For nine years, and I'll tell you something, this is the investor session I'm most excited about. I think we're going to show you some things today that frankly, I didn't think were even possible about a year and a half ago. So I think it's going to be phenomenal. Really looking forward to it. Really excited to see so many people in the room. We have several members of our board here, so we'd like to welcome them. Also, our sell-side analysts, as well as investors. Every year, when Ken and I put together the agenda for the investor session, we engage with all of you, get your feedback, and then work that into the agenda for today. So very excited about what we're going to be covering. All right, there we go.
So just to start with some housekeeping, I'm going to put the safe harbor statement up here, give you all a chance to read it. Certain statements in this presentation may be considered forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Investors are cautioned not to place undue reliance on such forward-looking statements, and any forward-looking statements in this presentation represent our views as of June 10, 2024. I'm not going to read the whole thing. Just going to leave it up here again for you guys to be able to read through. For additional information about our safe harbor statement, please see our most recent filings with the Securities and Exchange Commission, including our 10-K annual report for 2023, as well as our Q1 2024 earnings release. All right, getting to the agenda for today.
We have Alan Trefler here, our founder and CEO. Alan is going to be coming up, and he's going to be talking about changing the way the world builds software, the purpose of Pegasystems. In addition to that, he's going to be talking about AI. So AI was the number one thing when we talked to all of you that you wanted to hear us cover. So there's going to be a big theme in today's presentation about AI. So very excited about that. After Alan finishes up his remarks, we're going to open it up for Q&A. Alan has a lot of client meetings today, so he'll be with us for about 20 minutes. So if you have questions for Alan, you want to get those questions asked while he's here before he leaves the room in about 20 minutes.
After Alan finishes up, Kerim Akgonul, our Chief Product Officer, is going to talk about product and give you some amazing insight into what we're doing in the product space and how we're innovating. One of the things that I'm most excited about Pegasystems is our long history of innovation. And I'll tell you something, in my nine years, I've never seen the level of innovation we're coming out with now that's highly differentiated in the industry. So very excited for Kerim's presentation. There are over 5,000 employees at Pegasystems. Anu Shah, who's our Director of Sales Consulting, is one of my favorites. She's very sharp. She's going to be giving you a demo of Pega GenAI. For those of you who have already seen Pega GenAI, you haven't seen what she is going to show today. She's going to show some just mind-blowing features and capabilities.
Really, really excited about hers. John Higgins and I, John is the Chief of Client and Partner Success, have actually worked together at two different companies, Pegasystems and another firm. John has over 25 years of experience with go-to-market, so he's going to give you a go-to-market update. Then we'll have Mr. Stillwell, Ken Stillwell, come up here, our Chief Operating Officer and CFO, and talk about the financial update, driving accelerated growth and free cash flow. Then we'll open it up at the end for questions. We are streaming the event today. There are a bunch of people listening. If you're going to ask a question, please raise your hand. We have mic runners. They'll bring a mic over so that we can capture your audio for the transcript.
If you could identify yourself, first name, last name, and also state the firm that you're with, that would be great for the transcript. If you're listening to this on the phone today and you have questions, you can actually submit them via the website. We've got Ralph in the back of the room monitoring for those questions coming in, or you can send an email to Pega Investor Relations at Pega dot com or to me, Peter Welburn at Pega. So at this point, we will have Mr. Trefler come on up and talk about our strategy.
Thank you, Peter, and I'll talk briefly and just give people a chance to ask away. Hopefully, the keynotes this morning and the discussion from the VA and T-Mobile, I think really said a lot more than I could recapitulate now. The reality is, the technology agenda that we are bringing to market going forward is, from my point of view, enormously exciting. It's powerful in terms of what it can do for our clients. I think it positions Pega in an extremely advantageous way. It plays to our traditional strengths in terms of the architecture that we have, and it opens up an enormous number of new doors.
You know, we've talked about our purpose being to change the way the world builds software, where that vision was based on the idea of having a model-driven architecture, having this layer cake in the middle of our system that let you be able to define rules and processes and decisions and how you wanted your, you know, decisioning and AI to work, and to have that be in a structure that we've spent candidly 40 years working, reworking, and developing in ways that I think are tremendously advanced. When Gen AI became available, all of a sudden, we saw a way to really plug that in to our architecture, as opposed to other folks who are doing add-ons and features.
Don't get me wrong, nothing wrong with a bunch of good features, but we saw a way that we could really take a different approach to what this AI was capable of doing. And, I would say I think what you're able to see today shows both a new way of doing things and the practical achievement of many goals. You know, the way to change the way the world builds software, I think, is not by more code written by AI, but using AI to structure how you want a business to run and then being able to execute. Now, I spoke in my keynote about the three types of artificial intelligence. Statistical AI, you know, think of this as being something that is making decisions based on numerical patterns, based on machine learning. Been around a long time.
We've done it for a long time, and the customers like T-Mobile that spoke about it are specialists in the application of statistical AI for tremendous, tremendous business outcomes. And then with generative AI, you're seeing AI productivity tools, things like the ability to summarize a document or write a letter or to coach somebody. Great stuff, but I don't consider them to be game-changing in the same way that the third approach to applying AI is, which is to apply AI to the very way the business is defined and evolved. And that's where Blueprint comes in. That's where optimization capabilities off of process mining and other sorts of ways to continually improve your business comes in.
What I'm excited about is I see Pega as having a huge advantage by being able to plug AI into an architecture that already was able to run and control and manage extremely sophisticated organizations. This will let us do that faster and better for them. This will let them have more control. This will address issues of language. This will address speed of change in ways that I think two years ago I couldn't even imagine. So, you know, that's where we are, and I feel very, very comfortable that Pega has a great, great agenda. You know, the team is excited. My customers and my early adopters are excited. My partners are excited and are really contributing to this, and I think it's a really exciting time. So with that, I'm just gonna throw it open to questions here, I assume.
Okay, great. Is this on? No. There, oh, there it is. Okay, cool. Oh, that's loud now. Okay, great. Steve Enders from, Citi. Thanks for, thanks for the great presentation and, everything today. I guess maybe just to start, I want to ask about, you know, what you're seeing from customers, especially on the macro side and the impact that AI is having. I mean, I think there's been a few, you know, challenging software prints recently, so it would be great to get your view of kind of where things are, in that setup and, you know, how maybe AI is changing the decision-making for, for customers today?
Well, I think customers have a lot of enthusiasm about the buzz of AI, but as often happens, a level of skepticism sets in about, you know, which of that buzz, you know, insects and, you know, which of those, that buzz is honeybees. I don't know if that's the right metaphor or not, but, you know. I think that we're coming across really as being able to bring them the honey that they need to drive their business. But boy, there's a lot of noise out there that they are absolutely—customers are absolutely correct to be skeptical, to be hesitant, and, and, and to wonder about it.
But I'll leave it to you to form your own opinions about what's real and to ask the customers that we have in attendance what they think is real based on what they're seeing and what they're hearing from other people. But look, I, I was with a client a week ago, and I said to them, I said, "You know, it's got to be really horrible being you 'cause you know, every meeting you're in, all you hear about is AI, AI, AI." They said, "Yeah, it's absolutely miserable." He says, "Just, you know, you can't figure out what's going on." And I said, "Well, we're gonna try to make it clear for you." So a lot of what we're doing is actually trying to bring clarity to the different types of AI and to make the use cases really clear and visible.
And my sense is that's getting across. But Steve, any suggestions you have of how to make that more clear? We're always interested.
I wish I had better ideas out there, but it feels like there's a lot of a lot of noise, and there's some good signal here coming from you all. I guess maybe to clarify a little bit, just, you know, when you're saying that the customers you're working with, that they're seeing clarity, or you're trying to help them with clarity, like, are they proceeding forward with AI initiatives with you all yet? Or is it still kind of early days of you know, those initiatives?
Well, it's both early days, and we're proceeding forward. I mean, I am stunned by the adoption of Blueprint by literally, at this point, over 100 clients. That when a customer builds a blueprint, we don't see what's in the blueprint, but we do see the customer, you know, name, and we do see the title of the blueprint. So I can tell you they're building blueprints that sound really, really interesting. Perhaps not as interesting as mud management, but, you know, very practical, handling exactly the types of things you'd want customers to be looking at and playing with. And so, you know, on one hand, it's early days, but we didn't get here, like, overnight. We've been working on this for quarters to be able to have something that turned into Blueprint. You know, we had an early version earlier in the year.
It set the stage, didn't do too much. This version, which is live this week, does a lot, and as we've continued to enhance it, we've seen the adoption go up. And I'm just also blown away by the fact that in relatively short period of time, we've had 12 different marquee partners decide to put their effort and their IP into it for them to be able to use with clients. That's not something our sales team can use. That's something, though, that when they go see a client, they can say, "Hey, we have a blueprint to do X, so that's why you should use us to do a project," et cetera.
To be blunt, I would never have expected, you know, 60 blueprints by partners, you know, actually loaded into our system in 4, you know, 3 or 4 weeks since we started doing that. So, yeah, I'm seeing very tangible, once again, beginnings. You know, our goal, we have to, we have to turn this into, into bigger, better growth. You know, we're not, we're not going to make a lot of money selling AI SKUs. We got a couple of them, but that's not the material use. The material use of this is, can we get customers to do faster, better, you know, cheaper things through the application of AI that will lead to more adoption and as a result, more sales of Pega?
Perfect. Pass it along.
Next.
Hey, Alan, thanks for taking the questions. Jake Roberge here with William Blair. Just wanted to double-click into kind of the customer feedback and appetite to adopt your solutions. If you had to segment your base, how many of them would fall under the T-Mobiles, the VAs of the world that we're talking earlier? Is it that 100 or so that you just mentioned that are already creating blueprints? And then, what percentage of the base would you say is still on that, like, skeptical, what does AI do for me type of mindset? If you kind of could paint the picture of what you're seeing and hearing from customers.
I think they're still trying to figure it out in a lot of situations, and they're also trying to figure out if situations that are that they might apply it to could be considered risky by their risk committees and all the folks who are, you know, anxious about what this means. But with Blueprint as being, I would say, the most important application of AI that we are using, we're seeing almost no skepticism because we've been able to answer a lot of the hard problems. They don't have to run it on their system. They don't have to worry about creating something that's going to go out of control because AI is there to help the creators, just not by writing garbage code. It's there to help the creators by helping them rethink and recatalyze their problems.
And so the level of adoption is running into almost no skepticism for Blueprint. And then we do have customers who agonize over, you know, am I willing to interpret the voice stream? So it's one of the things you saw this morning was being able to interpret the voice stream and automatically default words into fields on the screen and, you know, "Oh, my God, is that going to be an issue or not an issue?" Every one of those we operate, sell, you know, and market has the skepticism questions. But the Blueprint capability and what flows from Blueprint is, I would say, very skepticism-free. Also, partially because it's so easy for them to try it themselves and see what the power of the AI is.
Just following up on that, when you think about the Pega blueprints that are being created, like, when do you think those types of blueprints actually go live into production for actual applications? Like, when does that activity start to ramp in terms of building it, but then actually getting it live into production?
I think we're going to be seeing blueprints materially go live in Q3. We're telling customers that we're involved in that every implementation should start with a blueprint. That it'd be crazy to not begin with a blueprint. Our standard implementation methodology is being changed to be organized around blueprints, and we're strongly encouraging our partners, and I know you can see that our partners are very engaged in also thinking about it. So I think if you spend some time with it and see how rich it is in terms of what it's able to do, you'd be... Look, the old way of doing things, you stood in the room, you put up sticky notes, you stood at, you know, stared at whiteboards, you argued, you drew things. You might decide how you wanted your workflows to work.
Now, with some relatively light Q&A, you're presented with a bona fide candidate for how you might run your business. And even if you change it, and you can use it to collaborate, we have a collaboration facility that allows you to share a blueprint with somebody by name, so you can pick an individual, I want to share with you, or I want to share with this partner there. Being able to operate around something that's experiential, something that's around tangible, but something also that if you're not happy with, you just press the button and say, "Hey, AI, regenerate this... try to do a better job for me." That changes the whole dynamic of how you design, think things, how you choose to build things enormously well, in an enormously positive way.
