Pegasystems Q1 2025 Earnings Call Transcript

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April 23, 2025
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Operator

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 First Quarter twenty twenty five Earnings Conference Call. 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. I would now like to turn the conference over to Peter Welburn, Vice President of Corporate Development and Investor Relations. Peter, you may begin.

Peter Welburn
Peter Welburn
VP - Corporate Development & Investor Relations at Pegasystems

Thank you, Krista. Good morning, everyone, and welcome to Pegasystems' Q1 twenty twenty five earnings call. Before we begin, I would like to read our safe harbor statement. Certain statements contained in this presentation may be construed as forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. The words expects, anticipates, intends, plans, believes, will, could, should, estimates, may, forecasts and guidance or variations of such words and other similar expressions identify forward looking statements, which speak only as of the date the statement was made and are based on current expectations and assumptions.

Peter Welburn
Peter Welburn
VP - Corporate Development & Investor Relations at Pegasystems

Because such statements deal with future events, they 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 Q1 twenty twenty five results and in the company's filings with the Securities and Exchange Commission, including its annual report on Form 10 ks for the year ending 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 a result of new information, future results or otherwise.

Peter Welburn
Peter Welburn
VP - Corporate Development & Investor Relations at Pegasystems

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. Constant currency measures are calculated by applying the 03/31/2024, foreign exchange rates to all periods shown.

Peter Welburn
Peter Welburn
VP - Corporate Development & Investor Relations at Pegasystems

Reconciliations of GAAP and non GAAP measures can be found in the company's press release announcing its Q1 twenty twenty five results. And with that, I turn the call over to Alan Trefler, Founder and CEO, Pegasystems.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

Thank you, Bir, and thank you to everyone on today's call. It's great to be off to such a strong start in 2025 and to see how the changes we made continue to drive profitable growth around the world and across industries. Ken will walk you through the financial highlights in a few minutes, but let me talk a little bit about having been on the road in q one and having met with clients and partners in Europe, Asia, and The US. Now more than ever, we're seeing that organizations want to accelerate digital and legacy transformation to be more efficient and effective in serving their staff and customers. And, they also, I think, are really looking for help cutting through the hype that exists and keeps getting deeper, frankly, about how to go about implementing the newest AI technologies without additional risk.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

We're finding that they're really interested in solutions that give them practical approaches and proven capabilities with predictability and governance, but that can help them achieve the critical objectives that they have. And I believe Peg is perfectly positioned to be the strategic software partner for clients who are serious about driving the transformation they need to compete better. Our team has never been more confident, more capable, or more prepared to meet the needs and seize this opportunity to help our clients achieve their digital and legacy transformation goals. Now over the past year, Tanka, GenAI Blueprint has been front and center in pretty much every client conversation we have, providing a differentiating hands on experience that quickly and dramatically demonstrates the power of Pega. Blueprint is, in fact, an agent that uses the power of AI to take and Pega's proven best practices and our clients' and partners' knowledge to make it easy for business and IT to collaboratively design enterprise workflow applications in minutes.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

It supersedes the slow, failure prone traditional app design process, and it's not just faster, it's better. It uses the AI to stimulate design thinking and to trigger a whole better way to go at building and rebuilding systems. It creates a shared understanding of the application design, a faster path to value, and apps that are built for change, not just for launch. Pega Blueprint gives our clients a differentiated approach. It it it doesn't generate code.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

It generates clarity. It's not just faster. It's sustainable, and that is a game changer. This powerful tool enables our teams to rapidly demonstrate real use cases and showcase Pega's full capabilities. It makes the case for transformation clearer than ever.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

And we're seeing our partners really become really interested in engaging around Blueprint, and I think we're gonna be seeing them adopting Blueprint as a powerful tool that they can use to showcase more and more of their own IP and to leverage with clients. Now remember, you could experience the magic of Blueprint yourself by going to pega.com/blueprint. We continue to add new functionality and in delivering increased value to our clients, partners, and our field. For example, users can now upload documents directly into Blueprint, such as specifications, requirements docs, or even application documentation for legacy systems if the customer wants to retire. And this new feature makes it easier than ever for clients to tackle technical debt, rethink their legacy systems, and begin the process of replacing them to transform the future.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

We've also made it so workflows designed in Blueprint are inherently agentic. Now agentic is a a term we're hearing a lot. It's kind of a new term. Let me explain what it means because I think we've got a really, really interesting approach to this. Users can interact with Blueprint when workflows or even chat with them in phone calls.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

