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Pegasystems Inc (PEGA) Q1 2019 Earnings Call Transcript

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Pegasystems Inc (NASDAQ: PEGA)
Q1 2019 Earnings Call
May. 7, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Pegasystems First Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ken Stillwell, Chief Financial Officer, Chief Administrative Officer and Senior Vice President. Please go ahead.

Ken Stillwell -- Chief Financial Officer, Chief Administrative Officer and Senior Vice President

Thank you. Good evening, ladies and gentlemen, and welcome to Pegasystems' Q1 2019 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, will, could, should, estimates, may, targets, strategies, intends to, projects, forecasts, guidance, likely and usually or variations of such words and other similar expressions identify forward-looking statements which speak only as of the date the statement was made and are based on current expectations and assumptions. Because such statements deal with future events, they are subject to various risks and uncertainties. Actual results for fiscal year 2019 and beyond could differ materially from the company's current expectations.

Factors that could cause the company's results to differ materially from those expressed in forward-looking statements are contained in the company's press release announcing its Q1 2019 earnings and the company's filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2018, 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.

Alan Trefler -- Founder and Chief Executive Officer

Thank you, Ken, and thank you, investors. I'm pleased with our results for Q1. We're off to a solid start for 2019 and continue to be happy with how our strategy is playing out, especially around accelerating growth and continuing our shift to recurring revenue. This quarter's results demonstrate our strategy is working. Pega Cloud represented 70% of our new business, far above the 50% we saw in Q1 2018 and had projected for 2019. This is great news, good news, and frankly, challenging news.

The great news is that it validates our strategy is succeeding. The good news is it reflects the excellent underlying growth and breadth of this opportunity. And the challenging news is in the optics of our reported financials. From an accounting perspective, it requires just extra digging to really appreciate the health of our business. Now we know that investors are about -- are positive about our trend to recurring, though we also know the transition to recurring revenue requires them to look harder to understand what's really going on because of the immediate -- intermediate effect on revenue.

That's why we've been focusing on ACV as our key financial measure. And highlighting the underlying strength of our business, we saw total ACV growth of 20% year-over-year. A very positive measure of our performance. And RPO backlog is up 38% year-over-year to about $633 million. This is especially remarkable when you know that we only focused our sales team on ACV since the beginning of 2018. So from a strategy differentiator's point of view, we continue to focus on delivering the best solutions for customer engagement, also known as CRM, and digital process automation, which you could think of as a modern and advanced form of what used to be called workflow. In a nutshell, these 2 things mean we're really good at making decisions and then automating the work flows from them.

And we're still the only provider with a top-rated unified capability. Our software continues to be recognized in the major categories in which we play. Since we last spoke, we were named the leader in Forrester's Real-Time Interaction Management report, that evaluated a dozen companies. We received the highest scores possible in 9 top-level criteria. And it's particularly satisfying if you come to our website and look at the chart because there's no better place for our dot to be. We're about as far to the top in the right as possible.

We were also just named a visionary in Gartner's Multichannel Marketing magic quadrant involving 22 competitors. We were the only company listed as excelling in real-time and we're praised for our ability to support the needs of large complex organizations. These recent highlights complement our long-standing domination of the business process market, where we have, for years, been recognized as the industry leader. Whether it's called BPM, workflow automation, intelligent business process management or digital process automation.

Though we moved full bore to cloud, frankly, later than others in the industry, we've benefited significantly from our understanding of the importance of cloud choice for our clients, and we've made this central to our strategy. Our strategy was formulated in response to feedback from clients who wanted an alternative from other vendors that locked them in to a single proprietary solution. And cloud choice means clients can take full advantage of our Pega Cloud managed service offering or choose to deploy on any private cloud of their choice, what we call Client Cloud. Today, over 90% of our business has been cloud choice, either Pega Cloud or Client Cloud.

