Pegasystems at Oppenheimer Conference: Strategic Expansion and Growth

On Wednesday, 13 August 2025, Pegasystems (NASDAQ:PEGA) presented at the Oppenheimer 28th Annual Technology, Internet & Communications Conference, offering insights into its growth strategy and future outlook. The company highlighted its transition to a recurring subscription model and the increasing role of GenAI in driving value. While Pegasystems showcased strong financial performance, it also acknowledged potential challenges related to R&D deductibility changes.

Key Takeaways

• Pegasystems has transitioned to a recurring subscription model, with over 50% of clients on Pega Cloud.
• The company reported a 14% year-over-year increase in Annual Contract Value (ACV), driven mainly by existing clients.
• Pega generated $286 million in free cash flow in the first half of 2025, exceeding expectations.
• GenAI and Pega Blueprint are seen as key accelerators for value creation and market expansion.
• The company aims for mid-30s free cash flow margins while continuing to invest in growth.

Financial Results

• ACV Growth:

- Pegasystems reported a 14% year-over-year ACV growth in constant currency.

- Growth is primarily from existing customers expanding into new applications.

• Pega Cloud ACV:

- Pega Cloud ACV grew by 25% year-over-year, now comprising half of Pega’s total ACV.

• Free Cash Flow:

- Generated $286 million in free cash flow in the first half of 2025.

- Original guidance for 2025 was $440 million in free cash flow.

- Changes in R&D deductibility rules are expected to add $25 million to $30 million annually in 2025 and 2026.

- Pega aims for mid-30s free cash flow margins in the long term.

• Sales and Marketing Efficiency:

- Targeting a cost of sales and marketing to net ACV growth multiplier of 2 to 2.5.

Operational Updates

• Pega Cloud Transition:

- Over 50% of Pega’s clients are now on Pega Cloud.

• Go-to-Market Changes:

- Recent changes involved rightsizing the sales force and improving role clarity.

- These changes are yielding positive results in 2024 and 2025.

• Pega GenAI Blueprint:

- A design agent that accelerates application design and build processes.

- Provided to clients for free, with monetization through usage-based models.

Future Outlook

• ACV Growth:

- Aiming to sustain double-digit ACV growth in the long term.

• Free Cash Flow:

- Targeting mid-30s free cash flow margins in the coming years.

• Target Market Expansion:

- Expanding focus to a broader range of organizations beyond the current 500 to 1,000 clients.

• R&D Impact:

- Legislative changes in R&D expensing expected to enhance cash generation in 2025 and 2026.

• Legacy Transformation Opportunity:

- The legacy transformation market presents significant growth potential.

Q&A Highlights

• ACV Growth Components:

- Driven by volume and value from existing solutions and new applications.

• Pega Cloud Acceleration:

- Growth fueled by exclusive go-to-market strategy and GenAI adoption.

• Free Cash Flow Conversion:

- Margins approaching high twenties, with potential to reach mid-thirties.

• Go-to-Market Strategy:

- Focused on targeting the right organizations and improving sales efficiency.

• GenAI Impact:

- GenAI seen as a disruptor for companies not requiring structured data processes.

For a deeper understanding, readers are encouraged to refer to the full transcript.

Full transcript - Oppenheimer 28th Annual Technology, Internet & Communications Conference:

Brian, Oppenheimer Representative, Oppenheimer: Good morning. I wanna welcome everyone to day three of the Oppenheimer Technology Conference. I’m thrilled to have Pegasystems here to kick it off on day three. And presenting the company, we have the CFO and the COO, Ken Stillwell. He Ken’s a regular here at Oppenheimer.

So we’re we’re thrilled to have you here again.

Ken Stillwell, CFO and COO, Pegasystems: Thanks, Brian. Great to be here. Good to see you.

