Pegasystems Inc. (PEGA) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to the Pegasystems Second Quarter 2026 Earnings Call and Webcast. [Operator Instructions] I will now hand the conference over to Peter Welburn, Vice President of Corporate Development and Investor Relations. Please go ahead.

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, may, forecasts and similar expressions are intended to identify these forward-looking statements. These statements speak only as of the date the statement was made and are based on current expectations and assumptions. Because these statements relate to future events, they 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 as 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.

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 Pega. 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 the 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 was 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 share 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 arise. 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 cloud logic. These reasoning costs become surprisingly and prohibitively expensive. Now this cost uncertainty is leading many, many organizations to sort of freeze and trying 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 token costs. Our clients' demand for predictable outcomes and predictable costs plays directly and uniquely to Pega strength. 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 and build and continues to evolve. As our tag line 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 2 misguided approaches that others in the market are offering. The first of this guides 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 coding 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 themselves of those technologies and tools. It went through an inexpensive fingers 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 by stages, 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 applied powerful AI reasoning at design time before an application goes into production enabling our clients to reimagine how they get worked on, create better processes and see them working in an application, they can design in minutes. Blueprint takes in information about our clients' business and create 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 Kodex, where is the architecture, how is the business launch 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 either the inputs they're giving. 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 enable clients to reimagine their business processes to be better to see how those processes translate into 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 nisperiential and product led one. In retrospect, when we started with Blueprint, we really focused on new clients and new applications. We have not yet brought the full power of Blueprint to help existing clients reimagine and rethink their existing big applications for 2 reasons. First, we were learning how to use it. And secondly, in helping clients reimagine existing systems is, in many ways, a more tricky and complex problem. But now with Pega 26, 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 Pega applications. This release brings Blueprint AI from the design time use and to build the 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 ones. 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, how are they 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 could use Claude Code or open AI codecs or any coating 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 2 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 run time. Now people know this approach brought risks. I mean agents built on LLM 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 of 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. Highlight the metaphor of chef. Great restaurant doesn't reinvent each dish each and every each and every paper. 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 and run time. And this also means we're not using up massive amounts of costly reasoning tokens and run time. And it's how we are able to offer our Agentic AI as an uplift to our case base price with no variable per token costs. We use AI selectively for specific and well-defined tasks, where it adds value in run time, like a 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 allow our clients both ensure they deliver the outcomes they want predictably and to ensure their AI costs or 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. And 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 build 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 of installation of 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. We imagine 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 worker design cut. And then what uses requested business outcome, the menu at the restaurant contains the proven recipes that organization has been how to do extremely well at scale and that are consistent with regulators' needs and the efficiency the organization wants. Clients, I believe are continuously -- are increasingly recognizing the value of our approach, and we have a strong and differentiated story today. The clients who saw the PegaWorld who I met with extensively, we're extremely excited. And you can see Infinity 26 to sell in Kerim'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 to 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've talked to a lot of customers who don't see how that works either. Our approach instead really builds on our traditional workflows, inspired by AII for way more aggressive design and the use of AI to do the pieces that it needs to do have run time. And we remain committed to how we help our clients get through the confusion that has been candidly obligated. But so much noise in the market about SaaSpocalypses and software being debt, et cetera. 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 accept, 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 cash -- 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 technology and capabilities to improve our efficiency and create additional operating leverage. And we will temper our spend accordingly vis-a-vis our free cash flow needs. With that, let me turn it over to Ken to provide more color on our first half. Jim?

Thanks, Alan. The first half of '26 had challenges for 3 primary reasons. First, as we explained in February, our renewal portfolio significantly weighted toward the back half of the year, resulting in a more typical seasonal pipeline pattern. Because of 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 software market created significant buyer uncertainty organizations wrestle 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 whiplash to the opposite extreme, where companies sought to tightly monitoring 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 Pega 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 clear view of the business momentum than revenue growth in a subscription model. Pega Cloud ACV increased by [ $165 billion ] as reported year-over-year, growing 22% as reported and in constant currency. This growth reflects the continued expansion of our cloud business and reinforce the success of the subscription transition we began in 2017. As a result, Pega Cloud remains the fastest-growing and most important component of our subscription model. The 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 Pega 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 Pega 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 Pega Cloud ACV will create a more predictable, higher quality revenue stream, improved cash flow visibility and strengthen our ability to compound shareholder value. While our total ACV growth was below expectations, we continue to operate 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 an 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, managing token costs. So this -- 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 2026. The 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 first half of 2026. Share repurchases remain very attractive use of capital and represent a meaningful opportunity to create long-term shareholder value, especially in a disruptive market that we see around SaaS. We remain confident the long-term prospects of the company and our strong cash generation provides 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 shifts favors Pega's 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. Pega does not charge or token, rather than monetizing for token, our AI monetization strategy is based on the business value that clients create on our platform. Clients should be rewarded for driving outcome, not penalized for AI usage. Our monetization approach features 2 key elements. First, Blueprint makes it easier and faster for clients to create and deploy applications on the Pega platform. Given our case-based pricing model, the more workflows clients run on the platform, the more value that they create and then the more ACV that we generate. Second, we apply case price uplift for advanced AI-powered run time capabilities, including innovations such as Agentic Process Fabric. This approach aligns our economic interest with our clients value creation and success as clients drive more value for Pega 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 of 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 model our full year net new ACV ad for 2026, we assumed 1/3 of that add would be in the first half of the year and 2/3 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 that 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 that Pega 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 Pega 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 investors. As we iterate on our annual -- as we reiterated at our annual investor session last month, we expect to generate $700 million plus of free cash flow than 2028. Slower ACV growth in the first half of '26 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 the Rule 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 organizations are struggling to justify the economics of Token masking and broad-based AI experimentation that failed to deliver ROI. Our investments in Blueprint and Infinity Studio [indiscernible] Process Fabric and the broader Pega platform are designed to help clients deploy AI at scale within a governed framework that accelerates productivity and business transformation. We made some critical architectural choices that even if you take -- 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 in the approach of our competitors. Looking 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. Pega 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 substantially growing free cash flow and confident in our disciplined approach to balancing growth and profitability and will sustain strong Rule 40 performance and create significant long-term value for our shareholders. With that, operator, can you please open the line for questions.

