Q1 2024 Pegasystems Inc Earnings Call

Please wait the conference will begin shortly.

[music].

Jamie: Thank you for standing by my name is Jamie and I will be your conference operator today at this time I would like to welcome everyone to the Peggy systems <unk> 'twenty 'twenty four earnings call and Web conference or webcast conference. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a quest.

Jamie: And the answer session, if you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad if.

Jamie: If you would like to withdraw your question Press Star one again, thank you.

Jamie: I would now like to turn the conference over to Peter Welborn, Vice President of corporate development and Investor Relations you may begin.

Peter Welburn: Thanks, Jeanie good morning, everyone and welcome to <unk> systems, Q1, 2024 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 1095, the words expects anticipates intends.

Peter Welburn: Plans believes will could should estimates may forecasting guidance or variations of such words and other similar expressions identify forward looking statements, which speak only as of the date. The statement was made and are based on current expectations and assumptions because such statements deal with future events. They are subject to various risks and uncertainties.

Peter Welburn: Actual results for fiscal year, 2024, and beyond could differ materially from the company's current expectations factors that could cause the companys results to differ materially from those expressed in forward looking statements are contained in the company's press release announcing its Q1 2024 results and in the Companys filings with the Securities and Exchange Commission.

Peter Welburn: <unk> its annual report on Form 10-K for the year ended December 31, 2023 and in other recent filings with the Securities and Exchange Commission investors are cautioned not to place undue reliance on such forward looking statements and then there are no assurances that the matters contained in such statements will be achieved although subsequent events may cause our view.

Peter Welburn: To change.

Peter Welburn: Except as required by applicable law, we do not undertaken specifically disclaim any obligations to publicly update or revise these forward looking statements whether as a result of new information future future events or otherwise and with that I will turn the call over to Alan Tressler, founder and CEO of <unk> systems.

Alan Trefler: Thank you Peter and thank you to all who have joined today's call. We're off to a strong start in 2024, our results reinforce the soundness of our go to market strategy and we continue to improve execution, resulting in strong cash flow and significant expansion of cloud gross margins. This.

Alan Trefler: We continued to grow by deepening and expanding client engagement throughout our target account model.

Alan Trefler: And to drive our Gen AI strategy forward with significant new and enhanced technology. The reaction, we're seeing from clients as they begin to experience and fully understand the potential impact of <unk>.

Alan Trefler: As from Memphis is open up a whole new avenues for collaborations between our clients and our partners as well as inside our client organizations across their teams and functions.

Alan Trefler: Even more excited than when we last talked about the incredible opportunity to leverage <unk> AI to drive success in 2024 and beyond.

Alan Trefler: And for our clients now to talk about the strategy as a reminder, when we apply to nai.

Alan Trefler: Using that to generate code, we're using it to optimize the business outcomes and best practices that our customers are able to follow.

Alan Trefler: Unique technical structure is built around business concepts and <unk>.

Alan Trefler: Enterprise processes their rules data models UI all organized into layers that can be built on a reuse. It turns out that this is a perfect architectural Virginia.

Speaker Change: I think it gets purger unique advantage because we directly officer.

Speaker Change: And optimize the business concepts themselves in a way that both business and.

Speaker Change: Understand.

Operator.

Speaker Change: [noise] architecture underneath it all.

Think of re readily copied or reproduced now.

Speaker Change: You may remember on our last call I talked about the major areas, where we believe our unique approach to Jenny will drive massive impacts for our clients and for us.

Speaker Change: Delivering solutions that will first bill double developer productivity and bring.

Speaker Change: <unk> to the fingertips of our customers that will ignite enterprise innovation through a blend of industry expertise.

Speaker Change: Expertise.

Speaker Change: Technology and client insights that will maximize revenue efficiency with real time optimization and personalization of our customer interactions.

Speaker Change: We will streamline work processes and customer experiences by giving the right people.

Access not just to real time enterprise knowledge, but to the processes that are necessary to get the results they want.

Speaker Change: We've continued to deliver on that strategy to help our clients unlock business transforming outcomes.

Speaker Change: This amazing technology will be showcased in parallel world.

Speaker Change: 10000 square foot innovation out featuring more than 200 interactive demos that we'll be showing off the latest.

Speaker Change: <unk> and how it will drive the future yes.

Speaker Change: And experience you can only have if you are there.

Speaker Change: Eric person.

Speaker Change: Now here are just a few highlights of the newest technology, you'll see in here.

Eric: First we announced.

Eric: Jeremy I blueprint in mid February and began immediately testing it with partners and clients.

Eric: We've now made it available to anyone who wants to use it since late March.

Eric: You are a pair clients are not all you have to do is go search on peg for peg a blueprint and Youll find our website really just have everything you need to get started.

Eric: Up and running in minutes.

Eric: No. Other competitor has anything that can do what we do and we think thats a major competitive advantage.

Eric: Nevertheless, the last month hundreds of clients.

Eric: Houses of blueprints together, we our clients and our partners are finding new ways to leverage this technology everyday and stretching the boundaries of what's possible.

Eric: Based on user feedback, we're enhancing continuously and because of the SaaS application. We're releasing new versions every one to two weeks and just the last few weeks. For example, we added new capabilities that allow you to import blueprints directly into a pegged application to allow you to really be game changing.

Eric: The work in seconds that otherwise would have taken weeks.

This enables people to iterate on application requirements and we generate blueprints as they have new ideas and experience what's going on in their collaborative efforts now more enhancements are planned in the coming weeks and months and alliances.

Eric: Clients and partners use it we're getting extreme.

Eric: <unk> ideas that are being.

Eric: Being met with great excitement by partners and customers and great excitement by US for example.

Eric: Things that we are seeing many customers looking to use blueprint to be able to reshape and modernize their legacy estate. Yes. These are large collections of often ancient applications, they're all customers want to try to drive down in terms of complexity.

Entity Blue.

Eric: Blueprint makes envisioning and designing for the replacement of legacy apps.

Eric: Different experience and incorporate design thinking our best practices.

Eric: And the near term.

Eric: Greg ceramic usage Gen AI to synthesize the information and make recommendations on how they can improve this is where our use of journey II I believe is truly groundbreaking as we allow enterprises to explore entirely new ways in the repositioning their business processes building on what is known on the Internet.

Eric: And what we have done over our decades of experience, making it dramatically easier to align business than it was.

Eric: We think it's a great opportunity for us and we'll be talking much more about it at <unk> World.

Eric: Now in addition to blueprint, we continue to introduce and enhance our existing suite of solution last week, we launched and contributed $24 one with transformative capabilities to help our clients become self optimizing enterprise.

Eric: Incorporating enterprise grade AI and automation this newest release empowers organizations to optimize service sales marketing and their business operations with new capabilities, including.

Eric: Jenny.

Eric: Buddy, which helps users synthesize knowledge scattered across content libraries to quickly answer employee and customer questions.

Eric: There are hundreds of thousands of chat bots out there. These days everybody has a couple of jackpots, but they don't include the kind of robust enterprise based capabilities organization space too.

Eric: Audit whats going on and provide the right security the ride control and be able to have confidence in the answers. That's what we focused our knowledge body on we're also introducing the <unk> Jimmy I coach, which serves as a real time mentor analyzing employee workflows and providing actionable insights to optimize.

Eric: Activity and we have new accelerated bundles, what we call Packer, Jenny I automate and peg a journey on annualized which surface and summarize insights about cases data meetings conversations to make it easier and faster for salespeople and service agents to follow up and engage with prospects and customers.

Eric: As well as many many other enhancements.

Eric: We see a terrific long term growth opportunities as these capabilities are the ones that are coming help clients adopt our software more quickly and five new used cases for Becker.

Eric: Now I've talked about pedal a bit.

Eric: Aren't you too.

Eric: Really consider strongly coming to Las Vegas, and joining us because it is going to be terrific.

As exciting as the new product announcements will be showing are what really central figure world from many other tech conferences are incredible.

Eric: The world.

The very deep examples of how our clients are using the software the data themselves going to the Mega rule and talk about them in ways that where candidly we couldn't talk about it because we have to maintain our client confidentiality, but when they get up and speak about it we think is wonderful.

Eric: We are honored that they are willing to discuss some of the amazing things that theyre doing.

Eric: The customers, who accounting will be for example T mobile.

Eric: Who will talk about their focus on customer centricity the customer service overall, not just lead to improve efficiency, but massively improved customer satisfaction and how AI driven insights are empowering their frontline staff to build stronger relationships.

We will also talk about the key success metrics that they are achieving provide insights into the ambitious AI plants.

Eric: <unk> Dot com will describe how we are leveraging capabilities to meet the evolving travel needs. While also maintaining their super high customer satisfaction levels Tiger supports their customer centric approach, ensuring the thousands of agents around the globe can deliver unparalleled experiences to travelers.

Eric: Worldwide <unk>.

Eric: National Australia Bank will explain how they're bringing together the left brain of analytics.

Eric: Bringing creative thinking to build real relationship led personal experiences relevant in the moment in any channel.

Eric: Dave a fascinating story about how the blend of data.

Eric: Extra export irritation, and peg a technology are disrupting conventional approach its communications and how they've users to delivered $91 million customer engagements and a 40% increase in customer successful engagements in just over a year.

Eric: And then finally just to make another one.

Appointment of Veterans Affairs, who will discuss how they're modernizing their benefits program for veterans and spouses children and caregivers to improve responsiveness and the essential program.

Eric: As a reminder, we've scheduled our investor session for Monday June 10th local time is new and we are hoping to see you there.

Eric: We have received by now and you haven't let us know and be sure to register its going to be a fabulous event.

Eric: So in summary, our <unk>.

Eric: Go to market strategy focused model are deepening relationships driving good results, including a healthy balance of growth and profitability. We continue to focus on leveraging the latest gen AI capabilities to deliver advantages to our clients.

Eric: <unk> has been through massive technology transitions through our 40 year history, we've done.

Eric: Five completely architectures of what we've done and I believe we are perfectly positioned.

Eric: To incorporate gen AI into the architecture, we have and the way that we're going to deliver for our clients. This experience of being able to manage through and well an extreme change of the technical environments is up I think one of the reasons that gen AI is going to be especially advantageous.

Eric: To us our newest offerings are truly enhances our relationships with our customers and our clients relationships with their customers I think we have a huge opportunity to drive success in 2024 and beyond is going to be very platform.

Eric: To provide color on our financial results, let me turn it over to our COO and CFO Ken Stillwell.

Thanks Alan.

