Pegasystems Inc. (PEGA) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to Pegasystems' First Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Peter Welburn, Vice President of Corporate Development and Investor Relations. Peter, you may begin.

Thank you, Krista. Good morning, everyone, and welcome to Pegasystems Q1 2025 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, 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 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 Q1 2025 results and in the company's filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ending 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. While those 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 a result of new information, future results 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 March 31, 2024, foreign exchange rates all periods shown. Reconciliations of GAAP and non-GAAP measures can be found in the company's press release announcing its Q1 2025 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. It's great to be off to such a strong start in 2025 and to see how the changes we made continue to drive profitable growth around the world and across industries. Ken will walk you through the financial highlights in a few minutes. But let me talk a little bit about having been on the road in Q1 and having met with clients and partners in Europe, Asia and the U.S. Now more than ever, we're seeing that organizations want to accelerate digital and legacy transformation to be more efficient and effective in serving their staff and customers. And they also, I think, are really looking for help cutting through the hype that exists and keeps getting deeper, frankly, how to go about implementing the newest AI technologies, where it's out additional risk. We're finding that they're really interested in solutions that give them practical approaches and proven capabilities with predictability and governance, but they can help them achieve the critical objectives that they have. And I believe Pega is perfectly positioned to be the strategic software partner for clients who are serious about driving the transformation they need to compete at. Our team has never been more confident or capable or more prepared to meet the needs and seize this opportunity to help our clients achieve their digital and legacy transformation goals. Now over the past year, Pega Gen AI Blueprint has been front and center in pretty much every client conversation we have, providing a differentiated hands-on experience as quickly and dramatically demonstrates the power of Pega. Blueprint is, in fact, an agent that uses the power of AI to take Pega's proven best practices and our clients and partners' knowledge to make it easy for business and IT to collaboratively design enterprise workflow applications in minutes. It supersedes the slow failure prone traditional app design process, and it's not just faster, it's better. It uses the AI to stimulate design thinking and to trigger a whole better way to go at building and rebuilding systems. It creates a shared understanding of the application design, a faster path to value and apps that are built for change, not just for launch. Pega Blueprint gives our clients a differentiated approach. It doesn't generate code. It generates clarity, it's not just faster, it's sustainable, and that is a game changer. This powerful tool enables our teams to rapidly demonstrate real use cases and showcase Pega's full capabilities. It makes the case for transformation clearer than ever. And we're seeing our partners really become really interested in engaging around Blueprint. And I think we're going to be seeing them adopting Blueprint as a powerful tool that they can use to showcase more and more of their own IP and to leverage with clients. Now remember, you did experience the magic of Blueprint yourselves by going to pega.com/blueprint. We continue to add new functionality and in deliver increased value to our clients, partners and our field. For example, users can now upload documents directly into Blueprint such as specifications, requirement stocks or even application documentation for a legacy system, if the customer wants to retire. And this new feature makes it easier than ever for clients to tackle technical debt rethink their legacy systems and begin the process of replacing them to transform the future. We've also made it so workflow designed in Blueprint are inherently agentic. Now agentic is a term we're hearing a lot. It's kind of a new term. Let me explain what it means because I think we've got a really, really interesting approach to this. Users can interact with Blueprint workflows or even chat with them in phone calls you can literally make a phone call to their workflows and ask them to do take things for you, like create a new account or fix a bad charge on your statement. Now workflows built in Blueprint can use agents at any step to automate document processing or perform additional research. All under the governance that workflows provide. And the response to these innovations has been overwhelmingly positive, and it's exciting to see the momentum build reflected in the increasing number of Blueprints that get created. We're now seeing over 1,000 new Blueprints created every week, more than double what we saw just months ago. In response to this interest, this past quarter, we introduced 2 new versions for flavors of Blueprint. For government clients, we've introduced Blueprint for Government Efficiency toolkit, a Gen AI offering that helps public sector agencies accelerate digital transformation and increase efficiency. While remaining compliant with Sanders. And as a reminder, for over a decade, we've also offered a really important product called Customer Decision Hub or CDH for sort which is a significant part of our business, that Forrester says "Sets the gold standard for enterprise real-time interaction management implementations." CDH is our always on centralized brain that uses statistical AI and predictive analytics to enable personalized interactions. And we still believe statistical AI is very