Q3 2022 Pegasystems Inc Earnings Call

Good day and welcome to the Tiger Systems' third quarter 2022 earnings results Conference call. Today's conference is being recorded at this time I would like to turn the conference.

Over to Ken Stillwell C O O and CFO . Please go ahead.

The words expects anticipates intends plans believes will could should estimates may targets strategies projects 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 company's current expectations factors that could cause the companys results to differ materially from those expressed.

And forward looking statements are contained in the company's press release announcing its Q3 2020 to earnings and in the company's filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2021, and other recent filings with the SEC investors are cautioned not to place undue reliance on.

Such forward looking statements and there are no assurances that the matters contained in such statements will be achieved although subsequent events may cause our view to change except as required by applicable law, we do not undertake and specifically disclaim any obligation to publicly update or revise these forward looking statements whether as a result of new information future events.

<unk> or otherwise.

And with that I will turn the call over to Alan traveler, founder and CEO Tiger systems.

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

I'm pleased with this quarter's results in fact this is by far the best quarter. We've had this year.

As we discussed last quarter, we've become very focused on how we manage our business with a goal of balancing growth and profit to be a rule of 40 company as we exit 2024.

We reassessed our business outlook in July and Q3 is a positive indicator that we are making progress.

We continue to make operational efficiency, a priority limiting increases to our cost structure until we're confident of tangible benefits.

And you can see evidence of progress and our results.

On a non-GAAP basis year over year operating expense increased less than 3% in Q3.

Slow with year over year growth in operating expenses, we've seen for years, despite a high inflation environment.

Ken will talk in more detail about the numbers in a few minutes.

At the same time that we've been working.

Across our business, we've been doing a special focus with regard to how we go to market.

We've realigned the organization to really focus on the largest global clients, where we believe we have the most upside for profitable growth.

We know there is significant opportunity to increase our presence with these clients who know us well.

I have often already experienced success using our software.

I'll take the the government area.

We have a robust heritage of success working with many of the largest government agencies around the world to help them achieve modernization goals and transform the digital experience for their staff and since Georgia constituents and we continue to increase our presence.

For example in Q3, we expanded our footprint and the footprint in the U S Department of Justice and Veterans Affairs as.

As well as the state of California, who are using our intelligent automation capabilities to improve efficiency ultimately providing better experiences for their constituents.

Also last quarter, we expanded our work with a U K shared services program out of the cabinet office, they provide workflow automation services.

Administering <unk> and are expanding their use of <unk> workflow automation to deliver pay and pension services to the ministry of defense.

And we've been conducting events like a peg a thought at one of the largest U S. Federal agencies. It started with low code workshops that were attended by over 300 of our clients' employees.

I'm wondering about tiger and get their hands on experience with it and it culminated with hundreds of participants and there's a wide build event to showcase their interactions.

I was thrilled because I was able to spend nearly half of the quarter meeting with key clients and partners.

Including a run through Asia Pacific.

India, Singapore, Australia, and then onto the U K and Europe .

After two and a half years of being able to visit.

It was really energizing to get back on the road in significant way.

I met with some of our most strategic I'm longest standard financial services clients.

Hi Bose.

Premier Financial community conference that at over 8000 attendees.

Chance to spend time with our two very first clients who've been with us.

I think our software since 19 eighty-four through multiple generations of the technology and obviously a rapidly changing.

Extensively changed technical and business landscape.

At this event, we have more than 90 significant meetings.

With clients and I met personally with about 45 clients and partners. It was great to hear their confidence.

Our ability to help them solve their pressing business challenges and I'm gratified to hear that pattern continues to be seen as a critical strategic partner in digital transformation efforts and many of them talk about their intentions to further invest in backup.

Back at home, we've been very busy hosting clients and partners at our Cambridge headquarters at our New Edge Center for innovation.

In Q3, we held more than 20 meetings with clients like <unk> mayor from Europe .

<unk> and Siemens, giving me more opportunities to connect in person with some of the key people.

I've heard a few consistent themes.

One is our clients continue to face multiple issues like we talked about last quarter from labor shortages rising inflation to supply chain interruptions.

And many are bracing for a recession.

And they want help in tackling short term challenges, while supporting your long term strategic goals.

As I've said I believe the Padua is uniquely suited to help enterprises manage through such uncertainty while building for the future.

And then in an environment, where efficiency and productivity of Paramount or low code software platform for AI powered decisioning and workflow automation.

Demanding enterprises work smarter unified experiences save money.

That quickly.

At times like these we also know that many organizations prefer to do business with partners, they know and who inspire confidence because their products have worked and are providing strategic value.

Even as economic environments charge.

Now part of that confidence I think comes from our continued focus on innovation to deliver the industry's best technology platform for our clients.

Since we last spoke we've continued to enhance our software to make it easier for our clients can be productive.

