Ladies and gentlemen, thank you for being here. My name is Krista, and I will be your conference operator today. I would like to welcome everyone to Pegasystems Second Quarter 2025 Earnings Conference Call. I will now turn the conference over to Peter Welburn, Vice President of Corporate Development and Investor Relations for Pegasystems. Peter, you may begin.

Thank you, Krista. Good morning, everyone, and welcome to Pegasystems Q2 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, including statements about the long-term opportunity for Pega and trends we expect to see in our Q3 financial results and other statements that use words like expects, intends, believes and other similar words. These forward-looking statements speak only as of the date the statement was made and are based on current expectations and assumptions. Because these statements deal with future events, they are 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 Q2 2025 results and in the company's filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ending December 31, 2024, and in 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 June 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 Q2 2025 results. And with that, I turn the call over to Alan Trefler, Founder and CEO of Pegasystems.

Thank you, Peter, and to everyone joining today's call. It's wonderful to see such a strong first half of 2025. This success has been fueled by our team's dedication, execution, and our unique AI strategy that resonates well with clients, prospects, and partners. Ken will share the financial highlights from the first half shortly, but I want to take some time to discuss our AI approach and why we believe our method for AI transformation is much quicker, simpler, and safer than others. Since we last connected, I have engaged extensively with senior executives globally, including at PegaWorld last month. Our value proposition and competitive edge have clearly resonated with them. We're tackling one of the biggest challenges clients face: how to efficiently develop and implement AI and agents with the right controls for mission-critical applications, ensuring both speed and accuracy at scale. We think this calls for a significantly different approach than what other companies are proposing. Our competitive edge stems from our long-standing structural differences that we have built and refined over more than four decades. Our architecture is unique, with our platform inherently model-based, meaning applications are defined through models instead of traditional hand-coded methods. We centralize business logic and process logic in every application, allowing them to operate across any channel and integrate with various data sources or back ends. The Pega Infinity platform, our low-code, cloud-native decision-making and process automation tool, translates these application designs into production-ready, enterprise-grade applications with no coding required. This architecture facilitates a more intuitive and efficient development process, where business logic workflows, user interfaces, and data structures can be configured using reusable design components. We believe this is the right structure for a dynamic world that demands constant change and seeks ubiquitous self-service and automated processes. It also enhances automation potential, enabling us and our clients to utilize AI more swiftly and efficiently. Let's delve deeper into Blueprint. It's a unique solution that serves as the foundation for all we do. With Pega Blueprint, users can simply articulate their business in plain language, and within minutes, Blueprint harnesses generative AI agents to transform that input into Pega's best practices and industry standards. We achieve this by utilizing knowledge accumulated from our 40-year experience, along with access to vast online resources for any additional information we might lack. After this initial transformation, users can easily refine aspects of the application design and deploy it directly on the Pega platform. However, I want to emphasize that speaking alone is not the main advantage of Blueprint. It efficiently incorporates AI into the design process, enabling collaboration to unlock new insights and innovations, ultimately helping businesses enhance their operations. It significantly reduces the initial workload required to design a system. The combination of power and speed facilitates faster value realization and accelerates substantial enterprise transformation. This is part of why we consider our approach to Generative AI to be revolutionary. During PegaWorld, I highlighted how we merge the capabilities of AI with the consistency of workflows to offer what we term predictable AI, a term we have trademarked. We believe that no other company can truly provide this, as it stems from our architectural unique characteristics. The variability that makes generative AI appealing for creative applications, allowing it to produce different responses to the same inputs, poses challenges for enterprise operations that require predictable outcomes. However, this variability is beneficial for design thinking and innovation. This feature makes the prompt-based AI agents our competitors offer unsuitable for handling mission-critical transactions where consistency is essential. Conversely, Pega's method recognizes this duality by strategically applying AI's creativity during the design phase when envisioning application functionality or business operations through various perspectives and innovative solutions that add immense value. We then ensure that production operations follow structured workflows to eliminate unpredictability. Hence, instead of resisting AI's inherent variability or attempting to eliminate it through complicated prompt management, we embrace it during the design phase while controlling for consistency where it matters most during runtime. Designs produced by Blueprint aren't just theoretical; they are entirely executable within Pega Infinity. This close alignment between design and execution results in quicker development cycles, increases agility in responding to changes, and fosters a better collaborative relationship between business and IT stakeholders. The outcome is an AI that propels innovation during development while delivering the reliable, auditable results necessary in production. Meanwhile, competitors are saturating the market with countless agents and proposing command centers to manage them. They are establishing prompt studios and encouraging clients to manage these agents through free-text prompts that can yield varying