Q4 2022 Pegasystems Inc Earnings Call
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You are currently holding for the Peg a systems fourth quarter and fiscal year end 2022 earnings results conference call. At this time, we're assembling their audience and will be underway shortly but thank you for your patience and holding enough that you. Please remain on the line.
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Good day and welcome to the Peg a systems fourth quarter and fiscal year end 2022 earnings results conference call.
Today's conference is being recorded at this time I would like to turn the conference over to Kenneth Stillwell. Please go ahead.
Thank you.
Good evening, ladies and gentlemen, and welcome to <unk> systems Q4, and for full year 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 the private Securities Litigation Reform Act of 1995, the words expects anticipates.
<unk> intends plans believes will could should estimates may targets strategies for JAKKS forecast guidance likely and usually or variations of such words or other similar expressions identify forward looking statements, which speak only as of the date. The statement was made and are based on current.
<unk> 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 in the forward looking statements are contained in the companys.
Press release announcing its Q4 2022 and full year earnings and in the company's filings with Securities and Exchange Commission, including its annual report on Form 10-K for the year ended September 31, 2022, and other recent filings with the SEC investors are cautioned not to place undue reliance on such forward looking.
Statements and there are no assurances that the matters contained in such statements will be achieved although subsequent events may cause our view to change except as required by applicable law, we do not undertake and specifically disclaim any obligation to publicly update or revise these forward looking statements, whether as a result of new information future events or otherwise and with that.
I will turn the call over to Alan traveler, founder and CEO of <unk> systems.
Thank you Ken and thank you to everyone on today's call.
Proud of how our team adapted leveraged our strengths and executed in 2022, demonstrating exceptional resiliency.
We ended the year at 16% ACB growth right, where we said we were despite multiple significant distractions and challenges.
We're making progress to become a rule of 40 company, which will drive greater value for our shareholders.
Securities to further invest in our business, our technology and our people.
Our results reinforce the effectiveness of our strategy.
Target customers, where we know we have tremendous opportunities for growth.
We will discuss in more detail later in the call.
The market dynamics here I think are very positive for us in some ways digital transformation continues to be a driving force for our clients and we expect it to be even more important in 2023, given the economic indicators.
Certain environment we're in.
Youre going to continue to be.
Enterprise automation is top of mind for clients, who are looking to optimize their investments increase efficiency and improve effectiveness.
According to Idc's 2022 worldwide CEO survey.
Number one skilled Ceos think will be most critical to their success over the next three years digital Delta.
At the same time, there was a growing scarcity of developer skills, which helps drive increasing use of low code and no code solutions.
According to the latest forecast from Gartner the worldwide market for low code development technologies is projected to total $1 7 billion in 2023, an increase of nearly 20% from 2022.
IDC projects that by 2025, 60% of all application developers worldwide will be low code or no code developers.
This theme is consistent with what we're hearing from clients I. Originally came back from Davos, where I met face to face with Ceos of some of our largest and most strategic customers.
Told me, we are focused on digital transformation as key to success.
It's got to be especially true in what they expect will be a challenging year.
Would be better and faster ways to do things driven by the economic environment and scarcity of resources and.
<unk> is perfectly positioned to leverage these dynamics.
We have a long history in the space and a clear strategy to focus on us this year MBR.
Our strategy is very much invested in our technology as a technology provides the most powerful and scalable low code platform for AI powered decisioning and workflow automation.
<unk> to help clients maximize value simplify service and boost efficiency.
Greenberg to adapt to change.
Our product leadership.
We recognized by industry analysts and has led to dramatic successes.
With many of the world's most recognized and sophisticated organizations and their partners.
As a cloud innovation is accelerated adoption and we've made tremendous progress on modernizing our clients, who now more than ever are able to make use of our latest advancements.
We are strengthening deep strategic relationships with our clients as their trusted partners and we believe that they are more likely to consolidate their technology choices with proven and trusted providers in this uncertain environment.
Driving accelerated value for these clients will translate directly to significant growth for us.
And we are building a healthy agile and efficient organization. So that we can work closely with our client and inspire innovative ideas and creative solutions to their biggest challenges.
