• ACV Growth: Increased 11% year-over-year in constant currency.
• Pega Cloud ACV Growth: Increased 21% year-over-year in constant currency.
• Cash Flow from Operations: Grew 59% year-over-year to $346 million.
• Free Cash Flow: Grew 68% year-over-year to $338 million.
• Cash and Investments: $740 million as of December 31, 2024.
• Pega Cloud Non-GAAP Gross Margins: Increased by approximately 300 basis points year-over-year to 78%.
• Stock Repurchase: 884,000 shares repurchased for $73.5 million in 2024.
• 2025 ACV Growth Guidance: Expected to grow by 12% year-over-year.
• 2025 Free Cash Flow Guidance: $440 million, a 30% increase year-over-year.

• Warning! GuruFocus has detected 5 Warning Signs with GPN.

Release Date: February 13, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Pegasystems Inc (NASDAQ:PEGA) achieved a Rule of 40 status, balancing growth and profitability, which is a testament to their strategic transition to a subscription cloud business.
• The company reported a significant increase in cash flow from operations, growing 59% year-over-year to $346 million, and free cash flow grew 68% year-over-year to $338 million.
• Pega Gen AI Blueprint is driving transformative change, with new capabilities that enhance legacy transformation and create new market opportunities.
• Pega Cloud ACV increased by 21% year-over-year in constant currency, indicating strong growth in their cloud offerings.
• The company has a strong cash and investment position of $740 million, providing financial flexibility to pay off convertible debt and repurchase shares.

Negative Points

• Currency headwinds impacted Pegasystems Inc (NASDAQ:PEGA)'s financial results, with a $40 million headwind in Q4 affecting Pega Cloud backlog and revenue growth.
• Maintenance revenue is expected to decline as the company transitions more clients to Pega Cloud, which could impact short-term revenue streams.
• Pega Cloud gross margins are expected to remain flat in 2025 due to investments in cloud migrations, limiting potential margin expansion.
• The company faces challenges in maintaining sales efficiency while increasing investment in sales and marketing to pursue new logos.
• There is uncertainty in the timing of client migrations from term licenses to cloud, which could affect revenue recognition and growth projections.

Q & A Highlights

Q: Can you discuss the investments in increasing sales coverage and how Blueprint is being used for net new opportunities? A: Alan Trefler, CEO, explained that Blueprint has transformed their sales approach by allowing demos specific to clients in the first meeting, reducing the need for extensive sales resources. This change enhances their ability to pursue new and existing opportunities more effectively and efficiently. Kenneth Stillwell, CFO, added that they now have a more targeted approach with better organizational coverage, reducing the need for a large sales team.

Q: How should we think about the Rule of 40 mindset and potential for further optimization? A: Kenneth Stillwell, CFO, emphasized that there is no endpoint to improving the business. They aim to accelerate growth while maintaining margin discipline, potentially moving beyond the Rule of 40. Alan Trefler, CEO, added that they are focusing on opening the aperture for growth while maintaining discipline and sustainability.

Q: Can you provide clarity on the linearity of ACV and the deal environment? A: Kenneth Stillwell, CFO, noted that currency impact was significant in Q4, affecting optics. The year was more balanced, with activity in the middle of the year. For 2025, they expect a strong year with Q1 and Q4 showing more activity in ACV growth.

Q: What are the opportunities with legacy replacement using Blueprint? A: Alan Trefler, CEO, explained that Blueprint allows clients to rethink and replace legacy systems, not just wrap them. This capability enables clients to create cloud-native databases and integrate with existing systems, opening new opportunities for legacy transformation.

Q: How is Blueprint impacting application go-lives and Pega platform consumption? A: Alan Trefler, CEO, stated that Blueprint is driving faster application go-lives and increasing platform consumption. Since its introduction, there have been over 70,000 Blueprint creations, with many being genuine systems that are starting to deploy into production.

Q: How should we think about the financial impact of Blueprint on ACV growth? A: Kenneth Stillwell, CFO, highlighted two impacts: faster client engagement and sales efficiency. While client engagement is already impacting bookings, sales efficiency is still being rolled out. Blueprint is expected to drive scalability and efficiency in their go-to-market model.

Q: What type of price uplift is seen with customers migrating to Pega Cloud? A: Kenneth Stillwell, CFO, noted that price uplift varies, typically ranging from 25% to over 100%, depending on the customer's previous contract and additional purchases during migration.

Q: How is Pega Agent Experience being monetized? A: Alan Trefler, CEO, explained that Pega Agent Experience is integrated into the Infinity experience, with monetization based on the quantum of work done by customers, rather than user licenses. This approach aligns with the agentic universe and provides flexibility for customers.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.