Pegasystems (NASDAQ:PEGA) reported second-quarter financial results on Wednesday. The transcript from the company's second-quarter earnings call has been provided below.
This transcript is brought to you by Benzinga APIs. For real-time access to our entire catalog, please visit https://www.benzinga.com/apis/ for a consultation.
Access the full call at https://events.q4inc.com/attendee/421269211
Summary
Pegasystems reported a 22% year-over-year growth in annual contract value (ACV), driven by the expansion of its cloud business.
The company introduced Pega Infinity '26, featuring Infinity Studio and Blueprint AI, to enhance AI-driven workflow automation and reduce implementation timelines.
Management highlighted market confusion due to AI-driven changes in software economics, impacting decision cycles and delaying new deals.
Pegasystems plans to temper investments to maintain Rule of 40 performance and generate strong free cash flow, targeting $700 million by 2028.
The company repurchased 9 million shares for over $360 million in the first half of 2026, demonstrating a commitment to shareholder value amidst market disruptions.
Full Transcript
OPERATOR
Hello everyone. Thank you for joining us and welcome to the Pegasystems second quarter 2026 earnings call and webcast. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Peter Welburn, Vice President of Corporate Development and Investor Relations. Please go ahead.
Peter Welburn, Vice President of Corporate Development and Investor Relations
Good morning everyone and welcome to Pegasystems Q2 26 earnings call. Before we begin, I'd like to read our Safe Harbor Statement. Certain statements contained in this presentation may be construed as forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, forecasts and similar expressions are intended to identify these forward-looking statements.
These statements speak only as of the date the statement was made and are based on current expectations and assumptions. Because these statements relate to future events, they are subject to certain risks and uncertainties that could cause actual results to differ materially from our current expectations for fiscal year 2026 and beyond. Factors that could cause such differences are described in the Company's press release announcing our Q2 2026 results and in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2025, as well as other recent SEC filings.
Investors are cautioned not to place undue reliance on these forward-looking statements as there can be no assurances that the results contemplated will be realized except as required by law. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. In addition, non-GAAP financial measures discussed on this call should be considered in conjunction with and not a substitute for our consolidated financial statements prepared in accordance with GAAP.
Constant currency measures are calculated by applying the June 30, 2025 foreign exchange rates to all periods presented. Reconciliations of GAAP to non-GAAP measures can be found in our earnings press release. With that, I'll turn the call over to Alan Trefler, Founder and CEO of Pegasystems.
Alan Trefler, Founder and CEO
Thank you, Peter, and thank you, everyone, for joining today's call. Ken will walk you through the first half financial results shortly, but before he does, I'd like to spend a few minutes discussing some major market shifts that we've seen and a lot of the tension and confusion in the market and why we believe it creates significant opportunity for Pegasystems. The market evolution shows a structural shift in software. We're still in the early stages of the fundamental transformation driven by AI.
Across the industry, organizations are rethinking how software is designed, built, operated, and evolved. And for a time, AI providers acted a little bit like drug dealers, offering their products for free or charging $20 a month for what felt like unlimited usage. To many users, the experience is magical. But at the same time, the frontier model providers have been investing literally billions or trillions of dollars building the data centers required to power AI.
And now they're going to need to seek a return on that investment, making a significant shift in the economics of the market. These companies are under pressure to generate meaningful revenue, and what was once available for free or for all-you-can-eat licensing is priced now by token use with the attendant anxiety and ambiguity. And it's not done. More of this is coming. The challenge for enterprises is token consumption is opaque until the bill arrives.
Many of the tokens these models consume are reasoning tokens. They don't show up in input or output, but are used by the model itself as it loops through increasingly complex logic. These reasoning costs can become surprisingly and prohibitively expensive. Now this cost uncertainty is leading many, many organizations to sort of freeze and try to figure out what's going on and take a more deliberate approach to technology investments as they assess the economic environment.
Decision cycles have lengthened as clients seek greater clarity around technology strategies, AI priorities, and the reality of highly variable token costs. At PegaWorld, we unveiled the solution, offering our clients access to AI agents with no per-token cost. Our clients' demand for predictable outcomes and predictable costs plays directly and uniquely to Pegasystems' strengths. Our clients see the opportunity to use AI to deploy software faster and more effectively, and to see the power of AI agents to automate work that could not have been automated before.
But the value from this technology will not be measured in the lines of code generated or the number of agents deployed. The value comes from better business outcomes with greater speed, control, and efficiency. For decades, we have delivered software that optimizes and executes the workflows and decisions that run our clients' businesses. AI is making that software much, much easier to design, build, and continuously evolve. As our tagline puts it, build for change.
AI dramatically expands what is possible, but the requirements of enterprise systems remain the same. They need to be predictable, governable, secure, and cost-effective at scale. So our goal is simple: help our clients avoid AI chaos and the mess that comes from it by delivering predictable outcomes at predictable costs. Our approach is different from the two misguided approaches that others in the market are offering. The first misguided approach is that enterprises should just use AI agents to code up anything they want, generating millions of lines of code.
