Pegasystems Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 13, 2025

There are 11 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to Pegasystems Fourth Quarter Fiscal Year twenty twenty four Earnings Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

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.

Speaker 1

Thank you, Christa. Good morning, everyone, and welcome to Pegasystems Q4 and fiscal year twenty twenty four 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 are 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.

Speaker 1

Because such statements deal with future events that are subject to various risks and uncertainties, actual results for fiscal year twenty twenty five 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 Q4 twenty twenty four and fiscal year twenty twenty four results and in the company's filings with the Securities and Exchange Commission, including its annual report on Form 10 ks for the year ended 12/31/2024, 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 there are no assurances that the matters contained in such statements will be achieved. Although subsequent events may cause our view to change except as required by law, we do not undertake and specifically disclaim any obligation to publicly update or revise these forward looking statements whether 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.

Speaker 1

They are not a substitute for financial measures prepared under U. S. GAAP. Constant currency measures are calculated by applying the 12/31/2023, foreign exchange rates to all periods shown. Reconciliations of GAAP and non GAAP measures can be found in the company's press release announcing its Q4 twenty twenty four and fiscal year twenty twenty four results.

Speaker 1

And with that, I turn the call over to Alan Trezler, Founder and CEO of Pegasystems.

Speaker 2

Thank you, Peter. And thank you to everyone on today's call. In 2024, we demonstrated our commitment to delivering on our plans. And I'm thrilled about the changes we've made to our business and how well the team executed to deliver strong results. 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.

Speaker 2

Ken will walk you through the financial highlights in a few minutes. Our team has never been more energized to drive transformative change for our clients, and we have great momentum coming into 2025. Pega Gen AI Blueprint is changing every client and prospect conversation. 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 their press release their use of blueprint.

Speaker 2

The pace of blueprint's 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 2

First, Blueprint now empowers every workflow to be a gentle. We'll talk more about that in a few minutes. And, second, there are capabilities that create, I believe, what will be a massive new market opportunity for back end of our partners by helping our clients rethink and replace legacy systems. Now, many of our clients have recognized Blueprints power to accelerate legacy transformation. Getting their business logic out of dated applications and onto a modern cloud architecture.

Speaker 2

And in the past months, we've been adding new legacy transformation capabilities. For example, Blueprint can now import BPMF, what's called business process modeling notation, an outdated and common approach to defining business process maps. Many clients have hundreds but thousands of these documents, which can now be enhanced by Blueprint to create cloud native modern workflows in just minutes. We're not just replatforming these processes, we're actually using the AI and Pega's experience and Pega's ability to improve the model that make them superior. Additionally, Blueprint can now import a client's APIs, the interfaces to their systems and to their database structures 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.

Speaker 2

And this provides a terrific foundation for moving on premises systems of record to the cloud and having it having them interact with the other key systems that the customer has. Now, we are going to continue to enhance Blueprint 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 and, apply the best of technology to what our customers want to be able to do. This isn't a simple lift and ship.

Speaker 2

Blueprint helps our clients rethink and transform for the future. Now when we talk to customers, we find that every large client has hundreds, if not thousands, of applications that are targets for legacy transformation. And we're actively working with our partners and product teams to make BluePrint a central 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 BluPrint into their legacy transformation tools and into their legacy transformation practices. I said it before that BluPrint is central to every client interaction.

Speaker 2

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. Now, there still is so much talk about AI, a lot of talk about agents. We'll get that in a moment. But I just want to remind people about how we will get AI, which I I think is standing up well in terms of the marketplace. There are three types of AI as we think about it.

Speaker 2

The first is statistical AI. This powers Pega's customer decision hub, which we've been shipping now for 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 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 with their customers. Now a lot of people have forgotten statistical AI or sometimes I refer to it as mathematical AI, because generative AI has been so hot.

