Pegasystems Inc (PEGA) Q3 2026 Earnings Call Transcript

Hello, everyone. Thank you for joining us and welcome to the Pegasystems third quarter 2026 earnings call and webcast. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Peter Welburn, Vice President of Corporate Development and Investor Relations. Please go ahead.

Thank you, Ellen. Good morning, everyone, and welcome to PegSystems Q3 2026 earnings call. Before we begin, I'd like to read our safe harbor statement. Certain statements made during this call and the accompanying materials may be construed as forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, forecasts, and similar expressions are intended to identify forward-looking statements. These statements speak only as of the date this statement was made and are based on current expectations and assumptions. Because these statements relate to future events, they are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations for fiscal year 2026 and beyond. Important factors that could cause actual results to differ materially are described in the company's press release, announcing our Q3 2026 results, and in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2025, as well as other recent SEC filings. Investors are cautioned not to place undue reliance on these forward-looking statements. Except as required by law, we undertake no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. In addition, non-GAAP financial measures discussed on this call should be considered in addition to and not as a substitute for financial measures prepared in accordance with GAAP. Constant currency measures are calculated by applying the September 30, 2025 foreign exchange rates to all periods presented. Reconciliations of GAAP to non-GAAP measures can be found in our earnings press release. With that, I'll turn the call over to Alan Treffler, founder and CEO of Pegasystems.

Thank you, Peter, and thank you to everyone joining us today. Before Ken covers our results, I want to just touch on the AI market context and why it's a major long-term opportunity for Pega. Our technology is differentiated and very relevant. Candidly, our execution this year has not kept up. We are making real changes to better capture the opportunity, and Ken will be providing more detail. I would say the market status is confusion and a search for value. Enterprise leaders are facing tsunamis of AI hype. This is the most chaotic and confused technology market I've seen in my career. It makes the internet bubble of 2000 look like it unfolded in slow motion. There is real promise in AI and occasionally real delusion. This quarter, Salesforce announced Cloudforce essentially tying its future to Anthropic, a company that has said publicly it is going after TAM, their target addressable market. And then in September, Anthropic called for a pause in AI development. And leaders at OpenAI and other frontier labs chimed in to support the idea. But in the month since, Anthropic has released three major clouds. Opium AI has also released three major GPT models. Google has released a new Gemini model. That's not counting the new models from Mistral, Kwan, DeepSeek, or model labs that are using things internally they haven't released yet. So I guess this is what a pause looks like these days. No wonder everyone is confused. The leaders have actually stopped chasing the latest model. They want AI connected to business operations in ways that deliver measurable value while maintaining governance and controlling costs. The market is full of ingredients, and enterprises need a recipe. And the changes that Ken will talk about are focused on getting that recipe directly to the customers and senior leaders who need it. Now, much of the AI industry is selling models and tokens. Pega is offering something different. A structure for AI that delivers predictable outcomes and predictable costs built on how enterprises really operate. Our architecture harnesses the power of LLMs and our own statistical AI to transform how enterprises design, build, and run the workflows and decisions. Now, models are an important agreement, but the recipe for AI demands structure to provide operational context that tells it what to do. Our workflows wrap AI in a control and governance structure that feeds exactly the knowledge and context it needs at the right time. As Forrester put it in his very recent report on enterprise AI platforms, workflows, not insights, are the value driver. We apply that structure at every stage of AI transformation. At Design, we help clients reimagine their workflows and decisions that we built to help create and maintain the applications in a way that's understood, and we run them to create agentic workflows that behave predictably. So leaders I speak to know they shouldn't just bold AI data processes. They want to be designed the way they work, and Blueprint harnesses AI to solve a problem that no one else has, giving business and IT teams a way to reimagine their operating model together at AI speed. It takes the raw power and gives it a structure built on decades of Pega's workflow expertise and industry best. Blueprint combines the raw power of models like Claw, GPT, and Gemini with the decades of our knowledge from the work we've done with leaders in various industries. It helps establish the rules, workflows, policies, and operating model up front before an application. The result is a repeatable recipe for how businesses should run, translated directly. And here is what much of the 95% processes themselves will be transformed by AI. But once you figure out how to process, you want to do it the same. Letting AI reasoning run, we design them so they are able to be able to run with a and we also let clients bring their own model if for some reason they have something either an activity or we have added in the pegging environment operate in a color so developers can get the speed of a jet we provide the structure reusable and scalable now we understand that one of the pitches ai companies are making is you know code it yourself. And the reality, we've competed against code it yourself for decades. And of course, AI coding tools are powerful. We use them ourselves. And we've built them into the AI assistants in Infinity Studio. But this doesn't change the underlying question. AI agents generate lots and lots of code, millions of line code than we've ever seen before. And much of that code becomes very hard to understand and even harder to change six or 12 months later. That is at the heart. In Pega, the logic stays visual and transparent, not buried in code so that business and IT users can look at the workflows, the rules, and the configuration in Pega and see exactly what their application does. us. This is what it means to build for change. Now, at runtime, PEGA applications run agentic workflows that orchestrate agents with control and governance. In Infinity, any agent, a customer service chatbot, an employee assistant, even one outside of PEGA, can discover and run PEGA workflows and decisions. They don't need to re-reason through every step. Blueprint has already done that for them at design time and we've put the human in the loop, blessing the design as opposed to sticking them in every time a transaction runs. Pega-agentic workflows call for agents to perform specific tasks like reading a document or researching a case or client history and the workflow, each agent is controlled in what it can do and what it can see. This small focused agent approach obviates hallucination risk and uses far fewer tokens. That's how we can offer a fixed case price with no token charge. And I'm getting a lot of enthusiasm from clients. Now, at PegaWorld, I compared this approach.