You can literally make a phone call to either workflows and ask them to do things for you, like create a new account or fix a bad charge on your statement. Now workflows built in Blueprint can use agents at any step to automate document processing or perform additional research, all under the governance that workflows provide. And the response to these innovations has been overwhelmingly positive, and it's exciting to see the momentum build reflected in the increasing number of blueprints that get created. We're now seeing over a thousand new blueprints created every week, more than double what we saw just months ago. In response to this interest, this past quarter, we introduced two new versions or flavors of Blueprint.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

For government clients, we introduced Blueprint for Government Efficiency Toolkit, a GenAI offering that helps public sector agencies accelerate digital transformation and increase efficiency while remaining compliant with standards. And as a reminder, for over a decade, we've also offered a really important product called customer decision hub or CDH for short, which is a significant part of our business that Forrester says, quote, sets the gold standard for enterprise real time interaction management implementations. CDH is our always on centralized brain that uses statistical AI and predictive analytics to enable personalized interactions. And we still believe statistical AI is very important and is perfectly perfectly complementing our use of generative AI. I think having both of those in our bag gives our clients and us some huge advantages.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

And now that we're beginning to roll out a blueprint aimed at CDH, it's going to really help our customer visualize their customer journeys and quickly design engagement programs with speed and clarity. So let's go back to that agentic work and talk a little bit about our perspective on agents. Now the the promise of agents is potentially enormously transformative. The notion that these concepts of agent and agentic for the system is doing things for you is well, it it sounds and looks magical. And they're becoming ubiquitous bunch of buzzwords.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

And vendors are flooding the market with thousands of undifferentiated solutions. Now our designs are really quite different, and I think reflect a unique understanding and leverage of unique capability that we've developed over years. And we've taken the starkly different approach because we think it's gonna give us and our clients a competitive advantage. The fundamental flaw in most agentic solutions lies in their dependence on prompts, pretext instructions given to AI models that, can require extensive five two five duting, sometimes by armies of specialized prompt engineers. But the problem with this is not the effort.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

The problem is that this approach creates inherent unpredictability, making it impossible to guarantee consistent results, especially enterprise scale. For mission critical processes like insurance claims or business critical decision, the lack of predictability presents an unacceptable risk and is a fundamental challenge for the many enterprises trying to manage thousands of mission critical agents as they map their future out. Now enterprises want the promise and power of automation that agents could offer, but we don't think they want thousands of agents running unchecked, producing unreliable, undesirable results. They need an agent to, wherever possible, follow a consistent process with full transparency on how it does work done. And this is where our unique approach comes in, combining the power of language model driven agents with the predictability of workflows.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

With our latest enhancements for Blueprint and Pega Infinity, all of the enterprise workflows are intrinsically agentic, both in their creation and their execution. This means the workflows are designed by AI agents who challenge the users to optimize them, who use that reasoning power to figure out the best way to do something. And this can suggest new and better ways of getting work done, which is powerful and profound. They work collaborative with the business people and IT to perfect the best way for an organization to work. But incorporating this reasoning at design time provides this advantage without this exposure by of spontaneously doing reasoning at runtime when the end users are actually using the application.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

And this is precisely what we built with Pega GenAI. Once the workflow is designed and importantly approved by humans, it is cataloged and prepared for use at the right time. And when an agent is invoked at runtime, Pega leverages language models to directly find and send requests to the right workflow, leveraging the design and approved workflows, but providing the flexibility and fluidity of a conversational approach and, having the system be able to kick off multiple workflows as well. The workflows become the knowledge base, helping the system gather the right information and take the right action. You can now experience this right in Blueprint.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

And as I said, it's literally getting better every two weeks. You can design an application with many specific workflows. And in preview, use a conversational agent to chat with that whole application, have the application find the right workflow of what we're trying to do, and it's beautifully interactive. This means enterprises can harness the power of agents while maintaining the predictability of workflows, the best of both worlds. And it's in stark contrast to what our competitors are offering, which are agents that are black boxes of best decks, and we don't think can be relied on to follow processes that govern large or regulated businesses.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

Now this capability is unique to Pega because of our extensive workflow average, and we don't think it can be easily replicated. That's why I believe we're perfectly positioned to take advantage of AgenTik AI, but do it in a way that is gonna have a higher level of quality and reliability. You can see more about these exciting innovations leading up to and at PegaWorld. So as we enter this era of authentic workforce, think of Pega as positioned to lead this transformation with our clients and our partners. Let me say a few things about PegaWorld as well.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

