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Pegasystems inc (NASDAQ:PEGA)
Q3 2021 Earnings Call
Oct 27, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Pegasystems Third Quarter 2021 Earnings Results Conference Call. Todays conference is being recorded. At this time, Id like to turn the conference over to Pegasystems COO and CFO, Mr. Ken Stillwell. Please go ahead, sir.

Ken Stillwell -- Chief Operating Officer & Chief Financial Officer

Thank you. Good evening, ladies and gentlemen, and welcome to Pegasystems Q3 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, forecast, guidance, likely and usually or variations of such words and other similar expressions identify forward-looking statements, which speak only as of the date of the statement was made and are based on current expectations and assumptions. Because such statements deal with future events, they are subject to various risks and uncertainties. Actual results for fiscal year 2021 and beyond could differ materially from the companys current expectations.

Factors that could cause the companys results to differ materially from those expressed in forward-looking statements are contained in the companys press release announcing its Q3 2021 earnings and in the companys filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2020, and other recent filings with the SEC. Investors are cautioned not to place undue reliance on such forward-looking statements, and there are no assurances that the matters contained in such statements will be achieved. Although subsequent events may cause our view to change, except as required by applicable law, we do not undertake and specifically disclaim any obligation to publicly update or revise these forward-looking statements whether as 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.

Alan Trefler -- Founder, Chief Executive Officer & Chairman of the Board

Thanks, Ken. And Id like to say that Im really pleased with our results year-to-date, and we continue to see strong adoption of our low-code digital transformation technology. Through Q3, our total annual contract value, or ACV, which we think is the best indicator of our performance, increased by 22% year-over-year, and our subscription revenue grew 32% year-over-year. The benefits of our recurring revenue model are increasingly visible, and were happy with our progress. Now to provide an update on the pandemic and some industry trends. So the status of the pandemic still varies region to region. We are seeing the global economy recovering. And there are positive signs that the worst is behind us. The demand for digital transformation solutions continues to be strong and is expected to be one of the fastest-growing enterprise software markets in coming years. The IDC report says the market for digital transformation software is growing globally at about 19% CAGR and is expected to reach $619 billion by 2024. We believe were in a great position to benefit from the growth in this market, driven, in large part, by the challenges in the last 18-plus months. Organizations know they must adapt to todays needs while preparing for inevitable additional changes that will come tomorrow. And thats where Pega comes in.

In an unpredictable world, we help our clients crush business complexity, so they can work smarter, simpler and faster. Our tag line, Build for Change, is as relevant as ever, given the imperatives that organizations establish a technology and a business architecture that empowers them to adapt and thrive in constantly changing markets. The Customer Decision Hub, our real-time decisioning engine, helps customers predict their customers needs, personalize interactions and deliver across channels to deepen relationships and maximize value. Our customer service solutions leverage automation and AI, so reps can handle any engagement quickly and effectively, ensuring customers get what they need. And our intelligent automation solutions boost efficiency by streamlining any process, often the most business-critical sophisticated workflows that require a high degree of intelligence and automation. And we continue to benefit from offering our customers Cloud Choice, which we pioneered in 2017. Offering client alternatives played perfectly to where we see the future going. Historically, organizations have thought of and implemented cloud as a collection of islands. And thats fine for many types of cloud usage. However, Pega is often used as a strategic backbone for an organization. And in those cases, clients will often want to weave Pega into and across their existing cloud infrastructure. And thats what Cloud Choice does. It lets Pega become part of their fabric, part of a clients strategic future, improving their effectiveness and fostering a longer-term commitment to Pega.

It has gone to recommend, CIOs are aggressively skilling up on cloud capabilities. This makes our cloud solutions more effective, whether were operating them or the client is. And its good news for us and our client because we support both options. And regardless of our clients deploy, the software is the same. So they benefit from the same industry-leading software and all that comes with it. A center-out approach that puts the outcomes they are achieving at the center of their solution, design thinking that brings people and technology together to design and deploy innovative solution in weeks or even days and the industrys only low-code platform built with a prescriptive approach to business and IT collaboration. Were proud of how central our software is to the strategic operations of our clients, many of the most recognized and successful brands on the planet. We are most successful when we engage with the senior leaders in these large enterprises where the focus is on strategic big bet initiatives that are crucial to their success. That means the commitment on both sides can be very significant. And once clients experience the value we bring, we have tremendous opportunity to deepen and expand those relationships. For example, on the commercial side of our business, in this last quarter, we expanded our footprint with three of the worlds largest telecommunications companies, three of the worlds largest financial services companies and three of the worlds largest healthcare companies. And just this past week, our client, Lloyds Banking Group, won a Digital Transformation of the Year Award for the work that theyre doing with Pega.

