Conference Transcript - PEGA 2026-06-02

Pat McElwee, Analyst — William Blair

Good morning and thank you all for joining the PEGA system session at our growth stock conference. I'm Pat McElwee and I'm a research analyst in the software group at William Blair as a part of which I cover PEGA. I'm required to inform you that a complete list of disclosures and potential conflicts of interests are available at our website at williamblair.com. Today we're thrilled to have the PEGA team back at our conference including COO and COO Ken Stilwell as well as Peter Welburn who leads the IR team here in the audience. So welcome to Chicago, Ken. You mentioned to me that Pega hasn't done a fireside or a roadshow in Chicago in a few years now, so it's great to have you here. And I think especially timely, given that we're just ahead of your investor session and Pega's annual user conference next week. So for investors here who are not familiar with Pega, can you just start us off by giving them an overview of the company's solutions and why the Pega platform is particularly

Ken Stillwell, CFO

interesting today. Sure, and thanks for having us. It's actually been a while since I've been in Chicago in general, so it's good to get back. Good time to be here. Yeah, it is. That's true. June is a good month. So if you think about in large organizations, they have, and when I think of large, I think of like banks, insurance companies, healthcare companies, governments, where you have either a B2C business model or you're supporting constituent management it, like in the public sector, there's a number of use cases to support those consumers, those customers, those constituents, things like health care claims, managing credit card approvals, loan originations, onboarding, change of ad, there's just a series of actions that need to be really structured and managed consistently. because it's regulated, like managing a credit card dispute and how Visa or MasterCard requires the banks to manage those disputes, or other things that might be more driven because it's the internal control processes of the organization to do it a certain way. So when you have those deterministic workflows, work that needs to be done exactly the same way through a series of steps and stages, and be able to know on the front end and know the back end that you actually executed that work that's typically called enterprise workflow pega is the leader in enterprise workflow and so sometimes the solutions are more horizontal they look like onboarding that might be very similar across different verticals sometimes they're very specific to an industry to an industry or a vertical like know your customer in banking and so we've been helping clients for um more than 40 years doing essentially an alternative to either writing their own application or trying to buy a commercial off the shelf solution and try to make it good enough to meet the so we've kind of functioned as this low code platform where you don't have to write code but you can get the level of specificity and

Pat McElwee, Analyst — William Blair

configuration that you need for your use cases okay okay that's great and and with more to kind of build on that right so so more than three quarters your revenue comes from highly regulated industries like you touched on can you talk about why those customers rely on pega you know is it that trust that you've built over 40 plus years the security the services component what's the

Ken Stillwell, CFO

secret sauce so we we we tend to sit in this kind of convergence of a number of different factors one the scale the volume of transactions not many systems are able to manage what could be billions of interactions in the course of a year in that scale and multiple, you know, kind of instantaneously having multiple threads of transactions. So there's one is like a scale differentiation. The other one is that what I talked about about being highly configurable. Now highly configurable does not translate into customized, although I, you know, some clients do like to you know build customization around Pega it's really just around the ability to configure a set of work and to be able to enter to iterate and change the nature of that work over time that's a very there's very few vendors that actually have enterprise workflow that allow you to do that another another dimension of that is the level of security that we have and security meaning not just native to the platform but we have you know over a hundred different industry certifications, everything from PCI to HIPAA to FedRAMP to IRAP to ISO 27001. So in any country, in any vertical, we help our clients support their third-party certification requirements that sometimes are because they're regulated, other times it's just the nature of the business that they're in. And another dimension is the ability to really drive the very robust structure of the work and be able to separate the work. We have something called a case, which is not only do we have the actual workflow, but we have the ability to contextualize each incident or each activity in a way that is unique but also related to other incidents that look like that. Many of our competitors manage that just in a database, right? They do indexing and they have rows and columns. And it really prevents the ability to understand deeper associations and relationships around the metadata that is associated with each individual transaction. So people typically buy us for the combination of all of that. And that really, everything that I just said really fits tightly with enterprise needs. large companies have scale transactions regulatory matters consistency repeatability and the ability

Pat McElwee, Analyst — William Blair

to manage as the business changes okay yeah that's great and so in your overview you said the word deterministic so i'd like to ask you to kind of elaborate on that because i think it's still not completely understood in the investor community what exactly pega does right it's providing secure reliable deterministic workflows that work for an enterprise every time and then And then what foundational models like Claude do, providing more probabilistic calculations, where there's overlap, where there's a distinction, and kind of where there's a harmony between the two.

