Earnings call transcript: Pegasystems Q3 2025 results beat forecasts, stock surges

Pegasystems Inc. (PEGA) reported robust financial results for the third quarter of 2025, surpassing Wall Street expectations with earnings per share (EPS) of $0.30 against a forecast of $0.20, marking a 50% surprise. The company also exceeded revenue forecasts, reporting $381.35 million compared to the expected $351.54 million. Following the earnings announcement, Pegasystems’ stock price surged by 12.54% to $63.25, reflecting strong investor confidence. According to InvestingPro data, PEGA has demonstrated impressive momentum with a 55% return over the past six months, while maintaining a strong financial health score of 3.26 (rated as "GREAT").

Key Takeaways

• Pegasystems reported a 50% EPS surprise and an 8.48% revenue surprise.
• The stock price increased by 12.54% in post-earnings trading.
• Pega Cloud ACV and free cash flow reached record highs.
• The company launched innovative products, enhancing its cloud and AI offerings.
• Pegasystems remains debt-free, with strong cash reserves.

Company Performance

Pegasystems demonstrated significant growth in the third quarter of 2025, driven by its cloud and AI initiatives. The company’s Annual Contract Value (ACV) grew by 14% year-over-year, while Pega Cloud saw a 27% increase. This performance underscores Pegasystems’ competitive edge in the digital process automation sector, where it is recognized as a leader by Forrester and Gartner. InvestingPro analysis reveals the company operates with a moderate level of debt and maintains strong cash flows sufficient to cover interest payments, supporting its growth initiatives. For deeper insights into PEGA’s financial health and growth prospects, investors can access the comprehensive Pro Research Report, available exclusively to InvestingPro subscribers.

Financial Highlights

• Revenue: $381.35 million, up from $351.54 million forecasted
• Earnings per share: $0.30, exceeding the $0.20 forecast
• Operating cash flow: $347 million
• Free cash flow: $338 million, a 38% increase year-over-year

Earnings vs. Forecast

Pegasystems delivered a notable earnings surprise with EPS of $0.30, 50% above the forecast of $0.20. Revenue also surpassed expectations by 8.48%, with actual figures reaching $381.35 million compared to the anticipated $351.54 million. This performance marks a significant improvement from previous quarters, showcasing the company’s ability to exceed market predictions.

Market Reaction

Following the earnings release, Pegasystems’ stock rose by 12.54%, reaching $63.25. This upward movement reflects strong investor sentiment and confidence in the company’s strategic direction. The stock’s performance is notable given its proximity to the 52-week high of $67, suggesting potential for further gains. InvestingPro data indicates the stock has delivered a remarkable 51.71% return over the past year, though current valuations suggest the stock may be trading above its Fair Value. Additional InvestingPro Tips highlight both opportunities and risks in PEGA’s current market position.

Outlook & Guidance

Looking ahead, Pegasystems remains focused on expanding its AI-powered workflow automation and cloud migration strategies. The company’s guidance for future quarters indicates continued growth, with EPS forecasts for upcoming quarters ranging from $0.27 to $0.77. Revenue projections for the next fiscal year are set at $1.7 billion, with an increase to $1.8 billion in 2026.

Executive Commentary

"Our goal is to be the workflow automation and AI orchestration platform of choice," stated CEO Alan Trefler, highlighting the company’s strategic focus. Trefler also emphasized the shift to a work-based pricing model, aligning with Pegasystems’ innovative approach to client engagement and service delivery.

Risks and Challenges

• Potential volatility in AI adoption rates could impact growth.
• The competitive landscape in cloud services remains intense.
• Macroeconomic factors, such as interest rate fluctuations, may affect investment.
• Regulatory changes in data privacy could pose compliance challenges.

Q&A

During the earnings call, analysts inquired about the evolution of Pegasystems’ pricing model and its impact on revenue. Executives also addressed questions on federal government project dynamics and the strategic role of AI agents in legacy system transformations.

Full transcript - Pegasystems Inc (PEGA) Q3 2025:

Krista, Conference Operator: 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 you to the Pegasystems Third Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press the star, followed by the number one on your telephone keypad. If you’d like to withdraw your question, again, press star one. Thank you. I would now like to turn the conference over to Peter Welburn, Vice President, Investor Relations and Corporate Development. Peter, please go ahead.

Peter Welburn, Vice President, Investor Relations and Corporate Development, Pegasystems: Thanks, Krista. Good morning, everyone, and welcome to Pegasystems Q3 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 are 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’re 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 Q3 2025 results and the company’s filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2024, and other recent filings with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance on such forward-looking statements, and there are no assurances that the matters contained in such statements will be achieved. Although subsequent events may cause our views to change, except as required by law, we do not undertake and specifically disclaim any obligation to publicly update or revise these forward-looking statements, whether as the result of new information, future events, or otherwise.

Our non-GAAP financial measures discussed in this call should only be considered in conjunction with our consolidated financial statements prepared in accordance with GAAP. They are not a substitute for financial measures prepared under U.S. GAAP. Constant currency measures are calculated by applying the September 30, 2024 foreign exchange rates to all periods shown. Reconciliations of GAAP and non-GAAP measures can be found in the company’s press release announcing its Q3 2025 results. With that, I turn the call over to Alan Trefler, Founder and CEO of Pegasystems.

