Earnings Call Transcript - PEGA Q1 2026

Operator, Operator

Thank you for standing by. My name is Carly, and I will be your conference operator today. At this time, I would like to welcome everyone to Pegasystems 1Q 2026 Earnings Call and webcast. Operator instructions were provided. I would now like to turn the call over to Peter Welburn, Vice President of Corporate Development and Investor Relations. Please go ahead.

Peter Welburn, Vice President of Corporate Development and Investor Relations

Thank you, Carly. Good morning, everyone, and welcome to Pegasystems' Q1 2026 Earnings Call. Before we begin, I'd like to read our safe harbor statement. Certain statements contained in this presentation may be construed as forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, forecasts and similar expressions are intended to identify these forward-looking statements. These statements speak only as of the date the statement was made and are based on current expectations and assumptions. Because these statements relate to future events, they're subject to certain risks and uncertainties that could cause actual results to differ materially from our current expectations for fiscal year 2026 and beyond. Factors that could cause such differences are described in the company's press release announcing our Q1 2026 results and our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2025, as well as other recent SEC filings. Investors are cautioned not to place undue reliance on these forward-looking statements as there can be no assurances that the results contemplated will be realized. Except as required by law, we undertake no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. In addition, non-GAAP financial measures discussed on this call should be considered in conjunction with and not a substitute for our consolidated financial statements prepared in accordance with GAAP. Constant currency measures are calculated by applying the March 31, 2025, foreign exchange rates to all periods presented. Reconciliations of GAAP to non-GAAP measures can be found in our earnings press release. And with that, I'll turn the call over to Alan Trefler, Founder and CEO of Pegasystems.

