Conferencia de resultados del T3 de 2026 de Pegasystems (PEGA): crecimiento del ACV y reestructuración

Puntos clave

• El valor anual del contrato (ACV) aumentó un 7% interanual a tipo de cambio constante, alcanzando los 1.660 millones de dólares. El nuevo ACV neto del Q3 fue de 32 millones de dólares, la incorporación trimestral más sólida de 2026.
• El ACV de Pega Cloud creció un 20% y representó el 59% del ACV total. La cartera de pedidos de Pega Cloud se incrementó un 25% a tipo de cambio constante.
• El flujo de caja libre sumó 290 millones de dólares en los primeros nueve meses de 2026, afectado por un menor crecimiento del ACV y desembolsos de efectivo extraordinarios, incluidos acuerdos judiciales.
• La dirección prevé que el crecimiento del ACV se acelere en el Q4, pero señaló que es probable que el crecimiento del ACV para todo el año 2026 finalice entre la tasa actual del 7% y el 10%.
• Pegasystems está reorganizando su modelo de comercialización, unificando el área de marketing, creando un equipo de ingeniería Lighthouse orientado al cliente y centralizando las operaciones comerciales. Se prevé que la plantilla se reduzca a aproximadamente 5.000 empleados en el Q1 de 2027.
• La empresa mantuvo su objetivo a largo plazo de alcanzar al menos 700 millones de dólares en flujo de caja libre en 2028, al tiempo que reconoció que se requiere un mayor crecimiento del ACV y una disciplina de costes continuada.

Datos financieros principales

Rendimiento operativo y del negocio

Pega Cloud continuó siendo el principal motor de crecimiento. La dirección afirmó que los contratos que entran en la cartera de pedidos de Pega Cloud suelen convertirse en ingresos durante los dos o tres trimestres siguientes, según las fechas de entrada en vigor y las condiciones contractuales.

La demanda se centró en Blueprint, flujos de trabajo basados en agentes y automatización diseñada para ofrecer resultados, costes y gobernanza predecibles. La dirección posicionó la arquitectura de flujo de trabajo de Pega como una alternativa controlada a permitir que los agentes de IA razonen a través de procesos empresariales completos durante la ejecución.

La empresa citó a un importante banco estadounidense donde los flujos de trabajo gobernados y los agentes especializados de IA redujeron el tiempo de resolución de reclamaciones de 10 días a 10 minutos. También describió un despliegue gubernamental que convierte automáticamente documentos no estructurados en trabajo estructurado, al tiempo que deriva las excepciones a revisión humana.

El volumen de la cartera de proyectos (pipeline) mejoró durante el Q3, incluida la actividad proveniente de nuevos clientes y la expansión de flujos de trabajo en la base de clientes existente. La dirección señaló que el Q4 comenzó con una cartera de proyectos más madura, aunque las tasas de cierre para nuevos clientes siguen siendo más difíciles de predecir debido a que la empresa cuenta con menos datos históricos sobre esas oportunidades.

Pegasystems está implementando cuatro cambios operativos:

1. Acercar la autoridad comercial y los recursos a los clientes regionales.
2. Consolidar el área de marketing bajo un único líder para ofrecer un mensaje unificado sobre IA y flujos de trabajo.
3. Crear una organización enfocada en la adopción, que incluye ingenieros Lighthouse desplegados sobre el terreno para trabajar directamente con los clientes.
4. Centralizar las operaciones de comercialización y consultoría bajo la estructura financiera.

La empresa prevé contar con aproximadamente 5.000 empleados en el Q1 de 2027, unos pocos cientos menos que en los niveles actuales. La dirección espera que estos cambios mejoren la ejecución y el apalancamiento operativo con el tiempo.

Previsiones de la dirección

La dirección prevé que el crecimiento del ACV se acelere en el Q4 de 2026, pero no espera alcanzar su plan inicial para el segundo semestre. El director financiero, Kenneth Stillwell, afirmó que no ve factible un crecimiento del ACV superior al 10% para todo el año, lo que indica un rango probable entre la tasa actual del 7% y el 10%.

Para 2027, la dirección prevé que el crecimiento mejore en comparación con los niveles del Q3 y Q4, y señaló que el ejercicio podría estar menos concentrado en el tramo final que en 2026. Se espera que los beneficios de los cambios operativos sean visibles entre principios y mediados de 2027, tras uno o dos trimestres de gestión del cambio.

La dirección ve factible alcanzar un flujo de caja libre ajustado superior a 600 millones de dólares en 2027, excluyendo los gastos extraordinarios o no operativos identificados. Pegasystems mantiene su objetivo de lograr un flujo de caja libre de al menos 700 millones de dólares en 2028, supeditado a un mayor crecimiento del ACV y al control continuado de los costes.

Riesgos y aspectos a vigilar

• Los ciclos de ventas a grandes empresas se mantienen más largos, ya que las compras involucran a más partes interesadas, aprobaciones adicionales y un mayor escrutinio sobre la estrategia de IA, los plazos de implementación y la viabilidad económica.
• Los clientes del sector de servicios financieros se han mostrado especialmente cautos con las grandes inversiones tecnológicas tras realizar desembolsos significativos en iniciativas de IA.
• Los desafíos en el despliegue por parte de los clientes han ralentizado la adopción, lo que ha llevado a Pegasystems a acercar sus recursos de ingeniería y prestación de servicios a los clientes.
• El entorno de contratación del gobierno federal de EE. UU. sigue siendo menos predecible debido a los cambios en los procesos de contratación y en las relaciones con los integradores de sistemas.
• El flujo de caja libre se ha visto afectado por el menor crecimiento del nuevo ACV neto, los acuerdos judiciales y los costes de reestructuración previstos.
• La dirección afirmó que las tasas de adjudicación se mantienen por lo general constantes y que no ha observado un cambio significativo en las dinámicas competitivas. La principal limitación es el tiempo que tardan los clientes en tomar decisiones.

