Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to Pegasystems' Fourth Quarter Fiscal Year '24 Earnings Conference Call and Webcast. [Operator Instructions] And I would now like to turn the conference over to Peter Welburn. Vice President, Corporate Development and Investor Relations. Peter, you may begin.

Thank you, Krista. Good morning, everyone, and welcome to Pegasystems Q4 and Fiscal Year 2024 Earnings Call. Before we begin, I would like to read our safe harbor statement. Certain statements contained in this presentation may be construed as forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The words expects, anticipates, intends, plans, believes, will, could, should, estimates, may, forecasts, and guidance or variations of such words and other similar expressions identify forward-looking statements, which speak only as of the date the statement was made and are based on current expectations and assumptions. Because such statements deal with future events, they are subject to various risks and uncertainties. Actual results for fiscal year 2025 and beyond could differ materially from the company's current expectations. Factors that could cause the company's results to differ materially from those expressed in forward-looking statements are contained in the company's press release announcing its Q4 2024 and fiscal year 2024 results, and in the company's filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2024, and other recent filings with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance on such forward-looking statements, and there are no assurances that the matters contained in such statements will be achieved. Although subsequent events may cause our view to change, except as required by law, we do not undertake and specifically disclaim any obligation to publicly update or revise these forward-looking statements, whether as the result of new information, future events or otherwise. Our non-GAAP financial measures discussed in this call should only be considered in conjunction with our consolidated financial statements prepared in accordance with GAAP. They are not a substitute for financial measures prepared under U.S. GAAP. Constant currency measures are calculated by applying the December 31, 2023, foreign exchange rates to all periods shown. Reconciliation of GAAP and non-GAAP measures can be found in the company's press release announcing its Q4 2024 and fiscal year 2024 results. And with that, I turn the call over to Alan Trefler, Founder and CEO of Pegasystems.

Thank you, Peter, and thank you to everyone on today's call. In 2024, we demonstrated our commitment to delivering on our plans, and I'm thrilled about the changes we've made to our business and how well the team executed to deliver strong results. It's great to see that we continue to drive profitable and balanced growth across industries and across geographies, while delivering the most innovative products in our history. Ken will walk you through the financial highlights in a few minutes. Our team has never been more energized to drive transformative change for our clients, and we have great momentum coming into 2025. Pega GenAI Blueprint is changing every client and prospect conversation, driving hands-on experiences and showcasing the power of Pega technology in an easy to understand in practical way. And we're thrilled to see new business like the recently announced U.K. Armed Forces recruiting service engagement included in their press release the use of Blueprint. The pace of Blueprint innovation is unprecedented and accelerating. With every week, we are adding new capabilities. And if you haven't used Blueprint at least twice in the last month, you haven't seen what it can do, and it is worth seeing. There are 2 sets of capabilities we're particularly excited about. First, Blueprint now empowers every workflow to be agentic. We'll talk more about that in a few minutes. And second, there are capabilities that create, I believe, what will be a massive new market opportunity for Pega and our partners by helping our clients rethink and replace legacy systems. Now many of our clients have recognized Blueprint's power to accelerate legacy transformation, getting their business logic out of dated applications and onto a modern cloud architecture. And in the past months, we've been adding new legacy transformation capabilities. For example,…

Thanks, Alan. Several years ago, we implemented our new strategy, or new at that time, of becoming a subscription cloud business. A critical outcome from the subscription transition was to be a Rule of 40 company, balancing growth and profitability. We completed the subscription transition in 2023, and I'm excited to share that today, we're a Rule of 40 company when we measure our annual contract value growth and free cash flow margin, including supplemental items. Looking back at the client success we've delivered, the challenges we've managed, achieving this milestone is a testament to our team's hard work, resilience, determination and most importantly, commitment to our clients. ACV growth, the most important metric to measure the success of our business, increased 11% year-over-year in constant currency. That result was driven by growth in Pega Cloud ACV, which increased 21% year-over-year in constant currency. Our ACV growth was also powered by our focused target account sales model. We discussed and anticipated that 2024 would be a less back-end loaded here from a booking standpoint, and that's certainly how the year played out. Our clients and prospects are using Pega GenAI Blueprint, which lets them instantly get acquainted with Pega in an incredibly experiential manner. Pega GenAI Blueprint will dramatically speed clients' time to value. Cash flow from operations grew 59% year-over-year to $346 million, and free cash flow grew 68% year-over-year to $338 million. The improvement in our cash flow was driven by 3 key factors: Our double-digit ACV growth, our Pega Cloud gross margin expansion, and our improvements in go-to-market efficiency. If you take into account the unplanned $32 million settlement for our shareholder lawsuit, our free cash flow would have exceeded our guidance by $20 million. So what looks like a slight shortfall for 2024 is exactly the…

