Jake Roberge: Ken, if you’d just take a step back and look at the model and how that’s shaping up, do you think this is the last year that we should see the gap between revenue and ACV growth, so that heading into next year, those metrics could actually start to converge a bit more?
Ken Stillwell: Certainly, the variances will continue to shrink. We’re going to have over 50% of our ACV Pega Cloud, but we still do have a significant percent that’s not Pega Cloud. So to the extent that that percentage continues to go down, and really it’s not the maintenance line, it’s, of course, the term license line, as soon as that continues to go down as a percentage of our business, you’ll have less risk of variability. And so, I do think that you are correct, in that when you go into 2025, 2026, 2027, the difference between, say, when you look at our operating margin and you look at our free cash flow, those two, you would think that they would be very close together. That’s the point you’re on. But they do vary based on term revenue. That will continue to become more muted over time.
Alan Trefler: If we didn’t have the 606 insanity where you have to present value some revenue even though it comes in on an annual basis, I think we’d all be beautifully more consistent. The reality is, because of that, especially, I think we get a lumpiness from time to time. But if you look over a year, that should also be less and less.
Ken Stillwell: And let me just touch on one thing that could be a question behind your question, Jake, or what other investors might be thinking about, if you look at our business for 2024 and you say, which is the more representative normalization of the business, free cash flow or your operating profit? In 2024, it is free cash flow. There’s nothing unusual happening with free cash flow. But with revenue, when you have more Pega Cloud opportunities, you do have the revenue being spread out a little more. So that may be a question that other investors have. Let’s be very clear with that. Free cash flow is the normalization of the business. Sometimes revenue and EPS are a little bit off from that, either slightly high or slightly lower.
Jake Roberge: It feels like the macros started to stabilize a little in Q4. And then you’re also seeing some nice demand trends for AI heading into 2024. As you constructed the guide for this year, did you take those trends into account? Or would you say that you’re still factoring in just some potential macro uncertainty that’s out there?
Ken Stillwell: We’re still factoring in some amount of macro question about interest rates, an election, et cetera. Those are all things that will factor into how we think about guidance.
Jake Roberge: Congrats, again, on the great results.
Operator: Your next question comes from the line of Kevin Kumar with Goldman Sachs.
Kevin Kumar: I wanted to ask about investment priorities for the year. I guess guidance, there was a pretty nice uptick in free cash flow. So, Ken, can you talk about where you’re seeing opportunities for leverage? Obviously, cloud gross margins continue to expand? But how are you thinking about maybe the other OpEx categories and maybe just touch on key investment priorities for the year?
Ken Stillwell: In 2024, we’re still going to see operating leverage in pretty much every line, and that’s just like pretty much every line. You’re going to see gross margin expand, you’re going to see sales and marketing become more leveraged, you’re going to see R&D, G&A. So, you’ll see contributions from everything come in. In terms of the investment priorities, our go-to-market transformation, we really love where we are in terms of the focus on our clients. And so, the decision, the strategic decision we need to start making is how do we want to think about introducing new logos or new expansion and at what pace do we want to do that, and we want to make sure that’s really thoughtful, so that we can leverage the model that we have, which is a deep client engagement model.
In terms of R&D, you see a lot of investment in Gen AI. We really feel like, with the combination of Gen AI and the power of our platform, it’s just, it really is just mind blowing in terms of the opportunity we have in front of us. So, those are going to be there, including investment, continued investment in Launchpad as we actually scale Launchpad. So we see we see efficiency, though, across all of the lines because our costs will grow less than our ACV does.
Operator: Your next question comes from the line of Pinjalim Bora with J.P. Morgan.
Pinjalim Bora: Ken, one quick one for you. You talked about shorter contract duration. Can you help me understand what has changed in the business because your consumption based nature of the business has always been there. So what has changed for customers to kind of drive towards shorter contracts?
Ken Stillwell: Pinjalim, what we’re really talking about is as clients have opportunities to leverage scaling up the Pega usage within their contract, the commitment or the reset periods tend to be shorter than a three or a five year type fixed commitment. And so, there’s a connection there between more and more larger clients actually enjoying that consumptive growth nature and actually the durations coming down a little bit. So those two things are connected.
Operator: Your next question comes from the line of Austin Cole with Citizens JMP.