Kenneth R. Stillwell: Very excited about our start to 2024 annual contract value of our ACB increased 9% year over year, which is where we thought it would be in Q1 as I explained on our last earnings call ACD growth. Thanks to a tough year over year compared to first quarter of 2024, because the net.

Kenneth R. Stillwell: Net HCV, adding Q1 of 2023 was unusually strong and as a result, we knew the ACB growth rate will be at the lowest point as the year began peg a cloud drove the majority of net new ACD AD in the first quarter and take a cloud ACD, which is approaching 600.

<unk> million dollars continues to be the largest and fastest growing portion of HCV.

Kenneth R. Stillwell: Moving to free cash flow when we started our subscription transition in late 2017, we knew the transition would over time resulted in more predictable subscription billings and free cash flow now that the transition is complete it's great to see that vision become reality, we generated $180 million.

Kenneth R. Stillwell: Free cash flow in the first quarter, a record by far for any quarter in the history of the company.

Kenneth R. Stillwell: Our strong free cash flow performance was driven primarily by three factors first ACD grew by about $100 million year over year ACD is a strong proxy for subscription billings. So an increase in ACD will naturally drive a material increase in subscription billings second we're doing.

Kenneth R. Stillwell: Really well on our cost management initiatives, which improved operating leverage again in the quarter for example, sales and marketing expenses decreased by about 15% year over year in the first quarter of 2024 versus the same period one year ago.

Kenneth R. Stillwell: Third many of our deals closed and renewed in the last quarter of the year, which means collections.

Kenneth R. Stillwell: Often occur through the first quarter of the year, our fast start on free cash flow generation may be a little surprising to many of you and it's quite frankly, a little better than we had even expected but nationally starting off strong gives us that much more confidence in our progress to improve margins and our cash flow momentum.

Kenneth R. Stillwell: Moving on to margins Peg a cloud gross margin increased to 77% a 500 basis point increase from a year ago and Thats just awesome to see the continued improvement the improvement was driven by three factors first the increasing scale of peg, a cloud, which grew 21% year over year.

Kenneth R. Stillwell: $131 million in revenue in Q1 second more active planning and management of our global cloud capacity to optimize performance and to reduce costs third and increasing use of kubernetes for cloud scalability and efficiency.

Kenneth R. Stillwell: Now that we've released hanger jet AI blueprint in Q1, I'd like to share some thoughts on the timing of journey II monetization in 2024, we expect peg a journey I blueprint will both change the way we engage with our clients and also decrease the time it takes for clients to envision and build new applications on the peg a platform and we.

Kenneth R. Stillwell: We're already seeing evidence of that that we're still in the early days of jet AI. We can see that this innovation is going to be central to our clients' buying decisions.

The unit, we complement the statistical AI, we've delivered for decades, we expected jet AI would be central to our products as we put our 2024 plan together and Thats what were seeing thus monetization will be as a result of improvements in the selling cycle, which we believe will be fully realized in 2025.

Jeanne: Thank you for standing by. My name is Jeanne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pegasystems 1Q 2024 earnings call and web conference or webcast conference. All lines have been placed on mute to prevent any background noise.

I have received feedback that it's helpful. When I provide thoughts on modeling our business. So today I'll continue to share. Some insights first we expect our ACD bookings will be more backend loaded this year and the majority of our subscription billings will occur in Q1 and Q4, so for the <unk>.

Jeanne: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the conference over to Peter Welburn, Vice President of Corporate Development and Investor Relations. You may begin.

Kenneth R. Stillwell: Full year, we expect our cash flow to be strongest in the first and last quarters of the year.

Peter Welburn: Thanks, Jeannie. Good morning, everyone, and welcome to Pegasystems' Q1 2024 Earnings Call. Before we begin, I would like to read our Safe Harbor Statement. Certain statements contained in this presentation may be construed as forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. The words expects, anticipates, intends, plans, believes, will, could, should, estimates, may, forecasts, and guidance, or variations of such words and other similar expressions identify forward-looking statements that speak only as of the date the statement was made and are based on current expectations and assumptions.

Second our sales and marketing expenses are slightly higher in the second quarter as a result of peg a world cost our annual client conference which occurs in June.

Peter Welburn: Because such statements deal with future events, they are subject to various risks and uncertainties. The actual results for fiscal year 2024 and beyond could differ materially from the company's current expectations. Factors that could cause the company's results to differ materially from those expressed in forward-looking statements are contained in the company's press release announcing its Q1 2024 results and in the company's filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2023, and in other recent filings with the SEC.

Peter Welburn: Investors are cautioned not to place undue reliance on such forward-looking statements, and there are no assurances that the matters contained in such statements will be achieved. Although subsequent events may cause our views to change, except as required by applicable law, we do not undertake and specifically disclaim any obligations to publicly update or revise these forward-looking statements, whether as a result of new information, future events, or otherwise. And with that, I will turn the call over to Alan Trefler, founder and CEO of Pegasystems.

Kenneth R. Stillwell: Third we expect term license revenue will decline year over year at 2024 as peg a cloud continues to become an increasingly larger portion of our overall business and this is certainly connected to jet AI momentum.

Kenneth R. Stillwell: As cloud accelerates an increasingly smaller part of our growth is coming from subscription.

Kenneth R. Stillwell: Revenue subscription license revenue excuse me, which is term.

Kenneth R. Stillwell: And maintenance revenue both of those are expected to continue to decline as a percentage of our revenue and also subscription license I E term revenue, it's going to decline year over year. In fact term license revenue will likely be less than 25% of our full year.

Kenneth R. Stillwell: Our revenue and it will be backend loaded, but that's okay, because it doesn't impact cash flow timing and we will gladly trade term license revenue variability and apply for having a business accelerate faster to the cloud.

Kenneth R. Stillwell: Turning to our capital structure as many of you are aware, we have about $500 million of remaining outstanding convertible debt.

Seven 775 interest rate debt matures in March of 2025, we continue to evaluate alternatives, but at the end of Q1, our total cash and investments balance was about $619 million. So we are now at a net cash positive position.

Alan Trefler: Thank you, Peter, and thank you to all who have joined today's call. We're off to a strong start in 2024. Our results reinforce the soundness of our greater market strategy, and we continue to improve execution, resulting in strong cash flow and a significant expansion of Pegacloud Gross Marks. This quarter, we continue to grow by deepening and expanding client engagement throughout our target account model and driving our Gen-AI strategy forward with significant new and enhanced technology.

Kenneth R. Stillwell: When factoring in pay off the convert.

Kenneth R. Stillwell: We are still waiting for the opinion from the Virginia Appeals Court, we don't know when that court wish you an opinion, but of the cases, our panel of judges has hurt the majority of those cases have been decided.

Kenneth R. Stillwell: I also would like to provide you with a brief update on the shareholder class action suit that was filed in 2022, we reached an agreement to resolve that.

Kenneth R. Stillwell: Shareholder suit for $35 million.

Alan Trefler: The reactions we're seeing from clients as they begin to experience and fully understand the potential empathy of Pega Gen-AI are tremendous. It's opened up whole new avenues for collaboration between us, our clients, and our partners, as well as inside our client organizations across their teams and functions. I'm even more excited than when we last talked about the incredible opportunity to leverage Gen-AI to drive success in 2024 and beyond, for PEGA, and for our clients. Now, to talk about the strategy, as a reminder, when we apply GenAI, we're not using it to generate code.

Kenneth R. Stillwell: We look forward to putting that distraction and the associated legal fees behind us.

Kenneth R. Stillwell: I'm looking forward to seeing all of you would peg a world, which is being held at the MGM Grand in Las Vegas again. It starts on Sunday June night will hold our investor session as Alan mentioned on Monday June 10th.

Speaker Change: Sean <unk>.

Speaker Change: To register for the Investor session. Please E mail peg at Investor Relations at <unk> Dot com.

Our reach out to Peter Welborn.

Speaker Change: Featured speakers during our Investor session will include our founder and CEO, Alan traveler as well as other members of our senior leadership team. We will provide updates on our long term strategy, our latest product innovation and our go to market approach.

Alan Trefler: We're using it to optimize the business outcomes and best practices that our customers are able to follow. Our unique technical structure is built around business concepts. An enterprise's processes, their rules, data models, and UI, all organized into layers that can be built on and reused. It's turned out that this is a perfect architecture for GenAI, and I think it gives Pega a unique advantage because we directly author, enhance, and optimize the business concepts themselves in a way that both business and IT can understand and collaborate on. And it's a patented architecture underneath it all that I don't think can be readily copied or reproduced.

Speaker Change: Conclusion.

Speaker Change: I feel really really great about running a sound business, our strong cash generation in Q1 demonstrate demonstrates the power of a SaaS business and we're in a great position to accelerate our profitable growth from here on.

Speaker Change: Operator, please open the line for questions.

Speaker Change: Thank you the floor is now open for questions. If you have dialed in and we'd like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue.

If you would like to withdraw your question simply press Star one again.

Speaker Change: If you are called upon to ask your question and they are listening via loud speaker on your device. Please pickup your handset and ensure that your phone is not on mute when asking your questions.

Alan Trefler: Now, you may remember on our last call, I talked about the major areas where we believe our unique approach to Gen AI will drive massive impacts for our clients and for us, delivering solutions that will first double developer productivity and bring PEGA skills to the fingertips of our customers, that will ignite enterprise innovation through a blend of industry expertise. PegaExpertise, PegaTechnology, and ClientInsight, which will maximize revenue and efficiency with real-time optimization and personalization of customer interactions.

Speaker Change: Your first question comes from the line of Raimo <unk> with Barclays. Please go ahead.

Raimo: Thank you Congrats from me two quick questions one for you.

Raimo: Maybe it's actually for both of you if you think about the monetization fee.

Raimo: I understand you correctly.

Raimo: That's the.

Speaker Change: Adoption of <unk>.

Speaker Change: Hey, quite nicely is that all of the main things we had to give you should think about monetization or is that also kind of skus that have more AI versus let's say either kind of tried to monetization there.

Speaker Change: A question one question two would be for Ken.

Alan Trefler: And we'll streamline work processes and customer experiences by giving the right people instant access, not just to real-time enterprise knowledge, but to the processes that are necessary to get the results they want. We've continued to deliver on that strategy to help our clients unlock business-transforming outcomes. This amazing technology will be showcased at Pegawatt, in our 10,000 square foot innovation hub featuring more than 200 interactive demos that will be showing off the latest in AI advances and how they will drive the future. It's an experience you can only have if you're there in person.

Speaker Change: The cash flow you, obviously gave us last quarter like annual cash flow idea.

