Q3 2023 Pegasystems Inc Earnings Call

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Greetings and welcome to the Packer systems third quarter 2023 honors results conference call.

At this time all participants are in a listen only mode.

A brief question and answer session with all of the formal presentation.

If anyone should require operator assistance during the call for at least for us as far as zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Peter Welborn, Vice President corporate development and IR Footpad that system. Please go ahead.

Thank you Priscilla and good morning, everyone and welcome to <unk> Systems' Q3, 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.

<unk> 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.

<unk> actual results for fiscal 2023 and beyond could differ materially from the company's current expectations. Our press release announcing our Q3 2023 earnings and our SEC filings, including our most recent annual report describe factors that could impact our results and cause them to materially differ from those expressed.

And forward looking statements investors should not place undue reliance on forward looking statements matters contained in forward looking statements may not occur.

Later events, new information or other factors may cause our views to change, but we will not publicly update or revise forward looking statements unless required by law to do so and with that I will turn the call over to Alan Trusler, founder and CEO of <unk> systems.

Oh, Thank you Peter and to everyone, who has joined today's call.

It's great to see improved performance.

Uncertain macroeconomic environment now.

Now more than ever we are focused on running a business that balances growth and free cash flow.

And it's especially good to see record cash flow as we come out of our subscription transition.

Just getting started Kevin will go into more detail on our financial results in a moment.

As I mentioned last quarter, we've been finding additional ways to engage effectively and efficiently with our clients.

Information of our go to market model is delivering on our goal of deepening client relationships. This helps drive more meaningful engagement across multiple teams as those realized relationship strength.

And I was excited to spend most of Q3 on the road.

Prospects partners globally coming off the tremendous momentum of peg a world and the launch of Infinity 23. It was terrific to spend this direct time, whereas these constituents and.

We have around the world trip.

And it was good to see you folks know.

<unk> had a chance to see Tiger World I've met face to face with over 100 clients and partners and had terrific conversations across the board across the U S.

Bank of America Health group.

And even to India with Verizon.

Were they like many of our clients are accomplishing global competency centers, and we're having a chance to win.

Our Indian team directly with them.

Going down to APAC.

And said that National Australia Bank multiple government agencies.

Hey P J.

Along with HSBC, Lloyds and Vodafone as well.

Dozens of our partners around the world, including Accenture, Capgemini cognizant <unk> and Infosys.

So what I'll tell you also is our U S. Briefing center continues to be extremely busy. This year, we've had hundreds of meetings with clients like ISG Mongo as Navy Federal Union and Scotiabank with your staff has really come in to do with deep dive on topics ranging from bigger strategy to hybrid cloud.

We have many more planned for Q4.

And in Q3, we kicked off a series of account based marketing client events to continue the momentum of world with 75 regional and client specific events planned and we're going to have even more before the end of the year I'm really enjoying being back on the road in a significant way and a terrific very excited about the level.

Engagement and dialogue, we're having.

How are you going to accomplish a lot remotely medium first and provides a different type of opportunity to get it.

I understand what's top of mind for our clients.

If I've done this I haven't had a chance to really hear firsthand what the client interest and questions are about what Patrick can do and it does have a unique advantage in this current environment.

But I'll tell you is the share price has become central so nearly every client conversation and questions are following falling into a few categories.

First what are their AI strategy.

Okay.

Second how can they protected government a proprietary customer data and third how can they address the risks associated with your NII.

Such as hallucinations, whereas the AI provides a response not backed up by data or best process.

These prices are where packet technology and experience gives us a unique competitive advantage in my view, let me elaborate.

First in terms of strategy, we have decades of hands on experience, helping clients leverage AI and we can use it to help them with their strategy. We have terrific insights into the most successful early use cases, we're getting.

Those we believe will deliver the highest return on investment and we're showing them to our clients and getting tremendous tremendous positive feedback.

One of the best things that actually any of you picked right is this interactive demo and petco dot com that shows how we have linked generative AI into the core thinking of how peg a workflow should work and how it can help you create all the necessary elements using the knowledge of the.

Internet to be able to bring best practices into our business, you'll see within seconds workflows. The users the data model and the other key elements identified.

We launched it when Peggy Infinity went live in mid September and in the first month thousands of people from around the world access the demo and did over 6000 workflow generations from employee on boarding to.

Score bar generator.

I would suggest that anybody interested.

Scanning how this can be done really practically go find it and try it it's free it's on peg a dot com just go to the site either take the interactive tour that we have or just search for jetblue.

Check out the interactive demo, which is what I've just been talking about building it out for your comments firm or a business that you've been thinking about starting when you retire.

Think you'll be <expletive>, you'll share with the excitement of how purger is in a position to really bring this technology home.

Very unique way, we've had a lot of fun and a lot of clients have gotten very jazz and interested in this event even trying it on your mobile phone and you can be building. These sorts of things right from your mobile phone and it's also quite a good team over there so when customers see what we're able to do.

See what we're shipping and infinity twenty-three, we get a very positive reaction in terms of how we can add.

From a pragmatic capabilities to their businesses.

Now in terms of what peg it fits into your strategy you need to remember that while most companies continue to think about gen AI as a code generator.

Hey, guys. Its core is based on the concept of a business model that brings a structure and system that can evolve as the client needs of the industry needs is a customer needs evolve.

Instead of code RJR, we generate business launch it into a model the organizers of business objectives, and let's see AIB understood that to be reviewed adjusted sure rate and approved.

And the center of this is what you've heard me referred to as our unique situation, where you're okay. This is something that organizes the way our business runs into layers with some elements of operating across the business at a whole summer revision some perhaps in this department and so on.

And for different customer segments or different regions or geographies.

This unique structure organizes all the enterprise assets processes of rules the data models and UI into these layers, which are designed for reuse their perfect architecture for using journey onward.

And I guess, what gives <unk> a unique I believe sustaining advantage because you'll plugged in AI.

When the rules and workflows are defined and there'll be able to complement what already exists there'll be able to let you change pieces of your business or workflow at a time and they provide I think a power that's very very different than a lot of hype. That's out there because users are looking at our model versus looking at.

Operator: A brief question and answer session will follow the formal presentation. If anyone should require operator assistance within the conference, please press the star zero on your telephone keypad. As a reminder, this conference is being recorded.

They can actually collaborate in the business users have transparency working with.

It provides that vehicle for governance when changes are introduced makes them all manageable.

Sure.

Takes the output from the AI and organized way that really helps businesses build for change.

Peter Welburn: It is now my pleasure to introduce your host, Peter Welburn, vice president, corporate development and IR for the Pegasystem. Please go ahead.

It's proprietary to better I don't think it can be readily copy to reproduce and we don't see anybody else taking this approach we really feel good about what this means for us.

Peter Welburn: Thank you, Priscilla, and good morning, everyone, and welcome to Pegasystems Q3 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 is defined in the Private Security's litigation reform act of 1995. The words expects, anticipates, intends, plans, believes, will, could, should, estimates, may, forecast, and guidance are variations of such words and other similar expressions that identify forward-looking statements which speak only as of the date the statement was made and are based on current expectations and assumptions.

We've also created about 20 Gen AI boosters with Paragon at Trinity that makes the Gen. II practical that makes it all wheel and you can also see those described the Packer dot com.

Secondly, relative to data, we will be able to help clients with test and government customer data through the powerful capabilities that our software packages audit trail capabilities, which has been described as the best in the industry are robust.

Peter Welburn: Because such statements deal with future events, they are subject to various risks and uncertainties, actual results for fiscal 2023 and beyond could differ materially from the company's current expectations. Our press release announcing our Q3 2023 earnings and our SEC filings, including our most recent annual report, describe factors that could impact our results in causing them to materially differ from those expressed in forward-looking statements. Investors should not place undue reliance on forward-looking statements, matters contained in forward-looking statements may not occur. Later, events, new information, or other factors may cause our views to change, but we will not publicly update or revise forward-looking statements and less required by law to do so.

Comprehensive.

Third we address Jenny I risks by leveraging our platform, which is designed to help customers deploy all of their processes and their AI effectively and responsibly responsibly clients can see what's happening it help identify where he is working on their models.

And that helps them understand when the AI is doing something that makes sense and when it's generating nonsense are robust capabilities also help clients confirm that the data that powers AI decisioning unbiased and comprehensive using our unique ethical biased Jack with <unk>.

Helps identify and eliminate biases heated in the AI are flagging possible discriminatory offers and messages generated by AI before they reach the customer does this unique capability helps clients pinpoint any offending elements and then adjust the algorithms to ensure.

Alan Trefler: And with that, I will turn the call over to Alan Treffler, founder and CEO of Pegasystems. Thank you, Peter, and to everyone who's joined today's call. It's great to see us improve performance in an uncertain macroeconomic environment. Now, with an effort, we are focused on running a business that balances growth and pre-cash flow. And it's especially good to see record cash flow as we come out of our subscription transition and we're just getting started.

Fair outcomes not a client response, we're happy to this is very very exciting and inspiring and it's wonderful to see our clients now beginning to work on this and taking it very very much a part I think as we move into 2024, we're going to complement what we've already released here in 'twenty three.

Alan Trefler: Ken will go into more detail on our financial results in a moment. As I mentioned last quarter, we've been finding additional ways to engage effectively and efficiently with our clients. The transformation of our go-to-market model is delivering on our goal of deepening client relationships. This helps drive for meaningful engagement across multiple teams as those relationships strengthen. And I was excited to spend most of Q3 on the road, meeting with clients, prospects and partners globally.

With great New pipeline of features that are going to very very aggressively continue to the extend the power of these game changing capabilities, but also leveraging our unique architecture.

Before I left off.

Wrap up I also want to provide a quick update on peg a launch pad, our new cloud based low code application development platform for building business to business applications that we announced last year.

Alan Trefler: Coming off the tremendous momentum from Pegaworld and the launch of Infinity 23, it was terrific to spend this direct time with these efficiencies. And the reason we had around the world trip and it was good to see folks I had not had a chance to see a Pegaworld. I met face-to-face with over a hundred clients and partners and had terrific conversations across the board, across the US with Amazon, back in America, the United Health Group and even to India with Verizon, where they, like many of our clients, are establishing global competency sectors and we're having a chance to engage our Indian team directly with them.

It's gorgeous piece of software and the team has done a tremendous job in staying focused and supporting our early adopters and we now have our first handful of watch add clients.

