Thank you for joining us today. I’m Krista, your conference operator. I am pleased to welcome you to Pegasystems' Fourth Quarter Fiscal Year '24 Earnings Conference Call and Webcast. I will now hand over the call to Peter Welburn, Vice President, Corporate Development and Investor Relations. Peter, please go ahead.

Thank you, Krista. Good morning, everyone, and welcome to Pegasystems Q4 and Fiscal Year 2024 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, will, 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 2025 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 Q4 2024 and fiscal year 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, 2024, and 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 view to change, except as required by 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. Our non-GAAP financial measures discussed in this call should only be considered in conjunction with our consolidated financial statements prepared in accordance with GAAP. They are not a substitute for financial measures prepared under U.S. GAAP. Constant currency measures are calculated by applying the December 31, 2023, foreign exchange rates to all periods shown. Reconciliation of GAAP and non-GAAP measures can be found in the company's press release announcing its Q4 2024 and fiscal year 2024 results. And with that, I turn the call over to Alan Trefler, Founder and CEO of Pegasystems.

Thank you, Peter, and thank you to everyone on today's call. In 2024, we demonstrated our commitment to delivering on our plans, and I'm thrilled about the changes we've made to our business and how well the team executed to deliver strong results. It's great to see that we continue to drive profitable and balanced growth across industries and across geographies, while delivering the most innovative products in our history. Ken will walk you through the financial highlights in a few minutes. Our team has never been more energized to drive transformative change for our clients, and we have great momentum coming into 2025. Pega GenAI Blueprint is changing every client and prospect conversation, driving hands-on experiences and showcasing the power of Pega technology in an easy to understand and practical way. And we're thrilled to see new business like the recently announced U.K. Armed Forces recruiting service engagement included in their press release the use of Blueprint. The pace of Blueprint innovation is unprecedented and accelerating. With every week, we are adding new capabilities. And if you haven't used Blueprint at least twice in the last month, you haven't seen what it can do, and it is worth seeing. There are 2 sets of capabilities we're particularly excited about. First, Blueprint now empowers every workflow to be agentic. We'll talk more about that in a few minutes. And second, there are capabilities that create, I believe, what will be a massive new market opportunity for Pega and our partners by helping our clients rethink and replace legacy systems. Now many of our clients have recognized Blueprint's power to accelerate legacy transformation, getting their business logic out of dated applications and onto a modern cloud architecture. And in the past months, we've been adding new legacy transformation capabilities. For example, Blueprint can now import BPMN, what's called business process modeling notation, which outdated the common approach to defining business process maps. Many clients have hundreds or thousands of these documents, which can now be enhanced by Blueprint to create cognitive modern workflows in just minutes. We're not just re-platforming these processes. We're actually using the AI and Pega's experience and Pega's ability to improve the model to make them superior. Additionally, Blueprint can now import a client's APIs that interfaces to their systems and to their database structures to automatically create data models and the way that the interfaces will have to work to connect these workflows up to their existing backend systems. And this provides a terrific foundation for moving on-premise systems of record to the cloud and having them interact with the other key systems that the customer has. Now we are going to continue to enhance Blueprint with additional capabilities. You'll shortly see the ability to upload client documentation. So we can take things such as user manuals and other documents and bring them in and have the AI continue to use that to improve and apply the best of technology to what our customers want to be able to do. This isn't a simple lift-and-shift. Blueprint helps our clients rethink and transform for the future. Now when we talk to customers, we find that every large client has hundreds, if not thousands, of applications that are targeted for legacy transformation. And we're actively working with our partners and product teams to make Blueprint a central point of our