And in fact, we offered the cloud choice concept for years and provided the industry's first Cloud Choice Guarantee in 2017. Meanwhile, those who built their businesses around a proprietary or single cloud option, some of which are now 20 years old, I think they're going to be struggling to catch up. This is a case where being a bit late to market will work to our advantage. Interestingly, Google, both a strategic partner and a client, made an announcement a few weeks ago that perfectly complements our cloud choice vision and supports what we've been saying for years. Google's new major cloud offering, Anthos, allows businesses to use Google Cloud or other third party clouds, including some of their biggest competitors like AWS or Azure. Google called the ability for businesses to run on multiple clouds a real game changer.

And this is something we definitely agree with. Also in the cloud world, at the end of the quarter, Pega Cloud for government received FedRAMP authorization. Now while we have a very successful and growing government business, our FedRAMP authorization will make it even easier to sell Pega into the federal market and we've already seen positive responses from prospects. We're continuing to increase sales capacity and drive marketing initiatives to what we see as an enormous market opportunity. Client success is critical to us. And ultimately, it's our ability to attract and retain clients that is completely key to our success as a business. And that's always been based on our ability to help them achieve real, tangible, strategic business results.

And we love it when clients choose to talk publicly about their work with us. It's a real privilege. For example, we were delighted recently see that our client VIVAT, a meaningful Dutch insurance company, called out Pega actually in their annual report noting they, "made good progress with automation and cost reduction, thanks to Pega." And National Australia Bank was prominently featured in the media about how they're using Pega natural language processing to read, categorize and respond to internal client emails. They call the capability a "star" of the bank's universal workflow system and commented, "Our original premise, was we would get something in the region of about 40% auto-classification on the first pass with the models we've built, but we hit literally 70% within 3 weeks. It was really, really impressive." But there's no better place to hear more of these client success stories than by coming to PegaWorld. And this year, it's stacking up to be the biggest and best event ever.

We're expecting about 5,000 attendees including clients, prospects, partners and industry influencers. With more than 100 breakout sessions and keynotes, we once again have an align -- a terrific alignment -- lineup of amazing customer stories. Like Air France showcasing their I-Care application which is built on Pega to improve loyalty and experience. The resulting productivity gains allowed their 1,000 agents to spend more time really engaging in customer interactions. Ford supporting their global omnichannel customer and dealer network with Pega's Customer Decision Hub using enhanced AI. GE Healthcare showing how they're extending the foundation for their digital transformation to revolutionize order management and reducing overall cycle time by 80%.

HSBC Australia using Pega to create a unified digital experience for customers using real-time decisioning to acquire, retain and grow relationships. Scotiabank modernizing their global technology platforms and offering Pega Infinity on their cloud as a service to internal partners across the enterprise. And UNUM, a Fortune 500 insurer, will talk about how they improved their processes for issuing policies using Pega to create a full case management platform in just 12 weeks. In addition, our 100,000 square-foot Tech Pavilion will showcase over 50 partners, hundreds of live demos, hands-on app building. Expect to see lots of pictures on social media from the inside. And finally, we'll have some exciting product news to share as well.

So in summary, we're off to a solid start in 2019. Our strategy to drive stronger underlying growth while shifting to a more recurring revenue model is working. The uniqueness of our unified product offering, combined with our cloud choice approach, we think, are the distinct competitive advantage. We continue to be very positive about how our software is being adopted and our long-term growth opportunities. And I'm excited about how PegaWorld is shaping up. And I hope you'll join us for our investor meeting on Monday afternoon, June 3. Stay for the OneRepublic concert Monday night and check out the rest of the content-rich customer stories on Tuesday. To provide more color on the financial results, I'm now going to turn this over to Ken Stillwell

Ken Stillwell -- Chief Financial Officer, Chief Administrative Officer and Senior Vice President

Thanks, Alan. It's really, really exciting to see Pega becoming a much larger recurring business. For Q1 of 2019, as Alan mentioned, we experienced strong growth with Pega Cloud ACV increasing an impressive 76% from Q1 2018. In addition, total ACV, which includes Client Cloud, increased 20% year-over-year to $591 million in Q1 of 2019 or increase of almost $100 million.

