Q2 2023 Pegasystems Inc Earnings Call
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Greetings and welcome to the Packer system second quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Peter Wahlberg, Vice President of corporate development and Investor Relations. Thank you Sir you may begin.
Good morning, everyone and welcome to <unk> systems, Q2, 2023 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 forecast and guidance 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 2023, and beyond could differ materially from the company's current expectations factors that could cause the companys results to differ materially from those expressed in forward looking statements are contained in the company's press release announcing its Q2 2023 <unk>.
And in the company's filings with the Securities and exchange condition, including its annual report on Form 10-K for the year ended December 31, 2022 and in 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.
Those subsequent events may cause our views 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 Trusler founder and CEO .
Oh, a packer system.
Thank you Peter and to everyone, who has joined today's call, especially those of you who've gotten up pretty early to do so.
I wanted to Uh huh.
Reinforce that it has the world last month I had the opportunity to spend time with many of our clients are very immediate.
And in virtually every discussion.
Not just the ones I had a meeting with other Patrick Zacks, our clients wanted to talk about the future of AI.
Specifically about the impact of together.
And how they should be thinking about how we were approaching it and how they can leverage AI.
Responsibly and safely clients are seeing that the technology will change their business in fundamental ways and we're excited about the potential at the same time there was so much information in the market and so many conflicting opinions they are eager to learn more and separate out the marketing hype from the reality.
It's clear this technology is going to drive massive shifts in how we get worked out.
And Petros World how applications are design built your ball and support it.
We believe <unk> is uniquely positioned to leverage this technology regulatory clients in a safe and secure way and take advantage of this massive opportunity.
Those who attended the World you saw this firsthand on the main stage as well as during our investors we.
We believe the generally the way I would ask.
Celebrate the adoption of <unk>.
Making it easier faster and cheaper to deploy it improving the client experience and driving expansion of existing relationships.
And that will translate into helping our clients leverage NII and the organizations to improve efficiency and save money and enhanced employee and customer satisfaction.
Nonetheless, there are concerns about the overall economic environment and clients are being conservative in their decision, making even as they engage in these very positive conversations more heat wave now.
Taking client feedback and evaluating the impact of this new technology I guess, we havent clear to us that we have further opportunities to streamline how we engage with our clients. During this quarter, we will be working with our teams on ways to get even closer to our customers.
No because it's so important I want to take a minute to be able to reiterate why Padua is uniquely positioned to leverage generally they are and why this will bring special benefits to our clients now.
Integrating and innovating the use of artificial intelligence and automation since I founded the company.
And we've gone through many evolutions.
This is an exciting one as I've ever seen.
I believe we understand what clients' needs and we can find value and acceleration from generally they are while preserving the scale and scope.
Enterprises demand.
And a big piece of it.
That is unique to pickup as we built.
Detection that is perfectly suited to tap into the disruptive power of general debate.
Both today and well into the future and we know how to monetize it.
Most companies are thinking about generative AI as a coal generator a walk forward.
But that will really only get them so far.
It wasn't directly from plants to code doesn't really provide the structured enterprise needs to create an enterprise client system to get them all.
In contrast, <unk> has always been based on the concept of a business model at the center.
To create a structure and a system that can evolve as the industry and customer needs change.
Our architecture is built on what we call the situational layer cake and Youre going to hear me talk about the later pick a lot not just now but it's.
Having borders as it helps to really powered this revolution.
Terry capability that organizes all other enterprises processes raw data models and you are right.
Layers. So it supports building and reuse. It now this layer cake is the perfect place to plug in Jennie O.
It creates greater pace.
After the journey.
Previous people can see the model touch it understand it and we generate as needed.
It is a slender K. This architecture that is what is uniquely able to provide our clients a proprietary structural advantage at the heart of our products.
It sounds like there can be easily copied or reproduced and it allows us to develop an integrated generative AI rapidly and seamlessly.
So we have been at the forefront of using AI and responsible ways and he's responsible AI frameworks that are trusted by our clients and they will be critical as they built their own AI models and the layer cake helps us there too by helping create visibility for what comes from Patrick <unk>.
As what a customer might build or develop independently on top of it.
Now this combination of architecture experience and capabilities I believe will make us more successful than our competitors because it will help our clients be more successful and being able to let them quickly adapt and build for change.
By the way I think <unk> is going to be devastating to the most of the low code companies that haven't taken this type of approach.
As a result, you already see some players starting to talk less about using <unk>.
And I forgot what it was high Flyers, who can't get wiped out by the Pentagon, We're still talking about low code because we always use low code to build the layer cake. We've always used low code in a way that provides a structure that was really almost prescient we design for.
The introduction of concepts.
Generally that.
So we can implement generative AI as a strength.
Now I expect that we will monetize generative AIG three ways.
Clients will create more pegged it absent process more work on our platform.
Most of our licenses are already work.
Quantity based.
Years ago, we began moving away from seat licenses.
