Pegasystems achieves record Q3 2025 results with 14% ACV growth, fueled by AI strategy and innovative Blueprint platform driving client transformation.

Krista - Operator - (00:01:22)

Ladies and gentlemen, thank you for standing by. My name is Krista and I will be your conference operator today. At this time I would like to welcome you to The Pega Systems third quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press STAR followed by the number one on your telephone keypad. And if you'd like to withdraw your question again, press Star one. Thank you. I would now like to turn the conference over to Peter Welburn, Vice President, Investor Relations and Corporate Development. Peter, please go ahead.

Peter Welburn - Vice President, Investor Relations and Corporate Development - (00:02:05)

Thanks, Krista Good morning everyone and welcome to Pegasystems Q3 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. The words expects, anticipates, intends, plans, believes, will, could, should, estimates, may, forecast and guidance or variations of such words and other similar expressions identify forward looking statements which speak only as of the date the statement was made and are based on current expectations and assumptions. Because such statements deal with future events, they're 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 Q3 2025 results and the Company's filings with the securities and Exchange Commission, including its annual report on Form 10K for the year ended December 31, 2024 and another 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 segments 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 US GAAP. Constant currency measures are calculated by applying the September 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 and announcing its Q3 2025 results. And with that, I turn the call over to Alan Treffler, Founder and CEO of pegasystems.

Alan Treffler - Founder and CEO - (00:04:02)