Puntos destacados del turno de preguntas de analistas

La dirección señaló que los mayores cambios organizativos ya se han producido, mientras que las acciones restantes se llevarán a cabo en las próximas semanas y durante el Q1 de 2027. No prevé que la transición se alargue a lo largo de muchos trimestres.

En cuanto a los despliegues con clientes, la dirección afirmó que el desafío no se limita a Pegasystems. Las grandes empresas necesitan un apoyo más directo para identificar dónde genera valor la IA y para desplegar la automatización de flujos de trabajo bajo un nuevo modelo operativo. El objetivo del equipo Lighthouse es acortar ese proceso.

En relación con los precios, la empresa no ha observado un cambio sustancial en la duración de los contratos. No obstante, el gasto en IA ha incrementado la presión sobre los presupuestos de TI y ha llevado a los clientes a examinar con mayor detenimiento las cláusulas de incremento de precios y los ajustes vinculados a la inflación.

La dirección indicó que el Q3 incluyó operaciones que se habían aplazado en periodos anteriores, mientras que algunas transacciones previstas para el Q3 se trasladaron al Q4. La empresa inició el Q4 con una amplia cobertura de la cartera de proyectos, pero enfatizó que la programación de decisiones de los clientes sigue siendo menos predecible.

En cuanto a la asignación de capital, Pegasystems afirmó que la inversión orgánica sigue siendo su prioridad. Las recompras de acciones continuarán de forma selectiva, junto con el compromiso de mantener e incrementar el dividendo con el tiempo y preservar la flexibilidad del balance.

Transcripción completa de la conferencia de resultados

Transcripción completa de la conferencia de resultados

Comentarios de la dirección

Operator

Hello, everyone. Thank you for joining us, and welcome to the Pegasystems Third 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.

Peter Welburn

Good morning, everyone, and welcome to Pega Systems Q3 2026 Earnings Call. Before we begin, I'd like to read our safe harbor statement. Certain statements made during this call and the updating materials may be construed as forward-looking statements as defined in the Private Securities Litigation Form Act of 1995. Words such as expects, anticipates, intends, times, believes, will, could, should, estimates, may, forecasts and similar expressions are intended to identify 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 that are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations for fiscal year 2026 and beyond.

Important factors that could cause actual results to differ materially are described in the company's press release announcing our Q3 2026 results, and 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. 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 addition to and not as a substitute for financial measures prepared in accordance with GAAP. Constant currency measures are calculated by applying the September 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

Thank you, Peter, and thank you to everyone joining us today. Before Ken covers our results, I want to just touch on the AI market context and why it's a major long-term opportunity for Pega. Our technology is differentiated and very relevant to the times we're in. However, candidly, our execution this year has not kept up. We are making real changes to better capture the opportunity, and Ken will be providing more detail in a moment.

I would say the market status is confusion and a search for value. Enterprise leaders are facing tsunamis of AI hype. This is the most chaotic and confused technology market. I've seen in my career. It makes the Internet bubble of 2000 look like it unfolded in slow motion. There is real promise in AI and occasionally real delusion. This quarter, Salesforce announced Cloudforce essentially tying its future to Anthropic, a company that has said publicly, it is going after all of Salesforce's TAM, their targeted addressable market. And then in September, Anthropic called for a pause in AI development and leaders at OpenAI and other Frontier labs trying to support the idea. But in the month since, Anthropic has released 3 major cloud model changes. OpenAI has also released 3 major GPT models. Google has released a new Gemini model. That's not counting the new models for Mistral, Quien, Deep Seek or model labs that are using things internally, they haven't released yet. So I guess this is what a pause looks like these days. No wonder everyone is confused.

The leaders I spoke to at businesses have actually stopped chasing the latest model. They want AI connected to business operations in ways that deliver measurable value while maintaining governance and controlling costs. The market is full of ingredients and enterprises need a recipe. That's what Pega delivers. And the changes that Ken will talk about are focused on getting that recipe directly to the customers and senior leaders who needed. Now much of the AI industry is selling models and tokens, Pega is offering something different, a structure for AI that delivers predictable outcomes and predictable costs built on how enterprises really operate. Our architecture harnesses the power of LLMs and our own statistical AI to transform how enterprises design, build and run the workflows and decisions that power their businesses.

Now models are an important agreement, but the recipe for AI demands structure, you can put around the model to provide operational context that tells them what to do. Our workflows wrap AI in a control and governance structure that fits exactly the knowledge and context it needs at the right time. As Forrester put it in its very recent report on enterprise air platforms, workflows, not insights are the value driver for agentic AI. We applied that structure at every stage of AI transformation. At design, we help clients reimagine their workflows and decisions for an AI world. As we build to help create and maintain the applications in a way that is understandable and accessible, and we run them to create a genetic workflows that behave predictably at scale. So leaders I speak to know they shouldn't just bolt AI or the legacy systems and outdated processes. They want to be designed the way they work. And Blueprint harnesses AI to solve a program that no one else has, giving business and IT teams a way to reimagine their operating model together at AI speed. It takes the raw power of generative AI and gives us the structure built on decades of Pega's workflow expertise and industry best practices.

