember weeks people couldn't get food and paper towels toilet paper I mean, it was it was we were <unk>.

Grambling, we didn't know how long it was going to be and and it was I think there was a lot of angst about just what was this thing we were dealing with so I think the level of uncertainty and confusion and stress was high I I remember looking at the unemployment drop of whatever I increase excuse me up you know I don't know what.

It was like you know X million people that what it does it followed claims in one week in today's environment, what I see as people more going through a typical economic reset right, they're saying, we know what's coming and we've got to manage our budgets, we need to slow hiring we need to think about projects that will help us optimize our business.

This happens you know every whatever you know five to 10 years, whatever the recession cycle happens to be I don't view it as being comparative to Q2 because of the level of just general mass confusion in the market that happened for a few months in the middle of 2020. That's my perspective I think this is much more I do feel like people know whats.

Coming they may they may not know how bad it is gonna be or how long, it's going to laugh, but we've been through recessions before so I I kinda, that's my perspective, Alan Yes, I would agree that the.

<unk> up atmosphere back then was much more of confusion.

Confusion.

Who knows what's going to be how long, it's going to be for will be able to you know.

We've got the right staff support.

And support the business at all there were a little bursts.

Oh, My God, we've got to automate something but there wasn't a Saturday two words that people said I've got to do it in 10 days or a week and by the way we delivered some pretty amazing systems and their time to support things like the paycheck.

The Paycheck Protection Act I was just talking to them.

One of our very large banking customers, who said that they will never forget what they were able to do in a week.

With our system when they were just trying to hold on there. The time now is just a lot more rational.

Alright people people expect the dimensions are gone.

Fall into just how long it was going to be tight people extremely interested.

Any other low code.

Geez is very very valuable because people are extremely interested in being able to continue to run their systems without necessarily the same frankly.

Frankly depths of engineering talent that some of those companies have been able to.

It depend on or in some cases now even afford depending on what's happening with cost. So I would describe this as a much more.

Frankly reassuring time.

Then just to go back to the point, where every every week with a new tariff.

Got it no appreciate some of the color on that and then just one follow up for me.

Can you maybe speak to you I'm, just kind of a sales execution during the quarter and how you kind of feel about that and also are you seeing any customer data or like more pricing concessions or more flexible payment terms given kind of the macro environment. Thank you.

So oh awesome.

For the second one.

First our.

Bread and butter customers are the ones the ones that we're particularly focused on going forward are not the ones who need payment concessions.

Candidly you know people always like to ask for things, but they're just not that's not the part of the market that we're going to focus on.

Go through from a sales execution point of view you know as I think a lot of you know we've undergone a lot of change.

From a go to market management perspective.

And a lot of that change happened during Q2, we are right in the middle of it all and I'm sure that didn't help.

I was getting things together I believe we're now largely through.

The.

What I'll describe as you finish one of change management, which is understanding what we wanted to do from a structure and a positioning point of view et cetera, we still have a lot of work to do.

As we go through the next couple of.

Of quarters, but you know the the reset I would say all of our business to being a cost effective grower really worrying about cost et cetera that is.

Picking a hold in the psyche of the organization as a whole.

And the go to market organization and now I believe we have a plan that we can execute on a strategy that makes enormous sense.

Very strong.

We've done this for a long time.

And we know that there is the demand there in our customers. There's no doubt that customers appreciate particularly the ones. We're talking about the way our software can really uniquely help firm.

Deal with.

There are pressures on their own confusion so I'm.

I'm feeling good about that obviously the first half of this year was.

It was pretty volatile I mean, we know you know that there were some management changes significantly.

And all of that happened in the last 12 months.

So oh unquestionably that would have some impact on Q2 and by the way we're not happy with what the outcomes were yes, we're committed to trying to get a you know we're not happy that 16% is a good number going forward it just might be the.

Realistic wanted to think in terms of for where we are this year.

And I'll add one I'll add one piece of color clients I have not seen I see a lot of the client interactions as you might imagine I don't see clients deciding to try to get the same amount of value out of paying up for a lower amount I do see clients trying to manage.

Ah cost increases as a result of inflation right like naturally CPI is that much higher number and you know and there's an expectation in the market that technology companies will receive some increase in the annual spend is that clients are more focusing on trying to manage that as we are trying to match.

That as well because we expect to get you know increases to help offset our cost increases of all of our team members et cetera that I think is a focus area, but not general spend reduction that's not something we've seen.

Thanks, I appreciate the detail.

Yep.

We will now take the next question from Kevin Kumar from Goldman Sachs. Your line is open. Please go ahead.

Hi, Thanks for taking my question Alan given the macro environment are there any changes in the types of use cases across the customer base, whether that's customer engagement or customer service other areas of automation and curious where youre seeing the most appetite.

