Pegasystems Q3 2026 Earnings Call Transcript

Pegasystems (NASDAQ:PEGA) reported third-quarter financial results on Wednesday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Pegasystems reported a 7% year-over-year growth in annual contract value (ACV) to $1.66 billion, with their cloud segment showing a 20% increase.

The company is focusing on AI integration into business operations, emphasizing structured workflows over mere insights to drive value.

Operational changes are underway, including a regional go-to-market model and a unified marketing strategy to enhance execution and client engagement.

Despite execution challenges and longer sales cycles, the company maintains a positive long-term outlook targeting $700 million in free cash flow by 2028.

Management highlighted the importance of predictable outcomes and costs in AI deployments, distinguishing their approach from competitors.

Full Transcript

OPERATOR

After today’s prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Peter Welburn, Vice President of Corporate Development and Investor Relations. Please go ahead.

Peter Welburn (Vice President of Corporate Development and Investor Relations)

Thank you, Ellen. Good morning, everyone, and welcome to Pegasystems’ Q3 2026 earnings call. Before we begin, I’d like to read our Safe Harbor statement. Certain statements made during this call and the accompanying materials may be construed as forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, forecast, and similar expressions are intended to identify forward-looking statements.

These statements speak only as of the date this statement was made and are based on current expectations and assumptions. Because these statements relate to future events, they are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations for fiscal year 2026 and beyond. Important factors that could cause actual results to differ materially are described in the Company’s press release announced in our Q3 2026 results and in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2025, as well as other recent SEC filings. Investors are cautioned not to place undue reliance on these forward-looking statements except as required by law. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances.

In addition, non-GAAP financial measures discussed on this call should be considered in addition to and not as a substitute for financial measures prepared in accordance with GAAP. Constant currency measures are calculated by applying the September 30, 2025, foreign exchange rates to all periods presented. Reconciliations of GAAP to non-GAAP measures can be found in our earnings press release. With that, I’ll turn the call over to Alan Trefler, Founder and CEO of Pegasystems.

Alan Trefler (Founder and CEO)

Thank you, Peter, and thank you to everyone joining us today. Before Ken covers our results, I want to touch on the AI market context and why it’s a major long-term opportunity for Pegasystems. Our technology is differentiated and very relevant to the times we’re in. However, candidly, our execution this year has not kept up. We are making real changes to better capture the opportunity, and Ken will be providing more detail in a moment. I would say the market status is confusion and a search for value. Enterprise leaders are facing tsunamis of AI hype. This is the most chaotic and confused technology market I’ve seen in my career. It makes the Internet bubble of 2000 look like it unfolded in slow motion. There is real promise in AI and occasionally real delusion. This quarter, Salesforce announced Cloudforce, essentially tying its future to Anthropic, a company that has said publicly it is going after all of Salesforce’s TAM, their target addressable market.

And then in September, Anthropic called for a pause in AI development, and leaders at OpenAI and other frontier labs chimed in to support the idea. But in the months since, Anthropic has released three major Claude model changes. OpenAI has also released three major GPT models. Google has released a new Gemini model. That’s not counting the new models from Mistral, Quand, DeepSeek, or Model Labs that are using things internally they haven’t released yet.

So I guess this is what a pause looks like these days. No wonder everyone is confused. The leaders I spoke to at businesses have actually stopped chasing the latest model. They want AI connected to business operations in ways that deliver measurable value while maintaining governance and controlling costs. The market is full of ingredients and enterprises need a recipe. That’s what Pegasystems delivers, and the changes that Ken will talk about are focused on getting that recipe directly to the customers and senior leaders who need it.

Now, much of the AI industry is selling models and tokens. Pegasystems is offering something different: a structure for AI that delivers predictable outcomes and predictable costs, built on how enterprises really operate. Our architecture harnesses the power of LLMs and our own statistical AI to transform how enterprises design, build, and run the workflows and decisions that power their businesses. Now, models are an important ingredient, but the recipe for AI demands structure you can put around the model to provide operational context that tells it what to do.

Our workflows wrap AI in a control and governance structure that feeds exactly the knowledge and context it needs at the right time. As Forrester put it in its very recent report on enterprise AI platforms, workflows, not insights, are the value driver for agentic AI. We apply that structure at every stage of AI transformation. At design, we help clients reimagine their workflows and decisions for an AI world. We build to help create and maintain the applications in a way that’s understandable and accessible. And we run them to create agentic workflows that behave predictably at scale. So leaders I speak to know they shouldn’t just bolt AI onto legacy systems and outdated processes. They want to redesign the way they work.

And Blueprint harnesses AI to solve a problem that no one else has, giving business and IT teams a way to reimagine their operating model together at AI speed. It takes the raw power of generative AI and gives it a structure built on decades of Pegasystems’ workflow expertise and industry best practices. Blueprint combines the raw power of models like Claude, GPT, and Gemini with the decades of our knowledge from the work we’ve done with leaders in various industries. It helps establish the rules, workflows, policies, and operating model up front before an application goes into production. The result is a repeatable recipe for how businesses should run, translated directly into working systems.

And here is what much of the AI play misses: that 95% plus of work a business does each day repeats. Processes themselves will be transformed by AI, but once you figure out how to process a dispute or best onboard a new customer, you want to do it the same way at scale. Letting AI reasoning run roughshod over that repeatable work is risky and expensive. Blueprint uses AI to capture those repeatable processes. We design them to be far more efficient and then run them consistently at massive scale without a massive token bill.