PegaWorld, starting on June 1, you can experience all these innovations firsthand and explore over 200 live product demos in our hundred thousand square foot intervention hub. This will really show you what the possibilities are as well as what people are really, really doing. And we have great clients talking just to to mention a few. RoboBank will be describing how they're empowering employees to serve customers and society while keeping criminals outside of the financial system. Unilever will be discussing how they transform distributor onboarding and unlock vast efficiency gains.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

And Verizon will explain how they're financing the combined power of generative AI, intelligent case management, and hyper personalization. I hope you'll join us for this unmissable event, including our Investor Day. Ken will provide information about how to register. So to wrap up, we're off to a great start in 2025. The changes we made to our business are delivering for us financially and organizationally.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

Our unique architecture and approach to AI gives us what we see as a major competitive advantage. And across the board, this team is excited and more confident than ever to deliver for the company, our clients, our partners, and our investors. To provide more color on our financial results, I will now turn it over to Ken.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

Thanks, Alan. We're off to an amazing start in 2025. The first quarter was outstanding on nearly every measure, with our most important metric, annual contract value, adding $74,000,000 Strong leadership and excellent execution by our sales teams worldwide, driven by enthusiasm for PegaGen AI Blueprint sparked an acceleration in ACV growth to over 13% year over year. PegaGen AI Blueprint is changing the way Pega engages with our clients, partners and prospects around the world. It's also giving our sales teams a new level of confidence by enabling them to visually showcase the power and capabilities of Pega's unique platform within minutes rather than weeks or months because Blueprint makes it so fast and easy to demonstrate Pega.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

That's a massive difference. At our investor session in June 2024, we set a strategic growth target of 20% or higher for Pega Cloud ACV. Accomplishing this goal is critical because our transformation strategy calls for Pega Cloud ACV to expand in the coming years. As Pega Cloud becomes a larger and larger portion of total ACV, there's also an opportunity for us to blend off our ACV growth rate, especially given our high client retention rates. As a result, we've been very focused on strategic initiatives to drive workloads onto Pega Cloud.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

Our q one Pega Cloud ACV growth rate of 23% to 700,000,000 of ACV validates this focus and provides evidence that our sales team teams are effectively cross selling and upselling into our existing clients, capturing new logos, and accelerating legacy workloads to Pega Cloud. It's amazing to think that Pega Cloud ACV was only 50,000,000 when we started this subscription transition journey in late two thousand seventeen. And now Pega Cloud represents approximately half of our total ACV. So we're on the right trajectory to becoming an even more durable and predictable business. Moving to free cash flow.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

We delivered $2.00 $2,000,000 of free cash flow in the first quarter, an amazing result given that we generated additionally $2.00 $1,000,000 of free cash flow for the entire year of 2023. We dramatically improved our free cash flow generation for two primary reasons. First, we're increasing ACV growth, which drives collections and therefore drives cash generation. ACV, a proxy for subscription billings, increased by over $170,000,000 year over year in constant currency from the first quarter of twenty twenty four to the first quarter of twenty twenty five. Higher ACV and expanded billings in turn will drive accelerated cash flow performance.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

Second, we're efficiently managing the business, which is translated to stronger cash flow. Our robust cash flow allows us to optimize capital allocation and deepen the power of our platform. Share repurchases are becoming an increasingly key element of our efforts to optimize capital. In the first quarter, we repurchased approximately 1,500,000.0 of our shares for $120,000,000 much more than offsetting Q1 dilution. In fact, we reduced the number of outstanding shares by nearly 550,000 shares in the first quarter.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

Given our confidence in Pega's future and the value we see in our stock, our Board has authorized an additional $500,000,000 for share repurchases. Our repurchase program gives us flexibility to return free cash flow to shareholders while maintaining a very healthy balance sheet. Having a strong and flexible balance sheet is another key component of our capital allocation strategy as we look to optimize our capital structure. In Q1, we fully repaid our remaining convertible note balances of $468,000,000 achieving debt free achieving the debt free status marks an important achievement and represents a significant milestone in our transformation journey. The capital raised through these convertible notes was instrumental in funding our subscription model transition and helped us on our Rule of 40 journey.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

Achieving the Rule of 40 required a deep cultural change and significant effort from all of our team members around the world. We clearly have Rule of 40 in our DNA. Thank you to everyone at Pega for embracing a Rule of 40 mindset. Our Q1 results demonstrate the various strategies we're employing to increase free cash flow per share. Going forward, we believe that growing free cash flow per share will drive meaningful value for our shareholders.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

