Let's hear him. Yep. Great. Hello everyone. I'm Kurt Simon. I'm a Vice Chairman on the banking side at Goldman Sachs. It's my pleasure, is it too loud, is it okay? It's my pleasure, is it too loud, is it okay? You're good. It's my pleasure to welcome and interview Ken Stillwell from Pega. Thank you for coming to the conference and being back in San Francisco. Just quickly on Ken's bio. Ken's got an organization of about 1,000 people in his finance and operational organization. He's had a lot to do with Pega's cloud transition, which we'll talk about today, amongst other important functions here. He's had 25 years of experience as a senior finance executive at high growth companies. Before Pega, he spent time at Dynatrace. Welcome back to the Bay Area. It's great to have you at our conference. There might be some new investors in the room. Maybe just start with Pega as an equity and a little bit about what you guys do operationally, what makes you guys, you know, this is an important time for the company, which we'll talk about here, but how investors should think about Pega as an equity opportunity going forward. Sure. Pega's been, you know, it's interesting. Companies go through different stages of life by event. Pega originally was founded, you know, 40+ years ago, which is kind of a crazy number to think about. It was really focused on kind of solving the problem of companies wanting to write custom code to be able to solve work automation, workflow, process automation use cases. As the decades elapsed in our history and we got more scale, that took us into the CRM space. That also took us really away from a perpetual model into a subscription model and then increasingly into having more of a SaaS offering. The real big shifts that happened in the business were when we started to move away from more back office custom workflows into more consumer or constituent for government clients workflows. The next phase of that was really moving into this cloud journey that we started probably a little less than 10 years ago, maybe seven years ago or so. That has then connected us to a much broader set of use cases. We're really, really tying into this movement to legacy transform lots of historical systems that large companies like Goldman actually have and helping our clients modernize. An interesting convergence that happens there is with AI, right? AI has very much been a multiplier around clients thinking about moving faster on that journey. We are now at this important inflection point where we can use AI, specifically Pega Blueprint, which I'm sure we'll talk about today, to help to really speed up how long it historically has taken for clients to move applications to the cloud and modernize them. The opportunities in front of us are to really not just have a few hundred organizations that we can target very selectively, but to have thousands of organizations that we can support. That launched recently, Pega Blueprint? Pega Blueprint. When GenAI came out, just a little connection there on that. When we saw GenAI, we immediately went to the biggest problem that our clients have, which is how hard and how long it takes, it is to be able to transform these workflows into a new modern stack to modernize their applications. We didn't think about the AI as more being, you know, ways to do call wrap-ups and some of the traditional things. We do that, but we saw the big challenge was to use AI as really a design agent on the front end to help orchestrate and build the application so that when the application was built, you could cut that time down materially. We started that about a little over a year ago in terms of really announcing that to the, we've been working on it before that, but it's really been about a year. Our sales team had it in their hands starting the beginning of this year in January. We've been primarily using Blueprint as that front-end selling designing tool to help our clients move faster and digitally transform. Spend a minute on powered by Pega Blueprint. Yep. Why you guys decided to launch that and why that's important. I think the real big shift that our clients, we want to help our clients on, is changing the way they think about going at these programs. Normally, what they would think about is they'd say, "Okay, I've got this application that I need to, you know, that does a certain piece of work. It's not satisfying my needs. I need to get it modernized. I even maybe want to move on to a more modern platform like Pega," but that isn't enough. What you really have to think about is starting that journey with the first time you think about the application. That's why we really start that powered by Pega Blueprint, which is from the very first time that you have a conversation with a client, you're starting with Blueprint. You're using Blueprint to design, to ideate, to build the application. Custom. What could be a very custom use case, but is actually not built in a custom way. It's built in a very configurable way. That then allows you to leverage best practices, to build something that's scalable, to not have custom code, to not deal with innovation and