Not only is this far more cost-effective, it is exactly the right approach for AI governance. By creating the workflows, you plug directly into the Claude or GPT or AI tool of your choice. With MCP connectors, you’re building workflows that tell agents exactly what they’re allowed to do, what data they can access, and what rules they must follow. We believe the right way to govern AI is to design it into the processes from the start. Now this is exactly what Blueprint does and the Pegasystems technology does.

And while others are selling control towers or kill switches to manage problems after they happen, we consider that madness. It’s addressing the problem too late and in the wrong place. Our clients can’t afford to rely on a kill switch. With our approach, they never need one. So the key here is structure. By helping clients finish design of their recipes in days and load Blueprint into Infinity to build the application, they are able to run with agents like Copilot, Claude, and Codex. But we also let clients bring their own model if for some reason they have something either an activity, or they have a preference. And we have added into our development environment more than 50 agent skills, so the developer’s environment and the Pega environment operate in a collaborative and comprehensive fashion.

So developers can get the speed of agentic development, but we provide the structure that makes it understandable, reusable, and scalable. Now, we understand that one of the pitches AI companies are making is code it yourself. And the reality: we’ve competed against code it yourself for decades. Of course, AI coding tools are powerful. We use them ourselves, and we’ve built them into the AI assistants in Infinity Studio. But this doesn’t change the underlying question. AI agents generate lots of code—lots and lots of code—millions of lines, more code than we’ve ever seen before.

And much of that code becomes very hard to understand and even harder to change six or 12 months later. That is at the heart of the Pegasystems difference. In Pega, the logic stays visual and transparent, not buried in code so dense that only agents can read it. Business and IT users can look at the workflows, the rules, and the configuration of Pega and see exactly what their application does. This is what it means to build for change. Now, at runtime, Pega applications run agentic workflows that orchestrate agents with control and governance. In Infinity, any agent—a customer service chatbot, an employee assistant, even one outside of Pega—can discover and run Pega workflows and decisions. They don’t need to re-reason through every step. Blueprint has already done that for them at design time. And we’ve put the human in the loop, blessing the design as opposed to sticking them in every time a transaction runs.

Pega agentic workflows call for agents to perform specific tasks, like reading a document or researching a case or client history. And the workflow sets the task constraints, so each agent is controlled in what it can do and what it can see. This small, focused agent approach obviates hallucination risk and uses far fewer tokens. That’s how we can offer a fixed case price with no token charges. And I’m getting a lot of enthusiasm from clients as to this approach.

Now, at PegaWorld, I compared this approach to a chef using a test kitchen to perfect the recipes before opening a restaurant. Rather than reinventing every dish for every customer, Blueprint is that test kitchen. At design time, clients create a collection of business recipes—the workflows, decisions, rules, data—and organize them so that they can be approved, understood, and most importantly, changed. At runtime, the system executes those recipes as predictable workflows, calling agents only at the steps where they add value.

Deterministic work stays deterministic. Yeah. By the way, this is also hundreds, maybe thousands of times more efficient than running a continuous reasoning session on graphical processing units. Clients reimagine the process and then run a successful recipe thousands or millions of times. Design once, reuse many. AI gets the workflow right at design time and is invoked discreetly at runtime, with structure and governance built in. I think the industry is recognizing our differentiated approach. Just in the last several weeks, Pegasystems was named a leader in the Forrester Wave for AI platforms, sitting next to companies like Amazon and Google. As I mentioned, in that report they wrote that workflows, not insights, are the value driver in agentic AI. And we strongly agree. And last month, Gartner again named Pegasystems a leader in the Magic Quadrant for Business Orchestration and Automation Technologies, or what they call BOAT.

I think you’re going to hear that term a lot going forward because it really reflects the power that AI needs to bring to organizations. Gartner built this category on the idea that the combination of process orchestration, workflow orchestration, and agentic AI create the foundation for predictable enterprise AI outcomes. And in terms of these two recognitions, Pegasystems was the only company named as a leader in both. You can find both reports on pega.com, but the most important recognition is what we get from helping clients to maximize the value of their current AI investments and their goals.

Together with our partners, we’re delivering predictable outcomes that candidly just weren’t possible before, all with predictable costs. At a large government agency, Pega workflow turns unstructured information into structured work, automatically processing documents and surfacing only the exceptions that require human judgment, helping people move work more effectively while maintaining enterprise-grade governance and control. At a major U.S. bank, Pega’s governed workflows and specialized AI agents have cut complaint resolution times from 10 days to 10 minutes in a customer-critical and highly regulated process.

Pega agentic workflows orchestrate our agents and third-party agents to intake documents, classify requests, summarize histories, perform research, and determine next-best-action recommendations. Employees have embraced this new workflow right away. They report higher productivity and enthusiasm for capabilities that give them more time for judgment and customer outcomes rather than administrative. So these results confirm to us that enterprises want AI and that having AI that delivers predictable outcomes and predictable costs with governance built in is absolutely the right way to go. And you know, it’s interesting because the market is chaotic and there’s more hype, more tokens, more models being discussed and feared by organizations. But with Pega Blueprint, with Pega Infinity, we can deliver outcomes, and we think that’s incredibly important.

