Q4 2024 Pegasystems Inc Earnings Call
Krista: Ladies and gentlemen, thank you for standing by. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to Pegasystems' fourth quarter fiscal year 24 earnings conference call and webcast.
Krista: All lines have been placed on mute to prevent any background noise.
Krista: After the speaker's remarks, there will be a question and answer session.
Krista: If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad.
Speaker Change: And if you would like to withdraw that question, again, press star one. Thank you. And I would now like to turn the conference over to Peter Welburn, Vice President, Corporate Development and Investor Relations. Peter, you may begin.
Peter Welburn: Thank you, Krista. Good morning, everyone, and welcome to Pegasystems Q4 and Fiscal Year 2024 Earnings Call. Before we begin, I would like to read our safe harbor statement.
Peter Welburn: Certain statements contained in this presentation may be construed as forward-looking statements.
Peter Welburn: As defined in the Private Securities Litigation Reform Act of 1995.
The words expects, anticipates, intends, plans, believes.
Peter Welburn: Will, could, should, estimates, may, forecast, and guidance or variations of such words and other similar expressions identify forward-looking statements which speak only as of the date the statement was made and are based on current expectations and assumptions.
Peter Welburn: Because such statements deal with future events that are subject to various risks and uncertainties, actual results for fiscal year 2025 and beyond could differ materially from the company's current expectations.
Peter Welburn: 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 Q4 2024 and fiscal year 2024 results.
Peter Welburn: 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 31st, 2024, and in other recent filings with the Securities and Exchange Commission.
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.
Peter Welburn: Although subsequent events may cause our view to change, except as required by law, we do not undertake and specifically disclaim any obligation to publicly update or revise these forward-looking statements.
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Speaker Change: as the result of new information, future events, or otherwise. Our non-GAAP financial measures discussed in this call should only be considered in conjunction with our consolidated financial statements prepared in accordance with GAAP. They are not a substitute for financial measures prepared under U.S. GAAP.
Speaker Change: Constant currency measures are calculated by applying the December 31, 2023 foreign exchange rates to all periods shown.
Speaker Change: of GAAP and non-GAAP measures can be found in the company's prior release, announcing its Q4 2024 and fiscal year 2024 results. And with that, I turn the call over to Alan Trefler, founder and CEO of Pegasystems.
Alan Trefler: Thank you, Peter, and thank you to everyone on today's call.
Alan Trefler: In 2024, we demonstrated our commitment to delivering on our plans.
Alan Trefler: And I'm thrilled about the changes we've made to our business and how well the team executed to deliver strong results.
Alan Trefler: It's great to see that we continue to drive profitable and balanced growth across industries and across geographies while delivering the most innovative products in our history.
Alan Trefler: Ken will walk you through the financial highlights in a few minutes.
Alan Trefler: Our team has never been more energized to drive transformative change for our clients, and we have great momentum coming into 2025.
Speaker Change: How does GNI Blueprint is changing every client and prospect conversation?
Speaker Change: Driving hands-on experiences and showcasing the power of Pega technology in an easy-to-understand and practical way. And we're thrilled to see new business like the recently announced UK Armed Forces Recruiting Service engagement.
included in their press release.
Speaker Change: There is a blueprint. The pace of blueprint innovation is unprecedented and Accelerating with every week we are adding new capabilities And if you haven't used blueprint at least twice in the last month you haven't seen what it can do and it is worth seeing
There are two sets of capabilities we're particularly excited about.
Speaker Change: First, Blueprint now empowers every workflow to be agentic. We'll talk more about that in a few minutes.
Speaker Change: Second, there are capabilities that create, I believe, what will be a massive new market opportunity for Pagan and our partners by helping our clients rethink and replace legacy systems.
Speaker Change: Now, many of our clients have recognized Blueprint's power to accelerate legacy transformation, getting their business logic out of dated applications and onto a modern cloud architecture.
Speaker Change: and in the past months, we've been adding new legacy transformation capabilities. For example, Blueprint can now import BPMN, what's called Business Process Modeling Notation, and outdated the common approach to defining business process maps.
Speaker Change: Many clients have hundreds of thousands of these documents, which can now be enhanced by Blueprint to create cloud native modern workflows in just minutes.
Speaker Change: We're not just re-platforming these processes, we're actually using the AI and PEGA's experience and PEGA's ability to improve the model to make them superior.
Speaker Change: Additionally, Blueprint can now import a client's APIs, the interfaces to their systems and to their database structures.
Speaker Change: to automatically create data models and the way that the interfaces will have to work to connect these workflows up to their existing back-end systems. And this provides a terrific foundation.
Speaker Change: for moving on-premises systems of record to the cloud and having them interact with the other key systems that the customer has.
