PEGA - NASDAQ

Thank you for standing by. My name is Jeannie, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Pegasystems 1Q 2024 Earnings Call and Web Conference -- Webcast Conference. [Operator Instructions] I'd now like to turn the conference over to Peter Welburn, Vice President of Corporate Development and Investor Relations. You may begin.

Thanks, Jeannie. Good morning, everyone, and welcome to Pegasystems Q1 2024 Earnings Call. Before we begin, I'd 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, will, could, should, estimates, may, forecast 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're subject to various risks and uncertainties. Actual results for fiscal year 2024 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 Q1 2024 results, 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 31, 2023, and in other recent filings with the Securities and Exchange Commission. 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 a result of new information, future events or otherwise. And with that, I'll turn the call over to Alan Trefler, Founder and CEO of Pegasystems.

Thank you, Peter, and thank you to all who have joined today's call. We're off to a strong start in 2024. Our results reinforce the soundness of our go-to-market strategy and we continue to improve execution, resulting in strong cash flow and significant expansion of Pega Cloud gross margins. This quarter, we continued to grow by deepening and expanding client engagement throughout our target account model and to drive our Gen AI strategy forward with significant new and enhanced technology. The reaction we've seen from clients as they begin to experience and fully understand the potential impact of Pega Gen AI is tremendous. It's opened up 4 new avenues for collaboration between us, our clients and our partners as well as inside our client organizations across their teams and functions. I'm even more excited than when we last talked about the incredible opportunity to leverage Gen AI to drive success in 2024 and beyond, for Pega and for our clients. Now to talk about the strategy, as a reminder, when we applied Gen AI, we're not using it to generate code. We're using it to optimize the business outcomes and best practices that our customers are able to follow. Our unique technical structure is built around business concepts and enterprises, processes, their rules, data models, UI all organized into layers that can be built on or reused. It's turned out that this is a perfect architecture for Gen AI. And I think it gives Pega a unique advantage because we directly offer enhanced and optimize the business concepts themselves in a way that both business and IT can understand and collaborate on. And it's a patented architecture underneath it all that I don't think can be readily copied or reproduced. Now you may remember on our last call, I talked about the major areas where we believe our unique approach to Gen AI will drive massive impacts for our clients and for us. Delivering solutions that will first double developer productivity and bring Pega skills to the fingertips of our customers that will ignite enterprise innovation through a blend of industry expertise, Pega expertise, Pega technology and client insights that will maximize revenue efficiency with real-time optimization and personalization of customer interactions and we'll streamline work processes and customer experiences by giving the right people, instant access, not just to real-time enterprise knowledge, but to the processes that are necessary to get the results they want. We've continued to deliver on that strategy to help our clients unlock business transforming outcomes. This amazing technology will be showcased in PegaWorld, in our 10,000 square foot innovation hub, featuring more than 200 interactive demos that will be shown off the latest of the AI advances and how it will drive the future. It's an experience you can only have if you're there in person. Now here are just a few highlights of the newest technology you'll see and hear at PegaWorld. First, we announced Pega GenAI Blueprint in mid-February and began immediately testing it with partners and clients, and we've now made it available to anyone who wants to use it since like March whether you're a Pega client or not. All you have to do with your search on Pega for Pega Blueprint, and you'll find our website that really just has everything you need to get started. You can be up and running in minutes. I think that no longer a competitor has anything that can do what we do, and we think it's a major competitive advantage. In the last month, hundreds of clients have generated thousands of blueprints. Together, we, our clients and our partners are finding new ways to leverage this technology every day and stretching the boundaries of what's possible. Based on user feedback, we're enhancing it continuously. And because of the SaaS application, we're releasing new versions every 1 to 2 weeks. In just the last few weeks, for example, we added new capabilities that allow you to import blueprints directly into a Pega application to allow you to really do game changing work in seconds that otherwise would have taken weeks. And this enables people to iterate on application requirements and we generate blueprints as they've new ideas and experience what's going on in their collaborative efforts. Now more enhancements are planned in the coming weeks and months. And as more clients and partners use it, we're getting an extreme of additional ideas that are both being met with great excitement by the partners, customers and great excitement by us. For example, we think that we're seeing many customers looking to use Blueprint to be able to rethink and to modernize their legacy estate. These are large collections of often engine applications that all customers want to try to drive down in terms of complexity and quantity. And