Brian, Oppenheimer Representative, Oppenheimer: Good to see you again. Ken, we we may have some new listeners in the audience that aren’t familiar with the Pegasysm story. So can you maybe just take us from the really high level 20,000 feet view, give us a brief overview of Pega, the problems you’re solving for your customers and the platform technologies?

Ken Stillwell, CFO and COO, Pegasystems: Sure. So, you know, larger larger companies or I should say, you know, companies that have scale operations, these can be companies that have as low as a few $100,000,000 of revenue, but typically ones that have, you know, are above a billion and in some cases significantly above a billion. They have a significant amount of application use cases that they need to manage. I mean, for example, large financial institutions sometimes have thousands of applications, five, six, 7,000 different workflow type applications. So the infrastructure that they’re that’s required to run their businesses and all the different divisions of their businesses require a significant investment from a technology standpoint.

Those workflow applications either need to be modernized or in many cases need to be replaced as the company scales and tries to leverage new technology. Pega has been a central participant in helping our clients use our best in class workflow and work automation platform to be able to help move that those workloads, move those applications into a more modern kind of future proof scalable and flexible environment. We tend to help clients that have processes that either are internal control regulated or maybe regulated by the industry or the country that they operate in. So these systems are complex with data residency, data protection, the work flow and the outcomes and automation. We’re and so it’s it’s they’re and they’re, you know, pretty much any company that we operate with.

You know, if you’re buying a phone, if you’re buying a car, if you’re opening a bank account, if you’re processing a healthcare claim, you’re going to touch a system like Pega, that helps manage that work. At Pega, we’ve been on a journey over the last number of years moving away from what was a historically perpetual license business with maintenance moving into the cloud, transitioning our business to be a recurring business and getting them onto Pega Cloud. Then we’ve significantly transformed our business where seven or eight years ago we had less than 5% of our clients on Pega Cloud and now we have over 50% of our clients on Pega Cloud and all of our business in a recurring subscription model. We don’t focus on users, we focus on work. So our licensing model is based on the work that we actually do for our clients, whether that be transactions, that be events.

So we’re very tied to automating and scaling our clients work. GenAI has been a tremendous accelerator for us in terms of that value creation because we have things like Pega Blueprint, which we might talk about, which is our design agent, but we also have other AI accelerators to get rid of the human interaction that has been historically needed to work on these systems, to work within these systems when we support all of these different work automation use cases. So we’re really excited with the transformation, very happy with how the business executed through that. And we feel like the future is very bright in terms of our ability to accelerate growth as a rule of 40 plus company.

Brian, Oppenheimer Representative, Oppenheimer: Thank you for the overview there, Ken. I’d like to get into the business highlights, and there’s there’s certainly been a lot of it coming from the company in the first half of this year. You know, your bookings met met measure your you do report ACV annual contract value. You just reported a few weeks ago, and the ACV growth was 14% year over year. That was in constant currency.

So how do you think about the components of ACV growth, thinking about price and usage, your talk about capturing existing workloads and new workloads, etcetera?

Ken Stillwell, CFO and COO, Pegasystems: So although we do get some small price uplift just based on the cost of living changes and the cost of servicing, that normally is pretty small and just helps to offset some of the client and ACV churn that you might see. So those so if you think about gross retention rate being close to 100% inclusive of any price increases, where we get our growth from is not from price increases. It’s really from the volume that clients are doing that, the value that the solutions drive with the clients and our clients expanding into new use cases, new applications. And then smaller over the last few years, what we think is a bigger opportunity in the future, is new organizations that have not engaged with Pega, new logos per se, or even a new division at a client, which kind of feels and looks like a new logo. So where our growth comes from is kind of right now equally from the systems themselves driving more value and new applications, new systems, new logos, so to speak, that we’re working with our clients.

And so that’s what’s been helping our growth rate stay double digits for decades.

Brian, Oppenheimer Representative, Oppenheimer: As we think about the future and the durability of the bookings growth, how do you feel your confidence in Pega’s ability to continue to deliver durable double digit fee growth over the long term. So what what gives you the confidence in the firm’s growth engine?