Now look, Pega has competed against code-it-yourself for decades. And the reality is it went through an open source cycle where everything was going to be open source and people would code it themselves. With those technologies and tools, it went through a use-inexpensive-engineers-in-India cycle. But the problems with code and our moat against it remains the same. In fact, with AI, the problems with this alternative get worse. Code is hard to change, it's hard to understand, and AI generates more code with less visibility, making those limitations even more pronounced.
Clients report to me that simple things like changing the label on a field become really, really hard when that field is buried in millions of lines of code that no human has ever reviewed and wasn't structured for people to really understand. The code is only readable by coders and it doesn't fit into a model that business and IT can jointly see. Pega provides that model. Our system is built on a structured and visual foundation of workflows, business logic, personas, and integrations.
These remain transparent, understandable, governable, and adaptable over time. We represent the logic in business metaphors like stages and steps and decision rules that clients can easily understand and change. With the release of Pega Infinity last week, we took a significant step forward with the introduction of Infinity Studio. Together, Pega Blueprint and Infinity Studio now create a more complete AI-powered life cycle that helps clients design, build, operate, and then continuously evolve enterprise systems, all in a model that both business and IT can work in.
That capability reinforces what has always differentiated Pega—our ability to help enterprises build for change. And in an AI-driven world, that advantage becomes even more valuable. While with Blueprint we apply powerful AI reasoning at design time before an application goes into production, enabling our clients to reimagine how they get work done, create better processes, and see them working in an application they can design in minutes. Blueprint takes in information about a client's business and creates a system built around the scalable structures of workflows, personas, integrations, and decisions.
And structure is critical. In contrast, if clients generate code directly with tools like Claude or Codex, where's the architecture? How is the business logic captured and understood? And code-first approaches become opaque, complex, difficult to govern, and extremely expensive to change, especially at scale. When we developed and released Blueprint, it really opened up people's eyes to how they could reimagine their businesses. It brings in our decades of experience and our Blueprint agents are able to really come up with things better than even the inputs they're given.
It's enormously exciting and I'm constantly having clients tell me this is one of the most novel uses of AI they have seen. There's really nothing else like it out there. Blueprint enables clients to reimagine their business processes to be better, to see how this process is translated to working systems, and engage with a working system early in the sales cycle. Blueprint is transforming how we engage clients and prospects at the front end of the sales cycle, moving Pega from a conceptual sales process to an experiential and product-led one.
In retrospect, when we started with Blueprint we really focused on new clients and new applications. We had not yet brought the full power of Blueprint to help existing clients reimagine and rethink their existing Pega applications for two reasons. First, we were learning how to use it, and secondly, helping clients reimagine existing systems is in many ways a more tricky and complex problem. But now with Pega Infinity '26, which we released last week, we've made the power of Blueprint AI available for clients to reimagine and improve their new and existing.
This release brings Blueprint AI from the design-time use into build and deployment and to evolve using this Infinity Studio capability. Our completely reimagined builder environment enables our Pega Cloud and client-cloud clients to leverage Blueprint AI to deploy new applications and to improve existing work. Blueprint AI helps businesses and helps IT leaders reimagine how organizations get work done. Infinity Studio extends the power of Blueprint AI into the application development and deployment, creating a continuous path from idea to execution.
This is especially compelling for our existing clients who can use Blueprint to modernize and evolve existing Pega applications, helping them reimagine what's possible. But it also is terrific for new clients who can answer the question of how they are going to continue to evolve after their initial build. Furthermore, we've made the whole Pega development environment available via MCP, so people who are very technically oriented can use Cloud Code or OpenAI Codex or any coding agent to be able to initiate their Pega applications.
These improvements dramatically lower the barriers to entry, reducing training time and accelerating productivity, and will enable more workflow creation across the enterprise. Infinity Studio will make it easier for our clients to build and extend their workflows. We launched it last week and we'll be rolling it out aggressively through the rest of the year. But Infinity Studio is a really big deal for our clients and prospects. I said there were two misguided approaches to AI, and let's talk about the second for a moment.
The second approach says, hey, just use AI agents to reason through every process at runtime. Now people know this approach brought risks. I mean, agents built on LLMs don't execute with the consistency that enterprises need for most of their workflows. It also turns out, however, that it can be hugely expensive. We've got a calculator at pega.com that shows you the difference between this and our approach, and it's pretty staggering. Our approach is fundamentally different.
Use AI extensively at design time to Blueprint AI and design the workflows and get them right and really make them excellent. But once you get them right, run them repeatedly at scale, thousands or millions of times, only using the AI selectively in the runtime steps where it makes sense. I like the metaphor of a chef. A great restaurant doesn't reinvent each dish each and every night, each and every patron. They take the time to design a recipe or set of recipes that work really well at scale.
And that's what we do with Blueprint. And then when it comes time to execute the dinner service, the whole kitchen follows the recipe predictably and consistently, tuning it only when needed. That's our workflow running in production. Clients know how to execute effectively at scale, providing the perfect balance between AI inspiration at design time and AI used consistently at runtime. This also means we're not using up massive amounts of costly reasoning tokens at runtime.
