Pegasystems Inc Q1 2023 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Jacob Roberge - William Blair & Company L.L.C., Research Division - Analyst : Alan, just wanted to dig deeper into your comments that generative AI could commoditize lower and low-code use cases. Could you just talk a little bit more about why Pega's history in the AI world and its positioning in more mission-critical workflows help you really take advantage of the opportunities from the AI moving forward?

Question: Jacob Roberge - William Blair & Company L.L.C., Research Division - Analyst : Very helpful. And then, Ken, how do you feel about the pace of your subscription transition at the start of this year? Have you seen any impact to the migration as a result of macro? And do you feel like Pega is still on track to complete the transition this year and be a Rule of 40 business as you exit 2024?

Question: Pinjalim Bora - JPMorgan Chase & Co, Research Division - Analyst : Ken, I'll try one more time on the FCF performance, seems pretty strong. It seems like the change in working capital was positive after a long time in Q1. And then it seems like the SBC jumped a little bit. But I want to just make sure that it's not a onetime thing that's driving this, just thinking through what should we expect here on free cash flow. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 26, 2023 / 9:00PM, PEGA.OQ - Q1 2023 Pegasystems Inc Earnings Call

Question: Pinjalim Bora - JPMorgan Chase & Co, Research Division - Analyst : The stock-based comp seems jumped a little bit, and it seems like -- go ahead.

Question: Pinjalim Bora - JPMorgan Chase & Co, Research Division - Analyst : Yes. Understood. Very clear. One for Alan. Obviously, we have heard a lot of AI in this call, and you're doing a lot of things around AI. I wanted to ask you about -- how do you think about kind of the potential to capture incremental value from the efficiency that customers will gain from using AI capabilities versus kind of the potential pressure on seats that those efficiencies might actually drive?

Question: Steven Richard Koenig - SMBC Nikko Securities America, Inc., Research Division - Analyst : Congratulations on a great start to the year. Just maybe a housekeeping question or 2 for Ken and then a question for Alan. Ken, you mentioned that 67%, I think, it was of net new ACV is cloud. Just so I'm clear, you guide based on an assumption on cloud percentage of new client commitments and that guide, I think, was 60% to 70% for the year, is that the same definition that you're using is this net new ACV being cloud? Or what -- like what was the percent of new client commitments? Was it the same definitionally?

Question: Steven Richard Koenig - SMBC Nikko Securities America, Inc., Research Division - Analyst : Got it. that makes sense, we can calculate that from the financials. So that's great. Okay. So you're on track with your guide so far in terms of your cloud assumption, is my takeaway there. And then I -- we also noticed the cloud ACV and RPO was very good in the quarter, better than we expected, and cloud was especially good. The cloud ACV was a bit higher than we would have predicted based on the revenue results, cloud revenue. And so I'm wondering, were there some back-end loaded cloud deals that should help cloud revenue next quarter. And then on the same lines, you had an outlook that subscription licenses would be relatively level for Q1 through Q3, is that still kind of your thinking here? And then 1 last one for Alan, if you don't mind.

Question: Steven Richard Koenig - SMBC Nikko Securities America, Inc., Research Division - Analyst : Got it. Great. Super. So moving -- yet another question on generative AI, but very relevant here, I think. Alan, one of the kind of knocks on Pega, I guess, over the years is that there's not as many Pega developers as there are Java developers, so kind of hard -- that's a hard one to overcome that. But you've got more and more Pega trained developers, a lot of partners, you've grown your ecosystem very well and really focused on that. The generative AI capability to build models even or to help build the model that you talked about earlier, is that -- does that fundamentally make the current Pega-trained developers more productive? Or can that be used to democratize development of the model? And then along the same lines, like does the model even need to be transparent to users if this AI gets good enough. Like, why not have the AI -- from the language model, build the process model and then have the whole thing turn that -- have Pega turn that into code, soup to nuts? So anyway, just some random questions for you. Hopefully, that's -- I'm coherent.