Because of the way we've built it, it out of the box supports that center-out way of thinking. That is very important, I think, strategically, to make it so if you build something, you don't get stuck in a channel. Like, you don't build something that only works on the mobile app. You're building something that then will enable you to operate across those channels. That may be a little more subtle for some customers, but boy, I can tell you, they already get that.
Hi, Austin Cole, Citizens JMP. Thanks for taking the questions. You mentioned that there's a certain level of detail that you can see in terms of the blueprints that customers are building. Is there anything you can share about, like, what you're, what kind of blueprints you're seeing the most of? Is there any asymmetry across, like, industries or anything like that? Anything you can share?
There's a wide variety. There's a lot of folks, you know. Remember, I can only see the name. So, though, a lot of times, you talk to a customer, you ask them what they're doing, they'll tell you. So that's not. We just didn't want our customers to think that we were peeking into the details of the work that they're doing. You know, we have to be very careful about making sure the customers know that their work is respected. So we're not, as a matter of course, we're not doing that. But, they're fascinating. They're across the board.
I have a number of customers that I follow on our sales automation system, and when any of those customers do a blueprint, I follow a couple of dozen clients. And so when something significant happens with another customer, I get a little notification, and I'm getting 50 notifications some days from customers who are doing everything. A lot of work around know your customer, interest about collections, so a lot of financial-type things. In multiple industries, there's account onboarding and how do you onboard accounts, or how do you onboard providers in a healthcare sort of situation? A lot of the types of things that really are important processes to the customer bases that we sell to.
Steve Enders from Citi again. You know, you have this vision of the autonomous enterprise and, you know, customers deploying AI and, you know, automating things broadly. I guess, where do you feel like the customer base is today in terms of driving towards that vision? And I guess, what does the process look like to maybe get there to help, you know, customers 500 to 1,000 or some of the, you know, late adopters to get to that level and deploy Pega more fully?
Yeah. So I think customers want... They often refer to it as we want, quote, "straight-through processing," or, "We want to have zero touch on certain types of things." But on the other hand, they want to be able to support variation, and all of them compete through their processes. So you're-- You know, it's, it's not easy to make things zero touch if there's going to be changes and there's going to be competition, and if you're going to have multiple back ends that you have to go work with. The, the key I found, and I think we've gotten a lot of organizations in the last couple of years, even before GenAI, to buy into this, is to get them to realize that the way you end up being autonomous is you stop building systems for people.
You organize the system around: What's the work we're trying to get done? And if a person has to be involved, consider that to be almost an exception, consider that incidental. As opposed to saying, "Oh, I'm going to start with a data entry screen and ask for these fields," you say, "No, no, no. When I have the data, what am I going to do with it? What are the steps? What are the processes?" That's what we mean by center out. And so you get to be an end-to-end organization, but you do it around the work as opposed to around the UI. I think increasingly customers are understanding that, and I think tools like Blueprint will make it easier for them to both understand it and adopt that. And with that, I think I'm at time.
Thank you, everyone, and I hope you have a great, you know, two days. I would. I'm not going to embarrass you by asking you how many of you have actually done a blueprint, but know that next time, I very well might. Thanks, everyone.
Our next speaker will be Kerim Akgonul, our Chief Product Officer.
The blueprints. Right. Hello, everyone. My name is Kerim, responsible for products. I hope you all had a chance to actually see the presentation that we just came from, right? So some of this content will be repeated, but, like Alan said, we do think that the Blueprint is making a major impact in many aspects of our business. We think it's bringing a tremendous amount of value to our customers. It's bringing a lot of value to our partners. It is really changing the world, changing the way - not changing the world yet. Well, that's the next version, hopefully.
It's changing the way how our sales consulting, technical sales organization is actually operating, and how they go to their engagements, and how they're discovering new opportunities into, in their target accounts. And it's really making a big impact on how the consulting arm is actually going about implementing new solutions for our customer base. So now when we're trying to basically use it to push in all those fronts. One thing that I want to also mention before going deeper into slides is a core capability that's a part of Blueprint is the fact that when you are done blueprinting, right, when you're actually finished capturing your thoughts, because the GenAI just gives you a recommendation.
My expectation is that everybody that receives that recommendation actually goes in and tweaks it, and changes it, and updates it, and make it theirs, make it reflect their vision, so it becomes their blueprint. And once you're ready with the blueprint, one of the greatest tools that we built is we have the, a new set of capabilities in as a part of what we call Autopilot, which I'll talk about, that can actually import that blueprint into a Pega runtime environment and can actually generate the application in a standard way following Pega's best practices and reflecting exactly, exactly what was captured in that blueprint and have it actually ready to essentially continue to be worked on.
It is not just completely ready to just take it into production, but all the core foundational elements are in place to be able to further the construction part. So we're very, very excited about that. Now, for those of you who are not completely familiar with what Pega does and haven't been with us for many years, I just wanted to take two minutes and remind what Pega does at the core. So, you know, we've been in business, you know, Alan, I think, you know, founded this company over 40 years ago, and we've been in business directly engaging with large enterprises in three key areas.
The first one, basically on the slide you see here, is the one-to-one customer engagement, and this is the solution that is very much around leveraging statistical AI to determine what is the best way for an enterprise, like T-Mobile we saw, to engage with a customer at the moment of contact. When a customer is calling in, when they're on the website, when they walk into a retail shop, when they're in the mobile app, what is the right way to engage with the customer? Do we basically have a retention risk for this customer? So I'm going to take an action based on that. Do we basically have an upsell opportunity, an education opportunity, cross-sell opportunity?
To be able to use statistical AI in a market that's called real-time interaction management, to be able to have significant returns for the business. In the comms space, we see this heavily used on the retention side to reduce churn, and that's very much around some of the messages that we heard earlier on. And in the other industries, like banking, it's all around making the right offer at the right time, understanding the overall context of it, and it's a very, very powerful solution. And Pega has been ranked very, very high in this market for many, many years. The next area is the customer service area. We've been in this area for almost, you know, 15 years.
Actually, you know, the positioning that we have in this market is very high. And if you look at that, you know, if you look at that, Wave, in this case, from Forrester, the other competitors in that same area is, you know, next to Pegasystems, Salesforce, Oracle, and Microsoft. And this is very much around in the enterprise play, and it's all around the contact centers, whether they're basically the voice-based contact centers or it's basically your chat-based contact centers. It's around helping customers, the end consumers, essentially, with their problems or with their, with their requests. And if you see the quote down there from the, from the Gartner Customer Engagement, MQ, it is very... You know, Pega is basically differentiated, especially with sophisticated organization, large, large organizations that that targets.
At the core of what Pega does, every piece of technology that we go to market with is built on our core platform, and we go to market with the platform as an independent solution as well, and it's called intelligent automation. That is all about automating work. Work comes in, work comes in in many places, in many different forms, lots of different use cases. So these organizations, millions and millions of work coming in. I think we have some customers who do more than a billion pieces of work with Pegasystems. And how are you going to get it done? Somebody wants a change in their service. They want a new product. They want to add somebody else into the product. They have a dispute. They have a question. They have an update. Thousands, if not millions of different use cases in there.
What is the process? What is the data? What are the systems that need to be updated? Who are the people that need to be notified and participate in getting that work done, resolved end to end? And that has been essentially in the DNA of what Pegasystems does. I've been with the company for 32 years. That is basically what we work on. That is what we try to basically make better every day. And as that part of that effort, trying to make that better and much more optimized for our customers, we all realize that AI is changing everything, right? I know it's, I sound so, feel so silly saying, like I'm sort of saying something so obvious. But we're seeing AI being... You know, this AI is not just one thing out there, right?
There are basically thousands and thousands of different ways to apply that concept of AI and machine learning and generative AI to so many different use cases. We are entirely focused on using AI to revolutionize the way that these large enterprises succeed in their digital transformation journeys. That's what we basically are focused on. And our approach, hopefully, you see in these presentations, are dramatically different than some of the other vendors.... So, Alan mentioned this before, I mentioned this in my keynote. My suggestion is if you, if you see someone showing you using GenAI to generate code, run away.
If basically, we're going to have robots write millions lines of code and, you know, somehow that's going to, you know, layer on top of the existing infrastructure with these large enterprises, I don't think that's a, that's a formula for success, and we've seen that happen before anyway. We live in the large enterprise digital transformation world, and this world is, is hard. There is a lot of moving parts, there's a lot of systems. You know, understanding, just understanding what is actually going on today is really, really hard. And there's lots of different departments. The meetings and the gatherings where people collaborate can be contentious. Getting alignment is hard. And then when you're trying to build something, you're basically really dependent on people with some very specific skills who probably don't understand your business, right?
Because you either have some of these extreme technical skills or you understand the business, and it's hard to find people that can combine those skills. And there's lots of restrictions around, of course, the systems, the access, et cetera. So when we first built the AI capabilities into the product last year, and we announced this as a part of our product last year, we built the GenAI as a core aspect of how Pega operates. You know, we have workflows. That's a part of every application. We have decisioning concepts. That's a part of application. We have integrations. That's a part of application. And we built GenAI so that it will become a part of every application.
One of the most, you know, impactful things that we did is we built the blueprint that's leveraging that core element to make a part of the design of every single application. And we think that GenAI Blueprint basically has a tremendous amount of benefits to our business, to our engagement with with customers and prospects, and like I said, to our partners as well. It sort of moves away from lots of high-level conversations and gets us very early in the discussion of how should we solve this problem? How can we actually get to a better outcome? How fast can we generate something that we can take a look at together and see if we like it, and how would we change it so that we all like it?
And then when we build it, when we actually import it into the Pega environment, how do we know 100% guaranteed that what is going to be built out as the foundation of that application is actually following the best practices? So that... You know, what, what we see in a lot of cases is, business and IT, and sometimes the IT is an outsourced IT. They'll have lots of discovery meetings, those sessions that Alan talked about, with lots of Post-its around the, you know, on the screens, and they gather the requirements, and then they go on their own way. And then the IT team comes back months later to show the business what's built, and major mismatch of basically what people thought that they were agreeing to versus what actually got built. And then sometimes people had to redo those things.
And then the question is, who pays for that redoing? And how long is it gonna take to redo it? And how do you know that the redo is actually gonna redo it into the right way? And Blueprint eliminates just about all of that to build that foundation, eliminates the requirements to get, like, high-level architects into the engagement of building the foundation, and also basically it creates an environment where people can do this really, really rapidly, directly on the website, from a through an incredibly easy-to-use experience, where no GenAI skills, no Pega skills, really not a lot of computer skills required. To actually, for subject matter experts, for somebody who understands mud management, to be able to actually capture what would a mud management workflow application look like in a Pega system, and then say, "Yeah, okay.
I'm okay with this experience." And the latest capabilities that we're announcing today is, we're basically importing lots of different technologies like BPMN and Swagger, which are some of the technical components. But not only are we using GenAI to create the workflow and to basically make recommendations around different people that are gonna participate, we're now using GenAI to actually create the user experience and simulate the user experience for the subject matter expert. So they don't have to imagine what this will be like. They can just literally, literally see it. And, you know, we, we think that this is a big part of the revolution that we're seeing in, with GenAI in our specific industry, in how we build applications that are part of modernization, digital transformation, in the organizations that we work with.
So we're not trying to become a general GenAI type of a solution. We're just trying to use GenAI specific to the problems that we are best at and differentiated at solving. And this is we believe this is just the very beginning. As I mentioned in my presentation earlier on, there's a lot more coming in, and having this just being a natural part of our architecture gives us incredible flexibility to basically rethink everything we do from the perspective of can we apply GenAI to actually generate this, right? So all the way on the left, what you see is the Pega GenAI Blueprint, which is just capturing that vision, getting that design, then taking that blueprint and actually using in the delivery, in the actual construction of the application.