legacy transformation strategy. I've been sharing this vision with leaders in our cloud and global systems integrator partners. And there's huge interest in integrating Blueprint into their legacy transformation tools and into their legacy transformation practices. I said it before that Blueprint is central to every client interaction. It really supports the expansion of our business into exciting new opportunities, and this legacy transformation opportunity, I think, is a perfect example. Now there still is so much talk about AI. There's a lot of talk about agents. We'll get to that in a moment. But I just want to remind people about how we will get AI, which I think is standing up well in terms of the marketplace. There are 3 types of AI as we think about it. The first is statistical AI. This powers Pega's Customer Decision Hub, which we've been shipping now for well over a decade. The AI drives real-time contextual customer experiences for global brands, like you can see on our website, Citibank, Ford, Horizon, and Wells Fargo as they describe what they are doing. It remains a significant part of our business, and we feel we have unmatched capabilities and a high barrier to entry for competitors, and it's key to really supporting what our customers need to do to do a great job with their customers. Now a lot of people have forgotten statistical AI, or sometimes I refer to as mathematical AI, because generative AI has been so hot. But in reality, generative AI is a complementary capability, really based on very, very different underlying technology, and they work well together. Now generative AI itself should be broken into 2 categories in our view. The first is what I described as productivity features. This is AI that helps customers and employees save time and effort. It does things like summarizing conversations or providing self-service for customers or, for instance, generating correspondence. Now productivity features are great. And we have dozens of these offerings built into our platform, and we keep creating more. But ultimately, we believe that you're going to see lots of them from lots of vendors, and they're not going to be the things that really distinguish the companies that are extremely successful going forward from those that aren't. Now I think our competitors are so focused on productivity features that most, if not all of them, are missing the true transformative power of generative AI. And this is the third type of AI, transformative generative AI, which has the power to profoundly change our organizations to engage their customers and run their operations. And this is exactly what Blueprint was developed to do and is already achieving. It's up-leveling our conversations with our clients to focus on their desired business outcomes. And Pega is uniquely able to deliver this type of transformation because we've spent decades perfecting the structures needed to automate workflows and make decisions at scale. Blueprint is a breakthrough AI model that has learned from that structure, worked from that experience that incorporates things we've learned from industries and best practices, and it's really enabled us to bring the wisdom of the Internet in a safe way to all the experience we've worked on for these decades, and that lets our clients experience a modern agentic approach to workflow in minutes. Best of all, it fits perfectly into our existing architecture. So Blueprint has allowed us to quickly and effectively integrate all these types of AI into our products, and I think it's having an extraordinary effect on our clients. Yet, we believe we've just scratched the surface of what we can do. Yesterday, we announced our newest transformative Gen AI offering, focused on the world of agents, called Pega Agent Experience, or Pega AgentX, for short. The Pega Agent Experience is Pega's approach to agentic AI. Now you've likely seen the deluge of new agent announcements, literally thousands and thousands of agents flooding the market, along with new ways to manage them. And despite all the headlines of the hype, or many as a result, many organizations, I think, are a bit confused, and some are overwhelmed by this. Now some of the agents we've seen are pretty underwhelming, often a little more than the same chatbots that have frustrated customers for years. Our clients want predictable, audible, auditable, and governable agents that do real work. And we know that deploying agents doesn't have to be chaotic or risky. We believe that the orchestration of agents is absolutely critical and best done through workflow, and workflow is what we do. That's why I believe that Pega is made for this moment. Our new agent experience capabilities make any workflow agentic. Let me repeat that. It makes their existing workflows agentic. So you can chat with it or talk to it, and it still brings the power of the way