Blueprint makes envisioning and designing for the replacement of legacy apps completely different experience. It incorporates design thinking and best practices from both Pega and Internet, integrates them and uses Gen AI to synthesize the information and make recommendations on how they can improve. This is where our use of Gen AI, I believe, is truly groundbreaking as we allow enterprises to explore entirely new ways in envisioning their business processes, building on what is known on the Internet and what we've done over our decades of experience, making it dramatically easier to align business and IT. We think it's a great opportunity for us, and we'll be talking much more about it at PegaWorld. Now in addition to Blueprint, we continue to introduce and enhance our Infinity suite of solutions. Last week, we launched Infinity 24.1 with transformative capabilities to help our clients become self-optimizing enterprise, incorporating enterprise-grade AI and automation, this newest release empowers organizations to optimize service, sales, marketing and their business operations with new capabilities, including the Pega GenAI Knowledge Buddy, which helps you to synthesize knowledge scattered across content libraries to quickly answer employee and customer questions. There are hundreds of thousands of chatbots out there these days. Everybody has a couple of chatbots, but they don't include the kind of robust enterprise-based capabilities organizations need to audit what's going on, provide the right security, the right control and be able to have confidence in the answers. That's what we focused our Knowledge Buddy on. We're also introducing the Pega GenAI Coach, which serves as a real-time mentor, analyzing employee workflows and providing actionable insights to optimize productivity. And we've new accelerated bundles what we call Pega GenAI Automate and Pega GenAI Analyze, which surface and summarize insights about cases, data, meetings, conversations to make it easier and faster for salespeople and service agents to follow up and engage with prospects and customers as well as many, many other answers. We see a terrific long-term growth opportunity as these capabilities are the ones that are coming, help clients adopt our software more quickly and find new use cases for Pega. Now I've talked about PegaWorld a bit, and I want you to really consider strongly coming to Las Vegas and joining us because it is going to be terrific. As exciting as the new product announcements we'll be showing are what really separates PegaWorld from many other tech conferences are the incredible real-world very, very deep examples of how our clients are using the software that they themselves bring to the PegaWorld and talk about them in ways that well, candidly, we couldn't talk about them because we've to maintain our clients' confidentiality. But when they get up and speak about it, we think it's wonderful. And we're honored that they're willing to discuss some of the amazing things that they're doing. Some of the customers who are coming will be, for example, T-Mobile who will talk about their focus on customer centricity, the customer service overhaul that not just led to improve efficiency, but massively improve customer satisfaction and how AI-driven insights are empowering their frontline staff to build stronger relationships. We'll also talk about the key success metrics that they've achieved and provide insights into their ambitious AI plans. Booking.com will describe how they're leveraging Pega capabilities to meet evolving traveler needs, while also maintaining their super high customer satisfaction levels. Pega supports their customer-centric approach, ensuring that thousands of agents around the globe can deliver unparalleled experiences to travelers worldwide. National Australia Bank will explain how they're bringing together the left brain of analytics and the right brain of creative thinking to build real relationship-led personal experiences, relevant in the moment in any channel. They've a fascinating story about how the blend of data, creative experimentation and Pega technology are disrupting conventional approaches of communications, and how they use us to deliver 91 million customer engagements and a 40% increase in customer successful engagements in just over a year. And finally, just to pick another one, the Department of Veterans Affairs. We'll discuss how they're modernizing their benefits programs for veterans' spouses, children and caregivers to improve responsiveness in the essential program. As a reminder, we've scheduled our investor session for Monday, June 10. Local time is noon, and we're hoping to see you there. You should have received a invite by now, if you haven't, let us know, and be sure to register. It's going to be a fabulous event. So in summary, our go-to-market strategy, our focused model, our deepening relationships driving good results, including a healthy balance of growth and profitability. We continue to focus on leveraging the latest Gen AI capabilities to deliver advantages to our clients. Pega has been through massive technology transitions through our 40-year history. We've done 5 completely architectures of what we've done, and I believe we're perfectly positioned to incorporate Gen AI into the architecture we've and the way that we're going to deliver for our clients. This experience of being able to manage through and well in extreme change in the technical environment is, I think one of the reasons that Gen AI is going to be especially advantageous to us. Our newest offerings are truly enhancing the relationships with our customers and our clients' relationships with their customers. I think we have a huge opportunity to drive success in 2024 and beyond, and it's going to be very transformative. Now to provide color on our financial results, let me turn it over to our COO and CFO, Ken Stilo. Ken?