Now, we are going to continue to enhance Blueprint.
Speaker Change: with additional capabilities. You'll shortly see the ability to upload client documentation. So we can take things such as user manuals and other facts and bring them in and have the AI continue to use them to improve and
Speaker Change: to make Blueprint a center point of a legacy transformation strategy. I've been sharing this vision with leaders at our cloud and global systems integrator partners and there's huge interest in integrating Blueprint into their legacy transformation tools and into their legacy transformation practices.
Speaker Change: I said it before, the blueprint is central to every client interaction. You know, it really supports the expansion of our business into exciting new opportunities. And this legacy transformation opportunity, I think is a perfect example.
Speaker Change: Now, there still is so much talk about AI, a lot of talk about agents, we'll get to that in a moment. But I just want to remind people about how we will get AI, which I think is standing up well in terms of the marketplace.
Speaker Change: There are three types of A.I. as we think about it.
The first is statistical AI.
Speaker Change: This powers Pega's customer decision hub, which we've been shipping now for well over a decade. The AI drives real-time contextual customer experiences for global brands, like you can see on our website, Citibank, Ford, Verizon, and Wells Fargo, as they describe what they are doing. It remains a significant part of our business and we feel we have unmatched capabilities.
Speaker Change: and a high barrier to entry for competitors and that it's key to really supporting what our customers need to do to do a great job for their customers.
Now, a lot of people have forgotten some things.
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Speaker Change: because generative AI has been so hot. But in reality, generative AI is a complementary capability, really based on very, very different underlying technology, and they work well together.
Speaker Change: Now generative AI itself should be broken into two categories, some of you. The first is what I describe as productivity features.
Speaker Change: This is AI that helps customers and employees save time and effort. It does things like summarizing conversations, or providing self-service for customers, or for instance, generating correspondence.
Speaker Change: Now productivity features are great and we have dozens of these offerings built into our platform and we keep creating more
Speaker Change: But ultimately, we believe that you're going to see lots of them from lots of vendors, and they're not going to be the things that really distinguish the companies that are extremely successful going forward from those that aren't.
Speaker Change: Now, I think our competitors are so focused on productivity features that most, if not all of them, are missing the true transformative power of generative AI.
Speaker Change: And this is the third type of AI, transformative generative AI, which has the power to profoundly change how organizations engage their customers.
and run their operations.
Speaker Change: And this is exactly what Blueprint was developed to do and is already achieving. It's up leveling our conversations with our clients to focus on their desired business outcomes.
Speaker Change: and Pega is uniquely able to deliver this type of transformation because we've spent decades perfecting the structures needed to automate workflows and make decisions at scale.
Speaker Change: Blueprint is a breakthrough AI model that has learned from that structure, learned from that experience, that incorporates things we've learned from industries and best practices, and it's really enabled us to bring the wisdom of the Internet in a safe way.
Speaker Change: to all the experience we've worked on for these decades. And that lets our clients experience a modern, agentic approach to workflow in minutes.
Speaker Change: Best of all, it fits perfectly into our existing architecture. So Blueprint has allowed us to quickly and effectively integrate all these types of AI into our products. And I think it's having an extraordinary effect on our clients. Yet, we believe we've just scrapped the surface of what we can do.
Speaker Change: Yesterday we announced our newest transformative Gen AI offering focused on the world of agents called Pega Agent Experience or Pega Agent X for short.
Speaker Change: The PEGA agent experience is PEGA's approach to agentic AI. Now, you've likely seen the deluge of new agent announcements, literally thousands and thousands of agents flooding the market, along with new ways to manage them.
Speaker Change: and despite all the headlines and the hype or maybe as a result, many organizations I think are a bit confused and some are overwhelmed by this.
Now, some of the agents we've seen are pretty underwhelming.
Speaker Change: Often little more than the same chat box that have frustrated customers for years.
Our clients want predictable.
Speaker Change: auditable, auditable, governable, repeatable agents that do real work. And we know that deploying agents doesn't have to be chaotic or risky. We believe that the orchestration of agents is absolutely critical and best done through workflow.
Alan Trefler: and workflow is what we do. That's why I believe that Pega is made for this moment. Our new agent experience capabilities makes any workflow agentic.
Let me repeat that. It makes their existing workflows agentic.
Alan Trefler: So you can chat with it or talk to it and it still brings the power of the way they want to run their business together with the latest ways to interface and interact.
Alan Trefler: And with Pega Agent X, any agent, Pegas or somebody else's that the organization chooses to apply, deploy, can find the right process or workflow and then follow that workflow to complete the work in a way that is predictable and auditable.
Pega Agent X
that guide AI agents step-by-step through their tasks.