With increased free cash flow generation, we have additional capacity to return capital through buybacks. We plan to share more information in our investor session, which will be held at PegaWorld at the MGM Grand Hotel in Las Vegas on Monday, June 2, at noon. To register, please e mail pegainvestorrelationspega dot com. I've received feedback over the years that it's helpful when I share some thoughts on modeling, so I'll do that again. While Q1 was exceptionally strong, we are only one quarter in the year.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

And as usual, we have lots of work throughout the remainder of 2025. We believe revenue and free cash flow will continue to follow seasonality patterns, which means we expect our term license revenue and free cash flow to be stronger in Q1 and Q4 of twenty twenty five. Please keep in mind, currency fluctuations may create noise in the next few quarters, especially in the revenue line items of our P and L. For example, we mentioned at the end of the year of 2024 that we had some currency impact to Pega Cloud backlog, and you're seeing some of that flow in to Pega Cloud revenue in 2025. We started our subscription transition with the vision of transforming Pega into a more durable, recurring subscription business that balanced revenue and profitability as a Rule 40 company.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

Now that we've finished our subscription transition and achieved the Rule 40, we're in a great position to continue to improve our profitability while attempting to drive higher growth. In conclusion, we exceeded our expectations. It feels amazing to be in this position and to execute the way that we did. As I've always said, one quarter does not make a trend, and we still have work to do in 2025, but it sure does feel great to start the year this way. And with that, operator, please open the line for questions.

Operator

Thank you. We will now begin the question and answer session. You. And your first question comes from Raimo Lenschow with Barclays. Please go ahead.

Raimo Lenschow
Raimo Lenschow
Managing Director at Barclays

Hey, congrats from me as well. That's an amazing first quarter, especially in this environment. The one quick question. If you look to there was a big outperformance on term licenses. Can you speak a little bit about the factors there?

Raimo Lenschow
Raimo Lenschow
Managing Director at Barclays

And the one question I got from investors was like very, very strong ACV bookings on Pega Cloud as well. Pega Cloud revenue came in slightly lower. Can you talk about the difference there? I would expect this currency, but like maybe can you elaborate on that a little bit? Thank you.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

Yes, absolutely. So you're absolutely right. I mean, term you know us well that we try to really explain that revenue does move around because of the term license revenue. Some quarters, you have term license revenue like we have in Q1. Other quarters, you don't have as much term license revenue.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

So it is the unfortunate accounting for ASC six zero six. So we just like to clarify with and you I think you're leaning your question leans into this point, which is you shouldn't expect the term revenue as being something that is kind of linear and consistent, lots of seasonality there. So you got absolutely good call out on that. The second point that you're on, which is ACV and backlog. ACV and backlog and revenue will be aligned with for something like Pega Cloud.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

However, it doesn't happen in a in in a sequential nature, like, immediately the next quarter. We've kinda highlighted that it typically takes a few quarters for the backlog and ACV to convert into revenue. So some of it is that just that normal lag in the way that the revenue flows through our model. But we also did have a currency impact that rolled over from last year as well into Pega Cloud. And and and quite frankly, you know, we're not gonna guess what that will be in the future because naturally, currency rates move around.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

But I I think there is it is a it is a very, important call out to say that ACV does not immediately flow into Pega Cloud revenue the subsequent quarter. It takes a few quarters. And so that's what's happening in our model.

Raimo Lenschow
Raimo Lenschow
Managing Director at Barclays

Lovely. Very clear. Thank you. Congrats.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

Yep.

Operator

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

Pinjalim Bora
Pinjalim Bora
Executive Director at JP Morgan

Great. Thank you for taking the questions and congrats on the quarter. Alan or Ken, I think everybody is trying to figure out kind of the macro environment post March. Maybe talk about what are you hearing from customers in April in Q1 so far? How are they kind of bracing some of the macro uncertainties?

Pinjalim Bora
Pinjalim Bora
Executive Director at JP Morgan

Have you seen any changes in customer buying behavior in April? Or are you seeing any changes in the sales cycle? Any color would be helpful. Well, I I don't think

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

with April in particular. I mean, the last couple of months, there's been a higher level of, uncertainty and anxiety that comes along with that. And that's, I think, especially true in some of the European countries where, some of what's going on, I think, has been taken almost a bit of it personally as as it were. But the level of engagement with customers across the board continues to be extremely high. And, you know, we as a company tend to do pretty well when things are done.

