Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to Pegasystems Second Quarter 2025 Earnings Conference Call. [Operator Instructions] And I would now like to turn the conference over to Peter Welburn, Vice President of Corporate Development and Investor Relations for Pegasystems. Peter, you may begin.

Thank you, Krista. Good morning, everyone, and welcome to Pegasystems Q2 2025 Earnings Call. Before we begin, I would like to read our safe harbor statement. Certain statements contained in this presentation may be construed as forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, including statements about the long-term opportunity for Pega and trends we expect to see in our Q3 financial results and other statements that use words like expects, intends, believes and other similar words. These forward-looking statements speak only as of the date the statement was made and are based on current expectations and assumptions. Because these statements deal with future events, they are subject to various risks and uncertainties, actual results for fiscal year 2025 and beyond could differ materially from the company's current expectations. Factors that could cause the company's results to differ materially from those expressed in forward-looking statements are contained in the company's press release announcing its Q2 2025 results and in the company's filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ending December 31, 2024, and in other recent filings with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance on such forward-looking statements, and there are no assurances that the matters contained in such statements will be achieved. Although subsequent events may cause our views to change, except as required by law, we do not undertake and specifically disclaim any obligation to publicly update or revise these forward-looking statements, whether as the result of new information, future events or otherwise. Our non-GAAP financial measures discussed in this call should only be considered in conjunction with our consolidated financial statements prepared in accordance with GAAP. They are not a substitute for financial measures prepared under U.S. GAAP. Constant currency measures are calculated by applying the June 30, 2024, foreign exchange rates to all periods shown. Reconciliations of GAAP and non-GAAP measures can be found in the company's press release announcing its Q2 2025 results. And with that, I turn the call over to Alan Trefler, Founder and CEO of Pegasystems.

Thank you, Peter, and to all who are joining today's call, it's great to see such a terrific first half of 2025. I believe it's driven by our team's excellent focus, execution and our smart and differentiated AI strategy that I see resonating with clients, prospects and partners. Ken will walk you through the first half financial highlights in a few minutes, but I'm going to spend a little time explaining a little more about our AI and why we think our AI transformation approach is much faster, easier and safer than alternatives. Now since we last spoke, I've continued to spend a lot of time with senior executives around the world, including at PegaWorld last month. And our value proposition and competitive differentiation have resonated clearly with them and are really getting their attention. We're addressing one of the most challenging voice questions clients have, how to effectively develop and deploy AI and agents with the proper controls to create mission-critical applications with speed and accuracy at scale. We believe this requires a dramatically different approach than other companies are advocating. Our competitive advantage is based on our longstanding structural difference, which we've been building and improving for more than 4 decades. The architecture is unique to us and our platform is inherently model based, which means that applications are defined through models rather than alternative hand-coded approaches. We put business logic and process logic at the heart of each application. So applications are designed and built wants to work in any channel and across any data source or back end. The Pega Infinity platform, our low-code cloud-native decisioning and process automation platform translates those application designs or models into production-ready enterprise-grade applications without any coding. This architecture allows for a more intuitive and streamlined development process where business…

Thank you, Alan. I am so excited for the businesses at the midpoint of 2025. We're seeing the outcomes we had hoped to see as our team delivered spectacular results in the first half of 2025, demonstrating the power of our aligned strategy, innovation and execution. Annual contract value, our key business performance vector grew 16% year-over-year as reported 14% in constant currency. To bring our business momentum into focus, our net new ACV add increased by 60% year-over-year in constant currency in the first half of 2025 versus the first half of 2024, a significant acceleration that reflects multiple strategic wins. This growth reflects the Pega GenAI Blueprint is transforming our go-to-market motion, our value proposition is resonating with our clients, and we're expanding our footprint in key verticals. It's also a clear indicator that we're not only winning more deals but also higher quality long-term client commitments, which ultimately fuels durable growth. It's also to see total ACV exceed $1.5 billion as reported for the first time in Pega's history, powered by Pega Cloud ACV growth of 28% as reported and 25% in constant currency. I'm especially excited to see our team deliver such robust ACV growth in a market that continues to be uncertain. Our Rule of 40 mindset is not only delivering strong ACV growth, but also strong free cash flow growth. Free cash flow growth reached $286 million in the first half of 2025. Our free cash flow performance is no accident. It's the outcome of two powerful Rule of 40 forces coming together. First, our accelerated growth in ACV and it's important to remember that our financial model ACV is a proxy for subscription billings. As a result, each incremental dollar of ACV roughly translates to an incremental dollar of subscription billings, which in…

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

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

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

Okay. Perfect. That's really helpful. And then on term -- obviously, you had good renewals in Q1. It looks like Q2 looks good as well. Can you -- is that like -- kind of was that like -- if you think about the shape of the year, was that like this year the core renewals were kind of more first half focused? Or how do I think about the rest of the year there? Congrats from me.

