Pegasystems Inc at RBC Capital Markets Global Technology, Internet, Media and Telecommunications Conference (Virtual) Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Rishi Nitya Jaluria - RBC Capital Markets, Research Division - Analyst : Great. That's a really helpful overview. I want to drill down into a comment you made, Ken, which is about the Pega Cloud versus client cloud mix. 3Q, we obviously saw what was a strong quarter for client cloud. Maybe help us understand what drives that decision for customers to choose client cloud over Pega Cloud. And you talked about maybe specific use cases, but maybe drilling a little bit deeper into that. As you think front office versus back office, is there one that tends to lend itself more towards Pega Cloud versus client cloud?

Question: Rishi Nitya Jaluria - RBC Capital Markets, Research Division - Analyst : Yes, okay, that's really helpful. And so a 2-part question to kind of think about this because I get this from investors a lot. Number one, I know you're not forcing anyone to go one way or the other. Cloud choice is obviously a very important part of the value proposition. Are you giving any incentives, though, soft incentives, to either the customers or salespeople to choose or to even migrate to Pega Cloud? And maybe longer term, how should we be thinking about what's the target mix or steady state mix of how much business is Pega Cloud versus client cloud? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 16, 2021 / 1:00PM, PEGA.OQ - Pegasystems Inc at RBC Capital Markets Global Technology, Internet, Media and Telecommunications Conference (Virtual)

Question: Rishi Nitya Jaluria - RBC Capital Markets, Research Division - Analyst : Yes. Got it, got it. All right. On thinking about Pega Cloud, this is something I think is still not fully understood by investors, and hence, why I think I ask you this question every single year that we do these. Architecturally, right, Pega Cloud is single tenant, right? Most SaaS we always think about as multi-tenant. I think the very critical exception is obviously ServiceNow, which is single tenant, they call themselves multi-instance. Maybe can you help us understand the -- why the choice for single tenant, kind of the trade-offs of single-tenant versus multi-tenant? And then where are the areas you've talked about being able to leverage multi-tenant services around the single tenant core to help gross margins and, eventually, might even be able to help you get a little bit more down market as well?

Question: Rishi Nitya Jaluria - RBC Capital Markets, Research Division - Analyst : Yes. Great. And so as we talk about efficiencies, that leads us into -- I'm sure your favorite question you always get, which is about gross margins. We have been seeing, obviously, cloud gross margins moving in the right direction. Just how do we think about the long-term gross margin potential, both in terms of overall gross margins as well as, specifically, what's the scalability and long-term cloud gross margin profile?

Question: Rishi Nitya Jaluria - RBC Capital Markets, Research Division - Analyst : Yes, yes. Got it, got it. All right. I want to maybe pivot to and think about some of the changes within the organization, and specifically drill on Hayden Stafford. So he's now been at Pega for, what, coming up on 2 years, if I'm not mistaken. Maybe a little less than that.

Question: Rishi Nitya Jaluria - RBC Capital Markets, Research Division - Analyst : 1.5 years. yes.

Question: Rishi Nitya Jaluria - RBC Capital Markets, Research Division - Analyst : Okay. Okay, yes. So with Hayden Stafford joining, and at the same time he became COO, he got promoted to President. Can you talk a little bit about what changes you think you can make to drive higher sales efficiency and ultimately accelerate ACV growth? I know we had him at the REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 16, 2021 / 1:00PM, PEGA.OQ - Pegasystems Inc at RBC Capital Markets Global Technology, Internet, Media and Telecommunications Conference (Virtual) investor session earlier this year, and it was great to have that level of exposure to them. Generally, how have some of the changes that he's been brought been received so far? And how do you think about how long it takes to see results from some of these changes?

Question: Rishi Nitya Jaluria - RBC Capital Markets, Research Division - Analyst : Yes. Great, great. I want to think a little bit about the sales people you've had and specifically think about the hiring environment for salespeople. And maybe this is kind of a 2-parter. Number one, I know when we were having this conversation about 1.5 years ago, you made comments about wanting to kind of keep your foot on the accelerator in spite of the uncertainty out there. And it sounds like in contrast to a lot of software companies, right, no hiring freeze and definitely no risk or anything like that. Maybe talk about what drove that strategy and what you've seen as a result? And then tying that into we hear constantly about the labor shortage, and software is not immune to that, right? It is getting tougher to hire qualified sales reps. What are you seeing in terms of the hiring environment? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 16, 2021 / 1:00PM, PEGA.OQ - Pegasystems Inc at RBC Capital Markets Global Technology, Internet, Media and Telecommunications Conference (Virtual)

Question: Rishi Nitya Jaluria - RBC Capital Markets, Research Division - Analyst : Yes. Yes, great. All right. Then I want to talk about the partner ecosystem. You discussed about making the product obviously more GSI friendly. But I think, in the past, you've also talked about taking the strong partner ecosystem and the thousands or more Pega-certified people at the large SIs and maybe leveraging them as a direct channel partner, similar to what other software companies do, and actually generating sales to partners. Can you talk a little bit about that opportunity and what sort of momentum you've seen from that?

Question: Rishi Nitya Jaluria - RBC Capital Markets, Research Division - Analyst : That's helpful. You've mentioned Project fnx a couple of times. And I know Alan has talked a lot about it through the years. Why is -- I guess what is Project fnx? And why is it so important for Pega?

Question: Rishi Nitya Jaluria - RBC Capital Markets, Research Division - Analyst : Yes. That's helpful. All right. Now let's maybe pivot to talking about the competitive environment, right? Maybe help us understand how do you think about it. And maybe let's break that up into 2 parts, right, the back office side with Appian and then now UiPath coming public; and then the front office side with Salesforce and maybe with Microsoft, especially because they seem to be making a bigger push with dynamics recently. And we did mention ServiceNow earlier. Do you see potential to go against them over time?

Question: Rishi Nitya Jaluria - RBC Capital Markets, Research Division - Analyst : Yes. Got it, got it. All right. In the minute or 2 that we have left, I want to talk about the long-term profile, right? You've talked about becoming a Rule of 40 company. What is it that's giving you confidence in reaching that target? And I think, more importantly, how sustainable do you think that kind of steady-state 2023 financial profile will be?

Question: Rishi Nitya Jaluria - RBC Capital Markets, Research Division - Analyst : All right. Great. Great, Ken. That's just a great place to jump off. Thanks so much for being here. Again, always a pleasure to have you. And thank you, everyone, for joining us. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 16, 2021 / 1:00PM, PEGA.OQ - Pegasystems Inc at RBC Capital Markets Global Technology, Internet, Media and Telecommunications Conference (Virtual)