We're really excited to ramp this business up in 2024 and beyond.

In summary, we continue to improve our performance and as we come out of this subscription transition we see the cash improving despite the uncertain macro environment.

Transformation of our go to market model is improving our sales efficiency and our engagement focusing on really deepening the critical relationships that drive our business and our unique technology architecture is a competitive advantage that lends itself to really leverages <unk> in a way that I don't see arc.

Alan Trefler: Going down to APAC with ANZ Bank, National Australia Bank and multiple government agencies across APJ and in London with HSBC Lawyers and Vodafone, as well as with the dozens of our partners around the world, including Accenture, Cap Gemini, Cognizant, EY, and Infos. So, what I'll tell you also is our U.S. Briefing Center continues to be extremely busy this year. We've had hundreds of meetings with clients like I&G, Mondoes, Navy Federal Union, and Scotiabag with your staff have really come in to do a deep dive on topics ranging from Pegas strategy to Pegaclog.

Competitors easily replicating it is going to be a big and long lasting distinction.

So we continue to make good progress we continue to make good progress in becoming a rule of 40 company balancing growth with fiscal discipline and to provide more color on the financial results. Let me now turn it over to our COO and CFO, Ken Stillwell, absolutely. Thanks Alan.

The first three quarters of 2023, we've made meaningful progress improving our cash flow, while maintaining double digit ACB growth, we're managing the company with a rule 40 mindset. The principal at a well run firms growth rate and free cash flow margin should meet or exceed 40%.

Alan Trefler: We have many more plans for Q4. And in Q3, we kicked off a series of account-based marketing client events to continue the momentum of Pegaworld, with 75 regional and client-specific events planned, and we're going to have even more before the end of the year. I'm really enjoying being back on the road in a significant way, and I'm terrifically excited about the level of engagement and dialogue we're having. And even though you can accomplish a lot remotely, meeting a person provides a different type of opportunities to get and understand what's up-of-mind for our clients.

And that's an exciting news to share later on the call regarding our free cash flow.

Now I'm going to start this morning with the most important metric to measure the success of our business growth in annual contract value or AC D D.

This year, we've experienced a macro economic environment, that's not noticeably worse than last year, but it's certainly not much better our clients are still buying but they're scrutinizing things more closely sales cycles are a little longer than they've been for the last few years. Despite that our sales team delivered a good Q3 with significant.

Alan Trefler: Now, as I've done this, I have had a chance to really hear firsthand what the client interests and questions are about what Pegas can do, and does Pegah have a unique advantage in this college environment. And what I'll tell you is that AI, known as surprise, has become central to nearly every client conversation, and their questions are following if only into a few categories. First, what should their AI strategy be? And where does Pegah fit it?

Alan Trefler: Second, how can they protect and govern their proprietary customer data? And third, how can they address the risks associated with an AI, such as hallucinations, where the AI provides a response not backed up by data or best process? And this, these places are where Pegah technology experience gives us a unique competitive advantage in my case.

Sure.

From EMEA.

And from our financial services clients through the first three quarters of 2023 total contract value <unk> bookings increased by about 20% year over year and I think that's just an important measure to complement to our ACB in backlog outperform us given the strong level of active.

We experienced in Q3, our new go to market strategy is clearly leading to deeper engagement with our clients.

As a result, ACB grew 12% year over year with currency, helping our growth by around 2%.

We like numerous other companies received SEC comment letter relate related to standardizing our keep our free cash flow measures as you know the more traditional way to calculate free cash flow is to take cash flow from operations and subtract capital expenditures. So going forward. This is the approach we use.

Alan Trefler: Let me elaborate. First, in terms of strategy, we have decades of hands-on experience helping clients leverage AI, and we can use it to help them with their strategy. We have perfect insights into the most successful early use cases for Gen AI, and those we believe will deliver the highest potential investment, and we're showing them to our clients, and getting tremendous, tremendous positive feedback. What are the best things that actually any of you could try?

Going forward, we're not adding back one time cash items, such as restructuring charges to calculate and adjust and adjust free cash flow. However, we will continue disclosing in our earnings release cash items that we believe are not representative of our ongoing operating performance as we enter 2024, we do not any.

Alan Trefler: Is this interactive demo on Pegah.com that shows how we have linked to Gen AI into the core thinking of how Pegah workflow should work, and how it can help you create all the necessary elements using the knowledge of the Internet to be able to bring best practices into a business. You'll see within seconds the workflows, the users, the data model, and the other key elements identified. We launched it when Pegah's affinity with live in the September, and in the first month, thousands of people from around the world access the demo and did over 6,000 workflow generations, from employee onboarding to a cricket scoreboard generator.

Dissipate, one time cash items being a big part or a big item of interest for investors.

Over the first three quarters of 2023 peg it generated $138 million of cash flow from operations and $124 million up free cash flow in Q3 alone we added $24 million of free cash flow.

124 million is the highest amount of free cash flow dollars generated in the first three quarters of a year in the history of the company, we increased our cash and marketable securities by $60 million year to date and Thats, given our almost 100 million.

Alan Trefler: Now, I would suggest that you take the interactive tour that we have, or just search for Gen AI, and check out the interactive demo, which is what I've just been talking about. Try building an app for your common firm or a business that you've been thinking about starting when you retire, and I think you'll share with the excitement of how Pegah is in a position to really bring this technology home in a very unique way.

<unk> repurchase.

As we outlined during the most recent investor session that peg a world in June our multi year plan to improve our free cash flow features three key levers first we need to expand total gross margin. We're confident we can continue to expand total gross margin by scaling our peg a cloud business, increasing cloud automation implementing Cooper daddies.

And multi tenancy.

And our most recent results confirm that we're making progress in Q3 on a trailing 12 month basis non-GAAP total gross margin increased to just over 74% a 129 basis point improvement year over year, our key driver of our gross margin improvement as non-GAAP Purger cloud gross margin, which increased 400 <unk>.

Alan Trefler: We've had a lot of fun, and a lot of clients have gone very jazz and interested in this. You can even try it on your mobile phone, and you can be building these sorts of things right from your mobile phone, and it's also quite a good demo there. So, when customers see what we're able to do, see what we're shipping in Infiniti 23, we get a very positive reaction in terms of how we can add powerful and pragmatic capabilities to Now, in terms of what Pegat fits into the astrology, you need to remember that while most companies continue to think about Genai as a co-generator, Pegat's core is based on the concept of a business model that brings a structure and system that could evolve as the client needs or the industry needs and the customer needs to evolve.

30 basis points from 69% to just under 73% on a trailing 12 month basis.

Another lever.

To improve our free cash flow is to improve sales efficiency, which we view as the most important of the three levers as you know we made the difficult decision to reduce our head count in the last year with the majority of those reductions coming from the sales and marketing organization, it's difficult to deliver double digit growth while at the same time improving sales efficiency.

And we spend more than half a billion dollars annually on sales and marketing, that's a pretty big number and we need to make sure that we're leveraging that to drive our growth. The last lever is really just you and as we improve our free cash flow is to enhance our operating leverage by growing total other costs like general administrative and R&D to make sure that those spend at.

Alan Trefler: Instead of code with our Genai, we generate business logic into a model. That organizes the business objectives and what's the AIB understood, what to be reviewed, adjusted, sure-ranked and approved. And the center of this is what you've heard me refer to as our unique situation layered cake. This is something that organizes the way a business runs into layers with some elements operating across the business at a whole, some on a division, some perhaps in the department, and some for different customer segments or different regions and geographies.

A slower pace than our ACB growth at our company our size, we should definitely be able to exhibit operating leverage as we scale.

Over the last year, we've taken action to simplify our go to market motion for.

For software companies like ours, the enemy of sales efficiency and effectiveness is often complexity. So we've eliminated layers of management further clarify team roles focused our sales team on cross selling and upselling into our existing clients, making sure that all of our teams are aligned taken together. These actions are helping to improve our sales efficiency.

And you can see the results in our financials on a non-GAAP basis total sales and marketing spend as a percentage of revenue declined from 47% to 38% year over year in Q3 on a trailing 12 month basis.

Alan Trefler: This unique structure organizes all the enterprise assets that processes the rules, data models and UI into these layers which are designed for reuse. There's the perfect architecture for using Genai with. And this one gives Pegat a unique and I believe standing advantage because you'll plug Genai in when the rules and workflows are defined and they'll be able to complement what already exists. They'll be able to let you change pieces of your business or workflow at a time and they provide, I think, a power that's very, very different than a lot of the hype that's out there.

Our focused execution on balancing growth and profit is positively impacting our profitability generating 124 million of free cash flow as I mentioned in the first three quarters of 2023.

It shows progress across all of our levers.

Big change from the negative free cash flow of $36 million generated in the first three quarters of 2022.

Also got some good news to share regarding our free cash flow trajectory as we go forward based on where we are year to date and our global teams successful execution on our plan and I'm confident that we've got a shot to deliver more than $200 million of free cash flow in 2023, I'm excited that our teams are positioned to deliver the highest annual cash flow in the history of the company.

Alan Trefler: Because users are looking at a model versus looking at a code, they can actually collaborate. The business users have transparency working with IT and it provides that vehicle for governance when changes are introduced and makes them all manageable. So in short, it takes the output from the AI and organizes it in a way that really helps businesses build for change. And it's proprietary to better. I don't think it can be readily copied or reproduced and we don't see anybody else taking this approach and we really feel good about what this means for us.

In Q4 is typically our strongest cash flow generation quarter of the year to be clear, we do not update guidance quarterly and im not creating any type of precedent are officially updating free cash flow guidance for 2023, I'm just sharing my current thoughts on our free cash flow trajectory as we approach the completion of 2023.

In prior calls we have shared some thoughts on modeling our business and we've received feedback that this practice is helpful. So I decided to reinforce those again today first let me start with free cash flow I know that making a change in how we present free cash flow might be considered somewhat unusual though.

Alan Trefler: So we've also created about 20 Genai boosters with Pegat infinity that makes the Genai practical and makes it all real and you can also see those described in Pegat.com. Now secondly, well today we will be able to help clients repent and govern customer data through the powerful capabilities in our software. Pegat is autotrail capabilities, which has been described as the best in the industry, a robust and comprehensive. And third, we address Genai risks by leveraging a platform which is designed to help customers deploy all of their processes and their AI effectively and responsibly.