No, I don't -- I think that Q1 definitely had a higher renewal cycle in the first quarter. I think that Q2 was not anything unusual, and I don't think that you're going to see a lot of anomalies through Q3 and Q4. Q1 just happened to be a bigger quarter.

Your next question comes from the line of Steve Enders with Citigroup.

Okay. Great. Thanks for questions this morning. I guess I just want to start asking just on, I guess, what you are seeing in the deal environment. I mean, I guess the numbers kind of speak for themselves. But I guess, what do you -- what are customers focused on? I think we keep hearing questions on like DOGE impact and tariffs and I guess it doesn't look like you're seeing anything there, but just what impact have you seen? Or how does that kind of discussion play out with the customers that you're having right now from the those factors?

So look, there is a level of anxiety in some customers because, let's face it, the world has a little bit of predictability into it. And we have all that same visibility. We don't have anything specific around tariffs that to this point have affected us or have reasonably affected our clients. And happily, we're not in the parts of the government where -- really targeted in terms of closing down. So we feel that we need to be alert to what's going to change and things are changing all the time. But we're not seeing anything that I would describe as a real headwind. .

We are seeing -- I think one trend we are seeing, Steve, is that with GenAI being central to every company's strategy to figure out how you can adopt it and where the value is, it is driving the legacy transformation discussion at a very accelerated pace. More than we've seen in years in terms of clients really looking at not just leveraging GenAI and how do I modernize my applications, how do I get to the cloud so I could leverage all of this new technology, that definitely is a trend that has accelerated.

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

So the question -- the first part of your question was how do we view the ACV trend through the year given the very, very strong start in the first half of the year. I think, look, when you have a start like we have, you want to keep that momentum going. And we're not viewing the fact that we did really well in the first half as being a substitute for how we perform in the second half. We want to take this momentum and continue to drive accelerated growth and achieve what we can achieve for the year. Kind of we're not -- certainly not like viewing it as like, great, we're further along, so we can take our foot off the pedal in the back half of the year. In terms of currency, there is -- the dollar is has weakened and we have a currency headwind, so to speak, on growth. And it's been about 2 percentage points in each of the quarters. So it's just kind of been about a consistent currency tailwind for the first 2 quarters.

Your next question comes from the line of Jake Roberge with William Blair. .

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

Well, first of all, the idea of legacy transformation is really mostly not starting with Pega as the system you're transforming. I mean, you're typically transforming somebody's got -- it's not common for somebody to have like three or four or five like onboarding systems or systems that do something in the function. And first, they really don't like any of them. And two, they'd like to pull them all together. And with Blueprint, which is really cool, you can put the documentation of all of them in. And the AI will propose how to do it right and how to do it better and then give you a canvas on which to collaborate. The collaboration part of us is super important. So if you try it out, I think it will become clear. So I think legacy transformation is really -- 98% of it is things that didn't start on Pega making transformed, but things that were their existing, COBOL or God forbid, Lotus Notes or Ada Base or there's a lot of old stuff out there that just can't move to the cloud and organizations, now are known anchors and they got to clean that up. There's a lot of interest in that. And Blueprint tethers into that perfectly because Blueprint isn't limited to legacy transformation. But the fact that it feeds on it and that it can incorporate things like AWS transform which does code analysis, but it doesn't just depend on code analysis. I think code analysis is inherently limited in terms of what it does for transformation because all you are doing is replicating the [things] of the past, what else you do is take that analysis and use it for data structures and other types of things. They are really augmented with how do we want to do this business function? If I put in the best practices, how do I actually get the system to recommend and to do it in a way that will be conversational in agentic as well as through traditional ways. So I think transformation at large is going to be a really important avenue for our growth in the next 2 or 3 years. And Blueprint is right at the heart of it.

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

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

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

Yes. I think the interesting development there, which is a little hard to predict exactly how it's going to go, but I think it's going to go quite well, is what this movement to create these partner-branded Blueprint is going to do in terms of opening up Pega to be way more visible to our partners' customers because what we're really seeking to do between now and the end of the year as we continue to enhance this and work with our partners on it, is that to have Pega become a tool not just for a partner that sell Pega, but for a partner to basically sell what they themselves are doing. There are a lot of consulting firms who are under a lot of pressure these guys and need to be able to make better pitches to customers. And if you see the pitch made on the back of Blueprint, it's pretty amazing. I mean, the customer can see a touch and feel something that otherwise they can't. If we can be successful at getting our partners to really understand how this can help their business outside of Pega and how we can continue to enhance it to make that possible, I think that just opens up the amazingly large stream of prospects to partners who are not customers of ours. So that candidly is going to be the trend from our point of view for the upcoming 6 to 12 months.

Your next question comes from the line of Devin Au with KeyBanc Capital Markets.

