Pegasystems Earnings: ACV Speed Bump as Cash Flow Shines During Continued Cloud Transition

No-moat Pegasystems was in line with our top-line expectations for the second quarter, primarily driven by the strength of its Cloud business. Shares are down on the report given the sequential decline in annual contract value, or ACV, for which we struggle to recall a precedent throughout our experience. Management pointed to various contract changes, types of new contracts signed, and client churn as driving this anomaly. We consider this a red flag that can be removed next quarter with a return to normal linear progression in ACV. On the flip side, the company generated substantial free cash flow during the quarter which, once sequential ACV growth resumes, we assume investors will applaud. We maintain our fair value estimate of $52 per share given no material guidance update, macro headwinds fueled by uncertainty in customer budgets, and the ongoing litigation process with Appian. After the selloff, we view shares as fairly valued.