It's 12:00. We're going to get started.
Look at that. Peter's right on time. He's always that way. That's good.
Very excited to welcome you to our 2025 Investor Session. For those of you who do not know me, my name is Peter Welburn. I'm Vice President of Corporate Development and Investor Relations for Pega. One of our goals for this year was to double the in-person attendance at the investor session. We've done that, so very, very excited to see such a big crowd here in the room. On behalf of Alan Trefler, our founder and CEO, and the Pega team, welcome today. Just to cover a little bit in terms of logistics, we are audio streaming the audio only of today's session. If you do have a question in the room, if you could raise your hand, state your name, state the firm that you're with, we would like that for the transcript of today's session.
In terms of the agenda today, Alan Trefler, our founder and CEO, will come up. He'll talk about our strategy and give you some insight into our differentiation. After Alan finishes his portion, his opening comments, he will take questions from you. Alan has meetings with clients today, so he will not be here for the entire session. Make sure if you have questions for Alan, you jump in there. We'll have Alan here for a few minutes before he takes off. After Alan speaks, I'm going to talk about our market opportunity, talk to you about the size and growth of the market, the drivers of the growth of the market, and how we're responding to that. After that, Don Schuerman, our CTO, will come up. He is going to give a demonstration of our latest Blueprint technology.
For those of you who were at the keynote this morning, there are a bunch of people in the room today who were not at the keynote. He is going to show that keynote video again and that live demonstration again. Just wanted to make sure you were aware of that. Don will also tailor it more to this audience. After that, Eric Musser will come up. Eric is going to talk about go-to-market and how we're using artificial intelligence to change the way we're engaging with our clients and drive growth going forward. As we usually do, we'll wrap up with Ken Stillwell, our Chief Operating Officer and CFO. He'll talk to you, give you a financial update. As part of that financial update, he's going to talk about our capital allocation strategy and more.
This will be, I think, the first time that we've talked in depth about the capital allocation strategy, so I'm really excited and looking forward to that. Then we'll wrap up at the end with questions and answers. My expectation for today is that we'll run about an hour and 45 minutes to two hours and 15 minutes, depending on the number of questions that we get. The feedback we've gotten from investors is a two-hour session works well for them. That's why we're kind of going for the two hours.
In closing, before I bring Alan up, we always try to, at the investor session, engage with all of you, our analysts, as well as the investors, get an understanding for you for what would be the most valuable topics for us to cover, where you'd like additional insight, where you'd like to better understand our differentiation. We very much have tailored today's agenda to the feedback that we've gotten. We typically work on the investor session content for about six months. I am very excited that this is all coming together for today and looking forward to today's session. With that, I will ask Alan Trefler, our founder and CEO, to come up.
Thank you very much. Nice to see the greater number of faces here. I think this is a tremendously exciting time at Pega. I'll just ask one question. How many people saw my keynote? Okay, pretty good, but not 100%. I am not going to reprise it in too much detail. I may point out one or two things. The heart of, I think, what I was saying in my keynote, but also I think the heart of one of our messages to our clients is that we have a better way of thinking about agentic. It is profoundly different, and we think profoundly better. That way of thinking is that you should not just turn your business over to thousands of textual prompts that somebody keys into agents that will miraculously do the right things.
I want you to understand that I say this not because I am in any way skeptical of the potential power of AI. AI is real and tremendously important. Like with many things that have power, it has to be used the right way. Our view on this right way is very clear. You want to use the intelligence and brilliance of the AI to design highly effective, highly granular, highly specific workflows that you can then execute reliably and predictably. The great news is Pega already had a state-of-the-art workflow engine. What we did is we made it so that our workflows, designed by this Blueprint capability through AI, could now use AI to talk conversationally with people and get the work done.
Getting the power of the conversational interaction that makes everybody so excited, but doing it with the complete reliability of workflows. Not losing the inspiration of coming up with the best workflows. In fact, I would say we do that way better than anyone else out there. We do not send somebody in to go invent prompts. We work with them. We collaborate with them. We take our IP. We take IP from partners. We take IP from their documents and use the AI to grind it together so you get the best workflows executed in a predictable and reliable way. That idea that in Pega, every workflow, including the ones that people have built for years, can now become agentic, I think is going to be a very, very important message.
What I would describe is not just that we're six months ahead of the other guys. We're on a completely different path. I think when they discuss and describe to themselves where they've been missing and they realize that they've been wrong, it's not like they can make an easy left turn and get to where we are. I feel really excited about the technology and what's happening in the technology. This slide, which we call Center Out, really describes our view of the whole enchilada. Pega, think of as that engine in the middle. It makes decisions. It makes workflows run. It keeps track of what happens with record keeping. You can do machine learning off of it. It is a set of engines, not just one, but a set of engines that can run your business.
Built off of a Layer Cake that describes how you want different parts of your business to run. That you've got a business that perhaps in one part of the country or one part of a customer base wants to have some variations. Now with Blueprint, we've tied AI into the construction of these workflows in this business in a way unlike ever before. Years ago, we always had an engine that was strong. We kept working it. We've been making it stronger. The problem was never the strength of our engine. The problem always was the challenge to find people who knew how to configure it, knew how to use it, knew how to evolve it, and that it was complicated. We've been working on it for years, working really hard to make it better and making progress, but the progress was slow.
Going into 2023, what I saw and the other leaders at Pega saw was we could use this generative AI stuff to completely upend the problems of understanding and configuring and make it all not just much easier, but through AI, more empowered, more stimulated by the system to do better and get better outcomes. That is what the center is. The concept of Center Out is the center describes your business. Your channels on the left, whether those channels are customers coming in directly or employees doing work or in this new world, agents that will come in, they all need to draw on the center and they should draw on the same workflows. You should not get different outcomes. You should not build agents specific to individual subpopulations. We are the only guys who say that.
On the right-hand side, unlike a lot of our competitors who are obsessed about the data fabric and that they want a data fabric that will somehow bring all the data together, which, by the way, I've been in the business for a long time. We've been talking about that for 30 years. It hasn't happened. It's very, very hard. We said, Look, we're going to go out to the data as it is and where it is. If that data is all normalized and beautiful and elegant, terrific, we'll use it. God bless you. But if it's not, we have the ability to map that data as it comes into and out of the engine." You can build your rules, build your processes, build your practices as if your data all made perfect sense, even before it does.
If you want to go make your data make sense, we say, Go with God, more power to you. That is not where the value of your business is. The value of your business is in what your business is. What your business is are the processes you do and the work you do for the next person who shows up. It is not in the history that is recorded in the data. Once again, a bit controversial. We are getting people to respond to it, and we are really excited about it. Now, final point, all this agent talk, we have agents to do design. Think Blueprint. You will see some super powerful. I am told that it is the best use of generative AI that people have ever seen. You will form your own opinion.
Conversational, you'll see us operate being able to have freewheeling dialogues that find the right workflow, find the way to plug into the workflow, find the way to take the output to the workflow and turn it conversationally into multiple languages. Being able to do that with the power of the language model, but not corrupting the workflows while we do it. Not allowing the workflows to go off in all directions, having the workflows do what they were designed to do. The power of automation, being able to get work away from people because the workflows with the right logic, paired with the right data coming into it, can get things done. Pega has always been a business that focused on automation.
You know, it's interesting when I see what's going on in the positioning here in the marketplace, there are a lot of people who are now going to their customers and saying, "In this age of agents, we have to get rid of seat licensing." You know, how many companies that are getting rid of seat licensing? Like all of them? We did that seven years ago. We do work-based licensing. How many units of work do you do? Because we could see that with what we were already doing with the automation, that seats were going away. That selling something to a customer, having them get rid of 30% of the seats and then want to pay you less, really didn't feel great. By the way, they've all accepted it.
We have this whole idea of what's called case-based licensing, which is work-based licensing, outcomes-based licensing, which is central to the way nine out of ten Pega systems are sold. We also have Coach, which is an innovative use of AI to use the knowledge base of a company to be able to coach people about what would you want to say to this person, what are the right types of things you might send to this person, trying to take somebody who's maybe a newbie and get them to be as effective as a highly experienced worker. It works terrifically. It's based on a knowledge base. What's interesting is we've been able to use this idea of knowledge in the latest announcement I'm excited about that we made today about partner AI or partner Blueprints.
We have a handful of partners, but they're massive partners that have agreed to create knowledge bases based on our knowledge body that reflect their understanding of legacy transformation. And we've baked these into Blueprint. So all of you can use Blueprint. And when you go into Blueprint, if you're from Accenture with an Accenture ID and you go into Blueprint, it will say Accenture on it. Now it's on pega.com, so you know that it's Pega related, but say Accenture on it. And it will use the Accenture assets in helping to create the replacement legacy system. We think this is terrific because it allows us, in conjunction with partners, to bring all sorts of additional insights to prospective customers.
I also think it's terrific because if this works the way I'm hoping, it will get slews of Accenture salespeople and Accenture COOs and Accenture workers to actually want to use this with their customers because it's free. It's on pega.com. It doesn't require anything to do. I think if that starts to happen, it's going to be part, and not just Accenture, by the way, but Ernst & Young and Cognizant and Virtusa and all the other companies that stepped up to do this. What it's going to do, I think, is both be great for them because I think this will help them very, very rapidly improve and increase their businesses. I think it obviously can be good for us.
To make this more effective, we've introduced and announced to the partners yesterday a whole new pricing model that's out of the box where for as little as $60,000 a year, a customer can get up to 80,000 pieces of work. There is no longer the sort of heavy back and forth we used to. We are also now talking about being able to work with instead of the Fortune 1000, looking to increase that to 10,000, looking to increase this to pretty much all the customers that one of our partners would want to use and work with. That just had been previously something we didn't do. We have a lot going on, but it's all based on the availability of AI to change our business in a way that helps our customers' businesses change. I think it's super exciting.
With that, I believe I am done.
If you could take a few questions, Alan.
Certainly.
Katie and Danielle have mics. If you raise your hand, they can bring them over. Please identify your name and the firm you are with for the transcript for the audio.
We see you.
Awesome. Thanks. Steve Enders with Citi. Thanks for doing this. I want to ask just on in terms of all the new innovation you're coming out with today, how do you think about what that means for the addressable SAM over the next kind of few years? Where do you kind of see the most opportunity for that to drive a revenue impact from here?
Steve, I think we'll have a much better idea in 90 days. I mean, a lot of this is just hitting. It is, to be honest, pretty radically different than the way we would articulate our go-to-market. In fact, the thing that we're most being careful about is to not mess up our existing go-to-market while we do this. The people who will work with our partners to operate with these possibly smaller companies that partners will now be bringing in, we've designated select identified salespeople in each region who will be the people to do this. We're not going to take our reps on Citibank, for instance, and distract them with what somebody else may come in. They've got plenty of work to do with your firm. We're going to make sure that they do it.