So we've added a table in our earnings release to show the free cash flow quarterly just to help with your modeling. The table also separately disclosed items that affect our cash flow and are considered by management not to be representative of the core business operations, such as restructuring costs second our prior 2023 annual free cash flow guidance included these adjustments so going.

Forward, our free cash flow guidance will be consistent with a more conventional methodology.

Okay.

Lastly, we did close more term license deals in the quarter that is typical or term license bookings are strongest in the first and the final quarters of the year. So a strong term license booking result in Q3 is not typical however, we view the growth in ACB is the most critical measure.

Alan Trefler: Finds can see what's happening and help identify where AI is working in their models and help them understand when the AI is doing something that makes sense and when it's generating knowledge, are robust capabilities also helped clients confirm that the data that powers AI decisioning is unbiased and comprehensive using our unique ethical bias check, which helps identify and eliminate biases hidden in the AI are flagging possible discriminatory offers and messages generated by AI before they reach the customer. And any ascending elements and adjust the algorithms to ensure fair outcomes.

And our clients, sometimes decide to use client cloud versus peg, a cloud and we will support them when they make that decision.

This year, we've continued to make progress on our journey to improve our cash flow while at the same time, maintaining a double digit ACB growth rate.

Give me an ACB growth rate in what continues to be a more uncertain selling environment. Our team is clearly embracing our role 40 mindset and doing a much better job of managing the tradeoffs between growth and profit.

<unk> greatest software companies do not only achieved the rule of 40 in a single year, but they do it consistently and over sustained periods of time, that's our objective to be the kind of company that balances growth and profit over the long term and we look forward to closing out 2023 in the next few months as I wrap up today I wanted to announce that our annual inverse.

Alan Trefler: Now the client response we're having to this is very, very exciting and inspiring and it's wonderful to see our clients now beginning to work on this and taking it very, very much so far. I think as we move into 2024, we're going to complement what we've already released here in 23 with a great new pipeline of features that are going to very, very aggressively continue to the extent the power of these game changing capabilities, but also leveraging our unique architecture.

<unk> session will be held on Monday June 10th the MGM hotel in Las Vegas during Peg a world. Please mark your calendars I look forward to seeing you all on the road as we get out to meet current and potential investors in November and December.

One last point the date for our oral argument in our Virginia Appeal is now scheduled for November 15.

Alan Trefler: Before I wrap up wrap up, I also want to provide a quick update on peg a launch pad our new cloud based low code application development platform for building business to business sound applications that we announced last year. It's a gorgeous piece of software and the team has done a tremendous job in staying focused and supporting our early adopters and we now have our first handful of launch pad clients. We're really excited to ramp this business up in 2024 and beyond.

Although it will likely be months before we know the result, it's still great to have the appeal now scheduled and in front of us with that operator, please open the call for questions.

Thank you.

We will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue.

Alan Trefler: So in summer, we continue to improve our performance and as we come out as a subscription transition, we see the cash improving despite the uncertain macro environment. The transformation of our go-to-market model is improving our sales efficiency and our engagement, focusing on really deepening the critical relationships that drive our business. And our unique technology architecture is a competitive advantage that lends itself to really leveraging GNI in a way that I don't see our competitors easily replicating and is going to be a big and long-lasting distinction. So we continue to make good progress, we continue to make good progress and become a real 40 company balancing growth with fiscal discipline and to provide more color on the financial results.

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For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Q1.

One moment, please while with pool for questions.

And our first question comes from Keith <unk> with Citi.

Go ahead.

Okay, great. Thanks for thanks for taking the questions. This morning.

Maybe just to start I just wanted to get a better understanding of occur you know when you talk about uncertain macro and that kind of continuing what that actually it looks like in terms of the the deal environment that you're seeing out there and maybe the hurdle.

Things may be changed so far.

Ken Spilwell: Let me now turn it over to our COO and CFO Ken Spilwell. Thanks, Alan. Through the first three quarters of 2023, we've made meaningful progress improving our cash flow while maintaining double-digit ACV growth. We're managing the company with a rule of 40 mindset. The principal in a well-run firm's growth rate and free cash flow margin should meet or exceed 40%. I've got some exciting news to share later on the call regarding our free cash flow.

October from our conversations in the deal environment that you're seeing.

Okay.

Yeah, I would I would.

I would say that.

Yep.

The mood and a lot of clients.

So the last year plus candid way.

It has been just more question it is entirely consistent with organizations really doing graph.

Candidly a better level of scrutiny than when money was free you know people were acting now across the board like they're really respecting businesses that are positioned to deliver profitability. So you get more checking.

Ken Spilwell: Now, I'm going to start this morning with the most important metric to measure the success of our business, growth and annual contract value or ACV. This year, we've experienced a macroeconomic environment that's not noticeably worse than last year, but it's certainly not much better. Our clients are still lying, but they're scrutinizing things more closely. Sales cycles are a little longer than they've been for the last few years. Despite that, our sales team delivered a good Q3 with significant contributions from AMIA, and from our Financial Services Clients.

The deals and that can lead to slightly longer sales cycles, I would tell you I'm not seeing anything.

That is traveling as we enter the fourth quarter. The reality is that customers are also really really want to set their businesses up for success in 2024, and I've had conversations with many clients that see us as being central to how they're going to gain real efficiencies.

Ken Spilwell: Through the first three quarters of 2023, total contract value, TCV, bookings, increased by about 20% year over year. And I think that's just an important measure to complement our ACV and backlog performance. Given the strong level of activity we experienced in Q3, our new go-to-market strategy is clearly leading to deeper engagement with our clients. As a result, ACV grew 12% year over year with currency helping our growth by around 2%. We liked numerous other companies, received an SEC comment letter related to standardizing our free cash flow measures.

Which isn't around across software, but it's really around the cost of their operations and their ability to engage with us.

I've said over the last year, we've been through lots of recessionary periods and when things get a little tougher even if we're not in a recession I think people are kind of being a little light. We are even if we win when that happens we sort of aim.

The needle as it were.

How do we deliver really tangible things for clients as opposed to focusing on revenue, which are the things. We're happier everybody who wants to spend time on that does that give you some color.

Ken Spilwell: As you know, the more traditional way to calculate free cash flow is to take cash flow from operations and subtract capital expenditures. So going forward, this is the approach we use. Going forward, we're not adding back one-time cash items, such as restructuring charges, to calculate and adjust and adjust free cash flow. However, we will continue disclosing in our earnings release cash items that we believe are not representative of our ongoing operating performance.

No definitely that's that's helpful contacts there, especially for the for Q4 Q Gail.

Definitely appreciate the commentary there and then.

And maybe shifting gears, a little bit more to.

The sales and marketing changes and initiatives.

Yeah I guess.

As we think about what that means for closing out the year and the improvement in productivity and efficiency there.

Ken Spilwell: As we enter 2024, we do not anticipate one-time cash items being a big part or a big item of interest for investors. Over the first three quarters of 2023, Peggy generated 138 million of cash flow from operations and 124 million of free cash flow. In Q3 alone, we added 24 million of free cash flow. 124 million is the highest amount of free cash flow dollars generated in the first three quarters of a year in the history of the company. We increased our cash and marketable securities by $60 million a year today, and that's given our almost 100 million of convert repurchase.

I guess what has been the feedback from customers that you you talk to you in terms of the impact that could potentially have and as we think about the free cash flow impact, but in the quarter moving forward.

And I guess, how should we be thinking about.

But the impact that those changes.

It would be happening there.

The cashless specifically.

So there is a couple of pieces to that question. So let me see if I can hit a couple of pieces as Steve said the first as we made changes we made some organizational changes in the in the last few months.

Those are never easy and.

Ken Spilwell: As we outline during the most recent investor session in that Peggy world in June, our multi-year plan to improve our free cash flow features three key levers. First, we need to expand total gross margin. We're confident we can continue to expand total gross margin by scaling our Peggy cloud business, increasing cloud automation, implementing Kubernetes, and multi-tenancy. And our most recent results confirm that we're making progress. In Q3, on a trailing 12-month basis, non-gap total gross margin increased just over 74 percent, a 129 basis point improvement year over year.

A lot of empathy for the people that were impacted those changes have not actually resulted in any improvement in free cash flow for the business yet as you might imagine and they will have a very small if any impact even in Q4.

The actions taken however, they will have a full year impact in 2024. So that's it. So that's just something that's almost kind of on the shelf for an improvement in 2024.

I wanted to also clarify one thing when I talk about achieving $200 million in free cash flow I'm actually referring to that the new more traditional measure. If you were to take into account one time items et cetera naturally under the way that we were previously talking about that number would be much higher so just to clarify that because I do.

Ken Spilwell: Our key driver of our gross margin improvement is non-gap Hega cloud gross margin, which increased 430 basis points from 69 percent to just 73 percent on a trailing 12-month basis. Another lever to improve our free cash flow is to improve sales efficiency, which we view as the most important of the three levers. As you know, we made the difficult decision to reduce our headcount in the last year with the majority of reductions coming from the sales and marketing organization.

That was maybe a little a little vague in my script.

I would also say that we worked very hard and I think the team did a great job to take and make the changes so that we could enter Q4 with the changes behind us and we basically got to that so I'm not expecting that.

Ken Spilwell: It's difficult to deliver double-digit gross while at the same time improving sales efficiency. We spend more than half a billion dollars annually on sales and marketing. That's a pretty big number, and we need to make sure that we're leveraging that to drive our growth. The last lever is really just as we improve our free cash flow is to enhance our operating leverage by growing total other costs, like General Administrative and R&D, to make sure that those spend at a slower pace than our ACV growth.

So we would we would tell you next year that Q4 had been materially implemented by change right now I would say we're into heavy execution mode.

Okay perfect great. Thanks for thanks for taking the question.

Thanks, Steve.

Our next question comes from Hassan being bought out with Jpmorgan. Please go ahead.

Ken Spilwell: At a company our size, we should definitely be able to exhibit operating leverage as we scale. Over the last year, we've taken action to simplify our go-to-market motion. For software companies like ours, the enemy of sales efficiency and effectiveness is often complexity. So, we've eliminated layers of management, further player by team roles, focused our sales team on cross-selling and upselling into our existing clients, making sure that all of our teams are aligned.

Hey, Thanks, guys for taking my questions can I ask you about the term outperformance what drove that was was federal.

Part of it or anything else to kind of call out.

Secondly.