So I'm feeling good going into the year, we do expect it will be a drop here based on all the economic indicators.
We taken steps and planned accordingly.
As we announced in early January that means having had to make some tough decisions to help set us up for both long term and short term success.
These changes were focused on our go to market organization, where we're driving alignment to further improve our go to market operating model.
To drive real clarity of accountability enable greater efficiency of sharpened our client focus.
Especially where our historical investment outpaced our growth.
Nearly all of the changes have been completed so there are some markets that we're working through evaluation and in Aaron's to local regs.
Processes.
I know this is a challenging time, preventing whose roles are changing.
Being eliminated as well as those saying goodbye to colleagues we care deeply for.
We're working to take great care to support those who lead with transition support in keeping with our values.
Like many other companies, we're planning for more conservative growth in 2023, which Kevin will talk about more later in the call.
Our overall approach and strengths will continue to serve us well as we go beyond this year and into future years, where we will continue to adapt and we're in a position where whether our clients are focused on rapid growth or whether our clients are focused on efficiency and cost cutting.
Got the technology of the approach to do either as we've shown over the years.
I'm also excited to see that our subscription transition is coming to completion.
You can see the related impact on our financial results and projections.
Combined with the organizational changes we are making we are well positioned to be a more significant cash generator overtime.
Which gives us the flexibility to invest in growth opportunities for the business.
No I think has always had a focus on innovation.
Providing the most innovative and effective solutions for our clients.
<unk> been central to our success in.
In 2022, we continue to enhance the affinity to give clients. The best look low code platform in the industry.
The highlights included launching a new version of <unk> affinity, which lets organizations develop apps faster.
Create smarter workflows and improve experiences for customers and employees.
We continued to focus on peg a cloud and have significantly increased adoption.
Also finding that our global operations Center, which uses extensive workflows built <unk> infinity.
Greg automation availability reliability and scale to our own cloud operation.
And we're seeing this as a reason where clients are choosing hybrid cloud over running on their own cloud because they can see how well we can do it.
We introduced new low code Templars courses and services that help organizations improve productivity.
Reducing strained on IP teams.
All while still maintaining good governance with the demand for professional developers exceeding talent availability.
Organizations want to be able to tap citizen developers to get work done.
Citizen development could also create silos at increased risk of course, if there is a proper governance.
The tools are not sanctioned the supported by enterprise.
Many of the lower end low code tools in the market today are contributing to that challenge.
It is low code factory approach.
Power's citizen developers, while providing technology supported governance to automate the enforcement of best practice, ensuring security scalability and maintainability.
We've also enhanced our robotics capabilities to make it even easier for users of any skill level to quickly build robotic automation.
That helped make business processes more efficient while robotics makes sense.
We acquired ever flow drag intuitive process mining capabilities to create what we believe is the industry's most complete hyper automation solution.
Enabling peg of clients to uncover and fix hidden process inefficiencies that would otherwise bogged down an organization's operations.
We are also a lot of interesting tax developments. We're tracking for example, we're looking carefully at the latest generative AI technologies and how they can position.
Themselves inside our offering to make them better we're looking at model driven approaches that helped programmatically tactful business levels and all of this I think players are historical ferrexpo cargo package terrifically positioned to take advantage of these trends, we see lots of potential to provide more value to our clients and enhance their <unk>.
<unk> chip.
I expect we will have some very exciting news to share yet pedal world. Good June .
As a result of this work.
We also announced <unk> launched a new cloud based low code application development platform designed to empower users to build and monetize new business to business SaaS applications.
This has the potential to provide new revenue streams.
Interesting new market for us our goal is to sign up several early adopters during 2022 in anticipation of launching in 2023, and we're right on track with where we wanted to be.
I'd like to touch on some client highlights because ultimately that's what this is from our point of view all about for us to be successful and grow our business, we need to make sure. Our clients are successful innovation renovation sake has never been our strategy whether homegrown are required we've always thought first.
About how many new feature of our technology or product, which support our clients' goals and contribute to their success.
