Pegasystems Inc (PEGA) 2021 Q2 法說會逐字稿

Good day, everyone, and welcome to the Pegasystems Second Quarter 2021 Earnings Results Call. Today's call is being recorded.

At this time, I would like to turn the conference over to Ken Stillwell, Chief Operations Officer and CFO. Please go ahead.

Thank you. Good evening, ladies and gentlemen, and welcome to Pegasystems Q2 2021 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, intends, plans, beliefs, will, could, should, estimates, may, targets, strategies, projects, forecasts, guidance, likely and usually or variations of such words or other similar expressions identify forward-looking statements, which speak only as of the date of the statement was made and are based on current expectations and assumptions. Because such statements deal with future events, they are subject to various risks and uncertainties. Actual results for fiscal year 2021 and beyond could differ materially from the company's current expectations.

Factors that could cause the company's results to differ materially from those expressed in forward-looking statements are contained in the company's press release announcing its Q2 2021 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, 2020, and other recent filings with the SEC. Investors are cautioned not to place undue reliance on such forward-looking statements, and there are no assurances that the matters contained in such statements will be achieved.

Although subsequent events may cause our view to change, except as required by applicable law, we do not undertake and specifically disclaim any obligation to publicly update or revise these forward-looking statements whether as the result of new information, future events or otherwise.

And with that, I will turn the call over to Alan Trefler, Founder and CEO of Pegasystems.

Thank you, Ken, and thank you to our shareholders. I'm pleased with our results for the first half of the year, and they reflect the strong demand for our digital transformation technology and our continued progress towards a recurring revenue model.

Our total ACV, which we consider to be the best indicator of our performance, increased by 22% year-over-year as our backlog continued to grow as well. I'm excited that we're seeing really strong cloud adoption, led by Pega Cloud which is the majority of our new business, complemented by great success in client cloud.

Now as parts of the world begin to emerge from the acute conditions of the pandemic, digital transformation remains at the forefront of our clients' priorities. It's more appellant than ever that there's no straight line back to a pre-pandemic environment. And clients, I think, are understanding the need for agility and that it's more important than ever if they're going to thrive in an increasingly unpredictable world. We're also benefiting from a renewed interest in workflow, a category we helped pioneer and it is being heavily discussed in the market. However, we believe that our low-code platform and our outcome-centric approach to workflow truly differentiates us and uniquely positions us to help our clients solve their business complexity while maximizing flexibility and delivering excellent value now and in the future.

Our strategy is to continue to focus our efforts on building solutions and an ecosystem directed in improving efficiency, usability, accessibility and time to value. When we last spoke, we were days within the PegaWorld iNspire user conference and saw several significant announcements. We launched the next major release of Pega Infinity, that includes enhanced low-code intelligent automation and AI capabilities. This newest version empowers business users to deliver differentiated user experiences with powerful development capabilities that deliver digital transformation at scale for even the largest and most sophisticated global enterprises.

Using a center-out approach, the latest enhancements help improve back-end process efficiencies, streamline front-end customer service processes and enable real one-to-one customer engagement to drive meaningful and lasting transformation. Employees can work smarter to drive the impactful outcomes, while end customers can enjoy faster, easier and more personalized experiences that truly help our customers deliver satisfaction and loyalty.

We also launched our new streamlined Pega partners program, designed to help clients rapidly accelerate their digital transformation initiatives by more easily identifying the partner that best fits their needs through new distinctions. In addition to the implementation role our partners have historically applied, the program makes it easier for them to engage with us in joint solution development, co-sell and even on incentives for referring clients.

This is the second year we held PegaWorld iNspire virtually. And we're able to incorporate a lot of learning and innovation to make this year's event even more engaging. I hope many of you were able to join live or can still watch the replays. After more than a year of essentially all global events becoming virtual, we had some concerns about digital event burnout. But we had a great response, with more than 18,000 attendees from almost 800 unique client organizations. Additionally, since the live event, we've seen more than 16,000 replay views, significantly broadening the impact and effect of the content. As successful as our last 2 virtual PegaWorlds have been, we are looking forward to being back in person in Las Vegas in 2022 and hope you'll be able to join us.

Now in terms of new business and some of the client work we've been doing. In Q2, we continue to see a good mix of business globally within our key verticals and across all 3 major solution areas while making some inroads in some emerging spaces. We continue to see both net new business and expansion of business within existing clients, indicative of the continued opportunity to extend our footprint within our installed base.

I love winning business, but I'm still most excited by seeing the great results we've been able to help our clients achieve, many of whom did share their stories at PegaWorld in May, like top 10 global bank HSBC is following a highly successful deployment of Pega Marketing and real-time decisioning in Australia by using Pega across the entirety of its retail banking and wealth management customer base. They are maximizing reuse and deploying to a number of markets across multiple sales and service channels. And this results in significant improvements in customer and colleague experience as well as revenue uplift.