Alan Trefler, Founder and CEO, Pegasystems: Thank you, Peter, and to all who are joining today’s call. I’m really excited to see the continued strong results through Q3. As we’ve seen for the last number of quarters, our team is really focused, executing well, and our differentiated AI strategy continues to resonate with clients, prospects, and partners. We’ve been saying for some time that we believe we have a competitive advantage in today’s AI world, one that’s built on a unique architecture and a special approach to AI and agents. I believe that the results we’ve seen over the past few quarters reflect those advantages and will continue to serve us, our clients, and partners well for the foreseeable future. We’ll walk you through the financial highlights in a few minutes. I want to talk a bit about what I’m seeing in the market.

AI continues to dominate the tech conversation, and candidly, not always for the right reasons. The buzz is dizzying. There are new tools, new terms, lots of hype. We’ve all seen headlines that 95% of enterprise pilots are failing and predictions that Gen AI will actually, in some ways, eliminate the software industry. I think all of that misses the point. First, most of the failures aren’t about bad tech. They’re about misapplication. This is an industry problem stemming from our competitors’ approach to use large language models to orchestrate and control workflows while an application is running live in production. In other words, at runtime, using a large language model to orchestrate and control workflows at runtime runs the risk of mixing the appropriate context and guardrails and results in what we consider to be an inadequate level of accuracy and reliability.

The unpredictability of this approach is a non-starter for regulated industries like banking, healthcare, and insurance, where even minor inconsistencies can trigger major consequences. That’s exactly why our competitors’ approaches are falling short. Pegasystems’ revolutionary idea is to really harness the power of the large language model to design the application and then use the power of Pegasystems’ patented world-class workflow engine to create appropriate context and guardrails prior to putting the application into production. We think this unique combination is our advantage, and it’s a structural advantage. It’s about the structure of how we operate. I don’t think our competitors can readily replicate this because they don’t have this world-class workflow engine that’s the core of driving consistency. They don’t have anything like Pega GenAI Blueprint to ideate and design client workflows. As a result, they’ve taken this prompt-driven approach.

There are fundamental challenges with depending on prompts alone for critical work and decisions. Small changes in wording or in the data can produce wildly different results. LLMs evolve constantly, so the same prompt can yield different answers over time. The suggestion of using prompt-driven AI to make decisions in real time is akin to hiring somebody and saying, "Hey, your process claims how you think is best." What organization would do that? A much better approach is to give them defined processes to follow so that every claim is handled the same way. Similarly, we wouldn’t let a customer service rep freestyle responses to sensitive questions. You train them, guide them, ensure they escalate when needed. We think the same logic applies to AI and is why you need to design this thoroughly and get the right sort of approvals before you begin.

Prompts can be great for brainstorming and creativity, but not for making critical decisions in the moment based on variables that can be unpredictable, especially in those critical regulated industries. Enterprises should use Gen AI to innovate and to get the workflows right. Once they’re agreed upon, the agents must follow them so it operates the right way every time. Once again, our approach with Pega GenAI Blueprint is to leverage the power of LLMs at design time with the power of a robust workflow engine at runtime, delivering the best of AI plus the best of reliability. It’s an optimal approach for building a sustainable, scalable, agentic framework, even in complex enterprise environments. Last quarter, I continued to spend significant time with senior leaders around the world, and these conversations reinforce how some of them are really seeing the strength of the approach I described.

Our architecture and AI strategy are built for real-world impact, helping customers move faster with greater confidence and control. Our goal is to be the workflow automation and AI orchestration platform of choice for the enterprise. I believe we have the right architecture, solutions, and approach to make that happen. We are seeing strong momentum as clients shift from experimentation to execution, embracing Pega GenAI Blueprint to drive meaningful transformation across their enterprises and critical systems. Blueprint is more than a tacked-on feature. It is an entirely new way to drive enterprise transformation, built on the concepts and architecture we have developed over decades of automating enterprise processes. It breaks down silos between business and IT. It helps organizations reimagine how to get work done. It helps clients and partners move from ideas to execution faster than ever.

Blueprint has changed how we engage with our clients, replacing weeks of discovery and demo building with near real-time examples of what is possible with Pega. It has been a game changer. It enables us to target a broader group of organizations because it makes things easier and faster to understand and more reliably applicable to implement Pega. We are seeing Blueprint shorten sales cycles, especially the early stage parts of this conversation. We are also starting to see the time from design to production truly accelerating as we build additional functionalities of Blueprint and key parts of the development cycle are jump-started. This allows companies to get to production faster. We see more projects going live faster than has been the historical norm. Though it is early days, we are really excited to see this happening.

For example, a global food and beverage company launched a marketing spend management application, a large U.S. bank deployed a consolidated tax return solution, a consumer goods company went live with a pricing approval automation solution, a telecommunications provider launched a network issue resolution workflow application, and one of our large automotive clients, which presented at their Pega event a few weeks ago, described how they leveraged Blueprint to transform an old Lotus Notes-based collection of finance applications into a modern cloud-based Pega system. All of these went live in under 100 days. It is much more than speed because Blueprint enhances the way that business and IT collaborate, and it uses AI to reimagine outdated ways of working. It means our clients get better apps that deliver more value. When clients can get that much value that quickly, we think they are much more likely to invest in Pega.

As a reminder, you can try out Blueprint for yourself at pega.com/blueprint. What I like when I’m talking to the senior execs is it’s not just clients that are excited about our approach. Partners are also leading it. In June, we introduced Powered by Blueprint, which allows select partners to make Blueprint their own by embedding their best practices into the tool and branding it with their name and logo when they use it. It’s sparking new momentum and becoming a rallying cry for our ecosystem. It’s going to help partners differentiate, deliver faster, and scale smarter. It’s a signal that the clients are getting a modern AI-native approach to transformation now, not just from Pega, but from the whole ecosystem. It’s a big deal because real enterprises aren’t one-size-fits-all. They’re complex, messy, and diverse. Pega and Blueprint are built for that.