To address address their employees their customers needs I'm.

I'm really excited about the latest edition of Purger Infinity, which.

Which we announced last week. This newest release helps transform how organizations quickly deploy apps, great smarter workflows deliver better experience for employees and customers with enhancements throughout our software suite.

New features empower brands with enterprise wide, Greg Maddux AI that works behind the scenes to increase efficiency speed innovation and improve customer interactions.

Improved end user experience and helps deliver better apps.

Combining AI with automation and a well architected platform helps employees with their productivity lets them make better decisions and less of an improved business performance.

We also continue to receive recognition from leading analyst firms and other third parties.

Earlier this month <unk> was named a leader in know your customer or pay one fee solutions by charters research, a leading risk technology analyst firm that focuses on this important sector know your customer standards are designed to protect for national institutions against fraud corruption.

Money laundering terrorist financing.

Increasingly important international banks, and we see tremendous interest in this area. The report evaluated these 32, most significant care why she providers across four criteria.

<unk> received the highly highest possible scores and three of those categories.

And in September we were recognized by Gartner as the highest ranked vendor out of 14, and it's 2022 critical capabilities for Salesforce automation.

Port States ecosystems offers exceptional automation and process management within its CRM Tiger systems vision is one of autonomous CRM, where automation offload repetitive work and AI assist users increasing their efficiency and improve.

Moving the deliberate customer experience.

Now as you likely know by now Little makes me happier than clients, who are willing to go on public record with their success stories and we've just posted the two new videos on Echo Dot Com you might want to take a look at QB, a global insurer with policy holders at 140.

Trees.

Suddenly completed a video testimonial you can find on our website.

They leverage <unk> intelligent automation to free up over 50, thousands of employee time of year.

50000 hours of employee time of year.

W. W. A leading German financial services group also completed a video describing their use of how panga supports their customer engagement and how they've gone about to create a center of excellence to support and guide their transformation initiatives.

Now regarding our company culture I continue to be proud of during these difficult post pandemic times of our resilience and passionate team.

Their commitment to our clients our partners the communities we serve.

And to each other.

And looking to create a vibrant diverse and equitable culture.

Happy to see how our people are adopting a rule of 40 mindset across the company to bring the the sort of value.

To our constituencies constituencies.

And then is that people are getting back together in person I'm seeing teams combining leading with volunteer we're fundraising activity for the causes they believing this is fostering terrific collaboration and providing support for causes that matter to our clients as well.

I continue to be inspired by the generosity and kindness of our people towards each other as well as towards those in need.

So in summary, I'm pleased with our results this quarter show progress towards.

Adopting the rule of 40 vision, making that happen I believe the discipline and focus we are driving in our go to market strategy is absolutely the right approach.

I'm excited about the way it is feeling and what we're saying.

And though we continue to operate in an environment of significant volatility.

We believe that our software is uniquely suited to address these times.

And that we have appropriately.

And how we are going to market to make that clearer to our clients and prospects.

I'll provide more color on the financial results, Let me now turn it over again to Ken Stillwell Kent.

Thanks Alan.

Our team executed very well in Q3, and what was as Alan mentioned very uncertain times I'm really happy with the way we finished the quarter given the economic environment that all of US are facing in fact, it was the strongest quarter of the year for US we had more 1 million.

Plus purchases by clients in Q3 than any other quarter this year and our business was particularly strong.

In financial services and it had some nice contributions from our public sector.

As we continue our multiyear subscription transition growth in annual contract value or as we refer to an ACD continues to be the most important metric to measure the success of our business in Q3 total ACB grew 16% in constant currency year over year, our ACD growth was powered by Tegra.

Cloud ACB growth of 39% and clients take breaks a year over year, which reached $416 million take a cloud ACB reached 40% of our totally CB for the first time and it continues to be our fastest growing ACB component.

You've clearly made some good progress in improving our go to market execution in Q3, and I want to remind you that Q3 2021 was a strong ACB growth quarter. So Q3, 2022 faced a relatively tough compare.

The second most important metric to measure the success of our business during our subscription transition is growth in remaining performance obligation or <unk> or backlog.

Total backlog grew 18% in constant currency year over year Peg a cloud bookings were the largest contributor to backlog growth in the quarter take a cloud backlog grew.

Additionally.

Right very high pace and constant currency year over year of over 30%.

Volatile foreign currency exchange rates continue to reduce our reported results, which is why we're focusing on being very clear with our constant currency performance, we're primarily exposed to changes in the currency values associated with the U S dollar Euro British pound and the Australian dollar for example.

The persistent strengthening of the U S dollar negatively impacted ACB growth when normalizing exchange rates.

Q3, 2021 to Q3 2022 total HCV was reduced by $58 million year over year. We've included charts in our earnings release illustrate the currency impact both ACD and on backlog.