Kenneth R. Stillwell: With a very strong Q1, we still have like some timings that helps you.

Kenneth R. Stillwell: How do you feel about the full year number thank you.

Kenneth R. Stillwell: So we're.

Speaker Change: Permeating our products with Jenny.

Speaker Change: So that this is really becoming.

Speaker Change: So I'm, saying.

Speaker Change: I think it is going to be a reason that people say boy, we can get this to work faster better.

Speaker Change: And more broadly in the organizations and that's the way, we monetize things and don't want to get a feel for that just drive blueprint make perfect sense to you of duress.

Speaker Change: Yeah on the on the question about annual cash flow I think thats, probably a a very common questions on mind that lots of people listening to this call, but it's our results. So it's a great question.

Alan Trefler: Now, here are just a few highlights of the newest technology you'll see and hear at Pegawatt. First, we announced PEGA GenAI Blueprint in mid-February and began immediately testing it with partners and clients, and we've now made it available to anyone who wants to use it since late March, whether you're a PEGA client or not. All you have to do is search on PEGA for PEGA Blueprint, and you'll find our website really just has everything you need to get started. You can be up and running in minutes.

Speaker Change: I'm generalizing a bit but if you think about Q1 and Q4 being big cash collection quarters are Q2, and Q3 being more subdued and quite frankly, not significant cash generation to get more than half of your full year target in the first quarter is certainly a great start.

Speaker Change: I wouldn't go as far as to say that changes our view for the year I would say what that does is really reinforce the momentum that we're on and the confidence that we have for the full year, but it is it's great naturally you always want cash flow as soon as you can get it in the year, but but.

Alan Trefler: I think that no other competitor has anything that can do what we do, and we think it's a major competitive advantage. In the last month, hundreds of clients have generated thousands of blueprints. Together, we, our clients, and our partners are finding new ways to leverage this technology every day and stretching the boundaries of what's possible. Based on user feedback, we're enhancing it continuously. And because it's a SaaS application, we're releasing new versions every one to two weeks.

Speaker Change: It wasn't it was expected in Q1, and Q4 would be bigger collection quarters.

Speaker Change: Okay perfect. Thank you.

Speaker Change: Yes.

Speaker Change: Your next question comes from the line of Kevin Kumar with Goldman Sachs. Please go ahead.

Kevin Kumar: Alright, Thanks for taking my questions I wanted to touch on blueprint.

Alan Trefler: In just the last few weeks, for example, we added new capabilities that allow you to import blueprints directly into a Pega application to allow you to really do game-changing work in seconds that otherwise would have taken weeks. And this enables people to iterate on application requirements and regenerate blueprints as they have new ideas and experience what's going on in their collaborative efforts. Now, more enhancements are planned in the coming weeks and months, and as more clients and partners use it, we're getting a stream of additional ideas that are both being met with great excitement by the partners and customers and great excitement by us.

Kevin Kumar: The interest is pretty strong there.

I have gone on in that mode as well.

Kevin Kumar: And it looks great.

Kevin Kumar: Alan just curious about I guess, the second order impacts of just being able to speed up the design process with blueprint are you seeing any early indications that this fit.

Kevin Kumar: Drive more applications being developed on the platform.

Alan: Yes, we are I mean, we're seeing.

Alan: Norm is interest from clients and from partners.

Alan: We see blueprints being.

Alan: Included now in RFP responses.

Alan: It's that are going to customers. So it's up.

Alan: It's a big step forward.

Alan Trefler: For example, we think that we're seeing many customers looking to use Blueprint to be able to rethink and modernize their legacy estate. These are large collections of often ancient applications that all customers want to try to drive down in terms of complexity and quantity, and Blueprint makes envisioning and designing for the replacement of legacy apps easier.

Alan: Candidly a step that's only going to get bigger as we continue to add in some of the features that are planned for even now.

Alan: Pedro World, So we're really really seeing.

Alan: Concrete usage with clients I also think this opens the door to peg are being seen as an engine for legacy transformation.

Alan: We talk to.

Sure.

Alan: People in the Tech World, who have literally thousands of applications.

Alan Trefler: It incorporates design thinking and best practices from both BEGA and the Internet, integrates them, and uses Gen-AI to synthesize the information and make recommendations on how they can improve. This is where our use of Gen-AI is truly groundbreaking, as we allow enterprises to explore entirely new ways of imagining their business processes. Building on what is known on the internet and what we have done over our decades of experience, making it dramatically easier to align business and IT. We think it's a great opportunity for us, and we'll be talking much more about it at Pegawatt. Now, in addition to Blueprint, we continue to introduce and enhance our Infinity suite of solutions.

Being able to use a technology like this to help take them out faster and better get rid of some of the technical depth hook them altogether in what we call. It process fabric, which is a technology we've talked about in the past, but lets you have multiple paid apps or act as one.

I think it's a very appealing message, even though it's early days so we'll see.

Alan: Just about this.

That's great and then Kevin one for you you called out sales and marketing and <unk> from year over year decreases in expenses, there and just curious kind of where youre seeing opportunities there.

Alan: Reduce expenses within that Oregon should we expect that to kind of continue throughout the year.

Alan Trefler: Last week, we launched Infinity 24.1 with transformative capabilities to help our clients become self-optimizing enterprises. Incorporating enterprise-grade AI and automation, this latest release empowers organizations to optimize service, sales, marketing, and their business operations, with new capabilities including The PEGA GenAI Knowledge Buddy, which helps users synthesize knowledge scattered across content libraries to quickly answer employees and customer questions.

Kevin Kumar: Yes so.

Kevin Kumar: You bet.

A little bit of a stabilization point in terms of the run rate of expenses right now because we essentially normalize some of the some of the restructuring that we did last year.

Kevin Kumar: Gross margin definitely will continue to improve and peg a cloud because theres a lot of things that we're implementing that are not actually not have not.

Kevin Kumar: Ben.

Kevin Kumar: Impacting margin to the positive yet and we'll continue to think about or think about our go to market cost is less around where we can take cost out and more about leveraging that resource pool to accelerate growth. Kevin we were really we have a great growth opportunity acceleration through the rest of the year, we feel very confident that we were.

Alan Trefler: Everybody has a couple of chatbots, but they don't include the kind of robust enterprise-based capabilities organizations need to audit what's going on, provide the right security, and so on. That's what we focus our knowledge base on. We're also introducing the Pegagen AI Coach, which serves as a real-time mentor, analyzing employee workflows and providing actionable insights to optimize productivity. And we have new accelerator bundles, what we call Pegagen AI Automate and Pegagen AI Analyze, which surface and summarize insights about cases, data, meetings, and conversations to make it easier and faster for salespeople and service agents to follow up and engage with prospects and customers, as well as many, many other examples.

Kevin Kumar: We'll accelerate growth in Gen. AI is this really just a massive catalyst for.

Pushing productivity and our go to market teams because of that speed to IEA ship and the speed to getting clients see the vision the speed to getting them to realize their architecture designs in their workflows and actually now with the latest changes to blueprint improvements a blueprint to actually get the peg application started so.

Kevin Kumar: We feel like that is just such.

Kevin Kumar: A.

Kevin Kumar: A tailwind so to speak to sales productivity, we're focused on really putting those putting those resources in the right place to accelerate scale and become more productive as opposed to a cost cutting exercise.

Speaker Change: That makes sense. Thank you both.

Alan Trefler: We see a terrific long-term growth opportunity as these capabilities help clients adopt our software more quickly and find new use cases for Packard. Now, I've talked about Pegaworld a bit, and I want you to really consider strongly coming to Las Vegas and joining us, because it is going to be terrific. As exciting as the new product announcements we'll be showing are, what really separates Pegaworld from many other tech conferences are the incredible, real-world, very, very deep examples of how our clients are using the software that they themselves bring to Pegaworld. And talk about them in ways that, well, candidly, we couldn't talk about them, because we have to maintain our clients' confidentiality, but when they get up and speak about it, we think it's wonderful.

Speaker Change: Your next question comes from the line of pendulum Bora with J P. Morgan. Please go ahead.

Pinjalim Bora: Great. Thank you for taking the question just two parts one question from me.

Are you starting to see some of the G&A and capabilities that you're introducing in cloud drive customer conversations around cloud migrations from the self managed.

Speaker Change: Uh huh.

Pinjalim Bora: Product that you have and then I guess cloud ACB growth seems like has kind of reached a low point I'm wondering if it is kind of at the trough level at this point as blueprint and other.

Capabilities drive consumption going forward.

Speaker Change: Let me take the second part of that we do think Q1 was a trough for ACD growth. We had thought that that was the case when we when we guided we had said that really in Q1 I think most of you know that because we saw the models that all of you had built in so I think you're definitely hurt us on that.

Alan Trefler: And we are honored that they're willing to discuss some of the amazing things that they're doing. Some of the customers who are coming will be, for example, T-Mobile, who will talk about their focus on customer centricity, the customer service overhaul that not just led to improved efficiency but massively improved customer satisfaction, and how AI-driven insights are empowering their frontline staff to build stronger relationships. We'll also talk about the key success metrics that they've achieved and provide insights into their ambitious AI.

Speaker Change: In terms of the ability for cloud migrations, and Jen AI and the connection Allen thoughts on that yes.

Speaker Change: We've hoped.

Speaker Change: Sure.

Speaker Change: Our general AI capabilities, which are unfolding so quickly.

Speaker Change: <unk> cloud.

Speaker Change: <unk> only makes sense because.

Speaker Change: We're able to roll out so much more efficiently and effectively and we definitely see customers being interested in moving to bigger crowd, but historically because I think the structure both cost effective but also offers some scalability and other features.

Alan Trefler: Booking.com will describe how they are leveraging Pega capabilities to meet evolving traveler needs, while also maintaining their super-high customer satisfaction levels. Pega supports their customer-centric approach, ensuring that thousands of agents around the globe can deliver unparalleled experiences to travelers worldwide.

Speaker Change: They may have difficult emulating in other environments. So we've historically seen that there was strong interest we're definitely seeing the gen II makes that interesting.

Speaker Change: More critical for customers reward already underway.

Alan Trefler: National Australia will explain how they are bringing together the left brain of analytics and the right brain of creative thinking to build real relationship-led personal experiences relevant in the moment across any channel. They have a fascinating story about how the blend of data, Creative Experimentation, and Pegatechnology is disrupting conventional approaches to communications and how they've used this to deliver 91 million customer engagements and a 40% increase in Customer Success Engagements in just over a year. And finally, just to pick another one, the Department of Veterans Affairs will discuss how they're modernizing their benefits program for veterans, spouses, children, and caregivers to improve You should have received your invite by now.