Frankly, ctrip ought to go down.
If the industry does the right thing that should go down a lot and we saw this coming a long long time ago.
So you can think of most of our licensees as being consumption of capacity basis, which is exactly I believe the type of license you want in this sort of environment I think it's good for the client and good for us.
Secondly, I do think we're going to see that the fact that we're doing this generative AI work in peg or cloud, leading with peg a classic everyday art will serve as a catalyst for more clients to move from existing term or maintenance contracts to peg a cloud subscription agreements.
And third we will offer specific Jim Howard add on features.
Of which there will be an additional charge.
Now, we recently announced and showed a peg a world.
Any generative AI boosters that will be available with <unk> 23. This summer.
And we've just gotten started.
In fact, our engine.
Engineering team began this year with a gen AI focused hackathon that resulted in more than 100, new prototypes of capabilities.
Many made it into infinity twenty-three and theres much more to come in subsequent releases we have.
Clients, who are signing up for the early adopters already.
They are engaged and excited about these capabilities and we're excited about working with them and seeing what we can accomplish together.
Before I move on I want to take just a few minutes and provide some additional color on peg or because it was so spectacular.
This was the first time, we came together in person since 2019, and the energy and excitement was palpable.
Couldnt joined the sessions or would just like to see all the replays are available on <unk> Dot com just search on Petro World, we place with more than 302500 attendees from around the world representing over 47 countries and we are inspiring keynotes from clients like Virgin Media Rabobank City.
And Aflac, who are all using peg up to drive their business, we have more than 80 deep dive breakout sessions with additional clients sharing their stories from companies, including BT Google's Theyre, Siemens T mobile United Healthcare, Verizon and Wells Fargo.
But one of my favorite breakouts with some lease Flynn.
Who talked about their transition to a fully digital business model.
They're leveraging pegged our new center of excellence in pursuit of their vision to becoming a part as a service organization with a strong focus on service efficiency.
Digital channels, there's lots of them optimize costs.
What's your market growth and they're leveraging our state of the art constellation open user experience technology, and our prescriptive design system to give their clients and their staff exceptional experiences.
You can find a replay of this excellent session on peg a dot com just go to peg a world under events and search on lease plan one word.
No.
There are.
Very often how much clients value being able to connect with peers and some other companies have learned from the echo journeys of others.
And they told me that attending in person you were able to get down to just a few days what might have taken weeks or months in terms of discovery getting questions answered experiencing the technology and ultimately understanding the value you can provide.
Also very positive feedback about our client first target org model and the value. We are I think mutually achieving providing a more focused and dedicated engagement team to stay close to our clients and they are excited about the new capabilities and they are really looking forward to seeing how we continue to refresh.
In the future finding ways to accelerate development and improve the function of business users without the needs for our well traditional longer ways to do it. So I came away feeling incredibly energized and more convinced than ever that we have the right client engagement style.
The right technology and a team that can drive success for our clients and for our partners with the Air Force and they also I think quite across enormous value and I saw tremendous engagement, which we and our clients. So as we move into the second half of the year, we're going to be looking to.
Continue to double down and push on the strategy to improve operating effectiveness with an additional improvements to our go to market alignment that will help maintain and bring even greater attention to that focus.
So.
In summary, we are focused on building a successful company for the long term.
And having our clients successfully navigate what is currently candidly a challenging selling environment.
We think may persist for some time.
Let's face it right now the world is uncertain and rapidly changing.
But I believe we have the right strategy to succeed in this environment, while building for the future.
We're focusing on our client base with solutions that drive efficiency and cost savings and that we're helping our clients navigate the same set of macroeconomic conditions.
We see the journey II will rapidly change the landscape of how work gets done massively and we have a unique advantage that we can leverage and that I believe will be sustainable.
And we are making good progress as we pursue the goal of trying to be a rule of 40 company as we exit next year balancing growth with fiscal discipline and I'm happy to point out generating very very significant cash flow now.
Now to provide more color on financial results. So let me turn it over to our CFO and C O L. Stilwell.
Thanks, Allen, our first half results demonstrate our ability to generate increasing amounts of free cash flow, while maintaining a double digit growth rate the.
The most important metric to measure the success of our business continues to be the growth in annual contract value or HCV.
Mid point in 2023, ACD grew 13% year over year, our ACD growth was driven by the continued momentum of peg a cloud ACD, which reached $499 million at the end of the second quarter I am excited that our cloud SaaS business continues to be the largest and fastest growing ATB component.
And peg a cloud backlog grew by 23% or $164 million year over year Peg a cloud now represents more than two thirds of total backlog. This growth is further evidenced that the underlying strength and momentum of our subscription transition.
Another key metric to measure the success of our business is cash flow in the first half of 2023 peg it generated $114 million of cash flow from operations and $123 million of free cash flow a fantastic achievement $123 million is the highest level of free cash flow dollars.
Numerous examples of our team members, making meaningful steps to focus on improving profitability third.