Alan Trefler, Founder and CEO

Thank you very much, Peter. I've just gotten back from a few weeks on the road across EMEA and the U.S., including an AI conference last week. It's interesting because I think we're pretty practiced at separating hype from what's real, but there is a lot of confusion out there. Nonetheless, I'm hearing consistent themes from leaders of clients, prospects and partners. In a world of constant disruption, clients want and need innovation without sacrificing reliability. They want solutions to reimagine how their businesses work while still running them predictably and delivering measurable results. This means platforms architected for scale, interoperability and continuous change, where AI is governed, explainable and harnessed in workflows rather than bolted on. That's what Pega provides, a harness for enterprise AI. Blueprint helps reimagine how work should run and helps people rethink their businesses, and then the Pega platform operationalizes it with confidence and evolves it as regulatory demands evolve. There's a lot of noise about the future of the software industry itself, and it's creating some real confusion and some real moments of doubt and bias. Some investors I've met aren't sure what the future looks like and are even questioning the long-term viability of enterprise software vendors. But we think AI will be good for some and bad for others. And for Pega, it will be good. The reality is that enterprises don't succeed based on the alternative of coding fast using AI. They succeed based on whether they can design the right outcomes, execute them predictably and evolve safely over time. The assumption that AI-generated code can replace architecture is backwards. In mission-critical enterprises, AI increases the value of platforms that are architected for predictability, governance, interoperability and continuous change, and that's us. When outcomes matter with customers, regulators and systems that must evolve for decades, AI-generated code still needs structure. Certainly, for some small tasks you can just bind code together. But AI doesn't replace the need to have a business system. Alternatively, if people are using AI to just dynamically reason each process over and over, what we're seeing is it's now running up costs and giving nondeterministic outcomes. The moment you weaken your enterprise platform, you make your whole business weak. Putting AI in the middle in an ungoverned way is, I think, just a recipe for disaster. So whether you use AI to generate code that you want to orchestrate and pull together, whether you use AI to run or handle certain parts of your business where you want the creativity of agent-to-agent interactions, or whether you want Pega to pull together and orchestrate multiple business functions with a harness like Pega driving that, in all of those cases, Pega adds tremendous value. So let's talk about how mission-critical enterprise software is built. Enterprise applications have always been around a continuous life cycle regardless of technology. It's not a single build moment. You need to design and align on what the software must do and how it must perform. And that design really can involve collaboration among many parties. Having a collaborative environment like Blueprint that brings the power of the internet, the power of Pega best practices and the power of a customer and/or partners thinking all together in a way that they can understand the experience and improve is absolutely central to getting to a great outcome. You have to build it. And there are lots of ways to build it, but the great news about something you've done in Blueprint is that you get both. You need to be able to execute or operate it to run it at scale, secure, make sure performance is being watched and managed. And with Pega Cloud, which you'll see is really, really continuing to grow beautifully, we give our customers a price to execute that is without parallel. Then you need to be able to evolve it and respond to change if the cycle starts again. This cycle is high stakes, and it's absolutely critical to get businesses not just what they want to get done in two, four or six weeks, but to get them to operate over the years of the business. The Pega model, which is at the heart of the Pega system, is the key to most of these factors. It's the same model that lets you design it, lets you collaborate, makes the build trivial, actually executes it and orchestrates the AI. Best of all, it lets you go back to it and have a structure that you can look at, understand and direct change from. And that, ultimately to us, is how this life cycle operates in this new AI orchestration age. While LLMs dramatically accelerate the build, they don't replace these other key factors nor are they going to be able to. That's why clients see Pega. Some people say, well, why don't we just get software? And certainly, AI can generate code quickly. But prompts to code alone fall short. They don't tell the enterprise what should change. The gap we have isn't coding speed. It's understanding what's there and making sure you don't accidentally change something with unintended consequences. When you're operating at the speed of the prompt, it's actually easier to do that, not harder, particularly if you haven't put out a solid architecture that makes what's going on visible. Now some people believe in AI-only execution and ask, why do I need a workflow engine at all? Why do I need a harness at all? Why don't you just turn everything over to general-purpose AI agents and have a control plane that watches what's going on and reports out? But these systems become difficult to test, expensive to run and nearly impossible to evolve safely. LLMs are incredibly sensitive to even the tiniest bits of additional data. A new version of an