I’ve also learned something from the dozens of successful clients I’ve spoken to in the last quarter. We have the right technology, but in a market this noisy and fast, we need to do a better job at directly helping our clients find clarity and keep up. Success happens when we have deep executive and technical engagement, a clear message that cuts through the market, and technical experts on the ground. So while the quarter showed improvement from the first half, we don’t think the growth of the quarter anywhere comes close to reflecting the opportunity in front of us, and we take responsibility for that. Buying decisions have become more complex and we can be more consistent in helping clients move from interest to commitment and from commitment to adoption. We are acting on what we want. We’ve moved accountability closer to clients with a regional go-to-market model.

We’ve made steps to unify our message, and we are creating a dedicated team to accelerate adoption of the latest AI capabilities, bringing operations teams together to simplify AI and improve how we plan and operate. These are execution changes, not a change in strategy. We remain focused on helping enterprises apply AI to workflows and decisions and helping them with governance, predictability, and economics that are required to scale. I’ll hand it over to Ken to walk through the quarter’s results and details of these operational changes.

Ken Stillwell (Chief Operating Officer and Chief Financial Officer)

Thanks, Alan. While our annual contract value growth through the first three quarters of 2026 did not reflect the opportunity we see in the market, we’re encouraged by the engagement we’re seeing with our clients and prospects. Clients are increasingly looking to transform how work gets done through AI, automation, and intelligent workflows, and companies, especially in regulated industries, have a big challenge in trying to keep up with the ever-changing regulations.

We continue to see growing interest in Blueprint agentic workflows and automation initiatives that help organizations achieve predictable outcomes at predictable costs. While buying patterns have not fully normalized, we saw improved visibility and more consistent progression of opportunities through the third quarter. Our ACV add was the strongest of the year, representing a step forward. More importantly, the underlying market opportunity remains significant.

Our focus is on improving how we execute against that opportunity. The go-to-market changes I’ll discuss shortly are designed to strengthen accountability, increase speed, and help us build on the progress we saw in the quarter. Looking back, our assessment is that the primary constraints have been execution, longer sales cycles, and customer deployment challenges rather than broad-based deterioration in market demand. Nothing we’ve seen in Q3 changes that view that the underlying opportunity remains significant. As we look ahead, we’re applying the lessons we’ve learned so far this year to better capitalize on the demand we’re seeing in the market. We’ve already begun implementing a series of changes designed to increase accountability, improve speed of execution, and accelerate growth.

First, in today’s market environment, clients are best served when commercial leadership and day-to-day execution authority sit closer to the market within consistent company-wide pricing, contracting, and financial controls. Additionally, although the global demand has held up in spite of some of the European and Middle East conflicts, clients increasingly demand data sovereignty and governance. They want their systems, their data, their processes to be closer to their operations.

They increasingly demand local control and support for their solutions. This fits perfectly into our Pegasystems Cloud solution, but also with the option for cloud choice. As a result of all this, we’re evolving our go-to-market leadership and coverage model. This change will bring leaders, resources, and expertise closer to in-region clients, enabling faster decisions, stronger engagement, and greater ownership of outcomes. It also returns us to an operating model where the senior leaders have more commercial-driven authority and more direct connection to our clients.

As buying decisions increasingly move higher within client organizations, having our senior leaders in region will help us engage more effectively and accelerate execution. We’ve seen this trend in the past, and we have successfully executed under this operating model. Second, we’re creating a more unified marketing organization to tell one clear and differentiated Pegasystems story. We’re bringing all marketing-related teams together under a single leader. In a market crowded with competing AI narratives, this structure will sharpen our positioning, strengthen execution across channels, and help us reach executive decision makers more consistently. Enterprises are looking for clarity, confidence, and a trusted path forward.

A unified marketing organization will improve our visibility and communicate more effectively how Pegasystems helps clients succeed in the AI era. Third, we’re rallying a new organization focused on accelerating adoption of Pegasystems’ AI capabilities while transforming our products to make it more dramatically easier for clients to access our latest innovation and stay current with Pegasystems. The pace of innovation in AI is unprecedented, and the ability to successfully adopt and scale these capabilities is becoming the key differentiator between clients that experiment with AI and those who realize measurable business value from it.

This new organization will bring together engineering, early adopter programs, and delivery excellence to quickly identify adoption barriers and turn those insights into improvements. It will also include a team of forward-deployed engineers known as our Lighthouse team, who will work directly with clients to accelerate successful deployments and help them realize value faster. By bringing product teams closer to our clients, we can capture real-world best practices, identify what drives successful outcomes, and continuously accelerate deployment of agentic workflows so that clients can realize value fast.

Over time, these learnings will become industrialized, making it easier for every client to benefit from agentic workflows. Additionally, we will create a tighter feedback loop between innovation and adoption. By connecting our product teams directly with our early adopters, we can shorten learning cycles, accelerate product development, and turn client insights into repeatable success. Fourth, we’re centralizing go-to-market and consulting operations under the finance organization, having a single leader to simplify planning, resource allocation, and performance management across the company. Commercial and delivery leaders will remain accountable for strategy and client outcomes, while the unified operations team drives greater consistency, scalability, and execution discipline. Over time, we expect these and other changes to contribute to margin improvement and increase the operating leverage.