[Operator Instructions] Your first question comes from the line of Rishi Jaluria from RBC.

Wonderful. Nice to see continued momentum in the business. I want to maybe drill a little bit into the investments you're making in increasing sales coverage. Can you maybe talk about some of the near-term and longer-term priorities? And maybe related to that, I know in the past, you had a couple of false starts with really wanting to go down the net new logo acquisition game. Given the success that you're having with Blueprint and how that can reduce friction to creating workflows, creating cases, how should we be thinking about using Blueprint now as a front door for some of these net new opportunities that you haven't been able to penetrate in the past? And then I've got a quick follow-up.

Great question. And we certainly have been paying close attention to how what we've been doing and how we've been engaging has given us new ways to think about doing this that we might have done in the past. What's interesting is I would describe the way we traditionally did selling is a sales guy trying to get in with somebody new would spend, I don't know, 3, 4, 5 meetings trying to convince the customer that they should see or really sort of specialized demonstration. And then they would bring in a solution consultant to it, create a customized demo to try to really intrigue the customer. And the conversation was often very theoretical in terms of concepts. We talked about a lot of concepts as a company, concepts like Center-out, which we think is important. But it takes a while for people to internalize this. Blueprint has entirely changed that. We now do the demo, and demo in a way that is specific to the client in the first meeting. And we're doing it almost every level of the organization, right up to CEOs. And I'll tell you, they really are pretty engaged with what they do. We no longer need the same ratios of salespeople to solution consultants to build custom stuff. We have AI doing that for us. And it all becomes much more experiential. The customer can see it, feel it and they can then try and play with it themselves. So we're still calibrating this. But I will tell you, it has completely changed our go-to-market motion already. And I think that's really exciting. And it means that we're going to be able to, I believe, be much more effective at our pursuits with both new and existing organizations. And it also should change our cost profile in terms of what it takes to get to that point we can show with customers something real. Does that make sense?

Yes. No, that's super helpful. Really appreciate the color, Alan. And then just...

It's Ken. Just let me add a little color. What we did before when we went after new logos is we had more of a territory model, just to follow up on what Alan said, which is we didn't have tight, I would say, connection to the actual works that we cover. We more allowed kind of fishing anywhere, so to speak. And what Alan is really talking about is very targeted works. We know the customers, we know the verticals. We actually work with our partners very closely, and our partners understand on those logos as well. So we're actually -- have a much better curated process around organizational coverage. Secondly, we don't need -- as Alan insinuated, we don't need as big of a selling team as we actually had to go after these new logos because of Blueprint. I just want to highlight those 2 things because I think they're very different.

Yes. No, got it. That's really helpful. And then maybe I just want to kind of think about the Rule of 40 mindset that you've had over the past several years. You talked about hitting that now in 2024, your guide for 2025 implies you'll be at or around Rule of 40. Just how should we be thinking about, I guess, number one, the durability of kind of maintaining this balance Rule of 40? And number two, is that kind of the end state? Or is there potential to further optimize the model and maybe even potentially accelerate growth from here and actually exceed that as kind of a North Star?

So we believe, fundamentally, and I think this is -- and I think our teams do, that there is no endpoint to how you can improve a business. And so for us to suggest that when we're at Rule of 40, we're just done and that's it for us, that is absolutely the opposite of how we make at Pega. So what's next for us, Rule of 45, right? We just got to keep trying to improve. Naturally, we would love to do that on the backs of accelerated growth, though. So our real focus is going to be to accelerate growth without losing our margin muscle and to be able to drive to a much higher kind of balance of growth and profitability but we want to make sure that we're giving ample focus to the growth engine.