Clients are increasingly looking to transform how work gets done through AI, automation, and intelligent workflows. And companies, especially in regulated industries, have a big challenge in trying to keep up with the ever-changing regulations. We continue to see growing interest in blueprints, agentic workflows, and automation initiatives that help organizations achieve predictable outcomes at predictable costs. While buying patterns have not fully normalized, we saw improved visibility and more consistent progression of opportunities through the third quarter. Our ACV ad was the strongest of the year, representing a step forward. More importantly, the underlying market opportunity remains significant. Our focus is on improving how we execute against that opportunity. The go-to-market changes I'll discuss shortly are designed to strengthen accountability, increase speed, and help us build on the progress we saw in the quarter. Looking back, our assessment is that the primary constraints have been execution, longer sales cycles, and customer deployment challenges rather than broad-based deterioration in market demand. Nothing we've seen in Q3 changes that view that the underlying opportunity remains significant as we look ahead we're applying the lessons we've learned so far this year to better capitalize on the demand we're seeing in the market we've already begun implementing a series of changes designed to increase accountability improve speed of execution and accelerate growth first in today's market environment clients are best served when commercial leadership and day-to-day execution authority sit closer to the market within consistent company-wide pricing, contracting, and financial controls. Additionally, although the global demand has held up in spite of some of the European and Middle East conflicts, clients increasingly demand data sovereignty and governance. They want their systems, their data, their processes to be closer to their operations. They increasingly demand and local control and support for their solutions. This fits perfectly into our PegaCloud solution, but also with the option for cloud choice. As a result of all this, we're evolving our go-to-market leadership and coverage model. This change will bring leaders, resources, and expertise closer to in-region clients, enabling faster decisions, stronger engagement, and greater ownership of outcomes. It also returns us to an operating model where the senior leaders have more commercial-driven authority and more direct connection to our clients. As buying decisions increasingly move higher within client organizations, having our senior leaders in region will help us engage more effectively and accelerate execution. We've seen this trend in the past, and we have successfully executed under this operating model. Second, we're creating a more unified marketing organization. To tell one clear and differentiated PEGA story, we're bringing all marketing-related teams together under a single leader. In a market crowded with competing AI narratives, this structure will sharpen our positioning, strengthen execution across channels, and help us reach executive decision makers more consistently. Enterprises are looking for clarity, confidence, and a trusted path forward. A unified marketing organization will improve our visibility and communicate more effectively how PEGA helps clients succeed in the AI era. Third, we're rallying a new organization focused on accelerating adoption of PEGA's AI capabilities while transforming our products to make it more dramatically easier for clients to access our latest innovation and stay current with PEGA. The pace of innovation in AI is unprecedented and the ability to successfully adopt and scale these capabilities is becoming the key differentiator between clients that experiment with AI and those who realize measurable business value from it. This new organization will bring together engineering, early adopter programs, and delivery excellence to quickly identify adoption barriers and turn those insights into improvements. It will also include a team of forward-deployed engineers, known as our Lighthouse team, who will work directly with clients to accelerate successful deployments and help them realize value faster. By bringing product teams closer to our clients, we can capture real-world best practices, identify what drives successful outcomes, and continuously accelerate deployment of agentic workflows so that clients can realize over time these learnings will become industrialized to benefit from agentic workflows. Additionally, we will create a tighter feedback loop between innovation and adoption. By connecting our product teams directly with our early adopters, we can shorten learning cycles, accelerate product development, and turn client insights into repeatable success. Fourth, we're centralizing go-to-market and consulting operations under the finance organization, having a single leader to simplify planning, resource allocation, and performance management across the company. Commercial and delivery leaders will remain accountable for strategy and client outcomes, while the unified operations team drives greater consistency, scalability, and execution discipline. Over time, we expect these and other changes to contribute to margin improvement and increased operating leverage. Taken together, these four actions are designed to improve execution in the near term while positioning PEGA to deliver long-term durable ACV and cash flow growth to our shareholders. During the first quarter of 2027, we expect our headcount will be approximately 5,000 employees, down a few hundred from where we sit today, as we streamline the organization and improve execution. Moving to our financial results. Annual contract value, or ACV, grew 7% year-over-year in constant currency to $1.66 billion. dollars. In Q3, we added 32 million in net new ACV in constant currency, our strongest quarterly performance of the year, and a step forward in rebuilding growth momentum. PegaCloud continued to drive that performance. PegaCloud ACV grew 20% year over year and represented 59% of our total ACV. PegaCloud backlog increased 25% in constant currency year over year, demonstrating the continued strength of our cloud business. Total backlog now stands at over $2 billion with current backlog at just around $1 billion. Backlog reflects existing non-cancelable contracts expected to be recognized as revenue in future periods. Two factors shape the quarter. First, we enter Q3 with a larger and more diversified pipeline with strength across both