interpretations every time they are executed. We think that's a bit misguided. We believe our clients and partners are beginning to recognize the benefits of our predictable AI approach, which offers creativity when needed and reliability where it is crucial for daily business operations. When we demonstrate how we introduce structure and governance to AI deployment and uniquely blend AI agent power with reliable workflows, we witness enlightening moments that validate our vision. The impact of Blueprint is substantial. It enables users to quickly and effortlessly leverage the power of Pega for transformational initiatives, speeding up time to value while helping organizations shed outdated systems that hinder progress. We have numerous instances of individuals with minimal or no technical knowledge of Pega creating impressive blueprints, from frontline employees to business line leaders. During my keynote at PegaWorld last month, Vodafone shared how they use Blueprint to kick off every new development project, successfully taking their budgeting process from idea to a production application in under 40 hours. But it’s not just about speed; it’s also about the app's power, creativity, and sophistication, driven by AI combined with robust workflow execution within Pega. Last month, we also launched partner-branded blueprints, which have captivated several of our key partners. They are eager to incorporate their intellectual property and knowledge directly into a personalized version of Blueprint that they can proudly present as their own. This allows them to showcase their unique insights and expertise while benefiting from our extensive knowledge base developed over the years. We believe this will broaden our reach into our partners' customer base and enhance sales opportunities. In the month since we announced this initiative, several of the world's largest systems integrators have signed up to create their branded blueprints for use with their clients, including Accenture, Capgemini, Cognizant, UI, Infosys, TCS, and Virtusa, among others. This trend is indicative of their commitment to leverage Blueprint in their operations. Blueprint equips them with a powerful tool for collaboration around their IP while expanding awareness of the benefits offered by Pega. You may have seen that we recently appointed Dan Kasun from AWS as our Head of Global Partner Ecosystem to lead the strategic evolution of Pega's partner network. This initiative includes strengthening alliances with global systems integrators and hyperscalers, as well as fast-tracking the adoption of Pega GenAI and Pega Blueprint. We believe this will greatly enhance partner revenue. Just last week, we announced a five-year strategic collaboration agreement with AWS, which synergizes the power of Pega Blueprint and AWS' Transform product, aimed at accelerating legacy transformation projects without compromising vital business operations. We also believe that having Pega software available on the AWS marketplace will streamline client access to our software and its capabilities. Regarding the evolution of Blueprint, interest and utilization continue to surge. Currently, over 1,000 organizations worldwide are engaged in building Blueprints. This trend is raising awareness and engagement, representing a long-term opportunity for Pega to enhance familiarity and understanding of our offerings’ value. We are continuously augmenting its functionality to support enterprise transformation, whether developing a new app or reimagining a legacy application. For instance, we introduced new features in June to assist clients in addressing critical legacy transformation challenges with efficiency and speed. Business transformation often gets hindered by outdated technology that demands resources, budget, and time, stifling innovation. You may have come across reports about the costs tied to technical debt. Forrester anticipates that legacy systems will account for two-thirds of global tech spending in 2025, presenting a significant challenge. However, we believe Pega Blueprint offers a fresh approach to legacy transformation, one that is powerful and full of opportunity. We've integrated robust AI capable of ingesting, analyzing, and converting numerous legacy system assets into modern application models. Users can input everything from requirement documents to user manuals, screenshots, and videos—anything that describes an application. If you attended PegaWorld, you likely saw a compelling demo by Kerim Akgonul. I highly recommend you check out the replay at pega.com/PegaWorld if you missed it. He demonstrated how Blueprint can dynamically adapt a video of a user navigating an old Oakley Cobalt application alongside an AWS Transform analysis of that app, including reviews of its extensive codebase. In mere minutes, Blueprint proposed a recommended application design for modernization in Pega, featuring a conversational agent capable of interacting in nearly any language. This was showcased live on stage just minutes after importing the video and documents. As with any blueprint, users can iterate and refine the initial design to ensure it meets current and future needs. Once finalized and imported into Infinity, they achieve tangible productivity gains and can implement advanced AI features throughout Infinity as well. We see no other companies doing this, and we view it as a tremendous opportunity for us. We're shaping the future of enterprise transformation—determining how it will be designed, sold, delivered, and ensuring seamless transitions of ideas from thoughts to models to market. I'm excited about the impact Blueprint will have for our clients, partners, and our business. Notably, Blueprint rolls out new capabilities approximately every two weeks. If you haven't seen it in a month, you are missing out, and this fast pace of innovation provides a valuable opportunity for collaboration with our customers and partners. I encourage each of you to try it out for yourself—take 15 minutes to visit pega.com/Blueprint, sign in, and envision any type of business you'd like to create. Personally, I enjoy demonstrating a llama rental business, which is more sophisticated than it sounds. But you can work on serious topics as well, like customer onboarding and collections. I think you'll find it engaging, and I assure you will understand why it's so powerful and how it aligns with Pega's unique strengths. We are diligently working on this, and we believe it will yield positive outcomes. To provide additional insights into our financial results for the first half, let me turn it over to Ken. Ken?