And it's how we are able to offer our Generative AI as an uplift to our case-based price with no variable per-token cost. We use AI selectively for specific and well-defined tasks where it adds value at runtime, like summarization or reading documents. But core workflows remain deterministic, predictable in the outcomes they deliver, and efficient in the cost it takes to run them. This is a key and structural differentiator for us. It's hugely important to how our clients both ensure they deliver the outcomes they want predictably and to ensure their AI costs are tied to value.
We've taken this power even further with Infinity '26. Every single workflow in Pega, both new and existing, is automatically available through MCP. That means any agent built on any agent platform can find and invoke a Pega workflow. The workflow instructs the agent to operate predictably and consistently. And because the workflow does the reasoning for the agent, Pega helps our clients make even agents built outside of Pega more cost-effective.
So in conclusion, our clients tell us they want to see increased efficiency and better results from AI. They also, however, want better outcomes, insulation from runaway token costs, and measurable results in increased efficiency and better processes for much of the work they do. They don't want to re-reason a business process every time it runs. And instead our approach really resonates: reimagine with AI, execute predictably, continuously evolve and improve it.
And this is what Pega delivers, giving clients the ability to design an effective recipe for executing work or design. And then when users request a business outcome, the menu at the restaurant contains the proven recipes that organizations know how to do extremely well at scale and that are consistent with regulators' needs and the efficiency the organization wants. Clients, I believe, are increasingly recognizing the value of our approach and we have a strong and differentiated story today.
The clients who saw it at PegaWorld, who I met with extensively, were extremely excited. And you can see Infinity '26 yourself in Karim's keynote, which is available on pega.com. It's also becoming increasingly clear that while the market is still early in its AI journey, many of the key trends I think are moving in our direction. Increasingly, clients are coming to us to ask how they can manage business costs while achieving business value. As organizations move beyond AI experimentation and try to bring ROI into production deployments, they will avoid approaches that generate massive amounts of brittle code or highly unpredictable economics.
We think that these companies will succeed with AI by becoming those that combine innovation with structure, control, and economic discipline. Some of the things we hear just seem like madness—people talking about trying to control thousands and thousands of independently operating agents. We just don't see how that works. And candidly, I talk to a lot of customers who don't see how that works either. Our approach instead really builds on our tradition of workflows inspired by AI for way more aggressive design and the use of AI to do the pieces that it needs to do at runtime.
And we remain committed to how we help our clients get through the confusion that has been, you know, candidly promulgated by so much noise in the market about SaaS-pocalypses and software being dead, etc. I think some software is definitely under threat, unquestionably, but the types of systems we are—to build them in code would be extremely complicated, hard to update, hard to extend, and that build for change is important for our clients. So these principles relate to how we are going to work with our customers to work with them.
But we don't just want to help our customers bring efficiency to their businesses and help our customers run well-managed businesses. We need to also operate our business that way. We remain committed to getting through the current period of wild confusion and generating strong free cash flow along the way. Regardless of market conditions or how long it takes for the sort of understanding here to stabilize, we will be using and leveraging our AI technologies and capabilities to improve our efficiency and create additional operating leverage, and we will temper our spend accordingly vis-à-vis our free cash flow needs.
With that, let me turn it over to Ken to provide more color on our first half.
Ken Stillwell, Chief Operating Officer and Chief Financial Officer
Thanks, Alan. The first half of 2026 had challenges for three primary reasons. First, as we explained in February, our renewal portfolio is significantly weighted toward the back half of the year, resulting in a more typical seasonal pipeline pattern. Because a meaningful portion of our net new ACV comes from cross-selling and upselling into our existing client base, fewer renewal opportunities naturally result in fewer expansion opportunities. Given our typical contract length, renewal timing is inherently a long-term dynamic in our business.
Second, as Alan explained, unprecedented change in the software market created significant buyer uncertainty. Organizations wrestled with fundamental questions about how AI would reshape software development and whether they should build more capabilities themselves. The market entered a token-maxing mindset where organizations encouraged, even celebrated, token consumption and then whiplashed to the opposite extreme where companies sought to tightly monitor and control token usage.
The resulting uncertainty made customers more cautious and contributed to a more confused and longer buying cycle. Third, we didn't execute well enough on our go-to-market change to drive deeper and broader engagement with our clients and prospects. As part of that effort, we are increasing prospecting activity, expanding executive-level engagement, identifying new workflow and legacy transformation opportunities with not only existing clients but also strengthening our focus on new logo acquisition.
We are also using Blueprint to help shorten sales cycles. Powered by the combination of Blueprint and the newly released Infinity Studio in Pegasystems 26, these are the right changes to improve pipeline quality, conversion, and sales productivity over time. Our progress in the first half was slower than we anticipated, but we remain very confident this is the right approach. With that context in mind, let me turn to our financial results. Annual contract value growth, or ACV growth, is one of the most important metrics—in our view, the best indicator of underlying execution.