On cloud ACB growth that seems to continue to decelerate.

To your point on.

Overall <unk> growth.

Being more important but as you launch Infinity 23, which adds kind of a lot of journey our capabilities on the cloud side I believe should we expect the cloud ACB growth to kind of cross at some point going forward.

Ken Spilwell: Taking together these actions are helping to improve our sales efficiency, and you can see the results in our financials. On a non-gap basis, total sales and marketing spend is a percentage of revenue, declined from 47% to 38% year-over-year, in Q3 on a trailing 12-month basis. Our focused execution on balancing growth and profit is positively impacting our profitability, generating 124 million of free cash flow, as I mentioned in the first three-quarters of 2023, and it shows progress across all of our levers. It's a big change from the negative free cash flow of 36 million generated in the first three-quarters of 2022.

Yes, so great question. So let me so when you see quarter. So if you look at if you will.

You'll kind of newer organizations or even newer.

Kind of activity that a that our client is doing there is a.

Higher amount of those that typically go pay the cloud that has got it did because pick a class. When you have clients that may expand existing workflows existing relationships. They may bring on a new project and they already are managing pegged the client cloud environment naturally that's the way that they would purchase or expand their relationship with <unk>.

Ken Spilwell: I've also got some good news to share regarding our free cash flow trajectory as we go forward. Based on where we are a year-to-date, and our global team's successful execution on our plan. I'm confident that we've got a shot to deliver more than $200 million of free cash flow in 2023. I'm excited that our team is in a position to deliver the highest annual cash flow in the history of the company, and Q4 is typically our strongest cash flow generation of the year.

So when you see quarters, where do you typically have a higher percentage of kind of term versus SaaS. The primary driver for that is probably just a little bit outsized expansion with existing clients that may not know many of our clients have both so it kind of depends on which.

Ken Spilwell: To be clear, we do not update guidance quarterly, and I'm not creating any type of precedent or officially updating free cash flow guidance for 2023. I'm just sharing my current thoughts on our free cash flow trajectory as we approach the completion of 2023.

Patient environment, there, which which set of use cases, they're expanding but that's typically it's really not it's not a change in strategy or a change in buying behavior. It just comes down not to like how.

Kevin how are you.

Ken Spilwell: In prior calls, we have shared some thoughts on modeling our business, and we've received feedback that this practice is helpful. So I've decided to reinforce those again today. First, let me start with free cash flow. I know that making a change in how we present free cash flow might be considered somewhat unusual. So we've added a table in our earnings release to show the free cash flow quarterly just to help with your modeling.

How does the difference between the two in terms of like a net new workloads versus existing workloads. So that's kind of why you might see the.

Ken Spilwell: The table also separately discloses items that affect our cash flow and are considered by management not to be representative of the core business operations, such as restructuring costs. Second, our prior 2023 annual free cash flow guidance included these adjustments. So going forward, our free cash flow guidance will be consistent with a more conventional methodology. Lastly, we did close more term license deals in the quarter than is typical. Our term license bookings are strongest in the first and the final quarters of the year.

The drop.

I would also say that based on just the vibrations in the market here as we enter Q4.

I'd be surprised if we.

Don't see it pick up.

The cloud rates.

We go into the next quarter or two yes, I think that's I mean.

If you you kind of you know that the difference between our Q4 typically had a little bit more.

Client cloud license and Thats typically because that tends to be a period, where you have clients kind of look at.

Ken Spilwell: So a strong term license booking result into three is not typical. However, we view the growth in ACV as the most critical measure, and our clients sometimes decide to use client cloud versus pegged cloud, and we will support them when they make that decision. This year, we've continued to make progress on our journey to improve our cash flow while at the same time maintaining a double-digit ACV growth rate. And what continues to be a more uncertain selling environment, our team is clearly embracing a rule of 40 mindset and doing a much better job of managing the trade-offs between growth and profit.

Increasing their spend with us during a renewal period. So just think about that kind of same activity can happen sometimes in other quarters.

Yeah understood just to be clear for this quarter in term, where there any very large deals.

Swung kind of the number.

Towards towards the positive any one or two large deals are.

No. It was just actually no we and in our in our movement.

That's a very fair question, but no Q3 was not skewed by like one deal or two deals of that and also as we as we move a little bit more towards as we referred to in a more consumption based you do actually have more repeatable growth and not as many very large kind of shop deals clients are increasing over time as.

Ken Spilwell: The world's greatest software companies do not only achieve the rule of 40 in a single year, but they do it consistently in over sustained periods of time. That's our objective to be the kind of companies that balances growth and profit over the long term, and we look forward to closing out 2023 in the next few months.

In our previous model, even in the perpetual model there tended to be kind of whales as we used to call them.

Got it thank you very much.

Okay.

Our next question comes from Jake Roberts with William Blair. Please go ahead.

Ken Spilwell: As I wrap up today, I wanted to announce that our annual investor session will be held on Monday, June 10, the MGM Hotel in Las Vegas during Peggo World. Please mark your calendars.

Hey, Thanks for taking my questions Alan when you're talking to customers worth dollars for AI spend coming from are they coming from existing budgets and maybe crowding out other areas of spend are you seeing customers create net new budget dollars and potentially actually expand their a variety overall it spend to account for those investments.

Ken Spilwell: I look forward to seeing you all on the road as we get out to meet current and potential investors in November and December.

Ken Spilwell: One last point. The date for our oral argument in our Virginia appeal is now scheduled for November 15. Although it will likely be months before we know the result, it's still great to have the appeal now scheduled in front of us.

So we're seeing both and happily we are seeing.

The innovation budgets starting to come forward.

Operator: With that operator, please open the call for questions. Thank you.

We've had.

Wanted to actually just yesterday announced they were putting another several hundred million dollars into their innovation budget, which is a great thing for a year from our clients that were currently.

Operator: We will now be conducting a question and answer session. If you would like to ask a question, please press tar one on your telephone keypad. A confirmation tone will indicate your line isn't the question in queue. You may press tar two, if you would like to remove your question from the queue. For participants using a speaker equipment, it may be necessary to pick up your headset before pressing the key. One moment, please. Why would you for questions?

True.

So I think that it will affect.

Some traditional spend for sure, but they're really looking to make some changes in their business over the next couple of years and they're all not wanted to fall behind.

Very helpful. And then Ken do you still feel tagging is on track to complete the subscription transition. This year and then I know you put out those targets of being a rule of 40 business as you exited 2024, giving constant currency ACD growth ticked down to 10% this quarter, how should we think about the balance.

Steven Enders: And our first question comes from Is It Enders? Which CD? Please go ahead. Okay, great. Thanks for taking the questions this morning. Maybe just to start, I just want to get a better understanding for when you talk about uncertain macro and that kind of continuing, what that actually looks like in terms of the deal environment that you're seeing out there and maybe have things maybe change so far in October from the conversations in the deal environment that you're seeing today.

Between growth and margin as you as you look to reach those targets.

So we do believe we'll be done with the subscription transition in fact, I would I would even go as far as to say were really done now we've had a few years, where our perpetual license revenue was under 5% of our total.

Oh, sorry, perpetual bookings have been under 5% for now probably four years, maybe and so I think the business has normalized much more naturally will have variability quarter to quarter and you do have the unfortunate accounting of a 606, but that said take that aside the billings the consistency of billings that predictability.

Steven Enders: Yeah, I would say that the mood and a lot of clients for the last year plus candidly has been just more questioning and it's entirely consistent with organizations really doing a candidly a better level of scrutiny than when money was free. You know, people are acting now across the board like they're really respecting businesses that are in a position to deliver profitability. So you get more checking of types of deals and that can lead to slightly longer sales cycles.

That is very much normalized in our business now Jay and then when you think about exiting 2024 and it certainly looks to us that 2024 would exit with a a.

Much higher contribution on the free cash flow that the growth just even where we are now naturally as a rule of 30 type company cash flow is higher than our growth rate and I think as you know being being realistic about where we thought we would lay out you know we always kind of have this model of 15 25 kind of company.

Steven Enders: I will tell you, I'm not seeing anything that is troubling as we enter the fourth quarter. The reality is that us through also really, really want to set their businesses up for success in 2024. And I've had conversations with many clients that see us as being central to how they're going to gain the real efficiencies, which isn't around the cost software, but it's really around the cost of their operations and their ability to engage.

It was kind of a.

Very nice sustainable model.

And so we have a little work to do on the growth side, but I think we're well on track to actually.

Kind of mid to high <unk>, you know free cash flow company in 2020 for it that's our goal. So naturally we're still another quarter away from thinking about our guidance for 2024, but.

Steven Enders: But I think I've said over the last year, we've been through lots of recessionary periods and when things get a little tougher, even if we're not in a recession, I think people are kind of asking a little like we are. When that happens, we sort of aim the needle as it were. How do we deliver really tangible things for clients as opposed to focusing on generating revenue, which are the things we're happier, everyone wants to spend time on that?

We've been very transparent with that is our objective.

Helpful. Thanks for taking my questions.

Sure C J.

Our next question comes from pardon Kumar with Goldman Sachs. Please go ahead.

Thanks for taking the question Alan you called out EMEA on your script. So just curious if you can expand on the health of the customer base in those regions and just the overall kind of macro environment there.

Steven Enders: Does that give you some comments? No, definitely. That's the total projects there, especially for the 4Q, 4Q view. So definitely appreciate the commentary there. And then maybe shifting years a little bit more to the sales and marketing changes and initiatives. I guess as we think about what that means for closing up out the year and the improvement in productivity and efficiency there, I guess what has been the feedback from customers that you've talked to in terms of the impact that could potentially have.

Yes, I would say that if you go back a couple of quarters EMEA was looking a little tepid.

I was very pleased with my last visit and I'm actually coming back there in Q4, because we see things that.

Our or set to be done so.

I'm seeing a return in most of the countries in EMEA not not all of them. Some of them are still a little tougher I would say, Germany for instance.

But the U K.

A lot of political stuff going on there, but they are very interested in.

Steven Enders: And as we think about the free cash flow impact both from the core moving forward, I guess how should we think about the impact that those changes would be having to the cash flow. So there's a couple pieces to that question. So let me see if I can hit a couple pieces Steve. So the first is we made changes, we made some organizational changes in the in the last few months. And those, you know, those are, you know, there's never easy.

Try to figure out how to reframe those businesses to be more profitable.