We're doing a better job of lining are spending with our a C V growth drivers in other words were instilling better operational rigor than we have in the past for example, we believe that more than 90 per cent of our a C. V broke this year will originate from existing clients through our high client retention rates and our cross sell and upsell activity, it's far more efficient to sell it to existing class.
<unk>, new logos, especially in times of greater economic uncertainty that I think we'd all agree we're experiencing today, one reminder, and a subscription based business like ours, which generate significant term license revenue there can be a mismatch between buildings and revenue under Asti 606. The majority of term license software revenue is recognized.
Up front, however, billings in cash collections of curb primarily one year in advance and equal installments over the life of the contract. This dynamic means that we can deliver strong cash flow even as reported revenue in any given quarter fluctuates up or down as a reminder, we do not provide quarterly revenue guidance.
Collectively our mid year results show that we continue to make progress in managing the company within toward a rule of 40 mindset. As a reminder, we define rule 40 is the combination of a C V growth and free cash flow margin.
Cheating the rule of 40 milestone is a very important one for all of us would purger reach.
Reaching the skull will provide us with another reason to be proud of the business, we're running generating strong free cash flow provides the fuel for Peggy to invest in our business and to provide outstanding support to our clients and it gives us the financial strength and flexibility to navigate through any uncertain economic environment. For example in the first half of 2000.
Twenty-three or cash and marketable security balanced crew, providing with providing us with the ability to spend about $90 million on repurchases are convertible debt at a discount at the end of Q2 are outstanding convertible that balance was approximately $500 million.
As we outlined in our investors that should drink Pegaworld in June we see three major levers to achieve the free cashflow margin necessary to attain the rule 40. The first is expanding total gross margin, which is a function of purger cloud gross margin.
Term maintenance gross margin and our professional services gross margin improving Peggy cloud gross margin will be the biggest driver a total gross margin improvement, we expect to improve purger cloud gross margin by continuing to scale panga cloud, increasing automation and implementing multi tendency improver nineties.
On a trailing 12 month basis ticket plowed revenue, it's now $423 million up from about 50 million in just a few years ago in the first half of 2023, Purger cloud gross margin improved from 68% to 73% year over year. The second major lever that will drive operating leverage to need.
Area of sales and marketing. This is certainly the most difficult of the three to tackle we continue to balance our need to invest in sales and marketing to drive ACB Grove with our need to improve sales efficiency. We certainly have a lot of work to do.
And the last few months, we received feedback from our clients partners and employees on ways to further simplify client engagement to drive greater success. We're evaluating all of these suggestions to approve or go to market effectiveness and we plan to implement changes in the second half of the year to continue driving improvement in our go to market productivity.
Third and final major lever that will improve our operating leverage sneak area of research and development and G&A. The approach here is simple we plan to increase R&D and G&A spending at a slower rate than we expect to grow the company delivering best in class intubation to our clients continues to be critical to our success. We we will continue to invest heavily in R&D.
However, we believe we can do so in a manner, that's still improves our efficiency as you can tell we're very focused on growth expanding gross margin improving sales efficiency and increasing operating leverage the.
The companies that are successful in navigating uncertain economic times like the environment. We're in today typically are ones that focus on growth expense management and generating free cash flow, it's very reassuring to our clients pegging maintains a financial strength to continue providing outstanding customer support and product innovation.
Before I wrap up I've been asked to offer a few thoughts are modeling our business with the second half of 2023 as a reminder, the third quarter of the year is typically one of the lightest term license revenue quarters of the year due to seasonality, that's because we often bulk far far fewer renewals a term license agreements in that period in contrast.
The final quarter of the year is typically a relatively stronger term license revenue quarter, because we like most enterprise software companies experience a higher level of contract renewals in the last quarter of the fiscal year <unk>.
In conclusion, it was great seeing so many of you in person drawing or investor session in June Pegaworld in Las Vegas, and I'm looking forward to seeing all of you as we get back on the road in August and September <unk>.
Operator at this time, please open the line for questions.
Thank you we will now be conducting a question and answer session I think I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that you're lying within the question queue. You May press star two if you would like to remove your question from the queue for.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the starkey.
One moment, please while we pull for questions.
Our first question comes from Steve vendors, which city. Please proceed with your question.
Okay, great. Thanks for thanks for taking the questions. This morning, I I guess I'm just gonna ask <unk>, you know kind of what you are saying out there in the in the macro situation and the certainty with with customer budget and I guess, you know how that relates into the <unk> sequential decline that we saw here on the a C V.
A line in the quarter.
So let me let me hasty this get Uhm, let me let me hit on the second part of your question and then I'll I'll I'll head over to Allah to give a perspective on the on the market landscape. So it is unusual to have a decline in a C V sequentially and a quarter. It's it's not it's not unheard of especially in a situation where we have such.
Strong build in the first quarter, there's there's a lot of there's a lot of anomalies that pop up at a quarter around you know renewals and you know we do have some churning clients. It doesn't always happen linear we actually have consumption agreements that reset at different points in the way we calculate ACB. So we we.