Thank you, Alan. I am so excited for the businesses at the midpoint of 2025. We're seeing the outcomes we had hoped to see as our team delivered spectacular results in the first half of 2025, demonstrating the power of our aligned strategy, innovation and execution. Annual contract value, our key business performance vector, grew 16% year-over-year as reported and 14% in constant currency. To bring our business momentum into focus, our net new ACV add increased by 60% year-over-year in constant currency in the first half of 2025 versus the first half of 2024, a significant acceleration that reflects multiple strategic wins. This growth reflects that Pega GenAI Blueprint is transforming our go-to-market motion, our value proposition is resonating with our clients, and we're expanding our footprint in key verticals. It's also a clear indicator that we're not only winning more deals but also higher quality long-term client commitments, which ultimately fuels durable growth. It's also great to see total ACV exceed $1.5 billion as reported for the first time in Pega's history, powered by Pega Cloud ACV growth of 28% as reported and 25% in constant currency. I'm especially excited to see our team deliver such robust ACV growth in a market that continues to remain uncertain. Our Rule of 40 mindset is not only delivering strong ACV growth, but also strong free cash flow growth. Free cash flow growth reached $286 million in the first half of 2025. Our free cash flow performance is no accident. It's the outcome of two powerful Rule of 40 forces coming together. First, our accelerated growth in ACV, and it's important to remember that our financial model ACV is a proxy for subscription billings. As a result, each incremental dollar of ACV roughly translates to an incremental dollar of subscription billings, which in turn drives cash flow. The second powerful force is margin expansion. We continue to grow cash expenses at a slower rate than ACV, expanding margins, driving free cash flow growth, and supporting increased profitability. Total remaining performance obligation or backlog increased by 31% as reported and 27% in constant currency year-over-year. As a reminder, backlog represents client commitments not yet recognized as revenue but provides good visibility into our future performance. Pega Cloud current backlog, which is backlog that's expected to come into revenue within 12 months, increased by 28% as reported and 25% in constant currency in the same period. The majority of Pega Cloud bookings go into backlog, creating a more predictable future revenue stream, the benefit of our subscription transition. Last month, I outlined our capital allocation strategy and emphasized that our strong free cash flow generation provides us with significant financial flexibility. That financial strength opens up a number of options for us as we evaluate how to best deploy capital to create long-term shareholder value. One of the options we discussed at our annual investor session at PegaWorld last month was the potential to allocate from time to time, a greater portion of our free cash flow towards share repurchases. To be clear, it's great to have this flexibility available for us to do so under the right circumstances. Now that Pega is a significant cash flow generator with no debt, returning cash to shareholders via buyback could make sense for several reasons. First, periodic share repurchases when done responsibly can help mitigate the diluted impact of stock-based compensation. Second, buying back shares at attractive valuations can lead to improved per share valuation over time. And third, we view share buybacks as a strategic lever that reinforces our confidence in Pega's long-term vision and our belief in the firm's durable cash flow generation capability and is also significantly accretive to shareholders as we execute on our strategy. So in the first half of 2025, we repurchased about 6 million of our shares for $251 million, representing over 85% of our total free cash flow generated during the period. While we've not made firm commitments regarding the scale or timing of future repurchases, we plan to continue to take a disciplined and balanced approach to buybacks going forward. Our first priority, of course, is to invest in the core business to drive sustainable growth and innovation. Beyond that, we will continue to evaluate our capital allocation options through the lens of long-term value creation. Given our significant cash flow generation, repurchases of our shares are a great investment opportunity. I've heard from several of you that it is valuable when I provide a few thoughts to help frame how we model our business. I want to take a moment to share two important points as we head into Q3. First, it's important to recognize that the third quarter has historically been our softest in terms of net new ACV, add and free cash flow. This is a fairly consistent seasonal pattern that reflects the timing around contract renewal dates. Contract renewals are more than just administrative milestones; they are key drivers of business activity. Fewer renewals in a quarter typically means fewer opportunities to engage and drive expansion and generate near-term billings. It's also worth remembering that we typically bill our clients one year in advance tied to the contract renewal date. That's why in quarters with fewer scheduled renewals, we typically see a corresponding slowdown in free cash flow. Second, as you refine your Q3 revenue expectations, please keep in mind that our term license revenue tends to be at the lowest point also in Q3. This is another predictable seasonal trend driven by the timing of term license rules. Understanding these dynamics is important when modeling third quarter term license revenue and also free cash flow, especially to avoid over projecting in what's typically a lighter quarter. In conclusion, it's great to see our continued business momentum. We're doing what we said we were going to do. We're capitalizing on major market trends such as artificial intelligence, legacy transformation, and a move to the cloud, and by leveraging Pega GenAI Blueprint. It's fantastic to see such solid ACV growth, continued momentum around trailing 12 months free cash flow. We're on an amazing trajectory, and consistent execution over the long term sets us up well to significantly accelerate growth in free cash flow per share over time. I'm looking forward to seeing many of you on the road as we meet investors in the coming weeks and a number of the investment banking conferences around the United States. And with that, operator, please open the line for questions.