And then we have another new capability called Pega GenAI Autopilot, that facilitates the development and helps the developers to actually use the best practices of Pega in order to construct all the different remaining aspects of app development. And then once the applications are up and running, and then users are actually on the system, clicking through the processes and updating the, the system, there is basically capabilities like Coach and Automate and Knowledge Buddy and Analyze that you heard us mention, to boost the productivity of people who are actually directly responding to customer requests. And you'll see us push heavily on every single aspect of this. So, you know, we believe Pega GenAI is all around revolutionizing the way digital transformation happens.
The way we see it is, look, we all use ChatGPT, and what's great about ChatGPT and generative tools is, you type in, you say, you know, "Write me a song about the, you know, Boston Celtics, you know, winning the game last night," it will just write you a song. It'll be a great song. If you basically ask it to create an image of, you know, two puppies skiing, it will just create you an image. Here, we're basically saying you're writing a prompt: "Build me a business application that handles the loan processing for a retail bank," and it creates that application. And with all the tooling that we have in our system, you can further refine it, you can make it yours, you can make it perfect, and be able to actually bring value to the organization faster.
When you're using ChatGPT to create the picture with the two puppies, you don't have to be a graphic designer to do it, right? You can just type it in, and basically you have an image. With this, you don't have to be an experienced system architect for 10 years to be able to design an enterprise application. You can just type it into GenAI Blueprint, and it will just do it, and we think that part is a big game changer. So with that, I feel like I was talking fast. I'm gonna pass it over to Anu to give us a quick demonstration. I have a clicker. And is this the right laptop for you to use?
Yeah.
All right. Well, come on over.
I'm not here. Thanks, Kerim. I do need the slide clicked, though, here. There we go. All right. Hello, everyone. My name is Anu Shah. I'm a director of solutions consulting here at Pegasystems. I've been at Pega for over 15 years now, and over those 15 years, my job has been to help understand the challenges our clients are facing and help them envision technical solutions to those challenges, and technical solutions built on Pega's technology. This includes the technical architecture of those solutions, as well as prototyping and demonstrating, that vision. And I have to say, in my 15 years here at Pega, this is one of the most exciting innovations I've seen, and it's exciting to myself, my peers. I've seen clients extremely excited and partners extremely excited.
As a testament to that excitement, we've had over 30,000 blueprints created, and over half of the organizations we work with have created blueprints, as you've heard by now. When I think of a blueprint, I built a house about 10 years ago, and I started with ideas in an Excel spreadsheet, and I worked with an architect. When I worked with that architect, I specified the rooms, the layout, we talked about dimensions, materials, renderings, plumbing, electrical, et cetera. As you've heard, at the end of that process, I had a blueprint for my home, and I could envision what my home would look like. Analogously, that's the intent behind Pega GenAI Blueprint. We have constructs that Pega understands is necessary to build an enterprise application. You have the type of work you're trying to accomplish.
Is it disputing a credit card charge, or is it processing a claim? You understand that that work needs to go through a life cycle, so how do you progress that work? There's people involved in that work, there's systems involved in that work, there's data, and there's a user experience. How are clients and those personas going to experience that application? And when you define how to stitch all of those components together, you can understand what your application vision will be. And I really see this as this technology as enabling a massive shift in how clients define and design their applications. And before I go into the demo, there's three... I just wanted to highlight how easy this process is, and you can try it for yourself.
There's kiosks at the Innovation Hub, so I encourage you all to go to the Innovation Hub and try it. It's easy in three primary ways. First, it's available on Pega.com/blueprint. It's a SaaS application. There's very little barrier to entry, and it's free. We don't charge our clients and our community for this technology. Secondly, it's easy to align on this vision. Are you good? Okay. It's easier to align, and what I mean, what I mean by align is you have all of the stakeholders in the application. Oh, I'll log in in a second then. You have all of the stakeholders in the application aligning on a shared visual paradigm, and you'll see that's the Pega paradigm, right? How do we visually define our applications? It's very easy and intuitive to collaborate in a Pega language.
Third, it's going to be easier to deliver these applications, and I'll, I'll tell you more about that after we do this demo. So I'm gonna log in to my laptop and start showing you Blueprint.... Is, there we go. All right, so right now I'm actually using the kiosk version of Blueprint, and I like to use personal examples when I'm showing Blueprint. So I recently bought an electric vehicle, and there was a process by which I... I was confused by what charger and how to install a charger, et cetera. So if I'm an auto manufacturer that doesn't, hasn't spun up this sort of application, or I'm starting a company around this, I may say I'm in the manufacturing industry. So the first thing you're gonna do is define the industry you're in.
And then I, I'm gonna say I'm in automotive, and I am going to say I'm within the operations. And as we look at defining our application purpose, we're gonna say it's EV purchase and EV charger, and this makes a difference, charger purchase and installation. And we define a functional description for our application. If you're ever unsure as a user within Blueprint, we talked about how intuitive it is. You can just click, what should I write? And, an eye icon will help you along. For the sake of brevity, I'm gonna put in, EV charger, selection, purchase, and installation. And then we can specify an organization name. We're gonna say it's manufacturing. As you heard earlier, you can specify the language.
If we click next, what's actually happening here is pretty powerful. You're taking the intent and the specification of your application, you're going out to the rest of the world, to the internet, and getting all of the expertise around purchasing, installing, and maintaining your electric vehicle charger. And then you're taking Pega's decades of expertise to understand the intent and that language and turn it into those constructs we talked about. What type of cases and what type of work do we need to do? How do we need to do that work? What systems are we likely to integrate with? What data are we likely to need, and what people are likely to be involved in this process? And as you can see here, it's fairly accurate. We have. We would want to select a charger. We'd want to go through the purchase process of that charger.
We'd probably want to schedule some installation. Installation, maybe, you know. And if you look here, what's being rendered on the right is a starter user interface. What's that user experience? And this is what's new in Pega. We've introduced the ability to experience your application, not just define your application, and chart testing and commissioning. So you can see some options here. Let's say installation, execution. Generative AI hasn't done the best job for me in this case, so I don't think I need to execute that. If I delete it, and you can see it on the right, if I delete this, let's go ahead and delete it, it's actually changing the user experience real time. So we're leveraging generative AI, not to just to define the application, but to also allow users to experience that application.
If we click next, what we're doing is we're going through a seven-step process. We first defined the intent. What, what are we trying to accomplish? We went out to generative AI and leveraged Pega's decades of expertise and those constructs, and we said, "This is the type of work." Now, how should that work be done? And this is what we call, a work, you know, typical workflow or the life cycle of this work. And if you look at the charger selection, we want to capture the information and what type of charger you want. You may want to evaluate the models on the market based on your vehicle. You'd want to next go to a stage where you'd analyze your costing and, and finalize it, and purchase and install it, and validate it, right?
This is stunningly accurate and gives you a starting point for defining your applications versus a blank piece of paper. If I go in, I can edit it. I can say, maybe instead of capturing requirements in site survey, I'd also like to obviously capture the vehicle. As I learned when I purchased, there's different standards in chargers, and it was quite confusing, level two, level one, level three, and what type of charger. So let's first capture requirements, and before we do a site survey, I don't want to do that yet. I want to capture my vehicle, and then maybe I'd want to notify of options. You can play with this and collaborate with your stakeholders in the application to generate the definition of how you want this work to be completed. This moment is pretty powerful.
This was recently released, the ability to visually preview this application. So this is really, really important in allowing our customers to visualize how this workflow will come to life. If I was in an auto dealership, and I have my desktop, and I am helping some, a customer understand the charger selection process, I may have an employee desktop. But if I'd like to have my buyer, myself, go onto their mobile to select charger options, what would that mobile experience be? Maybe I prefer my desktop, and so what would that desktop experience be if I'm on my laptop? And then, of course, some people maybe have a question, and you want to speak to someone. What would that contact center experience be? And within minutes, we're able to look at how this work can be done and experience that work as well....
So once we've defined and started our collaboration of how we want this charging process to be done, we're now again going out to generative AI to generate the type of data we need to capture within this application. And generative AI is taking all of the information we've specified so far and saying, "Let's go out and, and figure out the type of data, the particular data we'll need." And again, as Kerim mentioned, you can see this experience. What type of data would you need? And it's stunningly accurate. The charging speed, which I didn't know existed, the contact people, the location, et cetera, and you can add the type of charger, et cetera. And then if we continue to step five, we typically need to integrate with systems, right? So you may want to pull from a database of the types of chargers available.
You may have an ERP system or a system handling your customers, an order management system, an in-installation request system. So once we've defined the systems with which we're pushing data out to or pulling data in from, we then typically have personas. So step six are the people you're dealing with. You may have an operations manager, a site supervisor, a sales rep, et cetera. I see maybe sales rep is missing, so maybe I want to generate more personas, right? And now we're again going out to generative AI to get ideas of who should be involved in this application. And we could go ahead and add a salesperson if we wanted to. At the end of this process, I click Next. At this point, we have a blueprint of our application.
We've defined all of the constructs, the type of work, the type of systems, the type of people, et cetera, that are going to be involved. And if I click over here, I can actually download that PDF and share it with my stakeholders. This is technical, but right now I can also download a blueprint file, and in technical terms, that's your JSON. So you can take that JSON and import it into a working system, and the version—what's really important to me, being a technical seller, is this is version agnostic. When you build a blueprint, you're just building it. If someone is on Infinity '24.1 or Infinity '23, they can still take this blueprint and import it into that system with this JSON format. So at this point, we're, you know, we can collaborate, we can demo live.
We have the ability within pre-sales to demo this live and pull it into a live system, which is exciting, and then we can also share and collaborate on that blueprint. So hopefully, you've seen how easy this process is. It's easy because it was a SaaS application. I could go to Pega.com, or I encourage you to go to the Innovation Hub, access it. This is really important because in my role, I see a lot of clients have friction in getting access to environments. They have budget to get a cloud environment or time to spin up an environment. With Blueprint, you're able to start that application development and design process on Pega.com easily and quickly, right? Reducing that friction, so when that environment is ready, you're able to take your blueprint and import it in to kickstart your applications.
Second, it's easy to align on a shared Pega vision and in a visual Pega paradigm. This is really important because the old way we used to work is, as Kerim said, and Alan said, you'd go into a room, you'd whiteboard your process, you'd capture, you'd sticky note, maybe do some design thinking. You'd come out with a requirements doc, maybe create a PowerPoint, show it to the client, develop a prototype. It could be weeks of time, if not months of time, from idea to reality and prototype. With Blueprint, you're aligning on their requirements in hours and able to demonstrate a vision and a prototype in hours. Thirdly, I think it's easier to deliver. You have it in this visual Pega paradigm.
You don't have to translate it, and you can take that, you can scope it much more easily, and then you can also, because you can import it and take that JSON and import it into a working application, it streamlines that delivery process as well. So I really, really think with Blueprint, we're changing how you get from an idea to reality rapidly, and I think... The way I think of it to myself is I like to simplify things. It's allowing our clients and our integrators to really think like Pega. You don't have to translate what you need to build into Pega. You're doing it immediately, streamlining that delivery, and also streamlining the process by which clients can understand how Pega can solve their business challenges.
The last thing that really hit home, I talked to account teams, and there's an example that made a lot of sense to me, and it really clicked on how this is really helping our clients. We have a center of excellence around automation at one of our clients, and the job of the center of excellence owner is to go to their business stakeholders and help them solve their business challenges. With Blueprint, this individual is able to go to their business stakeholders quickly, understand their challenges, quickly blueprint an application, right? Blueprint your design, and now that business owner can understand how Pega can solve their challenges rapidly. So with that, hopefully, this was helpful, and, yeah, I think we're done. I will introduce John next.
Any, just a second. Any questions?
Sure.... Okay.
Awesome, great. Thanks for the demo, Steve Enders from Citi again.
Hi, Steve.