And then moving to the status of our subscription transition when the final phase of our multiyear subscription transition and we expect to wrap it up in mid 2023 as previously communicated in this final phase, we expect profitability and cash flow at a normalized positioning peg out to achieve the rule of 40 as we exit 2002.

24, as a reminder, we define rule of 40 is a combination of ACD growth and free cash flow margin.

Given our best in class Enterprise solutions and robust renewal rates. We think there is tremendous untapped earnings power in our company.

We are already seeing tangible results from the efforts to refocus our go to market motion. Our sales productivity has begun to improve in Q3 and was better than the first half sales productivity, an indication that our strategy to refocus our sales team on organizations with the highest propensity to purchase is working.

Our go to market strategy focus as our sales teams are deeper client relationship engagement to tackle the considerable additional opportunities they have to explain their relationship with tiger by deploying new applications, expanding volume and capacity on existing solutions and embracing the digital business era, we measure sales productivity.

Tiffany by comparing net new ACB AD in the period relative to sales and marketing spend we plan to continue driving strong expansion purchase activity going forward to drive ACB in backlog growth in <unk>.

Moving to the cloud gross margins and increasing sales and marketing operating leverage are two key drivers of our plan to achieve rule of 40 as we exit 2024. It was encouraging to see improvement on both of these levers in Q3.

Going to our outlook for the rest of the year through the first three quarters of 2020 to peg a cloud represented just under 70% of our new client commitments, which is higher than the 50%. We expected when we set our plan for the year just to remind you a higher peg a cloud mix negatively impacts reported revenue in the current peer.

Sure yet.

In Q2, 2022, we communicated our intention to implement cost saving initiatives to reduce the impact of the previously announced revenue shortfall on our profitability I am happy to share that we've made great progress against those cost saving initiatives and you're already seeing the impact of that work flow through our financial results and.

In Q3 2020 to pick our cloud gross.

<unk> improved 400 basis points, increasing from 67% in Q3, 2021% to 71% in 2003 2022 on a trailing 12 months based on a trailing 12 month basis. After several quarters. Several years excuse me up quarter on quarter growth 200 to 300 basis points or more.

The quarter over quarter on growth in sales and marketing expense has been flat for the last few quarters as.

As we continue to navigate a very uncertain economic environment, especially in Europe , We plan to do what peg. It does best deliver best in class mission critical solutions to the worlds largest clients peg has successfully grown revenue through difficult economic times in the past by focusing on large enterprise clients who have the.

As propensity to purchase peg and receive value from the solutions that we offer.

We are fortunate to have so many marquee customers in our installed base of tremendous additional opportunity that we have not yet tapped. In addition, this installed base is led by the firms that will be able to most successfully weather and its proven itself even prosper during difficult economic times in our experience.

Many large enterprise clients consolidate vendors during times like these which is one of the reasons why we're currently.

Last one capturing new logos as we believe given high inflation and economic uncertain outlook enterprises will focus even more on automation and digital transformation for efficiency gains.

Man catalysts for our intelligent automation product portfolio.

In conclusion, I'm really pleased with our Q3 2022 results and really proud of our team given that we have some distractions in the first half of the year, it's great to see the positive Q3 performance and the business.

Heading in the right direction. This is by far the best quarter. We've had this year given the combination of growth ACB take a cloud in backlog while at the same time, we're making progress managing the business and much more of a focus on operational discipline and profitable growth as we progress on our journey to achieve the rule of 40 as we exit 2012.

For seeing a finished with a strong Q3 gives me confidence in our ability to finish the year well I'm looking forward to seeing many of you as I hit the road for face to face Investor meetings in November and December I also wanted to encourage all of you to Mark your calendars for our Investor Day on Monday June 12th which will be.

Held live and in person at <unk> World in Las Vegas, Nevada at the MGM Grand.

That's right Peg a world is live in 2022 23, and we are excited.

Operator, please open the line for questions.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Again, Please press star one to ask a question.

Our first question comes from Kevin Kumar with Goldman Sachs.

Hi, Thanks for taking my question.

Alan I kind of wanted to touch on the public sector. I think you made a comment there on seeing relative strength, there I know peg a recently created a new entity service the government customer base, so maybe a little bit on the rationale for the creation of that entity and what youre seeing from a demand perspective in the government sector relative to some of the other verticals.

Those would be helpful. Thank you.

Sure well you know it's interesting because.

We're seeing.

Good interest in the government sector not just in the U S where I mentioned the work with the Department of Justice Veterans Affairs, Yeah, we all.

So you'll have as we've done for a long time and continue to work with well many of the departments from IRS to Marshalls et cetera, but.

We're seeing some very very strong interest.

From <unk>.

Foreign governments as well you know when I went through Australia had passed with camber, which is the capital and there is a lot of work that we're doing there in the UK I've met with some of the people where we are.

