Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to Pegasystems' First Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Peter Welburn, Vice President of Corporate Development and Investor Relations. Peter, you may begin.

Thank you, Krista. Good morning, everyone, and welcome to Pegasystems Q1 2025 earnings call. Before we begin, I would like to read our Safe Harbor statement. Certain statements contained in this presentation may be construed as forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The words expects, anticipates, intends, plans, believes, will, could, should, estimates, may, forecasts and guidance or variations of such words and other similar expressions identify forward-looking statements, which speak only as of the date the statement was made and are based on current expectations and assumptions. Because such statements deal with future events, they are subject to various risks and uncertainties, actual results for fiscal year 2025 and beyond could differ materially from the company's current expectations. Factors that could cause the company's results to differ materially from those expressed in forward-looking statements are contained in the company's press release announcing its Q1 2025 results and in the company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ending December 31, 2024, and in other recent filings with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance on such forward-looking statements, and there are no assurances that the matters contained in such statements will be achieved. Although subsequent events may cause our view to change, except as required by law, we do not undertake and specifically disclaim any obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future results, or otherwise. Our non-GAAP financial measures discussed in this call should only be considered in conjunction with our consolidated financial statements prepared in accordance with GAAP. They are not a substitute for financial measures prepared under U.S. GAAP. Constant-currency measures are calculated by applying the March 31, 2024 foreign exchange rates to all periods shown. Reconciliations of GAAP and non-GAAP measures can be found in the company's press release announcing its Q1 2025 results. And with that, I turn the call over to Alan Trefler, Founder and CEO, Pegasystems.

Thank you, Peter, and thank you to everyone on today's call. It's great to be off to such a strong start in 2025. And to see how the changes we made continue to drive profitable growth around the world and across industries. Ken will walk you through the financial highlights in a few minutes, but let me talk a little bit about having been on the road in Q1 and having met with clients and partners in Europe, Asia and the U.S. Now more than ever, we're seeing that organizations want to accelerate digital and legacy transformation to be more efficient and effective in serving their staff and customers. And that they also, I think, are really looking for help cutting to the hype that exists and keeps getting deeper, frankly, about how to go about implementing the newest AI technologies where it's an additional risk. We're finding that they're really interested in solutions that give them practical approaches and proven capabilities with predictability and governance, but they can help them achieve the critical objectives that they have. And I believe Pega is perfectly positioned to be the strategic software partner for clients who are serious about driving the transformation they need to compete better. Our team has never been more confident, more capable, or more prepared to meet the needs and seize this opportunity to help our clients achieve their digital and legacy transformation goals. Now over the past year, Pega GenAI Blueprint has been front and center in pretty much every client conversation we have, providing a differentiating hands-on experience that quickly and dramatically demonstrates the power of Pega. Blueprint is, in fact, an agent that uses the power of AI to take Pega's proven best practices and our clients' and partners' knowledge to make it easy for…

Thanks, Alan. We're off to an amazing start in 2025. The first quarter was outstanding on nearly every measure with our most important metric, annual contract value adding $74 million. Strong leadership and excellent execution by our sales teams worldwide driven by enthusiasm for Pega GenAI Blueprint sparked an acceleration in ACV growth to over 13% year-over-year. Pega GenAI Blueprint is changing the way Pega reaches with our clients, partners, and prospects around the world. It's also giving our sales teams a new level of confidence by enabling them to visually showcase the power and capabilities of Pega's unique platform within minutes rather than weeks or months because Blueprint makes it so fast and easy to demonstrate Pega. That's a massive difference. At our investor session, in June 2024, we set a strategic growth target of 20% or higher for Pega Cloud ACV. Accomplishing this goal is critical because our transformation strategy calls for Pega Cloud ACV to expand in the coming years. As Pega Cloud becomes a larger and larger portion of total ACV, there's also an opportunity for us to blend up our ACV growth rate, especially given our high client retention rates. As a result, we've been very focused on strategic initiatives to drive workloads on to Pega Cloud. Our Q1 Pega Cloud ACV growth rate of 23% to $700 million of ACV validates this focus and provides evidence that our sales teams are effectively cross-selling and upselling into our existing clients, capturing new logos and accelerating legacy workloads to Pega Cloud. It's amazing to think that Pega Cloud ACV was only $50 million when we started this subscription transition journey in late 2017 and now Pega Cloud represents approximately half of our total ACV. So we're on the right trajectory to becoming an even more durable…

[Operator Instructions] And your first question comes from Raimo Lenschow with Barclays. Please go ahead.