Great and then maybe can you give an update on the government vertical what use cases, where you're best positioned for and just in general the level of deal activity that youre seeing in that vertical.

Yes, we're seeing a lot of activity in that vertical and we just hired our gen. Pratt a new senior executive who we announced who is pushing forward to really I think help us be much more effective.

Steven Enders: And we have a lot of empathy for the people that were impacted. Those changes have not actually resulted in any improvement in free cash flow for the business yet as you might imagine. And they will have a very small if any impact, even in Q4, that those the actions taken. However, they'll have a full year impact in 2024. So that's, so that's just something that's almost kind of on the shelf for an improvement in 2024.

In there in that vertical so I'm very excited I love the way she is coming up to speed. Those you know she's only been here a couple of months now.

What I've seen in that vertical is a lot of interest.

Our bellwether clients like the IRS.

B I and department of Justice, there Theres a lot of stuff going on and there are major needs in those businesses, but I use cases, we do is we handle serious workflows yard candidly. There are workflows that are kind of pushing ticket surround those aren't the peg a worthless Pedro more places where you actually pay.

Steven Enders: I wanted to also clarify one thing. When I talk about achieving $200 million in free cash flow, I'm actually referring to the new more traditional measure. If you would have taken to account one time items, et cetera, naturally under the way that I, we were previously talking about that number would be much higher. So just to clarify that because I know that was maybe a little, a little vague in my script.

A meaningful piece of work that has typically a lot of data associated with it that has to live over a long period of time, which is perfect for the government's environment and that needs a combination of automation auditing and improve citizen engagement, which is.

Steven Enders: I also say that we worked very hard and I think it seemed to be a great job to take and make the changes so that we could enter Q4 with the changes behind us. And we've basically done that. So I'm not expecting that, you know, we would, we would tell you next year the Q4 had been materially implemented by change. Right now, I would say we're at the heavy execution mode. Okay, very good to hear. Thanks for thinking the question. Thank you.

Now increasingly top of mind for for organizations. So government not just in the U S. But when I take a look at what's going on with some major major work we're doing in the UK when I look at what we're actually doing in Germany.

Trip I just took through APAC, we have.

More than a dozen government systems running in Singapore for instance.

Tijalin Bota: Our next question comes from Tijalin Bota with JP Morgan. Please go ahead. Hey, thanks guys, fitting the questions. Can I ask you about the term out performance, what drove that was, was federal part of it or anything else to kind of call out? Secondly, on cloud ACV growth, that seems to continue to decelerate and I hear your point on overall ACV growth being being more important. But as you launch infinity, 23, which adds kind of a lot of genetic capabilities on the cloud side, I believe, should we expect the cloud ACV growth to kind of cross at some point going forward?

We're seeing lots of things in every region that make me feel great about where can I go for government.

And just one additional comment on that if you think about eight a vertical so to speak that is more.

Prone to keep legacy applications plugged in but be able to try to modernize kind of at the user layer like it, which which really feeds well into purger, orchestrating and being able to interact and interface with.

With data assistant with systems that may be embedded in the government. I mean that is a that is a very strong value proposition to be able to improve the customer experience. The applications modernized go to cloud, but yet still interact with some of these systems that they really just the government really just can't mothball.

Alan Trefler: Yeah, so, so great question. So let's, so, when you see quarters, so if you look at, if you look at, you'll kind of newer organizations or even newer kind of activity that a that a client is doing, there is a higher amount of those that typically go peg of cloud. That is kind of because peg of cloud. When you have clients that may expand existing workflows, existing relationships, they may bring on a new project and they already are managing peg in a client cloud environment.

Alan Trefler: Naturally, that's the way that they would purchase or expand their relationship with peg of. So when you see quarters where you typically have a higher percentage of kind of term versus SAS, the primary driver for that is probably just a little bit outsized expansion with existing clients that may not, now many of our clients have both. So it kind of depends on which application environment there are, which set of use cases there are expanding.

Yeah.

Great. Thank you both.

Our next question comes from John Lucia with RBC. Please go ahead.

Okay.

Yeah.

Wonderful thanks, guys. So much for taking my questions.

I wanted to go back to better understand the macro impact and more specifically think about.

What our customers and partners, saying about large scale digital transformation, because because we've been hearing from partners that those are the things that a lot of customers I think dragging their feet on.

The uncertain macro.

Simultaneously I'd have to imagine has companies are contemplating their generative AI strategies.

The transformation to enable that and integrate workflows becomes more and more important. So maybe can you help us understand what you're seeing in terms of those and kind of weighing the puts and takes about both the near term macro as well as how your customers are kind of trying to position themselves long term to embrace generative AI.

Alan Trefler: But that's typically, it's really not, it's not a change in strategy or a change in buying behavior. It just comes down not to like how, how the difference between the two and in terms of like a net new workload versus existing workload. So that's kind of why you might see the drop. I would also say that based on just the vibrations in the market here as we enter Q4, I'd be surprised if we don't see a pickup in the cloud rates as we go into the next quarter or two.

And your role in enabling that and then I've got a quick follow up.

Sure so.

That's a good question I would say there are actually a couple of parallel threats deploy here. So there's no question, whether the macro it becomes a little more dour than organizations want to make sure what they're really investing it is practical and pragmatic. So they want to make sure that once they are going to see is gonna have results.

Alan Trefler: Yeah, I think that's, I mean, if you, if you, if you know that the difference between a Q4 typically had a little bit more client cloud license. And that's typically because that tends to be a period where you have clients kind of look at increasing their spend without stirring a renewal period. So just think about that kind of same activity can happen sometimes in other quarter. Yeah, understood, just to be clear, for this quarter in term, were there any very large deals that swung kind of the number towards the positivity one or two large deals?

And pack it is very very well equipped for that environment.

Switched ourselves away from the.

Boy, we help you really boost revenue is much more to add we're gonna help you make decisions better. We're gonna help you drive workflows better in ways that literally get our work done. So that's something that I think we're well suited for it.

Yes, a lot of buzz around generative AI.

But there's also a lot of what I would describe as clients gambling and experimentation customers are trying to figure it out.

And so a lot of them are trying they're buying they're getting developers to build things lots of lots of little Pops stirring, but they're also looking for the places in which gen. A all right.

Alan Trefler: No, it wasn't actually, no, in our movement, that's a very dear question, but no, Q3 was not skewed by like one deal or two deals of that. And also as we move a little bit more towards, as we refer to in a community, more consumption based, you do actually have more repeatable growth, and not as many very large kind of shock deals, clients are increasing over time, as opposed in our previous model, even in the professional model, they're tended to be kind of wailed as we used to call them.

Can be use to really drive that previous category that the category of really differently approaching pragmatic results and.

I've seen customers get really excited about what we can do I was visiting with clients, who put back to one of its call centers to be able to use what we call voice AI.

Unknown Speaker: Thank you very much.

Are you able to interpret it Phil and screens and do a whole variety of things to massively improve productivity, which cost theyre looking for but also significantly reduce it average handle time and improves the customer experience. So I think it's going to be interesting for the investment community to trying to delineate.

Jacob Roberge: Our next question comes from Jake Robert with Wind and Blair, please go ahead. Hey, thanks for taking the questions, Alan, when you're talking to customers, where are the dollars for AI spend coming from? Are they coming from existing IT budgets and maybe crowding out other areas of spend, are you seeing customers net new budget dollars, and potentially actually span their overall IT spend to account for those investments?

What action in the market is tied to the AI hype and the experimentation.

Which in some cases, there's not been a persistent and what's going to be tied to the real core systems evolutions theyre going to work now we're going to work into future years does that help.

Alan Trefler: So what's it about? And happily, we are seeing the innovation budgets starting to come forward. We've had, we've declined to actually just yesterday and now if they were putting another several hundred million dollars into the innovation budget, which is a great thing to hear from a client that we're currently selling to. So I think that it will affect some traditional spend for sure, but they're really looking to make sea changes in their business over the next couple of years, and they're all not wanting to fall behind.

Unknown Speaker: Very helpful.

Yes, absolutely very helpful. Thanks, Alan and then Ken just a follow up for you on on the gross margin side continue to show.

Pretty impressive cloud gross margin expansion.

How should we be thinking about terminal gross margins on the cloud side, especially as you do have a little bit of a melt multi tenancy around the core you are embracing kubernetes is this is this something that over time could become an 80% cloud gross margin business or is there anything structurally that might be holding you back from that thanks.

Ken Spilwell: Then ten, do you still feel peg is on track to complete the subscription transition this year, and then I know you put out this targets of being a rule of 40 business as you exit 2024 giving constant currency ACV growth, tick down to 10% this quarter. How should we think about the balance between growth and margin as you as you look to reach those targets? So we do believe what we've done with the subscription transition.

Yeah, Great question, So I will I will.

I will say this with a level of confidence but also.

To get there when we first started peg a cloud we were hoping to get to 70% and then when we got close to 65, we said we should be 75 and now that we're approaching 75 were saying we should be.

Ken Spilwell: In fact, I would even say it goes far as to say we're really done now. We've had a few years where our perpetual license revenue has been under five percent of our total book, sorry perpetual bookings have been under five percent for now probably four years maybe. And so I think the business has normalized much more naturally will have their ability quarter to quarter and you do have the unfortunate accounting of six or six, but that said take that aside, the billings, the consistency of billings, the predictability of billings, that is very much normalized in our business now.

So I do see a path to 80.

I don't know how hard it will be to get much above 80, it might be it might be surprisingly easy it might be terribly difficult, but I would say now that we're approaching 75, we definitely see a path to 80.

Alright wonderful. Thank you so much guys.

Hey, Rishi.

Our next question comes from Raimo <unk> with Barclays. Please go ahead.

Hey, Thank you.

This quarter, we obviously at the the term was much better than cloud.

Ken Spilwell: And then when you think about exiting 2024, I mean it certainly looks to us that 2024 would exit with a much higher contribution on the free cash flow than the growth just even where we are now naturally as a rule of 30 type company cash flow is higher than our growth rate. And I think it's being realistic about where we thought we would land. We always kind of have this model of 15, 25 kind of company was kind of a very nice sustainable model.

And you've kind of talked about some of the reasons there.

Do you think about the next steps for you guys know as we kind of get them maneuver.

Maneuvering through the downturn.

Is there any are there any.

<unk> to kind of double click more on the cloud side or is that do you think you will continue to stay on that the customer has a choice here.

