PEGASYSTEMS INC (PEGA) Q2 2026 Earnings Call Transcript

Hello, everyone. Thank you for joining us, and welcome to the Pegasystems Second Quarter 2026 Earnings Call and Webcast. I will now hand the conference over to Peter Welburn, Vice President of Corporate Development and Investor Relations. Please go ahead.

Good morning, everyone, and welcome to Pegasystems Q2 '26 Earnings Call. Before we begin, I'd 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. Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, forecasts and similar expressions are intended to identify these forward-looking statements. These statements speak only as of the date the statement was made and are based on current expectations and assumptions. Because these statements relate to future events, they are subject to certain risks and uncertainties that could cause actual results to differ materially from our current expectations for fiscal year 2026 and beyond. Factors that could cause such differences are described in the company's press release announcing our Q2 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 as there can be no assurances that the results contemplated will be realized. 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 conjunction with and not as a substitute for our consolidated financial statements prepared in accordance with GAAP. Constant currency measures are calculated by applying the June 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.

Thank you, Peter, and thank you, everyone, for joining today's call. Ken will walk you through the first half financial results shortly. But before he does, I'd like to spend a few minutes discussing some major market shifts that we've seen and a lot of the tension and confusion in the market and why we believe it creates significant opportunity for Pega. The market evolution shows a structural shift in software. We're still in the early stages of the fundamental transformation driven by AI. Across the industry, organizations are rethinking how software is designed, built, operated and evolved. For a time, AI providers acted a little bit like drug dealers, offering their products for free or charging $20 a month for what felt like unlimited usage. To many users, the experience was magical. But at the same time, the frontier model providers have been investing literally billions or trillions of dollars building the data centers required to power AI. And now they're going to need to seek a return on that investment, taking a significant share in the economics of the market. These companies are under pressure to generate meaningful revenue. What was once available for free or with all-you-can-eat licensing is now priced by token use with attendant anxiety and ambiguity. This is not finished — more of this is coming. The challenge for enterprises is token consumption is opaque until the bill arrives. Many of the tokens these models consume are reasoning tokens. They don't show up in input or output, but are used by the model itself as it loops through increasingly complex logic. These reasoning costs can become surprisingly and prohibitively expensive. This cost uncertainty is leading many organizations to freeze and try to figure out what's going on and take a more deliberate approach to technology investments as they assess the economic environment. Decision cycles have lengthened as clients seek greater clarity around technology strategies, AI priorities and the reality of highly variable token costs. At PegaWorld, we unveiled the solution, offering our clients access to AI agents with no per-token costs. Our clients' demand for predictable outcomes and predictable costs plays directly and uniquely to Pega's strengths. Our clients see the opportunity to use AI to deploy software faster and more effectively and to see the power of AI agents to automate work that could not have been automated before. But the value from this technology will not be measured in the lines of code generated or the number of agents deployed. The value comes from better business outcomes with greater speed, control and efficiency. For decades, we have delivered software that optimizes and executes the workflows and decisions that run our clients' businesses. AI is making that software much, much easier to design and build and continues to evolve. As our tagline puts it, "build for change." AI dramatically expands what is possible. But the requirements of enterprise systems remain the same. They need to be predictable, governable, secure and cost-effective at scale. So our goal is simple: help our clients avoid AI chaos and the mess that comes from it by delivering predictable outcomes at predictable costs. Our approach is different from two misguided approaches that others in the market are offering. The first misguided approach is that enterprises should just use AI agents to code up anything they want, generating millions of lines of code. Pega has competed against "code it yourself" for decades. The reality is it went through an open source cycle where everything was going to be open source and people would code it themselves with those technologies and tools. It also went through an inexpensive labor cycle. But the problems with code and our moat against it remain the same. In fact, with AI, the problems with this alternative get worse. Code is hard to change. It's hard to understand. AI generates more code with less visibility, making those limitations even more pronounced. Clients report to me that simple things like changing the label on a field become really hard when that field is buried in millions of lines of code that no human has ever reviewed and wasn't structured for people to really understand. The code is only readable by coders and it doesn't fit into a model that business and IT can jointly see. Pega provides that model. Our system is built on a structured and visual foundation of workflows, business logic, personas and integrations. These remain transparent, understandable, governable and adaptable over time. We represent the logic in business metaphors like stages and steps and decision rules that clients can easily understand and change. With the release of Pega Infinity last week, we took a significant step forward with the introduction of Infinity Studio. Together, Pega Blueprint and Infinity Studio now create a more complete AI-powered lifecycle that helps clients design, build, operate and then continuously evolve enterprise systems, all in a model that both business and IT can work in. That capability reinforces what has always differentiated Pega: our ability to help enterprises build for change. In an AI-driven world, that advantage becomes even more valuable. With Blueprint, we applied powerful AI reasoning at design time before an application goes into production, enabling our clients to reimagine how they get work done, create better processes and see them working in an application they can design in minutes. Blueprint takes in information about our clients' business and creates a system built around the scalable structures of workflows, personas, integrations and decisions. Structure is critical. In contrast, if clients generate code directly with tools like Claude or Codex, where is the architecture? How is the business logic captured and understood? Code-first approaches become opaque, complex, difficult to govern and extremely expensive to change, especially at scale. When we developed and released Blueprint, it really opened up people's eyes to how they could reimagine their businesses. It brings in our decades of experience and our Blueprint agents are able to come up with things better than even the inputs they're given. It's enormously exciting. I'm constantly having clients tell me this is one of the most novel uses of AI they have seen. There's really nothing else like it out there. Blueprint