Hi, congrats from me as well. That's an amazing first quarter, especially in this environment. The one quick question, if you look to the - there was a big outperformance on term licenses. Can you speak a little bit about the factors there? And the one question I got from investors was like very, very strong ECV bookings on Pega Cloud as well. Pega Cloud revenue came in slightly lower. Can you talk about the difference there? I would expect this currency, but like maybe, Ken, you can elaborate on that a little bit. Thank you.

Yes, absolutely. So you're absolutely right. I mean, term rev, you know us well that we try to really explain that revenue does move around because of the term license revenue. Some quarters you have term license revenue like we have in Q1, other quarters you don't have as much term license revenue. So it is the unfortunate accounting for ASC 606. So we just like to clarify with - and you - I think you're leaning - your question leans into this point, which is you shouldn't expect the term revenue as being something that is kind of linear and consistent, lots of seasonality there. So you got absolutely good call-out on that. The second point that you're on, which is ACV and backlog. ACV and backlog and revenue will be aligned with - for something like Pega Cloud. However, it doesn't happen in a sequential nature like immediately the next quarter. We've kind of highlighted that it typically takes a few quarters for the backlog in ACV to convert into revenue. So some of it is that just - that normal lag in the way that the revenue flows through our model, but we also did have a currency impact that rolled over from last year as well into Pega Cloud. And quite frankly, we're not going to guess what that will be in the future because naturally currency rates move around. But I think there is - it is a very important call-out to say that ACV does not immediately flow into Pega Cloud revenue in the subsequent quarter, it takes a few quarters. And so that's what's happening in our model.

That's been very clear. Thank you. Congrats.

Sure.

Your next question comes from the line of Pinjalim Bora with JPMorgan. Please go ahead.

Great. Thank you for taking the questions and congrats on the quarter. Alan or Ken, I think everybody is trying to figure out kind of the macro-environment post-March. Maybe talk about what are you hearing from customers in April, in Q1 so far? How are they kind of bracing some of the macro uncertainties? Have you seen any changes in customer buying behavior in April? Or are you seeing any changes in the sales cycle? Any color would be helpful.

Well, I don't think with April, in particular, I mean, the last couple of months, there's been a higher level of uncertainty and anxiety that comes along with that. And that's I think especially true in some of the European countries, where some of what's going on, I think has been taken almost a bit of it personally as it were. But the level of engagement with customers across the board continues to be extremely high. And we as a company tend to do pretty well when things are done.

Yes, I see. Okay. And then, Ken, obviously, the ACV results are pretty solid. You probably added one of the highest sequential ACV ever in the company's history for Q1. But that follows Q4 when the ACV added was - was a little bit of a low bar for Q4. So wondering how much of the ACV outperformance is kind of based on timing of deals from Q4 to Q1? Or did you see any kind of a pull-in from Q2 or rest of the year?

Yes. I think that's - first-off, I think that's a very fair question to say, did deals flow from Q4 into Q1, or conversely, did you pull deals in from the future? If you look at the deal structure in Q1, I can credibly say that there was not a rollover effect from Q4, and there was not what we would consider to be a pull-in effect from future quarters. I think we were set up at the end of the year with our pipe to be able to really have a good Q1. But to be honest with you, we did better in Q1 than I had initially thought we would do. So Q1 was just a very good execution quarter.

Got it. Thank you so much.

Sure.

Your next question comes from the line of Steve Enders with Citi. Please go ahead.

Okay, great. Thanks for taking the questions this morning here. I guess maybe just a follow-up on the ACV dynamics in the quarter. Just was there - I guess, what was the maybe quarter-over-quarter FX impact on ACV, or is there a way to think about what the constant currency like net new ACV growth was in for 1Q?

It was in the low-60s, Steve. Like 74 was the as-reported. But if you adjust for currency, I think there was about a $10 million. We do kind of - we do show that in the earnings release, but I think it was about $13 million of currency. So we would have done constant currency, the net add would have been in the kind of low-60s.