LLM, and they are coming out quickly, can often behave differently from the one you used just the day before. I think it's safe to say that for many kinds of work, continual re-provisioning is not a reasonable business strategy. People want predictability and reliability. The other thing which really broke last week is that this approach to AI reasoning is becoming cost prohibitive. I hear growing discussion about the cost of GenAI and how teams are bouncing between maximizing token usage and rationing tokens to usage caps to managing surprising bills. The concerns are real, but they reflect the misapplication of AI using the wrong AI at the wrong time. When you ask GenAI to reason at runtime over and over again for processes you've already validated, every interaction becomes a new experiment and consumes tokens. You end up paying repeatedly for the same thinking, which is expensive, unpredictable and hard to scale. Instead, do what Blueprint AI does: do the heavy reasoning at design time, where GenAI can brilliantly explore options, let you collaborate and pressure-test decisions. Then use the right AI for execution, focusing on consistency and speed. Costs become predictable and value scales with governance. GenAI isn't inherently expensive, but misapplication is, and smart organizations will stop paying an LLM to relearn their business every five minutes. Success in the enterprise doesn't come from AI reasoning everything on the fly. It comes from executing redesigned, reimagined work within clear governance structures. Our architecture uniquely allows enterprises to design intelligence into how work gets done, not bolted on afterwards. Since we last spoke, we introduced new vibe coding tooling into Pega Blueprint. This combines the speed of AI-augmented design with the security and predictability that Blueprint gives. You can try it out on Pega.com/Blueprint. Remember that Blueprint facilitates the reimagination of critical work, not just the development of applications. That reimagination goes beyond process alone; it includes redefining roles, decision rights, skills and experiences. AI can be applied intentionally to these rather than accelerating what already exists. Users interact with Blueprint designs in natural language now, describing changes by typing or speaking. The results are enterprise-ready governed workflows. We received continued validation of Pega's leadership across the industry from clients, partners and analysts who see and work with Blueprint AI. Recently, Forrester named Pega a leader in customer service solutions, recognizing Pega Customer Service, Pega Blueprint and Pega Process Mining for automation and agentic capabilities. So we're also winning awards for our software. We've already this year received four awards for innovation related to how we're leveraging AI, including a Product of the Year award. We love receiving awards for our work. But personally, it's even better seeing our clients win awards for the work they do with our software. Just last month, the National Health Service, which provides 24-hour digital and telephone-based health service to Scotland's 5.5 million citizens, received the public sector award for work leveraging Pega software. These recognitions reinforce our strength and the need to be able to orchestrate complex service journeys and apply AI predictably. This is not theoretical. For example, Proximus, Belgium's largest telecommunications operator, used Pega to modernize a mission-critical B2B installations application, moving from a fragile legacy tool to an orchestrated cloud-ready solution. They built their first prototype in Blueprint in 15 minutes and went live in weeks. Numerous other large names, including Vodafone and National Australia Bank, have driven change with redesign and extensive automation, all AI-powered. I'm excited that customers are eager to present their work at PegaWorld in June in Las Vegas because we all learn by seeing what other clients are doing. PegaWorld runs June 7 to 9. It's a must-see event and a chance to interact with thousands of transformation leaders from around the world and see more than 200 AI-powered demos. We have exciting keynotes and nearly 100 customers from 60 organizations presenting detailed breakout sessions. MetLife will show how a highly regulated insurer moved from AI experimentation to AI at scale. Unum will discuss large-scale legacy modernization, leveraging Pega Blueprint and AWS to rearchitect decades of legacy core systems. Wells Fargo will talk about how they highlight AI-driven decisioning across billions of customer interactions. We will have great customer stories and a substantial product agenda this year. Blueprint AI has fundamentally changed upfront design and reimagining how people should work with systems. What we're doing this year and will show at Pega is how Blueprint AI is moving into the entire development and support suite so that AI-driven guidance and that power will operate from visualization and inception through to completing a system and supporting a production system. I think this is the most consequential change to the underlying technology that I have seen; it supports the Agentic process fabric technology we have that allows Pegasystems and even non-Pegasystems to operate as a connected, orchestrated network for the next generation of technology. I think only Pega has the efficient runtime intelligence, the deep design-time capabilities, the experience with these key workflow harnesses and can put in your hands the way to make our harness yours. We look forward to continuing the conversation, and we can continue the investor conversation on Monday, June 8, at noon in Las Vegas, where we're hosting an investor session. Thank you all. We are working hard. And for the numbers, let me turn it over to Ken.