Yeah. So in the in the real time interaction management space, which is a.

Think of that as AI powered decisioning.

There's when when the economy goes through this sort of change we've seen in the last 90 days, we shift our emphasis.

From cross sell up sell to retention.

And we have and we do a lot of very I think effective war.

In.

The areas of retention certain use cases.

Sometimes referred to as compassionate hopefully collections, which is where you try to figure out how to be the smartest about about your business getting paid those are examples of used cases that accompanies a sort of a recessionary push that once again, we've seen before we see the same thing happening now.

Those discussions go off of.

But a lot of attention as well on the workflow space.

Automation and transparency being able to handle a workforce, that's distributed and not likely to ever come together, we get where you want to be able to manage them. Those once again on the apps. We felt that was referred to and you'll hear us talking more and more about what we call the process fabric.

Do we have an organization together those are the types of use cases that go with these times.

And the other thing I'll say about all of those as those systems.

Pretty big systems.

Not all at once necessarily but over time those become very very meaningful.

That's helpful. Thank you and then.

And as you integrate the ever flow acquisition, how is customer traction there and hum.

How should we think about.

ACD uplift on deals where process mining is abuse.

So I think I think masters mining is primarily a vehicle.

To be able to make the customer more effective at deploying your software.

Thank the more than a very significant increase in ACB on the deal I think you will see an acceleration.

Of consumption and use and that leads to in effect larger parts of the business.

Being in a position to cost justify it rationalize.

The purchase so I view, it as contributing to HCV more by helping promote volume than by kicking the prices up.

Good morning, Brian it's discovering the opportunity there.

Optimizing the opportunity, which lets you go big.

Bigger, particularly with these big companies and just to clarify just to make sure that is crystal clear we are not in the business of selling user base licenses Asics as our exclusive go to market, where you keep price up ticking every figure feature function when I was talking about as clients get more value by putting more automated.

Transactions through our system and that's the way the ACB goes up because they're paying on kind of a quote consumption type model, that's kind of the connection there just to make sure. That's clear yeah per user pricing. We think of this in this world is sort of an anachronism, because everybody wants to move to one form or another.

Non insurer.

Activity right, whether it's customers doing work themselves, whether it's parts of the system landscape actually doing fully autonomous work.

Yes.

Hyper automation so our standard approaches tend to talk about the you know.

How many units of work done by the customer and that's what process mining can accelerate as opposed to one.

A more user more so I know some other people do but I don't think that's I don't think that's a very forward looking model.

For companies to do a ratio.

That's helpful. Thank you for taking my questions.

Yeah.

We will now take the next question is from Joel <unk> from <unk>. Your line is open. Please go ahead.

Hey, guys. Thanks for taking my questions.

The first question I apologize if you've already said this in the prepared remarks, but could you just give us.

Some clarity on you know the the cost initiatives that you're talking about I think you said it would be more than more than half of.

The decline caused by the public cloud, but can you just clarify that.

Yeah sure. So I kind of liked the wording, it's tough sometimes to get through clearly so where we anticipate that the combination of the three factors peg a cloud mix currency, which is the smallest of the three and the impact of our ACB targets will will reduce revenue from where we were we kind of initially.

Thought it would be by about $120 million to $130 million.

We well you might say Oh, well that means there is an impact to EPS by that same amount no to the contrary, we're actually maintaining we believe we have the staff that we need to get through 2022, and quite frankly to hit our 22023 objectives as well and that that Oh.

Fishing C that we would get by maintaining our cost structure.

Consistent with where we are now will get us over $100 million of that hundred twenty's honored and $30 million of a bit of a revenue decline. So we won't get all the way there we might but we're not we're not we're not signaling that we think we can get all the way there, but we will get you know almost all the way there when I was.

Saying, Joe as I was saying well make up the ACB drop will make up the currency and we will get more than half of the way there on the cloud mix and nasty all of those three add up to over $100 million of mitigation.

That's perfect Super helpful. Tim Thanks, I appreciate it.

And then Josef follow up last quarter last quarter, you spoke about several new products, including <unk>.

Enhancements to the peg that customer decision hub and voice AI and messaging solutions for customer service. Just curious if you have any early customer feedback on those any any positives that you can point to you.

Thanks, so much for taking the questions.

Yeah. So you know we continue to.

To get excellent feedback.

On the.

Customer decision hub, that's the real time interaction management piece that I was talking about the forest or just Lauder and you know that continues I would say it would be by far.

Industry, leading product in that in that in that segment.

The new capabilities, our reviews and being.

It can be widely enjoyed well.

The voice AI is rolling out slowly we've got some pilot work that we've been doing.

I think that's it's enormously exciting but to be candid I think that a lot of organizations are just trying to stabilize that part of their business and their.