Last month, I sat down with Ravi Kumar, the CEO of Cognizant, for a fireside chat about the role of AI in enterprises and the power of Blueprint. Ravi said he was, quote, "blown away," unquote, by Blueprint and excited to take it to his clients. You can find the interview on YouTube. Just search Trefler Kumar. I hope you watch it because you’ll get to see the kinds of conversations and reactions we’re seeing from our global partners. We continue to innovate across the Pega null Suite, most recently with the availability of Pega null 25, which we believe is the industry’s first agentic enterprise transformation platform. Enhancements across the suite, including Blueprint, provide improved capabilities for enterprise transformation. They deliver trustworthy, predictable AI agents that operate as an orchestration fabric across the enterprise, including the ability to leverage Pega as well as non-Pega agents.

This makes it easier for organizations to capture and reimagine legacy systems, automate work, and boost productivity. As I noticed a few minutes ago, our goal is to be the workflow automation and AI orchestration platform of choice. Work in this world is done by a combination of people, automation technologies, and AI. In addition to our belief that we have what’s needed to claim a top spot here, we’re also receiving outside validation from top industry analyst firms like Forrester and Gartner as leading in the key categories in which we play. These include decisioning management, AI decisioning platforms, real-time interaction management, CRM software, process mining platforms, and enterprise low-code application platforms. Recently, in August, we were named a leader in the digital process automation platforms by Forrester, receiving the highest scores among 14 evaluated vendors in both Commonwealth and Strategy categories.

The report stated that Pegasystems, quote, "best suits enterprises with a sophisticated transformation of goals, particularly if they want to focus on customer-facing AI agents," unquote. Just last week, out of 20 vendors, we placed as a strong leader in Gartner’s inaugural Magic Quadrant for business orchestration and automation technologies, or what they call BOAT. I think this is going to be a big area in the future. I think business orchestration and automation is a place where we are beautifully suited, and it’s nice to get that sort of recognition. We also earned number one scores in the adjacent critical capabilities evaluation for case management and enterprise task and process automation. These industry recognitions are, we think, important, and they give us some insight.

What we really love is how we’re starting to have different, and I think the right conversations about Blueprint, about AI agents, about the agentic process fabric concept. Those coupled with a strong partner strategy and our vertical understandings, I think, puts Pega in a really good position. We’re thrilled by the new clients. We’re thrilled by the whole way that the analysts, I think, are responding to what we’re doing. We’re really pleased that the ability to work with partners is being massively increased by some of the new technology and some of the new positioning and approach we’re taking. I’m pretty optimistic about our future. I think Pega is built for this moment. The distinctive architecture, the unrivaled Blueprint solution, it makes us uniquely capable to handle volatility and complexity of modern enterprise environments.

I’m confident that our approach to AI will continue to resonate with prospects, clients, and partners. I think if you take a few minutes to think about it, this idea of really doing the creativity at design time and doing reliability at runtime just makes a lot of sense. Now, to provide more color on our financial results, Ken, your turn.

Ken, CFO, Pegasystems: Thanks, Alan. We delivered record results in Q3 2025 with Pega Cloud ACV, revenue, and free cash flow, all reaching new highs and showing continued acceleration. These results reflect the demand for Pega and our ability to both execute on and monetize our differentiated AI strategy. At the same time, we’ve demonstrated our strong commitment to return capital to shareholders by completing our largest share repurchase quarter ever. Annual contract value grew 14% year over year. Through the first nine months of 2025, we added over $147 million in net new ACV in constant currency. That exceeded the total net new ACV we added in the entire year of 2024. Once again, the standout performer was Pega Cloud, which grew 27% year over year and represented the fastest growing component of Pega’s total ACV.

This accelerating growth trajectory highlights not only the scalability of our platform, but also the increasing client focus on cloud-native architectures and solutions for the adoption of AI. Several factors drove our ACV growth. First, our global sales organization continued to execute well across all major GOs. Several years ago, we made a strategic decision to reorganize and refocus our go-to-market model, aligning teams more closely to our clients. That transformation is clearly paying off through deeper client engagement and a far more efficient sales motion. Second, Pega Cloud remains a major growth driver. As more clients migrate to Pega Cloud, we’re experiencing accelerated growth and momentum. The economics of our cloud migration strategy are compelling as well. Pega Cloud margins continue to expand, approaching 80% in Q3.

With the vast majority of our net new ACV coming from Pega Cloud, we continue to realize the benefits of a more scalable business model that drives significant customer value. Third, our unique approach of utilizing AI in the design phase, as Alan mentioned, while leveraging predictable workflows at runtime, is fundamentally unique and continues to differentiate us in the market. Clients are using Pega GenAI Blueprint to design sophisticated workflows that streamline operations and improve customer service. This new innovation is generating enormous enthusiasm. We’re seeing examples of deals closing faster as clients recognize and take advantage of the numerous tangible benefits of our AI-powered architecture. For example, we sourced and closed a new logo via a non-Pega partner within Q3, a powerful example of speed, precision, and alignment across teams. Keep in mind, this is someone who never knew Pega but found Blueprint and saw its power.