Thanks, Alan. I'm very excited about our start to 2024. Annual contract value, or ACV, increased 9% year-over-year, which is where we thought it would be in Q1. As I explained on our last earnings call, ACV growth faced a tough year-over-year compare in the first quarter of 2024 because the net ACV add in Q1 of 2023 was unusually strong. And as a result, we knew the ACV growth rate would be at the lowest point as the year began. Pega Cloud drove the majority of net new ACV add in the first quarter. And Pega Cloud ACV, which is approaching $600 million continues to be the largest and fastest-growing portion of ACV. Moving to free cash flow. When we started our subscription transition in late 2017, we knew the transition would, over time, result in more predictable subscription billings and free cash flow. Now that the transition is complete. It's great to see that vision become reality. We generated $180 million of free cash flow in the first quarter, a record by far for any quarter in the history of the company. Our strong free cash flow performance was driven primarily by 3 factors: First, ACV grew by about $100 million year-over-year. ACV has a strong proxy for subscription billings. So an increase in ACV will naturally drive a material increase in subscription billings. Second, we're doing really well in our cost management initiatives, which improved operating leverage again in the quarter. For example, sales and marketing expenses decreased by about 15% year-over-year in the first quarter of 2024 versus the same period 1 year ago. Third, many of our deals closed and renew in the last quarter of the year, which means collections often occur through the first quarter of the year. Our fast start on free cash flow generation may be a little surprising to many of you. And it's, quite frankly, a little better than we had even expected. But naturally, starting off strong gives us that much more confidence in our progress to improve margins and our cash flow momentum. Moving on to margins. Pega Cloud gross margin increased to 77%, a 500 basis point increase from a year ago, and that's just awesome to see the continued improvement. The improvement was driven by 3 factors: First, the increasing scale of Pega Cloud, which grew 21% year-over-year to $131 million in revenue in Q1; second, more active planning and management of our global cloud capacity to optimize performance and to reduce cost; third, an increasing use of Kubernetes for cloud scalability and efficiency. Now that we've released Pega GenAI Blueprint in Q1, I'd like to share some thoughts on the timing of Gen AI monetization. In 2024, we expect Pega GenAI Blueprint will both change the way we engage with our clients and also decrease the time it takes for clients to envision and build new applications on the Pega platform, and we're already seeing evidence of that. Though we're still in the early days of Gen AI, we can see that this innovation is going to be central to our clients buy decisions. And it beautifully complements the statistical AI that we've delivered for decades. We expected Gen AI would be central to our products as we put our 2024 plan together, and that's what we're seeing. Thus, monetization will be as a result of improvements in the selling cycle, which we believe will be fully realized in 2025. I've received feedback that it's helpful when I provide thoughts on modeling our business. So today, I'll continue to share some insights. First, we expect our ACV bookings will be more back-end loaded this year. And the majority of our subscription billings will occur in Q1 and Q4. So for the full year, we expect our cash flow to be strongest in the first and the last quarters of the year. Second, our sales and marketing expenses are slightly higher in the second quarter as a result of PegaWorld cost, our annual client conference, which occurs in June. Third, we expect term license revenue will decline year-over-year in 2024 as Pega Cloud continues to become an increasingly larger portion of our overall business and this is certainly connected to Gen AI momentum. As cloud accelerates, an increasingly smaller part of our growth is coming from subscription revenue -- subscription license revenue, excuse me, which is term and maintenance revenue. Both of those are expected to continue to decline as a percentage of our revenue and also subscription license, i.e., term revenue is going to decline year-over-year. In fact, term license revenue will likely be less than 25% of our full year revenue, and it will be back-end loaded. But that's okay because it doesn't impact cash flow timing, and we'll gladly trade term license revenue variability and decline for having a business accelerate faster to the cloud. Turning to our capital structure. As many of you're aware, we've about $500 million of remaining outstanding convertible debt at 0.75% interest rate that matures in March of 2025. We continue to evaluate alternatives. But at the end of Q1, our total cash and investment balance was about $619 million. So we're now in a net cash positive position when factoring in payoff of the convert. We're still waiting for the opinion from the Virginia Appeals Court. We don't know when that court will issue opinion, but of the cases our panel of judges has heard, the majority of those cases have been decided. I also would like to provide you with a brief update on the shareholder class action suit that was filed in 2022. We reached an agreement to resolve that shareholder suit for $35 million. We look forward to putting that distraction and the associated legal fees behind us. I'm looking forward to seeing all of you at PegaWorld, which is being held at the MGM Grand in Las Vegas again and starts on Sunday, June 9. We'll hold our investor session, as Alan mentioned, on Monday, June 10 at lunchtime. To register for the investor session, please e-mail [email protected] or reach out to Peter Welburn. Featured speakers during our investor session will include our Founder and CEO, Alan Trefler, as well as other members of our senior leadership team. We'll provide updates on our long-term strategy, our latest product innovation and our go-to-market approach. In conclusion, I feel really, really great about running a sound business. Our strong cash generation in Q1 demonstrates the power of a SaaS business. And we're in a great position to accelerate our profitable growth from here. Operator, please open the line for questions.

