Q2 2025 PagerDuty Inc Earnings Call
Good afternoon, everyone, Tony Righetti with Investor Relations at Patriot duty, we're having some technical difficulties and I was trying to sort those out now so hopefully we will be with you in a few minutes.
Speaker Change: Thank you.
Okay.
Yeah.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Good afternoon folks sorry for the delay we've had some technical difficulties with zoom, but we're gonna get going here in just two seconds.
Speaker Change: Okay.
Tony: Go ahead Tony.
Tony: Good morning.
Tony: So apologies again for the delay we will.
Tony: Mr. Hu is be safe Harbor right about now.
Speaker Change: Good afternoon, and thank you for joining us to discuss Pedro duties second quarter fiscal year 2000, and twenty-five results with me on today's call are Jennifer to order <unk> Chairperson and Chief Executive Officer, and Howard Wilson, Our Chief Financial Officer.
Speaker Change: 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.
Speaker Change: By the forward looking statements.
Speaker Change: 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.
Speaker Change: And we undertake no obligation to update these.
Speaker Change: During today's call, we will discuss non-GAAP financial measures, which are in addition to and not a substitute substitute for or superior to measures of financial performance prepared in accordance with GAAP.
Speaker Change: A reconciliation between GAAP and non-GAAP financial measures is available in our earnings release.
Speaker Change: 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.
Speaker Change: Including our most recently filed Form 10-K as well as our subsequent filings made with the FCC.
Speaker Change: With that I will turn the call over to Jennifer.
Jennifer: Good afternoon, and thanks for your patience and thanks for joining us today.
Jennifer: Peter duty delivered a solid second quarter with revenue growth within our guidance range, 8% and non-GAAP operating margin four points above the range at 17%.
Speaker Change: This was our eighth consecutive record quarter of non-GAAP profitability, we increased annual recurring revenue by approximately $11 million to $474 million, we've stabilized era grows at 10% year on year for a third consecutive quarter as.
Speaker Change: As well as dollar base rent net retention of 106% quarter over quarter. Both results were supported by an improving new and expansion bookings, especially in our enterprise segment as we've shared in recent quarters Patriot <unk> scaling by addressing the critical operations needs of the enterprise segment with our operations cloud our multi product.
Speaker Change: <unk> farm, helping our largest companies in the world improve resilience and modernize their digital operations.
I'm encouraged by the signals in both the market and the business that validate our strategy in fact, the value segment of accounts with air are greater than $500000 grew more than 20% as we executed a more effective cross selling and up selling strategy.
Speaker Change: During the quarter, we signed a record number of multi year agreements representing nearly a third of renewal here. Despite the volatile macro environment, while we still experience in street increased scrutiny and multiple approval levels when selling into the enterprise segment, which can lengthen sales cycles, our focus is paying off our <unk>.
Speaker Change: Enterprise segments first half dollar based net retention and then 10 points above that of our SMB segment.
Speaker Change: Many of the global 2000 companies suffered the negative effects of major incidents in the past quarter. When these incidents occur global innovation and customer service get disrupted as ITT teams and development teams around the world work day, and night to diagnose and recovery impacted systems, coughing billions and lost labor and law.
Speaker Change: Off time.
Speaker Change: For our customers and the broader market recent major technology failures are a wakeup call. A reminder, that suffering negative business impact from widespread incidence is not a question of if but when nearly two thirds of enterprise leaders. We surveyed this year saw customer facing incidents thrived 43%.
Speaker Change: <unk> year over year.
Speaker Change: The systematic for agility that triggers these events exposes an existential threat, we see across industries, where aging infrastructure growing technical debt and manual processes persist. This challenge is compounded by the increasing proliferation of complexity.
Speaker Change: C D distributed architecture and generative AI co development all become mainstream.
Speaker Change: With recent global outages and technology disruptions.
Speaker Change: These recent global outages and technology disruptions underscore the pivotal role our platform pay place when the world is down customers rely on Pedro duty to identify issues orchestrate and increasingly automate the best possible response to quickly contain and reduce business impact.
Speaker Change: The July 19th outage test at our platform on a massive scale the operations cloud rose to the occasion, we saw an over 1400% increase in incident workflows initiated on that day alone and we maintained high availability speed and fidelity without <unk>.