Thank you Peter, and to all who are joining today's call. I'm really excited to see the continued Strong results through Q3. And as we've seen for the last number of quarters, our team is really focused executing well, and our differentiated AI strategy continues to resonate with clients, prospects and partners. We've been saying for some time that we believe we have a competitive advantage in today's AI world, one that's built on a unique architecture and a special approach to AI and agents. I believe that the results we've seen over the past few quarters reflect those advantages and will continue to serve us, our clients and partners, well for the foreseeable future. Ken will walk you through the financial highlights in a few minutes, but I want to talk a bit about what I'm seeing in the market. AI continues to dominate the tech conversation and candidly, not always for the right reasons. The buzz is dizzying. There are new tools, new terms, lots of hype, and we've all seen headlines that 95% of Enterprise pilots failing and predictions that gen AI will actually in some ways eliminate the ZOPW industry. I think all of that misses the point. First, most of the failures aren't about bad tech, they're about misapplication. And this is an industry problem stemming from our competitors approach to use LLMs to orchestrate and control workflows while an application is running live in production. In other words, at runtime, using an LLM to orchestrate and control workflows at runtime runs the risk of mixing the appropriate context of guardrails and results in what we consider to be an inadequate level of accuracy and reliability. The unpredictability of this approach is a non starter for regulated industries like banking, health care and insurance where even minor inconsistencies can trigger major consequences. And that's exactly why our competitors approaches are falling shock. Sure, Pegasystemsystemss revolutionary idea is to really harness the power of the LLM to design the application and then use the power of Pega's patented world class workflow engine to create appropriate context and guardrails prior to putting the application into production. And we think this use unique combination is our advantage and it's a structural advantage about the structure of how we operate. And I don't think our competitors can readily replicate this because they don't have this, you know, world class workflow engine that's the core of driving consistency. And they don't have anything like PEGA blueprint to ideate and design clients at workplace. As a result, they've taken this prompt driven approach. But as I said, there are fundamental challenges with depending on prompts of love for critical work and decisions. Small changes in wording or in the data can produce wildly different results. And LLMs evolve constantly so the same prompt can yield different answers over time. The suggestion of using prompt driven AI to make decisions in real time is akin to hiring somebody and saying hey, your process claims how you think is best. What organization would do that? A much better approach is to give them defined processes to follow so that every claim is handled the same way. Similarly, we would let a customer service rep freestyle responses to sensitive questions. You train them, guide them, ensure they escalate when needed. We think the same logic applies to AI and is why you need to design this thoroughly and get the right sort of approvals before you begin. Prompts can be great for brainstorming and creativity, but not for making critical decisions in the moment based on variables that can be unpredictable, especially in those critical regulated industries. Enterprises should use gen AI to innovate and to get the workflows right. But once they're agreed upon, the agents must follow them so it operates the right way every time. So once again, our approach with blueprint is to leverage the power of LLMs at design time with the power of a robust workflow engine at runtime, delivering the best of AI plus the best of reliability. It's an optimal approach for building a sustainable scalable agentic framework even in complex enterprise environments. Now, last quarter I continued to spend significant time with senior leaders around the world and these conversations reinforce how some of them are really seeing the strength of the approach I described. Architecture and AI strategy are built for real world impact, helping customers move faster with greater confidence and control. Our goal is to be the workflow automation and AI orchestration platform of choice for the enterprise. And I believe we have the right architecture, solutions and approach to make that happen. And we're seeing strong momentum as clients shift from experimentation to execution, embracing PEGA blueprint to drive meaningful transformation across their enterprises and critical systems. Blueprint is more than a tacked on feature. It's an entirely new way to drive enterprise transformation. Built on the concepts and architecture we have developed over decades of automating enterprise processes. It breaks down silos between businesses and it's it helps organizations reimagine how to get work done and it helped clients and partners move from ideas to execution faster than ever. Blueprint has changed how we engage with our clients, replacing weeks of discovery and demo building with near real time examples of what's possible with Mega. It's been a game changer and it enables us to target a broader group of organizations because it makes things easier and faster to understand and more reliably applicable to implement Pegasystemsystems. So we're seeing blueprint shorten sales cycles, especially the early stage parts of this conversation. And we're also starting to see the time from design and production truly accelerating as we build additional functionality as a blueprint and key parts of the development cycle are jump started. This allows companies to get to production faster and we see more projects going live faster than has been the historical norm. So though it's early days, we're really excited to see this happening. For example, a global food and beverage company launched a marketing spend management application, a large US bank deployed a consolidated tax return solution, a consumer goods company with LIVE with a pricing approval automation solution, a telecommunications provider launched a network issue resolution workflow application. And one of our large automotive clients, which presented at PEGA event a few weeks ago, described how they leveraged blueprint to transform an old Lotus node space collection of finance applications into a modern cloud based ecosystem. And all of these went live in under 100 days. But it's much more than speed because business because blueprint enhances the way that business and IT collaborate. And it uses AI to reimagine outdated ways of working. It means our clients get better apps that deliver more value. And when clients can get that much value that quickly, we think they're much more likely to invest in peg. As a reminder, you can try a blueprint for yourself@Pegasystemsystems.com blueprint but what I like when I'm talking to senior execs is it's not just clients that are excited about our approach. Partners are also leading it. In June we introduced Powered by Blueprint which allows select partners to make blueprint their own by embedding their best practices into the tool and branding it with their name and logo. When they use it. It's sparking new momentum and becoming a rallying cry for our ecosystem. And it's going to help partners differentiate, deliver faster and scale smarter. It's a it's a signal that the clients are getting a modern AI native approach to transformation now, not just from ha, but from the whole ecosystem. And it's a big deal because real enterprises aren't one size fits all. They are complex, messy and diverse. Pega and Blueprint are built for that Last month I sat down with Ravi Kumar, the CEO of Cognizant, for a fireside chat about the role of AI in enterprises and the power of blueprint. Ravi said he was quote blown away on quote by Blueprint and excited to take it to his clients. You can find the interview on YouTube just search treflu Kumar and I hope you watch it because you'll get to see the kinds of conversations and reactions we're seeing from our global partners now we continue to innovate across the Infinity suite, most recently with the availability of Pega Infinity 25, which we believe is the industry's first agentic enterprise transformation platform. Enhancements across the suite, including Blueprint provide improved capabilities for enterprise transformation and they deliver trustworthy, predictable AI agents that operate as an orchestration fabric across the enterprise, including the ability to leverage PEGA as well as non Pega agents. This makes it easier for organizations to capture and reimagine legacy systems, automate work and boost productivity. As I noticed a few minutes ago, our goal is to be the workflow automation and AI orchestration platform of choice. Now work in this world is done by a combination of people, automation technologies and AI. In addition to our belief that we have what's needed to claim a top spot here, we're also receiving outside validation from top industry analyst firms like Forrester and Gartner as leading in the key categories in which we plan. These include decisioning management AI decisioning platforms, real time interaction management, CRM software, process mining platforms and enterprise low code application platforms. Recently in August we were named a leader in the digital process automation platforms like Forester, receiving the Highest scores among 14 evaluated vendors in both common operating and strategy categories. The report stated that Pegasystemsus Quote best suits enterprises with a sophisticated transformation goals, particularly if they want to focus on customer facing AI agents. And just last week out of 20 vendors we placed as a strong leader in Gartner's inaugural Magic Quadrant for Business orchestration and Automation technologies, or what they call boat. I think this is going to be a big area in the future. I think business orchestration and automation is a place where we are beautifully suited and it's nice to get that sort of recognition. And we also earn number one scores in the adjacent Critical capabilities evaluation for Case management and enterprise task and process automation. Now these industry recognitions are, we think important and they give us some insight, but what we really love is how we're starting to have different and I think the right conversations about blueprint, about AI agents, about the agentic process fabric concept and those coupled with a strong partner strategy and our vertical understanding, I think puts PEGA in a really good position. So we're thrilled by the new clients. We're thrilled by the whole way that the analysts, I think are responding to what we're doing. And we're really pleased that the ability to work with partners is being massively increased by some of the new technology and some of the new positioning and approach we're taking. So I'm pretty optimistic about our future. I think PEGA is built for this moment. The distinctive architecture, the unrivaled blueprint solution. It makes us uniquely capable to handle volatility and complexity of modern enterprise and partners. And I'm confident that our approach to AI will continue to resonate with prospects, clients and partners. And I think if you take a few minutes to think about it, this idea of really doing the creativity at design time and doing reliability at runtime just makes a lot of sense. Now to provide more color on our financial results, Ken, your turn.