[Operator Instructions]. Your first question comes from the line of Raimo Lenschow with Barclays.

Congrats from me. I've 2 quick questions. One, Alan, for you, or maybe it's actually for both of you. If you think about the monetization, if I understand you correctly, it's going to accelerate client adoption of Pega quite nicely. Is that kind of the main things we had to -- we should think about monetization? Or is -- are there also kind of SKUs that have more AI versus, let's say, either old kind of product monetization there? So that's question one. Question two would be for Ken. On the cash flow, you obviously gave us last quarter like an annual cash flow idea with a very strong Q1. Was there like some timings that helped you? Or how do you feel about the full year number?

So we're permeating our products with Gen AI. So that -- this is really becoming something that I think is going to be a reason that people say, Boy, we can get this to work faster, better, cheaper and more broadly in the organizations. And that's the way we monetize things. And if you want to get a feel for that, just try Blueprint, it will make perfect sense to you in 2 minutes. Ken?

Yes. On the question about annual cash flow, I think that's probably a very common question on the minds of lots of people listening to this call when it's our results. So that's a great question. I'm generalizing a bit. But if you think about Q1 and Q4 being big cash collection quarters and Q2 and Q3 being more subdued and, quite frankly, not significant cash generation. To get more than half of your full year target in the first quarter is certainly a great start. I wouldn't go as far as to say that changes our view for the year. I'd say what that does is really reinforce the momentum that we're on and the confidence that we've for the full year. But it's great. Naturally, you always want cash flow as soon as you can get it in the year. But it was expected that Q1 and Q4 would be bigger collection quarters.

Your next question comes from the line of Kevin Kumar with Goldman Sachs.

I wanted to touch on Blueprint. It appears that interest is pretty strong there, and I've gone on and demoed it as well, and it looks great. Alan, just curious about, I guess, the second order impacts of just being able to speed up the design process with Blueprint. Are you seeing any early indications that this could drive more applications being developed on the platform?

Yes, we're. I mean we're seeing an enormous interest from clients and from partners and we see Blueprints being included now in RFP responses and in bids that are going to customers. So it's -- I think it's a big step forward. And it's candidly a step that's only going to get bigger as we continue to add in some of the features that are planned for even now to PegaWorld. So we're really, really seeing concrete uses with clients. I also think this opens the door to Pega being seen as an engine for legacy transformation. We talked to people in the tech world who have literally thousands of applications and being able to use a technology like this that help take them out faster and better, get rid of some of that technical debt, put them all together in what we called a Process Fabric, which is a technology we've talked about in the past that lets you've multiple Pega apps that act as one. It's -- I think it's a very appealing message even in its early days. So we're pretty jazzed about this.

That's great. And then, Ken, one for you. You called out sales and marketing and seeing some year-over-year decreases in expenses there. And just curious kind of where you're seeing opportunities to kind of reduce expenses within that organ, should we expect that to kind of continue throughout the year?

Yes. So we're kind of at a -- we're at a little bit of a stabilization point in terms of the run rate of expenses right now, because we've essentially normalized some of the restructuring that we did last year. Gross margin definitely will continue to improve in Pega Cloud because there's a lot of things that we're implementing that are not actually not -- have not been impacting margin to the positive yet and will continue to. I think about our go-to-market cost, it's less around where we can take cost out and more about leveraging that resource pool to accelerate growth, Kevin. We're really -- we've a great growth opportunity, acceleration through the rest of the year. We feel very confident that we'll accelerate growth. And Gen AI is really just a massive catalyst for pushing productivity in our go-to-market teams because of that speed to ideation, the speed to getting clients see the vision, the speed to getting them to realize their architecture designs and their workflows. And actually now with the latest changes to Blueprint, the improvements to Blueprint to actually get the Pega application started. So we feel like that is just such a tailwind, so to speak, to sales productivity. We're focused on really putting those resources in the right place to accelerate scale and become more productive as opposed to a cost-cutting exercise.

Your next question comes from the line of Pinjalim Bora with JPMorgan.

Great. Just 2 parts. One question for me. Are you starting to see some of the Gen AI capabilities that you're introducing in cloud drive customer conversations around cloud migrations from the self-managed product that you've? And then I guess, cloud ACV growth seems like has kind of reached a low point. Wondering if it is kind of at the trough level at this point as Blueprint and other Gen AI capabilities drive consumption going forward?

Let me take the second part of that. We do think Q1 was a trough for ACV growth. We had thought that, that was the case when we guided, we had said that really in Q1. I think most of you know that because we saw the models that all of you have built. And so I think you definitely heard us on that. In terms of the ability for cloud migrations and Gen AI and the connection, Alan, thoughts on that.