Speaker 2

But in reality, generative AI is a complimentary capability, really based on very, very different underlying technology, and they work well together. Now generative AI itself should be broken into two categories in our view. The first is what I describe as productivity features. 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 2

Now productivity features are great, and we have dozens of these offerings built into our platform, and we keep creating more. 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. 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. 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. And this is exactly what Blueprint was developed to do and is already achieving.

Speaker 2

It's up leveling our conversations with our clients to focus on their desired business outcomes. 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. 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 to all the experience we've worked on for these decades. And that lets our clients experience a modern, objective approach to workflow in minutes.

Speaker 2

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. 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. The Pega Agent Experience is Pega's approach to Ajentic AI.

Speaker 2

Now you've likely seen the deluge of new agent announcements announcements. Literally, you have thousands and thousands of agents flooding the market, along with new ways to manage them. And despite all the headlines and the hype, or or many 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. Often little more than the same chat box that have frustrated customers for years.

Speaker 2

Our clients want predictable, audible, 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. And workflow is what we do. That's why I believe that Pega is made for this moment.

Speaker 2

Our new agent experience capabilities makes any workflow agentic. Let me repeat that. It makes their existing workflows agentic. 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. And with Pega Agent X, any agent, Pegas or somebody else's that the organization chooses to deploy 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.

Speaker 2

Pega Agent X instantly turns Pega's proven and trusted workflows into smart supervisors that guide AI agents step by step through their tests. 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 from competitors whose agents are black boxes and can't be counted on to follow the processes needed to govern a large or regulated company. And company competitors are proposing that employees, enterprises deploy thousands of these ungoverned black boxes. Now, we aren't building agents by pasting textual prompts into a communication channel or a copilot.

Speaker 2

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. And we can do this because Pega's workflows have always been able to do the most sophisticated and most important work, unlike the simple sort of physio diagrams that our competitors who talk about workflows do. And since Bootric allows our clients to design and deploy new workflows rapidly, we've got an approach that is both industrial strength and fast.

Speaker 2

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. And Pega Agent X ensures any agent, whether from Pega or another vendor, follows established rules and security protocols. With Pega AgentX, 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. We can do this because of the center out architecture, which lets our clients build their systems around outcomes of war flows and the decisions that drive those outcomes, instead of the traditional way that you see everyone else doing it where they're they're building their engagement around channels, around the website, around the contact center, around a chatbot, or around their backend data sources.

Speaker 2

The centerline architecture is perfect for orchestrating agents. And with agent acts built right into the heart of our center out architecture, it has entirely become agentic. In fact, we've started referring it to it as our center out agent architecture. Anyone, and everyone on this call can experience Pega Agent X by logging into Pega Gen AI Blueprint, designing a new workflow, and then previewing how Agent X delivers authentic conversations across channels by clicking on the conversational agent button in the preview my app experience within Blueprint. We've showed this compatibility to several hundred of our partners at a recent sales kickoff, and they were blown away.

Speaker 2

I think you will be too. And you can expect us to announce new agenda power and capabilities in coming months. This is all a continuation of a vision you've heard me talk about now for candidly two years. 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. 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 2

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. 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. With our advanced technology, our engaged partner community, and eager clients, we feel that we couldn't be better positioned than to to lead this transformation. So in summary, we executed well and delivered strong results in 2024.

Speaker 2

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 autonomous enterprises and achieve their visions.

Speaker 2

And I'm incredibly excited about the opportunity ahead of us. To provide more color on our financial results, take it away, Kevin.

Speaker 3

Thanks, Alan. 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. We completed the subscription transition in 2023, and I'm excited to share that today we're a Rule 40 company when we measure our annual contract value growth and free cash flow margin, including supplemental items. 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.

Speaker 3

ACV growth, the most important metric to measure the success of our business, increased 11% year over year in constant currency. That result was driven by growth at Pega Cloud ACV, which increased 21% year over year in constant currency. Our ACV growth was also powered by our focused target account sales model. We, 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. Our clients and prospects are using PegaGen AI Blueprint, which lets them instantly get acquainted with Pega in an incredibly experiential manner.