Speaker Change: One last point on that.

Speaker Change: The.

Speaker Change: About two thirds to 75% of our clients have seen pegged our cloud now meaning that they have at least one application or one environment for paying a cloud as that.

Speaker Change: It's a natural momentum that as clients have one application on peg a cloud they look at moving all of our other applications to peg a cloud. So you do have a little bit of a flywheel on people buying more peg a cloud more clients getting exposed to peg a cloud, which then will lead to the migration discussion that you mentioned so I do think it's up I do think it's.

Speaker Change: It's really a good time for that to happen now.

Speaker Change: Got it thank you.

Speaker Change: Yes.

Speaker Change: Your next question comes from the line of Richie Deloria with RBC capital markets. Please go ahead.

Rishi Nitya Jaluria: Hi, Thanks, This is rich Poland on for <unk>. Thanks for taking my question.

Rishi Nitya Jaluria: So I guess first one Ken just to clarify I believe you said AI contribution embedded in the full year guide when it was provided was zero. So if we take a step back.

Alan Trefler: If you haven't, let us know, and be sure to register. It's going to be a fabulous event. So, in summary... Our go-to-market strategy focused model is deepening relationships and driving good results. We continue to focus on leveraging the latest GenAI capabilities to deliver advantages to our clients. You know, Pega has been through massive technology transitions through our 40-year history. We've done five.

Rishi Nitya Jaluria: Can we just think about what needs to happen to achieve the guidance and what kind of early adoption of blueprint blueprint accelerating the adoption curve be upside to those numbers.

Kenneth R. Stillwell: Yeah. So yes. Your question is you guided at the beginning of the year, 11% ACB growth and we did say that we did not believe that factored in a noticeable impact to HCV from Gen. II. Youre question is if there was a notice of Westpac would that provide upside to the growth number.

Alan Trefler: [inaudible] Incorporate GenAI into the architecture we have and the way that we're going to deliver for our clients. This experience of being able to manage through and well in extreme changes in the technical environments is, I think, one of the reasons that GenAI is going to be especially advantageous to us. Our newest offerings are truly enhancing relationships with our customers and our clients' relationships with their customers. I think we have a huge opportunity to drive success in 2024 and beyond, and it will be very transformative. Now, to provide color on our financial results, let me turn it over to our CLO and CFO, Ken Stillwell. Ken? Thanks, Alan. I'm very excited about it.

Kenneth R. Stillwell: And if that's the sense that that's the sense of the question, which is what I read I would say, yes significantly faster adoption of Gen AI and influence into this into the into the pipe and the conversion of pipe is certainly an upside opportunity.

Speaker Change: Okay, Great. That's helpful. And then one for Alan you mentioned the industry expertise as kind of a differentiator around AI can you just kind of expand on that a bit and just what youre seeing right now in terms of use cases in specific industries or just maybe any.

Alan: Main expertise they are infusing into some of the solutions there.

Alan: Sure, we took our industry experts and.

Alan: And we have them pull together.

Alan: The templates that made most sense for common industry problems in the areas, where we have a lot of experience that we have a lot of experience.

Kenneth R. Stillwell: Thanks, Alan. I'm very excited about our start to 2024. Annual contract value, or ACV, increased 9% year-over-year, which is where we thought it would be in Q1. As I explained on our last earnings call, ACV growth faced a tough year-over-year comparison in the first quarter of 2024 because the net ACV add in Q1 of 2023 was unusually strong. And as a result, we knew the ACV growth rate would be at its lowest point as the year began.

Alan: Banking insurance and healthcare and government and you can see that if you use blueprint we have before.

Alan: Before we go out and begin using the Gen AI content into the analysis you can see our standard templates actually visible in the blueprint choices you may So if you say hey here.

Alan: Game services credit card and I wanted to figure out where collections is a function you'll see a whole collection of our best practices.

Kenneth R. Stillwell: PegaCloud drove the majority of net new ACV additions in the first quarter, and PegaCloud ACV, which is approaching $600 million, continues to be the largest and fastest growing portion of ACV. Moving to free cash flow. When we started our subscription transition in late 2017, we knew the transition would, over time, result in more predictable subscriptions, billings, and free cash flow. Now that the transition is complete, it's great to see that vision become reality. We generated $180 million of free cash flow in the first quarter.

Alan: And so I think we've been able to use the things that we've learned about the industry. The things we've learned about technology, which is how we've been able to Brazil, and I think the team's done a great implementation to be able to bring this together in a way that's very.

Alan: Tangible will be the basis for a lot more coming.

Speaker Change: Awesome. Thank you.

Speaker Change: Your next question comes from the line of Jake <unk> with William Blair. Please go ahead.

Kenneth R. Stillwell: A record, by far, for any quarter in the history of the company. Our strong free cash flow performance was driven primarily by three factors. First, ACV grew by about $100 million year-over-year. ACV is a strong proxy for subscription billings, so an increase in ACV will naturally drive a material increase in subscription billings. Second, we're doing really well on our cost management initiatives, which improved operating leverage again in the quarter. For example, sales and marketing expenses decreased by about 15% year over year in the first quarter of 2024 compared to the same period one year ago.

Jake: Hey, Thanks for taking the questions and great to hear about the hundreds of customers.

Jake: They're already using blueprint just curious what type of use cases are you seeing customers target with that solution and then I know you have 20 or so other gen. AI accelerators are there any other solutions that you are starting to see customer interest pick up.

Jake: Sure.

Speaker Change: We're finding that the customers are creating blueprint.

Speaker Change: All over the map there is a lawsuit or tied to particular service flows. So things that you wanted to do in customer service.

Kenneth R. Stillwell: Third, many of our deals close and renew in the last quarter of the year, which means collections often occur through the first quarter of the year. Our fast start on free cash flow generation may be a little surprising to many of you, and it's, quite frankly, a little better than we had even expected. But naturally, starting off strong gives us that much more confidence in our progress to improve margins and our cash flow momentum. Moving on to margin.

Speaker Change: Onboarding and lifecycle management of clients is another place where I'm I'm seeing a lot of blueprints being done is being created youll being able to think about how you can modernize the front ends to your other.

Speaker Change: Other backend systems is an area that central so.

Speaker Change: Really.

Speaker Change: Multitude of processes that historically people have to go and sit down in front of a whiteboard rain storm you can now ask our history and the Internet to come together, how do we do in two minutes.

Kenneth R. Stillwell: Pegacloud's gross margin increased to 77%, a 500 basis point increase from a year ago, and it's just awesome to see the continued improvement. The improvement was driven by three factors.

Speaker Change: Used to take two weeks.

Speaker Change: And.

Speaker Change: I think thats going to be pretty game, changing particularly as it continues.

Kenneth R. Stillwell: First, the increasing scale of Pegacloud, which grew 21% year over year to 131 million in revenue in Q1. Second, more active planning and management of our global cloud capacity to optimize performance and reduce costs. Third, an increasing use of Kubernetes for cloud scalability and efficiency.

Speaker Change: It continues to evolve.

Speaker Change: The accelerators that we have the ones that I think one of the ones that as I think most interesting is.

Speaker Change: We're going to be showing up in peg a world that have a client actually talking about the ability to do what's called voice AI, which is to have var loosen to the stream.

Kenneth R. Stillwell: Now that we've released the PEGA GenAI Blueprint in Q1, I'd like to share some thoughts on the timing of GenAI monetization. In 2024, we expect the PEGA GenAI Blueprint will both change the way we engage with our clients and also decrease the time it takes for clients to imagine and build new applications on the PEGA platform. And we're already seeing evidence of that.

Speaker Change: Conversation, that's going on and use that to both make sure the person, saying the right place. So if we are in our regulatory business you have to say certain described to make sure that if things are actually said, but also to default fields of the screens.

Speaker Change: It really varies.

Speaker Change: Very substantially improved productivity, both through that and also through things like being able to summarize the call. So.

Kenneth R. Stillwell: Though we're still in the early days of GenAI, we can see that this innovation is going to be central to our clients' buying decisions, and it beautifully complements the statistical AI that we've delivered for decades. We expected GEN-AI would be central to our products as we put our 2024 plan together, and that's what we're seeing. Thus, monetization will be as a result of improvements in the selling cycle, which we believe will be fully realized in 2025.

Speaker Change: I would say there are lots of features out there and AI feed lots of vendors talked to you about future rang in future via future see what I'm. Most excited about is not that we won't have a great set of features.

Speaker Change: Absolutely we do have we will have.

Speaker Change: It features.

Speaker Change: <unk> to use the Gen II.

Speaker Change: Fundamentally optimize the way the business wants to be able to use it to build processes.

Speaker Change: I think there's somewhere between anywhere else doing that.

Speaker Change: And that makes me this time.

Kenneth R. Stillwell: I've received feedback that it's helpful when I provide thoughts on modeling our business, so today I'll continue to share some insights. First, we expect our ACD bookings to be more back-end loaded this year, and the majority of our subscription billings will occur in Q1 and Q4. So for the full year, we expect our cash flow to be strongest in the first and last quarters of the year. Second, our sales and marketing expenses are slightly higher in the second quarter as a result of TegaWorldCost, our annual client conference, which occurs in June. Third, we expect term license revenue to decline year over year in 2024 as TegaCloud continues to become an increasingly larger portion of our overall business, and this is certainly connected to the Gen AI momentum.

Speaker Change: Yes, that's very helpful.

Speaker Change: And then Ken great to see the improvement in Peg a cloud gross margins, where do you think those ultimately trend over time or are there any costs to consider in that metric as it relates to jet AI.

Speaker Change: Yes.

Kenneth R. Stillwell: It's actually an insightful question and the second one.

Kenneth R. Stillwell: The margins, we see the margins getting above 80.

Speaker Change: And when I say, Bob I'm not talking about.

Kenneth R. Stillwell: Five years out right Im talking about in the.

Speaker Change: In the relative near term.

Speaker Change: So we think we'll get above $80. A question of once we get above 80. Jacob's question is how far can you really push that and then you look at like other other companies in our space at best of class for a multi tenant SaaS solution is probably like low to mid Eighty's I mean, that's about as good as you as I have seen companies get for us to get above 80.

Kenneth R. Stillwell: As cloud accelerates, an increasingly smaller part of our growth is coming from subscription revenue, Subscription License Revenue, excuse me, which is Term and Maintenance Revenue. Both of those are expected to continue to decline as a percentage of our revenue, and also Subscription License revenue, i.e., Term Revenue, is going to decline year-over-year. In fact, Term License revenue will likely be less than 25% of our full-year revenue, and it will be a back-end load.