Blueprint combines the raw power of models like Chat GPT and Gemini with the decade of our knowledge from the work we've done with leaders in various industries. It helps establish the rules and workflows policies and operating model upfront before an application goes to the production. The result is a repeatable recipe for how businesses should run, translated directly into working systems. And here is what much of the AI play misses that 95% cost of work of business does each day repeats. Processes themselves will be transformed by AI. But once you figure out how to process a dispute or best onboard a new customer, you want to do it the same way at scale. Letting AI recently run a rough shot over that repeatable work is risky and expensive. Blueprint uses AI to capture those repeatable processes, we designed them to be far more efficient and then run them consistently at massive scale without a massive token bill.

Not only is it far more cost effective, it is exactly the right approach for AI governance. By creating the workflows you plug directly into the cloud or GPT or AI tool is your choice with MCP connectors, you're building workflows that tell agents exactly what they're allowed to do, what data they can access and what rules they must follow. We believe the right way to govern AI is to design it into the processes from the start. Now this is exactly what Blueprint does and the Pega technology does. And while others are selling control towers or kill switches to manage problems after they happen, we consider that madness. It's addressing the problem too light and in the wrong place. Our clients can't afford to rely on a kill switch. With our approach, they never need one. So the key here is structure. Now by helping clients finish design their recipes in days and load Blueprint into Infinity to build the application, they are able to be able to run with agents like CoPilot, Cloud and Kodex. But we also let clients bring their own model for some reason, they have something either an activity or they have a preference and we have added into our development environment, more than 50 Asian skills.

So the developer's environment and the Pega environment operate in a collaborative and comprehensive fashion. So developers can get the speed of agenetic development, but we provide the structure that makes it understandable, reusable and scalable. Now we understand that one of the pictures AI companies are making is code it yourself. And the reality we've competed against code it yourself in decades. And of course, AI coding tools are powerful. We using ourselves, and we've built them into the AI assistance and Infinity Studio, but this doesn't change the underlying question. AI agents generate lots and lots of code, millions of line code than we've ever seen before. And much of that code becomes very hard to understand and even harder to change 6 or 12 months later. That is at the heart of the Pega difference.

In Pega, the logic stays visual and transparent. Not buried in code, so dense that only agents can read it. Business and IT users can look at the workflows, the rules and the configuration of Pega and see exactly what their application does. This is what it means to build for change. Now at run time, Pega applications run on agentic workflows that orchestrate agents with control and governance. In Infinity, any agent, a customer service chatbot and employee assistant, even one outside Pega can discover and run Pega workflows and decisions. They don't need to rereason through every step Blueprint has already done that for them at design time. And we've put the human in the loop, blessing the design as opposed to sticking demand every type of transaction mode. Pega agenetic workflows call for ages to perform specific tasks like reading a document or researching a case or client history. And the workflow sends the task constraints. So each agent is controlled in what it can do and what it can see. This small focused agent approach obviates hallucination risk and uses far fewer turbines. That's how we can offer a fixed case price with no debenture. And I'm getting a lot of enthusiasm from clients as to this approach.

Now at PegawWorld, I compared this approach to a chef using a pet kitchen to perfect the recipes before opening a restaurant rather than reinventing every dish for every customer. Blueprint is that test kitchen. At design time, clients create a collection of business recipes, their workflow decisions, rules, data and organize them so that they can be approved, understood and, most importantly, change. At runtime, the system executes those recipes as predictable workflows, calling agents only as the steps where they add value. Deterministic work stays deterministic. Yes. By the way, this is also hundreds, maybe thousands of times more efficient than running a continuous reasoning session on graphical processing units. Clients reimagine the process and then run a successful recipe thousands or millions of time, design once, reuse many. AI gets the workflow right at design time and [indiscernible] discretely at run time. with structure and governance built in. And I think the industry is recognizing our differentiated approach.

Just in the last several weeks, Forrester was named a leader in the Forrester Wave, Pega was named the leader of the Forrester wave for AI platforms. Sitting next to companies like Amazon and Google. As I mentioned, in that report they wrote that workflows, not insights are the value driver in agentic AI, and we strongly agree. And last month, Gartner again named Pega a leader in the magic laro for business orchestration and automation technologies, what they call BOAT. I think you're going to hear that term a lot going forward. because it really reflects the power that AI needs to bring to organizations. Gartner built this category on the idea that the combination of process orchestration, workflow orchestration and agent AI create the foundation for predictable enterprise AI outcomes. And in terms of these 2 recognitions, Pega was the only company named as a leader in both. You can find both reports on pega.com.

But the most important recognition is what we get from helping clients to maximize the value of their current AI investments and their goals. Together with our partners, we're delivering predictable outcomes that candidly just weren't possible before, all with predictable costs. At a large government agency, Pega workflow turns unstructured information into structured work automatically processing documents and surfacing only the exceptions that require human judgment, helping people move more effectively while maintaining enterprise-grade governance and control. At a major U.S. bank, Pega's governed workflows and specialized AI agents has cut complaint resolution times from 10 days to 10 minutes in a customer critical and highly regulated process, Pega agenetic workflows, orchestrate our agents and third-party agents to intake documents, classified requests, summarize histories, perform research and determine next best action recommendation.

Employees have embraced this new workflow by the way. They report higher productivity and enthusiasm for capabilities to give them more time for judgment and customer outcomes rather than administrative. So these results confirm to us that enterprises want AI and that having AI that delivers predictable outcomes and predictable costs with governance built in, is absolutely the right way to go. And it's interesting because the market is chaotic there's more hype, more tokens, more models being discussed and feared by organizations. But with Pega Blueprint with Pega Infinity, we can deliver outcomes, and we think that's incredibly important. I've also learned something from the dozens of successful clients I've spoken to in the last quarter. We have the right technology. But in a market this noisy and fast, we need to do a better job at directly helping our clients find clarity and keep up. Success happens when we have deep executive and technical engagement a clear message that cuts to the market value and technical experts on the ground.