Blue Shield of California is lowering cost per customer while growing in the highly competitive California market. They are improving customer service to deliver personalization with every engagement, creating an integrated service model that thrills both customers and staff. Fortune 500 insurer Unum has successfully implemented Pega natural language processing to support one of its largest contact centers, providing business users better insight into the types of requests being made by customers.

And UPC Switzerland, the country's largest cable operator and part of the Liberty Global Group, is responding to the challenge of massive changes in the telecoms industry. Pega is helping UPC with a radical digital transformation to create seamless customer experience across channels while keeping costs down and productivity up. You can hear more about these successes directly from our clients by watching PegaWorld iNspire replays on our website. Just click on the Events tab on the home page, and I think you'll find it really worthwhile.

Now from an operational perspective, we continue to hire strategically, attracting talent from peers and competitors while we invest in retaining and developing our own high-caliber team. Around the world, I continue to be impressed with the tenacity, commitment and passion our team has shown to get us through these new challenges and to show new things to our clients. We're just starting to support travel and allowing people back into offices as, of course, local conditions and regulations allow, while prioritizing the health and safety of our staff, clients and partners.

Now look, we all know the pandemic has had a profound effect on how we work. Some of it, very challenging, but it's also stressed our limits in positive ways. And we found innovative new approaches in working together with our clients to become an even tighter and more connected organization. Many of these changes will persist and continue to bring positive change going forward. And we're seeing with many organizations around the world that we've collectively learned that we can be much more flexible than we thought possible. And this creates new opportunities from -- everything from recruiting to retaining the best people, to being able to engage differently with our clients.

You may have seen that our headquarters building in Cambridge was recently sold, and we are ending our lease there. Rather than simply find another similar space in Cambridge, we took this opportunity to rethink what our workforce would look like in the future based on employee surveys and discussions with peers. As a result, we're leasing a smaller headquarters in Cambridge that will include a state-of-the-art client briefing center and also a second space west of the city in Waltham, which we're building out now and will be custom designed to support our future workforce.

We also, in the region, have beautiful offices in Salem, New Hampshire, north of the city. We think, for example, this approach will give current and future staff more options for where to work and support the flexible work environments that we see employees seeking. We believe our offices should be a magnet, not a mandate, and that this approach will benefit our recruitment and retention efforts.

So in summary, I think we're executing well on our strategy, and this is reflected in our results for the first half of 2021. We're making terrific progress on our transition to the recurring revenue model. Our clients are leveraging our software to address both immediate and short-term challenges as well as preparing and building for long-term opportunities.

I think we're making the right strategic investments to take advantage of the heightened focus on digital transformation, and we have our unique outcome-driven workflow that will enable this to be possible, all while we are collectively working to judiciously manage margins. And we continue to see significant opportunities among both our existing and new clients. To provide more color on the financial results, let me now turn this over to our COO and CFO, Ken Stillwell. Ken?

Thanks, Alan. For those of you who are interested, I'm excited to say this is my 20th earnings call as Pega's CFO. The economy certainly looks like it's recovering, and we continue to execute well on our cloud transition. Now during this transition, there are 2 key metrics that I've mentioned, that are how we measure our business success.

The first key metric is the growth in annual contract value, what we call ACV. ACV growth represents the annual contract value of recurring arrangements between Pega and its clients. I'm really excited to see Q2 finished with ACV growth of 22% year-over-year, inclusive of a 3% to 4% tailwind from FX. Total ACV reached $899 million, an increase of $161 million from the same period 1 year ago. The biggest contributor to our ACV growth was Pega Cloud. Pega Cloud ACV grew by an impressive 46% to $307 million. Client Cloud ACV grew by 12% year-over-year, reaching $592 million.

The second metric to measure our business success during the cloud transition is growth in remaining performance obligation or backlog. Total backlog at the end of the second quarter crossed the $1 billion mark to $1.03 billion, an increase of 26% from a year ago. The growth in current backlog, which is backlog of the 1 year -- the growth in current backlog, which is backlog of 1 year or less, was also strong, increasing 23% to $567 million over the same period, powered by current Pega Cloud backlog growth of 47%.

With these ACV and backlog metrics in mind, Q2 was a solid quarter, and it was sequentially much better than Q1. As I explained last quarter, our cloud transition includes 3 major phases. Pega is currently in the second phase of the cloud transition. I call this the revenue growth transition. In the first few years of the cloud transition, the revenue growth rate declined as new client commitments transitioned from perpetual license agreements to subscription arrangements. Most of these new arrangements are subscription bookings and go into backlog for recognition as revenue in future periods.

