Summary of Key Points from the Conference Call Industry Overview - The focus is on the SMID (Small and Mid-Cap) industrials, particularly those exposed to AI infrastructure and data centers, which are trading at a discount compared to large-cap stocks [1][5] - Both SMID and large-cap stocks exhibit elevated market implied CFROI (Cash Flow Return on Investment) expectations, with SMID stocks showing a higher Market Implied Yield (MIY) [1][5] Core Insights - **Market Implied CFROI**: The market implied CFROI for SMID stocks has reached a decade peak, indicating strong market expectations, yet they trade at a discount relative to large caps [5] - **Valuation Discrepancy**: SMID AI infrastructure and data center stocks are trading at a higher MIY compared to large caps, suggesting they are undervalued [1][5] - **Regional Performance**: US SMID stocks are experiencing positive momentum, while European counterparts are perceived as expensive relative to their peers [2][35] Sales Growth Expectations - **CAGR Expectations**: Many SMID tech stocks have low market implied 10-year sales CAGR expectations compared to trailing and forward consensus sales CAGRs [3][40] - **Cooling Solutions**: In the European cooling solutions sector, BEAN has the highest market implied 10-year sales CAGR expectation at 12.1%, while MTRS has the lowest at 3.1% [4][23] - **US Construction/Services**: Companies like EME and FIX have low market implied sales CAGR expectations of 5.8% and 8.9% respectively, compared to higher consensus forecasts [4][29] Momentum and Valuation - **Mixed Momentum**: US SMID tech stocks show positive momentum, while European SMID tech stocks have weaker momentum [2][35] - **Peer Rankings**: US SMID stocks (e.g., FIX, EME) are noted for attractive valuations amid positive momentum, while European SMID stocks with positive momentum come at a higher price [14][35] Sector-Specific Insights - **Semiconductors**: ASMI and BESI in the European semiconductor sector have low market implied expectations compared to their forward consensus forecasts [43] - **Software & Semiconductors**: Companies like Pegasystems and Teradyne have low market implied 10-year sales CAGR expectations compared to their consensus-driven 3-year sales CAGR forecasts [53] Additional Considerations - **Economic Profit Trends**: Belimo has shown a consistent increase in economic profit over the past seven years, with CFROI near all-time highs, while Munters has the lowest market implied sales CAGR expectation in its sector [23][29] - **Data Center Exposure**: Emcor Group has benefited from record revenue and earnings growth, maintaining a backlog of projects related to data centers, indicating strong future growth potential [29] Conclusion - The SMID industrials sector, particularly those involved in AI and data centers, presents potential investment opportunities due to their current valuation discounts and positive market expectations, despite mixed momentum across regions and sectors [1][5][35]

Core Insights - Adobe (ADBE) and Pegasystems (PEGA) are key players in the enterprise software sector, focusing on digital transformation through cloud-supported solutions [1] - The digital transformation market is projected to reach approximately $4 trillion by 2027, with a CAGR of 16.2% from 2022 to 2027, indicating significant growth potential for both companies [2] Adobe's Position - Adobe has enhanced its AI offerings with Adobe GenStudio and Firefly Services, facilitating collaboration on marketing campaigns [3] - Tools like Acrobat AI Assistant and Adobe Express are gaining traction among business professionals, with over 700 million monthly active users reported by the end of Q2 fiscal 2025 [5] - Adobe's Digital Media Annual Recurring Revenue (ARR) reached $18.09 billion, reflecting a 12% year-over-year increase, and its AI-first products are on track to exceed the $250 million ARR target by the end of fiscal 2025 [6] Pegasystems' Position - Pegasystems is experiencing strong demand for its AI-powered, cloud-based solutions, with the market expected to exceed $150 billion by 2029 [7] - The company's shift to a subscription-based model has driven a 14% year-over-year growth in Annual Contract Value (ACV) in Q2 2025, supported by the adoption of Pega GenAI Blueprint [8] - PEGA's capabilities include using agentic AI to modernize legacy systems, enhancing application development speed [9] Earnings Estimates - The Zacks Consensus Estimate for Adobe's fiscal 2025 earnings is $20.63 per share, indicating a 12% increase from 2024 [11] - The consensus for PEGA's 2025 earnings has risen by 5.3% to $1.98 per share, suggesting a 31.1% growth from fiscal 2024 [12] Stock Performance and Valuation - Year-to-date, Adobe shares have declined by 18.6%, while Pegasystems has seen a larger decline of 21.8% [13] - Both companies are considered overvalued, with Adobe trading at a forward Price/Sales ratio of 6.11X compared to PEGA's 5.13X [16] Investment Outlook - Adobe's focus on monetizing its AI tools positions it favorably for investors, while PEGA's valuation concerns present risks [19] - Currently, Adobe holds a Zacks Rank 2 (Buy), while Pegasystems has a Zacks Rank 3 (Hold), indicating a stronger investment case for Adobe [19]