We will now begin the question-and-answer session. Your first question comes from Raimo Lenschow with Barclays.

Congratulations from me on an amazing quarter. Just a quick question on Pega Cloud. If I'm looking at my math, you just basically had like a record add on ACV. Is that already Blueprint? Or is that just kind of the normal momentum in terms of more customers coming from the client cloud over to you, like overall general market? Can you speak to that number because it's very strong, obviously, and it's a good indicator?

So I think you will see some incremental Pega Cloud ACV when clients decide to move to Pega Cloud. But I would comment that Blueprint is engaged in every one of our sales campaigns now. It has been a significant driver for business activity in Q2. If you just look at the total ACV growth that we have, it's really quite an amazing quarter, the strongest Q2 we've ever had. I think Pega Cloud is the SKU that tends to be where that business goes when it comes off of Pega Blueprint. So although there will always be some migrations here and there, the majority of our business is coming from expansion with clients and Blueprint is central to that.

Okay, that's really helpful. In terms of renewals, you had strong results in Q1 and Q2 appears to be positive as well. Can you share your thoughts on whether the core renewals are more concentrated in the first half of the year? How should I assess the outlook for the rest of the year? Congratulations from me.

No, I don't think that Q1 had a higher renewal cycle. Q2 was typical, and I don't expect many unusual trends in Q3 and Q4. Q1 just turned out to be a larger quarter.

Thank you for your questions this morning. I want to start by asking about the deal environment. The numbers speak for themselves, but I'm curious about what customers are currently focused on. We keep hearing inquiries about the impact of DOGE and tariffs, and it seems there hasn't been much change there, but what kind of impact have you observed? How is that discussion unfolding with your customers right now regarding those factors?