Alan Trefler: Just like a manager guides a new employee through their job with established procedures, not throwing them away and asking them to do whatever their experience tells them they should do. This is very different for competitors.
of these ungoverned black boxes.
Now, we aren't building agents.
Alan Trefler: by pasting textual prompts into a communication channel or a co-pilot. Remember, prompts may not be interpreted the same way every time. And candidly, that is unacceptable for the enterprise.
Instead, we've made workflows the core of our agent architecture.
Alan Trefler: And we can do this because Pegas workflows have always been able to do the most sophisticated and most important work. Unlike the simple sort of Visio diagrams that our competitors who talk about workflows do.
Alan Trefler: And since Blueprint allows our clients to design and deploy new workflows rapidly, we've got an approach that is both industrial strength and fast.
Alan Trefler: Pega Agent X enables our clients to leverage the power of their workflows to deliver the agents they need to better serve customers and operate efficiently.
Alan Trefler: and Pega Agent X ensures any agent, whether from Pega or another vendor,
follows established rules and security for our protocols.
with Pedia H&S
Alan Trefler: Pega workflows can invoke other agents, such as calling an agent to automatically extract data from a set of documents. And this allows clients to automate more complex tasks, orchestrating multiple agents together seamlessly, and making Pega a central part of their center-out architecture.
Alan Trefler: around the website, around a contact center, around a chatbot, or around their back-end data sources. The center-out architecture is perfect for orchestrating agents, and with Agent X built right into the heart of our center-out architecture, it has entirely become agentic.
Alan Trefler: In fact, we've started referring it to it as our center out agent architecture.
Alan Trefler: Anyone, everyone on this call can experience Pega Agent X by logging into Pega Gen AI Blueprint.
Alan Trefler: Designing a new workflow, and then previewing how Agent X delivers agentic conversations across channels by clicking on the conversational agent button.
Alan Trefler: in the Preview My App experience within Blueprint. We've showed this capability to several hundred of our partners at a recent sales kickoff, and they were blown away. I think you will be too. And you can expect us to announce new Agenda power and capabilities in coming months.
Speaker Change: You know, this is all a continuation of a vision you've heard me talk about now for hands-only.
Speaker Change: I've spoken about the autonomous enterprise, the vision of a self-optimizing enterprise that leverages AI and automation to enhance decision-making, make operations more effective, and make customer service great across an organization.
Speaker Change: To achieve this vision, clients must clear out the technical data of their legacy systems, which is why we're enhancing Blueprint to accelerate legacy transformation.
Speaker Change: and they must be able to deploy AI agents that are orchestrated by a trusted workflow platform. And that's what we've enabled with Pega Agent X.
Speaker Change: We're focusing on deploying AI in ways that empower our clients with technology handling routine tasks while people can focus on innovation, strategy, and care.
Speaker Change: With our advanced technology, our engaged partner community, and eager clients, we feel that we couldn't be better positioned.
then to lead this transformation.
So in summary
Speaker Change: More from Ken in a moment. I think we've entered 2025 with great momentum. We have competitive advantages and an approach to leveraging AI that is unique and I don't believe can be easily replicated. We're in a great position to leverage this Gen AI revolution and have truly, truly embraced it right into the heart of the company. And it's going to help our customers become
Kent: autonomous enterprises and achieve their visions and I'm incredibly excited about the opportunity ahead of us. To provide more Colorado financial results, take it away Kent.
Thanks, Alan.
Kent: You know, several years ago, we implemented our new strategy, or new at that time, of becoming a subscription cloud business. A critical outcome from the subscription transition was to be a Rule 40 company, balancing growth and profitability.
Kent: We completed the subscription transition in 2023, and I'm excited to share that today we're a Rule of 40 company when we measure our annual contract value growth and free cash flow margin, including supplemental items.
Kent: Looking back at the client success we've delivered and the challenges we've managed, achieving this milestone is a testament to our team's hard work, resilience, determination, and most importantly, commitment to our clients.
Kent: Our ACV group was also powered by our focused target account sales model.
Kent: We discussed and anticipated that 2024 would be a less back-end loaded year from a booking standpoint, and that's certainly how the year played out.
Kent: Our clients and prospects are using Pega Gen AI Blueprint, which lets them instantly get acquainted with Pega in an incredibly experiential manner. Pega Gen AI Blueprint will dramatically speed clients' time to value.
Kent: Cash flow from operations grew 59% year over year to $346 million and free cash flow grew 68% year over year to $338 million.
Kent: The improvement in our cash flow was driven by three key factors, our double-digit ACV growth, our peg-to-claw gross margin expansion, and our improvements in go-to-market efficiency.
