Earnings Call: Q2 2018

Aug 8, 2018

Good day, and welcome to the Pegasystems Second Quarter 2018 Earnings Results Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ken Stilwell, Chief Financial Officer, Chief Administrative Officer and Senior Vice President. Please go ahead, sir. Thank you. Good evening, ladies and gentlemen, and welcome to Pegasystems Q2 2018 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, believes, could, should, estimates, may, targets, strategies, intends to, 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 2018 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 the forward looking statements are contained in the company's press release announcing its Q2 2018 earnings and in the company's filings with the Securities and Exchange Commission, including its annual report on Form 10 ks for the year ended December 31, 2017, 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'll turn the call over to Alan Trefler, Founder and CEO of Pegasystems. Thank you, Ken. In terms of sort of a couple of highlights for the quarter and first half of the year, we are continuing to make progress on our strategic plan, and the movement to the cloud is very encouraging. At the same time, we know and are building up the business to pursue a much bigger opportunity in front of us that we're focused on capturing. As I've often said, it's important to look at our results in context, especially as we are now reporting under the new ASC 606 accounting standards. These new rules have the potential to further exacerbate lumpiness in our quarters associated with term licenses and may result in some comparisons looking odd. Our year to date results are good examples of why context is important. We continue to see acceleration in our move to the cloud and recurring arrangements. In Q2, for the first time in our history, cloud represented more than 50% of all new business, and it was 54% in Q2 and grew 37% year over year. Now I think this is really terrific for our business long term. It can make our performance in short term periods harder to understand. And it's important, we think, therefore, to consider growth in ACV, what's called annual contract value, when evaluating how the business is doing. In this quarter, the accelerated shift to the cloud adversely affected revenue growth and EPS, but you can see the incredibly positive impact on ACV in the ACV charts. We saw year over year growth of 20% in our total annual contract value, which does include maintenance recurring revenue. And we saw strong growth in our term license and cloud ACV of 31% year over year. For context, compare this to our full year ACV growth in 2017 of only 20%. Now Ken has been showing the ACV numbers since the beginning of 2017. So those of you who've been with the company for a while will find this quite familiar. Ken will be providing additional financial details momentarily. Now in terms of what happened in Q2, Q2 in many ways in Pega was dominated by PegaWorld and our largest ever product announcement, what we call Pega Infinity. I know many of you may have been able to attend and experienced the excitement firsthand. For those of you who didn't, I encourage you to watch the replays, which are available on pega.com. The event and the product launch reflected our strategy and focus on delivering the best solutions for digital transformation, which we believe requires both effective customer engagement and digital process automation. More than 70 customers discussed their use of Pega Live, reflecting our unique competitive differentiators. The 6 core differentiators, which we called out, include: 1st, what we refer to as real time omnichannel artificial intelligence that is self optimizing and can embed itself seamlessly and work across channels to deliver the right action at every customer touch and optimize those interactions for both experience and value. End to end robotic automation that includes robots, process automation, case management and natural language e mail bots to drive inside optimization and productivity. Importantly, we are the only CRM with robotic automation included. What we refer to as journey centric rapid delivery that allows our clients to attack their customer engagement initiatives one journey at a time, rapidly letting them get value and work effectively across channels, starting where it makes the most sense for them and their clients. What we refer to as the situational layer cake, which is a unique architecture that allows organizations to quickly specialize, differentiate and reuse their applications across products, regions and channels. And all of this is based on our unique model driven development approach. Sometimes people are talking about low code. We'd like to think of ours as no code That lets business and IT design applications together and then have the system generate, tune and ultimately document the software that it creates. This empowers the 6th aspect, which we refer to as Cloud Choice. We're the only vendor in our space that allows our clients to decide where and how they want to run their applications without being locked into a single vendor platform. They can run it on Pega Cloud, our cloud, a private cloud, a partners cloud or a hybrid cloud and move between as needed. We think and we've heard from customers this is a tremendous