Okay, welcome. We'll get going here on the final day of the conference. So we have on stage with us today Ken Stillwell, Chief Operating Officer, Chief Financial Officer of Pega. Ken, welcome.
Thank you.
Thanks for coming and joining us again this year. So maybe to just kick us off, you guys have been busy with a lot of good stuff recently. So maybe just kind of give us the quick highlights of kind of what's been going on lately, and then we'll kind of double-click on that as we get into the conversation.
Sure. Probably the most relevant one is we just wrapped up a cloud subscription transition, and we went through the first kind of stage, which is to change our entire go-to-market, sell cloud first. We went from less than 5% of our clients were on cloud. Now we have about 50% of our ARR that's on cloud, and that's kind of built into our selling motion. And we're starting now to look at those clients that originally, years ago, did not buy cloud and start to work with them on the migration to the cloud. As you can imagine, with large clients like Morgan Stanley, as an example, you have to really feather that in terms of the migration because these are very mission-critical systems. And as we kind of got through that cloud transition, we went from we had a big billing transition as well.
We went from really having zero to slightly negative free cash flow just a few years ago, and then we stacked into we had $20 million, then $200 million, then $350 million, and now we've guided $440 million, which is not unexpected as you make that transition and you start to get the operating leverage and the billing normalization. That's kind of where we are from a business model transition. The other thing I would add is we've really leaned hard into trying to be innovative around how we could leverage GenAI to help our clients in two ways. One, to add value around the workflows that they use on Pega to help manage activity and work.
Also with this new innovation called Blueprint, which I'm sure we'll talk about, which was really trying to tackle the problem of enterprise transformation is costly, takes time, and we want to help clients make that faster.
Just double-clicking on the last point with the legacy transformation, you've talked about this as an exciting opportunity for Pega in 2025 and beyond. What is it that gives you that confidence that now is the time for this to really be deployed and actively kind of engaged across the customer base?
Yeah, that's a great question. So we started this digital transformation journey, and when I say we, I mean as an industry, as a collective group, really started in earnest, call it five to 10 years ago. And I think most of us would have thought we would have been further along as we get into 2025. But if you talk to GCP or you talk to Google, you talk to Microsoft, you talk to AWS or anybody that's kind of on the back end of this transformation, they would tell you we're anywhere between 10% and 20% of the way there. I mean, AWS, Matt talked at one of the conferences in the fall and said that he thinks that maybe we're 10%-15% of the way there. And companies, and by the way, McKinsey released a report that suggested we're 15%.
So these are all independent parties kind of landing at the same place. If you look at where large organizations want to be, they want to be more like 80% in the cloud. So if you start with we're 15% and we want to be 80%, we've got a lot of work in front of us. And so Pega only has so much capacity to sell and to support and to try to help be part of that transformation. And our SIs that support us have a certain amount of capacity as well. So it becomes this throttling effect of how much can you do at once, how much can you invest, how much can you put resources on.
So when GenAI came out, we actually looked at GenAI as a completely different opportunity, which is now the time to really push hard to get clients off of these legacy applications, these legacy solutions, and get them into a more modern environment. And so we just felt like probably the timing has been right for years, but we just have to take advantage of innovation when it gets put in front of you.
Yeah, that's fair. I think those numbers are much lower than I thought they would have been as it relates to just general penetration within that. But as we kind of double-click on that GenAI effort to help accelerate some of that, let's just kind of now talk a bit about GenAI at Blueprint. You've added a ton of features more recently, and I think the intent obviously is to make some of these transformations easier for clients as they think through it. What were some of those features that have been added more recently? And then just maybe some of the things that you're excited about with that thesis going forward. I presume most folks here are kind of familiar with it, but maybe just like a higher level Blueprint review and then kind of diving into some of the new features and capabilities.
Sure. So maybe I'll just spend a minute or two and just kind of explain our view of how enterprise transformation has happened. The way that it typically happens is you look at an old system, you basically try to identify what that system does, you try to put a bunch of smart people in a room for weeks, months, unfortunately sometimes years to basically figure out what does that new system need to look like, what do you want to keep from your existing system, what do you want to add, what are all the technology decisions that you need to make, and then you go through a process of trying to evaluate how's that going to work. You typically engage an SI like an Accenture or Pricewaterhouse or Deloitte or Cognizant, etc.
