All right. Welcome, everyone. Let's go ahead and get started. This is day two of the Citizens Technology Conference. My name's Austin Cole. I'm an associate on the Software Equity Research team here at Citizens. And I'm joined today with Ken Stillwell. He's the Chief Operating and Chief Financial Officer of Pegasystems. So delighted to have you here with me.
Thanks, Austin. Good to be with you.
Yes. I'd love to spend just kind of a couple minutes rounding out your kind of background. Right? You've been at Pega for nearly 10 years. Is that right?
I have, believe it or not, yes.
Yeah. And so you started at PwC. You're at an aerospace company and then a variety of other software companies until Pegasystems. So what originally kind of attracted you to Pegasystems about nine years ago?
That's a great question. Maybe the first time someone's asked me that up here. So I started off in public accounting and then went into the mergers and acquisitions practice. And that led me to private equity-backed companies, primarily in software through my career. But the original one was in the corporate aircraft industry. When I heard about the opportunity at Pega and actually came through a former CEO that I'd worked for, Jim Heppelmann from PTC, he had known Alan for a lot of time, a lot of years. He had known me. And he really felt like that there was a really good matching of a founder/innovator like Alan and someone that was much more of a classical kind of operator.
That's actually played out to be very true over the last 10 years that I think I've tried to help to shape the right strategic and operating decisions for the business. Alan's been a wonderful partner in that.
And then maybe just quickly too, for those of you who may not be as familiar with Pegasystems, maybe you could kind of walk through what are kind of the solutions that you provide your customers, the markets that you play in, just to help us kind of level set for those who may not be familiar.
Sure. Typically for companies of scale, and when I say scale, I typically mean there's a lot of transactions. The businesses are not only large but also have large customer bases, large number of transactions. There's just a ton of work that needs to be done in the various channels, whether that be internal, whether that be customer service channels, marketing, sales, fulfillment, and that significant amount of transactions are typically managed through various forms of workflow systems. Pega is the leader in workflow automation, so any time that you're trying to get work done through a series of steps and stages, you would think of Pega. Now, you may also think of other companies that are more branded in, say, the CRM space or even around the ERP space.
But we view ourselves as the most powerful platform to be able to drive automated workflow. And we've leveraged AI in our platform for decades in terms of automating that, driving logical decisions, statistical-based decision-making value in that process. Another way to think about Pega is that if you're trying to build a workflow application and you don't want to write code, which in today's world, very few people want to start by writing code, we have a low-code platform that allows you to build those workflow applications on the platform. Real-time, we integrate with any system. We're able to be the system of record or the orchestration engine. So a lot of flexibility with how we're used.
Yeah. And we're going to get into more of that. So let's, I guess, talk now about kind of where Pega is today. And on that front, maybe just kind of open-ended question, just how's business?
Sure, so I think the market in general is a little jittery in the last few weeks, and I say the market, I mean the investment community. If you look to the buyer universe, that doesn't translate as quickly to enterprise buyers. I mean, there's not an immediate reaction between a market move and how nervous large-scale buyers get. That said, prolonged periods of uncertainty or volatility are not good for anyone, so I think that's something we need to watch, but I think digital transformation, moving to the cloud, as you might call it, or digitally transforming legacy applications into modern applications is the, if it's not the top initiative for every client that we talk to, it's certainly in the top two or three. Maybe AI might be up there as well, so I think that that's a really big tailwind in terms of getting discussions and momentum.
In the larger verticals that we're in, financial services, insurance, healthcare, telecommunications, those are, I think, very lots of momentum there. They're very early on their journey, as crazy as that may be. There's many, many, many years, potentially a decade or more in terms of how they track on that journey. Public sector, which is about approximately 10% of our business, is public sector across the world. The U.S. is the largest of that, probably, I don't know, say two-thirds of that or something like that is the U.S. public sector. We're certainly not a massive percentage of our business, but certainly it is an important one. I think there's definitely a lot of people are paying attention to how all this plays out with DOGE and what the risks are or not.