[Operator Instructions] Your first question comes from the line of Steve Enders with Citi.

I guess I wanted to dig in a little bit more on just what it is you are seeing on the demand side. It sounded like exiting 2Q, but 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 have you seen deals get over the finish line now? Are the deals that pushed from 2Q? Like are they 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 undo into the back half of the year?

So we are seeing movement. We went through a period I would say, 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 see. 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 trying to figure out what to do, they're trying to figure out how this all fits into our 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 Pega, 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 and design time and use it, that's something people can internalize and understand. And the fact that we translate that into a new token cost model, has gotten a lot of candidly excitement and provides real reassurance of these clients that we have a thing to do. So I'm seeing see things starting to move. But I'll be honest, in the summer, the third quarters are lousy time for return around, it's 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 were choosing this architecture. I think it's been enormously indicated and customers do see the difference. But in terms of unlocking, yes, they will be unlocking in the second half. how quickly it will happen, that's candidly part of this great uncertainty, I think a lot of companies are dealing with.

Okay. Okay. That's context around that. And then on, I guess, just the investments that you feel like it may be a little bit more kind of discretionary or at least to make the $700 million in free cash flow work in a few years. Just -- I guess is this, I guess, making you change how you feel about the own investments that need to be made in your business? Or I guess if rubber meets the road, just what does that look like? Or how does that maybe take shape or change strategically, how you think about the business and the investments that need to be made to grow here?

Some of -- we really enjoyed after years of capable not operating that way, we've really enjoyed the benefits of being a Rule of 40 cash flow generated 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 we don't go back to the 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 of this.

Well, I think, Steve, I think what really the simplest way to think about this is that we work very hard to build the muscle of 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 rightsize the amount of investment spend that we have based on where we are and our future growth trajectory. So that's just -- 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 optimized 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 could drive efficiency and how we deliver value in all the different parts of the business. I would not put us -- 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 is 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 that we believe rule and certainly free cash flows lever in that value creation.

Your next question comes from Raimo Lenschow with Barclays.

Can you kind of mention the 3 areas that kind of impacted the numbers. And I was just trying to -- the cohort we knew about the go-to-market changes as well, and 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 the go-to-market changes and the cohort, which is kind of in your control, so you can control the controllable versus the talking 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 1 follow-up.

Yes, that's a great question. And there is a connection between those 2 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 work flows into new use cases. So there's a tremendous opportunity with Blueprint to be able to unlock in a much faster and 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 Pega over the last 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 is 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 Pega. So I think those things are -- there is a relation there, but a lot of this is in our control.

Yes. Okay. Perfect. That's good to hear. And then the other things on the guidance. I mean, a common pattern would be like, look, you had a tougher first half to kind of derisk guidance somewhat. Just kind of -- can you kind of -- and you talk to that a little bit, Ken, but like I'm still slightly confused why not use this opportunity.

Well, so we're -- we've stayed away from the pattern, whether you agree with it or not or whether others agree with it or not, we saw the pattern of being in this constant kind of chasing, trying to reguide guide and reguide 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? 2/3 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 reguiding 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 1/3, 2/3, certainly, we have significantly underachieved on the 1/3 in the first half. And if you just assume we can't make that up, but we will still work hard to achieve what we originally thought in the back half. That's hopefully some color to help you get a view of that, Raimo.

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

Would love to just get a little more context on some of the deal elongation commentary. I know you gave kind of that commentary of expecting to add 1/3 and 2/3 of the new you 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 2Q into the second half or beyond that? And are these deals that were kind of pushed out, are they concentrated in any specific vertical or geos. Just any context there would be helpful.

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 the client says, oh, we're not doing that. We're only going to use AI. We're not doing that. We're going to -- we chose not to do any transformation, for example. So we don't think that the market is actually deciding the transformation is not important. But a lot of those pipeline deals that just did close, right? They elongated. So we -- when that will unlock and when that will correct, Devin, I think it's a very hard thing to predict. But I think the thing that I would be most worried about that I'm personally not seeing it's just -- if 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 buyer dynamics in the market. Alan, anything to add there?

No, 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, suddenly take started costing something. People realize that they have an economic decision to make here. Because before that, it was all magic and no expense. Candidly, I think we have a compelling story even in a free token competitor 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 a reasonable cost. And we're going to work really hard to push [ 26 ] 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 online customers as we enter the third and fourth quarter.

Got it. I appreciate the additional context there. And then maybe just a quick follow-up on the free cash flow side. I mean just given the potential of a kind of more muted ACV outlook for the year. Can you just kind of speak to the confidence in the lowering the $575 million outlook for the free cash flow side? Was that kind of guidance to hinge on the ACV growth to accelerate for the year? Just any color there?