Speaker Change: At less than $1 billion of revenue I think is actually quite quite good but I think there is still room to optimize there. So we're not we're not in any way taking.

Speaker Change: Taking our foot off the pedal on that.

Speaker Change: <unk> point that you made about Gen AI journey, our utilization in the cloud as of right now the costs are relatively modest I think as they scale nationally as the as the journey I costs scale, our infrastructure cost to run it there will be indirect correlation from that to ask.

Kenneth R. Stillwell: But that's okay, because it doesn't impact cash flow timing, and we'll gladly trade term license revenue variability and decline for having a business accelerate faster to the cloud. Turning to our capital structure, as many of you are aware, we have about $500 million of remaining outstanding convertible debt at a 0.75% interest rate that matures in March of 2025. We continue to evaluate alternatives, but at the end of Q1, our total cash and investments balance was about $619 million.

Speaker Change: The ACB and cloud revenue that we're getting from our clients. So we do not believe that will be a headwind to margin expansion by any stretch. We think it will be just the cost of doing business like like our AWS and <unk> costs are gone.

Kenneth R. Stillwell: So we are now in a net cash positive position when factoring in the payoff of the conversion. We are still waiting for the opinion from the Virginia Appeals Court. We don't know when that court will issue an opinion, but of the cases our panel of judges has heard, the majority of those cases have been decided.

Speaker Change: I think Barry.

Speaker Change: Aggressive thoughtful.

Speaker Change: Working through how at this point, we want worldwide, Jr. And so the way that we've done it and we got information about this on our website. Our CTO is a nice little seven video about how Purger appliances technology is up through the use of your vector databases.

Speaker Change: And were cold rag techniques.

Speaker Change: Retrieval augmented generation that allow us to use a conventional model.

Speaker Change: Jackie boutique think Gemini from Google.

Speaker Change: Bedrock for Amazon and being able to pick the right model to us to be able to assemble.

Kenneth R. Stillwell: I also would like to provide you with a brief update on the shareholder class action suit that was filed in 2022. We reached an agreement to resolve that class action lawsuit for $35 million. We look forward to putting that distraction and the associated legal fees behind us.

Speaker Change: Analysis from the work that we're doing.

Speaker Change: I think it is very cost effective. So we are thinking of a way of doing this it's going to scale up nicely as the business grows.

Speaker Change: Very helpful. Thanks for taking my questions.

Kenneth R. Stillwell: I'm looking forward to seeing all of you at PegaWorld, which is being held at the MGM Grand in Las Vegas again and starts on Sunday, June 9th. We'll hold our investor session, as Alan mentioned, on Monday, June 10th at lunchtime. To register for the investor session, please email pegainvestorrelations at pega.com or reach out to Peter Welburn. Featured speakers during our investor session will include our founder and CEO, Alan Trefler, as well as other members of our senior leadership team.

Speaker Change: Thanks Jake.

Speaker Change: Your next question comes from the line of Dan Ives with Wedbush. Please go ahead.

Daniel Harlan Ives: Yes. Thanks.

Daniel Harlan Ives: So on the go to market strategy.

Daniel Harlan Ives: Yeah.

Daniel Harlan Ives: Hi.

Daniel Harlan Ives: Can you just talk about what we could expect next 369 months like is it more partnerships even ramping up internally you are in terms of the types of individuals can you just talk about from a go to market.

Kenneth R. Stillwell: We will provide updates on our long-term strategy, our latest product innovation, and our go-to-market approach. In conclusion, I feel really, really great about running a sound business. Our strong cash generation in Q1 demonstrates the power of a SaaS business, and we're in a great position to accelerate our profitable growth from here. Operator, please open the line for questions.

Daniel Harlan Ives: In terms of like the next steps there.

Daniel Harlan Ives: Yes.

Daniel Harlan Ives: Definitely are working with some key partners.

Daniel Harlan Ives: Looking to broaden the partner relationships.

Daniel Harlan Ives: A lot of enthusiasm from partners to.

Daniel Harlan Ives: Being able to apply some of this new technology here as well what I'm excited about it.

Daniel Harlan Ives: We're seeing such a quick uptake never seen such a quick uptake of a capability like what we've put out there with blueprint.

Operator: Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Your first question comes from the line of Raimo Lenshow with Barclays; please go ahead.

Daniel Harlan Ives: Like a factor of Japan.

Daniel Harlan Ives: In terms of the number of customers with a number of things that are actually doing with it and it really gives them a case of journey II by the way not just in English I love.

Daniel Harlan Ives: Over in Europe, two weeks ago.

Daniel Harlan Ives: We have a good read.

Daniel Harlan Ives: Any of them.

Daniel Harlan Ives: People generating boot.

Daniel Harlan Ives: Blueprint.

Daniel Harlan Ives: Adoption of Italian and it was really quite remarkable to gauge their reaction.

Raimo Lenschow: Actually, for both of you. If you think about the monetization, if I understand you correctly, it's going to accelerate client adoption of Tegra quite nicely. Is that kind of the main thing we had to think about monetization, or are there also kind of skews that have more AI versus less AI that could kind of provide monetization there? So that's question one. Question two would be for Ken. On the cash flow, you obviously gave us last quarter, like an annual cash flow idea, with a very strong 2-1. Was there like some timing that helped you? Or, you know, how do you feel about the folio number? Thank you.

Daniel Harlan Ives: The stuff I couldn't understand.

Daniel Harlan Ives: The uptake on this I think our go to market and it's going to end up being a lot more viral.

Daniel Harlan Ives: It has been historically and where we are going to ramp up to support that.

Speaker Change: Thank you.

Speaker Change: Your next question comes from the line of Steve Enders with Citi. Please go ahead.

Steven Enders: Okay, great. Thanks for thanks for taking my questions here.

Steven Enders: I guess, maybe just to start like I know <unk> kind of came in line with the growth.

Steven Enders: Growth expectations for the quarter, but I guess, how would you kind of like frame, where the macro environment is today and.

Speaker Change: And how people are viewing opportunities in budgets.

Alan Trefler: So we're permeating our products with Gen-AI so this is really becoming something that I think is going to be a reason that people say, boy, we can get this to work faster, better, cheaper, and more broadly in organizations. And that's the way we monetize things. And if you want to get a feel for that, just try Blueprint. It'll make perfect sense to you in two minutes. Yeah, on the question about annual cash flow.

Speaker Change: Maybe the impact that AI is having on that so far.

Speaker Change: So I'll take I'll take.

Speaker Change: Add some comment.

Speaker Change: I'll take the first al can add some comments, so Steve I would say that the.

Speaker Change: The economy continues.

Speaker Change: Certainly in the organizations that we're engaging with continues to be pretty resilient in terms of clients wanting to invest in digital transformation and I think that jet AI is just an accelerant to that to that momentum because the clients are looking at jet AI and digital transformation not.

Kenneth R. Stillwell: Yeah, on the question about annual cash flow, I think that's probably a very common question on the minds of lots of people listening to this call, and it's hard to resolve, so it's a great question. I'm generalizing a bit, but if you think about Q1 and Q4 being big cash collection quarters and Q2 and Q3 being more subdued and quite frankly not significant cash generation, to get more than half of your full year target in the first quarter is certainly a great start.

Speaker Change: Two different things, they're looking at them as being very related how do I manage this legacy application situation that I'm in and when I think about developing new capabilities, how do I want to insert jet AI, we're actually taking even a different angle that which is how do we leverage <unk> AI to help you sell.

Speaker Change: Right your digital transformation to get your faster to the place that you want to get too. So I think that there is still a tremendous amount of resiliency in the market and quite frankly, I think clients are thinking.

Kenneth R. Stillwell: I wouldn't go as far as to say that that changes our view for the year. I would say what that does is really reinforce the momentum that we're on and the confidence that we have for the full year, but it's great. Naturally, you always want cash flow as soon as you can get it in the year, but it was expected that Q1 and Q4 would be bigger collection quarters.

Speaker Change: At the same oriented increasing pace around digital transformation than they were over the last 12 to 24 months. So I think we're feeling very good about client's interest in Tiger solutions, and how we can help them with digital transformation and naturally we have an election coming in the fall interest rates are still high inflation is.

Operator: Your next question comes from the line of Kevin Kumar with Goldman Sachs. Please go ahead.

Kevin Kumar: Hi, thanks for taking my questions. I wanted to touch on Blueprint. It appears that interest is pretty strong there, and I've gone on and demoed it as well. And it looks great. Alan, just curious about, I guess, the second order impacts of just being able to speed up the design process with Blueprint. Are you seeing any early indications that this could drive more applications, you know, being developed on the platform?

Speaker Change: Coming back a little or not.

Speaker Change: And there's a lot of macro distractions, there, but we see our clients really investing heavily in their in their digital transformation journeys.

Speaker Change: Okay great.

Speaker Change: That's helpful.

Speaker Change: And then I guess just on the.

Speaker Change: Now that blueprint are out there like are you seeing have you seen customers actually convert that into production production app download that capability is out there or.

Alan Trefler: Yeah, we are. I mean, we're seeing things.

Alan Trefler: We're seeing an enormous interest from clients and from partners, and we see blueprints being included now in RFP responses and in bids that are going to customers. So I think it's a big step forward, and it can only be a step that's only going to get bigger as we continue to add in some of the features that are planned for even now in Pegaworld. So we're really, really seeing concrete uses with clients.

Speaker Change: Yeah, how should we kind of think about.

Speaker Change: Maybe the impact it's having on like top of funnel or the kind of conversations that you're having today with that with that.

Speaker Change: Well I know, we're talking about something that's really been out there for a grand total of two weeks or so.

Speaker Change: It's a little premature, but we see that happening imminently I think probably bigger world will have a number of success stories with our drug.

Speaker Change: Okay perfect Thats helpful.

Speaker Change: Thanks for taking the questions.

Alan Trefler: I also think this opens the door to Pega being seen as an engine for legacy transformation. You know, we talked to people in the tech world who have literally thousands of applications and are being able to use technology like this to help take them out faster and better, get rid of some of that technical debt, and put them all together in what we call a process fabric, which is technology we've talked about in the past that lets you have multiple Pega apps that act as one. I think it's a very appealing message, even in its early days. So we're pretty jazzed about that.

Speaker Change: Thanks, Steve.

Speaker Change: Your next question comes from the line of Austin Cole with citizens JMP. Please go ahead.