I guess I just want to understand, like, you know, helpful to see this live. What does it look like then taking this from, you know, a blueprint into actual production? And does it maybe speed up the implementation time or, you know, the time to spin up a new Pega application?
Yeah, yes, it does. So we obviously, Alan said we're looking to Q3 before we go to production for those applications. But what I didn't show you, for the sake of time, is when you take that JSON file, we have the ability to import it into an existing Pega application. But of course, clients are going to have existing assets, so we have the ability to reuse those assets and build on top of your existing assets. Like, obviously, a client would have the notion of what a customer is, or what an account is, or what an order is. So we can import a blueprint into an existing system and then build on top of assets you have. Yeah.
Yeah, you mentioned earlier about 30,000 blueprints have been created. When... Oh, also, this is Jake Roberge with William Blair. But, you, you mentioned that it was 30,000 blueprints. When you talk to your customers that you're working with, like, what is, what's success in terms of actually getting those blueprints created? Is it: "Hey, we built 100 different blueprints, we went to all of our business owners, and we were ultimately able to get 5 or 10 in production?" Like, I'm just curious, when you're talking to customers, what, what the success rate that they're, they're looking to see from these blueprints are.
So, right. In my roles in pre-sales and selling, I think part of the success is getting stakeholders within an organization to understand how Pega can solve their business challenge. So aligning on that shared vision initially, right? How can Pega solve the problem you're presenting to me, is pretty successful. And then we are obviously looking to get clients to production. Okay. Oh.
Thank you. Jack Nichols with KeyBanc. Are customers asking, using Gen AI for blueprints that are already deployed and in uses to help fix, optimize, you know, think along the lines of, process mining? Are customers asking for using Gen AI within deployed blueprints?
GenAI within deployed blueprints? Okay.
Correct. To optimize the workflows, make them better in deployed use cases.
Yes. So customers are looking to, and we're looking to augment Blueprint and then probably can't... I don't know if we can talk about future versions yet. So, yes.
There was a feature on one of the screens where you talked about import the BPMN.
Yes.
That's an example where you can take it, or maybe talk about that for a second.
Sure. We do have clients using different notations for applications, and you can take in a BPMN for application definitions. I do see this as a key way when you have a system in another technology, per se, and you have a BPMN representation of that. You can absolutely import that to kickstart your Blueprint and then move that application to Pega. Yeah. More question.
Hi, Jaiden Patel from J.P. Morgan. I wanted to ask, what portion of clients currently using Blueprint are in Infinity '24 versus 23.1? You know, I'm trying to understand if the upgrade cycle could delay what seems like a very interesting opportunity.
Can I ask him to hold that question till later? I think it's a little up there for you to answer that question.
Sure.
Sure.
We'll talk about that later.
Okay.
Any other questions about the demo maybe, or about our seller, how we use Blueprint in the selling process? Thank you.
All right. Thank you.
Nice job.
Oh.
Good afternoon, everybody. My name is John Higgins. I am responsible. I co-lead our global go-to-market organization with my colleague, Leon Trefler, who's in the room. I'm looking forward to spending the next 10 or 15 minutes with you in regards to what does this mean in respect of our go-to-market motions. I've been in the industry for over 25 years. Just under 50% of that has been in first-generation cloud companies. I've never been more excited than where we are as an industry right now. We've just spent the last couple of hours really getting into the technology. What I want to talk about today is: how do we take that to market? What impact is that gonna have?
You know, if you look at a very simplified model of our industry, enterprise software companies, one side of the house builds technology, the other side of the house distributes that technology. I'm gonna talk about how, what, what we're trying to do to ensure that we improve sales efficiency and what we're trying to do to ensure that we accelerate sales cycles. Now, anybody who's been looking at our industry for any period of time, what you will know is that enterprise software sales life cycles are very long, and there are some very good reasons for that. Stakeholder alignment, Kerim talked about it. We have introduced an army of specialist roles, and this is not a problem unique to Pega. This is a problem in enterprise software, full stop.
So if you look at the introduction of specialist of roles, business analysts, developers, project managers, program managers, UI, UX, systems architects, business architects, integration architects, I could keep going. The average enterprise application has 12-14 different specialty roles involved. Each role comes with a transition. Each transition comes with a point of friction. It slows things down. So that's one of the reasons why, you know, it is a frustration of ours. How that shows up, elongated delivery cycles, things cost too much, integration complexity, and, you know, 70% of transformation programs fail to meet their original objectives. This is all in the news that we know. This is what we've been living for decades now.
When we kind of go to the next stage, what that tells us is our industry, at this moment in time, has never been more ripe for disruption. And Kerim talked about if anybody's gonna use GenAI to generate more code, tell them to run away. I agree with that, but we are at an inflection point. If you have a choice where you can have a short-term fix of using GenAI to deliver an application, that will be delivering more code. That code will go on top of the existing debt or mountain of debt that you probably already have. I have yet to meet a CIO who needs more code. I've yet to meet a chief risk officer or a chief a COO who wants more operational risk and complexity. So turning left is like a fast food fix.
It will satisfy you in the short term, but it's not gonna be good for you in the long term. Or we can use a systematic approach in the safety of a platform, partner with AI in order to use it to consolidate and simplify your enterprise architecture. If I take an example of this, and this was a serendipitous example, we're working with one of the largest CPG organizations. We do a lot of work with them around supply chain management. How do we bring—they've got five different operating units within that. How do we drive harmonization and bring all those business processes together? When we were going through a program review, we showed them Blueprint in regards to designing a future state.
The COO saw that there was a workflow there around safety, and he asked us to pause the meeting, and he wanted to go into more detail to see what it was. What unveiled itself was quite interesting. The reason he was interested in it is this company has over 100 workflow applications across their factories in different parts of the world doing employee safety. I, I can guarantee you those 100 applications are probably in 40 different technologies. So that is a really good example of a lot of kind of legacy or one-off applications that is ripe for consolidation. Historically, if a client had asked me, "Fix this problem for me, standardize," we would have gone out, and we would have done a review of all of those independent applications. We would have done the best of the best, come back, done readouts.
We don't have to do that anymore. We can ingest all of these. What used to take months can now be done in hours and weeks. So when you partner, you know, with the technologies that we're bringing to market now, this is revolutionary. And the word revolution means you've got to really fundamentally change how you sell, how you design, how you implement, and how you deploy, and I think that is our leadership moment. I think that is the thing that Pega has been waiting for. With the introduction of this technology, I think it's extra fuel to get us there faster. Back in November, we were looking at what are the principles that we need to achieve with Blueprint?
And there were some simple kind of things that we said, "Look, without this, it's not gonna land well." The first is it's got to be an engaging, design-led journey. It's got to be a native, collaborative environment. We need to make sure that we respect all the things that our clients and partners love about Pega. It needs to be secure, safe, auditable. We need to have the ability to ensure it's channel-independent, so you're taking advantage of everything that Alan talked about earlier, and ultimately, it helps clients go faster. As I was building this slide, I kind of realized that we actually have a client testimonial this week, so I thought it'd be better for you to actually hear from a client, in regards to their experience with Blueprint.
Yeah, yeah, we just finished our, our great low-code enterprise development workshop here at the Rabo, right?
Sorry about that.
Yeah, yeah, we just finished our great low-code enterprise development workshop here at the Rabo, right? I really loved to see all the whole engagement of the both of the teams. We had the business and IT basically together in one workshop. And what we also said is that we want to work in a low-code way, and if you go low-code, then, of course, Blueprint is there to help us, right? So how was it to experience Blueprint in our workshop to get your requirements as a PO more clear?
Yeah, what, what we see with the business is that it's very hard for them to really identify what their needs are. And, with the use of Blueprint in the last couple of days, we really saw that it gives you new insights on how you can approach stuff.
Yeah.
So where we first thought, "Oh, it's very complex," Blueprint really helps you with getting a good solution in place and a design for it.
Yeah.
It's very valuable for what we want to reach and what we want to accomplish.
Yeah, I saw it, like, the first thinking, using Blueprint, getting to the point, right? But then we have a blueprint, and then it's up, of course, to you then to say, "Okay, we take the blueprint." How was it to use Blueprint and getting it further into your application structure?
Yeah, so as an LSA, we're really exciting to see the blueprint. We saw a blueprint, and then we wanted to really quickly implement it. But at the beginning, it was kind of unlearn stuff that you know and try to implement it the right way, build modules around it, build a modular structure, use reusable things throughout Rabobank, which they can other areas as well. You know, build those blocks, small Lego blocks, put it in your main application, then have the whole feature, and then push it over to RPO back again for the development. You know, he can she can add some things more on top of that, so that-
Especially with Constellation, right?
Yeah.
We were using Constellation, of course, the latest technology on that. And then it was funny also to see during the workshop that even, like, the PO, like, "Hey, I can start building my own case type," right? "My first case type.
Case type.
How was it to work with Constellation in App Studio?
It is very easy to do, even for me, without any knowledge on Pega whatsoever. I do have a lot of knowledge on the business side, but Pega, for me, was totally new, and basically, in a very small amount of time, I could already start building my own workflow. And I can take that to the business to show them for this is what it could be, which I think is very valuable in getting them on board on this change process and getting a workflow into place, which really will accelerate in the way that they work-
Yeah
... to take out all the manual effort that they have now, and, which can really speed up our processes.
Yeah. Make your life easier, right?
Of course, and also, like, you know, all the members involved in the workshop, like, you know, from the BAs to the POs, the developers, the SS, SSAs, LSAs, and you. So it was a joint effort where we, you know, collaborated. At the end of the third day, we had an application almost working, and, you know, it's ready for demo. So that was, that was fabulous and awesome.
Yeah.
Yeah.
It was great workshop.
Excellent, yeah.
Now keep going and basically quickly develop new functionality, right?
That's-
Yeah
... that's definitely the goal.
So if you also get excited around what we did here at Rabo, start with your business, right? With your PO, with your BAs, and do it in the right way, and you will very fast get your results, and you will be as enthusiastic, basically, as we saw here today.
So my favorite part to that video is when Marieke says, "I know nothing about Pega, but in a relatively short period of time, I was building my own workflows." So that's a game changer for Pega. That's really democratized how easy it is to engage and get going. And again, keep in mind that this is a product that we released in March, so it's having immediate impact. So there's no better example than obviously a client example. A preview of tomorrow's keynote, so I'd really encourage everybody to go and have a look at the Deutsche Telekom keynote tomorrow. Deutsche Telekom is, you know, just under 200,000 employees, over 250 million customers. They are in the middle of a program to modernize over 800 human resource processes.
When they saw Blueprint, they kind of paused and said: "We're gonna use Blueprint going forward." So the final 300 of that modernization program, they're gonna instrument using Blueprint. The testimonial is, "Feels like Pega priorities are our priorities," which again is a nice endorsement in regards to the original mission that we went about. The reception from our clients has been really, really positive, and these are large, large organizations who've been working with Pega for quite some time. So when we kind of look forward and say, "Well, what impact is this gonna have on our go-to-market organization?" The first thing I would say is it really is opening up new frontiers of client engagement, and kind of there's four really important things within this.
One is we've got a very, very solid and focused target org model in how we go to market. Ken will probably talk about that in more detail. But we have now an opportunity that we're starting to see client and partner-initiated pipeline. If, if we, if we look at pipeline and pipeline generation, the example that Alan gave earlier, where our partners have uploaded over 60 templates of their industry best best knowledge into their Blueprint instance, that means they have an ability to go to market where Pega is part of their solution, and that's quite, that's quite game-changing. When a client has an ability to start instigating their own workflows, self-initiated pipeline is gold dust, right? It's a lot more valuable than trying to sell, you know, a specific target need.
So having that, those two frontiers kind of opened up to us. There was a question earlier in regards to, what are we seeing by way of activity when clients are doing Blueprints? I see three very clear kind of categories. The first one's easy to understand. It's kind of like the example that Anu did, which is, "Hey, this is cool, new technology. I want to play with it. I want to see what its limitations are. Is it good?" And so there's a lot of experimentation. That's very good for Pega because our clients are starting to see, you know, Pega in a new light. You know, Pega isn't complicated. I've got skills at my fingertips, and I can get to value quickly. So there's a lot of experimentation in that.