Then one Ken for you like if I think about the margin progression, obviously very good progress this year.

We get ready to use for more investments, we'd potentially better times ahead, how do you think about that balance of growth versus investments for going forward. Thank you.

Ken Spilwell: And so we have a little work to do on the growth side, but I think we're well on track to actually be a mid to high 20 free cash flow company in 2024. That's our goal, you know, naturally we're still another quarter away from thinking about our guidance for 2024, but we've been very transparent with that's our objective.

So I'll take the first one and maybe Alan you can give your thoughts on AI and how it might help the margin profile of loss and our clients out of so so the first one the first piece we are fully committed to.

To peg a cloud as being what we really are excited about our clients leveraging that said we understand clients are on a journey to get there and we want to support them through that journey and in some cases that journey may take longer than we may hope that it would because they have unique.

Unknown Speaker: Thank you for taking my questions.

Kevin Kumar: Our next question comes from Kevin Kumar, with Godblum Tax. Please go ahead. Thanks for taking that question. Alan, you called out Amia in the script. So just curious if you can expand on the health of the customer base and those regions and just the overall kind of macro environment there. Thanks. Yeah, I would say that if you go back a couple of quarters, Amia was looking a little carpet.

<unk> needs and quite frankly, they they may not be ready to move to cloud at the pace that other companies well. So we are our commitment to paying a cloud is unchanged completely committed completely committed to scale it and modernize it makes the experience better for clients always automate etcetera improved margins, but that said we.

Alan Trefler: I was very pleased with my last visit, and I'm actually coming back there in Q4 because we see things that are set to be done. So I'm seeing a return in most of the countries in Amia, not all of them. Some of them are still a little tougher. I would say Germany, for instance, but the UK, you know, there's a lot of political stuff going on there, but they're very interested in trying to figure out how to reframe those businesses be more profitable.

We're not moving away from our ability to support our clients and client choice. So that's our that's our stance Alan you want to talk a little about AI and how that might fit into the margin profile. Yes. So I think that's going to be really interesting as we go forward and.

Unknown Speaker: Great.

Those of you who were there where you may recall that in my closing presentation at Peg a world, which was in June I stood up and I said, we're going to be using these new technologies.

Which many of which we've now released more coming as soon as Q1.

We're going to use these new technologies to do four things and just to re highlight the two that are relevant to your question. One is to put pegging your fingertips sort of radically change the training and education and ease of use profile of packet technology by using this.

Alan Trefler: And then maybe give, can you give an update on the government vertical, what use cases are your best position for? And just in general, the level of the activity that you're seeing in that vertical. Yeah, we're seeing a lot of activity in that vertical. We just hired a Jen Pratt, a new senior executive who we announced who is pushing forward to really, I think, help us be much more effective. In that vertical.

To really help people build and guy faster and the second is what we actually said we were going to report in June which as you know a little bit of time, but it's coming up upon us.

Alan Trefler: So I'm very excited and I love the way she's coming up to speed those. You know, she's only been here a couple of months now. What I've seen in that vertical is a lot of interest, you know, our bell weather clients, like the IRS, you know, and the FBI and Department of Justice. There, there's a lot of stuff going on, and there are major needs in those businesses. The use cases we do is we handle serious, you know, workflows.

I expected that we'd have doubled productivity of people building and Packer, which should open up a major stream of new opportunities for our clients to get results faster and better. The other piece is we also have many susie's sort of.

The accelerators that we built are these these.

Jen AI capabilities important new features.

Alan Trefler: You know, I can't believe there are workflows that are kind of pushing tickets around. Those aren't the Paggle workflows. The Paggle workflows is where you actually take a meaningful piece of work that has typically a lot of data associated in it and with it that has to live over a long period of time, which is perfect for the government's environment, and that needs a combination of automation, auditing, and improved citizen engagement, which is now increasingly top of mind for organizations.

That will also make the customers' operations more productive and improve their cost profile as well through the use of <unk>. So we have a lot that we're working on right now that I think is very very very much change that view as we enter 'twenty four and as we go through 'twenty four.

Okay. Thank you.

Our next question comes from Mark shut out with them.

Alan Trefler: So government's not just in the US, but when I take a look at what's going on with some major, major work we're doing in the UK, when I look at work, we're actually doing in Germany, the trip I just took to APAC. We have more than a dozen government systems running in Singapore. For instance, I've seen lots of things in every region that make me feel great about what better does for government.

From market.

Go ahead.

Hi, Thank you for taking my question Alan starting with you I appreciate your comments on generative AI.

Her remarks look I realize it's still early for that solution, but are you seeing the offering attract a like a new type of customer to the company.

Oh, Yes, hi.

I am I'm I'm seeing see.

Alan Trefler: And just one additional comment on that. If you think about a vertical, so to speak, that is more prone to keep legacy applications plugged in, but be able to try to modernize kind of as a user layer, which really feeds well into Paggle orchestrating and being able to interact in their face with data systems that may be embedded in the government. I mean, that is a very strong value proposition to be able to improve the customer experience, the applications, modernize, go to cloud, but yet still interact with some of these systems that they really just, the government really just can't mothball.

Remember, we have a target organization structure. So it's really a new type of buyer and size of the customer who I know if you want to really get a feel for this just go to that generally the way I page on peg a dot com that I mentioned, which we sit with business buyers you think of this as being in many ways.

A technical part of himself, but we sit with business buyers and we say why don't you put in.

Whatever workflows youre worried about or whatever whatever ways of doing business that you are concerned about the most interesting I added.

That's a sidebar as international banking conference a month ago, we had a senior executive from a large U K banks come in and ask to see what should that process be.

Unknown Speaker: Paul. Great, thank you both.

Closing the account of.

But politically exposed persons.

Rishi Jaluria: Our next question comes from Hishi Jaluria with RBC. Please go ahead. Oh, wonderful, thanks guys so much for taking my questions.

Read the news you may notice that the I believe it was the CEO of crudes was fired because they had done that inappropriate way and what came out.

Was mind blowing it completely changes the whole way you think about how you want to operate and develop processes. So.

Alan Trefler: Maybe I want to go back to better understanding the macro impact and more specifically think about what are customers and partners saying about large scale digital transformations because we've been hearing from partners that those are things that a lot of customers might be dragging their feet on given the uncertain macro. But simultaneously, I'd have to imagine as companies are contemplating their generative AI strategy, digital transformation to enable that and integrate workflows becomes more and more important.

Try it and we've got a whole generation of a whole new area of buyers, where we didn't use to have something like that that we could show up before and now we've got thousands and they're playing with it.

That's helpful. Thank you and then Tim on the on the go to market front.

I believe you noted organizational changes to the sales team that coincided with the workforce reduction I Wonder if you could just detail a little bit further what those org changes, where I assume you somewhat flattened the organization a sales organization.

Alan Trefler: So maybe can you help us, you know, understand what you're seeing in terms of those and kind of weighing the puts and takes about both the near term macro as well as how customers are kind of trying to position themselves long term to embrace generative AI, you know, and your role in enabling that. And then I've got a quick follow-up. Sure, so I did the question. I would say there are actually a couple of parallel threads to pull on here.

Well, what we're referring to the changes that we have previously disclosed we talked about mark which is to put a lot of the selling type resources closer to the client to put a lot of our tactical both pre sales and post sales resources.

Resources kind of closer together, so that we could actually have like kind of a.

Continuous engagement from pre sales to post go live we've looked at that.

Got it.

Alan Trefler: So there's no question when the macro becomes a little more dour that organizations want to make sure what they're really investing in is practical and threat-matic. So they want to make sure that what they're going to see is going to have results. And Pagan is very, very well at work for that environment. We've switched ourselves away from the, you know, boy, we help you really boost revenue much more to, hey, we're going to help you make decisions better, we're going to help you drive.

The state of the the hierarchy of the organization in terms of the layers the number of management layers, we've looked at.

Bringing people kind of it did similar type roles into a unified mission. Those are the types of activities that we have that really were part of what I was referring to.

And it's good to have a total of Argos Yep Yep, that's better than before.

Great. Thanks.

Alan Trefler: Work was better in ways that literally get the work done. So that's, you know, something that I think we're well suited for. There is a lot of buzz around generative AI, but there's also a lot of what I would describe as client dabbling and experimentation. Customers are trying to figure it out, and so a lot of them are trying, they're buying, they're getting developers to build things. A lot's a lot's a little pause stirring, but they're also looking for the places in which Gen AI can be used to really drive that previous category, that the category of really differently approaching pragmatic results.

Our next question comes from John My Pet's Securities. Please go ahead.

Great. Thanks for taking the questions guys I had another question about the head count reductions.

Are you guys planning to.

Rely more on partners now in light of reducing head count in sales and marketing.

And then just as far as.

It was helpful to hear but it's not going to add.

Free cash flow in 2023, and I'm not asking you to guide to 2024, but just curious what the potential dollar impact from the sales and marketing to be there.

You know the fact that you are going to be getting over $200 million in free cash flow potentially this year does that bring that three to five year $500 million free cash flow target closer to the three year end of that range. Thank you.

Alan Trefler: And I've seen customers get really excited about what we can do. I was visiting with a client who put Pagan into one of its call centers to be able to use what we call voice AI to be able to interpret and fill in screens and do a whole variety of things to massively improve productivity, which, you know, cost they're looking for, but also it's significantly reduced average handle time and improves the customer experience.

So I'll take the last part of your question.

But so the we are very we feel we feel great about the progress that the organization may in the results naturally some of the decisions, we made our heart and we but we have to make them.

And when.

Alan Trefler: So, you know, I think it's going to be interesting for the investing community to try to delineate what action in the market is tied to the AI type and the experimentation, which in some cases is not going to persist, and what's going to be tied to the real core systems evolutions. They're in the future years. Does that help? Yeah, absolutely, very, very helpful. Thanks, Alan.

When you think about when you think about an annual run rate impact of a change like that a rule of thumb that I always use is what the restructuring charges times four that's just a that's just an easy rule of thumb I would say most companies kind of have that have that type of situation. So if you look at our charge times four that's typically the runway.

Savings Youre, probably talking $60 million to $70 million of kind of annual kind of run rate impact from the change that we made last quarter.