Now, for Pega, we've principally focused against user-based licenses for a very long period of time. We think that user-based licenses are not the right way to connect value of a solution to our clients. We focus on the volume, the transactions that the system is processing, and so if a government agency or a commercial client is not using Pega, then naturally they wouldn't be paying for that unused usage in the majority of cases, and so for us, we feel like there's a strong connection between volume to value, strong drive with digital transformation, get off of old legacy systems to new digital, get to the cloud. We feel like those are all very aligned with efficiency in the public sector.
Gotcha. And then, maybe let's definitely get a chance to talk about Blueprint. And maybe it would be helpful, kind of, what is Blueprint as a product? And you've just kind of outlined Pegasystems' solutions, how you kind of interact with your clients. Where does Pega Blueprint, that is, fit into that equation? And what can it do for your business?
So maybe I'll start by just going back for just a second back to statistical AI, and then I'll connect to Blueprint. Citizens, for example, is a client, a very valued client of Pega, and has been for years. We help Citizens in the consumer bank with what I would traditionally consider to be statistical AI, our Customer Decision Hub in marketing automation and customer service. We help to use statistical AI to make better decisions, to put better offers in front of your clients, to put better information in front of your employees when they're working with your valued clients. Think about that as the kind of the historical, the way we thought about AI, which is more kind of machine learning, model-driven statistical AI.
Blueprint was really our step into leveraging Gen AI in the use case that we feel is most relevant, which is how long does it take to digitally transform or build an enterprise-scale application, and because in large companies that is an expensive and long process, we viewed Gen AI, we viewed Blueprint as a way to take all of the domain expert content, the best practices of how you would deploy and build and run an enterprise-scale application and leverage the Gen AI capabilities of the large language models and merging those together to be able to build the application in an automated fashion using the best practices. Historically, that would be done with people.
And so we took maybe a different angle on Gen AI to say that if Blueprint can be used as an architecture vehicle where you could literally talk through the prompts, leveraging an agent to build your app, you could build more consistency, leverage the best practices, much faster time to value, reduce the implementation cost, all things that we felt were big value-add. So that's the role that Blueprint plays and how it connects to our heritage of having AI kind of in our DNA.
And it's a constantly evolving piece of technology. You guys are innovating a lot there. I think the Pega agent experience announcement is demonstrated with that.
Yeah. When Blueprint first started, our first version of it was produced a PDF document that actually told you what your with chevrons. It said, this is what your work. If you look at what it is now, when you're actually chatting with it, you can see a visual of the app being built with an agent interacting with you that can help you answer questions, can help do work for you in building that out.
From a business standpoint, you're in the middle of a cloud transition. Blueprint is playing a role there in kind of accelerating that. I think what you've said is finishing the year 2024, right? 9% ACV, 11% in constant currency.
11%.
The guidance is 12% for next year. So maybe just walk us through kind of what are your expectations in terms of kind of Blueprint relative to that guidance? What's baked in from kind of a Pega Cloud ACV standpoint and just how you kind of expect 2025 to play out there?
Sounds good, and I think a couple thoughts. So, maybe I'll just a very short bridge to the 12%. We grew 11% constant currency in 2024. We're guiding 12% constant currency in 2025. That slight difference in growth really is coming from the impact from a small increase in the amount of clients migrating and a very modest increase from the implementation of Blueprint, which we rolled out to our sales team about a month ago. So, we don't expect 2025 to be the year where there was a massive impact for Blueprint. We think there will be a massive adoption and there will be a lot of value built, but just talking about ACV. When you flip to the biggest component or the most important component of ACV, it's Pega Cloud ACV.