It really gives their employees and their customers the best experience at key moments of truth. Im very proud of the work that were doing together. Additionally, the government sector continues to drive significant business, and we increased our presence in government clients in every region around the world. Government leaders know that the next few years are going to be challenging and that the flood of service and program needs that we have experienced over the past 1.5 years will continue. They dont have to deliver a wide portfolio of critical services and yet outdated systems, inefficient processes and disconnected channels can slow down that service and make it hard to keep pace with needs and changes. We help government clients go live quickly and drive amazing outcomes, whether its starting with one small critical application like we rolled out for the state of Bavaria, which, by the way, has led to new opportunities across EMEA, or at massive scale like at the U.S. Census. Weve been wildly successful with our government clients over recent years to find the platform is built for change, sophistication and scale. By the way, our outstanding work for the Census is now documented in a recent video available on pega.com highlighting success. As Michael Thieme, the Census assistant director to the decennial program said, "Everything worked as it was supposed to. It was smooth. I would almost call it historically smooth." And not just in this continent, in Australia, our software is being used by the Department of Home Affairs to develop, what they call, their Permissions Capability Platform as part of an overhaul of their visa processing system.

They wanted an integrated enterprise scale workflow system capable of being used across the government. We expect to roll out new digital incoming passenger cards, which will include vaccination status to airports around the country by the end of the year, paving the way for border reopening. And in the U.K., our software is being used by the Royal Navy and Royal Air Force to develop new end-to-end recruiting platforms. The goal is to provide a better digital experience for the 180,000 annual potential candidates and help reduce recruitment cycles. Now as we emerge from the pandemic, we are gauging our clients and partners comfort level and meeting in person, and were gradually bringing back in-person events and getting our selling teams back on the road where we can. We continue to raise our visibility among our key clients and prospects with targeted selling and marketing approaches. For example, you may have seen that we sponsored the Ryder Cup this year, a new initiative for us to increase our visibility, and it provided an excellent opportunity to connect with so many of our more senior and strategic clients and partners. We just held our inaugural Executive Partner Advisory Council meeting with senior context from some of our most strategic partner organizations who are broad and deep established relationship with many of our clients. Were excited to be able to hold this meeting in person. And our new streamlined partner program that was rolled out this summer is being well received, and we will continue to focus on deepening these relationships to make it easier for partners to engage with us in joint solution development, co-selling and client referrals.

As a result, were seeing increases in partner engagement and partner-sourced business, and we have plenty of opportunity to fully leverage, we think, a strong and growing partner network and feel very positive about the overall direction of momentum. So in summary, Im pleased with how were executing on our strategy and how its reflected in our results in Q3. We continue to make excellent progress on our transition to a recurring revenue model. Our clients recognize the need for digital transformation solutions that can solve both their short-term challenges and long-term strategic needs. And we feel we are uniquely available and able to help them. And we continue to focus on strategic investments to leverage this great opportunity while thoughtfully managing margins. So to provide more color on these results, Ill now turn it over to our COO and CFO, Ken Stillwell. Take it away, Ken.

Ken Stillwell -- Chief Operating Officer & Chief Financial Officer

Thanks, Alan. Q3 was another strong quarter following on the heels of what was a very strong Q2. When it comes to our most important metric that we measure as our business success, ACV continues to be the most important metric, and thats the growth in our annual contract value. In fact, if you look at the combined Q2 and Q3 of 2021, we added an impressive net new ACV gain of $95 million, an increase of 45% year-over-year. And whats really nice is to see such strong momentum through what is traditionally a slower ACV growth period for Pega, which is the middle of the year, the Q2 and the Q3 time period. As you know, in late 2017, we started a multiyear cloud transition, moving from a company that primarily sold perpetual licenses to a company whose go-to-market motion is focused on selling subscription. Today, almost all of our new client commitments are Cloud Choice. These clients are either subscribing to Pega Cloud, a cloud deployment that Pega manages; or client cloud, a cloud deployment that our clients manage on the cloud of their choice. As a result, our total software revenue mix has shifted to subscription. In fact, through the first nine months of 2021, more than 97% of our software revenue is, in fact, subscription.

Pega remade itself as a subscription software company over the last few years, a significant achievement that were very proud of at Pega. During our transition to the subscription model, there are two metrics that properly measure our success. The first and most important metric is growth in ACV, as I mentioned earlier, which represents the annualized value of our active client contracts as of the measurement date. In Q3, ACV grew 22% as reported and 21% in constant currency from a year ago. Since the ACV growth had dipped below 20% constant currency earlier in 2021, Im really excited to see total constant currency ACV growth accelerates back above 20% in Q3. One thing to clarify with our ACV growth is that it came about a little differently this quarter with a higher client cloud mix than in recent quarters. Were not entirely surprised by this mix as weve seen our clients become increasingly sophisticated in adopting and managing their own cloud environments for their most mission-critical tightly integrated applications. We believe increasing adoption of client cloud reflects this dynamic. Going forward, we continue to believe that Pega Cloud will be the faster-growing component of ACV, but its awesome to see our clients truly embracing Cloud Choice. An interesting note is that almost half of our clients who have ACV greater than $1 million per year leverage both Pega Cloud and client cloud. We view this as a validation of our Cloud Choice strategy.