new logos and workflow expansion within our existing install base. Second, purchasing behavior continues to evolve. We did see some movement to more normal buying patterns in the third quarter. However, enterprise clients, especially in the financial services sector, are applying greater scrutiny to large technology investments, particularly around business case validation, AI strategy, and implementation timing. Decision processes now involve more stakeholders and additional approval steps than we've seen in recent years. Decisions continue to go to senior leaders in the organization and that's the importance of our go-to-market change is to connect our teams with the decision makers. Separately, organizational changes and workforce reductions within several client accounts can extend timelines further. Let me be clear about what we're not seeing. Win rates are remaining generally consistent with prior periods and we're not seeing a meaningful shift in competitive dynamics the constraint is how long it takes for clients to reach a decision not whether we win when they do reach that decision we are addressing that directly by driving prospecting activity leveraging blueprint and increasing executive level engagement to compress sales cycles and also to build incremental pipeline below the headline number several leading indicators improve pipeline volume strengthened during the quarter blueprint engagement continues to expand, and more opportunities are progressing toward the decision process, in the decision process. Turning to free cash flow, we generated $290 million of free cash flow in the first three quarters of 2026. There's two factors that impacted that result. First, free cash flow included an unusual level of cash expenditures that we do not expect to recur at the same level in normal operations. We've included those expenditures in our free cash flow, and we're providing supplemental detail to investors so they can evaluate the nature and the timing of those. Second, ACV growth was lower than our original plan. Slower net new ACV translates into lower billings, lower collections, and lower free cash flow than we had modeled. As a reminder, our billings are seasonally weighted toward the fourth quarter, consistent with the renewal concentration that we discussed earlier in the year. As a result, free cash flow follows a similar seasonal pattern with the two largest net free cash flow production being in the first quarter and the fourth quarter of the year. Turning to capital allocation, our capital allocation strategy features several key elements. First, invest in organic growth. Our highest return use of capital remains product innovation and go-to-market capacity. That spending is largely built into our operating model. Second, repurchase shares opportunistically. We've leaned higher into buybacks in 2026, more than in a prior year, and we did so deliberately. In the first nine months of 2026, we repurchased just under 11 million shares for around 430 million in the open market under prior board authorizations. Total common shares were reduced by 6.8 million shares in the first nine months of 2026. At current levels, repurchasing our shares can be an attractive use of excess capital after funding our organic growth priorities. Buybacks are accretive to earnings, offset dilution from stock-based compensation, and compound value when executed at attractive valuations. We will continue to compare repurchases with other uses of capital and act selectively and strategically around our buyback program. The third element of our capital allocation strategy is to pay a consistent and increasing dividend. We view the dividend as a long-term commitment, and we intend to grow it over time. Fourth, we maintain balance sheet strength and flexibility. We remain debt-free, and we will evaluate any future use of debt against our strategic priorities, expected returns, and commitment to financial flexibility. we ended the third quarter with approximately 300 million in cash and marketable securities looking ahead we will continue to return capital to shareholders opportunistically while preserving strategic flexibility we're disciplined buyers not automatic ones following our july earnings call many of you asked for some additional perspective on how we're thinking about the remainder of the year as a reminder we provide annual guidance at the beginning of the year and do not typically update our outlook inter-year, nor do we guide quarterly. Given the many calls for more color, we've decided to share a few more thoughts on ACB and free cash flow as it's late in the 2026 cycle. On ACB, we added $52 million of net new ACB and constant currency through the first three quarters of the year. We expect we will deliver an acceleration of growth in Q4, but we don't believe that we'll achieve our full plan for the second half. On free cash flow, given the unusual level of cash expenditures incurred this year, we also believe it's useful to consider supplemental cash information to determine the cash generating capability of our business. Please see our earnings release for more detail on these supplemental items. We're not changing our long-term ambition. We continue to target $700 million or more of free cash flow in 2028. Although ACV growth has slowed this year, the underlying economics of our business remain intact. That new ACV creates future billings growth, and those billings ultimately convert into increased cash flow. Achieving our 2028 target will require stronger ACV growth and continued cost discipline, and we are aligning our cost structure with our growth trajectory and take the appropriate actions to improve our operations, positioning the business to ensure achieving that objective that we have for $700 million or more in 2028. Stepping back, organizations worldwide are rethinking how work gets done in an AI-driven economy. That shift plays directly to capabilities we have spent years building, workflows and decisioning that apply AI to mission-critical business operations with governance, predictability, and scale enterprises required. While execution remains our top priority for the balance of Q4 and beyond, our long-term conviction has only strengthened. We remain confident in our market opportunity, confident in our ability to deliver substantial and growing free cash flow, and confident in our disciplined approach to balancing growth and profitability to sustain a strong Rule 40 performance and create significant long-term value for shareholders. And with that, operator, please open the line for questions.

