Pegasystems Inc.

Ladies and gentlemen, thank you for standing by. My name is Krista and I will be your conference operator today. At this time, I would like to welcome you to the Pega Systems fourth quarter and full year 2025 earnings conference call-in webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. And if you'd like to withdraw your question, again, press star 1. Thank you. I would now like to turn the conference over to Peter Welburn, Vice President, Corporate Development and Investor Relations of PegaSystems. Peter, please go ahead.

Thanks so much, Krista. Good morning, everyone, and welcome to PegaSystems Q4 2025 earnings call. Before we begin, I would like to read our safe harbor statement. Certain statements contained in this presentation may be construed as forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. The words expects, anticipates, intends, plans, believes, will, could, should, estimates, may, forecasts, and guidance, or variations of such words and other similar expressions, identify forward-looking statements which speak only as of the date the statement was made and are based on current expectations and assumptions. Because such statements deal with future events, they are subject to various risks and uncertainties. Actual results for fiscal year 2026 and beyond could differ materially from the company's current expectations. Factors that could cause the company's results to differ materially from those expressed in forward-looking statements are contained in the company's press release, announcing its Q4 2025 results, and in the company's filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2025, and other recent filings with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance on SHIP's forward-looking statements, and there are no assurances that the matters contained in such statements will be achieved. Although subsequent events may cause our view to change, except as required by law, we do not undertake and specifically disclaim any obligation to publicly update or revise these forward-looking statements, whether as the result of new information, future events, or otherwise. Our non-GAAP financial measures discussed in this call should only be considering conjunction with our consolidated financial statements prepared in accordance with GAAP. They are not a substitute for financial measures prepared under U.S. GAAP. Constant currency measures are calculated by applying the December 31st, 2025 foreign exchange rates to all periods shown. Reconciliations of GAAP and non-GAAP measures can be found in the company's press release announcing its Q4 2025 results. And with that, I turn the call over to Ken Stilwell, Chief Operating Officer and CFO of Pegasystems.