That's because ACV growth provides a clearer view of the business momentum than revenue growth in a subscription model. Pegasystems ... increased by 165 million as reported year over year, growing 22% as reported and in constant currency. This growth reflects the continued expansion of our cloud business and reinforces the success of the subscription transition we began in 2017. As a result, Pegasystems Cloud remains the fastest growing and most important component of our subscription model.
Though growth moderated to 27% at the end of last quarter in constant currency, we're watching that trend closely and remain focused on improving our broader ACV growth trajectory. Our overall ACV growth rate was offset by decreases in maintenance ACV and subscription license ACV. As a result, total ACV grew 7% as reported and 8% in constant currency year over year. We expect Pegasystems Cloud ACV to continue increasing as a percentage of total ACV over time and still believe it can ultimately reach approximately 75% of the total, and that mix shift toward Pegasystems Cloud will continue to put pressure on maintenance and subscription license ACV growth in future periods. Over the longer term, however, a greater concentration of Pegasystems Cloud ACV will create a more predictable, higher quality revenue stream, improve cash flow visibility, and strengthen our ability to compound shareholder value. While our total ACV growth was below expectations, we continue to operate in a period of significant market disruption. Several software companies have recently noted delays in purchasing patterns where the business is not going away.
Clients are frozen in the confusion. It remains difficult for us to assess the magnitude or duration of potential IT spending reallocations and impact on software growth. But more broadly, clients are still focused on legacy transformation and using and refining their AI strategies, but also governing usage and managing token costs. Although this is a great long-term trend for us and our value proposition, it still may continue some delay in investment decisions.
Moving to cash flow: Even with slower ACV growth, the durability of our model is evident in our cash generation. We generated $288 million of free cash flow in the first half of 2026, a record that reflects the strength of our subscription model and our disciplined approach to managing the business. Increasing free cash flow over time is one of the most important measures of value creation and business health. It also provides strategic flexibility for capital allocation, which then brings me to my next topic.
As we discussed during our investor session in June, we intend to deploy a substantial amount of our free cash flow toward opportunistic share repurchases. In the first half of 2026, we repurchased 9 million shares for over $360 million in the open market. Under the prior authorizations, that cash expenditure represented well over 100% of the free cash flow generated during the same period, and total common shares were reduced by 6 million shares in the first half of 2026.
Share repurchases remain a very attractive use of capital and represent a meaningful opportunity to create long-term shareholder value, especially in the disruptive market that we see around SaaS. We remain confident that the long-term prospects of the company and our strong cash generation provide us considerable flexibility. While we're pleased with our capital allocation results, one of the most common questions investors have been asking is: what are we seeing in the demand environment?
As we exited the second quarter, we began to see a more balanced discussion emerging around AI economics and deployment costs. Clients and prospects are increasingly focused on measurable business outcomes, governance, and total cost of ownership rather than just experimentation alone. This shift favors Pegasystems' differentiated approach and creates an opportunity for us to more effectively communicate our unique value proposition and our approach to AI cost containment.
Let me be clear: Pegasystems does not charge per token. Rather than monetizing per token, our AI monetization strategy is based on the business value that clients create on our platform. Clients should be rewarded for driving outcomes, not penalized for AI usage. Our monetization approach features two key elements. First, Blueprint makes it easier and faster for clients to create and deploy applications on the Pegasystems platform. Given our case-based pricing model, the more workflows clients run on the platform, the more value that they create and the more ACV that we generate.
Second, we apply case price uplift for advanced AI-powered runtime capabilities, including innovations such as Agentic Process Fabric. This approach aligns our economic interests with our clients' value creation and success. As clients drive more value from Pegasystems and expand adoption across the enterprise, both parties benefit. Before I conclude, I'd like to provide a few forward-looking thoughts on our business. As a reminder, we provide annual guidance at the beginning of the year.
We do not issue quarterly guidance or typically update our outlook during the year. Given our back-end-loaded renewal portfolio and our slower-than-expected start to the first half of 2026, we definitely have our work cut out for us in the second half. That said, we expect the market disruption and buyer confusion to remain factors in the near term. I'm optimistic, though, that our ACV growth over the long term will be stronger than our Q2 results would indicate.
I also thought it would be helpful to share that when we modeled our full-year net new ACV add for 2026, we assumed one-third of that add would be in the first half of the year and two-thirds of that add would be in the second half of the year. We will work hard to recover as much of that first-half shortfall as possible, but it will be very difficult. The second half requires stronger execution than we delivered in the first half, particularly in expansion activity, new logo contribution, and conversion of our healthy qualified pipeline.
From a mix perspective now, Pegasystems Cloud ACV is 57% of total ACV and continues to be the fastest growing element of the business. We expect continued pressure on maintenance and subscription license growth rates as clients migrate to Pegasystems Cloud, as I mentioned a moment ago. In addition, as more and more buyers move from the experimental phase of AI into the ROI stage, that shift plays to our strengths as AI costs come under greater scrutiny.