This rapid win highlights how Pega’s cutting-edge technology and delivery methodologies are transforming the way clients envision and implement intelligent automation. By leveraging Pega GenAI Blueprint, the client was able to instantly visualize their use case, dramatically accelerating stakeholder alignment and simplifying the decision-making process, which can typically take months, was reduced to days. About a month after the first Blueprint was created with the Pega sales team, the deal was signed, demonstrating the power of AI-driven co-creation and agile execution. Implementation will be powered by Blueprint Delivered, Pega’s new AI-powered delivery methodology. This approach ensures rapid time to value, reduced delivery risk, and a smoother path to deployment, helping clients realize benefits sooner and with greater confidence. In addition, the deal also features Pega’s usage-based model. This creates a scalable foundation for future growth.

If the client leverages the platform to get more work done, Pega’s subscription revenue scales alongside it. It’s a true partnership. When the solution goes live, Pega will be compensated based on the real work processed, reinforcing the partnership and outcomes as well. This win showcases the impact Blueprint can have with new Pega partners and clients. Moving on to cash flow, we generated $347 million of operating cash flow and $338 million of free cash flow through the first nine months of 2025, representing an increase of 38% growth year over year for both metrics. This robust cash flow reflects our strong ACV growth, disciplined management, and the continued benefits of our recurring financial model. Our healthy cash generation and our solid balance sheet also enabled us to invest in innovation and also return capital to shareholders.

As a result, we have purchased $393 million of Pega stock, or approximately 8.7 million shares, demonstrating our confidence in the long-term value of our business and our commitment of returning value to our shareholders. As of September 30, we had $350 million in cash and marketable securities on our balance sheet. As a reminder, since repaying our convertible senior notes in March 2025, we remain debt-free. I’ve received some feedback over the years that it’s helpful when I share comments on modeling our business, so I’m going to continue to offer some perspectives on the fourth quarter of 2025. As more and more client workloads migrate to Pega Cloud, this trend reinforces the long-term strength of our subscription model, even while putting some near-term pressure on maintenance and term license ACV.

Over 85% of our ACV growth this year has been generated by Pega Cloud, a clear indicator of how rapidly clients are embracing and adopting our modern, scalable cloud platform. This momentum highlights the growing reliance of Pega Cloud as the foundation of our clients’ most mission-critical workloads, even as it will naturally reduce term license and maintenance activity over time. As you model Pega Cloud revenue, it’s important to keep in mind that based on contract effective dates and typical client go-live schedules, there’s often a delay of a few quarters before reported Pega Cloud ACV becomes Pega Cloud revenue. As a reminder, we provide annual guidance at the start of each fiscal year and do not typically update it. In conclusion, we’re confident in our business, our strategy, and the opportunity ahead.

We’re focused, obviously, on closing the year out strong and continuing the momentum that we’ve seen through 2025. We look forward to seeing many of you in person at numerous upcoming investment banking conferences across the United States. At this point, operator, please open the line for questions.

Krista, Conference Operator: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw that question, again, press star one. We also ask that you limit yourself to one question and one follow-up. Any additional questions, please re-queue. Your first question comes from Steve Enders with Citi. Please go ahead.

I’m sorry, Steve Enders from Citi. Thank you so much for taking our questions. My first question is, you touched on this a bit, what drove the much better ACV and acceleration versus your expectation of it slowing down on a much tougher comp? How should we think about ACV for Q4 and the FY25 as a whole?

Ken, CFO, Pegasystems: Thank you for your question. I think when we guided at the beginning of the year, we were pretty clear that we said we were not going to factor a direct impact from Pega GenAI Blueprint into our results. I think what you’re seeing is through the first three quarters, Pega GenAI Blueprint has begun to impact our business in a positive way. It’s the exclusive way that we go to market with our clients, and our partners are now adopting it at an accelerated pace. I think the performance is certainly connected to the impact of Pega GenAI Blueprint on our business. We see that continuing.

Perfect. Thank you. I have a follow-up on what you are seeing on the federal side of the business and what the deal environment looks like.

I mean, the federal space, I think, obviously has been through a lot of change in 2025. You know, with the current situation of the government not being open right now, certainly there is impact to our clients. That said, our projects with our clients are long-term and very strategic and tend to go across not just weeks and months, but tend to go across years in terms of the change we’re helping them drive. We’ve been through shutdowns before, and our clients have certainly continued to move forward with their initiatives. We don’t expect that to be different now.

Perfect. Thank you so much.

Krista, Conference Operator: Your next question comes from the line of Jake Robers with William Blair. Please go ahead.

Yeah, thanks for taking the questions, and great to hear that Blueprint continues to resonate with customers. Just in some of the newer predictable AI agents you recently launched, can you talk about the early feedback you’re getting for those solutions and just what’s different about those agents versus what some of your competitors are doing?

Alan Trefler, Founder and CEO, Pegasystems: Yeah, I think it’s actually great seeing that the understanding of the difference is starting to resonate with customers because there’s so much noise and hype in this space. It’s just, you know, can’t believe it’s pretty crazy. The way all of our competitors build agents is they give you a prompt studio. You go into a studio and you begin writing prompts, and now they’re trying to put additional controls in because they realize those prompts haven’t necessarily always resulted in the right outcomes. They introduced Salesforce’s agent script to be able to sort of jury-rig controls. The problem with that approach is relying on the LLM at runtime is inherently unpredictable to a degree.

When you’re in a business where you really, really want predictability, you want it to be two customers the same way based on law, based on policy, it’s really important to have codified that in advance. By using the LLM to foster the creativity, to foster the discipline at design time, then being able to take this library of workflows and be able to execute it at runtime, it’s really quite remarkably predictable and it’s structural. You know, the other thing that I’ll tell you, and this is interesting as well, a lot of people talk about how LLMs are driving waste in the electric grid. You know, candidly, when we run at design time, the LLMs we’re using are exactly the same. A workflow is thousands of times less consumptive of natural resources than an LLM. They run on an ordinary CPU.