enables clients to reimagine their business processes to be better, to see how those processes translate into working systems and engage with a working system early in the sales cycle. Blueprint is transforming how we engage clients and prospects at the front end of the sales cycle, moving Pega from a conceptual sales process to an experiential and product-led one. In retrospect, when we started with Blueprint, we really focused on new clients and new applications. We have not yet brought the full power of Blueprint to help existing clients reimagine and rethink their existing Pega applications for two reasons. First, we were learning how to use it. Second, helping clients reimagine existing systems is, in many ways, a trickier and more complex problem. But now with Pega 26, Infinity 26, which we released last week, we've made the power of Blueprint AI available for clients to reimagine and improve both new and existing Pega applications. This release brings Blueprint AI from the design-time use into build, deployment and evolution using the Infinity Studio capability. Our completely reimagined builder environment enables our Pega Cloud and Client Cloud clients to leverage Blueprint AI to deploy new applications and to improve existing ones. Blueprint AI helps business and IT leaders reimagine how organizations get work done. Infinity Studio extends the power of Blueprint AI into application development and deployment, creating a continuous path from idea to execution. This is especially compelling for our existing clients who can use Blueprint to modernize and evolve existing Pega applications, helping them reimagine what's possible. It is also terrific for new clients who can answer the question of how they are going to continue to evolve after their initial build. Furthermore, we've made the whole Pega development environment available via MCP. So people who are very technically oriented can use Claude Code or OpenAI Codex or any coding agent to initiate their Pega applications. These improvements dramatically lower the barriers to entry, reduce training time and accelerate productivity and will enable more workflow creation across the enterprise. Infinity Studio will make it easier for our clients to build and extend their workflows. We launched it last week, and we'll be rolling it out aggressively through the rest of the year. Infinity Studio is a big deal for our clients and prospects. I said there were two misguided approaches to AI, and let's talk about the second for a moment. The second approach says, "Hey, just use AI agents to reason through every process at runtime." That approach brings risks. Agents built on large language models don't execute with the consistency that enterprises need for most of their workflows. It also turns out that it can be hugely expensive. We have a calculator on pega.com that shows you the difference between this and our approach, and it's pretty staggering. Our approach is fundamentally different. Use AI extensively at design time with Blueprint AI to design the workflows and get them right. Once you get them right, run them repeatedly at scale, thousands or millions of times, only using AI selectively at runtime steps where it makes sense. I like the metaphor of a chef. A great restaurant doesn't reinvent each dish for every patron. They take the time to design recipes that work really well at scale. That's what we do with Blueprint. When it comes time to execute, the whole kitchen follows the recipe predictably and consistently, tuning it only when needed. That's our workflow running in production. Clients know how to execute effectively at scale, providing the perfect balance between AI inspiration at design time and AI used selectively at runtime. This also means we're not using up massive amounts of costly reasoning tokens at runtime. It's how we are able to offer our Agentic AI as an uplift to our case-based pricing with no variable per-token cost. We use AI selectively for specific and well-defined tasks where it adds value at runtime, like summarization or reading documents. But core workflows remain deterministic, predictable in outcomes and efficient in runtime cost. This is a key and structural differentiator for us. It's hugely important to help our clients ensure they deliver the outcomes they want predictably and to ensure their AI costs are tied to value. We've taken this power even further with Infinity 26: every single workflow in Pega, both new and existing, is automatically available through MCP. That means any agent built on any agent platform can find and invoke a Pega workflow. The workflow instructs the agent to operate predictably and consistently. Because the workflow does the reasoning for the agent, Pega helps our clients make even agents built outside of Pega more cost-effective. In conclusion, our clients tell us they want increased efficiency and better results from AI. They also want insulation from runaway token costs and measurable results in increased efficiency and better processes. For much of the work they do, they don't want to re-reason a business process every time it runs. Our approach really resonates: imagine with AI, execute predictably, continuously evolve and improve. This is what Pega delivers, giving clients the ability to design an effective recipe for execution. Then when users request a business outcome, the menu at the restaurant contains the proven recipes that organizations know how to execute extremely well at scale and in ways consistent with regulators' needs and organizational efficiency. Clients, I believe, are increasingly recognizing the value of our approach, and we have a strong and differentiated story today. The clients who saw PegaWorld, whom I met with extensively, were extremely excited. You can see Infinity 26 yourself in Kerim's keynote, which is available on pega.com. It's also becoming increasingly clear that while the market is still early in its AI journey, many of the key trends are moving in our direction. Increasingly, clients are coming to us to ask how they can manage business costs while achieving business value. As organizations move beyond AI experimentation and try to bring ROI to production deployments, they will avoid approaches that generate massive amounts of brittle code or highly unpredictable economics. We think companies will succeed with AI by combining innovation with structure, control and economic discipline. Some of the things we hear seem like madness — people talking about trying to control thousands and thousands of independently operating agents. We don't see how that works, and candidly, many customers don't see how that works either. Our approach builds on our tradition of workflows, inspired by AI for more aggressive design and using AI to perform the pieces that make sense at runtime. We remain committed to helping our clients get through the confusion that has been promulgated by so much noise in the market about "SaaSpocalypses" and software being dead. Some software is under threat, unquestionably. But systems built in code would be extremely complicated, hard to update and hard to manage; building for change remains important for our clients. These principles relate to how we will work with our customers. We don't just want to help customers bring efficiency to their businesses; we must also operate our business that way. We remain committed to getting through the current period of confusion and generating strong free cash flow along the way, regardless of market conditions or how long it takes for the understanding to stabilize. We will leverage our AI technology and capabilities to improve our efficiency and create additional operating leverage. We will temper our spend accordingly with respect to our free cash flow needs. With that, let me turn it over to Ken to provide more color on our first half. Ken?