important and is perfectly, perfectly complementing our use of generative AI. We think, having both of those in our bag gives our clients and us some huge advantages. And now that we're beginning to roll out a Blueprint aimed at CDH. It's going to really help our customers visualize their customer journeys and quickly design engagement programs with speed and clarity. So let's go back to that Agentic or/and talk a little bit about our perspective on agents. Now that the promise of agents is potentially enormously transformative. The notion that these concepts of agent and the Agentic for the system is doing things for you is well, it sounds and looks magical. And they've become ubiquitous bunch of a [ plus ] words. And vendors are flooding the market with thousands of undifferentiated solutions. Now our designs are really quite different and I think reflects a unique understanding and leverage of unique capability that we've developed over years. And we've taken the start, we took an approach because we think it's going to give us and our clients a competitive advantage. The fundamental flaw in most Agentic solutions lies in their dependence on prompts. Pretax instructions given to AI models that can require extensive fine tuning, sometimes by armies of specialized prompt engineers. But the problem with this is not the effort -- the problem is that this approach creates inherent unpredictability, making it impossible to guarantee consistent results, especially at enterprise scale. For mission-critical processes like insurance claims or business-critical decision, the lack of predictability presents an unacceptable risk and is a fundamental challenge for the many enterprises trying to manage thousands of mission-critical agents as they map their future on. Now enterprises want the promise and power of automation that agents could offer. But we don't think they want thousands of agents running unchecked, producing unreliable, undesirable results. They need an agent to wherever possible follow a consistent process with full transparency on how the guys worked out. And this is where our unique approach comes in, combining the power of language model-driven agents with the predictability of workflows. With our latest enhancements of Blueprint and Pega Infinity, all of an enterprise workflows are intrinsically Agentic, both in their creation and their execution. This means the workflows are designed by AI agents, who challenge the users to optimize them, who use that reasoning power to figure out the best way to do something. And this can suggest new and better ways of getting work done, which is powerful and profound. They work collaboratively with the business people and IT to perfect the best way for an organization to work. But incorporating this reasoning at the side time provides this advantage without this exposure -- of spontaneously doing reasoning at the run time, when the end users are actually using the application. And this is precisely what we built with Pega Gen AI. Once the workflow is designed and importantly, approved by humans. It is cataloged and prepared for use at the right time. And what an agent is invoked at run time, Pega leverages language models to directly find and send requests to the right workflow leveraging the design and improved workflows by providing the flexibility and fluidity of a conversational approach and having the system be able to kick off multiple workflows as well. The workflows become a knowledge base, helping the system gather the right information and take the right action. You can now experience this right in Blueprint. And as I said, it's literally getting better every 2 weeks. You can design an application with many specific workflows and in preview, use a conversational agent to chat with that whole application, have the application to find the right workflow what we try to do and it's beautifully interactive. This means enterprises can harness the power of agents, while maintaining the predictability of workflow, the best of both worlds and it's in stark contrast to what our competitors are offering, which are agents that are black boxes of texts, and we don't think can be relied on to follow processes that govern large or regulated businesses. Now this capability is unique to Pega. Because of our extensive workflow average. And we don't think it can be easily replicated. That's why I believe we're perfectly positioned to take advantage of Agentic AI, but do it in a way that it's going to have a higher level of quality and reliability. You can see more about these exciting innovations leading up to and as PegaWorld. So as we enter this era of Agentic workflows, think of Pega as positioned to lead this transformation with our clients and our partners. Let me say a few things about PegaWorld as well. At PegaWorld, starting on June 1, you can experience all of these interventions firsthand and explore over 200 live product demos in our 100,000 square foot innovation hub. This will really show you what the possibilities are as well as the people are really, really doing. And we have great clients talking. Just to mention a few RaboBank will be describing how they're empowering employees to serve customers and society, while keeping criminals outside of the financial system. Unilever, we'll be discussing how they transform distributor onboarding and unlock vast efficiency gains. And Verizon will explain how they're financing the combined power of generative AI intelligent case management and hyper personalization. I hope you'll join us for this unmissable event, including our Investor Day. Ken will provide information about how to register. So to wrap-up, we're off to a great start in 2025. The changes we made to our business are delivering for us financially and organizationally. Our unique architecture and approach to AI gives us what we see as a major competitive advantage. And across the board, the team is excited and more confident than ever to deliver for the company our clients, our partners and our investors. To provide more color on our financial results, I will now turn it over to Ken.

