Pega’s shares were up in after hours trading following the release of its strong Q4 and full-year numbers, which revealed that the process management vendor has now hit $1 billion in annual subscription revenue. CEO Alan Trefler said that he’s confident that Pega’s recent organizational restructure, combined with the company’s product offering, will leave it well positioned to take advantage of buyers’ demands in what will be a challenging year.
For Q4 2022, Pega saw revenues increase by 25 percent to $396.47 million and full year revenues jump 9% to £1.317 billion. But subscription revenues grew a whopping 37% to $340.903 million in the quarter, and were up 12% for the full year to $1.067 billion.
Commenting on the numbers, Trefler said:
I’m also excited to see that our subscription transition is coming to completion. And you can see the related impact on our financial results and projections. Combined with the organizational changes we are making, we are well positioned to be a more significant cash generator over time, which gives us the flexibility to invest in growth opportunities for the business.
In January, Pega announced a 4% reduction in its global workforce, which it expects to result in over $75 million of net savings versus its original spending plan. During the earnings release, Pega said that it is also focused on improving its sales efficiency by further selling into its existing client base. CFO Kenneth Stillwell said:
We are pursuing new clients selectively. We often land new clients because a buyer from an existing client takes a role with a new prospect or because a partner recommends Pega as part of a major digital transformation project or because an industry analyst firm recommends Pega.
Over [our] five-year transition period, we’ve achieved a nearly 250% increase in our annual contract value and more than doubled our subscription revenue, which in 2022, I’m happy to say topped $1 billion.
And now the subscription revenue represents 81% of Pega’s total revenue, up from just around 50% a few years ago, with the majority of the remaining revenue coming from professional services.
Our subscription model helps us build a more resilient business and improve profitability and scale through operating leverage, especially with our high client retention rates and massive client expansion opportunities.
It’s worth adding that Pega does currently have an ongoing legal appeal taking place in Virginia, where it is disputing the $2 billion verdict awarded to Appian, after the jury found that Pega had violated the Virginia Computer Crimes Act. Appian alleges that Pega infiltrated and misappropriated its trade secrets.
Market trends
Trefler also noted this week that pega is aiming to become a Rule of 40 company, which is where a software company’s combined revenue growth rate and profit margin should equal or exceed 40%. Pega hopes to achieve this at the tail end of 2024.
However, Trefler didn’t shy away from the fact that market conditions are tough and that there will be macroeconomic headwinds this year. That being said, Trefler argued that Pega is well positioned. He said:
The market dynamics here, I think, are very positive for us in some key ways. Digital transformation continues to be a driving force for our clients and we expect it to be even more important in 2023, given the economic indicators. The type of uncertain environment we’re in – and we’re going to continue to be in – enterprise automation is top of mind for clients who are looking to optimize their investments, increase efficiency and improve effectiveness.
We do expect it will be a tough year based on all the economic indicators, and we’ve taken steps and planned accordingly. As we announced in early January, that means having had to make some tough decisions to help set us up for both long-term and short-term success. These changes were focused on our go-to-market organization where we’re driving alignment to further improve our go-to-market operating model. To drive role clarity and accountability, enable greater efficiency and sharpen our client focus, especially where our historical investment outpaced our growth. Nearly all of the changes have been completed.
He added:
I recently came back from Davos, met face to face with CEOs of some of our largest and most strategic customers. They told me they are focused on digital transformation as key to success, and it’s going to be especially true in what they expect will be a challenging year.
They know they need better and faster ways to do things, driven by the economic environment and scarcity of resources, and Pega is perfectly positioned to leverage these dynamics. We have a long history in this space and a clear strategy to focus us this year and beyond.
Pega’s strategy is centered around using AI and automation technologies to deliver process optimization for enterprises. It recently acquired Everflow, a Brazilian-based process mining company, to help position itself as the ‘platform of choice for hyper automation across the enterprise’. In addition to this, Pega is embracing low-code and in recent years has released a number of capabilities in order to cater organizations that want to build more applications, but don’t necessarily have the developer skills to do so.
Trefler said:
Our strategy is very much vested in our technology. Pega technology provides the most powerful and scalable low-code platform for AI-powered decisioning and workflow automation is designed to help clients maximize value, simplify service and boost efficiency, free to adapt to change.
We continue to focus on Pega Cloud and have significantly increased adoption. We’re also finding that our global operation center, which uses extensive workflows built on Pega Infinity [Pega’s low-code platform] can bring automation, availability, reliability and scale to our out cloud operation. And we’re seeing this as a reason where clients are choosing Pega Cloud over running on their own cloud because they can see how well we could do. We introduced new low-code templates, forces and services to help organizations improve productivity while reducing strain on IT teams, all while still maintaining good governance.
With the demand for professional developers exceeding count availability, organizations want to be able to tap citizen developers to get work done. But citizen development can also create silos and increase risk and costs if there isn’t proper governance or if the tools are not sanctioned or supported by enterprise IT. Many of the lower-end low-code tools in the market today are contributing to that challenge.
Pega’s low-code factory approach empowers citizen developers while providing technology support and governance to automate the enforcement of best practice, ensuring security, scalability and maintainability. We’ve also enhanced our robotics capabilities to make it even easier for users of any skill level to quickly build robotic automations that help make business processes more efficient when robotics makes sense.
Similar to other other vendors, Pega is also mulling the impact of generative AI in the enterprise, following the rapid success of ChatGPT. Trefler added:
There’s also a lot of interesting tactic elements we’re tracking. For example, we’re looking carefully at the latest generative AI technologies and how they can position themselves inside our offering to make them better. We’re looking at model-driven approaches that help dramatically tackle business models. And all of this, I think, plays on the historical strength of Pega.
My take
It’s been a period of extensive change for Pega, as it transitioned its client base from perpetual licensing to a subscription model. It seems that much of this work is now complete and the vendor is now doubling down on advancing its position in the market. It’s worth adding that process optimization and low-code are front of mind for buyers, as they look for cost cutting opportunities to do more with less. The vendor’s event in June should shed more light on what it’s got planned for the coming year.