Speaker 3

Pega's Jet AI Blueprint will dramatically speed client's time to value. Cash flow from operations grew 59% year over year to $346,000,000 and free cash flow grew 68 year over year to $338,000,000 The improvement in our cash flow was driven by three key factors. Our double digit ACV growth, our Pega Cloud gross margin expansion and our improvements in go to market efficiency. If you take into account the unplanned 32,000,000 settlement for our shareholder lawsuit, our free cash flow would have exceeded our guidance by $20,000,000 So what looks like a slight shortfall for 2024 is exactly the opposite. Our strong free cash flow momentum put our balance sheet in strong cash and investment position of $740,000,000 as of 12/31/2024, which gives us the capacity necessary to pay off our convertible debt in March.

Speaker 3

That free cash flow momentum and the corresponding financial flexibility also enabled us to repurchase 884,000 shares of our stock in 2024 for $73,500,000 offsetting dilution with the majority of those repurchases occurring in Q4. Pega Cloud non GAAP 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 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 Rule 40 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 newly arriving retail investors.

Speaker 3

Moving to guidance. We see our ACV growing by 12% year over year in 2025. Think of this as an as reported and a constant currency guide. We expect Pega Cloud ACV to materially drive this goal. Our 2025 ACV growth guide does not factor in a massive adoption of Pega Cloud GenAI Pega GenAI Blueprint, which could be an upside for us.

Speaker 3

Let me be clear, we believe Blueprints 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 Jet AI Blueprint in 2025. Our strong finish in 2024 against a hard Q4 compare, our go to market momentum and our industry leading technology gives us confidence in our ability to achieve our targets this year.

Speaker 3

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. 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 $440,000,000 a 30% increase year over year. Please note that our 2025 annual EPS guidance has not been adjusted for the proposed two for one stock split.

Speaker 3

You've given me feedback that is 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. That means that we expect net new ACV add to be slightly stronger in the first quarter and the fourth quarter of twenty twenty five. We also don't anticipate significant variability in our ACV growth rate throughout the year. Second, a strengthening U.

Speaker 3

S. Dollar will be a headwind to Pega Cloud revenue growth in 2025. For total current backlog alone, the currency headwind on growth from Q3 to Q4 of twenty twenty four was about $25,000,000 The vast majority of that $25,000,000 that impacted Pega Cloud backlog will then impact Pega Cloud revenue in 2025. 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 execution by focusing on cross selling and up selling into our installed base.

Speaker 3

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. Finally, given the investments we're making in Pega Cloud to support cloud migrations in 2025, we're forecasting Pega Cloud margins to remain largely flat in 2025. In conclusion, I'm really pumped where our business is right now. We are very well in 2024. We hit our key financial objectives and we're doing an outstanding job balancing growth and profitability.

Speaker 3

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 2 at PegaWorld at the MGM Grand in Las Vegas. 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.

Operator

Thank you. We will now begin the question and answer session. And your first question comes from the line of Rishi Jaluria from RBC. Please go ahead.

Speaker 4

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?

Speaker 4

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. Given the success that you're having with Blueprint and how that can reduce friction to creating workflows, creating cases, 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 then I've got a quick follow-up.

Speaker 2

Great question. And we certainly have been paying close attention to how what we've been doing and how we've been engaging, has given us new ways to think about doing this that we might have done in the past. What's interesting is I would describe the way we traditionally did selling is a sales guy trying to get in with somebody new would spend, I don't know, three, four, five meetings trying to convince the customer that they should see a 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 often very theoretical in terms of concepts.

Speaker 2

We talked about a lot of concepts as a company, concepts like center out, which we think is important. But it takes a while for people to internalize this. Blueprint has entirely changed that. We now do the demo, and we should just demo in a way that is specific to the client in the first meeting. And we'll do it at almost every level of the organization, right up to CEOs.