So while the quarter showed improvement from the first half, we don't think the growth of the quarter anywhere comes close to reflecting the opportunity in front of us, and we take responsibility for that. Volume decisions have become more complex, and we can be more consistent in helping clients move from interest to commitments and from commitment to adoption. We are acting on what we learned. We've moved accountability closer to clients with a regional go-to-market model. We've made steps to unify our message, and we are creating a dedicated team to accelerate adoption of the latest capabilities bringing operations teams together to simplify and improve how we plan and operate. These are execution changes, not a change in strategy.

We remain focused on helping enterprises apply AI to workflows and decisions and helping them with governance, predictability and economics that are required to scale. I'll hand it over to Ken to walk through the quarter's results and details of these operational changes.

Kenneth Stillwell

Thanks, Alan. While our annual contract value growth through the first 3 quarters of 2026 did not reflect the opportunity we see in the market, we're encouraged by the engagement we're seeing with our clients and prospects. Clients are increasingly looking to transform how work gets done through AI, automation and intelligent workflows. And companies, especially in regulated industries, have a big challenge in trying to keep up with the ever-changing regulations.

We continue to see growing interest in Blueprint, agentic workflows and automation initiatives that help organizations achieve predictable outcomes at predictable costs. While buying patterns have not fully normalized, we saw improved visibility and more consistent progression of opportunities through the third quarter. Our ACV ad was the strongest of the year, representing a step forward. More importantly, the underlying market opportunity remains significant. Our focus is on improving how we execute against that opportunity. The go-to-market changes. I'll discuss shortly are designed to strengthen accountability, increase speed and help us build on the progress we saw in the quarter.

Looking back, our assessment is that the primary constraints have been execution, longer sales cycles and customer deployment challenges rather than broad-based deterioration in market demand. Nothing we've seen in Q3 changes that view, that the underlying opportunity remains significant. As we look ahead, we're applying the lessons we've learned so far this year to better capitalize on the demand we're seeing in the market. We've already begun implementing a series of changes designed to increase accountability, improve speed of execution and accelerate growth. First, in today's market environment, clients are best served with commercial leadership and day-to-day execution authority, sit closer to the market within consistent company-wide pricing, contracting and financial controls. Additionally, although the global demand has held up in spite of some of the European and Middle East conflicts, clients increasingly demand data sovereignty and governance. They want their systems, their data, their processes to be closer to their operations. They increasingly demand local control and support for their solutions.

This fits perfectly into our Pega Cloud solution but also with the option for cloud choice. As a result of all this, we're evolving our go-to-market leadership and coverage model. This change will bring leaders resources and expertise closer to in-region clients, enabling faster decisions, stronger engagement and greater ownership of outcomes. It also returns us to an operating model where the senior leaders had more commercial driven authority and more direct connection to our clients, and buying decisions increasingly move higher within client organizations having our senior leaders in region will help us engage more effectively and accelerate execution. We've seen this trend in the past that we have successfully executed under this operating model. Second, we're creating a more unified marketing organization to tell one clear and differentiated Pega story, we're bringing all marketing-related teams together under a single leader. In a market crowded with competing AI narratives, this structure will sharpen our positioning, strengthen execution across channels and help us reach executive decision makers more consistently.

Enterprises are looking for clarity, confidence and a trusted path forward. A unified marketing organization will improve our visibility and communicate more effectively how Pega helps clients succeed in the AI era. Third, we're rolling a new organization focused on accelerating adoption of Pega's AI capabilities while transforming our products to make it more dramatically easier for clients to access our latest innovation and stay current with Pega. The pace of innovation in AI is unprecedented and the ability to successfully adopt and scale these capabilities is becoming the key differentiator between clients that experiment with AI and those who realize measurable business value from it. This new organization will bring together engineering, early adopter programs and delivery excellence to quickly identify adoption barriers and turn those insights into improvements.

It will also include a team of forward deployed engineers, known as our Lighthouse team who will work directly with clients to accelerate successful deployments and help them realize value faster. By bringing product teams closer to our clients, we can capture real world best practices, identify what drives successful outcomes and continuously accelerate deployment of agentic workflows so that clients can realize value fast. Over time, these learnings will become industrialized, making it easier for every client to benefit from agentic workflows. Additionally, we will create a tighter feedback loop between innovation and adoption by connecting our product teams directly with our early adopters, we could shorten learning cycles, accelerate product development and turn client insights into repeatable success.

Fourth, we're centralizing go-to-market and consulting operations under the finance organization having a single leader to simplify planning, resource allocation and performance management across the company. Commercial and delivery leaders will remain accountable for strategy and client outcomes, while the unified operations team drives greater consistency, scalability and execution discipline. Over time, we expect these and other changes to contribute to margin improvement and increased operating leverage. Taken together, these 4 actions are designed to improve execution in the near term while positioning Pega to deliver long-term durable ACV and cash flow growth to our shareholders.

During the first quarter of 2027, we expect our headcount will be approximately 5,000 employees, down a few hundred from where we sit today as we streamline the organization and improve execution. Moving to our financial results. Annual contract value, or ACV, grew 7% year-over-year in constant currency to $1.66 billion. In Q3, we added $32 million in net new ACV in constant currency, our strongest quarterly performance of the year and a step forward in rebuilding growth momentum. Pega Cloud continued to drive that performance. Pega Quality grew 20% year-over-year and represented 59% of our total ACV. Pega Cloud backlog increased 25% in constant currency year-over-year, demonstrating the continued strength of our cloud business. Total backlog now stands at over $2 billion with current backlog at just around $1 billion. Backlog reflects existing noncancelable contracts expected to be recognized as revenue in future periods.

