Pegasystems Inc (PEGA) 2021 Q4 法說會逐字稿

Good day, and welcome to the Pegasystems Fourth quarter and Full Year 2021 Earnings Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ken Stillwell, Chief Operating Officer. Go ahead, sir.

Thank you. Good evening, ladies and gentlemen, and welcome to Pegasystems Q4 2021 earnings call. Before we begin, I would like to read our safe harbor statement. Certain statements contained in this presentation may be construed as forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The words expects, anticipates, intends, plans, believes, 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 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, '22 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 Q4 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, 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 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 everyone who's joining today's call. I'm pleased that we ended the year with solid results by staying focused and leveraging our strengths. We grew ACV, Annual Contract Value. Our most important metric to over $1 billion for the first time ever. Our low-code software platform for workflow automation and AI power decisioning is I think, it's unmatched in the industry.

And the largest and most demanding enterprises and governments around the world choose us to address their most mission-critical challenges. Increasingly, we're being selected as the enterprise workflow standard for activity done at scale from the simple to the most complex. With Pega, our clients don't need to sacrifice scale to speed. We support their digital transformation objectives with solutions that provide immediate value and with the agility to tackle whatever challenges they may face in the future. We continue to enhance this innovative technology, which consistently receives some of the highest possible ratings from leading analyst firms like Forrester and Gartner, and drive significant and meaningful outcomes for our clients.

We have a loyal client base that understands and values the power of what we offer and is leveraging Pega to deliver inspiring results and continues to provide ample opportunity for expansion. We have a dedicated and deepening partner ecosystem that's helping us accelerate our growth and bring even more value to our clients.

Our partners continue to focus on delivery excellence and our essential element in ensuring successful adoption by our clients. We have a culture built on inclusivity, collaboration, accountability, innovation and excellence, committed to giving back and making a difference in our communities. I'm really proud that we recently scored 95 out of 100 on the Human Rights Campaign Foundation's 2022 Corporate Equality Index. This is a globally recognized benchmark and represents our team members coming forward and doing the right things.

And importantly, we have a team of more than 6,000 people around the world, that are dedicated, passionate and resilient who make all of this possible and who make me proud every day. Now in terms of market dynamics and competitive differentiation, let me just say that digital transformation continues to be central to our clients' successes and is driving our business.

Gartner is predicting continued growth in enterprise software spending, driven largely by organizations upgrading their software stack to Software-as-a-Service and seeking continued flexibility and agility. And IDC is predicting investment in digital transformation software to grow about 25% every year from now through 2024. Though initially accelerated by the pandemic, it's clear to me that industry focus will continue, and we're in a great position to capitalize on this trend for years to come.

I'm energized about the terrific market opportunity this represents for us, and our ability to significantly help clients solve problems both today and for tomorrow. We are working to be the low-code software platform, the low-code software platform for workflow automation and AI-powered decisioning. And these powerful capabilities allow us to crush business complexity.

So our clients can more easily make decisions, save time and get work done. We differentiate on our architecture, which allows us to tackle mission-critical issues our clients have today and will have in an unpredictable future. Our Cloud Choice approach, which allows clients to use our fully-managed Pega Cloud services or to run our software on their cloud of choice, supports the growing trends we're seeing in multi-cloud environments.

And our exceptionally powerful and adaptable software is scalable to provide maximum reuse while enabling collaboration between business and IT leaders for rapid innovation. I'm pleased that we're trusted by many of the world's largest and most demanding enterprises, and governments and that they're using us to fundamentally evolve their businesses and to improve how they engage with their clients, by personalizing customer engagement to maximize customer value, streamlining customer service to increase customer satisfaction, retention and agent productivity, and improving the efficiency of onboarding operations and exceptional workflows to save time and cost while increasing speed and agility.

Now over 2021, we continue to see the positive impact of our deep and profound client relationships, and how they're able to drive outstanding results for our clients. We expanded our reach in many clients in key verticals, including communications, financial services, health care, insurance and government. We also continue to make inroads into organizations that represent new growth opportunities in places like manufacturing, consumer services and technology services.

We continue to deepen relationships and see tremendous opportunity for growth within those existing clients. These clients become sustaining relationships that routinely renew year after year and set the standard for successful examples of significant digital transformation. Our clients continue to expand their use of Pega, because we drive value today, and we see how they can drive value in the future. That's why so many of our clients are willing and we're honored that they are to publicly talk about their work with us, and they will this year, again, when we're once again holding PegaWorld virtually in May.