Candidly, we've not just stabilized the business, but been able to grow the business and show the success that we showed in Q1 off the back of that mode. We want to grow that mode and make it mature. I see this as opening up a whole nother flank. It is an entirely fair question. How will it grow? What will it take, et cetera? We're literally with our partners on day one of this journey. I'm going to ask for a couple of weeks or months to be able to have Ken come to you with some numbers on that.
I'll add just one, just a little color on what Alan's talking about. You said 10,000, which gives a frame of, if you think about the large system integrators that we talked about with their own branded Blueprints, when a client of Gartner or Forrester, of which there's 15,000-20,000 clients between the two of those organizations, come to a system integrator or a system integrator is discussing the best workflow solution for legacy transformation, as Alan said, if we weren't covering those with direct salespeople, our partners were not encouraged to proceed with those. That's the change that Alan's talking about that starts today. It's a way for us to get to that addressable market in a much more cost-effective way and in partnership with our long-standing partners. Just a, and we'll, as Alan said, we'll see how that goes.
Last year, I'm sorry, Carter Dunlap, Dunlap Equity Management. Last year, when we rolled this out, one of the things we looked forward to is the whole concept of ideation shrinks. The number of people you have deployed to that long process presumably become unnecessary and redeployed. Where are we in putting those people elsewhere?
It is staggeringly good. I think you heard if you listen to the presenters like Vodafone and what they say, and you'll be seeing from some additional presenters, we've taken what we used to call a catalyst process. You'll still hear people talk about it, which would routinely take one to two weeks, involve whiteboards, post-it notes, imagination. CRM showed you how you start that by uploading a video of somebody using the system you want to kill. It doesn't just replace it. It says, All right, that's an input. We're going to make it better. You give all of those inputs in, and suddenly you're ideating literally in an hour or two. You are ideating with the machine, with the AI. That's what Blueprint does. I would say it's taken the ideation phase down by 90%, maybe more. More importantly, it's better.
I think that's super, super exciting.
Does that mean you need to pursue more opportunities or to redeploy those people who were in the ideation or in the longer process that's now shrunk?
Yeah, if you're talking about inside Pega, we're moving our teams around very significantly. For example, we used to have salespeople and their solution consultants who would do demos with them. We used to have those with certain ratios. It's all changed. We expect the salesperson to be able to do a Blueprint with a customer in the first meeting all by themselves. They don't have to go jockeying for three or four meetings to be able to convince them to have somebody come in. The catalyst team, I'm expecting the sellers can do all but the most sophisticated catalyst operations. We still have a catalyst team because we work with customers, some of whom have very complicated problems that do require digging into and looking at and design thinking at some level. I see the productivity of those going up by a factor of four.
The way we're thinking about that is all of these teams are going to get more effective. Our business is growing. I hope it grows faster, but our business is growing. We'll grow into that additional capacity. We'll also spread it out so that in effect, we will have more sellers without having to hire more sellers.
Hey, thank you, Raymond Lencher from Barclays. Hey, Alan, the dream of the application modernization has been there for a long, long time. If I look at the demo today at the keynote, I'm like, wow, that just it looks like it's becoming real. How do you think this market will evolve? How close are we from that demo to kind of reality? I'm not just asking for my Barclays COBOL systems, but more for the general market. Thank you.
I think we're going to see that reality starting to hit in the second half of this year. We're right now engaged with legacy transformation programs with early adopter customers. It's awesomely exciting. As you know, any adoption goes like the chasm curve. You've got the early adopters. You've got the early majority. You've got the late majority. You've got the laggards here as well. No question. We're in with the early adopters, but we're in with them. A big part of that is we're learning a lot, turning that into enhancements, improvements, et cetera. I'm seeing the things that tell me we're on the right track.
Benjamin Mora, JP Morgan, hey, Alan. Yeah, that demo was fantastic, the COBOL transformation. But I'm just.
It almost doesn't look real, does it?
It doesn't, actually.
I expect that. I mean, the thing that you guys should realize is you can go do that. That's on pega.com. It does not require a whole lot of training or education to do. You can just upload a bunch of documents. I had a customer prospect who had an RFP. She and her team, they took the RFP they were going to send out. They uploaded it into Blueprint. We went and visited them. They said, We could not believe what we got out. I mean, they do not have an RFP anymore. They have a sample system. Do not get me wrong, it is still going to require some work. Yeah, it is entirely unbelievable, which is why people have to try it.
Yeah, I want to ask you, a lot of these legacy transformations, I would imagine, would have to be on-premise. They might just want to keep it on-premise versus going to cloud, right? Would Blueprint kind of allow that in the Infinity on-premise versions as well? The second part to it is there's, I mean, complex legacy transformations always have a lot of data problems. You kind of highlighted that in that saying rationalizing data, how Pega is rationalizing data. Can you talk about a little bit how you're doing and what do you mean by that exactly?
Yeah, sure, on a couple of fronts. One, we support cloud choice, which means that if you do a Blueprint and you want to instantiate that system in your customer cloud (on-premise in your on-premise version), go with God. We think there are lots of great reasons to use Pega Cloud, but we're not forcing that. We've got to be good enough that customers want to do it. Happily, the majority of the customers now do. We're not going to put the only cloud as an impediment. Our new pricing packages that they can just buy are only cloud because we want to make it simple. If a customer, an existing on-premise customer, wants to do it, I've got on-prem customers using Blueprint now. It's just fine here. Relative to that use or that blocker, it's not.
I think that getting the data in a system that you're going to replace out of the archaic data structures it's in, out of, God forbid, Lotus Notes, yes, there are a lot of them out there, Adabas, SQL Server, some ancient version of Oracle, getting the data out of that into a thoroughly modern application is an important and complicated part of legacy transformation. I think we still have some work to do, but I think we've got it nailed. In what you have in these releases, you can upload the ERD, the entity relationship diagram, or the lists of fields, or the database schema, or the Lotus Notes object format. You can push all of that into Blueprint. And Blueprint will turn that first into, hey, what are the workflows that this application is really doing? So we know what the application does.
What is the data that needs to live in those workflows? What is the data that needs to live outside of those workflows in tables? You may have a workflow that's managing a parts inventory. You're going to have a parts table that has all the parts in it. It's not going to be in Pega. It wants to be in a database table. What are the interfaces outside this system, like SAP or whatever, that it wants to talk to through APIs? You load the APIs in. You load the data structures in. You load the user manual so it kind of knows what it's trying to do in. Put some descriptions in.
What you get out, and you can go try this, is a system that has the right workflows, has that center-out omnichannel experience, has the conversational agentic ability just built into those workflows, has the case data that you need for those workflows figured out, visible to you, creates what's called DDL, Database Definition Language, for a cloud-native database structure to hold that parts data. It will create the replacement database for you. Plus, it will create the bindings to be able to go out to the APIs, to the SAP API or the Oracle API, to connect to that data.
We've contemplated what's the data that needs to be in the system for workflows, data that needs to be complementary for being able to be system of record data, what's the data that needs to be in remote systems that we interface and communicate with, and all of those are being accommodated in the Blueprint architecture. Now, don't get me wrong. You're still going to have to do some work to get that horrible data out of Adabas and load it into the system. Until you do that, Blueprint creates fake data so it can actually see what it's going to look like without having to worry about PII or privacy or anything.
It'll create dummy data for you so that your users can play with it and say, Yeah, this is really what I want. When you're ready to go, this is why there will be professional services involved in this to actually physically move the data, to do the planning, to handle it, et cetera. What I'll tell you is I think done a good job of figuring out the architecture and making it so you don't have to invent the architecture every single time you begin one of these projects, which is where I see these projects go off the rails. Most of them go off the rails right at the beginning because the architectures go off in all directions. I think we've got a terrific story. As we continue to perfect this, it's going to get better and better.
I think we should do one more question, Alan, and then let you get to the customer meetings that you have.
Yeah, thank you.
If anyone has one last question.
Thank you. This is Will Jellison from D.A. Davidson. I'd be curious, Alan, for your perspective on if you look at the overall rate of improvement from two years ago when we very first saw Blueprint to today, which overall has been massive, how would you break that down between the improvement in the underlying foundation models on which it depends versus Pega's own R&D to figure out how to leverage the tool to the max?
Yeah, I think that it's 80%-90% us. I mean, yes, the models have gotten a little bit better, but they're already candidly pretty good. The things that we're doing are not dependent on those improvements. Sometimes we don't even use the version of the model that is the most mystical because it just takes too long. We find sometimes that the variation between the latest version of Anthropic just isn't worth waiting for, so we work with the one that existed nine months ago. Don't get me wrong. These all get better over time. We're not highly model dependent. We've come up with ways to train the model in real time using something called embeddings, which is a language model technology that lets us take knowledge, turn it into a format that makes sense to language models, store it in what's called a vector database.
When we're running, we go and grab the right best practices and other information out of the vector database. What we do is we send it to the model along with whatever information we want the model to work with. It turns out that's a very effective way to be able to deal with changing models. The last thing you want to do is be training the model and then retraining the model every time. We've gone to a, I think we made some very good architectural decisions. One was to make Blueprint a SaaS app so that it could change all the time. The Blueprint literally changes every one to two weeks. The second was to really do this style that lets us advance very, very quickly with a high level of model independence.
I would say that teams deserve 90% of that.
Thank you very much, Alan.
Thank you, everyone.
All right. Great. Thank you. Again, my name is Peter Welburn, I'm Vice President of Corporate Development and Investor Relations for Pega. For those of you that joined a couple of minutes late, there is lunch in the back just on logistics. I'm going to talk next for a few minutes about the market opportunity that's out there for Pega. We estimate the market opportunity that's out there in terms of the potential addressable market for us to be about $90 billion, growing to about $150 billion over the next few years. That's a double-digit growth rate. I've been doing market sizing for technology companies for over 25 years. I just wanted to give you a little bit of insight in terms of how we do the market sizing. The first step in the process is to do a top-down analysis.
We take a look at Gartner, for example, IDC, how they break out the market. IDC, as an example, breaks the software market into three primary markets, 20 secondary markets, and 79 functional markets. We look at those functional markets, identify the ones that we think are a fit for us to go after. That will give us a sizing. We'll do adjustments based on the verticals that we focus on, the size of customers that we focus on. That will bring that down. In addition to the top-down analysis, we also do a bottoms-up analysis. What that means is we have a target account model. We know what our ACV run rate is for each of the target accounts that we have that we've captured.
