Pegasystems (NASDAQ:PEGA) executives said the company faced a challenging first half of 2026 as customer uncertainty around artificial intelligence, a back-half-weighted renewal portfolio and go-to-market execution issues weighed on annual contract value growth.
On the company’s second-quarter earnings call, Founder and CEO Alan Trefler said the software market is undergoing a “fundamental transformation driven by AI,” but that the shift has also created confusion for enterprise buyers. He said organizations are reassessing how software should be designed, built and operated as AI pricing models evolve from low-cost or free access toward usage-based token pricing.
ACV Growth Slows as Customers Delay Decisions
COO and CFO Ken Stillwell said annual contract value, or ACV, remains one of Pegasystems’ most important operating metrics because it provides a clearer view of business momentum in a subscription model.
Pega Cloud ACV increased by $165 million year over year, growing 22% both as reported and in constant currency. Stillwell said the cloud business remains the fastest-growing and most important part of the company’s subscription model, although growth moderated from 27% in constant currency at the end of the prior quarter.
Total ACV grew 7% as reported and 8% in constant currency year over year, with gains in Pega Cloud offset by decreases in maintenance ACV and subscription license ACV. Stillwell said Pega Cloud now represents 57% of total ACV and could ultimately reach approximately 75% of the total over time.
Stillwell identified three primary reasons for the slower first-half performance:
- A renewal portfolio that is significantly weighted toward the second half of the year, limiting first-half expansion opportunities.
- Customer uncertainty caused by rapid changes in the software market and AI economics.
- Slower-than-expected execution on go-to-market changes intended to deepen engagement with clients and prospects.
Because a meaningful portion of Pegasystems’ net new ACV comes from cross-selling and upselling into its existing customer base, fewer renewal opportunities in the first half naturally resulted in fewer expansion opportunities, Stillwell said.
Executives Say Pipeline Remains Active Despite Longer Sales Cycles
In response to analyst questions, Stillwell said Pegasystems is not seeing customers abandon transformation projects or disengage from the company. Instead, he said many opportunities have elongated rather than disappeared.
“A lot of those pipeline deals in Q2 just didn’t close,” Stillwell said. “They elongated.” He said the company’s pipeline is growing and that late-stage pipeline is “very strong” compared with last year, but acknowledged that the duration of customer uncertainty is difficult to predict.
Trefler said the company saw “movement” in customer conversations after a period of heightened uncertainty in the second quarter. He said customers are still trying to determine how AI fits into their future technology plans, but added that many have “serious things they need to get done.”
Stillwell said Pegasystems had assumed that one-third of its full-year net new ACV additions would occur in the first half of 2026 and two-thirds in the second half. He said the company underachieved that first-half expectation and will work to recover as much of the shortfall as possible, though he described that task as “very difficult.”
Pegasystems Emphasizes AI Cost Predictability
A central theme of the call was Pegasystems’ positioning around AI costs. Trefler argued that enterprises are becoming more concerned about opaque token consumption, particularly “reasoning tokens” used internally by large language models. He said these costs can become unexpectedly expensive when AI agents reason through processes repeatedly at runtime.
Pegasystems is emphasizing an alternative approach that uses AI heavily at design time through Pega Blueprint AI, then runs structured workflows predictably at scale with selective AI use at runtime. Trefler compared the approach to a restaurant that designs recipes in advance rather than reinventing every dish for each customer.
“Our goal is simple,” Trefler said. “Help our clients avoid AI chaos and the mess that comes from it by delivering predictable outcomes at predictable costs.”
Stillwell said Pegasystems does not charge customers per token. Instead, he said the company’s AI monetization strategy is based on business value created on the Pega platform. Blueprint is intended to make it faster for customers to create and deploy applications, while advanced AI-powered runtime capabilities can carry a case price uplift.
New Infinity Studio Release Extends Blueprint
Trefler highlighted the release of Pega Infinity 2026 and the introduction of Infinity Studio, which he said extends Blueprint AI from design into application development, deployment and ongoing evolution. He said the release allows Pega Cloud and client cloud customers to use Blueprint AI to deploy new applications and improve existing ones.
He said Pegasystems initially focused Blueprint on new customers and new applications, but Infinity 2026 makes the technology available to help existing customers reimagine and modernize current Pega applications. Trefler called Infinity Studio “a really big deal” and said the company will roll it out aggressively through the rest of the year.
Executives also discussed the company’s use of Model Context Protocol, or MCP. Trefler said every workflow in Pega is automatically available through MCP in Infinity 2026, allowing agents built on other platforms to find and invoke Pega workflows.
Free Cash Flow, Buybacks and 2028 Target
Despite slower ACV growth, Stillwell emphasized Pegasystems’ cash generation. The company generated $288 million of free cash flow in the first half of 2026, which he described as a record. He said strong cash generation provides flexibility for capital allocation.
In the first half, Pegasystems repurchased 9 million shares for more than $360 million under prior authorizations. Stillwell said the cash spent on repurchases represented well over 100% of free cash flow generated during the period, and that total common shares were reduced by 6 million in the first half.
The company reiterated its expectation to generate more than $700 million of free cash flow in 2028. Stillwell said slower ACV growth in the first half of 2026 does not change that objective, but it will require the company to reevaluate certain investment priorities. He cited cloud scale, mix shift, sales productivity, gross margin improvement and disciplined investment prioritization as levers supporting the target.
Asked about the company’s free cash flow outlook for 2026, Stillwell said any ACV shortfall would put pressure on the company’s ability to reach its $575 million free cash flow outlook for the year, though he said Pegasystems continues to see cash flow durability in the business.
Trefler closed the call by acknowledging the challenging environment but said the company has navigated major technology and market shifts before. “We have a really good understanding of how to react strongly but smartly,” he said.
About Pegasystems (NASDAQ:PEGA)
Pegasystems Inc is a software company specializing in customer engagement and digital process automation solutions. Headquartered in Cambridge, Massachusetts, Pegasystems develops enterprise applications designed to help organizations streamline operations, manage customer interactions and automate complex workflows. Its platform supports a wide range of use cases, from sales and marketing optimization to case management and robotic process automation.
The core of Pegasystems’ offering is the Pega Platform, a low-code development environment that enables businesses to build and deploy applications with minimal hand-coding.