Our outcome-based pricing model provides a clear and more efficient path for clients to generate and measure return on their AI investments. As we reiterated at our annual investor session last month, we expect to generate $700 million plus of free cash flow in 2028. Slower ACV growth in the first half of 2026 does not change that objective, but it will require us to reevaluate certain investment priorities. Our 2028 free cash flow objective is supported by multiple levers, including cloud scale, continued mix shift, sales productivity, gross margin improvement, and disciplined investment prioritization.
We will make appropriate adjustments to ensure that we remain on track to achieve or exceed this target. Strong free cash flow enables long-term shareholder value creation, and our commitment to Rule of 40 performance reflects our belief that the world's most valuable companies combine durable subscription growth with disciplined cash generation. In conclusion, we remain optimistic. Our latest technology enables clients to achieve predictable outcomes at predictable costs.
At a time when organizations are struggling to justify the economics of token-maxing and broad-based AI experimentation that fail to deliver ROI, our investments in Blueprint, Infinity Studio, Agentic Process Fabric, and the broader Pegasystems platform are designed to help clients deploy AI at scale within a governed framework that accelerates productivity and business transformation. We've made some critical architectural choices that—even if it takes a few quarters to recognize—are going to be game-changing.
The idea of design time and runtime being respected in their own ways is massively different than the approach of our competitors. Look at it yourself to appreciate the differentiation and how hard it would be for someone to emulate. We continue to see strong engagement from both new logos and existing clients, growing Blueprint adoption, and increasing interest in solutions that help organizations move from AI experimentation to AI-powered business outcomes.
And the market is increasingly rewarding companies that can combine AI, workflow automation, and enterprise transformation within a governed, production-ready platform. Pegasystems is uniquely positioned at the intersection of all of those trends. While execution remains our top priority for the balance of 2026, our long-term conviction has only strengthened. We remain confident in our market opportunity, confident in our ability to deliver substantial and growing free cash flow, and confident in our disciplined approach to balancing growth and profitability, and we will sustain strong Rule of 40 performance and create significant long-term value for our shareholders. With that, Operator, can you please open the line for questions?
OPERATOR
We will now begin the question and answer session. Please limit yourself to one question and one follow up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question for optimum sound quality and, if muted locally, remember to unmute your device. Please stand by while we compile the Q and A roster. Your first question comes from the line of Steve Enders with Citi.
Your line is currently opening. Please go ahead.
Steve Enders, Analyst at Citi
Okay, great. Thanks for taking the questions this morning. I guess I want to dig in a little bit more on just what it is you are seeing on the demand side. It sounded like exiting Q that maybe some of these deals were beginning to unlock and things were getting over the finish line. But can you just maybe give a little bit more clarity on, you know, have you seen deals get over the finish line now? Are the deals that pushed from Q2, like, are those starting to close and just, I guess, how does that make you feel about, I guess, the broader kind of opportunity for these delays to unthaw into the back half of the year?
Alan Trefler, Founder and CEO
So we are seeing movement. We went through a period, I would say, you know, early to mid second quarter in which the level of confusion—look, I've been doing this a long time so I've seen other enormous moments of confusion, but this would rival anything that I'd seen. People just weren't sure what they should be doing. And I would say even today there is enormous confusion that is percolating in lots of these organizations and they're trying to figure out what to do.
They're trying to figure out how this all fits into a future. And the reality is, though, these companies have serious things they need to get done. So we've had excellent engagement from customers. The things we announced in PegaWorld, which obviously was just in June, have generated a lot of enthusiasm. The idea that we have an architecture that is understandable—you can actually understand, hey, big difference between agents that do a lot of their thinking at design time and reuse it—that's something people can internalize and understand.
And the fact that we translate that into a no token cost model has gotten a lot of excitement and provides real reassurance to these clients that we have a thing to do. So I'm seeing things starting to move, but, you know, I'll be honest, in the summer, third quarters are lousy times for a turnaround just in general, and we are working it and I have a lot of confidence that what we're doing is the right thing. And candidly, what we did a couple of years ago in choosing this architecture I think has been enormously vindicated.
And customers do see the difference. But in terms of unlocking, yeah, they will be unlocking in the second half. How quickly it will happen, you know, that's candidly part of this great uncertainty I think a lot of companies are dealing with.
Steve Enders, Analyst at Citi
Okay, okay, that's a couple context around that. And then on, I guess, just the investments that you feel like maybe are a little bit more kind of discretionary, or at least to make the, you know, 700 million in free cash flow work in a few years. Just, I guess, is this making you change how you feel about the own investments that need to be made in your business? Or, I guess, you know, if rubber meets the road, just what does that look like? Or how does that maybe, you know, take shape or change strategically how you think about the business and the investments that need to be made to grow here?
Alan Trefler, Founder and CEO
So look, let me just say we've really enjoyed—after years of candidly not operating that way—we've really enjoyed the benefits of being a Rule of 40 cash flow generating company. And we are committed to doing that. We have enormous opportunities to change the way we operate and become more efficient. And we're seeing that happen and we're doing that. We will temper our investments to make sure that, you know, we don't go back to that spend culture that I think we probably had more of if you go back a decade.
So I'll turn it over to Ken, who's going to be the enforcer on this.