Thank you, Peter. I'm thrilled to share the financial highlights of what's been an outstanding year for Pega. Execution by our global sales team, powered by our blueprint experiential sales approach, drove top-line outperformance in 2025. And our company-wide commitment to Rule of 40, supported by robust internal adoption of AI built natively in our platform, delivered bottom-line outperformance as well. Let's start with the top line. Total ACV grew 17% year over year, as reported, and 14% in constant currency, beating our guidance. Pega Cloud ACV, once again, drove that growth, increasing 33% year over year, as reported, and 28% in constant currency. That was a pretty significant acceleration from last year's 18% growth rate as reported and 21% in constant currency. And Pega Cloud ACB growth accelerated sequentially in all four quarters in 2025 in constant currency, demonstrating the power of both our cloud-first strategy and Blueprint, our AI design agent. Three factors drove our ACB growth acceleration. in 2025. First, the Blueprint revolution has been key to our growth. Blueprint moved from a promising experiment in 2024 to a fundamental change in how we sold in 2025, enabling a completely new experiential sales process. Our Blueprint agent is now core to how we operate, shaping everything from how we sell to how we deliver and drive client success. Second, We have the strongest global sales execution that we've ever had. We drove a highly effective discipline and scalable sales cadence worldwide with an unwavering focus on customer outcomes. Our account executives executed exceptionally well against our target account model, reinforcing the importance of focus and discipline. And third, we've been increasing demand from our clients and partners for Pegas differentiated predictable AI agents. integrated into proven enterprise workflows. As a result of these factors, our net new ACV increased by 37% year over year in constant currency. Looking ahead, we're confident in the durability of our ACV growth because of the strength of our moat. PEG is deeply embedded in our clients' core operations through vertical specific workflows, and it's integrated at enterprise scale. supporting hundreds of millions of users globally. Pega has become a trusted compliance backbone for our clients and for regulators worldwide. And you may have noticed that we just achieved ISO 42001, a certification across Pega Cloud Services, our Gen AI solutions, and our predictive and adaptive analytics capabilities. Pega's financial performance achieved several key milestones in 2025. Among them, free cash flow increased 45% year-over-year to $491 million, exceeding our guidance by $51 million. This outstanding improvement in free cash flow was driven by our ACV growth and reflects the full strength of Pega's subscription model and the benefits of our subscription transition. Our strong free cash flow generation provides us with the flexibility to invest for growth while also returning significant capital to shareholders. In 2025, our capital allocation strategy stayed firmly focused on driving long-term shareholder value. Our top priority continued to be investing in organic growth including product innovation and go-to-market capacity, where we generated consistent strong returns on invested capital. We also maintained a strong balance sheet. We ended 2025 with $426 million in cash and investments. During 2025, we repaid $468 million of debt, repurchased $498 million of shares, and distributed $15 million in dividends. This reflects the strength and durability of our business model. Looking ahead, we are confident in our ability to sustain this balanced and disciplined approach to capital allocation. Our contractually committed backlog grew 28% as reported year over year, and 23% in constant currency, and now exceeds $2 billion as reported for the first time in Pega's history. The biggest driver of our backlog increase was the increase in PegaCloud backlog, which grew 36% as reported year over year. PegaCloud backlog now represents 74% of total backlog, which is amazing. We're also really pleased that the Supreme Court of Virginia unanimously affirmed what the Virginia Appellate Court also unanimously recognized as that the trade secret trial and resulting verdict were fundamentally flawed. What this means is that the $2 billion verdict is gone. For more details, please see the email I sent to our employees on January 8th, which we filed as an 8K. Moving to 2026 guidance. As a reminder, we provide only annual guidance, not quarterly guidance, and we typically do not update guidance during the year unless we have a material acquisition. Here are our key guidance metrics for 2026. Total ACV growth of 15 percent. Total revenue of $2 billion, an increase of approximately 15 percent, and a very significant milestone for the firm. And free cash flow of $575 million, a 17 percent increase over 2025. With our rapidly increasing free cash flows, our board also authorized an additional $1 billion in buyback capacity. This authorization reflects our confidence in the durability of our cash flows and our commitment to discipline capital allocation. Since we don't provide quarterly guidance, I've received feedback that it's helpful when I provide a few thoughts on modeling our business for 2026. With our subscription transition complete, you'll notice in our 2025 results and in our 2026 guidance that revenue growth and ACV growth are more closely aligned. Going forward, we expect this trend to continue, a dynamic some of your models may not have fully reflected yet. Now that PegaCloud ACV is greater than 50% of total ACV, our annual revenue becomes more predictable. Second, in 2026, we expect the progression of our net new ACV to follow a more historically seasonal pattern with a significant amount of our net new ACV occurring in the second half of 2026. This timing reflects the nature of our contract renewals, which are more concentrated into Q3 and Q4 of 2026. As a result, we expect subscription license revenue to be back-end loaded as well. Third, as AI reshapes how Pega and its partners deliver solutions with Blueprint, we intentionally reduced our professional services billable headcount and increased our reliance on partners for delivery. So we expect full-year professional services revenue to represent roughly 10% of our $2 billion revenue guide in 2026. Finally, but also the most impactful factor is our rate of PegaCloud ACV growth. PegaCloud ACV has accelerated for four consecutive quarters, fueled by the strength of Blueprint and strong execution. We expect this growth acceleration will continue to be driven by AI-powered automation initiatives by CIOs and executives prioritizing productivity and efficiency gains. Given these dynamics, we expect Pega Cloud revenue to continue to accelerate above 30% in 2026. And you can see that acceleration signal in our current Pega Cloud backlog growth. In conclusion, we've made tremendous progress in transforming our business model over the last several years. Looking back, 2025 was a year where we positioned Pega exceptionally well for continued growth accelerations. Thanks to all of our employees for running the business with a rule of 40 mindset. We look forward to seeing investors in the next few weeks at upcoming investor banking conferences. And also, please mark your calendars. Our annual investor session will be held on Monday, June 8th, at the MGM Grand in Las Vegas, Nevada, in conjunction with PegaWorld, our annual client conference. We'd love to have you join us there in person. And with that, I'd like to hand it over to Alan Treffler, our founder and and CEO.