Okay, thanks. Hi, everyone. Welcome to our final day of the conference. Thank you all for being with us this week. As you probably have noticed this year, pretty busy, thanks again for being here. Ken Stillwell with us from Pegasystems, COO and CFO. Ken, maybe to start the conversation, let's just give folks a little background of the company, origins, kinda what... where you are now, and some of the things you're helping customers do, just so we can level-set the conversation, we'll build from there.
Sure. We help enterprise clients, and when I say enterprise, typically think of B2C business models where you have lots of transactions, lots of customers, trying to move to digital self-service, use automation in the process. We help clients both in the back office and the front office to automate workflows Typically, workflows that go across touching multiple systems, so something like a loan origination. We also help clients with things like, you know, kind of, open/close things like a dispute for a credit card provider or a reissuance of a card that's lost or a number that's compromised. We're helping clients in primarily in the financial services, healthcare, insurance, telecommunications, public sector, where there's a lot of constituent management.
The platform that we have has kind of different themes of ways that we solve. We help things with, like, an issue or dispute management. We also are used for things like onboarding a client, like in a healthcare plan or a participant in a 401(k). We also help with things that might be kind of more around marketing or presenting offers, presenting ideas and digital channels. We also have some solutions that look more like kind of a commercial off-the-shelf product.
Mm-hmm
a digital, a contact center management software, where we actually help call center customer service reps operate moving away from, like, the desktop environment. So we have everything from a low-code platform that you can kinda build what you want, all the way up to something that looks like something that you would kind of, buy a little bit more as a, as a, as a common problem. We've been around for, you know, we are coming up on our 40th anniversary.
Wow
... as a company. We've been a public company since 1996, but we were founded in 1983, and interestingly enough, all of those clients that we had in 1983, they're all still clients with us now. The only difference is they spend a lot more. We do a lot more with them.
That's a good problem to have. All right, just thinking about the durability of those customers, and they've been with you, and you mentioned it's all about transforming some of those manual, tedious processes and, you know, digital transformation's a buzzword that's used very, very often, but if you think about those customers that have been enduring for you all over the course of 10-plus years.
Yep
... what do you think it is about those customers, your product, which allows it to be something that is sticky, recurring, how you're helping them to not just solve those problems they had before, but as they're continuing to evolve and grow within their respective ecosystems, how you all continue to address those problems for them?
Sure. The things, there's some common traits that we've seen with clients that have invested heavily in Pega and continue to expand. They're clients that tend to use. These are some of the examples. They tend to use best-in-breed software for point solutions. Those point solutions need to be integrated or stitched together to be able to execute work over. For example, if you're trying to deal with a consumer, you may have a lead generation engine. You might actually have some type of a pipeline management or kind of a nurturing program. You might also have kind of a selling-type software application. You might have an onboarding, then a customer success, maybe a customer service. Those might all be different solutions.
If it's someone, you know, it's someone like Morgan Stanley, you're, you know, you're gonna have hundreds of different applications, and even different applications depending on the business unit that you have, and the specific needs that that business unit might have. And trying to stitch all of those together in an educated way to automate, to get human touch out.
Mm
... to use AI when you can to be able to make, to help people or make decisions for them, clients love that, the power of Pega to be able to do that orchestration. Another example is, things that can't really be purchased in a solution.
Sure
... more off the shelf. You might have a problem or a workflow or an activity or a process that there isn't really something that's out there. You need to really construct something, and that thing that you construct might need to change every 90 days, every year as the business evolves. We use the word future-proof, right? You wanna have an application that you don't have to constantly be rewriting the code. Constantly, every time something changes, you do an acquisition, you enter a new country, a regulatory rule changes. Because our platform is really a no-code platform, it allows you to configure in the UI and be able to change.
People love, clients love that ability to anchor in an enterprise-grade application, and then be able to make a change and put it into production the next day, and I think that flexibility is really powerful.
Yeah.