Ken Stillwell, Chief Operating Officer and Chief Financial Officer
Well, I think, Steve, I think what really the simplest way to think about this is that we worked very hard to build the muscle and the discipline in the organization to run as a Rule of 40 company. And based on where our growth trajectory is, we need to always be looking at opportunities to right-size the amount of investment spend that we have based on where we are and our future growth trajectory. So that's, to me, that's just running a good business.
The specific opportunity we have ties to a lot of the opportunity around AI in our own operation, which is areas where we can optimize—where we can not only optimize by leveraging technology, but also optimize by looking at places where we might be able to organize more effectively and be able to get better outcomes by thinking about themes of work that we do that could be better coordinated—and also, just quite frankly, looking at ways that we can drive efficiency in how we deliver value in all the different parts of the business.
I would not say that any part of our financials are best in class and cannot be improved, going from gross margin the whole way through to spend in each of our functional areas. That's really what you should hear from us: that we're going to continue to run a good business, investing in the right areas, and make sure that we're delivering value for shareholders. And we believe Rule 40, and certainly free cash flow, is an important lever in that value creation.
Steve Enders, Analyst at Citi
Perfect. No, it makes sense. And thanks for taking the question.
OPERATOR
Thank you. Your next question comes from Raimo Lenschow with Barclays. Your line is open. Please go ahead.
Raimo Lenschow, Analyst at Barclays
Perfect, thank you. Can you kind of mention the three areas that kind of impacted the numbers? And I was just trying to—the cohort we knew, we knew about the go-to-market changes as well, and, you know, I heard your comments there. How do I have to think about like how much of what we're seeing here now is kind of stuff that, you know, the go-to-market changes and the cohort, which is kind of in your control, so you can control the controllable, versus the token maxing that we see in the market?
So how much is in your control really to change what's going on here? And I have one follow up.
Ken Stillwell, Chief Operating Officer and Chief Financial Officer
Yeah, that's a great question. And there is a connection between those two themes that I think will make sense to you, which is with the whole AI kind of disruption—what that really, that happens kind of right in the middle of us really pushing harder to grow into new logos, grow into new workflows, into new use cases. So there's a tremendous opportunity with Blueprint to be able to unlock, in a much faster, more efficient way, opportunity with both our existing clients and new logos.
So that is a motion that is different than the way that we've operated at Pegasystems over the last, you know, quite frankly, 40 years. So that was a change for us. I think maybe we underestimated some of the ways that we needed to really manage that change internally. So that is a big part of what happened in the first half of the year—we just didn't move as fast as we would have liked to in terms of making that change. And we believe that is a tremendous value unlock, even in a confused market, because there is lots of opportunity where people are looking at solving this problem with a deterministic workflow approach, and certainly with the best platform to do that in Pegasystems. So I think those things are—there is a relation there, but a lot of this is in our control.
Raimo Lenschow, Analyst at Barclays
Yeah. Okay, perfect. Okay, that's good to hear. And then the other things on the guidance—I mean, a common pattern would be like, look, you know, you had a tougher first half to kind of de-risk guidance somewhat. Can you kind of—and you talked to that a little bit, Ken, but, like, I'm still slightly confused. Why not use this opportunity? Thank you.
Ken Stillwell, Chief Operating Officer and Chief Financial Officer
Well, so we've stayed away from the pattern—you know, whether you agree with it or not, or whether others agree with it or not—we stay away from the pattern of being in this constant kind of chasing, trying to re-guide and guide and re-guide quarters. Our business is a business cycle that doesn't happen in a 90-day period typically. So we've kind of tried to stay away from that. I think what we're trying to give some color to is that we had a lot of work to do in the back half of the year in the existing model.
Right? Two thirds of our business was going to be in the back half of the year. That's a good working set for us to go after. It's just going to be very challenging to make up the gap that we already experienced in the first half. So hopefully that gives some color around how we're thinking about the potential range of outcomes. But to be honest with you, I think guiding, re-guiding to a number in an uncertain environment I don't think is super helpful for anybody, including us.
We're going to try to—we want the number to be as big as possible, obviously. But I think that helpful guide of, like, we originally said one third, two thirds—certainly we have, you know, significantly underachieved on the one third in the first half. And if you just assume we can't make that up, but we will still, you know, work hard to achieve what we originally thought, the back half—that's hopefully some color to help you, to help you get a view of that.
Raimo Lenschow, Analyst at Barclays
Okay, perfect. Thank you. Good luck.
Ken Stillwell, Chief Operating Officer and Chief Financial Officer
You're welcome.
OPERATOR
Your next question comes from the line of Devin Au with KeyBanc Capital Markets. Your line is open. Please go ahead.
Devin Au, Analyst at KeyBanc Capital Markets
Hi, Ken. Hi, Alan. Thanks for taking my questions here. Would love to just get a little more context on some of the deal elongation commentary. I know you gave kind of commentary of expecting to add one third and two thirds of the new ACV for the year in the first half and second half, but would love to just get maybe more context. Maybe you could kind of quantify the magnitude of deals that might have slipped from Q2 into the second half or beyond that.