they want to run their business together with the latest ways to interface and interact. And with Pega AgentX, any agent, Pega's or somebody else's, that the organization chooses to deploy, can find the right process or workflow and then follow that workflow to complete the work in a way that is predictable and auditable. Pega AgentX instantly turns Pega's proven and trusted workflows into smart supervisors that guide AI agents step by step through their task, just like a manager guides new employees through their job with established procedures, not throwing away and asking them to do whatever their experience tells them to do. This is very different from competitors whose agents are black boxes and can't be counted on to follow the processes needed to govern a large or a regulated company. And clearly, the competitors are proposing that enterprises deploy thousands of these ungoverned black boxes. Now we aren't building agents by pasting textual prompts into a communication channel or a copilot. Remember, prompts may not be interpreted the same way every time. And candidly, that is unacceptable for the enterprise. Instead, we've made workflows the core of our agent architecture. And we can do this because Pega's workflows have always been able to do the most sophisticated and most important work, unlike the simple sort of diagrams that our competitors have talked about workflows do. And since Blueprint allows our clients to design and deploy new workflows rapidly, we've got an approach that is both industrial strength and fast. Pega AgentX enables our clients to leverage the power of their workflows, to deliver the agents they need to better serve customers and operate efficiently. And Pega AgentX ensures any agent, whether from Pega or another vendor, follows established rules and security protocols. With Pega AgentX, Pega workflows can invoke other agents such as calling an agent to automatically extract data from a set of documents. And this allows clients to automate more complex tasks, orchestrating multiple agents together seamlessly and making Pega a central part of their Center-out architecture. We can do this because of the Center-out architecture, which lets our clients build their systems around outcomes of workflows and the decisions that drive those outcomes instead of the traditional way that you see everyone else doing it, where they're building their engagement around channels, around their website, around the contact center, around a chatbot or around their backend data sources. The center-out architecture is perfect for orchestrating agents. And with AgentX built right into the heart of our center-out architecture, it has entirely become agentic. In fact, we've started referring to it as our Center-out agent architecture. Anyone, and everyone on this call, can experience Pega AgentX by logging into Pega GenAI Blueprint, designing a new workflow and then previewing how AgentX delivers agentic conversation across channels by clicking on the conversational agent button in the preview my app experience within Blueprint. We've showed this capability to several hundred of our partners at a recent sales kickoff, and they were blown away. I think you will be too. And you can expect us to announce new agentic power and capabilities in coming months. This is all a continuation of a vision you've heard me talk about for, candidly, 2 years. I've spoken about the autonomous enterprise, the vision of a self-optimizing enterprise that leverages AI and automation to enhance decision-making, make operations more effective and make customer service great across the organization. To achieve this vision, clients must clear around the technical data of their legacy systems, which is why we're enhancing Blueprint to accelerate legacy transformation, and they must be able to deploy AI agents that are orchestrated by a trusted workflow platform. And that's what we've been able with Pega AgentX. We're focusing on deploying AI in ways that empower our clients with technology handling routine tasks, while people can focus on innovation, strategy, and care. With our advanced technology, our engaged partner community, and eager clients, we feel that we couldn't be better positioned to lead this transformation. So in summary, we executed well and delivered strong results in 2024, more from Ken in a moment. I think we've entered 2025 with great momentum. We have competitive advantages and an approach to leveraging AI that is unique, and I don't believe it can be easily replicated. We're in a great position to leverage this Gen AI revolution and have truly, truly embraced it right into the heart of the company, and it's going to help our customers become autonomous enterprises and achieve their visions, and I'm incredibly excited about the opportunity ahead of us. To provide more color on the financial results, take it away, Ken.