Austin Cole: Thanks for taking the question.

Austin Cole: I've got yet another blueprint question I think the excitement around that.

Austin Cole: <unk> tangible.

Austin Cole: I was wondering.

Austin Cole: If you can share any detail.

Austin Cole: As you mentioned in your prepared remarks partners coming in with new ideas, maybe can't go into detail on that just yet, but then also.

Austin Cole: Any anything you can share on maybe the breakdown between pagan clients using blueprint and non <unk> clients.

Austin Cole: That are coming to blueprint.

Kenneth R. Stillwell: That's great. And then Ken, one for you, you called out sales and marketing and seeing some year over year decreases in expenses there, and I was just curious kind of where you're seeing opportunities to kind of reduce expenses within that organization and truly expect that to kind of continue throughout the year.

Austin Cole: And those two buckets, and where youre, where youre seeing that distribution any detail there would be helpful. Thank you.

Austin Cole: Sure.

Austin Cole: We made the decision to preview blueprint with our partners a couple of weeks before we made it publicly available too.

Kenneth R. Stillwell: Yeah, so we're kind of at a we're a little bit of a stabilization point in terms of the run rate of expenses right now, like we did because we essentially normalized some of the some of the restructuring that we did last year. Gross margin definitely will continue to improve in Pegacloud because there's a lot of things that we're implementing that are not actually have not been impacting margin to the positive yet and will continue to.

Austin Cole: Clients and prospects on our web site to make sure the partners felt respected and that they were part of it can reduce moving forward and they were at service one of the things they ask for which we're in the process of implementing the ability for our partners to themselves create blueprints that they could use to capture.

Austin Cole: Their intellectual property and the structure of a better system. The way we've talked about cases in Saint Joseph steps and interfaces and.

Austin Cole: Given the ability to create their blueprints, which would then be proprietary to them to make it so that when a customer blueprint was created that customer blueprint, which today is an amalgam of best practice.

Kenneth R. Stillwell: I think about our go-to-market costs as less around where we can take costs out and more about leveraging that resource pool to accelerate growth. Kevin, we really have a great growth opportunity, acceleration through the rest of the year, and we feel very confident that we will accelerate growth, and Gen AI is really just a massive catalyst for pushing productivity and our go-to-market teams because of that speed to ideation, the speed to getting clients to see the vision, the speed to getting them to realize their architecture designs and their workflows.

Austin Cole: Best practice of the Internet will now be able to be an amalgam of peg a best practice the best practice from whatever partner was there particular, plus the internet putting those all together I think that's going to be hugely usually powerful. So that's our agenda for the extra few days just to get that working and that was.

Kenneth R. Stillwell: And actually now with the latest changes to blueprint, the improvements to blueprint to actually get the pig application started. So we feel like that is just such a, you know, a tailwind, so to speak, to sales productivity. We're focused on really putting those resources in the right place to accelerate scale and become more productive as opposed to a cost-cutting exercise.

Austin Cole: Based on what we heard from partners as to how they want to leverage this to be able to help them.

Austin Cole: Their go to market, which obviously helps our go to market. So we're seeing a lot of enthusiasm there.

Austin Cole: We are getting customers in very significant quantity.

Austin Cole: There is going to require doing literally thousands of these blueprints and just a couple of weeks and we are seeing prospects coming in.

Austin Cole: I think we will see more of that as this begin to take hold.

Operator: That makes sense. Thank you both.

Speaker Change: Yes, there'll be more positive about that.

Pinjalim Bora: Your next question comes from the line of Pinjalim Bora with J.P. Morgan. Please go ahead.

Speaker Change: It's still once again very young.

Austin Cole: As you can experience it yourself, it's very real.

Pinjalim Bora: Great, thank you for taking the questions. Just two parts. One question for me: Are you starting to see some of the GNI capabilities that you're introducing in the cloud drive customer conversations around cloud migrations from the self-managed? Unknown Speaker Product that you have?

Speaker Change: Great. Thank you.

Speaker Change: Your next question comes from the line of Mark Scaffold with loop capital markets. Please go ahead.

Mark William Schappel: Thank you for taking my question Alan with respect to blueprint I realize it's still early but I was wonder if you could just talk about.

Kenneth R. Stillwell: And then, I guess, cloud ACV growth seems to have kind of reached a low point. Wondering if it is kind of at the top level at this point as Blueprint and other GMAI capabilities drive consumption going forward.

Mark William Schappel: Some of them.

Mark William Schappel: Some trends or patterns that <unk> seen on the peg a platform with respect to the the early blueprint adopters.

Alan Trefler: Let me take the second part of that. We do think Q1 was a trough for ACV growth. We had thought that was the case when we guided, and we had said that really in Q1. I think most of you know that because we saw the models that all of you had built. And so I think you definitely heard us on that.

Speaker Change: Yes.

Speaker Change: I never would have expected we get thousands.

Speaker Change: They are in 'twenty and blueprints created somewhat bigger staff those votes to be counted as well, but many many thousands of our customers and partners.

Speaker Change: I would say that actually would have exceeded my expectation a month ago. When we were beginning to talk about how we're going to roll this out.

Kenneth R. Stillwell: In terms of the ability for cloud migrations and Gen-AI and the connection, Alan's thoughts on that? Yeah, so we've hoped for Gen-AI capabilities which are unfolding so quickly to Pegacloud, which only makes sense because we're able to roll out so much more efficiently and effectively. And we definitely see customers being interested in moving to Pegacloud. They've historically because

Alan Trefler: [inaudible]

Speaker Change: And maybe what's happened so.

Speaker Change: Yes.

Speaker Change: Garnering quite a bit of excitement if you come to peg a world.

Speaker Change: We will be there then you'll have a chance to talk to clients themselves.

Speaker Change: Great. Thanks, Mark I think just to add one thing on that does the new feature that we just rolled out recently, where you can actually implement a blueprint and a peg US system. Originally you could turn it into a PDF rate you can look at it the PDF and recently you have we have the ability to actually convert that into a peg a system.

Speaker Change: That to me is this possibly the the glue that connects what Youre doing in a blueprint to the realization of how fast an app can actually be built and it is really I mean.

Speaker Change: Now we're talking about as you could probably envision but to think about sitting down spending 30 seconds to two minutes getting a framework of a workflow going in and making it your own through the course of what could be 20 minutes could be an hour and then clicking a button that says implemented and you're looking at an application that actually.

Kenneth R. Stillwell: One last point on that. The, About two-thirds to 75% of our clients have seen Pegacloud now, meaning that they have at least one application or one environment for Pegacloud. As a result, there's a natural momentum that as clients have one application on Pegacloud, they look at moving all or other applications to Pegacloud. So you do have a little bit of the flywheel effect on people buying more Pegacloud, and more clients getting exposed to Pegacloud, which then will lead to the migration discussion that you mentioned. I do think it's really a good time for that to happen now.

Speaker Change: We had a fairly weak.

Speaker Change: So what's interesting so we've now once again its all very good but very real.

Speaker Change: For a lot of years sort of us two years and a program we call catalyst, where we would go in with a real design suite.

Speaker Change: Sort of approach.

Speaker Change: To help customers envision how they wanted to.

Speaker Change: Rebuilding app or rebuild or part of their business function and we have a very talented team that's able to do this or.

Speaker Change: At a high level I just saw.

Operator: Your next question comes from the line of Rishi Deloria with RBC Capital Markets. Please go ahead.

Speaker Change: The video of the first catalysts.

Speaker Change: We are doing with blueprint instead of a traditional way where people would candidly ended up at a whiteboard with stickies post it notes on the whiteboard.

Richard David Poland: Hi, thanks, this is Rich Poland on behalf of Rishi. Thanks for taking my question. So I guess the first one, Ken, just to clarify, I believe you said the AI contribution embedded in the full year guide when it was provided was zero. So if we take a step back, can we just think about what needs to happen to achieve the guidance and what kind of early adoption of Blueprint or Blueprint accelerating the adoption curve would be upside to those numbers? Yeah, so yes, you're

Speaker Change: Using using neuro technology.

Speaker Change: Imagine a year what they wanted.

Speaker Change: They were able to do.

Speaker Change: In two days with enormously high quantity quality two half days.

Speaker Change: Bluebird customers away and.

Speaker Change: It was really really.

Speaker Change: April to do what we always wanted to do with catalysts, which is to catalyze new thinking.

Kenneth R. Stillwell: So, yes, your question is, you guided at the beginning of the year 11% ACV growth, and we did say that we did not believe that factored in a noticeable impact to ACV from Gen-AI. Your question is, if there was a noticeable impact, would that provide upside to the growth number? And if that's the sense of the question, which is what I read, I would say, yes, significantly faster adoption of Gen-AI and influence into the pipe and the conversion of pipe are certainly an upside-down.

Speaker Change: And leverage what they what they were able to do so this was a major.

Speaker Change: European back that we did it with two half day sessions. They do what they did what I would've actually candidly, we would expect it to take three weeks or a month and the.

Speaker Change: The customer was fro so.

Speaker Change: Yes.

Speaker Change: It's not just a little type thing and actually organizes the way people think about how they want to automate their processes.

Speaker Change: That makes sense with peg architecture.

Kenneth R. Stillwell: Okay, great. That's helpful.

Speaker Change: I think we have refined over all these years of doing it to be just a very effective way to thinking about process automation and being able to.

Speaker Change: Get rid of some of the historical barriers about well, it's hard to use and there's a lot of experience.

Speaker Change: Okay.

Alan Trefler: Sure, we took our industry experts and had them pull together the templates that made most sense for common industry problems in the areas where we have a lot of experience. We have a lot of experience, as you know, in banking, insurance, healthcare, and government.

Speaker Change: I think give us another couple of weeks.

Alan Trefler: And then one for Alan, you mentioned industry expertise as kind of a differentiator around AI. Can you just kind of expand on that a bit? And what you're seeing right now in terms of use cases in specific industries, or maybe any domain expertise that you're infusing into some of the solutions there? Sure. We took our industry experts and we had them.

Speaker Change: This is not going to be true so really exciting.

Speaker Change: Great. Thanks, and then Ken real quick given the strong free cash flow generation. This quarter is there any update to achieving your rule of 40 targets. This year.

Kenneth R. Stillwell: Well I mean, certainly certainly.

Alan Trefler: And you can see that if you use Blueprint. Before we go out and begin infusing the Gen-AI content into the analysis, you can see our standard templates actually visible in the Blueprint choices you make. So if you say, hey, I'm in banking or financial services or credit cards, and I want to take a look at collections as a function, you'll see a whole collection of our best practices.