We also do an analysis on what we think the potential spend could be in terms of ACV for each of those accounts. That gives us a bottoms-up analysis for the market sizing. The third thing that we do is what I call field research, where we actually go out and talk to customers and meet with customers. I want to validate when IDC says a particular subsegment or a particular functional market is going to grow at a certain level that we feel like that's actually true. The last thing that we do is we take a look at our competitors that are out there in the market or firms that talk sort of like we do. For example, we take a look at the market sizing that Salesforce does. They're at about $290 billion, the last numbers I saw.
ServiceNow estimates the market opportunity total at $350 billion. That will give us the market opportunity. I think whether you say Pega has a $90 billion market opportunity, a $100 billion market opportunity, a $100 billion market opportunity, or a $150 billion market opportunity, these are massive numbers. We do not have a market opportunity problem. I think for us, the key focus is how do we capture more of that market opportunity. I'll give you a little bit of visibility into that. We take a look for what are the major market trends that are out there. Certainly today, moving to the cloud is a huge trend that's out there in the market. McKinsey did an analysis about a little over a year ago. What they found in large enterprise-class companies was that about 15%-20% of their applications were running on the cloud.
In the next five to seven years, they wanted to get that to 80%. I think for us, in terms of the move to the cloud, this is a great opportunity for us. As you look at our business, it's validated by the fact that Pega Cloud continues to be the fastest portion of ACV overall. We feel like that's one of the key market drivers that we're paying a lot of attention to. In addition to that, why do companies want to get to the cloud? They want to reduce costs, become more efficient, become more effective. Another major trend that we see out there that's already come up many times today is legacy transformation. There are a lot of companies out there that are still on legacy systems. A lot of that initial transformation work, the easy work, has been done.
They're struggling with the more difficult work that's out there. Frankly, that's where Pega really excels with the innovation that we have. The other major driver that we see in terms of the market opportunity is artificial intelligence. Companies want to reduce costs of legacy systems, take those cost savings so that they can reinvest in innovation and invest in AI. As Ken and Alan and I go out there and meet with customers, talk to customers, engage with customers, legacy transformation is an area that they're struggling with, comes up again and again and again. These are some of the core market drivers. What is different for Pega today versus a year ago or two years ago when we got together? There's this legacy on-premise environment. The easy work has been done. They're struggling with more difficult work.
Pega GenAI Blueprint for us is the game changer. Now, I can tell you as someone who's been at Pegasystems for 10 years, 10 years ago, two years ago, it was difficult for me sometimes to articulate to investors, partners, current customers, potential customers exactly what Pega did. For me personally, Blueprint has been a game changer. I've done probably over 100 Blueprint demonstrations. I know I've done Blueprint demonstrations for a lot of you that are in this room. Blueprint gives you the opportunity to not only talk to a customer about what Pega does, but to give them a demonstration of the power and the capabilities of Pegasystems. I can do demos. I'm not a technical person. I don't need to call pre-sales anymore. I can do those just like the demonstration that Don is going to do today.
A big game changer for us. What is new with Blueprint that we're talking about today? It's the new legacy transformation capabilities that we've added. Don, during his product update, is going to show you a live demonstration of consuming a mainframe video into Blueprint to replicate, create a new version of that application as part of a legacy transformation project. Brand new capabilities. We're not in Blueprint today. We're not in Blueprint before today. Very, very exciting. What else is different in terms of Pega and Blueprint? We are allowing our partners to create their own branded Blueprints that feature their intellectual property, their unique IP that is unique to them. Accenture is one of the firms that's doing that. Eric, when he comes up, is going to talk about the partners and some of the momentum that they're having.
After today's session, for those of you who are in the room, you can actually go down to the Innovation Hub, and you can see the Accenture Blueprint that they've created. Super exciting for us, brand new features, brand new capabilities. The other thing that I'm really excited about is the relationship that we have with Amazon Web Services and Google. Customers want to get these legacy applications off the mainframe, for example, and onto a new modern cloud architecture, AWS or Google. We now have a partnership with Amazon and a partnership at Google where clients can procure Pega software through those marketplaces. Really, really exciting. We are also now part of Amazon's mainframe modernization program. We're the only software vendor that's currently on their website featured as part of that.
As you think about the overall market opportunity for Pega, how are we going to capture more of that market opportunity? We're going to leverage Blueprint. We're going to leverage the capabilities, the unique capabilities our partners have created with their partner-branded Blueprints that feature their intellectual property to go after this legacy market opportunity. I think for us, it's a fantastic opportunity. It's something that clients have really been struggling with for way, way, way too long. With that, I will pass it over to Don Schuerman. I know that Don has other customer meetings today as well. Thank you, Don, for taking the time to do that today.
No problem, Peter. Now that I heard you could do the demo, maybe I'll just hand this over to you. Good morning, afternoon, everyone. My name is Don Schuerman. I'm CTO at Pega. I often describe that as Chief Translation Officer because I think a lot of what me and my team end up doing is making sure that we can translate some of the things that we're doing in our technology over to our clients, over to our partners, to our investors and teams like you. Can you guys leave the slides up for just one more second? Sorry. I'm going to talk just a little bit about how we see the world, how we see the market. Then I'm going to show and take you through the capabilities we put into Blueprint around legacy transformation.
Again, if you saw CRM's, this is going to follow along that. I will try to slow down a little bit and show you some of the things that are happening under the covers to make that possible. There is this sort of push momentum in the marketplace right now around AI and agents. There is some talk of, well, maybe just enterprise apps as we know it will just go away, and that will just be replaced by an agentic layer. I think when you actually talk to clients who run enterprises in a regulated business, I had dinner last night with a gentleman who runs, for example, a retirement and funds trading organization. Just plopping down a bunch of agents and letting them run wild is not how they are going to actually drive their business. There are real practical problems to making this stuff work.
Not least of which, Alan illustrated, I think, beautifully this morning in his little back and forth with ChatGPT around chess, which is the large language models are really good at certain things. They're really good at semantics. They're really good at creating text. They're really good at brainstorming. They're not really good at solving certain types of problems consistently. They have a wonderful ability to be incredibly confident even when they are completely wrong. As you think about sort of taking a purely prompt-based approach, you can have a great capability. I can write some prompts. Then I have to figure out from an enterprise perspective, how do I test that? How do I put test cases together to make sure these agents actually do the same thing consistently so that every customer request gets answered at the same time?
What happens is we work a lot with a lot of these models. One of the things that we know is that if OpenAI or Anthropic or Google comes out with new versions of these foundational models, all the prompts start behaving differently. We have to go back. We have to re-engineer the prompts to make them work with the new models. That creates huge maintenance and testing challenges. That is why I'm hesitant on these views where we talk about clients deploying tens of thousands of agents. I think agents are going to be in a lot of places. I think we're going to have a lot of AI doing a lot of work and driving a lot of automation. It is going to happen in a way that drives a high degree of control.
For us, our goal as we move into this time is to combine some of the power and creativity that agentic AI offers because we do think it's pretty astounding. I'm going to show you an example of it. Then link it to the predictability of things like workflows and statistical AI models that provide enterprises with the assurance that I'm going to do this thing the same way. I'm going to be able to audit it. I'm going to be able to have confidence and consistency. I'm going to be able to ensure that my best practices and my regulatory obligations are followed. As Alan said, we do that and are able to do that because we think we have the right architecture.
I think the other thing, and it's a distinction that I would draw, I think there's a danger of looking at the AI world and coming to the conclusion that architecture doesn't matter. That if we just throw enough horsepower, enough GPUs at the problem, the models will just figure it out. I actually believe, and Pega believes, that actually in this agentic world, in this AI world, architecture is more important than ever. Because the challenge is not getting an agent to do a single magic trick pretty well. The challenge is to now get that to work repeatedly at scale, connected together across an enterprise, and work with all of the different legacy and existing data stores and systems. I think architecture becomes radically important. We believe that we have the right architecture. You heard a little bit of that.
How many people heard the Unilever keynote? Unilever talked a little bit about an aspect of our architecture called the Layer Cake, which can sometimes become very heady. If you start talking to people about multidimensional inheritance architectures inside a model-based code environment, all of a sudden people's eyes glaze over and go, right? What I loved about how Unilever explained it is we do business in 190 countries. I can't build apps for every one of those countries. I need to have a way to say, what's my enterprise layer? What's common? What's going to be consistent about everything I do in the supply chain management space? Then how do I drop in variations that allow me to support the market and culture that's unique in Indonesia versus the market and culture that's unique in India versus the market and culture that's unique in the U.K.?
That idea of having an architecture that actually supports the business architecture of our clients we think is really powerful. Because the other thing that I think is happening is for years we talked about business transformation. We talked about technology transformation. And they were kind of separate things. You go talk to McKinsey, you do your business transformation. You go talk to an IT firm, you do your technology transformation. I think over the last couple of years they've gotten closer together so that they've become almost sort of, as our Chief Strategy Guy says, sort of two sides of the same coin. We have business transformation and IT transformation go hand in hand. I actually think they are increasingly becoming the same side of the same coin. That there is no business transformation for our clients without high degrees of technology transformation.
There is no point in technology transformation unless it transforms our business. We think with Blueprint, we have a pretty powerful transformation platform that brings business and technology together for our clients. With that, I thought now we can pull up my laptop and I'll kind of show you what that looks like. Awesome. This is Blueprint. What I've got is Blueprint is a SaaS app. It's available on pega.com. Again, any of you can go use this Blueprint. You could also use, if you're interested in more of the marketing side of the world, you can use the customer engagement Blueprint that CRM also showed with Nikola. That's all on pega.com. The version that I'm showing you is probably a couple of weeks pre-release. We release changes every week or so.
This is just if you went to Blueprint, you will not see all of this today, but you will see it very shortly. I am going to create a new Blueprint. If you have done this, you know that you can go through Blueprint. You can select the industry you want. You can answer some questions about the sub-industry, the use case that you are looking to address. Blueprint will start laying things out. What we have done in this latest set of capabilities is we have actually allowed you to short circuit that by uploading some supporting content and supporting assets. As we have talked to our clients and to our partners about how they are driving legacy transformation, one of the things we are asking is, what kind of information do you have about these legacy systems? We kind of broke it down into a couple of categories.
There's kind of the process diagram stuff. I might have pictures. There's a notation called BPMN, which over a drink, if you want me to tell you what I really think of it, I will. There's media, which I'll show you an example. There are data schemas, integrations. Alan talked about interpreting DDL, which stands for Data Definition Language. It's how you describe the structure of a database. There are some other standards there that are a little more tied to REST services and more modern forms of data integration and data fabrics. People have requirements documents, user documentation, documentation that was gathered to sort of build the application in the first place. Increasingly, there's this set of tools. Peter mentioned that we are the one vendor listed on AWS's legacy transformation page. That's a set of tools they call AWS Transform.