Core Insights - Pegasystems (PEGA) is experiencing strong growth in its cloud business, with a 30% year-over-year increase in Pega Cloud backlog, reaching approximately $1.32 billion, and total backlog at $1.84 billion, indicating a healthy revenue pipeline for future quarters [1][10] - The Annual Contract Value (ACV) has risen 16% year-over-year to $1.514 billion, while Pega Cloud ACV surged 28%, reflecting robust demand for PEGA's AI-driven solutions [2][10] - The current cloud backlog, expected to convert within the next 12 months, has grown 28% year-over-year, providing near-term revenue visibility [3][10] - The Zacks Consensus Estimate projects revenue growth of 13.71% for fiscal 2025 and 5.83% for fiscal 2026 [4] Competitive Landscape - Pegasystems faces significant competition in the cloud market from Oracle and Salesforce [5] - Oracle is expanding its cloud infrastructure and applications, enhancing its competitive position with strengths in AI-driven databases and integrated enterprise solutions [6] - Salesforce leads in cloud-based CRM, offering a fully cloud-native solution that emphasizes usability and integration, setting a high benchmark in customer engagement [7] Financial Performance - Pegasystems' shares have increased by 9.7% year-to-date, compared to a 10.8% return for the broader Zacks Computer and Technology sector and a 16.3% rise in the Computer-Software industry [8] - The company has a Value Score of D and is trading at a forward 12-month price-to-earnings ratio of 24.66X, lower than the industry's 32.73X [12] - The Zacks Consensus Estimate for PEGA's earnings is $1.98 per share for 2025, reflecting a year-over-year growth of 31.13% [15]

Summary of Pega Systems Conference Call Company Overview - **Company**: Pega Systems - **Industry**: Software, specifically focusing on AI decisioning and workflow automation platforms Core Markets and Challenges - Pega focuses on transforming legacy systems, workflows, and customer engagement through AI and automation [5][8] - Core end markets include financial services, healthcare, insurance, government, and telecommunications [8] - The company addresses challenges such as technical debt and the need for increased efficiency in customer service and marketing [5][6] AI and Automation Insights - Pega's platform processes tens of millions of workflows annually, with some clients handling billions of interactions in real-time [10] - The company emphasizes the importance of using AI to streamline operations and enhance customer experiences [12][13] - Pega's clients are encouraged to leverage data from customer interactions to drive continuous improvement [11] Technical Debt and Legacy Systems - A survey indicated that 88% of executives believe technical debt hinders agility, and 68% feel it prevents full AI implementation [18] - Pega aims to help clients transition from legacy systems to modern architectures to unlock AI capabilities [21][20] Pega Blueprint - Pega Blueprint is a rapidly adopted product that allows clients to create new applications and workflows efficiently [22][29] - The tool can extract workflows from screen recordings of legacy systems, enabling quick application design [24][25] - Vodafone has adopted a corporate mantra of "no sprint without a print," emphasizing the importance of Blueprint in their development process [30][32] AI Integration and Future Outlook - Pega's architecture is designed to integrate with various AI models, allowing flexibility in choosing the best model for specific tasks [64][66] - The company does not build its own large language models but collaborates with existing models like GPT-4 and Anthropic's Quad [61][62] - Pega sees AI as an accelerant for business processes, enhancing the speed and quality of workflow automation [76] Revenue Model and Cost Management - Pega monetizes based on the volume of automation and cases processed, rather than user-based pricing [55][57] - The company anticipates that AI will lead to faster legacy transformation projects, resulting in higher value and lower operating costs [96][97] RPA and Future Innovations - Pega views traditional RPA as a temporary solution, with a shift towards more integrated AI-driven processes [82][84] - The company has embedded AI tools to automate regression testing, allowing faster app deployment [91][94] Conclusion - Pega Systems is positioned to leverage AI and automation to transform legacy systems and enhance operational efficiency across various industries, with a strong focus on customer engagement and continuous improvement. The adoption of Pega Blueprint and the integration of AI models are key components of their strategy moving forward.