If you take into account
Kent: the unplanned $32 million settlement for our shareholder lawsuit, our free cash flow would have exceeded our guidance by $20 million. So what looks like a slight shortfall for 2024 is exactly the opposite.
are strong free cash flow momentum.
Kent: put our balance sheet in strong cash and investment position of $740 million as of December 31, 2024, which gives us the capacity necessary to pay off our convertible debt in March. That free cash flow momentum and the corresponding financial flexibility also enabled us to repurchase
Kent: Pegacloud non-gap gross margins increased by approximately 300 basis points year over year, jumping from 75% in 2023 to 78% in 2024.
You may also have noticed in our disclosure materials
Kent: that our board has approved a two-for-one stock split subject to shareholder approval of increasing our shares at the next annual shareholder meeting. We believe this stock split conveys the confidence we have in our Roll40 mindset, our ability to execute on our digital transformation strategy, and the strong momentum in our business. And that will provide several benefits, including increased liquidity for our employees and investors, including
and newly arriving retail investors.
Moving to guidance.
Kent: We see our ACV growing by 12% year-over-year in 2025. Think of this as an as-reported and a constant currency guide.
Kent: We expect PegaCloud ACB to materially drive this goal. Our 2025 ACB growth guide does not factor in a massive adoption of PegaCloud GenAI blueprint, which could be an upside for us.
Kent: Let me be clear. We believe Blueprint is absolutely driving positive benefits for Pega. It's impactful. We feel the energy, as do our clients. But our ACV growth guidance assumes a modest impact from Pega Gen AI Blueprint in 2025.
Kent: Our strong finish in 2024 against a hard 2-4 compare, our go-to-market momentum, and our industry-leading technology gives us confidence in our ability to achieve our achieve our targets this year.
Kent: and our philosophy is that free cash flow per share should grow faster than ACV growth. Best-in-class software companies should be able to accelerate ACV growth while at the same time increasing operating leverage.
Kent: We provided all of our guidance metrics in our earnings press release, but two important ones that I want to highlight. Our ACV growth of 12% year-over-year, as I mentioned, and our free cash flow guide of $440 million, a 30% increase year-over-year.
Kent: Please note that our 2025 annual EPS guidance has not been adjusted for the proposed two-for-one stock split.
Kent: You've given me feedback that it's helpful when I provide some thoughts on financial modeling, so I'm going to continue to do that. First, we expect our business activity will follow our more typical cadence in 2025.
Kent: That means that we expect net new ACV ad to be slightly stronger in the first quarter and the fourth quarter of 2025. We also don't anticipate significant variability in our ACV growth rate throughout the year.
Kent: Second, a strengthening U.S. dollar will be a headwind to Pegacloud revenue growth in 2025. For total current backlog alone, the currency headwind on growth from Q3 to Q4 of 2024 was about $25 million.
Kent: The vast majority of that $25 million that impacted Pegacloud backlog will then impact Pegacloud revenue in 2025.
Kent: Third, we're going to maintain our commitment to efficiency, but we expect to increase our investment in sales and marketing in 2025 to more aggressively pursue new logos. As a reminder, we went through our sales transformation in 2022 and 2023 in order to improve our go-to-market
Kent: execution by focusing on cross-selling and up-selling into our install base. Given our recent improvements in go-to-market efficiency and the adoption of Blueprint, we believe now is the right time to consider increasing our sales and marketing coverage to selectively pursue more new logos.
Kent: Finally, given the investments we're making in Pegacloud to support cloud migrations in 2025, we're forecasting Pegacloud margins to remain largely flat in 2025.
Kent: I look forward to seeing our investors on the road in the next few weeks in San Francisco and in New York. And I also wanted to let everyone remind everyone about our annual investor session that will be held Monday, June 2nd at PegaWorld at the MGM Grand in Las Vegas.
Kent: We plan to share updates on the business and provide access to several members of our leadership team.
With that operator, please open the line for questions.
Speaker Change: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue.
Speaker Change: And if you would like to withdraw that question, again, press star one. And please limit yourself to one question and one follow-up. For any additional questions, please re-queue. And your first question comes from the line of Rishi Jalluria from RBC. Please go ahead.
Rishi Jalluria: Oh, wonderful. Thanks so much for taking my questions. Nice to see continued momentum in the business. I want to maybe drill a little bit into the investments you're making in increasing sales coverage. Can you maybe talk about some of the near term and longer term priorities and maybe related to that? I know in the past, you've had a couple of false starts with really wanting to go down the net new logo acquisition game. You know, given the success that you're having with blueprint and how that can reduce friction to
Rishi Jalluria: creating workflows, creating cases, you know, how should we be thinking about using Blueprint now as a front door for some of these net new opportunities that you haven't been able to penetrate in the past? And I've got a quick follow-up.
