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 PEGA Systems fourth quarter and full year 2025 earnings conference call and webcast. 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 at that time, simply press star followed by the number one on your telephone keypad. And 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, Corporate Development and Investor Relations of Pegasystems. Peter, please go ahead.

Thanks so much, Krista. Good morning, everyone, and welcome to Pegasystems Q4 2025 earnings call. Before we begin, I would like to read our safe harbor statement. Certain statements contained 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 forecasts and guidance or 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 are subject to various risks and uncertainties. Actual results for fiscal year 2026 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 Q4 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 ended December 31, 2025, and in other recent filings with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance on forward-looking statements, and there are no assurances that the matters contained in such statements will be achieved. Although subsequent events may cause our view 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 considering 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 December 31, 2025 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 Q4 2025 results. And with that, I turn the call over to Ken Stillwell, Chief Operating Officer and CFO of Pegasystems.

Thank you, Peter. I'm thrilled to share the financial highlights of what's been an outstanding year for PEGA. Execution by our global sales team, powered by our blueprint experiential sales approach, drove top-line outperformance in 2025. And our company-wide commitment to Rule of 40, supported by robust internal adoption of AI built natively in our platform, delivered bottom-line outperformance as well. Let's start with the top line. Total ACV grew 17% year-over-year as reported and 14% in constant currency, beating our guidance. Pega Cloud ACV, once again, drove that growth, increasing 33% year-over-year as reported and 28% in constant currency. That was a pretty significant acceleration from last year's 18% growth rate, as reported, and 21% in constant currency. And Pega Cloud ACB growth accelerated sequentially in all four quarters in 2025 in constant currency, demonstrating the power of both our cloud-first strategy and Blueprint, our AI design agent. Three factors drove our ACB growth acceleration in 2025. First, the Blueprint revolution has been key to our growth. Blueprint moved from a promising experiment in 2024 to a fundamental change in how we sold in 2025, enabling a completely new experiential sales process. Our Blueprint agent is now core to how we operate, shaping everything from how we sell to how we deliver and drive clients' strongest global sales execution that we've ever had. We drove a highly effective, disciplined, and scalable sales cadence worldwide with an unwavering focus on customer outcomes. Our account executives executed exceptionally well against our target account model, reinforcing the importance of focus and discipline. And third, we've been increasing demand from our clients and partners for PEGA's differentiated predictable AI agents integrated into proven enterprise workflows. As a result of these factors, our net new ACV increased by 37% year-over-year in constant currency. Looking ahead, we're confident in the durability of our ACV growth because of the strength of our moat. PEG is deeply embedded in our clients' core operations through vertical-specific workflows, and it's integrated at enterprise scale, supporting hundreds of millions of users globally. PEGA has become a trusted compliance backbone for our clients and for regulators worldwide. And you may have noticed that we just achieved ISO 42001, a certification across PEGA Cloud services, our Gen AI solutions, and our predictive and adaptive analytics capabilities. PEGA's financial performance achieved several key milestones in 2025. Among them, free cash flow increased 45% year-over-year to $491 million, exceeding our guidance by $51 million. This outstanding improvement in free cash flow was driven by our ACV growth and reflects the full strength of PEGA's subscription model and the benefits of our subscription transition. Our strong free cash flow generation provides us with the flexibility to invest for growth while also returning significant capital to shareholders. In 2025, our capital allocation strategy stayed firmly focused on driving long-term shareholder value. Our top priority continued to be investing in organic growth, including product innovation and go-to-market capacity, where we generated consistent strong returns on invested capital. We also maintained a strong balance sheet. We ended 2025 with $426 million in cash and investments. During 2025, we repaid $468 million of debt, repurchased $498 million of shares, and distributed $15 million in dividends. This reflects the strength and durability of our business model. Looking ahead, we are confident in our ability to sustain this balanced and disciplined approach to capital allocation. Our contractually committed backlog grew 28% as reported year over year and 23% in constant currency and now exceeds $2 billion as reported for the first time in PEGA's history. The biggest driver of our backlog increase was the increase