Ken - (00:17:57)

Thanks Alan. We delivered record results in Q3 2025 with Pega Cloud, ACV revenue and free cash flow all reaching new highs and showing continued acceleration. These results reflect the demand for PEGA and our ability to both execute on and monetize our differentiated AI strategy. At the same time, we've demonstrated our strong commitment to return capital to shareholders by completing our largest share repurchase quarter ever. Annual contract value grew 14% year over year through the first nine months of 2025. We added over 147 million in net new ACV in constant currency and that exceeded the total net new ACV we added in the entire year of 2024. Once again, the standout performer was PEGA cloud, which grew 27% year over year and represented the fastest growing component of pega's total acv. This accelerating growth trajectory highlights not only the scalability of our platform, but also the increasing client focus on cloud, native architectures and solutions for the adoption of AI. Several factors drove our ACV growth. First, our Global Sales organizations organization continued to execute well across all major geos. Several years ago we made a strategic decision to reorganize and refocus our go to market model, aligning teams more closely to our clients. That transformation has clearly paying off through deeper client engagement and a far more efficient sales motion. Second, PEGA Cloud remains a major growth driver. As more clients migrate to PEGA Cloud, we're experiencing accelerated growth and momentum and the economics of our cloud migration strategy are compelling as well. PEGA cloud margins continue to expand approaching 80% in Q3. With the vast majority of our net new ACV coming from Pega Cloud, we continue to realize the benefits of a more scalable business model that drives significant customer value. Third, our unique approach of utilizing AI in the design phase, as Alan mentioned, while leveraging predictable workflows at runtime is fundamentally unique and continues to differentiate us in the market. Clients are using pegagen AI blueprint to design sophisticated workflows that streamline operations and improve customer service. This new innovation is generating enormous enthusiasm and we're seeing examples of deals closing faster as clients recognize and take advantage of of the numerous tangible benefits of our AI powered architecture. For example, we sourced and closed a new logo via non pega partner within Q3, a powerful example of speed, precision and alignment across teams. Keep in mind this is someone who never knew PEGA but found Blueprint and saw its power. This rapid win highlights how pega's cutting edge technology and delivering methodologies are transforming the way clients envision and implement intelligent automation. By leveraging pegagen AI blueprint, the client was able to instantly visualize their use case. Dramatically accelerating stakeholder alignment and simplifying the decision making process, which can typically take months, was reduced to days. About a month after the first blueprint was created with the PEGA sales team, the deal was signed demonstrating the power of AI driven co creation and and agile execution. Implementation will be powered by Blueprint Delivered pega's new AI powered delivery methodology. This approach ensures rapid time to value, reduced delivery risk and a smoother path to deployment, helping clients realize benefits sooner and with greater confidence. In addition, the deal also features pega's usage based model. This creates a scalable foundation for future growth as the client leverages the platform to get more work done. Pega's subscription revenue scales alongside it. It's a true partnership. When the solution goes live, PEGA will be compensated based on the real work process, reinforcing the partnership and out partnership and outcomes as well. This win showcases the impact Blueprint can have with new PEGA partners and clients. Moving on to cash flow we generated 347 million of operating cash flow and 338 million of free cash flow through the first nine months of 2025, representing an increase of 38% growth year over year for both metrics. This robust cash flow reflects our strong ACV growth, disciplined management and the continued benefits of our recurring financial model, our healthy cash generation and our solid balance sheet also enabled us to invest in innovation and also return capital to shareholders. As a result, we have purchased 393 million of Pega stock, or approximately 8.7 million shares, demonstrating our confidence in the long term value of our business and our commitment of returning value to our shareholders. As of September 30, we have $350 million in cash and marketable securities on our balance sheet. And as a reminder, since repaying our convertible Senior Nets Senior Notes In March 2025, we remain debt free. I've received some feedback over the years that it's helpful when I share comments on modeling our business. So so I'm going to continue to offer some perspectives on the fourth quarter of 2025 as more and more client workloads migrate to Pega Cloud. This trend reinforces the long term strength of our subscription model even while putting some near term pressure on maintenance and term license ACV. Over 85% of our ACV growth this year has been generated by Pega Cloud, a clear indicator of how rapidly clients are embracing and adopting our modern scalable cloud platform. This momentum highlights the growing reliance of Pega Cloud as the foundation of our clients most mission critical workloads, even as it will naturally reduce term license and maintenance activity over time. As you model Pega Cloud revenue, it's important to keep in mind that based on contract effective dates and typical client go live schedules, there's often a delay of a few quarters before reporting Pega Cloud ACV before reported Pega Pega Cloud ACV becomes Pega Cloud Revenue As a reminder, we provide annual guidance at the start of each fiscal year and do not typically update it. In conclusion, we're confident in our business, our strategy, and the opportunity ahead. We're focused obviously on closing the year out strong and continuing the momentum that we've seen through 2025. We look forward to seeing many of you in person at numerous upcoming investment banking conferences across the United at this point. Operator, please open the line for questions.