Tend to not look at things you know in such a small discrete period is a quarter and things to think about things over a trailing 12 months kind of view. So like I said it is unusual to see that happened, but it is not something that we believe his stomach and we don't think it impacts our ability for you know to drive toward or for your results.
<unk>, so I'll have that Alan on the on the view of his view of the market. Yeah. <unk> I think the market is definitely being conservative you know, we're seeing more approvals, sometimes popping in at the last moment.
We are having some things that you would have expected would have just closed and no matter for us <unk>, but that just took longer I think that and the companies that all our clients.
Definitely an extra level of scrutiny that is that he was going on which you know I've seen before and then other times when there was uncertainty and I think we know how to deal with it.
<unk> I can deal with it but I do know that.
I'm I'm I'm expecting that this is gonna be true for a lot of other companies and it's gonna be true, possibly for the next quarter Roger.
Nope.
Figured affects our long term prospects of anywhere.
Okay. No. That's that's that's helpful contact with it and I appreciate the.
The comments around that I guess, you know kind of given the budget situation that we're talking about here and now the the excitement around a I how are you thinking about the the path to modernization for <unk>.
The new functionality that you talked about and released at at Pegaworld last month, and how customers are kind of feeling about those investments and and Peggy how're you going forward.
Toyota customers are being bombarded with every.
Every company they talked to do even ones I'm sure, they're trying to avoid having it offering a I'm miracles to them I I.
The hypothetical here is is actually I think it might be a breath of that too.
The the reality, though is we have a lot of credibility required, particularly when we can show them to wield types of things that we were able to show it pegaworld.
You can see in some of the videos that we posted so there was a tremendous amount.
Oh interest and I think we have a lot of confidence from our employers. That's the way. We're gonna do is gonna be a way that really works now we are seeing as we've seen a lot of customers doing your own experimentation a lot of customers. As you would expect are are putting their.
Their toes dipping their toes and a lot of phones.
We're seeing the favorite analytics too that there's just a lot of Oh, My God, how do I figure out how to get the value out of my data Ottawa drive expense, how do I do everything from.
Great better <unk> automation <unk>, you'll be able to have the AIG. Some rosaceous otherwise a human would have to do so there's just so much activity and interest I think we're doing well I live in a lot of meetings in which I was obsessed with.
Explaining why the Purger approach is differentiated why it's architecturally superior.
No customers were taking that very very seriously and I expect that will lead to.
As I said in the three ways, we think of monetizing this <unk> two regular usage and we're already primed for that greater usage. So we do.
Better outcomes for them and good outcomes Ross.
Okay perfect. Thanks for taking the questions.
Our next question comes from Kevin Kumar like Goldman Sachs. Please proceed with your question.
Thanks for taking my question I I had one on cash flow, which was very strong in the first half of the year and I I know you updated guidance during Investor day to 180 million for the year. It feels like you're you're tracking ahead of that number, particularly given four too tends to be a strong order is that still the right way to think about that.
Thing else would call out in terms of kind of the cadence of of cash flow for the <unk>.
Hey, Kevin Thanks for your question. So it would it would be there'll be silly for me to suggest that being where we are at the midway point doesn't you know is it a good thing in terms of us achieving our cash flow for the ear and I certainly don't think that you know a one.
Hundred and 50 or 180 or whatever number. We have is is something where we'll just stop and say Oh, we've achieved that we're good for the year. So we're gonna try to generate as much cash flow as we can because we know that the more casual that we generate this year just means that our structure is set up to generate cash flow in future years. So I.
I would say, we're not we're not updating or adjusting guidance, but I would say, we're we're very pleased with where we are and we think it bodes well for the future of increase in cash flow for Purger I'll also say that the mood of the company is is really we've come a long long way in a golf thing.
A culture balance trying to go head towards route 40, this year with 40 next year and so.
If it wasn't like the cash just fell out of the sky cause what people are doing the right things you were thinking about about being more economical, but also how to <unk> <unk> <unk> <unk> <unk>.
Bob the critical component of being a ruler of 30 and 40 company you know, it's part of everybody's Scotland.
It's one of those things that.
A little extra attention.
It helps a lot.
That's great. Thanks for the contacts there and I had one on just.
On you're you're looking at the segment revenue detailed implies I think Europe accelerator revenue growth in the first half.
Is that maybe just catch up and Ain't No is there anything you would call that in terms of potential recovering and some of those different regions and anything that you can.
And from your customer base. Thank you.
Yeah that I will I will I would say don't please be careful with how much you look into a segment reporting for Reid for Regents on revenue because remember a lot of our revenue still his term license revenue under ASE 606, and so the the mix of the timing can can somewhat just be.
He just happens to be the you know the.
The way the revenue flowed between the between the <unk> I would say that said, we have not seen a noticeable change in in the theaters in the first half of the year in terms of positive or negative I, just think sometimes the revenue.
