PEGASYSTEMS INC Q2 FY2026 earnings

Revenue for fiscal 2026's second quarter rose 9.4% to $420.7 million from $384.5 million a year earlier, and gross profit rose 13.7% to $312.7 million. The mix beneath that growth is shifting. Cloud and subscription services carried the quarter while consulting and maintenance revenue declined. The six-month picture is weaker: revenue of $850.7 million was down 1.1% from $860.1 million, held back by subscription license revenue, which fell after several large multi-year contracts were recognized in the prior-year period. Gross margin for the quarter was 74.3%, up 2.8 percentage points; the six-month gross margin of 74.8% was down 0.6 percentage points.

Profitability thinned. Operating income of $16.6 million in the quarter was down 3.7%, and the quarter's operating margin of 4.0% was down 0.5 percentage points. Net income fell 55.7% to $13.3 million, and diluted earnings per share of $0.08 compared with $0.17. Over six months, operating income of $53.8 million was down 62.7% and net income of $46.1 million was down 60.1%; diluted earnings per share of $0.26 compared with $0.63. The six-month operating margin of 6.3% was down 10.4 percentage points. The non-GAAP view is brighter. Non-GAAP net income of $59.5 million for the quarter was up 19% and non-GAAP diluted earnings per share of $0.35 was up 25%. For the six months, non-GAAP net income of $142.6 million was down 25% and non-GAAP diluted earnings per share of $0.81 was down 22%.

Cash remained the strongest part of the story. Six-month operating cash flow of $298.2 million was up 2.7%, and free cash flow of $288.3 million was up 1% from $286.5 million. Second-quarter operating cash flow of $86.0 million was flat against the prior-year quarter. Capital expenditures climbed 98.6% in the quarter to $4.2 million and 148.2% to $10.0 million for the six months. Deferred revenue of $468.4 million was up 11.0% and remaining performance obligations of $2.02 billion were up 10.0%, both pointing to contracted work still to be recognized. The company spent $367.2 million on share repurchases in the first half and paid a quarterly dividend of $0.03 per share.

ACV is the metric that frames the outlook. Annual contract value of $1,620 million was up 7% from a year earlier and 8% in constant currency. Pega Cloud ACV of $926.3 million rose 22%, but maintenance ACV fell 10% and subscription license ACV fell 6%. Management tied the slowdown to unprecedented changes in the AI market that caused clients to delay purchasing decisions, and said ACV growth slowed significantly over the six months ended June 30, 2026 against the same period last year. The company warns these factors may keep hurting the ACV growth rate for the rest of the year, and that cash flow generation may be adversely affected too. That outlook covers the remainder of fiscal 2026 rather than a single quarter. Management also pointed to Pega Infinity 26 and its positioning around predictable token costs, and called the first half a record period for cash flow.

Costs and legal exposure add pressure. Sales and marketing and research and development spending both rose, and restructuring charges stemmed from workforce reductions aimed at an AI-first delivery model. Legal fees tied to proceedings outside the ordinary course, including the litigation with Appian, are expected to keep weighing on results. Other risks named in the filing include cyber-attacks and security breaches, protection of intellectual property, reliance on key personnel, and client retention. The buyback has room to run: the board extended the repurchase program to June 30, 2027 and increased the authorization by $1 billion, leaving $875.1 million available at the end of June 2026.