in PEGA cloud backlog. which grew 36% as reported year over year. PegaCloud backlog now represents 74% of total backlog, which is amazing. We're also really pleased that the Supreme Court of Virginia unanimously affirmed what the Virginia Appellate Court also unanimously recognized, that the trade secret trial and resulting verdict were fundamentally flawed. What this means is that the $2 billion verdict is gone. For more details, please see the email I sent to our employees on January 8th, which we filed as an 8K. Moving to 2026 guidance. As a reminder, we provide only annual guidance, not quarterly guidance. And we typically do not update guidance during the year unless we have a material acquisition. Here are our key guidance metrics for 2026. Total ACV growth of 15%. Total revenue of $2 billion, an increase of approximately 15%, and a very significant milestone for the firm. And free cash flow of $575 million, a 17% increase over 2025. With our rapidly increasing free cash flows, our board also authorized an additional $1 billion in buyback capacity. This authorization reflects our confidence in the durability of our cash flows and our commitment to disciplined capital allocation. Since we don't provide quarterly guidance, I've received feedback that's helpful when I provide a few thoughts on modeling our business for 2026. First, with our subscription transition complete, you'll notice in our 2025 results and in our 2026 guidance that revenue growth and ACV growth are more closely aligned. Going forward, we expect this trend to continue, a dynamic some of your models may not have fully reflected yet. Now that PegaCloud ACV is greater than 50% of total ACV, our annual revenue becomes more predictable. Second, in 2026, we expect the progression of our net new ACV to follow a more historically seasonal pattern with a significant amount of our net new ACV occurring in the second half of 2026. This timing reflects the nature of our contract renewals, which are more concentrated into Q3 and Q4 of 2026. As a result, we expect subscription license revenue to be back-end loaded as well. Third, as AI reshapes how PEGA and its partners deliver solutions with Blueprint, we intentionally reduced our professional services billable headcount and increased our reliance on partners for delivery. So, we expect full-year professional services revenue to represent roughly 10% of our $2 billion revenue guide in 2026. Finally, but also the most impactful factor is our rate of PegaCloud ACV growth. PegaCloud ACV has accelerated for four consecutive quarters, fueled by the strength of Blueprint and strong execution. We expect this growth acceleration will continue and be driven by AI-powered automation initiatives by CIOs and executives prioritizing productivity and efficiency gains. Given these dynamics, we expect PegaCloud revenue to continue to accelerate above 30% in 2026. And you can see that acceleration signal in our current PEGA cloud platform. In conclusion, we've made tremendous progress in transforming our business model over the last several years. Looking back, 2025 was a year where we positioned PEGA exceptionally well for continued growth acceleration. Thanks to all of our employees for running the business with a rule of 40 mindset. We look forward to seeing investors in the next few weeks at upcoming investment banking conferences. And also, please mark your calendars. Our annual investor session will be held on Monday, June 8th, at the MGM Grand in Las Vegas, Nevada, in conjunction with PegaWorld, our annual client conference. We'd love to have you join us there in person. And with that, I'd like to hand it over to Alan Treffler, our founder and CEO.

Thank you, Kat. And it's a pleasure hearing you tick off those numbers. It really was a terrific 2025, And though it actually feels like a long time ago, we should take a brief moment and enjoy it. Now that that moment has passed, let me tell you about what's going to be happening in 2026. I'm really proud of our team coming into this year because what we have is the basis for some things that can be really, really exciting. You know, in 25, we launched the Infinity platform as the first real agentic enterprise transformation platform. And we really extended our leadership position in the industry of reports that matter the most to our customers and prospects. You know, I love to have people see how Gartner and Forrester reflect on what we do and what we are doing. and being in this position where as a rule of 40 plus company where you have the resources we have the balance to go after ask a question please press star

one on your telephone keypad to raise your hand and join the queue and if you'd like to withdraw that question again press star one we also ask that you limit yourself to one question in one follow-up for any additional questions please requeue and your first question comes from Steve Enders with city group please go ahead okay great thanks for um thanks for taking the questions this morning um i guess i just want to start on just the the deal environment and and what you're seeing out there in terms of the the macro um you know understand that there's a uh it seems like things are resonating on on blueprint and say i messaging but just i guess what are you seeing in terms of uh deals getting across the the finish line just how would you kind of characterize the current environment and how you're thinking about that into 26?