There is some level of anxiety among customers due to the unpredictability in the world. We share that same awareness. So far, we haven't encountered any specific tariffs that have impacted us or our clients. Fortunately, we're not affected by government closures in a significant way. We recognize the need to stay alert to changes, which are constantly happening. However, we aren't experiencing anything that I would consider a significant challenge.

We are observing a significant trend where GenAI has become central to every company's strategy. Organizations are eager to adopt it and identify its value, which is accelerating discussions about legacy transformation at an unprecedented pace. Clients are not only interested in leveraging GenAI but also in modernizing their applications and transitioning to the cloud to take advantage of this new technology. This trend has certainly gained momentum.

Okay. Got you. That's helpful. And then just on, I guess, the ACV frontier, I guess does that change maybe how you would think about the pace of ACV through the year? Or maybe how you think about the numbers exiting the year? And I guess, what was the impact of FX quarter-over-quarter on the ACV number in 2Q?

The first part of your question was about our perspective on the ACV trend throughout the year, especially following a very strong start in the first half. When you have a beginning like ours, it’s important to maintain that momentum. We don't view our strong performance in the first half as a reason to ease off in the second half. Instead, we aim to continue harnessing this momentum to drive accelerated growth and reach our goals for the year. We're definitely not seeing it as an indicator that we can relax in the latter half of the year. Regarding currency, the dollar has weakened, presenting a currency headwind for growth, which has impacted us by about two percentage points in each quarter. So, we’ve experienced a consistent currency tailwind during the first two quarters.

Yes. Really impressive growth in net new ACV. If you had to parse out the growth acceleration between Blueprint opening up new deals, I know you talked about rising interest in digital transformation. So obviously, that bumps up Pega Cloud migrations or maybe just broader AI tailwinds. What would you point us to as maybe the one or two largest factors driving that acceleration?

The concept of legacy transformation primarily involves systems that weren't originally built on Pega. Typically, organizations don't have multiple systems they are pleased with and want to consolidate them. With Blueprint, you can integrate the documentation for all these systems. The AI will suggest optimal solutions and create a platform for collaboration, which is crucial. I believe that most legacy transformations involve existing systems that are outdated, such as COBOL or Lotus Notes, which are difficult to migrate to the cloud, and organizations recognize the need to address these issues. There is significant interest in this area. Blueprint aligns perfectly with this need, as it is not limited to legacy transformation; it enhances it and can incorporate tools like AWS Transform, which performs code analysis. However, solely relying on code analysis has limitations since it merely replicates past systems. The goal is to leverage that analysis to inform data structures and improve business functions. By implementing best practices, we can guide systems to provide conversational and interactive suggestions, as well as traditional methods. I believe that large-scale transformation will be a key driver for our growth over the next two to three years, with Blueprint playing a central role.

Jake, one additional piece of information that kind of goes under the covers of one of your questions. We are seeing momentum around engaging with both existing and new clients on new workflows. When I say new workflows, remember what Alan said, new to Pega, they could be something that the client has done for decades on another provider, but they're new to Pega. And that is where Blueprint really helps us break in. You can see the momentum in the new activity and that's very exciting because that's not just increasing the volume of an existing solution that Pega has or migrating to the Pega Cloud. We're seeing opportunities to put new solutions for both our existing clients and new divisions of existing clients and new logos. There's a noticeable change happening through the first half of the year.

Okay. That's helpful. And then just on that new logo topic, I know you've been investing more in that motion over the past few quarters just given the success with Blueprint. Can you talk about how that push has gone thus far? And if there have been any learnings for that motion as you've started to invest more in it?

Yes, let me clarify one thing, and then I'll kick to Alan on the learnings. I think we have to think about new logos, but we have to think about new workflows because our clients have massive divisions and locations around the world of their business. They are not clients of ours right now. So to us, that is a new logo as well. We don't characterize them as new logos in how we talk to investors. But it is a brand-new opportunity, a new engagement. So I just want to be clear that is a really important opportunity for us as well as brand-new companies. So, Alan, will tell you the kind of observations or learnings around how we try to go deeper into our existing and new logos with them.