Ken Stillwell, CFO

Sure. So I'll start by saying there are two types of work, or two types of – I'll use the word workflow – but two types of processes. One type is probabilistic, generative, where you would expect there to be an error rate. The error rate might, you might want it to be 1% or half a percent or 10%, but you would expect it to not execute exactly the same every time. Because it's going to use the data that it has. And even when given all the exact same variables, there is a slight risk that the probabilistic model will pick, you know, if left with two equal choices, may pick one one time and one another. And that's just the way the models are built. There's nothing incorrect or erroneous about that. They're built to be inaccurate. They're built to try to get it close enough. And then there's deterministic, which is really not focused primarily on the outcome. It's focused on the process. How is it that you will go through the work? Good example of a probabilistic action or a deterministic action, probabilistic would be if you come to a website of a large credit card company and they want to speculate exactly what rendering of a picture or a call to action or an offer they give you, that would be probabilistic. They're not going to get it 100% right. They might see that you're coming in from the Midwest and that you're over 50 years old and you have a family. So they might show a picture of a family sitting under a tree in a cornfield because they feel like that might be the most relevant. They might have that completely wrong because you're from France and just happened to move to the Midwest and actually that picture doesn't resonate at all with you. But that's not a problem. That just means they got it slightly wrong. And then there's a probabilistic workflow. I'm going to approve a loan and I have to follow all the state guidelines, discriminatory lending guidelines, credit guidelines, wholesale lenders, whether it's FHA or VA, very, very structured. And you cannot get it wrong. Might an underwriter make a decision at a stage in that workflow that could be wrong? Yes. That's where the judgment fits. That's where the probabilistic fits with the deterministic. But the structure of how you process that loan must be the same every time.

Pat McElwee, Analyst — William Blair

And it really... Sorry to correct you. Deterministic. Sorry.

Ken Stillwell, CFO

Deterministic.

Pat McElwee, Analyst — William Blair

Sorry. Sorry. Sorry.

Ken Stillwell, CFO

Probabilistic is where you can have an error rate and you're making a best guess. Deterministic is where you decide the work that is done on the front end. But in a deterministic workflow, you will have probabilistic AI that's used as well. The example would be that underwriting decision. In the underwriting step in that workflow, there may be some judgment. You might look at loan to value. You might look at things in there. Someone might have to make a human call on that. You could make an AI call on that. And you realize that maybe you give a loan to someone that you slightly – maybe you shouldn't have because maybe there was a credit risk you couldn't anticipate, but that doesn't undermine the process of which you went through to approve that loan. There wasn't an intentional discrimination against a borrower. So in consumer industries, there is a, as you might imagine, there is a high bias to protect the consumer. And then if you go across the world in different countries, there's an increased bias around protecting GDPR in Europe, protecting sovereign information, not sharing information outside. there's so many rules and regulations across consumer industries that it's very important that you understand where does a workflow need to be

Pat McElwee, Analyst — William Blair

deterministic and where can a workflow actually be probabilistic and when it's probabilistic I think that's where AI can can play a role okay yeah very helpful thank you I think it's an important distinction yeah to call out so just given this is a generalist conference by nature can you touch on pricing model. I think that's been a big concern across software, the software sector at large recently, and PEGA's pricing model is a little unique, so can you just kind of clarify?

Ken Stillwell, CFO

So I'm going to go back about 10 or 15 years, because we changed our pricing model with had no relation to AI or any of the things that are going on now. So what PEGA does is it takes what otherwise were human activities that would be managed manually across maybe a structured set of workflow steps and we automated that into a system. When we automated that into a system, what we would do with our clients is we would build efficiency so that if they had ten people that might have been needed to manage a certain body of work, they might only need five. In a licensing model that's a user model, that's That's kind of counterintuitive, that we would go out, help a client take their headcount down by 50%, and we would then get 50% of the revenue associated with that. We did have a licensing model that was a user-based model 20, 30 years ago. Some of our contracts still do have licensing components that are user-based, but we made a big shift to move to what we call a case. A case is a unit of measure in PEGA. Think of a case as a piece of work. We license based on the pieces of work. A piece of work could be a dispute on a credit card, a loan origination, the number of clients that are onboarded, different measures, the number of card replacements that you might have for lost credit cards. So that unit of measure of a case is how we license. And we feel like the more that the system automates work, the more cases that it does, the more that PEGA should receive compensation because we're automating and driving efficiency. So you might call that a usage model. So essentially a case is a piece of the use of the technology. In an AI world, that's become now much more obvious, but we have 75 plus percent of our contracts that are exclusively case-based, and the ones that aren't, that have users, they're typically purpose clause driven, like they're like, you can use it for this purpose and this number of users and cases. We typically have both. So we were ahead of that challenge, but not because we saw AI coming. It was more around just our value proposition made more sense to charge based on usage. The analogy I use is, you know, if you were using AWS for your cloud, AWS would never charge you based on the number of employees you have. They would charge you based on, like, the number of CPU, you know, the CPU, storage, processing, et cetera,