Then one additional use case is many times, Pega becomes kind of the way to verify or handle the compliance of certain standards to a process. You know, if you're thinking about, like, let's use loan origination as an example. You know, you're getting inputs both from people applying direct to the bank, but you may also have inputs coming from mortgage brokers and other parties, and you may wanna be able to then go back and look at a pool and say, "Did we treat all borrowers the same?
Yeah.
Did we actually comply with security and privacy and anti-discriminatory laws in local states and countries?" That's very difficult to do with.
Yeah
all the disparate systems, because you have to almost check at each point. Pega can become that kind of the... almost the source of truth-
Mm-hmm
... that can be leveraged to be able to show compliance. That's another kind of benefit to that orchestration.
Okay. Just kind of double-clicking on that point you mentioned, kind of the low-code platform, being able to quickly be nimble, be responsive, always up, because things are constantly changing.
Yep.
If we think about that landscape, just, you know, low-code, no-code, it's... there's a lot of names out there. I think maybe what you all are doing is more sophisticated than maybe what some of the others are doing from a complexity standpoint, and it isn't just a simple, "Here's a widget. Go design something that's cute." You're doing the real integrations behind the scenes, the complexity of the workflows, et cetera. If you were to kind of help just distill the core difference between, let's say, you and some of your other peers that folks may know, you know, kind of how would you characterize that?
That's a great question, and that is, I would say, both, the opportunity, but maybe sometimes can become a limiter for us as well.
Yeah.
We are very differentiated when you hit scale, when you hit complexity.
Mm-hmm
... when you hit, variability, dimensionality, where you need to be able to handle things at a regional and a global scale and leverage some of the pieces, but there may be slight differences.
Yeah.
There are really none of our competitors can manage the level of sophistication that many of these systems are needed.
Mm-hmm.
When you think about a real powerful enterprise-grade workflow tool.
Yeah
... I don't think there's a lot of people that can compete with us there.
Okay.
Negative to that is that you can't. That the benefit of Pega also becomes somewhat of a limiter in terms of scaling.
Mm-hmm.
You know, we're not necessarily the best solution to scale to 50,000 companies that may actually have a very commoditized solution, and some of our competitors are more focused on that market. There's some that try to do both.
Mm-hmm.
I think the ones, you know, that we've seen our major competitors, without going through the list of them, are, you know, the larger like low-code, no-code workflow type applications. The, you know, the biggest names in tech are in that space. They tend to have really packaged offerings that they do, like a sales automation or a marketing automation or a service tool, and they sell those kind of as a piece of the solution.
Yeah.
Where we tend to differentiate against them is when you're trying to pull those together. We can compete at that solution, at the service automation. I would say our differentiation is maybe more slight there than it is.
Sure
... on actually being able to help manage the workflow end to end.
Right.
Because that's what the way they're architected. One of the advantages we have with that is that we operate in a single-tenant environment.
Mm-hmm
... which does allow us to do things like real-time integrations, things that multi-tenant platforms have a hard time doing because of the tax that.
Sure
... puts on the rest of the tenants.
Okay. If we just maybe talk about the customer engagement part of your business specifically, you know, we were just trying to tease that out a bit here more specifically. How do you see that part of the platform evolving? Maybe if you're thinking about, you know, your R&D efforts between the different pieces of your business, are these both equal focuses, or do you see more opportunity in one side or another?
It's interesting. When you think about customer engagement, there's something that we have called Customer Decision Hub, which is basically, you know, the brains of our product. It's the AI, right? It's the native AI that we use, and we leverage that a lot more when we're engaging with consumers because you need real-time, instantaneous decisions based on information that you may glean from the person coming to a URL. You might know what country they're coming from.
Right.
You might even know who they are, depending on if their IP address or the cookies that they have signal that. The decision engine that we have is actually interesting because there's... I know later you have the gentleman from OpenAI.
Yeah
... talking in one of your sessions. You know, AI, you know, if you go back 20 years ago, AI was almost like, you know, something that was like a movie, you know? It was like, kind of like it was like science fiction, right? It was like, "Oh yeah, AI." It's like, "That's not really real." AI simply is taking a data set, information, and creating a way to create logic to discern information from the rules of the data set, and we've done that forever. We've done that at least since we did our Chordiant acquisition in 2010. We've done that for call it 25 years. The difference with where we're going with our product now is to allow that integration to other AI tools, right?