Yes. I think the interesting development there, which is a little hard to predict exactly how it's going to go, but I think it's going to go quite well, is what this movement to create these partner-branded Blueprints is going to do in terms of opening up Pega to be way more visible to our partners' customers because what we're really seeking to do between now and the end of the year is that to have Pega become a tool not just for a partner that sells Pega, but for a partner to basically sell what they themselves are doing. There are a lot of consulting firms who are under a lot of pressure these days and need to be able to make better pitches to customers. If you see the pitch made on the back of Blueprint, it's pretty amazing. The customer can see a touch and feel something that otherwise they can't. If we can be successful at getting our partners to really understand how this can help their business outside of Pega and how we can continue to enhance it to make that possible, I think that just opens up an amazingly large stream of prospects to partners who are not customers of ours. So that candidly is going to be the trend from our point of view for the upcoming six to twelve months.

I know you've already addressed Steve's question about the macro environment, and while it seems there isn't anything too significant to highlight, I want to focus on the public sector since it's a current topic, especially after SAP mentioned deal elongation in the U.S. public sector. Have you noticed any similar delays in your public sector business? I'm interested in understanding how your discussions with customers in that specific market have been.

Interestingly, I'm going down to D.C. tomorrow, so we are engaged. I think that some projects got reshuffled and put on hold. I think there's some services implications; services is obviously not the most critical part of our business here as well. As I said, I think it's going to vary a lot by company here. But as businesses are looking to become more efficient and the government wants to become more efficient, that's got to be good for us. I mean, my view is that being able to engage with the government around streamlining workflows, being able to make things more efficient, those are all things that play to our strengths and our history. So it's questionable there will be disruptions in that space. But this is something that I think directionally should be a tailwind, not a headwind.

I mean, the public sector certainly in the U.S. has been very vocal about getting to the cloud, digitally transformed, and ingesting AI into their infrastructure and leverage it. You may have seen our announcement of having FedRAMP High; we're perfectly positioned. I mean, that is our value proposition.

Yes. I think you should take these comments being primarily about the U.S., just to clarify on what Ken pointed out. Our work with governments globally has been strong and continues to be strong. Year-to-date has been incredibly strong. We announced a major win in the U.K. where we were selected to do the recruitment system for the military, then the U.K. Army. We already do the Air Force and the Navy. This is a revolutionary system for them, which is going to handle all of their recruitment in a set of integrated, very sophisticated workflows. We're seeing those types of interests in other governments as well. As some of these governments spend more on defense, I expect we'll see more opportunities like that.

Got it. Super helpful context. Just a quick follow-up, and I just want to ask about the ACV strength in the quarter. Curious if any deals might have shifted one way or the other and the multiple strategic wins that you have won in the quarter. Have you seen sales cycles shorten and your ability to push the deals to close, to finish meaningfully earlier as a result of Blueprint versus your initial plan?

I believe Blueprint serves multiple purposes for us. When customers observe it, we often receive implicit feedback indicating that they now comprehend how to implement AI in their businesses safely and predictably. This perspective is something we haven't encountered in this manner before. Many individuals are expressing that this is both new and intriguing. This positively impacts our brand perception and establishes our company as a reliable player in the AI space. Blueprint is particularly beneficial in the early stages of the sales cycle, even more so than in the latter stages, and we are witnessing evidence of this. It has become significantly easier to engage with customers and present tailored solutions, which now often occurs during the initial meeting. Previously, we would rarely provide something specific until the fourth or fifth meeting when we could assemble a custom demo to help customers grasp what Pega offers. Now, it enables customers to understand Pega much earlier in the process.

There were no pull-ins from future quarters. This occurs in any business, but there was nothing extraordinary in the first half of the year that would indicate the quarter was strong due to pulling a deal in from the future.