What AWS Transform does is it analyzes, say, COBOL code, which is the programming language that a lot of mainframe apps are written in. Or it might analyze old Java code or old C code or any of these old programming languages. What you get at the end of that, and this is an actual AWS Transform document, so this actually was built by that tool, you get a sort of description of the app. What does the app do? What's some of the logic? What's the underlying data flow, data schema, et cetera? These are really useful, but these are pretty long documents. I mean, I think this is close to 100 pages of information about this COBOL app. That's one source of information. The other source of information is you just have videos of this stuff.
Is anybody, have you been in the career where you actually worked in green screens? I actually started at Pega actually working in green screens at places like Citibank. This is often called a green screen application. It is a terminal emulation of connecting to a mainframe. What is really astounding, the dirty little secret in the software industry, is how much of the U.S. economy still runs on this stuff and how much of the global economy still runs on this stuff. There is a lot of it still out there. The problem with these systems is, one, you have to actually learn a lot about what field do I toggle to, what do I type. It is not intuitive. It does not guide you. It has no chance of being connected to an agent and being conversational. There is no chance.
You're not going to do customer self-service with this bad boy. There are lots of reasons, both in terms of technical cost of maintenance as well as boat anchors on innovation and customer experience, why our clients might want to get rid of this. This legacy system, this is just a screen cam of it.
I can enter the account number for the account I want to update. All the fields show up and are editable, including credit limit, current balance, FICO score, and others. I can choose any field to change. I will change the credit limit and hit Enter. If I press F5, I will save the changes I made back to the database.
All right. It is just somebody is using that app and just narrating what they're doing. Those are the two pieces of information I'm going to give to Blueprint.
I'm going to import this movie. I'm going to import this AWS analysis. Now we're sending a bunch of agents off behind the scenes to transcribe that video, to match the transcript to the pictures, to read through that document, and come back and figure out, OK, what's in this application? What it figures out is the functional description, the workflows that are in it, the data that's in it. This is a summary. It actually has a lot more metadata that you'll see when the Blueprint actually gets built. This now becomes the starting point for my app. If I accept that, now if I notice I go through my Blueprint, all of my selections have been pre-populated. It's already figured out. This is retail banking. This is retail banking operations. This is a credit card management app.
It's associated with a bank called U+ Bank. The app operates in english. Now, based on all of that and all the metadata and information that we've pulled out of that video and that document, Blueprint is now designing me a new application. It understands what's in the app. It also understands from both the embedded knowledge and the language model and some of our own best practices that Alan talked about feeding in through that embeddings technology, what the best practices of a credit card app are. By combining all of that, it's able to say, great, if I'm building a card management app to replace this legacy system, it would have these workflows in it: credit limit adjustment, profile management, transaction, billing. Blueprint has also started figuring out what those workflows look like.
This is where I think we do something really interesting, which is we are not just replicating the workflow as it was in the legacy app. Because for most of our clients, the workflow as it was in the legacy app stinks. If all I do is pick up the legacy app, move it to the cloud, and I have the exact same workflow, I may have moved my tech, but I actually have not transformed my business. I have not changed the experience for my employee or my customers. We take that initial workflow as a basis, but we start applying some of those best practices that either we or now increasingly our partners have fed in. We design a version of the app that begins to think about, OK, how could we automate this?
Are there places you can see in that third step down, the purple with the star? Are there places that we could use AI or agents or statistical decisioning to automate more and more of this process? We are recommending what the process could look like. Now usually, if we had more time and I was doing this with an actual client, we would not just stop here. We would actually now start debating this. We would move steps around. They would maybe suggest we should add a step or take a step out. This is now, instead of writing a bunch of requirements docs, we are going to use this to refine what we want our app to do. This is how Vodafone talked about delivering an app in 40 hours.
By using this to refine and get final agreement on what the business wanted, that's how they're able to move so fast. That is how you'll hear from Eric, we're able to have discovery conversations with our client that used to take weeks to even get set up. Now we just do them in the first meeting. I've got this workflow. I've got the data model behind it. We've even figured out, again, based on what that user was putting in the screens, what fields are required. They're checked as primary here. That'll become important later. We figured out also the underlying integrations and data this app uses. This is where a lot of the stuff that the AWS tool gives us is what are the other data objects this app uses?
As a matter of fact, what's the relationship between all of these data objects that you have in your application? If you go back, I think I skipped it over here. If you look here in the data model, we actually can help the business see inside this case, where's all the data being stored? What's living in Pega? What's living in some of their existing legacy systems? Alan talked about the importance of being able to set up to move all that data up to the cloud. This is now giving me the visibility that enables me to do that. Of course, we know who participates with the app. Who would be using this? A customer, administrator? Again, this is where we're starting to inject some of our best practices. That mainframe legacy, I probably didn't have a virtual agent.
We know that if you're going to build a modern app, it probably has a virtual agent associated with it, especially if it's going to do self-service for your customer. The other real power of Blueprint is that I'm not just talking about this theoretically. As I'm working between business and IT partners, I'm not just having a theoretical discussion about what this app could be. I can at any moment just click Preview. I can see the app. If I want to run this application, I can actually see what the app is going to look like. This happens to be with Pega's user interface, where we've actually got pre-built reports.
We basically generate a bunch of dummy data, synthetic data to use the term of art these days, to actually make this app demonstrable so that people can experience what it looks like. We can do it in a mobile app. We have a pre-built plug-in to Salesforce. A lot of times, we become the workflow engine that helps connect Salesforce requests into the rest of the world where things actually get done. We plug naturally into Salesforce to do all of that. We can be a web self-service application. This is now that credit line increase workflow, but embedded as a self-service request into the U+ website. Like everything today, we can be a conversational bot. I can have a conversation with my workflows. This is where it's important to understand a little bit of the distinction of how we look at this.
We are not going to have this conversational bot figure out the logic of how to do a credit line increase. I do not want an AI agent deciding what I should do to extend the credit lines of my customers. If I'm a bank, I have rules and I have processes that we follow when we determine how we give credit to people. They have to be demonstrable, audited, et cetera. This conversational agent has access to the workflows that do all of that. It can provide a linguistic or semantic, a language-based front end to those workflows so that I can ask it things like, where does my credit limit? It knows how to go get that information. I can say, what is my current balance? Current balance is, right? It is now using the fact that it has access to data.
In this case, it's using dummy data, but it's showing us how we could have that conversation. Because it's all being guided and controlled by our workflows and our architectures, we have full auditing of everything that's happening behind the scenes. Now, what I'd like to show you, see if this works in this room. Because this is all now being done with agents, I can also just call this thing.
Please enter your six-digit Blueprint voice preview code. One moment while we connect you to your Blueprint voice preview.
Welcome to U+ Bank Blueprint. How can I help you?
Hi. Yes. I'd like to be able to spend $5,000 on a dinner tonight.
I can help with that. First, could you provide the last four digits of your credit card?
3456.
Just to follow up on your request to spend $5,000 on a dinner tonight, I've checked your account ending in 3456. Your current available credit is $2,000. Would you like to request a credit limit increase to accommodate your dinner plans?
Yes, please.
Could you tell me the new credit limit you'd like?
How about $30,000?
Your credit limit has been increased to $30,000. You're all set for your dinner tonight. Is there anything else I can assist you with?
Can you summarize what you did for me?
Sure. I increased your credit card limit to $30,000, allowing you to spend $5,000 on a dinner tonight. Is there anything else you need help with?
Can you give me that summary in German?
[Foreign language] 30.000 U.S.-Dollar [Foreign language] 5.000 US-Dollar...
[Foreign language]
[Foreign language]
Right.
That credit line increase was processed not by the agent making a random decision, but if you notice, it kicked off the credit line increase workflow. It followed the rules inside the workflow. I get kind of giddy when I demonstrate this technology because we just took a video of a COBOL application. I put that video into Blueprint. I did a couple of clicks and adjustments. I got to preview a new application that had an entirely web-based front end plugged into all kinds of self-service channels and even let me call it up on the phone and talk to my workflows. I did not write a single line of code. It took me about four to five minutes with pauses to explain what I was doing.
We are, I think, on the precipice of being able to profoundly accelerate how our clients do their legacy transformation. The great thing is we just see such a need for this inside our client base. We're pretty excited about the technology. I'll hand it back to Peter to go through some of the rest of the session.
Thanks a lot, Don. All right. Next, we're going to have Eric Musser come up. Eric is the Head of Solutions Consulting. I've known Eric since we acquired his company, OpenSpan, for those of you who are familiar with Pega's robotic process automation, robotic desktop automation technology. Eric was the CEO of that firm. We're super excited that Eric is still with us. Eric will talk to you about go-to-market and how we're leveraging artificial intelligence to change the game, move to an experiential sale, et cetera.
Yeah.
I'm excited and happy to be here. There was a great question that was asked to Alan in the back row there. Yes, the question about ideation. He said, Hey, you're ideating so much faster today. What does that really mean to your business? My team is the solution consulting team. We're the technical pre-sales group. We're the people that go out, explain all this technology. Every time we're in front of a client, every hour that we're there, we spend countless hours building demos, thinking about all the data that's needed for it, thinking about, OK, how do we present this? What I'm going to talk to you about is some of the goals that I have for my team. We're going to be doubling our client-facing time because of all this GenAI capability that's out there.
We're changing the way that we're selling. Not only are we selling faster, it's better. The end result is incredible here. I'm going to walk you through some of these changes and what it means to me and my part of the business. As Peter said, I've been in software doing package software, ERP, supply chain, CRM, a couple of decades out there. I love the fact, I love to be in front of clients, and I love to sell. The way that we're selling today is changing. When I really think about over the years what people wanted to buy from me, they didn't really want generic software. They didn't want package software. They wanted something that was built for them.
No matter when I showed up at a client site and I showed them what I thought that they really wanted, their financial services organization, they're in lending, I thought I had the perfect demo for them. They would look at that demonstration. They would look at what I brought them. They would say, We do it a little bit different. That's not really exactly what we do. Our data is different. Our transactions are bigger. They're smaller. We have more steps in our process. We have fewer steps in our process. This is what happens over and over and over again. They wanted personalization. They wanted it in their logos, their colors, their look and feel. At the end of the day, they wanted a custom meal. They wanted it cooked to their specifications. That took us countless days, months, hours to do that.
What a lot of software companies have done over the decades is they said, I'm going to have different types of demonstrations for different types of clients. This one's for my financial services lending. This is for health care complaints. The effort involved in keeping all these demo systems up and running, countless hours in the back office working and getting this engineering, testing them, making sure that they work properly. What did you just see from Don? Don did the whole thing in five minutes. If this isn't disruption, I don't know what is. It is changing the way that we're thinking about this.