Ken Stillwell, CFO and COO, Pegasystems: I think that I think one of the factors, Brian, is the total addressable market is just so massive in the space that we’re in. I mean, if you if you if you conservatively say that the total addressable market is a $100,000,000,000 a year and we’re doing less than two, it gives you a just a a perspective of how much opportunity there is. I would argue the addressable market is much higher than a $100,000,000,000 a year, if but you just use that as a round number. So that’s the first thing. It’s just a massive market.

The second is that much of the spend even today that clients are doing around workflow is in old legacy applications not on the cloud that have to be modernized. They have to be fixed. They have to be addressed. And likely they have to be moved to the cloud. They can’t leverage GenAI.

They’re not secure. They’re old technology. In many cases, they’re custom built. They’re the these clients are losing the people in the company to even be able to support these applications because these applications may have been built fifty years ago. So there’s just a tremendous amount of legacy debt that exists with large organizations.

And Pega is, we believe, the leader in helping clients modernize their work automation platform. So just a big space, lots of transition, lots of transformation and Pega historically and consistently being ranked as the best workflow automation platform by the likes of Gartner and Forrester.

Brian, Oppenheimer Representative, Oppenheimer: Ken, you mentioned about Pega Cloud and that’s certainly very exciting the growth that’s going on with that. Again, you reported recently that Pega Cloud’s ACV grew 25% year over year, so much faster than the overall ACV, and now it’s making up half of your bookings or your total ACV. So, you know, why is Pega Cloud ACV growth accelerating? What’s what are the key drivers of the acceleration of the cloud?

Ken Stillwell, CFO and COO, Pegasystems: Naturally, a factor that helps is that Pega Cloud is our exclusive way that we go to market with our clients. Now Pega Cloud is how we sell, it’s how we position every client that we engage with. Pega Cloud is either the place where they are now or the place that we want to get them and they want to get to. Secondly, with every one of our clients trying to evaluate how they leverage GenAI to drive even greater efficiency and scale with their applications, that’s done on the cloud. It’s very hard to actually take a legacy application and try to leverage GenAI in a legacy on premise environment.

So this big push to try to incorporate GenAI into the application landscape, which is very, very significant in terms of our clients getting value by leveraging GenAI with their automation platforms like Pega, they want to be on the cloud. So you’ve got push from us, you’ve got this push from the industry, you’ve got this push from GenAI. And lastly, many of these applications cannot be supported. I mean, these are really they’re big risks for large organizations to continue to operate in the way. They could be regulatory risk.

They could be cybersecurity risk, but they’re also client experience risks. Right? If you think about large government agencies having to have know, trying to deal with a constituent request and sending them to, like, using three to 10 different applications to answer a simple question like, what’s my Social Security payment going to be next year? Right? It’s really it’s a terrible constituent or consumer experience when these applications are modernized.

So there’s a number of factors that are driving people to Pega Cloud.

Brian, Oppenheimer Representative, Oppenheimer: And last question on the growth, know, thinking about the growth. So this is just on the mix. So how much of the net new ACV is coming from the installed base, your existing customers versus net new? And how do you think that mix changes, if it changes at all in the future?

Ken Stillwell, CFO and COO, Pegasystems: So in the past few years, the majority of our growth has come from existing logos, people that we have we have already have a established relationship. I do believe that will change in the future as we target more organizations than we have historically target targeted to sell to. In terms of the scale of that, we’re selling right now to largely 500 to 1,000 organizations. But if you look at the number of clients that go to say a Gartner to ask for information around digital transformation, that number is more like 10,000 to 20,000 clients. So then just if you just use that as a gauge for anybody going to one of these large firms looking for advice on transformation project, they’re probably a client target for Pega.