Great. And congratulations to you guys on the quarter. So Alan, I want to go big picture with you, if that's okay. So I hosted a fireside chat last week with the former Head of AI for Salesforce. And he made this comment, which I think probably also applies to Pega, but I'd love to hear your thoughts on it. Here's what he said: I do think, in general, a lot of the big SaaS players do have a massive advantage, they have the data. What are your thoughts on that?

Well, look, Salesforce wants to become the owner of all the customers' data. I think there's going to be a lot of resistance to that in many organizations. I think customers think they should own their own data. The emergence of cloud-native databases, you look at things like Databricks, Snowflake, and others, they want to own the data. There's a lot of hunger for data. In reality, I think what really makes a difference is process. I mean, the data is helpful, but when we do our blueprint as you may have seen, we use generative AI. We actually grind through our best practices, our partners' best practices. We go out to the Internet and pull in all the data on how to do those types of processes. We reconcile them. We don't trust any of them; we grind it together and show it to say, hey, this is really what we want to do. That is a process. That is a process that will operate on the transactional data when you're actually trying to do something. That is enormously central to the whole way that businesses run and the whole IP of legacy transformation. I think there are a lot of companies, Salesforce is one of them, that have really moved a lot into our prescriptive analytical space. To be honest, that's a space where we expect to partner with organizations and we expect our customers. We don't provide the analytical framework that you might get from some of the other companies out there, and we don't want them. We want to be the process engine and the workflow engine that revolutionizes how these businesses operate and it goes out in real time, which is what Blueprint does and gets the data or gets additional information which is what the system does. A lot of people talk a lot about data. I'm happy to say we've got a different bet, and it's the bet we've done for 40 years. So I'm pretty sure it's going to work.

A quick follow-up. So I was at PegaWorld in the audience when you did the process agentic process fabrics, Pega Agentic Process Fabric. And you guys said I think that was going to be generally available in Q3 '25?

Yes, we're hoping to have that around Labor Day.

This is my first earnings call with Pega. Great to speak to Alan, Ken, and Peter. Alan, could I follow up on the previous question? Can you talk about the booking momentum and demand trends after the Pega Cloud Conference?

Yes, welcome Alexei. The PegaWorld Conference was really, really exciting. The customers were tremendously engaged and enthused; there was a huge amount of interest and great follow-up across the board. What that means is that our pipeline is nicely increasing. You would expect coming off of a conference like that, it would be good. We had a lot of stuff to show, which you can check out a video and you can see, and some of which is in the market, like the Blueprint changes we've been putting in, some of which are imminent. You can see what's coming, like agentic process fabric that I just mentioned. So we have a lot of interest from clients coming off of that. That doesn't turn really into business so much necessarily this year as in future years, but we can see that swell, I would say.

And Ken, if I could ask about your guidance. It feels like the margin expansion outlook is somewhat conservative. Are there any factors we should keep in mind that could limit margin expansion this year?

That's a great question. I certainly don't want to focus too much on our guidance. We don't provide specific guidance and we did make some adjustments during PegaWorld, but that's quite rare. Our goal is to execute effectively and we aim to surpass any numbers we discuss each year. I believe there is no risk regarding margin expansion on the cost management side. We are executing excellently with a level of discipline we haven't seen before in the company's history, but we are naturally reliant on growth. Our goal is to maintain our growth trajectory, as faster growth will result in increased cash flow. There is a clear connection between generating ACV growth and achieving free cash flow growth. While this may seem obvious, there isn't anything concerning in our execution beyond our booking and billing that worries me.

Nice job on the quarter. Alan, a question for you. I appreciate your commentary around Blueprint in your prepared remarks. I was wondering if you could just talk about who Blueprint is often competing with? Is it, for instance, internal development initiatives at customer sites or are you running up against other software vendors? And if it's other software companies, which ones would they be?

Yes, the footprint doesn't really have a direct competitor in the market as we see it. There's always competition in various forms. The competition includes companies like Salesforce or ServiceNow that offer their own platforms and applications. In contrast, Blueprint provides a platform that is customized for the user. This presents a different message. While Salesforce and ServiceNow do pose a competitive challenge, we also collaborate with both at various customer sites. It's not an all-or-nothing scenario. Additionally, there are developers using Microsoft to create applications, but the unique systems we offer cannot be easily replicated with those tools, especially not in the context of agentic solutions. Our agent architecture enables us to convert workflows into agents seamlessly, without the need for extensive prompts. I believe this approach will be very appealing to many customers.