For example, in the first half of 2018 and '19, Pega's total revenue growth rate declined year-over-year. However, once a company passes the midpoint of the cloud transition, revenue growth starts to accelerate again and can even exceed the ACV growth rate, which is what Pega experienced in the first half of 2021.

Total revenue in the first half grew by 30% year-over-year, reaching $639 million. This is the fastest total revenue growth that Pega's business has experienced in over a decade when comparing first half revenue of the current year to first half revenue of a prior year. However, it's important to point out that total revenue in the first half of 2020 included the impact of the pandemic, a slightly lower renewal period and the revenue trough of being in the middle of the cloud transition.

Subscription revenue for the first half of the year was $511 million, a 37% increase from the same period 1 year ago. Subscription revenue, which includes Pega Cloud and maintenance now contributes about 80% of total revenue, up from just over 50% when we started the cloud transition in late 2017. You'll notice that we disclosed in our 10-Q that in the second quarter of 2021, we had a large existing client that renewed an existing multiyear contract also expanded their use of Pega software and extended the term of the agreement earlier in the year than we had anticipated.

The accounting for this deal under 606 led to over $30 million of reported revenue in Q2, which would have otherwise been anticipated in future periods. That deal was the biggest single variant to our expected revenue results for the quarter and the first half.

A core element of our go-to-market strategy is to increase sales coverage for our large target accounts, win new deals and cross-sell and upsell into those client bases. Our first half results are just one more proof point that our strategy is working. Some of our clients are doubling or tripling down on their Pega investments because they need a low-code platform to help them advance digital transformation initiatives and improve workflows. As a result, we plan to continue to invest in technology, leadership and additional sales capacity as we win more than our fair share of the $65 billion-plus market opportunity for digital transformation.

Our non-GAAP earnings for the first half of the year was $42 million or $0.49 per share. This improvement resulted from a combination of solid revenue growth and improved expense management, however, was impacted by the large term deal in Q2. I want to reiterate that ACV and backlog are the 2 most important growth metrics for the business. Pega Cloud is our Software-as-a-Service offering. For these customers, we manage the cloud infrastructure on behalf of our clients.

Client cloud revenue includes revenue from maintenance and term license contracts. The client manages these deployments on the infrastructure of their choice.

The final phase, the cloud transition, is the cash flow transition. We expect our cash flow will normalize in the coming years and has already improved in the past year. We believe it will be important to balance growth and profitability over the long term. We think of the Rule of 40 metric, the combination of ACV growth and free cash flow margin, to calibrate the trade-off between profitability and growth. We continue to expect that as we complete the cloud transition in 2023, we will make increasing progress toward that goal.

In conclusion, this was certainly a solid quarter on all fronts. Operator, please open the line for questions.

(Operator Instructions) First, we'll go to Chris Merwin from Goldman Sachs.

This is Kevin on for Chris. I had a question on the partner channel. Given you've had several changes in the way that you collaborate with your partners, are you seeing any early signs of improvement in engagement?

Yes, this is Alan. I think the engagement is visibly more intense. And we've added to that team to be able to work more closely with partners. And I'll tell you that the level of partner engagement on both actual deals and prospective opportunities are both visibly up. So I'm feeling good about the effort we're putting in our partners. And obviously, we need to continue to cultivate and develop that. But we're hearing from them a lot of enthusiasm about Pega, which is great.

Great. And then maybe one more for me. It's great to see ACV growth accelerate. Curious about kind of the CRM side of the business. How has deal activity been in that segment? And kind of what types of use cases are you seeing with your customers?

Well, for example, one of that big expansion that we talked about, I think, is very squarely in what people would consider to be set of CRM and broad CRM use cases. I think -- CRM, of course, means different things to different people. But the significant majority of our software is used and why is that possibly impact customers while trying to save the customer our client's money. And those are just going to continue, and we see a lot of interest and a lot of hunger for continuing to improve customer engagement.

And next, we'll go to Jack Andrews from Needham.

I want to ask -- Alan, you mentioned renewed interest in workflow in your prepared remarks. I was curious if you could drill into what specific types of use cases are you seeing customer interest in on that front?

So I think it varies a little bit by industry. For example, in the health care space, the conversations in many cases are around how do you improve care management and population health to make it so that, for example, you can both make people's lives better at the same time that you're saving money, which is the best of all possible worlds.

I would tell you in financial services, which has been and continues to be a strong area for us, a lot of the workflows are about trying to get the -- a lot of people used to refer to as the middle office out of the picture and replacing that with a high level of automation so that you can go directly from a multichannel or omnichannel need all the way through execution, whether that's through a Pega front end or by plugging us into one of the other channels.

I've never loved the word workflow, to be honest, though it's been popularized of late, and we're really outstanding at it. I've always preferred the word work do. Because you don't really want to flow the work around, you really want to actually execute and do it. And that is truly what we excel. And frankly, I think we're miles beyond lots of other people who have been or claim to be in that space. So I'm happy to have that word become more prominent, and I think that it plays to our differentiation.