update and modernization challenges in the future. Also, to be able to use Blueprint to continue to innovate. Most of our clients have Pega in a software development lifecycle within their own technology teams, so Pega Blueprint becomes this incredible tool to help you manage the continuous innovation flow. We spent a lot of time talking about AI and where we are in the journey. Obviously, early days. Where do you think, like, are we in the first inning? Are we in the second inning? It's interesting. You know, the classic, I mean, I think everyone would, I think everyone would believe me when I say that we in the investment community tend to get really kind of over-hyped in the early couple of years and probably miss what really could happen in that 5- 10 year window. I think GenAI is, that's a classic example of that. I think that what GenAI, where we are with GenAI is, I really believe we're in those first couple of innings. I don't even know if we're even in the second inning yet, right, in terms of, and I think that that's kind of the challenge that our clients have is they're very, they're hearing lots of different messages. They're trying to manage security and capabilities and trying to understand if models are different and where is it going. I do think that causes a lot of excitement, but also a lot of consternation around what is next and how do we manage this. I was just at a dinner last week with a number of both vendors and clients talking about a lot of, most of them being AI vendors. You can see so much innovation and so much excitement, but yet the value isn't there yet, right? The question really is where. There's a lot of hype. It is natural for that to be. What I think is going to happen is I think in the next year, probably 6 months- 18 months, you're going to start to see this obvious connection to the use cases. We know some of them, right? There's no doubt. I mean, GPT-5, there's clearly a use case there. I think some of the things like the code, the vibe coding tools and approaches, you're going to start to see where things really work well and they don't. I think the thing that is really over-hyped, and naturally, maybe I'm not 100% objective on this point, but I think what is really hyped is this concept that AI is going to be able to redo enterprise use cases, meaning you just go to a prompt and you say, "Please post all my transactions and then give me all my GL reports and produce my financial statements." GenAI is not going to be able to do that properly without having an ERP backbone of the structure of how you want it to actually execute. That platform, whether that be ERP or other use cases, I think with AI is where you really get the power. The next 12-18 months as these clients are really focused on use cases, that's going to be a good moment for Pega, right? Because that's basically, you're going to be there helping them. Our core use case is you've got companies, you know, companies like Goldman have three, four, five, 10,000 applications in their IT environment, and they probably should have 1,000, right? You might even say that's too many. I take you over on the 10,000. How many screens do you interact with every day that you say, "My God, this screen was built before my parents were born," right? It's really just the technology. That's every company, right? Yup. I mean, that's not, I just think it's interesting to see the actual experience. If any of you have actually known people that work at these large organizations and you actually ask them, how do they interact when you're going to do a, for example, we have modern-day financial institutions that I, that you, I wouldn't even say it's one, I would say many of the ones that you might name that when they go in to adjust a credit, a request for a credit increase, they go in to something that is a green screen application, right? That actually can't even add the fields together to be able to get, I mean, it's just something that's the world we're living in, right? It's just crazy. These applications need to be modernized. Pega Blueprint is the foundation of how we get there. Let's move to financial metrics because you guys are at an inflection point here, I think. Last quarter, ACV was up 12% and it gets concurrency. You're seeing, you know, what's causing that acceleration in the business? Just one clarification. We guided 12%. We were up about 14%. We're at 14% concurrency. What's happened is, and what's really interesting is the ACV growth is one measure, and that is an important one to all of us. What's more important is the growth in the net ACV add year-over-year, right? Because that's really the leading indicator of where our growth is going. We're up significantly year-over-year, right? 