Yes, I think that's fair. Look, Pega needed to go through some internal reeducation to get us to the point where we had the discipline to go from where we were a couple of years ago to here very solidly in a Rule of 40 camp. Nothing has been done in a way that everything we've done the way that I believe is completely sustainable. But our next focus needs to be how do we open the aperture on growth. And you've heard me talk about wanting to get back to the high teens or 20% type growth that we've had is kind of the direction, how do we open that aperture while maintaining that sort of discipline and sustainability. And that's what we're going to be really, I think, focusing on this year. But we're not ever going to go back to the way we used to run the business.

Your next question comes from the line of Steve Enders with Citi.

Okay. Great. I guess maybe just to start, I do want to ask on just linearity of ACV and what's going on there. I mean, I just if I'm looking at the 4Q number, I think it's the lightest 4Q since like 2018 or something like that, if I'm adjusting for FX in the right way here. But yes, I guess, can we just give a little bit more, I guess, clarity on kind of what you're seeing in deal environment? And maybe like did deals push into Q1? Or just how we should think about what that looks like or the implications of that?

Sure. So I'll take -- I'll touch on linearity. You're directionally right on the currency but I think maybe you might be minimizing a little bit the currency impact. Currency impact in Q4 was pretty massive for us. So the optics of the as reported. If you look at through the year, Q4 of 2024 was still stronger, right, than the other quarters in the year but it just doesn't look that way optically because currency was like a $40 million headwind or something like that in Q4. So it's a pretty big number. But in terms of the linearity through the year, that's said, take just look at constant currency, we kind of saw the year shaping up to be a little bit more balanced. We knew we had activity in the middle of the year that -- some of that stuff is just stuff that you work hard to pull in as fast as you can and otherwise may have hit in Q4 if we weren't successful doing that. So that does happen in enterprise selling, where there aren't -- we don't have millions of deals. We have hundreds of deals. So they do big deals can skew quarters. In terms of 2025, 2025, I think, is shaping up to be a very good year. And quite frankly, as was this past year, it will be the strongest net ACV adds that we've ever had. But I think the shape of it will probably look different in that Q1 and Q4, and historically, we've had a little bit more activity in terms of ACV growth. We think 2025 will look a little more like that.

Okay. Great. That's helpful context. And then I guess I wanted to ask on some of the legacy replacement opportunity. And I think highlighting some of the BPMN stuff and I think the past couple of quarters talking about some of the legacy replacement opportunities here with Blueprint. Can you just help us think about like what that looks like or the use cases that you can maybe go after that would be different or would be accelerated from this? And maybe how you kind of see that playing out here over the next couple of years?

Yes. Historically, Pega was used in legacy transformation settings but we would actually talk about working with clients, to the quote we used to use, is wrap and renew legacy systems. So they have a system, what we would typically do historically is we would work to improve the processes, maybe tie it together with other systems but we would be their back ends here as well. And what we introduced in the middle of last year and what we've been building into Blueprint here is the ability to now say, "Hey, we're going to let you rethink and replace your legacy systems." So you can still wrap them if you want. But what customers really want to be able to do was to turn off their legacy systems. So what did we do? Well, we've added capability into Blueprint to make it so that we can generate cloud native database controls so that a customer can say, hey, I want to replace the system. I want the processes to end up in Pega. I'm going to have maybe some systems of record like SAP financials that I'm going to have it talk to. We can now immediately import those APIs with staggeringly little effort. But I also have some data that used to live in that system, and I want to create a cloud native database, maybe a BigQuery database or a Databricks database or a Redshift database, something that would run their cloud environment, that Pega can now, as part of the workflow, just automatically updated. And this gives us a tremendous breadth of new opportunity to be able to do this, rethink and replace, which has really been resonating with clients in our early discussions in the last couple of months. So I'm really excited that we've opened an aperture here around legacy transformation. And with things like all the big SAP migrations that are going on with SAP putting pressure on their customer base, not everything built in SAP wants to migrate to an SAP environment. The financials do for sure. But all the stuff around it, we've got customers right now who are putting those into Pega, and we think that, that represents, from our point of view, a pretty dramatically expanded opportunity.