Two factors shape the quarter. First, we entered Q3 with a larger and more diversified pipeline, with strength across both new logos and workflow expansion within our existing installed base. Second, purchasing behavior continues to evolve. We did see some movement to more normal buying patterns in the third quarter. However, enterprise clients, especially in the financial services sector are applying greater scrutiny to large technology investments particularly around business case validation, AI strategy and implementation timing. Decision processes now involve more stakeholders and additional approval steps that we've seen in recent years. Decisions continue to go to senior leaders in the organization, and that's the importance of our go-to-market changes to connect our teams with the decision makers. Separately, organizational changes in workforce reductions within several client accounts can extend time lines further.

Let me be clear about what we're not seeing. Win rates are remaining generally consistent with prior periods, and we're not seeing a meaningful shift in competitive dynamics. The constraint is how long it takes for clients to reach a decision not whether we win when they do reach that decision. We are addressing that directly by driving prospecting activity, leveraging Blueprint and increasing executive-level engagement to compress sales cycles and also to build incremental pipeline. Below the headline numbers, several leading indicators improved. Pipeline volumes strengthened during the quarter. Blueprint engagement continues to expand and more opportunities are progressing toward the decision process -- in the decision process.

Turning to free cash flow. We generated $290 million of free cash flow in the first 3 quarters of 2026. There's 2 factors that impacted that result. First, free cash flow included an unusual level of cash expenditures that we do not expect to recur at the same level in normal operations. We've included those expenditures in our free cash flow, and we're providing supplemental detail to investors so they can evaluate the nature and the timing of those. Second, ACV growth was lower than our original plan. Slower net new ACV translated -- translates into lower billings, slower collections and lower free cash flow than we had modeled. As a reminder, our billings are seasonally weighted towards the fourth quarter, consistent with the renewal concentration that we discussed earlier in the year.

As a result, free cash flow follows a similar seasonal pattern with the 2 largest net free cash flow production being in the first quarter and the fourth quarter of the year. Turning to capital allocation. Our capital allocation strategy features several key elements. First, invest in organic growth. Our highest return use of capital remains product innovation and go-to-market capacity. That spending is largely built into our operating model; second, repurchase shares opportunistically. We leaned higher into buybacks in 2026, more than in the prior year, and we did so deliberately. In the first 9 months of 2026, we repurchased just under 11 million shares for around $430 million in the open market under prior Board authorizations. Total common shares were reduced by 6.8 million shares in the first 9 months of 2026.

At current levels, repurchasing our shares can be an attractive use of excess capital after funding our organic growth priorities. Buybacks are accretive to earnings, offset dilution from stock-based compensation and compound value when executed at attractive valuations. We will continue to compare repurchases with other uses of capital and act selectively and strategically around our buyback program. The third element of our capital allocation strategy is to pay a consistent and increasing dividend. We view the dividend as a long-term commitment, and we intend to grow it over time. Fourth, we maintain balance sheet strength and flexibility. We remain debt-free, and we will evaluate any future use of debt against our strategic priorities, expect the returns and commitment to financial flexibility.

We ended the third quarter with approximately $300 million in cash and marketable securities. Looking ahead, we will continue to return capital to shareholders opportunistically while preserving strategic flexibility. We're disciplined buyers, not automatic ones. Following our July earnings call, many of you asked for some additional perspective on how we're thinking about the remainder of the year. As a reminder, we provide annual guidance at the beginning of the year. We do not typically update our outlook intra-year or do we guide quarterly. Given the many calls for more color, we've decided to share a few more thoughts on ACV and free cash flow as it's late in the 2026 cycle.

On ACV, we added $52 million of net new ACV in constant currency through the first 3 quarters of the year. We expect we will deliver an acceleration of growth in Q4, but we don't believe that we'll achieve our full plan for the second half. On free cash flow, given the unusual level of cash expenditures incurred this year, we also believe it's useful to consider supplemental cash information to determine the cash-generating capability of our business. Please see our earnings release for more detail on these supplemental items.

We're not changing our long-term ambition. We continue to target $700 million or more of free cash flow than 2028. And although ACV growth has slowed this year, the underlying economics of our business remain intact. That new ACV creates future billings growth, and those buildings ultimately convert into increased cash flow. Achieving our 2028 target will require stronger ACV growth and continued cost discipline, and we are aligning our cost structure with our growth trajectory and take the appropriate actions to improve our operations, positioning the business to ensure achieving that objective that we have for $700 million or more in 2028. Stepping back, organizations worldwide are rethinking how work gets done in an AI-driven economy. That shift plays directly to capabilities we have spent years building. Workflows in decisioning that apply AI to mission-critical business operations with governance, predictability and scale enterprises require. While execution remains our top priority for the balance of Q4 and beyond, 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 to sustain a strong rule for performance and create significant long-term value for shareholders. And with that, operator, please open the line for questions.

Operator

[Operator Instructions]

Your first question comes from the line of Raimo Lenschow with Barclays.

Preguntas y respuestas

Raimo Lenschow

Perfect. One, Ken, it was really interesting to hear your remarks on kind of streamlining the organization or just changing the go-to market. Is that some, sorry, is that something you're doing to do, sorry, under the weather a little bit. Is this something that you do like midyear now? Or is this kind of the plan for the new financial year? Can you speak to that, please

Kenneth Stillwell

Yes. We're going to -- we're in the process. Some of those changes we've already made, and some of them are coming in the future weeks. But we want to prepare ourselves so that we start with as many of the improvements as we can get done, but some of them will go into the first quarter of '27. But this is something we're doing in the very near term.

Alan Trefler

But the biggest changes have already happened.