For my team, doubling our client-facing time, spending more time with clients, interacting and talking about the solutions and problems that they have, teaching them about the idea of how could they solve their problems with Pega via Blueprint is really what we're doing today. When we think about this and we walk through this, GenAI is unlocking not only a lot of things related to speed, but also differentiation. I'm going to walk you through a few things that are changing for us that are beyond just the demonstration and beyond that interaction with the client. It's also, how do we get in front of clients? How do we get that personalization and value out there? What I'm going to show you is I'm going to show you a quick video.
Now, when you watch this video, you're going to say, Eric, this looks like what we've seen from other software companies. It's a video. It's a product video, two minutes in length. It's about Blueprint. But it's a specific Blueprint. It's about health care. It's about insurance. It's about looking at a very specific Blueprint for this client. What we're doing today is our salespeople, our AEs, account executives, they create a Blueprint that they think might resonate with you. When they build that, they're able to go onto our website and say, I want a video that I could send to this client that is personalized. We're using GenAI and the capabilities within Blueprint to specialize every interaction that we have for a client.
No longer are we sending a generic video out to a client to say, Hey, in this TikTok generation, here's what you might be interested in, something that is not special for you. Now we are able to send these videos out that are specialized not only for the company with their branding on it, but we are also able to specialize it for that individual. We are doing hundreds of these. I have three people doing this work. Hundreds, three people doing this work. I would have had hundreds of people doing a video a month a couple of years ago. Let me play this and sit back and listen.
We all know the hype around AI and how it is changing the world, how we work, communicate, and get things done. Have we seen anything that has truly transcended yet?
Something that goes far beyond what we ever thought was possible? Something that not only delights, but changes the way we experience the world going forward? Imagine a tool with the power to intake a simple business request, then generate workflows, data, personas, and even an application preview within seconds. This is Pega Blueprint. Let's take a look at an example for first notice of loss for U+ Insurance. Simply select the industry business focus and enter a short description of what you're trying to achieve. Pega Blueprint does the rest. Drawing from Pega's decades of experience helping clients build and deploy best-in-class enterprise applications, Pega Blueprint, powered by Pega generative AI, creates everything you need to jump-start your development process, decreasing design and requirements, gathering time by 70%.
It also allows IT and business stakeholders to collaborate, align on requirements, and preview the application using live UI as changes are made. Pega Blueprint is then easily imported into the Pega Platform, where the application is brought to life in a matter of minutes. This allows teams to immediately focus on integrations, testing, and deployment of the application in record time. Here's a quick look at the application created with only a few simple steps. The application is imported to jump-start the development process, which then allows defined personas to collaborate and process first notice of loss for U+ Insurance faster and more accurately using Pega workflow automation and AI-powered decisioning. That is the power of Pega and Pega Blueprint. Bring your vision to life in minutes and your application to life 70% faster. Now get out there and capture that transcendent moment using Pega Blueprint.
Now think about this. Two years ago, we would send a video out. Don's team probably created it. It had sent one a quarter we'd be able to pick from. Now let's assume that you're in U+ Insurance and you get the exact problem in front of you that you're trying to solve right now. A video customized to your environment. We crank these things out. It is a selling aid for us. We're doing this across the board. Think about the leverage that we're gaining not only through Blueprint, but also through generative AI and using it to carry the load, carry some of the work out here and be able to sell faster and quicker with fewer people.
When we think about this and we think about this rapid design that's going on out here, this is what's consolidating and changing the way that we're selling today. Think about each of these steps. Let me just take you back not a decade, but let me take you back 12 months. The rapid application design part of the system here, we sometimes would spend a month or two months trying to get the client to agree to spend two weeks with us. We would then spend two weeks with us. We would then say, We will come back in a month with a custom demo. Every time you do this, what enters into the cycle is risk. It is such risk that's associated with this in the sales cycle that they get distracted. They get a new boss.
They get a new initiative from their organization. The economy changes. All these things add risk to the sales cycle. This idea of collapsing it down and being able to do this front half faster, quicker, better is allowing us to sell quicker. As you've seen earlier from the sessions today, and I'm going to replay a little bit of what we saw earlier, but allowing our clients to get to live and get the value quicker and faster. All of this is what we see in my team today, the solution consulting team, about the idea of doing more with less, doubling our client-facing time with the same team. The team size that I have today is about 60% of the team size that I had three years ago. This is going faster and faster and faster.
I used to train my team in huge training twice a year was sufficient. I could put them through massive amounts of training every time a release comes out. I now run, I host a session every other week on new technology, new capabilities, new faster ways to sell. That is a mandatory conversation that we have every other week because things are moving quickly. It is just, it's a fun ride. It is nice. The thing that Don showed you is we could do that with any business problem you have. It does not need to be banking. We did one yesterday for the partner team. All of our partners are in a room. You have a much bigger room than this. I do not know. The room is probably five times bigger than this. All the partners are sitting there.
One of our staff came on, and he had shorts on and looked like he came from the pool. The guy is, I think, what's he, 33 now, 32. He said, Vegas is no longer fun to him. He said, He's too old for Vegas now. He said, Let's create a complaint system. On the fly, they had created a complaint system. They had the voice going into it. A lot of times we'll come up with fun ideas so people could understand that this is not prepackaged. It's not something that we built just to spend months in the back office building to show you today. It is live. That's the change that's happening right now.
When you think about this change in software that's going on, this is not only happening related to us selling, but it's happening with implementing. That implementation change is fundamental to how fast we give value to our clients. I think everybody has always looked at Pega. When I talk to our clients, they say, "Pega's the best technology out there. It is what we use when we have our hardest problems, our most important problems we put on Pega." It takes work to get there. It takes work to figure all these systems out. For a long period of time, I think we were pushed into this upper complex problem space. What we're seeing right now with this idea that says, "Hey, let's collapse this front-end part of the problem.
Let's reduce it down." They're now talking to us about problems that they would have not talked to us before about, simpler problems, medium-sized problems. They're saying, "You're faster now. You're quicker now." That is opening up the aperture of the types of problems we're solving for our clients. Everybody always wanted us, but there was a barrier to entry. We are reducing that barrier to entry through Blueprint, through GenAI, through our cloud capabilities so that the market within our existing clients is expanding. We have seen this many times. For those of you that were in the main stage today, I am going to replay this video. Think about this video in a different way. Think about this in the way that Vodafone is now looking at Pega differently.
Think about it as that they are identifying new opportunities for Pega and driving value in their organization by using the best technology out there. Let's watch the video.
How are businesses transforming in the AI era? I recently met with Simon Norton, Head of the European Division of Digital Networks and OSS at Vodafone, for his insights.
What is very clear to me with the kind of evolution, revolution in the AI space is that we're going to need to pivot very rapidly to a new way of thinking. We need to be smarter and more creative around how we approach our processes, how we approach all of those key aspects across our network lifecycle. That obviously comes with its complexity. We have to overcome the legacy challenge. It's not possible to automate everything within our network today.
We need to make sure that we're evolving, that we're simplifying when we're making the right investments to do this.
What about market drivers?
For me, autonomous networks is all about really linking that principle of hyperscaling the use of AI automation technologies to be able to deliver strategic goals for the business, but also deliver the best customer experience. Blueprint was not something that was on my radar. It's something that Ben and the team brought towards us and said, "Look, we're going to start experimenting with this," which is great. We want that kind of organic innovation happening across the organization. The main goal of this solution is to take all of that goodness from the data and insights and the AI, which is telling us where we need to focus.
It is helping to hone that by building the work stack, prioritizing for our optimizers where they need to go and make interventions on our network. Blueprint has really, really helped us completely reimagine the way that not only do we look at requirements analysis, but the way that we engage the customer throughout that process. Instead of now taking two to three months, they can map existing processes, generate the to-be, come up with a backlog of requirements, and, crucially, get working product into the hands of the users within that 48-hour period. For us, certainly when it comes to the type of areas where we deploy the Pega capability, it is nothing short of r evolutionary.
Since you have been working with Blueprint on one of your major projects, there has been 30% less rework and 10% efficiency gains.
Those stats are real. They are validated.
They've been presented widely across the business. I actually think we can go further. By bringing forward working software, users getting their hands on it, we're able to build a better minimum viable product from the get-go, therefore minimizing change requests to be able to do the basic function it was designed for and instead using that time and effort to add features and innovate. That's what I really like. We're very, very keen to build once and deploy to many across our markets because it enables us to be more standardized, more consistent. Everything that our joint Pega team and the partners that work alongside us have touched in the last three years has literally turned to gold. It's generating huge return on investment for every single application or workflow that we build on top of the solutions.
We're very thankful for Pega for helping us with that journey.
Over the past couple of years, I spent a lot of time explaining Pega technology and trying to get people to understand what problems they could solve with Pega technology. Today, I'm no longer explaining. I'm letting them experience. They are experiencing this for themselves. They are now determining in their own way what problems can I solve with Pega. It is inspiring to watch them. It is inspiring to watch people like Vodafone explain how they've gone through this journey. This is not happening at one client. This is happening in a wave. For my team, I've been dedicated. We support a number of account executives. I know most of them by first name. Today, that's changing. Today, that's fundamentally shifting.
We've really focused on 250 core clients that we've generated most of our ACV from, larger population there. It was a handful of account executives out there that are driving this, hundreds, not thousands. Today, we met with our partners yesterday. We were talking about how do we drive to these 10,000 enterprises out there. I'm going to be able to support those partners with the same team that I have today. I'm not looking at a magnitude of doubling, tripling, quadrupling my solution consultants so I could support these partners selling. With the innovation that we have today, with the strides in generative AI, Blueprint, I am now able to scale my technical team across a broader audience of sellers. This leverage, I think, is critical for us. This is what we're doing out there. These partners are going out.
These are some of the names of the partners out there. They're putting their branding on Blueprint. They're putting their intellectual property inside of Blueprint. We now have buddies that are helping people through figuring out new types of problems and leveraging their knowledge that they have. Earlier question to Alan, what's happening with these resources? They're getting expanded in many ways. The technical resources are helping partners. The technical resources are not spending as much time building demos. They're now in their most productive place in front of a client, talking to them about the solutio ns that we create. That, Peter.
Thank you so much.
It brings back to you.
Thank you so much, Eric.
Yeah.
Our last speaker today is going to be.
We have a question here. Yeah. Go ahead.
Could you just state your name and your firm?
I'm sorry. Carter Dunlap, Dunlap Equity. What happens to lifecycle management? Six months, 12 months, 18 months? Do you bring in the same process back? How d o you do that?