So there’s a significant expansion of 10x probably easily maybe 20x organizations that we could target. One of the really important differentiations that Pega has is that we do not sell based on we do not charge our clients or sell based on the number of users that they have, right? That is really a model that we got away from ten plus years ago where we focus on how much value the application is driving and that is based on the number of automations that it’s doing. That could be loan originations, exceptions, card replacements, claims adjudication. There’s a volume metric.

The system does more work, Pega should share the cost savings that we drive with our clients. The historical user based models really don’t have a connection between value and the amount that the vendor receives from that. And so we went we moved away from that years ago and we’re really happy that we did because clients want to see the connection between how much work the system does, which is tied to savings and value and that’s a vendor should participate in that sharing.

Brian, Oppenheimer Representative, Oppenheimer: Great. Okay, Ken. Let’s switch over to cash generation. Your favorite part is the is the finance leader. So, look.

Six months ago, as we came into the year, you know, you guided to generate 440,000,000 in free cash flow for this year for 2025. Now we’re two quarters in. The business has generated 286,000,000 of free cash flow. So you’re clearly, you know, ahead of the trajectory where you thought you would be six months ago. So does the strong first half in terms of the free cash flow generation, does that change your expectations of what the business could generate in terms of free cash flow this year?

Ken Stillwell, CFO and COO, Pegasystems: So we we do have a a couple points. One is the first quarter of the year tends to be our strongest cash flow generation. That’s because we have a lot of our renewals that tend to hit toward the fourth quarter of the prior year and the billing and collection tends to happen as kind of bridging across Q4 and Q1. So Q1 tends to be our strongest, Q4 tends to be our second strongest. Q2 and Q3 are, I would say less rich in terms of cash flow generation than Q4 and Q1.

One of the things that we’re and so where we are very happy with where we are great signal to where we can what we can achieve for 2025. One

Brian, Oppenheimer Representative, Oppenheimer: of the

Ken Stillwell, CFO and COO, Pegasystems: things that is kind of a positive development in terms of our cash flow trajectory for 2025 that is relatively newer news is that with the approval of the of the new budget bill, the one big beautiful bill that was approved by Congress, it does have some favorable deductibility changes around R and D. And the fact that with, you know, US R and D can actually be expensed from a tax standpoint immediately as opposed to capitalized and amortized, which was the pre which was prior to. So that will help us from an actual tax payments made in 2025 and ’twenty six. So that does give us even a little bit of positive upside in terms of our cash generation for the year. And so that’s we’re really happy with where we are.

And with this change in legislature, we should be able to get some of the benefits from incremental cash through less tax payments. Because our free cash flow is after adjustments, after taxes. It’s not its true cash generated by the business.

Brian, Oppenheimer Representative, Oppenheimer: Maybe just one follow-up question on that. Have you estimated how much of an impact to your free cash flow, the new changes in the law will have for the business?

Ken Stillwell, CFO and COO, Pegasystems: Yeah. It could be as much it could be as high as 25 or $30,000,000 incrementally a year for 2025 and ’26.

Brian, Oppenheimer Representative, Oppenheimer: Terrific. We talked earlier about the durability of the ACV growth, you know, continuing to grow at a double digit rate for the foreseeable future. How does the free cash flow conversion trend if you sustain a double digit growth with with your ACV. So, you know, after tax, could PEGA’s free cash flow margins reach a mid thirties percent rate? Have you talked at all about what the the ceiling could be for PAGUI in terms of the free cash flow margin potential?

Ken Stillwell, CFO and COO, Pegasystems: Sure. So, you know, right now right now, we’re kind of in the we’re approaching kind of in the high twenties in terms of that after, you know, that after tax free cash flow. You know, we believe that the the best in class is, you know, in the mid to high thirties. That’s like that’s where we we think companies of scale should be able to operate with a three, you know, beginning with a three. And we hope that we can achieve to, you know, those levels to get into the mid thirties.