The second category I think is strategically the most interesting, and that's the example I, I mentioned with the large CPG organization, where clients who have a portfolio of applications that are doing similar things that they want to consolidate, but they're not documented. So any client that's using Pega to understand their business processes has to be a good thing for us. 'Cause again, it makes the clients think about us in a, in a fresh way. And then the final category is the one which is more immediate, and that was the question around how many clients are working with Blueprint now? When do we expect to see the first go-lives? That's when a client's got a very, very specific need, and they're getting into an envisioning, they're getting into, you know, the co-creation with the various different stakeholders, and they're getting to live.
We're seeing a very rapid uptake of that in regards to clients that are kind of using it. Within our own internal organizations, Anu mentioned this as well, we're changing how we do project estimation. We're changing how we sell, so that we can take advantage of all of these assets that are being built by clients, aided by solution consultants or partners, and how we pull them together and then help the client to really take that, lock it down when it represents what they need to do, and then get to go live first. And then the final bit, which the capability that was released last week, that was demoed today, being able to demo a working application in the moment, is a first, you know, and that's real-time, and you saw that in the demo.
That's really important in regards to getting clients engaged, their fingerprints on what the solution looks like. So that design led, that whole experience is quite powerful. So Blueprint really massively, you know, reduces the time to complete our pre-sales work, and all of that work that we do transitions into the next phase, into the build. Now, zooming back out again on an industry level, and, you know, this is my experience. I've been working in enterprise software and delivery for, like, 25 years, and if I really kind of simplify where is most of the time and effort spent, it's really in three specific areas: gathering requirements, building the application, and building the UI. Most large enterprises do have a separation of the UI from the workflow. Our world-class Pega clients obviously put all of that together.
But if you kind of, at an industry level, if you look at that, that's kind of a norm. So about 70% of the effort across those activities is where your calories and where your money goes. What we've shown you is we've shown you how we've brought those three phases together, how we've stitched them together so they're all parts of a single step. So gathering your requirements, building the workflow, and automatically building a Constellation UI off that workflow is a massive step forward, a revolutionary step forward in making it easy for clients to envision their application and get to value fast. So when Alan said last year, we're going to double developer productivity, you know, this is actually doubling the double in regards to the level that we go through that, and we are still very much in the early stages. Again, if...
You know, the thing that I would really, really emphasize about kind of where we are, it might be early stages, but we've made massive steps forward in solving some of the biggest barriers and obstacles that are in front of us. This will have a huge change for how we sell, how we design, how we implement, and ultimately, how our clients go to market. Having the force of the partners behind us and them so energetically engaged in using Blueprint to bring their IP to market, gives me very, very strong kind of optimism. Couple of things. You know, hopefully, you've seen firsthand how Blueprint is something that really brings stakeholders together. It ensures that everybody is aligned. It really kind of takes the months and weeks into hours and days in regards to the simplification of getting to good.
The infusion of this capability into the platform, and Pega is a platform that has been respected for decades because of its flexibility and specialization and ability to scale. All of that coming together really gives a lot of confidence to our clients that this is very different to other options that they've got. So in closing, you know, the traditional approach to enterprise software, sales, and delivery is far too complex. It's ripe for disruption. We believe at this moment in time that a change is coming. This is our leadership moment to take that change. We've certainly got the technology. You've seen it.
We've got to go execute on that, and I do think that this is going to be a very refreshing change in how we go to market, how we engage with our clients, and I couldn't be more excited about leading our global go-to-market organization or the opportunity that we have to disrupt our industry. Thank you. And over to Ken.
So, is this working? Good? Keep talking.
Did you get the right channel? Yes. It might be off. Let me check and see. Oh, it's on. It said number 5, but it's—Make sure it's on. Go ahead and speak.
Can you, can you hear me now?
Yeah.
Okay.
Raise the mic up a little.
Okay. All right. Well, one way or the other, you can hear me. So, thanks, thanks to everyone for joining. The traditional approach to PegaWorld for those who, that have not been here before, the keynotes were this morning. The investor session, of course, is now. Through the afternoon, the innovation hub will be open. I would encourage everyone to go over there and walk through. You can talk to vendors, you can talk to partners, you can demo Blueprint on the kiosks. And also, I would encourage you to take advantage of the fact that, you know, everyone here at PegaWorld is pretty open to talk about what their view is of the market, of Blueprint, of all the...
And that's one of the reasons why we do the event here is because we want to give you direct access to talk to people that, you know, aren't necessarily myself or other people from our management team talking about, you know, our view of the market. So please take advantage of that, and, you know, learn from different viewpoints. And I think you'll hear the excitement about Blueprint, and you'll also hear some of the changes that even our partners and our clients view that Blueprint will do to their businesses that have nothing to do with what our. You know, they're very aligned, but they have nothing to do, they're not planted from us. So take advantage of that.
The keynote's tomorrow and some of the breakout sessions throughout the day, you get to-- you can see, you can hear client examples, so take, you know, please take advantage of that. We're gonna go-- I'm gonna go through some slides here that are in the financial section. We'll have Q&A at the end. You know, we'll go as long as there are questions within reason, so there's not a time rush or anything. So just, you know, feel free. I also know that we filed this as an 8-K, and just standing in the back of the room, I know probably all of you already know that 'cause I see many of you have this presentation up on your screens, which is fine.
But let's just, you know, just so if you wanna actually follow along and you don't know, you can go to Pega Investor Relations, the Pega Investor Relations site, and you can pull up the 8-K. So let's talk about, let's start with a framing of what are we. What is, what is, how does Pega view the coming few years, and where are we now in that journey? There's a massive market opportunity.
I wouldn't even begin to debate the numbers that we might talk about in terms of the size of the market, because they're so large that in terms of the size of Pega, I think that, you know, whether you think the market is $50 billion, $100 billion, $200 billion, $300 billion, they're all ridiculously large numbers, and so I don't think we have a market opportunity issue. We just wrapped up our subscription journey. That means the transition... If you remember, the subscription journey had three pieces to it. The first piece was really changing the way our go-to-market, how we focused on selling subscription versus perpetual licenses, and subscription now has increasingly meant Pega Cloud.
The second phase of that was that normalization of kind of the clients, you know, normalizing that billing cycle, where you used to bill upfront, you know, and moving more towards recurring billing. And the cost structure kind of matching that and pairing up to the actual billing cycle is now where we are. Now, you could say: Well, why is your revenue not exactly matching your ACV? And I think that that is always going to be a challenge until we're 100% Pega Cloud. But naturally, as Pega Cloud is a bigger proponent, a bigger component of our business, excuse me, then it'll become a lesser issue. You're also seeing closer alignment with the non-professional services growth of revenue and ACV, and I do think over time, that will continue to converge.
We are a recurring model. You know, we'll—you'll see in a couple slides, or if you've looked at the deck, you'll see that we talk about 85% of our business is recurring. But if you take away professional services, 100% of our business is recurring. The only part of our business, we have a very tiny amount of perpetual license, like a few million dollars a year, and that's normally just legacy, you know, contract, small purchases on contracts of perpetual licenses that we sold, you know, quite frankly, decades ago. But if you look at the core business, it is a recurring business. And we have now firmly planted the Rule of 40 mindset in the business. And that...
You know, if you go back three or four years, I was optimistic that Pega would adopt a kind of a balanced trade-off scarcity model if we, if we really helped support the organization and messaged it. I would say that the level at which the company has adopted the Rule of 40 mindset is far beyond what I thought was actually going to happen at Pega. And the reason why I say that is, if you're curious, just catch a Pega employee at the event and say: "What do you, what do you think is the thing that you, you most hear at Pega?" You'll hear Blueprint, and you'll probably hear Rule of 40 right after that. So I think it's really been, it's really been baked into who we are. We're not going to lose that because we've achieved Rule of 40.
We're not somehow going to say: "Oh, we've scored a touchdown, so let's just start over now." So that, by the way, that is always a risk because you kind of can accept some level of achievement and maybe not stay committed to the principles. We won't let that happen. We are going to stay committed to being a balanced growth and profit company, which means we wanna grow faster, but we're going to do it in a smart way. We're not just going to grow at all costs. And I think that's a very, that's a very different cadence of how we run the business. I talked about the market opportunity. If you look at some of our competitors, they'll show, they'll show $200+ billion sizes.
We've tried to be as objective as we can, cutting down the market for the target organizations that we focus on, right? We're not focusing on every single company at every size or tier level of the pyramid, so to speak. We're focused typically on larger organizations, meaning $1 billion of revenue and up, and those are the organizations that we've traditionally had a lot of success with, and they are. Now, there, we have, you know, 500-1,000 of those as clients. There's probably 2,000-5,000 of those as companies, so there's still quite a lot of market there, just focused on the same types of organizations, in quite frankly, the same verticals that we've had our success. It's just a massive market.
This is just a reminder of where we were in 2017, where we are now. I'm not gonna, I'm not going to talk too much about this slide, except just a reminder of the fact that we are done with the subscription transition. This is an interesting slide for a couple reasons. One, it highlights the significant growth from about $500 million on the far left in 2017 to $1.2 billion of recurring over the last, you know, over the last six or seven years. It also shows the significant kind of compression of the amount of non-recurring revenue, which right now is almost exclusively professional services.
If you look at the amount of revenue in that $232 million, you know, probably all but $5 million of that, just a reminder, is professional services. You might say: Why does Pega do professional services? Is that a focus area for growing? Why do you, why don't partners do more of your professional services? Partners do 10 plus X of this every year in professional services. We do a very small percentage of the total amount of services in the ecosystem. We are, we, we have a professional services team because we believe that there are certain types of work, certain clients, certain engagements that we really want to lead or be deeply involved in. We are not out bidding on any, any, staff augmentation or any implementation work that against our partners.
Invariably, I'm sure that happens from time to time because, you know, the process is not perfect, but that's not our strategy. Our strategy is to do value-added, specific, deeper technical, architectural, business transformation work with our clients, and we're continuing to move our business in that direction, and the partners will do the lion's share, by far, of the work around Pega. When we talk about Rule of 40, there are two measures we've talked about: ACV growth and cash flow. Those are our two measures. Some companies talk about revenue. We've specifically not tied to revenue because of that kind of anomaly around term license that all of you are very familiar with. ACV ties directly to billings. If you tie our ACV to annual billings, close connection. If you try to track revenue to billings, there's not as much of a connection there.
So therefore, I think if you're connecting to cash flow, you want to look at the growth in billings, the growth in recurring billings, and that's really the inherent growth in the business. And of course, how well do we convert that into profit, into free cash flow? How well are we running the business? So let's talk a little bit about ACV, 'cause this is probably the one I'm sure that most of you are more interested in, which is: Where can Pega, where is Pega's growth coming from? How could we continue that growth curve? How can we accelerate our growth, as we've talked about aspiring to do?
This pyramid is, shows kind of a visual of, we have clients under $1 million in ACV, and lots of them, and we have a couple that have now surpassed the $50 million in ACV. The great thing about this chart is if you went back at the beginning of our subscription transition and you looked at this chart, we wouldn't have had a client above the $10 million-$25 million threshold, and there weren't many in above that number because we weren't a recurring business, right? We were actually... You know, we might have had some maintenance that was recurring from perpetual licenses, but many of our clients were kind of in that $1 million-$5 million or under $1 million. And so our goal is to add some targeted new logos, not...
By the way, all targeted new logos do not go into the first tier. Some start at a higher level because you might sell a, an initial client at $2 or $5 or maybe even $10 million in that first year. It's unlikely it would be $10 million, but certainly, there are $2-$5 million new clients. But some of them come into that under $1 million tier, and we think it, we know that we will have new target organizations, but the organizations will not be random. They won't be in a territory model. They won't just be any company that answered, you know, some outbound email campaign. We're actually focused on the right types of organizations that we can believe can expand up that pyramid, certainly well above $1 million in ACV.