Flow is different kevin's, so that I, it's more that than it is actual economic changes.
Understood. Thanks for taking my questions.
Yep.
Our next question comes from <unk>.
<unk> <unk> you're at R. B C capital markets. Please proceed with your question.
Oh wonderful thanks again for taking my questions first I wanted to kinda drill a little bit back into the the consumption element to the business at the Analyst Day, you had said that part of the goal of generative AI is driving more consumption, maybe can you give us a little bit of a remind.
Or for for today, how much of your business is is actually consumption and as we think about the actual adoption of generative AI solutions, how that impacts the mix of of consumption versus subscription you know and and maybe what does that do to some of the leading metrics like.
A C D and R. P O that we're all still looking at and then I've got a fall.
So let me let me start with added and Alan can can fill in the gaps so <unk>.
Just a reminder for us.
When we say consumption, we don't mean, a contract that is paid by the drink with no commitments from the clients. What we mean is that contract is based on a a usage jerk consumption metric and that and that that increase in that metric allows sharing a V.
Now you between our clients getting more value from using the solution in us achieving more value from those commitments. If if the when you think about our contract consumption, meaning a model that our contracts are based on a consumption usage metric, it's well about 50% of our contracts are actually using.
Usage type metrics or consumption like matrix in terms of the amount of our a C D or revenue that is driven by variances from contractually committed arrangements with our clients meeting overages or very it's very variances, it's still a relatively small part of our business.
Comes from clients going over their contractual normally what happens with clients is where they get to that point, we re contract with net with new commitment. So so most of the agreement. So I think just to clarify we're kind of saying there cause I think it's a really interesting and important for it we just.
We did some things several years ago. When we began wanting to move to a more non seats based model model was based on the quantity of work to converge concepts of subscription and consumption.
So what we found this occurrence really don't like it when the amount they have to pay balances around too much from one quarter to another makes it hard for them to budget.
It can feel unpredictable, particularly if it ends up being driven by some external circumstance you know the the suddenly somebody call us.
A lot more items are a lot more exceptions, all the colors of the call center. So.
A quarter to quarter variation was something you wanted to reward what are the other hand, we wanted to accommodate customers, whose business was increasing even as their seats with with decreasing so what we basically typically do is Ken said to avoid having to bounce too much for our customers in order to order is instead of doing overage charges, we use.
Use the increased level of use you've reached consumption to reset a new subscription price.
So that it reflects itself and then go forward a C V.
And it becomes something mechanically is a lot easier for the customer to budget and understand.
I think if that's easier for us to administer but I don't believe that was <unk>.
The motivation does that makes sense regime.
Yeah. That's that's that's that's a very very thorough answer really appreciated guys and then you know.
Hi, I'm, an answer I got pretty sure I'm Gonna answer one part of your question that we didn't answer backlog RPM. When you move to more consumption or usage based models. There is a chance that the client a contract duration would come down slightly and so that could actually be a headwind to RVO grove slightly not materially but.
Slightly so that's your second the one part of your question there just to clarify that and the reason why that is is we want we won faster iterations of measuring our clients usage to be able to grow ACB longer durations tend to walk in usage for longer periods of time. So that's a that's a D. R. P O of Westcott answer.
Okay, great and and and just just to clarify.
Clarified that shouldn't shouldn't have an impact on C. R. P. R. R. P O with one you're under correct no no. It would probably be a do it is highly unlikely the impact current RPM yep. Okay. <unk> really helpful. Thanks, and then one other piece of feedback we got when we were talking to partners. At Pegaworld is is that generally I can can really.
Helps speed up time to value maybe based on your customer conversations.
How do we think about the potential for this to reduce the implementation times reduced sales cycles, you know and and and kind of lead to maybe over time, you know <unk> better net new business, you know showing up and the model make maybe help us understand that are you thinking about that thanks.
I think it's going to be huge you know when I did my closing pedal world video still up there are talks about four things that I expect it to come back to that audience.
The following year and I want you to know that the company is galvanized around working as hard as we can to make sure we deliver on these things.
But first with what we called Peg at your fingertips, so using the power jeopardy. They are.
Including some of the things that are going to be 23.
Be able to make it so the system is giving people building. The software advice. It's also gonna be able to give end users who are using the software advice and even do more for them. So that was the first before the sentence was we expect to double developer productivity.
As a direct result of the implementation of these features and relative to what you were asking about I think this is unquestionably going to increase the velocity cell cycles.
And it's it's gonna make it easier for customers to get a lot more dog with the same dollars.
And so we're working to get our partners excited about how this will let them do more for the sake of.
About we should've root beer sales cycles as well so.
Bundled Tuesday may remember worthy.
So if it wants to add a new phone with that approach.
Okay perfect. Thank you guys.
Our next question comes from pin traveling <unk> with J P. Morgan. Please proceed with your question.