Taken together, these four actions are designed to improve execution in the near term while positioning Pegasystems to deliver long-term, durable ACV and cash flow growth to our shareholders. During the first quarter of 2027, we expect our headcount will be approximately 5,000 employees, down a few hundred from where we sit today as we streamline the organization and improve execution. Moving to our financial results, annual contract value, or ACV, grew 7% year over year in constant currency to $1.66 billion. In Q3 we added $32 million in net new ACV in constant currency, our strongest quarterly performance of the year and a step forward in rebuilding growth momentum. Pegasystems Cloud continued to drive that performance. Pegasystems Cloud ACV grew 20% year over year and represented 59% of our total ACV. Pegasystems Cloud backlog increased 25% in constant currency year over year, demonstrating the continued strength of our cloud business.

Total backlog now stands at over $2 billion with current backlog at just around $1 billion. Backlog reflects existing non-cancelable contracts expected to be recognized as revenue in future periods. Two factors shaped the quarter. First, we entered Q3 with a larger and more diversified pipeline, with strength across both new logos and workflow expansion within our existing install base. Second, purchasing behavior continues to evolve. We did see some movement to more normal buying patterns in the third quarter. However, enterprise clients, especially in the financial services sector, are applying greater scrutiny to large technology investments, particularly around business case validation, AI strategy, and implementation timing.

Decision processes now involve more stakeholders and additional approval steps than we’ve seen in recent years. Decisions continue to go to senior leaders in the organization, and that’s the importance of our go-to-market changes: to connect our teams with the decision makers. Separately, organizational changes and workforce reductions within several client accounts can extend timelines further. Let me be clear about what we’re not seeing: win rates are remaining generally consistent with prior periods, and we’re not seeing a meaningful shift in competitive dynamics.

The constraint is how long it takes for clients to reach a decision, not whether we win when they do reach that decision. We are addressing that directly by driving prospecting activity, leveraging Blueprint, and increasing executive-level engagement to compress sales cycles and also to build incremental pipeline. Below the headline number, several leading indicators improved. Pipeline volume strengthened during the quarter, Blueprint engagement continues to expand, and more opportunities are progressing toward the decision process.

Turning to free cash flow, we generated $290 million of free cash flow in the first three quarters of 2026. There are two factors that impacted that result. First, free cash flow included an unusual level of cash expenditures that we do not expect to recur at the same level in normal operations. We’ve included those expenditures in our free cash flow, and we’re providing supplemental detail to investors so they can evaluate the nature and the timing of those.

Second, ACV growth was lower than our original plan. Slower net new ACV translates into lower billings, lower collections, and lower free cash flow than we had modeled. As a reminder, our billings are seasonally weighted toward the fourth quarter, consistent with the renewal concentration that we discussed earlier in the year. As a result, free cash flow follows a similar seasonal pattern, with the two largest periods of net free cash flow production being in the first quarter and the fourth quarter of the year.

Turning to capital allocation, our capital allocation strategy features several key elements. First, invest in organic growth. Our highest return use of capital remains product innovation and go-to-market capacity. That spending is largely built into our operating model. Second, repurchase shares opportunistically. We’ve leaned higher into buybacks in 2026 more than in a prior year, and we did so deliberately. In the first nine months of 2026, we repurchased just under 11 million shares for around $430 million in the open market.

Under prior board authorizations, total common shares were reduced by 6.8 million shares in the first nine months of 2026. At current levels, repurchasing our shares can be an attractive use of excess capital. After funding our organic growth priorities, buybacks are accretive to earnings, offset dilution from stock-based compensation, and compound value when executed at attractive valuations. We will continue to compare repurchases with other uses of capital and act selectively and strategically around our buyback program.

The third element of our capital allocation strategy is to pay a consistent and increasing dividend. We view the dividend as a long-term commitment, and we intend to grow it over time. Fourth, we maintain balance sheet strength and flexibility. We remain debt free, and we will evaluate any future use of debt against our strategic priorities. We ended the third quarter with approximately $300 million in cash and marketable securities. Looking ahead, we will continue to return capital to shareholders opportunistically while preserving strategic flexibility.

We’re disciplined buyers, not automatic ones. Following our July earnings call, many of you asked for some additional perspective on how we’re thinking about the remainder of the year. As a reminder, we provide annual guidance at the beginning of the year, do not typically update our outlook intra-year, nor do we guide quarterly. Given the many calls for more color, we’ve decided to share a few more thoughts on ACV and free cash flow as it’s late in the 2026 cycle. On ACV, we added $52 million of net new ACV in constant currency through the first three quarters of the year.

We expect we will deliver an acceleration of growth in Q4, but we don’t believe that we’ll achieve our full plan for the second half. On free cash flow, given the unusual level of cash expenditures incurred this year, we also believe it’s useful to consider supplemental cash information to determine the cash-generating capability of our business. Please see our earnings release for more detail on these supplemental items. We’re not changing our long-term ambition. We continue to target $700 million or more of free cash flow in 2028. Although ACV growth has slowed this year, the underlying economics of our business remain intact. Net new ACV creates future billings growth, and those billings ultimately convert into increased cash flow. Achieving our 2028 target will require stronger ACV growth and continued cost discipline, and we are aligning our cost structure with our growth trajectory and taking the appropriate actions to improve our operations, positioning the business to ensure achieving that objective of $700 million or more in 2028.