Operator - (00:25:01)

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press Star one on your telephone keypad to raise your hand and join the queue. And if you would like to withdraw that question again, press Star one. We also ask that you limit yourself to one question in one follow up. Any additional questions, please re queue. Your first question comes from Steve Enders with Citi. Please go ahead. Hi, this is Palak Sir, Steve Anderson, Sidi. Thank you so much for taking our questions. So my first question is, you touched on this a bit is what drove the much better ACV and acceleration versus your expectation of it slowing down on a much tougher comp. And how should we think about ACV for Q4 and the and FY25 as a whole.

Steve Anderson - (00:25:55)

So thank you for your question. So I think when we, when we guided at the beginning of the year, we were pretty clear that we said we, we were not going to factor, you know, a direct impact from PEGA Blueprint into our results. And I think what you're seeing is through the first three quarters, PEGA Blueprint has begun to impact our business in a positive way. It's the, it's the exclusive way that we go to market with our clients and our partners are now adopting it at an accelerated pace. So I think the performance is certainly connected to the impact of blueprint on our business and we would, you know, we see that continuing. Perfect, thank you. And I have a follow up on what you are seeing on the federal side of the business and what the deal environment looks like.

Ken - (00:26:52)

I mean the federal, the federal space I think obviously has been through a lot of change in 2025 and with the current situation of the government not being open right now, certainly there is impact to our clients. That said, our projects with our clients are long term and very strategic and tend to go across not just weeks and months, but tend to go across years in terms of the change we're helping them drive. And so we've been through shutdowns before and our clients have certainly continued to move forward with their initiatives. So we don't expect that to be different now.

Operator - (00:27:35)

Perfect. Thank you so much. Your next question comes from the line of Jake Roberge with William Blair. Please go ahead.

Jake Roberge - (00:27:46)

Yeah, thanks for taking questions and great to hear that Blueprint continues to resonate with customers just in some of the newer predictable AI agents you recently launched. Can you talk about the early feedback you're getting for those solutions and just what's different about those agents versus what some of your competitors are doing?

Alan Treffler - Founder and CEO - (00:28:06)

Yeah, I think it's actually great seeing that understanding of the difference is starting to resonate with customers because there's so much noise and hype in this space. It's just canceling. It's pretty crazy. The way all of our competitors build agents is they give you a prompt studio. You go into a studio and you begin writing prompts and now they're trying to put additional controls in because they realize those prompts haven't necessarily always resulted in the right outcomes. So they introduced Salesforce's agent script to be able to sort of jury controls it. The problem with that approach is relying on the LLM. And runtime is inherently unpredictable to a degree. And when you're in a business where you really, really want predictability, you want to be two customers the same way, based on law, based on policy, it's really important to have codified that in advance. So by using the LLM to foster the creativity, to foster the discipline at design time, then being able to take this library of workflows and be able to execute it at runtime, it's really quite remarkably predictable and it's structural. You know the other thing that I'll tell you this is interesting as well. A lot of people talk about how LLMs are driving waste in the electric grid. And you know, candidly, when we run at design time, the LLMs we're using are exactly the same. But a workflow is thousands of times less consumptive of natural resources than an LLM. They run on an ordinary cpu. They don't need the fancy GPU to be able to run. Being able to do this has an interesting additional environmental impact. So as far as I'm concerned, the predictability is the most absolutely compelling part of it.

Ken - (00:30:26)

Very helpful. And then it's pretty clear the acceleration that Blueprint is driving within the existing base. But now that you've started to invest more in new logos over the past few quarters, can you talk about the door, the doors that Blueprint is opening on that front and just how that overall push has gone thus far? Well, I think, I think Jake, I'll start just real quick and then let Alan chime in. I think there's two things that there's two aspects of new local acquisition. The first is how you initially engage with them and what the experience is. And I think that Blueprint is a completely different kind of non technical, very user friendly experience where you don't need to know or actually have someone that is an expert in PEGA to start that engagement. The second thing is it speeds up the business development kind of solutioning time in the campaign. So I view those as two really great accelerators and we're seeing the ability to actually be more targeted with more new logos to be able to accelerate that which previously was hard to do because of the time that it took to actually get through kind of getting something into the pipe, so to speak. Any thoughts on.

Alan Treffler - Founder and CEO - (00:31:41)

Yeah, I think that the ability to show a customer what we do has gone from something that took months and lots of meetings to something that when people see Blueprint and spend an hour. And if you haven't done already, Peter, I'm sure would be glad to walk you through a blueprint demo. Any of you be happy to do that. When you see it, you go, oh, I get it. And the thing I'm really excited about is it's not just speed. We've been able to take a lot of our design principles and a lot of the ways that we've learned about and have thought about workflows and process automation for all these decades, and we've been able to build those into blueprint as a critical part of intellectual property. And what that does is it's not just faster. I think even more important than speed is it's way better. And I think it's also much more reliable from an implementation point of view because it guides you to get it right. So it's a fundamental change, particularly with new logos and others who don't know Pega because they just get it. I'll tell you the truth, it's actually made our own internal training of all of our staff easier and better too, because people really, really understand Pega at a different level after having just even done one.

