Good morning. I want to 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. Ken's a regular here at Oppenheimer. We're thrilled to have you here again. Thanks, Brian. Great to be here. Good to see you. Good to see you again. Ken, we may have some new listeners in the audience that aren't familiar with the Pegasystems story. 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. Sure. Larger companies, or I should say, companies that have scale operations, these could be companies that have as low as a few hundred million dollars of revenue, but typically ones that 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. For example, large financial institutions sometimes have thousands of applications, five, six, seven thousand different workflow type applications. The infrastructure 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 those workloads, move those applications into a more modern, 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. These systems are complex with data residency, data protection, the workflow, and the outcomes and automation. Pretty much any company that we operate with, 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 historically a perpetual licensed business with maintenance, moving into the cloud, transitioning our business to be a recurring business and getting them onto Pega Cloud. We have 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. Our licensing model is based on the work that we actually do for our clients, whether that be transactions, whether that be events. 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 GenAI 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 workflow automation use cases. We are really excited with the transformation, very happy with how the business executed through that, and we feel like, you know, the future is very bright in terms of our ability to accelerate growth as a rule of 40+ company. Thank you for the overview there, Ken. I'd like to get into the business highlights. There's certainly been a lot of it coming from the company in the first half of this year. Your bookings measure, 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. How do you think about the components of ACV growth, thinking about price and usage? You talk about capturing existing workloads and new workloads, etc. 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. 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 the clients are doing, the value that the solutions drive with the clients, and our clients expanding into new use cases, new applications. Smaller over the last few years, but 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. 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. That's what's been helping our growth rate stay double digits for decades. 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 ACV growth over the long term? What gives you the confidence in the firm's growth engine? 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 conservatively say that the total addressable market is $100 billion a year and we're doing less than two, it gives you just a perspective of how much opportunity there is. I would argue the addressable market is much higher than $100 billion a year, but if you just use that as a round number. 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. Likely, they have to be moved to the cloud. They can't leverage Gen AI. They're not secure. They're old technology. In many cases, they're custom built. These clients are losing the people in the company to even be able to support these applications because these applications may have been built 50 years ago. There's just a tremendous amount of legacy debt that exists with large organizations. Pega is, we believe, the leader in helping clients modernize their work automation platform. 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. Ken, you mentioned about Pega Cloud and you know that's certainly very exciting, the growth that's going on with that. 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, your total ACV. You know why is Pega Cloud ACV growth accelerating? What are the key drivers of the acceleration of the cloud? 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. 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. You've got this push from us. You've got this push from the industry. You've got this push from GenAI. 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 risks. They could be cybersecurity risks, but they're also client experience risks. If you think about large government agencies having to have, trying to deal with a constituent request and sending them to like using three to ten different applications to answer a simple question like, what's my Social Security payment going to be next year? It's really, it's a terrible constituent or consumer experience when these applications aren't modernized. There's a number of factors that are driving people to Pega Cloud. Last question on the growth, thinking about the growth. This is just on the mix. How much of the net new ACV is coming from the install base, your existing customers versus net new? How do you think that mix changes, if it changes at all, in the future? In the past few years, the majority of our growth has come from existing logos, people that we have already established relationships. I do believe that will change in the future as we target more organizations than we have historically targeted to sell to. In terms of the scale of that, we're selling right now to largely 500 to 1,000 organizations. If you look at the number of clients that go to, say, a Gartner to ask for information around digital transformation, that number's more like 10,000 - 20,000 clients. If you just use that as a gauge for anybody going to one of these large firms looking for advice on a transformation project, they're probably a client target for Pega. 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. That is really a model that we got away from 10 + 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. It's a volume metric. The system does more work. Pega should share in the cost savings that we drive with our clients. The historical user base models really don't have a connection between value and the amount that the vendor receives from that. 