Now we're holding PegaWorld virtually this year, but we're excited to bring back in-person events in the second half of this year. And we'll be holding a variety of clients and partner events around the world, including regional client engagement events and client and partner advisory boards. Now going back to PegaWorld, one of the best parts of PegaWorld is hearing from our clients. And this year, we'll once again feature incredible stories like Cigna, who is using Pega to process more than one million critical and complex healthcare transactions each day and address the needs of customers and patients in a highly-personalized way.

Ford, who has created a center of excellence using Pega as their enterprise low-code workflow automation capability to enable citizen developers to create Pega applications and alleviate IT backlogs. Highmark, who is leveraging Pega to deliver enterprise-wide healthcare consumer engagement, and do it at scale across channels, focused on improving health outcomes, improving the member experience and also reducing cost.

For the U.K. Royal Navy, who is using Pega to transform and modernize its recruitment process with a unified digital platform that provides candidates a better experience and the data that the Navy needs for meaningful insights. Or Verizon, who will showcase how they're using Pega decision engine to influence and personalize customer relationships and increase sales velocity. Or at Wells Fargo, who is using Pega to ensure that each of their 5 billion monthly interactions with customers is targeted and relevant to the individual regardless of which channel they choose to connect through. They've just rolled out this new system in 5,000 U.S. branches within a year. And they just published a new video that features this work.

So you don't need to wait until PegaWorld to see their incredible story. Just go to pega.com. I hope you'll check out the PegaWorld website, register and join us live. I was also delighted to recently hear from our clients at Commonwealth Bank of Australia, that they've become the subject of a Harvard business school case study, as their work is being considered a global best practice. The case study is available online at the HBR store and is based largely on the work they're doing with Pega to drive what they call their Customer Engagement Engine, an AI-driven customer experience platform.

As the case study says, "Against the backdrop of a once-in-a-century global pandemic, CEE, their Customer Engagement Engine helped the group deliver a strong financial performance, while also supporting customers with assistance packages designed in response to the coronavirus outbreak."

Before I conclude, I also want to provide an executive update. I want to let you know that Hayden Stafford, the President of Global Client Engagement, has decided to pursue an opportunity with a pre-IPO company and will be leaving Pega.

In his 22 months with Pega, Hayden helped cultivate an extremely strong go-to-market operation, and we have an experienced and talented team. I am confident the team we have is well positioned to continue to deliver through 2022 and beyond. Collectively, we wish Hayden all the best in his next endeavor. So in summary, I'm excited that as we enter 2022, we are clearly a subscription business. Nearly 100% of our software business is now subscription. You can see the significance of this transition in our full year financial results, which look much more like what you'd expect from a subscription-driven business and which Ken will take you through shortly.

I'm especially excited to see that our revenue growth is now more closely aligned with our ACV growth, which, as I've said, we view as the critical measure. And the need for enterprise software to support digital transformation initiatives in our client base continues to grow. And I think we're in a great position to capitalize on that growth and provide solutions unmatched in the industry. We're really excited about the significant opportunity we have this year and beyond. And I believe we have the right team to deliver on these opportunities. To provide more color on the financial results, let me now turn this over to Pega's COO and CFO, Ken Stillwell. Ken?

Thanks, Alan. To hit on a few highlights at the top of our business, Annual Contract Value, ACV grew just over 20% year-over-year, surpassing $1 billion, as Alan mentioned. Currency negatively affected our ACV growth by about 1%. So in constant currency, we would have been kind of in the 21% range. Total revenue reached $1.21 billion for the full year.

Revenue would have been even higher if not for significant growth of 45% in our term license backlog. As many of you know, the timing of the revenue under our client cloud model is not -- it can have some lumpiness between quarters and it's not as predictable as our Pega Cloud revenue recognition. So it's important to look at revenue and backlog because it tells a complete story.

Subscription revenue grew 24% year-over-year and made up almost 80% of our total revenue in 2021. We delivered the highest total gross margin that we've reported at 72%. Remaining Performance Obligation, or RPO, or backlog reached $1.3 billion, an increase of 25% year-over-year. And it's great to see us get back to full year profitability and as non-GAAP EPS reached $0.22.

Now let me put this all in context. 2021 was another important year in the transformation of our business as we are now largely complete with our subscription transition. Remember, we're a subscription software business. And we're almost at the end of our financial model transition. When I first talked about this, I talked about us finishing the transition in 2022 going into the beginning of 2023. And we are still on that schedule.

Now that we've wrapped up 2021, let's go back and refresh everyone of what I talked about in 2017 about how the subscription transition would evolve if we execute it as planned. The first step was to change the way we sold software moving away from selling perpetual licenses. Before we started the transition back in late 2017, over 50% of our new client commitments were perpetual arrangements.