And are these deals that were kind of pushed out already concentrated in any specific vertical or geos? Just any context there would be helpful.
Ken Stillwell, Chief Operating Officer and Chief Financial Officer
So let me start just by saying one thing. So the thing that we're not seeing, which I think we view as a positive, is—what we're not seeing is clients not wanting to engage. Second thing we're not seeing is we're not seeing clients, our opportunities go away because a client says, oh, we're not doing that, we're only going to use AI; we're not doing that, we chose not to do any transformation, for example. So we don't think that the market is actually deciding that transformation is not important.
But a lot of those pipeline deals in Q2 just didn't close, right? They elongated. So when that will unlock and when that will correct, Devin, I think is a very hard thing to predict. But I think the thing that I would be most worried about that I'm personally not seeing is just deals just go away, right? Pipeline deals just go away. We're not seeing that. We just are seeing a little bit of a fine, a fine buyer dynamic in the market. Alan, any kind of—
Alan Trefler, Founder and CEO
Yeah, no, I think that's accurate. People are just confused. It's really almost a max confusion moment. It's starting to make more sense. Candidly, it was wonderful that earlier this year, you know, suddenly tokens started costing something. People realized that they had an economic decision to make here because before that, you know, it was all magic and no expense. You know, candidly, I think we have a compelling story even in a free token-competitive environment because we offer the predictability.
You need a level of determinism. I don't see anyone else out there who's able to use AI aggressively to be able to redesign and reimagine the business and then use AI selectively to make you deliver outcomes at scale at reasonable cost. And we're going to work really hard to push 26.1 out to a lot of new customers and have them get hands-on with that probably faster than we've done historically. And I think that will actually help us unlock customers as we enter the third and fourth quarter.
Ken Stillwell, Chief Operating Officer and Chief Financial Officer
We certainly would expect ACV growth to accelerate from where it is now through the back half of the year, but certainly any ACV shortfall puts pressure on our ability to hit that 575 for this year. So I definitely wouldn't suggest that the ACV landing spot and the free cash flow for the current year are completely unrelated or disconnected. There's certainly a relation there. There are decisions that we make around spending that are in-year decisions that we certainly will be much more thoughtful about given the first half performance.
But we still feel like the cash flow durability is strong. But I would be remiss to suggest that an ACV shortfall would have some cash flow impact associated with it.
OPERATOR
Your next question comes from the line of Patrick Walravens with Citizens. Your line is open. Please go ahead.
Patrick Walravens, Analyst at Citizens
Oh, great. Thank you. Hey, Alan. So as I think back to your June 8 remarks, I think you had a pretty good sense this was coming, right? Because you made a comment back then that's very similar to what you're saying now. You said there's still an enormous amount of confusion. It's going to take months and quarters for the confusion to abate. So what were you seeing at the beginning of June? Because you still had three weeks to go in the quarter. Like, was there a really big deal that pushed, or what made you suspect this was going to be a problem so early?
Alan Trefler, Founder and CEO
Well, I'm not sure it was so early. The reality is when you were talking to customers after the whole, you know, SaaS apocalypse narrative, people were wondering, what do we do, right? Should we be writing this ourselves? One of the interesting challenges for us is that particularly since we sell a lot to very large organizations and, for example, to banks, those have been primary targets of the people trying to get customers to become agenda, right.
I mean, everybody's talking about that. They hear it all the time. And you can just tell they're massively confused with what they hear originally from companies like Microsoft and Salesforce and then, yeah, recently just the overwhelming drumbeat of Anthropic and OpenAI and others coming with their coding solutions. What I'm encouraged by is as recently as last week, with the heads of technology for a very large financial institution going in and saying, we really don't want to be in a position to maintain all this code.
You know, the amount of code that this stuff generates and the lack of sort of sensible structure around it, somebody just needs to look at a Pegasus and say, hey, I can understand this. So when I go and I want to change something, it makes a difference. That's what we need to build on. But it's not unreasonable that everybody's trying to reevaluate things when you think of just all the noise that hit, and I think, you know, Patrick, a lot of that really in Q2.
Patrick Walravens, Analyst at Citizens
That's really helpful. And can I ask, I mean, you mentioned OpenAI and Anthropic. Is Salesforce or Microsoft—are the companies, is it like, is Sierra starting to pop up? Is Decagon starting to pop up? Are those types of vendors contributing to the confusion for your customers?
Alan Trefler, Founder and CEO
Well, you know, look, Sierra has been out there for a while and customers have been experimenting with them. I've yet to see the sort of groundswell that I think was promised in some setting for some of those. I think it does present some confusion opportunities to the customers because I think organizations are unsure: Should I do a Sierra? Should I do a workflow? Should I do direct OpenAI or Claude sort of interface? You know, everybody is in this party shouting at the customers, and in that environment, it's just incredibly noisy.
And what I'm going to say is that we have a distinctive story. I've never been happier that we made some of the decisions we made three years ago.
Patrick Walravens, Analyst at Citizens
All right, great. Thank you very much.