Client cloud is composed of term license and maintenance. These strong business results are further evidence that we are successfully executing on our strategy to transition Pega to a recurring business model. In anticipation of this shift, we started reporting ACV in our financial results in the first quarter of 2017 to provide more clarity into our underlying growth trends which are masked by this transition when you look at just reported revenue. Total ACV through the combination of annual commitments from Pega Cloud and Client Cloud, representing the annual recurring spend from our clients.

Total ACV has grown significantly over the last few years, and it's been 20% or more for each of the last 4 quarters year-over-year. The fantastic ACV growth is even more impressive given that we didn't change our sales model, as Alan mentioned, until the first quarter of 2018 from a total contract value, TCV-based compensation plan, to an annual contract value, ACV-based plan, shifting away from perpetual license arrangement to a large extent. Sales quickly embraced the new model, faster than expected.

In quarters like Q1 2019, where we have a noticeable shift to Pega Cloud, there will be awkward optics on the revenue line because of the difference in accounting between Pega Cloud and Client Cloud revenue. Let me take a few seconds to remind you of our business model evolution, and why it's important. Since 2017, Pega has aggressively moved into selling recurring cloud, both Pega Cloud, which is our preference, and Client Cloud. In the near term, this transition replaces large upfront cash and revenue with cash and revenue that's received over multiple years, comping the lag between business we win and when the revenue is reported, thus a mismatch between revenue and costs.

The effect was even more pronounced in Q1 of 2019 as we closed significantly more Pega Cloud business than anticipated. In Q1 2019, 70%, that's right, 70% of Pega's new license bookings were Pega Cloud. 20% higher than we -- 20 percentage points higher than we projected for the quarter. As a result, our revenue in Q1 was approximately $20 million lower than if it has been recognized upfront. For this year, Pega Cloud mix was expected to be 50% compared to the actual mix in Q1 2019, as I mentioned, of 70%. Each 1% shift toward Pega Cloud could potentially reduce revenue by approximately $3.7 million for the full year.

This economic value is reflected in ACV growth but not reflected in current period revenue when we book Pega Cloud deals. Approximately 90% of our new client software commitments in the quarter were recurring arrangements with perpetual license approximating 10%. Although we are excited to see the 70% Pega Cloud mix in the first quarter, it's a little early in the year to call it a trend due to potential variability to this mix throughout 2019. You can see additional evidence of our transformation success by reviewing Remaining Performance Obligation, which also is called backlog.

Pega Cloud backlog grew by $172 million, an amazing 96% year-over-year, highlighting the significant shift to Pega Cloud. Pega Cloud accounted for almost all of the total backlog increase. For the first quarter 2019, we're reporting both GAAP and non-GAAP results and a full reconciliation of all non -- GAAP to non-GAAP measures is provided in the financial tables in the press release issued earlier today. And those are also available on the Investors section of the website. From a profitability perspective, we're moving large upfront revenue and replacing it with revenue that's recognized ratably over several years, puts pressure on reported earnings in the short-term because operating expenses are largely unchanged.

As such, the impact of our large Pega Cloud shift in Q1 resulted in negative non-GAAP EPS, where we otherwise would have reported positive EPS. I want to stress that our ongoing transformation to a recurring cloud business has been deliberate and intentional. That's because, in our view, the long-term benefits of a recurring business model, including a more predictable future revenue and cash flow stream far outweigh the short-term optics around reported revenue growth and the impact to EPS, margin and profitability in the short term. One of the other major benefits of a recurring business model is that ACV is highly correlated with more stable and predictable cash flows.

We finished the period with total cash and marketable securities of $202 million compared to $207 million at the end of Q4 with cash flow from operations of $22.7 million, offset by share repurchases and dividends of approximately $25 million. Accounts receivable was down 25% due to increased cash collection of $293 million during the quarter and nearly $1 billion for the trailing 12 months, which is exciting. On headcount, we finished the period with nearly 4,700 employees, up approximately 9% from March 31, 2018.