Speaker 2

And I'll tell you, they really are pretty engaged in what they do. We no longer need the same ratios 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 and and they can then try and play with it themselves.

Speaker 2

So, you know, we're still calibrating this, but I will tell you it has completely changed our go to market motion already. And I think that's really exciting. And it means that we're gonna be able to, I believe, be much more effective in our pursuits with both new and existing organizations. And it it also should change our cost profile, in terms of what it takes to get to that point we can show a customer something real. Does that make sense?

Speaker 4

Yes. No, that's super helpful. Really appreciate the color, Alan.

Speaker 5

And then I just think I really

Speaker 4

appreciate the question. Okay.

Speaker 3

It's Ken. Let me just let me add a little color. What we did before when we went after new logos is we had more of a territory model, just to follow-up on what Alan said, which is we didn't have tight, I would say, connection to the actual orgs that we covered. We more allowed kind of fishing anywhere, so to speak. And what Alan is really talking about is very targeted orgs.

Speaker 3

We know the customers. We know the verticals. We actually work with our partners very closely and our partners understand those logos as well. So we're 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 blueprints.

Speaker 2

I just

Speaker 3

want to highlight those two things because I think they're very different.

Speaker 4

Yes. No, got it. That's really helpful.

Speaker 5

And then maybe I just want

Speaker 4

to 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 at or around rule of 40. Just how should we be thinking about, I guess number one, the durability of kind of maintaining this balance rule 40? And number two, is that kind of the end state or is there potential to further optimize the model and maybe even potentially accelerate growth from here and actually exceed that as kind of a North Star? Thanks.

Speaker 3

So we believe fundamentally, and I think this is and I think our teams do, that there is no endpoint to how you can improve a business. And so for us to suggest that when we're at rule of 40, we're just done and that's it for us. That is absolutely the opposite of how we think of Pega. So what's next for us? Rule 45, right?

Speaker 3

We just got to keep trying to improve. Naturally, we would love to do that on the backs of accelerated growth though. So our real focus is going to 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 want to make sure that we're giving ample focus to the growth engine.

Speaker 2

Yeah. I think that's I think that's fair. Look, Peggy, I needed to go through some, internal reeducation to get us to the point where we had the discipline to go from where we were a couple years ago to here very solidly in a rule of 40 camp. Nothing's been done in a way 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?

Speaker 2

And you've heard me talk about wanting to go back to the high teens with 20% 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.

Speaker 4

All right. Fantastic. Thank you so much, guys.

Operator

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

Speaker 6

Okay, great. Thanks for taking the questions this morning. I guess maybe just to start, I do want to ask on just linearity of ACV 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 2018 or something like that, if I'm adjusting for FX in the right way here. But, yes, 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 the deals push into Q1 or just, yeah, how we should think about, you know, what that looks like or the implications of, of that?

Speaker 3

Sure. So I'll touch on linearity. You're directionally right on the currency, but I think maybe you might be minimizing a little bit the currency impact. Currency impact in Q4 was pretty massive for us. So the optics of the as reported, if you look at through the year, Q4 of twenty twenty four was still stronger, right, than the other quarters in the year, but it just doesn't look that way because currency was like a $40,000,000 headwind or something like that in Q4.

Speaker 3

So it's a pretty big number. 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 stuff that you work hard to pull in as fast as you can and otherwise may have hit in Q4 if we weren't successful doing that. That does happen in enterprise selling where there aren't we don't have millions of deals.

Speaker 3

We have hundreds of deals. So they do big deals can skew quarters. In terms of 2025, '20 '20 '5, I think is shaping up to be a very good year. And quite frankly, as was this past year, it will be the strongest net ACV ad that we've ever had. But I think the shape of it will probably look different in that Q1 and Q4 historically.