Thanks, Alan. The first half of '26 had challenges for three primary reasons. First, as we explained in February, our renewal portfolio is significantly weighted toward the back half of the year, resulting in a more typical seasonal pipeline pattern. Because a meaningful portion of our net new ACV comes from cross-selling and upselling into our existing client base, fewer renewal opportunities naturally result in fewer expansion opportunities. Given our typical contract length, renewal timing is inherently a long-term dynamic in our business. Second, as Alan explained, unprecedented change in the software market created significant buyer uncertainty. Organizations wrestle with fundamental questions about how AI would reshape software development and whether they should build capabilities themselves. The market entered a token-maxing mindset where organizations encouraged — even celebrated — token consumption, and then whiplash to the opposite extreme, where companies sought to tightly monitor and control token usage. The resulting uncertainty made customers more cautious and contributed to longer buying cycles. Third, we didn't execute well enough on our go-to-market changes to drive deeper and broader engagement with our clients and prospects. As part of that effort, we are increasing prospecting activity, expanding executive-level engagement, identifying new workflow and legacy transformation opportunities with not only existing clients but also strengthening our focus on new logo acquisition. We are also using Blueprint to help shorten sales cycles, powered by the combination of Blueprint and the newly released Infinity Studio in Pega 26. These are the right changes to improve pipeline quality, conversion and sales productivity over time. Our progress in the first half was slower than we anticipated, but we remain confident this is the right approach. With that context in mind, let me turn to our financial results. Annual contract value growth, or ACV growth, is one of the most important metrics and in our view the best indicator of underlying execution. That is because ACV growth provides a clearer view of the business momentum than revenue growth in a subscription model. Pega Cloud ACV increased by $165 million year-over-year, growing 22% as reported and in constant currency. This growth reflects the continued expansion of our cloud business and reinforces the success of the subscription transition we began in 2017. As a result, Pega Cloud remains the fastest-growing and most important component of our subscription model, though growth moderated to 27% at the end of last quarter in constant currency. We're watching that trend closely and remain focused on improving our broader ACV growth trajectory. Our overall ACV growth rate was offset by decreases in maintenance ACV and subscription license ACV. As a result, total ACV grew 7% as reported and 8% in constant currency year-over-year. We expect Pega Cloud ACV to continue increasing as a percentage of total ACV over time and still believe it can ultimately reach approximately 75% of the total. That mix shift toward Pega Cloud will continue to put pressure on maintenance and subscription license ACV growth in future periods. Over the longer term, however, a greater concentration of Pega Cloud ACV will create a more predictable, higher-quality revenue stream, improved cash flow visibility and strengthen our ability to compound shareholder value. While our total ACV growth was below expectations, we continue to operate in a period of significant market disruption. Several software companies have recently noted delays in purchasing patterns where the business is not going away, but clients are frozen in the confusion. It remains difficult for us to assess the magnitude or duration of potential IT spending reallocations and their impact on software growth. More broadly, clients are still focused on legacy transformation and refining their AI strategies while governing usage and managing token costs. Although this is a great long-term trend for us and our value proposition, it may continue to delay some investment decisions. Moving to cash flow, even with slower ACV growth, the durability of our model is evident in our cash generation. We generated $288 million of free cash flow in the first half of 2026, a record that reflects the strength of our subscription model and our disciplined approach to managing the business. Increasing free cash flow over time is one of the most important measures of value creation and business health. It also provides strategic flexibility for capital allocation, which brings me to my next topic. As we discussed during our investor session in June, we intend to deploy a substantial amount of our free cash flow toward opportunistic share repurchases. In the first half of 2026, we repurchased 9 million shares for over $360 million in the open market under the prior authorizations. That cash expenditure represented well over 100% of the free cash flow generated during the same period, and total common shares were reduced by 6 million shares in the first half of 2026. Share repurchases remain a very attractive use of capital and represent a meaningful opportunity to create long-term shareholder value, especially in a disruptive market. We remain confident in the long-term prospects of the company and our strong cash generation provides us considerable flexibility. While we're pleased with our capital allocation results, one of the most common questions investors have been asking is, what are we seeing in the demand environment? As we exited the second quarter, we began to see a more