50%+ year-over-year in terms of net ACV add. That to me is really a kind of a really a forward kind of indicator of where our growth is going. You're starting to see that. I think we've got a few quarters of really seeing how Blueprint has actually kind of started to impact our go-to-market. Early returns are, it's changing the conversation. Like I said, we're just, we're really just a few months into it really getting adopted. What about Cloud ACV? Pega Cloud ACV is the most, I think the most important financial metric. Pega Cloud ACV growth really signals not just our overall growth rate, but clients adopting more to cloud. That'll translate into revenue. Typically takes a couple of quarters. That's our most important measure. That number has been growing. That number grew low to mid-20s in the first half of the year. That's really the accelerant. If we can keep that growth rate in that 20%- 25%, naturally, that will help the overall ACV. Do you agree about the inflection point? I would say we've started to see signs of that happening. I think Pega Blueprint and our ability to sell and target way more clients than we ever have in the past, that really will connect to that inflection point. Remaining performance obligation, how important of a metric is that? Pega Cloud, if you just look at the Cloud RPO, it's a, I would say it's a confirmatory measure. The ACV is the most important. The revenue will come to follow the ACV. I think a lot of investors try to tend to sometimes look at revenue first. I would say that that's kind of naturally not the most important one. It's ACV. RPO confirms that measure, gives you a little bit of insight into the growth trend. The revenue, the one thing with us is the revenue tends to lag by calling a couple of quarters just because of the go lives and the way that the process works to be able to get a client from a commitment until the revenue is realized. Let's talk about profitability of free cash flow. Margins in the mid-20s, free cash flow margins, right? 26% is your guidance. Where can those margins be over time? You think about all these levers we're talking about. The beauty with why we use ACV is ACV is a direct connection to billings, right? Billings and the revenue, our revenue is not that far off now because we've went through the messy time of the subscription transition. ACV to billings, our cash is pretty predictable in terms of the expenses. It's not linear. We have a path where we know that if we can grow ACV by double digits, our costs are not going to grow by double digits, and we're going to continue to get operating leverage. Our gross margin is approaching 80%. We're probably not going to get a tremendously, you know, we'll probably get a few more hundred basis points of expansion of gross margin. Our sales and marketing is really a big lever for us because that number, if we're, once again, if we're growing our ACV by 14%, our cost of sales and marketing are not going to grow by that, and that's going to continue to kick off leverage. A business like ours growing in the low double digits should be able to kick off 35%- 40% free cash flow. That is not an unreasonable target. We're not there yet, but we're certainly making good progress in that direction. Which is again 10+ points where you are today. Yeah, we could be, there's no reason why Pega couldn't be a rule of 50 company. We're already a rule of 40 company. We were a rule of 30, you know, a year or two ago. We were a rule of 20 a year before that. There's no reason why, if you calculate it now, we're over a rule of 40 company right now. I think there's no reason why we couldn't be a rule of 50 company. Capital allocation. You've been buying back stock. You retired your convert, right? How do you think about, we just talked about cash flow compounding here. How do you think about capital allocation going forward? If our free cash flow, if our ACV, if we can just keep margins flat, then obviously our free cash flow growth would be actually what our ACV growth is. We believe we will actually improve margins, which gives us a little bit of a higher free cash flow growth compared to our ACV growth. Let's just say if that number was 15%, just picking a number that we talked about at our investor day, we actually are now generating enough cash that we can more than offset any dilution. In fact, we can probably come closer to 2x actually offsetting the dilution. We believe, you know, where our trading multiples are, that's a really good use of cash. In fact, it's such a good use of cash. I think it makes it hard to really justify doing an acquisition over buying back our own shares because of the certainty you can get from that return. If we are able to continue to generate the cash, use that cash to retire shares, then you could see that free cash flow growth per share being not just 15%, but probably approaching that 15% - 20% range. Good question. On the multiple, it's like 16x? Yeah, it's about that. Yeah. Like you think about all the metrics we just went through, you're obviously trending well ahead of plan through the first six months of the year. The upside of free cash flow margins, what's your sense on why you trade at 16x and not a? Yeah, it's a great question. I think some of the trading, some of the valuations that happen in the market really connect to how confident investors are with the history, like the trend. Admittedly, our trend has not been, we have been doing this for five years. There's probably a little bit of a risk adjustment there. I also think