Jake Roberge - (00:33:12)

Very helpful. Congrats again on the great results. Thanks, Jake.

Operator - (00:33:17)

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

Remo Lens Chow - (00:33:24)

Perfect. Congrats for me as well. Ken, one for you. Like, I was trying to understand your comments a little bit better when you talked about like the impact of more cloud that it does have on term and license and you said you kind of wanted to help us a little bit with Q4. So should we kind of think about. That. Deceleration or like, you know, that. We saw on that kind of client cloud line of the business should continue probably maybe a little bit more in Q4 as you gain momentum there. Just kind of trying to translate your words into numbers. Thank you.

Ken - (00:34:02)

Yeah, I think so. That's a great question. I was, I was, I was, I was really trying to make sure to highlight that in some historical quarters the term revenue has been higher because the mix of the deals were more into the term bucket than Pega Cloud. And when you have 85% of growth happening in ACV from Pega Cloud, you get less of an impact from that. So you're going to see that term license revenue decline over time. I know that I've said that in the past and it hasn't declined at the pace that maybe, I think, maybe I even thought just because of the. Some of the anomalies around, like Duration. But that's really what I was touching on is when you have 85% Pega Cloud you would obviously expect less impact from term license revenue. It's not going to, I'm not talking about you know like you know, $100 million difference or anything of that scale, but you should expect that to decline. That's what I was say trying to highlight.

Alan Treffler - Founder and CEO - (00:35:09)

Yeah. Let's face it. Okay. A lot of this confusion that can come in is because of what I would consider an accounting anomaly where you know, if you have a piece of business that's a twenty thousand dollar a month piece of business and it's term, you know, if it goes on for extra years, you end up having a present value. Yeah. And look, we would much rather not do that, but it's just the way that the accounting rules work. I think you're seeing the powerful move of our business towards bigger cloud which is real validation of the quality cloud. I see with my customers that are switching that, they tell us that they get better reliability running on Pega cloud than they do when they were running it themselves. We're able I think to do a better job from a performance point of view with them because we've got so much automation and we've really, really hooked in just a whole support system for them that we can do when it's running on the cloud. And so, you know, you're seeing our business sort of inexorably shift to be, I don't know, an 85% cloud business over time. There's always going to be some customers who for one reason or another really want to write it on prem and we, you know, we like being able to offer that choice to our customers. But it's becoming really a cloud business. And at that point, once you realize that, yeah, we really are a bonafide cloud business, you then I think really want to look at acv. ACV is what tells you about the momentum of the business. It tells you, it tells you about the durability of the business and it doesn't flop around the way that it, particularly the term license line. And I think what Ken saying the term license line is going to, it flops around a bit just because of things that don't actually relate to the strength or weakness of the business. So you know, I just also direct from a quality point of view, you just think about Pega clearly has made the transition to cloud compared to where we were years ago. You know, when we started this we were a very small percentage and you know, look at look at it now and we have strong ACD growth. That's pretty exciting. Yeah, yeah, no, makes total sense. Yeah, it's really, really good to see. And then hopefully that translates into guidance and into guidance as well. The guidance approach as well. The, the other question I had, Alan.

Remo Lens Chow - (00:37:41)

Is the other big area around AI. That should be really interesting too is application modernization, because there's so much that. Can be done there. Can you speak a little bit about.

Alan Treffler - Founder and CEO - (00:37:52)

Where we are on that journey? Yeah. So we are seeing a lot of energy around that and in particularly around the new features that we've introduced in the last 60, 90 days, which you can see if you go to Blueprint and you go to the place where you can upload assets, we've made it so that, you know, if you have a, if you have an old mainframe system without any documentation, you can actually hook up and take a video of somebody using it and they can go through and they can explain what they're doing and what the system will generate off of a 20 minute video in terms of creating not just a, a cloud native replacement for some, you know, old legacy thing, but actually modernizing it and innovating. And if you have two or three systems you want to group together when they're modernized, you just grab the assets from all of them and upload it and Blueprint will work to help you reconcile them. So we think this is just enormously, enormously exciting and you're going to see us continue to put a lot of work into making this better because it's a pretty terrific area. A number of those hundred day implementations that we talked about fall into that legacy modernization category. Okay, perfect. Thank you. Congrats.

Operator - (00:39:23)

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

Patrick Walravens - (00:39:29)

Oh, great. Thank you so much and congratulations, you guys. Can we talk about how pricing is. Evolving maybe in this industry? In the script there was, I know. You touched on it, but if we. Go deeper, that'd be great. Script. There was one comment about priced on real, real work process and then you. Know, you got Brett Taylor, CEO of. Sierra, talking a lot about outcome based pricing and how that really shifts the playing peak field. So any thoughts you have on how pricing might be involving would be super interesting.