Thank you. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand, and to withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question for optimum sound quality, and if muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Remo Lenschao with Barclays. Your line is open, please go ahead.

Perfect. Thank you. One, Ken, I was really interesting to hear your remarks on kind of streamlining the organization or just changing the go-to-market. Is that something, sorry, is that something you're doing to do, something that you do like mid-year now or is this kind of the plan for the new financial year?

Can you speak to that, please? yeah we're gonna we're in the process of some of those uh changes we've already made uh primo and some of them were in they're coming in the in the future weeks but we want to prepare ourselves so that we start 27 as you know as with as many of the improvements as we can get done but some of them will will go into the first quarter of 27 but this is something we're doing in the very near term but the biggest changes have already happened okay perfect okay and then um obviously the you've talked before that Q4 has a much better renewal pool.

That should probably help you as well. What's the situation, if you think about next year as well, if you think about better results potentially coming out next year? I don't know if you can comment, probably not quantitatively, but qualitatively. What's the true progression from here? Thank you.

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

Okay, perfect. That's very helpful. Thank you.

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

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

Sure, Steve. So we're moving fast on the changes, and many of these changes are already in work. Some of them, as Alan mentioned a second ago, have already been executed. So I don't believe this is going to be a long, drawn-out changes. And now the second part of that question is, when do you think you'll see some of the improvements from that? I would expect this change to not take a significant amount of quarters. I would say there's always management that we need to manage going in or starting a new year. So I wouldn't expect this change to drag out over a long period of time. I would expect that we would hope to see improvements from this model in the early to mid part of 2027. The second question that you asked about ACV, and really what I'm saying is I believe our ACV growth is going to be up from here, but I don't see a path where our ACV growth would be above 10% for the 2026 year. So I would say we're seeing our ACV growth be somewhere between where we are now at 10 percent.

All right. Very clear. That's helpful there. And then maybe just on the technology side and, you know, we keep hearing about things like decisioning models and things like JEV that, you know, out there in the market and we keep getting the question from investors about, you know, maybe what that means for Pega and, you know, I guess your decisioning capabilities and if you viewed that as a, I guess it would kind of be good to get your perspective on how you're seeing that maybe competitively or what that means from tech adoption moving forward with some of these decisioning models starting to come out.