And for the last couple of years, almost 100% of our new client commitments are now subscription arrangements. Our sales team and our clients have clearly moved from a perpetual to a subscription buying and selling model, which is a very dramatic change in just a few years. It's also great to see that our revenue growth rate and our ACV growth rate have really converged closely.

When we started the subscription transition, I talked about our revenue growth rate declining in the early years of the transition, which is exactly what happened. And as we moved away from selling perpetual licenses where the license is largely recognized upfront, and as you move to a ratable subscription model, the revenue begins to reverse and normalize as you get closer to the exit of the transition.

Pega's annual growth -- annual revenue growth was flat in 2018, for example, and only grew 2% in 2019, but ACV was growing by over 20% in both of those years. Now when you fast forward to 2021, Pega's revenue grew 19% in 2021. Our subscription revenue grew 24% in 2021, and ACV grew just over 20%. So largely as we envision this playing out.

We've also made progress in the normalization of cash flow and profitability. The final phase of the cloud transition, which we should complete in 2023 is when you begin to see that margin expansion and normalization in a business like Pega, where we have very high retention rates and a lot of operating leverage with high gross margins, you would expect cash flow to generation to increase significantly as you exit and normalize out of the cloud transition.

In fact, in 2021, we delivered the highest gross margin since we started this transition, as I mentioned, at 72%. That strong improvement was powered by an increasing Pega Cloud gross margin, which reached 67% for the full year of 2021. For the full year, non-GAAP EPS was $0.22, a significant improvement over last year, but really just a step in the process of getting back to significant free cash flow generation.

Coming out of the subscription transition is the perfect time to remind people of the cash flow potential inherent in a subscription business with high retention rates like Pega. I believe we're starting to see that return to operating cash flow generation and is now inflecting upwards and will continue to in 2022 and beyond. We're confident that we can increase margins even further to achieve our free cash flow targets and accelerate our ACV growth at the same time. We continue to see a tremendous market opportunity for us in the digital transformation space. So we will continue to invest in sales and marketing to help accelerate our ACV growth. Our sales and marketing expenses are declining slightly as a percentage of total revenue, but we know we still have work to do there.

We're making progress. We're not quite there yet, but we know we are going to continue to drive sales productivity improvements in 2022 and beyond. Moving to Cloud Choice. We clearly benefited from Cloud Choice differentiation. It's very clear to us that multi-cloud is a real trend. In January, Investment Bank RBC reported that 77% of IT decision-makers use 2 or more cloud vendors, while 35% use 3 or more cloud vendors. And Gartner reported in September that 76% of firms use more than one cloud provider, offering our clients' Cloud Choice is critical. And by the way, we're excited that our subscription software is now available for purchase on the Amazon marketplace, giving us another distribution channel.

While on the topic of Cloud Choice, it's important to remind you that $1 of incremental ACV is a $1 of incremental ACV. When the client purchases Pega Cloud or Client Cloud, the long-term economics for us, are very consistent as we cross and upsell to our largest organizations. Our solid performance for the year is also evident in our remaining performance obligation or backlog. Total backlog represents expected future revenue from existing contracts with our clients.

Total backlog reached over $1.3 billion, an increase of 25% year-over-year. Our incremental backlog add was almost $300 million year-over-year. Ultimately, a subscription software company's revenue growth rate, our ACV growth rate and our backlog growth rate should all align. The fact that these 3 growth metrics are much closer in 2021, and even converging closer in 2022 and beyond is evidence that we've executed well on our subscription transition. Given the evolution of our business, you may notice we've updated the revenue categories in our financial statements to group our subscription revenue streams more clearly.

These new revenue line items better reflect the fundamentals and trajectory of how we think of our business. Total revenue reached over $1.2 billion, as I mentioned earlier, representing growth of 19% year-over-year. And highlighting why it's very important to look at RPO and revenue growth together when evaluating our performance. One challenge of our compelling Cloud Choice strategy is the revenue recognition for our offerings is not always ratable. As you know, as I mentioned, in 2021, our term license backlog increased 45% or $53 million year-over-year, which is unusually strong and was significantly higher than the term license revenue growth of 26% for 2021.

Normally, we would expect to see those growth metrics more in line with each other. But the higher RPO growth in 2021 just shows you that we have greater visibility into term license and revenue looking out in the future years. Cloud subscription revenue grew 24% year-over-year and made up 79% of total revenue. When you add our subscription revenue in our professional services revenue, it's in excess of 95% of the revenue in 2021.