Thanks, Alan. We're off to an amazing start in 2025. The first quarter was outstanding on nearly every measure, with our most important metric, annual contract value adding $74 million. Strong leadership and excellent execution by our sales teams worldwide, driven by enthusiasm for Pega GenAI Blueprint sparked an acceleration in ACV growth to over 13% year-over-year. Pega Gen AI Blueprint is changing the way Pega engages with our clients, partners and prospects around the world. It's also giving our sales teams a new level of confidence by enabling them to visually showcase the power and capabilities of Pega's unique platform within minutes rather than weeks or months because Blueprint makes it so fast and easy to demonstrate Pega. That's a massive difference. At our investor session in June 2024, we set a strategic growth target of 20% or higher for Pega Cloud ACV. Accomplishing this goal is critical because our transformation strategy calls for Pega Cloud ACV to expand in the coming years. As Pega Cloud becomes a larger and larger portion of total ACV, there's also an opportunity for us to blend up our ACV growth rate, especially given our high client retention rates. As a result, we've been very focused on strategic initiatives to drive workloads on to Pega Cloud. Our Q1 Pega Cloud ACV growth rate of 23% to $700 million of ACV validates this focus and provides evidence that our sales teams are effectively cross-selling and up-selling into our existing clients, capturing new logos and accelerating legacy workloads to Pega Cloud. It's amazing to think that Pega Cloud ACV was only $50 million, when we started this subscription transition journey in late-2017. And now Pega Cloud represents approximately half of our total ACV. So we're on the right trajectory to becoming an even more durable and predictable business. Moving to free cash flow. We delivered $202 million of free cash flow in the first quarter, an amazing result given that we generated additionally $201 million of free cash flow for the entire year of 2023. We dramatically improved our free cash flow generation for 2 primary reasons. First, we're increasing ACV growth, which drives collections and therefore, drives cash generation. ACV, a proxy for subscription billings increased by over $170 million year-over-year in constant currency from the first quarter of 2024 to the first quarter of 2025. Higher ACV and expanded billings in turn will drive accelerated cash flow performance. Second, we're efficiently managing the business, which has translated to stronger cash flow. Our robust cash flow allows us to optimize capital allocation and deepen the power of our platform. Share repurchases are becoming an increasingly key element of our efforts to optimize capital. In the first quarter, we repurchased approximately 1.5 million of our shares for $120 million much more than offsetting Q1 dilution. In fact, we reduced the number of outstanding shares by nearly 550,000 shares in the first quarter. Given our confidence in Pega's future and the value we see in our stock, our Board has authorized an additional $500 million for share repurchases. Our repurchase program gives us flexibility to return free cash flow to shareholders while maintaining a very healthy balance sheet. Having a strong and flexible balance sheet is another key component of our capital allocation strategy as we look to optimize our capital structure. In Q1, we fully repaid our remaining convertible note balances of $468 million, achieving debt-free achieving the debt-free status marks an important achievement and represents a significant milestone in our transformation journey. The capital raise through these convertible notes was instrumental in funding our subscription model transition that helped us on our Rule 40 journey. Achieving the Rule 40 required a deep cultural change and significant effort from all of our team members around the world. We clearly have Rule 40 in our DNA. Thank you to everyone at Pega for embracing a Rule 40 mindset. Our Q1 results demonstrate the various strategies we're employing to increase free cash flow per share. Going forward, we believe that growing free cash flow per share will drive meaningful value for our shareholders, with increased free cash flow generation, we have additional capacity to return capital through buybacks. We plan to share more information in our investor session, which will be held at PegaWorld at the MGM Grand Hotel in Las Vegas on Monday, June 2 at Noon. To register, please e-mail [email protected]. I've received feedback over the years that it's helpful when I share some thoughts on modeling. So I'll do that again. While Q1 was exceptionally strong, we are only 1 quarter in the year. And as usual, we have lots of work throughout the remainder of 2025. We believe revenue and free cash flow will continue to follow seasonality patterns, which means we expect our term license revenue and free cash flow to be stronger in Q1 and Q4 of 2025. Please keep in mind, currency fluctuations may create noise in the next few quarters, especially in the revenue line item of our P&L. For example, we mentioned at the end of the year of 2024 that we had some currency impact to Pega Cloud backlog and you're seeing some of that flow in to Pega Cloud revenue in 2025. We started our subscription transition with the vision of transforming Pega into a more durable, recurring subscription business that balanced revenue and profitability as a Rule 40 company. Now that we finished our subscription transition and achieve the Rule 40, we're in a great position to continue to improve our profitability, while attempting to drive higher growth. In conclusion, we exceeded our expectations. It feels amazing to be in this position and to execute the way that we did. As I've always said, 1 quarter does not make a trend, and we still have work to do in 2025, but it sure does feel great to start the year this way. And with that, operator, please open the line for questions.