Speaker Change: <unk> significant cost surges RV.
Speaker Change: Our reliability is the result of our history of investment in innovation and it's why companies Trust us to deliver operational resilience and their most vulnerable moments.
Speaker Change: Improving operational resilience for pretax customer experience and revenues, while mitigating risk and the cost of major incidents has up leveled incident management to a CEO imperatives similar to that of what we saw with cyber security in the past.
Speaker Change: <unk> operations cloud scales resilient Lee to address each of these challenges for enterprise companies.
Speaker Change: Anecdotally many of our customers have communicated a renewed preference for choosing a best in breed incident management offering and an increased sense of urgency to be better prepared for major incidents. It's early but we expect to see some benefit in demand over time.
Speaker Change: Our customers across verticals and regions are also increasingly subject to heightened regulation, requiring the automation and controls to mitigate risk and support compliance from Dora and the EU to diverse data and privacy oversight demands worldwide regulation has become a long term demand driver for.
The operations of the.
Speaker Change: The financial services vertical exemplified this trend in Q2 with several six and seven figure strategic expansions and overall <unk> growth above 20% for.
Speaker Change: For example, our global banking institution based in North America strengthen their operations cloud journey by expanding usage of incident management, AI ops and automation in Q2 at over $4 million of IRR, they're targeting a 30% reduction in incident duration through automated customizable work for.
Speaker Change: Rose by partnering pager duty the our Oi over three years is estimated to exceed 500%.
Speaker Change: Strategic platform agreements like this demonstrate the progress of our product to platform transition and the power of AI underpinning our platform <unk>.
Speaker Change: During the quarter, new products, including AI ops automation CFO for customer service apps and premium support contributed 65% of net new air arm.
Speaker Change: Two additional financial services customer signed strategic six and seven figure expansion in Q2.
Speaker Change: Based in Europe, and Australia, respectively. These financial leaders optimized for resilience at scale and shows the operations cloud to grow and protect their revenue.
Speaker Change: We also closed a high six figure expansion, including AI ops and customer service operations with a large workforce management software provider to help the company accelerate their operations Modernizations efforts.
Speaker Change: On the hardware side, our computer drive manufacturer and data storage company expanded the size and scope of their relationship by nearly doubling their incident management coverage and adding AI ops with these products the customers targeting and ROI of over 300% in the next three years the.
Speaker Change: The expanded feature set addresses the real time operations challenges presented by complex modern environments like machine learning flexible data ingestion and end to end event, driven automation environments, they're common within our million dollar air our cohort of customers.
Speaker Change: During the quarter. We also hosted five global customer events to build awareness and educate enterprise leaders and practitioners on both the technical and financial benefits of the operations cloud.
Speaker Change: One of the highlights of this serious was a positive response to paid your duty advance our suite of generative AI capabilities invented embedded in the page or duty operations cloud platform, which we made generally available at the end of July.
Speaker Change: These Jenny I offerings can save enterprise teams hundreds of hours equating to millions of dollars in annual savings for example, instead of wasting precious time updating leaders in responders as they join and in progress incident response. These coming those coming in late can use simple prompts for summarization of key incident.
Information and we offer tight integration with both slack and teams to efficiently keep work where it happens Pedro duty advance can also anticipate diagnostic questions and suggest troubleshooting steps for responders automating work and minimizing the financial impact at a time when the average incident costs in enterprise approximate.
Speaker Change: $800000 per incident.
Speaker Change: Generative AI Postmortems NII generated run books are progressing well in early access together. They further equip enterprise companies to accelerate digital transformation, while automating time consuming tasks and recommended actions at every step of the incident lifecycle.
Speaker Change: We also released new integrated capabilities across the operations cloud like the combination of dynamic escalation policies connected to any incident workflows using our proprietary data model. This saw the common challenge of not being able to match a problem to the most knowledgeable well equipped responder instantly.
Speaker Change: Requires deep knowledge and correlation on events past incidents and people and as such delivers a differentiated more complete incident lifecycle offerings.
From a social impact perspective, we announced our third impact accelerator cohort focused on crisis response services through Pedro duty Dot Org. These nonprofit provide emergency response services to support people in urgent prices and they leverage paid your duty to ensure availability of critical online.
