Pegasystems Inc.

Greetings and welcome to the PegaSystems second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Peter Welburn, Vice President of Corporate Development and Investor Relations. Thank you, sir. You may begin.

Good morning, everyone, and welcome to Pegasystem's Q2 2023 earnings call. Before we begin, I would like to read our safe harbor statement. Certain statements contained in this presentation may be construed as forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The words expects, anticipates, intends, plans, believes, wills, could, should, estimates, may, forecasts and guidance, or variations of such words and other similar expressions, identify forward-looking statements which speak only as of the date the statement was made and are based on current expectations and assumptions. Because such statements deal with future events, they are subject to various risks and uncertainties. Actual results for fiscal year 2023 and beyond could differ materially from the company's current expectations. Factors that could cause the company's results to differ materially from those expressed in forward-looking statements are contained in the company's press release announcing its Q2 2023 earnings and in the company's filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31st, 2022, and in other recent filings with the SEC. Investors are cautioned not to place undue reliance on such forward-looking statements, and there are no assurances that the matters contained in such statements will be achieved. Although subsequent events may cause our views to change, except as required by applicable law, we do not undertake and specifically disclaim any obligation to publicly update or revise these forward-looking statements, whether as the result of new information, future events, or otherwise. And with that, I will turn the call over to Alan Treffler, founder and CEO of Pegasystems.