More than half of our new hires were sales employees. Before I wrap up with my closing comments, I wanted to mention that we have introduced a new chart in our earnings release this quarter that breaks out Pega Cloud ACV growth as well as Client Cloud ACV growth. We felt that this view would be extremely helpful because now you can see the Pega Cloud ACV separate from Client Cloud ACV. During the transformation, total ACV growth continues to be the most important measure of our business success. This information provides new insight into how customers are adopting cloud choice, which we view as one of our key differentiators.

In summary, we're pleased with the solid start to the year and the progress toward meeting our goals in 2019 and beyond. While the near-term impact of the positive move to more ratable revenue will impact the optics of our financials, we're off to a good start in 2019. We continue to see solid demand from companies engaging in digital transformation to improve customer experience and streamline their business processes. In closing, I want to remind everyone and invite you all to join us on Monday, June 3, for Investor Day at PegaWorld 2019 in Las Vegas. If you haven't already signed up, please send an email to pegainvestorrelations@pega.com. Operator, please open the call for questions.

Questions and Answers:

Operator

(Operator Instructions) And we'll take our first question today from Steve Koenig with Wedbush Securities.

Steve Koenig -- Wedbush Securities -- Analyst

Great. Hi, Allen, hi, Ken. Thanks for taking my question.

Alan Trefler -- Founder and Chief Executive Officer

Hey, Steve.

Steve Koenig -- Wedbush Securities -- Analyst

Hey, if I can maybe slip in 2 in 1, I'll try to do that here. So a lot -- we're hearing more and more from the ecosystem about customer investments in digital transformation in the back office. You know, let's start in the front office, now moving in the back office. Maybe can you comment on this trend? And what you're seeing in the composition of your business? And then if you don't mind, I've got one follow-up.

Alan Trefler -- Founder and Chief Executive Officer

Sure. I'd like to give you the follow-up as well. So we're seeing a pretty balanced picture. The way to think about it is that to achieve true digital transformation, you really want end-to-end processes. You really want to bridge the traditional way of -- some people used to think of a front office, a middle office, God forbid, and a back office.

And when you have an end-to-end process that might go from the point that a customer touched something on the web or the mobile app all the way through to fulfillment, I'm not sure whether I'd classify that as a front office, a back office or half of each, end-to-end. But with, you know, cross because we are really extremely qualified to both make the right decision about what to offer a customer.

We view that as being on the front end, but then also drive that through to done, think about that being back office. I'd say we're seeing our demand story being very balanced.

Steve Koenig -- Wedbush Securities -- Analyst

Okay. Terrific. Okay. Great. And then for the follow-up, this one is about robotics. So the RPA -- the pure-play RPA vendors certainly have been making a lot of noise and seeing some very good growth. When we talk to them in some ways, Pega has become kind of a strawman for those vendors. But it seems in many ways you don't compete, what you have is different. So, maybe can you give us some color on what you're doing in robotics? Any color on what kind of growth you might be seeing there or might expect to see? And how your focus might differ from those vendors, that would be helpful. Thanks a lot.

Alan Trefler -- Founder and Chief Executive Officer

Sure. So I do think the noise in some of the valuations around some of the RPA vendors have been, I'll just say, mind-numbing here. And what I think that's interesting is when you have a robot, when everything -- when you only have the hammer, everything looks like a nail. What they end up doing is they end up doing trying to build sophisticated business logic into a technology that grew up out of screen scraping. And we think that's just backward. You really need the end-to-end process.

Where our philosophy is, and we have a terrific robotics capability, is that when the process hits something that doesn't have an API or program-to-program interface, then we fire the robot up it -- whether it's working on the desktop in conjunction with a person or whether it's working sort of as a back office process hanging off, no human in the system, the robot, in effect, closes the gap at the end. We saw something really interesting happening in financial services business which might be familiar to you, where years ago we used to have all these companies who were doing "robotics" to scrape, for example, financial information from people's bank accounts and consolidate it.