balanced discussion emerging around AI economics and deployment costs. Clients and prospects are increasingly focused on measurable business outcomes, governance and total cost of ownership rather than just experimentation alone. This shift favors Pega's differentiated approach and creates an opportunity for us to more effectively communicate our unique value proposition and our approach to AI cost containment. Let me be clear: Pega does not charge per token. Rather than monetizing token usage, our AI monetization strategy is based on the business value that clients create on our platform. Clients should be rewarded for driving outcomes, not penalized for AI usage. Our monetization approach features two key elements. First, Blueprint makes it easier and faster for clients to create and deploy applications on the Pega platform. Given our case-based pricing model, the more workflows clients run on the platform, the more value they create and the more ACV we generate. Second, we apply case price uplift for advanced AI-powered runtime capabilities, including innovations such as Agentic Process Fabric. This approach aligns our economic interest with our clients' value creation and success: as clients drive more value on Pega and expand adoption across the enterprise, both parties benefit. Before I conclude, I'd like to provide a few forward-looking thoughts on our business. As a reminder, we provide annual guidance at the beginning of the year. We do not issue quarterly guidance or typically update our outlook during the year. Given our back-end loaded renewal portfolio and our slower-than-expected start to the first half of 2026, we definitely have our work cut out for us in the second half. That said, we expect the market disruption of buyer confusion to remain a factor in the near term. I'm optimistic though that our ACV growth over the long term will be stronger than our Q2 results would indicate. I also thought it would be helpful to share that when we modeled our full-year net new ACV add for 2026, we assumed one-third of that add would be in the first half of the year and two-thirds would be in the second half. We will work hard to recover as much of that first-half shortfall as possible, but it will be very difficult. The second half requires stronger execution than we delivered in the first half, particularly in expansion activity, new logo contribution and conversion of our healthy qualified pipeline. From a mix perspective, now that Pega Cloud ACV is 57% of total ACV and continues to be the fastest-growing element of the business, we expect continued pressure on maintenance and subscription license growth rates as clients migrate to Pega Cloud, as I mentioned a moment ago. In addition, as more buyers move from the experimental phase of AI into the ROI stage, that shift plays to our strengths. As AI costs come under greater scrutiny, our outcome-based pricing model provides a clear and more efficient path for clients to generate and measure return on their AI investments. As we reiterated at our investor session last month, we expect to generate $700 million-plus of free cash flow in 2028. Slower ACV growth in the first half of '26 does not change that objective, but it will require us to reevaluate certain investment priorities. Our 2028 free cash flow objective is supported by multiple levers, including cloud scale, continued mix shift, sales productivity, gross margin improvement and disciplined investment prioritization. We will make appropriate adjustments to ensure that we remain on track to achieve or exceed this target. Strong free cash flow enables long-term shareholder value creation and our commitment to Rule of 40 performance reflects our belief that the world's most valuable companies combine durable subscription growth with disciplined cash generation. In conclusion, we remain optimistic our latest technology enables clients to achieve predictable outcomes at predictable costs at a time when organizations are struggling to justify the economics of token-maxing and broad-based AI experimentation that failed to deliver ROI. Our investments in Blueprint and Infinity Studio, Agentic Process Fabric and the broader Pega platform are designed to help clients deploy AI at scale within a governed, production-ready framework that accelerates productivity and business transformation. We made some critical architectural choices that, even if it takes a few quarters to recognize, are going to be game-changing. The idea of design time and runtime being respected in their own ways is massively different than the approach of our competitors. Look at it yourself to appreciate the differentiation and how hard it would be for someone to emulate. We continue to see strong engagement from both new logos and existing clients, growing Blueprint adoption and increasing interest in solutions that help organizations move from AI experimentation to AI-powered business outcomes. The market is increasingly rewarding companies that can combine AI, workflow automation and enterprise transformation within a governed platform. Pega is uniquely positioned at the intersection of all of those trends. While execution remains our top priority for the balance of 2026, our long-term conviction has only strengthened. We remain confident in our market opportunity, confident in our ability to deliver substantially growing free cash flow, and confident in our disciplined approach to balancing growth and profitability. We will sustain strong Rule of 40 performance and create significant long-term value for our shareholders. With that, operator, can you please open the line for questions?