So our annual contract value or our ARR, as you might want to refer to it, is the recurring billings growth year over year. Pega Cloud ACV is the same thing around SaaS. It's the recurring billings around our SaaS offering, Pega Cloud. For our ACV to grow 12%, our Pega Cloud growth ACV has to grow somewhere in the 20%-25% range, right, because you're going to get the majority of your growth coming from Pega Cloud. And so naturally, quarters will move around through the year because we're not a completely linear business in terms of bookings. But just think about that. Pega Cloud growth needs to be north of 20%, probably somewhere in that 20%-25%. And if that happens, we're well on pace to achieve our 12% ACV growth. We have other ACV lines, like our maintenance line will likely decline.
Our term license, or as we call it, Client Cloud line, that will likely grow a little because some clients do increase usage on non-cloud systems, but it will not grow at the pace that Pega Cloud will. So our growth will come from Pega Cloud. We need that number to be kind of just north of 20% to keep pace with our 12% ACV growth.
Okay. And so you guys do not guide quarterly, only to the year. And traditionally, it's been kind of a lumpy business, you could say. And over time, as that cloud transition plays out, that will probably change, right?
And has changed in the last few years. It hasn't been as dramatic in the last few years.
Certainly, so when you look at the ACV guide for the year, how much of that might come in Q1 versus as a percent of the total year is kind of you'd expect, okay, four quarters in a year, is it 25% or higher? Or where might that be?
So in our business, and this is not uncommon for enterprise businesses, the bookings tend to be a little bit more back-end loaded. So it would not be uncommon for us to have 50% of the bookings in the fourth quarter for a year. We've worked really hard to have that not be the case. Last year, we actually had a pretty level loaded year where we kind of incrementally built each quarter to where the Q4 was the largest, but it was probably more like 30% of the year than it was 50%. This year looks like Q1 and Q4 will be the largest quarters, right? But Q4 will be kind of in that 40%-50% range of bookings. And Q1, probably more in the 20%-25%, probably kind of closer to the 25% range.
And then the two middle quarters, Q2 and Q3, which typically are less ACV add quarters historically, would fill the gap for the year.
Gotcha. And then the other important metric that you look at is free cash flow, right? So really when you're kind of evaluating your business, you have ACV and free cash flow. And I think Pega achieved Rule of 40 last quarter on those two metrics. What's kind of your confidence level in maintaining that Rule of 40 over time? There's really been tremendous free cash flow growth, but how should we maybe think about that other side of the equation as well?
Yeah. So our free cash flow, so the thing that's really interesting about our business is that the ACV does not have the risk on each side of the ACV is really not that great, right? If we're guiding to a number like 12%, it's unlikely that you're going to see that number be more than a couple hundred basis points on either side of that number. It's still a big range, but I understand. But more likely, it's probably going to be within 100 basis points of that number on either side, just based on statistics. If you look at the free cash flow number, that variance actually can be less on the free cash flow because the cash payments are really not, they're very predictable, right? You know what your salaries are. You know what your payments are for AWS costs, etc.
And the billings, the majority of our billings are already contractual commitments that we have. So there's a large, there's very large level of predictability in billings and our cash outflows. So I feel like our free cash flow is very credible in terms of our visibility to it, even more so than our ACV growth. That said, our free cash flow tends to lump in Q1 and Q4 as well. So Q1 tends to be a stronger cash flow as well as Q4. You might say why. It's typically because of the historical billing cycle that hits in Q4 into the beginning of Q1, which causes a lot of our collections to come in those two quarters. But the cash payments are a little bit more level loaded.
Okay. So maybe stepping back from the numbers a little bit, just with this Blueprint product, and I think you've spoken about kind of what you're doing from a go-to-market perspective with kind of targeting new logos, just maybe walk us through kind of how you're tooling internally to kind of go after this opportunity in terms of new logos and with Blueprint and yeah?
So I'll start with Blueprint. So we just did a very large, very important kickoff with all of our global sales teams in January. And Blueprint is if you watch the kind of the hype videos that we replay internally in the company, and you would say, what do you remember from the event? I mean, it's Blueprint, Blueprint, Blueprint. That's all anybody heard. That's all we've talked about. So you might say, well, why didn't you roll that out last year? The reality was their innovation curve was so steep on Blueprint that it would be really silly to go into a sales team and say, please start using Blueprint, even though in the next two weeks, big things are going to change. So we wanted to get.