They go out to all different back accounts, put them together. They were and are a number of like wealth management or financial management companies that did that. And these are all being replaced now with computer-to-computer APIs, programming interfaces. Because, frankly, they're more reliable, they're faster and they're better. We think of robotics as just a great way to close that last mile and we've had a lot of success dealing with Fortune 200 companies, frankly, getting them to change the what that they're thinking.

I think a lot of these robotic deals that are being sold are basically being sold in as little departmental things and also in many cases, rogue projects as opposed to something that really wants to be sustained part of the architecture. So we feel both good about the capability and I think you're going to see us increasingly position our robotics as we go forward over the next 12 months.

Steve Koenig -- Wedbush Securities -- Analyst

Great. Well, thanks very much, guys.

Alan Trefler -- Founder and Chief Executive Officer

Sure, Steve.

Operator

Next we'll hear from Rishi Jaluria with D. A. Davidson.

Rishi Jaluria -- DA Davidson -- Analyst

Hey, and thanks for taking my questions. Let me start off with the ACV metric. Just maybe, Ken, help us understand, it includes all recurring arrangements, right? And that will be maintenance associated with on-premise perpetual license as well, correct?

Ken Stillwell -- Chief Financial Officer, Chief Administrative Officer and Senior Vice President

Hi, our ACV metric concludes -- it is all recurring arrangements between us and our client. That is correct.

Rishi Jaluria -- DA Davidson -- Analyst

Okay, got it. So if you were just a kind of do back of the envelope to maybe say how comparable is this to the term and cloud ACV metric that we used focus on in the past. It seems like this was relatively in line with maybe what you saw in the back half of the year, and maybe an acceleration from the first half of the year. Is that directionally the right way to think about it? Or are there any wrinkles we need to consider when doing these calculations?

Ken Stillwell -- Chief Financial Officer, Chief Administrative Officer and Senior Vice President

Now. The 20% growth is pretty consistent with what we saw throughout the last -- through all 2018, yes. And what you have now with ACV is you have the ability to seek cloud ACV, you also have the ability to see maintenance ACV and term ACV because the maintenance revenue on the financial statement is essentially a good proxy for maintenance ACV and then naturally you're able to get the 3 pieces. Whereas in the past, we used the lump term and cloud together and you couldn't see cloud broken out. So that's why we wanted to provide another element to this that a lot of people were very interested in which is what's the cloud ACV on its own.

Alan Trefler -- Founder and Chief Executive Officer

And also breaking out the RPO, the backlog, by every one of these categories. Now we understand that the numbers from -- look, were going to get through this transition. 18, 24 months from now, we won't have any complex explanations to give. But we understand it's complex now so we want to be -- try to clear and absolutely transparent as possible.

Rishi Jaluria -- DA Davidson -- Analyst

Yes, absolutely. And definitely appreciate the level of details that you guys give us, especially in the Q. So speaking on RPO, I mean we saw a big spike in RPO on the cloud side as you talked about in the prepared remarks and really if we looked it on a sequential basis, it was really biggest on kind of the longer term, the greater-than-3-years side. Just wanted to understand was there a changing duration on your cloud deals? Or is there something else that led to that and maybe help us square that away?

Ken Stillwell -- Chief Financial Officer, Chief Administrative Officer and Senior Vice President

Quick question. No. We have not seen a noticeable shift in cloud duration from -- in Q1 compared to the back half of '18. We're still kind of having that cloud duration be somewhere between, it goes as high as sometimes 5 years, we typically don't do cloud deals under 3 years. And we kind of hover in that 3 to 4-year. Now sometimes the buckets of RPO will refresh, so to speak, based on the timing of the renewal cycle.

That can actually skew the percentages ever so slightly to that, but there is nothing noticeably different in the way we're running the business. And we still kind of target 3 years as being kind of our go in. But some clients like to engage us in longer commitment periods than that. We certainly will accept that so long as we are not giving kind of pricing away to get those extra years.