Okay.
We natively used our Customer Decision Hub, which a which essentially used all the data that you might provide that and the data models to be able to learn and iterate and be able to improve the quality of the decisioning. Where we're going is actually allowing that leverage of other AI tools, other data sets, whether that be public or private data sets, to do things, you know, like, you could actually say, you know, write the JavaScript code to be able to.
Sure
... execute a certain activity. It could be, you know, tell me what the, you know, the best way to process a loan is in, you know, in the Netherlands.
Mm-hmm.
It will provide information. Doesn't mean that information will automatically populate, but it's another tool that you can use as you're designing. Another good example, in the customer service area, we used to do something called Next Best Offer. Shoot, I said "used to." We do something called Next Best Offer with our customer service reps, where if you're on-
Yeah
if you're actually in a panel and you get a call in from a customer, it's taking information in and it's suggesting-.
Mm-hmm
... maybe you should ask them whether they, you know, if they have a, they're maybe delinquent on a credit card or maybe they have a customer service open ticket. You actually have information to know. What the next evolution of that is the AI will actually tell the customer service person what to say.
Yeah.
It will actually say this or say this. Say this if the customer says, you know... We have Voice AI, so it can hear what the customer actually says, and it would say, "Now based on what the customer said, the new calculation is," say. That's just, and that's leveraging things that may actually be outside of, either inside or outside of your data set. We're really taking that customer engagement, and we're taking it to the next level of AI, which is not just to leverage our innate AI-
Mm-hmm
in turn, but to leverage other forms of AI.
Actually, that sounds like it's gonna do wonders for customers in being able to drive more value within their ecosystems. Maybe just touching on another piece of the business that folks may not be aware of, you all are actually a leader in the Forrester category for RPA. How is your kind of what is your RPA solution and product, maybe the origins there, what you did slightly different as it compares to some of the other well-known peers that folks are familiar with?
Yeah, that's a really interesting story. We bought a company called OpenSpan in 2016. OpenSpan was a leader in RPA. From 2017 to 2020, we've almost exclusively focused on getting that RPA solution native to the Pega platform, so that in every workflow and every client, they could leverage robotics. They could leverage it in skipping a step in the workflow or reversing back or auto-populating or kicking off some type of a notification or making or reprioritizing to a person in the company like, you know, an event or an issue. We were criticized, I personally was with the investment community about why don't you just go out and sell desktop RPA?
Yeah.
Just go right, just go right at UiPath and sell the screen scraping software to everybody in $20,000, $30,000, $40,000, $50,000 transactions. We fought that because we do not believe that is actually where the market was going. We believe that that was a solution that is necessary, but it is a band-aid to the end solution because you wanna have systems integrated with each other. You don't wanna constantly have robots grabbing data and copying and pasting. However, that is necessary, so we have a desktop solution. It's just wasn't a primary strategy. I think what you're seeing now with the rankings is the recognition of what we said we were gonna do.
Yeah
... is actually the way customers wanna use robotics, which is not in a desktop RPA kind of. You know, there's been screen scraping since the eighties, so that's not something that's new. What really clients wanna do is be able to automate inside their applications, and that's where I think. I think what you're seeing now is that recognition that that's really catching on and that our solution. It, you know, it does take a couple years to kind of manifest that strategy.
Yep
... but I think you're seeing that come through now.
Okay. Maybe just transitioning here a bit. You know, over the last five years, you've all taken a, an approach to become more cloud focused, shifting more toward ACV type metrics and to get better visibility into your business, but also kind of to extract more, more value there. Maybe can you just kind of give us an update on where you see things right now in the trends, in the trend transition-
Yep
... and what's kind of changed operationally, financially, and kind of what's your perspective on that going forward?