You go into an exercise to essentially ideate putting together the Visio diagrams and the process flow maps and whiteboarding out and getting together user groups to get feedback on schematics of how the system might work. That's unfortunately just the way that most systems, most processes are modernized. That's not different for Pega, right? That's the same type of activity that you would go through. What Blueprint does is Blueprint essentially takes all of the legacy and institutional knowledge that Pega has supporting workflows of all types for 40 years. It also uses the power of public information that's available around those exact same use cases, takes that information, allows through a series of prompts and agent-assisted discussion, and forms the application structure on Pega. It builds the actual configuration on the Pega platform. Now, why is that possible?
Well, one. GenAI is very powerful in understanding common sequencing of how things are done and being able to identify best practices. Pega's platform is perfectly built to be able to execute that enterprise work automation, and we have all the knowledge base of how it's been done at hundreds of clients and tens of thousands of use cases. So when you put that together, you can quickly actually identify how to build that application. So what we see Blueprint doing is actually helping clients get really far ahead in potentially a matter of weeks where they would otherwise have to take months, quarters, and years. What I'm most excited about Blueprint, when Blueprint first came out, we first came up with this idea a little less than a year ago, and it was just a concept at that point.
And what that really did was you typed in some prompts and it would produce some chevrons and a visual workflow and a PDF document. That's essentially what we had. It was amazing innovation at that time to say that could shortcut a lot of discussions. But you look at what we have now. You go through that prompt as discussions, what industry you're in, what's your workflow, describe your application. It forms. Here are the users that we think you're going to need. Here are the data integrations. Here's the workflow. Here's the steps that you want to take. Here's all the content. Here's sample test data that we'll form for you that you can run through the system, and it actually will build the application, and there's literally a side-by-side screen that you can see the application being built with the toolbar, with the dropdowns.
If you change something, you can see a change in the application. It simulates the integrations. For example, if it says you have an SAP integration, it'll simulate the relevant data that you might get from an SAP integration. So you can actually run the application. You can get in, do test data, watch it execute. At the end of that, and this is literally in two weeks this can be done. At the end of that application, a client might say, "I want to actually put that into a production pilot. I want to try that out." Push button, it actually builds the application for real. The only thing you need to do is you need to harden your integrations because remember those integrations were simulated in the original Blueprint.
So the power of being able to just visually walk through how that application, what it does, and to be able to get a fully formed app in a matter of a couple of weeks is just very powerful. The last point I would make is Blueprint allows you to ingest data. So for example, you might have a business process diagram of what your application, your legacy application does. You can load that document into Blueprint, and it will learn from that document exactly what your process, what your workflow is that you're trying to execute. So these are advancements in terms of digital transformation that we've never seen at Pega. And it's powered by those three things: Pega Platform, the best that's out there, content with tens of thousands of examples of what good looks like in GenAI.
Got it. So just if I think about the differentiation here, you all are sitting on years of experience doing this. And so the unique data assets and workflows and what works well, what does not work well, that seems very hard to replicate, right? Obviously, you have a bunch of code generators and things of that sort, but just understanding the nuances of what really goes on in some of these more complex business processes, it sounds like you're pretty uniquely positioned to do that well.
That is a very big advantage that we have. Using the example of code generators, if you think about if you're ABC software company and you have all of this legacy code and you want to use GenAI to migrate that code into a new application, you're well advanced over someone that's going to start from scratch. It's analogous to that example.
Okay, great. And maybe just touching on something you mentioned on your most recent earnings call about pursuing new logos more aggressively. Anytime you're going out tweaking go-to-market or kind of adjusting your motion, if you will, there's some touch points upside down. So maybe just give us some color on that motion and maybe the logos or types of logos you're targeting for this year and then when do you expect those to kind of fully ramp up?
