Pegasystems (PEGA)

Low-code automation software company Pegasystems (NASDAQ:PEGA) reported Q3 CY2025 results beating Wall Street’s revenue expectations, with sales up 17.3% year on year to $381.4 million. Its non-GAAP profit of $0.30 per share was 50.1% above analysts’ consensus estimates.

Company Overview

With a "Center-out Business Architecture" approach that transcends organizational silos, Pegasystems (NASDAQ:PEGA) develops software that helps organizations automate workflows and use artificial intelligence to improve customer experiences and business processes.

The whole purpose of software is to automate tasks to increase productivity. Today, innovative new software techniques, often involving AI and machine learning, are finally allowing automation that has graduated from simple one- or two-step workflows to more complex processes integral to enterprises. The result is surging demand for modern automation software.

Pegasystems competes with major enterprise software providers including Salesforce.com, Microsoft Corporation, Oracle Corporation, ServiceNow, SAP SE, and IBM in various segments of the customer engagement, workflow automation, and low-code application development markets.

A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Pegasystems grew its sales at a 11.7% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the software sector, which enjoys a number of secular tailwinds.

Long-term growth is the most important, but within software, a half-decade historical view may miss new innovations or demand cycles. Pegasystems’s annualized revenue growth of 13.1% over the last two years is above its five-year trend, but we were still disappointed by the results.

This quarter, Pegasystems reported year-on-year revenue growth of 17.3%, and its $381.4 million of revenue exceeded Wall Street’s estimates by 8.5%.

Looking ahead, sell-side analysts expect revenue to grow 2.7% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and implies its products and services will see some demand headwinds.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Pegasystems’s billings punched in at $371 million in Q3, and over the last four quarters, its growth was solid as it averaged 17% year-on-year increases. This performance aligned with its total sales growth, indicating robust customer demand. The cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Pegasystems’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a highly competitive environment where there is little differentiation between Pegasystems’s products and its peers.

For software companies like Pegasystems, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Pegasystems’s gross margin is good for a software business and points to its solid unit economics, competitive products and services, and lack of meaningful pricing pressure. As you can see below, it averaged an impressive 75.7% gross margin over the last year. That means for every $100 in revenue, roughly $75.74 was left to spend on selling, marketing, and R&D.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Pegasystems has seen gross margins improve by 3.8 percentage points over the last 2 year, which is very good in the software space.

Pegasystems’s gross profit margin came in at 72.2% this quarter, up 2 percentage points year on year. Pegasystems’s full-year margin has also been trending up over the past 12 months, increasing by 1.3 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Pegasystems has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 17.4%. This result isn’t too surprising as its gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Pegasystems’s operating margin rose by 8.2 percentage points over the last two years, as its sales growth gave it operating leverage.

This quarter, Pegasystems generated an operating margin profit margin of 3.8%, up 7.4 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Pegasystems has shown robust cash profitability, driven by its attractive business model that enables it to reinvest or return capital to investors while maintaining a cash cushion. The company’s free cash flow margin averaged 24.9% over the last year, quite impressive for a software business.

Pegasystems’s free cash flow clocked in at $51.83 million in Q3, equivalent to a 13.6% margin. This result was good as its margin was 5.2 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends trump fluctuations.

Over the next year, analysts predict Pegasystems’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 24.9% for the last 12 months will increase to 30.1%, it options for capital deployment (investments, share buybacks, etc.).

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Pegasystems is a profitable, well-capitalized company with $351.4 million of cash and $62.4 million of debt on its balance sheet. This $289 million net cash position is 3% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We enjoyed seeing Pegasystems beat analysts’ revenue expectations this quarter. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 7.8% to $61.50 immediately following the results.

Updated: December 4, 2025 at 9:36 PM EST

Are you wondering whether to buy Pegasystems or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Pegasystems isn’t a terrible business, but it doesn’t pass our bar. To begin with, its revenue growth was uninspiring over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its impressive operating margins show it has a highly efficient business model, the downside is its customer acquisition is less efficient than many comparable companies. On top of that, its expanding operating margin shows it’s becoming more efficient at building and selling its software.

Pegasystems’s price-to-sales ratio based on the next 12 months is 5.6x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $73.09 on the company (compared to the current share price of $57.03).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.