Yeah. Here's the best thing about this. When we came out with Blueprint, it was really focused on a net new application. The ideation of a net new application. Now, in the innovation labs, you'll see we now have that circular process going on. From a Pega application, we could get an application signature, put it back through Blueprint again, and regenerate it another time with reimagining different parts of that process. We don't believe that at any point in time the company is going to be stagnant.
We believe that they're going to reimagine over and over again. This is really why I believe that their packaged software, as it was in the past, is going to be different. It's going to be different because people can get specialized to what they want. It's not a one-stop shop. This will be a circular process that they go through.
All right. Great. Our next speaker is going to be Ken Stillwell, our Chief Operating Officer and CFO. For those of you who are in the room, here's our safe harbor statement on the screen. For those of you that are listening on audio, please be aware that certain statements in this presentation may be considered forward-looking statements. We encourage you to review the safe harbor statement, be familiar with it. I'm going to give you a second here to read it.
All right.
We'll pass it over to Ken.
Thanks, Peter. Thanks, everyone, for joining us. This is maybe our seventh or eighth year of doing an investor day or session with Pega World. During COVID, when we were virtual, we actually still did do this either virtual. We actually did one live kind of right at the end. I appreciate many of the faces in here. You guys have been to a bunch of them. There's actually quite a bit of new faces. What I typically use this session for is to ground everyone a little bit on what the opportunity is and what we're focused on in the coming years. It's less focused on 2025. This is not a guidance presentation. This is a presentation talking about kind of our midterm plan.
Typically, we think about it in terms of three to five years. Maybe just a reminder or grounding everyone what we said we wanted to do. In 2017, we flipped the business to start talking about ACV. We had never talked about ACV before 2017. We talked about revenue, and we talked about EPS. We had a non-GAAP EPS number that we used, which was essentially like an adjusted EBITDA. We made the decision to move the business away from our perpetual license business. ACV was the term that we used, annual contract value, to really highlight what we thought was the biggest value driver, which was recurring annual spend from our clients. Fast forward to Q1 of 2025, that number is approaching $1.5 billion. It has been a massive transformation in the business, significant movement also into the cloud during that time period.
When we got through, when we were about midway through the transition, we told everybody, I specifically went through in great detail explaining the change in the business model, the revenue not being upfront, the billings not being upfront, to being more recurring over time. We went through that transition. You have to deal with the trough process that many companies that have went through that transition go through, where we went from having positive cash flow to being slightly negative for a couple of years until we really hit 2022. We then came out and said in 2022, we're going to be a rule of 20, rule of 30, and rule of 40. That was our target. I also kind of talked about this concept that if we execute this well, we could be generating free cash flow close to $300 million.
That was something that I said to many of you, or said to everybody, but many of you may remember if you go back as kind of 2020, 2021. Admittedly, I'm not sure how many people actually believe that we would be able to go through that transition. I don't think many people believe we would generate $300 million in free cash flow at any point in the future, given that the best year we did before that was $80 million. Right? I think it was a, I would say I think we did a reasonably good job executing through the transition. One of the big drivers of that was in 2017, when we started this, we had $50 million of Pega Cloud ACV. Now that number is $700 million. That's about 40% CAGR over that time period.
This transition that you go through, look, we're not the first company to go through a subscription transition. We're not the first company to move to the cloud. We had a playbook. Quite frankly, Pega was probably the fourth company that I actually did a transition to the cloud or to a recurring model. The beauty of the model is we knew what to expect. We knew what the financials were going to look like. We knew what objection handling we'd have to deal with with clients. We knew how we'd have to change our organization, change our comp structures. I never like to kind of put a stake in the ground and say, "Victory accomplished." I would say I'm very proud of where we are in the transition and what we've been able to accomplish over the last few years.
The next kind of theme is, so how durable is your business? That is a question that gets asked quite a bit. It's interesting how much that question gets asked, given that our retention rates are as high as any company in software. And I think everybody actually kind of instinctively knows that. Either you know it because you know our business, or we talk about it, and you can validate it by looking at when we talk about GRR and net retention rate. The second point is much of our growth comes from our existing clients. It's highly visible. It's actually pretty predictable. If you look at the range of our net retention rate over the last 10 years, it's probably been 10%-15%. It's been a risk. It's never been zero. It's never been 30. But it's relatively predictable NRR. It's relatively predictable gross retention rates.
We're in a massive market. One of the challenges that I have with that is that we've been very, very selective with the organizations that we went after. We really never tried, except for one two-year period where, quite frankly, we didn't do a good job of trying to go after new logos and trying to expand. In 2020 and 2021, we got much more aggressive. We hired a number of sales teams, not just sales reps, but the associated teams. We went to market aggressively, and we really didn't do it in the right way. We didn't have a focus on the verticals, a focus on the use cases. We went with more of a territory model. I think we quickly learned inside of 24 months that that was not an efficient way to do it.
We made a decision to back off of that. This decision that we are talking about, that you heard about with the partner Blueprint, with trying to go after not an extra 2 or 300, but 10,000 organizations through our partners, excuse me, was really one that we had to think about the mistakes that we made in the past, mistakes that companies make in the past around the cost of the distribution model. If we are going to go direct with a targeted organization model where we have to hire an account executive, hire a solution consultant, hire other members of the team, and that selling process is one to two years, I do not have to convince you very hard around the amount of cost upfront for an unproven level of growth. What is different now? What is different now is Blueprint. Because Blueprint changes the entire front end.
When I say front end, I don't mean the first day or two. I mean the front one-third to half of the actual engagement process with our clients is done in a way that is experiential, that is leveraging. Quite frankly, we could have never done this without GenAI. Let's be clear. If we didn't have GenAI, we could have tried to put all the structure together, but we wouldn't have had the tool and, quite frankly, the compelling reason to really lean hard into this. What I love about our business is we've got through the transition. We've got a very solid model. When our clients engage with us, they engage for decades. They tend to increase their engagement over time. Now we have an opportunity to, in a cost-effective way, go after a bigger part of the market.
That has been always the trick for Pega. Why do we only have 500 clients to 1,000 clients? It's because it's very costly to get those clients, and we have to be very thoughtful about that. Now it's an opportunity to say, "Let's actually really open up the market in a way that we never have before." Interesting, we also had another dimension, which is because we were selling to these large organizations, we tended to have enterprise license agreement-type models, which is complicated, long negotiating, really non-standard terms, non-standard measurements. Kind of every deal was bespoke. With that, it's hard to scale. It's hard to get 1,000 new clients when every single arrangement is going to be unique. Some were user licenses. Some were case licenses. Some were a combination of cases and users. Some were the amount of takeoffs and landings at Heathrow Airport.
Sometimes it was the amount of wheel, the amount of tires sold by. Sometimes it was the amount of number of onboarding calls. Sometimes it was impressions. I mean, one of our contracts with a credit card company was the amount of times that someone actually does a search for something. It was just we were very, very bespoke. We have also changed our business model to be focused on user usage-based pricing models. That is primarily a case-based. A case is a measurement unit in Pega that we can physically measure around a different type of activity. If someone has a loan origination, we can measure that. We can measure the steps, the stages. We understand all the different transactional things that are happening in that.
It gives us an objective way to say to a client, "If you push more volume through our system, we're going to drive automation. You're going to save money. You're going to speed up. You're going to get much more predictable results. We should share in that, right, the more that you use our system." It's not dissimilar to the way that AWS or Azure or GCP charges, right? They charge based on compute. It's similar to that. It's analogous to that. We talked also about what are these kind of discrete opportunities that we have for expansion. We have very strong base, high gross retention rates, and the ability to get NRR of 110%, let's say, into the foreseeable future. I think that number can be much higher.
Let's just use the number that we've experienced for the last three to five years pretty consistently. We have a very strong base where we are going to get growth from our existing clients. In addition, there are clients that are going to move to Pega Cloud. We are not forcing clients to move. We're not defunctioning the non-cloud solution. We're not taking any of those dramatic steps that other companies do that, quite frankly, are not very client-friendly. Understandably, people do it to fix the model. We have made a decision to not do that. Quite frankly, in the world of uncertainty around tariffs and nationalism that might happen in different parts of the world, having the ability for a client to run that solution on their own private cloud is actually a very good differentiator for us. We want to lean into that.
Naturally, we want people to run on Pega Cloud, but that flexibility gives us a great opportunity to not have to say no to any clients, to give them an opportunity to expand with Pega in different models. New logos. I just talked about a few seconds ago, which is this ability to allow our partners. Our partners have 20x-40x the number of Pega resources that Pega has. They are in our clients. They have deep relationships, and they are driving digital transformation with our clients. What better opportunity than to have the Accentures of the world and their competitors going into clients saying, "You want to digitally transform?
Pega's the way to go. In the past, and I'm not saying this to be humorous or to be embarrassed either, but our model was that if a partner came and brought us an opportunity, we would say, "Is the opportunity covered by a salesperson? If so, we'll support you. If it isn't, we will respectfully decline to chase that." Twenty-five years ago, Alan would say, "We made our clients earn the right to buy product from us." Right? That was actually our model. We actually didn't want to spend time with anybody that wasn't going to spend millions of dollars with us. We just said, "I'm sorry.
When you're more serious, come and maybe we'll sell you some software." That pivoted to, "We're going to be very targeted around this list." Now we're pivoting to all organizations should have the ability to experience Pega and help us and let Pega help drive their digital transformation. We couldn't do that without Blueprint, though, just to be clear. In the operating model of Pega, there was a pretty big transformation happening under the hood. I don't go back further than 2022 in this slide. But for those of you that knew Pega in 2017, our gross margin on Pega Cloud was 35%. In 2021, it was about 50%. Let's maybe 51%. It was just north of 50%. Our Pega Cloud gross margin now is approaching 80%. Now, granted, some of that is just operating leverage and scale.
Quite frankly, a lot of that is our ability to really improve the operations of the business to be able to expand that margin. Our sales and marketing was approximately 50% at one point in our past, around 50% of revenue was sales and marketing. That number is now targeting, is tracking down towards 30%. I predict we'll go lower than 30%. I have on the right side kind of the, I won't call it timeless model, but the model that you could think about over the next couple of years. I don't think those are endpoints. I think we can actually get much better. Think about what Blueprint can do to our selling motion that Eric talked about. I mean, it can materially transform the cost structure.
For those of you that may be aware and for those of you that maybe aren't aware, our sales model used to have one salesperson and a team of people around the salesperson, a solution consultant, a specialist, someone that worked with the partners, an innovation team, someone that would be maybe focused on specific use cases, industry verticals. It was a very, if you had 100 salespeople, you might have 500-600 people alongside of them. Costly model. The model that we're moving to is dramatically different, where more and more of those teams are actually now at the tip of the spear. They're actually sellers. They're going out. They're doing Blueprints. They're driving pipe. Tremendously different model. This is a very interesting slide. Probably if I can be prideful for one second, this is the most exciting thing that I'm proud about personally at Pega.