Sure. 2017, for those of you that may not be aware, we actually embarked on a transition to move away from a perpetual business model to a subscription model. In 2018, we also pivoted hard to SaaS. When we first started the transition, it was more of an economic model transition that clients really wanted to contract more in a recurring model. It gave them more flexibility. Kind of right in the middle of that, I think there was a pretty big momentum shift up in terms of SaaS.
Mm-hmm.
Enterprise companies managing on cloud. In the last 5 years, we went from a business that we had about 3% of our revenue on Pega Cloud, and now, you know, approaching 50% of our revenue is Pega Cloud. We went from a company that was getting 5%-7% of our new customer orders were SaaS. Now it's 2/3 of our business, new business is SaaS. We went from a company that had, you know, 70% of our non-professional services revenue was perpetual licenses to now it's, you know, 2%.
Yeah.
I think we've made the transition. We got through the tough, weird accounting that happens there, where you go away from revenue up front to kind of the subscriptions. I think we're made some good progress there. We also went through the billings trough too, because perpetual, you bill up front, you move to billing over time. 2023 was always the year that we felt like we would kind of emerge from that.
Mm-hmm.
2024 would kind of be the first kind of normal year, so to speak. Originally, take that back. Originally, we thought we would end at the end of 2022 and 2023. We're probably about 6 months behind on that transition. 2024 becomes like, you know, relatively normal year. Things are kind of back to. Free cash flow should be more. The thing that we're actually, just to touch on the cost side of that, everything I think has went, I would say, as projected on the transition, the cloud move, the cloud gross margin, et cetera. What we did do that we are addressing is that we, I think like other companies, we probably, you know, overinvested or overhired in our go-to-market based on where our growth rate was.
We, you know, we unfortunately, did a, you know, a restructuring in December to take back some of the investment that we had made, and we need to be very thoughtful about future investment. I think some of that was, you know, we were kind of maybe in the same boat as a lot of other companies.
Sure, sure.
I think COVID kind of made it confusing on what the market would really look like when we ended. That said, the rest of our business model, I would say, is kind of as expected. It's just we've got to get that go-to-market cost as a percentage of revenue in line, and then we'll be a Rule 40 company as we exit 2024.
Maybe just double-clicking on that, kind of workforce reduction on the go-to-market side. You know, given, you know, your sales motion, maybe just help us understand, you know, the upsell, cross-sell right now and then, you know, the impact that you'll have within the customer base, if any.
Sure. So, the interesting unit economics for Pega is that, before we kind of recalibrated to focus on our target organization model, which target organization model is a heavy focus on the Global 1000 and heavy focus on our existing clients to expand, to cross-sell, upsell to existing clients. That's our strategy for the end of 2022 and 2023 going forward. The interesting unit economics is that we had about 75% to 80% of our growth in ACV was coming from existing clients. 50% of our go-to-market costs were focused on new logos. You can see the unit economics of how costly new logo dollar growth was. New logos are great if they're the right logos.
If we're actually, you know, if we're selling, if we have a Verizon and AT&T as a client, and we're going to sell to T-Mobile, that's a perfect match. If you have Verizon and AT&T are going to sell to, like, a local telecommunications company that has 400 employees, that's not the right focus, right? That's not a. I think for us, it's really around the right orgs. Orgs, enterprise scale. Remember what I said at the beginning, lots of transactions, lots of consumers, enterprise scale, sophistication of use case. That's kind of where our target is. We think that the changes that we've made, not only in the reduction of the overall selling cost structure, but also the shifting of the primary quota carriers.
Mm-hmm
... to cover existing logos, the combination of that will have us, you know, probably achieve a slightly lesser growth rate than what we had before, but a much more efficient one.
Okay. Got it. Maybe just building on that point, you announced your 2022 results in February. ACV was up 16%, which I think was the target you all had put out there the year prior. You know, Pega Cloud revenue is up about 30%. You put a target out for this year. I think it's 12% ACV growth.
Yep.
