Q2 2024 PagerDuty Inc Earnings Call

Speaker 1: is key to us revolutionizing operations. This quarter, we made further progress through the general availability of custom fields and incident workflow templates. With custom fields, we are widening the aperture of use cases for the operations cloud to teams beyond engineering. For example, customer service teams can define an incident type in order to trigger different types of incident workflows. A security team can trigger an incident for a data breach, which will loop in PR and legal.

Speaker 1: These capabilities mark exciting progress against our long-term vision for PagerDuty's offering across the enterprise, and expand the monetization opportunity for our higher value plan.

Speaker 1: Additionally, the powerful new analytics capabilities we announced today are available to all paying customers.

Speaker 1: PagerDuty's Insight reports provide teams with more granular visibility and control over operational health and maturity, specifically designed with technology executives in mind. These reports provide leaders with real-time critical insights into the state of their operations, including which services are most impacted, achievement against SLAs, and overall team health. Participation is also embedded in how PagerDuty empowers mission-driven teams to build a more equitable world and sustainable future. This quarter, our social impact team leveraged our no-code workflow builder to automate the capture of employee volunteer hours. Our employees remain invested in their communities, posting more than 80% volunteer participation in the quarter. For the second consecutive year, the San Francisco Business Times recognized PagerDuty as one of the top 100 corporate philanthropists in the Bay Area.

Speaker 1: Additionally, PagerDuty was named 2023 Top 50 Inspiring Workplace in North America and as one of Fortune's best workplaces in the Bay Area and best workplaces for Millennials. Moving forward, we intend to maintain the go-to-market and product development rigor that enabled us to deliver non-GAAP profitable growth during the second quarter.

Speaker 1: Gartner estimates spending on cloud application and services will exceed $240 billion in 2024, and we believe this indicates a significantly larger opportunity available to us long term. We're successfully undertaking more strategic conversations within enterprises, standardizing the operations cloud go-to-market playbooks, and accelerating awareness through demand gen and partnership events.

Speaker 1: The structural initiatives implemented throughout the past two years codified a profitable framework for delivering consistent innovation required by businesses to cross the operations chasm. We believe this positions us to monetize the operations cloud and achieve our long-term operating targets.

Speaker 1: I want to thank our customers for their loyalty and our teams for their focused and enduring commitment to championing our customers. With that, I'll turn the call to Howard and look forward to your questions.

Speaker 2: Thank you, Jen, and good day to everyone joining us on this afternoon's call.

Speaker 2: In Q2, we delivered solid results ahead of both our revenue and non-GAAP operating margin guidance as we continue to adjust to the economic environment.

Speaker 2: Our enterprise and mid-market customers, where the cost and risk of operational failure is high, continue to choose the Patriot Duty Operations Cloud to mature, modernize and scale their digital businesses.

Speaker 2: Unless otherwise stated, all references to our expenses and operating results are on a non-GAAP basis and are reconciled to our GAAP results in the earnings release that was posted before the call.

Speaker 2: Revenue was $108 million in the second quarter, up 19% year over year. The contribution from international was 27% of total revenues, an increase from the 23% seen in Q2 of last year.

Speaker 2: We delivered 114% dollar-based net retention in Q2 compared to 124% in the same period one year ago. Our DBNR expectation for the second half remains at or above 110%.

Speaker 2: Customers spending over $100,000 in annual recurring revenue grew to 773, up 12% from a year ago.

Speaker 2: Total paid customers increase sequentially by 57 to 15,146.

Speaker 2: In Q2 of the prior year the count was 15,174.

Speaker 2: Free and paid customers on our platform grew to over 26,000, an increase of approximately 19% compared to Q2 of last year.

Speaker 2: Q2 growth margin was 86% at the top end of our target range of 84-86%.

Speaker 2: Operating income improved 1,700 basis points to $14 million or 13% of revenue compared to a loss of $3 million or negative 4% of revenue in the same quarter last year.

Speaker 2: In addition to revenue outperformance, this metric was above our initial expectations due to a few million dollars of non-recurring expenses related to consulting engagements and marketing programs spent shifting from Q2 to Q3.

Speaker 2: In terms of cash flow for the quarter, cash from operations was $11 million or 10% of revenue and free cash flow was $9 million or 8% of revenue.

Speaker 2: The shift of expenses I just mentioned also leads to an improvement to free cash flow. As a result, we now anticipate Q3 to be the low point this year for cash but remain positive.

Speaker 2: Turning to the balance sheet we ended the quarter with $504 million in cash, cash equivalents and investments.

Speaker 2: Total deferred revenue ended the quarter at $197 million, up 16% year over year.

Speaker 2: The seasonality of our renewals, along with our standard co-terming practices, creates fluctuations in our quarterly billings.