Core Insights - Pegasystems (PEGA) shares closed at $50.96 on August 12, approximately 16% lower than the 52-week high of $60.96 reached on July 30, with a slight increase of 0.1% since the second-quarter 2025 results were reported on July 22, underperforming the broader Zacks Computer & Technology sector and peers like Microsoft, Oracle, and SS&C Technologies [1][10]. Financial Performance - The Zacks Consensus Estimate for third-quarter 2025 earnings is 18 cents per share, reflecting a 5.3% year-over-year decline, while the revenue estimate is $355 million, indicating a 9.2% year-over-year growth [3]. - Year-to-date, PEGA shares have appreciated 9.4%, still underperforming the broader sector [4]. Competitive Landscape - The underperformance of PEGA shares is attributed to a challenging macroeconomic environment and intense competition from Microsoft and Oracle in the business process management space, as well as SS&C Technologies' Blue Prism in robotic and digital process automation [2][10]. Growth Drivers - Pegasystems is experiencing strong demand for its AI-powered and cloud-based solutions, with the market expected to exceed $150 billion by 2029 [12]. - The shift to a subscription-based business model has been a significant catalyst, with Pega Cloud Annual Contract Value (ACV) increasing 25% year-over-year to $71 million in Q2 2025, and total ACV rising 14% year-over-year [13]. - Net new ACV addition surged 60% year-over-year in the first half of 2025 compared to the first half of 2024, indicating robust growth potential [13]. Backlog and Future Outlook - At the end of Q2 2025, backlog increased 27% at constant currency, providing good visibility into future performance, with Pega Cloud's current backlog expected to convert into revenues within 12 months increasing by 25% [14]. Innovation and Product Development - Pegasystems has introduced Pega Blueprint capabilities, utilizing agentic AI to modernize legacy systems rapidly, which accelerates application development from months to weeks [15]. - The company is expanding its enterprise clientele across various sectors, including financial services, insurance, telecommunications, healthcare, manufacturing, and the public sector [16]. Valuation Concerns - Pegasystems shares are considered overvalued, with a trailing 12-month Price/EBITDA ratio of 24.06X, higher than the broader sector's 20.01X and SS&C Technologies' 8.41X, although lower than Microsoft and Oracle [17].

Core Insights - Pegasystems Inc. (PEGA) exceeded expectations in its fiscal second-quarter 2025 results, showcasing strong momentum driven by its cloud strategy [1][3] - The company reported total revenue of $384.5 million, a 9% year-over-year increase, surpassing analyst estimates [3][4] - Cloud revenue surged by 24% year-over-year, reaching $166.7 million, which constitutes 43% of total revenue [4][5] Financial Performance - Annual Contract Value (ACV) rose 16% year-over-year to $1.514 billion, exceeding the estimated $1.476 billion [4][6] - Pega Cloud ACV increased by 28% year-over-year, reaching $761.1 million, indicating a shift from on-premise to cloud-based deployments [5][6] - Recurring maintenance revenue was $79.3 million, slightly above the projection of $76.5 million, while term license revenue was $74.6 million, down 6% year-over-year but beating estimates [6] Guidance and Future Outlook - The company reaffirmed its fiscal 2025 guidance, projecting 12% ACV growth, total revenue of $1.7 billion (up 7% year-over-year), and $440 million in free cash flow [7][8] - Analysts expect Pegasystems to generate $452.2 million in free cash flow for fiscal 2025, translating to a 27% free cash flow margin [8] - The company is well-positioned for long-term growth, with strong momentum in its cloud business and reduced legal risks [9]