Kenneth Stillwell, Chief Financial Officer

Thanks, Alan. As discussed last quarter, the rhythm of our business was expected to return to a more typical seasonal pattern in Q1 of 2026. We entered the year knowing the first quarter would also be a challenging comparison given the $60 million of net ACV add in the first quarter of 2025, which was very much an outlier and roughly 20% higher than any other quarter last year. It's no doubt an interesting start to 2026. With all of the AI experimentation that Alan mentioned, the federal government shutdown, and two wars, both in Europe and in the Middle East, the environment is under pressure. So it's not surprising that Q1 did have a lower growth rate. We continue to believe in the durability of demand for our platform, especially for our cloud offering. Pega Cloud revenue in the first quarter of 2026 increased year-over-year from $151 million to $205 million and also grew 30% on a trailing 12-month basis. Pega Cloud ACV grew 29% year-over-year as reported, and 27% in constant currency to just over $900 million, an over $200 million jump. It's very exciting to see Pega Cloud ACV now rapidly approach the $1 billion mark. As we've said, ACV growth and mix is reflective of the evolution of our business. Pega Cloud ACV now represents about 56% of total ACV. Our focus on growing Pega Cloud puts pressure on both term and maintenance ACV as well as revenue. Naturally, as Pega Cloud ACV continues to grow as a percentage of overall ACV, it will impact near-term and in-quarter revenue for term and maintenance. Moving to free cash flow: free cash flow reached $207 million in Q1 of 2026, marking a strong start to the year. As a reminder, our free cash flow is primarily driven by our operating efficiency and our ACV growth, which serves as a proxy for subscription billing growth. We remain confident in our strategy to drive free cash flow and ACV growth for several reasons. First, expansion within our existing client base remains a core go-to-market motion, with our sales team continuing to successfully cross-sell and upsell into our installed base. Second, we're accelerating new logo pipeline build with Pega Blueprint as a key enabler. Blueprint makes it easy for sellers to showcase the power of the Pega platform while enabling buyers to reimagine their legacy mission-critical workflows. As a result, Blueprint is already driving meaningful pipeline creation across both new logo and existing clients. We expect this new pipeline will begin converting into ACV in the second half of the year as deals progress through the sales cycle with a faster motion thanks to Blueprint. This is an unusually high level of new logo pipeline growth, which is great to see. Third, we're already seeing early proof of Blueprint's ability to accelerate time to value. Last month, I met with a large healthcare organization. This existing client used Blueprint to design and build two new applications, one going live in 92 days and a second in 70 days — a strong example of what our platform can do powered by Blueprint. Fourth, we're seeing renewed interest in legacy transformation as more enterprises look to leverage AI and the cloud to modernize their operations. Blueprint is unlocking these legacy transformation opportunities by simplifying how clients reimagine and redesign their workflows to drive growth, reduce costs and improve customer experience. Together, Blueprint and Pega Infinity create a powerful combination: Blueprint to design and reimagine the work and Infinity to run it, reinforcing Pega's position as the platform of choice for large-scale mission-critical workflow transformation. Unlocking legacy transformation is just one way Blueprint is transforming our business. Early signals show Blueprint is accelerating pipeline growth and helping us capture new clients. For example, in Q4, we signed a new financial services logo, leveraging Blueprint's new legacy transformation capabilities with plans to migrate more than 30 applications from a legacy application platform to Pega Cloud. Blueprint is also driving meaningful go-to-market efficiency, where deals that once required a full bench of supporting roles can now be advanced with fewer resources because our client executives can cover far more ground with clients when leveraging Blueprint. Finally, we're seeing R&D benefits as well. Our new Agentic engineering approach will enable us to execute our product roadmap more efficiently, allowing us to increase our pace of innovation. Since Blueprint runs on Pega Cloud, we can deliver new features and capabilities rapidly to clients and prospects. We're excited to share more about this new approach with you at our upcoming investor session in June. Moving to capital allocation: we continue to maintain a balanced approach, prioritizing investments in long-term ACV growth while returning capital to shareholders as appropriate. In Q1, we returned more than 80% of our free cash flow to shareholders, repurchasing 3.5 million shares for $167 million under our repurchase program and paying $5 million in quarterly dividends. As of March 31, 2026, our shares outstanding decreased from the end of 2025 by 1.6 million shares. Looking ahead, we will continue to opportunistically return capital while maintaining strategic flexibility. Our buyback reflects our unwavering confidence in the durability of our cash flow. As you know, these buybacks are accretive to earnings and also combat stock-based compensation dilution. They are made possible by strong and durable cash flow. Next, a few thoughts on modeling. We provide full year guidance at the start of the year, and we typically do not issue quarterly guidance or update our outlook during the year. As I mentioned earlier, our renewal portfolio is back-end loaded this year, which means we expect a higher level of business activity in the second half of the year. The shape of our pipeline also influences the timing of term license revenue, which is largely recognized upfront in the quarter a client contract is renewed. As a result, we expect term license revenue to be more heavily weighted toward the second half of 2026. At the same time, our focus on driving Pega Cloud ACV growth also puts pressure on term and maintenance ACV. The success of our Pega Cloud sales efforts is already reflecting this shift, and we expect it to continue as Pega Cloud ACV scales to 75% or more of our total ACV over time. Put simply, a portion of our Pega Cloud ACV growth is displacing term and maintenance ACV as intended, and we expect this dynamic will persist as we march toward our cloud mix goal. In addition, we're beginning to see a meaningful change in how enterprise clients are thinking about AI. The economics of AI are changing. Frontier model providers are tightening monetization. In the era of low-cost subsidized experimentation, that phase seems to be ending. As a result, AI usage is increasingly treated as a true operating expense. Every API call must be justified with clear business value. Given this change, buyers are moving out of the experimental phase of AI into the ROI stage. This transition to profitable AI plays directly to our strengths. Pega has always been focused on delivering measurable business value. AI is not just about efficiency; it's about generating tangible returns, and that's exactly what Pega is built to do. Importantly, our pricing model is aligned with the shift toward outcomes. Pega prices based on cases, which is a measure of the amount of work that the Pega platform executes, tying our economics directly to the business value delivered rather than to users or seats. This stands in contrast to many model providers where pricing is driven by usage metrics like tokens or API calls. As AI costs come under greater scrutiny, we believe our outcome-based pricing model provides a clearer and more efficient path for clients to generate and measure return on their AI investments. As Alan mentioned earlier, we're holding our annual investor session at PegaWorld on Monday, June 8, at the MGM Grand in Las Vegas. During the investor session, we look forward to providing additional color on several of the topics I discussed today. We also plan to provide more insight into how we envision clients driving legacy transformation with Pega and how we're progressing against the long-term targets we laid out last year. We also plan to give you insights into several key Blueprint metrics, including the impact of pipeline build and deal progression and some of the most interesting metrics around new logo momentum. In closing, we look forward to seeing you on the road at conferences and non-deal roadshows over the next few months and at our investor session at PegaWorld in June, which we encourage all of you to join. Please also note that we plan to participate in the NASDAQ opening bell ceremony on Monday, July 13, at NASDAQ Marketplace in New York to celebrate the 30th anniversary of Pega's initial public offering. With that, operator, please open the line for questions.