Okay. Perfect. All right. That's - yes, that's very helpful there. And then just in terms of - it seems like macro seems like it's okay, but I guess when you're thinking about the future pipeline dynamics and, maybe kind of building off of the Pinjalim's question as well, just with the uncertainty going on, have you seen any kind of change in how customers are talking about their kind of future deal flow with you, or has there been any pauses? And I know there is some federal exposure there. So I guess what impact has maybe the dose conversations had on, and specifically within the federal side of the business?

I'll maybe start and then I'll let Alan add some color. We - there's always - I would say when you have times of uncertainty, it's not - I don't think I'm saying anything that's rocket science that clients have to rethink their priorities and their initiatives, and that happens in the commercial sector as well as public sectors. What we have found is that legacy transformation and digital transformation is at the top of everyone's list. And GenAI fits squarely into that camp. So we have seen continued momentum around the way that we solve and help our clients solve problems. Naturally, when spending environments change, everybody will be impacted to some extent. But we have not seen the level of anxiety around the solutions that we are providing for our clients. We actually think in many ways that, as an example, the DOGE situation. One of the primary initiatives around that - around DOGE is to streamline and modernize lots of the technology that the federal government has that is very old. And so that fits squarely into what we can do. So I do think this is a great opportunity time for us. And you will see the natural anxiety, but I don't think that it's - I don't think it's - I don't think what we're doing with our clients are things that people want to wait on, I think they're already behind.

Yes, I would - I would say relative to some of the DOGE initiatives, Pega years ago began moving our customers off of user-based licenses which I think has been one of the targets that they have been going after to basically work-based licenses, which fits really well with the idea of automation and getting work done. And we did that because we realized years ago that the number of users were going to go down if systems like ours did what they were supposed to do. So we really didn't want to be linked to that. So that's been something we've done very much across the board here. And I think it really - yes, it's well. There is a lot of uncertainty, people don't know, a lot of changes in terms of the leadership. I'm hoping it will settle down over the next couple of months or quarters because that would definitely make it easier to work with. But as Ken said, I think there's as much opportunity as there is risk here. And so we just need to really, really work it effectively. I'm going to point to workflows as stuff that can really show customers' improvements in their business, is a wonderfully reliable thing to be able to show a client. And the fact that we can use the AI the way we can to create and scale and then use the AI to find the best one and operate it is almost like the perfect mixture of what you do as a language model and what you want to do with a workflow that's really well nailed down and auditable. And so we think we've got a message here that people are really understanding, and we'll continue to see. So we think that - we feel pretty good about it.

Okay, awesome. That's great to hear, and thanks for taking the questions.

Thanks, Steve.

Your next question comes from the line of Patrick Walravens with Citizens JMP. Please go ahead.

Great. Can you guys hear me?

Yes, we can hear you, Pat.

All right. Perfect. Congratulations. First of all, it's great to see. Alan, I would love you to go a little deeper on the topic that you mentioned in your prepared remarks where you were talking about how noisy it is out there with so many different vendors claiming to have agentic types of solutions. So, can you talk a little bit more about what you're seeing there? How hard is it to cut through that noise? And then maybe specifically in terms of solutions you see from Salesforce and Microsoft, what do you think?

Look, I think customers have been subject to lots of AI hype for a couple of years now. And so the level of really skepticism, I think is pretty high in the customer base that we get - we deal with. I mean, it's a pretty sophisticated customer base. I believe we can explain to them pretty clearly why a mix of language models and workflows is the ideal combination. And the reality is when we build Blueprint, people talk about Blueprint like it's a SKU, it's really not a SKU. It's really a whole new way of doing what we've been doing all along and it really builds on all of the decades actually of knowledge and understanding and the very, very powerful systems we have. And that's why I think we've been able to cut a lot in a relatively short period of time. And I really love the runway of where this is going to go in this "agentic world." But look, the buzzword, the hype is and the disappointment I think is going to be huge out in the market. Just huge. Aren't these people doing prompt engineering on "thousands of prompts," How the hell are you going to test that when the language model changes? These language models are changing couple of times a year. You've got a business running off of prompts. The language model changes, you got to get a new version. What's going to do? I know exactly what we do. We're running an execution time to work for us, but I don't know if these other guys are.