our free cash flow trend and our buyback trend is relatively new as well. I think we'll continue to get rewarded for that. The real kind of pragmatist in me tells me also that there are some companies in and around our space that are not doing as well and their growth is slowing. That growth that's slowing actually, they trade at lower multiples. I think that probably impacts us a little. When you think about peers, like what, again, not the ones that are not performing as well as you, but you know, what peers do you look at operationally, or you know, financially or trading-wise, that? We don't actually try not to get too hung up on the multiple that we're trading at. We just try to focus on our execution, and we let the market kind of, you know, reward us or, quite frankly, not reward us and ask us to either provide more clarity or to operate in a more efficient way. Right. If you hit those mid-30s targets over time, I mean, everything else you think about. Risk-adjusted cash flow risk adjusted multiples would suggest that we should be much higher than 16, I would agree. Recently, Forrester named Pega, a leader in digital process automation platforms. Talk a little bit of what that means for the company and how important that is to customers, prospective customers, etc. I think a really. It's a big deal. I think a really important connection is you can't just have Blueprint, right? Because if you have Blueprint and you're trying to convince clients to use Blueprint as a design agent to speed up your design on a shitty product, that's not, you know, there's no value proposition there. They have to go together. There's a third piece too, which is our engagement with our clients. We need to really expand that as well and not just engage through our direct channels, but also our partners. I think that Gartner and Forrester and we very much appreciate not only where we sit in the ranking, but also the fact that we've been there for decades, right? In terms of the appreciation for, and I think the two big pieces are where we rank in process automation, which is workflow, and where we rank in AI. Those two were up into the right, a leader in both. We think the combination of those two are what's going to lead us. It's a big deal. It's how the market views us in terms of where we should, you know, whether we should win or not. I assume you get feedback from customers, prospective customers in that regard. I think when anybody that's going to buy a workflow platform and it's a large company is going to be impacted by what those types of analysts say, because they look to them as the experts. You have a long-term free cash flow target, I guess, 2028 of $700+ million, is that right? Yes. Think about deconstructing that into some of the pieces. What do some of the other KPIs need to look like, or what's the roadmap and how you think about? That assumes that we would grow about 15% CAGR in free cash flow. If we're growing ACV by, say, you know, low double digits, quite frankly, not a lot has to happen at that number, right? We just got to make sure our gross margins don't decline, we get a little bit of operating leverage on sales and marketing, and we don't get any worse on R&D and G&A, and we hit those numbers. The good thing with our business is there's not a lot of, there's not a lot of weird things that happen with our billing and conversion to cash. Our DSO stays pretty steady, our ACV and billing is pretty steady, our cash, we don't have big years of capital expenditures because we use AWS and GCP for our cloud infrastructure. The good news with our cash flow is you can really predict, you see the ACV, you know what our billings are going to be, and the cost trend is pretty, is pretty straightforward. Speaking of Amazon, you recently announced a strategic collaboration with them. Why don't you talk a little bit about that? One of the big changes we need to make at Pega that we've really pushed hard with our partners and with the hyperscalers is Pega historically has been a target org selling model, which means we select an org, we sell direct, no one else sells to that org, we sell with our own teams. That's led to very deep engagement, but it's also led to a smaller overall customer base. It's more challenging to go after new logos because you have to actually cover specific logos. Almost at the beginning of a year or the beginning of a sales cycle, the big move that we're moving to is to put Blueprint in the hands of the hyperscalers, in the hands of the system integrators, and have them actually selling for us. That's not that uncommon. Lots of enterprise software companies do that, but that's uncommon for us. We've typically sold direct. The Amazon strategic collaboration agreement is really an example of where we want their sales teams at AWS to go out and think of legacy transformation. When they do, think of Pega. The good news is if you go to the AWS legacy transformation webpage, you'll see only one software company on there, and that's Pega. We feel like that's a good sign that they're serious about it. Talk a little bit about how that relationship has evolved over time. We