advantage. The PegaWorld presentations included customers like JPMorgan Chase, who described using Pega in its digital transformation initiatives with scalable, secure and agile application development to really impact the customer experience. Aflac, who outlined using Tega also in a major transformation initiative, that changed the internal perception of IT from being an order taker to a consultative business partner, really simplifying and streamlining processes, making it possible to work differently and engage with the business and engage with customers very, very differently. And Google, a new client who described its use of PAG as dynamic case management to automate network maintenance to sustain and ramp up capacity to support its global enterprise customers. In addition to seeing these differentiators highlighted on stage at PegaWorld, these unique capabilities continue to drive new business. We continue to see a good mix of business across our core verticals, platform, applications and geographies. For example, we drove new business in this quarter with a new client, Liberty Global, one of the world's largest international TV and broadband companies with over 22,000,000 customers. They chose Pega as part of their global digital transformation, an initiative they call Atlas, which is designed to provide an always on approach to engage customers and provide a context led experience to let them really react to changing needs and market threats. Liberty Global Vision is to be incredibly strategic in the way that it engages with its customers. FedEx selected Pega as the company's enterprise case as a service platform to support digital automation of a whole variety of processes and aspects of customer engagement and customer satisfaction. This new platform will replace a 20 year old mission critical set of applications that are used across the global enterprise and rationalize more than a dozen additional case management systems, a part of their customer service, global trade networks, variety of applications. And Mitsubishi UFJ Trust, one of the part of one of the world's largest financial services groups by assets. The bank expanded its work with Pega to support also a multiyear digital transformation to help fulfill their trust drives our future corporate branding. To achieve that vision, Pega is helping improve the customer experience, loyalty and trust by supporting the bank strategies about how to engage with customers. And this quarter, we celebrated go lives with clients such as Credit One Bank using Pega to support their rapidly growing customer base through an integrated customer service initiative Cox Communications, which is using Pega in a new business unit designed to help roll out new network capabilities and Vodafone, which continues to roll out Pega globally. This quarter, Vodafone Spain went live with a new marketing application that brings together decision making from a customer perspective and ensures relevant touches while reducing churn and increasing satisfaction. Now from a technology and ecosystem point of view, as I mentioned, we announced our biggest product launch ever at PegaWorld. What we refer to as Pega Infinity provides the industry's best, in our view, digital transformation architecture, something that really holds things together from end to end. We refer to it as the Pega DX, digital transformation architecture, and it does a terrific job of bringing together those 6 core elements I described earlier, each of which we see as meaningfully differentiating us from competitors and customer alternatives. Now highlights of this architecture include the AI, the robotic automation, DevOps capabilities that allow our clients to improve customer engagement, truly automate from end to end and more easily build for change, which, of course, is our very motto. Since our last call, we also announced a number of advancements to expand our ecosystem, enhance our offerings and make our software more available to new and additional organizations. We have a new independent software vendor program to bring our solutions to clients with more specific market needs, added by partners our new Pega community to empower people in all experience levels to build software without coding and understand how to use our products, we've extended the free use of our Pega Academy, which is having tremendous success at bringing new partners, new customers into the mix. We introduced a Pega Blockchain Innovation Kit that enables Bags to see how Ethereum can really be used in our know your customer and client lifecycle management applications, a real, I think, bona fide and genuine use of this technology and a partnership with LinkedIn to integrate our offerings and help power engagement strategies across sales and marketing. And of course, it was a pleasure to be able to have Google on stage talking about Kaga on the Google Cloud, now a part of our Cloud Choice offering. We also continue to receive awards and recognition from the leading industry analysts like Gartner, Forrester. And this past week, OVA, a noted analyst, named us the number one customer engagement platform out of 11 solutions evaluated. And these included companies like salesforce.com, Adobe, Oracle, and they recognized our customer decision hub as best for its ability to predict the next best action at the