Kenneth R. Stillwell: We are dependent on hitting both our growth and our cash flow for the year, which is obvious.

Speaker Change: Having a start with the cash flow in Q1.

Kenneth R. Stillwell: <unk>.

Kenneth R. Stillwell: Moving the ball so to speak down the field quite a bit so that side of the equation.

Kenneth R. Stillwell: R R.

Kenneth R. Stillwell: Previous comments about the fact, we knew Q1 was going to be a difficult compare so we knew that we were going to start with ACB growth decelerating in Q1, and we'll work our way back to that 11% that was exactly how we model. So I'm feeling just as confident as I was last quarter and our achievement of a rule of 40.

Kenneth R. Stillwell: And it's right there in front of US, which is great and I think everybody can see in the numbers, how we get there but.

Speaker Change: <unk> got three more quarters to execute Mark So we're going to keep focused on that.

Speaker Change: Okay. Thanks.

Operator: Your next question comes from the line of Jake Roberge with William Blair. Please go ahead.

Speaker Change: Your next question comes from the line of Blair Abernethy with Rosenblatt Securities. Please go ahead.

Jacob Roberge: Hey, thanks for taking my questions. And great to hear about the hundreds of customers that are already using Blueprint. I'm just curious, what type of use cases are you seeing customers target with that solution? And then I know you have 20 or so other gen AI accelerators. Are there any other solutions that you're starting to see customer interest pick up for? I'm sure.

Blair Harold Abernethy: Thanks, very much just Ken following on the last question.

Blair Harold Abernethy: What are your what's your renewal book look like this year in the back half of this year versus last year and I guess I'm just looking for some of the key incremental drivers that gives you that confidence that off this 9% growth number of the year.

Alan Trefler: Sure. We're finding that customers are creating blueprints All over the map, there's a lot that are tied to particular service flows, so things that you want to do in customer service. The onboarding and lifecycle management of clients is another place where I'm seeing a lot of blueprints being done and being created. Being able to think about how you can modernize the front ends of your SAP and other back-end systems is an area that's central.

Blair Harold Abernethy: The average is out to 11, Thats a pretty back.

Blair Harold Abernethy: Back half is going to have to be a fair bit stronger.

Blair: Sure Blair So Q4.

Blair: You mentioned last quarter that our renewal book is skewed towards the back end of the year. This year in 2024.

Blair Harold Abernethy: No no less and a little bit more than a typical year.

Blair Harold Abernethy: What what what hurt us in this year in Q1 is strong the strong Q1 of last year.

Blair: Certainly what helps us through the middle part of the year is that the compares in the middle part of the year or not is not.

Alan Trefler: So it's really a multitude of processes that historically people had to go and sit down in front of a whiteboard and brainstorm. You can now ask history and the Internet to come together and have you do in two minutes what used to take two weeks. And I think that's going to be pretty game-changing, particularly as this continues. Terrific! But the ability to use Gen AI to fundamentally optimize the way the business runs, to be able to use it to build processes, I think is something I'm not seeing anyone else doing. And that makes me think, Yeah, that's really cool.

Blair: Not us.

Blair: Difficult as the beginning of the year. So some of this is just the timing of when ACB growth happens in the prior year and as you know how that fits into the trailing 12 month calculation that we have so renewals. There's still always we always have a lot of renewals in Q4, that's no different for this year. So we've got we certainly have expansion opportunities.

Blair: But also the activity through the middle part of last year was much more subdued.

Blair: We expect this year.

Speaker Change: Okay, Great and then just shifting onto the product side any update at all on the Launchpad initiatives launched last last summer.

Blair: Yes.

Blair: <unk>.

Speaker Change: I think it is growing very very well.

Blair: <unk> ended the quarter with 11 partners, who are building apps on launch.

Blair: That's been we've been.

Blair: Doing this on a very sort of.

Blair: Bootstrap basis.

Blair: And we've seen our first partners bring their first customers.

Blair: Production, so we're really quite.

Blair: Pleased with how it's going.

Blair: It's not going to be the driver of growth this year.

Blair: The core business is going to be.

Blair: That's up to the the growth objectives that we have for this year I think launched values.

Blair: Hopefully going to continue to develop in a way that it is and it's going to be a nice driver for that.

Blair: Next year and into the future.

Speaker Change: Great. Thank you.

Speaker Change: Your next question comes from the line of Tom Blakey with Keybanc capital markets. Please go ahead.

Kenneth R. Stillwell: Yeah, that's very helpful. And then Ken, great to see the improvement in Pegacloud gross margins. Where do you think those will ultimately trend over time? And are there any costs to consider in that metric as it relates to Gen AI?

Thomas Blakey: Hi, good morning, everyone and thanks for taking my questions maybe for you.

Thomas Blakey: Just.

Thomas Blakey: On the success of blueprint, sorry, a little bit of redundancy in terms of topics here and we talk about the maybe the roadmap I know, it's early but I'm sure you have a roadmap here in terms of.

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Thomas Blakey: Using utilizing some of these or other technologies in terms of process automation process mining rather in terms of automating.

Speaker Change: Some of the further automation of ideation here, just creating some of the other <unk>.

Speaker Change: Solution here and on the free cash flow Ken.

Speaker Change: Ken can you just maybe to <unk> first question on the call here and maybe this is the last one remind us of some of these metrics I think it was a $350 million free cash flow estimate for the year, you're starting off so strong here in <unk> b, usually better than <unk>.

Speaker Change: I think we might all be looking forward for.

Speaker Change: Accused here a little bit more.

Speaker Change: Guidance here in terms of how to manage and model free cash flow here for the rest of the year and the visibility there would be great. Thank you.

Kenneth R. Stillwell: Yes so.

Speaker Change: All this is that this is a <unk>.

Speaker Change: More of a general comment Tom, but I think to your point Q1, and Q4 is where we get the majority of our cash generation in 2020 for even more skewed that direction than what you saw last year Q1 started off strong I think our I think our billing and collection processes. Good our days sales outstanding is very.

Speaker Change: Strong, but the reality is you have more bookings in Q4, which do help the Q4 and Q1 billing and collection cycle in Q2, and Q3 is as it most enterprise software is a little bit more subdued than that kind of a hockey stick towards the end of the year and bookings and so that's just kind of and by the way a lot of our renewals.

Alan Trefler: Aggressive and thoughtful in working through how, at this point, we want to apply Gen-AI. And so the way that we've done it, and we've got information about this on our website, our CTO has a nice little seven-minute video about how Pega applies this technology, is through the use of vector databases and what are called RAG techniques, retrieval augmented generation, that allows us to use a conventional model. Think ChatGPT, think Gemini from Google, and think Bedrock from Amazon.

Speaker Change: <unk>, we built typically annually in advance. So you have a lot of those annual billings that happened in that same timeframe. So just just picture Q2, and Q3 being much more subdued.

Speaker Change: In some cases, we may not even generate cash flow at a quarter in the middle part of the year with our cash flow really focused on Q1 and Q4 in terms of the timing, so hopefully thats kind of helpful and relative to the <unk>.

Speaker Change: The roadmap, we have a very robust roadmap.

Speaker Change: The things, we've recently implemented around being able to pull the blueprint into a bigger system. It actually turned it into a running app was.

Alan Trefler: And being able to pick the right model to use to be able to assemble the analyses from the work that we're doing in a way that I think is very cost-effective. So we, I think, have a way of doing this that's going to scale up nicely as the business grows.

Speaker Change: Very recent division that obviously contemplated but makes a big difference are I think some of our next big steps are going to have to do with how we actually incorporate our customers' CAGR structures.

Speaker Change: Existing.

Operator: Very helpful. Thanks for taking the questions. Thank you. Your next question comes from the line of Dan Ives with Wedbush. Please go ahead. Yeah, thanks. So on the Gudum.

Daniel Harlan Ives: Your next question comes from the line from Dan Ives with Wedbush. Please go ahead. Yeah, thanks.

Speaker Change: Data repositories into.

Speaker Change: Into the blueprint could be able to make it so they really can plug into the real life that our clients have.

Speaker Change: Also IC blueprint being able to be fed by process mining.

Speaker Change: Other sorts of.

Speaker Change: Things, we do there will also help supercharge it so lots more to come.

Speaker Change: With that I know, we're at the top of the hour. Let me say, thank you to all of you work it hard and we look forward to seeing in February.

Alan Trefler: Yeah, so I you know, we definitely are working with some key partners and looking to broaden the partner relationships. And there's a lot of enthusiasm from partners to be able to apply some of this new technology here as well. What I'm excited about is I've never seen such a quick uptake, never seen such a quick uptake of a capability like what we've put out there with Blueprint. I mean, by like a factor of 10.

Speaker Change: Thank you. This concludes today's call you may now disconnect.

Speaker Change: Please wait the conference will begin shortly.

Speaker Change: Okay.

Speaker Change: [music].

Operator: In terms of the number of customers, the number of things they're actually doing with it, and it really gives them a taste of Gen AI. By the way, not just in English. What I love is I was over in Europe two weeks ago, and we had these, I couldn't read any of them, but we had people generating blueprints in Dutch and Italian. And it was really quite remarkable to gauge their reaction to the stuff I couldn't understand. So, the uptake on this, I think our go-to-market is going to end up being a lot more viral than it has been historically, and we're looking to ramp that up to support that.

Speaker Change: Okay.

Speaker Change: Sure.

Speaker Change: [music].

Speaker Change: Yes.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: [music].

Steven Enders: Your next question comes from the line of Steve Enders with Citi. Please go ahead.

Kenneth R. Stillwell: Okay, great. Thanks for taking the questions here. I guess moving to the start, like, you know, ACV kind of came in line with the growth expectations for the quarter. But I guess how would you kind of like frame the macro environment today and how people are viewing opportunities and budgets and maybe the impact that AI is having on

Kenneth R. Stillwell: So I'll take I'll take it and I'll add some comments. I'll take it first.

Kenneth R. Stillwell: I can add some comments. So Steve, I would say that the economy continues, certainly in the organizations that we're engaging with, continues to be pretty resilient in terms of clients wanting to invest in digital transformation. And I think Gen AI is just an accelerant to that momentum because the clients are looking at Gen AI and digital transformation not as two different things. They're looking at them as being very related.

Kenneth R. Stillwell: How do I manage this legacy application situation that I'm in? And when I think about developing new capabilities, how do I want to integrate Gen AI? We're actually taking a different angle on that, which is how do we leverage Gen AI to help you accelerate your digital transformation, to get you faster to the place that you want to go. So I think that there's still a tremendous amount of resiliency in the market.