We went from a company that was generating less than $100 million in our best year of free cash flow. Last year, we did $338 million in free cash flow, up from breakeven two years before. The business isn't growing 30% or 40%. This is a significant change in our operating model for a company growing low double digits to be able to generate the change in free cash flow. By the way, we're not at 40% free cash flow margin, so we still have plenty of room to go. Guess what? Through this transformation, our growth rate has not slowed. In fact, in the last 24 months, or, well, 2025 and 2024, it's actually slightly accelerated. We can run a growth-focused business that's driven by innovation and still run it well so that we can improve free cash flow.
On the slide on the right, we can go back in time. Originally, we said we wanted to do $300 million of free cash flow when we finished the subscription transition. We did $338 million. We said at some point we are going to do $500 million in free cash flow. There are people in this room and some on the call that came up after me two years ago at Investor Day and said, "Why would you say something like that? Why would you say you could generate $500 million when you know you will not be able to do it?" That is actually what an investor said to me. "There is no way you guys will ever generate $500 million in free cash flow." "Okay." I said, "We are going to try." Right? You can see where we are now in 2025 with what you heard from guidance.
You saw what Q1 looked like. I think you can infer the track that we're on. We're now putting the next stake in the ground. $700 million or more free cash flow by 2028. That's a 15%-20% free cash flow growth year -over -year. I know we can do it. It's not even a question. Our growth rate does not need to go to 20% to meet these free cash flow targets. In fact, I would argue that if our growth rate grows much higher than where we are now, we'll still hit these targets and be investing in future sales and marketing and future growth. I think this is not only our target, but I think we've proven over the last few years that we can be on this trajectory.
I certainly feel better that we have more credibility than we had when we first started talking about this three or four years ago. That will generate cumulatively over $2 billion of free cash flow. We have no debt. We paid off our debt. As all of you know, in our public filings, we have begun buying back shares in the fourth quarter of 2024. We accelerated that into the first quarter of 2021. We have a significant capital allocation decision to make. What might we do with that cash? We pay a small dividend. That dividend, for those of you that might ask the question of why, we have done a dividend forever. Quite frankly, there are many mutual funds and index funds that actually are able to invest in Pega if we actually have a dividend.
We're not trying to be a dividend payer, 1.5% of market cap or anything like that. Just having that dividend, quite frankly, does give opportunity for more investors to participate in Pega. I think increasing a dividend, even ever so slightly over time, sends a confidence message. The second one is optimized debt. I am a big believer in reducing leverage until you need it. I understand that leverage can juice up returns. It also creates restrictions on what you can actually do with that capital. I think we need to be thoughtful. We leveraged debt when we did the convert. We needed to do that. We paid down the debt as soon as we could. I'm not afraid to go back out to the markets for debt if it made sense for a strategic transaction.
I also think we want to make sure that we're properly keeping that leverage at the right level and repurchasing shares. That is naturally now a bigger part of our strategy given the amount of free cash flow that we're generating and the fact that we don't have debt. The other two opportunities we have is to organically invest in the business and to look at strategic M&A. I think certainly the M&A one was really not in play for us over the last couple of years because of the situation we were in with the convert coming due. We wanted to get through the transformation. We had a lot of things that were internally focused on our operating model. Quite frankly, doing a transaction of any size in the middle of that is a little bit more risky. We wanted to get the model settled.
We wanted to get through the transition. We're there. I don't believe we're going to be a tuck-in M&A strategy anymore. I think we will look at things of scale. We will look at things that can be sold through our distribution channel. I don't think there's a reason why something that we look at has to be rewritten onto the Pega platform. It might be. That might be a strategy. I think there's an opportunity for us to open our eyes more to other opportunities. That is not a commitment to go out and be disrespectful to the model or to take on risk. It's just a point of, I think we have the opportunity to look at a broader view of what we might be interested in.
I just want to make sure that maybe is obvious of where we are in the model, but just to highlight that. In the last couple of years, we've done some of these things. We pay a small dividend. We've paid $600 million of debt off. We bought back about $200 million of stock, mostly in the last 180 days. We've certainly moved in that direction. You'll see that right now in this period, our cash flow or excuse me, our buybacks have been 27% of free cash flow. That's just because we just started the buybacks. There's no reason in the world why we couldn't have a much more significant percentage of our free cash flow allocated to buybacks. That is not a commitment. That is just a statement of we have that level of flexibility.
The reason why you keep more cash on the balance sheet is businesses do not know about the predictability of the free cash flow. They do not understand when they might actually need to make transformational investments through the life cycle. We have now had six consecutive quarters, actually at least six. It may be depending on if you look at adjusted or unadjusted, six consecutive quarters of positive free cash flow. Our model is now one that it is more likely than not that we will not have quarters that we do not generate some amount of free cash flow. Very different position for us to be in than where we were over time. When you think about the opportunity around offsetting dilution, but also to reduce share count, what I did was I just put stock-based compensation as the yellow line.
I understand that's not a perfect representation of the dilution requirement, but it's representative of it. If you look at the blue line, you'll see our change in free cash flow. We are now in a situation where we have plenty of free cash flow to be able to offset dilution, assuming reasonable valuations and our board's support of us doing so. How do we turn this business or how do we maintain significant outsized performance results to our shareholders, to all of you, to our internal teams? It's really this formula. Our growth rate of ACV, how much operating leverage can we drive in the business, and can we offset dilution and take down share count to create a level of accretion to that free cash flow growth? I mentioned to you before that our free cash flow growth, we target to be 15%-20% per year.
There is no reason in the world why this model could not generate more than that range when you look at it on a per-share basis. I think maybe three key themes that we talked about today. One is GenAI Blueprint changes the game. Changes the game for how we can attack the market, how we can go after new logos, how we can really accelerate our penetration. Our tagline at Pega is Build for Change. Our strategy at Pega has been to change the way the world builds software. Unfortunately, you cannot change the way the world builds software selling to 500 companies. If we really want to be true to our mission, true to our strategy, Blueprint helps us be able to attack a much bigger opportunity set. We are done with the subscription transition.
The operational discipline that we have put in the business is I will tell you that one of the biggest skepticisms that people had, I did not have it, to be honest with you, because I had had deep conversations with Alan and our board about this. There was a lot of skepticism about whether Pega would be able to execute this model. Would Pega be able to be disciplined, be able to run the business in a cost-effective way, be able to drive free cash flow, and be able to think about a balance to our business? I hope that we have at least instilled some level of confidence that we are that kind of company.
We will continue to try to earn your respect and your belief and your support as we try to go to that next milestone, which is the $700 million of free cash flow that we are targeting in 2028. We have been and we are continuing to drive value for our shareholders. That value is a growth business that is run well and taking the capital that we are generating from that business and putting it back to work, either by buying back shares, distributing that cash back to shareholders, or by being very thoughtful about strategic acquisitions that might make sense to help us to drive continued growth in that free cash flow. One kind of very small thing, but I want to make sure I highlight it. Given where Q1 was, we have decided to update our targets for 2025.
We're taking our revenue target from $1.6 billion, excuse me, to $1.7 billion. You can see this table. All of this information that I talked about will actually be filed in an 8K. It's actually already filed in the 8K. I just didn't tell you because I didn't know how many of you would jump on and start looking at it and not pay attention to the presentation. It's out there right now. You can get the 8K. Probably many of you already knew that. This is the end of the slide. You'll be able to see this. All we did was just cascade that $100 million through it at normal gross margins. That's how we got to the free cash flow. With that, I want to go to Q&A.
I'm just going to highlight that if you want to ask a question, raise your hand, wait for the mic, state your name so that the people that are actually online can hear the questions as well. Because they can hear me, but they won't be able to hear you unless you have a microphone.
Our expectation today was we would go about two hours, two hours and 15 minutes. We're right around two o'clock. Maybe take questions for 15 minutes or so.
Oh, let's see what questions we have.
Hi, Matthew Handorf, Harbor Asset Management. With impressive Blueprint data points on productivity, ideation, and transformation, it's clear that there's high value for customers. My question is hoping to understand how value is currently accruing to Pega and contemplate what Pega could look like with a higher Blueprint penetration. One, across the cohort of customers using Blueprint, can you quantify the impact on usage and dollar net retention thus far? Two, what are your expectations from partners for new logo contribution?
Blueprint has been actively rolled out in our field teams for about a quarter or so. We do not have really any data around adoption rates, change in case volume based on Blueprint. That will certainly be things that we will watch and we will communicate more as it happens. What we would expect to have happen is that we would expect for clients to be able to tackle more legacy transformation opportunities, which would drive more case volume to Pega, which is how we monetize. Blueprint we do not charge for. We would hope that Blueprint would be used in every selling campaign and clients would be able to adopt faster through that. When they go to production, we monetize on the volume. Your second question was around partners. I think this is a new, this is like a little bit of a new frontier for Pega.
We've never really went to partners and said, "Go just show Pega everywhere." As long as you put it through the marketplace, there are certain requirements that we want just to be able to not have every deal be custom negotiated, so to speak. We are very optimistic, but I would say once again, it is relatively new. What we would hope to see is that we would see organizations in the similar verticals that we sell to that we would not have otherwise put salespeople on with very similar use cases. The Blueprints would be driving more automation around all the content in the domain around the use cases that we already know. I do not think that is a stretch to see that kind of being the way it plays out. How much success there will be would be really interesting to see how fast the partner adoption is.
Great. Steve Enders from Citi again. Thanks for doing this. I do want to ask on the updated guide because.
The $1.6-$1.7?
I want to ask on that, but I guess more on the free cash flow side of it.
Okay. Yep.
I guess I don't at least see it explicitly called out in the slides, but is there a change on the free cash flow guide?
No, there's no change to ACV or free cash flow. The only thing we did was with revenue. It was pretty obvious with the first quarter that revenue was going to be higher. Instead of having everybody wonder that for the entire year, we just thought we would provide some clarity on that.
Okay. Great. That's helpful. I want to ask on the medium-term, I guess, outlook now. I guess seeing less ACV explicitly called out this time versus last year, but I want to see if there's any change in those kind of expectations. Secondly, just as we think about the free cash flow ramp from here, I think you gave the $500 million last year for 2027. I guess is there anything that we should be keeping in mind as well for the ramp up from there to 2028?