Speaker 2: In quarters where we have a high volume of smaller expansion transactions, while not impacting contractor arrangements does reduce the predictable nature of billings.

Speaker 2: This has been evident over the past two quarters and we expect to see this trend of a high volume of smaller transactions continue.

Speaker 2: To provide additional transparency during this period, we will be providing more frequent updates on Porter End Annual Recurring Revenue or ARR.

Speaker 2: ARR exiting Q2 grew 17% year-over-year to $431 million.

Speaker 2: For consistency with prior calls, quarterly calculated billings were $102 million, an increase of 11% year over year, and below the range of 12 to 15% provided during last quarter's call.

Speaker 2: On a trading 12 month basis, the length was $433 million, an increase of 20% compared to a year ago and in line with our estimates.

Speaker 2: With respect to Q3, we expect calculated billings growth to be between 8 and 10% and trading 12 months billings growth to be approximately 14%.

Speaker 2: Turning to our guidance.

Speaker 2: For the third quarter fiscal 2024 we expect revenue in the range of $106.5 to $108.5 million, representing a growth rate of 13 to 15%.

Speaker 2: and net income per diluted share attributable to Page Duty Inc. in the range of 13 to 14 cents. This implies an operating margin of 8 to 9%.

Speaker 2: For the full fiscal year 2024, revenue is expected to be in the range of $426 to $430 million, representing a growth rate of 15 to 16%.

Speaker 2: This compares to the range previously provided of $425 to $430 million.

Speaker 2: A net income per-duted share attributable to pay to duty in remains between 60 and 65 cents thus implies an operating margin of 11 to 12%.

Speaker 2: We remain focused on the long term, building on the crust our customers, placing us and committed to durable, profitable growth.

Speaker 2: I would like to recognise our teams across the globe for their dedication to our vision and for providing the continuous innovation required to transform critical work and revolutionise operations. ANYction

Speaker 2: With that, I will open up the call for Q&A.

Speaker 3: Okay, thank you. And to our analyst on the line, please feel free to raise your hand. We'll begin by going to Keith Weiss with Morgan Stanley . Keith, please feel free to go ahead.

Speaker 4: Hi, good afternoon. This is Fiona on percentage singing Keith Lice. Thank you for taking the question. I wanted to ask on the new SKU called AIOPS, which was announced last quarter.

Speaker 4: The interesting thing about this SKU is that it's priced on consumption and not seats, and I think that you noted that you had about 100 new customers up taking this SKU in the quarter. So, curious about any early learnings that you've seen about bringing this SKU to market. How does the co-selling motion work with the rest of the product portfolio? And anything else that might be of note. Thank you.

Thanks for the question. It's a very natural selling motion. I think one of the competitive advantages of AIOPS compared to point solutions that are in the market or older kind of legacy event management solutions is that it not only enables AI driven analysis and event orchestration, but because it's deeply integrated into the operations cloud, it also ensures action on the back of that analysis, which is not the case for other AIOPS solutions. So it's a natural part of the incident response value chain and even more importantly, a welcome insight connected into the automation that we deliver through the combination of incident response AIOPS process automation and even customer service up. So it's actually a real natural step in the selling motion and in fact, a good door opener to talk further about process automation and even customer service operation. You nailed it. The reason that we're in market with a consumption base queues to learn to understand how the usage patterns may be the same or differ from see-based licensing and it's early but we're encouraged by what we see.

Great, thank you very much. Sure. Thank you. Next, heading to Rob Oliver with Baird. Rob, please come on forward. Great. Thank you, guys, for taking my question. I appreciate it. Good afternoon. I wanted to ask one for you, Jen, just to start. So you mentioned on the call some of the changes that you guys had made to adapt to sort of the changed macro environment, which took you guys by surprise a little bit last quarter. I was wondering if you could provide a little bit of color for us as to what some of those changes were in particular. And then I had a quick follow-up for Howard. Thanks. Thanks.

Sure, well, I'm really proud of our team and their execution throughout the quarter. As you're aware, we've been spending a lot of investment on innovation and shipping that to market. And our sales teams have really had to up level their messaging and having more strategic conversation with C-level buyers as budgets have become more constrained and there are more and more sort of procurement steps involved in the process. And we were really pleased to see in this quarter stronger large deal transaction flow, as well as a number of various strategic operations cloud deals. The one I mentioned with a semiconductor supplier and also with a global financial institution. I mean, I spent all of summer visiting with customers. I saw over 50 customers this summer and there's a huge appetite for not only automation, but an operations platform that helps them solve an increasingly material problem, which is reducing the cost and risk associated with material operations failures, whether that's driven by technical debt, operations debt, changes in staffing or cybersecurity threats. And so I also think that we're in the market at the right moment with the right platform for large enterprises that need a highly reliable, resilient operations platform at scale and also are trying to reduce the cost of their overall operations and yet improve the customer experience. And so really telling that entire story to the CIO, the CTO, and even in some cases, the CFO has been important and really, I think, trying to articulate the operations cloud in terms of the business problems that our customers have to solve is an area that we've improved in.

