Pegasystems Inc. (PEGA) Earnings Call Transcript & Summary

Well, thanks, everybody, for joining us this afternoon. I'm Steve Enders, part of the software research name here at Citi. I want to welcome everyone to day 1 of the Citi Global TMT Conference. With us for this session, we have Ken Stillwell from Pega. Ken, thank you so much for being here.

Thanks, Steve. I appreciate the invite again. .

Yes, of course. Maybe just to start off, I'm sure people know who Pega is, but maybe we can maybe introduce Pagano investors who maybe are a little bit newer to the story. And maybe what are some of the key problems that Pega is helping customers solve today?

Sure. So Pega has been helping enterprise clients for gosh, 4 or 5 decades. And the types of solutions or some examples of the things that we do to help our clients typically referred to as enterprise workflow and specifically workflow where it's deterministic, which is things that either have a certain process that needs to be regulated or there's a requirement for a certain way that something gets done. Or internally, clients may put those types of controls on their own internal processes. So for example, things around ERP, as 1 example, that might not be legally regulated, but you may have certain internal controls or processes that you need to have repeatable that need to be very predictable that can be proven after the fact that you followed a certain series of steps and stages to be able to execute that work. And we've always had AI. Pega was -- we bought -- we actually purchased a company in 2010 called Cordiant which did statistical AI. We integrated that in with our solutions as a customer decision hub swords with many people that know Pega will have heard that term before, where we helped drive certain statistical probabilistic based decisions or outcomes with generative AI, which we've introduced into the platform a few years ago, we're now leveraging Gen AI both in the design and the run time capabilities, design being heavily winder conceptualizing and modernizing a specific application and run time where you want to really try to take unnecessary human steps out of that workflow or just otherwise make it be more automated, whether that be kind of the interaction with the customer or in just terms of the back-office transaction flow.

Okay. All right. No, that's helpful. I do want to talk about AI and what you're doing, what you're doing there? I guess before we get into that, I do want to talk a little bit about just the demand environment and the performance that we've seen so far this year. I think for the quarter, we were at 8% constant currency growth on ACV. You were originally talking about 15% growth for the year. How does that maybe performance that you've seen so far this year change your outlook? Or how are you thinking about the ACV environment in the back part of the year?

Sure. So 1 thing to start with is we only guide for those that are not aware of this, we guide at the beginning of the year, and we do not reguide. We don't guide quarterly. We guide for a full year. We don't reguide. In that environment, what we've tried to do is to help provide information that would help connect some of the some of the views that we had around where the full year looked like it would land. Many of our sell-side analysts, including yourself, took that information and then kind of reprojected what they thought the year would look like. And I think you guys have done a good job kind of collate ground where that was going to be. In terms one, I think the reason why we're not going to get to 15% or I would say it's unlikely we're going to get to 15% is we already had a lot of business in the back half of the year. And for us, we don't have a lot of pipeline build and close within the 30-, 60- or 90-day period. Our campaigns tend to progress over a quarter or 2 or 3. So for us to close something in, say, it likely would have had to have been in the pipeline when the quarter started. So we just have like a runway opportunity. The second point is that the ramp that we had in the back half of the year over what last year was a pretty significant ramp already in terms of the growth in net new ACV year-over-year. We were kind of already targeting something like in the 30s in terms of the percentage increase year-over-year. So we had a pretty aggressive ramp. We don't have a very short pipe building to conversion process. And what we saw in the first half of the year, I think probably we didn't do as good of a job in the back half of 2025. And maybe even into Q1 to try to think about leveling the year more, pulling things forward that we could building back up pipeline, bookings, et cetera. So for the full year, I think the Street has somewhere around 10% growth or something. And if I had heard what we said on our call, I probably would have landed somewhere around that number.

Okay. All right. That's good to hear. Maybe we can talk a little bit about the levers that you feel like you can pull into the back part of the year. What do you feel like you can do differently? Or what changes have you maybe kind of put in place to improve the execution and improve the sales performance in the back part?