Stepping back, organizations worldwide are rethinking how work gets done in an AI-driven economy. That shift plays directly to capabilities we have spent years building: workflows and decisioning that apply AI to mission-critical business operations with the governance, predictability, and scale enterprises require. While execution remains our top priority for the balance of Q4 and beyond, our long-term conviction has only strengthened. We remain confident in our market opportunity, confident in our ability to deliver substantial and growing free cash flow, and confident in our disciplined approach to balancing growth and profitability.

Time to sustain a strong Rule 40 performance and create significant long-term value for shareholders. And with that, operator, please open the line for questions.

OPERATOR

Thank you. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one. To raise your hand and to withdraw your question, press star one again. We ask that you pick up your handset when asking a question. For optimum sound quality, if muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Raimo Lenschow with Barclays.

Your line is open. Please go ahead.

Raimo Lenschow (Analyst at Barclays)

Perfect. Thank you. Ken, it was really interesting to hear your remarks on streamlining the organization or changing the go-to-market. Is that something you’re going to do midyear now, or is this kind of the plan for the new financial year? Can you speak to that, please?

Ken Stillwell (Chief Operating Officer and Chief Financial Officer)

Yeah, we’re in the process. Some of those changes we’ve already made and some of them are coming in the future weeks, but we want to prepare ourselves so that we start 27, as you know, with as many of the improvements as we can get done. But some of them will go into 1Q27. This is something we’re doing in the very near term. But the biggest changes have already happened.

Raimo Lenschow (Analyst at Barclays)

Okay, perfect. Okay. And then, obviously, you’ve talked before that Q4 has a much better renewal pool. That should probably help you as well. What’s the situation if you think about next year as well? Do better results potentially come out next year? I don’t know if you can comment — probably not quantitatively, but qualitatively — what’s the progression from here? There. Thank you.

Ken Stillwell (Chief Operating Officer and Chief Financial Officer)

Yeah. So I’ll make one comment about 2027, but naturally we’re in our planning process, and things that happen in Q4 of 26 will obviously impact 27. So there’s still a lot of things that are in the works. But I would say we would expect to grow from where we are now in Q3 and Q4 and into 2027. And just based on the distribution of ACV growth in 26, based on my visibility, I wouldn’t anticipate it being as back-end loaded at this early stage as what 26 looks like it is going to play out to be.

Raimo Lenschow (Analyst at Barclays)

Okay, perfect. That’s very helpful.

OPERATOR

Thank you. Thank you. Your next question comes from the line of Steve Enders with Citi. Your line is open. Please go ahead.

Steve Enders (Analyst at Citi)

Okay, great. Thanks for taking the questions this morning. Maybe just to start, I’d like to get your perspective on how long you think the changes you’re making will take to play out and drive better execution, and ultimately what that means for sales and new ACV moving forward. And I guess also would like to clarify the comment you made about ACV and not achieving the second-half plan that you were expecting. Can you just maybe give a little bit more clarity on what exactly that means?

Ken Stillwell (Chief Operating Officer and Chief Financial Officer)

Sure, Steve. We’re moving fast on the changes and many of these changes are already in work. Some of them, as Alan mentioned a second ago, have already been executed. So I don’t believe this is going to be a long, drawn-out set of changes. Now, the second part of that question is when do you think you’ll see some of the improvements? For that, I would expect that this change will not take a significant number of quarters. There’s always a quarter or two of change management that we need to manage going into starting a new year, so I wouldn’t expect this change to drag out over a long period of time.

I would expect that we would hope to see improvements from this model in the early to mid part of 2027. The second question that you asked about ACV — really what I’m saying is I believe our ACV growth is going to be up from here, but I don’t see a path where our ACV growth would be above 10% for the 2026 year. So I would say we’re seeing our ACV growth be somewhere between where we are now and 10%.

Steve Enders (Analyst at Citi)

Okay, all right, very clear. That’s helpful there. And then maybe just on the technology side, we keep hearing about things like decisioning models and things like JEV that are out there in the market, and we keep getting the question from investors about what that means for Pegasystems and your decisioning capabilities. Would be good to get your perspective on how you’re seeing that competitively, or what that means for tech adoption moving forward, with some of these decisioning models starting to come out?

Alan Trefler (Founder and CEO)

Sure. We, as you would expect, pay close attention to all of this. And we actually think things like JAM may be things we find opportunities to use in our product line. But at its core, the big deal about Pegasystems is that we make the way the business runs, processes, and makes decisions transparent. And at the end of the day, the folks who are trying to go down the alternate paths — one which is, hey, let’s write it all in code. Well, candidly, massive amounts of code are not very transparent.

Or, hey, let’s just try to program prompts that the AI will figure out how to do things. You know, that’s candidly the exact opposite of transparency. I was talking with a customer who complained to me that he had a thousand lines of prompt that they were trying to edit to figure out how to get small behavior changes. That’s exactly the sort of thing that happens. So, you know, these new models — the interesting thing is the AI models that are out there and evolving, which, by the way, we can harness. Part of what we do is we want to use the frontier and other models — they don’t fix the core lack of transparency and lack of governance that you have by doing this stuff at runtime instead of design time.

Steve Enders (Analyst at Citi)

Okay, perfect. All right, well, appreciate your thoughts and thanks for taking the questions.

OPERATOR

Your next question comes from the line of Gavin with KeyBanc Capital Markets. Your line is open. Please go ahead.