If things go a little more normal I think that's going to pick up but you're right right. Now there's just an enormous amount of what I describe as contact center exhausting.

People, who are just running those things or just trying to deal with making sure they've got the staff.

They are able to just keep them running so well.

Probably going a little slower than I'd like but that was never going to be a big part of a number of orders for this year.

Thanks again.

We will now take the next question from Matt <unk> from Loop capital. Your line is open. Please go ahead.

Hi, Thanks for taking my question and starting with you with respect to the macro just to be clear here are you are you, saying youre seeing lengthening sales cycles and project delays in your business today or are you just trying to get ahead of the curve with with your comments.

Great question, I would say aye.

<unk>.

A little bit of lengthening sales cycles, but nothing I would say material to to lead me to a an absolute conclusion I am more trying to get ahead of where I think the market will be for the rest of the year.

Okay, Great and then.

With respect to the sales cycles are you seeing that in any particular geography more so than others.

Europe I can let Alan speak to but certainly Europe is much closer to the front lines of the conflict in Ukraine, Russia, Ukraine and that they are.

<unk> things like energy resources food they are much more disruptive than certainly.

The United States is and even AR AP and even a P. J. So I I I I personally I think Europe is a is in a tough place right now.

Okay great.

Uh huh.

Yes, correct.

I was just going to say customer mood and some of those countries just harder to get your attention.

Yeah.

No I understand.

One final question here.

Around the launch pad I believe in your prepared remarks, you mentioned that the product would be run as a separate commercialization effort. I was wondering if you could just go into a little bit more details of what exactly that means.

Well it means that we were able to take a couple of very entrepreneurial people, who we already had on stuff.

Are we going to create a largely virtual team, but we're not gonna co mingled out at all with the car.

From a go to market and the current messaging.

See that as a separate product.

Using experience, obviously that we've had for many many years to inform it.

That will go to market through a separate channel.

As you know our partner sold channels sold by actual organizations that have the IP that they want to sell so I'm really really looking to insulate book core business from any sort of disruption. So we can really focus on doing as well as we grow I think we can do this year.

Great. Thank you.

Yeah.

We will take the next question from Julien moving chat from JMP Securities. Your line is open. Please go ahead.

Thanks, So much for the question Alan I would love to hear more about Google Cloud I know, it's early but how is that partnership progressing thus far and maybe what are your early learnings and then one for Ken can you give us an update on that retention.

Does that metric trended and maybe how we should think about it on a go forward basis. Thank you so much.

Sure. So the Google relationship I would say is terrific.

You know we work with them.

And we've been able to work with them to stand up this capability I think.

You know just being able to offer customers the ability to use Amazon credits or Google credits.

Oh that they may have committed to also I think at certain customers.

Your customers' excitement so that relationship is deep and.

Very positive.

I'm also pleased to say the googles of clients.

Which is a wonderful when a company like that decides that they want to use your stuff.

Internal it so that I believe is going to work out very very well you know Amazon has been a terrific partner and we love working with them also but the reality is as they move into say the medical field as they recently have done.

Greater quantity and as they move into.

Or is it our CPG and retail that means that certain of the very large clients that we want to sell to.

I have well less.

Traction to using them as a platform it doesn't actually impacts not even visible to a customer whether they're running.

Cloud on Amazon.

Or on Google, but some companies have their own standards and their objectives in that regard and now we're just in a position to give.

That extra dimension of clients choice, which is always great Ken yeah. So on net retention. So that's a that's a really good finish to the questions because it's but it's one that we haven't really touched on.

Directionally I've always talked about if we have 20% ACB growth to 15% of that 'twenty would be with existing clients and the other 5% would be net new logos that as a directional number but that is not far off when you think about us or our ACB growth declining by some percentage the majority of that decline would be our expectation of getting <unk>.

From net new logos right, because so I think our net retention number is not going to decline much if our overall ACB decline because that is our bread and butter that is actually where we're gonna put our capacity, that's where we've always got the majority of our bookings and so our focus has got to be really heavy there, especially in the end.

Any type of a less uncertain economic environment, you should always stay close to your clients because they're going to deepen deepen their relationship with existing vendors that is just the trend. So I think our net retention rate will hold pretty steady to what it's historically been maybe maybe Mike dropped by a percent or so but not much and the what will happen.

As we will probably you know just just.

Just being pragmatic, we will chase new logos less.

Super helpful. Thank you, but I think.

And with that I think we're at a time when I I'd like to thank all the.

Folks who are participating in or listened to the call. You should know that are where we're working very hard we're taking the needs of our shareholders very seriously and I'm hopeful.

Hopeful that we'll be able to report some good things in a quarter. Thank you very much.

This concludes today's call. Thank you for your participation you may now disconnect.

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Yeah.

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