So a pretty big shift for us -- we intended to embark on at the beginning of the year at our sales kickoff. And just to be honest with you, I don't think we fully internalized or pushed hard enough on this change. And the change was historically, Pega has been more of an account manager type selling motion, which is we have existing organizations, those organizations spend with us. They -- we look at expansion opportunities. We don't have a lot of new logo chasing. We don't have a lot of growth even outside some of the buying centers that we've typically done business with, that has not been something that was, I would say, reflects at Pega. . When we did our sales kickoff in January, we instrumented a number of activity measures that we wanted to measure, things like new contracts, new meetings. More kind of think about them as more hunter or outbound type activities. And we -- one could probably argue that we should have probably always had some level of that motion, but we really wanted to intentionally do that in 2026. A few reasons. One, we were starting to see a little bit more interest in new logos. Two, we knew with AI that with AI, there's -- everybody is telling a story with our clients around AI and how they're going to solve all their problems. We had to make sure that we were kind of instinctively going out and getting that message in front of clients. And it turned out that in Q2 there was a lot of confusion with clients around AI. What's the value prop every single week, somebody would come out with some new industry that AI was going to put out of business, right? So there was a lot of talk, a lot of hype, a lot of anxiety, a lot of confusion. And at that exact time, that's when we needed to execute on our hunter mentality. And I just don't -- I don't think we did a good job of executing that. So we really hit hard toward the end of June which quite frankly is probably too late to actually make a difference in Q2 to make sure that, listen, even if we're talking to the same buyers that we know, even if we're talking to our contact we may have known for 25 years. They're getting attacked by all different vendors, whether they're AI natives, whether they're competitors or service providers talking about the promise of what they can do for our clients. And we need to make sure that we're with them and helping educate them and arming them to understand how we can help them and how our unique value proposition. So I think there's -- that's -- I would call that in the bucket of execution, which is managing activity, managing contacts and I think we've now -- we instrumented that. We've actually now put that into our sales forecast calls because we think this is not something that's going to be a 1 or 2 quarter. We believe this is going to be critical to make sure that you're constantly building like the motion of getting in front of clients and talking about the value prop. Now Interestingly enough, we have Blueprint that we released a couple of years ago that's been a great tool for actually enabling that conversation with our clients. So the key is BLUEPRINT to activity, getting in front of buyers, whether those be buyers we know, buyers that we don't, new logos, to really drive kind of the awareness of how Pega can help and then the next naturally tracking pipeline build, pipeline progression. But the most important first part first point is really just getting -- not taking anything for granted around our clients' digital transformation journeys, even if we have very, very deep relationships with them.

Okay. And I guess, since you started putting this emphasis in place and trying to change the mentality -- what have you seen so far from the sales force? Like what are the metrics you're tracking there? How are those kind of trending? And -- just how is that maybe looking through Q3 so far?

It's interesting. We've had -- just as a small start to that -- to answer that question, we've seen some people in our sales team that have said, obviously, thank you for reinforcing that. Of course, we do. We've had others that have kind of paused and said, it's -- are you sure you want me doing that. Like I have 1 big client, I have 2 buyers. And so what we realized is that was good feedback to understand because we're not saying that every single of our people and our team are going to do hunting and not account. There is a balance of how we distribute the team. So I think we learned a lot -- what I took from that, though, is the people heard they were processing it. We had those. So that was great. Our sales managers, I think, also keeping in mind that this is not just about an account executive, this is about the whole management chain, right? If you have an account exact really good at hunting but a management chain that isn't, that won't work. If you have a management chain that's hunters, but it account exact that won't work. You have to really have -- everybody has to be kind of moving to the same beat. And so I think from that standpoint, like that was a really great like anchoring and awareness to see how much our teams internalize the importance of that, all the way up to our Chief Revenue Officer. The second thing I've noticed is that the amount of engagement and insight that we have early in the sales campaign, you can see the direct connection where that activity is higher. So I think the -- and that's exactly what we wanted, right? We didn't expect this to be like a silver bullet that when you did something pipeline would just immediately grow. This is a part of a process of being of really being deeply engaged with buyers and influencers. And PEG is the kind of solution that does have -- you do at times have a buying by committee dynamic of it, right? You have a business owner, you have someone in the CIO's office. You have other standard. You have a system integrator, you may have executive sponsors. There's a lot of influencers in that. So I think the thing we've just seen is 2 things. One is the internalizing why we're trying to do it, I think, was is a big change, but I think has been internalized by our field teams. And the second is just the activity of actually getting those at bats, right? And by the way, we just released Infinity 26, I think it was GA about 30 days ago. And what better thing to do to use that as a way to get in front of our clients and get them exposed to the to the AI to AI native solution that we just released.

