Richard Poland: And then just as a follow-up. With some of the ISV and global system integrator partnerships that you’ve had, it seems to be picking up a bit in recent quarters. I know Pega LaunchPad has been a good driver there. But just kind of as we think about the relationships there and then kind of what your strategy is on a go-forward basis with some of the partner ecosystem. Is there any update there?
Alan Trefler: Yes. So what’s interesting is that I think that the change of relationship with our partners regarding the new strategy has actually played to the way a lot of them are working, which is a lot of them are concentrating on what they call their — sometimes they call them new diamond customers. Their customers, with whom they have the most significant relationships. And what we have stressed it is the responsibility of our on-the-ground account teams to meet and to now and to be really face-to-face with the key partner at a major organization think top telco or top bank, they need to build those direct relationships as opposed to thinking of that as something that comes through some sort of third party there. That, I think, is very, very positive, and I’m seeing real enthusiasm from partners as well as from our staff from having taken that responsibility on directly.
I hope that makes sense to you in terms of saying it’s the person on the ground at Citibank that’s going to be responsible for making sure that the partners who work there have direct relationships and can build a sense of trust. Relative to LaunchPad. I just want to be clear that we’re not expecting LaunchPad to be a significant revenue producer in 2023, but we are really excited about what the potential is there and the uptake. And we are getting interest from A lot of companies, a lot more companies than frankly, we’re in a position to be able to service, but we didn’t tee up any LaunchPad revenue in any material way for any of the numbers that we’ve got here. That, I think, is really something we hope to be able to talk a lot about it in ’24.
Operator: And we’ll move on to our next question from Pinjalim Bora with JP Morgan.
Pinjalim Bora: On quarter. Ken, just one question on the ACV growth guidance. Can you help us understand maybe your approach to building that guidance? I’m trying to understand what kind of assumptions you’re baking in? Are you kind of taking the pipeline entering and using kind of the close rates you saw in Q3, Q4, flowing that through the year? Are you taking a step down in those close rates? Maybe you’re thinking some of the expansion rates ticking down? Just help us understand some of those levers.
Kenneth Stillwell: Sure. So there’s a few factors that we typically look at. Naturally, when you look at pipe, we also look at pipe in the organizations that we’re focused on in terms of coverage is an existing client. We look at the pipe connected to events like renewals, for example, because natural
Kenneth Stillwell: And ladies and gentlemen, please stand by while we work to we dropped again. So let’s try it out…
Alan Trefler: So I want to be clear Ken is not dropping the mic. We’re happy to sit here and answer whatever other questions you’ve got.
Kenneth Stillwell: I’m not sure why our front line dropped, but there’s no power issue anything. So we look at pipe, we look at renewal events because renewal that tend to tie to higher-quality pipe we look at where that pipe is coming from. And quite frankly, some of the — we don’t have — we have enough clients that we can actually look at the specific pipe and probability adjust the pipe as opposed to using broader level of statistical analysis on close rates, et cetera, across a bigger population. So there’s a bunch of factors that play in. And then there’s another factor, which is basically a little bit more of the nuance feeling of who are how many AEs, what are the tenured AEs, where the orders were covering, what’s the momentum with those ones.
So there’s a quantitative measure that we use, and then there’s also some factors that we use to kind of triangulate on what we think that number would be. But it is not — we’re not using historical close rates or Q4 close rates. It’s very specific to the orange and the pipe that we see.
Pinjalim Bora: And can you talk maybe help us about the changes that you made with the risk in the sales are going into this year? And apart from that, obviously, in Q4, I see, as you were pointing out, the S&M was down. What — how — where are you seeing that efficiency beyond the risk?
Kenneth Stillwell: Well, so there was some cost calibration that we did in the middle of the year that you may recall in the July time frame. In Q4, you really saw that come into some of our savings. Maybe many people weren’t expecting to see it at the level that it came in, in Q4. And then you have the adjustment that we did to the reduction that we talked about, which had its impact that did not impact Q4. That would have impacted Q1 and beyond in terms of savings because none of those actions happen until Q4 was closed out. To your point on where we’re seeing the efficiency. The biggest efficiency driver — the biggest efficiency driver in sales and marketing that we’re focused on is the ratio of non-primary quota carriers to primary vote carriers on our — on our key organizations on our target organizations, excuse me.
And that ratio had expanded when we did things like what Alan said, like where we actually were going after new logos, we actually had partners trying to drive pipe, et cetera. We really focused on our account executive being the quarter back, so to speak, for the account and the right level of in right level support for that organization and then time the yield that we expect to get from that cost buildup that we make around the organization. So really focused — that is where we’re going to drive efficiency because it’s going to tie our productivity to the investments that we make around regions or verticals.