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 a vendor should participate in that sharing. Great. Okay, Ken, let's switch over to cash generation, your favorite part as the finance leader. Look, six months ago, as we came into the year, you guided to generate $440 million in free cash flow for this year, for 2025. Now we're two quarters in, the business has generated $286 million of free cash flow. You're clearly ahead of the trajectory where you thought you would be six months ago. Does the strong first half in terms of the free cash flow generation change your expectations of what the business could generate in terms of free cash flow this year? We do have a couple of 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. 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. We are very happy with where we are, great signal to what we can achieve for 2025. One of the 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 new budget bill, the one big beautiful bill that was approved by Congress, it does have some favorable deductibility changes around R&D and the fact that with U.S. R&D can actually be expensed from a tax standpoint immediately as opposed to capitalized and amortized, which was prior to. That will help us from an actual tax payments made in 2025 and 2026. That does give us even a little bit of positive upside in terms of our cash generation for the year. 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, it's through cash generated by the business. 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? Yeah, it could be as much, it could be as high as $25 million or $30 million incrementally a year for 2025 and 2026. 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 your ACV? After tax, could Pega's free cash flow margins reach a mid-30% rate? Have you talked at all about what the ceiling could be for Pega in terms of the free cash flow margin potential? Sure. Right now we're kind of in the high 20s in terms of that after-tax free cash flow. We believe that the best-in-class is in the mid to high 30s. That's where we think companies of scale should be able to operate, with a three, beginning with a three. We hope that we can achieve those levels to get into the mid-30s. That's not going to happen in 2025, of course, or even in 2026. As we scale our business in the coming years, we think there's a great opportunity for us to continue to get that margin up. I think the trade-off and the balance, Brian, is at some point you have to be thoughtful around your free cash flow and investment levels and make sure that you're investing for growth. We don't want to 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 resources. 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. Sounds good from my lens, Ken. You're talking about durable, the rule of mid-40s potentially, yeah, the rule of 50 business. That's rare air among public software companies. Thank you for putting up 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? I've been following the company here for several years, and you did make significant changes to the go-to-market organization in late 2022, early 2023. Can you, first of all, for the audience, recap what those changes were? Now you've had an opportunity a couple of years later to see how it's played out. How have those changes benefited your business in the first half of 2025? From 2020 to 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. I mean, we focused on selling in more of a territory model than an actual target organization model. 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, were 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 confusion around role clarity and maybe too many different roles doing similar type things and maybe creating another level of inefficiency. 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. Those two things combined finished at the kind of towards the end of 2023, middle to the end of 2023, 2024 being the first full year where those changes were implemented. I think you saw really good execution in 2024, and in 2025, 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. Is the size of the number of quota carrying sales reps a limiting factor in terms of the business growth? If the answer is yes, how do you think about the CAC or the efficiency in balancing the growth and the sales and marketing expense against what we've seen, the acceleration in the business's ACV growth? 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. We think that getting down into the 2 to 2.5 in terms of that multiplier is a very good place for an enterprise company like Pegasystems. 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 12-month basis, we're really close. 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. 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. We will be very selective and targeted in how we scale our sellers. Speaking of growth opportunities, why don't we shift and talk about Pega's role in the generative AI cycle that's, you know, certainly becoming pervasive throughout the enterprise software market? 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? Please tell us what Pega GenAI Blueprint is. Sure. In the enterprise, maybe just a little background on this, companies like Pega that do enterprise application transformation workflow systems, there's 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 generative AI and before Pega GenAI Blueprint, that was done through a lot of documentation, tribal knowledge, experience, collaboration, whiteboard sessions, the Visio diagrams and documentation that kind of 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. When we saw Gen AI, we targeted two things. One was how can we leverage Gen AI to accelerate the value in Pega 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. We call those the GenAI accelerators that we actually allow clients to use and purchase to help accelerate the application value. We also looked at this problem of enterprise scale applications and how long it takes to design and build them. That is where Pega 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 generative AI to be able to mine all of that information and create a kind of a framework of what that application might look like. Generative AI, think about it as a design agent. You're engaging with it through kind of configured prompts around what you're explaining you want it to do. It's going and grabbing all the rich information that Pegasystems has had over 40+ years of being the workflow leader and also information the client has about their processes, about their applications to build the app. 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. 