They don’t need the fancy GPU to be able to run. Being able to do this has an interesting additional environmental impact. As far as I’m concerned, the predictability is the most absolutely compelling part of it.

Very helpful. It’s pretty clear the acceleration that Pega GenAI Blueprint is driving within the existing base. Now that you’ve started to invest more in new logos over the past few quarters, can you talk about the doors that Pega GenAI Blueprint is opening on that front and just how that overall push has gone thus far?

Ken, CFO, Pegasystems: I think, Jake, I’ll start just real quick and then let Alan chime in. I think there’s two things, there’s two aspects of a new logo acquisition. The first is how you initially engage with them and what the experience is. I think that Blueprint is a completely different kind of non-technical, very user-friendly experience where you don’t need to know Pega or actually have someone that is an expert in Pega to start that engagement. The second thing is it speeds up the business development kind of solutioning time in the campaign. I view those as two really great accelerators. We’re seeing the ability to actually be more targeted with more new logos to be able to accelerate that, which previously was hard to do because of the time that it took to actually get through kind of getting something into the pipe, so to speak. Any thoughts, Alan?

Alan Trefler, Founder and CEO, Pegasystems: Yeah, I think that the ability to show a customer what we do has gone from something that took months and lots of meetings to something that when people see Blueprint and spend an hour, and if you haven’t done it already, Peter, I’m sure we’d be glad to walk you through a Blueprint demo. Any of you would be happy to do that. When you see it, you go, "Oh, I get it." The thing I’m really excited about is it’s not just speed. We’ve been able to take a lot of our design principles and a lot of the ways that we’ve learned about and have thought about workflows and process automation for all these decades, and we’ve been able to build those into Blueprint as a critical part of the intellectual property. What that does is it’s not just faster.

I think even more important than speed is it’s way better. I think it’s also much more reliable from an implementation point of view because it guides you to get it right. It’s a fundamental change, particularly with new logos and others who don’t know Pega because they just get it. I’ll tell you the truth. It’s actually made our own internal training of all of our staff easier and better, too, because people really, really understand Pega at a different level after having just even done one.

Very helpful. Congrats again on the great results.

Ken, CFO, Pegasystems: Thanks, Jake.

Krista, Conference Operator: Your next question comes from the line of Raymond Lenzchao with Barclays. Please go ahead.

Perfect. Congrats for me as well. Ken, one for you. I was trying to understand your comments a little bit better when you talked about the impact of more cloud that it does have on term and license. You said you kind of wanted to help us a little bit with Q4. Should we kind of think about that deceleration or the that we saw on that kind of client cloud line of the business should continue probably maybe a little bit more in Q4 as you gain momentum? They’re just kind of trying to translate your words into numbers. Thank you.

Ken, CFO, Pegasystems: Yeah, I think that’s a great question. I was really trying to make sure to highlight that in some historical quarters, the term revenue has been higher because the mix of the deals were more into the term bucket than Pega Cloud. When you have 85% of growth happening in ACV from Pega Cloud, you get less of an impact from that. You are going to see that term license revenue decline over time. I know that I’ve said that in the past, and it hasn’t declined at the pace that maybe I even thought just because of some of the anomalies around duration. That’s really what I was touching on. When you have 85% Pega Cloud, you would obviously expect less impact from term license revenue. I’m not talking about, you know, a $100 million difference or anything of that scale, but you should expect that to decline.

That’s what I was trying to highlight.

Alan Trefler, Founder and CEO, Pegasystems: Yeah, let’s face it, a lot of this confusion that can come in is because of what I would consider an accounting anomaly where, you know, if you have a piece of business that’s a $20,000 a month piece of business and it’s term, you know, if it goes on for extra years, you end up having a present value.

Ken, CFO, Pegasystems: Yes.

Alan Trefler, Founder and CEO, Pegasystems: Look, we would much rather not do that, but it’s just the way that the accounting rules work. I think you’re seeing the powerful move of our business towards Pega Cloud, which is real validation of the quality of cloud. I see with my customers that are switching that they tell us that they get better reliability running on Pega Cloud than they do when they were running it themselves. We’re able, I think, to do a better job from a performance point of view with them because we’ve got so much automation and we’ve really, really hooked in just a whole support system for them that we can do when it’s running on the cloud. You know, you’re seeing our business sort of inexorably shift to be, I don’t know, an 85% cloud business over time.

There’s always going to be some customers who, for one reason or another, really want to run on-prem. We like being able to offer that choice to our customers, but it’s becoming really a cloud business. At that point, once you realize that, yeah, we really are a bona fide cloud business, you then, I think, really want to look at ACV. ACV is what tells you about the momentum of the business. It tells you about the durability of the business, and it doesn’t flop around the way that it, particularly the term license line. I think what Ken’s saying is the term license line is going to, it flops around a bit just because of things that don’t actually relate to the strength or weakness of the business.

I just also direct from a quality point of view, you to think about Pega clearly has made the transition to cloud compared to where we were years ago. When we started this, we were a very small percentage. You know, look at it now. We have strong ACV growth. That’s pretty exciting.

Yeah, it makes total sense. It’s really, really good to see. Hopefully that translates into guidance and into guidance as well, the guidance approach as well. The other question I had, Alan, is the other big area around AI that should be really interesting to you is application modernization because there’s so much that can be done there. Can you speak a little bit about where we are on that journey?