Appreciate that. And just as a follow-up question, could you update us in terms of your hiring plans for the year? And any metrics in terms of just productivity and things like that? And how we should expect the balance of hiring to unfold throughout the year?

Well, I'll turn it over to Ken for the numbers. I'll just comment. But your hiring you do in a given year is really, to be honest, about improving productivity for the upcoming ones, right? So you don't -- certainly, as you enter the second half, anything we do is not going to be seen as productivity until we get some time into next year, just being the nature of onboarding, et cetera. Ken, do you want to comment about how you think those staff numbers are going to look?

Yes, sure. So Jack, we had done -- we were targeting kind of the just round numbers around kind of the 20% increase in kind of selling capacity. I would say our target for the year is not far off of that number. I would say that we're a little bit -- we've grown a little slower in the first half of the year. It's not linear in terms of the growth. So whether we actually achieve that growth rate by the end of the year, it probably might be a little less than that just because of the -- it's a competitive market out there.

And we were a little bit more, I would say, thoughtful about hiring into the back of the year and the first quarter because COVID was kind of still lingering a little bit. But certainly, we're -- the economy is holding up really well, our clients are very active. And like Alan said, hires that we do this year, even hires that we bring on in this quarter are just really starting to have a chance to impact next year. That's really a hire for 2023. So we really need to keep the growth rate up. So kind of think of that number, probably a little short of 20% for the year.

And next, we'll go to Mark Murphy from JPMorgan..

Yes. I'm interested in whether you have any metrics you could provide that might help us just understand your scale of adoption in the low-code market? For instance, just how many Pega users or how many seats do you think you have that would say that they are citizen developers that kind of sit on the business side rather than on the IT side? And just what does that mix look like for you in terms of seats on the IT side versus the business side?

So the work that we've done actually for the past 24 to 36 months, if you go onto our website and you look at what we call our Pega Express methodology, and you actually look at some of the short videos or customer testimonials or other things, you'll see that we have really worked to make the technology accessible to the business. And the real key for us is our software is designed to be accessible for the business, but not to do a little sort of what I would describe as kind of tiny toy solutions that might almost compete with spreadsheets. That's not where we think the needle is going to get moved for material organizations.

So if you take a look at the latest release we have 8.6, which we just announced at PegaWorld and are now actively shipping, we've got dozens of clients who are in the low-code factory space, trying to set up factories for their "citizen developers" or their populations to be able to both build apps, but also really facilitate a collaboration between the business and IT where they can reuse things that IT provides but do it in a way that has the right sort of security, reliability and other types of things built in.

When I listen to the -- some of the low-code mantras, it just sort of brings you back to the eras of Lotus Notes and PowerBuilder and all sorts of other things that frankly ended up having a bit of a, let's just say, limited and not necessarily fortunate life at their end. And what I'm excited about is that we've been able to empower those sorts of business developers which I prefer is a better word than citizen developers, which sounds a little sort of radical, but be able to really empower those developers to participate in a completely different way and work constructively on things that are going to end up being important apps for their organization.

And there are going to be things that can start small and grow to real big. And we have -- I'm thinking of a couple of my Fortune 50 customers who actually have these sorts of developers who built more than 500 applications and are running substantial numbers of apps that are being used by tens of thousands of the staff in those organizations, all powered by people who you wouldn't think of as traditional IT at all.

Okay. Very interesting. The -- also on the customer engagement segment, following up on that question from Chris Merwin's team. I think -- I'm trying to understand where did you see the strongest growth factors in Q2? Would be more in the customer service and support, more in the sales automation or the -- the other piece that does the cross-sell, the next best action piece? I'm just trying to understand what is getting prioritized as the economy reopens and starts building momentum here?

A lot of next best action, coupled with service and end time fulfillment. There's a lot of people who've seen the bailing wire in their internal operations and know that they need to really make this better, trying to make things more efficient. And that is primarily something that has to do with customers but is about an efficiency play and about an end-to-end automation play inside those orgs.

So I'd put it very much more in the sort of fulfillment and deepening client relationships. I think a lot of organizations have realized that the way they're going to get through sales is, in many cases, going to be by deepening existing relationships as opposed to necessarily going out after a whole source of new companies. And we're being used heavily in those types of environments.

Okay. Understood. And then I just had a final quick one for Ken. I think it's -- you kind of -- you spoke to the kind of the mega deal that ended in Q2. And so it helps us understand why that term license line can show so much volatility. The -- it almost looked like it might have gone a bit beyond that. Can you help us understand the -- when we look at the upside in that term license line, how many distinct deals maybe are driving kind of that full magnitude of upside, if you will?