Turning to our fiscal year 2022 guidance. I want to remind you that it's our practice to provide annual guidance at the beginning of the year. We do not update annual guidance during the year unless we do a material acquisition. We expect total revenue of $1.46 billion to $1.49 billion, an increase of 20% to 23% year-over-year. And for the first time, we're providing ACV growth guidance, which we expect to grow 20% to 22% year-over-year in 2022.

We've created a range, which we believe provides some level of visibility to the business and the growth of the business without the unnecessary predictability of guessing an exact percentage number, which, as you know, is very hard to do. From a profitability perspective, we expect 2022 non-GAAP EPS of between $0.75 and $1, a solid improvement and a step in the right direction on the way to the Rule of 40.

We realized that there is tremendous leverage inherent in our operating model, and we plan to exhibit that leverage as the business scales and grows larger. We continue to see solid demand for digital transformation in both the front and the back office and our product continues to be best-in-class with differentiated capabilities. Before opening the call for questions, I want to reiterate Alan's invitation to each of you to our Annual Client Conference, PegaWorld iNspire in May. We also plan to hold an annual investor conference sometime in June. More details to follow on that. We're hoping maybe that, that investor conference can be live, but fingers crossed.

And with that, operator, let's open the call to questions.

(Operator Instructions)

And we'll take our first question from Rishi Jaluria with RBC.

Nice to see a little bit of acceleration in the business, and I appreciate the shout out for our recent sales survey. I wanted to maybe drill down a little bit more into the guidance. So great that you're guiding for accelerating revenue growth and margin expansion, which is obviously a rare combination in software land. So really great to see that on the table. But 2 things I wanted to drill into that. First is you're guiding to about 300 to 400 basis points of operating margin expansion.

We -- there's obviously puts and takes with the cloud transition and the margin expansion side. But can you maybe let us know how should we be thinking about the prior targets you laid on the table for hitting the Rule of 40, let's call it, in 2023. Is that still on the table? Because that would be assuming, I think, some pretty dramatic margin expansion then in 2023. And then the ACV guidance really appreciate that. That will definitely help us all build our model. Just anything that you can tell us in terms of what sort of FX assumptions are baked into that? And then I've got a follow-up.

So let me touch -- okay, let me touch on a couple of those. I'll maybe go back. So we're not -- our FX assumptions are relatively muted in terms of the full year impact. So we don't see a tremendous amount of FX impact, a slight amount of headwind on FX, Rishi, but we're not making any bigger bold predictions on significant movement of the dollar one direction or the other. As you know, the currency moved around in the year, the dollar was weaker at the beginning of the year and then it was stronger at the end of the year. But overall, it's going to be a little bit of a headwind year-over-year on the currency.

In terms of margin expansion, we -- I think it's probably worth highlighting that we can make the margin of the business be quite frankly, what we want it to be by just de-investing in the business. Now I know you're not proposing that nor are we. But I think that the margin expansion trajectory that we're on will show an increased margin improvement in 2022 and will show a noticeable increase in '23 and in '24. Will we be at the rule of 40 in 2023? Probably not. Will we be well on our way there in terms of the balance? Absolutely. So I think that from that standpoint, we haven't seen the -- I would say the sales productivity kick in as fast as we had hoped.

And I think COVID certainly wasn't helpful in that. And that's probably the one thing that's probably drug out our Rule of 40 achievement a little bit.

Got it. That's helpful. I appreciate that. And then just on the Pega Cloud side specifically, look, we all understand the Cloud Choice, and that's obviously a major competitive advantage for you. But it does look like there's a bit of a slog on, especially on the cloud revenue side or even cloud CRPO. Can you maybe just let us know what's going on? Any kind of factors that make that number a little wonky in terms of rev rec? And how should we be thinking about the potential for Pega Cloud growth to accelerate, maybe, let's call it, next year 2023?

Sure. So throughout 2021, I mean all of you are aware that our -- that clients really are much more proficient at managing their own cloud, which actually has strengthened our Client Cloud growth in 2021. When we started the year or even started 2020, I don't think that it was as obvious to us how important it is for clients to be able to manage many of the solutions that they're buying from vendors like Pega.

So that's one -- that is certainly one difference in the last few years that is -- we view it as a positive because we really buy into client embracing that with clients. In terms of your question about Pega Cloud specifically, there isn't any rev rec issues. There's nothing unique going on. Pega Cloud is a very traditional SaaS subscription revenue recognition model. So nothing there on that side.

But I think as the percentage of Pega Cloud and Client Cloud has stayed relatively steady, and our growth rate of ACV has stayed relatively steady, it wouldn't be unusual for the cloud growth rates to converge a little bit. And that's really what you're seeing happen as clients manage their own solutions on Pega at a little bit of a higher pace.