Pinjalim Bora
Pinjalim Bora
Executive Director at JP Morgan

Yeah. I see. Okay. And and then, Ken, obviously the ACV results are pretty solid. You probably added one of the highest sequential ACV ever in the company's history for Q1.

Pinjalim Bora
Pinjalim Bora
Executive Director at JP Morgan

But that follows a Q4 when the ACV added was a little bit of a low bar for Q4. So wondering how much of the ACV outperformance is kind of based on timing of deals from Q4 to Q1? Or did you see any kind of a pull in from Q2 or rest of the year?

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

Yes. I mean, that's a I think that's a first off, I think that's a very fair question to say that deals flow from Q4 into Q1 or conversely, did you pull deals in from the future? If you look at the deal structure in q one, I I can credibly say that there was not a rollover effect from q four, and there was not what we would consider to be a pull in effect from future quarters. I think we were set up at the end of the year with our pipe to be able to really have a good q one. But to be honest with you, we did better in q one than I had, initially thought we would do.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

So Q1 was just a very good execution quarter.

Pinjalim Bora
Pinjalim Bora
Executive Director at JP Morgan

Got it. Thank you so much. Your

Operator

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

Steve Enders
Steve Enders
Analyst at Citigroup

Okay, great. Thanks for taking the questions this morning here. I guess maybe just a follow-up on ACV dynamics in the quarter. Just was there I guess, what was the maybe quarter over quarter FX impact on ACV? Or is there a way to think about what the constant currency, like net new ACV growth was in for 1Q?

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

It was in the low 60s, Steve. Like $7,474,000,000 was the as reported. But if you adjust for currency, I think there was about a $10,000,000 We we we do kind of, we do show that, in the, earnings release, but I think it was I think it was about $13,000,000 of currency. So we would have done would have constant currency, the net add would have been in the kind of low 60s.

Steve Enders
Steve Enders
Analyst at Citigroup

Okay. Perfect.

Steve Enders
Steve Enders
Analyst at Citigroup

All

Steve Enders
Steve Enders
Analyst at Citigroup

right. That's, yes, that's very, very helpful there. And then just in terms of it seems like, you know, macro seems like it's okay. But I guess when you're thinking about the future pipeline dynamics and, you know, maybe kind of building off of, to Jim's question as well, just, you know, with the uncertainty going on, have you seen any kind of change in how customers are talking about their kind of future deal flow with you or, you know, has there been any pauses and and there is some federal exposure there. So I guess what impact is maybe, you know, the those conversations had on and specifically within

Steve Enders
Steve Enders
Analyst at Citigroup

the federal side of the business?

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

I'll maybe start and then I'll let Alan add some color. We there's always I would say when you have times of uncertainty, it's not I don't think I'm saying anything that's rocket science that clients, you know, have to have to rethink their priorities and their initiatives, and that happens in the commercial sector as well as public sectors. What what we have found is that legacy transformation and digital transformation is at the top of everyone's list, and GenAI fits squarely into that camp. So we have seen continued momentum around the way that we solve and help our clients solve problems. Naturally, when spending environments change, everybody will be impacted to some extent.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

But we have not seen, you know, the level of anxiety around the solutions that we're providing for our clients. We actually think in many ways that, you know, as an example, the Doge situation, one of the primary initiatives around that around Doge is to is to streamline and modernize lots of the technology that the federal government has that is very old. And so that fits squarely into what we can do. So I do think this is a great opportunity time for us. And you will see the natural anxiety, but I don't think that it's you know, I don't think it's it's peep I don't think what we're doing with our clients are things that people wanna wait, you know, on.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

I think they're they're they're already behind.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

Yeah. I would I would say relative to some of the those initiatives. You know, Pega years ago began moving our customers off of user based licenses, which I think has been one of the targets that they have been going after, to basically work based licenses, which fits really all of the idea of automation and getting work done. And, you know, we did that because we realized years ago that the number of users was gonna go down. Your systems like ours did what they were supposed to do.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

So we really didn't wanna be linked to that. So that's been something we've done very much across the board, here. And I think it really fits fits well. There is a lot of uncertainty. You know, people don't know.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

A lot of changes in terms of the leadership. I'm hoping it will settle down over the next couple of months or quarters because that would definitely make it easier to work with. But as Ken said, I I think there's as much opportunity as there is risk here. And and so we just need to we just need to really, really work it effectively. You know, being able to point to workflows as a that can really show customers improvements in their business is a wonderfully reliable thing to be able to show a client.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

And the fact that we can use the AI the way we can to create and scale and then use the AI to find the best one and operate it is almost like the perfect mixture of what you do with the language model and what you wanna do with a a workflow that's really, well, nailed down and and and auditable. And so, yeah, we we think we've got a message here that people are really understanding, and we'll continue to understand. So we think that we feel pretty good about

Steve Enders
Steve Enders
Analyst at Citigroup

Okay. Awesome. That's great to, great to hear, and, thanks for taking the questions.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

Thanks, Steve. Your

Operator

next question comes from the line of Patrick Walravens with Citi Citizens JMP. Please go ahead.