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

Congrats from me as well. That's an amazing first quarter, especially in this environment. The 1 quick question. If you look -- there was a big outperformance on term licenses. Can you speak a little bit about the factors there? And the 1 question I got from investors was like very, very strong ACV bookings on Pega Cloud as well. Pega Cloud revenue came in slightly lower. Can you talk about the difference there? I would expect this currency, but like maybe can you -- can elaborate on that a little bit?

Yes, absolutely. So you're absolutely right. I mean turn you know us well that we try to -- we try to really explain that revenue does move around because of the term license revenue. Some quarters you have term license revenue like we have in Q1, other quarters, you don't have as much term license revenue. So it is the unfortunate accounting for ASC 606. So we just like to clarify with -- and I think you're leaning -- your question leans into this point, which is you shouldn't expect the term revenue as being something that is kind of linear and consistent, lots of seasonality there. So you absolutely good call out on that. The second point that you're on, which is ACV and backlog. ACV and backlog and revenue will be aligned with something like Pega Cloud. However, it doesn't happen in a sequential nature like immediately the next quarter. We've kind of highlighted that it typically takes a few quarters for the backlog and ACV to convert into revenue. So some of it is that just that normal lag in the way that the revenue flows through our model, but -- we also did have a currency impact that rolled over from last year as well into Pega Cloud. And quite frankly, we're not going to guess what that will be in the future because naturally, currency rates move around. But I think there is -- it is a very important call out to say that ACV does not immediately flow into Pega Cloud revenue in the subsequent quarter, it takes a few quarters. And so that's what's happening in our model.

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

Great. And congrats on the quarter. Alan or Ken, I think everybody is trying to figure out kind of the macro environment post March. Maybe talk about what are you hearing from customers in April and Q1 so far? How are they kind of bracing some of the macro uncertainties. Have you seen any changes in customer buying behavior in April? Or are you seeing any changes in the sales cycle? Any color would be helpful.

Well, I don't do with April in particular. I mean, the last couple of months, there's been a higher level of uncertainty and anxiety that comes along with that. And that's, I think, especially true in some of the European countries where some of what's going on, and I think has been taken almost a bit personally, as it works. But the level of engagement with customers across the board, continues to be extremely high. And we, as a company, tend to do pretty well when things recover.

Yes, I see. Okay. And then, Ken, obviously, the ACV results are pretty solid. You probably added 1 of the highest sequential ACV ever in the company's history for Q1. But that follows a Q4 when the ACV added was a little bit of a low bar for Q4. So wondering how much of the ACV outperformance is kind of based on timing of deals from Q4 to Q1? Or did you see any kind of pull-in from Q2 or rest of the year?

Yes. I mean I think that's -- first off, I think that's a very fair question to say, did deals flow from Q4 into Q1? Or conversely, did you pull deals in from the future? If you look at the deal structure in Q1, I can credibly say that there was not a rollover effect from Q4. And there was not what we would consider to be a pull-in effect from future quarters. I think we were set up at the end of the year with our pipe to be able to really have a good Q1. But to be honest with you, we did better at Q1 than I had initially thought we would do. So Q1 was just a very good execution quarter.