Alan Trefler -- Founder and Chief Executive Officer

If you look at the detailed chart that's under the pretty graph that compares the -- in the RPO section, that compares the cloud RPO change from 2018 to now, and you'll actually see that the cloud RPO in aggregate grew 96%, or nearly doubled over the years, and the actual 1-year or less duration grew faster than the greater-than-3-year duration. So we're not seeing any massive shift in the durations.

Rishi Jaluria -- DA Davidson -- Analyst

And then just in your prepared remarks and in the press release, you talked about the 70% cloud of new sales was about $20 million headwind. Can you just walk us through the math, is the impact for cloud as a percentage of new sales consistent with, I think, what you've guided us to in the past or is it in greater? That would be really helpful.

Ken Stillwell -- Chief Financial Officer, Chief Administrative Officer and Senior Vice President

So yes. The impact of -- so this is a simple way to think about it. In the previous year, we -- I had mentioned that a 1% shift away from our kind of targeted, so to speak, cloud mix would be a little over $3 million. You may remember that reference from last year. And now I have mentioned in my prepared remarks and it's about $3.7 million. You might say, "Well why is it different?" It's because our bookings level was noticeably higher. And so naturally 1% of a higher bookings level, a higher new client arrangements level, will actually yield more impact from a dollar standpoint.

So we believe that number to be kind of it -- it, kind of depending on when that happens in the year, it could be as much as $4 million. And so the way to think about it is if you have a shift that gets you 20% or greater of a cloud movement, you've got, for the full year, you could be in the $70 million to $100 million range of revenue impact. It just depends on the timing. It depends on -- and your -- and kind of your new business commitment level.

Alan Trefler -- Founder and Chief Executive Officer

But $3.7 million annual impact is pretty consistent with what you talked about with the quarterly impact being about $1,000,000 per percentage point.

Ken Stillwell -- Chief Financial Officer, Chief Administrative Officer and Senior Vice President

That's a rough estimate, yes.

Alan Trefler -- Founder and Chief Executive Officer

And with the 20% swings, it's all I think pretty aligned.

Rishi Jaluria -- DA Davidson -- Analyst

Got it. Okay. And then last one for me and I'll jump off. Just want to maybe understand, as we think about customers who are deploying Pega in-kind of their own private cloud, or doing kind of self-hosting versus Pega-hosted, just wondering if you've done any surveys or any insight you can give into of your non-Pega Cloud customers or Client Cloud customers, how many of them are actually running Pega in a cloud environment? And maybe that can help us understand the directionality of cloud adoption which I imagine is a lot bigger than the actual Pega Cloud ACV number, actually?

Alan Trefler -- Founder and Chief Executive Officer

Yes. It is a lot bigger. Today, I'm seeing almost every customer, including new clients, so they don't have an installed infrastructure, choosing to run in 1 form or another, a public cloud. And just today we had a -- I'm sorry, yesterday, a visit from one of the largest banks in Australia and they were talking about how they want to move all their stuff to the public cloud that the regulator there will let them to do.

I would say in terms of actual deployment, what we would have thought as a traditional on-premise deployment, only is happening when it's a follow-on purchase by an existing customer that hasn't made the transition yet. All the new stuff is going on to AWS, Azure or Google.

Ken Stillwell -- Chief Financial Officer, Chief Administrative Officer and Senior Vice President

And Rishi, anecdotally, if you look at a lot of the -- a lot of our client interactions that we have, it's obvious that even some of our clients that have traditionally bought on-premise are looking at moving a lot of year workloads to private clouds because they're at -- they're talking to us asking questions about interoperability, things like Azure, so you can feel it happening kind of everywhere.

Rishi Jaluria -- DA Davidson -- Analyst

Got it. That's really helpful. All right. Thank you, guys.

Operator

Next we will hear from Mark Schappel with Benchmark.

Mark Schappel -- Benchmark -- Analyst

Hi, good afternoon. Thanks for taking my question. Alan, let me just start by saying congrats on the federal government authorization for Pega Cloud. And on that front, the government sector has been an increasing focus on the company. I was just wondering if you could just review some of the other efforts that are going on to boost or punch up your government sector efforts?