Actually delivering the recruitment system.

For the UK Navy and Air Force and ads.

You think about what's happening here you have the programs in many cases that were rolled out during the pandemic had a lot of bailing wire in them and people have had to and have wanted to go back and see if they can actually make sure that they are more stable and more secure and theres still a strong strong need for efficient.

Please.

And government.

Yeah.

Our software is being I think very well regarded for so.

I think the.

Sure.

The rationale for liking the government spaces.

They tend to have lots of workloads and workflows tend to be complex.

Yes, they are.

Often can get big which is something we do are usually well.

That's helpful and then I wanted to touch on.

Kind of some of the cost rationalization and kind of improvement on efficiency I guess.

Maybe touch on free cash flow conversion Ken.

I know, there's some volatility on a quarterly basis, but curious if cash flow margin is trending in line with your expectations should we expect that to track ahead of other metrics like operating income and net income as we kind of near the end of the model transition. Thank you.

Sure. So there's a couple of parts of that Kevin and then I'll touch on first off.

Our operating cash flow for 2022 does have.

Yes.

Some.

Kind of nonrecurring headwind because of the legal expenses that we've.

We've added back to our non-GAAP EPS related to some of the legal discussions you are well aware of.

So that one is just to highlight that as a starting point, but yes, our operating cash flow you know our working capital is staying relatively consistent as we scale. Our we've been doing a very good job on our on our DSO and accounts receivable. So so certainly nothing there happening and we know.

So that cash flow is never a straight line for a company like pegging that has a lot of client engagements that have typically been initiated at the end of the year in Q4. So certainly our billings are not linear through the year.

Other enterprise software companies, but we are I believe that we finished the year, we're going to have positive operating cash flow as we expected even given some of the headwinds that I mentioned and then when we get to next year will be kind of that next step toward rule of 40, and then in Q in 2024.

It will be will be a rule of 40 company. So cash flow is trending as expected. It is still negative in this part of the year because like I said, the billings are not as heavy in Q2 and Q3.

Yes.

Our next question comes from Steve Anderson with Citi.

Hi, great. Thanks for thanks for taking the question here.

I just want to ask about the strong sales execution that happened in the quarter here I guess, how much of that was driven by some of these kind of delayed deals and some of the pent up activity that.

You saw in the first half versus some kind of net new opportunities coming.

Coming in and then how should we kind of think about for the year I think you talked about 16% ACB graph.

Last quarter I was kind of the target for the year, how should we kind of think about that.

Going forward given the execution here.

Sure. So so we don't we got during the year, we did reassess because we've made such a.

Frankly major set of changes to the way. They go to market organization was structured and I would tell you that.

<unk> in Q3.

Or in my view.

Almost entirely as a result of the changes it's not like deal slipped and suddenly came back.

Wasn't it at all.

A big part of what we did is we re oriented ourselves to saying look we are we have many hundreds of customers who are writing US checks you know every every month or quarter and we need to spend time on that we need to make them successful like us.

And.

In reality the upside in those organizations as my mother.

Yes.

Tremendous example for for our sales growth frankly for the next couple of years, so youre not completely issuing a new name, but basically saying, we're going to stop chasing them, which I think had been.

Pretty materially the way, we were going to market.

While ago.

I think the results of our of our change in focus is what.

The better results in Q3, you know it wasn't a whale or two or a big slipped deal or two as Ken said it was.

Balanced and that makes me feel good that the things we're doing are right even as the economy has obviously seen it stopped.

And Steve I'll add I'll add one additional thought on there. So Alan mentioned a couple of things one the breadth of the performance, meaning the contribution from lots of clients was really healthy that there's sometimes you had a quarter with like just one big deal or two big deals that wasn't our Q3, that's what that's really promising probably the most probably the most probably the.

Most optimistic thing in the quarter is that breadth of engagement with so many different clients.

Pointed you May remember me, saying this but with Detroit with the change in our sales strategy sales leadership in kind of a refocus.

Did we did experienced distraction in Q2 and that even carried into July as I mentioned previously so even that said that we even had part of Q3 that had some level of distraction and we still executed well and I think the reason why that may be is because and you've met some of you may have heard me.

Say this before selling and cross selling upselling, expanding cross selling et cetera to existing logos is much more productive in general so is it a peg US say just in general it's always more efficient to sell to an existing client that a new logo. So naturally that helps with our rule of 40 as well.

I think theres some of that happening in Q3 as well.

Okay great.

Very helpful contacts bar.

I guess kind of more broadly just thinking about the macro and I know it is kind of a.

Challenging challenging time right now how are we kind of view in the pipeline.

Opportunities as we think about for Q has there been kind of any change in either deal dynamics things slowing down or or.

That deal is potentially coming in a little bit smaller than expected how should we kind of think about what youre seeing in the current environment.

Well the the style of engagement.