Sure. We, as you would expect, pay close attention to all of this. We actually think opportunities to use, you know, the big deal about PEGA is that we make the way the business runs. And at the end of the day, the folks who are trying to go down the alternate paths, one which is, hey, let's write it all in code, candidly massive amounts of code, or, hey, let's just try to program prompts that the AI will figure out how to do it. Candidly be talking with a customer who complained to me that he had a thousand lines of prompts to figure out how to get small behavior changes. That's exactly the sort of thing that happens. So, you know, these new models, the interesting thing is the AI models that are out there and evolving, which, by the way, we can harness. I mean, part of what we do is we want to use the frontier of other models. They don't fix the core lack of transparency.

All right. Well, appreciate your thoughts and thanks for taking the questions.

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

Great. Good morning. Thanks for taking my question. So maybe just one look at, I want to be asked a little bit about kind of the pipeline maturity as we look at fourth quarter year, how much of that pipe is in late stage and how much of the expected growth is kind of supported by new logos, which is kind of an area we've kind of seen strong traction coming to the second half and just more color there.

Sorry, you were a little bit rough here there. Really just the question is pipeline and new logos? Yeah, yeah. Yeah. Okay. Sorry. Sorry, Gavin. There's a pro and a con. The good thing is we're seeing a lot of great activity, a lot of good pipeline build. People are prospects that don't really know much about periods of time, and the teams are working really hard to engage. That's the positive. Maybe the more cautious part of this is it's hard to predict close rates and progression rates with new logos because we don't really have a history of it. So we're really, we're kind of in a game where we've been closing some new logos, but learning from offers, pricing, value positioning, targeting, like all those things that, so I would say we're definitely getting growth from, we're still in that maybe like learning a little bit about what works and maybe what we need to double down on or change.

But in terms of the maturity, I would tell you that the opportunities as we enter Q4 and think about next year is meaningfully more mature than it was at any other time. Pipeline, I would say, we're really putting a lot of focus on maturing opportunities and getting them to.

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

What I would say is less predictable than what we've seen in the changes in how they procure, the system integrator changes that moved everything, moved a lot of buying onto GSA schedules. So we don't expect that to get more clear in the fourth quarter. But also, buying activity is happening, and it's not like the government is not moving forward. It's just that it is less predictable. So Q4, the Q4 quarter is not a particularly massive quarter. Like our government business is pretty, our U.S. government business is pretty steady across the quarters. So it's not that there's anything unique in terms of size in Q4 around the public sector. But it definitely is a less predictable space right now just because of a lot of the changes that they've made to process. But I don't I don't suspect that to be a big impact for our Q4 results.

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

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

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

Well, you know, we really, I can't actually think of a time when we've ever competed against Braze. So I don't think it's very meaningful to us. I think when I look at this, I think companies are doing whatever they, but I don't think it.

One thing I would say, Pat, that's not really a Braze comment, but something we've seen. I do think you've seen M&A activity around technology companies start to spin up a little bit in the last few months. And I do think that highlights, you know, what I believe to be is the significant value that maybe was questioned maybe six to nine months ago around software. And I definitely think you're seeing, you know, the Snyder Electric's purchase of PTC, for example. I think there's a lot of value attributed to the knowledge base that software has, the engagement we have with users, and also the data that we actually have within our system. So I definitely think that there is a little bit of that angle, and Braze might be in that bucket. So that's just something that we've been watching, not particularly because we're a buyer or a seller, more just to learn what's happening.

I think your point, you know, this does sort of the dying cesspocalypse.

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

Well, I think answering either of those questions would make this one hell of an earnings call, wouldn't it?

It really would, yeah.

So, Will, we're going to have to respect for you.

You can do the what would you like to, yeah, yeah. Look, we – You can do what's on your radar list, right? Yeah, or how you think about it.

Look, we look at companies routinely, and we have typically technology purchases that convince more of the market. So we don't have a shopping list. Peter here is constantly.

Thank you very much.

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

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

Yeah, we're seeing customers respond with enthusiasm to it. It's still young, you know, is the reality. But customers, this actually does a much better job of taking existing customers and giving them a path.

One thing we have seen, Blair, is that we've seen at this point in time when we released Pega25, we have more than twice as many clients have moved to Infinity26 as at this point in time when we released 25. So we are seeing a much more aggressive client's want it. So that's something we are seeing.

