Alan Trefler: Yes. It’s also beneficial customers are under pressure in terms of retaining some of the right skilled staff. This once again, obviously, it’s super easy when we’re operating and running it. But just to make it a little more tangible for folks we’ve got some customers, very large customers where we have systems that literally-literally do 10s of millions of cases a month that are so woven into their heavy duty, a combination of automation and driving on Amazon or Google Cloud, and they want to basically pick up their data center and move their data center in total including apps that may not run on the cloud that might be billing and accounting systems that would have to run in a non vendor cloud. vendors who know how to do it best, or whether they want to do it by picking up their data center and/ or data centers and moving them on that. And there’s some of these .
Unidentified Analyst: Sounds great. Thanks for taking my questions.
Kenneth Stillwell: Thank you.
Operator: Next question Pinjalim Bora with JP Morgan. Please go ahead.
Pinjalim Bora: Hey, thanks for taking the question. Ken, I’ll try one more time on the SCF performance seems pretty strong. It seems like the change in working capital was positive after a long time in Q1. And then it seems like the SBC jumped a little bit. I want to just make sure there’s not a onetime thing that’s driving this just thinking through what should we expect for the year on free cash flow.
Kenneth Stillwell: Sorry, Pinjalim I heard that I heard the free cash flow point. But I did you say SBC for the second point?
Pinjalim Bora: The stock base comp seems, jumped a little bit and seems like, go ahead.
Kenneth Stillwell: Yes. I’ll explain. I thought I just like you, you were a little bit faint on the volume. That’s why. It’s okay. So yes. Free cash flow. If you think about that maybe the way to think about free cash flow is to think about billings and billings connected a little bit to the revenue cycle. If you think about the revenue cycle through the year, our largest quarters for revenue are typically Q1 and Q4. Our softest quarters revenue are Q2 and Q3. Our billings are not materially different than that across the year which means our billings would be higher in Q1 and Q4, and a little bit lesser in Q2 and Q3 but our costs are relatively consistent across the year. And so if you now take billings and costs and you translate that into cash flow, our cash flow would typically be stronger in Q1 and Q4 and less strong in Q2 and Q3.
So hopefully, that’s helpful to give a little bit of color on the cash flow. On stock base comp, one of the biggest is that there is a adjustment I shouldn’t say adjustment, there is a higher stock base comp in the beginning and through 2023 because of two factors, primarily one, we actually adjusted our vesting period from five to four years for stock based compensation, which will play it a little bit into the kind of near term acceleration, but not there. I would kind of call that a onetime thing. And then the second one is that we actually did an equity grant that was out of cycle in the second half of 2022. And that is in the calculation for 2023 that certainly would not be something that would repeat. So there’s a little bit there. There is some one time pressure up on that that is not that is not a structural change to our stock based compensation strategy.
Pinjalim Bora: Yes. Understood. Very clear. One for Alan. Obviously, we have heard a lot of AI in this call and you’re doing a lot of things around AI. I want to ask you about how do you think about kind of the potential to capture incremental value from the efficiency that customers will gain from using AI capabilities, versus kind of the potential pressure on seats that those efficiencies might actually drive?
Alan Trefler: So I think for a lot of folks, the automation that occurs, is going to put potential pressure on seats, because candidly, if you can do things in an automated channels, or self service becomes better or the chatbots become better that obviously affects, for example, the number of contact center seats you have. However, to the extent that it’s being run through us, and we are the tooling that I think companies find is best to use to manage those client interactions, including the automated ones. We’ve really moved away from user based pricing got a couple of seats, and think of automating those, because candidly it’s better for the customer, and it’s fine. .
Kenneth Stillwell: Thanks Pinjalim.
Operator: Next question, Steve Koenig with SMBC Nikko. Please go ahead.
Steve Koenig: Hi, Gentlemen, thanks for taking my questions. Congratulations on a great start to the year. Just maybe a housekeeping question or two for Ken and then a question for Alan. Ken you mentioned that 67% I think it was a net new ACV cloud. Just so I’m clear you guys based on an assumption cloud percentage of new client commitments. And that guide, I think, was 60% to 70% for the year. Is that the same definition that you’re using is this net new ACV being cloud or what like, what was the percent of new client commitments? Was it was it the same definitionally?