Pat McElwee, Analyst — William Blair

and that's that's very analogous to pega okay very clear thank you for that and so i think you know whether or not it's completely misled there's a fear of disruption associated with some of this automation technology right now um but when i've spoken to customers of you and your peers alike it seems like they are leaning more into these trusted platforms more than they're trying to move away from them right can you talk about um just how those customer conversations look when you're talking to enterprise grade customers that are looking to roll out AI automation at scale?

Ken Stillwell, CFO

So a few maybe a few few thoughts on that. So one is when this when AI really started to get more visibility maybe in the like kind of November December maybe even January time period there was a lot of confusion even with our customers to be honest with you I think there's still quite a bit of confusion with investors but there was confusion with our customers around this concept of deterministic versus probabilistic work so originally it was you know there's this ai thing and what can ai do and we should try to experiment and see i think that carried into the investors thinking well why why couldn't ai just get rid of all of these sas companies all of these all this technology and i think that the that was kind of the first wave which is the which i think is largely been settled down now it's certainly with customers where I think they're not confused. They know that 80% of the applications that they have are deterministic and they're not going to use an agent to go execute that work. But there's probably 20% or so that you probably don't even need a software application and an agent or some type of a prompt could actually execute what you need to. So I think they're honing in on that. The next step of that was, well, okay, so I'm not going to displace it. I still need I still need a software product, but could I just write my own could I actually use now then the model started to say, well, you know, we can help you write code. And then there were tools like cursor like that would help you be like kind of almost like a development harness to be able to help you drive using the models to write code, which you know, which we do at Pega, which we've been not not we're not fully rolled out of that, but we're in that journey as well. That kind of takes you back to, well, why would you want to write your own application? In some cases, you write your own application because there isn't something you can buy, to be honest with you. I mean, it's just your use case is unique enough. Or you write your own application because what you could buy isn't quite the perfect fit or it's just too costly to buy versus you just actually writing yourself. So I think there's definitely going to be applications where the companies decide, I can actually build my own, and it's going to be faster, cheaper, easier to support. Then you get into the bucket of why would they try? And many of our clients, I've heard this conversation over and over again where there's a couple dimensions. One, error rate is one. So when you have a situation where you cannot have error rate, there's no such thing as like, I'll accept a 1% error, is where the system that you're building is highly complex, it's going to manage a lot of scale and may be subject to regulatory or control processes. You run into that risk of, is it better for me to build my own ERP system or should I buy an ERP system that actually I know is hardened to be able to support all those controls? I think when I say that example, most investors would even say, yeah, that's kind of ridiculous if someone would go try to build their own ERP system. But there are a lot of enterprise systems that have the same level of sophistication and discipline that you would see in some of the ERP modules. So I think that's one of these decisions that companies will make. One of the biggest challenges that our clients are seeing with the AI models is, and I'll get it to the last one, which is cost. But the middle one is the level of imperfection that you get. For example, I'll give you an example. This morning, I was finishing up one of my investor meetings, and Peter, our investor relations vice president, pulls up a screen. And the article was from TipRanks, which is basically like, you know, essentially it's, you know, Benzinga TipRank. And the title said Pegasystems stock retreats based on comments made by COO and CFO. So we read the article and it said Ken Stilwell made comments at the William Blair fireside chat that caused the stock to go down. That was three hours before I'm sitting here, and that was an actual article that went out. Now we called them and they took the article down, but this happens all the time, right? This is called AI slop, right? It's out there, nobody knows if it's right, nobody knows if it's real. Enterprise company, I mean that's just funny that that happened today, but it happens all the time.