Speaker Change: Services to their communities. These are an ideal and important page or did he use case.
Speaker Change: Overall, we're encouraged by the gains we have made to scale our enterprise business. This progress moderates the effects of lower growth and higher volatility and F&B. These positive trends validate our strategy and reinforce our optimism in paint your duties long term market opportunity as we progress through the back half of the year, we remain calm.
<unk> that we can increase dollar based net retention and professional services attach rates.
Speaker Change: From an air our perspective, the elevated awareness of our value proposition. Following recent I T outages, along with quarterly highs in multi product and multi year agreements.
Speaker Change: <unk> in a strong close in the first half this reinforces my confidence in our ability to exceed 10% are our growth in FY 'twenty five.
Speaker Change: I'd like to express my gratitude to our shareholders for their ongoing support our customers for their trust and our dedicated employees and partners for their commitment to revolutionizing operation with that I will turn the call over to Howard and look forward to your questions.
Speaker Change: Okay.
Thank you Jane and good day to everyone joining us on this afternoons call.
Howard: 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.
Howard: In the second quarter, we continued to solidify our progress in the enterprise.
Howard: Consistent with the last quarter closing six and seven figure multi product multi year contracts with large companies across our U S and international regions.
Howard: Customers remained focused on value when negotiating both new business and renewals.
Howard: Enterprise business is strengthening and expanding with our strategic deal classes, whereas F. N b remains a headwind to growth with high levels of churn and downgrade.
Howard: As our business becomes increasingly enterprise focused we continue to make adjustments to the typical rhythms and seasonality of the sales motion there.
Howard: Momentum in the enterprise and the strength of our back half pipeline gives me confidence in the Reacceleration of our outgrowth by the end of the year.
Howard: Revenue for the quarter with $116 million up 8% year over year, despite unfavorable nice new IRR linearity and phasing of onetime service engagements, we remained within our guidance range.
The contribution from international was 27% of total revenues similar to the year ago period.
Howard: Annual recurring revenue exiting Q2 grew 10% year over year to $474 million.
We delivered 106% dollar based net retention in line with our Q2 expectations.
Howard: Our DB and our expectation for Q3 is to be at least 106% and 107% by year end.
Howard: Customers spending over $100000 in annual recurring revenue grew to 820 up 6% from a year ago.
Howard: In addition, a cohort of logos with greater than $500000 in IRR grew in the low twenties up from the high teens in the first quarter.
Howard: Total paid customers decreased to 15044 compared to 15146 in the year ago period.
Howard: The bulk of the decrease came from customer departures in our SMB segment.
Howard: Free and paid companies on our platform grew to over 29000, an increase of approximately 12% compared to Q2 of last year.
Speaker Change: Q2 gross margin was 86% at the high end of our 84% to 86% target range. We continue to expect services to grow modestly this year, but our current view is that gross margin will remain at the high end of our range until moving closer to the midpoint in FY 'twenty six.
Speaker Change: Operating income was $20 million or 17% of revenue compared to $14 million or 13% of revenue in the same quarter last year.
Speaker Change: The outperformance compared to our guidance was primarily due to head count 15 to the second half lower commissions and marketing expenses shifting from Q2 to Q3.
Speaker Change: In terms of cash flow for the quarter cash from operations was $36 million or 31% of revenue and free cash flow was $33 million or 29% of revenue.
Speaker Change: The benefit we receive from working capital during the second quarter will even out during Q3 with free cash flow being near breakeven for the quarter, we expect free cash flow for the full year to be a couple of points above our operating margin.
Speaker Change: Turning to the balance sheet, we ended the quarter with $599 million in cash cash equivalents and investments.
Speaker Change: In Q2, we repurchased one 3 million shares from 100000 million 100.
Speaker Change: Million dollar repurchase plan.
Speaker Change: We have $72 million remaining through May 2026.
Speaker Change: On a trailing 12 months basis billings were $468 million, an increase of 8% compared to a year ago.
Speaker Change: With respect to Q3, we anticipate trailing 12 month's billings growth to be approximately 10%.
Speaker Change: At the end of Q2 total ARPA was approximately $403 million of this amount approximately $280 million or 70% is expected to be recognized over the next 12 months.