And maybe I can work that as well. Some of the things that we did practically, Rob, were really around, made fine tuning some of our approaches to pipeline management. So taking into the account that there would be longer approval cycles and more stakeholders involved. So that led to a different emphasis around both pipeline creation and pipeline management. And we saw encouraging trends with the conversion rates from Q1 to Q2 improving modesty. So it wasn't a dramatic improvement, but moving in the right direction. And as Jen mentioned, the improvement in large deal flow was actually with also notable. So those things we think are laying the foundation for us to be poised to respond well to an improving economy. And how are that was going to be my follow up was just on that relative to the your philosophy on the on the data. Look for that, you know, for the rest of the year or not. And then, you know, obviously you called out buildings and you prepare remarks, which I know for you guys have always bounced around. Yeah. But the less they are, you know, sort of forecasted to be relatively weak for the rest of the year. So just wanted to get your thoughts on that. Thank you. Yeah. So, you know, we take a prudent view of our guidance both from a top line and from an operating margin perspective. So as we've looked at the revenue guidance pool. The full year, we obviously have the impact of the slower growth in age one, creating like an impact in the second half of the year with lighted bookings. It translates into that lagging indicator of revenue in the second half. But we've also not factored in any improvement in the macro environment in our outlook for the rest of the year. And from an operating margin perspective, we've, you know, really taken a view of controlling the controllables. We still are continuing to invest.

We want to ensure that we have the right sales capacity, as I mentioned, to be able to reaccelerate growth as the economy improves. And we've also ensured that we are continuing to execute on what we see as a large $38 billion tap. Great. Thanks again, Gus. Okay, moving next to from RBC, Anushtha Mittal. Anushtha, please go ahead. Hi. This is Anushtha from Matt Hedberg. Thanks for taking my questions here. I had one for Howard. It's good to see that you guys have continued to show leverage in the model by the cost actions that you've taken over the past couple quarters. Cash flow was also very strong this quarter. Can you talk more about how you think about the fee cash flow progression for the remainder of the year and as we look towards fiscal 25?

Yeah, sure. Thanks for the question Anush. In terms of free cash flow, you'll notice that it often over the course of the year follows a fairly similar trend that's seasonal in terms of movement often related. We are often a few percentage points better on the operating free cash flow over the operating margin for the full year, but that does move around through the quarters. So our expectation for the full year would be that it would be a couple of points better. I think the expense shift that you saw, for example, from Q2 into Q3, that leads to better than expected free cash flow in Q2. But as a result, that takes away some free cash flow in Q3. Got it. And then you recently had a CRO change with David leading in February and Jeremy taking the reins. Now with two quarters of him in charge, what are some things he's focused on and have you seen any disruption in the sales organization given the change? You're on mute. In fact, I'm really pleased with how Jeremy has settled in. He's someone who's been in our business for nearly seven years. He is a deep domain expert, understands the product.

Very well and has done a fantastic job of really focusing the sales force on up leveling the conversation to a multi-product sale having more strategic discussions at a higher level with the CIO, the CTO, and in some cases, the CFO , and he's really leading the charge for the company around the operations cloud messaging and really helping to build awareness for that. I think that it would be easy to sort of scapegoat a change management where we've really seen as the impact of a macro and in fact Jeremy and his leadership team have adjusted very quickly and very well and you can see that in the improvement in conversion, the improvement in pipeline, some of the new product attached that we talked about for AIOPS. And in particular, some of the strategic agreements that we've gotten done with the large SEMI Conductor Supplier, the global finance institution that I mentioned. The other thing I would say is that I have been able to get out into the field and spend time with over 50 customers across North America, Europe , I was in Japan for a week later in July . And the level of engagement on the part of the enterprise and mid market business community is as high as I've ever seen it in the business. And there's a lot of excitement around the multi-product platform that is the operations cloud and being able to leverage automation and service of their teams and service of their revenue goals as well as reducing operating expense, et cetera. So I think as the economy improves as budget is boosting up, we are very well positioned to re-accelerate the business and very focused, continue to be focused on the long-term opportunity and the large term that is available for us to execute against.