Great. And then as a follow-up regarding the recent strategic agreement with AWS, is it fair to assume that we could see similar partnerships in the future with some of the other hyperscalers?

Yes.

Yes. I think it's more than fair to assume. I would say, look forward to sharing those with you.

On the partner-branded Blueprint, that seems like it could be a really meaningful opportunity. So the question is, do you disclose roughly the mix of the business that currently goes through the channel versus direct? And then two parts. How does that fit recently? And how do you expect that mix to trend over time with some of the newer channel investments that you've made?

Yes. At this point, a partner doing a partner-branded blueprint is not reselling Pega. We'll be on the AWS marketplace and GCP marketplace, the customer will be able to buy. We're really just facilitating that partner. That partner gets to charge for their own IP and for their own work, and that's how they have a business interest in doing it in terms of the way we do. So we don't really have a meaningful channel business in the way that I think you're asking. That's pretty consistent. We've been really so historically focused on the high end. It's really been consistent with the way those customers want to buy; those customers unquestionably want a direct relationship with us so they can engage. Who knows what might happen in future years? But this is still all emerging, though it's really, really exciting.

We sometimes pay for transactions through partners. They might be the prime, we might be the sub, we might partner. That happens. But to Alan's point, we don't have a channel. We don't hand someone a product and they go sell it on their own. This is really the first entry point for us using Blueprint into that arena. So any opportunity we have here is all new. It's all incremental.

Okay. Very helpful. And then just one follow-up. Just to double click on the macro. Has anything changed versus 90 days ago? I know like generally, it seems pretty stable. It doesn't seem like anything is being reflected in the numbers. The second quarter is pretty solid. Have you seen any change in sentiment versus, say, in April or May?

I think there's slightly lower anxiety level. I think people are feeling a little more sanguine about the world. Inflation is not racing. The world is continuing in a way that is, I think, reassuring to some customers. So nothing negative from a sentiment point of view. There's still uncertainty about things like tariffs, but I think part of it is we're growing accustomed to living with a level of uncertainty.

Yes. I would pay close attention to this and talk to my peers. I would say, generally speaking, the environment, I would say, is slightly better now than it was a quarter ago, just because of what Alan said: like people realize the consumer is reasonably strong. Inflation has not raised its ugly head. Tariffs have taken probably a path of more rationality than worried back on Liberation Day. Generally, things are much more settled than they were 90 days ago.

Congrats on a very strong first half. Alan, just a quick question around some of your GenAI technology that you fielded outside of Blueprint. Could you talk a little bit about GenAI Coach and Knowledge Buddy and customer engagement Blueprint? What's sort of a take-up? What are you seeing out there? And kind of where can these GenAI capabilities go to?

Yes. We're seeing customers really liking the way that we've been applying AI, things like Coach. Coach is something that will kind of step in and help you finish a piece of work or tell you the right way to do things. Knowledge Buddy is a way to create a repository that you can get processes and procedures. By the way, Knowledge Buddy is a tremendous asset because we're using Knowledge Buddy to hold both our and our partners' IP. It serves as a vehicle to get IP and make it operational. We've got dozens of these AI features, those types of things, summarization features. The way I described the PegaWorld is generative AI will be used through sets of features, and our customers will buy some of those from us, some they'll build themselves, some they'll buy from other companies. Blueprint and the idea of design is I think where our generative AI approach is extremely meaningful. From what I see, no one else is actually able to come close.

And that concludes our question-and-answer session, and I will now turn the call back over to Alan Trefler, CEO, for closing comments.

Thank you, Krista. I appreciate everyone paying attention, and we're excited about our current position and performance. The potential for this is significant and aligns well with our long history. We view the emergence of AI as nearly remarkable. Thank you, and I look forward to discussing more with you all next quarter or sooner.

And this concludes today's conference call. Thank you for your participation, and you may now disconnect.