Got it. I totally understand. And last one for me, and I'll jump back into the queue. Cloud gross margins, obviously, they've improved dramatically since you started on this cloud transition. I know in the past, you've talked about getting a more SaaS-like gross margins, call it, 70% plus.

And understandably, the single-tenant architecture is always going to be a little bit of a drag there. But it's been relatively flat throughout the course of 2021. How should we be thinking about the potential for cloud gross margin expansion from here?

You should probably expect a few hundred basis points of cloud gross margin expansion each year for the next few years.

And I would say relative to architecture. We've been doing a lot of work, technology called Kubernetes, other types of things that I think provide in coming years. Some really good opportunities to achieve the types of things Ken is talking about in a pretty reliable way.

Just to confirm one thing because it's probably a question Rishi and others might have. Our goal for Pega Cloud gross margins in the kind of timeless model have not been reduced.

If anything, I think something that Alan mentioned in architectural improvement, would give us opportunity to improve them. So we have plenty of scale of Pega Cloud. So we're not worried about our Pega Cloud gross margin targets that we talked about over the last few years.

Next, we'll take our next question from Steve Enders with KeyBanc.

Great. I guess I want to ask a little bit on what you're seeing from a demand function at this point and where the top of funnel activity stands? I think there's been concerns in the market around digital toleration potentially causing a pull-forward in demand into '20 and '21. So just wondering what you're seeing on the demand front and how the top of funnel activity looks today and into calendar '22 here?

So I can take that. As we look at the first half of the year and what's going on, I think the demand is still robust. People have profound needs and we are a real enterprise engagement organization much more than what you described as kind of a lead or a broad lead-gen beat the bushes sort of organization. So we really have focused on what I would describe as a target organization model. And that, I think, is a pretty reliable way to get demand compared on just trying to be exclusively pulsing for leads, which some companies or a lot of companies do. So we're seeing tremendous amount of activity and interest in our customer base.

And I don't want to take anything for granted, but I think that's going to persist. And I think that the industry focus on transformation and improving efficiencies and frankly, some of the great resignation, which is putting pressure on customers to find better ways to deliver their systems. I think some of these actually have good long-term promise for us as well as the early part of this year.

Okay. Great. That's helpful. And then just on the -- on, I guess, partially on the go-to-market front with Hayden leaving. I guess how does that kind of change? How you're thinking about the leadership in that area and the go-to-market organization and has been a bigger focus on the partner and channel strategy? Is there going to be any change on that front moving forward?

No. The strategy we entered the year with is the strategy we're pursuing for the year. I'm pleased that we have a strong and deep team that's going to be able, I believe, to take some of the good work that Hayden did as he brought us some new insights and some new capabilities and some new talent and be able to continue to drive it and continue to grow it. So I believe we have in place a team that's going to be able to deliver this year, and that's what we're planning to execute on.

We'll move on to Steve Koenig with SMBC Nikko.

Great. So just building on Steve's question on the organization of Hayden's departure. And then I've got one follow-up. It's a little bit more on the financial side. Are you all looking to replace his function that brought together a lot of the geo-focused activities with a single role or to go back to more of a geography-focused organization and functionally-focused organizations within the go-to-market? And then I've got one follow-up for you guys.

No, we're not going to go back to for folks who didn't know. We used to have a pretty hard split between what we call the Americas and international. And we are going to continue to have -- obviously, people are deployed in regions, but we are not going to go back to that sort of highly bifurcated regional sales and service organization, having a single sales organization and a singular services organization having customer success management and partners also be thought of in a global context. We're happy with some of the things that, that's brought for us, particularly since a lot of our clients are global as well and absolutely not moving that off this year or any time and what I would say is the foreseeable future. So I think we're structured in a way that's good, and we're going to continue.

Great. And then if I have a chance to give Ken a follow-up here. Ken, can you explain your commentary on how the heavy term activity negatively impacted rev rec? And give us any color you can on the cloud mix of bookings. And then I'll just throw this out there, total cloud bookings as we compute from the change in backlog in cloud revenue, it grew a whopping like 67%. It was actually really big. So where there's some big cloud longer-term cloud contracts out there. So -- and that's it.

Sure, Steve. So let me see if I can go in order there and get those right. So the first thing is good question on -- I mean it is difficult in the script to make this really crisp. But when you have arrangements that where the client commits in a period, but you don't get the revenue in the period, it goes to backlog, of course, it goes into the backlog. So what happened at the end of '21 is we always have term arrangements that go into backlog. It's just the nature of enterprise selling and the timing of when clients go live.