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

No, term lengths, no. I think that always bounces around, but I haven't seen anything like clients trying to do longer or shorter terms. I think that does move around. It's kind of client-specific. In terms of pricing, the one thing I would say is that with all the spend on AI, I definitely think IT budgets are under pressure this year. And so that does make for scrutiny that happens around price escalation, CPI, things of that nature. So we definitely see some of that. And I think that's just tied to clients that spend a lot of money on AI, like dabbling and trying to find some value. I do, based on what we see with our clients, I think that will settle. And I think clients know, have a better view now, of where they may be controlling their AI spend better than they had earlier in the year when I think it was a little bit more out of control. But I think some of that does play into just enterprise buying pressure.

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

Thanks, guys.

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

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

So the main, what I would consider to be non-recurring or non-operational spend that we've had in our cash flow this year and some of it will be in to next year is related to of a number of our legal matters. So I would say that's a big component of it. We will also have some restructuring charges that will probably get firmed up between now and the beginning of the first quarter of 27. I would consider those to be kind of the non-recurring type to kind of show you what more operating cash flow would be. So I would see a path of where that adjusted for onto a 700 path in 2028. That's kind of what we see. This year, the number will be lower naturally because we haven't made some of those structural changes to our cost structure. We haven't made those changes to our cost structure. And we've got some of these kind of unusual one-time things related to some of the legal matters, some of them being settled. I think that's kind of, so this year will be lower cash flow.

Next year, we'll have a smaller amount of ad backs and some of the cost changes and then we'll be on track to go okay yeah helpful thanks ken and following up so regarding the customer deployment challenges and the constraints on growth and you know the fde team you're you're not ramping to address that but my question is what what specifically do you feel is preventing customers from from moving some of these projects into production today are are those mostly implementation and or integration challenges or do you feel at all, that there are some aspects of the core product that could need to become easier to deploy and ultimately maintain?

I don't think PEGA is alone in this challenge. Deploying things in an AI world is a different mindset of actually how you instrument and deploy and get value. And I think that just like many of the clients that are deploying AI have spent a tremendous amount of money trying to bring in consultants and system integrators to try to help them figure out where AI can add value. Some of that is adopting AI in a new paradigm around how you develop workflow and automation solutions on Pega as well. So I think some of that is just us getting our engineering teams and our professional service teams and our solution consultants to really be like with the client and actually helping them drive that value. So that's the big change as opposed to letting clients do it more on their own, which is traditionally how software has been deployed.

And look, I think historically, we were pretty, and this goes back years, our customers and we were pretty slow at times to deploy the latest events. The reality is we actually have had customers who have told us they never want to be on the most recent release. They want to be on N-1 or we want to be on N-2. So getting things into the hands of customers is not something that had been. Now, we're much better because the combination of Pegacloud and some of the changes we're making.

Very helpful. Thank you both.

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

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

We did have some deals close earlier. We've also had some deals slip into Q4 that we thought we're going to close in Q3. So what I would say is we have a lot of work too in Q4. My quarter's just started. We're entering it with the strongest pipeline that we've ever had, I think maybe in a Q4 ever. That said, the market's not as predictable as it has been. And so we have to kind of balance that in terms of our expectations. But we have plenty plenty of opportunities and we just need to, you know, we need to just, you know, focus on our execution and helping our clients, you know, quite frankly, you know, get out of their own way at times, right, to actually move forward on some of these advancements.

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

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

Maybe I'll give you our perspective or my perspective. In the commercial side, in certain verticals, specifically financial services being a big one, they've spent a lot of money in AI to kind of test things out, to try things out, to evaluate. I would say in the public sector, not as much. It's important to the public sector, but I don't think they've distracted.

That's helpful. Thank you.

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

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

So just simply, I'm glad you actually said that. I wouldn't connect what we talked about with helping clients get adoption with things that are already in PegaCloud or PegaCloud backlog. That's more around things that are in the, hopefully that's a helpful clarification on that. That's more about our future growth. The things that are in PegaCloud backlog typically come into revenue over the next two to three quarters, typically. So you should think about, well, first, the first part of your question was, how should we think about PegaCloud going to 59% of the strengthened backlog? I think what that really highlights is that our clients are very committed to Pega, right? And committed over a long term. So I think that's a great sign. PegaCloud, the current RPO tends to come in a couple quarters after it enters, just depending on effective dates, when things start, the specific contracts and how they roll into revenue. But just assume a couple quarters.

Thank you.

We have reached the end of today's Q&A. I will now turn the call back to Alan Treffler for closing remarks. This does conclude today's call. Thank you for attending. You may now disconnect.