Alan Treffler - Founder and CEO - (00:40:05)

Yeah, My thought is we're about a decade ahead of all these other guys. So in the right place. Yeah, yeah. We realized, you know, eight or nine years ago that we would go into a customer, sell them a bunch of seats, make them 30% more efficient, and then you come to renewal Time and the customer says, well, I don't need all these seats. And it really didn't seem right when, you know, particularly on our cloud, we're burning through all these, the number of transactions has gone up, not down. So we said, look, we're just thinking about this the wrong way if we're thinking about butts on seas. And so we really began a move to move our client Broadway to work based pricing. We price based on the amount of work the system does. And you know, we tend to be a process automation, workflow, case management system. So the system makes it pretty easy to count and charge for the number of workflows, the amount of work, the amount of output that the system is involved in. I think all of these people who have some form or another of seat or human counting based pricing have a structural problem. And they have a structural problem both because that's, I think, a lousy way to do business with the customer. It doesn't align the incentives of the vendor and the customer. We as a vendor and the customer should both want to make that business as efficient as possible. Seed based pricing businesses don't, don't, don't work that way. They get penalized by making more efficient, whereas we really have every incentive to do that. So I think that the pricing in this industry is going to have to change pretty radically and we feel like we're way ahead.

Patrick Walravens - (00:41:55)

That's right. As a follow up, Alan, are you seeing any new players in the space? Are you seeing Sierra or Decagon or.

Alan Treffler - Founder and CEO - (00:42:01)

Anyone else like that? We see them on the periphery. I mean, they talk to a lot of the same customers that we talk to. We get asked about them. You know, the challenge with these, you know, chat bot agent type systems is one of the big things you've, you've heard me talk about patients is this concept of center-out, this idea that you need an agentic system that's going to be able to work in every channel that the rules and the processes that run need to be able to operate. If somebody's having a dialogue with the system, or if somebody sends an email to the system, or if somebody's in a back office and wants to go to the system. In all of those situations, you really want to be in a true omnichannel way. What we call center-out, which we've been talking about also for about eight years. And I think a lot of these companies that are out there are building things that get locked into a particular channel. And when you're locked into a channel, it's hard to envision how you're going to do something that really can serve clients and serve the staff in all the places they're going to want to use it. But I also think structurally, this, this center-out concept is perfect for agents because it lets you work agentically, but it also lets you work when you have to have a person involved. And so these folks who come in and people have come in for a long time with one, you know, years ago it was IVRs, you know, then it was robots. I think that running your enterprise at the periphery, having the business logic at the periphery, it just doesn't make as much sense as to have a fabric that is a center of time for effort.

Patrick Walravens - (00:43:53)

Okay, thank you very much.

Operator - (00:43:57)

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

Marc Chappelle - (00:44:04)

Hi. Thank you for taking my question. Nice job on the quarter, guys. A couple of questions around the legacy transformation opportunity. Alan, starting with you, the newest Blueprint release introduces AI agents that kind of essentially analyze legacy apps and automatically design workflows regarding that transformation opportunity. Are you seeing customers actually integrate this capability into production today or are they just still in the planning stages, for that matter? Well, Blueprint is responsible for every new implementation that we've done in the last six months, and many, many, many of those are in production. Remember, what runs in production is our workflow engine. You know, the nice thing about this is we're able to enhance Blueprint literally every week or two because it runs as a SaaS app on pega.com connected to a Pegasus. We've recently added localization facilities so that the blueprints actually will get stored in our. If a customer is a PEGA cloud customer, the information that is uploaded about Blueprint actually gets stored in their Pega cloud region. So it's stored on a distributed basis, which includes if they're in another country and they worry about data residency and things of that type, that's now all been incorporated so that it will save the information in a place consistent with the sort of sovereign rules. And then runtime, what's running is the Pegasus as we built it existed for such a long time, obviously with enhancements, but it's not like Blueprint itself. This is where I think people got a little confused when we talk about blueprint. Blueprint is a different way of doing pega. It permeates the entire design environment. It's not this sort of separate skew that they would then run. So every customer that I can think of has started with a blueprint for months here. And it was funny. We had somebody appeared at one of our sessions. One of our customers got up and had a sign that said this is our motto, no Sprint without a blueprint. Which basically that every time they went to look to build something, they always start that way and there's a lot of enthusiasm for it. Okay.

Ken - (00:46:32)

And then as a follow up, Ken, if I recall correctly, the legacy transformation opportunity was supposed to add about a point of growth to ACV this year. Is it still tracking to that or do you see the legacy opportunity kind of out, outperforming that expectation? I would say that any, any acceleration over what we guided. I would say I would, I would completely tie to, or I would largely tie to blueprint and legacy transformation opportunities. I think that if we accelerate growth, it's going to be on the backs of blueprint and most of what we do is tied to some type of digital legacy transformation or application modernization, whatever buzzword the industry is using.

Marc Chappelle - (00:47:18)

Great, that's helpful. Thank you. That's all for me, thanks. Mark.

Operator - (00:47:23)

Your next question comes from the line of Blair Abernathy with Rosenblatt Securities. Please go ahead.

Blair Abernathy - (00:47:31)

Thanks very much. Nice quarter guys. I just wanted to delve into verticals. Just a little bit. You touched on federal, maybe just to dig into that a bit more. What sort of are you seeing there from a claims volume perspective? I'm not sure what percentage of the government base is on cloud versus on prem. So if it makes that much of a difference. And are you changing your go to market activity there right now and just. Maybe a little more color around what. You guys see happening in federal?