So that's kind of -- or when they are effective dates start. So that's always going to be the case. But when you see such a big jump from the end of '20 to the end of '21, the first question you would say is, oh, that must have impacted revenue because if backlog grows, that means you really kind of had less revenue in the current period. So that's the connection that I was making there, which is revenue would have been bigger in Q4, but for deals going into backlog that will then come into revenue in future periods. So that's the connection on the first piece of your question.

The second one was around cloud growth. Yes, Pega Cloud growth, actually, the mix of our business is slightly more Pega Cloud than Client Cloud. And when I say slightly like 50, 55 percentage kind of in terms of the mix of the business activity. And that's fairly consistent over the last few years, as you know, because I've talked about that each quarter.

But Q4 did have a robust Pega Cloud amount of activity. And to remind everyone, Q4s typically are not as strong Pega Cloud quarters. Q4s typically have a little bit more Client Cloud in terms of the mix. So as that dynamic going on, but also RPO, and I know when you talk about -- you're calculating total contract value, which includes revenue and the change in RPO, you have to be careful, just like I talked about in quarters that might look weaker, it may just be a poor renewal quarter in quarters that look unusually strong, you could have seasonality of renewals as well.

So just remember that is a factor as well. Although, Pega Cloud was stronger in Q4 of '21 versus Q4 of '20 for sure. But you also do have some timing of renewals in there. So hopefully, that hits the questions that you asked.

And next, we'll move on to Pinjalim Bora with JPMorgan.

I wanted to ask about the sales organization as well. I mean as you head into the new year now with the leadership change, is the plan already in motion? Have you made any kind of tweaks into the sales organization to drive rep focus at this point? And then given the tight labor market, I mean, we're you're able to end the year where you wanted to be in terms of sales capacity?

So we were already -- as we entered the year, as we entered January, we had already done the sort of setup for 2022, as you would expect. There's a tremendous amount of work that goes into our sales kickoff in January to both get the salespeople structured so they can get off to a good start for the year. Most people do not change their focus, as you would expect. We want people who know these organizations and are building sustaining relationships with them. But of course, there's always some tuning, some adjustments, some introduction here.

I would say we probably didn't end the year exactly where we wanted to be from a sales staffing point of view. But we did, as you can see in our numbers, have very robust hiring. And I don't -- we often set goals that we don't quite pick up to. So that's not really anything that I would view as surprising or concerning. But as a result of this change, there is no strategic change, no restructuring of kind of what the strategy is. The strategy that we worked out coming into the year is the one that we're executing on, and I feel good about that.

Got it. One follow-up on the ACV guidance and thank you for providing that. I was -- it's more of a quantification, I guess, but ACV growth of 20% to 22%, obviously, it's kind of a continuation of what you're doing, but it seems like it's tapped below the IDC number that you highlighted of 25%, right? So what -- my question is what takes you there, right? What are the levels that takes you to that 25% number or higher? And can we get there in the next couple of years?

So maybe I'll start, Alan, and then you can jump in. So the primary lever -- so I think about, I think about the way you grow in 3 dimensions. It's pretty straightforward. One, what's the market opportunity growth; two, how good is your solution to be able to capture some level of the market and cannibalize market share; and three, how much selling -- productive selling capacity you have to be able to get there.

I'm not worried about the market, knock on wood, right? I'm actually certainly not worried about our solution and where it is positioned and the strength of it in the market. And what we're really focusing on is trying to really improve and our sales productivity as we increase and ramp our sales productivity.

And that has not been an easy linear process for us, but that's what we're working really hard on is the third one. So yes, Alan, if you have other thoughts to add to that, but that's kind of how I think about it.

And I think sales productivity has lots of elements. It relates to the effectiveness of our marketing messages. It relates to our ability to enable and bring new staff up the curve. It relates to the cadence that we use to manage the business on an ongoing basis and provide reinforcement. It relates, frankly, to our clients being successful and themselves wanting to become sort of enabled and engines of growth.

And all of those are key elements that I think are part of being productive as a company. And we aspire as Kenneth talked about to be more productive as a company and I think that there is every opportunity for us to do that. So that's where some of the goals around increasing margins come from there.

As we -- we've hired a lot of people. We need to make sure that they become increasingly effective. We need to -- I think we always can improve how we talk to the market, and we're going to be doing that, too.

Next, we move on to Mark Schappel with Loop Capital.

Ken, starting with you, with respect to renewals in the coming year, is 2022 going to have more renewals in the prior year?