All right. That's great. And then Peter, can I just ask you a follow-up, which is investors are so worried about the impact on closing rates and you guys felt good and SAP sounded good last night. You have any thoughts you can share with us in terms of where the disconnect is?

Are you - you're just saying why are software companies having variable results?

Yes, no, you don't sound bad at all, right? And SAP sounded pretty good. And so yes, just you can see from all the stocks how worried we all are. So it's just interesting that maybe it's not quite as bad out there. I don't know, any thoughts on that, I would love this...

No, that's a - so that - so I'll give you - I can only - I can tell you two things. One, what we're seeing and I can also tell you an observation that I have. So what we're seeing is that clients are still engaging and very much trying to modernize, digitize cloud, leverage GenAI, figure out how to - ways to drive efficiency and better client experience. That has not changed. Quite frankly, I haven't seen that change at all in the last three months. So from that standpoint, there's a lot of opportunity. What I would say on the point that you're making about varied results that you're hearing from different vendors, my gut is that this is - some people - some companies' businesses are just not doing as well from time to time and sometimes people use the macro as the reason why that's happening. And I think there's a little bit of that going on. I think that you may have seen the same results in a neutral macro-environment or a good macro-environment, or a bad one. But I think sometimes companies point to that as the reason why they don't execute. And so that - so I think there's a little bit of that going on, Pat. I would definitely say to what Alan said is that, of course, the environment is less certain now. I mean, you have to watch the news every morning to figure out what's going to happen when the futures move 500 up or down day-to-day, that's not great. Volatile environments aren't great. That said, we've seen our clients continuing to lean in on the problems that we saw with them.

Okay, great. Thank you, both.

Yes.

[Operator Instructions] Your next question comes from Devin Au with KeyBanc. Please go ahead.

All right. Good morning. Thanks for taking my question. First one I have is I also want to dig a little bit deeper into the strong ACV results in the quarter, but maybe I want to ask it through a lens of Blueprint. I know that last quarter, you guys mentioned hundreds of millions of pipeline was driven by Blueprint. So I'm kind of curious if you can share any more color on that. It would be great to hear if you have any updates to share regarding what Blueprint has influenced deals-wise in the quarter.

Yes, I would tell you that every single piece of business we're right is influenced by Blueprint. Every single one. It's become ubiquitous. I think it's wonderful because it really broke down some of the bout piece between business and technical people, really good people on the same page. And if you haven't tried it and anybody who's on the call, I'd recommend you give it a shot. I think it's a really very pragmatic but innovative use of AI is what I would say. So yes, I think Blueprint has profoundly changed our business. And with the new capabilities we're adding to it, we're expecting that that's going to continue and extend.

Got it. Okay. That's helpful. And then just one quick one on backlog. I think you just posted backlog growth of 21%, quite a meaningful step-up from the 14% in 4Q. Peter or Ken, curious if you have any additional commentary on what drove that strong acceleration, have you seen contract durations change one way or the other? Just any color there would be helpful. Thank you.

Yes. So I would advise to pay more attention to the current RPO than the total RPO. The current RPO is very much a signal or an alignment with the ACV growth. And I think that's a really - in terms of thinking about the growth of the business, the total RPO does move a little depending on a multi-year cloud - Pega cloud renewal cycles, which can - and you can kind of see that kind of in the lattering. We do - we have a pretty robust disclosure and you can kind of see that in some of the lattering. So I would say if you look at backlog, backlog is a healthy indicator of the clients making long-term commitments to us. We love that. Current RPO is very aligned with the kind of the ACV growth in the business.

Got it. Thank you for taking my questions and congrats on the strong start to the year.

Thank you.

Your next question comes from the line of Mark Schappel with Loop Capital. Please go ahead.

Hi, thank you for taking my question, and nice job on the quarter. Ken, with respect to the upside in the quarter, how much of that would you attribute to the sales changes that have been put in place over the past year or two versus, say, new product introductions like Blueprint?