Let me take the cash flow one first. For those of you that may not remember all the detail of this, two years ago, we said that we were targeting $500 million of free cash flow in 2026. Last year, we pushed that out to 2027. Today, do not read today as me saying anything about what we have said in the past, but where our guide is for this year, if we are able to achieve that, certainly gives you a perspective on when $500 million might happen in terms of what year. The second part, the first part of your question, which was around growth versus margin and the model. We put a model out last year that was just a framework of if we get to $2 billion ACV in five years, that is about 10% growth. I am using round numbers.
If we get to ACV $2 billion in four years, that's about 12%. If we get there in three years, that's about 17%. Right now, we're tracking toward the base case, so to speak, which is the middle one. I think that framework still exists, Steve.
Hey, again.
Benjamin Mora, JP Morgan. Blueprint is giving you a tremendous kind of opportunity. We have heard it a lot around legacy transformation and everything else as well. It's opening up the opportunity for you. You're going after 10,000 clients and whatnot. Why not be deliberate? You're generating a lot of cash now. Why not be a little bit deliberate to go after it with your own sales force and kind of go pursue that growth? From the partner perspective, it makes sense, but it sometimes does not pan out. Why not be more deliberate with growth? The second part of that is I think you saw 15%-20% growth on free cash flow that is supported by a double-digit ACV growth that's written there. Does that include M&A or are you thinking about more of an organic?
Yeah, good question. None of these assumptions have any M&A in them. They're all organic. M&A would be additive to anything that we have. Naturally, we reduce the amount of shares that we could repurchase or the debt that we might have. No, anything in here does not assume any acquisitions. On your first question, which is about why not go after more of the growth with our own sales teams? Two things. One is we are because we're shifting the makeup of our sales teams to be more client-engaged Blueprint deliverers for that. Say we had in the previous model, say we had one salesperson and four others, those five people would now maybe be two or three people selling and two or three others. There is embedded in the model the ability to cover more direct orgs independent of the partner model.
The second piece of that is we are once again a quarter or so into the Blueprint adoption, and we have added new logos, and we actually have specific groups targeting new logos. As that shows yield from Blueprint, we will not be hesitant to accelerate our focus on investing in that. That is why when I talk about the free cash flow growth, I do not actually talk about it coming from margin or growth because if we grow faster, that just gives us more billings and more ability to invest in that to be able to get to the same trajectory. I have been very specific around just talking about we are going to get to that cash flow target. Naturally, we want to get there with a higher growth rate, but we are committing to get there regardless of whether we get that acceleration in growth or not.
Hey, thank you, Raymond Lencher from Barclays again. Ken, can you talk about M&A a little bit because you have such a great opportunity here now, but you kind of clearly seem to be indicating that you're looking at kind of bigger deals more. How should we think about that? Where would you fit in? Is that adjacencies? It looks like there's more work that you can do internally anyway on the distribution side. I am just wondering a little bit how should we think about that?
I think there were opportunities for us to either enter a new vertical potentially with a solution or to expand the footprint with our existing clients. We did not have the luxury of being able to do that because we did not have the free cash flow. We did not have the borrowing capacity. We did not want to issue a ton of equity to make an acquisition that we viewed as more risky given that our model was not stable through that. That is really what I am focused on. If you asked me where might the most interesting places to look, it would be places where there are solution areas sitting adjacent to what we sell and support to our existing clients. Then completely kind of orthogonal to that, the ability to potentially enter new verticals.
There are verticals that have tremendous customer service relevancy that look just like, for example, I'll give you an example of one, the utilities industry. It's largely a customer service-focused engagement. It is not dissimilar to credit cards or retail banking. There's a lot of commonality there. The reason why we don't go in, we didn't go into there is because you have to build a vertical team, hire the sales team, get domain knowledge. There are opportunistic things that we might see in the M&A space that might give us a leg into another vertical, for example. Those are just examples. I don't think you should take today as meaning something dramatically has changed and we're going to go out and just try to, we're going to be like a serial acquirer. It's more that it is in play now. It was never really in play before.
It's an opportunity we can consider. It's kind of a tool in the toolbox, so to speak, that we could use that we really couldn't before.
Hey, Austin Cole from Citizens. Just wondering, with all these new capabilities in Blueprint to kind of import legacy assets, how much of a needle mover is that in terms of driving existing clients to Pega Cloud? If you were to think maybe a year ago to today from looking at what Blueprint looks like, how would you gauge kind of your confidence in Blueprint to drive more to Pega Cloud?
Some of our clients have a modernization opportunity, which maybe makes them not ready to move to Pega Cloud in the near term without something like Blueprint. Certainly, Blueprint is just as relevant for a client of Pega that may have an application that was not built in a modern way to be able to do that as well. That is not, if you look at the number of our clients that are not, say, if you use recency of the currency that they're on, the version that they're on at Pega as a proxy for older build apps, the majority of our clients are on new versions. We do have some of our clients that that could be relevant. That could help.
Just like we're doing legacy transformation off of some old mainframe system, there might be opportunities with Pega clients as well to get them to Pega Cloud. That is absolutely, that is an opportunity. Not many of our clients are in that situation, but some are. It's not at the client even. Some clients have maybe one app that might be that way.
Thank you. Devin Au from KeyBanc. Sorry, I want to follow up on the free cash flow linearity question that a couple of people have asked already. I know you said there's latitude in the model, but should we expect free cash flow growth to maybe in the early half of the five-year range to be maybe towards the low end in the 15% as you kind of ramp investments in sales enablement and as you reallocate some of your sales team? Also, I think you mentioned in the past there's some cash taxes to be mindful of. Should we kind of just expect a slower growth in the first half and then kind of ramp towards the?
No, I view it being much more linear than not. Yeah, I don't think there's any episodic events or anything that would be we are paying more taxes, but that is built into the model. I would frame it as more linear than not.
Thank you.
Yep.
Hi, thank you. This is Michael Lilienstein with Thrivent. It sounds like your sales efficiency is going to be improving, as you said. You're going to get to that free cash flow number either through growth or margin. For investors, is there a KPI we should be tracking, or is there any reason that new ACV over your sales and marketing expense shouldn't improve over time?
Yeah, that would be, I think if you compare ACV to total sales and marketing cost, you will get some small operating leverage just because you scale if you look at it on total ACV. We would expect the incremental ACV to be slightly more efficient in terms of ACV build compared to sales and marketing costs in year. Yes, that is an assumption that we believe.
Is that what we as investors should be looking at to kind of track your progression, or is there a better metric?
That is a measure. I think there's a macro measure that naturally is the free cash flow growth compared to the ACV growth, which includes all of the different operating. The two places, one place where we'll still get some more operating leverage, but not as much as we've had in the past is gross margin because you get it in two ways. If Pega Cloud improves and also the mix of professional services will go down. You should see a little bit of an uptick there. Sales and marketing would be bigger than that. R&D is kind of more operating leverage. Our G&A is like 4.5%. It's already best in class. We're probably not going to get a lot of operating leverage there. Those are the two. It's sales and marketing first and then gross margin second. Yep.
Naturally, not as much improvement to be made versus what we did over the last three to four years because we made so much improvement in those areas. We still see an opportunity to drive efficiency through the model years that we've talked about here.
Thank you, Will Jellison with D.A. Davidson. Ken, given how new this partner motion is, I'd be curious to better understand the incentives that you have in play with these partners and what they stand to benefit from growing their business with Pega.
There are two things. One is a reduction of cost on their side, and the other one is an opportunity. There are a couple of ways you can motivate partners. One way is you can try to give them a commission cut on the ACV or the ARR. We have found that system integrators do not care too much about that. That is not really their business. Their business is selling transformational projects that are driven by the people that they have doing the work. If you think about their business model, what they really want is they want to be driving the transformation at their clients.
With them having the ability to actually use, to quote, refer Pega through that, they have the opportunity to pick a transformation project and drive that and not have to worry about whether Pega has to independently sell that and then we have to merge together. One of the biggest complaints that we have seen from partners, and I'm sure we are not different than a lot of software companies, is that the SIs say, "Hey, it's great that we work together," and then you win the deal, and then we have to go, and then you bring your own team in and compete with us or some other partner comes in. It gives them an opportunity to be on the front of that and to actually build that relationship. We get what we want, which is we want the ACV. We're not a services business.
Our professional services teams are largely because clients want us to be involved, and we tend to do first-of-kind type deployments, but we do not want to compete with our system integrators. We really want the technology stream. What is in it for them is they get that captive nature of the relationship. They will be sole source, so to speak, on that work. The second thing is on the front end, SIs tend to have to do a lot of free services work to build out the prototypes. Blueprint allows them to not have to go through that work. They normally cannot bill for that. They do that almost as business development costs.
They can reduce cost on the front end of the selling process, be able to not have as much distraction of competition because they're leading the discussion and they're viewed as the transformation partner, and we get what we want, which is the ACV.
Thank you. Yep.
May I ask a follow-up as well?
Yep.
I think it's timely, obviously, to talk about capital allocation again. I wanted to ask a clarifying question, which was, now that you have visibility to being more active in share repurchases, how are you thinking about balancing commitment to offsetting dilution and visibility into free purchases versus being opportunistic with the stock price?
Yeah, so that's a great question. Typically, the way that companies do it, and it's the way that we do it, is you have a pool of allocation for buybacks, and you essentially set up a 10b5-1 grid that as prices are higher, you buy less. If prices are lower, you buy more. We do not fully commit ourselves because then it gives yourself the ability to do advanced share repurchases if you want or be able to do spot market transactions. That's kind of the approach we take.
Thank you.
Yep.
And there also becomes a point, just to be honest with everyone, I hope we actually hit this point. There may become a point where you do not want to buy back as much because your valuation, you believe, is so much higher than the market. No, that is not the situation we are in, or we are not close to that. But you could, we are not just going to buy back to buy back. We want to buy back because we believe it is good for shareholders. We think we are in that zone right now.
Okay, I think we are up at time. Ken, can you go forward one more slide? For those of you that are in the room, I would encourage you to go down to the Innovation Hub. We have 10,000 sq ft of space up there.
Up on the screen here, if you want to take a picture of this, we identified the top five must-see attractions on the show floor for you. I would encourage you to go see Blueprint, the CDH Blueprint that's out there, see the latest version of the Pega Platform. There's a fantastic customer service simulator that's there, and there's also our AI agent around Socrates. We thought it would be helpful for the investors and for the analysts to have a little bit of a playbook for where to go in the Innovation Hub. It can be overwhelming there. It's so packed and full. That's really it. We also have printouts of this that are available.
If Katie Jones from my team is here, if you could stand by the door with those and pass those out for folks who would like the old school printouts, that would be great. In conclusion, thank you again all for coming to the 2025 Investor Session. Really great to see you all, and we look forward to the rest of the year.