Speaker Change: Close attention to how what we've been doing and how we've been engaging
have given us new ways to think about doing this.
three, four, five meetings.
Speaker Change: trying to convince the customer that they should see a really sort of specialized demonstration and Then they would bring in a solution consultant who would have created a customized Demo to try to really intrigue the customer and the conversation was was often very theoretical
Speaker Change: In terms of concepts, you know, we talked about a lot of concepts as a company concepts like center out which we think is important But you know, it takes a while for people to internalize this
Speaker Change: to the demo, and we should just demo in a way that is specific to the client in the first meeting.
Speaker Change: and we'll do it in almost every level of the organization right up to CEOs and I'll tell you they really are
Speaker Change: pretty engaged in what they do. We no longer need the same rate shares of salespeople to solution consultants to build custom stuff. We have AI doing that for us and it all becomes much more experiential.
The customer can see it, feel it, and feel it.
Speaker Change: and they can then try and play with it themselves. So, you know, we're still calibrating this, but I will tell you, it has completely changed.
Speaker Change: or go-to-market motion are ready. And I think that's really exciting. And it means that we're going to be able to, I believe, be much more effective at our pursuits with both new and existing organizations. And it also should change our cost profile.
Speaker Change: in terms of what it takes to get to that point we can show a customer something real. Does that make sense?
Speaker Change: We actually work with our partners very closely, and our partners understand those logos as well. So we actually have a much better curated process around organizational coverage. Secondly, we don't need, as Alan insinuated, we don't need as big of a selling team as we actually had to have these new logos because of Blueprint. So I just want to highlight those two things, because I think they are very different.
Speaker Change: Yeah, got it. That's, that's really helpful. And then maybe I just want to, you know, kind of think about the rule of 40 mindset that you've had over the past several years. So you talked about hitting that now in 2024, your guide for 2025 implies you'll be, you know, at or around rule of 40. You know, just how should we be thinking about, I guess, number one, the durability of, you know, kind of maintaining this balanced rule of 40. And number two, is that kind of the end state, or is there potential for further
for NorthStar.
So we believe fundamentally
Speaker Change: And I think this is, and I think our teams do.
that.
Speaker Change: there is no end point to how you can improve a business. And so for us to suggest that when we're at Rule 40, we're just done and that's it for us, that is absolutely the opposite of how we think at Pega. So what's next for us?
Speaker Change: Rule 45, right? We just gotta keep trying to improve. Naturally, we would love to do that on the backs of accelerated growth though. So our real focus is gonna be to accelerate growth without losing our margin muscle and to be able to drive to a much higher kind of balance of growth and profitability. But we wanna make sure that we're giving ample focus to the growth engine.
Speaker Change: Yeah, I think that's I think that's fair. Look, Padgett needed to go through some internal re-education to get us to the point where we had the discipline to go from where we were a couple years ago to here, you know, very solidly in a rule of 40 camp. Nothing's been done in a way.
Speaker Change: that everything's been done in a way that I believe is completely sustainable. But our next focus needs to be, how do we open the aperture on growth? And you've heard me talk about wanting to get back to the high teens or 20% that growth that we've had is kind of the direction. How do we open that aperture while maintaining that sort of discipline and sustainability? And that's what we're going to be really, I think, focusing on this year, but we're not ever going to go back to the way we used to run the business.
Fantastic. Thank you so much, guys.
Speaker Change: Your next question comes from the line of Steve Enders with Citi. Please go ahead.
Okay, great. Thanks for taking the questions this morning.
Speaker Change: I guess maybe just to start, I do want to ask on just linearity of ACV and
Speaker Change: And what's going on there? I mean, I just, if I'm looking at the 4Q number, I think it's the lightest 4Q since like 2018 or something like that, if I'm adjusting for FX in the right way here, but...
Speaker Change: Yeah, I guess, can we just get a little bit more, I guess, clarity on kind of what you're seeing in the deal environment and maybe, like, did deals push into Q1 or just, yeah, how we should think about, you know, what that looks like or the implications of that.
I think maybe you might, you might be.
Speaker Change: you know, if you look at if you look at the through the year, Q4 of 2024 was still stronger, right than the other quarters in the year. But it just doesn't look that way optically, because currency was the like a $40 million headwind or something like that in Q4. So it's a pretty big number. But But in terms of the linearity through the year, that said, take just look at constant currency, we kind of saw the year shaping up to be a little bit more balanced, we knew we had activity in the middle of the year, that
Some of that stuff is just.
Scott Selleck, Peter Welburn, Alan Trefler, Unknown Executive
Yes, as was this past year, it'll it'll be the
Speaker Change: the strongest net ACB ads that we've ever had. But I think the shape of it will probably look different in that Q1 and Q4, historically, we've had a little bit more activity in terms of ACB growth. We think 2025 will look a little more like that.