next best moment as well as having an underlying architecture that needed to fulfill and execute. So we are continuing to grow the company. We are continuing to bring on new talent. And one of the things I'm really pleased about is we just announced the appointment of Adriana Boccaherde as Chief People Officer. Succeeding Jeff Yanagi, who's taking a well deserved retirement after doing a great job with us for over a decade. Adriana brings more than 20 years of leadership experience in fast growing companies and is recognized as an innovative high performing leader with the ability to architect, execute and drive business growth. We really are excited to have Adriana continue our focus on bringing high caliber talent into the organization so that we can meet our goals and work to accelerate our growth. So in summary, we've had a solid first half in 2018. We continue to see good progress in areas important to the execution of our strategy: the move to cloud and recurring revenue streams increased engagement with our key clients and prospects continued enhancement to the key differentiators in our product capabilities and the broadening of our sales force, along with improved onboarding and training to try to bring them up to speed faster. We have a strong differentiated offering at the intersection of major growth areas and client needs, and we continue to be very positive about how our software is being adopted and the long term growth opportunities. To provide some more color, let me turn this over to you, Ken. Thanks, Alan. The first half of twenty eighteen has resulted in very positive movements in the business. For the first half of twenty eighteen, we experienced a solid increase in new license and cloud commitments, continued acceleration of ACV growth and a noticeable shift toward cloud arrangements. As we've discussed in the past, our strategy is to accelerate growth with much higher mix of recurring client arrangements. Over time, we can leverage this movement to recurring contracts to expand margin. If one just looks at our reported revenue for the first half, it would lead to an incorrect conclusion. Our year over year term and cloud ACV growth exceeded 30%, and it's a very important headline and is much more reflective of our overall business momentum. Also, the significant amount of year to date client commitments that were cloud exceeded 50 percent for the first time in our history. The associated revenue trade off that occurs with a massive movement to the cloud is normal and expected. In addition, I'll remind everyone that we also had a very large terminal of $35,000,000 that occurred in the first half of twenty seventeen, which can add to making a year over year revenue comparison an incomplete good measure of our progress against our strategy. Let me talk a little bit more about the details. Our new license and cloud commitments grew by over 25% year over year. In the first half of twenty eighteen, our mix of new commitments was over 86% term in cloud. But most notably, cloud was over 50% of new commitments. To provide a comparison, cloud as a percentage of new commitments was approximately 20% in the first half of twenty seventeen and approximately 22% for the full year of 2017. We had an anticipated cloud increasing to approximately 30% of our new commitments. So this acceleration to over 50%, well, it's a pretty significant shift. Conversely, perpetual deals dropped from 57% of new commitments in the first half of twenty seventeen to just 14% in the first half of twenty eighteen. The short term revenue impact of this significant shift is obvious if you look at the top line revenue. However, there are much more meaningful learnings when you look the individual revenue elements. If we adjusted for the $35,000,000 term renewal in the Q1 of 2017 and adjusted for our bookings mix that we had modeled for 2018 of approximately 30% cloud, our revenue would have increased approximately 20% year over year. If you adjust excuse me, if you adjust for the extraordinary $35,000,000 term renewal, term revenue would have increased by 30% year over year. Maintenance revenue continues to grow by approximately 10% annually. Our consulting revenue year over year only grew by 8%, which is much more in line with our long term targeted growth rate and our build of our ecosystem so that more of our services work can be done through our partners. Cloud grew by an amazing 56% year over year. So when you look at the individual revenue elements, you can see our move to recurring and specifically cloud playing out well, though it does require some examination to come to that conclusion. Our full year guidance was developed using an estimate for cloud at 30%, as I mentioned earlier, versus the first half actual of more than 50%. Although it is still early, cloud momentum has been accelerating. This is driven by market demand as well as improvements to our financial incentives for the cloud. As we've said in the past, each 1% shift toward cloud has the potential to reduce full year 2018 revenue. We estimate that to be approximately $3,000,000 per year as the economic value is reflected in ACV, but is not reflected in current period revenue when we book cloud. We began disclosing annual contract value, as Alan mentioned, about 6 quarters ago. With the impact of implementing a new revenue