Gavin (Analyst at KeyBanc Capital Markets)

Great. Good morning. Thanks for taking my question. Maybe just one look at — we asked a little bit about the pipeline maturity as we look at the fourth quarter here. How much of that pipe is in late stage, and how much of the expected growth is supported by new logos, which is an area you’ve seen strong traction in into the second half? Just more color there.

Ken Stillwell (Chief Operating Officer and Chief Financial Officer)

Sorry, you were a little bit rough to hear there.

Gavin (Analyst at KeyBanc Capital Markets)

Really. Just a question — pipeline and new logos?

Ken Stillwell (Chief Operating Officer and Chief Financial Officer)

Yeah. Sorry, Gavin, I couldn’t quite hear you there. So, yeah, we’ve had — there’s a pro and a con around when you sell to new logos, right. The good thing is we’re seeing a lot of great activity, a lot of good pipeline build. It’s very, very exciting to see clients — prospects that don’t really know much about Pegasystems — being very intrigued by our value proposition in such a short period of time, and the teams are working really hard to engage.

That’s the positive. Maybe the more cautious part of this is it’s hard to predict close rates and progression rates with new logos because we don’t really have a history of it. So we’re really learning. We’re kind of in a game where we’ve been closing some new logos but learning from offers, pricing, value, positioning, targeting — all those things. So I would say we’re definitely getting growth from new logos. We’re still in that learning phase about what works and what we need to double down on or change.

In terms of the maturity, I would tell you that the stage of our opportunities as we enter Q4 and think about next year is meaningfully more mature than it was at any other time this year. So the pipeline, I would say, is looking very promising, and we’re really putting a lot of focus, particularly with some of these new changes, on maturing opportunities and getting them to offer faster.

Gavin (Analyst at KeyBanc Capital Markets)

Understood. Thanks for the details there. And then quick follow-up: maybe just give an update on how your public sector business has performed in the third quarter, just given that’s usually a pretty big quarter for that end market. I don’t know if you’ve seen any sort of delays in that sector with the upcoming election here in the U.S. Thank you.

Ken Stillwell (Chief Operating Officer and Chief Financial Officer)

What I would say is the federal buying cycle has been, I would say, less predictable than what we’ve seen in past years because of a lot of the changes in how they procure, the system integrator changes that moved a lot of buying onto GSA schedules. So I don’t think we expect that to get more clear in the fourth quarter. But buying activity is happening, and it’s not like the government is not moving forward. It’s just that it is less predictable.

So Q4 is not a particularly massive quarter — our U.S. government business is pretty steady across the quarters. So it’s not that there’s anything unique in terms of size in Q4 around the public sector, but it definitely is a less predictable space right now just because of a lot of the changes that they’ve made to process. But I don’t suspect that to be a big impact for our Q4 results.

Gavin (Analyst at KeyBanc Capital Markets)

Got it, got it. Thank you. Thanks for taking my questions.

OPERATOR

Your next question comes from the line of Patrick Walravens with Citizens. Your line is open. Please go ahead.

Patrick Walravens (Analyst at Citizens)

Oh great. Thank you. Alan, given the news yesterday of Salesforce acquiring Braze and paying a multiple that’s pretty much twice where you guys are trading, I’d love to hear your thoughts on what this means for the industry and what it means for you.

Alan Trefler (Founder and CEO)

Well, you know, we really — I can’t actually think of a time when we’ve ever competed against Braze. So I don’t think from a product acquisition point of view it’s very meaningful to us. I think when I look at this industry, I look at an industry that’s really confused, and I think companies are doing whatever they can to try to generate revenue and attention and stand out. That feels to me like buying Braze was an expensive way to do it, but I don’t think it affects our competitive dynamic.

Ken Stillwell (Chief Operating Officer and Chief Financial Officer)

One thing I would say, Pat — not really a Braze comment, but something we’ve seen — I do think you’ve seen M&A activity around technology companies start to spin up a little bit in the last few months. And I do think that highlights what I believe to be the significant value that maybe was questioned six to nine months ago around software. And I definitely think you’re seeing the Schneider Electric purchase of PTC, for example. I think there’s a lot of value attributed to the knowledge base that software has, the engagement we have with users, and also the data that we actually have within our system.

So I definitely think that there is a little bit of that angle to the Braze — might be in that same bucket. That’s just something that we’ve been watching. Not particularly because we’re a buyer or seller, more just to learn what’s happening in the software space.

Alan Trefler (Founder and CEO)

Yeah. I think your point — this does sort of put the question to the dying Sasspocalypse commentary, which is we’re seeing customers recognize that there is software in their future, and obviously Salesforce does too.

Patrick Walravens (Analyst at Citizens)

And investors too. I mean, if you look at my universe as a whole, four months ago the median stock was down like 33% — the median — and now the median is up 5% year to date. So the follow-up question would just be, would you guys be open to being acquired? And the flip side of that, what would you want to acquire, if anything?

Alan Trefler (Founder and CEO)

Well, I think answering either of those questions would make this one hell of an earnings call. Wouldn’t really. Would. Yeah. So we’re gonna have to respond. You can do the. What would you like to call? Yeah, yeah, look, we, we, you can do what’s on your radar list, right? Yeah. Or how you think. Look, we look at companies routinely and, you know, we have purchased typically technology purchases that really sort of tuck in to the overall model. We’re feeling pretty darn good about the shape of our technical products right now. We really think that we’re onto something. We just have to convince more of the market we’re onto it. And that’s what our mission is going to. That’s what our mission is going to be. So we don’t have an active specific shopping list, but, you know, Peter here is constantly talking to firms, as you know.