So the new logo motion is focused on companies that look very similar from a profile standpoint to the clients that we already have. They're verticals that we know. They're companies at scale that have scale transactions that have the same legacy transformation problems that our existing clients have. So that's a starting point. So very, I would say they should be really good target orgs that we would go after. The second piece of that is we didn't have Blueprint before. So if we were trying to actually go after a new logo, the time, the selling process, and the duration of even that first step just to be able to get in to walk through a PowerPoint slide and maybe a demo could take a while with the new logo.
Now what we've got is an opportunity to really, even quite frankly, without even a salesperson on site, clients can go to our website. They can actually do a self-drive Blueprint on their own. You can go to pega.com/blueprint. You can actually look it up. You can work on it on your own. We actually see that information. We don't see the content, but we see that Morgan Stanley was there in this use case. So we actually kind of can get started when we actually engage with that new logo. So we feel like it's actually really the right time for us to think about new logos as well. We changed our, I would say, refined our go-to-market when we did the sales restructuring in 2023, and we really liked the momentum that we have and the improvement.
So we felt now is the time to start thinking about bringing on some new logo targets. Now, that does not mean that we're going to hire lots of people in our selling organization to go after those new logos. We will be very targeted if we need to hire. We also think there's a transformation going on with our total selling team mix, right? Because Blueprint really helps make more efficient that solutioning aspect of selling. We think many of the teams that were involved in solutioning may actually mature into front-end sellers, right? And we're not the only software company that's thinking about that. That's the transformation that's going on in the industry.
So this is kind of a form of eat your own dog food, right? You use your own tools and systems to make your processes more effective and efficient. And it sounds like you're targeting the customers that are most similar to your existing base. So there's efficiency, there's thoughtfulness around the approach, and it sounds like your total go-to-market motion is conforming to that. But as we think about the channel or system integrators, are they kind of involved or helping additional leverage to get to those customers, or is that a separate motion altogether?
So we've really doubled down with our system integrators as well as part of this. Our partners are, to a large extent, have adopted Blueprint before our actual sales team because we actually rolled out Blueprint with our partners in 2024, and we've rolled out Blueprint with our entire selling team in our sales kickoff two months ago. So our partners actually have been early adopters, and we've got tons of momentum with our partners. And we instituted some partnering programs like referrals and things that are incentives to drive partners to actually bring the right types of new logo opportunities to Pega. That's a very different shift from where we were a few years ago.
Okay, so we kind of have the go-to-market approach. We have new logos, and maybe just if we take a step back here and think about the spend environment. I think this week we've heard from companies with different levels of engagement across different parts of the cycle here, but maybe what are you seeing as it relates to enterprise spend this year, this cycle, as opposed to where we were last year? And maybe how does that reflect or impact the go-forward business plan?
So this does change. My answer last week could probably change this week based on the environment that we're in. But I would say definitely since the election, there has been an increased level of business optimism on a number of fronts. And I think the spending environment is certainly no worse than it was since November, December from prior to that. There is an increasing level of uncertainty, I would say, that people feel. We have not seen that in our selling activity. We haven't seen that in actual deals and pipeline and client spend. We haven't seen clients actually start to say, "Hey, we're going to change our spending. We're going to deprioritize things." If this uncertainty lasts for a prolonged period of time, obviously that's a much bigger risk the longer that it goes. But we haven't seen that at this point.
I think what helps our visibility is the majority of our bookings come from our existing clients. Our existing clients are the who's who of every vertical that we're in. Those clients tend to have very large businesses, very large customer bases, very competitive around being digitally transformed. And quite frankly, the profit profile of companies in these industries are much better now than they were a few years ago. So I think the largest organizations are in much better shape to weather some amount of uncertainty. But we can't have it forever.
No, I agree. I think that's a well-said response there. So maybe just pivot here shortly to the Pega Agent Experience, Pega Agent X. I think there are a lot of agents at organizations that are doing a bunch of different things that are being deployed for chats, etc., etc. Many are black boxes. But maybe just kind of give us a viewpoint on kind of Pega's approach, maybe how you think about orchestrating other agents to achieve broader, more complex workflows, and then perhaps the compare versus something like Salesforce Agentforce and maybe what's similar, what's different, and how you're thinking about agents generally?