Yes. So we've hooked our Gen AI capabilities, which are unfolding so quickly to Pega Cloud, which only makes sense because we're able to roll out so much more efficiently and effectively. And we definitely see customers being interested in moving to Pega Cloud. They've been historically because I think it's such a both cost effective, but also offers some scalability and other features that they may have difficult emulating in other environments. So we've historically seen their strong interest. We're definitely seeing that the Gen AI makes that interest even more critical for customers who weren't already heading in that direction.

One last point on that. The -- about 2/3 to 75% of our clients have seen Pega Cloud now, meaning that they've at least 1 application or 1 environment for Pega Cloud. As that -- there's a natural momentum that as clients have 1 application on Pega Cloud, they look at moving all or other applications to Pega Cloud. So you do have a little bit of the flywheel on people buying more Pega Cloud, more clients getting exposed to Pega Cloud, which then will lead to the migration discussion that you mentioned. So I do think it's really a good time for that to happen now.

Your next question comes from the line of Rishi Jaluria with RBC Capital Markets.

This is Rich Poland on for Rishi. So I guess first one, Ken, just to clarify. I believe you said AI contribution embedded in the full year guide when it was provided was 0. So if we take a step back, can we just think about what needs to happen to achieve the guidance? And what kind of early adoption of Blueprint or Blueprint accelerating the adoption curve, the upside to those numbers?

Yes. So yes, your question is you guided at the beginning of the year 11% ACV growth. And we did say that we did not believe that factored in a noticeable impact to ACV from Gen AI. Your question is if there was a noticeable impact, would that provide upside to the growth number. And if that's the sense of the question, which is what I read. I'd say, yes, significantly faster adoption of Gen AI and influence into the pipe and the conversion of pipe is certainly an upside opportunity.

Okay. Great. That's helpful. And then one for Alan. You mentioned the industry expertise as kind of a differentiator around AI. Can you just kind of expand on that a bit and just what you're seeing right now in terms of use cases in specific industries or just maybe any domain expertise that you're infusing into some of the solutions there?

Sure. We took our industry experts, and we've them pulled together the templates that made most sense for common industry problems in the areas, where we've a lot of experience. And we've a lot of experience, as you know, in banking, insurance and health care and government. And you can see that if you use Blueprint, we've -- before we go out and begin infusing the Gen AI content into the analysis, you can see our standard template actually visible in the Blueprint sources you make. So if you say, hey, in banking or financial services and credit card, I want to take a look at collections as a function, you'll see a whole collection of our best practices of product. And so I think we've been able to use the things that we've learned about the industry. The things we've learned about technology, which is how we've been able to pull this in. And I think the team has done a great implementation to be able to bring this together in a way that's very tangible and will be the basis for a lot more coming.

Your next question comes from the line of Jake Roberge with William Blair.

And great to hear about the hundreds of customers that are already using Blueprint. Just curious, what type of use cases are you seeing customers target with that solution? And then I know you've 20 or so other Gen AI accelerators. Are there any other solutions that you're starting to see customer interest pick up for?

Sure. I -- we're finding that the customers are creating blueprints all over the map, there's a lot that are tied to particular service flows, so things that you want to do in customer service. The onboarding and life cycle management of clients is another place, where I'm seeing a lot of blueprints being done and being created. Being able to think about how you can modernize the front ends to your SAP and other back-end systems is an area that central. So it's really the multitude of processes that historically, people have to go and sit down in front of a whiteboard and brainstorm, you can now ask our history and the Internet to come together and have to do in 2 minutes, what used to take 2 weeks. And I think that's going to be pretty game changing, particularly as it continues to evolve. Now other accelerators that we've. The ones that I think -- one of the ones that is I think most interesting is we're going to be showing off at PegaWorld. We've a client actually talking about the ability to do what's called voice AI, which is to have the AI listen to the stream of literal conversation that's going on and use that to both make sure the person is saying the right things. So if you're in a regulatory business, you've to save certain disclaimers to make sure those things are actually set, but also to have default fields on the screens and really very, very substantially improved productivity, both through that and also through things like being able to summarize the call. So I'd say there are lots of features out there in AI. You've seen lots of vendors talking about feature A, feature B and feature C. What I'm most excited about -- it's not just we won't have a great set of features, we absolutely do have and will have terrific features. But the ability to use the Gen AI to fundamentally optimize the way the business runs, to be able to use it to build processes, I think it's something I'm not seeing anyone else doing. And that makes me excited.