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

Great. I guess maybe just a follow-up on ACV dynamics in the quarter. Just was there -- I guess, what was the maybe quarter-over-quarter FX impact on ACV? Or is there a way to think about what the constant currency like net new ACV growth was in -- for 1Q?

It was in the low 60s, Steve. Like [ $74 million ] was -- as reported. But if you adjust for currency, I think there was about $10 million. We do kind of -- we do show that in the earnings release, but I think it was -- I think, it was about $13 million of currency. So we would have done constant currency, the net adds would have been in the kind of low-60s.

Okay. Perfect. All right. That's -- yes, that's very helpful there. And then just in terms of -- it seems like macro seems like it's okay. But I guess when you're thinking about the future pipeline dynamics and maybe kind of building off of Pinjalim's question as well, I would just with the uncertainty going on, have you seen any kind of change in how customers are talking about their kind of future deal flow with you? Or has there been any positive and I know there is some federal exposure there. So I guess, what impact is maybe the dose conversations had on specifically within the federal side of the business?

I'll maybe start, and then I'll let Alan add some color. We -- there's always -- I would say when you have times of uncertainty, it's not -- I don't think I'm saying anything that's rocket science that clients have to rethink their priorities and their initiatives, and that happens in the commercial sector as well as public sectors. What we have found is that legacy transformation and digital transformation is at the top of everyone's list. And Gen AI fits squarely into that camp. So we have seen continued momentum around the way that we solve and help our clients solve problems. Naturally, when spending environments change, everybody will be impacted to some extent. But we have not seen the level of anxiety around the solutions that we are providing for our clients. We actually think, in many ways that -- as an example, the Doge situation, one of the primary initiatives around Doge is to streamline and modernize lots of the technology that the federal government has that is very old and so that fits squarely into what we can do. So I do think this is a great opportunity time for us. And you will see the natural anxiety, but I don't think that it's I don't think it's -- I don't think what we're doing with our clients are things that people want to wait on. I think they're already behind.

Yes. I would say relative to some of the Doge initiatives. Pega years ago began moving our customers off of user-based licenses, which I think has been one of the targets that they have been going after. So basically, work-based licenses, which is really with the idea of automation and getting work done. And we did that because we realized years ago that the number of users are going to go down, if systems like ours did what they were supposed to do. So we really didn't want to be linked to that. So that's been something we've done very much across the board here. And I think it really -- fits well. There is a lot of uncertainty. People don't know a lot of changes in terms of the leadership. I'm hoping it will settle down over the next couple of months or quarters because that would definitely make it easier to work with. But as Ken said, I think there's as much opportunity as there is risk here. And so we just need to really, really work it effectively. Being able to point to workflows that can really show customers improvements in their business is a wonderfully reliable thing to be able to show our clients. And the fact that we can use the AI the way we can to create at scale and then use the AI to find the best 1 and operate it is almost like a perfect mixture of what you do in the language model and what you want to do with a workflow that's really well nailed down and auditable. And so we think we've got a message here that people are really understanding and we'll continue to see -- we think that we feel pretty good about.

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

Congratulations, first of all, it's great to see. Alan, I would love you to go a little deeper on the topic that you mentioned in your prepared remarks, where you were talking about how noisy it is out there with so many different vendors claiming to have Agentic types of solutions -- so can you talk a little bit more about what you're seeing there? How hard is it to cut through that noise? And then maybe specifically in terms of solutions you see from Salesforce and Microsoft, what do you think?

Look, I think customers have been subject to lots of AI hype for a couple of years now. And so the level of really skepticism, I think, is pretty high in the customer base that we -- we deal with, I mean, it's a pretty sophisticated customer base. I believe we can explain to them pretty clearly. Why a mix of language models and workforce is the ideal combination. And the reality is when we build Blueprint, people talk about Blueprint like it's a SKU. It's really not a SKU. It's really an whole new way of doing what we've been doing all along, and it really builds on all of that the decades actually of knowledge of understanding on the very, very powerful systems we have. And that's why I think we've been able to cut a lot in a relatively short period of time. And I really love the runway of where this is going to go in this "Agentic world." But look, the buzz word at the hype is -- and the disappointment, I think, is going to be huge out in the market. Just huge, all these people doing prompt engineering, or "thousands of prompts" how the hell you're going to test that when the language model changes? If language models are changing couple of times a year. You've got a business running off of prompts, the language model changes, you get a new version, what are you going to do? I know exactly what we do. We're running an execution time to workflows. But I don't know if these other guys can come.