Hey, guys. Thanks for taking the questions I wanted to ask you. One thing that you were talking to script about more opportunity to further streamline sales additional improvements to go to market is there any way to kind of pieces that out what other things are you thinking that you can you know.
Hi.
Yeah, we've we've just begun sharing that with the company.
And are going to spend some time today talking with the company as a whole about what we're doing but in principle, we're going to make it. So in a couple of the roles and functions that historically have been kind of segmented out.
Are are gonna become less siloed.
In the front office of the go to market, but the the work of people that we call success managers and people would call it kind of executives at.
Other sorts of roles and functions that are in there that were specialists in certain areas. We're gonna work to bring them under a common organizational and management structure so that.
I believe is once again going to continue to make us more effective certainly gotten feedback from our clients that it will be easier for them to deal with more focused teams and I think of it is just really a continuation to some degree from southern in January .
I do believe that would prove.
Sales efficiency.
But that is not the primary driver.
Got it understood and Ken going back to kind of discretion declining ACB, what's the back crew sequentially worse E Q2 vs Q1, any anything to note there.
I I don't believe the macro was worse I think our performance in Q1 was better than our performance in queue to it naturally that contributes but that but that that pendulum that actually happens in a business like ours, where we have.
Smaller numbers of deals where the deals are larger value you tend to not get kind of like like it's not like a statistical like kind of trend in terms of the bookings. So that's not that unusual to see in our business.
Thank you.
Our next question comes from Jake Robert with William Blair. Please proceed with your question.
Hey, guys. Thanks for taking my questions just wanted to dig deeper into your comments at Jeremy Thomas has monetize just those lower end use cases and low code could you just talk more about why your platforms positioning helps you take advantage of it and then just from a timing perspective. When do you think we can actually start seeing.
A I layer and tomato is that something that's more Q4 or do you think that's more of a 2024 story.
Could you repeat the second question I'm, sorry, you said, one can we start seeing.
Yeah. It was just really around the timing of only you can start seeing a I later until the model is that something that starts generating revenue in Q4 is that more of a 2024 story.
So so a couple of different things.
Things, they're all of which I think are terrific actually so.
The reality is a lot of what you see are people building systems using AI by using them as accelerated or for traditional coding you think about think about co pilot using using here too even generate in the local area entire systems the trouble with it.
The system is generated like that is it's it's really hard to change it doesn't have a structure that makes it easier for you to go in and saying Oh, Italy wants to do something differently.
When I go change the set of things for Italy.
Because candidly when the generated stuff happens it tends to kinda get generated.
Mmm clubs or in a way that's not necessarily organized.
The lawyer taken Paygo lets you organize the key dimensions of change we find that in businesses and enterprise has changed typically happens for one of three reasons you generally got a general way you Wanna do a process of making decisions and they will vary based on a product variation.
For a customer variation.
Or jurisdictional variational locational barriers and we have built those dimensions into this layer K. So when do you want to make a change or how something works for Italy, or how you handled particular high value seven clients you got a place to go.
Place to go when the later okay.
You can regenerate those pieces as opposed to having to deal with something that looks a lot more like soup now the soup doesn't matter as much in small systems.
So I think it's going to be used extensively there but is there anything that you'd think it was an enterprise solution really important to have that structure and this will be hitting the streets. This year. So.
So this.
This is going to be something that our customers with 103 shifts the summer this is going to be in the answer.
Okay helpful. And then just we're we're obviously hearing a lot about platform consolidation just given the uncertain macro have you seen any changes the competitive environment or even with your GSI partnerships just in some of the larger software platforms like Microsoft and service now and best more in the space and then on.
On the other end have you started to benefit at all just as customers may look to consolidated like a point solution R. P a or process mining vendor onto your broader platform.
Yeah, we're we're seeing actual some real benefits apply appointment celebration in the pipeline I'm actually in real implemented systems, where some of our clients are you using using us to do more of their.
More of their workflows.
And I think that's actually a larger source of benefit for us than the consolidation across different products Emily.
You know process mining versus.
Which is what we're motivation, but yeah I do I do think we are going to see some consolidation and I would expect based on our history has been one of those sort of things happen that that is beneficial for us.
<unk>, thanks for taking my questions.
Yes.
Someone to call.
Our next question is.
I'm from Benaud sitting <unk> from Barclays. Please proceed with your question.
Hi, guys. Thanks for taking my questions I just wanted to follow up on some of the macro and Janet can AI questions you've talked about.
And it seems like you know you're seeing some off setting demand factors between 10 is Jenny I starting to help by macros still being kind of more of a negative factor. When do you expect this tug of war I can kind of start to favor Jan a I over a macro and kind of start to show up in a stronger pipeline and then really start to show up in them.
Net new ACB growth.
Yeah, I figured that new icy group.
The the tug of war.
Is is one by real things in the hands of real customers. No. If you look at what's out there are a lot of a lot there's a lot of stuff.