Yes, that's very helpful. And then, Ken, great to see the improvement in Pega Cloud gross margins. Where do you think those ultimately trend over time? And are there any cost to consider in that metric as it relates to Gen AI?

Yes. That's actually an insightful question. The second one. So in the margins -- we see the margins getting above 80%. And I don't -- when I say above 80%, I'm not talking about 5 years out, right? I'm talking about in the relative near term. So we think we'll get above 80%. The question of once we get above 80%, Jacob, the question is how far can you really push that? I mean if you look at like other companies in our space and that's a class for a multi-tenant SaaS solution is probably like low to mid-80s. I mean, that's about as good as you -- as I've seen companies get. For us to get above 80% at less than $1 billion of revenue, I think it's actually quite good. But I think there is still room to optimize there. So we're not in any way taking our foot off the pedal on that. The second point that you made about Gen AI and Gen AI utilization in the cloud. As of right now, the costs are relatively modest. I think as they scale, naturally, as the Gen AI costs scale our infrastructure cost to run it, there will be indirect correlation from that to actually ACV and cloud revenue that we're getting from our clients. So we do not believe that will be a headwind to margin expansion by any stretch. We think it will be just a cost of doing business like our AWS and GCP costs are.

Yes. And we've been, I think, very aggressive and thoughtful in working through how at this point we want to apply Gen AI. And so the way that we've done it and we've got information about this on our website. Our CTO has a nice little 7-minute video about how Pega applies this technology is through the use of Vector Databases and what we called RAG techniques, Retrieval-Augmented Generation that allow us to use a conventional model, say, ChatGPT. I think Gemini from Google, I think Bedrock from Amazon and being able to pick the right model to use to be able to assemble the analyses from the work that we're doing. In a way that I think is very cost-effective. So we, I think, have a way of doing this. It's going to scale up nicely as the business grows.

Your next question comes from the line of Dan Ives with Wedbush.

So on the go-to-market strategy, looking at AI. Can you just talk about what we could expect next 3, 6, 9 months? Like is it more partnerships even ramping up internally in terms of the types of individual? Can you just talk about from a go-to-market in terms of like the next steps there?

Yes. So we definitely are working with some key partners and looking to broaden the partner relationships, and there's a lot of enthusiasm from partners to be able to apply some of this new technology here as well. What I'm excited about is I've never seen such a quick uptake, never seen such a quick uptake of a capability like what we've put out there with Blueprint. I mean by like a factor of 10 in terms of the number of customers, the number of things they're actually doing with it. And it really gives them a taste of Gen AI. By the way, not just in English. What I love is I was over in Europe 2 weeks ago, and what we had -- I couldn't read any of them with people generating blueprints in Dutch and Italian. And it was really quite remarkable to gauge their reaction to the stuff I couldn't understand. So the uptake on this, I think our go-to-market is going to end up being a lot more viral than it has been historically, and we're looking to ramp up to support that.

Your next question comes from the line of Steve Enders with Citi.

Okay. Great. I guess we'd just to start, like I know ACV kind of came in, in line with the growth expectations for the quarter. But I guess how would you kind of like frame where the macro environment is today and how people are viewing opportunities in budgets and maybe the impact that AI is having on that so far?

So I'll take -- I'll add some comments. I'll take it first, and Alan can add some comments. So Steve, I'd say that the economy continues certainly in the organizations that we're engaging with, continues to be pretty resilient in terms of clients wanting to invest in digital transformation. And I think that Gen AI is just an accelerant to that momentum because the clients are looking at Gen AI and digital transformation, not as 2 different things. They're looking at them as being very related. How do I manage this legacy application situation that I'm in. And when I think about developing new capabilities, how do I want to insert Gen AI, we're actually taking even a different angle to that, which is how we leverage Gen AI to help you accelerate your digital transformation, to get you faster to the place that you want to get to. So I think that there's still a tremendous amount of resiliency in the market. And quite frankly, I think clients are thinking at the same or in an increasing pace around digital transformation than they were over the last 12 to 24 months. So I think we're feeling very good about clients' interest in Pega solutions and how we can help them with digital transformation. Naturally, we've an election coming in the fall. Interest rates are still high. Inflation is kind of coming back a little or not. I mean there's a lot of macro distractions there, but we see our clients really investing heavily in their digital transformation journeys.

Okay. Great. That's helpful. And then I guess just on the -- now the Blueprints are out there, like are you seeing -- have you seen like customers actually convert that into production apps yet done at that capability is out there? How should we kind of think about maybe the impact of having on like top of funnel or that kind of conversations that you're having today with that?

Well, we're talking about something that's really been out there for a grand total of 2 weeks. So it's a little premature. But we see that happening imminently, I think, by PegaWorld. We'll have a number of success stories background.