If there was a client that could never spend more than $1 million in ACV right now, in 2024, in the next three or four years, that's not our primary focus. Our focus are clients that can go higher than $1 million, and just based on their propensity to spend. So move clients up, add new logos to the pyramid. This is the last five years. This is all data that you could pull from any of our financials. We more than doubled our ACV in the last five years. We're $570 million. We're now at the- this is at the end of 2023, just to be clear. This is so $1.255 billion. Look at the mix of the business in 2018.
19% of our ACV was Pega Cloud. Now it's 44%. We've 5x-ed, almost exactly, we've 5x-ed Pega Cloud over the last five years, went from $110 million - $550 million. Really important point there, very little of that is a migration, meaning that is all new workloads, new applications, new spend. Some, there is some migration, but very small percentage of that. Look at the maintenance number. The maintenance number and the term license number, or subscription, sorry, subscription and maintenance number. Subscription went from $190 million to $378 million. Maintenance went from $270 million to $324 million, right? Those, if you kinda go across, you might say: Why is maintenance increasing? Just a reminder, when we sell a license that the client manages themselves, we split the license between term and maintenance.
So much of the maintenance and all of the maintenance increase was tied to Client Cloud, as we call it, licenses where the client actually manages it themselves. But you'll see that the growth is really coming from Pega Cloud… Right? $450 million of the $685 million of growth came from Pega Cloud over those five years. So how do we get there? Subscription transition, target org model, including new logos, targeted new logos. So when you, when you look at, if you kind of say, "Okay, where'd that 685 come from?" If you go to the right and look at the right side of this, how did we get there? We got there because we're focused on selling subscription licenses and not perpetual. That's obvious. We increased the number of clients that spend more than $1 million in ACV.
We increased that by 100, meaning we are at the, from 2018 until 2023, we added 100 organizations that went above the $1 million tier. At the same time, the average of clients above a million dollars went up by $1.3 million, meaning if you took the average of all clients above $1 million in 2018, that average is now $1.3 million higher. You can see that we got all of our growth from taking clients. Now, how many of those are new clients, new organizations? There are a handful of those that were not clients at all in 2018, and now they are clients above $1 million and continuing to add every year.
So this is what—this is how we got from 2018 to 2023. So if you think about this framework and you think about the market opportunity that we have in front of us, which is massive, considering the amount of legacy transformation that needs to happen at our clients, what we aspire to be is $2 billion plus in ACV. Now, when we think about that in terms of the time to get there, we've done three simple scenarios. If we got there in three years, which is by the end of 2026, we need to have a CAGR of 17% ACV growth over the next three years.
Conversely, if we got there from in five years, 2028, that would be a CAGR of growing 10%, and the middle one in 2027 is about 12%, a little north of 12%. So this just is a framework of saying, if we're gonna get to $2 billion, what's the pace of growth that we need to have over the next three to five years to be able to get above that $2 billion of ACV, and what when might that happen? These are just kind of... Think about this as a simple framework or a simple model of how we get there. The next one is, so now let's look out those next three to five years using the same viewpoint that we had just a second ago.
We want to go from $1.25 billion to $2 billion. How are we gonna get there? We're gonna continue to grow the base. We've got an opportunity now with more clients now wanting to move to Pega Cloud, right? So Pega Cloud migrations is, you know, remember, Pega Cloud is 50, is less than 50% of our ACV right now. If you look on the left, it's $553 million. It's 44% of the $1.255 billion. There's an opportunity for clients to migrate to Pega Cloud. And then targeted new logos. We've had new logo adds each of the last five years. We've already had new logo adds in 2024. We will continue to have new logos, but they are going to be targeted.
We're not going to adjust our selling model to be able to attract new logos. We're going to focus on being, having a deep commitment to an engagement model of our sales teams, our account teams, our field teams, being deeply engaged with clients. That doesn't mean, could we add hundreds of new logos in the next five years, next three to five years? Absolutely. Can Blueprint help us accelerate that? I firmly believe it can. But we have to be committed to not go down market into organizations that do not have. It's not a product market fit for actually what our solutions are or our go-to-market model, so we have to be careful with that. And there are ways we can leverage partners in some of these spaces as well, that we're working through.
But what the—think about the model on the right, and keep in mind, these are models, right? We, we have no, we have no idea where we're going to be in three to five years. If any of you know, let, please let me know so that I can adjust the business model for that. But what we think about is, we can get, if we tripled the amount of Pega Cloud ACV with cloud migrations, with the complete focus on selling Pega Cloud, with GenAI, right? There's no reason why we couldn't triple. We—remember, we 5x'd the growth in Pega Cloud with, quite frankly, a, a Cloud Choice model and not, and not the impact of GenAI and no migrations in the last 5 years.
So we don't believe, however, and by the way, I would love to be wrong on this, but we don't believe that we will be 100% Pega Cloud in the next three to five years. We don't... First, there's a couple reasons why. One, our clients are incredibly valuable to us. They are the, they are the biggest names, the biggest brands, the most well-respected companies in every vertical that we're in, and they can move at the pace that they can move. And so we have to be realistic about what we can actually do, but we can certainly try to invest everything that we can to lead them to the path of more Pega Cloud. And our clients want to be there in a very large way. So I think there is a, there is a strong alignment there.
So this kind of, when you think about this model, we added $685 million of ACV over the last five years. We need to add $745 million over the next three to five years. It's... I would say, I don't want to use the word modest, but I would say it's not a significant increase in the amount of total ACV that we would target to add. Now, if we could do that in three years? That would be pretty awesome, and that's what we're gonna, you know, that's our goal, is to try to get there in three years. But if we get there in four years, you know, will we be disappointed?
I would say we'll be frustrated, but I think it's also a really valuable transition that we'll be at, where we have, you know, 75%+ of our ACV on Pega Cloud. The other byproduct of that is that our revenue reporting, our accounting, the consistency of our-- really, really helps to neutralize some of the noise that many of you struggle with, right? Even though, even many of you that know our business really well, you know, don't love the fact that, you know, you know, 13, you know, sell-side analysts might get together and, and, and miss the term license up or down by a significant dollar amount just because it's hard, right? We, we appreciate that. Like, we, we have a hard time pegging that number in a quarter.
So I think that we're the more we move to Pega Cloud, I think the more we neutralize that confusion risk. And it is a risk, and I don't want to minimize that. So what would need to happen to get that $745? This is probably the most interesting view for me. We added 100 clients the last five years above $1 million, meaning we graduated 100 clients above the $1 million threshold. We need to do another 100 in the next three to five years, and we need to increase the average ACV by another $1 million. If you remember back, that those numbers were 101.3. So how would we add $750 million?
Quite frankly, the same way that we added the $685 million over the last five years. So the model that we're putting together, I think, is very achievable. I think it, it's connected completely to how we achieved our growth in the past. And this doesn't take into account the impact of Blueprint. What might Blueprint do to the number of logos that we could add? How fast we can actually expand? How much more wallet share we can get from our clients if they, if they can actually get production lives faster and not spend as much money on professional services, et cetera? So we think this is a very reasonable, rational, achievable model for us to be able to scale our business above $2 billion in ACV. Excuse me. So let's talk a little bit about free cash flow.
One of the biggest important lever points we have for free cash flow is our gross margin. The gross margin - where the, where the gross margin of Pega Cloud goes, the gross margin of Pega goes, because Pega Cloud is going to be our largest, very soon, our largest component of revenue. And our - and it was, and it was Pega Cloud gross margin, when we started this journey, was about 40%. Actually, I think it was 37%, the first year that we started to move to Pega Cloud, and then it went to 45%, and then 50%, and then it stayed in the low-to-mid 50s% for a while, and then it got above 60%. Now, we're approaching the high 70s%, you know, 80%.
For those of you who remember when we talked in 2018, I was hopeful that we could get to a 70% gross margin for Pega Cloud. After a couple of years, we took it up to 75%, and after a couple of years, now it's 80%, right? Do I think it could go to 85, 90, 95? I think we need to be realistic. Like, getting above 80% for a SaaS product is, you know, is respectable. Could we be 80%-85%? That's probably where we'll land, somewhere in that range. So I, so I think we're, you know... We've proven, I think, that we could actually get profitability, and we're only at $500 million of ACV. Imagine if our Pega Cloud business was $5 billion, right?
I mean, if you go and look at some of the kind of other software companies that are $500 million-$1 billion, I would challenge you to find many that have gross margins near 80%, right? ServiceNow's gross margin was under 70% when they were $2 billion, as an example, right? So, like, there is certainly. I feel like we've done a reasonably good job getting to the point we are, but we're gonna keep pushing. We're gonna push with increased automation. We're gonna leverage Kubernetes microservices to be able to drive the AWS, GCP, and the time it takes to manage our clients down, right? 'Cause that's, those are the variable costs that go into cost of goods sold. This chart is an interesting chart.
$50 million, and this is trailing twelve months base revenue for Pega Cloud, was $50 million, when we ended 2017. It's about $500 million. As you know, revenue lags ACV by, you know, the ACV is $553 million. The revenue is a little bit behind that, typically six months to a year behind the ACV. What I think is most interesting is that we've never had a quarter that went down, and the curve, the growth curve is pretty predictable and pretty consistent.
I think we have an opportunity to keep the slope of that line being closer to the 20% growth, which is, I think, a really important number that will actually help our ACV growth, right, anchor up in, you know, well above the 10%, the 9%-10% that we're at right now, up into the low double digits. This is just something we look at less from a prideful standpoint, but more just to reinforce that Pega Cloud has been a consistent help to our growth rate, and it has happened quarter in and quarter out. Our sales teams have really adopted well Pega Cloud, and you can see this just in our performance year in and year out.
Our percentage of Pega Cloud last year was noticeably higher in terms of ACV, the contribution to ACV growth than it ever has been in the past. When you actually look at some of the other components of the financial model, you know, we're right now kind of in that, starting to peak up into the mids at the mid- to high 70s. We're past mid, but the high 70s on gross margin. We said last year, and we continue to believe, that we can be 80% or above. Quite frankly, we'll be at that 80% number, you know, well before the 2027 year. But we think getting above, getting that, you know, keeping an 8 in front of that gross margin number, we think is critical.
The sales and marketing efficiency in terms of percentage of revenue, we've already made a pretty big, noticeable drop down. If you look at 2024, it'll be less than the 35%. So we think we have a real opportunity to have sales and marketing costs to be less than 30% of our revenue in 2027. And R&D, we're really just getting operating leverage there. If you think about the investment we have in innovation, we are not compromising that. It's just that we know that we do not need to increase the amount of R&D spend at the same level that we're increasing our ACV growth rate.
Now, we will get to a point where that needs to stabilize more, and I think you're starting to see that in the 17%-18% range. But that's a framework of how we're thinking about getting to those free cash flow targets that we strive to achieve. This really just highlights the subscription trough, right? The transition trough. When we started this, we were generating a little over $100 million of free cash flow. 2017 was the best free cash flow year that we'd ever had in the history of Pega. I actually believe it was the only year that we were above $100 million.
Typically, we were between $60 million and $90 million of free cash flow in a year. We did... 2017 was a good year. 2018 is when we started the transition, and you can see what happened. We actually went out, got the convert, as all of you are aware, because we needed the convert to get us through the transition, or at least, thankfully, we didn't need as much as we could have, but we, we did that as a precautionary measure. And now, 2023, we generated $200 million of free cash flow. That actually doesn't even take into account all the one-time items that were in there. That number would have been more like $260 million, if you actually looked at it without some of the legal fees and other things.