Including ours, which hasn't fully hit the street, yet and I think as that is the street, we're going to see if you are a much harder tug in in that direction. I. I also think some of the macro just represents greater conservativism, just extra layers of approval.
Pulls or we will run it by the CFO at the end.
[laughter] Yeah. It was not casually president as much as we entered the year, but isn't at all shocking.
Giving the uncertainty that everybody's trying to save money you know.
And the survivor. So Ah you know I'm I'm very excited we need to.
We were able to achieve our rule of 40 ambitions for next year, we need a good Broadway.
And we're still sight to be able to do that.
Understood and then just maybe on there will have 40 or yeah, your progression and scaling and peg the cloud and gross margin Pegaworld. I saw you guys were you know hoping to adopt externalized services for my poor services I think by Infinity twenty-four with that more Apple deployment by then.
After that how should we think about what kind of modeling <unk> gross margin as you kind of hit those milestones.
Yeah. So we wanted to get the way I would the way I would frame. It is way back when when we started this like five years ago. We said, we Wanna get peg it plowed gross margin, 70% a couple of years ago. We said, we're going to change that number to 75% were.
Know pretty close to 75% of that we've talked about that there's no reason why that number can go and approach 80, you know in the coming years. So I I would model what kind of in a more linear fashion that is probably one part of our business that actually does have linearity in terms of scaling so I would I would probably say.
[noise] about it that way.
And we're putting improvements online every quarter.
Got it thanks I appreciate it.
Yep.
Our next question comes from Fred half a mile with Mccoy. Please proceed with your question.
Thank you very much could speak Alan next weekend.
I think.
I I was coming in with more technical focused question, but something here kind of take them by fancy. So I wanted to ask I think maybe for Allen as we think about the opportunity here to potentially improve how customer service sales et cetera are done with the aid et cetera.
You'll have all the pieces in place to do things like automatons agents for enterprise and the like but just wanted to ask what what do you think about the opportunity to kind of like Augmenter improve how customer services done more efficiently with general.
I think it's enormous I think it's enormous and an assistant says and I also think that it's gonna really fundamentally change the way self service works as well, which is why I'm glad we're not tied to see cats, because let's face it one of the big cost savings, where people are achieving and one with cheese.
As is.
The reduction of labor that they have trouble finding anyway.
And so you know.
No I think it's going to be a really perfect storm in that direction and I I do think that we do have.
Terrific.
Collection of the parts to deliver all that for advice or a visit.
Right.
I'm looking forward to seeing what you'll be doing there I guess the next one is just with respect to your partners as well Howard may approaching their strategies recommendations at the moment related to just know code locos and trying to get back to their clients are they kind of also in a place where there <unk>.
Harriman thing with helping to clients experiment with new technology and is there any sort of a headwind that this experimentation was doing to platform. It up like low code enough to apply for that option.
I I I think there is a lot of experimentation going on throughout.
The entire business system.
Because candidly you know people are trying to figure out what's real and what's hype. The the partner engagement ipads, though his music extremely enthusiastic about what we were doing I'm not sure that they're as in Susie Africa about everybody, but I'm sure. The covered I'm sure. The partners will find a way to monetize of themselves.
Without without without it.
Thank you.
Our next question comes from Marc Schaffel loop capital markets.
Please proceed with your question.
Hi, Thanks for taking my question and when I'm on a launch pad you discuss the you're offering in more detail with the recent Investor Day I was wondering if you just bring yourself. The date on the status of your early adopter program for launch pad and and maybe just.
Talk a little about the sum of the parts of capabilities will be offering that your partner Sir I'm most excited about.
So I'm I'm.
Thrilled actually with the feedback from our early adopters. The early adopter program is oversubscribed.
And the apartment was showing enormous enthusiasm just so folks know if you haven't.
<unk> didn't want that launchpad as a way of bringing the way. We've historically thought about work driven Cisco's two partners, who wanted to capture their own I P and offer their own I P. Two subscribers powered by Tiger and.
It was built specifically for this one I think it's really unique in the market.
And being able to do that and that is the feedback we've gotten from the the organizations that we've done in the early work with so we've we've been reluctant to make any projections for this year because it is a nascent technology, but I'm expecting that I won't be able to talk about launchpad contribute contribution.
To the financial strength of the business next year, because I think it's going really well.
Alright, thank you.
Our next question comes from Tom Blakey with Keybanc capital markets. Please proceed with your question.
Hey, Alan thing and can thanks for squeezing me in here.
Stuff here I'm trying to balance out these two I'm moving parts on the macro.
Seems to have gotten incrementally little.
Morehead Windy and AI, which you see you seem more bullish on island.
In terms of the the $1.4 billion calendar twenty-three guy it seems like maybe it could be incremental here, but.
Just trying to understand kind of where we are like <unk>. When the guidance was set in where we are now in terms of balancing these two points out and I have a follow up on free cash flow.
Ah So let me think let me take that one on the revenue side, So Tom I think.
It is this has happened to us and in a few years, where when there to purger cloud momentum.