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

I guess I wanted to dig in a little bit more on just what it is you are seeing on the demand side. It sounded like exiting 2Q, maybe some of these deals were beginning to unlock and things were getting over the finish line. Can you give a little more clarity on — have you seen deals get over the finish line now? Are the deals that pushed from 2Q starting to close? And how does that make you feel about the broader opportunity for these delays to unthaw into the back half of the year?

So we are seeing movement. We went through a period, I would say, early to mid-second quarter, in which the level of confusion — look, I've been doing this a long time, so I've seen other enormous moments of confusion. This would rival anything I've seen. People just weren't sure what they should be doing. Even today, there is enormous confusion percolating in many organizations. They are trying to figure out what to do and how this all fits into their future. The reality is these companies have serious things they need to get done. We've had excellent engagement from customers. The things we announced at PegaWorld, which was in June, have generated a lot of enthusiasm. The idea that we have an architecture that is understandable — you can actually understand the big difference between agents that do a lot of their thinking at design time and reuse — that is something people can internalize and understand. The fact that we translate that into a no-token-cost model has generated a lot of excitement and provides real reassurance to clients that we have a viable approach. I'm seeing things starting to move. But I'll be honest, the summer and third quarter are generally lousy times for a turnaround to accelerate. We are working it, and I have a lot of confidence that what we're doing is the right thing. Candidly, the architectural choices we made a couple of years ago have been enormously vindicated and customers do see the difference. In terms of unlocking, yes, they will be unlocking in the second half, but how quickly it will happen is part of the current uncertainty many companies are dealing with.

Okay. That's helpful. On the investments that are perhaps more discretionary — to make the $700 million in free cash flow work in a few years — is this changing how you feel about the investments that need to be made in the business? If rubber meets the road, what does that look like or how might that change strategically? How do you think about the investments needed to grow?