All right. That's great. And then Peter, can I just ask you a follow-up, which is investors are so worried about the impact on closing rates. And you guys felt good and SAP sounded good last night. Do you have any thoughts you can share with us in terms of where the disconnect is?

Are you -- you're just saying why are software companies having variable results?

Yes. No, you don't sound bad at all, right? And SAP sounded pretty good. And so yes, just -- we can see from all the stocks, how worried we all are. So it's just interesting that maybe it's not quite as bad out there. I don't know, any thoughts on that, I would love this...

Yes. So I'll give you -- I can tell you 2 things. 1, what we're seeing, and I can also tell you an observation that I have. So what we're seeing is the clients are still engaging and very much trying to modernize, digitize, move to the cloud, leverage Gen AI, figure out ways to drive efficiency and better client experience. That has not changed. Quite frankly, I don't see that change at all in the last 3 months. So from that standpoint, there's a lot of opportunity. What I would say on the point that you're making about very results that you're hearing from different vendors, my gut is that this is some people -- some companies businesses are just not doing as well from time to time. And sometimes people use the macro is the reason why that's happening. And I think there's a little bit of that going on. I think that you may have seen the same results in the neutral macro environment or a good macro environment or a bad one. But I think sometimes some companies point to that as the reason why they don't execute. And so that -- so I think there's a little bit of that going on, Pat, I would definitely say to what Alan said is that -- of course, the environment is less certain now. I mean you have to watch the news every morning to figure out what's going to happen when the futures move 500 up or down day to day, that's not great. Volatile environments are great. That's said we've seen our clients continuing to lean in on the problems that we solve with them.

[Operator Instructions] Your next question comes from Devin Au with KeyBanc.

All right. First 1 I have is, I also want to dig a little bit deeper into the strong ACV results in the quarter. But maybe I want to ask it through a lens of Blueprint I know that last quarter, you guys have mentioned hundreds of millions of pipeline was driven by Blueprint. So I'm kind of curious, if you can share any more color on that? It would be great to hear, if you have any updates to share regarding what Blueprint has influenced deals wise in the quarter?

Yes. I would tell you that every single piece of business, we're at is influenced by Blueprint. Every single one. It's become ubiquitous. I think it's wonderful because it really broke down some of the mouthpiece between business and technical people, we're going to get people on the same page. And if you haven't tried it, I mean, anybody who's on the call, I recommend you to give it a shot. I think it's really very pragmatic, but in use of AI is what I would say. So yes, I think Blueprint is profoundly changed our business. And with the new capabilities we're adding to it, we're expecting that that's going to continue and expand.

Got it. Okay. That's helpful. And then just 1 quick one on backlog. I think you just posted backlog growth of 21%, quite a meaningful step up from the 14% in 4Q. Peter or kind of curious if you have any additional commentary on what drove that strong acceleration. Have you seen contract durations change 1 way or the other? Any color there would be helpful.

Yes. So I -- I would advise to pay more attention to the current RPO than the total RPO. The current RPO is very much a signal or an alignment with the ACV growth. And I think that's a really -- in terms of thinking about the growth of the business. the total RPO does move a little depending on multiyear Cloud -- Pega Cloud renewal cycles, which can -- and you can kind of see that kind of in the laddering. We do -- we have a pretty robust disclosure, and you can kind of see that in some of the laddering. So I would say, if you look at backlog, backlog is a healthy indicator of clients making long-term commitments to us. We love that. Current RPO is very aligned with the kind of the ACV growth in the business.

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

And nice job on the quarter. Ken, with respect to the upside in the quarter, how much of that would you attribute to the sales changes that have been put in place over the past year or 2 versus, say, new product introductions like Blueprint?