Yeah, we are seeing a lot of energy around that, particularly around the new features that we’ve introduced in the last 60, 90 days. If you go to Pega GenAI Blueprint and you go to the place where you can upload assets, we’ve made it so that if you have an old mainframe system without any documentation, you can actually hook up and take a video of somebody using it. They can go through and explain what they’re doing, and what the system will generate off of a 20-minute video in terms of creating not just a cloud-native replacement for some old legacy thing, but actually modernizing it and innovating. If you have two or three systems you want to group together when they’re modernized, you just grab the assets from all of them and upload it, and Pega GenAI Blueprint will work to help you reconcile them.

We think this is just enormously, enormously exciting. You’re going to see us continue to put a lot of work into making this better and better because it’s a pretty terrific area. A number of those 100-day implementations that we talked about fall into that legacy modernization category.

Okay, perfect. Thank you. Congrats.

Krista, Conference Operator: Your next question comes from the line of Patrick Walravens with Citizens. Please go ahead.

Oh, great. Thank you so much. Congratulations, you guys. Hey, can we talk about how pricing is evolving, maybe in this industry? In the script, there was, and I know you touched on it, but if we can go deeper, that’d be great. In the script, there was one comment about priced on real, real work process. You know, you’ve got Brett Taylor, CEO of Sierra, talking a lot about outcome-based pricing and how that really shifts the playing field. Any thoughts you have on how pricing might be evolving would be super interesting.

Alan Trefler, Founder and CEO, Pegasystems: Yeah, my thought is we’re about a decade ahead of all these other guys. We realize.

We’re in the right place, yeah.

Yeah, we realized eight or nine years ago that we would go into a customer, sell them a bunch of seats, make them 30% more efficient, and then you come to renewal time and the customer says, "I don’t need all these seats." It really didn’t seem right when, particularly on our cloud, we’re burning through all these, the number of transactions has gone up, not down. We said, "Look, we’re just thinking about this the wrong way if we’re thinking about bumps on seats." We really began a move to move our client broadly to work-based pricing. We price based on the amount of work the system does. We tend to be a process automation workflow case management system, so the system makes it pretty easy to count and charge for the number of workflows, the amount of work, the amount of output that the system is involved in.

I think all of these people who have some form or another of seat or human counting-based pricing have a structural problem. They have a structural problem both because that’s, I think, a lousy way to do business with the customer. It doesn’t align the incentives of the vendor and the customer. We, as a vendor and the customer, should both want to make that business as efficient as possible. Seat-based pricing businesses don’t work that way. They get penalized by making it more efficient, whereas we really have every incentive to want to do that. I think that the pricing in this industry is going to have to change pretty radically. We feel like we’re way ahead.

That’s right. As a follow-up, Alan, are you seeing any new players in this space? Are you seeing Sierra or Decagon or anyone else like that?

We see them on the periphery. I mean, they talk to a lot of the same customers that we talk to. We get asked about them. The challenge with these chatbot agent-type systems is one of the big things you’ve heard me talk about, Pat, is this concept of center-out, this idea that you need an agentic system that’s going to be able to work in every channel, that the rules and the processes that run need to be able to operate if somebody’s having a dialogue with the system, or if somebody sends an email to the system, or if somebody’s in a back office and wants to go to the system. In all of those situations, you really want to be in a true omnichannel way, what we call center-out, which we’ve been talking about also for about eight years.

I think a lot of these companies that are out there are building things that get locked into a particular channel. When you’re locked into a channel, it’s hard to envision how you’re going to do something that really can serve clients and serve the staff in all the places they’re going to want to use it. I also think structurally, this center-out concept is perfect for agents because it lets you work agentically, but it also lets you work when you have to have a person involved. These folks who come in, and people have come in for a long time with one, years ago, it was IVRs, then it was robots. I think that running your enterprise at the periphery, having the business logic at the periphery, it just doesn’t make as much sense as to have a fabric that is a center-out type fabric.

Okay, thank you very much.

Krista, Conference Operator: Your next question comes from the line of Mark Chappelle with Loop Capital Markets. Please go ahead.

Hi, thank you for taking my question. Nice job on the call, guys. A couple of questions around the legacy transformation opportunity. Alan, starting with you, the newest Pega GenAI Blueprint release introduces AI agents that essentially analyze legacy apps and automatically design workflows. Regarding that transformation opportunity, are you seeing customers actually integrate this capability into production today, or are they just still in the planning stages for that matter?

Alan Trefler, Founder and CEO, Pegasystems: Our Blueprint is responsible for every new implementation that we’ve done in the last six months, and many, many, many of those are in production. Remember, what runs in production is our workflow engine. The nice thing about this is we’re able to enhance Blueprint literally every week or two because it runs as a SaaS app on pega.com connected to a Pega system. We’ve recently added localization facilities so that the Blueprints actually will get stored in our, if a customer is a Pega Cloud customer, the information that is uploaded about Blueprint actually gets stored in their Pega Cloud region. It’s stored on a distributed basis, which includes if they’re in another country and they worry about data residency and things of that type, that’s now all been incorporated so that it will save the information in a place consistent with this sort of sovereign rules.

At runtime, what’s running is the Pega system as we built it, existed for such a long time, obviously with enhancements, but it’s not like Blueprint itself. This is where I think people got a little confused when we talk about Blueprint. Blueprint is a different way of doing Pega that permeates the entire design environment. It’s not this sort of separate SKU that they would then run. Every customer that I can think of has started with a Blueprint for months here. It was funny. We had somebody appear at one of our sessions of one of our customers got up and had a sign that said, "This is our motto: No Sprint Without a Blueprint," which said basically that every time they went to look to build something, they always thought that way. There’s a lot of enthusiasm for it.