standard, we believe annual recurring contract value is highly correlated recurring and predictable cash flows. Our term and cloud ACV grew by 31% year over year, which highlights the growth in predictable future cash flows from Term and increasingly Cloud. Our year over year ACV growth of 20% is the highest that we have reported to date. We have over $500,000,000 total ACV, which is up almost 40% over the past 2 years. We have consciously continued our strategic investments in go to market capacity, noticing this significant shift to the cloud. We are confident in the market opportunity, our ability to capture our fair share and that ACV acceleration we are seeing supports the long term value stream that we're creating here at Pega. Of course, there is a lead time in achieving full productivity from these investments these go to market investments, so much of this will be used to drive our continued growth in 2019. On a year to date basis, our non GAAP fully diluted net income and earnings per share have been materially impacted by the sharp shift to cloud and the lack of near term revenue associated with a shift like this. Although optically, the results look confusing during such a transition, we're fully committed to continue to drive to more recurring and specifically cloud. We're also confident that we are not the 1st company to transition to the cloud and manage through the associated revenue trough that comes with that. We are disclosing $477,000,000 of commitments from customers that have not been taken to revenue as of June 30, 2018, including perpetual, term, cloud, maintenance and consulting. We've increased the level of transparency related to this disclosure to include all commitments. Let me help provide some context around how to use this metric when thinking about future cash commitments from our clients. If you start with our unbilled receivables and contract assets that are on the balance sheet of approximately $325,000,000 and add to it this $477,000,000 of customer commitments not taken to revenue and then subtract our deferred revenue of approximately $170,000,000 to avoid double counting, you arrive at a balance of $632,000,000 This is the total committed future billings from our clients where we have recorded the commitment as revenue already or will recognize the commitment as revenue in the future. Though this is not an apples to apples comparison to our pre-six zero six measure of backlog, this is a measure that can be compared period to period and is an important operating metric that reflects business growth. From a cash flow perspective, we produced 70 $5,000,000 of operating cash flow for the first half compared to $86,000,000 for the first half of twenty seventeen. We finished the period with total cash and marketable securities of over $244,000,000 You can see that operating cash flow is not highly correlated to net income in times where there is a large shift to the cloud. Naturally, cash is king and the reason that we focus so much on ACV, especially when going through this type of shift. In the first half of twenty eighteen, we returned over $46,000,000 to shareholders through dividends, net settlements of equity and share buybacks. In summary, we are very pleased with our midyear execution against our strategy and focused on finishing 2018 strong and continuing that momentum into 2019. And with that, operator, we will open the call to questions. Our first question will come from Rishi Jaluria with D. A. Davidson. Hey, guys. Thanks for taking my questions. I appreciate the color on the cloud business. I mean, interest being significantly ahead of expectation. Ken, in your prepared remarks, you mentioned that it's a combination of increased demand and financial incentives. Can you expand a little bit on what sort of financial incentives there are that are driving customers towards cloud? Any changes organizationally that maybe need to be made to meet that demand? And then obviously, there's a it's hard to predict the future, but how should we be thinking about that metric in terms of cloud as a percentage of new bookings or new business going forward for the rest of the year? And I have a follow-up. Yes. I'm glad to clarify. We're not talking about financial incentives to customers. We changed when we went into this year, for the 1st year, we flipped our entire commission structure in the company to ACV, annual contract value. And historically, we had different rates for cloud versus other types of licenses. Now we're basically treating everything as if it is recurring and as if it is cloud. And that actually gives the salespeople a little more of a financial incentive. If they sell if they end up selling a term license without it running on the cloud, they just don't get comp for the additional revenue that they would get if it ran on the cloud. So they have an additional incentive. Having said that, I think a lot of it is that customers are interested and that ultimately is what drives what people buy. Got it. That's helpful. Yes, yes, no, that absolutely does. So how should we be thinking about where that directionally is going from here based on your existing pipeline today? So let me make 2 points on that. So there I want to talk about recurring versus nonrecurring and then we can talk about cloud for just a second. So the first thing