It was released Q1 of last year.
It was released for the first time in March of 2024, and that was really the PDF version, right? That was actually the version that really you couldn't use in a sales campaign yet. Now when you fast forward to probably around October or November is where the product really had where you could see the app side- by- side, so we really made the decision to not try to do an adoption in the middle of the fourth quarter of a selling year. We decided to do it consistent with how we kicked off the year, so we think 2025 is really the year of Blueprint for our selling teams. In terms of how we think about that selling motion kind of changing both with new logos and existing logos, Blueprint will play a very critical role.
We will not close for a six month building a demo and a production test, the production pilot, etc. That's typically how enterprise companies, they close for a project to do work to show you that the application might be something you're interested in. We'll be closing for a one or two-week Blueprinting session where we'll sit down with the client, and at the end of that session, they'll have an application that they can look at that they could migrate into production if they so chose to. That's a very different motion. That then feeds into the new logo discussion.
Because if we can do that with a new logo, we could cut the kind of that selling, that upfront kind of prospecting and selling to see if a new logo is really interested in Pega from what might have been a year or more down to maybe less than a quarter, and so that helps us to be able to.
I actually had a point there, which is just, right, so Blueprint, as is in the name, it's like it's a blueprint, right? So it's not actually going into production. And so the question is kind of, right, do the Blueprints need to go live in order to have a positive impact on your business and for your customers too, right? And for those of you that don't know, you can go on the site and try it yourself, right? So what has kind of even just aside from the applications going live, but just from kind of a brainstorming capabilities standpoint, what impact does that have?
So now what you can do, just remember the first version of Blueprint that I said that when you walk through a couple prompts, it produced a PDF file. If you start there as your baseline. By the way, that PDF file may have taken six months to do with people going through architecture reviews and whiteboarding and Post-it noting and doing their project. Still a tremendous value. But if you look at what happens now, we can sit down and go through a series of prompts, ask them some questions, maybe ingest some information from there, maybe a modeling document or a process document or their user manuals or screenshots of the application. And it will actually build up. It'll form what that application is, the steps, the stages. It'll connect who it thinks the personas are, what are the integrations.
In that Blueprinting session, we're building out an application that will show you what it's like to make a call to an ERP system, to make a call to SuccessFactors, to grab information. You can actually see the application working. Now, those integrations don't actually happen in Blueprinting. It's all simulated, but it's giving you the experience of it. It's showing you. It'll create test data to run significant amounts of tests through. Now if a client says, I love it. I want to go live. There's a process which is very streamlined to actually migrate that Blueprint framework into an actual live production environment.
What are some of the most common use cases you're seeing that actually make it to that go live?
It's typically the same use cases that we sold. Things heavy around customer service, around Customer Decision Hub. CDH is actually a new Blueprint that's actually where we've just started working with clients on. It's things like disputes and exceptions and onboarding and loan originations. A lot of common use cases that our clients have used for decades with us. The thing that I think is the biggest opportunity with Blueprint is actually going after the true legacy transformation. These are the applications that are sitting on mainframe systems and custom COBOL code that are sitting deep in the bowels of these large companies that they never envisioned that they could ever shut off.
Our view is to help Blueprint be part of that shut off process where they can replace those systems, get rid of all the focus and the risk that exists in those, and move those and modernize those into the cloud, and that's where our partnerships with GCP and AWS are critical because we'll be looking at actually transforming and moving all of that application to the cloud with back-end data stores like BigQuery and Databricks and Snowflake as our partners.
Great. Well, we have just a couple minutes left. D o wanna to give an opportunity to the audience if there are any questions out there for Ken. If not, it's been a pleasure, Ken. And we'll wrap there.
Awesome. Thanks, Austin.
Yeah. Thank you, everyone.