Alan Treffler - Founder and CEO - (00:48:07)

Yeah, so a couple of things. One, we feel a little fortunate that some of the agencies that really were targeted happen not to be the ones that we do a lot of work with. But having said that, you know, when the offices are closed, progress on projects is slowed down. You know the services projects, they don't necessarily come to a halt, but they massively, massively reduce. And so if this goes on, you know, this will obviously affect how those projects are alive. But as Kemp said, these tend to be very long term agreements and they're not going anywhere. So you know, we'll pick them up when things come come back. We, we have accelerated the move to the cloud in the federal government. So we've actually had a quite a few successes with our PEGA cloud for government offering which is designed specifically for the Fed ramp federal environment. We actually have other customers in other governments, like some state governments, et cetera, that are interested in Pega cloud for government, you know, so that's I think a good offering. So cloud, I think is strong. Projects are, as you would expect, in some turmoil with work stoppages when the workers don't come in. And we're hopeful that sooner than later this will get unblocked.

Ken - (00:49:39)

One comment I'll make on the government, on the government vertical, so to speak, is I've spent and Alan has as well over the last few months a series of meetings with different agencies, different committee members and their staffs to really understand kind of how Congress is prioritizing spending initiatives going forward. And it modernization is what they're actually calling it in the government is a bipartisan focus area. So I think what you're seeing is you're seeing a lot of momentum around fixing the legacy debt that these agencies have around it and actually even trying to repurpose dollars wherever possible to make sure that they're supporting that. So I think that that is one interesting kind of observation I've had is that it is, it is. No matter who you talk to it modernization is a priority in the government.

Alan Treffler - Founder and CEO - (00:50:39)

And there are lots of workflows in government and they really need to be done predictably. So I think it just plays perfectly to what we're doing.

Blair Abernathy - (00:50:50)

Okay, great. Thanks for the color guys.

Operator - (00:50:54)

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

Devin oh - (00:51:03)

Good. Good morning. Thanks for taking my questions here. Could you maybe talk a little bit more I guess a little bit more since you've already talked about it on the prepared remarks, but more so on the partner branded blueprints. I know you said it previously, but have you seen that kind of unlock a whole host of use cases that Pega and maybe broader partner system has not seen before and maybe give us some flavors on what the news new use cases that you've seen stemming from them and kind of how has that influenced sales pipeline and velocity thus far from the launch of that?

Alan Treffler - Founder and CEO - (00:51:36)

Yeah, so it's going to I think be quite important. It's very new. So remember we announced it in June. We have partners, we have five partners who have set up their what we call knowledge buddies, which are private knowledge stores that are private to them that we run on Pega cloud. And what, what happens is when blueprint runs for one of these partners, if a staff member, like I mentioned, cognizant somebody signs onto the system, what they will see is blueprint with that company's, the partner's name right at the top and it and only they if they're signed in from that ID will be able to access this ip. It will get pulled in automatically into the analysis that blueprint does and what happens. So I think it does a couple of pretty important things for us. One, it allows us to, to enable the partners to leverage their experience along with ours as part of. It's a great use of AI, to tell you the truth, to, to do that. But what I'm excited about is, you know, historically with most of these partners, in all of these partners they've had PEGA practices and the PEGA practices are the parts of the partner that would work on implementing the PEGA system. But for the very large partners, these PEGA practices were just a couple percent of the total population. What we're trying to do with powered blueprints is position this as a way where outside of the PEGA practice, the partner staff or the partner sellers will be able to use this as a way to talk to their prospects, their customers, not to sell ega, but to sell their IP and what they have to offer. As you know, the partners themselves are in very competitive environments now. And as we unlock this going into next year, I think it can be very, very exciting.

Ken - (00:53:57)

Great. That's helpful contacts. And then for my follow up for Ken, again, a really strong cloud ACV growth in the quarter. And also notice that license ACV declined sequentially quarter over quarter. I'm assuming that's a function of the strength you've seen from the strong migration activity. Could you maybe in any way kind of help put some numbers around? How much has kind of migration from licenses contributed to cloud ACV growth this quarter or maybe thus far this year? Thank you. Sure. Devin. So migrations are an important, important element of our strategy to get clients on Topega cloud. But migrations in and of themselves have not been. If you look at total ACV and the acceleration of total acv, that is not driven materially by migration, that is driven by clients continuing to expand their use of pega. However, migrations are going to drive the term ACV and associated term revenue down over time. And you haven't seen that this year. You're going to see term license revenue be up year over year because of the large revenue that we had. Sorry, term revenue. Sorry if I said ACV term revenue will be up year over year because of the large amount of revenue we had in Q1, but if you actually look at Q3 and in Q4, we see that term revenue kind of coming down when you compare year over year. So you are Going to see that. And that is a reflection of the movement to Pega Cloud. But overall our growth is being driven by more spend with our clients. Got it. Thank you. Thanks, Devin.