That we've been doing in the last several months.

Since we since we reoriented here the salary engagement is quite a bit different you know it's not a lead response.

Style.

Where you have to worry in the same way about quote deals slowing down conversion during different parts of our funnel that's not our style of selling this as a full.

Agent style understand the client strategy.

Demonstrate how we fit into that and I actually think those deals are much more reliable in terms of being.

Frankly influence and controlled by us.

It's not a mass or market motion.

That's especially true for organizations, where we already are doing things that they are building and as Ken said as.

As examples.

They decide they're going to put new workloads on they're going to move to a different department theyre going to do an analogous function they're there.

Building on our success that they've seen this idea of the App factory, which we talked about at the last quarter.

It really I think been talking about since the beginning of this year is I think really taking hold where customers are are in effect setting up factories to be able to do increases.

In the automation and increases in the us and we've taken steps to encourage customers to do that.

It makes it easier for them to get started on projects.

And I also think that's going to lead to greater reliability, even in a difficult and it is a difficult economic environment in some of these organizations are facing.

Okay perfect. Thanks for taking the questions.

Sure. It is nice selling to organizations that are going to.

But it will be through with the other apps that is that is the other room, which I think of this sort of style.

Going to market.

The next question comes from pension Tomorrow with J P. Morgan. Please go ahead.

Hey, everyone. This is Noah Herman on for pendulum, thanks for taking the questions.

And then for the full year are there any changes to the revenue guidance that you laid out last quarter in terms of some of the impacts.

Let me, let me take that second part of the question Alan and then maybe you can give your perspective on APAC and EMEA. So.

So as Alan mentioned earlier, where we're not in the business of a guiding quarterly.

What what I, what I would tell you is where we said we were going to be 16% constant currency ACD, we were 16% constant currency ACB for Q3, that's certainly up.

Confirming indication.

Q3 was kind of a step on that journey.

The one factor I think that is not related to us guiding but just to keep this in mind I mean, you know what happened with the dollar in Q3 right. So just that's the big that's the big wildcard right as currency in terms of the fundamentals of our business.

We anticipated that the economic environment was going to be deteriorating as we went through 'twenty, two and probably into 'twenty three but I think we're executing well in that but currency is definitely up.

A prolonged and significant headwind to a company like peg as it has.

The reports in the U S dollar.

And Alan maybe on EMEA and a PGA in terms of the demand environment your perspective.

Sure well, obviously since we're selling in local currencies just about always cut.

Customers expect that.

Obviously, the sale can get haircut by where the dollar is done.

That's just that's just the way it goes I would tell you I've been in both.

Significantly in both APAC.

And.

In the U K and also in Continental Europe , and just the last seven to eight weeks.

And the.

Demand environment I would tell you is it's it.

It is not pushing things off it is not hard to get the meetings you want to get people who are interested in how they are going to transform in ways that will let them become more efficient.

There's more of an interest I would say in the demand environment.

Brown.

Cost savings and protection.

And then there is about.

Trying to.

Boost revenue that's not true in every business or every environment put I would say generally, but that's exactly what we would expect and what we have seen before historically when oh.

The World has a recessionary.

Inflationary pressures so I.

I felt really good coming off of those trips and in fact it was so good I'm going to do another one.

After weeks.

Because this frankly is so much demand.

For folks who want to talk to us and I think that will translate into business ultimately.

That's what this is all about.

I think it's.

Stronger than you would believe reading the headlines since I guess the way I would.

I would put it.

Yes, that's great color. Thank you so much.

Yeah.

Our next question comes from Jim years Tray list. Your line is open.

Great. Thanks, so much for taking my question and I apologize for the background noise I swear.

Collaborate now.

I'm just curious last quarter, you mentioned that in the second half you were you were expecting sales cycles to elongate and I'm just curious if in Q3, they elongated more or less than you were expecting coming into the quarter.

I I.

Think that they.

I was probably a little more worried.

Then what actually happened.

When you're when you're in the early.

Bits.

You know it is not uncommon for things to elongate because people will put sometimes they'll put extra levels of controls on spending.

It's anecdotal statistical, but I didn't I didn't really see that happening.

In a.

A meaningful.

Yeah.

I'd say that was probably a smidge better than I might have been afraid of.

Going into the going into the quarter I think part of what's happening.

Is some of the scrutiny I think theres actually.

Occurring earlier in the process. So that you have customers, who are not going to be willing to do something are more likely to not engage.

As opposed to scrutiny coming later in the process, where you know.

Ken as CFO or COO.

I'll try to stop something from happening.

I think that actually bodes well for the level of attention we're getting.

I would add.

I would add one other thing Joe.

Yeah.

In this environment.

The biggest I think the biggest headwind as the sales cycle is actually related to new logos. It's related to companies that don't know the vendor and actually have to go through a prolonged process to kind of pick the vendor and onboard a new area. So I think in our position of selling and deepening engagement with existing.