Thanks, Alan. A few years back, we adopted a new strategy to transition into a subscription cloud business. A key goal of this transition was to become a Rule of 40 company, focusing on both growth and profitability. I'm pleased to report that we've completed this transition in 2023, and currently, we are indeed a Rule of 40 company, considering our annual contract value growth alongside our free cash flow margin. Reflecting on our client successes and the challenges we've overcome, reaching this milestone speaks volumes about our team's dedication, resilience, and unwavering commitment to our clients. Our annual contract value growth, which is the most crucial metric for our business's success, rose by 11% year-over-year in constant currency, primarily driven by a 21% year-over-year increase in Pega Cloud ACV. This growth was further supported by our focused target account sales model. We anticipated that 2024 would be less back-end loaded in terms of bookings, and this has indeed been the case. Our clients and prospects are experiencing Pega GenAI Blueprint, which provides an engaging introduction to Pega, significantly accelerating their time to value. Our cash flow from operations has surged by 59% year-over-year to $346 million, while our free cash flow improved by 68% year-over-year, reaching $338 million. This cash flow enhancement stems from three main factors: double-digit ACV growth, an expansion in Pega Cloud gross margin, and better go-to-market efficiency. After accounting for an unexpected $32 million settlement related to a shareholder lawsuit, our free cash flow would have surpassed our guidance by $20 million. Hence, what appears to be a slight shortfall for 2024 is misleading. The momentum in our free cash flow has strengthened our balance sheet, with a robust cash and investment position of $740 million as of December 31, 2024, allowing us the means to repay our convertible debt in March. This free cash flow momentum also afforded us the flexibility to repurchase 884,000 shares in 2024 for $73.5 million, primarily in Q4, helping to mitigate dilution. Our non-GAAP gross margins for Pega Cloud have increased by about 300 basis points year-over-year, rising from 75% in 2023 to 78% in 2024. Additionally, our Board has approved a 2-for-1 stock split, which will be subject to shareholder approval at the next Annual Shareholder Meeting. We believe this stock split reflects our confidence in our Rule of 40 strategy, our ability to execute our digital transformation plan, and the strong upswing in our business. It will also bring several benefits, including improved liquidity for our employees and investors, particularly new retail investors. Looking at our guidance, we expect our ACV to grow by 12% year-over-year in 2025, which applies to both as-reported and constant currency. We anticipate that Pega Cloud ACV will play a significant role in achieving this target. Our 2025 ACV growth guidance does not consider the potential widespread adoption of Pega Cloud GenAI — Pega GenAI Blueprint, which could provide additional upside. To be clear, we believe Blueprint is incredibly beneficial for Pega, and both we and our clients feel the positive momentum. However, our ACV growth guidance is based on a conservative estimate of Pega GenAI Blueprint's influence in 2025. Our strong finish in 2024, even against a challenging Q4 comparison, our ongoing market momentum, and our top-tier technology give us confidence in meeting our objectives this year. We operate under the principle that free cash flow per share should grow faster than ACV growth. A leading software company should aim to boost ACV growth while enhancing operating efficiency. We've detailed our guidance metrics in our earnings press release, but I'd like to emphasize two important points: our 12% year-over-year ACV growth and our free cash flow target of $440 million, representing a 30% increase year-over-year. Please note that our 2025 annual EPS guidance does not include adjustments for the proposed stock split. I appreciate your feedback on financial modeling, so I'll continue to provide insights in this area. First, we expect our business activity to follow our usual pattern in 2025, with net new ACV additions expected to be slightly higher in the first and fourth quarters. We do not foresee significant fluctuations in our ACV growth rate over the year. Second, the strengthening U.S. dollar is likely to pose a challenge for Pega Cloud revenue growth in 2025, with a $25 million currency headwind affecting total current backlog from Q3 to Q4 of 2024, which will also impact revenues in 2025. Third, while we remain committed to efficiency, we plan to increase investments in sales and marketing in 2025 to more actively pursue new clients. As a reminder, we revamped our sales strategy in 2022 and 2023 to enhance our go-to-market effectiveness by focusing on cross-selling and upselling within our existing customer base. Given our recent successes in this area and the adoption of Blueprint, now is the ideal time to broaden our sales and marketing efforts to target more new clients. Lastly, as we invest in Pega Cloud to support cloud migrations in 2025, we expect Pega Cloud margins to remain largely stable. In summary, I am very enthusiastic about the current state of our business. We performed excellently in 2024, meeting our key financial targets while effectively balancing growth and profitability. I look forward to connecting with our investors soon in San Francisco and New York. I also want to remind everyone about our annual investor session happening on Monday, June 2 at PegaWorld at the MGM Grand in Las Vegas, where we will provide updates on the business and offer access to various members of our leadership team. Now, operator, please open the line for questions.