That that’s not gonna happen in 02/2025, of course, or even in ’26. But as we scale our business in the coming years, we think there’s there’s a great opportunity for us to continue to get that margin up. I think the the the trade off and the balance, Brian, is, you know, at some point, you have to be thought for around your free cash flow and investment levels and make sure that you’re investing for growth. And you can you know, we don’t wanna be the kind of company that gets overly focused or exclusively focused on free cash flow and trying to get that number as high as possible at the expense of growth. We also don’t want to be the kind of company that spends inefficiently or in a silly way to get growth that is not really a good use of our.

So we’re trying to be the kind of company that does both, right? That has really good, strong, best in class operating margins, but is investing thoughtfully around all the different growth factors that we have.

Brian, Oppenheimer Representative, Oppenheimer: Sounds good from my lens, Ken. You’re talking about durable rule of mid forties potentially. Yeah. The rule of 50 business, that’s rare air among public software companies. So thank you for putting out at least that vision for the business.

Why don’t we switch over to how you’re selling into the market, the go to market? So, look, I’ve been following the company here for several years, and you did make significant changes to the go to market organization in late twenty twenty two, early twenty twenty three. Can you, first of all, for the audience, recap what those changes were were? And now you’ve had an opportunity a couple years later to see how it’s played out. So how have those changes benefited, you know, your business in the 2025?

Ken Stillwell, CFO and COO, Pegasystems: So from 2020 to 02/2022, we made a series of investments to increase the selling capacity and we didn’t probably do it in the way that we should have. And meaning, we focused on selling in a more of a territory model than an actual target organization model. So the first change that we made was to really right size the number of direct sellers that we had targeting the right organizations that would be very good targets for Pega to grow and expand to expand and grow with. That was the first step. What that did was that meant that unfortunately we had to resize and some people left the organization, maybe didn’t have the right skill set, we’re covering the wrong organizations, verticals, territories, and that was step one.

Step two was once we did that, we realized that the organization, our sales structure had a little bit of a little bit of confusion around role clarity and and maybe too many different roles doing similar type things and maybe creating another level of inefficiency. So we went after this in two phases. One was around the target organizations and the right size of the actual target sellers. The other one was the extended teams and making sure the extended teams were in alignment with the seller strategies and the coverage of those organizations by territory, by vertical, by org. And so those two things combined finished at the kind of towards the end of February, mid middle middle to the end of twenty twenty three, 2024 being the first full year where those changes were implemented.

I think you saw a really good execution in ’24. And in ’25, I think we’ve continued that trend of leveraging those changes that we’ve made to get the results that we’ve had through the first six months.

Brian, Oppenheimer Representative, Oppenheimer: And the follow-up, of course, is the size of the number of quota carrying sales reps a limiting factor in terms of the business growth? And then, you know, if the question is yes, you know, how do you think about the CAC or the, you know, the efficiency in in balancing the growth in the sales and marketing expense against, you know, what we’ve seen, the acceleration in the businesses ACV growth?

Ken Stillwell, CFO and COO, Pegasystems: So we look at we look at a similar CAC measure. We look at total cost of sales and marketing compared to the net ACV growth that we have. And the kind of the you know, we think that getting getting down into the two to 2.5 in terms of that multiplier is a very good place for an enterprise company like Pega. We’re not quite there yet, but we’re on a significant trend in that direction and we’re almost in that range. We actually are for the first six months, but on a trailing twelve month basis, we’re kind of really close.

So that really would signal then that we should put more wood on the fire, right? We should actually look at hiring more selling capacity and doing that in a way that we don’t lose that efficiency measure of sales and marketing costs connected to net ACV growth. So I think we’re in a great place because we’ve transformed the business. We’ve made continual improvements. We’re actually down now in a range that we have not seen at Pega ever in terms of that efficiency.

We still have some more improvement to do, but we really want to make sure we don’t miss the incremental growth opportunity. So we will be very selective and targeted in how we scale our sellers.