Operator - (00:55:46)

If you would like to ask a question, please press Star one on your telephone keypad. Your next question comes from Rishi Jalaria with RBC Capital Markets. Please go ahead.

Rishi Jalaria - (00:55:57)

Oh, wonderful. Thanks so much for taking my question. Nice to see continued strength in the business. I wanted to start by maybe thinking a little bit conceptually about pega's role in this new AI ecosystem, broadly speaking. You know, Alan, I know we've talked about this, this concept before, right. But as, as every kind of vendor and stack is building agents, one thing that we really haven't seen anyone truly crack the code on is, is the ability for someone to be kind of a neutral middleman and handle the agent orchestration layer. Right. And allow a lot of these agents to work with one another. And you know, especially at a time where MCP is still in its nascency and A TO A probably even more so. Can you talk about maybe what potential role PEGA can play in that, you know, in kind of assisting all these agents across so many different stacks. And then I've got a quick follow up. Sure.

Alan Treffler - Founder and CEO - (00:56:52)

So, you know, if you talk about orchestration or you think about. And maybe I'll take a moment and explain how we think about it. There are a couple of aspects to it. One aspect is the technical connectivity, orchestration. Like how does one agent call another? And things like MCP and A TO A actually are pretty good already at being able to make it so that if somebody else has an agent, I can call it and I can have it make sense. And we were doing that all the time now as part of how we execute. But the other part of orchestration is not just the kind of connectivity, it's the logic. I mean, orchestration is about getting things done. As I think about it, it's not just about connecting things. And the important part of getting things done is getting them done in the right order, in the right way, connect the, the right things. And that's where to us workflows come in. So when we look at our, you know, when we look at others, look at Microsoft, you know, look at Salesforce ServiceNow, they're allowing an agent to orchestrate or they're allowing their fabrics, as everybody uses that term too now, to orchestrate using an LLM for control. And as I said, the problem with that is particularly if you have agents calling agents or a fabric Calling agents. The Debbie Good back is sometimes subtly different, and the LLM can go down different paths. What we say is, hey, figure out what you want the orchestration to be for the different types of work that you do everywhere you can, and hesitate to call the LLM for reasoning at runtime. Make it so there's a reliable workflow that does the orchestration. And look, there are different use cases where this will matter more and better, less. But for the use cases where predictability is important, I think this is a huge, huge distinction and something that we have as a structural difference as opposed to just something that we could say, well, we're a little ahead or behind. It's not. We've taken a path that I think, if you think about it, is going to make a lot more sense for orchestration and for reliable, predictable execution. So we've got to get that message out there and we're seeing the customers who hear it. Not a lot, though. Let's face it, everything in this whole era is new.

Rishi Jalaria - (00:59:27)

Yep, got it. Thanks. That's helpful. And then if we just think conceptually about growth drivers for ACV from here, you know, clearly a lot of it's been, you know, you've had blueprint as a potential driver of upside, but, but a lot of it has been, you know, within your existing customer base. If we think now about blueprint and, you know, the lower barriers to entry, it feels like there, there really is an opportunity for net new logos to be a driver of, key driver of growth over the next several years. Just conceptually, just how should we be thinking about what that mix over time could start to look like? And could we see new logos be a more meaningful driver of future AC growth?

Alan Treffler - Founder and CEO - (01:00:14)

Thanks. Yeah, I think you're going to see new logos be a more meaningful driver if our partner strategy is successful. Because by recruiting partners to be able to have their own powered blueprints that let them bring their IP to their customers their way, it opens the aperture on who we would be talking to a lot and it does it without us having to do all the heavy lifting of doing it ourselves. So I think that, you know, we're, we're the cusp of a used set of changes here. But I think these changes, as you think about next year, you think about where this is going. We're, we're really pretty jazzed that we've got a lot of the stuff in the right group.

Ken - (01:01:00)

And I think, I think, Rishi, one way to think about it is if we try to scale new logos through a direct account executive covered model. We are limited with the logistics of scaling that organization. Right. You have to hire people, you have to assign orgs, you have to do. And so it will. That will still. That could, that will. And that could and will accelerate our, our ability to get new logos. But what Alan's talking about is an order of magnitude growth change is to leverage the, you know, hundred thousand plus sellers that are already talking to those same organizations in our partner ecosystem to. That's kind of where those are. Two, both. They're, they're not, they're not one or the other. It's just that one has the ability to push growth much faster. The other one is limited by the logistics of us scaling it.

Alan Treffler - Founder and CEO - (01:01:52)

And that's why we have to do a great job for our partners to let them capture their IP and let them bring their story to a prospect here. And if we can be successful on that, it's, I think extremely exciting. Hopefully that makes sense.

Rishi Jalaria - (01:02:10)

Really helpful. Yep, very helpful. Thank you so much, guys. Thanks.

Alan Treffler - Founder and CEO - (01:02:14)

Rishi and I. I think we are at time. So with this, I'm going to thank everybody for attending. I want folks to know we're working real hard for you and I look forward to talking to you after we wrap the year. Thanks.

Operator - (01:02:28)

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.