Logos E kind of that headwind doesn't really exist as much. So I do think in tougher economic times, new logos I think any company would tell you. This but we see that so that's the one area that I would say, we probably owe us.

Our focus area is probably driven by some of that intuition that we know that new logos are gonna have elongated sales cycles, both selling to existing clients. You do have at least you know a couple of those objections are are reduced.

Super helpful color from from both of you guys I appreciate it just as a follow up.

I think last quarter, you mentioned, you were expecting to get somewhat somewhere over $100 million in opex savings to offset that revenue headwind youre going to see I'm just curious how far along you are in that in that process. Thanks. So much.

As you know we've achieved that mitigation as we as we sit here in October so.

Now we're now we're looking to see how much more progress we can make through the rest of this year and 23 to prepare ourselves for our for our rule of 40 targets in 2024. So we're really happy I mean, we the team at Tiger I think made a lot of progress in Q3, and and I don't think that's something that.

This isn't like we're done kind of thing.

To run a good business and we're far away from old 40, right now and we need to get there and so that's this was kind of that.

Really positive step that we made in 2022.

Thanks again guys.

Hey, Joe.

Yeah.

Our next question comes from Steve Koenig with SMB Sammy. Please go ahead.

Hi, gentlemen, thanks for taking my questions.

One for Ken that's kind of a multi part about the numbers and then a question for Alan.

So, let's say, Ken just trying to understand the numbers and what they say about the nature of bookings.

Two observations here that maybe you can help explain to me how these how these.

So first thing is cloud ACB was up $12 million, which was nice but cloud bookings were up a whopping 139 million.

We're sorry that they were $139 million up 139 so.

So you know it.

It did huge bookings number that didn't translate as much HCV I.

I used to be but still good but just to hit the button number so is that where they're at.

And a lot of renewals in there wasn't a big renewal quarter for cloud and then maybe just the other one on the numbers.

Maintenance RPM has been down year on year two quarters in a row.

Was that the beginning of a trend what should we expect and is that a function of clients migrating from term to cloud and then a follow up for Allen.

Sure. So let me let me let me start by just throw in one thing out Steve which is currency. So don't don't don't lose track of that currency hit every number that you just said right. There because we actually do a reasonable amount of peg a cloud outside and maintenance outside the U S outside.

The U S. So the so the first thing is currency is a factor yes. There were renewals in Q3 that were that bad.

A larger pace than there were in Q2 for sure. That's why Q2, RP O and I mentioned that Theres not overhauls arent linear which is why Q2 AD RPM was a little bit of a slower growth that was just a little bit.

Little bit of a cycle that we go through the Q3 was more of a kind of more of a normal kind of renewal quarter, but also theres. A couple of factors. One is firstly the other one is sometimes when we hang a cloud they the the booking doesn't actually start in ACD in the quarter then it gets booked in meaning the effect.

Date could be the next quarter and you probably remember this word even could be a couple of quarters out and so some of that will get into backlog, but not actually get into ACB. So almost like pent up ACD. So to speak right. So that's that factor on maintenance. There are some clients that are over time moving to peg a cloud moving to more modern contrast.

Creasing their relationship with us that were previously on a perpetual maintenance arrangements, but also maintenance does have probably one of the biggest components of currency is actually in maintenance as well. So that's kind of the color there hopefully that was got it.

Yeah, Yeah, Yeah, that's super helpful. All right great. Thanks, and my follow up for Alan Alan Your.

You made some commentary about the culture and.

Bob.

Employee morale essentially in the post pandemic times.

That's encouraging to hear especially cost control at peg up I'm wondering if you could comment on.

Kind of I.

I guess.

One of the elephants in the room that that was distracting in Q2 was that was the last year and which is.

I guess, that's gone to appeal now.

What are you guys arent process, but how does that.

What kinds of questions, our employees asking and how does that.

You know kind of play into the.

Pat.

Motivation and alignment with them pegged out and questions you might be getting about that from employees. Thanks very much for your help.

Sure I would I would tell you that the staff very broadly and you know obviously, we have some long standing staff as well.

Has I believe a lot of confidence that we write our own software.

We've developed these things yes.

Frankly, they know how our tiger is pretty differentiated from.

Lots of the companies out there. So I don't think the staff has given much credibility at all to some of the assertions.

Assertions.

And I think the.

The reality is that there are also people who were with us during these time periods and let's just say.

Those of US who were there.

Very different.

Assessment and understanding of than some of what has been claimed so I I actually think they are holding up really well.

It does.

No it's not the easiest time to be the employer Hi Tech.

Hi.

Yes.

Circumstances, but the other thing is for those who have been around a long time and can talk to those who are perhaps even newer brand new.

The staff understands that.