Austin Cole: It sounds like there’s – obviously, you guys have a lot going on with generative AI. I’m wondering, and with Blueprint specifically, how is this helping you win more customers and stay competitive?
Alan Trefler: I think, actually, if you go look at it, it will speak for itself. The reaction I had from a couple of C suite executives who I was just on a call and we were demoing and showing them is they were kind of stunned. Because what it lets you do is it lets you from a couple paragraphs of a description of something you want to do with your business really stimulate new thinking. And not just do that. But, actually, go from this sort of design thinking approach of what you’re trying to achieve – because let’s face it, we live in businesses where they’re all workflows, they’re all doing work, they’re all posting transactions, they’re all engaging with clients. Being able to bring generative AI to both help you understand what workflows do you need for your business, and then what should each of those workflows look like, who are the participants in those workflows, what channels do they come in on, and what data will those workflows either consume from your back end systems or what you need to acquire or you want to post back to your back end systems when that workflow is done, all of those concepts are now in a position where literally, in a couple of minutes, you get something that is awesome.
It’s just a terrific point that you can edit and you can evolve and you can make yours. But you’re not starting from a whiteboard, you’re starting from something that historically would have taken us two, three, four weeks to get to. And that now is literally two, three, four minutes, completely changes the game. Now, this is brand new. It’s evolving. Our real target for a lot of this stuff fully hitting its stride – because we’ve sort of set our team up internally at PegaWorld being the place where this all comes to fruition to wow all of you who are there, but we’re showing it now. And it’s going to be available now. And it’s going to be available in a way that existing Pega ’23 and ’24 customers will be able to use. And the reaction is just – it’s actually very, very gratifying.
So, if you go to the website, check it out. There’s something you could see.
Operator: Your next question comes from the line of Dan Ives with Wedbush.
Dan Ives: Great quarter, guys. So, to that last question and your point, does it really feel that it’s starting to become just a more strategic conversation for Pega with existing as well as new logos? Is that your perspective?
Alan Trefler: Yeah, I would say that’s very much my perspective. In fact, we’ve had this conversation with many, including longstanding customers in which we say, look, you’ve historically thought of us in a certain way, as a way that we can do certain type of exceptions and disputes for you or the way that we can help you sell certain things in a certain area. We’re going to talk now about what this looks like at a much more strategic level. And we have several clients where we’ve completely changed that conversation. We were talking to the senior people before, but they were thinking of us as being more of an area solution. Now we’re really being thought of at a number of key clients as a way that they want to do business.
And I think that’s very, very gratifying. It was part of the goal of moving to the org focused deep engagement strategy. And I think it’s also something we’re going to be able to scale up to additional organizations, as we get our legs here under us with this new Gen AI capability. I’ll say one more thing about Gen AI. Historically, everyone thought Pega was very powerful. But in all candor, the wrap on us was that it could be a little harder to use and maybe the resources weren’t as prevalent. We’ve gone directly at those things with Gen AI. And we have all of the power, we have more of the power than we ever had. But, boy, I think that those traditional longstanding challenges are going to look completely different this year.
Operator: The next question comes from the line of Fred Havemeyer with Macquarie.
Fred Havemeyer: Congratulations on the results here. I wanted to ask regarding another Gen AI question. Sorry to be a little bit unoriginal here, but I’ve been seeing a lot of interesting work coming out, for example, like Bret Taylor’s new startup, Sierra, coming out from customer service agents and client facing agents that are taking on more like generative AI powered agentic characteristics. And I’m curious, I know that Pega has a deep expertise in building out client-facing bots and service portals and so forth. Just generally, how do you think about agents, like autonomous agents powered by Gen AI, as part of the overall product roadmap of Pega?
Alan Trefler: Sure, two thoughts there. One, we introduced recently, this concept of what we call the autonomous enterprise, which is – how do you not just think of agents as little one off things, but how do you think about structuring your entire enterprise, so it’s not built for “users,” but it’s built around the work itself you want to achieve, so that you build it for autonomy, but when it’s appropriate, you let people put their hands on the wheel and take over. So we’ve actually designed into this whole new blueprint way of thinking, this whole idea of an autonomous enterprise, what we sometimes call a center out enterprise, which doesn’t focus on either the front end UI and the back end systems, but really lets you focus on what is the very work that defines your institution and how do you build that in, so it can run with automation and autonomy.