Kenneth Stillwell: Yes, Steve, we did. We’re trying to be very consistent with that metric to what our reported metric is because it can sometimes get confusing when we use a metric that may be across one or two quarters versus one quarter. So that was the reason. But yes, it’s essentially the same measure. We just felt like it’d be much easier to talk about that metric, because that will translate into revenue, that will translate into billings and the backlog, etc.
Steve Koenig: Got it. That makes sense, we can calculate that from the financial. So that’s great. Okay, so you’re on track with your guide so far in terms of your cloud assumption, is my takeaway there. And then we also noticed the cloud, ACV and RPO was very good and a quarter better than we expected and cloud was especially good. The cloud ACV was a bit higher than we would have predicted based on the revenue results, cloud revenue. And so I’m wondering, were there some back end loaded cloud deals that should help cloud revenue next quarter, and then on the same line, just you had an outlet, the subscription licenses would be relatively level for Q1 through Q3. Is that still kind of your thinking here? And then one last one for Alan if you don’t mind.
Kenneth Stillwell: So revenue lags ACV for sure. So when we booked deals, they typically don’t have really any revenue impacts in the quarter. I’m generalizing. But so there’s definitely a lagging effect there. And yes, we don’t, we think that for our term license revenue for 2023, that would be more back end loaded, because that’s when the renewals are happening. That is a correct statement as well, that if you want to hit Alan with his question.
Steve Koenig: Got it. Great. Thanks. Super. So moving yet another question on generative AI. But very relevant here, I think, Alan one of the kind of knocks on Pega I guess over the years is that there’s not as many Pega developers, as there are Java developers. So kind of hard, that’s the hardest part wanting to overcome that. But you got to more and more Pega trained developers, a lot of partners, you’ve grown your ecosystem very well, and really focused on that. This generative AI capability, to build models, even or to help build a model that you talked about earlier does that fundamentally make the current Pega trained developers more productive or can that be used to democratize development of a model? And then along the same lines, like, does the model even need to be transparent to users if this AI gets good enough what, like, why not have the AI from the language model, build the process model and then have the whole thing, turn that Pega turn that into code soup to nuts?
So anyway, just some random questions for you hopefully that’s coherent?
Alan Trefler: No, I think they’re good questions. And they’re certainly top of mind. So Pega historically, in addition to perhaps there being fewer developers than Java, which is kind of a high bar to jump over. We’ve also, at times been criticized for being a little hard to use or requiring a learning curve, which we’ve been working to improve. But it’s one of the things that takes work. I think that the advent of generative AI takes a massive makes change to both of those. It will make existing developers very much more productive. But it really opens up the use of the technology to a much more to use your word democratize a group of citizen developers where we can leverage the structure we have, because a lot of the citizen developer stuff has the risk of not really providing the right guidance for an enterprise.
So we can provide that guidance and control with like our layer cake, but still make it so that the instructions don’t require any sort of deep Pega knowledge, but can be interpreted from language. Now, relative to your question of why go into the model at all. The real challenge, when you look at demos and think about this stuff, is not just how you create a little app, certainly for customers who have more than what I would describe as a single small . But if you need to create a system that does a number of things and talks to a number of backends. You need some structure that captures how that system works. Because when you want to go make changes to that system, you need to be able to go to a structure to make the changes. You don’t want to go around regenerating things all the time, that would be super unreliable, really easy to introduce bugs.
And because we have this model, that’s the center of our architecture I think we’re uniquely qualified to not just be able to capture like a little process flow. But to be able to capture the really robust things you need to build an app of how you edit and validate data, how you actually send it out to different backend systems, how you decide what the right controls are, if the thing is going to post a transaction, who needs to approve it; all of those types of things are in our model. And they’re visible. They actually can make sense to the business people. And now our models will be able to be constructed in this really exciting and staggeringly, I think, well staggeringly powerful way. So that’s why we’re really excited about what this does for us.
And it’s not just going to be one turn of the crank. This is going to really influence I think the business that we’re in quite a bit for years.