OPERATOR

Your next question comes from the line of Blair Abernethy with Rosenblatt. Your line is open. Please go ahead.

Blair Abernethy (Analyst at Rosenblatt)

Thank you. Just a couple things for me. I wonder if any early signs of feedback from Infinity. Infinity Studio with blueprint capabilities added in. Are you seeing anything there?

Alan Trefler (Founder and CEO)

Yeah, we’re seeing customers respond with enthusiasm to it. It’s still young, you know, is the reality of it. But customers like that. This actually does a much better job of taking existing customers and giving them a path to engage with our AI. And with hindsight, I wish we had done it sooner.

Ken Stillwell (Chief Operating Officer and Chief Financial Officer)

One thing we have seen, Blair, is that at this point in time when we released Pega 25, we have more than twice as many clients have moved to Infinity 26 as at this point in time when we released 25. So we are seeing a much more aggressive. Clients want it. So that’s something we are seeing.

Blair Abernethy (Analyst at Rosenblatt)

Okay, great. And Ken, just on the environment, are you seeing any changes in the pricing environment this year and anything in terms of what you’re seeing with the contract renewals or term lengths just given the changes in the pipeline execution,

Ken Stillwell (Chief Operating Officer and Chief Financial Officer)

Term lengths? No, I think that always bounces around. But I haven’t seen anything like clients trying to do longer or shorter terms. I think that does move around. It’s kind of client specific. In terms of pricing, the one thing I would say is that with all the spend on AI, I definitely think IT budgets are under pressure this year. And so that does make for, you know, scrutiny that happens around price escalation, CPI, things of that nature. So we definitely see some of that.

And I think that’s just tied to, you know, that, you know, clients have spent a lot of money on AI, like you’re dabbling and trying to find some value. I do. Based on what we’ve seen with our clients, I think that will settle and I think clients have a better view now of where they, you know, maybe, maybe controlling their AI spend better than they had earlier in the year when I think it was a little bit more out of control. But I think some of that does play into just enterprise buying pressures.

So there’s just some of that out there.

Alan Trefler (Founder and CEO)

Yeah, and what you said about out of control. Look, let’s face it, a whole lot of companies got caught overspending their budgets in the second and third quarters. I think that’s normalizing and, candidly, our message about predictable cost is a great way for clients to get their use of AI back in control.

Blair Abernethy (Analyst at Rosenblatt)

Great. Thanks, guys.

OPERATOR

Your next question comes from the line of Patrick McKilwee with William Blair. Your line is open. Please go ahead.

Patrick McKilwee (Analyst at William Blair)

Hi team. Thanks for the questions. So first one on free cash flow. Despite the weaker ECB growth and cash generation this quarter, you’re maintaining the fiscal 28 free cash flow target. I know there were some unusual expenditures within that this quarter, but as we think about some of the strategic tweaks you’re making, like ramping FTEs and then some rockier trends in growth. Ken, can you just talk about some of the expectations underlying that target at this point and maybe how much the path to that has changed over the last few months.

Ken Stillwell (Chief Operating Officer and Chief Financial Officer)

So the main, what I would consider to be non‑recurring or non‑operational spend that we’ve had in our cash flow this year, and some of it will be into next year, is related to the settling of a number of our legal matters. So I would say that’s a big component of it. We will also have some restructuring charges that will probably get firmed up between now and the beginning of 1Q27. I would consider those to be kind of the non‑recurring type items that we would add back to kind of show you what more operating cash flow would be.

So I would see a path where that adjusted free cash flow would be above 600 next year and then onto a 700 path in 2028. That’s kind of what we see. This year, the number will be lower naturally because we haven’t made some of those structural changes to our cost structure, and we’ve got some of these kind of unusual one‑time things related to some of the legal matters, some of that being settled. I think that’s kind of it. So this year will be lower cash flow with some higher amount of add‑backs.

Next year we’ll have a smaller amount of add‑backs and increased cash flow from higher ACV and some of the cost changes, and then we’ll be on track to go to that 700 number in 28. Hopefully that’s helpful.

Patrick McKilwee (Analyst at William Blair)

Yeah, helpful. Thanks, Ken. And following up. So regarding the customer deployment challenges, a constraint on growth, and, you know, the FTE team you’re now ramping to address that. My question is, what specifically do you feel is preventing customers from moving some of these projects into production today? Are those mostly implementation and/or integration challenges or do you feel at all that there are some aspects of the core product that could need to become easier to deploy and ultimately maintain?

Ken Stillwell (Chief Operating Officer and Chief Financial Officer)

I don’t think Pegasystems is alone in this challenge. Deploying things in an AI world is a different mindset of actually how you instrument and deploy and get value. And I think that just like many of the clients that are deploying AI have spent a tremendous amount of money trying to bring in consultants and system integrators to try to help them figure out where AI can add value. Some of that is adopting AI in a new paradigm around how you develop workflow and automation solutions on Pegasystems as well.

So I think some of that is just us getting our engineering teams and our professional service teams and our solution consultants to really be with the client and actually helping them drive that value. So that’s the big change as opposed to letting clients do it more on their own, which is traditionally how software has been deployed.