Alan Trefler: If we’re in a position where we have account execs and account teams who are focused on a very, very specific target organization, that’s a very different and candidly, a tremendously more efficient model when you already know people in that organization to get to know more people and to have the trusted credibility in that organization than the alternative, which we had much more of what I would describe as a lead response approach where we would be looking for people in often new organizations who had the classic qualification activity of bans, they have a budget authority we needed a time line. We’re not in that business. We’re now in the business of building and deepening credible relationships with in Fortune 2000 companies.
Operator: We’ll go to our next question from Steve Koenig with SMBC Nikko.
Steve Koenig: Both kind of financial questions here. First one is a little bit in the weeds, but kind of parse out based on your — the commentary you’ve offered. Is there a mix shift a little bit to cloud this year because you’re forecasting 6% revenue growth with 12% ACV growth?
Kenneth Stillwell: No, that good question, Steve. That really relates to the amount of backlog that we had at the end of ’21 that rolled into 2022 and Q1 of last year that actually kind of makes the optics a little bear because of the timing of revenue.
Steve Koenig: That makes sense, actually. Okay, that’s great. So the other question, maybe a little bit more open-ended. So you haven’t updated your fiscal ’25 model. You talked about the investor session that’s coming up in June. So maybe just a couple of questions around that. Maybe your thought process on waiting to update that model why later. And then in terms of like some of the numbers, I know you’re offering guidance, you’re not offering that long-term guidance right now. But you look at the kind of the base case 19% ACV growth that you had which looks pretty questionable now. But conversely, you should probably be able to do much better on free cash flow. What — can you give us any thoughts directionally on that? And then kind of lastly, tied to all this, why not Rule of 30 this year? Is that potentially feasible? And what would need to happen to make that happen?
Kenneth Stillwell: Yes. So we’re not going to preview Investor Day in terms of our long term. We will have some commentary on that. So look forward to talking about that in June. And I think your comment about Rule of 30, Rule of 40. I think that if we were in a normal kind of growth year in 2023, I think that I think that was kind of the track that we were on. I still think we will directionally I think we’ll be on our way there. The way the math might work was to see how we land on free cash flow. But keep in mind that free cash flow in 2023, remember, we booked a lot in Q4. We built a lot in Q4, and some of that cash leaks into Q1 of 2024. So if you use that measure only, there is a little bit of a back-end loaded billing and collection. And that kind of — that puts that — until we’ve normalized our free cash flow model, that’s one of the reasons why I talked about exits of years.
Steve Koenig: And just maybe the last follow-up on that. Do you — by midyear, do you — in what ways might you have better visibility into the longer-term model or into fiscal ’24, like what — the first — are there things in the first half of the year that you’d be looking for to inform that long-term model?
Kenneth Stillwell: I think one thing that will definitely be more interesting to see after we get a few months into this year is to see how the economy shakes out in the coming months. We’re in February right now, I think we see — we know a little bit more now than we knew in November, and I think we’ll know a little bit more in every month that we get through the year. And that will definitely inform whether 2024 could be a return to some level of normalcy of growth or our normalcy for growth or whether 2024, maybe a continuing challenged year like we think ’23 will start. I think we’re not — I think we’re seeing signs that this may not be maybe 2023, beginning of the year kind of situation, but we’ll have to see how that goes.
Operator: And we’ll go next to Joe Mearus with Truist.
Joe Meares: Nice quarter. Just we hear a lot from companies in the space about this theme of vendor consolidation. We’ve been hearing about it for, I think, a few years now, but it doesn’t ever seem to have any specific examples behind it. So I’m curious if — like the first question — the first part of the question is, have you seen any like actual evidence of that? And if not, do you think it’s still on the come and can provide some upside to the guidance for ’23?
Alan Trefler: I think the clearest manifestation of vendor consolidation is the reluctance to introduce new vendors, which I think you actually if you look, you’ll see it which is not great for folks who aren’t in the places they want to be. And that, I think, candidly, you’ve seen that historically as well. And I think you’ll see that more now.
Kenneth Stillwell: Yes, I think — so my — I’ve heard that — I’ve heard the same thing you’ve heard, Joe, for a number of years, predating my joining Pega, I think the reality is, what I think supply chains are really trying to say is, you add a vendor, you drop a vendor, right? Like you don’t actually go out and just keep like proliferating vendors, software vendors and really end up with like 6 systems that do the same thing. I actually think supply chain and budget owners are thinking about that. But I don’t know that they can actually — you can’t force an ERP vendor to do a CRM or for CRM to ERP. I mean you are limited with that. But I do think there’s a focus on not having this constant creep of the technologies that actually do the same thing as other technologies.
Alan Trefler: Yes. And we are seeing people who are interested in consolidating, for example, different workflow systems to want to Pega’s core strength. And so retiring things that weren’t able to scale what they wanted or that have targeted that it’s technical debt. So that’s a positive for us. I suppose I would put that under the vendor consolidation, but it’s, I think, a little close to what Ken is saying. It’s not like the number of eaters is going to go down by 35%.