So I think the term agent has a relatively consistent definition across different use cases. So I don't think that all these agent words are necessarily really big degrees of difference between one company to the next. The way we think of Agent X is that we believe that the power of any work that's being done, any application, is fundamentally powered by the strength of your architecture of your underlying solution, whether that be a code language or whether that be the Pega platform or whether that be somebody else's platform. If you have a strong base, then naturally what you can build on there and the durability of that and the power of that is much better. So you have to start from a strong platform base. That's point one.
Point two is when you build an application on the base of your product, there are lots of touch points for humans to interact, to make decisions, to enter data, to analyze data, just to drive throughput. The Pega AgentX experience is really focused on trying to make that system truly be autonomous. Where can you take human interaction out? Where can you see a decision that needs to be made? Where can you see a configuration that might need to be improved based on data that it's seeing go through the workflow? Having the Pega AgentX really be the power of what humans would otherwise do around that workflow before Pega AgentX. If you look at the way agents are being used in other companies, there is a similarity, which is they're trying to reduce human interaction.
But once again, the agent is only as powerful as the underlying technology that it's operating on. If you put an agent on a really poorly built system, it's not going to solve that, right? And so I think that's an important thing to remember. So I think that that's where I think some of the agent talk is a little bit disconnected with solving the problem. It's a little bit analogous to RPA, right? Which is there's a place for RPA, but RPA is not the answer to solve disconnected and poorly written and poorly designed systems that get bad outcomes. RPA doesn't solve that problem. You have to fix that. So I think that there's some I just think there's a difference there that's maybe not well understood.
Okay, fair. And then who are you all targeting with this agent as it relates to market opportunity? Who does Pega view as the kind of ideal customer?
So our agents will function around the Pega Platform and will also be able to function to go and interact with systems that integrate into Pega. We're not selling. The AgentX sales opportunity is not to sell agents to sit on other applications. But the agent will actually interact, will grab data, will instruct another application to do things that are in concert with the actual workflow that we're actually doing. So if you think about Pega's workflow typically interacts with other systems. We become an orchestration engine of sorts to manage things that might be captured and transacted in other applications that aren't Pega as well as in Pega. And so that agent can help manage the UI, can manage the actual application to Pega and to work, and also go out and instruct and manage communications with those other third-party apps.
Okay, great. So maybe let's shift to financials here so give you a chance to work the other muscles you got going. Just looking at GenAI Blueprint was launched Q1 of 2024. Just help us think through the monetization schedule for Blueprint and what are the pricing metrics that you look at when you're thinking about the deployment and how customers think about the value and ultimately what they're paying for.
So Blueprint is an important distinction here. Blueprint is not a product that we sell. Think about Blueprint analogous to a methodology of how to speed up the selling and solutioning and deployment process for our clients. So the value proposition is really more systems, more volume. We charge based on the volume that the system transacts. So if we have more systems, naturally we have more volume. We actually monetize it that way. So Blueprint itself, we're not charging. Blueprint is a tool that we would give to any client to allow that we'd give to any partner. Our sales teams use it. So it's really a cultural change in how our go-to-market works with our clients. And the way to measure the success of Blueprint will be more systems, more clients, more volume, higher ACV growth. That's the connection. How will it do that? It should speed up.
It should increase the amount of opportunities to get into our pipeline. It should speed up the advancement of that pipeline, and it should improve win rates. So that's at the simplest level. That's how it'll impact us.
So just looking at that through that lens and maybe your expectations for Pega Cloud ACV growth this year, what are you guys predicting?
So our guide for this year was 12% ACV. The way that was built up was assuming that our maintenance ACV would slightly decline. Our Pega Term license or Client Cloud would be maybe up those single digits, which leaves really the bulk of the growth coming from Pega Cloud. So Pega Cloud really needs to grow in that 20%-25% range. And probably be more precise, it's kind of more like the 22%-23% range for the full year. Naturally, quarters will be different, and they will build. And with our backend loaded with Q4 typically being the strongest quarter, an outsized amount of growth typically comes from Q4. That did not happen in 2024, but 2024 was an anomaly on that. Most years, we get the majority of our growth from Q4.
Okay, great. And so that growth number is slightly higher than last year.