Alan Trefler (Founder and CEO)

And look, I think historically we were pretty, and this goes back years, our customers and we were pretty slow at times to deploy the latest tickets. You know, the reality is we actually have had customers who have told us they never want to be on the most recent release, they want to be on N minus 1 or N. In one case, I have a customer who used to want to be on N minus 2. So getting things into the hands of customers quick is not something that had been part of the way we operate historically.

Now we’re much better positioned to do it with the combination of Pega Cloud and some of the changes we’re making. But, you know, it is a shift. I recently told a customer that having an N minus 1 strategy is just setting yourself up to lose. I don’t think that works anymore in the current technology realm. But we need to reposition ourselves and get more assertive about getting the technology out. Even though we’re faster than we’ve ever been before, we can be a lot faster than we are.

And that’s a big area where I’m trying to drive the company, sort of culturally.

Patrick McKilwee (Analyst at William Blair)

Okay, very helpful. Thank you both.

OPERATOR

Thank you. We ask that you please limit yourselves to one question so that we may accommodate all participants. Your next question comes from the line of Lucky Shriner with D.A. Davidson. Your line is open. Please go ahead.

Lucky Shriner (Analyst at D.A. Davidson)

Great. Thanks for taking my question. You guys called out the stronger net new ACV and you had originally called out, you know, that you would be back‑half weighted. But last quarter, I know you guys had some push deals that were still in the pipeline. So just curious if you can maybe level set for some of the puts and takes around. Did some of those push deals close and how did that contribute to the net new ACV this quarter? Thanks.

Ken Stillwell (Chief Operating Officer and Chief Financial Officer)

Sure. We did have some deals close that were expected to close earlier. We also had some deals slip into Q4 that we thought were going to close in Q3. So what I would say is our Q4, naturally we have a lot of work to do because it’s only October 20th, but we have a lot of work to do in Q4. My quarter just started. We’re entering it with the strongest pipeline that we’ve ever had, I think maybe in a Q4 ever. That said, you know, the market’s not as predictable as it has been, and so we have to kind of balance that in terms of what expectations.

But we have plenty of pipe, plenty of opportunities. And we just need to, you know, we need to just, you know, focus on our execution and helping our clients, you know, quite frankly, you know, get out of their own way at times, right, to actually move forward on some of these advancements.

OPERATOR

Your next question comes from the line of Marc Chapelle with Loop Capital Markets. Your line is open. Please go ahead.

Marc Chapelle (Analyst at Loop Capital Markets)

Hi. Thanks for taking my question. Ken, just building on an earlier question on your public sector business, are you seeing some of the same purchasing behaviors and AI scrutiny in your public sector business as you’re seeing in your commercial business?

Ken Stillwell (Chief Operating Officer and Chief Financial Officer)

That’s a really good question, Marc. There has been. Maybe I’ll give you our perspective, or my perspective, in the commercial side. In certain verticals, specifically financial services being a big one, they spent a lot of money in AI to kind of test things out, to try things out, to evaluate. I would say in the public sector, not as much. So I would say AI is still important to the public sector, but I don’t think they’ve distracted budgets to the same extent.

Marc Chapelle (Analyst at Loop Capital Markets)

That’s helpful.

Ken Stillwell (Chief Operating Officer and Chief Financial Officer)

Thank you.

OPERATOR

Your next question comes from the line of Alexei Gogolev with JP Morgan. Your line is open. Please go ahead.

Alexei Gogolev (Analyst at JP Morgan)

Hello, everyone. And I wanted to ask about cloud ACV and the back‑half strength. So now that the Cloud ACV is 59% of total and cloud backlog is up strongly, how should we think about the lag from cloud ACV and backlog to cloud revenue recognition over the next few quarters, especially given the deployment challenges that you talked about?

Ken Stillwell (Chief Operating Officer and Chief Financial Officer)

So just let me. Yes, I’m glad you actually said that. I wouldn’t connect what we talked about with helping clients get adoption with things that are already in Pega Cloud or Pega Cloud backlog. That’s more around things that are in the pipeline. So just hopefully that’s helpful clarification on that, that’s more about our future growth. The things that are in Pega Cloud backlog typically come into revenue over the next two to three quarters. Typically.

So you should think about—well, first, the first part of your question was how should we think about Pega Cloud going to 59% of a strength and backlog? I think what that really highlights is that our clients are very committed to Pegasystems. Right. And committed over a long, long term. So I think that’s a great sign. Pega Cloud, the current RPO tends to come in a couple quarters after it enters, just depending on effective dates, when things start, the specific contracts, and how they roll into revenue.

But just assume a couple quarters. Alexei, thank you.

Alexei Gogolev (Analyst at JP Morgan)

You’re welcome.

OPERATOR

We have reached the end of today’s Q and A. I will now turn the call back to Alan Trefler for closing remarks.

Alan Trefler (Founder and CEO)

Thank you to everybody who joined this call. I’ll share with you that we’re actually incredibly excited about this opportunity and the important strategic direction that we took a couple of years ago when we decided to go after things with this design and runtime distinction—that this highly differentiated approach that we are more convinced than ever is exactly right. And candidly, when we see organizations struggle with rogue agents, boy, it makes us smile a little bit that we chose an approach that mitigates that.

Getting this to be turned into business revenue—solid results—is exactly what our mission is. And I’ll tell you that we’re very energized about it. So thank you very much and look forward to talking with you all again soon.

OPERATOR

This does conclude today’s call. Thank you for attending. You may now disconnect.

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