Pat McElwee, Analyst — William Blair

We have to constantly be watching because the information that gets out.

Ken Stillwell, CFO

Now you're an enterprise company, you're Bank of America, you're William Blair. How important is it that you don't actually let AI decide that when you're trying to make a bill pay on your bank account, that it decides you've paid that vendor too much, so pay a different one? How do you catch that? How do you control that? These are the types of decisions that companies are making. Do I really want to go try to build my own? By the way, for those of you that are not aware, you should ask around on this. AI models now build code that is 50 times faster than a human's ability to review the code, which means we have no idea what it's writing. When we write it at Pega, we have no idea. So what you have to do is you have to throttle how much you can. You have to look at the code, run other models to test it, run test models, and hopefully you actually can know what the code... That never happened before. In the whole world of coding, you never had a situation where one person could write code faster than someone could actually review it. These are big, really big challenges that our clients are trying to figure out.

Pat McElwee, Analyst — William Blair

Okay. So to shift gears to the upshot of AI and how you're leveraging it within the platform, so Blueprint, it has been kind of revolutionary for you guys. It's been incredible to see how that tool has helped your go-to-market motion. and it's taken your sales cycles down materially. Can you just talk the audience through what that has meant for you and what that is?

Ken Stillwell, CFO

So prior to AI for Pega, if we wanted to work with a client, we typically had to go through a very manual and quite frankly, very human intensive discovery session on the front end. That typically involved whiteboard sessions, operational walkthroughs, lots of collaboration, trying to get people physically together, And then quite frankly, realizing that that took cycles to be able to really figure out like, what do we want the re-envisioning of an application to be? If we're trying to move something or trying to build something new, there was almost like a village that would have to build the like view of it. And unfortunately that could take quite a bit of time. So what that meant was slower ramp for sales to people, a harder to get pipeline deals in, early stage pipe moved slower. So these were all challenges that quite frankly, we just accepted as part of our business for decades. What blueprint, what PEGA blueprint is, is what we did was we took the AI models and we built on top of it all the knowledge of PEGA, specific knowledge of PEGA, all the workflow history. How does a workflow work? What are the use cases? What are the personas? What are the typical integration points? So that in an actual like agentic interface, You could chat with this application and build your workflow. And now the workflow that you build in that is not necessarily going to be one that you click a button and go right into production because these are enterprise companies. But it got you so far, it gets you so far down the path compared to what we had to do in kind of before AI. So it's been a massive revolution for us in terms of how fast you can get from concept to a design where you're actually looking at the application. At the end of Blueprint, you can click preview, and it shows you a working application. What we're announcing, or I guess we've already kind of leaked this out, but we're talking about Apega World next week. Next week is our user conference. We're going to talk about the next phase of that, which is the Blueprint experience goes into finishing the build of the application, something we're calling Infinity Studio, which is essentially keeping that hologetic experience until the point where you can actually go live and into production. We know right now that that has taken 50% of the actual time and engineering effort to just get to the point where you could decide what you're going to build. What we want to really do is make this as agentic and as automated as we can to get to application to go live. So that's kind of our, that's what Blueprint's done and that's how we're extending Blueprint into the build phase.

Pat McElwee, Analyst — William Blair

Okay. Yeah, that's great. And then can you just talk about, so a lot of large enterprises are still running mission critical systems on these legacy applications. Can you talk about what the implications of this technology are in terms of your ability to go and address that opportunity in the enterprise?