So, you know, I think the interesting thing about the blueprint approach and the whole way we've gone about using and pitching it is it so reduces friction around engaging the client. Because it's a very low-cost, low-risk transaction for the customer to take a meeting and see what one of his systems could have been. Just need a little information about what the systems are and what they do. And the fact is he can then touch it and feel it in the first hour. I think that's not getting the check, but it does put the whole mindset at ease. So I would describe the early stages of the pipeline as really excitingly advanced. We've also used Blueprint internally to create the workflows in our sales automation technology that enable us to evaluate a customer, see what we know about them, see what's available on the web, see what other systems, these people who still have Lotus Notes and TIBCO and other sorts of things, see what other systems can actually be in a position to propose how they could do legacy transformation. And this is all very fresh. It's a great use of AI. And it's a customer product matrix with an action. And I think that also lets us open up a whole new set of conversations, which from my point of view is pretty exciting.

I think, Steve, I'll add just maybe a more tactical point on this. I don't know that in my 10 years at Pega that I've seen more discussion with our clients around getting off of old legacy environments. Like the pace at which that conversation is happening and how much people are engaging with Blueprint and how many people or how many clients are coming to visit us that we're doing, like we're actually doing workshops on trying to identify which systems is like the pace of that is I've not seen that speed. So that's really exciting for us, you know, just in terms of really the pace of...

Okay, that's great to hear. I guess to follow up, just in terms of, you know, I guess the confidence on the ACV guide, you know, I guess what is it that you're seeing out there that gives you, you know, that feel that you're going to be able to hit that 15%? And I guess the question we're getting from investors is I think the 4Q ACV number, I think people were maybe hoping for a little bit of a better number there and seen a bit of a continued acceleration. And so I think, did anything like maybe slip into 26 or just, yeah, what is it that you're seeing that maybe provides that perspective that you're going to 15% for 26?

Well, I think our growth rate pretty much, our constant currency growth rate stayed pretty consistent across the year. It was kind of right around that 14% number all through the year. So I don't, you know, and it was well above our guide. So I think it was a fantastic year and a strong finish. In terms of the future, I think it really comes down to, you know, our net retention rate is expanding at the same time that we're actually targeting new logos. And Blueprint is much more prominent, which really builds the bridge for us to grab new logos at a pace that we haven't been able to. So that's really what it's a combination of NRR increasing and us going, you know, having the opportunity to go after new logos and really starting to see some.

Okay, that's great to hear. Thanks for taking the questions.

You got it.

Your next question comes from the line of Rishi Jaluria with RBC Capital Markets. Please go ahead.

Oh, wonderful. Hey, Ken, thanks so much for taking my question. Maybe I want to start by thinking about the role that you can play now as enterprises actually start to live deploy agents. Obviously, technology has a lot of promise. We've seen a lot of great demonstration. But just given how nascent protocols like MCPU and A2A have been, maybe these multi-agentic systems have maybe been a little bit more limited. So the question I want to ask is, as enterprises start to get a little bit more serious about deploying you know hundreds of thousands of agents can you maybe help us understand how can that serve as a tailwind for pega both in terms of being able to bring together alan as you talked about in prepared march you know agents from disparate systems and and get them to work together but also thinking about um you know having helping agents trigger workflows across systems from different technological spans um because i can imagine they're not embedded to build to work with mainframe systems or on-premise data stores maybe to help us understand how introducing this complexity can be a tailwind for pega what role you can play there and then i've got a quick follow-up yeah i think uh this is where we have some with pega tens of thousands