A fantastic job of really focusing the sales force on up leveling the conversation to a multi-product sale, having more strategic discussions at a higher level with the CIO, the CTO, and in some cases, the CFO , and he's really leading the charge for the company around the operations cloud messaging and really helping to build awareness for that. I think that it would be easy to sort of scapegoat a change management where we've really seen is the impact of the macro and in fact, the fact Jeremy and his leadership team have adjusted very quickly and very well and you can see that in the improvement in conversion, the improvement in pipeline, some of the new product attached that we talked about for AIOPS. And in particular, some of the strategic agreements that we've gotten done with the large SEMI Conductor Supplier, the global finance institution that I mentioned. The other thing I would say is that I have been able to get out into the field and spend time with over 50 customers across North America, Europe , was in Japan for a week later in July . And the level of engagement on the part of the enterprise and mid market business community is as high as I've ever seen it in the business. And there's a lot of excitement around the multi-product platform that is the operations cloud and being able to leverage automation and service of their teams and service of their revenue. We've got a lot of new goals as well as reducing operating expenses, etc. So I think as the economy improves as budget is losing up, we are very well positioned to re-accelerate the business. And very focused, continue to be focused on the long term opportunity and the large term that is available for us to execute against. Let's hope, well, thank you.

Thank you. Next, we'll hear from Nick Matiachi from Craig Hallam. Nick, please go ahead. Hi, this is Nick Onford, Chad Bennett. Thanks for taking our questions. So last quarter, I think you guys mentioned that you saw some of the deal scrutiny and elongated sales cycles really start to hit in the back half of the quarter. I was wondering if you could sort of talk about the linearity you saw through Q2 and the comments you're willing to provide on August . Well, I'd say that the macro itself hasn't really changed meaningfully. We've improved the way we're executing. We continue to see a high volume of transactions pointing to a high level of engagement in enterprise and mid-market, which is our largest segment and has been particularly resilient throughout a volatile macro environment. And as I said, I think executing better against the sort of no knowns and controlling the controllables has led to some strength in the quarter. S&B has generally been the hardest hit in terms of seat-based expansion where there just hasn't been as much available investment or as much headcount growth as we have seen in the past in that regard. I don't know, Howard, if you have something you want to add. No, I think you've covered it, Jane.

Got it. Then curious if you could touch on Japan. I think it's been a year now since you guys started the joint venture there. Just any comments you can provide on traction in that market and be your view on the opportunity there. Yeah. I am really excited about the opportunity there. I was in Tokyo the last week of July with Novosan and his team there. We held our first ever pager duty summit in Tokyo and had over 500 registrations and several 100 people in attendance. High level of engagement and some really already incredible customer stories and use cases where customers like NTP Docomo and others talked about the success that they've had with pager duty. It's still early in that market, but very excited about that opportunity and our investment there.

And then curious if you could touch on Japan. I think it's been a year now since you guys started the joint venture there. Just any comments you can provide on traction in that market and kind of your view on the opportunity there. Yeah, I am really excited about the opportunity there. I was in Tokyo the last week of July with Novasan and his team there. We held our first ever pager duty summit in Tokyo and had over 500 registrations. And several hundred people in attendance. High level of engagement and some really already incredible customer stories and use cases where customers like NTP Docomo and others talked about the success that they've had with pager duty. So it's still early in that market, but very excited about that opportunity and our investment there. Got it. Thank you.

Okay, thank you. Next we're going to Representative from William Blair. Hey all, this is Arjun Kocharand from Matt Stotler. Thanks for taking our questions. Maybe just the first one on FedRAMP approved for in-process status, could you maybe double click on what the size of that market opportunity there is tied to FedRAMP and how that fits into PagerDuty's long-term growth strategy?

Well, thank you for the question. We've long seen a lot of strengths in SLED in the state and local government and education where those customers have been present in our mid-market segment for quite some time. And we've worked with a number of federal customers over the past years, and this is something that they have been looking for. And it's also, I think, an important requirement for some of our large commercial customers for us to be able to support them where they have FedRAMP requirements. So this has really been driven by the voice of the customer, but I think opens up a large opportunity in the US federal government, which we think is a large and growing and sort of less cyclical market, somewhat less, I guess.

What's the word? Someone less impacted by the economic environment and yet very immature as it relates to incident response and incident management. So we think there's a lot of greenfield opportunity to be had there. And with the work that the team has done to get us to the certification that we've gotten so far within FedRAMP, I think that puts us in a very good position to start to have those conversations and build demand in that market.

Great, thanks. And maybe one more on the focus on multi-product customers. Could you double click on maybe the KPIs of that cohort in comparison to the overall business in terms of churn deal sizes there?

Howard, do you want to go ahead? I think we've shared in the past percentage of ARR for customers with more than two products.

Yeah, so we haven't shared anything recently on that topic, but at the end of the past fiscal year, part of one of our regular disclosures is the percentage of ARR coming from customers with two or more products. It was as of the end of the past fiscal year, that was 58%. We've seen a modest increase in that number as we continue to drive the adoption of the business cloud as customers are taking more of that product. I think a few of the characteristics that we are seeing is that...