So maybe I might maybe answer your question and kind of maybe a little more direct. So I'll say I think that some of the views of our Q2 revenue were probably a little conservative in the term line. So let me start there. We -- naturally, we don't guide, but we certainly saw an opportunity to perform well in the term line. So that would be one statement I would make.

And absent that $30-plus million deal, there's -- in a typical quarter, you're going to have 50 deals or so that contribute to revenue in a quarter, but only a very small number of them that will contribute, say, over $1 million in a quarter. So you don't think about Q2 as like the big deal plus 2 more. It was more than I think -- there was probably a more of a lesser expectation on that term line than maybe what we thought might occur in terms of this -- kind of the sell-side target, so to speak.

And next, we'll go to Rishi Jaluria from RBC.

And then nice to see continued solid execution. I wanted to start off by maybe drilling a little bit more into the ACV and cloud numbers because we did see a bit of a drop off in Pega Cloud ACV growth rates. And look, I understand the story about Cloud Choice. But maybe you could help us understand that as well as the slight decel that we saw on the cloud revenue side. Were these -- were there any factors that you could call out in the quarter? And should we expect that line to maybe reaccelerate over the coming year? And then I've got a follow-up.

Yes. So let me take that one, Alan. So yes, Rishi, and I realized that we just released earnings like an hour ago. So you guys need time to digest all the numbers for -- that takes more than 30 minutes. But I will highlight one thing. The actual growth in Pega Cloud ACV sequentially in Q2 was -- I think maybe like the biggest quarter we've ever had in Pega Cloud absent of Q4. So it was a very strong quarter in sequential Pega Cloud ACV growth.

Here's what's happening. You now have a big denominator when you're doing these growth numbers, right? And so by definition, trying to keep a 50% growth rate into perpetuity when we're getting $300 million, $400 million, $500 million, $600 million over time of Pega Cloud ACV will probably be an unrealistic expectation. But what I would say is that also, that number is a 12-month number and does have some -- depends on sequential -- or excuse me, prior year quarters and how that works out. But what I would tell you, though, is just look at the sequential Q1 to Q2 growth in ACV.

I think if my math was right, we grew Pega Cloud ACV something like $25 million and we grew Client Cloud, something like $21 million. And that's -- those -- that growth number are pretty remarkable growth numbers. But I don't think there's any weakness at all or anything that we should be thinking about for Pega Cloud or cloud -- or ACV in general. I just think sometimes the math gets a little bit kind of screwy depending on which quarter and also we got a bigger base number. That's really what's happening.

Okay. Great. No, that makes sense. I totally understand. And then following up just on the ACV line. It's nice to see ACV growth tick up a point or 2 on a constant currency basis from last quarter. I imagine you still have ambitions to not to see it get back up to that 20% mark that it had been pretty consistently above but accelerated further from there.

Can you maybe talk about what kind of the road map to get -- drive that reacceleration looks like? And what sort of progress you're seeing on some of those initiatives, including the improvement in sales motion and better leveraging the partner ecosystem?

Well, I'll take one piece of that and Alan, feel free to add any color here. So in terms of 2021 versus, say, '22, '23, '24. If you think about the difference this year, we absolutely are expecting our ACV growth constant currency to stay kind of at that 20% and hopefully even north of 20% number. So that's certainly our expectation and our hope for the year.

Now I don't think you're going to see much opportunity to accelerate ACV in 2021. I just don't think it's -- it's just -- we got a new sales leader that -- the new go-to-market leader that came in last year. We've got changes. We've got a new partner motion going on, as you know. I don't think it's realistic to think that, that's a 2021 big impact. Maybe I'll be wrong, and I'll be happy to be wrong on that, but I just think setting expectation.

'22, '23 are years that we should really see the benefit of the great work that Herde and his team are doing to really build some of those additional kind of relationship connections and lever points like the engagement with our partners and really pushing the tighter operational cadence. Those are -- those things that we're hoping and expecting to see an impact in 2022 and beyond. But I would say for 2021, I definitely -- am looking for ACV to improve over where it is now. But I don't think that it's going to be a big acceleration, probably is a little bit unrealistic, given where we are in the growth curve.

Got it. Okay...

Just to add a little bit of color to the future. I think Ken's view on '21 just represents where we are in the year and of the recency of some of the changes we made. But if you go take a look at LinkedIn and see the senior people that we've added from some pretty remarkable other organizations. Obviously, we're bringing on -- we brought on a lot of new and very senior leadership across Europe. In the APAC region, we've added, we've added in the Americas. We're bringing these people on because it's our belief in the market has the potential to grow faster than in the past. There's nothing that we would say differently about what we've been seeing.