Kenneth R. Stillwell: And quite frankly, I think clients are thinking at the same or an increasing pace around digital transformation as they were over the last 12 to 24 months. So I think we're feeling very good about our clients' interest in Pega solutions and how we can help them with digital transformation. Naturally, we have an election coming in the fall. However, interest rates are still high. Inflation is kind of coming back a little or not. I mean, there's a lot of macro distractions there, but we see our clients really investing heavily in their digital transformation journeys.

Operator: Okay, great. That's helpful. And then I guess just on the Now that blueprints are out there, like, are you seeing anything like customers actually converting that into production, you know, production apps yet down that that capability is out there? Or not? Yeah, how should we kind of think about maybe the impact of having on like top of the funnel or, you know, the kind of conversations that you're having today with that?

Alan Trefler: Well, you know, we're talking about something that's really been out there for a grand total of two weeks. So it's a little premature, but we see that happening imminently, I think, by Pegaworld. We'll have a number of success stories. Okay, perfect. That's helpful.

Operator: Okay, perfect. That's helpful. Thank you.

Austin Cole: Your next question comes from the line of Austin Cole with Citizens JMP. Please go ahead.

Austin Cole: Thanks for taking the question.

Alan Trefler: I've got yet another Blueprint question. I think the excitement around that is tangible. I was wondering if you could share any detail, as you mentioned in your prepared remarks, partners coming with new ideas. Maybe you can't go into detail on that just yet, but then also anything you can share on maybe the breakdown between PEGA clients using Blueprint and non-PEGA clients that are coming to Blueprint and those two buckets and where you're seeing that distribution. Any detail there would be helpful. Thank you.

Alan Trefler: Sure. So we made the decision to preview Blueprint with our partners a couple of weeks before we made it publicly available to clients and prospects on our website to make sure the partners felt respected and that they were part of the community that's moving forward. And they were enthused. One of the things they asked for, which we're in the process of implementing, is the ability for our partners to themselves create Blueprints that they could use to capture their intellectual property in the structure of a Pega system, the way we talk about cases and stages and steps and interfaces.

Alan Trefler: And given the ability to create their blueprints, which would then be proprietary to them, to make it so that when a customer blueprint was created, that customer blueprint, which today is an amalgam of Pega best practice and best practice from the internet, would now be able to be an amalgam of Pega best practice and the best practice from whatever partner was there.

Alan Trefler: Plus the internet, putting those all together, I think that's going to be hugely, hugely powerful. So, you know, that's on our agenda for the next 60 days, to get that working. And that was directly based on what we heard from partners as to how they want to leverage this to be able to help their go-to-market, which obviously helps our go-to-market. So we're seeing a lot of enthusiasm there. We are getting customers in very significant quantities, I mean, like, very significant quantities, doing literally thousands of these blueprints in just a couple of weeks.

Alan Trefler: And we are seeing prospects coming in. I think we'll see more of that as this begins to take hold and as there gets to be more buzz about it. It's still, once again, very young, but as you can experience it yourself, it's very real. Great, thank you.

Operator: Your next question comes from the line of Mark Schappel with Loop Capital Markets. Please go ahead. Thank you for taking the time to join us.

Mark William Schappel: I never would have expected we'd get thousands. You know, there have been 20,000 blueprints created, some by Pegastaff, those can count as well, but many, many thousands by customers and partners. And I would say that actually would have exceeded my expectations a month ago when we were beginning to talk about how we're going to roll this out, make this happen. So, it's garnering quite a bit of excitement. If you come to Pegaworld, and I hope Mark will be there, then you'll have a chance to talk to clients themselves. I think you're going to hear great things. Mark, I think I just want to add one...

Alan Trefler: Mark, I think, just to add one thing to that, the new feature that we just rolled out recently where you can actually implement a blueprint in Pegasystems. Originally, you could turn it into a PDF, right, you could look at it as a PDF, and recently, we have the ability to actually convert that into a Pegasystem. That, to me, is possibly the glue that connects what you're doing in a blueprint And it is really, I mean, I know we're talking about it, you could probably visualize it, but to think about sitting down, spending 30 seconds to two minutes getting a framework of a workflow, going in and making it your own through the course of what could be 20 minutes, could be an hour, and then building it.

Alan Trefler: We now, and once again, it's all very new but very real. We've had for a lot of years, over the last two years, a program we called Catalyst, where we would go in with a real design thinking sort of approach to help customers visualize how they wanted to, you know, rebuild an app or rebuild a part of their business. And we have a very talented team that's able to do this sort of work at a high level.

Alan Trefler: I just saw the video of the first catalysts that we're doing with Blueprint, instead of the traditional way where people would, you know, candidly end up at a whiteboard with stickies, you know, post-it notes on the whiteboard, you know, using mural technology to kind of Imagineer what they wanted, what they were able to do in two days was both an enormously high quality and extremely fast, those are two half days; it They were able to do what we always wanted to do at Catalyst, which is to catalyze new thinking and leverage what they... [inaudible] The European Bank that we did it with, and in two half-day sessions, they did what I would actually, can't believe, would have expected to take three weeks or a month, and the customer was thrilled.

Alan Trefler: So it's not just a little tech thing. It actually organizes the way people think about how they want to automate their processes in a way that makes sense with the PEG architecture, which I think we've refined over all these years of doing it to be just a very effective way of thinking about process automation and being able to get rid of some of the historical barriers about, well, PEG, you know, it's tricky, it's hard to use, it needs a lot of experience. You know, I think we should give them another couple of weeks. That's just not going to be true. So it is really exciting.

Kenneth R. Stillwell: Well, I mean, certainly, certainly, you know, we're dependent on hitting both our growth and our cash flow for the year, which is obvious. Us having a good start with the cash flow in Q1 is, is, is, you know, moving the ball, so to speak, down the field quite a bit. So that side of the equation and our and our previous comments about the fact that we knew Q1 was going to be a difficult comparison. So we knew that we were going to start with ACB growth decelerating in Q1. And we'll work our way back to that 11%. That was exactly how we modeled it.

Kenneth R. Stillwell: So, I'm feeling just as confident as I was last quarter in our achievement of Rule 40. And, and it's right in front of us, which is great. And I think everybody can see in the numbers how we get there. But, but, you know, we've got three more quarters to execute, Mark. So we're going to keep focused on that.

Operator: Your next question comes from the line of Blair Abernethy with Rosenblatt Securities. Please go ahead.

Blair Harold Abernethy: Thanks very much. Just Ken, following on from the last question, you know, what is your renewal book looking like this year, the back half of this year versus last year? And I guess I'm just looking for sort of the key incremental drivers that give you that confidence that off this 9% growth number, you're, you know, going to average it out to 11. That's a pretty, you know, back half is going to have to be a fair bit stronger. Short Blair

Kenneth R. Stillwell: Sure, Blair. So Q4, we mentioned last quarter that our renewal book is skewed toward the back end of the year this year in 2024, you know, no less and a little bit more than a typical year. What, what, what hurt us this year in Q1 is the strong, strong Q1 of last year. Certainly, what helps us through the middle part of the year is that the comparisons in the middle part of the year are not as, you know, it's not as difficult as the beginning of the year.

Kenneth R. Stillwell: So some of this is just the timing of when ACB growth happens in the prior year and, as you know, how that fits into the trailing 12-month calculation that we have. So renewal, there's still always, we always have a lot of renewals in Q4. That's no different for this year. So we've got, you know, we certainly have expansion opportunities, but also, you know, the activity through the middle part of last year was much more subdued than we expect this year.

Alan Trefler: Okay, great. And then just shifting on to the product side, any update at all on the launch pad initiative you launched last summer?

Alan Trefler: Yeah, you know, it's going very, very well. We ended the quarter with 11 partners who are building apps on Launchpad. And, you know, that's been, we've been doing this on a very sort of bootstrap basis, and we've seen our first partners bring in their first customers. Hopefully, it will continue to develop in the way that it is and it's going to be a nice driver for next year and into the future.

Operator: Your next question comes from the line of Tom Blakey with KeyBank Capital Market. Please go ahead.

Thomas Blakey: Hi, good morning, everyone. And thanks for taking my questions.

Alan Trefler: Alan, maybe for you, just on the success of Blueprint, sorry, a little bit of redundancy in terms of topics here. We talked about the roadmap. I know it's early, but I'm sure you have a roadmap here in terms of utilizing some of these other technologies in terms of process automation, process mining, rather, in terms of automating, you know, some of the further automation of ideation here, just creating some of the other, you know, an end-to-end solution here.

Alan Trefler: Now, the free cash flow, can you just maybe, to Raimo, the first question on the call here, maybe this is the last one, remind us of some of these metrics? I think it was a $350 million free cash flow estimate for the year.

Kenneth R. Stillwell: You started off so strong here.

Kenneth R. Stillwell: This is more of a general comment, Tom, but to your point, Q1 and Q4 are where we get the majority of our cash generation in 2024, even more skewed in that direction than what you saw last year.

Kenneth R. Stillwell: Q1 started off strong. I think our billing and collection process is good. Our day sales outstanding are very strong.

Kenneth R. Stillwell: But the reality is you have more bookings in Q4, which does help the Q4 and Q1 billing and collection cycle. And Q2 and Q3, as with most enterprise software, are a little bit more subdued than that kind of hockey stick toward the end of the year in bookings. And so that's just kind of... And by the way, a lot of our renewals, we bill typically annually in advance. So you have a lot of those annual billings that happen in that same timeframe.

Kenneth R. Stillwell: So just picture Q2 and Q3 being much more subdued. In some cases, we may not even generate cash flow in a quarter in the middle part of the year, with our cash flow really focused on Q1 and Q4 in terms of timing.

Kenneth R. Stillwell: So hopefully, that's kind of helpful.

Alan Trefler: And relative to the roadmap, we have a very robust roadmap. The things we recently implemented around being able to pull the blueprint into a Pegasystem and actually turn it into a running app were a very recent addition that, obviously, was contemplated but makes a big difference. I think some of our next big steps are going to have to do with how we actually incorporate our customers' data structures and their existing, you know, data repositories into the blueprint to be able to make it so this thing really can plug into the real life that our clients have. And also, I see Blueprint being able to be fed by process mining and other sorts of analytical things we do that will also help supercharge it. So lots, lots more.

Alan Trefler: And with that, I know we're at the top of the hour. Let me say thank you to all of you, let you know we're working hard, and we look forward to seeing you in Penguin World. Thank you. This concludes today's call. You may now disconnect.