Financial Performance - Pegasystems Inc. reported quarterly earnings of 28 cents per share, exceeding the analyst consensus estimate of 23 cents per share [1] - The company achieved quarterly sales of $384.512 million, surpassing the analyst consensus estimate of $362.588 million [1] AI Strategy - The company's unique approach to AI was highlighted as a key driver of strong first-half results, focusing on workflow design with Pega Blueprint and operational consistency through the Pega Infinity workflow engine [2] - Pega's Predictable AI approach aims to provide enterprises with both innovation and operational consistency [2] Stock Performance and Analyst Ratings - Following the earnings announcement, Pegasystems shares fell by 1.1% to trade at $57.40 [2] - Analysts have adjusted their price targets for Pegasystems, with Rosenblatt raising it from $59 to $61, Wedbush from $68 to $70, Citigroup from $66 to $70, and DA Davidson from $50 to $60 [8]

Financial Data and Key Metrics Changes - Annual contract value (ACV) grew 16% year over year, with a 14% increase in constant currency [29] - Net new ACV added increased by 60% year over year in constant currency, indicating significant acceleration [29] - Total ACV exceeded $1.5 billion for the first time in company history, driven by Pega Cloud ACV growth of 28% as reported and 25% in constant currency [30] - Free cash flow growth reached $286 million in the first half of 2025, supported by accelerated ACV growth and margin expansion [31][34] Business Line Data and Key Metrics Changes - Pega's GenAI Blueprint is transforming the go-to-market strategy, resonating well with clients and expanding the company's footprint in key verticals [30] - The majority of Pega Cloud bookings contribute to backlog, creating a more predictable future revenue stream [34] Market Data and Key Metrics Changes - The company is experiencing increased engagement and interest in its offerings, particularly in the context of legacy transformation and AI adoption [53][60] - More than a thousand organizations are currently building Blueprints, driving increased awareness and engagement [22] Company Strategy and Development Direction - The company is focusing on leveraging its unique AI-driven architecture and the Pega Infinity platform to enhance application development and deployment [10][18] - Pega is expanding its partner ecosystem, including a strategic collaboration with AWS to accelerate legacy transformation projects [21] - The introduction of partner-branded Blueprints is expected to enhance visibility and collaboration with partners' customers [20][68] Management's Comments on Operating Environment and Future Outlook - Management noted a level of anxiety among customers due to global unpredictability but emphasized that there are no significant headwinds affecting business [52] - The company is optimistic about the ongoing demand for AI and legacy transformation solutions, which are expected to drive growth in the coming years [53][60] - Management highlighted the importance of maintaining momentum in ACV growth and free cash flow generation throughout the year [54][39] Other Important Information - The company has repurchased approximately $251 million of its shares, representing over 85% of total free cash flow generated during the period [35] - The company is committed to investing in its core business while evaluating capital allocation options for long-term value creation [36] Q&A Session Summary Question: On Pega Cloud and ACV growth - Management indicated that Pega Cloud ACV is significantly driven by the Blueprint, which is central to sales campaigns [44] Question: Deal renewals and quarterly performance - Management noted that Q1 had a higher renewal cycle, but Q2 was consistent with expectations [46] Question: Customer focus and deal environment - Management observed that customers are increasingly focused on AI adoption and legacy transformation, driving accelerated discussions [53] Question: ACV strength and FX impact - Management confirmed that the strong ACV growth is not a substitute for future performance and noted a consistent currency headwind of about two percentage points [55] Question: Public sector engagement - Management acknowledged some project delays but expressed optimism about opportunities in the public sector for efficiency improvements [75] Question: Booking momentum post-conference - Management reported increased customer engagement and a growing pipeline following the Pega Cloud conference [96] Question: Margin expansion outlook - Management emphasized that margin expansion is dependent on growth and that they are executing well on cost management [100]