First of all, I think you gave free cash flow guidance as well. Maybe just help us understand the underlying assumptions there and kinda what gives you all, you know, the conviction to start with that new disclosure, given, you know, you have a more robust or more clear understanding of the business, especially in light of macro headwinds, et cetera, that every software, enterprise software company is facing.
Yep. I think there's a couple pieces to that. The first piece was we made a commitment, in 2017, that 2023 and 2024, we were gonna be focused on being a Rule Forty company as we exit the transition. We felt that the responsible thing to do was to actually start to hold ourselves accountable to that and to focus on free cash flow and to actually set a target and to be serious about that target. By setting that target, 1, it gives us something that we're accountable for. It also is a really important message to our teams, our internal teams, around what we expect in terms of margin expansion as we kinda get through. You know, we're not gonna be a Rule Forty company in 2023.
We're targeting to be one as we exit 2024. Regardless of whether that happens or not, we will have made significant progress to that goal. That's kind of... It was important for us to show that free cash flow. We talk about Rule of 40 as ACV growth and free cash flow. We're now at a point where we need to start measuring it, so it just felt logical to actually start to be accountable to that. The second thing is, now that we're a recurring business, we have very good visibility recurring billings, and our AR and days sales outstanding doesn't vary that much. We have pretty good view of our cost structure.
Yeah
... pretty good view of our billings, which means we should have pretty good view of our free cash flow. We just felt like, you know, that this is a really important time. Now, interestingly enough, it's also a time when all of the investors wanna see that too. To be honest with you, that's a little bit of a coincidence because of us exiting the transition at the same time that we're moving more to a value view of companies. That just gave us maybe a little bit more of a push to make sure that we did that in 2023. In terms of the last part of your question, which is visibility, look, we have an approaching 100% retention rate.
We sell most of our growth is with existing clients. Most of the growth in a year doesn't result in a ton of billings or collections in a year. Our cost structure is relatively predictable or manageable. I think our visibility to free cash flow is pretty good, right?
Yeah.
We don't have a lot of variables in there.
Okay. That makes sense. Is it worth noting then, you guys put out a target to get SaaS-like gross margins for Pega Cloud, which you all achieved?
Yep.
You know, anything that we should think about for kinda steady-state margins there for the cloud business going forward? Understanding that's gonna be a driver toward a lot of the free cash flow...
Totally
... growth, especially as you continue to scale that part of the business.
Yeah, I think I actually, I think that's a really great story at Pega that we probably don't even talk about enough. Originally, if you go back and look at when I, when I did an investor day, I think it was at our PegaWorld 2017, I actually pegged gross margin for Pega Cloud at 70%. Then 2 years later, I pegged 75%. I would tell you now, I think we can get closer to 80%. I actually think, like, that's not, you know... I don't think 70% is something to be proud of, don't get me wrong. But that's sub-scale SaaS business, too, right? We're talking about $200 million.
If you go back and, you know, get a company like ServiceNow and say, what was their gross margins at $250 million, they weren't 70%. I think, like, I think that we're, like, I think it's at least respectable.
Yeah.
We really, when we moved the Pega up to 75%, we were kinda thinking, you know, that's not gonna be a layup, right? Now I'm looking at it saying, "Well, you know, we're not likely to be there in 2023. Could, but we'll be there in 2024." I think now with Kubernetes, with the microservices, how much we're leveraging because our clients, when you get scale, you get some level of accretion of gross margin-.
Yeah
as the clients spend more. I think, you know, I wouldn't say 80% is my new target, but I would say I think we can beat 75%. I think that's exciting. Like I said, that's not a story we really brag about much, but that is a really great thing, 'cause our gross margins in Pega Cloud will probably start to exceed our overall blended gross margins in the next couple years.
Any questions in the audience before I continue? No. you know, you guys have had good performance. You're hitting the goals that you put out. You're giving more visibility into the future around cash flow, your ability to achieve Rule of 40. Your stock maybe isn't trading where you want it to trade. What is it that investors aren't understanding about the story, or not appreciating about the story that maybe we can try and dispel here today?
I think there's two observations that I have and, I think one is a completely kind of understandable one if I was an investor.