Okay. Ken, if I recall correctly, the legacy transformation opportunity was supposed to add about a point of growth to ACV this year. Is it still tracking to that, or do you see the legacy opportunity kind of outperforming that expectation?

Ken, CFO, Pegasystems: I would say that any acceleration over what we guided, I would completely tie to, or I would largely tie to, Pega GenAI Blueprint and legacy transformation opportunities. I think that if we accelerate growth, it’s going to be on the backs of Pega GenAI Blueprint. Most of what we do is tied to some type of digital legacy transformation or IT modernization, whatever buzzword the industry is using.

Great. That’s helpful. Thank you. That’s all for me.

Thanks, Mark.

Krista, Conference Operator: Your next question comes from the line of Blair Abernathy with Rosenblatt Securities. Please go ahead.

Thanks very much. A nice quarter, guys. I just wanted to delve into verticals just a little bit. You touched on federal. Maybe just to dig into that a bit more. What sort of are you seeing there from a claims volume perspective? I’m not sure what % of the government base is on cloud versus on-prem, so if it makes that much of a difference. Are you changing your go-to-market activity there right now? Maybe a little more color around what you guys see happening in federal.

Alan Trefler, Founder and CEO, Pegasystems: Yeah, so a couple of things. One, we feel a little fortunate that some of the agencies that really were targeted happened not to be the ones that we do a lot of work with. Having said that, when the offices are closed, progress on projects is slowed down. The services projects, they don’t necessarily come to a halt, but they massively, massively reduce. If this goes on, this will obviously affect how those projects roll out. As Ken said, these tend to be very long-term agreements, and they’re not going anywhere. We’ll pick them up when things come back. We have accelerated the move to the cloud in the federal government. We’ve actually had quite a few successes with our Pega Cloud for Government offering, which is designed specifically for the FedRAMP federal environment.

We actually have other customers in other governments, like some state governments, etc., that are interested in Pega Cloud for Government. That’s, I think, a good offering. Cloud, I think, is strong. Projects are, as you would expect, in some turmoil with WorkStop, which is when the workers don’t come in. We’re hopeful that sooner than later, this will get unlocked.

Ken, CFO, Pegasystems: One comment I’ll make on the government vertical, so to speak, is I’ve spent, and Alan has as well over the last few months, a series of meetings with different agencies, different committee members and their staff to really understand kind of how Congress is prioritizing spending initiatives going forward. IT modernization is what they’re actually calling it in the government. It’s a bipartisan focus area. I think what you’re seeing is a lot of momentum around fixing the legacy debt that these agencies have around IT and actually even trying to repurpose dollars wherever possible to make sure that they’re supporting that. I think that is one interesting kind of observation I’ve had, that it is, no matter who you talk to, IT modernization is a priority in the government.

Alan Trefler, Founder and CEO, Pegasystems: There are lots of workflows in government, and they really need to be done predictably. I think it just plays perfectly with what we’re doing.

Okay, great. Thanks for the color, guys.

Krista, Conference Operator: Your next question comes from the line of Devin O with KeyBank Capital Markets. Please go ahead.

Good morning. Thanks for taking my questions here. Could you maybe talk a little bit more, I guess, since you’ve already talked about it in prepared remarks, but more so on the partner-branded blueprints? I know you said it previously, but have you seen that kind of unlock a whole host of use cases that Pega and maybe the broader partner system has not seen before? Maybe give us some flavors on what the new use cases that you’ve seen stemming from them are and how that has influenced sales pipeline and velocity thus far from the launch of that?

Alan Trefler, Founder and CEO, Pegasystems: Yeah. It’s one that I think will be quite important. It’s very new. Remember, we announced it in June. We have five partners who have set up their what we call knowledge buddies, which are private knowledge stores that are private to them that we run on Pega Cloud. What happens is when Blueprint runs for one of these partners, if a staff member, like I mentioned, Cognizant, somebody signs on to the system, what they will see is Blueprint with that company’s, the partner’s name right at the top. It and only they, if they’re signed in from that ID, will be able to access this IP. It will get pulled in automatically into the analysis that Blueprint does and what happens. I think it does a couple of pretty important things for us.

One, it allows us to enable the partners to leverage their experience along with ours as part of, and it’s a great use of AI, to tell you the truth, to do that. What I’m excited about is, you know, historically, with most of these partners, in all of these partners, they’ve had Pega practices. The Pega practices are the parts of the partner that would, you know, work on implementing the Pega system. For the very large partners, these Pega practices were just a couple % of the total partner population.

What we’re trying to do with Powered by Blueprint is position this away as a way where outside of the Pega practice, the partner staff or the partner sellers will be able to use this as a way to talk to their prospects, their customers, not to sell Pega, but to sell their IP and what they have to offer as, you know, the partners themselves are in very competitive environments now. As we unlock this going into next year, I think it could be very, very exciting.

Great. That’s helpful context. For my follow-up for Ken, again, a really strong cloud ACV growth in the quarter. I also noticed that license ACV declined sequentially quarter over quarter. I’m assuming that’s a function of the strength you’ve seen from the strong migration activity. Could you maybe in any way kind of help put some numbers around how much has kind of migration from licenses contributed to cloud ACV growth this quarter or maybe thus far this year? Thank you.