In our view, total ACV growth is what ultimately matters for our strategy. Let me explain why. First, unlike other enterprise software companies, the Pega Cloud and client cloud are, in fact, the same underlying technology. The only difference between the two offerings is who manages the solution and where those solutions are managed. Second, we continue to view our strategy to provide customers with Cloud Choice. But reminder that the Cloud Choice is the choice to deploy with Pega Cloud or client cloud. It is a key differentiator for us. Oftentimes, our clients tell us that Cloud Choice is a key differentiator for us in the enterprise space. These clients have needs that are complex. Therefore, clients require flexibility when deciding how and where to manage their enterprise solutions. Another important metric to measure our success during the cloud transition is our growth in remaining performance obligation, RPO, sometimes called backlog. Total backlog represents clients contractual commitments that are expected to come into revenue in future periods. Total backlog increased by 23% from Q3 2020 to Q3 2021, increasing from $838 million to just over $1 billion. Its tremendous to see total backlog increase by almost $200 million in 12 months. Its worth mentioning that maintenance backlog growth also accelerated through 2021. When a client cloud deal is booked, a portion of that transaction is recognized as term license subscription and a portion goes into maintenance backlog to be recognized in future periods.

The strong growth in maintenance backlog is a direct result of our strong client cloud bookings during the last 12 months. Ive often advised investors not to get too hung up on the accounting of ASC 606, but instead, to think about combining term ACV and maintenance ACV as those together represent client cloud ACV. Turning to revenue. Total revenue through the first three quarters of 2021 increased 25% year-over-year. This increase was driven by Pega Cloud revenue growth, which increased 49% over the same period. Subscription revenue jumped by 32%, reaching $708 million through the first three quarters of 2021. Over this period, subscription revenue made up just under 80% of total revenue, up from 75% of total revenue during the same period last year. Our success in closing new and expanded Pega Cloud and client cloud deals drove our growth in term license, cloud and maintenance revenue, which makes up our subscription revenue sources. There are several factors powering the subscription revenue growth. Weve clearly expanded our total addressable market because of the pandemic. Companies are adopting modern software solutions to automate manual business processes across all of our key industries, financial services, insurance, telecommunications, healthcare, manufacturing and the public sector. We are still in the early innings of digital transformation, which is accelerating across the globe, and Pegasystems is at the center of this opportunity.

And our software is clearly becoming more important post pandemic. Companies are embracing a hybrid workforce, and that means more digital engagement between clients and their customers as well as their team members. In conclusion, we delivered a great third quarter, highlighted by solid total ACV growth, and were looking forward to closing out a record 2021. As always, Q4 is a critically important sales quarter, and we are laser-focused on finishing the year strong and positioning our company to deliver in the future. Operator, please open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Well take our first question from Steve Koenig with SMBC Nikko. Please go ahead.

Steve Koenig -- SMBC Nikko -- Analyst

Hi. Good afternoon. Thanks pega. Ill do one for Alan and one for Ken. Alan, could you give us an update on where you are in terms of the journey you launched with Pega Infinity? I think it was two years ago now. COVID has, by sense of time, warped sometimes. And where are you with multi-tenancy, micro services and the IDE, all the interesting stuff youre adding to the platform? And then Ive got one follow-up for Ken.

Alan Trefler -- Founder, Chief Executive Officer & Chairman of the Board

Yes. Steve, at the risk of really putting us all in a time warp, it was actually over three years ago that we announced what we call Project fnx, which was very carefully crafted strategic way to build additional capabilities into Infinity in a way that customers wouldnt have to wait until everything is done to take advantage of them. And what Ill tell you is that with our 8.6 release, which has been in our customers hands now for months and our 8.5 release, we were actually able to put very important capabilities in. For example, most recently, the ability to use what we call the DX API, the digital experience API, which is now being used by numerous production customers to give them a real cross-channel way of having the brains and the process from the Center-out architecture, from the guts of their -- where they run their business, drive their front ends. And we have numerous clients who are using it. And were now actually able to use that also to generate state-of-the-art react-based desktops, which is available in the clients on early adopter status in 8.6 and going to be broadly available in 8.7. So very, very substantial functional and compelling improvements. From a micro services point of view, we have very substantially taken the Pegasystems and subdivided it into key micro services and into key recurring services. And concepts like multi-tenancy are ones that are also building -- built in, in a variety of ways, but on, I think, very capable ways. We will continue to be able to offer certain clients the ability to run as their own, as it says, is a set of tenants, whereas I would expect that looking out a year a little more, youll be able to see us offering software to perhaps new cadres of clients. That is really the right way to enter certain sectors and segments of the market as we look ahead. So very pleased with the Project fnx progress. And you can see it in reality paying off today and arranging for us to pay off even more in the future.

Steve Koenig -- SMBC Nikko -- Analyst

Terrific. Thanks a lot Alan and then quickly for you, Ken. I think you mentioned that cloud was a really big part of new bookings. I think last quarter, it might have been 60%. It sounds like it was even higher this quarter. Could you give us some color on that? And then just to add to that, any color on how sales productivity is trending after all the hiring youve been doing? And how its been impacted by the go-to-market changes that Hayden has made? Thats all I have. Thanks very much.

Ken Stillwell -- Chief Operating Officer & Chief Financial Officer

Sure, Steve. So yes, let me clarify one thing. So our overall Cloud Choice is accelerating growth. We -- for the year, Pega Cloud to client cloud was still, for the year, about 50-50 in terms of the percentage mix between the two of them. So nothing real noticeable there. Client cloud has been -- was a stronger -- was stronger in Q3 than Pega Cloud just slightly. Whereas last quarter, they were close last quarter. I think Pega Cloud was maybe a little stronger. They were -- theyve been pretty equivalent. Weve seen good balance there. So just to clarify what youll see in the financials. On the sales productivity, whats interesting is because of the significant growth that we had in Q2 and Q3, the sales productivity or just for Q2 and Q3 certainly is -- has strengthened. Q1, I would say, was not as strong of a quarter in terms of overall ACV growth. But Q2 and Q3, weve certainly been moving in the right direction.