Your next question comes from the line of Pinjalim Bora with JPMorgan.

Alan, I want to ask you, what are you hearing from customers in terms of applications created through Blueprint going live? Trying to understand if the pace of application go-lives has picked up and if it's driving up kind of the aggregate consumption of the Pega platform in any material way?

It clearly is. I mean I clearly see -- look, people mistake Blueprint for something that's like a new front. Blueprint is a -- I think Blueprint more as a completely new way to rethink how you get the engine that we used to work pretty well up with customers to be understood and adopted at a completely different pace. And we've had -- since we really put this out in anger around PegaWorld last year, we've had over 70,000 -- 70,000 blueprint created. Now what a bunch of those are -- the bunch of those are people just getting on a flight but hundreds and hundreds of those are genuine modified systems, people are interested in either building or understanding. And we've started to see these deploy into production. So the idea that somehow this as a Blueprint business and a non-Blueprint business, I just think that's the wrong way to think about it. There's not a single conversation I had in the last 3 months that hasn't had Blueprint in the center.

And Pinjalim, I'll add one piece of color. I realize this is not an empirical thing I'm going to say but just to give you that there's been hundreds -- hundreds of millions of dollars of our pipeline that are actually being driven with the Blueprint, meaning it is actually getting into our selling process in a big way, right, in the last -- in 2025 is kind of the year of Blueprint, right? If you would have actually been at our kickoff, you would have heard a video, the feedback from our sales teams of like Blueprint is here, Blueprint is the way we go to market with our clients and drive down time to value with our clients. So it's everywhere.

Yes. Understood. Definitely, the excitement is palpable here. One question for you, Ken, the 12% ACV growth guide, I think you said something like material contribution from cloud. I'm trying to think how should we think about maintenance and term in that kind of mix? Like obviously, maintenance seems like the decline has kind of picked up a little bit. I think last time you said you might see a steeper decline in 2025 for maintenance. And then term, should we expect that to start to decline at some point?

Yes. So maintenance will decline. I mean it's -- we would expect it to decline. Term....

We want it to decline.

Yes.

Actually, we wanted to decline because the decline of maintenance coupled with an increased cloud tells you what's going on.

It means people are migrating, right? So we would expect maintenance to decline, and we would expect term to certainly grow at a much more subdued rate and could potentially decline as well year-over-year. The trick there is that a lot of these migrations will happen through '25 and '26 and even into '27. And so just the timing quarter-to-quarter and through the year of how that will happen, it's hard for us to necessarily pinpoint that. But I would say, assume that the majority of our growth is coming from Pega Cloud. Like that's our growth engine. And it might be -- we might actually end up with more than 100% of our growth coming from Pega Cloud because it's actually connected to migrations.

Your next question comes from the line of Jake Roberge with William Blair.

Really helpful color on the hundreds of millions of pipeline that you have right now for Blueprint. But is there any way to think about the financial impact of Blueprint thus far? Like is there a way to quantify the tailwind that's caused for ACV growth or how many Blueprint deals you've closed already? Just trying to understand how it impacted 2024 thus far.

So let's kind of -- let's calibrate on what Alan said earlier, and I'll add one other piece of color. There's 2 really big impacts that Blueprint will drive. The first is our ability to get engaged with clients and drive faster engagement, faster sales cycles, faster time to value for clients. Like that's one theme. And connected to that will help us drive a more efficient go-to-market model, both with existing and new logos. They are different things but they are related. If you look at those 2 things, what I think you've seen is the first one, which is client seeing value faster, engaging with us. And you're seeing that in many of our clients already. You're starting to see that hit. Naturally, that does -- that connects to bookings. There's a little bit of a lag there when it connects to bookings. But on the sales efficiency one, I would say not yet because it's still being rolled out. We're still in kind of the implementation phase of that. But you would see you get -- we would get scalability as we grow our sales, our addressable market, so to speak, that we're going after, the logos, the orgs that we target, you would actually see efficiency there kind of behind that, Jake, if that makes sense.