Let me say we've really enjoyed — after years of not operating that way — the benefits of being a Rule of 40, cash-flow-generating company, and we are committed to doing that. We have enormous opportunities to change the way we operate and become more efficient, and we're seeing that happen. We will temper our investments to make sure that we don't go back to the spend culture we had a decade ago. I'll turn it over to Ken, who's going to be the enforcer of this.

Steve, the simplest way to think about this is we have worked hard to build the muscle and discipline to run as a Rule of 40 company. Based on our growth trajectory, we need to continuously look at opportunities to rightsize investment spend relative to where we are and our future growth trajectory. That's running a good business. One specific opportunity ties to AI in our own operations — areas where we can optimize by leveraging technology and by organizing work more effectively. We're also looking at ways to drive efficiency in how we deliver value across the business. I wouldn't say any part of our financials is best-in-class and cannot be improved, from gross margin through to spending in each functional area. You should hear from us that we're going to continue to run a good business, invest in the right areas and ensure we're delivering value for shareholders. Rule of 40 and free cash flow are important levers in that value creation.

Your next question comes from Raimo Lenschow with Barclays.

Can you mention the three areas that impacted the numbers? We knew about the go-to-market changes and the renewal cohort. How much of what we're seeing is control-related — the go-to-market and cohort that you can influence — versus token-maxing in the market? How much is in your control to change?

That's a great question. There's a connection between those two themes. The AI disruption happened right in the middle of us pushing harder to grow into new logos, new workflows and new use cases. There's tremendous opportunity with Blueprint to unlock opportunities with both existing clients and new logos faster and more efficiently. That motion is different than the way we've operated at Pega over the last 40 years, so it was a change for us. I think we may have underestimated how we needed to manage that change internally. That is a big part of what happened in the first half — we didn't move as fast as we'd liked in making that change. We believe that is a tremendous value unlock even in a confused market because there are many opportunities where people are looking to solve problems with a deterministic workflow approach and Pega is the best platform for that. So those things are related, but a lot of this is in our control.

On guidance, a common pattern would be to derisk the guidance somewhat given a tougher first half. Can you explain why you choose not to do that?

We have stayed away from the pattern of constantly re-guiding quarters. Our business cycle typically doesn't resolve in a 90-day period. We've tried to avoid that. What we're trying to provide is color: we had a lot of work to do in the back half — two-thirds of our business was expected in the back half. It's a good working set to go after, but it'll be very challenging to make up the gap from the first half. I don't think re-guiding to a single number in an uncertain environment is helpful. We want the number to be as big as possible, but the helpful guide is that we originally assumed a one-third/two-thirds split. We significantly underachieved on the one-third in the first half. If you assume we can't fully make that up, but we still work hard to achieve what we thought in the back half, that's the color we wanted to give.

Your next question comes from the line of Devin Au with KeyBanc Capital Markets.

I'd like more context on deal elongation. You said you'd add one-third and two-thirds of the new ACV in the first and second halves respectively. Can you quantify the magnitude of deals that slipped from 2Q into the second half or beyond? Are these deals concentrated in a specific vertical or geography?

Let me start by saying what we're not seeing, which I view as positive. We're not seeing clients stop engaging. We're not seeing opportunities disappear because clients decide not to transform. We think the market is not abandoning transformation. A lot of pipeline deals in Q2 just didn't close — they elongated. When they will unlock is hard to predict. What I'd be most worried about would be deals simply going away. We're not seeing that. We're seeing a buyer-dynamics pause, not deal destruction. Alan, anything to add?

That's accurate. People are confused. It was a 'max confusion' moment. It was helpful earlier this year when tokens started costing something; people realized there's an economic decision. Before, it was all magic and no expense. I think we have a compelling story even in a free-token competitor environment because we offer predictability and determinism. I don't see anyone else using AI aggressively to redesign and reimagine the business and then use AI selectively to deliver outcomes at scale at a reasonable cost. We're going to push 26.1 out to many new customers and get them hands-on, probably faster than historically. I think that will help unlock customers as we enter the third and fourth quarters.

Got it. A quick follow-up on free cash flow: given the potential for a muted ACV outlook for the year, can you speak to the confidence in delivering the $575 million free cash flow outlook? Was that guidance hinged on ACV growth accelerating for the year? Any color would be helpful.