Steve Koenig -- SMBC Nikko -- Analyst

Great. Thanks a lot.

Operator

Thank you. Well now take our next question from Jack Andrews with Needham.

Jack Andrews -- Needham -- Analyst

Good afternnoon. Thanks for taking my questions. I was wondering if you could provide more details just on your partner progress. Is there a way to frame just what proportion of your opportunities are now influenced by partners these days?

Alan Trefler -- Founder, Chief Executive Officer & Chairman of the Board

I can talk to that. A significant majority of our opportunities have very meaningful partner engagement. I would actually say its north of 80% where a partner is meaningfully engaged. And this has been a key part of our strategy and something that Hayden has been advocating, and were very excited about. So theres a lot more opportunity here, frankly, as we continue to work going forward. But we believe our strategy needs to be extremely partner-friendly and that will only continue.

Ken Stillwell -- Chief Operating Officer & Chief Financial Officer

Jack, Ill add one other qualification on to what Alan said. Just to be -- so although partners -- Alan is right, partners are very involved in many of our campaigns. I would still say there is a lot of upside in terms of the deal, so to speak, that partners are bringing us. We are still sourcing the deals in our traditional fashion, and partners are starting to refer more to us. But were still in the early stages of that, if thats -- thats the other angle on that question.

Jack Andrews -- Needham -- Analyst

Got it. Thats helpful. Thank you and maybe just as a quick follow-up. Alan, you mentioned that youre most successful when youve got senior leadership engagement. I was wondering, is there a way to frame -- has there been like a change in either the frequency or intensity of C-level conversations that youre having these days?

Alan Trefler -- Founder, Chief Executive Officer & Chairman of the Board

I think weve been able to meaningfully increase that. As weve added ourselves more senior people who are comfortable dealing at the COO, CXO, even CEO level, those conversations have increased. I would also tell you that bizarrely, in some ways, the pandemic has been helpful because you no longer have to struggle as much, frankly, to get schedules perfectly aligned. People kind of are stuck. So you just -- you need to be able to find the right windows. Certainly, Im on a pretty continuous basis involved with clients. And thats also true for a lot of the other senior people. Hayden and the executives who run our different regions and the people who are responsible for both are products, the GMs of our one to 1, of our customer service and our intelligent automation and also of our industries are all very involved with senior customer discussions.

Jack Andrews -- Needham -- Analyst

Great. Congratulations on the results.

Alan Trefler -- Founder, Chief Executive Officer & Chairman of the Board

Thank you.

Operator

Well hear next from Steve Enders with KeyBanc.

Steve Enders -- KeyBanc -- Analyst

Okay. Great. Thanks for taking the questions on my end. I just wanted to get a better sense. I think we hear a lot in the news around great relegation and people worried about potential hiring out there. But I guess when you go back to your customers and your clients and have those conversations, is there an increased focus from them and around investing in their own automation initiatives given these potential challenges theyre seeing within their own potential employee base?

Alan Trefler -- Founder, Chief Executive Officer & Chairman of the Board

So I think thats a really good question. And as we think about the next several years, we believe that as a code that writes -- our software writes software. And I think organizations who want to have a lot of control over their destiny, so they dont just want to dump their systems in the hands of some off-the-shelf thing. So they want that level of control. But they realize thats increasingly hard in this world where, frankly, the technology is complicated. Security is an increasingly large issue, and the marketplaces with demanding agility. We think that our pretty unique ability to do this low-code implementation work with very sophisticated targets, customers who have multiple regions, multiple products, multiple types of customers that we think that, that actually strategically plays really well to our low-code strategy, but low-code for sophisticated organizations and for organizations with complexity, which we can help them rush. So theyre really interested. A lot of them are much more open-minded about doing it somewhere differently because they realize how hard it is to build the team and keep it around. So they need, frankly, new ways of doing it. I think thats going to be increasingly important over the next 24 to 36 months.

Steve Koenig -- SMBC Nikko -- Analyst

Okay. Perfect. No, thats great to hear. And then, Ken, maybe just a housekeeping question. Good to see ACV growth come in at 22% again. Just wondering what the constant currency growth was there, if theres any FX impact in the quarter here?

Ken Stillwell -- Chief Operating Officer & Chief Financial Officer

Yes. Constant currency was around 21%, Steve. So there wasnt as much of a currency tailwind in Q3. Its kind of the dollar starting to kind of get back to where it was toward the end of the year. So we actually had -- in constant currency growth, we had a pretty reasonable acceleration in Q3.

Steve Koenig -- SMBC Nikko -- Analyst

Okay. Perfect. Thats great to hear.. Thanks for taking my questions.

Ken Stillwell -- Chief Operating Officer & Chief Financial Officer

Sure.

Operator

Thank you. Ill hear next from Pinjalim Bora with JPMorgan.