Okay. Really helpful. And then as you're starting to see more and more of these customers migrate to Pega Cloud, can you help us understand what type of price uplift you've been able to see over the past year or so?

It does vary because it really depends on whether they bought perpetual, they bought term, what their pricing was, their contract models. There's a lot of factors in there. But we have -- we typically see anywhere between -- on the low end, kind of in the 25% to 35% range. And on the high end, you can see well above 100% uplift. But it's been -- it's been kind of -- it is very, very customer-specific because every -- a lot of times when clients migrate, they're also buying new stuff as well. So that all kind of gets packaged together in the relationship. So just think about it is there will be uplift with almost all of our clients, but not all of them, because some clients may move without it. It's really, really client-specific. So we can't -- I don't want us to get like too much of a math model because it's not that much of a science.

Your next question comes from the line of Patrick Walravens with Citizens JMP.

Great. This is Austin Cole on for Pat. Wondering about the Pega Agent Experience announcement, how are you guys thinking about the monetization, any additional monetization component there for front-end versus back-end experiences? Is this kind of baked into the whole Infinity experience? Anything there would be...

It's completely baked into the Infinity experience. Look, the way that Pega should monetize its products, I believe, is that our customers should deploy the work. And as our customers deploy more, as our customers get more benefit from the workflows that are being done, either automated workflows or workflows that involve people. We -- our contracts typically have increases in pricing that relates to the levels of consumption to the levels of ongoing use. One of the things I know with some amusement is all these other companies that didn't do what we did, we, a couple of years ago, went down the hard path of really moving our agreements from user licenses to work-based licenses, typically counting the amount of work that the customer did and having the price vary with that amount of work. I think customers who -- or vendors that have software that's being sold by the seat, I have no clue how they navigate the next 2, 3 years. And I think it's going to be very difficult for some of them. Certainly, everybody is thinking seats should go down. And some of the stuff, I heard another vendor talk about wanting to charge $2 per transaction, that they were going to charge what they do. We'll see how sustainable that is, and whether that happens. I don't think that's going to be sustainable at all. Pega has always been in a position certainly with all the new customers we've signed in the last several years, where it's charged based on the quantum of work. And I think that's perfect for energetic universe.

Great. And then maybe just as a quick follow-up. On the U.K. Armed Forces deal, can you talk a little bit about how that engagement came about? And what allowed you guys to win that deal?

Sure. It's interesting, like a lot of government areas of the U.K. Armed Forces had a couple of silos. And we had the privilege of being able to successfully do recruitment, which is super important for them, in both the Navy and the Air Force. And I think we have a really highly successful environment -- success there. They had both the Army and the Strategic Command, though, who weren't using Pega. And they decided to go to market in a highly competitive, very, very formal structured way as they talk to all the usual suspects about how they might go ahead and do this and went through an extremely rigorous process that took well over 18 months. And they decided that they would go with a consortium led by a company called Serco, that, I think, put together a very, very impressive bid, and we were honored to be a really central part of that in terms of providing the core technology that's going to be used to manage it. So I think it's a real example of winning on our merits here in extremely rigorous environment. And we're very committed to having this be successful, obviously, everybody is worried about defense these days and recruiting the right teams, and we're thrilled that they're going to be using our technology to do that.

And I would also add one point on that, which is a broader opportunity in the global public sector as they look at digital transformation, this is a good example of where we are well positioned with our platform to be able to help public entities kind of reimagine what their back ends look like. And I think there's been a lot of talk about that certainly in the U.S. public sector but that's an issue globally, right? Governments have old systems and they need to be refreshed, and we are perfectly positioned to have that to be a big player in that space. And this is a good example of one that we did.

Your next question comes from the line of Mark Schappel with Loop Capital Markets.

Ken, a question for you. In your prepared remarks, I believe you mentioned that Pega Cloud gross margins are expected to be relatively flat in the coming year. And I was wondering if you could just walk through some of the puts and takes around gross -- Pega Cloud gross margins? I would have expected maybe some leverage as Pega Cloud scales here.