started, we first went to Pega Cloud in roughly 2013, 2014. We had, you know, when I started in 2016, we had less than 5% of our clients on Pega Cloud. I think it was more like 3% of our clients on Pega Cloud. AWS was really more of an infrastructure provider. We really weren't, I wouldn't have classified us back then as SaaS. I would have said it was more of a hosted model. If you fast forward now, Amazon's innovation roadmap, there are literally items on the roadmap that are driven based on their relationship with Pega. We've actually, we are one of the largest companies to deploy client environments on AWS in the world. Pega is. In fact, if you look at the number of VPCs that we have across our client base, AWS would tell us we're the largest. It's actually like there's been a tremendous amount of momentum with AWS in that model. Because of that, they've continued to take us more and more seriously. They've actually exposed us to not only their vertical sellers, but now their legacy transformation teams. That's where the supplier collaboration agreement came from. Super exciting. How about macro? We spent a lot of time debating how strong the economy is. We saw kind of a mixed employment report last Sunday. What is it? You is it? You obviously have a pretty large, sophisticated customer base. What are you seeing amongst the large enterprises across the U.S. in terms of, or even globally? I maybe have a slightly contrarian view over what some companies have been saying over the last six months. We personally have not seen the largest organizations be impacted really much at all from what's happening. The tariffs are a lot of noise, some political division, some governmental, like, you know, we've had, we've heard from some governments in Europe about this, you know, concern about working with U.S. vendors. That has actually dissipated with some of the announcements of, you know, a tariff deal with the EU. That has certainly been distracting. I would minimize that part. Inflation connected to tariffs, I don't think really anyone was as worried as the media was around that actually connecting. I think if you look at the consumer, the consumer is in pretty good shape, doesn't have a lot of debt. Interest rates are maybe not where we want them to be, but they're certainly manageable. I think the biggest question from a macro standpoint really is around, you know, how to manage what is probably more of a nationalist movement by a lot of countries to try to bring work back inside their country. Restoring. Yeah, restoring. I think that, you know, for us, that's great because we actually don't run data centers. We run on AWS, GCP. They are in every single country. We have certifications, pretty much every single certification that you can get for the cloud. We feel like that's a great opportunity. If someone, if a client in France says, "We want to run it here on a French sovereign cloud or second cloud," which is the one in France, we can support that. If you want to do it in Japan, we can support that. If you need a certification of a specific regional or vertical certification, we have those. FedRAMP, you know, we're FedRAMP High for the U.S. government. We feel like what we have is a model where we lead with Pega Cloud. That is our offering. If a client has more complexity and they need to manage some of that activity on their own cloud, we can support that. If they need to run it in a certain country, we can support that. I think we've actually tried to break down all the barriers that might be out there. That's probably the one unknown around macro is how countries try to barter for different types of industries and businesses. I don't think we know yet, right? Yeah. I think we'll know over time. Maybe to wrap it up, and thank you for your time, but maybe just to sum up, what do you think the next 12 months look like for Pega? Thinking from a stock perspective. I think what you want to watch with Pega is you want to watch certainly our ACV growth rate. You want to see us continuing to grow our free cash flow. You want to see us talk about some of the success of the relationships with our partners and the hyperscalers. You want to focus on what we're, the innovation of Pega Blueprint. For those of you that have not seen Pega Blueprint, go to pega.com. You can actually see it right there. You can experience it. It's very easy. All you have to do is log in. You will get some nice email notifications from us, I'm sure, if you do that. I would say that, and that's the best way to see it. You'll see it. When you see it, it's hard for me to even sit up here and explain what Pega Blueprint is versus you seeing it yourself and actually experiencing it. I think that's, you know, our future right now is we, our mission at Pega from the very beginning was to change the way the world builds software. We can't do that if we're only selling to 500 -1,000 organizations, right? If we want to change the way the world builds software, we've got to let Pega be accessible by, you know, the top 5,000 or more organizations that are out there. Great. Thank you. Thank you for being here. Thanks, Kurt.