Your first question comes from the line of Rishi Jaluria from RBC.

Wonderful. Nice to see continued momentum in the business. I want to maybe drill a little bit into the investments you're making in increasing sales coverage. Can you maybe talk about some of the near-term and longer-term priorities? And maybe related to that, I know in the past, you had a couple of false starts with really wanting to go down the net new logo acquisition game. Given the success that you're having with Blueprint and how that can reduce friction to creating workflows, creating cases, how should we be thinking about using Blueprint now as a front door for some of these net new opportunities that you haven't been able to penetrate in the past? And then I've got a quick follow-up.

Great question. And we certainly have been paying close attention to how what we've been doing and how we've been engaging has given us new ways to think about doing this that we might have done in the past. What's interesting is I would describe the way we traditionally did selling as a sales guy trying to get in with somebody new would spend, I don't know, 3, 4, 5 meetings trying to convince the customer that they should see or really sort of specialized demonstration. And then they would bring in a solution consultant to it, create a customized demo to try to really intrigue the customer. And the conversation was often very theoretical in terms of concepts. We talked about a lot of concepts as a company, concepts like Center-out, which we think is important. But it takes a while for people to internalize this. Blueprint has entirely changed that. We now do the demo, and demo in a way that is specific to the client in the first meeting. And we're doing it at almost every level of the organization, right up to CEOs. And I'll tell you, they really are pretty engaged with what they do. We no longer need the same ratios of salespeople to solution consultants to build custom stuff. We have AI doing that for us. And it all becomes much more experiential. The customer can see it, feel it, and they can then try and play with it themselves. So we're still calibrating this. But I will tell you, it has completely changed our go-to-market motion already. And I think that's really exciting. And it means that we're going to be able to, I believe, be much more effective at our pursuits with both new and existing organizations. And it also should change our cost profile in terms of what it takes to get to that point where we can show customers something real. Does that make sense?

Yes. No, that's super helpful. Really appreciate the color, Alan. And then just...

It's Ken. Just to add some insight, previously, when we targeted new logos, we used a territory model, which meant we lacked a strong connection to the specific works we covered, allowing for a more generalized approach. What Alan is referring to is a much more focused strategy. We are well-acquainted with our customers and the industries they belong to. We collaborate closely with our partners, who also understand these accounts well. Therefore, we now have a more refined process for organizational coverage. Additionally, as Alan suggested, we no longer require as large a sales team to pursue these new logos due to Blueprint. I wanted to emphasize these two points as they represent a significant shift.

Yes. No, got it. That's really helpful. And then maybe I just want to kind of think about the Rule of 40 mindset that you've had over the past several years. You talked about hitting that now in 2024, your guide for 2025 implies you'll be at or around Rule of 40. Just how should we be thinking about, I guess, number one, the durability of kind of maintaining this balance Rule of 40? And number two, is that kind of the end state? Or is there potential to further optimize the model and maybe even potentially accelerate growth from here and actually exceed that as kind of a North Star?

We fundamentally believe that there is no limit to how much a business can improve, and our teams share this view. Suggesting that reaching the Rule of 40 means we're finished is completely contrary to our philosophy at Pega. So what’s next for us? The Rule of 45. We need to keep striving for improvement, ideally while also achieving accelerated growth. Our main focus is to enhance growth without sacrificing our profit margins, aiming for a better balance between growth and profitability, while ensuring we prioritize our growth initiatives.

Yes, I think that's fair. Look, Pega needed to go through some internal reeducation to get us to the point where we had the discipline to go from where we were a couple of years ago to here very solidly in a Rule of 40 camp. Nothing has been done in a way that everything we've done, the way that I believe, is completely sustainable. But our next focus needs to be how do we open the aperture on growth. And you've heard me talk about wanting to get back to the high teens or 20% growth that we've had is kind of the direction, how do we open that aperture while maintaining that sort of discipline and sustainability. And that's what we're going to be really, I think, focusing on this year. But we're not ever going to go back to the way we used to run the business.

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

Okay. Great. I guess maybe just to start, I do want to ask on just linearity of ACV and what's going on there. I mean, I think, if I'm looking at the 4Q number, I think it's the lightest 4Q since like 2018 or something like that, if I'm adjusting for FX in the right way here. But yes, I guess, can we just give a little bit more clarity on kind of what you're seeing in deal environment? And maybe like did deals push into Q1? Or just how we should think about what that looks like or the implications of that?

Sure. I'll address the topic of linearity. You are correct about the currency, but the impact of currency was actually significant for us. The reported figures may not fully reflect that. While Q4 of 2024 was still stronger compared to other quarters, it may not appear that way because currency presented a substantial challenge, around a $40 million headwind in Q4. This is a considerable figure. Looking at constant currency, we saw the year shaping up to be more balanced. We had some activity mid-year that we worked hard to accelerate, which might have otherwise contributed to Q4 if we hadn’t been successful. In enterprise selling, where we handle hundreds of deals rather than millions, large deals can influence quarterly results. As for 2025, we anticipate it will be a very good year and, like this past year, we expect the strongest net ACV additions we've ever experienced. However, the distribution may differ, with Q1 and Q4 historically having more activity in ACV growth, and we believe 2025 will reflect that trend.