of agents i think the people who want to install are delusional and you know we we want you know the reality is the people who put too many of them i think having an agent control control your agents tells you something about in pega if you have an application that that has say 40 or six and we have applications that have even much more than that the pega super agent is able to run all 40 and if any of those agents in any of those steps need to learn something from another agent that's not a peca agent or need to you know go to to a third party it can fire off an mcpa2a request that's already built into the system to be able to incorporate or orchestrate what that agent does um with the work of another agent here but the idea that that the competitors have where you go and you use a prompt studio to create literally thousands of agents that are defined in English and that are going to do the right thing reliably and saying, hey, I've got workflows that I know can run my business. I can do it at scale. I can do it at high volume and do it predictably. And the PEGA agent is able to run any of them. Does that make sense to you?

Yeah, no, absolutely. That's a very helpful caller. You know, and then maybe I wanted to follow up and think about Blueprint. Obviously, great to see this turn from kind of idea into reality show up in numbers, which is great to see, especially with the accelerating ACV. What I want to maybe understand is, you know, one of the theories when you first launch Blueprint is that this could help meaningfully shorten sales cycles and get customers from, you know, ideation to live deployment and value sooner. And you've directly talked about that, but, you know, in kind of the time since you've launched Blueprint, is there any way to quantify, you know, how that has impacted, whether it's, you know, on sales cycles, whether it's on, you know, just elapsed time from first conversation to live deployment? Ken, you did talk about NRR improving. Maybe any message you can share to kind of quantify the impact that Blueprint has had on that would be helpful.

So, yeah, so we're going to – we'll be basically about one year into the blueprint data when we get closer to our investor data. I will give you some of the early – we are seeing, even with existing clients or with new logos, so we are seeing those early signs. We'll be a little bit more precise with some of that data because we'll – when we get closer to signs of it impacting all the progression, win rates. You know, so we are seeing the early signs of that. That's what gives us, you know, a key part of giving us confidence of accelerating our growth.

We've seen a massive acceleration or improvement in the training time for new staff. I would say, you know, we used to hire somebody. We'd often take five or six loose on a client in the field in a month. A lot of that is that Blueprint just makes it so easy for them to get it and for them to explain it to their clients.

Very helpful. Thank you so much, guys.

Thanks, Rishi.

Your next question comes from the line of Remo Lenschau with Barclays. Please go ahead.

On Blueprint, guys, where are we on that app modernization journey? That was always the dream. In theory, you would think Blueprint and AI can really help there. How close are we for that dream to kind of come through? Because that would obviously unlock a lot of opportunities with so much legacy codes allowed there.

We have other partners, AWS, their tooling, like Reach Cobalt Code, to feed into Blueprint, to copy into documents. And it's in terms of doing that app modernization. I think this will be a good year for that. But we've also made it so that Blueprint can modernize pretty old Pega systems, and we've also modernized. That's also positive. So the feedback we're getting, I expect that we will have several standing opposites.

Yeah, okay, perfect. And then one for you, Ken, thank you. If you look, the Pega cloud is really strong. Can you talk a little bit about where are we on that client cloud, getting client cloud people to migrate over versus new opportunities, and how do you think that's going to play out in 2026? Thank you, and congrats from me as well.

Thank you. Yeah, so I touched on a couple things. I'll maybe be a little bit more explicit. Professional services ballparked around 10% of our revenue. Pegacloud ACB is going to continue to accelerate. Pegacloud ACB is going to be 30% plus in 2026. That's translating into the revenue. Our term license will still have clients when they tend to keep some level of concurrent rights as they go through that migration. Those migrations don't typically happen in like a weekend. They typically happen application by application as they're migrating. So, even though clients are moving to Pank cloud, you do still have like a little bit of a slower growth acceleration on the term license. So you'll see Pega cloud growing 30% plus. You'll see kind of maintenance, you know, flat to slightly declining. You'll see client cloud kind of being a slower grower just because of those concurrent rights as people migrate. The majority of our Pega cloud growth is coming from new activity. But the pace of migrations, we think 26 will be kind of same level of migrations. It's kind of half.