The goal clearly is in '22 and '23 to get a return on that talent that we've been bringing in. And we'll see how we do this year. They get a little bit of a pass because it takes some time to bring things up, to get people up to speed, but also to get an organization moving. But I'm very excited by some of the talent that we've been able to not just find but really attract. So we're excited.

Yes. Got it. That's helpful. And last one, and I'll hop off. But wanted to think maybe going back to the hiring question. So we hear a lot of companies in software land, talking about labor shortages or difficulty in getting the right talent. Maybe can you talk a little bit about what you're seeing from that perspective? And if I recall correctly, if we wanted to take back to the depths of the pandemic, right, in April and May, you kind of made this deliberate decision to keep kind of hiring and not put on a hiring freeze, not slow down hiring to take advantage of the environment. Can you talk a little bit about how some of those hires have panned out? And maybe what sort of position that leaves you in relative to -- if you had to put on a hiring freeze like many companies and software had?

So I think that -- look, the hiring affects us in a variety of places and in a variety of ways. If you think about, we were just talking about go-to-market, I believe we've been able to put together a team that will have very exciting prospects for us over the next 4 years. From a product point of view, we talked to PegaWorld about the continuation of what we had announced 2.5 years ago as Project Phoenix, which is the real continued motion of our products to be state-of-the-art and seen in newer and more exciting ways. And I loved what we were able to show at PegaWorld.

And concepts that we have like the idea of a process fabric, being able to interweave processes across systems, including non-Pega systems is, I believe, exactly on target. And those sorts of concepts, some of the new work we're doing in terms of working with both a highly advanced Pega UI and being able to have this digital experience API that can work in other settings, et cetera. I love what we're seeing, and we spent some time on the website. I think you'll hear some just tremendous case studies that are all being empowered by being able to bring the right people on, being able to grow the product, the culture overall and our go-to-market. So I'm feeling pretty good across the board.

And next, we'll go to Steve Koenig from SMBC Nikko.

I've got one for Ken and then one for Alan, a multipart question. So Ken, you talked a little bit about what the quarter looked like taking out the big term renewal. So we heard about it wasn't a quarter driven by other whales. Cloud was strong sequentially. Ex that term renewal, any color you can give us on duration, cloud mix in your business and any conversions to cloud? I think you have some big ones in the year ago quarter. And then I got one for Alan.

Yes, sure, Steve. So it was a slightly -- Pega Cloud was a little over 50% of new client commitments. You can kind of see that if you look at the sequential ACV growth. You know what I mean, you can kind of -- it was a little bit -- it was -- it was somewhere in the kind of mid-50s, I believe, in terms of the amount of new Pega Cloud versus new client cloud. No migrations of size. That's not how we did it. We are always talking to clients, but there wasn't any big shift that would have driven that number.

The duration is not an impact to revenue at all. We didn't do anything. We typically sell 3-year deals. That's kind of the standard, and clients renew for like terms or sometimes slightly shorter terms in terms of the renewals. So nothing weird happening there at all. So I would say we're looking at the numbers, Steve. No migration and no impact from -- I'm sorry, and slightly more than 50% impact from Pega Cloud in terms of new...

And Steve, not that I would feel the need to defend a renewal. But I guarantee you that this very substantial deal that did come in a little earlier in the year than we might have expected in one big lump, calling this a renewal is a major understatement. This was a very, very meaningful reflection of our competitive positioning against top line competitors at one of the biggest and most important companies in the world that ended up deciding that they were very much in with Pega. And so to classify it as a renewal, I think, undershoots it by more -- by the majority, just to be candid.

Got it. Very helpful. Very helpful. And then, Alan, maybe 2 topics for you that might be related. So I'll ask them both. When we talk about workflow or, as you say, work due, competitors talk about automation, they talk about integration, they talk about machine learning. You guys have technology that is leading edge for automation and decisioning. You don't talk as much about integration. And I kind of wonder what's your -- kind of what's your -- what directions are you headed there?

And then I'll just ask related to that, other things that could be enabled by FNX. Can you give us any color on your thinking about building an application ecosystem, some kind of marketplace? Are you looking at some kind of multi-tenant IDE or kind of would you stick with your current approach? Any thoughts there about stuff that would be enabled by FNX in terms of your ecosystem or client development, that would be really interesting.

Sure. So what I'll tell you is that to start with the last bit, the FNX part is -- it really represents, and we talked about a very broad thinking and evolution of how we want to go forward. And -- we've done this numerous times before because we've been around a long time and have seen lots of technology transitions. So I think we've got an unusually good, not just understanding of the types of things you need to do but understanding how to not lose a customer base, hopefully in the process of doing it.

And so we've talked about how FNX will, as it continues, enable multi-tenancy as an option. For example, not that I think our major stand-alone customers are going to want to run in necessarily their own tenant. But certainly, being able to support that gives us additional options and that's been on our road map here, and we've been doing the work to be able to support it.