is, if you look back a handful of years, we had a fairly reasonable amount of perpetual bookings and revenue in each year. And if you look at the first half of this year, I mean, we have $35,000,000 I believe $1,000,000 of revenue perpetual for the first half of the year versus if you go back into the 20 15 time frame, that number was approaching $200,000,000 right? So that the first point is we are seeing a pretty significant shift that customers like to buy recurring, right? They are interested in recurring models. And so that is completely aligned with our strategy and our compensation structure that we have with our field teams. The second point is cloud. We are cloud choice. We believe in that. We believe in giving customers the option of dealing with whether they want it inside of their private clouds or whether they want Pega to manage it in our cloud. And the important opportunity there is that customers can have flexibility and they also have flexibility if they decide that their needs have changed in the future. That said, we are seeing customers embrace our cloud at an accelerated rate. We can't predict if that will continue in the future. But normally, when you look at the market moving in that direction, cloud adoption tends to continue. And so we're hoping that this is a trend that continues. Okay. Got it. And last question on the cloud and I'll jump off. But Ken, you mentioned just the associated headwind. I just want to make sure I fully understand it. So is that each 1% increase in cloud as a percentage of new commitments that leads to a $3,000,000 headwind? And just kind of putting that together, if that metric stays at 50% for the full year relative to the 30% when you initially guided, that would be roughly a $60,000,000 top line headwind on a full year basis assuming no changes. Is that a fair statement? So that is a fair calculation. The reason why the 3% is not a science because it naturally depends on when that cloud deal is booked in the year, and I'm sure you realize that. But so that's a factor to consider. But there could be if our cloud stayed at 50 percent, you could see that kind of impact to revenue. Now naturally, you would see ACV growth being very stellar for the year if that happened, of course. Okay. Got it. Helpful. All right. Thanks, Alan and Ken. Thanks, Rishi. Our next question will come from Steve Koenig with Wedbush Securities. Hey, thank you, gentlemen. I appreciate taking my questions. I'll dig into the financials with Ken and then Alan, I've got a follow-up for you. So Ken, I think the people might be struggling in the aftermarket a little bit with Pega because it is complicated. But you guys have posted stellar ACV, stellar cloud mix. And in terms of triangulating on what the growth rate of new business is, there's obviously several ways to do it. But Alan mentioned that the TCV grew 20%. You mentioned new license and cloud commitments grew by over 25%. And then on top of that, I know that you guys don't manage sales to TCV anymore and it's not you don't quite manage to ACV, but kind of a it's still a little bit of a combination. Can I ask Steve? Steve, I might have mumbled. I meant to say I've stopped talking about TCV percentages entirely because we've got we've worked to get our company off of it. So read my TCV comment if I did make it as an ACV comment. Total to clarify, total ACV, Steve. So the Allen's 20% was total ACV, which is licensed cloud and maintenance. We don't measure TCV anymore in that way. So that's an important clarification. Right. Sorry to interrupt you. No problem. So you said new license and cloud commitments grew by over 25%. And now we know perpetuals were down. I can see that from the Q, and that's understandable. How do you think about the growth of your new business? And particularly, I'm thinking about in terms of the ways that you quoted your sales people. It looks like it was a pretty stellar quarter. How do we get our arms around that? And I guess a related question would be, that new disclosure looks really helpful. Do you have a sequential compare for that, a Q1 compare possibly? So let's I'll take those in order. So a question that is an easy one to answer that actually touches on your first one is that you might say, would your commission payments to our sales team, which is an indicator of kind of that bookings question that you asked, would they have increased by the 25%? And the answer would be yes. There is a correlation there with the amount of business activity and how we've motivated our sales team. So it's not a precise number that because of the way that we comp our team, we don't give a direct pay CV. We also encourage a small bonus for multi years for additional years. But yes, there is a correlation to our business activity growth being in kind of that 25% range. So that was your first question. The second question sorry, repeat the second question again. I was just wondering if you had a sequential compare possibly for that new disclosure, which looks very helpful. Sorry, yes. So I so we don't. And the reason being is that when we first did disclosure at Q1, we did it with which was the was only deals more than 365 days, if you remember. And when we got the feedback was that, that although that is technically permissible that really wasn't useful. And so we improved the robustness