Raimo Lenschow

Okay. Perfect. And then obviously, you've talked before that Q4 has a much better renewal pool, that should probably help you as well. What's the situation if you think about next year as well as you think about and do better results potentially coming out next year? Like I don't know if you can comment or probably not quantitatively but qualitatively, like what's this what's the progression from here then?

Kenneth Stillwell

Yes. So for -- so I'll make one comment about 2027. But naturally, we're in our planning process things that happened in Q4 of '26 will obviously impact '27. So there's still a lot of things that are still in work. But I would say we would expect to grow from where we are now in Q3 and Q4 and into 2027. And just based on the distribution of ACV growth in '26, I would, based on my visibility, I wouldn't anticipate it being as back-end loaded at this early stage as what '26 looks like it is going to play out today.

Operator

Your next question comes from the line of Steve Enders with Citi.

Steven Enders

Okay. Great. Maybe just to start, I guess, some kind of good to kind of get your perspective on how long you think that the changes you're making will kind of take to play out and drive the better execution? And I guess, ultimately, what that means for sales and new ACV moving forward? And I guess also, I would like to clarify the comment you made about ECV and not achieving ECV the second half plan that you were expecting? Can you just maybe get a little bit more clarity on, I guess, what exactly that means?

Kenneth Stillwell

Sure, Steve. So we're moving fast on the changes and many of these changes are already in work. Some of them as Alan mentioned, a second ago have already been executed. So I don't believe this is going to be a long drawn out changes. And now the second part of that question is do you think you'll see some of the improvements from that. I would expect that to this change to not take a significant amount of quarters. I would say there's always a quarter or 2 of change management that we need to manage going in, we're starting a new year.

So I wouldn't expect this change to drag out over a long period of time. I would expect that we would hope to see improvements from this model in the early to mid part of 2027. The second question that you asked about ACV, really what I'm saying is I believe our ACV growth is going to be up from here. But I don't see a path where our ACV growth would be above 10% for the 2026 year. So I would say we're seeing our ACV growth be somewhere between where we are now and 10%.

Steven Enders

Okay. All right. Very clear. That's helpful there. And then maybe just on the technology side and we keep hearing about things like decision in models and things like [indiscernible] out there in the market and we keep getting the question from investors about maybe what that means for Pega and, I guess, your decisioning capabilities and if you view that as a -- I guess, would it kind of be good to get your perspective on how you're seeing that maybe competitively? Or would that mean from Pega adoptian moving forward with some of these decision models starting to come out?

Alan Trefler

Sure. We, as you would expect, pay close attention to all of this. And we actually think things like [indiscernible] , maybe things we find opportunities to use a product line. But at its core, the big deal about Pega is that we make the way the business runs processes and makes decisions transparent. And at the end of the day, the folks who are trying to go down the alternate paths, one which is, hey, that's rightly candidly, massive amounts of code or not very transparent or, hey, let's just try to program prompts that the AI will figure out how to do things that's call the exact opposite of transparent.

I was talking with a customer who explained to me that he had 1,000 lines of trough that they were trying to edit to figure out how to get small behavior changes. That's exactly the sort of thing that happens. So these new models, the interesting thing is the AI models that are out there and evolving which, by the way, we can harden part of what we do is we want to use the Frontier and other models. They don't fix the core lack of transparency and like of governance that you have by doing the stuff and run time, et cetera the line time.

Operator

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

Devin Au

Maybe just one to look at -- or you ask a little bit about kind of the pipeline maturity as you look at fourth quarter here. How much of that pipe is in late stage? And how much of the expected growth is kind of supported by new logos, which is kind of an area you've kind of seen strong traction come into the second half? And just more color there.

Kenneth Stillwell

On -- sorry, you were a little bit rough the -- really just a question is pipeline and new logos?

Devin Au

Yes.

Kenneth Stillwell

.

Okay. Sorry, Devin. It was -- I couldn't quite hear you there. So yes, so we've had the there's a pro at a con around when you sell the new logos, right? The good thing is we're seeing a lot of great activity, a lot of good pipeline build -- it's very, very exciting to see like clients or prospects that don't really know much about Pega being very intrigued by our value proposition in such a short period of time. And the teams are working really hard to engage. That's the positive maybe the more cautious part of this is it's hard to predict close rates and progression rates with new logos because we don't really have a history of it.

So we're really -- we're kind of in a game where we've been closing some new logos, but learning from offers, pricing, value positioning, targeting like all those things that -- so I would say we're definitely getting growth from new logos. It's -- we're still in that maybe like learning a little bit about what works and maybe what we need to double down on or change.

Alan Trefler

But in terms of the maturity price, I would tell you that the stage of our opportunities as we enter Q4 and think about next year is meaningfully more mature than it was editing at a time. this year. So the pipeline, I would say, is looking very promising, and we're really putting a lot of focus, particularly with some of these new changes on maturing opportunities and getting them to offer faster.

Devin Au

Understood. And then just a quick follow-up. Maybe just give an update on how our public sector business has [indiscernible] performed in third quarter, just given that's usually a pretty big quarter for that end market. I don't know if you've seen any sort of delays in that sector with the upcoming election here in the U.S.

Kenneth Stillwell

What I would say is the federal buying cycle has been, I would say, less predictable than what we've seen in past years because of a lot of the changes in the changes in how they procure, the system integrator changes that moved everything, moved a lot of buying on to GSA schedule. So I don't think -- I don't -- we don't expect that to get more clear in the fourth quarter, but also buying activity is happening. And it's not like the government is not moving forward. It's just that it is less predictable.

So Q4, the Q4 quarter is not a particularly massive order like we -- our government business pretty -- our U.S. government business is pretty steady across the quarters. So it's not that there's anything unique in terms of size in Q4 around the public sector. But it definitely is a less predictable space right now just because of a lot of the changes that they've made to process. But I don't expect that to be a big impact for our Q4 results.