Your next question comes from the line of Austin Cole with Citizens JMP.

I've got yet another Blueprint question. I think the excitement around that is tangible. I was wondering if you can share any detail. As you mentioned in your prepared remarks, partners coming with new ideas, maybe you can't go into detail on that just yet. But then also -- anything you can share on maybe the breakdown between Pega clients using Blueprint and non-Pega clients that are coming to Blueprint and those 2 buckets and where you're seeing that distribution? Any detail there would be helpful.

Sure. So we made a decision to preview Blueprint with our partners a couple of weeks before we made it publicly available to clients and prospects on our website to make sure the partners felt respected and that they were part of the communities, we're moving forward. And they were enthused, one of the things they asked for, which we're in the process of implementing, is the ability for our partners to themselves create blueprints that they could use to capture their intellectual property and the structure of a Pegasystem in the way we talk about cases and stages and steps and interfaces. And given the ability to create their blueprints, which would then be proprietary to them to make us so that when a customer blueprint was created, that customer blueprint, which today is an amalgam of Pega best practice and best practice from the Internet would now be able to be an amalgam of Pega best practice, the best practice from whatever partner was there particular plus the Internet, putting those all together, I think that's going to be hugely, hugely powerful. So that's our agenda for the next 60 days is to get that working. And that was directly based on what we heard from partners as to how they want to leverage this to be able to help their go-to-market, which obviously helps our go-to-market. So we're seeing a lot of enthusiasm there. We're getting customers in very significant quantity. I mean, like very significant quantity, doing literally thousands of these blueprints in just a couple of weeks. And we're seeing prospects coming in. I think we'll see more of that as this begins to take hold and as there gets to be more buzz about that. It's still, once again, very young. But as you can experience it yourself, it's very real.

Your next question comes from the line of Mark Schappel with Loop Capital Markets.

Alan, with respect to Blueprint, I realize it's still early, but I was wondering if you could just talk about some of the consumption trends or patterns that you've seen on the Pega platform with respect to the early Blueprint adopters?

I never would have expected that we get thousands. There have been 20,000 blueprints created. Some by Pega staff, those being counted as well. But many, many thousands by customers and partners. And I'd say that actually would have exceeded my expectation a month ago when we were beginning to talk about how we're going to roll this out and make this happen. So it's garnering quite a bit of excitement. If you come to PegaWorld, and I hope once you'll be there, then you'll have a chance to talk to clients themselves. I think you're going to hear great things.

Mark, I think just to add one thing on that. The thing that new feature that we just rolled out recently, where you can actually implement a blueprint in a Pegasystem. Originally, you could turn it into a PDF, right? You can look at it as a PDF. And recently, you've -- we've the ability to actually convert that into a Pegasystem. That, to me, is possibly the glue that connects what you're doing in a blueprint to the realization of how fast an app can actually be rebuilt. And it is really -- I mean, I know we're talking about it, you could probably envision it, but to think about sitting down, spending 30 seconds to 2 minutes, getting a framework of a workflow going in and making it your own through the course of what could be 20 minutes, could be an hour and then clicking a button that's said implement it, and you're looking at an application that actually...

So what's interesting. So we've now -- and once again, it's all very new, but very real. We've, for a lot of years -- for the last 2 years, had a program we call Catalyst, where we'd go in with a real design to get sort of approach to help customers envision how they wanted to rebuild an app or rebuild a part of their business function. And we've a very talented team that's able to do this sort of work at a high level. I just saw the video of the first Catalyst that we're doing with Blueprint instead of the traditional way, where people would candidly end up with a whiteboard, with stickies, posted notes on the whiteboard using neural technology to kind of imagine a year, what they wanted. What they were able to do in 2 days was of enormously high quantity -- quality. Those were 2 half days. It blew the customers away and it was really, really able to do what we always wanted to do with Catalyst, which is to catalyze new thinking and leverage what they were able to do. So this was a major European bank that we did it with. And in 2 half-day sessions, they do what they did what I'd have actually candidly would have expected to take 3 weeks or a month. And the customer was thrilled. So it's not just a little tech thing. It actually organizes the way people think about how they want to automate their processes in a way that makes sense with Pega architecture, which I think we've refined over all these years of doing it to be just a very effective way to thinking about process automation and being able to get rid of some of the historical barriers about why Pegasystems are hard to use, you need a lot of experience. I think give us another couple of weeks, that's just not going to be true. So really exciting.

Great. And then Ken, real quick, given the strong free cash flow generation this quarter, is there any update to achieving your Rule of 40 targets this year?