Speaker Change: Okay, great. That's helpful context. And then I guess I wanted to ask on, you know, some of the legacy replacement opportunity and I think
highlighting some of the BPMN stuff and.
Speaker Change: I think that the past couple of quarters talking about some of the, you know, legacy replacement opportunities with Blueprint. Can you just help us think about, like, what that looks like or the use cases that you can maybe go after that would be different or would be accelerated from this and maybe how you kind of see that?
playing out here over the next couple of years.
Speaker Change: Yeah, you know, historically Pega was used in legacy transformation settings, but we would actually talk about working with clients to, and the quote we used to use, is wrap and renew.
Speaker Change: Legacy Systems. So they had a system, what we would typically do historically, is we would work to improve the processes, maybe tie it together with other systems, but we would keep their back ends.
Speaker Change: here as well. And what we introduced in the middle of the last year and what we've been building into Blueprint here is the ability to now say, hey, we're going to let you rethink and replace your legacy system.
Speaker Change: So, you know, you can still wrap them if you want, but what customers really wanted to be able to do was to turn off their legacy systems. So what did we do? Well, we've added capability into Blueprint to make it so that we can generate
crowd native database
Speaker Change: controls. So that a customer can say, Hey, I want to replace the system. I want the processes to end up in Pega. I'm going to have maybe some systems of record like a SAP financials that I'm going to have it talk to. We can now immediately import those APIs.
Speaker Change: with staggeringly little effort. But I also have some data that used to live in that system. And I want to create a cloud native database, maybe a BigQuery database or Databricks database or Redshift database, something that would run in their cloud environment.
Speaker Change: that Pega can now, as part of the workflow, just automatically update. And this gives us a tremendous...
Breath of New Opportunity.
Speaker Change: to be able to do this rethink and replace, which has really been fascinating with clients in our early discussions with them in the last couple of months. So I'm really excited that we've opened an aperture here around legacy transformation and, you know, with things like all the big SAP migrations that are going on with SAP putting pressure on their customer base.
Speaker Change: Not everything built in SAP wants to migrate to an SAP environment. You know, the financials do for sure, but all the stuff around it, we've got customers right now.
Speaker Change: who are putting those into Pega, and we think that that represents, from our point of view, a pretty dramatically expanded opportunity.
Speaker Change: Okay, great. No, that's great context. I appreciate you taking the questions this morning.
Thank you.
Speaker Change: Your next question comes from the line of Pendulum Bora with J.P. Morgan. Please go ahead.
Pendulum Bora: Oh, great. Thanks for taking the questions, guys. Alan, I want to ask you, what are you hearing from customers in terms of applications created through Blueprint going live?
Pendulum Bora: trying to understand if the pace of application go live has picked up and if it's driving up kind of the aggregate consumption of the Pega platform in any material way.
Pendulum Bora: It clearly is. I mean, I clearly see, look, you know, people mistake Blueprint for something that's like a new product.
Blueprint is a, think of Blueprint more as a completely
Pendulum Bora: New way to rethink how you get the engine that we used to work.
Pendulum Bora: pretty well with customers to be understood and adopted at a completely different scale.
Pendulum Bora: completely different place. And we've had, you know, since we really put this out in anger around PegaWorld last year, we've had over 70,000, 70,000
Pendulum Bora: Blueprints created. Now look, a bunch of those are junk, a bunch of those are people just getting on blank, but hundreds and hundreds of those
are genuine bona fide.
of Systems people are interested in either building or understanding
and we've started to see these deployed into production.
Pendulum Bora: So this idea that somehow there's a blueprint business and a non-blueprint business...
Pendulum Bora: I just think that's the wrong way to think about it. There's not a single conversation I've had in the last three months that hasn't had blueprint as a senator.
Pendulum Bora: I'll add one piece of color. I realize this is not
Pendulum Bora: This is not an empirical thing I'm going to say, but just to give you a there's there's been hundreds.
Yeah, understood. Definitely the
Speaker Change: The excitement is palpable here. One question for you. Can the 12% ACV growth guide
Speaker Change: The decline has kind of picked up a little bit. I think last time you said you might see a steeper decline in 2025 for maintenance. And then Tom, should we expect that to start to decline at some point?
Speaker Change: Yeah, so maintenance will decline. I mean, we would expect it to decline. Actually, we want it to decline. We want it to decline because the decline of maintenance, coupled with an increased cloud,
Jonathan Zittrain, Peter Welburn, Alan Trefler, Unknown Executive
Understood. Thank you. Yeah.
Speaker Change: Your next question comes from the line of Jake Roberge with William Blair. Please go ahead.