Operator

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

Patrick Walravens

Great. I mean, Alan, given the news yesterday of Salesforce acquiring [indiscernible] and paying a multiple is pretty much twice where you guys are trading I'd just love to hear your thoughts on what this means for the industry and what it means for you?

Alan Trefler

Well, we really -- I can't actually think of a time when we've ever competed against Braze. So I don't think from a product acquisition point of view, it's very meaningful to us. I think when I look at this industry, I look at an industry that's really confused. And I think companies are doing whatever they can to try to generate revenue and attention and stand out. It feels to me like buying Gray was an expensive way to do it. But I don't think it affects our competitive dynamic.

Kenneth Stillwell

One thing One thing I would say, Postini's not really a break. The 1 thing I would say is not really to [indiscernible] comment, but something we've seen. I do think you've seen M&A activity around technology companies start to spin up a little bit in the last few months. And I do think that highlights what I believe to be is the significant value that maybe was questioned maybe 6 to 9 months ago around software. And I definitely think you're seeing the -- Electrics purchase of PTC, for example. I think there's a lot of value attributed to the knowledge base software has the engagement we have with users and also the data that we actually have within our system.

So I definitely think that there is a little bit of like that angle to the and Braze might be in that bucket. So that's just something that we've been watching. Not particularly because we're a buyer or a seller, more just like learn what's happening in the software space.

Alan Trefler

Yes. I think your point is to sort of put the question the dying apocalypse commentary, which we're seeing customers recognize that they get software in their future. And obviously, Salesforce that's true.

Patrick Walravens

Yes. And investors, too. I mean if you look at my universe as a whole 4 months ago, the median stock was down like 33%, the median [indiscernible] and now the median is up 5% year-to-date. So a follow-up question would just be -- I mean, would you guys be open to being acquired? And the flip side of that, what would you want to acquire, if anything?

Alan Trefler

Well, I think answering either of those questions would make this one hell of an earnings call.

Patrick Walravens

It really would, yes.

Alan Trefler

Look, we're going to have to respect to you can do that. What would you like to car. Yes. Look, you can do.

Patrick Walravens

What's on your radar list, right? Or how you think.

Alan Trefler

Look, we look at companies routinely. And we have purchases typically technology purchases that really sort of tuck in to the overall model. We're feeling pretty darn good about the shape of our technical products right now. We really think that we're on to something. We just have to convince more of the market that we're on to it. And that's what that's what our mission is going to be. So we don't have an active specific shopping list. But Peter here is constantly talking to first as you know.

Operator

Your next question comes from the line of Blair Abernethy with Rosenblatt.

Blair Abernethy

Just a couple of things for me. I wonder if any early signs of feedback from Infinity Studio with Blueprint capabilities added in? Are you seeing anything there?

Alan Trefler

Yes. We're seeing customers respond with enthusiasm to it. It's still young is the reality of it. But customers like that this actually does a much better job of taking existing customers and giving them a path to engage with our AI. And with hindsight, I wish we had done it sooner.

Kenneth Stillwell

One thing we have seen, Blair, is that we've seen at this point in time when we released Pega 25, we have more than twice as many clients have moved to 2026 at this point in time when we release Pega 25. So we are seeing a much more aggressive clients want it. So that's something we are seeing.

Blair Abernethy

Okay. Great. And Ken, just on the environment. Are you seeing any changes in the pricing environment this year? And anything in terms of what you're seeing with the contract renewals or term lengths, just given the changes in the pipeline execution?

Kenneth Stillwell

No. Term links, no. I think that always bounces around, but I haven't seen anything like clients trying to do longer or shorter terms. I think that does move around. It's just -- it's kind of client specific. In terms of pricing, the one thing I would say is that with all the spend on AI, I definitely think IT budgets are under pressure this year. And so that does make for scrutiny that happens around price escalation, CPI, things of that nature.

So we definitely see some of that. And I think that's just tied to that clients have spent a lot of money on AI like dabbling and trying to find some value. I do -- based on what we see with our clients, I think that will settle. And I think clients know -- have a better view now of where the maybe controlling their AI spend better than they had earlier in the year when I think it was a little bit more out of control. But I think some of that does play into just enterprise buying pressure. So there's just some of that out there.

Alan Trefler

Yes. And what you said about out of control, let's face it, [indiscernible] of companies got caught over spending their budgets in the second and third quarters. I think that's normalizing. And candidly, our message about predictable cost is a great way for clients to get their use of AI back in control.

Operator

Your next question comes from the line of Patrick McIlwee with William Blair.

Patrick McIlwee

So first one on free cash flow. Despite the weaker ACV growth and cash generation this quarter, you're maintaining the fiscal '28 free cash flow target. I know there were some unusual expenditures within that this quarter. But as we think about some of the strategic tweaks you're making like ramping FTEs and then some rockier trends and growth Ken, can you just talk about some of the expectations to underline that target at this point? And maybe how much the path to that has changed over the last few months?

Kenneth Stillwell

So we the main -- what I would consider to be nonrecurring or nonoperational spend that we've had in our cash flow this year and some of it will be in to next year is related to the settling of a number of our legal matters. So I'd say that's a big component of it. We will also have some restructuring charges that will probably get firmed up between now and the beginning of the first quarter of '27. I would consider those to be kind of the nonrecurring type items that we would add back to kind of show you what more operating cash flow would be.