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. Ken, that was a great overview on Pega GenAI Blueprint. Tell us how you monetize, how you make money on this solution. We don't sell Pega GenAI Blueprint. We give it to everybody and we tell them, "Transform your businesses." 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. That's actually how Pega monetizes that. 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. 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. I know the product, you know, has just been out for a little while, but when do you think that it could scale enough to actually impact the overall ACV growth rate for the business? I think you're seeing an impact from Pega GenAI Blueprint even already in the first half of the year 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. 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. In the last part of our discussion, I just wanted to talk about the new innovation, the organic stuff that you're building inside for Pega GenAI Blueprint. At your annual customer conference a couple of months ago in June at PegaWorld, you announced Powered by Blueprints. That's a new solution. It ideally is for your channel. It's allowing system integrators to infuse their own IP and industry expertise directly into the Pega GenAI Blueprint. 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. 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, really quite frankly, any enterprise scale that could be a few hundred million dollars 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, which is Pega GenAI Blueprint? 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. 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. Pega GenAI 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. 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. We're very confident that we'll get the value as people use our systems. It probably also helps your R&D being able to have your partners and these large global system integrators be able to do the custom development work versus you having to take that on. It also, Brian, because of the way that Blueprint leverages GenAI and the way that it enforces best practices and 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. It's also helping us for future maintainability for all of our clients as well because it's keeping you within, so to speak, the guardrails of how an application should be built. In addition, you also, a couple of months ago, announced new capabilities and innovations with Pega GenAI Blueprint to help with legacy digital transformations. Talk to us, why is legacy transformation still a good market opportunity for Pega? 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 10% and 25% feels like about the right range from what we've seen with our clients. Are they going to be at 100%? Absolutely not. If you look at the polls from enterprise clients, the feedback they've given is that they want to be 75% - 80% cloud application modernized. That's their goal. If they're 10% - 25% after all these years and they want to get to 75%- 80%, 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, although unfortunately politicized, there's a lot of fact that came out of the DOGE work around the age of the systems that sit in the U.S. federal government. By the way, industry is no different than that. Industry has 50-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. The more that we can do to leverage generative AI to help drive the legacy transformation initiative with our clients is just going to help everything. It's going to help pricing, economies of scale. It's going to help security, cybersecurity, efficiency. It's even going to 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 COBOL, for example, which many applications are still running on. It's kind of scary to think that these applications are still using blue screen type technologies from the 1980s. That is an unfortunate reality of what's out there. That's why we think legacy transformation is such a long runway and so much transformation to come. Okay, 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 Pegasystems? Can you give us a few examples? 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. 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. We also allow clients to choose to the extent that they want to use or connect or build APIs to different models. We've been very open, and we support as much as we possibly can around model flexibility. Last question, Ken. I'm going to actually ask you to take off your Pegasystems hat and to share your perspective on, you know, the future of GenAI and software. You know, there's a lot of chatter that, you know, ChatGPT and GenAI is going to be the end of software. Mark Benioff called the end of software 25 years ago. I guess we're still here. Last week, ChatGPT 5.0 came out and, you know, took down a lot of software stocks because of that and the fear of the future. What's your view on the impact of things like ChatGPT on SaaS in the future? I think first off, generative AI 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 generative AI 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 can actually be self-learning, there are so many use cases I could see being very valuable from generative AI. Unfortunately, I think 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 citizen protection laws that exist around the world. It's not going to change regulatory things like the Fair Lending Act or discriminatory lending. There are going to be lots of protections and controls and standards and regulations that require work to be done a certain way, to follow a certain structure. When you're doing work that has to follow a certain structure, generative AI does not solve that problem. 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. I think many clients, I think many investors are missing that 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 Gen AI solving that problem. It will solve all of the interactions around that. The service agents, the self-service agents, the engagement, the chatbots, the advancement, absolutely will minimize human interaction around those systems. The systems are going to have to structure the agent. The agent is not going to structure the system. 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. Ken, we're out of time. We actually even went over time. I really want to thank you very much for sharing with us Pegasystems, and good luck in your meetings all day today. Thanks, Brian.