Brian, Oppenheimer Representative, Oppenheimer: Speaking of growth opportunities, why don’t we shift and and talk about Pega’s role in the generative AI cycle that’s, you know, certainly becoming pervasive throughout the enterprise software market. So you have a product, really a solution called Pega GenAI Blueprint. Why don’t we just first stop there and level set for the audience? So please tell us what Pega GenAI Blueprint is.

Ken Stillwell, CFO and COO, Pegasystems: Sure. So in the enterprise, maybe just a little background on this. Companies like Pega that do enterprise application transformation workflow systems, there’s an an aspect of the design of that system which is using best practices and approaches and the technology to essentially establish and build the final production system. Historically before GenAI and before Pega Blueprint, was done through a lot of documentation, tribal knowledge, experience, collaboration, whiteboard sessions, know, Visio diagrams and documentation that kinda landed you on a schematic of how you wanted to build that application. That process required a lot of time, a lot of energy, a lot of collaboration just with human beings and the schedules.

It could take time to actually build that application out. So when when we saw GenAI, we we targeted two things. One was how can we leverage GenAI to accelerate the value in PEG applications? Things like coaches and buddies and tools that we could use very similar to what you would see with a ChatGPT where you’re using it to mine data to help guide people’s behaviors and decisions. So those we call those the GenAI accelerators that we actually allow clients to use and purchase to help accelerate the application value.

Then we also looked at this problem of enterprise scale applications and how long it takes to design and build them. And that’s where GenAI Blueprint came from. What we viewed is if you’re going to build a house, if you’re going to build an application, you should use all the knowledge that you’ve had from all the other applications that you’ve built. We didn’t really have a tool before that like GenAI to be able to mine all of that information and create a kind of a framework of what that application might look like. So GenAI, think about it as a design agent.

You’re engaging with it through kind of kind of configured prompts around what you’re explaining you want it to do. It’s going and grabbing all the rich information that Peg has had over forty plus years of of being the workflow leader and also information the client has about their processes, about their applications to build the app. And and the experience for those of you that haven’t seen it, go to pega.com, look at the blueprint link, experience it for yourself. You’ll see that you can see the application rendering as you’re working with the design agent. A completely modern and different experience for our clients to engage in that design.

So not only have we focused on the AI accelerators, like mining data, giving advice, coaching a person through a process, We’ve also focused on the design agent to compress and speed up the time that clients can get to that usable production level application.

Brian, Oppenheimer Representative, Oppenheimer: And that was a great overview on Pega GenAI Blueprint. So tell us how you monetize, how you make money on this solution.

Ken Stillwell, CFO and COO, Pegasystems: So we don’t sell GenAI Blueprint. We give it to everybody and we tell them transform your businesses. And when you go live and you transform your business, there’s going to be a level of volume and activity, the value that that system drives. And that’s actually how Pega monetizes that. So as our clients use Blueprint, get their applications built, get the value from it, they will then share some of that value with us through a kind of a usage based relationship around the amount of work that the system is automating.

So we feel like we don’t want to have any impediments to clients adopting Blueprint and transforming their applications. When they do and when they get value from that, it’s only fair that we should share in that value of helping drive that automation.

Brian, Oppenheimer Representative, Oppenheimer: And I know the product has just been out for a little while. But when do you think that it could scale enough to to actually impact the overall ACV growth rate for the business?

Ken Stillwell, CFO and COO, Pegasystems: I I think you’re seeing an impact from GenAI Blueprint even already in the first half of the year of 02/2025. The clients view of Pega, the engagement with Pega, our sales team’s confidence in how they get to clients and help start that transformation process is forever impacted, right? In terms of how Pega engages with our clients by Pega GenAI blueprint. So I think you’re already seeing the momentum in pipe even in some of the deals that have closed in the first six months of the year. I think that will only continue to grow as we get that through our partner channels, through the hyperscaler channels and actually through deeper engagement with our sales teams to more and more organizations.