And we're looking now at a 2027 number after tax, important point, after tax, that's going to exceed $500 million. So the business has, you know, we've really, we've really kind of pivoted the business through the subscription transition to cash flow generation. And unfortunately, we're going to be a, you know, a reasonably large taxpayer in 2027 as we're generating this kind of free cash flow. But we're really excited, right, about where we are now in the transition. We still have work to do, but it's, you know, to think of us being an over $500 million after-tax free cash flow generator is not, I think, I think most of you would agree, is a very reasonable target given where we are right now in our, our performance.
The key is to keep our growth rate as high as it possibly can, to push to accelerate our growth rate and not compromise the scarcity mentality that we've actually, in, in a good way, instituted into our selling teams. But not just our selling teams, our product teams. We're looking at our product teams. What are you investing in? What does that, how does that drive our sales teams to be successful? If not, maybe we shouldn't do that. Let's focus on the, the areas in customer support and other parts of the organization. We've got to be really focused on making sure that everyone understands that the investments, the precious dollars that all of you as shareholders entrust for us to basically reinvest in the business, have to be connected to customer success and accelerating growth. That they have to be in the...
If they're not, then we need to fix that. So what does this all mean? We're focused on accelerating growth. I've mentioned to you before that I believe Q1 to be the trough. I said that at the end of Q1. I think this, that's our trough growth rate. I think growth rate will go up from here. Very confident in that. And I think we have, we know we have the market opportunity, and we really have much improved, I think, our sales alignment around our target orgs, and the sales teams are really working as a functional team better than they ever have in the past. So that gives us a lot of confidence. We're going to expand margins, right?
I mean, some of the, some of the heavier work has been done on margin expansion, but we're not done. We're going to continue to expand margins and continue to drive increased cash flow, and that will drive significant shareholder value. Our view is that increasing cash flow gives us a significant financial moat to be able to make increased investments, to drive into new, into new industries, into new verticals, quite frankly, maybe to new logos, to help accelerate digital transformation by supporting our clients, to help clients migrate to Pega Cloud faster. The more that we actually have free cash flow, the more we can make selective investments back into driving the business. And so we think there, we think the profitability of the business is tightly connected to the ability to help accelerate growth. They are not disconnected, right?
Many people think that if you want to make more money, you just have to accept lower growth, or if you want to grow faster, you just have to spend more money. I don't believe that to be true. I believe that when you build a fundamentally strong business that generates free cash flow, it allows you, it almost inspires you to be able to use that flexibility that you've built in the business to be able to make really targeted, high-return investments to be able to accelerate growth. And so that's how we're thinking of the business right now. And I think Blueprint, as you've heard through earlier today, you'll see through this whole event, and you've heard in all the other speakers, we believe is a fundamental advantage of anybody else that we're competing with because it allows clients-...
to get to the point where they can see, they can visualize what they would be actually deploying with Pega, and that is a hurdle in any enterprise selling process, that the time is a killer for all enterprise selling. And I think Leon would tell you that's the biggest. You wanna, you wanna close deals fast, 'cause if they lag, then people change, executives change, priorities change, and so we wanna, we wanna really cut that so that we can actually help our clients digitally transform faster. So with that, I'm gonna open it up to questions. And feel free to hit any of the topics. I'll answer what I can for any of the topics for today, so...
Thanks, Ken. Really appreciate the time. This is Jake Roberge with William Blair. When you put out those TAM figures, $90 billion-$130 billion, that's about 13% growth, and you're targeting 12% base case growth for ACV over the next three to five years. Now that the subscription transition is complete, I understand the more balanced Rule of 40 mindset, but what's the catalyst to get you growing faster than the market again? Is that possible with the new competitive environment, or how should we just think about you growing faster than the overall market growth?
So that's a great question, Jake, and the way I would frame it is, there is no reason that with our products, our solution offering in the markets that we target, that we couldn't grow much faster than 11%, which is the pace that we were on last year and the pace that we are on this year. There's no reason. The second question comes: Can you do it in a really efficient flywheel-type manner, where you can actually get the benefit of not depleting your margin? In fact, actually growing faster and getting some tailwind on your margin expansion.
We haven't proven that to ourselves or to any of you yet, but we believe that that is possible, and I think just from a responsibility standpoint, we've got to be really thoughtful about putting things behind us before we make commitments to the next thing, right? And I think right now, until we prove to ourselves and all of you that we can efficiently grow the business at a low double digits, we will take on the next push to. But I think just going out and saying, "Hey, we're growing at this. Here's a big number that we're gonna aspire to," I just don't think is credible, and so I think that that's, that's really something that we did not want to do, was just to throw a number out there. Could we grow at 20%? I don't think there's any question.
Could we grow at 20% without diluting our margins a lot? I'm not there yet, right? But, but, but we have to get through these gates, and I think all of you have, have been with us for a number of years, kind of appreciated my first gate was we gotta get the selling organization to sell subscription. We gotta get to Pega Cloud. Once we anchor those two, we've got to actually really focus on improving the margin. Now, we're looking at migrations. We're kinda checking through the life cycle of all the things that we need to do, but I don't think there's any reason we shouldn't be, couldn't be, and shouldn't be growing faster than the markets that we're in.
That's helpful. And then you obviously talked a lot about, like, the push to accelerate growth over the next few years. Can you give us a little more detail on what the impact of Pega Blueprint or these new AI solutions are actually having on realized pipeline? Like, are you starting to see visibility in the pipeline starting to accelerate that could lead to that visibility into ACV growth or revenue down the road? Just curious if that's actually having an impact on the pipeline today?
So we don't have enough empirical data in the last 6-8 weeks to be able to actually say credibly, like, "This is what happened with pipe." That's what we know: we know the engagement. So the precursor to pipe build in our business is engagement with clients, right? Like, pipe doesn't build on its own, right? Like, so we know that the engagement level with our clients is accelerating every single week, and we know that clients, and you heard on the Rabobank video, a very common use case... Sorry, a very common piece of feedback we hear is it helps to visualize what we're actually going to implement as a workflow solution to help solve a business problem.
That—the concept of the shortening the ideation cycle, getting the sales teams to actually have that, almost that operational walkthrough type in a couple hours, and the fact that clients can visualize and see the kind of that architecture diagram, and quite frankly, implement it into Pega with a push button. Well, it's actually downloading a file and implementing a file, but essentially a push button that takes less than 20 minutes, that can implement an enterprise-grade application. That, to me, is just fundamental to the next question, which is: How fast can pipe accelerate? So I don't think it's just about new pipe. I think it's about accelerated pipe. I think it's about finding opportunities that wouldn't have otherwise been there.
I think it's also about helping to transform how fast clients evolve their existing applications that aren't Pega, and quite frankly, with some of the applications that are Pega. So I think it's all of those things. What we're seeing is that first step, which is amazing client engagement and quite frankly overwhelming client engagement, such that we've had so much feedback in Blueprint from the actual client engagement that you've seen Kerim evolve on. Those aren't. Many of those things are not things that we've evolved that we figured on our own. They're actually from feedback from the people using Blueprint. That's exactly what we would want to have at this stage.
I think when you get to, like, even Q3 and to into Q4, we'll really be able to see materialize, you know, what the real impact is to the end result that we want, which is to accelerate the growth rate. Yep.
... Great. Steve Enders from Citi again. I guess I want to clarify a little bit just on the Blueprint timeline and what that looks like. It sounds like that's something that's coming in 3Q, and maybe that's the GA, but just want to clarify that. And then, I guess, as you think about the monetization path line for that, like, what is being embedded in that kind of, you know, 27 guide or the 26-28 guide for, for the top line?
So the first question, Alan mentioned Q3, which is why you might have talked about-
Yeah.
That isn't... He wasn't responding to when Blueprint is available. Blueprint's available now, and what he was responding to is when you might see deals close that were a result of a Blueprint sales cycle, which I think he's, you know, there might even be something this quarter, but I think Q3, Q4 is when you'll start to see that. So there's not an availability issue. When you look at the way, the reason why we actually did the three models was kind of the base, and you could think about the ex- more accelerated one, that if, if Blueprint really took off, like what might be...
That's kinda why we're—'cause it's hard for us to really gauge the time frame and how much, but we know that there will be an impact, but it's, you know, trying to separate that from what the base business would have done without Blueprint is over many years a little bit challenging. That's why we were kinda creating a framework just to show what it might look like, depending on how fast you get to that point.
Okay.
Yeah.
There is some level of, like, AI impact that's coming this year of monetization?
Not likely this year, but over the next three to five years, there is the upside case that is driven by Blueprint.
Okay.
Yeah.
Okay, helpful. And then on the free cash flow target, you know, I've been thinking about the guide for this year. I think you're at, like, 25% free cash flow margin over the ACV guide. And if I'm looking out to 2027, it's 25% free cash flow margin there, doing that same math. So is that kind of implying, you know, not seeing scale in the business or being conservative with that view? Can you just help us kind of, like, walk that kind of flat margin expansion?
Sure. So that number is above $500 million, so I would consider that to be thinking about that as a floor. That is also after a significant amount of taxes that we would be paying in those years, which are not actually in some of the trailing 12 months at the same level. So you want to think about, like, we may look like we're adjusting for one-time items too is a little bit messy, but we, if you think about it right now, we're not a 25% taxpayer right now. So we need to make up, some of that margin expansion will be to offset being a, you know, having a tax rate that's a little bit more timeless model.
Kevin Kumar, Goldman Sachs. I wanted to ask about cloud migrations. I think, Ken, you mentioned that's a key driver. Can you just remind us the impact to ACV? Is there any pricing dynamics there, or is it more a function of just as folks move to cloud, you see better expansion motion?
The second point is true, but there will be an uplift for not every single client, because you do have to look at the specific situation that the client is in and where pricing is. But for the majority of our clients, I just fear saying 100%, but for the overwhelming majority of our clients, there will be an uplift. Sometimes that uplift could be 2x, sometimes that uplift could be 25%, sometimes, you know, there's all kinds of... But it really is a very situational, strategic, based on how many apps, what's, you know, what are they paying right now? Like, what's their contract kind of consumption model and the contract. There's a lot of factors that play into that, but I think, if...
Just think about this: if we had, say, we had $700 million of ACV, you could easily see how that could, you know, be an opportunity of a couple hundred million dollars of the incremental ad.
Carter Dunlap, Dunlap Equity. As the evolution of Blueprint affects the sales force, I mean, and presumably is much more efficient, what happens? Do they increase their targets? Where do you put those resources?
So I think that's the great opportunity we have to really go into new logos, because if you think our sales force, not exclusively, but largely is vertical focused, right? So they have vertical domain expertise. Many of our sales teams are, like, experts in their vertical, right? Now, some of them are experts in a horizontal as well, and some are more generalists, but there's a strong connection to the verticalization of the solutions. So if you've got somebody that, say, works in financial services, and quite frankly, we're speeding up the selling efficiency around selling to some of those larger organizations, there will be an opportunity for them to actually go after some very targeted new logos because they may actually, those teams may have some capacity.
Whether or not that leads to different targets in terms of the actual booking or quota targets, I think we're far from thinking about that model. I mean, quite frankly, commission expense would be the least of my worries if we were actually able to add new logos and be able to get more, you know, be able to have sales teams produce more. But it really taps us into being able to go into new logos. The biggest threat we have to new logos is capacity of the sellers, right? To be able to have people focus. So this, we view this as like a help for not only accelerating our existing logos, but also allowing them to have some capacity for new logos.
It's not related, but you've talked about the, I think, the 30 system integrators that have you've seen come into the process. Do you... How does that, How do those jobs come back to you, or do those go off and stay with them?
... So you're so I think you're referring to someone mentioned, maybe it was Alan earlier, that SIs are actually blueprinting in there, creating their own blueprints, and we can't see the content, but we can see- Yeah, so what we're doing is there's a couple avenues we're taking. One, we're actually going into really like almost like joint targeting exercises with specific SIs, where we're leveraging Blueprint. We have our teams involved with the actual partner teams, and we're and we're focused on maybe different use cases, specific organizations, et cetera. What would happen is if a partner went out, this is a hypothetical, but if a partner went out, created a blueprint for, say, a collection app at Rabobank, just because you saw the video, that part- that partner would use that to essentially help refer that opportunity to Pega.