Okay. Great. That's helpful context. And then I guess I wanted to ask on some of the legacy replacement opportunities. And I think highlighting some of the BPMN stuff and I think the past couple of quarters talking about some of the legacy replacement opportunities here with Blueprint. Can you just help us think about like what that looks like or the use cases that you can maybe go after that would be different or would be accelerated from this? And maybe how you kind of see that playing out here over the next couple of years?

Yes. Historically, Pega was used in legacy transformation settings but we would actually talk about working with clients, to the quote we used to use, is wrap and renew legacy systems. So they have a system, what we would typically do historically is we would work to improve the processes, maybe tie it together with other systems but we would be their back ends here as well. And what we introduced in the middle of last year and what we've been building into Blueprint here is the ability to now say, 'Hey, we're going to let you rethink and replace your legacy systems.' So you can still wrap them if you want. But what customers really want to be able to do was to turn off their legacy systems. So what did we do? Well, we've added capability into Blueprint to make it so that we can generate cloud-native database controls so that a customer can say, 'Hey, I want to replace the system. I want the processes to end up in Pega. I'm going to have maybe some systems of record like SAP financials that I'm going to have it talk to. We can now immediately import those APIs with staggeringly little effort. But I also have some data that used to live in that system, and I want to create a cloud-native database, maybe a BigQuery database or a Databricks database or a Redshift database, something that would run in their cloud environment, that Pega can now, as part of the workflow, just automatically update.' And this gives us a tremendous breadth of new opportunity to be able to do this, rethink and replace, which has really been resonating with clients in our early discussions in the last couple of months. So I'm really excited that we've opened an aperture here around legacy transformation. And with things like all the big SAP migrations that are going on with SAP putting pressure on their customer base, not everything built in SAP wants to migrate to an SAP environment. The financials do for sure. But all the stuff around it, we've got customers right now who are putting those into Pega, and we think that represents, from our point of view, a pretty dramatically expanded opportunity.

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

Alan, I want to ask you, what are you hearing from customers in terms of applications created through Blueprint going live? Trying to understand if the pace of application go-lives has picked up, and if it's driving up kind of the aggregate consumption of the Pega platform in any material way?

It clearly is. I mean I clearly see, look, people mistake Blueprint for something that's like a new front. I think of Blueprint more as a completely new way to rethink how we get the engine that we used to work pretty well with customers to be understood and adopted at a completely different pace. Since we really launched this around PegaWorld last year, we've had over 70,000 Blueprints created. While some of those are people just getting started, hundreds of them are genuine modified systems, with people interested in either building or understanding. We've begun to see these deploy into production. So the idea that there’s a distinction between a Blueprint business and a non-Blueprint business is misguided. There's not a single conversation I've had in the last 3 months that hasn't had Blueprint at the center.

And Pinjalim, I'll add one piece of information. Although this may not be backed by hard data, I want to emphasize that hundreds of millions of dollars in our pipeline are being driven by the Blueprint, which is significantly integrated into our sales process. In 2025, we anticipate it will be the year of Blueprint. If you had attended our kickoff, you would have seen a video showcasing feedback from our sales teams highlighting that Blueprint is essential to our approach with clients and helps reduce time to value. It is present everywhere.

Yes. Understood. Definitely, the excitement is palpable here. One question for you, Ken, the 12% ACV growth guide, I think you said something like material contribution from cloud. I'm trying to think how should we think about maintenance and term in that kind of mix? Like obviously, maintenance seems like the decline has kind of picked up a little bit. I think last time you said you might see a steeper decline in 2025 for maintenance. And then term, should we expect that to start to decline at some point?

Yes, we expect maintenance to decline.

We want it to decline.

Yes. It indicates that people are moving away, so we anticipate a decrease in maintenance and a slower growth rate for term, which could also potentially decline year-over-year. The challenge is that many of these migrations will occur through 2025, 2026, and even into 2027. Therefore, the timing of these migrations on a quarter-by-quarter basis and throughout the year is difficult to predict accurately. However, we should assume that the majority of our growth is coming from Pega Cloud, which is driving our growth. In fact, we may see over 100% of our growth attributed to Pega Cloud due to its connection to migrations.