Operator, Operator

Operator instructions were provided. Your first question comes from Alexei Gogolev with JPMorgan.

Alexei Gogolev, Analyst (JPMorgan)

Ken, would you mind providing a bit more color on acceleration of ACV growth through the year? I remember you talking about client compelling events and renewal cycles driving potential uplift in the back half of '26?

Kenneth Stillwell, Chief Financial Officer

Yes. So there are two different factors to that. One is our renewal cycle is tipped toward the back end of 2026, which is a more typical distribution. In 2025, that was reversed and we had an unusually strong front half. When there are renewal cycles, that is typically an event where clients, if they're going to expand their relationship, tend to do it around that renewal cycle. The second factor is we've put a renewed interest in new logo focus with Blueprint. As we build pipeline, that will naturally grow and the conversion of that pipeline tends to sit toward the back end of the year as well. So there are two different factors that really tip our business momentum toward the back end of the year, which is very different than last year where we had an unusually front-loaded year.

Alexei Gogolev, Analyst (JPMorgan)

And Alan, in the past, you spoke about AI adoption disconnect. Can you talk a bit more about what you're seeing in terms of the narrative in the industry and update us on the trends from Q1 in terms of agentic adoption?

Alan Trefler, Founder and CEO

Yes. I think there's a lot to observe. I spend much of my time in the field talking to people about what they're doing. When people talk about LLMs and agentic approaches, and as we make heavy use of vector databases, I encounter organizations that believe they will be most successful by using LLMs for as much as possible. I'll be honest: that's risky. LLMs do magical things, but you want to use them for the right things, not for parts of the problem that are statistical or that should be planned out in advance — planning that should be done in design with a tool like Blueprint, not re-learned repeatedly at runtime. Some are enamored with LLMs and tell their teams to use them everywhere. That approach won't stick, due to cost and lack of reliability. It also has significant environmental cost given electricity use. Understanding proper use of LLMs is absolutely key. I think we've nailed it. What I see with many others is a structurally different path in most cases.

Operator, Operator

Your next question comes from Raimo Lenschow with Barclays.

Raimo Lenschow, Analyst (Barclays)

I just wanted to stay on that new logo focus. Over the years, you have been the high-end provider, very good for complex scenarios; but on the new logo side, that was always a bit of a question given a large installed base. Talk a little bit more about that new focus on new logos. I can see how Blueprint will help here, but I want to understand a little better. Ken, one for you also on the maintenance side: I hear you that the push towards Pega Cloud will impact maintenance. Are the numbers we saw this quarter indicative of what we should see for the year? Or were there other factors in Q1 that we should be aware of?

Kenneth Stillwell, Chief Financial Officer

I'll touch on maintenance first. As we continue to move toward Pega Cloud, you will see maintenance decline over time, and you will see term license be flat to down as well. Some clients will continue to run on client cloud, so this won't be a 100% transition in the near term, but the trend will move in that direction. On new logos: the way we think about the opportunity universe is large. If you look at firms that seek advice from major industry research providers, they have many thousands of clients that represent an opportunity for Pega. We're not talking about very small organizations; we're talking about large, multibillion-dollar firms. This is a newer but not brand-new motion for us. We have always added some new logos, but Blueprint completely changes the dynamic of how fast we can engage with a new logo and the speed at which we can validate interest. Previously, a prospective opportunity might entail a very long sales cycle to see if there was momentum. With Blueprint, that changes the game.

Alan Trefler, Founder and CEO

Blueprint is a great starter, and we've done other things that change the game too. Blueprint lets you design solutions that once required a lead system architect and decades of Pega experience. Now much of that expertise is built in and continues to be added monthly. We've radically changed the training curve and the expertise required, which also adjusts cost curves and improves speed of delivery. We've added a Socratic education approach that makes it easier to teach clients about their gaps without big formal courses. Between the fact that Blueprint runs on Pega Cloud and Pega Cloud is tied into our predictive diagnostic cloud — which handles self-maintenance, performance monitoring and scaling on Kubernetes — we're in a position to pursue a much larger universe of customers. It's not just a strategic choice to go after more new logos; it's years of product and business evolution that enable it.

Operator, Operator

Your next question comes from Steve Enders with Citi.