Alan Trefler: And then can just a follow-up for you on the gross margin side. So you continue to show pretty impressive cloud gross margin expansion. How should we be thinking about terminal gross margins on the cloud side, you know, especially as you do have a little bit of melt multi-tenancy around the core. You are embracing Kubernetes. You know, is this something that over time could become? In 80% cloud gross margin business, or are there anything structure that might be holding you back from that?

And now when you talk about like us getting to $500 million solicit, where we're thinking we're going to be above two 500 still still has a ways away that said I do think it shows us a path to get to that number in.

It's certainly within the range of what we talked about if we can get there a year earlier, while that would be great.

But but right now we're quite frankly focused on Q4 of 2003 as you can imagine so so I don't want to get too far ahead of ourselves.

Alan Trefler: Thanks. Yeah, great question. So I will, I will say this with a level of confidence, but also, you know, we have to get there. When we first started paying a cloud, we were hoping to get to 70%. And then when we got close to 65, we said, you know, we should be 75. And now we're approaching 75, we're saying we should be 80. And so I do see a path to 80.

Oh, sorry, all right great I'll try to help me remind me remind me the first part of the question again, because I think I was out Alan question.

Yeah, no it was more just.

Turning to rely more so partners given the heartbeat.

Yes.

Alan Trefler: I don't know how hard it will be to get much above 80. It might be, it might be surprisingly easy. It might be terribly difficult, but I would say now that we're approaching 75, we definitely see a path to 80. All right, wonderful. Thank you so much, guys. Very good.

I don't think we're depending any more on partners as a result of reducing head count, but we are emphasizing the importance of partner engagement with our account teams. So your partners are really critical but it's not like we're gonna have to replace.

The changes we've made a lot of the changes we make frankly were a simplification of some of the management structures.

Reducing the number of Paolo organizations that candidly one of our clients would have to deal with as well as internal way that where we're creating silos.

Blair Abernethy: Our next question comes from Rainbow Lenshal with Barclays. Please go ahead. Hey, thank you. This quarter of the, we obviously have the term was much better than cloud. And you kind of talked about some of the regions there. If you think about these, the next steps for you guys now as we kind of maneuvering through the downturn. Is there any plans to kind of double click more on the cloud side? Or is that you think you will continue to stay on that the customer has a choice there?

Really really good about where we're at.

Great.

A follow up around Gen AI.

One of the customers.

<unk> spoken to over the last three or four months.

Noted that they don't even really know how Jenny I can be applied to their businesses yet. So they don't feel that they are really in a position to take.

Purchase and so I'm just curious if you're seeing somewhat of a pause here in terms of you know.

Actually.

Signing contracts.

And if that means that this can be a little bit more accretive to 2020 for 2023 and do you do you think that youll have any case.

Blair Abernethy: And then one came for you like if I think about the margin progression obviously very good progress this year, but as we get ready for more AI investments, we potentially better times ahead. How do you think about that balance of growth versus investments for going forward?

Case studies by let's say the next Investor Day next year around this customer saw.

Things to watch any isolation I'm just curious.

So looking at that.

Ken Spilwell: Thank you. So I'll take the first one and maybe Alan, you can give your thoughts on AI and how AI might help the margin profile of us and our clients. So the first piece we are fully committed to Pega Cloud as being what we really are excited about our clients leveraging. That said, we understand clients are on a journey to get there and we want to support them through that journey. And in some cases that journey may take longer than we may hope that it would because they have unique operational needs and quite frankly they may not be ready to move to cloud at the pace that other companies will.

Far down the road.

Hum.

I'm I'm quite confident we will have their studies for net stable world.

I think we could even start drafting the SKU one sounds like there'll be waiting for Q2.

The one of the things I said was that I think a lot of clients are experiment because they are not entirely sure where how they should use it or if there are risks if there aren't risks, but when you take a look at for example, if you do the journey I demo I talked about you'll see the clients see that and they say Oh, My God I've got a whole new way to.

Think about my reengineering and transformation process I can actually use.

Ken Spilwell: So our commitment to Pega Cloud is unchanged, completely committed, completely committed to scale it and modernize it, make the experience better for clients always automate, et cetera, improve margins. But that said, we are not moving away from our ability to support our clients and client choice.

A lot of collective wisdom to bring the best practices that at least stimulate might think it.

And I think it's an example of a very practical and everyone sees that says work so well see what you said.

Okay.

Great. Thank you guys.

Alan Trefler: So that's our stance. Alan, you want to talk a little bit about AI and how that might fit into the margin profile. Yes, so I think it's going to be really interesting as we go forward and those of you who are there may recall that in my closing presentation at Pega World, which was in June. I stood up and I said we're going to be using these new technologies which many of which we've now released more are coming as soon as Q1.

Our next question comes from Fred Meyer with Mccarron. Please go ahead.

Hey.

Good morning, Ken.

Wanted to ask on <unk>.

Sorry, if I'm, beating a dead horse here, but generally today isolated topic, primarily I'm curious here are you seeing any sort of change in priorities among your partners, where they're investing or allocating into their practices as we've seen total co pilots become more robust and become more more production.

Alan Trefler: We're going to use these technologies to do four things and just to re-highlight the two that are relevant to your question. One is to put pegging your fingertips. So to radically change the training and education and ease of use for a profile of packet technology by using this to really help people build and guide faster. And the second is what we I actually said we were going to report in June which is, you know, a little bit of time but I'm not upon us, that I expected that we'd have doubled productivity of people building in Becker which should open up a major stream of new opportunities for our clients.

So first of all I would like to counsel you to not casually use of course, a matter for us.

We never we never talk about that it works is et cetera.

Or what do we do with water or any of that any of those sorts of things, but having said that.

I looked through I think the more interesting.

Yeah.

That's all I'm, saying.

Right right.

Horses flying strikes I don't worry about that.

The partners just trying to figure it out too.

There's a sense, there's an enormous opportunity, but boy is this going to massively change.

How a lot of partners and deliver.

Delivering their projects.

Alan Trefler: To get results faster and better. The other piece is we also have many through these sort of accelerators that we build are these gen AI capabilities, important new features that will also make the customers operations more productive and improve their cost profile as well through the use of gen AI. So we have a lot that we are working on right now that I think is going to vary very, very much change the view as we enter 24 and as we go through 24.

We're going to be it's going to be very very large and so I think that by hooking up with the partners on an innovation agenda, which is where we're working with and being able to use and show them. Some of the tooling we have right.

Unknown Speaker: Thank you.

Like the demo.

We were able to get them excited about how they could reorient some of their efforts because frankly, we're in a period of <unk>.

A lot of discovery going on there's no question in my mind that this is extremely real but there's also no question, there's a high cause I pace.

Some of the short term tangible benefits and everybody kind of knows that is figuring it out but boy. This is gonna so radically change our technology as we go through 'twenty four.

Alan Trefler: Our next question comes from Mark Shapo with Luke Capone Market. Please go ahead. Hi, thank you for taking my question. Alan, starting with you, I appreciate your comments on generative AI in your remarks. And look, I realize it's still early for that solution, but are you seeing the offering attract like a new type of customer to the company? Yes, I am. I'm seeing the right, but we have a target organization structure.

It's actually an enormously exciting.

Alan Trefler: So it's really a new type of buyer inside the customer who, and if you want to really get feel for this, just go to that generative AI page on pegged.com that I mentioned, which we sit with business buyers, you think of this as being in many ways a technical part of the sale. But we sit with business buyers and we say, why don't you put in whatever work for your work or whatever, whatever ways of doing business that you're concerned about the most interesting I had at the cyber internet for banking conference some months ago.

Yeah.

Thank you.

Our next question comes from Blair Abernethy with Rosenblatt Securities. Please go ahead.

Excuse me Brad you May go ahead.

Sorry, Thanks for squeezing me in guys.

Ken could you just comment on the renewal environment given.

Given the given the consistent a weakness in the macro or difficulty in the macro just how did renewals trend in Q3, and what should we be expecting in Q4.

We haven't seen any noticeable change in the.

And the likelihood of a of a client.

You know continuing to stay in and invest and even grow in the applications that they have with peg us. So I mean naturally we you know we do have we do have clients that decide to go a different direction. We do have clients that have transformational changes in their business and unfortunately peg. It may not be part of that that does happen. We're just to happen happens every software company.

Alan Trefler: We had a senior executive from the large UK banks and asked to see what should the process be for closing the account of a politically exposed person. But the news you make now that I believe was a CEO of goods was fired because they had done that inappropriately. And what came out was mind blowing and completely changes the whole way you think about how you want to operate and develop processes. So we've got a whole generation, a whole new area of buyers where we can just have something like that that we could show before. And now we've got thousands in their place. That's helpful. Thank you.

But it's not something that theres been a noticeable change in in 2023.

I made comments about the macro environment, none of them are related to the renewal environment. Our customers really were fortunate in this sector of the client base that we've really been focusing on our.

Northeast SMB type businesses that are more likely to try to squeeze out their vendors are our customers are trying to squeeze that benefit.

Ken Spilwell: Then, Ken, on the go-to-market front, I believe you noted organizational changes to the sales team that coincided with the workforce reduction. I wonder if you just detail a little bit further what those org changes where I assume you somewhat flattened the sales organization? Well, we're referring to the changes that we had previously disclosed that we talked about, Mark, which is to put a lot of the selling type resources closer to the client.

Normally when we talk about the sales cycles Blair for anyone else still listening, it's really focused on net new workloads is where are you with existing its existing applications existing projects or are not you know they they might be leaning more into trying to push volume to automate.

Ken Spilwell: And to put a lot of our technical, both pre-sales and post-sales resources closer together so that we could actually have a continuous engagement from pre-sales to post-go-live. We've looked at the state, the hierarchy of the organization in terms of the layers, the number of management layers. We've looked at, you know, bringing people kind of to did similar type roles into a unified mission. Those are the types of activities that we have that really were part of what I was referring to. And it's good to have that. Yeah, that's very important. Great. Thanks.

Okay, great. Thank you and just Alan just following on your commentary in your prepared remarks about AI risks can you maybe just expand on that a little bit but you you've had.

Infinity 23 has been in the market for a month or so here, but just you know what what sort of.

Given the nature of your banks and insurance customers whats the what are they looking for in terms of managing these risks and is that.

Is it a scalable I guess when I look at our.

Look at the issues from a from a from a.

From a risk perspective.

Well I think we have a really good understanding of that and I'll just tap off a couple of places that we're really working one is to give the right people a chance to cure rate the output from AI before it actually gets used in a way that might be unpredictable and we show examples of that and what we've already really.