Patrick Walravens
Analyst at Citizens JMP Securities, LLC

Oh, great. Can you guys hear me?

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

Yeah. We can hear you, Ben.

Patrick Walravens
Analyst at Citizens JMP Securities, LLC

Alright. Perfect. Congratulations. First of all, it's it's great to see. Alan, I would love you to go a little deeper on the topic that that you mentioned in your prepared remarks where you were talking about how noisy it is out there with with so many different vendors claiming to have agentic types of solutions.

Patrick Walravens
Analyst at Citizens JMP Securities, LLC

So can you talk a little bit more about what you're seeing there? How hard is it to cut through that noise? And then maybe specifically, you know, in terms of solutions you see from Salesforce and Microsoft, what do you think?

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

Look. I think customers have been subject to lots of AI hype for a couple of years now. And so the level of of really, you know, skepticism, I think, is is pretty high in the customer base that we deal we deal with. I mean, it's a pretty sophisticated customer base. I believe we can explain to them pretty clearly why a mix of language models and workflows is the ideal combination.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

And, you know, the the reality is when we build, you know, blueprint people talk about blueprint like a skew. It's really not a skew. It's really a whole new way of doing what we've been doing all along. And it it really builds on all of the the decades actually of knowledge and understanding of the very, very powerful systems we have. That's why I think we've been able to accomplish a lot in a relatively short period of time.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

And I really love the runway of where this is gonna gonna go in this, quote, agentic world, unquote. But look, the buzz world, the hype, it's and and the disappointment, I think, gonna be huge out in the market. Just just huge. You know, all these people doing prompt engineering on, quote, thousands of prompts, unquote, how the hell are you gonna test that when the language model changes? These language models are changing couple times a year.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

You've got a business running off of prompts. The language model changes. You gotta get a new version. What you gonna do? I I I know exactly what we do, know, we're we're running an execution time that works for us, but I don't know what these other guys are gonna do.

Patrick Walravens
Analyst at Citizens JMP Securities, LLC

Alright. That's great. And then,

Patrick Walravens
Analyst at Citizens JMP Securities, LLC

Peter, can I just ask you

Patrick Walravens
Analyst at Citizens JMP Securities, LLC

a follow-up, which is, investors are so worried about the impact on closing rates?

Patrick Walravens
Analyst at Citizens JMP Securities, LLC

And you guys sound good,

Patrick Walravens
Analyst at Citizens JMP Securities, LLC

and SAP sounded good last night. We're do you have any thoughts you can share with us in terms of where the disconnect is?

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

Are are you you're just saying why are software companies having variable results?

Patrick Walravens
Analyst at Citizens JMP Securities, LLC

Don't sound yeah. No.

Patrick Walravens
Analyst at Citizens JMP Securities, LLC

You don't sound bad at all. Right? And and SAP sounded pretty good. And so yeah. I was just I was just looking you know, you can see from all the stocks how how worried we all are.

Patrick Walravens
Analyst at Citizens JMP Securities, LLC

So it's just it's just interesting that that maybe it's not quite as bad out there. I don't know. Any thoughts you have on

Patrick Walravens
Analyst at Citizens JMP Securities, LLC

that? I'd love to hear.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

Yeah. No. That's a so that so I so I'll I'll give you I'll give you I can only I can tell you two things.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

One, what we're seeing, and I can also tell you an observation that I have. So what we're seeing is the clients are still engaging and very much trying to modernize, digitize, move to the cloud, leverage Jet AI, figure out how to weigh ways to drive efficiency and to and and better client experience. That has not changed. Quite frankly, I haven't seen that change at all in the in the in in the last, you know, three months. So from that standpoint, there's a lot of there's a lot of opportunity.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

What I would say on the point that you're making about varied results that you're hearing from different vendors, my gut is that this is some people some companies' businesses are just not doing as well from time to time, and sometimes people use the macro as the reason why that's happening. And I think there's a little bit of that going on. I I think that you may have seen the same results in a neutral macro environment or a good macro environment or a bad one. But I think sometimes companies point to that as the reason why they don't execute. And so that so I think there's a little bit of that going on, Pat.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

I would definitely say what Alan said is that, of course, the environment is less certain now. I mean, you have to watch the news every morning to figure out what's gonna happen when the futures move 500 up or down day to day. That's not that's not great. Volatile environments aren't great. That said, we've seen our clients continuing to lean in on the problems that we solve with them.