Okay, perfect. Thank you.

Your next question comes from the line of Devin O with KeyBank Capital Markets. Please go ahead.

All right. Good morning, Alan. Thanks for taking my questions here. I got a couple quick follow-ups to start. The 15% ACB growth, guys, Is that a constant currency basis or a reported basis? And then just quickly follow-up things on the NRR expansion comment. Historically, you guys have kind of talked about at the 110% level. Is that correct? And how much of an expansion have you guys been seeing from that?

So it is constant currency because our ACV is a balance sheet measure. So we are just, you know, we're only a month away of currency. That is a constant currency number. On the NRR, we're somewhere in the ballpark of 105 over 2024, and that number will probably, that level of NRR will probably stay consistent into 2026. We'll see a little bit more growth from new logos and expansion through our autonomous partner selling motion. So we're up about 100.

Got it. Super helpful context. And then maybe just switching gears a little bit. I know you guys had a pretty meaningful presence at AWS reInvent in December. Just would love to hear some of the feedback from customers on some of the product releases and pipeline builds coming out of that event, and we'd love to get an update on kind of partnership with AWS and how that partnership is evolving in the near term.

Maybe I'll start and then let Alan jump in. So I think the most critical alignment between AWS and Pega is that both of us are aligned with looking at legacy workflows. Using our tools, i.e. Blueprint, to transform, you know, using the AWS transform tool to actually ingest into Blueprint to essentially redesign and re-implement that work that's actually living in those legacy systems, and that gets on to Pega Cloud, which is aligned with AWS because that gets on to the AWS cloud. So that's just a tremendous alignment there with basically inspecting and digesting the actual activity that's happening, leveraging Blueprint to build out those workflows, and then those running on AWS. So very good alignment between our selling team, the AWS selling team, and the PEGA selling team to execute on that. So that's kind of what's happening around that relationship.

I think it's really going in a good direction, and I think you'll see a lot of AWS.

Your next question comes from the line of Patrick Wall-Ravens with Citizens. Please go ahead.

Oh, fantastic. Thank you. Congratulations, you guys. Alan, can you help us figure something out here? So, you know, 20 years ago, you were there when on-premise died and SAS took over. And now it feels like we're in a similar transition. what are the characteristics that we should look for in software companies to figure out who's going to make it through that transition? And then you can overlay how PEGA fits into that. But if you start with just a general framework for us, I think that would be incredibly helpful to everyone.

Well, sure. I obviously have some views in the space. I would say that I think the The death of SAS may be somewhat exaggerated, but there are aspects to put certain companies under more pressure or less pressure. I think the things that we find give us a lot of fun is, you know, the whole Gartner quadrant, which can business orchestration. orchestration, where, by the way, if you look at the picture, Pegas the Clint in boat, I think is a very, very strong world, especially because being able to do the orchestration and being able to do the automation is going to be absolutely key. And that is what we do. Now, I think the center of nonsense are ones that are kind of little small things where, you know, candidly, you could just get some code written and take care of it. You can run it in a space. There's lots of places where somebody writing some computer programming have just massively been reduced. But building a major system that does orchestration, worry about things, and I'll just drop in a couple of the words of art that we use, worry about things like two-phase commit. How do you make sure that when you commit records to the database that they're there and they're reliable, which is important? Having things that have a lot of, it can create a bit of a, some of that can be under attack. You know, AI can actually reset IP too. It can incorporate it. But the thing that I would say is most important is, is the system built for change? Because the problem with these code bases, you know, somebody else is so much, we have the idea of a can. Does that make sense? Thanks, Alan.