Yes, Mark, the only reason why we think that they might not scale as you get operating leverage is the pace at which we migrate clients. So if we migrate clients faster, we may make specific investments to help with some of that technical migration that would actually become a cost of goods sold. So it would actually be in our cost. So it's not that our -- like our timeless models would still improve but we just may have investments that we would make. So that will be directly related to the pace of migrations.

That's helpful. And then as a follow-up, one for you, Alan. I realize it's still early days for Blueprint here. But are you seeing any patterns emerge with, say, the types of Blueprints that customers are actually putting into production like in certain industries or use cases?

I think the thing that's starting to emerge is people looking more than they would have historically at this rethink and replace capability because candidly, we didn't need to sell it that way. And with the recent features that have added in last couple of months you now really got the ability to rethink and replace, and we've been talking to our teams about changing the lexicon from rapid renew to rethink and replace. So I'm starting to see that as an emerging and I think it could be quite significant. There are lots of really lousy systems out there that are expensive to maintain, possibly have security issues. And some of them can be -- God forbid, there are database and Lotus Notes systems that are still out there in customers. And some of them are more -- IBM mainframe is an area where we're seeing a lot of interest. And we have some of that history at Pega. So we're very comfortable working with organizations with some of that heritage. So yes, I think the legacy transformation is the biggest thing I see emerging that's new and really exciting.

Your next question comes from the line of Devin Au with KeyBanc Capital Markets.

I wanted to, first off, just want to get some more color on the fourth quarter performance. I know you kind of mentioned that net new ACV has kind of come in as expected. But curious if you've seen any sort of deals closed in the quarter as a result of maybe year-end budget flush or as a result of budget kind of flow through post-election in the U.S. here? Just any color you can provide.

We -- that's a question that we have heard throughout the year, this anticipated year-end budget flush. We did not see any unusual activity, maybe I'll put it that way. There's always the year-end transaction. Typically, that's why Q4s in enterprise software companies are larger is because you do have -- some of it's the way the commission plans are typically structured, other it's the budgeting cycle. But we didn't see anything unusual. So I wouldn't call there was any big budget flush or, quite frankly, any pullback of budget spend or opportunities. It looked like a pretty normal quarter to us.

Got it. No, that's great context. And then just one more for me. I know you kind of talked about you're really well positioned globally and the federal public sector business. Maybe if you could just kind of like kind of size it and kind of look at just the U.S. federal business, kind of how that has been trending? And just given some of the headlines that we've seen from the administration looking to drive efficiencies across different multiple agencies, have you seen any sort of uptick in top of funnel activity or pipeline generation there? Any color you can provide would be appreciated.

Yes, we have a lot of excitement -- we have -- there's a lot of excitement about how we think we might be able to engage in the federal space. There's -- it's frankly pretty confusing as you can tell by looking at the news but we're feeling good about it. The types of things we do are exactly what the government needs in terms of saving money, improving efficiency and providing service. So we're feeling pretty good about what that will mean. Obviously, there's a lot going on, and that's true, I'm sure for everybody in that space but we're not concerned about it. We actually think we're in a good place.

I'm going to make a comment that is not as general as it might sound. But if you think about the areas where governments -- where governments are most focused on looking at efficiencies, it typically isn't going to be the interactions that happen with constituents. And if you look at Pega, many of our solutions that we sell help our government actually communicate and manage interactions with constituents, right, or whether that be taxpayers or whether that be other interested parties. And so we feel like the solutions that we have are anchored well in that kind of workflow that happens within the government, whereas we think a lot of the targeted areas or at least what you read in the news, it looks like the target area are wasteful spend not related to benefits to constituents and like that. So we feel very good about the solutions that we sell and the agencies that we support. But we'll see how that all plays out.

And that concludes our question-and-answer session. And I will now turn the conference back over to Alan Trefler for closing comments.

Thank you very much, everyone. We're really pleased with how we ended the year. We're really excited about how we're positioned for 2025. And just know we're working hard on your behalf and look forward to talking to you again soon. Thanks all.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.