PagerDuty, Inc. (NYSE:PD) Q3 2024 Earnings Call Transcript

PagerDuty, Inc. (NYSE:PD) Q3 2024 Earnings Call Transcript November 30, 2023

PagerDuty, Inc. beats earnings expectations. Reported EPS is $0.21, expectations were $0.13.

Tony Righetti: Good afternoon and thank you for joining us to discuss PagerDuty’s Third Quarter Fiscal Year 2024 results. With me on today’s call are Jennifer Tejada, PagerDuty’s Chairperson and Chief Executive Officer; and Howard Wilson, Chief Financial Officer. Before we begin, let me remind everyone that statements made on this call include forward-looking statements based on the environment as we currently see it, which involve known and unknown risks and uncertainties that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. These forward-looking statements include our growth prospects, future revenue, operating margins, net income, cash balance and total addressable market, among others, and represent our management’s beliefs and assumptions only as of the date such statements are made, and we undertake no obligation to update these.

During today’s call, we will discuss non-GAAP financial measures, which are in addition to and not a substitute for or superior to, measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in our earnings release. Further information on these and other factors that could cause the Company’s financial results to differ materially are included in filings we make with the Securities and Exchange Commission, including our most recently filed Form 10-K as well as other subsequent filings made with the SEC. With that, I will turn the call over to Jennifer.

Jennifer Tejada: Good afternoon and thank you for joining us today. PagerDuty delivered solid Q3 top and bottom line results above the high end of our guidance ranges, with 15% revenue growth and a non-GAAP operating margin of 14%. Year-over-year operating margin expanded by over 1,000 basis points as we continue to demonstrate our commitment to profitable growth. Long-term demand remains strong as all enterprises seek to address similar high priority challenges. First, their customers are digital and expect real-time modern experiences and services. But their operations are antiquated, command and control and manual. Crossing this operations CASM is critical to protect and grow revenue in an increasingly digital on-demand marketplace.

Second, all businesses seek to do more with less in the face of an ongoing skill shortage. This has led to an increased appetite for automation and demand for generative AI in order to reduce costs and achieve operational efficiency at scale. And third, tech debt and complexity continue to rise, creating material risk of operational and business failures, driving demand for automated and intelligent incident management solutions. Solving these priorities is critical for technology and business leaders, especially in enterprise and has increased the demand for the PagerDuty operations cloud. New customer and acquisition in enterprise and mid-market and strengthen strategic customer expansions were the highlight of the quarter, surpassing results from Q1 and Q2 of this fiscal year.

Along the contributions to strengthen new business was a record-setting win with a long-standing enterprise software customer. This operations cloud expansion included all four products: incident management, AIOPs, automation, and customer service ops. Two, at over $1 million of ARR each and showcases Pat’s platform value proposition to increase productivity, protect revenue and reduce risk by advancing operational maturity and resilience for enterprises. Enterprise, our strongest performing segment during the quarter remains our strategic focus. Notwithstanding a few unusual but sizable renewal issues in Q3, enterprise dollar-based net retention was more than 500 basis points above that of SMB. Customer retention and growth in enterprise have also been more resilient over the past 12 months.

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Q&A Session

These key metrics reinforce our prioritization of resources and our confidence in our global enterprise strategy, product development and go-to-market efforts. Macro volatility and uncertainty continues to pressure budgets and slow customer decision-making. While our customers remain highly engaged with nearly 1/3 of enterprise and mid-market customers expanding with us in the quarter, they continue to apply conservatism to expansions and seek ways to reduce overall IT spend while protecting investments for critical functionality in operations. In the past, we’ve seen similar behaviors. We were rewarded by focusing on long-term relationships rather than short-term gains, and that will continue to be our approach. New and expansion ARR was the strongest of the fiscal year, reinforcing that even in a challenging operating environment, the operations cloud value proposition resonates.

That said, turning down grade dollars were unfavorable to our target and created a headwind to total business generated during the quarter. We are addressing the higher risk of downgrades in churn by First, systematically identifying risk and engaging with customers earlier in the renewal life cycle; second, by providing flexible multiyear pricing solutions for customers who demonstrate need and third, working with customers to optimize their use of the Operations Cloud to maximize business value. As centralized decision-making has become the norm for our customers, we continue to evolve our enterprise motion. This has included increased focus on C-suite buyers with centralized purchasing authority, positioning centered around the financial value proposition of the Operations Cloud, and enterprise pricing to support scaled expansion across all products.

This account management approach complements our high-velocity land-and-expand motion that focuses on technical champions and practitioners and has enabled us to methodically improve the quality and quantity of enterprise wins. The focus on enterprise leadership with our persistent pace of innovation underpins an increasingly efficient enterprise go-to-market practice. During the third quarter, our generative AI program continued to advance. We now have four intuitive features in early access including AI-generated runbook automation, status updates, postmortems and a new Slack based chat interface to make it even easier to engage with our capabilities. These capabilities are the first of the family of generative AI use cases we’re calling PagerDuty CoPilot and make it possible for PagerDuty customers to use generative AI across the operations Cloud from event ingest to resolution.

Our strategy is to take a platform approach to leveraging generative AI across all products, instantiating it as a core primitive developers and employees can build upon. With a common secure gateway and customer opt-in interface packaged as PagerDuty CoPilot. Our current primary goal is customer engagement and input available through our early access program. To date, the feedback on design and usage have been very positive. Also in Q3, we expanded our customer service operations solution to include private status pages and ServiceNow CSM case automation. These enhancements immediately connect customer service agents to PagerDuty in product, enabling customer-facing teams to more quickly close customer cases without contact switching. This level of visibility and engagement into live incident management is a workflow requested by our largest and most complex customers.

In AI ops, we rolled out several significant enhancements specifically for central IT teams, including network operation centers and site reliability engineering teams. These additions enable teams to improve operational resilience using automation to analyze and action vast volumes of data immediately with measurable results. During the quarter, these went into early access and are oversubscribed. And finally, on the product development front, we closed the acquisition of Kelly earlier this month, and I want to welcome Nora Jones and the team to PagerDuty. Incorporating Deli’s talented team and technology will further differentiate the Operations Cloud as a system of action, going beyond instant response to drive quantifiable improvements in productivity and resilience.

Jeli turns every incident into a learning opportunity by completing the life cycle of incident management, particularly for service reliability management in IT with deep actionable analysis in rich learning and proactive improvement. Customer reaction to this combination has been incredibly positive, and we look forward to expanding our incident management offering rapidly as a result. Incorporating product innovation into our enterprise go-to-market produces enduring customer commitments to the Operations cloud. Recall that in Q2, a global semiconductor supplier identified our no-code workflow automation as the unique solution to reduce manual work and human error in pursuit of eliminating tens of millions of dollars in non-value-added annual costs.

Our focus on enterprise continued to scale in Q3, resulting in a multiyear eight-figure record-setting win as well as an additional seven-figure operations cloud expansion. In both cases, strong executive alignment, combined with a proven track record in serving technical champions proved instrumental in navigating their centralized decision-making processes. With a large enterprise software customer, we tightly aligned across multiple business units on their service ownership journey to save tens of millions of dollars in operational cost and provide a best-in-class customer experience for their end users. Our team identified high-priority business problems in collaboration with executives to anchor PagerDuty as a strategic partner to scale across technology and customer service teams.