Well, I mean, certainly, we're dependent on hitting both our growth and our cash flow for the year, which is obvious us having a start with the cash flow in Q1. It is moving the ball, so to speak, down the field quite a bit. So that side of the equation and our previous comments about the fact that we knew Q1 was going to be a difficult compare. So we knew that we were going to start with ACV growth decelerating in Q1, and we'll work our way back to that 11%. That was exactly how we modeled, so I'm feeling just as confident as I was last quarter in our achievement of Rule of 40. And it's right there in front of us, which is great. And I think everybody could see in the numbers how we get there. But we've got 3 more quarters to execute, Mark. So we're going to keep focused on that.

Your next question comes from the line of Blair Abernethy with Rosenblatt Securities.

Just, Ken, following on the last question. What are your -- what's your renewal book look like this year, the back half of this year versus last year? And I guess I'm just -- I'm looking for some of the key incremental drivers that gives you that confidence that off this 9% growth number that you're going to average it out to 11%. It's a pretty -- back half is going to have to be a fair bit stronger.

Sure, Blair. So Q4 -- we mentioned last quarter that our renewal book is skewed towards the back end of the year. This year in 2024, no less and a little bit more than a typical year. What hurt us in this year in Q1 is the strong Q1 of last year. Certainly, what helps us through the middle part of the year is that the compares in the middle part of the year, it's not as difficult as the beginning of the year. So some of this is just the timing of when ACV growth happens in the prior year. And as you know, how that fits into the trailing 12-month calculation that we've. So renewals, there's still always -- we always have a lot of renewals in Q4. That's no different for this year. So we've got -- we certainly have expansion opportunities. But also the activity through the middle part of last year was much more subdued that we expect this year.

Okay. Great. And then just shifting on to the product side. Any update at all on the Launchpad initiatives you launched last summer?

Yes. It's -- I think it's going very, very well. We ended the quarter with 11 partners who are building apps on Launchpad. And that's been -- we've been doing this on a very sort of bootstrap basis. And we've seen our first partners bring their first customers into production. So we're really quite pleased with how it's going. So it's not going to be the driver of growth this year. The Gen AI and the core business is going to be what gets us to the growth objectives that we've for this year. I think Launchpad is hopefully going to continue to develop in a way that it is, and it's going to be a nice driver for next year and into the future.

Your next question comes from the line of Tom Blakey with KeyBanc Capital Markets.

Alan, maybe for you, just on the success of Blueprint, sorry, a little bit of redundancy in terms of topics here. Can we talk about maybe the roadmap. I know it's early, but I'm sure you've a roadmap here in terms of using -- utilizing some of your other technologies in terms of process automation -- process mining rather, in terms of automating some of the further automations of ideation here, just creating some of very other end-to-end solution here. On the free cash flow, Ken, can you just maybe to remind also first question on the call here, maybe this is the last one, remind us of some of these metrics. I think it was a $350 million free cash flow estimate for the year. You started off so strong here and 4Q is usually better than 1Q. I think we might all be looking for Qs here, a little bit more guidance here in terms of how to manage and model free cash flow here for the rest of the year. Any visibility there would be great.

Yes. So this is more of a general comment, Tom. But I think to your point, Q1 and Q4 is where we get the majority of our cash generation in 2024, even more skewed in that direction than what you saw last year. Q1 started off strong. I think our billing and collection process is good. Our days sales outstanding is very strong. But the reality is you've more bookings in Q4, which do help the Q4 and Q1 billing and collection cycle. And Q2 and Q3 is as in most enterprise software is a little bit more subdued than that kind of hockey stick towards the end of the year in bookings. And so that's just kind of -- and by the way, a lot of our renewals, we build typically annually in advance. So you've a lot of those annual billings that happen in that same time frame. So just picture Q2 and Q3 being much more subdued. In some cases, we may not even generate cash flow in a quarter in the middle part of the year with our cash flow really focused on Q1 and Q4 in terms of the timing. So hopefully, that's kind of helpful.

And relative to the roadmap, we've a very robust roadmap. The things we recently implemented around being able to pull the Blueprint into a Pegasystem and actually turn it into a running app was very recent edition that obviously contemplated, but makes a big difference. I think some of our next big steps are going to have to do with how we actually incorporate our customers' data structures and their existing data repositories into the Blueprint to be able to benefit. So this thing really can plug into the real life that our clients have. And also I see Blueprint being able to be fed by process mining and other sorts of analytical things we do that will also help supercharging. So lots more to come. And with that, I know we're at the top of the hour. Let me say thank you to all of you, letting you know, we're working hard, and we look forward to seeing you in PegaWorld.