Relative to being able to support a marketplace, we've, I think, clearly stated that supporting the ability to develop Pega-based components and being able to have them available and shippable and sellable by other parties is a very important part of this Phoenix journey. And if you take a look what's actually been delivered, this is not some badly designed waterfall approach. This really is a lot of iteration that's bringing many of these capabilities into the 4 right now. And you can see a lot of it in 8.6, you'll be able to see more of it in 8.7.

Coming to integration, we are so deeply integrated in our customers. And it is so central to what we do that we almost don't talk about it because we do integration like we were falling off a log. It's just absolutely standard. And you can't do the sort of automation and the sort of end-to-end service we do without being able to integrate easily. And what I love is the way that we integrate actually insulates the "workflows" or insulates the decisioning. It insulates it from variations in the back-end systems.

So that I was -- remember talking to a CIO who'd "standardize" in a very, very large company on SAP and said that they had 4 identical SAP instances. And I said, really identical? And he said, "Well, a kind of." Well, we make those systems all look identical to the various supply chain and other service-related processes that we do. And they can now modify, adjust, pull those together, acquire another company. And our integration is built into our architecture. And frankly, I look at pretty much everybody else that's out there, and it's an add-on. I mean your sales force had to go buy another company to add on integration. Ours is really part of the Pega model. And so maybe we should mention it more, Steve. I don't think we're getting enough credit for it.

And next, we'll go to Pat Walravens from JMP Securities.

Great. And let me add my congratulations. So Ken, on a constant currency basis, ACV growth is still below 20%, right? So is the sales team humming the way you want it to be? And -- if not, what are sort of the top 1 or 2 things that you can get it to the point you want it to be at?

Well, first off, of course, I wouldn't call it humming because we are not -- our sales productivity in terms of ACV growth compared to our sales and marketing expense is not where we want it to be. So I would definitely not say it's humming. I would say Q2 was a very strong quarter for our sales team, and I think they should be -- you know how it is with quarters, right? I mean you celebrate for exactly 30 seconds then you start the next quarter, but I do think our sales team performed well in Q2 in all of our regions, quite frankly.

So I definitely think good sign. That's exactly one quarter, but it's a good sign. I think that Hayden and the talent that has been brought in is certainly promising, Alan mentioned that earlier. I mean I'm very excited about the team that we have and the potential to really see that turn north in a meaningful way. So I'm, I would say, more optimistic now than I have been that said, no, I'm not happy with our productivity from the sales and marketing spend nor is Hayden. So we have -- we certainly have work to do there.

That's super helpful. And then this is -- I don't know if you can address this one. But -- and I know you guys don't update your guidance, but $0.25 and $1.25 billion for the year and you're already at $0.49 in just the first half of the year. So any big picture thoughts you can share at this in terms of how to think about Q3 and the year?

Well, so one thing I would say is certainly having a deal of the size that we had have revenue being recognized in Q2 where it otherwise would have been recognized later in the year or later -- in later periods certainly doesn't necessarily change a year theoretically in that model, right? But it does change the distribution of revenue and EPS between the first and the second half. So that you can't -- you almost have to take that deal out a little bit and then see what you think about.

You know what I mean, Steve -- I mean, Pat, that's kind of my thinking on that. If naturally, if we knew something that was materially different, we would certainly have to reevaluate whether that was meaningful or not. But we're not a business that is kind of -- we have with 606, there's some variability there and when revenue is recorded naturally, when revenue is recorded, that impacts EPS. So I wouldn't -- I think one of the biggest mistakes that people can make is looking at a quarter or half a year and then just extrapolating like we're Starbucks or something, right? It's not -- that's probably the one message I'd like to make sure people don't jump to that conclusion.

Ken, it's almost like you're struggling towards the lumpy word which I normally just...

This was -- yes, lumpy is a fair word. So -- and I think that you just got to -- we got to just remember that...

But it is nice. Even if the $30 million had come in at a small or more typical deal size, the quarter would have been good anyway. So I feel positive about that. And I think Ken is absolutely right about not getting carried away with considering one quarter a trend. If anything, we'd kind of know that some of this business was coming in this year or it was likely to come in this year when we did our original planning, it just hit in Q2 and we're thrilled to do it. We're trilled the customer was that serve about getting things done.

And next, we'll go to an Yun Kim from Loop Capital Markets.

So following up on Steve's earlier question about converting Pega client customers to Pega Cloud. It seems like we get this question almost every call. Can you just talk about why that conversion has not been happening more quickly? Is it not possible for a customer to have both client cloud and Pega Cloud architecture, where you just keep the old stuff where it is and just deploy new stuff on the cloud? What would it take for that Domino's to start falling?