Speaker 3

We've had a little bit more activity in terms of ACV growth. We think 2025 will look a little more like that.

Speaker 6

Okay. Great. That's, that's helpful context. And then, I guess I wanted to ask on, you know, some of the the legacy replacement opportunity. And I think, you know, highlighting some of the the b p BPMN stuff and, you know, I think the the past couple of quarters talking about some of the, you know, legacy replacement opportunities here with BluePrint is can you just help us think about, like, what that looks like or the use cases that you you can maybe go after that that would be different or would be accelerated from this and and maybe how you kinda see that playing out here over the next couple of years?

Speaker 2

Yeah. Historically, Pega was used in legacy transformation settings, but we would actually talk about working with clients to the quote we used to use is wrap and renew 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 here as well. And, what we introduced in the middle of 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 systems. So 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.

Speaker 2

So what did we do? Well, we've added capability into Blueprint to make it so that we can generate cloud native database, 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 SAP Financials that I'm going to have it talk to. We can now immediately import those APIs with 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 a Databricks database or a Redshift database, something that would run-in their cloud environment that Pega can now as part of the workflow just automatically update.

Speaker 2

And this gives us a tremendous breadth of new opportunity to be able to do this rethink and replace, which has really been resonating 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 with things like all the big SAP migrations that are going on with SAP putting pressure on their customer base, not everything built in SAP wants to migrate to an SAP environment. The financials do for sure, but all the stuff around it, we've got customers right now who are putting those into Pega. And we think that that represents, from our point of view, a pretty dramatically expanded opportunity.

Speaker 6

Okay. Great. No, that's great context. So appreciate you, you taking the questions this morning.

Speaker 3

Thanks, Steve.

Operator

Your next question comes from the line of Pindjalim Bora with JPMorgan. Please go ahead.

Speaker 5

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? 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?

Speaker 2

It clearly is. I mean, I clearly see look, people mistake blueprint for something that's like a new product. Blueprint is a think of blueprint more as a completely new way to rethink how you get the engine that we used to work pretty well at with customers to be understood and adopted at a completely different pace. And we've had since we've really put this out in anger PegaWorld last year, we've had over 70,000 blueprints created. Now look, a bunch of those are junk, a bunch of those are people just getting on a plane, but hundreds and hundreds of those are genuine, bona fide systems people are interested in either building or understanding.

Speaker 2

And we've started to see these deployed into production. So this idea that somehow there's a blueprint business and a non blueprint business, 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 in the center of it.

Speaker 3

And and, Pinchl, and I'll add one piece of color. I realize this is not this is not an empirical thing I'm going to say, but just to give you there's been hundreds hundreds of millions of dollars of our pipeline that are actually being driven with a blueprint. Meaning, it is actually getting into our selling process in a big way, right, in the last. And 2025 is kind of the year of blueprint, right? If you would have actually been at our kickoffs, you would have heard the feedback from our sales teams of like blueprint is here, blueprint is the way we go to market with our clients and drive down time to value with our clients.

Speaker 3

So it's everywhere.

Speaker 5

Yeah, understood. Definitely the excitement is palpable here. One question for you, Ken, the 12% ACV growth guide, I think you said something like material contribution from cloud. I'm trying to think how should we think about maintenance and term in that kind of mix? Obviously maintenance seems like the decline has kind of picked up a little bit.

Speaker 5

I think last time you said you might see a steeper decline in 2025 from maintenance. And then term, should we expect that to start to decline at some point?

Speaker 3

Yes. So maintenance will decline. I mean, it's we would expect it to decline.

Speaker 2

I'm sorry, we want it to decline. Yes. We want it to decline because the decline of maintenance coupled with an increased cloud tells you what's going on.