Alan Trefler, Founder and CEO
Thanks, Pat.
OPERATOR
Your next question comes from the line of Marc Chappelle with Loop Capital. Your line is open. Please go ahead.
Marc Chappelle, Analyst at Loop Capital
Hi. Thanks for taking my question. I tell you what, Ken, given that this year is more weighted toward the back half of the year, and given that some of the deals in the pipeline didn't close into a Q, what is giving you confidence that the current delay in purchase decisions is just temporary rather than kind of a more durable shift in spending priorities?
Ken Stillwell, Chief Operating Officer and Chief Financial Officer
I think that's a very fair question. I don't know that I would say I have complete clarity to refute the suggestion that this may go on longer. What does give me confidence is our pipeline is growing nicely and our late-stage pipeline is up. You know, it's very strong over last year and we're not seeing clients not want to engage. And the last point I would make is that the pipeline and the discussions that we have are companies that are using their thinking about AI priorities as well, and they're still kind of engaging with us in very healthy conversations around how we can help their transformation needs.
So it looks like the activity that we're seeing is real—it's real pipe. But the question you're asking about, like, how do I know for sure that the confusion won't continue for a prolonged period of time? I would say I don't think anybody in the market can guarantee that. But I would say we feel confident that the activity is rising, the pipeline is strong, clients are real. We know these clients in many cases. And our engagement around blueprint has been a real big difference maker for us in building that.
Right now, it's just down to us continuing to execute. I mean, I think somewhat of this is you just, as a software company through all this confusion, need to grind through it. You just need to work through and just stay focused on your objectives. I just think we're in that kind of market right now and we have the benefit of having real structural differentiation. I think it can be hard for people who don't want to spend the time digging in and looking.
But if you do, if you actually go look at the alternative approaches—where you have a company who's either writing massive amounts of code or generating dozens or thousands of agents—there's a big difference when you've got workflows at the heart of it. And to be blunt, we are the best workflow company out there by far.
Marc Chappelle, Analyst at Loop Capital
That's fair. Thank you. And then, Ken, would you say that renewals are holding up better than net new business, or are you seeing pressure on both?
Ken Stillwell, Chief Operating Officer and Chief Financial Officer
I would say the net new business and the expansion with existing clients is where some of the kind of the freezing happened, I think, in the first half of the year.
Marc Chappelle, Analyst at Loop Capital
Great, thank you.
OPERATOR
Your next question comes from Patrick McKilwee with William Blair. Your line is currently open. Please go ahead.
Patrick McKilwee, Analyst at William Blair
Hi, Alan and Ken. Thanks for taking my questions. So we've heard that blueprint helps cut your average sales cycle roughly in half, which seemingly supported material reacceleration in your revenue over the last year or two. Can you talk about the significance of Infinity Studio 26? You know, if you think that has the potential to have a similar effect on your implementation timelines, and as we think about that, do you feel that that dynamic alongside some of the frozen but not lost deals you've talked about provide any kind of spring loading of demand you feel like you have heading into late '26 or into '27?
Alan Trefler, Founder and CEO
Yeah, I think that's a good question. So, you know, bringing the blueprint AI capabilities into Infinity Studio is a really, really big deal. What we had done originally was focus very much on how do you completely reimagine the design process. And candidly, that was a sufficiently hard problem; it deserved our focus. But what it's meant is that after somebody wanted to begin using the system, the whole concept of building for change required you to return to a more antiquated environment.
And customers told us, no, no, we don't want to do that. We want to be able to continue in this sort of accelerated mode of thinking and inspiration. I think having Infinity Studio be available with blueprint AI technology is going to be a really, really big deal. And candidly, I think it will do more than halve the build and delivery experience. I think it's going to completely change it, much in the same way that blueprint did. So we're very excited about that.
But, you know, candidly, it's been in the market now for a week, so we're going to get some real experience. I'm sure we'll talk about it at the next call.
Patrick McKilwee, Analyst at William Blair
Okay, thanks. And wanted to ask if you could quickly provide some thoughts on the proliferation of open source and open‑weight models. You know, fast‑evolving space, but what implications, if any, you believe.
Alan Trefler, Founder and CEO
I think it's actually sort of great and inevitable. The reality is that these model makers are going to find that they've become largely commoditized and, you know, that's an interesting thing to see how quickly that is happening.
Patrick McKilwee, Analyst at William Blair
Okay. Thanks, Alan.
OPERATOR
We have reached the end of today's Q and A. I will now turn the call back to Alan Trefler for closing remarks.
Alan Trefler, Founder and CEO
Thank you. Obviously, it's a challenging moment, but last week, actually, we opened the NASDAQ to celebrate our 30th anniversary. And this being my 120th earnings call, frightening to say. We've seen a lot. We've seen a lot of technology change. We've seen a lot of market changes, a lot of market shifts. I just want to assure people that I think we have a really good understanding of how to react strongly but smartly, and we are going to do that.
And I appreciate your support. Thank you very much.
OPERATOR
This concludes today's call. Thank you for attending. You may now disconnect.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.
Login to comment