Steven Enders, Analyst (Citi)

Good to see everybody last week at the conference. I wanted to start on the AI discussion and the focus on becoming a harness for enterprises. I'd like to understand what this means for your customers in terms of use cases and how you see adoption progressing within some of your larger customers as you try to become that harness layer?

Alan Trefler, Founder and CEO

What I see is customers — take Proximus as an example — using our AI powered by Blueprint but still able at critical points in the workflow to call even a non-Pega agent. The idea is we can use our agents and customers' agents within the context of a business objective that they designed. That gives customers reliability and auditability that alternatives cannot match. Customers understand they don't want to re-run reasoning every time. For many tasks you can use general-purpose models like Claude, Gemini or OpenAI, but each of those calls consumes tokens and costs. I'm thrilled to use those models when the reasoning is exploratory and not repeated. But for routine processes — for example, credit card disputes — turning each case over to an LLM to reason each time misses the chance to bring stability and efficiency into operations. When we explain the harness concept, customers get it.

Kenneth Stillwell, Chief Financial Officer

I'll add that if Pega functions as a harness, you get efficiency, risk management and resiliency. We're using multiple models and can select the right model based on performance and speed in context. That lets us create a best-of-breed approach leveraging models at design time and selectively at run time.

Steven Enders, Analyst (Citi)

That's helpful context. On ACV dynamics, can you provide net new ACV in constant currency for the quarter and whether the levels this quarter were in line with expectations when you guided for the year? Does this change how you think about ACV growth for the year?

Kenneth Stillwell, Chief Financial Officer

I'll speak to Q1 and the first half as we discussed last quarter. Everything I'm saying is in constant currency. Last year, the first half had a significant amount of constant currency growth, which was unusual and will not repeat this year. We expected a more back-end-loaded year. Constant currency growth in Q1 was roughly $20 million. It's a few million dollars below where I had thought, but it's within rounding error and not significant. Q2 is not a big renewal quarter either; the renewals are primarily in Q3 and Q4. Overall, the year looks similar to how I envisioned it. We knew cash flow would be stronger in Q1 since Q1 is typically a strong cash flow quarter. So across the board, it wasn't dramatically different from plan.

Operator, Operator

Your next question comes from Rishi Jaluria with RBC.

Rishi Jaluria, Analyst (RBC)

Two questions for you. Ken, you mentioned macro factors including government and geopolitical tension as impacting the business. Can you expand on what you've seen so far this year as a result of these factors? Putting AI aside for a moment, specifically around geopolitical issues and government, how has that impacted your business so far and how should we think about potential impact for the rest of the year?

Kenneth Stillwell, Chief Financial Officer

Leaving AI aside: on government and the government shutdown, there were a few deals and a renewal or two that slipped out of Q1. We don't believe those deals are lost; it's more about the procurement process changing which caused some March delays. I don't expect that to be a prolonged issue, though Q2 may still show some confusion as agencies adjust. Regarding the wars: between the two conflicts, both are impactful for Europe and about 30% of our business comes from Europe. There's a potential for clients to de-risk spending given higher oil prices, temporary inflation and disrupted goods flow. We started to hear conversations that may impact spending, and while I can't point to specific deals in Q1 that were lost for that reason, it's something we're watching.

Alan Trefler, Founder and CEO

There's also been more emphasis on sovereign clouds in some regions, which adds complexity and can extend timelines. For example, AWS is working on sovereign cloud capabilities. That extra complication can drag things out.

Kenneth Stillwell, Chief Financial Officer

Yes. Thankfully, we offer cloud choice and can work with different hyperscalers in different regions. There's tension between U.S. providers and other parts of the world, and we have to manage through that as these conflicts continue.

Rishi Jaluria, Analyst (RBC)

Alan, you mentioned the era of subsidized unlimited tokens might be ending. Can you expand on what that means for Pega's own cost structure with Blueprint, which uses LLMs for design and ideation rather than runtime? And does this change how customer conversations are evolving — for example, moving from 'let's try AI everywhere' to a more measured ROI focus? Has that already shown up?

Alan Trefler, Founder and CEO

Yes. After recent pricing moves by some providers, it's useful for us. Blueprint is consumptive, but when you design something once and run it many times, design cost is small compared to runtime costs. That's the core point. I think token pricing moving closer to reality is positive for our model. Subsidies will persist to an extent, but the era of unlimited experimentation is changing. That plays to our strengths because Blueprint focuses heavy reasoning at design time and then efficient execution at runtime.