Patrick Walravens
Analyst at Citizens JMP Securities, LLC

Okay. Great. Thank you both.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

Yep.

Operator

Your next question comes from Devin Oh with KeyBanc. Please go ahead.

Devin Au
Devin Au
AVP - Associate Analyst at KeyBanc Capital Markets

All right. Good morning. Thanks for taking my question. First one I have is I also want to dig a little bit deeper into the strong ACV results in the quarter, but maybe I want to ask it through a lens of Blueprint. I know that last quarter you guys mentioned hundreds of millions of pipeline was driven by Blueprint.

Devin Au
Devin Au
AVP - Associate Analyst at KeyBanc Capital Markets

So I'm kinda curious if you can share any more color on that. You know, it it would be, you know, great to hear if you have any updates to share, regarding what Blueprint has influenced, deals wise in the quarter.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

Yeah. I would tell you that every single piece of business we're right is influenced by Blueprint. Every single one. It's, you know, it's become ubiquitous. I I think it's wonderful because it really broke down some of the the boundaries between, you know, business and technical people.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

It really gets people on the same page. And if you haven't tried it, anybody who's on the call, I'd recommend you give it a shot. I think it's a really very pragmatic, but innovative use of AI is is what I would say. So, yeah, I think Blueprint is profoundly changed our business. And with the new capabilities we're adding to it, we're expecting that that's gonna continue and extend.

Devin Au
Devin Au
AVP - Associate Analyst at KeyBanc Capital Markets

Got it. Okay. That's helpful. And then just one quick one on backlog. I think you just posted backlog growth of 21%, quite a meaningful step up from the 14% in 4Q.

Devin Au
Devin Au
AVP - Associate Analyst at KeyBanc Capital Markets

Peter or Ken, curious if you have any additional commentary on what drove that strong acceleration. Have you seen contract durations change one way or the other? Any color there would be helpful. Thank you.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

Yes. So I would advise to pay more attention to the current RPO than the total RPO. The current RPO is very much a signal or an alignment with the ACV growth. And I think that's a that's a really terms of thinking about the growth of the business, the total RPO does move a little depending on multiyear cloud Pega Cloud renewal cycles, which can and you can kind of see that kind of in the laddering. You know, we do we are we have a pretty robust disclosure, and you can kind of see that in some of the laddering.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

So I would I would say if you look at backlog, backlog is a healthy indicator of clients making long term commitments to us. We love that. Current RPO is very aligned with the ACV growth in the business.

Devin Au
Devin Au
AVP - Associate Analyst at KeyBanc Capital Markets

Got it. Thank you for taking my questions and congrats on the strong start to the year.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

Thank you.

Operator

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

Mark Schappel
Managing Director at Loop Capital Markets LLC

Hi. Thank you for taking my question and nice job on the quarter. Ken, with respect to the upside in the quarter, how much of that would you attribute to the sales changes that have been put in place over the past year or two versus, say, you know, new product introductions like Blueprint?

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

I that's a that's a it's tough to it's tough to, like, separate that. But what I what I would say is, Mark, that our sales model changes that we made have yielded really good behaviors. Like, the the behaviors of how our sales teams are managing, how we're managing pipe, how we're engaging, I'm I'm really very, very, pleased with, the activity and the progress. Naturally, we we can get better, we will get better, and we will push. But I I do think there's been a noticeable change in that in our process.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

And then you then you shift from that and say, much does Blueprint play into that? Separate from that, I think Blueprint is completely changed the ease at which a salesperson or a or or in the engagement with our clients, we explain how Pega can help and then help clients, visualize how Pega can help solve their digital and legacy transformation challenges. I mean, it's just you know, without when you try to walk through, like, well, let me explain what it is. Let's do an operational walk through. Can we actually get a few weeks to do discovery with you?

