But there’s also a lot of what I would describe as client gambling and experimentation. Customers are trying to figure it out. And so a lot of them are trying, they’re buying, they’re getting developers to build things, lots of little pots stirring, but they’re also looking for the places in which GenAI can be used to really drive that previous category, the category of really differently approaching pragmatic results. And I’ve seen customers get really excited about what we can do. I was visiting with a client who put [indiscernible] to one of its call centers to be able to use what we call voice AI to be able to interpret and fill in screens and do a whole variety of things to massively improve productivity, which costs they’re looking for but also significantly reduce their annual time and improves the customer experience.
So I think it’s going to be interesting for the investment community to try to delineate what action in the market is tied to the AI type and the experimentation, which in some cases, it’s not going to persist and what’s going to be tied to the real core systems evolutions, they’re going to work now and going to work into future years. Does that help?
Rishi Jaluria: Yes, absolutely. Very helpful. And then, Ken, just a follow-up for you on the gross margin side. So you continue to show a pretty impressive cloud gross margin expansion. How should we be thinking about terminal gross margins on the cloud side, especially as you do have a little bit of multi-tenancy around the core, you are embracing Kubernetes. Is this something that over time could become an 80% cloud gross margin business? Or is there anything structure that might be holding you back from that?
Kenneth Stillwell: Yes, great question. So I will say this with a level of confidence, but also we have to get there. When we first started Pega Cloud, we were hoping to get to 70%. And then when we got close to 65%, we said, we should be 75%. And now we’re approaching 75%, we’re saying we should be 80%. And so I do see a path to 80%. I don’t know how hard it will be to get much above 80%. It might be surprisingly easy. It might be terribly difficult. But I would say now that we’re approaching 75%, we definitely see a path to 80%.
Operator: Our next question comes from Raimo Lenschow with Barclays.
Raimo Lenschow: This quarter, we obviously had the term was much better than cloud. And you kind of talked about some of the reasons there. If you think about the next steps for you guys now as we kind of maneuvering through the downturn. Is there any plans to kind of double-click more on the cloud side? Or is that — do you think you will continue to stay on that. The customer has a choice there? And then one, Ken for you. Like if I think about the margin progression, obviously, very good progress this year. But as we get ready for more AI investments, potentially better times ahead. How do you think about that balance of growth versus investments for going forward?
Kenneth Stillwell: So I’ll take the first one, and maybe, Alan, you can give your thoughts on AI, and how AI might help the margin profile of us and our clients. So the first piece, we are fully committed to Pega Cloud as being what we really are excited about our clients leveraging. That said, we understand clients are on a journey to get there, and we want to support them through that journey. And in some cases, that journey may take longer than we may hope that it would because they have unique operational needs. And quite frankly, they may not be ready to move to cloud at the pace that other companies will. So we are — our commitment to Pega Cloud is unchanged, completely committed, completely committed to scale it and modernize and make the experience better for clients, always automate, et cetera, improved margins.
But that said, we are not moving away from our ability to support our clients and client choice. So that’s our stance. Alan, do you want to talk a little bit about AI and how that might fit into the margin profile?
Alan Trefler: Yes. So I think this is going to be really interesting as we go forward. And those of you who were there may recall, that in my closing presentation at PegaWorld, which was in June, I stood up and I said we’re going to be using these new technologies, which — many of which we’ve now released more are coming as soon as Q1. We’re going to use these new technologies to do 4 things. And just to rehighlight the 2 that are relevant to your question. One is to put Pega at your fingertips. So to radically change the training and education and ease-of-use profile of Pega technology by using this to really help people build and guide faster. And the second is what we — I actually said we were going to report in June, which is a little bit of a time, but it’s come out in front of us that I expected that we have double productivity of people building in Pega, which should open up a major stream of new opportunities for our clients to get results faster and better.
The other piece is we also have many — through these sort of accelerators that we build on these GenAI capabilities, important new features that will also make the customers’ operations more productive and improve their cost profile as well to the use of GenAI. So we have a lot that we are working on right now that I think is going to very, very much change the view as we enter ’24 and as we go through ’24.
Operator: Our next question comes from Mark Schappel with Loop Capital Markets.
Mark Schappel: Alan, starting with you, I appreciate your comments on generative AI in your prepared remarks. And look, I realize it’s still early for that solution, but are you seeing the offering attract like a new type of customer to the company?
Alan Trefler: Yes, I am. I’m seeing the — remember, we have a target organization structure. So it’s really a new type of buyer inside the customer who — if you want to really get filled for this, just go to that generative AI page on pega.com that I mentioned, which we sit with business buyers. You think of this as being, in many ways, a technical part of the sale, but we sit with business buyers, and we say, why don’t you put in whatever workflows you worry about or whatever ways of doing business that you are concerned about. The most interesting I had at the Cyprus International Banking Conference a month ago. Obviously, we had a senior executive from a large U.K. bank, asked to see what should the process be for closing the account of a politically exposed person.
If you read the news, you may note that the — believe it was the CEO Koos was fired, because they had done that inappropriately. And what came out was mind-blowing. And it completely changes the whole way you think about how you want to operate and develop processes. So try it, and we’ve got a whole generation — whole new area of buyers where we did use to have something like that, that had shown before. And now we’ve got thousands in their playing with it.
Mark Schappel: That’s helpful. And then, Ken, on the go-to-market front, I believe you noted organizational changes to the sales team that coincided with the workforce reduction. I was wondering if you could just detail a little bit further what those or changes, where I assume you somewhat flatten the sales organization.
Kenneth Stillwell: Well, we’re referring to the changes that we had previously disclosed and we talked about, Mark, which is to put a lot of the selling type resources closer to the client to put a lot of our technical both presales and post-sales resources kind of closer together so that we could actually have like kind of a continuous engagement from presales to post go live. We’ve looked at the kind of the state, the hierarchy of the organization in terms of the layers, the number of management layers. We’ve looked at bringing people kind of that did similar type roles into a unified mission. Those are the types of activities that we have that really were part of what I was referring to.