Ken, CFO, Pegasystems: Sure, Devin. Migrations are an important element of our strategy to get clients onto Pega Cloud. Migrations in and of themselves have not been, you know, if you look at total ACV and the acceleration in total ACV, that is not driven materially by migration. That is driven by clients continuing to expand their use of Pega. However, migrations are going to drive the term ACV and associated term revenue down over time. You haven’t seen that. This year you’re going to see term license revenue be up year over year because of the large revenue that we had. Sorry, term revenue. Sorry if I said ACV. Term revenue will be up year over year because of the large amount of revenue we had in Q1. If you actually look at Q3 and in Q4, we see that term revenue kind of coming down when you compare year over year.

You are going to see that. That is a reflection of the movement to Pega Cloud. Overall, our growth is being driven by more spend with our clients.

Got it. Thank you.

Thanks, Devin.

Krista, Conference Operator: If you would like to ask a question, please press star one on your telephone keypad. Your next question comes from Rishi Gillaria with RBC Capital Markets. Please go ahead.

Oh, wonderful. Thanks so much for taking my question. Nice to see continued strength in the business. I wanted to start by maybe thinking a little bit conceptually about Pega’s role in this new AI ecosystem, broadly speaking. You know, Alan, I know we’ve talked about this concept before, right? As every kind of vendor and stack is building agents, one thing that we really haven’t seen anyone truly crack the code on is the ability for someone to be kind of a neutral middleman and handle the agent orchestration layer, right, and allow a lot of these agents to work with one another. Especially at a time where MCP is still in its nascency and A to A probably even more so. Can you talk about maybe what potential role Pega can play in that, you know, in kind of assisting all these agents across so many different stacks?

Then I’ve got a quick follow-up.

Alan Trefler, Founder and CEO, Pegasystems: Sure. If you talk about orchestration or you think about it, maybe I’ll take a moment and explain how we think about it. There are a couple of aspects to it. One aspect is the technical connectivity orchestration, like how does one agent call another? Things like MCP and A to A actually are pretty good already at being able to make it so that if somebody else has an agent, I can call it and I can have it make sense. We’re doing that all the time now as part of how we execute. The other part of orchestration is not just the kind of connectivity. It’s the logic. Orchestration is about getting things done, as I think about it. It’s not just about connecting things.

The important part of getting things done is getting them done in the right order, in the right way, and connected to the right things. That’s where, to us, workflows come in. When we look at our, you know, when we look at others, look at Microsoft, look at Salesforce, look at ServiceNow, they’re allowing an agent to orchestrate, or they’re allowing their fabrics, as everybody uses that term too now, to orchestrate using an LLM for control. As I said, the problem with that is particularly if you have agents calling agents or a fabric calling agents, the deadbeat good back is sometimes subtly different. The LLM can go down different paths. What we say is, "Hey, figure out what you want the orchestration to be for the different types of work that you do everywhere you can." Hesitate to call the LLM for reasoning at runtime.

Make it so there’s a reliable workflow that does the orchestration. There are different use cases where this will matter more and matter less. For the use cases where predictability is important, I think this is a huge, huge distinction and something that we have as a structural difference as opposed to just something that we could say, "We’re a little ahead or behind." It’s not. We’ve taken a path that I think, if you think about it, is going to make a lot more sense for orchestration and for reliable and predictable execution. We’ve got to get that message out there. We’re seeing the customers who hear it, not a lot. I would say that everything in this whole era is new.

Yep, got it. Thanks. That’s helpful. If we just think conceptually about growth drivers for ACV from here, clearly, a lot of it’s been, you’ve had Blueprint as a potential driver of upside. A lot of it has been within your existing customer base. If we think now about Blueprint and the lower barriers to entry, it feels like there really is an opportunity for net new logos to be a key driver of growth over the next several years. Just conceptually, how should we be thinking about what that mix over time could start to look like? Could we see new logos be a more meaningful driver of future ACV growth? Thanks.

Yeah, I think you’re going to see new logos be a more meaningful driver if our partner strategy is successful. By recruiting partners to be able to have their own Powered by Blueprint solutions that let them bring their IP to their customers their way, it opens the aperture on who we would be talking to a lot. It does it without us having to do all the heavy lifting of doing it ourselves. I think that, you know, we’re in the cusp of a new set of changes here. I think these changes, as you think about next year and you think about where this is going, we’re really pretty jazzed that we’ve got a lot of the stuff in the right groove.

Ken, CFO, Pegasystems: I think, Rishi, one way to think about it is if we tried to scale new logos through a direct account executive-covered model, we are limited with the logistics of scaling that organization, right? You have to hire people, you have to assign orgs, you have to do. That could and will accelerate our ability to get new logos. What Alan’s talking about is an order of magnitude growth change to leverage the 100,000 plus sellers that are already talking to those same organizations in our partner ecosystem. Those are two, both, they’re not one or the other. It’s just that one has the ability to push growth much faster. The other one is limited by the logistics of us scaling it.

Alan Trefler, Founder and CEO, Pegasystems: We have to do a great job for our partners to let them capture their IP and let them bring their story to a prospect here. If we can be successful on that, it’s, you know, I think extremely exciting. Hopefully, that makes sense.

Really helpful. Yep, very helpful. Thank you so much, guys.

Ken, CFO, Pegasystems: Thanks, Rishi.

Alan Trefler, Founder and CEO, Pegasystems: I think we are at time. With this, I’m going to thank everybody for attending. I want folks to know we’re working real hard for you, and I look forward to talking to you after we wrap the year. Thanks.

Krista, Conference Operator: Ladies and gentlemen, this does conclude today’s conference call. Thank you for your participation, and you may now disconnect.

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