Alan Trefler: And it’s good to have that all behind us.
Kenneth Stillwell: Yes.
Operator: Our next question comes from Joe Meares with Truist Securities.
Joe Meares: I had another question about the headcount reductions. Are you guys planning to rely more on partners now in light of reducing headcount in sales and marketing? And then just as far as — it was helpful to hear that it’s not going to add to free cash flow in 2023. And you’re not asking you to guide to 2024, but just curious what the potential dollar impact from sales and marketing could be there? And the fact that you’re going to be getting over $200 million in free cash flow potentially this year, does that bring that 3 to 5-year $500 million free cash flow target closer to the 3-year end of that range?
Kenneth Stillwell: I’ll take the last part of your question. But — so the — we are very — we feel great about the progress that the organization has made in the results. Naturally, some of the decisions we made are hard, and we — but we had to make them. And — when you think about an annual run rate impact of a change like that, a rule of thumb that I always use is what the restructuring charges times 4. That’s just an easy rule of thumb. I would say most companies kind of have that type of situation. So if you look at our charge times 4, that’s typically the run rate savings. You’re probably talking $60 million to $70 million of kind of annual kind of run rate impact from the change that we made last quarter. And now when you talk about like us getting to $500 million, listen, we’re thinking we’re going to be above 2, $500 million still is a ways away.
That said, I do think it shows us a path to get to that number and it’s certainly within the range of what we talked about. If we can get there a year earlier, while that would be great, but right now, we’re quite frankly, focused on Q4 of ’23, as you can imagine. So I don’t want to get too far ahead of ourselves. Sorry, I remind me the first part of the question again because I think that was Alan question.
Joe Meares: Yes. No, it was more just if you’re planning to rely more so on partners given the you’re reducing headcount in sales and marketing.
Alan Trefler: I don’t think we’re depending anymore on partners as a result of reducing headcount, but we are emphasizing the importance of partner engagement with our account teams. So partners are really critical. But it’s not like we’re going to have to replace the changes we’ve made. A lot of the changes we made, frankly, were a simplification of some of the management structures and reducing the number of power organizations that candidly, one of our clients would have to deal with as well as internally that we’re creating silos. And I’m feeling really good about what we’re able to do.
Joe Meares: Great. And then just as a follow-up around GenAI. Some of the customers we’ve spoken to over the last 3 or 4 months have noted that they don’t even really know how GenAI can be applied to their businesses yet. So they don’t feel that they’re really in a position to make a purchase. And so I’m just curious if you’re seeing somewhat of like a pause here in terms of actually signing contracts? And if that means that this could be a little bit more accretive to 2024 than maybe 2023? And do you think that you’ll have any case studies by, say, the next Investor Day next year around this customer saw x savings from our GenAI solution. Just curious if you think things will be that far down the road by…
Alan Trefler: I’m quite confident we will have case studies for next PegaWorld. I think we could even start drafting them in Q1. It’s not like they’ll be waiting for Q2. The — one of the things that I said was that I think a lot of clients are experimenting because they’re not entirely sure where, how they should use it. And if there are risks, if there aren’t risks. But when you take a look at, for example, if you do the GenAI demo I talked about, you’ll see the clients see them and they say, “Oh my God, I’ve got a whole new way to think about my reengineering and transformation process. I can actually use a lot of collective wisdom to bring the best practices that at least stimulate my thinking. And I think it’s an example of very practical and everyone that sees that as well. So we’ll see what you say.
Operator: Our next question comes from Fred Havemeyer with Macquarie.
Fred Havemeyer: I wanted to ask on — sorry if I’m beating a dead horse here, but a generative AI-related topic. Primarily I’m curious here, are you seeing any sort of change in priorities among your partners? Where they’re investing or allocating into their practices as we’ve seen coding copilot become more robust and become more productionized.
Alan Trefler: So first of all, I would like to counsel you to not casually use horse metaphors. We never talk about dead horses in Pega. We’re leading them to water or any of that or any of those sorts of things. But having said that — keep it clean, that’s all I’d say right? But — and the horse is flying strong, so don’t worry about that. The partners are trying to figure it out. There’s a sense of an enormous opportunity. But boy, is this going to massively change how a lot of partners end up delivering their projects. It’s going to be very, very large, and so. I think that by looking up with the partners on an innovation agenda, which is what we’re working with, and being able to use and show them some of the tooling we have like the demo, we’re able to get them excited about how they could reorient some of their efforts.
Because frankly, we’re in a period of a lot of discovery going on. There’s no question in my mind that this is extremely real but there’s also no question that the [indiscernible] some of the short-term tangible benefits. And everybody kind of knows that industry going it out. term tangible benefits. And everybody kind of noticed that and just figuring it out. But boy, this is going to so radically change our technology as we go through ’24. Yes, it’s actually enormously exciting.
Operator: Our next question comes from Blair Abernethy with Rosenblatt Securities.
Blair Abernethy: Ken, could you just comment on the renewal environment, given the consistent weakness in the macro or difficulty in the macro, just how did renewals trend in Q3? And what should we be expecting in Q4?
Kenneth Stillwell: We haven’t seen any noticeable change in the likelihood of a client continuing to stay and invest and even grow in the applications that they have with Pega. So I mean, naturally, we do have clients that decide to go in a different direction. We do have clients that have transformational changes in their business. And unfortunately, Pega may not be part of that, that does happen. We’re just — it happens at every software company. But it’s not something that there’s been a noticeable change in 2023.
Alan Trefler: Yes. What I made comments about the macro environment, none of them are related to the renewal environment. Our customers really were fortunate in the set of the client base that we’ve really been focusing on are not the SMB type businesses that are more likely to try to squeeze out their vendors. Our customers are trying to squeeze that benefit.