of the disclosure in Q2, but we we didn't have the ability to go back and recreate that. Okay. And this is Going forward, you'll get it. Yes. You'll get it going forward though every quarter. Okay, great. And if I may, one follow-up for Alan here. Alan, you spoke about the fact that the reps now have a slight incentive to tilt towards cloud. Clearly, the market is favoring cloud as the migration to cloud in terms of new apps for sure. But your mix shift has changed radically and clearly there was a demand for your cloud solutions. Is it simply a matter that Pega unlocked the keys to selling cloud for the sales force? Or also, are there factors related to anything you've done with your product or building customer references or greater use of cloud in production environments as opposed to just dev test? What's driving the mix shift this year beyond the sales methodology? Yes. I think we've become in the last, I would say, 12, 18 months, much more focused on developing and maturing and growing our ability to talk cloud at state of the art levels. We've hired and are continuing to build out very, very robust cloud skilled and cloud knowledgeable people. And frankly, that's helped a lot as well. Before, we were not as aggressively in that business as we are today. We're going to continue. We're here stay. We've got a lot of customers interested signing up, etcetera. So I don't think it's just been a change to the comp plan in any stretch of the imagination. And we didn't do anything diseconomic like I know some companies have done. We just don't do that stuff. But we have greatly deepened our skill set. We announced on previous call, we announced we brought a fellow named Frank Herrera, who's a really well noted leader in at this point, a little over a year ago. And I think he has and is continuing to really deepen our bench there. So I'm excited about that. Next, we'll go to Greg McDowell from JMP Securities. Hi, thank you. One for Alan and one for Ken. First, Alan, I was at your user conference, had a great time once again. And I'd love to ask about Infinity and how you think your investors should track the progress of Infinity? I mean, ultimately, I know it's not necessarily a separate SKU, but do you think in the medium term or long term Infinity will lead to sort of higher ASPs on a per user basis or a per case basis? And will it allow you to just basically extract more value from your customer base? How should we track it? How should we think about it? Yes, I think it will. I think that it will both let us get more value and also compete more effectively in lots of settings. Some of the things I mentioned, which you would have seen at the conference and I think are really highly distinguished, is that we enable because we have this real commitment to architecture, we enable things like robotics, which is trendy these days, though frankly a lot of it doesn't work that well. Robots that can get data on systems, robots that can do natural language processing of e mails, those are seamlessly put together in Infinity with the rest of the insight we offer in the customer engagement, etcetera. And the reality is a lot of the other products out there are really very much pieced together, collections of clouds that have been renamed. We think Infinity as really this future looking architecture gives us just a lot of additional juice in both directions. I also think that frankly, relative to whether this is a stellar quarter or not, I think we can do a lot better, and I think we should be doing a lot better. And that's what this year and next year are going to be all about, being able to realize some of the return on investment on our technology by actually putting it in customers' hands and having them be more successful. Great. And Ken, one for you. I mean, you pretty materially beat my ACV estimates. And so kudos on that. I know the headline numbers often are don't accurately reflect what's going on in the business. But I guess my question is, I really want to still, your words, improve the robustness of my modeling for the second half of the year. So how can you sort of help us improve that term license, perpetual license breakdown and how we should think about maybe seasonality for the back half of the year? I mean, it was very helpful to see the recast for 606 on a quarterly basis for last year. So I guess I'm asking, what are the land mines, potentially the modeling land mines in the back half of the year we got to watch out for, whether it's 7 digit or 8 digit renewals in term or just anything we should be super careful of? Okay. So I'll kind of use this as maybe to reiterate something that we talked I talked a little bit about at Investor Day. So Q4 is always a larger has always been a larger new business activity quarter. So you know that, right? So just keep that in mind. Q3 and Q2 tend to be about the same level of business activity in our space. Now naturally, sometimes there's a variance there and sometimes Q2 is stronger than Q3. But if you see the kind of business activity that we saw in Q2 and you see the kind of cloud percentage that we saw, that Q2s and Q3s don't look dramatically different. I think the question in the wildcard for you to model and for us to model, quite frankly, is the percentage of cloud because that is just not we are not at a point where