Speaker 3

It means people are migrating, right. So we would expect maintenance to decline and we would expect term to certainly grow at a much more subdued rate and could potentially decline as well year over year. The trick there is that a lot of these migrations will happen through 2025 and 2026 and even into 2027. And so just the timing quarter to quarter and through the year of how that will happen is it's hard for us to necessarily pinpoint that. But I would say, assume that the majority of our growth is coming from Pega Cloud.

Speaker 3

Like that's our growth engine. It might be we might actually end up with more than 100% of our growth coming from Pega Cloud because it's actually connected to migrations.

Speaker 5

Understood. Thank you.

Speaker 3

Yes.

Operator

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

Speaker 7

Yes. 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 that's caused for ACV growth?

Speaker 7

Or how many Blueprint deals you've closed already? Just trying to understand how it impacted 2024 thus far.

Speaker 3

So let's kind of 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 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.

Speaker 3

They are different things, but they are related. If you look at those two things, what I think you've seen is the first one, which is clients seeing value faster, engaging with us. You're seeing that in many of our clients already. You're starting to see that hit. Naturally, that does that connects to bookings.

Speaker 3

There's a little bit of a lag there when

Speaker 8

it connects to bookings. But on

Speaker 3

the sales efficiency one, I would say not yet because it's still being rolled out. We're still in kind of the implementation phase of that. But you would see, you get, we would get scalability as we grow our sales, our addressable market, so to speak, that we're going after, the logos, the orgs that we target, you would actually see efficiency there kind of behind that, Jake, if that makes sense.

Speaker 7

Okay. Really helpful. And then as you're starting to see more and more of these customers migrate to Pega Cloud, can you help us understand what what type of price uplift, you've been able to see over the past year or so?

Speaker 3

It it it it does vary 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 kind of in the 25% to 35% range and on the high end you can see well above 100% uplift. But it's been kind of it is very, very customer specific because every lot of times when clients migrate they're also buying new stuff as well. So that all kind of gets packaged together as a relationship.

Speaker 3

So just think about it as there will be uplift with almost all of our clients, but not all of them because some clients may move without. It's just it's really, really client specific. So we can't I I don't want us to get like too much of a math model because it's not that much of a science.

Speaker 8

That makes sense. Thank you.

Operator

Your next question comes from the line of Patrick Walraubands with Citizens JMP. Please go ahead.

Speaker 9

Great. This is Austin Cole on for Pat. Wondering about the Pega agent experience announcement. How are you guys thinking about the monetization? Any additional monetization component there for front end versus back end experiences?

Speaker 9

Is this kind of baked into the whole, Infiniti experience? Anything there would be Yes.

Speaker 2

It's completely baked into the Infiniti experience. Look, the way that Pega should monetize his products, I believe, is that our customers should deploy them more. 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, our contracts typically have increases in pricing that relate to the levels of consumption, to the levels of ongoing use. 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 to work based licenses.

Speaker 2

Typically counting the amount of work that a customer the customer did and having the price vary with that amount of work. I think customers, who or or vendors that have software that's being sold by the seat, I have no clue how they navigate the next two, three years. And I think it's gonna be very difficult for some of them. Certainly, everybody's thinking seats should go down. And some of the stuff I heard another vendor talk about wanting to charge $2 per transaction that they were gonna charge, but they do.

Speaker 2

Yeah, we'll see how sustainable that is, whether that happens. I don't think that's going to be sustainable at all. Pega's 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 energetic

Speaker 9

universe. 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?

Speaker 2

Sure. You know, it's interesting like like, a lot of government areas, the UK armed forces forces had a couple of silos. And we had had the privilege of of being able to successfully do recruitment, which is super important for them, in in both the Navy and the Air Force. And I think we had a really highly successful environment, of success there. They had both the Army and the strategic command though who weren't using Pega, and they decided to go to market in a highly competitive, very, very formal structured way.

Speaker 2

And they talked to, all the usual suspects about how they might go ahead and do this and went through an extremely rigorous process. It took well over eighteen months. And they decided that they would go with a consortium led by a company called Serco 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 to manage it. So I think it's a real example of, winning on our merits here in, extremely rigorous environment.