Alan Trefler -- Founder and Chief Executive Officer

Yes. Just about 2 weeks ago, I was in Washington for a day and was visiting with a variety of just overall federal executives as well as some existing customers. And the customers are really excited by what we're offering. We held an event toward the end of last year called Government Empowered in Washington, and had basically close to 100% increase in attendees.

I didn't actually attend that one, but I understand it was north of 700 people in the government who showed up. There's a huge amount of enthusiasm. Until we got this authorization, we did actually have government customers who were running us on, for example, AWS, but now we can offer it as a fully managed service, and I think that's going to be very positive to a lot of them.

Mark Schappel -- Benchmark -- Analyst

Okay. Great. And then, Alan, with respect to the first quarter being just reported, I was wondering if you could just talk about any meaningful changes that were made at the sales force this year. So for example, I think a year-or-so ago, the company made the big shift from ACVs -- from an ACV metric to an ACV metric from a TCV model. I'm just wondering if there are any similar big changes that were made in the sales force this quarter?

Alan Trefler -- Founder and Chief Executive Officer

Well, that change actually went pretty well. I don't like necessarily making violent changes to big parts of the organization, but it went terrifically. We've been continuing to really work to deepen our bench. For example, we just hired a terrific new guy to run our government business nationally. We've been continuing to be pleased that very strong talent from other companies, other competitors see us in the field and think we'd a good company to work for and sell for.

So we're continuing to grow the sales force. We've also introduced a new, what we call, validation program, where we're really doubling down on making sure that, particularly for some of the newer folks, that they've really internalized the messages with a series of live interviews that get videoed and a pretty, pretty strict grading rubric to make sure that people are internalizing the messages and the differentiators and how to do it. So you're going to see us providing a lot of what I'll describe as go-to-market discipline and really focusing on covering the organization's we're covering well.

Mark Schappel -- Benchmark -- Analyst

Okay, great, thanks. And then that, Ken, one for you. Non-GAAP operating margins, what would those have been if it wasn't for the transition here and the big shift to the cloud this quarter?

Ken Stillwell -- Chief Financial Officer, Chief Administrative Officer and Senior Vice President

Yes. That's a little bit difficult only because -- what I could tell you mark is that you could drop that revenue impact right to the bottom line and that's probably a simple way to think about the impact just moving to the 70%, just that piece. There's still a lot of headwind in year 2 of the cloud transition. So we would -- I believe our non-GAAP operating margin, if we would have never went to the cloud would be better than what they were historically. But it's just -- it's all, as you know, messed up and moving from what was a 20% cloud business and now, in Q1, a 70% cloud business.

But I think the simple way against maybe what you might -- what we might've thought about early on for the full year would be to drop that revenue impact to the bottom line for Q1.

Mark Schappel -- Benchmark -- Analyst

Okay, great, thanks.

Ken Stillwell -- Chief Financial Officer, Chief Administrative Officer and Senior Vice President

You're welcome.

Operator

We'll now hear from Stephen Bersey with MUFG.

Stephen Bersey -- MUFG -- Analyst

Hey, guys, thanks for taking my question. Hey, When you're looking at the backdrop of a customer's infrastructure and those discussions, and looking at their needs, can you comment maybe on where they're coming from? Are these mostly greenfield deployments? They're just getting to digitalization? Or replacement of old homegrown stuff? Or are they ripping out maybe failed tries with a variety of other vendors. What are you seeing?

Alan Trefler -- Founder and Chief Executive Officer

I tell you it's a whole mix. So, there are still a lot of companies including ones that are writing material business with us who are trying to overcome the historical, cBOL legacy where those systems have now, I should say, they're very, very old and not very scalable. We're also finding that a lot of customers that are putting in even some of these fancy new comm systems and finding that they can't do the heavy lifting that they need, because that's really something that we're super good at is being able to drive the work to done, to make the decisions, execute the work.