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

Really helpful color on the hundreds of millions of pipeline that you have right now for Blueprint. But is there any way to think about the financial impact of Blueprint thus far? Like is there a way to quantify the tailwind that's caused for ACV growth or how many Blueprint deals you've closed already? Just trying to understand how it impacted 2024 thus far.

Let's revisit what Alan mentioned earlier, and I'll share some additional insights. Blueprint will have two significant impacts. The first is our enhanced ability to connect with clients, leading to quicker engagement, shorter sales cycles, and faster value realization for clients. This is one key theme. Additionally, it will help us create a more efficient go-to-market strategy for both existing and new clients. While these two aspects are different, they are interconnected. The first aspect is already evident, as clients are recognizing value more quickly and engaging with us, which is starting to show results across many of our clients. Of course, this ties into bookings, although there is a slight delay in that correlation. Regarding sales efficiency, we haven't seen that yet since we are still in the implementation stage. However, as we expand our sales and addressable market, we anticipate improvements in efficiency down the line, which I hope makes sense, Jake.

Okay. Really helpful. And then as you're starting to see more and more of these customers migrate to Pega Cloud, can you help us understand what type of price uplift you've been able to see over the past year or so?

The price uplift can vary significantly based on whether customers choose perpetual or term licenses, their pricing, and contract models. Typically, we see an uplift ranging from 25% to 35% on the low end, and on the high end, it can exceed 100%. It's very specific to each customer because many clients, when they migrate, also purchase additional products, which all factors into the overall relationship. Generally, there will be some uplift with most of our clients, though not all, as some may migrate without it. It’s important to note that this is highly individual for each client, so we shouldn't over-complicate it with a rigid mathematical model, as it’s not a precise science.

Your next question comes from the line of Patrick Walravens with Citizens JMP.

Great. This is Austin Cole on for Pat. Wondering about the Pega Agent Experience announcement, how are you guys thinking about the monetization, any additional monetization component there for front-end versus back-end experiences? Is this kind of baked into the whole Infinity experience? Anything there would be...

It's fully integrated into the Infinity experience. I believe that Pega should monetize its products by having our customers utilize the work. As our customers increase their deployments and gain more benefits from both automated workflows and those involving people, our contracts generally include pricing increases based on the levels of consumption and ongoing use. I find it amusing that many other companies chose not to follow our path; a couple of years ago, we made the challenging decision to shift our agreements from user licenses to work-based licenses, typically measuring the work performed by the customer and adjusting the price accordingly. I have no idea how vendors selling software per seat will manage over the next few years, and I predict it will be tough for some of them. There's a common belief that the number of seats should decrease. I also heard another vendor discussing a plan to charge $2 per transaction to reflect their offerings, but I'm skeptical about the sustainability of that approach. Pega has always maintained a structure where we charge based on the amount of work, which I believe is well-suited for an active marketplace.

Great. And then maybe just as a quick follow-up. On the U.K. Armed Forces deal, can you talk a little bit about how that engagement came about? And what allowed you guys to win that deal?

Sure. It's interesting that many areas of the U.K. Armed Forces operated with distinct silos. We had the opportunity to successfully handle recruitment, which is crucial for them, in both the Navy and the Air Force, where we achieved notable success. However, the Army and the Strategic Command were not utilizing Pega. They opted to engage in a competitive and highly formal selection process, consulting all the usual candidates for potential solutions. This process was extremely thorough and lasted over 18 months. Ultimately, they chose to partner with a consortium led by Serco, which submitted a remarkably strong proposal. We were honored to play a key role by providing the core technology that will manage this initiative. This situation exemplifies our ability to succeed based on our merits within a demanding environment. We are fully committed to ensuring its success, especially given the current concerns regarding defense and the need to recruit the right teams. We are excited that they will be using our technology for this purpose.