Jake Roberge: Yeah, thanks for taking the questions. Really helpful color on the hundreds of millions of pipeline that you have right now for Blueprint. But is there any way to think about the financial impact of Blueprint thus far? Like, is there a way to quantify the tailwind it's caused for ACV growth or how many Blueprint deals you've closed already? Just trying to understand how it impacted 2024 thus far.
Alan Trefler: So let's let's let's kind of let's let's calibrate on what Alan said earlier and I'll add one other piece of color. There's two really big impacts that blueprint will drive. The first is our ability.
Alan Trefler: To get engaged with clients and drive faster engagement, faster sales cycles, faster time to value for clients, like that's one theme and connected to that will help us drive a more efficient go to market model, both with existing and new logos. They are different things, but they are related. If you look at those two things.
Speaker Change: Okay, really helpful. And then, as you're starting to see more and more of these customers migrate to Pegacloud, can you help us understand what type of price uplift you've been able to see over the past year or so?
It does vary.
Speaker Change: because it really depends on whether they bought perpetual, they bought term, what their pricing was, their contract models, there's a lot of factors in there. But we typically see anywhere between on the low end, in the 25-35 percent range and on the high end, you can see well above 100 percent uplift. But it is very, very customer specific because a lot of times when clients migrate, they're also buying new stuff as well,
Speaker Change: it's really, really client specific. So we can't I don't want us to get like too much of a math model because it's not that it's not that much of a science.
That makes sense. Thank you.
Speaker Change: Your next question comes from the line of Patrick Walt Robbins with Citizens JMP. Please go ahead.
Speaker Change: Great. This is Austin Colon for Pat. Wondering about the PEGA agent.
Speaker Change: experience announcement. How are you guys thinking about the monetization, any additional monetization component there for front-end versus back-end experiences? Is this kind of baked into the whole Infinity experience?
Speaker Change: Yeah, it's completely baked into the Infinity Spirits. Look, the way that Pega should monetize...
Speaker Change: His product I believe is that our customers should deploy the law and as our customers deploy more As our customers get more benefit from the workflows that are being done either automated workflows or workflows that involve people we
Speaker Change: You know, our contracts typically have increases in pricing that relate to the levels of consumption.
to the levels of ongoing use.
Speaker Change: Yeah, one of the things I know with some amusement is all these other companies that didn't do what we did. We, a couple of years ago, went down the hard path of really moving our agreements from user licenses...
Speaker Change: to work-based licenses, typically counting the amount of work that a customer did and having the price vary with that amount of work. I think vendors that have software that's being sold by the seat,
Speaker Change: I have no clue how they navigate the next two, three years. And I think it's going to be very difficult for some of them. Certainly everybody's thinking seats should go down and some of this stuff. I heard another vendor talk about wanting to charge $2 per transaction.
Speaker Change: but they were going to charge for they do, you know, we'll see how sustainable that is. Whether that happens, I don't think that's going to be sustainable at all. HEC has always been in a position, certainly with all the new customers we've signed in the last several years, where it's charged based on a quantum of work.
and I think that's perfect for an agentic universe.
Speaker Change: Great. And then maybe just a quick follow-up. On the UK Armed Forces deal, can you talk a little bit about how that engagement came about and what allowed you guys to win that deal?
Sure, you know, it's interesting, like, like,
A lot of government.
areas.
Speaker Change: The UK Armed Forces had a couple of silos, and we had had the privilege of
being able to successfully.
do recruitment, which is super important for them.
Speaker Change: in both the Navy and the Air Force, and I think we had a really highly successful environment.
Speaker Change: They had both the Army and the Strategic Command, though, who weren't using PECA. And they decided to go to market in a highly competitive, very, very formal, structured way. And they talked to all the usual suspects about how they might go ahead and do this and went through an extremely rigorous process.
Well over 18 months.
Speaker Change: and they decided that they would go with a consortium led by a company called Serco.
Speaker Change: that I think put together a very, very impressive bid. And we were honored to be a really central part of that in terms of providing the core technology that's going to be used to manage it. So I think it's a real example of winning on our merits here in extremely rigorous...
Speaker Change: environment and you know we're very committed to having this be successful obviously
Speaker Change: Everybody's worried about defense these days and recruiting the right teams and we're thrilled that they're going to be using our technology to do that
Speaker Change: And I would also add one point on that, which is a broader opportunity.
Speaker Change: In the global public sector, as they look at digital transformation, this is a good example of where we are well positioned with our platform to be able to help
Public Entities.
Alan Trefler, Peter Welburn, Alan Trefler, Unknown Executive
Great. Super helpful. Thanks, guys.
Speaker Change: Your next question comes from the line of Mark Chappelle with Loop Capital Markets. Please go ahead. Thank you.