2022 is -- so the interesting thing, Mark, is just in general, now at our size at this point in the subscription transition, we won't have years where there's a material difference between the renewal opportunities that we have, which is really, I think, the fundamental point you're asking is there are really, really big difference 1 year versus another.

That said, '22 is a healthy renewal year, which means it's certainly not lower than average in terms of the renewal year. But we don't have a big deviation like if you think about like the standard deviation between a year for an old. Back 3 or 4 years ago, it could be 10%, 15% of the difference. When you actually look at it now, it's kind of like -- you might have a 5% difference 1 year or the other, but it's not as material.

Great. And then one of Hayden's responsibilities was building up your partner programs, and that's been a big initiative over the past year or so. What percent of your deals are now influenced by partners? And maybe just give us a sense of where it was, say, a year or 2 ago?

No, I would say the level of partner engagement has grown and at this point, is really very high. I don't have the stat in front of me, but I would say that north of 75%, 80% of our deals are involved with partners, partner engaged, very actively partner supported. The nature of our deals is our customers want to talk to us, right?

And so the reality is that we are involved. And I think the partner team has done a great job of deepening our relationship with the largest and most influential partners and that's just going to continue. We're committed to that path. We think it's important. And my whole leadership team is completely bought into that.

And I'll add one additional flavor to that, Mark, which is just to be clear, partners are not closing and booking and closing deals and sending us the paperwork -- just maybe someday that will be the case. I mean, that's certainly an efficient distribution model for many companies. But that's -- but partner influence, which is what you mentioned, partners are involved in 60% to 80% of our deals, and we think that's very healthy to have them involved, especially with the organizations that we're selling to.

Next, we'll move on to Fred Havemeyer with Macquarie.

I have a couple of questions. I think that many of them are another take on some of the ones that have been asked already. So firstly, I want to begin with just generally, your go-to-market philosophy relative to what was described at your 2021 Analyst Day, just with Hayden's departure. So we understand that back during the Analyst Day, there was a road map that was laid out talking about a number of different changes and initiatives. I want to focus more on the productization side of things here. Is there any change to your strategy of offering more prebuilt products or solutions or just items that could be offered off the shelf with any of these recent go-to-market changes? Or is that still on the road map?

Well, I'm going to defer at the end of this to Ken because he was literally there. So you can tell me if I missed anything. There's not a strategic change in terms of where we're going, if you look at a -- any sort of horizon. The reality is, I think we've had the right strategy for the last couple of years. I think this is very much around execution. And I'm not expecting any shift or revision in that overall big picture strategy. Ken, do you want to say something more specific? Because yes, I know you were in those sessions.

Yes. I think -- so, Fred, I think you're referring to one aspect of it, which is what we call our engagement strategy, which is customer service, intelligent automation and one-to-one customer engagement, No. Those are still very core, same areas for us in terms of how we go-to-market. And certainly, the solutions have a more complete finish. I mean they are not a build off of a platform from scratch.

Certainly, the way BPM was years and years ago. So from that standpoint, no strategy change at all. I think maybe just to clarify one thing, we are not -- we do not have shrink graft software that is actually kind of a click through, you'll kind of like Microsoft Office or anything. That's not -- that isn't our strategy nor is that what we communicated at Investor Day. But in terms of the engagement strategies and the solutions really being common, use cases and being much more kind of finished, so to speak, and ready for faster time to value for our clients deployment, that is absolutely consistent.

Well, and when you hear me talk or us talk and I think very consistently talking about making decisions like if you look at the Commonwealth Bank of Australia, customer engagement engine for existing sort of concept. You talk about driving work to done and getting work done. That's the intelligent automation engagement strategy, that's really kind of -- you can almost think about the next generation of workflow and low-code in terms of being able to like do stuff, which I think has been a traditional strength.

And then one of the core places you apply that, it's things that involve our clients' customer engagement. It's how our clients work with their customers across channels, across products, and how I think we very, very differentiatedly create a way for clients to create a holistic approach to their customers, and to their products with some of the really unique architecture that we have around what we call the layer cake and around the things that give an organization the ability to be specific to different customers and customer segments, customer areas, but still get that leverage built in, which has been central. Those are very much, those 3, what we call engagement strategies that Ken was referring to.

And those -- those are really what we're focusing on and what we're working with our partners on.

Thank you for the context on those engagement strategies. Around go-to-market again, I wanted to ask on the competitive landscape side of things. At this point, certainly, there's a number of pure-play low-code no-code vendors that are out there. And we're also, of course, seeing companies like ServiceNow really focus on and talk about low-code enterprise workflows and their ability to facilitate that. So I wanted to ask, are you seeing any changes in your competitive landscape? Who you're typically going against or going head to head against in deals? And generally speaking, any sort of shift in use cases that customers are adopting Pega for?