Team, we're pretty scrappy.

So you have some of the anxiety as you might have with the with companies who had to be a weather various storms and been around a long time, we don't have any of that and I think that helps a lot. We also try to be extremely.

Transparent with the team we have Q&A sessions, where we will take any questions.

From a staff member you know that.

We call them ask anyway, [laughter], we get asked a lot amongst your questions.

I think between good communication and.

So I think our heritage.

<unk>.

Been able to.

Keep the company together and keep the company solid and.

That's in the face of all of the obviously this had been extremely difficult year.

Having been preceded by a couple of them.

You can really difficult with different difficult years, I I think that you have.

Great companies are resilient companies and have real grid.

I do think that grid.

Grid is something we don't like.

No.

Got it.

Okay, I'm going to ask I'm going to just that.

One other one other perspective biopsy.

The thing that really engages our employees and get them fired up is their interactions and the solutions that we do with our clients and our clients' engagement.

That's really all time highs and I think that that show just by the breadth of our performance in Q3. So I think that's really another factor.

It's a very important to us because we're all of us at peg are here to help our clients. That's why we're in business. So I think that that's a really important aspect and we're so deeply engage with our clients you really can see the value that we're providing because how you know how tightly connected we are so that's also a very positive momentum.

Internet at times that kind of weird times like what you mentioned.

Great Great well. Thank you guys appreciate it.

Thank you.

Your next question comes from Phoenix to reinvest Raghavan with Barclays. Please go ahead.

Hi, Thanks for taking my question.

I know you had said you werent updating your guidance, but when you did formulate guidance in Q T. When you were reassessing can you just talk a little bit about your overall guidance philosophy did you build a buffer into guidance or are you one of those companies and it doesn't really do that and so we just really expect you to hit what you spell out there.

Yeah. So.

I think in the open the last three to four years, but not it was it was very hard for us to really peg and specifically a revenue and an EPS number and because of the.

The shift to peg a cloud and the variability that was happening in that ship like the percentage. So that that was kind of a much bigger factor over the last few years I would say in 2022 going forward, that's less impactful within a quarter or a year compared to what it was say in 2018, when when you know a 10%.

But impact us immediately by 40 or $50 million against a number that was much smaller in terms of <unk> revenue. So I would say, we have a little bit more certainty there, but there is some.

There is some variability there with the peg a cloud mix, there's also a little bit variability with the timing of renewals and bookings that may actually have upfront revenue recognition like client cloud as we call. It term licenses. So there are some there are some things that we do our best to try to peg it but there but it doesn't always.

Take out the way I would say revenue.

As we try to be to do a kind of a best efforts to get to what we thought the number would land that we did not build a ton of we werent building a question in kind of a beat and raise kind of model because we're not guiding each quarter, but we did we didn't we didn't create a stretched number either so I think we tried to come up with what we thought was a reasonably accurate number.

And then we factored in the cost savings that we were targeting and we felt like was a reasonable estimate of what we could get to which we feel we've made a lot of progress there. So I would say, we really tried to be.

As as accurate as we could of where we thought we were going to land.

Thanks, that's helpful and just one more for me.

See the rule of 40 expectation reiterated.

But I wanted to just kind of talk about the.

Kind of the weighting between growth and margins there given that some of the debt demand headwinds seem to be improving and you have those sales are basically improvements you know do you have any changes to the weighting of the factories and ideally like what would you like to see.

So I'll give you my perspective, and then I'll, let Kevin can weigh in if he has additional thoughts so the.

The beauty of the beauty of the way that you build a rule of 40 model is that if your ROE. If you set your growth expectations at a reasonable target and then get your margin to match. If you outperform on your growth. It actually helps you twice right because your credit is better and your bottom line profitability is better so our.

Our approach has been not to shoot for a growth number that is unachievable. When we think of rule of 40, but to make sure that we're building a margin profile that gives us a rule of 40 probability based on a reasonable growth target that said of course, we want to grow faster right. We only grow as fast as we can what we're not willing.

To do though is throw cost at a gross number we want to be very thoughtful and very profitable and how we think about that growth and I think that's kind of a a little bit of a different approach than what we had in the last few years, where we were making some bets in areas that.

We're a little bit longer pay off periods and Thats why our strategy change. This year. So that's kind of my perspective, Alan any anything any thoughts to out there.

I think that's on target.

Where we are.

Certainly.

Investing in garage, we want to be a company that grows.

Well, yes.

We've in the past so that we could grow 20% ACB a year in.

A lot better than 2016 to be blocked up but where we're at.

Not going to deal with the style of trying to hit 35% growth.

And spending.

As as they upset.

It could.

Could be could be financed it anyway, it's got to be balanced and I think that message.

As <unk> gotten to the company and I think the SAA.

Jeff is buying into it.

Okay, great. Thank you I appreciate the questions.