Joy Mari: Our next question comes from Joy, Mari, with Terp Security. Please go ahead. Great. Thanks for taking the questions, guys. I had another question about the headcount reductions. Are you guys planning to rely more on partners now in light of the process? We're reducing headcount in sales and marketing. And then just as far as it was helpful to hear that it's not going to add to free cash flow in 2023. And even not asking you to guide to 2024, but just curious what the potential dollar impact from the sales and marketing could be there.

And for everything that we're gonna be building over the next two releases in 'twenty, four or you're going to see more and more of that the second is we understand how to really eliminate hose and I was in Asia.

And being able to use both our best practices and client best practices to take the power generally they are.

But to make it operates in a very.

Trolled fashion I I'm not sure that everybody understands how to do that but we definitely do.

Joy Mari: And, you know, the fact that you're going to be getting over 200 million and free cash flow potentially this year. Does that bring that three to five year or 500 million dollar free cash flow target closer to the three year end of that range? Thank you.

That's a lot of what we're working on making sure. We're building in so that those knobs and dials are firmly in the players' hands and the third is and we've talked about this for three years, the whole ethical AI and biased checking and capability that we have around our statistically I think a lot of people with excitement about generative I should not forget the import.

Ken Spilwell: So I'll take the last part of your question, but so we are very, we feel we feel great about the progress that the organizations made in the results. Naturally, some of the decisions we made are hard and we, but we have to make them. And when you think about an annual run rate impact of a change like that, a rule of thumb that I always use is what the restructuring charge is times four.

It's a statistical way, which for example comes from our Decisioning and R.

Our process AI capabilities and those are also super important are those need different controls agenda.

And we've got we've already got tremendous things at Rosebel.

That's great. Thank you.

Ken Spilwell: That's just an easy rule of thumb. I would say most companies kind of have that type of situation. So if you look at our charge times four, that's typically the run rate savings. Here, you're probably talking 60 to 70 million dollars of kind of annual kind of run rate impact from the change that we made last quarter. And now when you talk about like getting to 500 million dollars, listen, we're thinking we're going to be up to 500 still is away the way that said, I do think it shows us a path to get to that number in, you know, and it's certainly within the range of what we talked about.

Sure.

Our next question comes from Austin called since then.

Securities. Please go ahead.

Great. Thanks for taking my question.

Just really quick a I've been looking at the I don't know that you mentioned, where do you see this technology in three to five years and what it's doing for our clients and adding value. Thank you.

Yeah, So what is going to do actually well before three years.

It's going to make it possible for.

Asked to take the knowledge of the Internet the clients best practices as they've identified and documented at the peg of best practices as our experts.

Ken Spilwell: If we can get there a year earlier, while that would be great, but right now we're quite frankly focused on Q4, 23 as you can imagine. I'm sorry, we remind me the first part of the question again, because I think I was out Alan question. Yeah, it was more just if you're planning to rely more so on partners, given the heartbeat, or do you think they can sell them more again? I don't think we're depending on any more on partners as a result of reducing headcount, but we are emphasizing the importance of partner engagement with our account teams, so partners are really critical, but it's not like we're going to have to replace the changes we made.

Drawing on our experience with multiple clients.

And the information in there Packer system themselves, so that they're able to use their own information and configurations and put those things together.

In a way that is candidly completely different than you would have to approach. This.

A year ago. So, it's it's going to really drive.

Much much greater duration.

Our clients operate with their customers and it's really going to help customers build for change which of course is our brand promise.

Great.

Well, thank you and let me thank everyone. We've run a few minutes over here.

Ken Spilwell: A lot of the changes we made, frankly, were a simplification of some of the management structures, and reducing the number of power organizations that candidly one of our clients would have to deal with as well as internally that we're creating silos, and I'm feeling really good about what we're able to do.

Very excited about both where we are and what we're going to be able to do going forward and I look forward to talking to all of you very soon thank you very much.

Joy Mari: Great, and there just was a follow up around Gen AI. Some of the customers we've spoken to over the last three, four months have noted that they don't even really know how Gen AI can be applied to their businesses yet, so they don't feel that they're really in a position to make a purchase. I'm just curious if you're seeing a lot of a pause here in terms of actually finding contracts, and if that means that this could be a little bit more creative to 2024 than maybe 2023.

This concludes today's conference call you may disconnect your lines perfect.

Thank you for your participation and have a great day.

Mhm.

Hum.

Hum.

Mhm mhm.

Hum.

Joy Mari: And do you think that you'll have any case studies by the next investor day next year around, you know, this customer saw ex-savings from our Gen AI solution, just curious if you think things will be that far down the road. Yeah, I'm confident we will have their studies for next fatal world. I think we could even start drafting them if you want, so like they'll be waiting for you to. One of the things I said was that I think a lot of clients are experimenting because they're not entirely sure where how they should use that and if there are risks of their interests, but when you take a look at, for example, if you do the Gen AI demo I talked about, you'll see the clients see that and they say, oh my God, I've got a whole new way to think about my reengineering and transformation process.

Mhm mhm.

[music].

Hum.

[music].

Joy Mari: I can actually use a lot of collective wisdom to bring me best practices that at least stimulate my thinking, and I think it's an example of very practical and everyone that sees that says why. So well, see what you said. Great, thank you guys.

Hum.

Frederick Havemeyer: Our next question comes from Fred Hevmeyer with McCauley, please go ahead. Hey, good morning, Alan. One of the ask on, I'm sorry, I'm being a dead horse here, a gendered AI related topic. Primarily and curious here, are you seeing any sort of change in priorities among your partners, where they're investing or allocating into their practices, as we've seen code and co pilots become more robust and become more more productionized.

Yeah.

[music].

Okay.

[music].

Alan Trefler: So first of all, I would like to counsel you to not casually use horse metaphors. We never, we never talked about dead horses in a second, or leading them to water or any of that, any of those sorts of things. But having said that, Bob, I look good, I look good more on this. And the voices flying strong, I'm going to worry about that. The partners are trying to figure it out too.

Alan Trefler: There's a sense as an enormous opportunity, but boy, is this going to massively change how a lot of partners end up delivering their projects? It's going to be very, very large. And so I think that by looking up at the partners on an innovation agenda, which is what we're working with, and being able to use and show them some of the tooling we have, like the demo, we're able to get them excited about how they could reorient some of their efforts.

Alan Trefler: So frankly, we're in a period of a lot of discovery going on. There's no question in my mind that this is extremely real, but there's also no questions of the height as I've paced some of the short term tangible benefits. And everybody kind of knows that and is figuring it out. But boy, this is going to so radically change our technology as we go through 24. It's actually enormously exciting.

Unknown Speaker: Thank you.

Blair Abernethy: Our next question comes from Blair Abernetti with Rosenwald Security. Please go ahead. Excuse me, Blair. You may go ahead. Sorry. Thanks for squeezing me in, guys. Can you just comment on the renewal environment, given the given the consistent weakness in the macro or difficulty in the macro? Just how did renewals trend in Q3 and what should we be expecting in Q4? We haven't seen any noticeable change in the likelihood of a client continuing to stay and invest and even grow in the applications that they have with Pegas.

Blair Abernethy: Naturally, we do have clients that decide to go a different direction. We do have clients that have transformational changes in their business. And unfortunately, Pegas may not be part of that. That does happen. We're just to have that with every software company. But it's not something that there's been a noticeable change in 2023. When I make comments about the macro environment, none of them are related to the renewal environment. Our customers, who really were fortunate in the sector, the client base that we've really been focusing on, are not these SMB type businesses that are more likely to try to squeeze out their vendors.

Blair Abernethy: Our customers are trying to squeeze out benefit. It's normally, when we talk about the sales cycles Blair done for anyone else still listening, it's really focused on net new workloads is where you would be existing. Existing applications, existing projects are not, you know, they may be leaning more into trying to push volume to automate.

Alan Trefler: Okay, great. Thank you. And just Alan, just following on your commentary to being, and you prepared remarks about the AI risks. Can you just expand on that a little bit, but you had, you know, Infinity 23 has been in the market for a month or so here, but just, you know, what, what sort of given the nature of your banks and insurance customers. What are they looking for in terms of managing these risks and is that, you know, is it scalable, I guess, when I look at, look at the issues from a, you know, from a risk perspective.

Alan Trefler: But I think we have a really good understanding of that. And I'll just tap off a couple of places that we're really working. One is to give the right people a chance to curate the output from AI before it actually gets used in a way that might be unpredictable. And we show examples of that and what we've already released. And for everything that we're going to be building over the next two releases in 24, you're going to see more and more of that.

Alan Trefler: The second is we understand how to really eliminate those in the coincinations. And being able to use both our best practices and client best practices to take the power of generative AI. But to make it that it operates in a very controlled fashion. I'm not sure that everybody understands how to do that. But we definitely do. And that's a lot of what we're working on making sure we're building in so that those knots and dots.

Alan Trefler: And the third is, and we've talked about this for two years, the whole ethical AI and bias checking capability that we have around our statistical AI. I think a lot of people with the excitement about generative AI should not forget the importance of statistical AI, which, for example, comes from our decisioning and our process AI capabilities. And those are all so super important. Those need different controls to generative AI. And so we've got, we've already got from industry as well. That's great.

Austin Cole: Thank you.

Austin Cole: Our next question comes from Austin called with fit and security. Please go ahead. Great. Thanks for taking my question. Just really quick. I've been looking at the AI demo that you mentioned.

Alan Trefler: Where do you see this technology in three to five years and what it's doing for clients and adding value. Thank you. Yeah. So what it's going to do actually well before three years is it's going to make it possible for us to take the knowledge of the internet. And the clients best practices as they've identified and documented it. The peg of best practices as our experts have drawn on our experience with multiple clients.

Alan Trefler: And the information in their Pegasystem themselves so that they're able to use their own information and configurations and put those things together in a way that is candidly completely different than you would have to approach this. It's a year ago. So it's going to really drive much, much greater iteration in how clients operate with their customers and it's really going to help customers build the change, which of course is our brand promise.

Alan Trefler: Thank you. And let me thank everyone we brought a few minutes over here. We're very excited about where we are and what we're going to be able to do going forward. And I look forward to talking to all of you very soon. Thank you very much.

Operator: This concludes today's conference call. You may just connect your lines at the time. Thank you for your participation and have a great day. .