Pinjalim Bora -- JPMorgan -- Analyst

Okay. Hi guys. Thanks for taking my questions. Ken, the mix shift to client cloud versus Pega Cloud, I just wanted to double click on that. Is that impacted by more regulatory industries this quarter who wants to just manage their own infrastructure or any particular use cases that youre seeing thats kind of informing that basically to take in-house versus using Pega Cloud? And then on the other side, I mean, I think you said cloud -- Pega Cloud growth should pick back up. Can you just -- are you suggesting that we are kind of hitting a trough on the Pega Cloud growth at this point?

Alan Trefler -- Founder, Chief Executive Officer & Chairman of the Board

Can I jump in for a second?

Pinjalim Bora -- JPMorgan -- Analyst

Yes.

Alan Trefler -- Founder, Chief Executive Officer & Chairman of the Board

I think its really important to understand how were talking about cloud. Ken mentioned that, and Ill just try to be a little more transparent. At the end of the day, actually at the start of the day, what were interested in is cloud solutions. Were all in on cloud solutions. Whether that cloud is operated by a customer because they want to put it, in effect, woven into their full backbone and the other 40 systems that they routinely hook us into, or whether they choose to have us be running on the Pega Cloud world where were operating it, but those integrations need to go across just like they would for anybody, they need to go across sort of standard, industry standard rest or other types of interfaces. Thats really an architectural choice that often reflects how the customer is thinking about as a state. Because the great news is that customers are thinking of us as an integral part of their technology architecture and the technology state. So we do not draw a distinction in how we compensate our salespeople, in how we think about it and judge ourselves internally about whether a dollar comes in from Pega Cloud or whether the dollar comes in from client cloud.

Unfortunately, the accountants account for them differently, which I wont offer my personal -- my personal opinion actually is that, thats really suboptimal. So you have to look at it from an accounting point of view. But from our point of view, its the same technology. Its really about what makes the most sense for this key strategic customer. So I just want to be clear because a lot of other companies, and were not one of them, have like completely different product lines from their cloud version versus their client version. We dont. So think of it all as being about ACV, and youll at least be looking at it more closely to how we think about cloud ACV, which we think about as more homogenous even if the accounting ends up being, at least in the short term only, but in the short term, the accounting is a little weird. But I think Ken works really hard to try to make that transparent. Does that make sense? Because we do get this question because other companies arent like this.

Pinjalim Bora -- JPMorgan -- Analyst

Yes. That definitely makes sense. One quick follow-up...

Ken Stillwell -- Chief Operating Officer & Chief Financial Officer

So Pinjalim, can I answer the back part -- can I just take the back part of your question now?

Pinjalim Bora -- JPMorgan -- Analyst

Sure.

Ken Stillwell -- Chief Operating Officer & Chief Financial Officer

So everything that Alan just said, so if you think about it, who would be more likely to buy client cloud? Well, use cases do play into it. But if you have larger organizations and using Pega centrally kind of inside their tightly integrated mission-critical environments, some of them may want to manage that themselves, right? That would be client cloud. What I said in my script, which actually is the second part of your question that you mentioned, which is -- its not that -- dont think about an acceleration or deceleration. What I had mentioned was that Pega Cloud will still be the fastest growing from a percentage standpoint, because even if we end up with this scenario where its 50-50, 50% client cloud, 50% Pega Cloud, Pega Cloud will still be an accelerated grower for some period of time in terms of the percentage.

Pinjalim Bora -- JPMorgan -- Analyst

Understood. Understood. Thanks for the clarification Ken. Ken, one more for you. In terms of the cash flow side, I think it seems like -- just help us understand the time frame on the normalization aspect of cash flow as we end this year and next year?

Ken Stillwell -- Chief Operating Officer & Chief Financial Officer

So think about operating cash flow connecting to what we call non-GAAP income, right? So just think about it that way, where non-GAAP income is very consistent with operating cash flow. The actual cash balance, of course, is impacted by other things like stock buybacks, et cetera, which we actually have a decent amount of stock buybacks that we do through the course of the year. So just think about non-GAAP EPS or non-GAAP income, which interestingly enough is $0.01 is kind of $1 million if you kind of do the math quickly or simply. So thats kind of the way to think about. Non-GAAP EPS is a very close proxy to free cash flow for -- thats just kind of a simple way to think about it.

Pinjalim Bora -- JPMorgan -- Analyst

Got it. I get that. But my question was more around the normalization of cash flow. I mean, consensus is modeling a big uptick in Q4 and next year. I think you were a little short on the cash flows side this quarter. So Im just trying to think is that normalization time frame pushed out? Or are we still...

Ken Stillwell -- Chief Operating Officer & Chief Financial Officer

No, were still under the same time frame. What we had is -- depending on the way the structure of the deal and when the billings come in, sometimes you do have some things shift between the quarters. But Q4 is typically -- Q4 and Q1 are kind of typically our stronger billing collection quarters just as a general rule because of the amount of activity that happens in Q4, not just new deals, but also renewals that happen. So that tends to be the more kind of seasonally adjusted period.

Pinjalim Bora -- JPMorgan -- Analyst

Understood. Thank you so much.

Ken Stillwell -- Chief Operating Officer & Chief Financial Officer

Yeah. Sure.

Operator

Thank you. Well now take our next question from Rishi Jaluria with RBC.