Yep. Yeah, it's a slight increase.
Obviously, that's acceleration. So looking beyond 2025, what's your viewpoint on the total market? You've alluded earlier digital transformation is in that 10%, 15%. So maybe just kind of help us think through some of the longer-term drivers that are helping contribute to growth acceleration, especially you're hitting on all cylinders in terms of higher ACV, higher profitability, and it seems to be kind of going directionally all super, super, super positive. So just kind of help us with those drivers that are helpful.
So, I think if maybe I'll start with what's the base level of growth that we could have if we have really no impact from Pega Cloud migrations and no impact from Blueprint. If you just think we're just going to sell to who we sell to with no change, no advancement in our selling methodology, and migration not really helping our growth rate. And I'll maybe start with that being an NRR number. If you look at our NRR number, it's kind of around the 110, kind of 110% range. And that's been that way for 110%-113% for, I don't know, probably five years. So that's kind of a pretty dependable way to think about what could we grow if nothing else worked in our favor. If you start with that 110 and you say, "Well, could you get 110%?
Could you get 100 basis points from migrations? Could you get 100 basis points from new logos? Could you get a little? And that's kind of how you could start to build your way up to say, "If Blueprint became this accelerant to our NRR and to new logos, could you be a 15% grower?" Of course you could. Could you be a 20% grower? I mean, the market's there. So it really just we kind of have to see how that plays out.
Sure. Okay. Yeah. But with the go-to-market and customers when they're ready, obviously that's a big determinant. So just unpacking one piece of that. When a customer does move from Pega Client to the cloud version, what is that uplift typically?
So it does vary quite a bit. But if they're buying, if they had previously had a perpetual license, which we don't have a lot of clients in that case, but if they previously had a perpetual license, the uplift would be what you would typically think, like two, two and a half, three times. If you look at the rest of the business, which is the majority of that, which is term licenses that would move to cloud, you're typically going to see like a 25%-35% uplift. So what I've typically said is that if you average that all out, you're kind of in the 25%-50% range in terms of the uplift that you'd get from what they currently pay us to what they would pay us on Pega Cloud.
We should expect to see less term, less maintenance as we shift to more.
Certainly as a percentage of ACV. Yeah. Pega Cloud will grow faster. And that's kind of what happened over the last five years when Pega Cloud went from being 10% of ACV to being 50% of ACV.
Okay, so any questions in the room, actually?
I have two questions. The first one is from the migration from on-prem to cloud. Are you doing that while increasing prices on on-prem to sort of help customers decide maybe faster to get on the cloud? And my follow-up is competition-wise, historically, the RPA players were your main competition, Appian and UiPath. I'm wondering if you're seeing any of the newcomers that claim to be in the same space, such as Airtable, etc.
So when we move, we have very high retention rates with our clients, and the majority of our business comes from existing clients. So we have not taken the approach of trying to force people to move to cloud by jacking up prices. That strategy would work, I think, if we had tens of thousands of clients and you could do it. But given the importance of our clients and the fact that they do have complexity with when and how they move, we've tried to be more partnering and trying to help them move. RPA vendors has not typically been our primary competitor. Our primary competitor over the last few years have been companies like Salesforce and Microsoft. Appian is a competitor of ours.
But when you look at the traditional, like if you look at Airtable or Smartsheet or kind of the lower Mendix, OutSystems, or even UiPath, like lower-end low SMB, low code or RPA, it's not that we never compete with them. It's just not as common. For some use cases, you might. The majority of it, we're competing with platform companies.
Hi. Can you please give us an update on the lawsuit situation with Appian? Kind of what's the latest? Where does it stand? How do you kind of think about a range of outcomes? Thank you.
So I can't talk about range of outcomes, but what I can tell you is the appellate court ruling happened in July of 2024 where the verdict was overturned. There was a 61-page brief written on why all the errors that happened in the case. There was a petition. There's a petition that Appian put in to have the Supreme Court review the appeal. And that's under review right now to see if the Supreme Court will do that or not. If they choose to do that, then we would likely have some type of a hearing sometime, I would assume, in 2025. And that's kind of the next step.
When do you think you find out?