We would go, and we would kind of co-close that opportunity, so to speak, and that partner would actually help the client do the final mile, so to speak, of actually implementing. There could be lots of things. There's still a lot of business for the partner to do, but we would be the... You know, we're actually gonna get involved in that selling opportunity. So we would actually have pipeline that would actually get built from those blueprints from our partners. So that's the way we monetize it.
Sam Brandeis, Wedbush Securities. Within the hundreds of clients currently using Blueprint, what are the use cases that, like, top use cases you guys are seeing right now? And are there any industries in specific that have seen higher interest compared to the others?
It's pretty much across all the industries. The use case—It's interesting, the use cases are, if you looked at the... Naturally, there's the descriptions of the use cases, so we kinda have to infer a little bit from the—But the majority of the use cases are really wheelhouse-type use cases, customer service, some of, you know, onboarding, disputes, you know, originations, you know, things that renewals, like, things that are, things that are very core to our business. So they're—we're not seeing, like, necessarily brand-new use cases. The one caveat to that is customer service is a really big, a really big net, right? So you could have customer service that could be dealing with customer disputes, like, you know, someone, or excuse me, customer adding a cell phone plan.
You could also have customer service that could be, you know, in a utilities company that's doing something that... So I think that there's a lot of the use cases we have really do lead to more horizontal opportunities, right? If you look at, if you look at disputes or you look at customer service or onboarding, a lot of those use cases are across many verticals, quite frankly, verticals that we're not in. So, but the use cases are kinda more the core use cases, Sam, that we've seen. And the, I would say the verticals are, we've had a lot in some of the larger organizations, so that would be maybe financial services would probably be a bigger one, just because of the concentration of Pega in that vertical.
Great, thank you. Unrelated, looking at the go-to-market strategy over the next six to 18 months, what do you guys think with ramping up the Blueprint and the rest of the generative AI applications, like, how are you guys thinking of it? Partners, mostly through partnership selling or compared to direct, or how are you guys looking at that?
I think all of the above. I mean, our sales teams, you know, you heard John mention a little bit and, you know, Leon and John's teams, and just the entire selling team is really adopting Blueprint as a principal way to engage with our clients. And our partners, as you'll see when you, if you talk to them and just with some of the early momentum, partners are using it as a principal way to help clients think about the digital transformation journeys that they might want to address and opportunities for the partners to expand and quite frankly, anchor some of the future business from those clients. And that's a mutual goal, right?
That mutual goal is we want clients to be able to visualize and move dollars to their digital transformation journeys, where Pega is, has an opportunity, and, and our partners have Pega practices. So, of course, they're motivated as well.
Austin Cole, Citizens JMP. I'm curious, are you guys using AI internally? And if so, is any kind of margin improvement from AI baked into your guidance for R&D, S&M, stuff like that?
So we are. If you look at some of the Pega AI tools that we have, we actually are using them in our go-to-market organization, in our internal IT department, and we're actually rolling. For example, the Buddy product that we have, the Coach, like, those are actual tools that were developed for use cases internally that we've commercialized for clients. So we are actually using those. And some of the optimization or scalability of kind of the operating model will be predicated on us continuing to drive more. We're not getting huge amounts of savings right now, but we do actually have quite a lot of AI initiatives. We've really challenged almost every functional vice president at Pega to look at rethinking how they actually do their job.
And our CIO and his team is actually working on supporting, like, almost a laundry list of, like, you know, kind of knocking off each of the use cases. The two big ones, actually, Alan mentioned the Socrates one, which is a really interesting one, but the two big ones are the Buddy and the Coach are the ones that we've been, you know, internally. And then the Socrates one is an interesting one because I'm not sure how much you guys could actually tell from the discussion of that, but it's essentially a way of. We have to do, like, we have to do lots of trainings. I'm sure you do as well, for different, you know, Foreign Corrupt Practices Act and different, you know, cyber risk, phishing, et cetera.
As opposed to having someone use, like, a tool like KnowBe4 to be able to go through and watch a video, and then you have to take a quiz and you, you don't get an 80%, you have to go back. And, you know, we're actually trying to get that embedded into, like, a conversational where you can, you can just talk to, you know, almost like, you know, ChatGPT, but you're talking and it's measuring your processing, and it's gonna say, "Okay, based on that, you've, you've cleared this. You've gotten this badge." And that, I think, is powerful in a lot of ways. You could use it to train salespeople, you could use it to train customer service reps, you could use it, you know. So I think that's a really interesting one that's kind of earlier stage.
Hi, Mark Schappel with Loop Capital. Ken, we haven't heard much on the way of Launchpad this year. How should we think about Launchpad, you know, going forward, or should we think about it as investors?
Yeah. Yeah, that's a fair point. Actually, we think we've been, we've been so focused on Blueprint. Launchpad actually has. We have our first live subscribers. We've had live subscribers. We have, you know, 20 or so companies that are actually that we're working with, many of them that have actually signed commitments to deploy applications on Launchpad. So it's going really well. It'll. You know, we said when we first re-released Launchpad, we kind of said it would take a couple of years for that to build into where we'd be getting some meaningful ACV from that, if that was, you know, if Launchpad was successful. I think we're quite frankly right on schedule for that. There was a question that you asked earlier.
We should probably, if you. Yeah, if you want to ask that one again, or if you have another one.
So I'll start with another one. Jayden Patel from J.P. Morgan. You said about $200 million of the 700 net new ACVs coming from migration to cloud, but your maintenance in terms seems like is going down by $200 million. So, you know, I would assume you're assuming a one-time conversion. Could there be upside to that if the conversion multiples are higher, or could you see some churn?
So yeah. So just to be clear, what I was ideating is if you had $700 million of ACV and you converted all of it, you could see a path that there would be at least $200 million of uplift, just to make sure that I'm saying the same thing that you did. Yes, there could be upside. For example, if all of that $700 million was at a maintenance run rate, well, then it would be much more than $200 million, right? So yes, I think it. That's where it gets into, like, you have to look at each client. You asked a question about churn. We're not forcing people to migrate to Pega Cloud. That's where I think you run the risk of churn.
We wanna, we want to strongly encourage them, right? Because this is in their best interest, right? This isn't, this is, this is something that's good for them. It's good for us, but it's also good for them because it really is gonna help future-proof their applications, and it's gonna take away a lot of the operational cost and focus that they've had supporting these applications by putting that off to us. And so naturally, there's an uplift that we need to get for all of that work. So yes, it could be more than $200 million. I don't, I don't, I don't think it would be noticeably less.
Okay, great. And then, on my previous question, what portion of clients today are in Infinity '24 versus 23.1? I'm trying to understand if, if it'll be difficult for, for customers on older platforms to use Blueprint.
No. So, well, not many clients are on 24.1, and there's still a lot of clients that aren't on 23.1 yet, right? They are on some later version of 8 that are moving to 23.1 in the coming year. But Blueprint, the beauty about Blueprint is you don't need to be on any version. You can use Blueprint, and it will naturally use the most current version. You can actually import that Blueprint file, or you can convert it into... You can actually take the BPMN model from the actual application and use Blueprint to actually reimagine the same application. So there's plenty of value creation that can be done, even if a client is not on.
Naturally, separate from that, we want all of our clients to be current, and we want to move them to 23.1 and then 24.1, and we want to move them to Pega Cloud. But, there's still the ability for them to leverage Gen AI through our on-prem bridge and to, to leverage Blueprint, because Blueprint, you don't even need a cloud environment to use it-
Okay
... 'cause you're using our environment.
Last question: What are the assumptions, you know, behind the conservative scenario for guidance?
Well, first of all, I wouldn't consider any of that guidance. It's just a model.
Right.
I would say, the way to think about the framework would be that if we have Blueprint success, we'll get to $2 billion in three years. If we actually don't have Blueprint success, and we kind of don't see really any acceleration in our growth rate, and then we'll get there in 5 years. That's like the two bookends, and the middle one is, you know, limited Blueprint impact, but continued kind of growth at the low double digits. Yep.
Hi, Jack Nichols with KeyBanc. Can you talk about how net retention rates are trending, so far year to date in 2024 versus year to date in 2023? And then, what are the main drivers here that you're seeing in net retention growth in terms of strengths and weaknesses, and any range you could provide that you're seeing in renewals?
... So our gross retention rates are still very high, high 90s%. Our net retention rates over the last 18 months or so have kind of come down because overall, our growth rate came down. So our net retention rates are kind of, you know, think about them as like approaching 10%. So the Q1 was just a little bit of a weird compare to the previous Q1, so I would say there's some noise that can happen in one quarter. But I would say that, you know, just think of net retention rates being around 110, and gross retention rates being in the high 90s%. And renewals typically still back-end loaded, that's kinda, you know, they tend to bridge the end of the year with a little bit into the first quarter.
That trend probably won't change.
Steve Enders from Citi again. I guess, as we're thinking about the cloud migration impact, I guess, is there any change in incentives or, you know, carrots for customers to move there? And, you know, how do you kind of view, you know, the potentiality of disruption coming from that shift?
So we will not, we will not attempt to insert confusion for our clients through that migration. So we have to be really thoughtful about when it's right for them, but help them. We have... One of my comments about increasing the inherent free cash flow in the business allows us optionality with how much we might want to invest in helping clients accelerate. So naturally, as we're generating more cash flow, it might make sense in the short term to take some of those investment dollars and help accelerate clients to make that migration, and that's something we've-- We've actually done a little bit of that this year, and quite frankly, it was baked into our numbers for Q1 and will be too, you know...
So we're not doing it at mass scale, but we think that that would help, right? So allocating, you know, we're not talking about allocating $100 million, but allocating, you know, $ millions toward helping clients move. Not every client, that will make a difference. Some clients will say, "Doesn't matter, this isn't a cost issue. I just can't do it right now." But some clients, that helps objection handle, you know, maybe budget that they don't have to move faster.
Okay. And last one for me. Just on the competitive environment, I think specifically within the customer service or call center use case, it feels like that's been a big area of maybe focus on the AI front, especially from other vendors in the space. But have you seen any kind of changes in the competitive landscape or how you kind of view the GenAI impact into that marketplace?
So trying not to be too provocative with this comment, but just being transparent. A lot of the AI stuff that we're hearing in the marketplace is really a lot of BS, right? And so I think that, I think you guys know that. You've seen it before. You've seen these trends, so it's not... But some of it's interesting, but I think when you hear companies talking about, you know, you know, "50% of our clients are using X or Y," I mean, some of that is just they kind of put it in a renewal, and they kinda check a box and, you know, that's like...
So I think, yeah, I think just maybe be a little skeptical on that, and we've been very specific to say, "Listen, we think there's value add with some of these accelerators, some of these Gen AI accelerators," but the mass adoption of AI in the day-to-day operations of our clients has not, I would say, happened at that scale. They are doing it. Every client has an AI initiative. Well, at least I'm not aware of a client that is absent of an AI initiative. But I think, you know, our clients and large enterprise clients do not take lightly big transformational changes to how their customer-facing data applications operate. So there's risk mitigation that happens there.
So, so competitive landscape, I'm not aware of us losing a deal because someone else had an AI feature that they put in. So I don't think that, and I don't suspect that's gonna happen anytime soon. I think we're really focused on the bigger prize, which is: How do we help clients do legacy transformation at a noticeably faster clip? I mean, you can look at McKinsey and some of these other places that have written articles that have talked about digital transformation's been going on for 10 years, and we're still only 25% of the way through it. I mean, why is that? 'Cause it just is, it takes so long, right? So we gotta, we wanna try to speed that up. Guys, thank you so much for coming, your questions, your attention.
You've always been great in all of these, in these sessions. Enjoy PegaWorld. For those of you that are here, there's a ton of events going on through the rest of the day, tomorrow, even into Wednesday. So for those of you that are here, enjoy it, and we'll be around. So thanks, everyone.