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

We'll go build a demo. We'll come back and show you that demo. I mean, that's a that's the way our process was, and that's very time and labor intensive on us and the client. And I think that that's where Blueprint has really just changed the game for us. Because we've had we have, you know, scores of examples where our salespeople say, I went in with a Blueprint.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

I showed the client immediately jumped to the second level, the third level, the fourth level discussion in a way that just could never have happened without it. And that that's to me. Those are separate things, but but I think both equally impactful to q one.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

I, you know, would say one additional thing, which is I'm a product guy. So I probably have a strong bias towards saying that the product is what matters. But in reality, these are products that have to be sold. And what I will tell you that I'm really pleased about that we saw in q one is that, you know, we didn't have the the business wasn't driven by whales. You know, you you used we used to talk about, you know, the whales and the porpoises.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

It would really be tied to sometimes just a deal or three, you know, in terms of making it whether it was a good quarter or a mediocre quarter. And, you know, they they show up the next quarter sometimes. Right? So you know? But what happened, I think, is is the Salesforce has gotten tremendously more disciplined about really working the business.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

And, I think this quarter that just showed up and a very, broad strong performance, which, and by the way, I love it. It makes the last weeks of the quarter a lot more relaxing.

Mark Schappel
Managing Director at Loop Capital Markets LLC

Great. That's helpful. One other question, Ken, with respect to the Rule of 40 targets, what are your thoughts with respect to the mix between ACV growth and free cash flow margins going forward here given the other results in Q1?

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

We're not adjusting our guidance for the year. Our model has really been that we believe we can accelerate growth and still get operating leverage through the system. So I think there's an opportunity for us to both accelerate growth and expand free cash flow margins. Certainly, if our growth does not accelerate, free cash flow margins will expand. I mean, I think we are very optimistic on that.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

I I think that we we have the we have the the really the really difficult, you know, strategy decision on how much are you willing to dial up to try to accelerate growth. But we're very committed to not allowing that to impact our free cash flow trend. So that's what we're paid to do. So to really manage that. But we're very we believe we can do both, Mark.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

We believe we can expand growth in the future expand our growth rates in the future and expand our free cash flow margins. Rule of 40 is kind of just a number. And quite frankly, we're not looking back.

Mark Schappel
Managing Director at Loop Capital Markets LLC

Great. Thank you.

Operator

Your

Operator

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

Blair Abernethy
Managing Director at Rosenblatt Securities

Thanks very much. Great quarter guys. Just a question on the Q1 term license. Was there a change or an impact from contract term length, like duration of of what you signed in the quarter?

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

No. There there wasn't. It's just the timing of our it's just the timing of our term license renewals. Q one just happened to be a quarter with more revenue.

Blair Abernethy
Managing Director at Rosenblatt Securities

Okay. Great. And then in terms of your go to market at this point for '25, are you looking at sales and marketing capacity at all and and particularly around, you know, new customer, opportunities?

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

We are. We we we have, you know, built into our plan. We have room for capacity increases in our sales model, and we will we will, you know, selectively, invest in those areas. I do think the new logo part of that is an interesting one. Because what we found with Blueprint now is because the engagement is so fast, the visualization is so fast, the solutioning and the ideation is so is so smooth with Blueprint.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

It does give us increased interest in how we could cover more logos and how could we do that and still be, you know, very efficient on the go to mark on the go to market, cost? So we are that that is the one thing that is different in our mind is just figuring out, like, how do we help more clients, you know, change the way they, you know, they build software.

Blair Abernethy
Managing Director at Rosenblatt Securities

Great. Thanks, guys.

Ken Stillwell
Ken Stillwell
COO and CFO at Pegasystems

Thanks, Mark.

Operator

And that does conclude our question and answer session. And I will now turn the conference over to Alan Treffler, Founder and CEO, for closing comments.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

Well, you, everyone. I want you to know we're working hard. Hoping to see all of you at PegaWorld on June 2, What we're gonna have our Investor Day, but we're also gonna a terrific, terrific slate of announcements and demos that we're gonna be able to show people that I think are gonna be really very exciting. And it's been a terrific start to the year, and we're pretty jazzed. And thank you all.

Alan Trefler
Alan Trefler
Founder, CEO & Chairman of the Board at Pegasystems

Look forward to talking to you again soon.

Operator

Participation and you may now disconnect.

Executives
    • Peter Welburn
      Peter Welburn
      VP - Corporate Development & Investor Relations
    • Alan Trefler
      Alan Trefler
      Founder, CEO & Chairman of the Board
    • Ken Stillwell
      Ken Stillwell
      COO and CFO
Analysts
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Earnings Conference Call
Pegasystems Q1 2025
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