So I'd say it's a full mix. None of the orgs we're dealing with, I shouldn't say none, like almost none, are what you would call greenfield in the sense that they're start-ups. They all have existing infrastructure. We specialize in companies that have a level of sophistication, so we have had a couple of small companies come on Pega Cloud, but 99% of our business is with organizations that have some form of, frankly, brownfield that they need to work with whether that's some ancient system that they bought or something that they built.

Stephen Bersey -- MUFG -- Analyst

Got it. And I know there has been a pretty high percentage of sales folks that were less than 12 months kind of with the firm. Just wondering how things are ramping up on that side? Where does the sales force stand especially in light of your recent hiring as well?

Alan Trefler -- Founder and Chief Executive Officer

Well, you can see the growth in the sales and marketing numbers as we report. I think the sales force is really quite enthused. In January, we had our annual sales kickoff. And there's just an enormous amount of excitement in the field. We're putting a lot of work into care and feeding around making sure that we can get them to internalize the messages. They feel comfortable giving them, doing some work to create sometimes what we called pods, where a couple of salespeople will share and work on a single or a set of organizations.

And I like a lot of what we are seeing. We're also finding that some of the work we did over the last 2 years, hiring a couple of more junior sales folks, who sometimes really get this stuff really well, and then now easing them in to be full-time high-end enterprise reps, account execs, is also I think a strategy that we're going to continue to do because we like what we're seeing. So I would say, in general, the sales force is more professional and better trained than it's ever been.

Stephen Bersey -- MUFG -- Analyst

Great. Maybe just one last one, as far as your ability to kind of plan on expense. When you're having customer interactions vetting the deal and all that, how far along is it before you get a sense of whether that deal will in fact go to either Pega Cloud versus a private cloud? Is it right out of the gate? Is it last minute, they say, "Oh, by the way?" How does it work, typically?

Alan Trefler -- Founder and Chief Executive Officer

If you recall, since we positioned cloud choice as being -- you know, if you should take a look at our website or talk about PegaWorld last year, as one of the 6 critical massive differentiators, we're going to be talking to them about the concept of cloud choice right out of the gate. So it's in the air, right? It's been discussed. The actual decision is often made pretty close to the end, which I think is fine.

Because sometimes they'll say, well, we definitely want Pega Cloud. But then they'll discover that they want to co-locate it, which for example, stuff that they are putting up themselves on Amazon. So even though it's in a public cloud, it's, in effect, behind their firewall as it were. As opposed to integrating it through services. And other times they'll say, hey, we just want the convenience of having you just run this as a service for us, so we don't have to have anybody trained in databases or anything techy.

We can really focus much more on the business aspects. So it can happen reasonably late and it could change which, frankly, makes it a little difficult to forecast. But I like the message, customers like the message. We're really happy seeing even companies like Google now adopt their concept of cloud choice. It's got to be right.

Stephen Bersey -- MUFG -- Analyst

Okay, that's helpful, thanks guys.

Alan Trefler -- Founder and Chief Executive Officer

Thanks, Steve.

Operator

That will conclude today's question-and-answer session. At this time, I'd like to turn the conference over to Mr. Trefler for any additional closing remarks.

Alan Trefler -- Founder and Chief Executive Officer

Thank you very much. I'd just like everybody to know that we are working very hard on your behalf. And once again, welcome those who can to come to PegaWorld, the June 3 Investor Day, I think, will be really exciting and more than just an Investor Day. You also get to hear from some absolutely terrific customers talking about real and tangible things that we're doing. So thank you very much and look forward to seeing you there.

Operator

That will conclude today's conference call. Thank you for your participation.

Duration: 43 minutes

Call participants:

Ken Stillwell -- Chief Financial Officer, Chief Administrative Officer and Senior Vice President

Alan Trefler -- Founder and Chief Executive Officer

Steve Koenig -- Wedbush Securities -- Analyst

Rishi Jaluria -- DA Davidson -- Analyst

Mark Schappel -- Benchmark -- Analyst

Stephen Bersey -- MUFG -- Analyst

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