Russell Rigby -- RBC -- Analyst

Thanks. This is actually Philip Rigby on for Rishi. So nice to see really nice acceleration in total ACV. And I think youve all touched on this in prepared remarks, but I want to make sure Im understanding this. The deceleration in cloud revenue, is that really all just a mix to -- is just trying to think through the disconnect between the deceleration in cloud revenue and the acceleration of total ACV. Yes, any color there would be really helpful.

Ken Stillwell -- Chief Operating Officer & Chief Financial Officer

Its just -- it is just a mix issue. So if you -- so the -- depending on the mix -- Ill just -- Ill answer your question on ACV because ACV is a little bit more connected, revenue has some kind of a little bit of weirdness around 606. But for ACV, if you actually have total ACV accelerating but the mix shifts in ACV, naturally, youll have one accelerate and one decelerate in terms of the speed. So youre absolutely right. Theyre just -- there that -- we look at it as total ACV. At the end of the day, although we see Pega Cloud being a critical part of our growth, at the end of the day, total ACV growth is really what matters, and we need that number to be accelerating and growing.

Russell Rigby -- RBC -- Analyst

Got it. That makes a lot of sense. And then any changes to what youre seeing in the new logo environment?

Ken Stillwell -- Chief Operating Officer & Chief Financial Officer

Alan, do you want to take new logos?

Alan Trefler -- Founder, Chief Executive Officer & Chairman of the Board

Yes, sure. We are continuing to get new logos, and we love it, of course, when we get new customers. Were also getting -- and I dont know if this counts in your mind as a logo or not, but were seeing a lot of, what I would describe, new businesses or, for example, the new parts of the Australian government and new parts of the German government and new agencies in the U.S. government that are coming on board based on our successes there. In effect, each one tends to have its own logo, but theyre really all part of a theme of continuing to do good work for some of these very, very large institutions and organizations and being able to continue to grow. And frankly, I think thats a very reliable way for us to really build our footprint and build the extremely, extremely high retention rates that we have with our clients.

Russell Rigby -- RBC -- Analyst

Got it. Thanks so much.

Operator

Well now take our next question from Fred Havemeyer with Macquarie.

Fred Havemeyer -- Macquarie -- Analyst

Hi. Thank you very much. So I wanted to ask, firstly, how has Pega been progressing with the new go-to-market update vision and organizational changes that Hayden laid out at your Analyst Day? Are you kind of pleased with your progress and where thats standing? Or do you see areas where you think theres more work that could be done?

Alan Trefler -- Founder, Chief Executive Officer & Chairman of the Board

So Im very impressed by the talent that we found and been able to attract under Haydens leadership in the last six months and nine months. I dont want to offend anybody by taking it off the visual time frame. And you can actually see thats coming on board. If you go on to LinkedIn and take a look, youll see very, very impressive people with terrific backgrounds and experience who are joining us from competitors. And theres a lot of appetite from people to take advantage of, I think, whats broadly perceived as a much better technology, which they can bring their selling skills and selling experience too. So Im extremely pleased by that. Having said that, the team is all really new. And were still in the process of pulling together, et cetera. I think a really important event for us that were all looking forward to is the beginning of January, our sales kickoff when I believe well be able to tag this team, which is my point of view, largely assembled and really be able to launch them as a unit that we have been developing. So Im really excited as we think about going into next year, what well be able to accomplish. But if you just take a look at the people, and this is public domain because you can find it on LinkedIn, its a very impressive collection of talent.

Fred Havemeyer -- Macquarie -- Analyst

Thank you for that. Well, Alan, I just added you on LinkedIn, and Ill start adding more people. So well be following that talent progression there.

Alan Trefler -- Founder, Chief Executive Officer & Chairman of the Board

You should do it.

Fred Havemeyer -- Macquarie -- Analyst

Ken, Im not...

Alan Trefler -- Founder, Chief Executive Officer & Chairman of the Board

If you go to the company page, the Pega page and you look at the insights, theres a tab that says Insights, it actually will lis for you, recent senior hires. And its -- you must be...

Fred Havemeyer -- Macquarie -- Analyst

Absolutely. And weve been tracking that part. So Ken, I have to ignore you a bit. Alan, I have another question that I think might be more in your direction here, kind of architectural. Weve been hearing more about the importance of event-driven architectures, not just for building scalable infrastructure and enterprise IT environment, but even for workflow systems. So Id just like to ask, how do you consider Pegas capabilities to take advantage of more like event streaming technologies or essentially event-driven automation and workflow?

Alan Trefler -- Founder, Chief Executive Officer & Chairman of the Board

I think were state-of-the-art. So weve built in, as part of Project fnx, one of the things that we did early on was make it so our system was amenable to events and made it completely natural in events or a first-class citizen. We plugged it to CoS guide, numerous customers, consuming events and applying a combination of real-time decisioning, rules, process AI and our workflows, which, of course, are our core. So that plays enormously strongly. And frankly, a lot of the stuff thats out there isnt very good. Im really proud of what our team has been able to build in that area as well.

Fred Havemeyer -- Macquarie -- Analyst

Okay, thank you.

Operator

Thank you. Well hear next from Mark Schappel with Loop Capital.

Mark Schappel -- Loop Capital -- Analyst

Hi. Thank you for taking my question. Alan, a question for you. Historically, M&A has played somewhat of a modest role at the company. And I was wondering with the business model transition winding down, whether you see M&A playing a larger role?