Yeah
One I think is not really fair. I'll start with the one that I think is not fair. I think that Pega gets categorized sometimes in a legacy category, and I think we are far from that.
Mm-hmm.
I think that because of that, you look at our growth rate and go, "Yeah, I don't think Pega's really gonna be able to grow double digits and keep, you know... I wonder what the... They have a really competitive landscape, they must be oversold in all their clients." Those are all, in my mind, completely unfair, false assumptions. Once again, we have to just continue to execute-
Yeah
... to prove that to be the case. One simple example is if you look at our largest client, our largest client doesn't spend $50 million a year with us. Just start there, and think about the clients that we have, and what do they spend with Salesforce? What do they spend with Adobe? What do they spend with you know Microsoft? What do they spend? I mean, hundreds of millions of dollars, and we sell, in many cases, the same solutions. To think that we can't... I'm not saying we can get every client to $50 million, but we should be able to get every client to $10 million, to $20 million. I mean, that's like 5x our ACV-
Yeah
... if we were able to do that. That's a tremendous... You know, do we have a $50 billion... Can we become a $50 billion company? I mean, I would love to, but can we become a $5 billion? Of course we can.
Right.
I don't think that's an issue at all. The one that I think is very fair is, we're exiting the transition. We have a little bit, because of ASC 606, the revenue conversion model is a little bit complicated. We haven't shown that we can generate free cash flow yet. I think there's a healthy skepticism.
Mm-hmm
... that I think is a little bit, of a show me kind of... I, to be honest with you, I think that's a rational view.
Yeah.
I think investors that understand our model and know what we're committed to are gonna be very happy that they're investors now or in two years, you know? I do think there's a reasonable skepticism on are they committed, can they do it...
Mm-hmm
... are they gonna do. You know? That's another reason why we put free cash flow out there, because we wanted to show our commitment to how important it is.
Okay. Maybe the last question from me, and we'll run out of time here. Plug for you all, PegaWorld, first time in person in four years, I think. Vegas this year.
Yeah.
Let me just recall the date so folks have that, and then maybe, I think we're gonna have some announcements coming out of that, but maybe there's something you can give us in terms of what's to come in terms of technologies or kind of, you know, new verticals, partnerships, et cetera, from Pega that would be. It's just helpful to just kind of.
So Pe-
Yeah
PegaWorld, yeah, first time live. You know, just like the great event you're having here, which I know you're oversubscribed and we would love to be too. We'll see how that goes. Our last one was 2019, all through COVID we did virtual. I think we did the best we could, but, you know, virtual is virtual-
Yeah
... and live is live. I mean, there's, there's a huge benefit there. It's June 11th to June. It's Sunday, June 11th to June 14th. It's Sunday to we end it on Wednesday. It's in Las Vegas, it's at the MGM. You can register, you can talk to. You can send an email to Peter Welburn. We actually have an investor registration code as well. We'll do an investor day there on Monday afternoon, we'll host somewhere between 25 and 50 investors will be there, will come. You can walk the floors, you can talk to our customers, you can talk to partners. It's a great opportunity to. I mean, we don't hold you back from anywhere. You can go wherever you want. You can talk to anybody.
We're completely transparent with that, you know, good, the good and the bad. What you should expect to hear, I think what you're gonna hear is the powerful relationships that we have with our clients. There's scores of customer testimonial sessions talking about what they've done, transformations that they've done with Pega. There's partner examples. I mean, it's just a great example of seeing real-life use cases, because we do these sessions where clients talk and explain to other clients the value that they've received to help them on that journey. You'll hear a lot about AI.
Mm-hmm.
It's, I mean, not that we're the only person talking about that. By that time, probably everyone will have talked about it, but I think AI is a really important leverage point for us. You'll hear about that. You'll also hear, you know, about Pega Infinity and how we're, you know, how we're helping our clients on that journey to really be the digital transformation platform for our clients and all the different ways that we're trying to accelerate innovation for them.
Okay.
We're excited.
All right. Thank you for joining us today.
Awesome. Thank you.