Creates a little bit of their ability on the on the accounting revenue piece of it right. So if you look at if you look at where we started the year revenue number can move around because of that mix of Purger cloud I think when you think about R. R. A C V and our buildings, which are which are kind of those are very integrally connected and say that.
Kind of where the macro discussion cause then I just want a separate revenue from the a C V. A little bit. So I think revenue revenue is is definitely a little bit more of a wildcard depending on the mix of the contracts. So that that's an unfortunate reality for our business up but setting that up in terms of the a C D and the buildings I think maybe I.
I'll leave you Alan to think about how you think about the macro now versus maybe when I started a year.
Macro basis, the economic uncertainty and the fact that we have seen like some more approvals come into the mix is.
Is obviously.
A challenge one we've seen before but I will tell you from a macro point of view Jenny I use a huge and not short term.
Factor here and I think it's going to.
This is not fundamentally changed our business and a number of other businesses in a very very big way over.
Over the next 12.
12 to 24 months, so I'm I'm very very bullish.
I'd love to be able to put out a quarter, where there wasn't some bit of mixed results.
We're working towards that and yoga, Oh gosh, what was very positive arrival Ah returns so that you're requesting you said about the iPhone.
Yeah, Yeah, I didn't before we get to that Alan just while I have you there on the on the huge comment on <unk> you know there's been some Sullivan enders in Big Titans out here, you're talking about monetization. There do you want to offer up maybe you know some visibility very early on here that you see in terms of possible you know like for like <unk>.
Lift in terms of pricing or a monetization per client given that 90 per cent of ACB, he's gonna come from existing clients.
Yeah, I think the biggest aspect of monetization is gonna because we're going to accelerate our clients use of the technology. So that they are going to use it more I think some of the benefits are you referring to are stuck with more of a seat model and they're gonna happen that'd be me right out of prison.
Don't have that problem. So we're really in a good place there's customers get excited about this and want to use it it's going to lead to greater volumes and that will be directly. The modernization. We will have some add on things that are separately price, but I don't expect that we're going to do something onerous to our clients like I I think some customers are worried about some other brothers.
I've heard some numbers brought forward on seat pricing.
That Ah stinker are gonna be anxiety, producing severe customer [laughter].
I'll have to do that could I get everybody for drinks at the moment. So yeah. I guess you know you know what I was referring to I don't think that's very clear and on the the impressive free cash flow here I'm. Just wondering you convert is still training I think at eight or nine per cent discount here can not pulling out anything specifically, but I'd like to know what your updated thinking.
Is there I know things are probably a little bit more for the lack of a better word happy for you here again, so but you know just an update on capital structure.
Capital return it also how it kind of like maybe possibly impacts that rule of 40.
As you as you move things around here with a much.
Potentially better balance sheet going forward that'd be helpful. Thanks, I I think I think that we were never we were never aggressively in the market to buy back that converts. We were offered those are opportunistic where where some investors you know what we're looking to to get out of their positions and we felt like there was an interest.
Sting IRR to do so naturally at the stock price goes up and as we get closer to majority that becomes then it becomes less arbitrage so to speak on that versus what we can get it overnight rates. So I would say we're still you know, we'll we'll consider opportunities when they when they come in but we're not we're not aggressive we're not aggressively.
Going out nor did did we on the other transactions I think it's more just a sign that you know we have a lot of confidence in the durability of the business and the cash flow the business and we felt like we're very comfortable you know taking that hundred million dollars out of the convert.
Okay, and then just one of them.
And from a longer term presented to just letting from a strategic perspective than just letting the cash build.
Yeah, I mean, we have.
Naturally from a capital allocation standpoint, we have a near term event. If we wanted to have which is to basically not you know to basically take out the converts and not to you know to read to re up them or to refinance up so naturally that's something that's out there that you know, we we want as much flexibility as we can't you know with our options.
At a time, but I've seen their Ah Ah Ah.
A couple of more people in the queue will very quickly take two more questions.
Thanksgiving.
[noise].
Our next question comes from Patrick Wow <unk> citizens JMP. Please proceed what's your question.
Oh, great. Thank you. So my question is do you have enough sort of P. H D level AI talent to do what you wanted to do I mean, you have Peter Vanderpool, and then you added Christian right, but.
How much do you need money.
Iron Rod Walker too is a pretty good Phd and has been with others on a mainstay pegaworld and I have a couple of others, who aren't phds with easily could've been who are sprinkled in it so yeah I feel really good about ourselves.
Oh, and then can I ask as long as I could get an update on the lawsuit there's probably not a lot you can say it but whenever you can say.
We're in in the appeal waiting process and I'm looking forward to.
You know getting.
Getting that in front of the judges.
I bet.
Alright, great. Thank you.
And I think we are at times. So we will we will have to call. It. Let me just tell everyone. Thank you very much we're working hard for you are actually generating cash.
When I wrote another side of it and we will can get you all up and take care of everyone Barbara.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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