I do want to touch on that. Before we go into that, though, maybe just last question, Tianbo, on the sales execution side of it. It did seem like there had been a big focus on net new logos and trying to drive that and maybe a little bit of shift away from the existing installed base just with the pipeline build and how long it takes for some of those deals to progress and get through the finish line -- just how does that maybe change how you think about the mix of existing versus net new through the rest of the year and maybe into next year and just the pipeline dynamics between those 2 different customer bases.

So it's a great question about where do we think the opportunity is and I think that I would maybe draw a bigger circle around this and say it's not just new logos. It's all new workflows. It's anything that's new to what we've already done. That could be a new workflow within an existing buyer that you might have had a 20-year relationship with. It could also mean a buyer that's 2 doors down in a different business unit at that same client. And then, of course, net new logos, someone that doesn't know Pega at all. So I think that I would say all of those are important to get that outbound motion. We would expect that what would come from that over time is that new logos would start to creep up a little in terms of the total amount of the impact on growth although that may be small enough and happen over a period of time that it may not be that noticeable in terms of the ratios. . So we're going to be very dependent for our growth to accelerate and continue to accelerate. We're going to have to sell to new use cases that we have not sold to. And that involves in a company like Citi and it also involves to a financial institution that we've never done business with.

Okay. I do want to make this interactive. So if there's questions in the room, we'll make sure to get to those. I do want to ask a little bit about the AI strategy first, and then we'll make sure to get to those. So just on the new Infinity release, and I think that it includes Infinity Studio, what's different that, that enables for you in -- both from a customer standpoint, like what they're able to do that they weren't able to do before? And maybe how does that kind of augment how you think about the ability to win or right to win within some of these accounts from that.

So BLUEPRINT, I'll talk about Blueprint and then finished Studio. So BLUEPRINT, the purpose of BLUEPRINT was to get into the design and the selling activity where we could help our clients visualize and ideate around ways that they could visualize how to solve kind of reimagine or a transformation of a legacy application. If we didn't have Blueprint, the way that was done was through a whiteboarding exercise typically. So it involved a lot of what I would say, custom and unique interactions that were not leading to necessarily as fast as we would like them to. So BLUEPRINT was around a very structured simple set of drop-downs and a few fields to be able to sketch out what that design experience, that upfront design experience. But without Infinity Studio, without Infinity 26 that left clients with this concept. Here's a concept of something I could kind of see what it looks like, how do I make that real. It wasn't as easy for them to make it real. They would go into a development experience that was like the development experience over the last 25 years. So that's where we had to really evolve the development experience, which is Infinity Studio. So think of Blueprint as I'm going to ideate, I'm going to build kind of almost like the wire frame, so to speak, of what this is going to look like. I'm going to load that blueprint into Infinity 26 -- and then in FINI 26, I'm going to have an AI-assisted actually development where I can say, "Okay, I'm trying to build this customer service app, here's the vertical that I'm in. Here's what I've done so far. Tell me what I'm missing. And it will go through a series of things. If you thought about your integrations, here are some likely integrations. Do you need MCP connection to be able to have people use AI tools be able to interact with the design environment for your application. Like you could go through and it would help you -- it would really help you not get lost right? It would help you not be lost in that journey. And that's really critical because our clients don't want to have to be super users to be able to go through that design experience. And historically, companies like Pega and Pega as well really had levels of higher certification that you were required to get to really be productive in the development environment. And that's -- so we wanted to change those 2 dimensions. One is at design time kind of in that upfront blueprint and also at design time when you're finishing or building out 1 of the minimum level product of the product and evolving it, innovating it. We wanted to make sure that, that experience didn't require you to have to have a PhD in Pega.