Operator, Operator

Our next question comes from Devin Au with KeyBanc Capital Markets.

Devin Au, Analyst (KeyBanc Capital Markets)

Ken, you mentioned geopolitical disruption in EMEA. When I look at your revenue performance in the U.S. and APAC in the quarter, both regions were down notably. Revenue isn't the best metric to assess the business quarter-over-quarter, but can you give more color on what drove the downtick specifically in those regions this quarter?

Kenneth Stillwell, Chief Financial Officer

That's solely the timing of term license revenue and how it compares year-over-year and quarter-over-quarter from Q4 into Q1. I don't believe we've seen an impact to bookings or new business in either of those regions; the revenue change is timing-related and not structural.

Devin Au, Analyst (KeyBanc Capital Markets)

Understood. A quick follow-up: you released a vibe coding capability in Blueprint. Have you seen early signs of increased usage or engagement and any early signals of greater expansion activity from users using that tool?

Alan Trefler, Founder and CEO

Yes, we're getting great feedback. It's right in the Blueprint UI as an AI assistant. On any page, you can type a request such as, 'add an insurance policy to this travel request,' and it will design data structures and fields directly into Blueprint. You don't have to get it perfect upfront. It's central to what we're doing and the feedback has been very positive.

Operator, Operator

Your next question comes from Patrick Walravens with Citizens.

Patrick Walravens, Analyst (Citizens)

Alan, two questions. You talked about the long-term viability of enterprise software vendors and said AI will be good for some and bad for others. In what ways will AI be bad for some vendors?

Alan Trefler, Founder and CEO

AI has already made some point features commoditized. There was a company we licensed for document processing; now many of those capabilities can be achieved by calling an LLM. Point features can be disrupted. I think many low-end workflow companies focused on smaller collaborative work management have suffered; those products are sometimes replaceable. For Pega, our work is different: we operate at scale across thousands of users and complex workflows where architecture, governance and predictability matter. AI adds value to that rather than replaces it.

Patrick Walravens, Analyst (Citizens)

A quick out-of-left-field: SpaceX reportedly buying Cursor with a large breakup fee — what does that tell us about the AI world?

Alan Trefler, Founder and CEO

There are many new AI companies and a lot of hype. Many are building code-writing or developer-assist tools and some have become rapid unicorns. This suggests parts of the AI market are in a bubble phase and will shake out. Whether a particular large acquirer like SpaceX or a model vendor dominates, we'll see a few survivors and many competitors will consolidate or disappear.

Kenneth Stillwell, Chief Financial Officer

One thought: Cursor functions as a kind of harness for programmers, which suggests models need to be governed in different ways for different use cases. That aligns with our broader messaging around governance and harnessing AI appropriately.

Operator, Operator

Your next question is from Mark Schappel with Loop Capital Markets.

Mark Schappel, Analyst (Loop Capital Markets)

Ken, could you talk about what portion of your pipeline is now AI-driven versus more traditional platform ACV?

Kenneth Stillwell, Chief Financial Officer

I'll reframe slightly: how much of our pipeline is led by Blueprint? Almost all of our new pipeline growth is connected to a use of Blueprint in some way, which I would categorize as AI-led. In terms of runtime AI accelerators — like Knowledge Buddy and Coach — we view those as value-added features typically sold at a premium relative to the platform activity. But if you look at net new pipeline and new workflows, those are largely led by Blueprint and by Pega AI.

Mark Schappel, Analyst (Loop Capital Markets)

Alan, how is demand for legacy-scale modernization programs evolving, especially in government and regulated industries?

Alan Trefler, Founder and CEO

We're engaging in a number of legacy transformation projects now. It's a slow process, but the market is huge and we're building expertise and collecting strong examples. At PegaWorld you'll see compelling demonstrations and customer stories about that work.

Operator, Operator

This concludes the Q&A portion of our call. I'll now turn the call back over to Alan for any closing remarks.

Alan Trefler, Founder and CEO

Thank you very much, everybody. We're working hard. We appreciate our investors, and I really hope to see all of you at PegaWorld. You should fire up your AI agents and have them book your reservations from June 7 to 9 in Las Vegas. As Ken mentioned, on June 8 we're hosting a very important investor session and we have a lot of new things to show. It should be awesome. See you there. Thanks.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.