April 25, 2024 - PEGA

Pega's Blueprint: A Trojan Horse for Legacy Transformation?

Buried within Pegasystems' recent earnings call lies a tantalizing hint of a potentially massive, yet largely unnoticed, strategic shift. While analysts buzz about generative AI's impact on developer productivity and Pega Cloud adoption, a deeper implication emerges: Pega may be positioning itself as the solution for enterprises drowning in legacy applications.

This shift hinges on Pega's newly launched GenAI Blueprint, a SaaS application that automates workflow application designs. At first glance, Blueprint seems like another tool to accelerate Pega development, aligning with the company's stated goal of doubling developer productivity. However, Alan Trefler, Pega's Founder and CEO, drops a significant clue in the Q1 2024 call: "We think that we are seeing many customers looking to use Blueprint to be able to rethink and to modernize your legacy stake."

This seemingly casual comment unveils a far broader vision. The "legacy stake" Trefler refers to represents the immense and often crippling burden of outdated applications that plague most large enterprises. These legacy systems are notoriously difficult and expensive to maintain, hindering agility and stifling innovation.

Here's where the "Trojan Horse" analogy comes in. Blueprint, with its ability to rapidly generate workflow designs based on both internet knowledge and Pega's industry expertise, can act as a powerful catalyst for legacy transformation. Enterprises can leverage Blueprint to quickly envision and design replacements for their legacy applications, streamlining their IT landscape and unlocking new efficiencies.

Consider the potential impact on Pega's financial performance. The Q1 2024 call highlights a significant shift towards Pega Cloud, with term license revenue expected to decline to less than 25% of full-year revenue. This cloud acceleration aligns perfectly with the legacy transformation hypothesis. As enterprises re-architect their legacy applications, they are more likely to opt for the scalability and flexibility of the cloud, further boosting Pega Cloud ACV.

Pega's strong Q1 2024 free cash flow of $180 million, a record for the company, underscores the financial power of this strategy. While Ken Stillwell, Pega's COO and CFO, attributes this to a combination of factors, the acceleration towards Pega Cloud, potentially driven by legacy transformation initiatives, undoubtedly plays a role.

Hypothetical Impact of Legacy Transformation

Let's assume that even a small fraction, say 5%, of Pega's existing client base embraces Blueprint for legacy transformation. If each of these clients undertakes a project worth, on average, $1 million in additional ACV, this could translate into hundreds of millions of dollars in incremental revenue for Pega.

Key Indicators to Watch

Pega's history is marked by significant technological transitions, with the company having undertaken five complete re-architectures of its platform. This ability to navigate and thrive amidst technological shifts positions Pega well to capitalize on the generative AI wave.

Projected Decline in Term License Revenue

The chart below illustrates the projected decline in term license revenue as a percentage of total revenue, based on information from the Q1 2024 earnings call. This shift reflects the increasing adoption of Pega Cloud.

If the legacy transformation hypothesis proves true, Pega's Blueprint could become more than just a developer productivity tool. It could evolve into a powerful weapon in the fight against technical debt, reshaping the company's market positioning and fueling a new era of growth. It's a possibility that no analyst seems to be considering, but one that could have seismic implications for Pega's future.

"Fun Fact: Did you know Pega's software played a crucial role in automating the US government's response to the COVID-19 pandemic? The Department of Health and Human Services used Pega to manage the distribution of billions of dollars in provider relief funds, ensuring that healthcare providers on the front lines had the resources they needed."