Alan Trefler -- Founder, Chief Executive Officer & Chairman of the Board

Well, we keep an open mind. The challenge, as weve discussed in the past, is when we go to market, and this is going to be true, I believe, going forward, a critical element that we tell our clients is that were not a Frankenstack, that we have bought things, but where we have, like we recently brought in the real-time speech and text analytics from a small technology company we bought called Qurious, thats just absolutely brilliant and being released to early adopters actually this quarter. That sort of thing, we believe, needs to be woven into our consolidated architecture, not just something that looks good on the PowerPoint, but something that really is reflective of good, what I would call, technology. So that does mean that were not expecting to be a company thats like a lot of our, frankly, competitors that have been financially quite successful, theyre basically buying revenue and buying revenue streams. But at the end of the day, their customers get what we sometimes refer to as a Frankenstack. Were so central to the architecture of our clients. I think thats going to be increasing that we would not want to lose that technical integrity. So that doesnt mean we have to build everything ourselves. Were really open-minded about being able to find both technology and talent that we can bring in. So as we complete the evolution, I would say, in the next 12, 24 months, we could become more amenable to M&A, but were always looking. So if you know something that we should look at, were glad to talk to them.

Mark Schappel -- Loop Capital -- Analyst

Great. Thanks. And then, Ken, a question for you. A few years ago, the company embraced the Rule of 40 as a guiding principle to balance ACV growth and cash flow margins. What is the right way that investors should be thinking about ACV growth versus profitability over time here?

Ken Stillwell -- Chief Operating Officer & Chief Financial Officer

Yes, so Ill point back, I think this is where your question is kind of going, Mark. I think if you had to -- if we had to look at a mix of Rule of 40 that would be more in line with the way that the investments that weve made in the business are trending, weve kind of said it would be kind of more in that 25% ACV growth, 15% margin. Now naturally, were not through the cloud -- through the subscription transition completely. And were not at 25% ACV growth right now. Were at kind of 22% now. But I think if you kind of think about that, I think thats a way to think about the investments that were making in the business and where you might see that if we were able to achieve Rule of 40, how it might look. Were not going to be a fill, although I would wish we were, were not likely to be a 40-10 -- or excuse me, a 40-0 kind of mix, 40% growth, 0%, and we certainly dont -- were not investing in the business in a way to think about ACV growth decelerating. So thats kind of the way I think about it.

Mark Schappel -- Loop Capital -- Analyst

Okay. Great. Thanks.

Ken Stillwell -- Chief Operating Officer & Chief Financial Officer

Sure.

Operator

Thank you. Well now take our next question from Vinod Srinivasaraghavan.

Vinod Srinivasaraghavan -- Barclays Bank PLC -- Analyst

Hi. Thank you for taking my question. Just a quick housekeeping question first. Did you disclose the breakdown in cloud ACV this quarter?

Ken Stillwell -- Chief Operating Officer & Chief Financial Officer

Yes. The breakdown between Pega Cloud and client cloud?

Vinod Srinivasaraghavan -- Barclays Bank PLC -- Analyst

I should have been more specific, sorry. The breakdown for client cloud between term and maintenance.

Ken Stillwell -- Chief Operating Officer & Chief Financial Officer

Yes. There is an ACV table. If you want to get the specifics, theres an ACV table that is -- its actually going to be in our MD&A. I will verify where that is, but the ACV -- were trying to take a view of client cloud being both together in terms of ACV because the two numbers, as you can imagine, become confusing if you look at them individually. So -- but Ill get back to you on where that is in the MD&A.

Vinod Srinivasaraghavan -- Barclays Bank PLC -- Analyst

Okay. Great. Thank you and then I just wanted to touch on the kind of the selling motion for Pega Cloud. Do you incentivize your sales force to sell it over client cloud? And do partners play a role in selling Pega Cloud as well?

Alan Trefler -- Founder, Chief Executive Officer & Chairman of the Board

Yes. Partners can be a source. We do have partners that actually bring us Pega Cloud deals. We generally, though not always, but almost always, the client ends up wanting to sign the contract with us even if its brought by a partner just because they like having that sort of relationship with their cloud provider. But we have done some indirect as well on Pega Cloud. We do not specifically extra incent one type of cloud versus another because we think the choice should be based on what the client needs. And I do think we have to really get people oriented around the fact that client cloud is no less sticky than Pega Cloud. Arguably, its more sticky than Pega Cloud because typically people who are using client cloud are doing it because its really deeply woven into their infrastructure and they just have so many interfaces they want to run it with the rest of their stuff. So I think that we are disadvantaged because lots of other software companies end up having very different software product lines, kind of their new stuff and their old stuff, and thats how they talk about cloud. Thats just not us. The Pega Cloud versus client cloud is sometimes a decision that gets made very late in the selling cycle based on strategic reasons. And I dont think it would be appropriate, frankly, to extra incent one versus the other.

Vinod Srinivasaraghavan -- Barclays Bank PLC -- Analyst

Got it. Thats helpful. And then I guess the last question for me. Can you just talk about how, I guess, quantitatively some of the benefits of Project fnx specifically on kind of your longer-term gross margin profile?