Thank you, Peter, and to everyone who has joined today's call, especially those of you who have gotten up pretty early to do so. I wanted to just reinforce that at Pega World last month, I had the opportunity to spend time with many of our clients and have very meaningful conversations. And in virtually every discussion, not just the ones I had, but in meeting with other Pega execs, our clients want to talk about the future of AI. and specifically about the impact of generative AI and how they should be thinking about it, how we are approaching it, and how they can leverage AI responsibly and safely. Clients are seeing that this technology will change their business in fundamental ways and are excited about the potential. At the same time, there is so much information in the market and so many conflicting opinions, they are eager to learn more and separate out the marketing hype from the reality. it's clear this technology is going to drive massive shifts in how we get work done. And in Pega's world, how applications are designed, built, evolved, and supported. We believe Pega is uniquely positioned to leverage this technology, bring it to our clients in a safe and secure way, and take advantage of this massive opportunity. Now, for those who attended Pega World, you saw this firsthand on the main stage as well as during our investor session. We believe the generative AI will accelerate the adoption of Pega, making it easier, faster, and cheaper to deploy it, improving the client experience, and driving expansion of existing relationships. And that will translate into helping our clients leverage Gen AI in their organizations to improve efficiency, save money, and enhance employee and customer satisfaction. Now, nonetheless, there are concerns about the overall economic environment. And clients are being conservative in their decision-making, even as they engage in these very positive conversations more deeply. Now, taking client feedback in and evaluating the impact of this new technology, it's become clear to us that we have further opportunities to streamline how we engage with our clients. During this quarter, we will be working with our teams on ways to get even closer to our customers. Now, because AI is so important, I want to take a minute to be able to reiterate why Pega is uniquely positioned to leverage generative AI and why this will bring special benefits to our clients. Now, Pega has been integrating and innovating the use of artificial intelligence and automation since I founded the company. And we've gone through many evolutions. I think this is as exciting one as I've ever seen. I believe we understand what clients need and we can find value and acceleration from generative AI while preserving the scale and scope that enterprises demand. And a big piece of this that is unique to Pega is we've built an architecture that is perfectly suited to tap into the disruptive power of generative AI, both today and well into the future. And we know how to monetize it. Most companies are thinking about generative AI as a code generator of one form or another. But that will really only get them so far. Going directly from prompts to code doesn't really provide the structure and enterprise needs to create an enterprise class system that can evolve. In contrast, Pega has always been based on the concept of a business model at the center. that creates a structure and a system that can evolve as the industry and customer needs change. Our architecture is built on what we call the situational layer cake. And you're going to hear me talk about the layer cake a lot, not just now, but in coming quarters, as it helps to really power this revolution. It's a proprietary capability that organizes all of an enterprise's processes, rules, data models, and UI, into layers, so it supports building and reusing. Now, this layer cake is the perfect place to plug in Gen AI. It creates a place that after the Gen AI contributes, people can see the model, touch it, understand it, and regenerate as needed. And it is this layer cake, this architecture, that is what Pega is uniquely able to provide our clients. a proprietary structural advantage at the heart of our products. Now, it's not something that can be easily copied or reproduced, and it allows us to develop an integrative generative AI rapidly and seamlessly. So we have been at the forefront of using AI in responsible ways and developing responsible AI frameworks that are trusted by our clients, and they will be critical as they build their own AI models. And the layer cake helps us there, too, by helping create visibility for what comes from Pega versus what a customer might build or develop independently on top of it. Now, this combination of architecture, experience, and capabilities, I believe, will make us more successful than our competitors because it will help our clients be more successful and being able to let them quickly adapt and build for change. By the way, I think Gen AI is going to be devastating to most of the low-code companies that haven't taken this kind of approach. As a result, you already see some players starting to talk less about using low-code, and I think a lot of low-code players are going to get wiped out. But at Pega, we're still talking about low-code because we've always used low-code to build the layer case. We've always used low-code in a way that provides the structure that was really almost presciently designed for the introduction of concepts like generative AI. So, we can implement generative AI as a strength. Now, I expect that we will monetize generative AI in three ways. First, clients will create more Pega apps and process more work on our platform. You know, most of our licenses are already work quantity-based. Years ago, we began moving away from seat licenses because, frankly, seats are going to go down. Or if the industry does the right thing, they should go down a lot. And, you know, we saw this coming a long, long time ago. So you can think of most of our licenses as being consumption and capacity-based, which is exactly, I believe, the type of license you want in this sort of environment. I think it's good for the client and good for us. Secondly, I do think we're going to see that the fact that we're doing this generative AI work in PegaCloud and leading with PegaCloud for generative AI will serve as a catalyst for more clients to move from existing term or maintenance contracts to PegaCloud subscription agreements. And third, we will offer specific GenAI-powered add-on features for which there will be an additional charge. Now, we recently announced and showed at PegaWorld 20 generative AI boosters that will be available with Pega Infinity 23 this summer. And we've just gotten started. In fact, our engineering team began this year with a Gen AI token hackathon that resulted in more than 100 new prototypes and capabilities. Many made it into Infinity 23, and there's much more to come in subsequent releases. We have clients who are signing up to be early adopters already, and they are engaged and excited about these capabilities. And we're excited about working with them and seeing what we can accomplish together. Before I move on, I want to take just a few minutes and provide some additional color on Pegaworld, because it was so spectacular. This was the first time we came together in person since 2019, and the energy and excitement was palpable. If you couldn't join the sessions or would just like to see all the replays that are available on Pega.com, just search on Pega World Replays. We have more than 3,500 attendees from around the world representing over 47 countries. And we have inspiring keynotes from clients like Virgin Media, Rabobank, Citi, and Aflac who are all using Pega to drive their business. We have more than 80 deep dive breakout sessions with additional clients sharing their stories from companies including BT, Google, Santander, Siemens, T-Mobile, United Healthcare, Verizon, and Wells Fargo. But one of my favorite breakouts was from Lease Plan, who talked about their transition to a fully digital business model. They're leveraging Pega in their center of excellence in pursuit of their vision to becoming a car as a service organization with a strong focus on service efficiency and digital channels. This will help them optimize costs and capture market growth. And they're leveraging our state-of-the-art Constellation open user experience technology and our prescriptive design system to give their clients and their staff exceptional experiences. You can find a replay of this excellent session on PEGA.com. Just go to PEGA World under Events and search on Lease Plan. One word. I heard there very often how much clients value being able to connect with peers from other companies and learn from the Pega journeys of others. And they told me that attending in person, they were able to get down in just a few days what might have taken weeks or months in terms of discovery, getting questions answered, experiencing the technology, and ultimately understanding the value Pega can provide. I also heard positive feedback about our client-first target org model. And the value we are, I think, mutually achieving, providing a more focused and dedicated engagement team to stay close to our clients. And they're excited about the new capabilities, and they're really looking forward to seeing how we continue to approach generative AI in the future. Finding ways to accelerate development and improve the function of business users without the needs for, well, traditional, longer ways to do it. So I came away feeling incredibly energized and more convinced than ever that we have the right client engagement style, the right technology, and a team that can drive success for our clients and for Pega. Our partners were there in force, and they also, I think, got a both enormous value, and I saw tremendous engagement between them and our clients. So as we move into the second half of the year, we're going to be looking to continue to double down and push on this strategy to improve operating effectiveness with additional improvements to our go-to-market alignment that will help maintain and bring even greater attention to that focus. So, in summary, we are focused on building a successful company for the long term and having our clients successfully navigate what is currently, candidly, a challenging selling environment that we think may persist for some time. Let's face it, right now the world is uncertain and rapidly changing. But I believe we have the right strategy to succeed in this environment while building for the future. We're focusing on our client base with solutions that drive efficiency and cost savings. And we're helping our clients navigate this same set of macroeconomic conditions. We see that Gen AI will rapidly change the landscape of how work gets done. Massively. And we have a unique advantage that we can leverage and that I believe will be sustainable. And we are making good progress as we pursue the goal of trying to be a rule of 40 company as we exit next year, balancing growth with fiscal discipline. And I'm happy to point out, generating very, very significant cash flow. Now, to provide more color on financial results, Let me turn it over to our CFO and COO, Ken Stilwell.