Financial Data and Key Metrics Changes - Annual contract value (ACV) grew 16% year over year, with a 14% increase in constant currency [28] - Net new ACV added increased by 60% year over year in constant currency [28] - Total ACV exceeded $1.5 billion for the first time in company history, with Pega Cloud ACV growth of 28% reported and 25% in constant currency [29] - Free cash flow growth reached $286 million in the first half of 2025, driven by accelerated ACV growth and margin expansion [30][31] - Total remaining performance obligation increased by 31% reported and 27% in constant currency year over year [31] Business Line Data and Key Metrics Changes - Pega's GenAI Blueprint is transforming the go-to-market strategy, leading to significant business activity in Q2 [28][29] - Pega Cloud bookings primarily contribute to backlog, creating a predictable future revenue stream [32] Market Data and Key Metrics Changes - The company is experiencing increased engagement and interest in its offerings, particularly in the context of AI and legacy transformation [50][72] - The public sector is showing strong demand for cloud and digital transformation solutions, with significant projects ongoing [71][72] Company Strategy and Development Direction - The company emphasizes a unique AI-driven approach that combines creativity during the design phase with predictability during production [12][15] - Pega Blueprint is positioned as a key differentiator, allowing users to design applications quickly and effectively [10][19] - The company is focusing on expanding its partner ecosystem and enhancing collaboration with global systems integrators [20] Management's Comments on Operating Environment and Future Outlook - Management acknowledges a level of unpredictability in the market but does not see significant headwinds affecting business [49] - The focus on AI and legacy transformation is expected to drive growth in the coming years [50][59] - The company aims to maintain momentum in ACV growth and free cash flow generation throughout the year [52][39] Other Important Information - The company has launched partner-branded Blueprints, attracting interest from major systems integrators [19] - A five-year strategic collaboration agreement with AWS was announced, enhancing the accessibility of Pega's software [20] Q&A Session Summary Question: Inquiry about Pega Cloud's ACV growth - Management indicated that Blueprint is a significant driver of business activity and is engaged in every sales campaign [43] Question: Discussion on renewal cycles - Management noted that Q1 had a higher renewal cycle compared to Q2, but Q2 was not unusual [45] Question: Deal environment and customer focus - Management observed a trend of increased interest in legacy transformation and AI adoption among clients [50] Question: Impact of ACV strength on future expectations - Management aims to maintain momentum and not view strong first-half performance as a substitute for second-half results [52] Question: Public sector deal elongation - Management noted some projects may have been reshuffled but sees potential tailwinds from government efficiency initiatives [70][72] Question: Competition for Blueprint - Management stated that Blueprint does not have direct competitors but faces competition from other software vendors like Salesforce and ServiceNow [99]

Core Insights - Pegasystems (PEGA) is expected to report second-quarter 2025 results on July 22, with revenue growth projected at 5.02% year-over-year to $368.77 million and earnings estimated at 24 cents per share, reflecting a decline of 7.69% from the previous year [1][10] Financial Performance - PEGA has consistently beaten the Zacks Consensus Estimate in the last four quarters, with an average surprise of 94.01% [2] - The company generated $202 million in free cash flow in the first quarter of 2025, surpassing the total for the entire year of 2023, indicating strong cash flow performance [6] Cloud Business Growth - Pegasystems is experiencing significant growth in its cloud business, with Cloud Annual Contract Value (ACV) increasing by 23% year-over-year to $701 million in the first quarter of 2025 [3] - The company aims for 20% or more annual Cloud ACV growth, with strategic efforts to transition legacy workloads to Pega Cloud gaining traction [4] Challenges and Risks - The second-quarter performance may be negatively impacted by unfavorable foreign exchange rates and cautious spending behavior in Europe, which has led to deferred client spending and reduced IT budgets [7][8] - Intense competition from Salesforce and Microsoft in the AI-driven space is expected to challenge Pegasystems' market share and margin stability [8] Long-term Prospects - The adoption of Pegasystems' GenAI strategy, particularly through its AI-powered low-code tool, Pega Blueprint, is expected to drive long-term growth [11] - A collaboration with Amazon Web Services is anticipated to enhance Pegasystems' growth by modernizing cloud-based legacy systems and improving AI capabilities [12] Stock Performance - PEGA shares have returned 9.3% year-to-date, slightly trailing the Zacks Computer and Technology sector's gain of 9.6% [13] - The stock is currently trading at a Price/Book ratio of 14.26X, indicating a premium valuation compared to the sector's 10.45X [16]