I think it's tough to like separate that but what I would say is Mark that our sales model changes that we made have yielded really good behaviors like the behaviors of how our sales teams are managing, how we're managing pipe, how we're engaging. I'm really very, very pleased with the activity and the progress. Naturally, we can get better, we will get better and we will push. But I do think there's been a noticeable change in that in our process. And then you shift from that and say how much does Blueprint play into that? Separate from that, I think Blueprint is completely changed the ease at which a salesperson or in the engagement with our clients, we explain how Pega can help - and will help clients visualize how Pega can help solve their digital and legacy transformation challenges. I mean, it's just without - when you try to walk through like, let me explain what it is, let's do an operational walk-through. Can we actually get a few weeks to do discovery with you? We'll go build a demo, we'll come back and show you that demo. I mean that's a - that's the way our process was, and that's very time and labor-intensive on us and the client. And I think that that's where Blueprint has really just changed the game for us. Because we have scores of examples where our salespeople say, I went in with a Blueprint, I showed the client, immediately jumped to the second level, the third level, the fourth level discussion in a way that just could never have happened without it. And that to me, those are separate things, but I think both equally impactful to Q1.

I would say one additional thing, which is I'm a product guy, so I probably have a strong bias towards saying that the product is what matters. But in reality, these are products that have to be sold. And what I will tell you that I'm really pleased about that we saw in Q1 is that we didn't have - the business wasn't driven by Wales. We used to talk about the Wales and the corporate system, it would really be tied to sometimes just a deal or three in terms of making whether it was a good quarter or a mediocre quarter. And great things show up the next quarter sometimes, right? So - but what's happened, I think, is the sales force has gotten tremendously more disciplined about really working the business. And I think this quarter that just showed up is a very, very broad strong performance, which - and by the way, I love it. It makes the last weeks of the quarter a lot more relaxing.

Great. That's helpful. One other question, Ken, with respect to the Rule of 40 targets, what are your thoughts with respect to the mix between ACV growth and free cash flow margins going forward here, given the others results in Q1?

I - we're not adjusting our guidance for the year. Our model has really been that we believe we can accelerate growth and still get operating leverage through the system. So I think there's an opportunity for us to both accelerate growth and expand free cash flow margins. Certainly, if our growth does not accelerate, free cash flow margins will expand. So I mean, I think we are very optimistic on that. I think that we - we have a - the - we have the really difficult strategy decision on how much are you willing to dial-up to try to accelerate growth, but we're very committed to not allowing that to impact our free cash flow trend. So that's what we're paid to do. So we got to - and we got to really manage that. But we're very - we believe we can do both, Mark. We believe we can expand growth in the future - expand our growth rates in the future and expand our free cash flow margins. Rule of 40 is kind of just a number and, quite frankly, we're not looking back.

Great. Thank you.

Sure.

[Operator Instructions] Your next question comes from Blair Abernethy with Rosenblatt Securities. Please go ahead.

Thanks very much. Great quarter, guys. Just a question on the Q1 term license. Was there a change or an impact from a contract term length like duration of what you signed in the quarter?

No, Blair, there wasn't. It's just the timing of our - it's just the timing of our term license renewals. Q1 just happened to be a quarter with more revenue.

Okay, great. And then in terms of your go-to-market at this point for '25, are you looking at sales and marketing capacity at all and particularly around new customer opportunities?

We are. We have built into our plan. We have room for capacity increases in our sales model and we will selectively invest in those areas. I do think the new logo part of that is an interesting one because what we found with Blueprint now is because the engagement is so fast, the visualization is so fast, solutioning and the ideation is so smooth with Blueprint. It does give us increased interest in how we could cover more logos and how could we do that and still be very efficient on the go-to-market cost. So we are - that is the one thing that is different in our mind is just figuring out like how do we help more clients change the way they build software.

Great. Thanks, guys.

Thanks, Blair.

And that does conclude our question-and-answer session. And I will now turn the conference over to Alan Trefler, Founder and CEO for closing comments.

Well, thank you, everyone. I want you to know we're working hard, hoping to see all of you at PegaWorld on June 2, what - we're going to have our Investor Day, but we also have a terrific, terrific slate of announcements and demos that we're going to be able to show people that I think are going to be really very exciting. And it's been a terrific start to the year and we're pretty jazzed. And thank you, all. Look forward to talking to you again soon.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.