It's tough to like separate that. But what I would say is, Mark, that -- our sales model changes that we made have yielded really good behavior. It's like the behaviors of how our sales teams are managing, how we're managing pipe, how we're engaging. I'm really very, very pleased with the activity and the progress. Naturally, we can get better, we will get better and we will push. But I do think there's been a noticeable change in that in our process. And then you shift from that and say how much does Blueprint play into that separate from that? I think Blueprint is completely changed the ease at which a salesperson or in the engagement with our clients, we explain how Pega can help -- and help clients visualize how Pega can help solve their digital and legacy transformation challenges. I mean it's just -- without -- when you try to walk through, like, well, let me explain what it is, let's do an operational walk through. Can we actually get a few weeks to do discovery with you. We'll go build a demo, we'll come back and show you that demo. I mean that's the way our process was, and that's very time and labor-intensive on us and the client. And I think that that's where Blueprint has really just changed the game for us because we have scores of examples, where our salespeople say, I went in with a blueprint, I showed the client to immediately jump to the second level, the third level, the fourth level discussion in a way that just could never have happened without it. And that to me -- those are separate things. But I think both equally impactful to Q1.

I would say 1 additional thing, which is I'm a product guy. So I probably have a strong bias towards saying that the product is what matters. But in reality, these are products that have to be sold. And what I will tell you that I'm really pleased about that we saw in Q1 is that we didn't have. The business wasn't driven by Wales. We used to talk about the Wales and the corporate system. It would really be tied to sometimes just a deal or 3 in terms of making it whether it was a good quarter or mediocre quarter and they'd show up the next quarter sometimes, right? So -- but what happened, I think, is the sales force has gotten tremendously more disciplined about really work into the business. And I think this quarter that just showed up in a very, very broad, strong performance, which -- by the way, I love it. It makes the last weeks of the quarter a lot more relaxing.

Great. That's helpful. One other question, Ken, with respect to the Rule 40 targets. What are your thoughts with respect to the mix between ACV growth and free cash flow margins going forward here given the other results in Q1.

We're not adjusting our guidance for the year. Our model has really been that we believe we can accelerate growth and still get operating leverage through the system. So I think there's an opportunity for us to both accelerate growth and expand free cash flow margins. Certainly, if our growth does not accelerate free cash flow margins will expand. So I mean, I think we are very optimistic on that. I think that we have the really difficult strategy decision on how much are you willing to dial up to try to accelerate growth, but we're very committed to not allowing that to impact our free cash flow trend. So that's what we're paid to do. So we've got to really manage that. But we're very -- we believe we can do both, Mark. We believe we can expand growth in the future -- expand our growth rates in the future and expand our free cash flow margins. Rule 40 is kind of just a number. And quite frankly, we're not looking back.

[Operator Instructions] Your next question comes from Blair Abernethy with Rosenblatt Securities.

Just a question on the Q1 term license. Was there a change or an impact from contract term length of duration of what you signed in the quarter?

No, there wasn't -- it's just the timing of our -- it's just the timing of our term license renewals. Q1 just happened to be a quarter with more revenue.

Okay. Great. And then in terms of your go-to-market at this point for '25, are you looking at sales and marketing capacity at all? And particularly around new customer opportunities?

We are. We have it built into our plan. We have room for capacity increases in our sales model, and we will selectively invest in those areas. I do think the new logo part of that is an interesting one. Because what we found with Blueprint now is because the engagement is so fast, the visualization is so fast, the solutioning and the ideation is so smooth with Blueprint. It does give us increased interest in how we could cover more logos. And how could we do that and still be very efficient on the go-to-market cost. So we are -- that is the one thing that is different in our mind is just figuring out like how do we help more clients change the way they build software.

And that does conclude our question-and-answer session. And I will now turn the conference over to Alan Trefler, Founder and CEO, for closing comments.

Well, thank you, everyone. I want you to know we're working hard. Hoping to see all of you at PegaWorld on June 2nd, we're going to have our Investor Day, but we're also a terrific, terrific slate of announcements and demos that we're going to be able to show people that I think are going to be really very exciting. And it's been a terrific start to the year, and we're pretty jazzed. And thank you all. I look forward to talking to you again soon.

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