Yeah.

Our next question comes from Joey Man check with JMP Securities.

Hi, Thanks, so much for the question first Alan I was hoping you could talk more about peg a body.

Which capabilities are you most excited about and then maybe at a higher level. How do you sort of think about your overall development strategy. Thank you so much.

Yeah, I think up so there's a there's a lot in a product that I think is exciting.

Additions to the App factory capabilities, which we're already seeing some some excellent adoption of where it makes it easy for organizations to.

<unk>.

Put in automation, but do it on a platform that as enterprise scale capabilities as opposed to you know little Standalone things, which.

Candidly I think some of the other players in the low code space.

Our.

More likely to be kind of the.

The reincarnation of Lotus notes as he then went backwards.

And being able to tell organizations that we can give you a structured way, but also a way to fast and that.

Builds on things that may be familiar to you I think those are some.

Terrific additions to the whole area of what we call process, AI, which is bringing artificial intelligence into the process. So that it can.

Predict which types of things are going to miss their service level makes it possible for you to pay greater attention to them and prioritize those sorts of things I think are also key we've added some really nice capabilities to the whole user experience.

And with the work on what we call the digital experience API. We've made it so that customers can use the packer experience or they can use candidly their own but do it in a way that's.

Super flexible and quite a bit different than what alternatives are.

In the marketplace.

Are things that I think are both functional in terms of.

Helping people be more apps and more technical in terms of being able to plug into other systems, which is obviously something that's super duty for us.

That's super helpful. Thank you so much and then can you just give us a quick update on the <unk> acquisition, what is sort of the feedback and demand been like from customers.

On those new process, Brian Thank you.

Ah we're demonstrating them there is a lot of interest I think that our process.

<unk> mining is one of those interesting things because I think the purpose of mining processes, just to be able to automate them and have them operate.

Operate better so that's a perfect example of the sort of acquisition that we like to do where it really fits very strategically with what are our product line is with what we actually do with <unk>.

Workflow automation with robotics.

Who seem quite impressed and.

I think it's going to turn out really well.

Yeah.

And our next question comes from Brad <unk> with Macquarie. Please go ahead.

Hi, Thank you.

I wanted to check in on a different part of the.

The lawsuit.

Without discussing the lawsuit specifically I wanted to understand has that come up in any or rather in your conversations with customers generally and if so is it shaping any of your customer conversations at all.

Okay.

So I think.

Kevin can comment on this as well of course it comes up with.

But in fact if.

They don't bring it off we'll bring it up.

You don't want something to be hanging out there.

I would say that our customers conversation with our customers.

<unk> has shown a lot of respect for the.

Longevity and independence of perk up as an entity.

And you know.

I would say that.

Our customers have been tremendous.

I think it's just been.

Terrific in terms of.

We are listening and.

Reading, what we've put on our website you know because we've put some stuff up that I think helps.

Helps provide some color.

Yeah, we're not going to get into the things that will become more visible as our appeal goes forward because the appeal process is just beginning and these things go agonizingly slowly.

I've been really pleased with the way customers have responded and our ability to.

And not have the conversations get unduly shaped.

The conversations need to be about what.

They need and what we can do for them and I would tell you that.

They have to say it that way.

Yeah.

Ken do you have any comment there.

Amit.

Yeah, I mean, Mike I think everything you said makes sense I think.

Fred the reality is when you have when you have an announcement like that a press release that newsworthy item of course clients.

Need to understand I need to understand what happened and as much as we can tell them and we've been very clear that two ought to point out and we haven't we haven't a spot.

As part of our web site that actually spells out exactly the facts not not opinions, but the facts around what this is and what it is that and I think that our clients.

We have universally been very pleased with our engagement on that and and.

As evidenced by the fact that we had the most 1 million dollar deals in Q3 with our with our clients that we've had so I think.

I think you know certainly I wouldnt say that that chapter is closed because the appeal was is in process, but I do believe our clients are.

Very comfortable with the engagement that we've had with them from my experience.

As one of them said they get sued all the time.

So it's.

It's about it's not a foreign concept so.

[laughter] not that anyone enjoys that but it's not it's not at all for them to any big bank or insurance company certainly.

Thank you very much for that.

Thanks Pat.

This concludes today's question and answer session.

I will turn the conference back to Allan Tessler for any additional or closing remarks.

Great well. Thank you everyone for dialing in and listening I think the team has been working very very hard.

I think we're in a.

And invigorated by the new software, we've put out we're invigorated by the ability to engage more directly with clients as the pandemic period has ended and there is a lot of enthusiasm for becoming a better run more efficient company.

Company and bringing those those those benefits.

Candidly to our stakeholders.

I like the feel of it and I like the energy and we're going to go back to work for Ya talk to you soon everyone. Thanks.

Yeah.

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

[music].

[music].

Yes.