So I would see a path of where that adjusted free cash flow would be above $600 million next year and then on to a 700 path in 2028. That's kind of what we see. This year, the number will be lower naturally because we haven't made some of those structural changes to our cost structure. We have made this change to our cost structure. And we've got some of these kind of unusual onetime things related to some of the legal matters, some of that being settled. I think that's kind of -- so this year will be lower cash flow with some higher amount of add-backs. Next year, we'll have a smaller amount of add-backs and increased cash flow from higher ACV and some of the cost changes and then we'll be on track to go to that $700 million number in 28 million. Hopefully, that's helpful.

Patrick McIlwee

Okay. Yes, helpful. And following up. So regarding the customer deployment challenges as a constraint on growth and the FTE team, you're not ramping to address that. My question is what specifically do you feel is preventing customers from moving some of these projects into production today? Are those mostly implementation and/or integration challenges? Or do you feel at all that there are some aspects of the core products could need to become easier to deploy and ultimately maintain?

Kenneth Stillwell

I don't think Pega is alone in this challenge. Deploying things in an AI world is a different mindset of actually how you instrument and deploy and get value. And I think that just like many of the clients that are deploying AI have spent a tremendous amount of money trying to bring in consultants system integrators to try to help them figure out where AI can add value. Some of that is adopting AI in a new paradigm around how you develop workflow and automation solutions on Pega as well.

So I think some of that is just us getting our engineering teams and our professional service teams and our solution consultants to really be like with the clients and actually helping them drive that value. So that's the big change as opposed to letting clients do it more on their own, which is which is traditionally how software has been deployed

Alan Trefler

And Lord, I think, historically, we were pretty -- and this goes back years. Our customers and we were pretty slow at times to deploy the latest in this. The reality is we actually have had customers who have told us they never want to be on the most recent release. They want to be on end minus 1 or in end minus 2 case, have a customer who used to want to be on in minus 2. So getting things into the hands of customers quick is not something that had been part of the way we operate historically.

Now we're much better positioned to do it with the combination of Pega Cloud and some of the changes we're making. But it is a shift. I recently told the customer that having an end minus 1 strategy is just setting yourself up to lose. I don't think that works anymore in the current technology room. But we need to reposition ourselves and get more assertive about getting the technology out, even though we faster than we've ever been before, we can be a lot faster than we are. And that's a big area where I'm trying to drive the company sort of culturally.

Operator

Your next question comes from the line of Lucky Schreiner with D.A. Davidson.

Lucky Schreiner

Great. You guys caught up the stronger net new ACV, and you had originally called out the year would be back half weighted. But last quarter, I know you guys had some push deals that we're still in the pipeline. So just curious if you can maybe level set for some of the puts and takes around some of those push deals closed? And how did that contribute to the net new ACV this quarter?

Kenneth Stillwell

Sure. We did have some deals closed that were that were expected to close earlier. We also had some deals slip into Q4 that we thought we're going to close in Q3. So what I would say is our Q4, naturally, we have a lot of work to do because it's only October 20. But like we have -- we have a lot of work to in Q4 by, quarter has just started. We're entering it with the strongest pipeline that we've ever had. I think maybe in Q4 ever. That said, the market's not as predictable as it has been, and so we have to kind of balance that in terms of our expectations. But we have plenty of pipe, plenty of opportunities, and we need to just focus on our execution and helping our clients quite frankly, get out of their own way at times, right, to actually move forward on some of these enhancements.

Operator

Your next question comes from the line of Mark Schappel with Loop Capital Markets.

Mark Schappel

Ken, just building on an earlier question on your public sector business, are you seeing some of the same purchasing behaviors and AI scrutiny in your public sector business as you're seeing in your commercial business?

Kenneth Stillwell

That's a really good question, Mark. There has -- maybe I'll give you a our perspective or my perspective. In the commercial side, in certain verticals, specifically financial services, being a big one. They spent a lot of money in AI to kind of test things out, to try things out, to evaluate. I would say, in the public sector, not as much. So I would say AI is still important to the public sector, but I don't think they distracted budgets to the same extent.

Operator

Your next question comes from the line of Alexei Gogolev with JPMorgan.

Alexei Gogolev

And I wanted to ask about it and the backlog strength. So now that cloud-based CV is 59% of total and cloud backlog is up strongly. How should we think about the lag from cloud ACV and backlog to cloud revenue recognition over the next few quarters, especially given the deployment challenges that you talked about?

Kenneth Stillwell

So just let me -- yes, I'm glad you actually said that. I wouldn't connect what we talked about with helping clients get adoption with things that are already in Pega Cloud or Pega Cloud backlog. That's more around things that are in the pipeline. So just hopefully, that's helpful clarification on that. That's more about our future growth. The things that are in Pega Cloud backlog typically come into revenue over the next 2 to 3 quarters typically.

So you should think about -- well, first -- the first part of your question was how should we think about Pega Cloud 2% to 59% on the strength in backlog. I think what that really highlights is that our clients are very committed to Pega, right, and committed over a long term. So I think that's a great sign. Pega Cloud, the current RPO tends to come in a couple of quarters after it enters just depending on effective dates, when things start the specific contracts and how they roll into revenue, but just assume a couple of quarters [indiscernible]

Operator

We have reached the end of today's Q&A. I will now turn the call back to Alan Trefler for closing remarks.

Alan Trefler

Thank you to everybody who joined this call. I'll share with you that we're actually incredibly excited about this opportunity and the important strategic direction that we took a couple of years ago when we decided to go after things with this design and run time distinction, this highly differentiated approach that we are more convinced than ever is exactly right.

And candidly, when we see organizations struggle with rogue agents, boy, it makes us smile a little bit that we chose an approach that mitigates that. And getting this to be turned into business revenue, solid results is exactly what our mission is. And I'll tell you that we're very energized about. So thank you very much, and look forward to talking with you all again soon.

Operator

This does conclude today's call. Thank you for attending. You may now disconnect.