Alan Trefler -- Founder, Chief Executive Officer & Chairman of the Board

Yes. I can talk to that a little bit. So Project fnx has already brought us on to the Kubernetes platform for new customers. Were running in production with what we sometimes internally call Cloud K, which is clients, our clients have been able to run on Kubernetes for a while. Were now running Pega Cloud on Kubernetes. That obviously gives us some additional savings. And other elements of Project fnx will give us, for certain, use cases the ability to do what you might describe as co-mingled multi-tenancy. Kubernetes gives you a form of multi-tenancy but is not co-mingled between organizations. We will have the ability to do co-mingled multi-tenancy as this continues to develop over the next, Id say, a year or so. But once again, we are thinking about how we commercialize that with our customers because we also like a lot of whats the sort of at least client-specific separations can provide -- it really provides some very powerful options as it relates to things like encryption and other elements of how you do these things. So fnx and this whole movement are definitely contributing to -- I think youre seeing margin improvements as we move along. And theyre not done. Were continuing to build on it.

Ken Stillwell -- Chief Operating Officer & Chief Financial Officer

So I mean just adding one other piece of information to that. So if you think about the best-in-class kind of multi-tenancy gross margins versus the best-in-class kind of single tenancy gross margin, the things that were doing is trying to kind of -- to have our margins kind of move in the direction of multi-tenancy by getting some of the efficiency but still having the flexibility of some of the benefits -- of some of the single-tenant benefits. So thats kind of just think about it as were trying to kind of gravitate higher margin by almost stimulating multi-tendency with some of the things Alan mentioned, like Kubernetes, for example.

Vinod Srinivasaraghavan -- Barclays Bank PLC -- Analyst

Got it. Thank you.

Operator

Thank you. Well now take our next question from with JMP Securities.

Joey Marincek -- JMP Securities -- Analyst

Hey, guys. Its Joey Marincek on for Pat. Thank you for taking the questions. A few quick ones for Ken here. First, I wanted to talk about the 2023 update you laid out during the investor briefing in June. How are you feeling about those targets? And then maybe how should we think about the trajectory and shape of getting to those targets? And then second, can you walk us through how youre thinking about the key levers to drive continued growth and possible acceleration in total ACV? Thank you.

Ken Stillwell -- Chief Operating Officer & Chief Financial Officer

Sure. So the targets that we talked about in the Investor Day, probably the only one that is -- I still feel good about all of them. But theres -- the one that is kind of the unknown a little bit is whats the mix of client cloud versus Pega Cloud. And as we talked about earlier, from a business standpoint, I think we quite frankly really dont care that much because theyre both valuable. We just really need to hit the growth number. But the mix of how theyre booked, so to speak, the way the client buys that solution, does impact some of the detailed lines that we talked about, like Pega Cloud ACV growth, Pega Cloud revenue, client cloud revenue, but it doesnt impact subscription -- total subscription and total ACV. So substantively, nothing is -- we dont feel really any different than what we talked about back in the spring. But it is -- the way the ACV and the revenue comes in is certainly -- we dont have a crystal ball on knowing whether its going to be client cloud versus Pega Cloud. But then again, at the end of the day, we just need total ACV growth to continue to accelerate. Im sorry, remind me on the second part of your question?

Joey Marincek -- JMP Securities -- Analyst

Yes. Just going off of that total ACV growth accelerating. How do you think about the key levers there in order to drive that?

Ken Stillwell -- Chief Operating Officer & Chief Financial Officer

ACV growth acceleration, I think, is -- look, we have plenty of addressable market. I dont think anybody would dispute that. We have a best-in-class solution set. I dont think anybody would dispute that. We have marquee clients. Im not sure anybody would dispute that. Really, the focus for us is to leverage those relationships that we have because we havent even scratched the surface on the penetration that we can have with our largest and even some of our emerging clients. So I think theres just a tremendous opportunity to accelerate ACV growth with the few hundred of the largest clients that weve built really good relationships, both in Pega Cloud and in client cloud, as I mentioned. I think that is going to be the key lever for us to accelerate ACV growth. Its to deepen those relationships, expand the use cases, like those clients want to do with companies like Pega.

Joey Marincek -- JMP Securities -- Analyst

Thats super helpful. Thanks so much.

Ken Stillwell -- Chief Operating Officer & Chief Financial Officer

Sure.

Operator

Thank you and that does conclude todays question-and-answer session. Id like to turn the conference back over to Mr. Trefler for any additional or closing remarks.

Alan Trefler -- Founder, Chief Executive Officer & Chairman of the Board

Thank you, and thank you to all of our investors and analysts. We are working hard on your behalf. I just want you all to know that. And please stay healthy, and I look forward to being able to see you all in person again at some point, hopefully in the near future. So be well, everybody. Talk to you again soon.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Ken Stillwell -- Chief Operating Officer & Chief Financial Officer

Alan Trefler -- Founder, Chief Executive Officer & Chairman of the Board

Steve Koenig -- SMBC Nikko -- Analyst

Jack Andrews -- Needham -- Analyst

Steve Enders -- KeyBanc -- Analyst

Pinjalim Bora -- JPMorgan -- Analyst

Russell Rigby -- RBC -- Analyst

Fred Havemeyer -- Macquarie -- Analyst

Mark Schappel -- Loop Capital -- Analyst

Vinod Srinivasaraghavan -- Barclays Bank PLC -- Analyst

Joey Marincek -- JMP Securities -- Analyst

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