Pegasystems Inc. (PEGA) Earnings

Management highlights

### Market & AI Differentiation - Management identifies a structural industry shift driven by AI, where frontier AI providers are moving from free/unlimited pricing to expensive token-based pricing, creating widespread cost uncertainty for enterprise buyers. - Pega's differentiated approach uses AI extensively at design time via Blueprint AI to create structured, reusable workflows, only leveraging AI selectively for defined runtime tasks. This eliminates per-token pricing and delivers predictable, deterministic outcomes at predictable costs, in contrast to two common misguided industry approaches: unstructured code generation from AI (which creates opaque, hard-to-modify code) and full AI runtime reasoning for every workflow (which creates inconsistency and massive token costs). - Pega's value proposition aligns with the market shift from unproductive AI experimentation to ROI-focused, governed production AI deployments. ### New Product Launch - Pega recently launched Pega Infinity 26, which introduces the new Infinity Studio capability that extends Blueprint AI from only design-time use to full build, deployment, and continuous evolution of both new and existing Pega applications. - The launch makes all Pega workflows available via MCP, allowing any external AI agent to invoke and leverage Pega's predictable structured workflows, improving cost efficiency for third-party agent deployments. It also supports custom AI coding tooling integration, lowering barriers to entry for technical users. - The new AI-powered workflow development lifecycle transforms Pega's sales cycle from conceptual to experiential and product-led, strengthening early client engagement. ### Operational & Capital Strategy - Management acknowledged slower-than-expected progress on planned go-to-market changes to expand new logo acquisition and deepen existing client engagement in the first half of 2026, with efforts now accelerated to improve pipeline conversion and sales productivity. - The company maintains a disciplined capital allocation strategy, prioritizing free cash flow generation and opportunistic share repurchases: it repurchased 9 million shares for $360 million in the first half of 2026, reducing total outstanding common shares by 6 million. - Pega will leverage its own AI technologies to improve internal operational efficiency and will temper discretionary spending to align with free cash flow targets, maintaining commitment to Rule 40 performance.

Guidance

- Management maintains full-year 2026 guidance, and does not update quarterly guidance, consistent with its long-standing policy of only issuing annual guidance at the start of the calendar year. - The full-year 2026 net new ACV forecast was originally structured with one-third of net new ACV expected in the first half and two-thirds expected in the second half. First half performance significantly underperformed this expectation, and management notes it will be very difficult to fully recover the first half shortfall in the second half, requiring much stronger execution across expansion activity, new logo contribution, and pipeline conversion to close the gap. - Maintenance and subscription license ACV growth rates are expected to continue declining as clients migrate to PegaCloud, a trend management expects to persist as cloud becomes a larger share of total ACV. - The company reaffirmed its long-term 2028 free cash flow objective, noting it will reevaluate and adjust discretionary investment priorities to stay on track to meet or exceed this target, supported by levers including cloud scale, sales productivity gains, gross margin improvement, and disciplined investment.

Segment performance

Overall annual contract value (ACV) grew 7% year-over-year as reported and 8% in constant currency. This overall growth was offset by decreases in maintenance ACV and subscription license ACV, with growth concentrated in the cloud segment. PegaCloud remains the fastest growing component of Pega's subscription model, with constant currency growth moderating to 27% from the prior quarter. As of Q2 2026, PegaCloud ACV makes up 57% of total company ACV, and management expects this share to grow over time to an eventual target of approximately 75% of total ACV. Net new ACV growth for the first half of 2026 came in below expectations, driven by a back-loaded renewal portfolio that limited cross-sell and up-sell opportunities in the first half. Free cash flow generation hit a record $288 million for the first half of 2026.

Risks & headwinds

- Unprecedented AI-driven market disruption has created widespread buyer uncertainty, leading to elongated decision cycles and delayed deal closures as enterprises reevaluate their AI and technology strategies. The magnitude and duration of this spending slowdown are difficult to predict, and uncertainty could persist for multiple quarters. - Slower-than-expected execution on go-to-market changes in the first half of 2026 contributed to below-forecast ACV growth, and continued execution risk remains for the second half as the company works to close the first half gap. - Shortfalls in full-year 2026 ACV growth create direct downward pressure on the company's ability to meet its 2026 full-year free cash flow target of $575 million. - The crowded AI vendor landscape with competing unproven approaches has added to customer confusion, potentially delaying adoption of Pega's solutions even when the value proposition is a strong fit for client needs.

Analyst Q&A

• Q: Have delayed Q2 deals started to close as we exit Q2, and what is your outlook for these deals unlocking in the second half of 2026? /

  A: Management confirms that while extreme market confusion still persists, deal activity is starting to move, with strong customer enthusiasm for Pega's predictable no-token-cost AI architecture after PegaWorld. Summer months typically slow turnaround activity, and the pace of unlocking in the second half remains uncertain, but Pega's architectural choices have been vindicated and customer reception has been positive.

• Q: How much of the first half underperformance stems from factors within Pega's control (go-to-market changes, renewal cohort timing) versus broader market token-related disruption? /

  A: The AI market disruption occurred while Pega was already implementing go-to-market changes to expand into new logos and use cases, a shift in operating approach that Pega had underestimated the internal work required to execute. This led to slower progress than planned in the first half, which is a factor within Pega's control to correct. The shift to a Blueprint-powered go-to-market is a major value unlock even in a confused market, and management is confident it will drive improved results over time.

• Q: What gives you confidence delayed deals are temporary rather than a durable shift in spending, and how are renewals performing relative to net new? /

  A: Management confirms that while it cannot guarantee confusion will not persist, the pipeline is growing, late-stage pipeline is strong year-over-year, and no deals are being fully canceled—they are only delayed. Clients remain engaged and focused on transformation and AI priorities, so the pipeline is real. Renewals are holding up better than net new and expansion business, where most of the spending freeze occurred in the first half.

• Q: Will Infinity Studio 26 have a similar impact on sales/implementation timelines as Blueprint, and does it create pent-up demand for late 2026 and 2027? /

  A: Bringing Blueprint AI capabilities into Infinity Studio to enable continuous accelerated development from design through deployment is expected to fundamentally transform the build and delivery experience, similar to how Blueprint cut average sales cycles roughly in half. The product has only been live for one week as of the call, so management will share more practical results on the next earnings call.