I know you've kind of responded to this question -- Steve's question on macro, it seems like there's nothing -- too material to point out, but I want to drill down on public sector just given how topical of the subject that is and especially after, I think, SAP kind of calling out deal elongation in the U.S. open sector. Have you seen any similar elongation within the public sector business? Just curious how your conversation has been with your customers in that specific market?

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

I mean, the public sector certainly in the U.S. has been very vocal around get to the cloud, digitally transformed and ingest AI into their infrastructure and leverage it. And we just -- you may have seen our announcement of having FedRAMP High, we're perfectly positioned. I mean, that is our value proposition.

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

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

I think Blueprint does a couple of things for us. One, when customers say it -- when customers see it, we get often unspoken feedback with a clear feedback, oh, I now understand how I can apply AI in my business in a safe and predictable way. And that's something I haven't really seen before this way. We've got a lot of people saying, this is new and interesting. I think that helps us as a brand, and that just helps the company in terms of being more of a sort of player that they know they can rely on in this AI world. I think that the part of the sales cycle that Blueprint will help the most with is the front-end part of the sales cycle even more than the back end, and we are seeing evidence of that. We are seeing it to be way easier to get in front of a customer and show them something. And what happens now is that routinely happens in a first meeting with the customer where you can show them something customer-specific. We never, ever or very rarely would you do that. You sometimes you have to wait to a fourth meeting or a fifth meeting to be able to put together a custom demo for a customer to get them to really kind of understand what Pega does. Now I think it's really helping the customers understand Pega way sooner.

And there were no pull-ins from future quarters of -- I mean, that always happens in any business, but there was nothing unusual in the first half of the year that would say, oh, that's the reason why the quarter was strong as we pulled some deal in from the future.

Your next question comes from the line of Patrick Walravens from Citizens Bank.

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

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

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

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

Question comes from the line of Alexei Gogolev with JPMorgan.

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

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

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

That's a great question. And certainly I don't want to lean in too much to our guidance, we don't reguide -- and welcome Alexei, by the way. We don't reguide. We did adjust something in PegaWorld, but it's very rare. We just -- we try to execute and naturally, we aim to beat any of the numbers that we talk about every year. The margin expansion on the cost management side, I think there is 0 risk. We execute -- we're executing incredibly well with a level of discipline that we've honestly never had in the history of the firm, but we are very dependent on growth, naturally. So we want to keep the growth trajectory. If we grow faster, that will yield increased cash flow. So there is naturally an obvious connection there between us generating ACV growth to be able to achieve free cash flow growth. So that's, I mean, maybe an obvious statement, but there's nothing in the execution of the kind of business other than our booking and billing that I'm worried about.

Your next question comes from the line of Mark Schappel with Loop Capital Markets.

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

Yes. So footprint really doesn't have a direct competitor in the market as we see it. So the competition -- there's always competition. The competition is other ways of doing things. And so the types of competition you'd see would be companies like Salesforce or ServiceNow that come in more would say, hey, we've got this great app, we've got this great platform. Blueprint basically says, hey, look, we're going to take this platform we have, but it's going to be yours. And that, to my mind, is a really different message. So of course, there's competition out there, and it's the usual, I would say, Salesforce and ServiceNow would be competitors. We work with both of them at customers too. So it's not an all or nothing world out there. But I would say those would be meaningfully significant. People going into Microsoft and writing code and power apps and other types of things. But once again, the systems that we really, I think, can uniquely do aren't something you could easily write in a power app. Certainly not in this agentic world. I think this will move towards agents and if you really understand what we're doing with the agent architecture and how that fits with our set of out architecture, the fact that if you want an agent, you don't create some big fat prompt for 2 pages of text. You just take the workflow, and we figure out, Blueprint figures out, we figure out how to turn that workflow into an agent that executes what that workflow does. I think that's a pretty exciting thing for some customers.

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

Yes.

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

Your next question comes from the line of Maximillian Anthony Persico with RBC.

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

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

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

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

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

Yes. I would I pay close attention to this and talk to my peers. And I would say, generally speaking, the environment, I would say, is slightly better now than it was a quarter ago, just because of what Alan said with -- like people realize like we're not -- the consumer is reasonably strong. Inflation is not been -- is not weird, it's ugly head. Tariffs have taken probably a path of more rationality than I think people worry back in on Liberation Day. So I think in general, things are much more settled than they were 90 days ago.

Your next question comes from the line of Blair Abernethy with Rosenblatt Securities.

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

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

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

Thank you, Krista. I really appreciate everyone paying attention, and we're really excited about where we are and how we're doing. And the potential, I think, for this is -- well, it really plays well to our long history. It really builds on what we've been doing for a long time. So we look at the advent of AI as really almost a wonderous thing. So with that, thank you and look forward to talking to you all next quarter or before.

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