Yeah, yeah, that's great.

Your next question comes from the line of Blair Abernathy with Rosenblatt Securities. please go ahead thanks and nice quarter guys just two quick ones for me first on on duration on contract duration I wonder if you just sort of talk us through how that was trending in in Q4 particularly you know PEGA cloud versus your on-premise renewals and then secondly just looking forward to 2026 and the mid-market. What sort of changes or what sort of learnings have you pulled in the last year or so, and what's your, I guess, how much emphasis are you really putting into in the mid-market next year?

So duration, Blair, has been pretty consistent. No big changes there. I mean, there's always like quarter to quarter little anomalies just because of the way things go into backlog, but there's no fundamental change in the duration that clients are looking for. We're not seeing any big shift there. I think Alan's point on the going after, I'll just generalize it and say new logos as opposed to any particular segment. I think Alan's point about blueprint and how important blueprint, the ability for an account executive to ramp quickly, the ability for us to target, and the ability for us to get into a really engaged pipeline building activity is what gives us a lot of controlling the engagement aspect, whether that be through the autonomous partner selling to our partners or through our direct target org model. We've never really had that confidence in the past because there was a long lead time to monetization of those account executives. So we were much safer in terms of trying to push for acceleration growth. Blueprint changes that completely. So that's the big focus area for us in 26 is, like, really, really running that.

Thank you.

You got it.

We have time for one more question, and that question comes from the line of Mark Chappelle with Loop Capital Markets. Please go ahead.

Hi. Thank you for taking my question. Ken, I was wondering if you could just talk about the firm's investment priorities for the coming year.

In terms of areas of growth of spend, is that what you meant, Mark?

Yes, that's right.

So we're going to get optimization across a lot of our P&L lines. Our gross margin is pretty respectable now, but it's not likely to go backwards. You know, we'll get leverage out of our, you know, kind of vibe coding and AI in our actual processes, including our operational processes. So we will see some gross margin kind of optimization around aspects of our business. Our sales and marketing teams, I think a lot of that is really around kind of the digital engagement and what we're doing, like, in our ability to engage with our clients in a really leveraging kind of agentic process is how we engage. In the target org model, there will still be an investment in relationship on the other side of those enterprise relationships there. That is not a – we're not talking to bots, right, when we're doing the enterprise selling. So I think there's – and we're going to disconnect. that there is such a disconnect between the narrative talking about around what's happening in enterprise and what we're seeing with our clients. Our clients have, and the concept of a digital quite puzzled by in terms of what we're seeing with our clients and what some of the narrative is. So we're going to continue to invest in engaging with our clients and helping them on that journey. And there's not one client that's not focused on trying to optimize their Thanks, Ben.

As a follow-up here, regarding the recent headcount reduction and restructuring, there's a couple articles out there mentioning that the company was transitioning to an AI-first delivery model.

I was wondering if you'd just kind of elaborate on what that means in practical terms. well i think that blueprint is an example of an ai first delivery model i mean blueprint has completely changed you know the movement lets you go from ideation and things that used to happen on on whiteboards and post-its uh over weeks to something where you're right on the system collaborating it and it can load into an honest to god runnable infinity system so the Ability to operate at not just better speed, but I think better quality is very much built into what we are working on with Blueprint, and we've already achieved a chunk of that. More to come to see.

That concludes our question and answer session. I will now turn it back over to Alan Treffler, founder and CEO of Pegasystems. Please go ahead.

Thank you to all who joined. We appreciate it. I just want to mention Pegaworld again. June 8th is invested from the 7th to 9th. I think you would find it to be insightful because in this world of insane noise, and the noise out there, there are real, and you can see and touch it in conjunction with our, and I will just tell you that I feel that we as a company were built. May we live in interesting times collectively.

Thank you very much, everyone. this concludes today's conference call thank you for your participation and you may now disconnect