Brian, Oppenheimer Representative, Oppenheimer: In the last part of our discussion, I just wanted to talk about the new innovation, the organic stuff that you’re building So at your annual customer conference couple months ago in June at PegaWorld, you announced, powered by Blueprints. So and, again, that’s a new solution. It it ideally is for your channel. It’s allowing SIs to infuse their own IP and industry expertise directly into the Pega GenAI blueprint.

So talk to us a little bit about that innovation from the company and the value that it should help to create not only for your channel, but for your customers too.

Ken Stillwell, CFO and COO, Pegasystems: So the system integrators and the hyperscalers, I’ll kind of put them into one category and say, they are engaging at scale with every company, every company of really quite frankly any enterprise scale that could be a few $100,000,000 of revenue all the way up to hundreds of billions of dollars in revenue. They’re engaging around change, around transformation. When they engage around transformation, why wouldn’t we want them to be able to get the best technology that’s out there around work automation and workflow transformation, is PegagenAI Blueprint. So we’ve helped them by even allowing branding for each one of those organizations so that they can use that tool to engage with their clients and help their clients go through that transformation journey and thought process. As they do that, some of those clients are going to move forward with their transformation decisions with Pega.

And we believe that the system integrators as well as the hyperscalers are very motivated to help drive that value with clients. That’s how they get value for their businesses. So PegaGen AI Blueprint is a tool. It’s an environment that we hand to them for free and say, help your clients. We know that at the end of the day, when that is successful, clients will get value and ultimately we will get value associated with clients driving change.

So we really tried to make it as easy as possible and get that in the hands of the ecosystem so they can leverage it, they can help drive change. And we’re very confident that we’ll get the value as people use our systems.

Brian, Oppenheimer Representative, Oppenheimer: I think it probably also helps your R and D being able to have your partners and these large global SIs be able to do the custom development work versus you having to take that on so

Ken Stillwell, CFO and COO, Pegasystems: It also, Brian, because of the way that Blueprint leverages Gen AI and the way that it enforces best practices of structure, it helps the app be built in a consistent, scalable, future proof way with less customization and less things that are bespoke so that you don’t have some of the issues that historically enterprise applications have had upgrading and keeping current. So it’s also helping us for future maintainability for all of our clients as well because it’s keeping you within so the so to speak, the guardrails of how an application should be built.

Brian, Oppenheimer Representative, Oppenheimer: And then in addition, you also, a couple of months ago, announced new capabilities and innovations with PegaGen eight iBlueprint to help with legacy digital transformation. So, you know, talk to us why is legacy transformation still a good market opportunity for Pega?

Ken Stillwell, CFO and COO, Pegasystems: So, you know, we, you know, we heard I think we heard Matt from AWS talk maybe about six months ago that his belief is that clients are not 15% through the journey. I think maybe he even used 10% through the journey of moving to the cloud of actually digitizing and modernizing their applications. I think even the most aggressive assessment is that clients are 25% through that journey. I would say somewhere between 1025% feels like about the right range from what we’ve seen with our clients. So are they going to be at 100%?

Absolutely not. But if look at the polls from enterprise clients that they have the feedback they’ve given is that they want to be 75% to 80% cloud application modernized. That’s their goal. If they’re 10% to 25% after all these years and they wanna get to 75 to 80, I mean, it I think you could see the opportunity that’s there around legacy transformation, around modernization. Even the work that happened in the federal government just in, you know, although although, you know, unfortunately politicized, there’s a lot of fact that came out of the doge work around this the age of the systems that sit in the US federal government.

By the way, industry is no different than that. Industry has fifty year old applications as well. We have to help get off of this legacy debt, and we’ve got to do it as fast and as efficient as possible because there’s not unlimited resources that our clients or our governments have to modernize. So the more that we can do to leverage Jet AI to help drive the legacy transformation initiative with our clients is is just gonna help everything. It’s gonna help pricing, economies of scale.