we're able to say that that will be 40 or 50 or 30 or 60. It's just it's challenging because customers have choice and they make decisions right up until the last part of the sales cycle around their decision. In terms of unusually large renewals that might sneak up on you, right, because that which is another factor that you mentioned, 2018 is not a large renewal year as scheduled. Now we could have a large amount of term deals that might translate into revenue in the back half of the year and that will depend on our business activity of course. But this isn't a year where we have a disproportionate amount of renewals. I would say 2018 is pretty much a typical year in terms of renewals. Whereas in 'seventeen, we had that very large renewal that was that made 'seventeen a little bit unusual. So I don't know how much that will answer your question, but it's kind of I'm trying to help connect what we talked about a little bit at Investor Day and now. I think the biggest wildcard is the percentage of cloud and how much that can change the revenue. And I think that's why it's important for us to show you ACV, talk about the percentage of cloud for new, give you a directional impact to revenue when there's a 1% shift. And I'll continue to give as much of that information so that you can kind of make sense of what that revenue variance might be based on the cloud mix percentage. Our next question will come from Mark Schappel with Benchmark. Hi. Thank you for taking my question. Just following on the theme of shifting to the cloud, Ken, your September quarter is usually a strong quarter for your growing up and coming federal business and federal government business. And the government historically has been slower adopters of the cloud. I was just curious if you could foresee your 3Q cloud commitments kind of reverting back to the 30% range as a result of that. That's a very good question, Mark. I would take the public sector out of this answer because I don't think the public sector makes a difference in this discussion. I see cloud interest from our customers and clients and our sales team and the market in general as being very robust. So I would think that cloud would be very interesting for us to sell and for our clients to buy going forward. Whether 50% of what we achieved in the first half is still achievable in the back half, well, that's to be determined. But I don't believe that the movement to cloud in the first half is just a onetime thing, and we're going to immediately go back to everything being on premise. Yes. I think it's pretty clear that the 30% number that we modeled at the beginning of the year, though more than it was for 'seventeen, was just unduly conservative that I would agree with. The federal government space, we're working and investing a lot to get approval for what's called the FedRAMP offering to the federal government. And to the extent that the federal government has run on the cloud historically, and they have, they bought a license from Pega and then just chose to put it up on one of their private or AWS type class. When we have FedRAMP, I think we will see receptivity in the government, and we're working very, very hard to try to get that. Great. And then Alan, could you just discuss a little bit of the contribution from your channel partners this quarter? And more specifically, are your channel partners are those deals that they're signing or helping sign, are those shifting to the cloud much more so than the direct deals? I would say there's not a big difference. We do have partners attached to 80% or more of the deals that we do. More often than not, they're not reselling because typically, I mean typically, our customers want to end up having a direct we're doing mission critical stuff, so they want to end up having a direct relationship with us. So the amount of resale business, I would say, is typically in the sort of single digits. I think it's going to go up on absolute basis as we go forward with some of our strategies. But I don't think it's going to radically change. I think it will just continue to grow with the business growing in general. If you're doing a digital transformation, we're squarely in that space. It's a wonderful space to be in. They want to be able to call up the company if there's something that's going on or to really partner with the company. And so we will continue to see, I think, a strong bias towards direct even if a partner is very involved in helping us sell it, which a number of them aren't. That does conclude our question and answer session. At this time, I'd like to turn the conference back over to management for any additional or closing remarks. Yes. This is Alan. I'd like to thank you all, and you should all know we're working very hard. I do appreciate that the modeling question is just hard to come up with a satisfactory answer for. I want you to know that we're going to continue to try to improve our disclosures and give the transparency that will let people see what's really going on in the business. So obviously, it does require a stronger look than it might for some other companies. I think that if you do take that look, you'll like a lot of what you see. So thank you very much, and look forward to seeing you all soon. That does conclude our conference for today. Thank you for your participation.