Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Pegasystems Inc (PEGA, Financial) reported a 13% year-over-year growth in annual contract value (ACV) in constant currency, exceeding $1.3 billion.
- The company's Pega GenAI Blueprint has been well-received, with tens of thousands of Blueprints created, driving deeper client engagement and accelerating growth.
- Pega Cloud net new ACV contributed 81% of the total net new ACV added in the first half of the year, with Pega Cloud ACV growing 19% year over year.
- Free cash flow totaled $218 million in the first half of 2024, a record for the first half of the year, driven by improved sales execution and operational discipline.
- Pegasystems Inc (PEGA) achieved FedRAMP high ready compliance and in-process status for Pega Cloud for Government, enhancing its credibility and opportunities in the government sector.
Negative Points
- Despite the positive performance, the company acknowledged that the full impact of GenAI and Blueprint on revenue is still in the early stages and will take time to materialize.
- Subscription license revenue is expected to decline year over year in 2024, as more clients transition to Pega Cloud.
- Consulting revenue is growing at a more moderate pace than total revenue, which may indicate slower growth in certain service areas.
- The company faces challenges in maintaining positive cash flow in quarters with lower billings, such as Q3, due to the seasonality of its contract renewal cycle.
- There is a risk of over-reliance on existing clients for growth, as the company continues to focus on expanding within its current customer base rather than aggressively pursuing new logos.
Q & A Highlights
Q: Can you talk about what's driving the strong ACV performance in Q2?
A: Kenneth Stillwell, CFO and COO: The focus on dense coverage of target organizations and selling Pega Cloud has reduced dependency on large, episodic deals. This approach has led to more consistent sales and pipeline development. Additionally, the integration of GenAI and Blueprint has reinvigorated client discussions and streamlined the selling process.
Q: Are you seeing the expected contribution from Blueprint in Q3?
A: Alan Trefler, CEO: GenAI is now at the heart of every sale and pursuit. The integration of GenAI into our products is transforming client engagement and ideation, leading to modernized legacy applications and digital transformation.
Q: How is the federal segment performing, and what is the strategy there?
A: Alan Trefler, CEO: The federal segment is seeing significant success, with large organizations like the Department of Commerce and the IRS expanding their use of Pega. The strategy involves a target organization approach, focusing on deepening relationships with existing accounts and leveraging GenAI to drive efficiency and innovation.
Q: How is GenAI impacting the cloud migration timeline for customers?
A: Kenneth Stillwell, CFO and COO: GenAI is accelerating the pace of cloud migration as clients see the benefits of moving to Pega Cloud for access to the latest capabilities. This trend is expected to continue into 2025, with Pega Cloud representing a significant portion of net new ACV growth.
Q: What feedback are you receiving from customers about the implementation of Blueprint?
A: Alan Trefler, CEO: Customers are excited about how Blueprint changes their design thinking for new applications. The ability to import Blueprints into existing Pega systems and blend them with existing rules and processes has been well-received, leading to numerous enhancement requests and rapid adoption.
Q: How should we think about the revenue mix between traditional subscription and consumption-based models?
A: Kenneth Stillwell, CFO and COO: The model involves a commitment with flexibility, allowing clients to scale usage organically. This approach provides better economics and volume discounts, aligning with how clients grow with Pega.
Q: How is the company targeting new logos with the potential to be $1 billion ACV accounts?
A: Kenneth Stillwell, CFO and COO: The strategy involves a targeted approach, focusing on major accounts that resemble existing successful clients. The sales teams are segmented to focus on prospecting and new logos, leveraging relationships with former Pega buyers and influencers.
Q: How is the AI cycle changing the overall spending environment for Pega?
A: Alan Trefler, CEO: AI is driving more deals as clients see Pega as a way to implement AI in their core business processes. This approach allows companies to incorporate AI without crafting it from scratch, making Pega a preferred choice for AI-driven transformations.
Q: What are some common applications and workflows being implemented with Blueprint?
A: Alan Trefler, CEO: Common applications include customer service workflows, onboarding, product addition, and master data management. These workflows leverage Pega's ability to integrate with backend systems while providing state-of-the-art AI-driven processes.
Q: How should we think about the impact of GenAI on the cloud migration timeline and maintenance revenue?
A: Kenneth Stillwell, CFO and COO: GenAI is accelerating cloud migration, with clients moving to Pega Cloud for digital transformation. The maintenance revenue is expected to decline as more clients transition to the cloud, with a potential 25% to 50% expansion in ACV as they migrate.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