It should be soon. Yeah. I mean, I didn't anticipate it would take very long for them to decide, I think, because they heard it on February 11th, I believe. So I'm sure in the next month or two, we would hear something.
Okay, so we're going to shift back to the profitability here. You all achieve Rule of 40, right? After pushing and dedication, you were very focused on it. Maybe just help the group here and investors just think about, one, what really went into achieving that, and I think more so the trajectory in terms of sustainability, but then more importantly, the expansion, continued expansion of margins.
There were things that were easier, and there were things that were harder, right? Things that were easier. It was not hard to hold G&A and R&D costs and make sure that we made the right to get some small level of operating leverage. It was maybe medium level of complexity trying to continue to drive gross margin up, right? I mean, that requires not just operating leverage, but also some engineering support. Engineering helped address some things that might help us do auto scaling and leverage Kubernetes, etc. I would call that probably put that in the medium category. Maybe the one that was a little bit more on the difficult side was to restructure our go-to-market, right?
And make sure that our go-to-market, we didn't lose the opportunity to grow, but we made sure that we were driving some level of efficiency in the model. I think the biggest thing when you're, I would say, this just as a Rule of 40 company in general, the biggest hurdle that companies have being a Rule of 40 or Rule of whatever company is the general alignment of the company, the management team, and the employees that it matters, that it's important. And so we spent a lot of time. I personally spent time with employees educating them on what is Rule of 40. Why does it make sense? Why are well-run companies Rule of 40 companies? Why does scarcity an important discipline enabler around how we run the business? And the amount of buy-in that we have had from our employee base has been massive, right?
Because they can see the value. And quite frankly, the market has rewarded us over the last couple of years as we've actually implemented and made progress. So I think it's important for the company to understand your strategy. I think we've done a very good job there. It's also important that your board, your management team is aligned. We are fully aligned as a management team. And then naturally, you've got to have really good clarity of communication to both internal and external stakeholders around that. And I think we've done a very good job of that. And by the way, companies in general are better at that than they were 10 or 15 years ago. But I think that we've done that really well. And we're not going to lose that momentum.
Now that we understand and appreciate the value of why you want to be a well-run company, some of it's just because we're accountable to our shareholders to actually run the company well, and some of it's just you feel better about the decisions that you make. You're proud of the outcomes that you get, and I think it really became almost a company motivator for us, and I don't want to minimize that. I think it's really important. It can be done in any company. If it's not done, it's typically because there's not a commitment from the management team.
Okay. So final question. You've kind of alluded to some of this: focus, dedication, driving on strategy, great returns over the last year in aggregate in terms of total market performance. You recently paid off the convert and cash, right? And now you're continuing to generate even more cash flow. So just kind of help us think through on a go-forward basis, return to capital strategy, whether it's repurchases, additional M&A, or if there's M&A, kind of where would you focus those efforts?
One of the reasons why we did the convert a few years ago was to help us bridge through getting through the transition. We knew we had to be in a position where we could settle this convert. We wanted to get to the cash flow levels. Quite frankly, we're doing a little better on cash flow than even what I had modeled a few years ago, which feels great. I think that this was all that paying off of the convert last Friday. This is actually where we wired the money. We announced it on Monday. That paying off of the convert was a milestone for us, right, of actually getting through the transition. We were limited in the amount of share repurchases we could do during that time period because naturally, we wanted to make sure that we could pay off that convert.
Now that we're generating the amount of cash we have and quite frankly, where valuations are in the market and on us, I think buying back stock is a great investment for our investors. So we're very committed to returning capital through share repurchases. It just makes sense. Now, if our valuations were so high that we felt like they were above the market, naturally, we would tone that down a little bit. But we feel like we're a great buy right now.
Okay. And maybe last thing, PegaWorld is June?
June 1st. June 1st is our Investor Day. It's a Monday. PegaWorld's a great event for any of you that haven't been there. You'll learn a lot about Pega. You can talk to our clients, talk to our partners, and we have an investor day session where we'll spend a couple of hours in the afternoon on Monday, so everyone's invited.
Okay. Great. Thank you, Ken.
Thank you.
Appreciate it.