So there is no -- absolutely, we have lots of customers who have client cloud or our more traditional clients even in sort of a pre-cloud mentality who have moved and begun bringing instances of Pega up on Pega Cloud. So they're not mutually exclusive. The -- it's absolutely not a big bang sort of -- big bang sort of thing.

I think that some companies have almost, maniacally in some cases, looked to "move their base" to a internal cloud, so they can get more credit for it. And to tell you the truth, we're really encouraging our base, our sales teams to sell new to either existing or new clients. I just think that's a better -- given our extreme retention rates, whether it's Pega Cloud or Client Cloud, I think that's just a better way to provide value.

So we, unlike a lot of other companies out there that I've read about, don't have a, hey, let's just convert the whole base sort of strategy, which I do see in other places. I think ultimately, that's going to add more long-term value for our clients and for our customers.

There's a misunderstanding out there and probably this is a good time to reinforce this. Client Cloud is not old stuff and Pega Cloud is new stuff, right? It's the same solution. And I think that because so many companies that have went through the subscription transition, the on-premise stuff in the other companies is like the old legacy stuff that you just stop supporting and you move everybody to your SaaS solution. That's not what we're doing. And so some clients will want to move, but just like the deal, the expansion deal that we talked about in Q2 that had all the revenue, that wasn't an old solution. That's a state-of-the-art new, modern digital transformation use case that, that client is expanding on a relationship that they expanded on a few years ago as well.

So I think that there's a misunderstanding with Pega that client cloud is old and legacy and old versions and not valuable. And although some clients do have maintenance from perpetual licenses on versions in the past. Lots of clients that we have are on the new state-of-the-art stuff on client cloud.

Got you. I think that really helps. So just maybe some housekeeping kind of question. What are you seeing in terms of new and existing customers mix? Now I am assuming with a partner ecosystem ramping, maybe you're seeing the new customer mix kind of increase?

Not yet. We still have the majority of our bookings coming from our existing installed base, kind of over 75% of our business activity is from clients that we have done business with. We would expect that to be an impact in the future, but I would -- not for this year, Yun, still, but -- and with COVID still virtual selling, you would expect it to kind of still stay that way a little bit until you have people kind of a little bit out and interacting kind of live more than we are right now.

Okay. Great. And then last question for you, Ken. For Pega Cloud, can you just talk about any kind of trends that you're seeing around the deal size?

No, deal sizes are pretty consistent. There's not -- deal sizes and deal duration and contract durations are pretty consistent. I wouldn't say there's anything noticeable that I've seen that would suggest we're moving in some dramatic direction in either way.

And next, we'll go to Mark Schappel from Benchmark.

Just one question here, Alan, for you. Your September quarter coming up is usually a good quarter for your federal government business. You got your FedRAMP certification a couple of years ago. And just wondering if you could just give us some additional color on how you think the FedRAMP -- or excuse me, the federal business is progressing?

Yes. We're pretty happy with the federal business. Actually, we were -- I was just talking to the CEO of Services Australia, which is the Australian federal business. We're seeing a lot of success, not just in the U.S., but they actually published an article about how they are ramping up with Pega down under. And obviously, Germany has been just terrific for us as we've talked about that as has the U.K. government too. So I think not just around the FedRAMP successes that we're having, I think some of you guys may know that it's been out there and you said it's a public domain, we won the census a couple of years ago in a very, very tight competition.

I'm thrilled that it's now deemed a success, and we've heard that they are really, really happy with the way that all worked and how that all played out with our software. And we've got a lot of agencies we're doing work with. Some of which have a lot of potential, like, frankly, the IRS, which we don't tend to announce those too much in advance of them being rolled out. But it's in the public domain, if you were to look at some of the federal websites.

So timing is always hard to predict. And I think in the government, it can be a little trickier than anywhere else. But those businesses, that whole government arm is going to continue, I think, to be extremely strong. as the governments continue to know that they have to modernize. And there's just so much need. So we're really excited about that business.

And we have no further questions at this time.

Well, that's great because we were going to have to wrap. I do have -- I don't want to steal Ken's thunder. And I do want to congratulate you, Ken, on the 20th earnings announcement that you've done. And I will tell you, it's been a privilege to be on this wild ride with you as we move from a very, very different shape of company in the markets to one that I'm extremely excited as we begin to head into the final phases of the cloud transition.

I will just share and this is a mind numbing thing to acknowledge that this is my 100th earnings call. And so I'm very thankful to those investors who've been along with us for, in some cases, a pretty good part of that journey. I want you guys to all know and all of you to realize that we've got a terrific team that's working hard to live up to your expectations and to your desires, and we are very excited about what's potential -- what the potential is. So with that, let me say thank you. Thank you for the 100 calls. And we're looking forward to getting back to work on your behalf. Talk to you all soon.

And that does conclude our call for today. Thank you for your participation. You may now disconnect.