Ken Stillwell, CFO

So I don't know what the percentage is, but I've heard different percentages, anywhere as low as 10% and as high as 25%, which is the percentage of applications that have actually been modernized in large enterprises. So I've heard, you know, Amazon talks about between 8 and 10% of applications have been modernized. I've seen more aggressive ones in the 20 to 25%. Whatever you believe the number is, it certainly is nowhere near 50. And there's a lot of work to do in terms of getting these typically like homegrown systems running on, you know, ancient infrastructure into a more modern world. Whether that be on cloud, public cloud, like PEGA cloud, or whether that be managed on a virtual private cloud. What Blueprint does for us, which is just massive, is it allows us to go after new logos and new workflows in a much more aggressive way, because the upfront selling process, the upfront solution process is so much faster. If you think about in the previous world before Blueprint, if PEGA wanted, if we wanted to target a new organization the first thing we had to do was hire a salesperson that would target that the next thing we did was train the salesperson for three to eight months to get them certified on pega then they would start calling the company but remember the the whiteboarding session example that might be a six to nine month pipeline building so we had sales people that we would hire and they might not build pipe till their second year working there and that's if they followed the path now we can hire a salesperson they don't need to be certified on pega all they need to know is how to get to pega.com blueprint that's how that's all that's the extent of what they need to know blueprint is right there they can engage with a client in a first meeting the other thing is with new logos if you think about a company that knows pega like bank of america use that example because they're a large many many decade client of ours we don't go into to Bank of America and say, let me tell you what Pega does. They already know. If we go into a brand new client, they don't know what Pega does. So we're going to go into that brand new client. Blueprint is an easy way to show it. Say, let's walk through one of your problems. Onboarding a client, managing a dispute. You pick whatever that vertical might be. It just makes the whole conversation. You're immediately going in to a demo that's very specific around the customer use case. And that, the level of confidence that gives our sales teams, how fast we can ramp our sales teams, how quickly we can attack new logos. These are all brand new things for us.

Pat McElwee, Analyst — William Blair

And you can correct me if I'm wrong, but you guys have actually quantified your sales cycle might have been 12 months before on average it's been cut in half and like last quarter you highlighted some deals that went live in what, 90 days?

Ken Stillwell, CFO

We had one that went live in 42 days, which may seem like 42 days may, for not knowing enterprise software, it may say, well, that's still a month and a half, but like, I mean, To take an enterprise application and actually go from whatever they had before into a working application inside of a quarter is nearly unheard of in enterprise. So we've had a handful of those in the past two quarters.

Pat McElwee, Analyst — William Blair

Yeah. Pretty impactful. Okay. So we can get more into the financials in the breakup, but just one. So there was some noise in the first quarter on the ACV growth. There was some noise around the license revenue, the renewal timing, a little disruption within in your federal pipeline, how should investors be thinking about current ACV growth versus the growth that you expect over the next few quarters?

Ken Stillwell, CFO

So when we guided the way we, so there's a little, in our business, many, much of our growth comes on the backs of a renewal cycle. So if a client has a renewal event, typically that's when our ACV, ACV is our equivalent of ARR, when our ACV increases, customer typically makes that commitment based on the usage or systems that went live in the previous year so we're tied to renewal cycles in 2025 our renewal cycle was not back-end loaded in fact actually there were more compelling events in the first quarter last year meaning 2025 and then in 2026 when we guided we had exactly the opposite we have more compelling events in the back end of the year and not as many in the first half of the year so it creates this dynamic of just difficult compares in the first half of the year and easier compares in the second half of the year um so it caused you know it makes our growth rate kind of bounce around a little bit because we measure a trailing 12 months and so that's really what we had we talked about in now separate from that in q1 we had a few um kind of isolated uh incidents that caused our bookings to be slightly lower than even what we would have modeled like we would have modeled about 25 million of net new acb in the first quarter and it was about 20 so we were at about a five million dollar gap some of those were some of the government shutdown and changing to the processes that they've had had some deals slip a little bit just there these are renewals with expansion so these are not deals that we have to win they're just paperwork um situations so we had a couple of those um and so we've we've had you know we've had a few situations in q1 that were um for various reasons that caused q1 to be slightly lower than what we had modeled but we had we've always we had said from the very beginning and we still feel that way that first half of the year tough compare back half of the year easier compare so it will cause some growth uh gyration through

Pat McElwee, Analyst — William Blair

the year okay got it so there's some more mechanical factors at play than um anything necessarily concerning and you guys still feel pretty good about that mid-teens acv growth

Ken Stillwell, CFO

target i i think probably the only thing that's still it's it does concern me but i don't i don't know how to quantify because it's not an empirical concern is you know um supply chain disruption from the middle east uh i you know i still don't know how to i just don't know how to measure that risk you know i don't it could be nothing it could manifest itself into something but um i think that's that's the one that i'm just still kind of not sure how to now we don't you know we're not in the energy space but i think i'm just more worried about the macro impacts that uh that could happen europe has started you know europe has been under a lot of strain with the ukraine but i think with natural resource you know with having some shipping delays and certainly you know running low on inventories for for oil and gas those are some areas i'm watching um that said you know the consumer has held up pretty well okay great yeah I think we're just

Pat McElwee, Analyst — William Blair

about a time so so we'll wrap it up there thank you can very much for being here appreciate everyone coming in and the breakout will be