It’s gonna help security, cybersecurity, efficiency. It’s even a help the risk you have with aging technical resources, people that are literally aging out of the workplace that have some of the skills on these legacy technologies that were used to build like Cobalt for example, which many applications are still running on. Just kind of scary to think that these applications are still using blue screen type technologies from the 80s, but that is an unfortunate reality of what’s out there. That’s why we think legacy transformation is so such a long runway and so much transformation to come.

Brian, Oppenheimer Representative, Oppenheimer: A couple more questions, Ken. Specifically internally at Pega, are you leveraging large language models in the platform? Or is it all just internal large language models from PagA? Can you give us a few examples?

Ken Stillwell, CFO and COO, Pegasystems: We didn’t we do not we chose not to build or structure our own model. We wanted to have a kind of a bring your own kind of best in class. I think that strategy has turned out to be a very good one given that there’s lots of different models that will probably end up being good or better for certain use cases. So we’re very happy with that model. We will integrate with a client’s model.

We also have the native models like if you’re running on AWS, we use native models in AWS. If we’re running on Google, we use the native models in Google. But we also allow clients to choose to the extent that they want to use or connect or build APIs to different models. So we’ve been very open, and we support as much as we possibly can around model, flexibility.

Brian, Oppenheimer Representative, Oppenheimer: Last question, Ken. I’m gonna actually ask you to take off your Pegasystems hat and just share your perspective on, you know, the future of GenAI and software. You know, there there’s a lot of chatter that, you know, ChatGPT and and GenAI is gonna be the end of software. Mark Benioff called the end of software twenty five years ago. Guess we’re still here.

But, you know, last week, ChatGPT five point o came out and, you know, took down a lot of software stocks because of that and and the fear of the future. What’s your view on the impact of things like ChatGPT on SaaS in the future?

Ken Stillwell, CFO and COO, Pegasystems: So I think that I think first off, GenAI is an amazing innovation and development and I don’t think we should minimize even where we are now and it will get better. There are a number of application use cases that I can picture that will be significantly disrupted by what GenAI can do. If you’re trying to design a website, if you’re trying to build a data, dashboard, if you’re trying to do faster, analytical search, if you’re trying to be able to create learning modules that you could actually be self learning that so many use cases I could see being very valuable, from GenAI. Unfortunately, I I think that that that potential value and that uncertainty of how the value plays out leads people to irrational connections around what Gen AI can do and would do. I don’t think that it’s going to change things like data residency and and citizen protection laws that exist around the world.

It’s not gonna change regulatory things like the Fair Lending Act and or discriminatory lending. And there’s going to be lots of protections and and controls and standards and regulations that require work to be done a certain way, to follow a certain structure. And when you’re doing work that has to follow a certain structure, Gen AI does not solve that problem. And I have not heard of a use case that it would solve that problem. I just think there’s an unnatural maybe or it’s not unnatural.

Maybe it’s understandable extraction of what it does to what it might do. But I think many investors are missing that it does the nature of what it does is unstructured. That is actually what it does. That is the beauty of why it’s fast and why it can get the results. It’s unstructured.

When the work needs to be structured, which most of Pega’s business, if you jump to Pega for a second, most of our business is work that needs to be structured. It’s work product that has a certain flow, a certain process. It’s not just about the outcome. It’s about how you got to the outcome and following a very kind of predictive and consistent model. When that is required, I just don’t see Jet AI solving that problem.

It will solve all of the interactions around that, you know, the the kind of the service agents, the self-service agents, the engagement, the chat bots, the advancement of absolutely will minimize human interaction around those systems. But the systems are gonna have structure the agent. The agent is not going to structure this the the system. And so I do think there’s probably a misunderstanding of that risk. That’s probably the one thing that is maybe a little bit overhyped right now.

Brian, Oppenheimer Representative, Oppenheimer: Ken, we’re out of time. We actually even went overtime. I really wanna thank you very much for for sharing with us Pegasystems, and good luck in your meetings all day today.

Ken Stillwell, CFO and COO, Pegasystems: Thanks, Brian.

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