Speaker 2

And, you know, we're very committed to having this be successful, obviously. 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 3

And I would also add one point on that, which is the broader opportunity 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 kind of re imagine what their back ends look like. And I think there's been a lot of talk about that certainly in The U. S. Public sector, but that's an issue globally, right?

Speaker 3

Governments have old systems and they need to be refreshed. And we are perfectly positioned to have that be a big player in that space. And this is a good example of one that we did.

Speaker 9

Great. Super helpful. Thanks guys.

Operator

Your next question comes from the line of Mark Chappell with Loop Capital Markets. Please go ahead.

Speaker 10

Hi. Thank you for taking my question. Ken, question for you in your prepared remarks. I believe you mentioned that Pega Cloud gross margins 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 Pega Cloud gross margins.

Speaker 10

I would have expected maybe some leverage as Pega Cloud scales here.

Speaker 3

Yes, 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 like our timeless models would still improve, but we just may have investments that we would make.

Speaker 3

So that will be directly related to the pace of migrations.

Speaker 10

That's helpful. Thanks. And then as a follow-up, one for you, Alan. I realize it's still early days for BLUEPRINT here. But 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 2

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 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 changing the lexicon 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. There are lots of really lousy systems out there that are expensive to maintain, possibly have security issues.

Speaker 2

And, some of them can be God forbid, there are database and Lotus Notes systems that are still out there and customers. And some of them are more IBM mainframe as an area of what we're seeing a lot of interest. And we have some of that history, I guess, 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.

Operator

Your next question comes from the line of Devin Oh with KeyBanc Capital Markets. Please go ahead.

Speaker 8

Thank you. Good morning. Thanks for squeezing me in here. I wanted to first off, just want to get some more color on the fourth quarter performance. I know you kind of mentioned that NANDUA 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, flow through post election in The US year?

Speaker 8

Is there any color you can provide?

Speaker 3

We, that's a question that we have heard throughout the year, this anticipated year end budget flush. We did not see any unusual activity, maybe I'll put it that way. There's always the year end transactions. Typically that's why Q4s in enterprise software companies are larger is because you do have some of it's the way the commission plans are typically structured. In other words, the budgeting cycle.

Speaker 3

But we didn't see anything unusual. So I wouldn't call there was any big budget flush or quite frankly any pullback of budget spend or opportunities. It looked like a pretty normal quarter to us.

Speaker 8

Got it. No, that's great context. And then just one more for me. I know you've kind of talked about you're really well positioned globally in the federal public sector business. Maybe if you could just kind of like kind of size it and kind of look at just The US federal business, kind of how that has been trending and just given some of the headlines that we've seen from the administration looking to drive efficiencies across different multiple agencies.

Speaker 8

Have you seen any sort of uptick in top of funnel activity or pipeline generation there? Any color you can provide would be appreciated. Yes.

Speaker 2

We have a lot of excitement. We have a there's a lot of excitement about how we think we might be able to engage in the federal space. There's it's frankly pretty confusing as you can tell by looking at the news, but 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 providing service. So we're we're we're feeling pretty good about what that will mean.

Speaker 2

Obviously, there's a lot going on and, that's true, I'm sure, for everybody in that space. But we're we're we're not concerned about it. We actually think we're in a good a good place.

Speaker 3

I'm going to make a comment that, is not as general as it might sound. But if you think about the areas where governments are most focused on looking at efficiencies, it typically isn't going to be the interactions that happen with constituents. 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 or whether that be 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.

Speaker 3

It's not like that. 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.

Speaker 8

Thank you. That's very helpful color.

Operator

And that concludes our question and answer session. And I will now turn the conference back over to Alan Treusler for closing comments.

Speaker 2

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.

Operator

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.

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Earnings Conference Call
Pegasystems Q4 2024
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