So there are lots of competitors in this market. I mean, to be candid, anything that is an alternative is a competitor, ranging from what you would call traditional programming to companies like ServiceNow in the last 18 months or so have really been talking about workflows, et cetera, which I find kind of ironic, given our long and storied history and all the different things, this stuff has been called during its evolution.

There's no shortage of competitors. The things that we do, I think we do very differently than our competitors. Very simple things. There are competitors ranging from programming all the way to the AppSheet people in terms of that. But part of the market, we, I think, are uniquely good at is the ones where they got to be fast. They have to deliver something now. They have to deliver something soon. But they need to be able to do it in a way that's going to be able to grow and evolve and support ultimate enterprise needs.

And we can get customers to understand what we do that's special in that area. We have an enormously strong competitive message. That's one reason why I think having an engaged enterprise sales force is important to the way we're going to market. And I think it's important to our clients. And that's why that's been the strategy. That's what the strategy is going forward. And I'm excited that we're going to continue to build these broader and deeper relationships with customers, which are key and have partners who really know how to help us leverage this in the evolving world.

So as long as there's competitors out there, it's nice being differentiated. It's our job to make that difference visible.

And then I think one final question for Ken on the financial side of things. Your commentary about the timing of deals just being shifted into backlog rather than revenue. Thank you for that context earlier. I wanted to ask if there's any read in to say the essentially whether these deals would just be recognized as Q1 revenue on the term license line? Or just generally, any commentary or context you could provide around how to understand the timing of these deals relative to seasonality in 2022 is helpful.

Yes. It's a good question, Fred. So I'm going to give -- so it's not always possible to exactly predict on these things because there are some things that are -- that can move between quarters. That said, when you have backlog growth that's unusually high in one quarter, some -- there is some impact, positive or net like, so let's say that it grew then you would have some impact to the -- in the next quarter in a positive way.

So there's definitely a correlation between backlog growth being slower or faster in one quarter to the next quarter or 2. So certainly, a strong robust term backlog at the end of the year will have a better impact on 2022, and it will impact probably Q1 a little bit, but I don't think we should -- I don't want to get too precise on that to suggest because there are some variables there.

I think we have time for maybe one more quick question.

We'll take our last question today from Raimo Lenschow with Barclays.

This is Vinod on for Raimo. Just 2 quick follow-ups. I think last year, you said your percentage of your sales force that was fully ramp or is just under 50%. Can you give us a sense of where that is now? And then secondly, as you expand your relationships with your partners, is there an opportunity to maybe move down market a little bit focus on the (inaudible) instead of just the top 500 to 1,000 companies?

Sure. I'll take the first one, Alan, maybe you could take the second one. So our percentage of salespeople that are -- what I would call reasonably ramped, fully is a tough word. I know I've used it before, but I'll just say ramped in a reasonable way is still just slightly under 50%. So I would say fairly consistent. Naturally, the number is higher, but I would say fairly consistent with the last year or so. And Alan, do you want to take the one on going more down market through partners?

Yes, I think that the strategy for this year was and is to, of course, take advantage of where partners have existing relationships. But there is so much -- I mean, massive, massive upside in the large customers that, in many cases, we and our partners have meaningful relationships with, but they're just doing a fraction of what they're capable of doing with us.

But that's really where I see our focus continuing for this year. And that's, I think, a very beneficial and highly -- I actually think fully productive area for us to work in and particularly when everyone is a little less sure what's going on with the economy more and more broadly, one of the things that haven't been around for a very long time, is we have a good idea, I think, of what it takes to do well in boom times and bad times, both.

And I'm very comfortable that we're thinking about this the right way, particularly when we're all looking at all the unpredictability in the market. We know the people that we're selling to with our partners are the ones who are going to keep buying, in at least our view. So that's I think unchanged in terms of a focus than we probably talked about you at the analyst conference or the Analyst Day last year, what we were focused on going into this year. And what I've seen happen with the Fed and some of the other stuff thus far this year, just makes me feel really good that we made some of those decisions the right way.

And let me just wrap up by saying thanks everyone for joining our call today. We've delivered a solid performance in 2021. I think both in terms of extending our leadership in the product in the market and financially just awesome to have crossed that $1 billion mark. I think we're well positioned for another strong year in 2022, and look forward to updating you. You guys should all know that we're all working hard for you. So thank you very much, be well and look forward to talking who knows, maybe meeting in person someday soon. Have a great evening.

That does conclude today's teleconference. We do appreciate your participation. You may now disconnect.