That's why we continue to see impressive results from our clients and one so many are willing to talk publicly about how they are leveraging our software.
For example, a number of our banking clients recently won awards for their use of Peg a software, including Nash Nat West Bank Best banking Tech provider for their use a know your customer and peg customer lifecycle management solutions.
At Lloyds banking group.
Awarded best use of <unk> in retail banking, which automation and streamlining of processes for customer credit cards, all built on Tiger cloud.
And more than 40 clients have signed up to share their success stories at hydro world in spine. This year in June , including Roche Wells Fargo Virgin Media and the FDA just to name a few.
We're so excited to be going back to Las Vegas for our first in person bigger world in four years.
In addition to the many clients we look forward to joining us there.
Already more than 30 major partners signed up as sponsors, including Accenture why cap Gemini and <unk>.
And there'll be demonstrating their services and solutions along with our latest technology.
Innovation hub please.
Please check out the peso will grab site website register and join Us live.
These stories and see the amazing technology firsthand.
I'd also like to note that this would really exciting in this new impersonal world again to see a steady stream of our clients.
Coming from Amsterdam to from Australia.
Visit our new executive briefing center at Cambridge.
For in depth highly strategic conversations.
So in summary, I think we began shown our resiliency and ability to execute in challenging times.
I am excited to see our transition to a subscription business coming to completion and the positive effect is having on our results.
And we are on pace to be a rule of 40 company as we exit 2024.
The right space with the right heritage of the right capabilities and the right strategy.
At the right time to leverage a significant opportunity in front of us.
And we have the right team to deliver on that opportunity.
To provide more color on the financial results, Let me turn it back to you Kevin.
Thanks Alan.
And nothing brings more stability to revenue profitability and cash flow that our recurring business model, especially in times of economic uncertainty.
That's the major reason, we embarked on our subscription transition five years ago, and our execution has been strong thanks to the hard work and resiliency of our team in close collaboration with our clients and our partners.
Over this five year transition period, we've achieved a nearly 250% increase in our annual contract value and more than doubled our subscription revenue, which in 2022 I'm happy to say topped $1 billion and now that subscription revenue is is represents 81% of peg is total revenue.
Up from just around 50% a few years ago with the majority of the remaining revenue coming from professional services.
Our subscription model helps us build a more resilient business and improve profitability and scale through operating leverage, especially with our high client retention rates and massive client expansion opportunities.
With an annual contract value is the key growth metric to measure our business momentum during the transition we almost exclusively focused on ACB because of its critical importance. So let's talk about our <unk> results in Q4 2020 to annual contract value increased 16% year over year in constant currency and 13% as reported.
Reaching.
A $1 1 billion, our ACB growth was driven by our go to market strategy, where we focus heavily on cross selling and up selling to our existing clients peg a cloud ACB reached $455 million, an increase of over $90 million or 60% over 60% of our new client commitments were from peg a cloud.
Deals in 2022.
Another important metric to measure our success during our subscription transition as growth in remaining performance obligation or backlog.
Total backlog reached 136 billion as reported as we highlighted last year on our earnings call in Q4 of 2021, our subscription license backlog was unusually high resulting in a tough compare this year focusing just on subscription services, which includes peg a cloud and maintenance backs.
<unk> grew 13% year over year in line with our reported ACB growth rate.
We are currently in the final months of our subscription transition and our 2002 2022 results demonstrate that we exited the year with improved profitability as we expected we would let me give you a few examples first our non-GAAP EPS reached <unk> 72, an increase of over 200%.
<unk> year over year, our non-GAAP EPS performance was primarily driven by more disciplined expense management, especially in sales and marketing in fact total sales and marketing costs were down slightly year over year, you'll hear a little later that we expect to see another significant increase in profitability in 2023.
Hey, good cloud gross margin improved approximately 300 basis points to 70% the improvement in peg a cloud cloud gross margin was driven by increased scale as well as innovation in our cloud architecture that helps increase automation and further drive efficiency.
On the subscription transition is complete free cash flow generation will start to normalize a critical step on our path to becoming.
And ladies and gentlemen, please standby, while we work to reconnect our presenters.