We would expect ACV growth to accelerate from where it is now through the back half of the year. Any ACV shortfall puts pressure on our ability to hit the $575 million for this year. I wouldn't suggest ACV landing and free cash flow are unrelated. There are in-year spending decisions we can make, and we will be thoughtful given first-half performance. We still feel cash flow durability is strong, but any ACV shortfall would have some cash flow impact.

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

Alan, thinking back to your June 8 remarks, you had a sense this was coming and said there's still an enormous amount of confusion that will take months and quarters to abate. What were you seeing at the beginning of June, since you still had three weeks to go in the quarter? Was there a big deal that pushed? What made you suspect this would be a problem so early?

When talking to customers after the 'SaaSpocalypse' narrative, people were wondering what to do — should we write this ourselves? We sell to many very large organizations, such as banks, which have been primary targets of those encouraging agentic approaches. Customers have been massively confused by the competing narratives from large vendors and newer coding approaches. Recently, when I spoke with heads of technology at very large financial institutions, they said they really don't want to maintain all this code. The amount of code these approaches generate and the lack of sensible structure around it is a problem. Someone looking at a Pega system can understand it and change it. It's not unreasonable that everyone reevaluates given all the noise that hit in Q2.

You mentioned OpenAI and Anthropic and Salesforce and Microsoft. Are other companies like Sierra or Decagon contributing to the confusion for customers?

Sierra has been out there for a while and customers have been experimenting with them. I haven't seen the groundswell some expected for certain vendors. They do contribute to confusion because organizations are unsure: should I use Sierra, a workflow platform, or direct OpenAI or Claude interfaces? It's incredibly noisy. We have a distinctive story and I'm glad we made some of our decisions three years ago.

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

Ken, given this year is more weighted toward the back half and deals in the pipeline didn't close in 2Q, what gives you confidence the delay in purchase decisions is temporary rather than a more durable shift in spending priorities?

That's a fair question. I wouldn't say I have complete clarity to refute that the confusion could last longer. What gives me confidence is our pipeline is growing nicely and our late-stage pipeline is strong relative to last year. We're not seeing clients stop engaging. The pipeline conversations are about real companies that are thinking about AI priorities and transformation. So the activity looks real. It's now down to us continuing to execute. Some of this is just grinding through as a software company in a confusing environment; you need to stay focused and keep at it.

We have the benefit of structural differentiation. If you dig into alternatives that create massive amounts of code or thousands of agents, there's a big difference when workflows are at the heart of the system. To be blunt, we are the best workflow company out there by far.

Would you say renewals are holding up better than net new business, or are you seeing pressure on both?

Net new business and expansion with existing clients is where some freezing happened in the first half of the year.

Your next question comes from Patrick McIlwee with William Blair.

We've heard Blueprint helps cut the average sales cycle roughly in half, which supported a material reacceleration in revenue over the last year or two. Can you talk about the significance of Infinity Studio 26? Do you think it has the potential to similarly affect implementation timelines? Do you feel that dynamic, alongside frozen-but-not-lost deals, provides any spring-loading of demand heading into late '26 or into '27?

Bringing Blueprint AI capabilities into Infinity Studio is a very big deal. Originally we focused on reimagining the design process, which was a sufficiently hard problem on its own. But after someone wanted to begin using the system, returning to a more antiquated environment was a pain point for customers. They told us they wanted to continue in an accelerated mode of thinking and exploration. Having Infinity Studio available with Blueprint AI technology will be a major change. I think it will do more than improve build and delivery; it will change the experience much like Blueprint did. We're excited, but it's been in the market only a week, so we'll get more real experience and discuss it on the next call.

Quickly, any thoughts on the proliferation of open-source and open-weight models and implications for the SaaS space?

I think it's great and inevitable. Model makers are becoming largely commoditized, and it's interesting how quickly that is happening.

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

Thank you. Obviously, it's a challenging moment, but last week we opened the NASDAQ to celebrate our 30th anniversary. This being my 120th earnings call — frightening to say — we've seen a lot: technology change and market shifts. I want to assure people that I think we have a really good understanding of how to react strongly but smartly. We are going to do that, and I appreciate your support. Thank you very much.

This concludes today's call. Thank you for attending. You may now disconnect.