And I would also add one point on that, which is a broader opportunity in the global public sector as they look at digital transformation, this is a good example of where we are well positioned with our platform to be able to help public entities kind of reimagine what their back ends look like. And I think there's been a lot of talk about that certainly in the U.S. public sector, but that's an issue globally, right? Governments have old systems and they need to be refreshed, and we are perfectly positioned to have that to be a big player in that space. And this is a good example of one that we did.

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

Ken, I have a question for you. In your prepared remarks, you mentioned that Pega Cloud gross margins are expected to remain fairly flat in the upcoming year. Could you elaborate on the factors affecting Pega Cloud gross margins? I had anticipated some leverage as Pega Cloud continues to scale.

Yes, Mark, the main reason we believe they might not scale with operating leverage is the speed at which we transition clients. If we transition clients more quickly, we may need to make specific investments to support that technical migration, which would become a cost of goods sold. Thus, it would impact our costs. Our core models would continue to improve, but we might incur some additional investments that would be directly linked to the speed of client migrations.

That's helpful. And then as a follow-up, one for you, Alan. I realize it's still early days for Blueprint here. But are you seeing any patterns emerge with, say, the types of Blueprints that customers are actually putting into production like in certain industries or use cases?

I think what's starting to become apparent is that people are increasingly considering the rethink and replace capability, which we previously didn't have to emphasize. With the features introduced recently, there’s now a real opportunity to rethink and replace, and we’ve been encouraging our teams to shift from using the term rapid renew to rethink and replace. I see this as an emerging trend that could be quite impactful. Many outdated systems exist that are costly to maintain and may have security vulnerabilities. Some of these include database systems and Lotus Notes that continue to be used by customers. Additionally, we’re noticing significant interest in areas such as IBM mainframes, and we have experience working with organizations that have this legacy. Therefore, I believe that legacy transformation is the most exciting new trend I’m observing.

Your next question comes from the line of Devin Au with KeyBanc Capital Markets.

I wanted to, first off, just want to get some more color on the fourth-quarter performance. I know you kind of mentioned that net new ACV has kind of come in as expected. But curious if you've seen any sort of deals closed in the quarter as a result of maybe year-end budget flush or as a result of budget kind of flow through post-election in the U.S. here? Just any color you can provide.

We have heard questions about the anticipated year-end budget flush throughout the year. However, we did not notice any unusual activity. There are always year-end transactions, which is why Q4s tend to be larger for enterprise software companies, sometimes due to commission plan structures and budgeting cycles. But we did not observe anything out of the ordinary. Therefore, I wouldn't characterize it as a significant budget flush or a reduction in budget spending or opportunities. It appeared to us to be a fairly typical quarter.

Got it. No, that's great context. And then just one more for me. I know you kind of talked about you're really well positioned globally and the federal public sector business. Maybe if you could just kind of size it and kind of look at just the U.S. federal business, kind of how that has been trending? And just given some of the headlines that we've seen from the administration looking to drive efficiencies across different multiple agencies, have you seen any sort of uptick in top of funnel activity or pipeline generation there? Any color you can provide would be appreciated.

Yes, we are very excited about our potential engagement in the federal space. While it can be quite confusing given the current news, we feel optimistic. The services we offer align well with the government's needs for cost savings, efficiency improvements, and service provision. We feel confident about what this could mean for us. There is a lot happening, and I’m sure that’s the case for everyone in this area, but we are not worried. In fact, we believe we are in a strong position.

I'm going to make a comment that is not as general as it might sound. If you think about the areas where governments are most focused on looking at efficiencies, it typically isn't the interactions that happen with constituents. Many of our solutions help governments communicate and manage interactions with constituents, whether that be taxpayers or other interested parties. We feel like our solutions are well anchored in the workflow that occurs within government. Meanwhile, a lot of the targeted areas that you read about in the news appear to focus on wasteful spending that is not related to benefits for constituents. We feel very positive about the solutions we offer and the agencies we support, but we'll see how everything plays out.

And that concludes our question-and-answer session. And I will now turn the conference back over to Alan Trefler for closing comments.

Thank you very much, everyone. We're really pleased with how we ended the year. We're really excited about how we're positioned for 2025. And just know we're working hard on your behalf and look forward to talking to you again soon. Thanks all.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.