Speaker Change: Hi, thank you for taking my question. Ken, question for you in your prepared remarks, I believe you mentioned that Pegacloud gross margins
Mark Chappelle: are expected to be relatively flat in the coming year. And I was wondering if you could just walk through some of the puts and takes around Pegasus Cloud gross margins. I would have expected maybe some leverage as Pegasus Cloud scales here.
Mark Chappelle: Yeah, Mark, the only reason why we think that they might not scale as you get operating leverage is the pace at which we migrate clients. So if we migrate clients faster, we may make specific investments to help with some of that technical migration that would actually become a cost of goods sold, so it would actually be in our cost. So it's not that our timeless models would still improve, but we just may have investments that we would make. That'll be directly related to the pace of migrations.
Speaker Change: Are you seeing any patterns emerge with, say, the types of blueprints that customers are actually putting into production, like in certain industries or use cases?
Speaker Change: I think the thing that's that's starting to emerge is people looking more than they would have historically at this rethink and replace.
Speaker Change: capability you know because candidly we didn't get to sell it that way and with the recent features that have been added in the last couple of months you've now really got the ability to rethink and replace and we've been talking to our teams about you know changing the the lexicon
Speaker Change: from Rapid Renew to Rethink and Replace. So I'm starting to see that as an emerging and I think it could be quite
Significant, you know, there are lots of really, you know
Speaker Change: IBM mainframe is an area where we're seeing a lot of interest. And we have some of that history at Becca. So we're very comfortable working with organizations with some of that heritage. So yeah, I think the legacy transformation is the biggest thing I see emerging that's
New and really exciting.
Thank you.
Speaker Change: Your next question comes from the line of Devin O. with KeyBank Capital Markets. Please go ahead.
Thank you. Good morning. Thanks for.
Squeezing me in here. I wanted to
Speaker Change: First off, just want to get some more color on the fourth quarter performance. I know, I know you kind of mentioned that 90 way CV has kind of come in as expected, but curious if you've seen any sort of deals closed in the quarter as a result of maybe year end budget flush, or as a result of budget kind of
Speaker Change: flow through post-election in the U.S. here. There's any color you can provide.
Speaker Change: That's a question that we have heard throughout the year, this anticipated year-end budget flush. We did not see
Speaker Change: Unusual activity, maybe I'll put it that way. There's always the year-end transactions. Typically that's why Q4's and enterprise software companies are larger is because there you do have You know some of it some of it's the way the commission plans are typically structured in other words the budgeting cycle But we didn't see anything unusual So I wouldn't call there was any big budget flush or quite frankly any
Speaker Change: pullback of budget spend or opportunities. It looked like a pretty normal court at us.
Speaker Change: Got it. No, that's great context. And then just one more for me. I know you've kind of talked about, you know, you're really opposition globally and the federal public sector business. Maybe if you could just kind of like
Speaker Change: and look at just the U.S. federal business, kind of how that has been.
trending and just given some of the headlines that we've
Speaker Change: seen from the administration looking to drive efficiencies across different multiple agencies. You know, have you seen any sort of uptick in top-of-funnel activity or pipeline generation there? Any color you can provide would be appreciated. Yeah, we have a lot of excitement.
Speaker Change: There's a lot of excitement about how we think we might be able to engage in the federal space. Um, there's, you know, it's, it's frankly pretty confusing as you can tell by looking at the news, uh, but we're, we're feeling good about it. The types of things we do.
are exactly what the government needs.
in terms of saving money, improving efficiency, and
and Providing Service.
and that's true I'm sure for everybody in that space.
Speaker Change: but we're not concerned about it. We actually think we're in a good place. I'm going to make a comment that is
Speaker Change: is not as general as it might sound. But if you think about the areas where governments
most focused on looking at efficiencies.
Speaker Change: And if you look at PEGA, many of our solutions that we sell help our governments actually communicate and manage interactions with constituents, right, or manage, you know, whether that be
Speaker Change: taxpayers, or whether that be other interested parties. And so we feel like the solutions that we have are anchored well in that kind of workflow that happens within the government. Whereas we think a lot of the targeted areas, or at least what you read in the news, it looks like the targeted areas are wasteful spend not related to benefits to constituents. So we feel very good about the solutions that we sell and the agencies that we support. But we'll see how that all plays out.
Thank you. That's very helpful, Colin.
Speaker Change: And that concludes our question and answer session and I will now turn the conference back over to Alan Trefler for closing comments.
Alan Trefler: Thank you very much, everyone. We're really pleased with how we ended the year. We're really excited about how we're positioned for 2025. And just know we're working hard on your behalf and look forward to talking to you again soon. Thanks all.
Speaker Change: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.