Speaker Change: As a reminder, our remaining performance obligations disclosure includes contracts within the original term of less than 12 months as of April 25.
Speaker Change: Applying the current definition to the year ago period total op here for Q2, FY 'twenty four would have been $294 million.
Speaker Change: Turning to our guidance.
Speaker Change: For the third quarter fiscal two.
Speaker Change: 2025, we expect revenue in the range of 115, and a half to 117 and a half million dollars, representing a growth rate of 6% to 8% and net income per diluted share attributable to pay for beauty, Inc. In the range of 16 to 17 cents. This implies an operating margin of 13%.
Speaker Change: For the full fiscal year 2025, we now expect revenue in the range of $463 million to $467 million.
Speaker Change: Representing a growth rate of 7% to 8%. This compares to the range previously provided of 471% to $477 million.
Our net income per diluted share attributable to page Judy Inc. Of 67 to 72 cents. This implies an operating margin of 14%. This compares to our prior guide of 66 to 71 cents and 13% to 14% respectively.
As we look to the back half of the year, we remain confident in accelerating our growth exiting the year above our current 10% right along with improvement in our dollar based net retention.
Speaker Change: The success, we're having in multi product multi year strategic contracts with enterprise customers and a strong growing multi quarter pipeline positions us well for growth, while we remain committed to continuing to expand operating margins over time.
Speaker Change: With that I will open up the call for Q&A.
Speaker Change: Alright. Thank you panelists. Our first question will come from Sanjay Singh of Morgan Stanley.
Speaker Change: Please go ahead Sir.
Sanjay Singh: Thank you for taking the questions. So I guess the theme of this call it sounds like the underlying.
Speaker Change:
Sanjay Singh: Fundamentals of the business seem to be pre improving on the enterprise side and at the same time guidance had come down.
Speaker Change: Just under $10 million. So I was wondering Howard or John if you want to take it sort of pieces that just between the the cut to the revenue guide and it seems like on the E. R. There are side more stability and your confidence in sort of exiting the year with acceleration is it great.
Speaker Change: Question, Thanks, Sanjay and thanks, everybody for your patience as we worked through a technical issue at the beginning of the call. So first of all I hate taking down guidance I'm not happy about it and it's largely a timing issue I want to walk you through this so the larger multi year multi product strategic deals that we're doing.
Speaker Change: Driving less linearity than we had seen in our land and expand transactional business and increased seasonality more so than in the past we saw a little bit of that in Q1 boot shop thought it was an anomaly, but Q2 was quite back end loaded and we're expecting more of that in Q3, and Q4 and that also results in a lag in <unk>.
Special services attach so it's really just timing from a revenue perspective, having said that you know just reconfirm. Our are our guidance is unchanged, we still expect IRR to accelerate in the back half and.
Speaker Change: Even with F&B, while we're seeing improving trends that that market has yet to stabilize and I'll remind you that's mostly tech startups for us and we know that funding and in tech startup land continues to be under pressure. So we're taking some of the risk out given this this timing issue.
Speaker Change: Issue, but are our growth is expected to improve through the year as a D. B NR. So are our growth above 10% for the full year and D V are above $100 or at 107% for the full year.
Speaker Change: Got it and when you find out I think.
Sorry, I was I would probably just add to that standard but in many respects as we focus more on the enterprise.
Speaker Change: The linearity and the seasonality that we've seen starts to reflect more like other enterprise SaaS companies.
Speaker Change: Understood.
Speaker Change: So when you talk about the underlying backdrop in terms of just more incidents and.
Speaker Change: It is getting more costly.
Speaker Change: What is that is that just sort of how does that translate ultimately to better growth for Patriot duty is that something that would turn into better inbound for you or how do you go sort of prosecute the opportunity in this sort of current environment, yeah, anecdotally its already driving a higher level.
Speaker Change: <unk> conversation at the CEO level at the audit committee level in the board, which I think over time will improve our ability to get to budget and ensure that budget is set aside for this much in the way we've seen cyber security budget prioritize them because win win.
Speaker Change: And its leaders realize the financial impact of a major third party or a worldwide outage, they're forced to think through what I'm what precautions at night, taking what in infrastructure investments do I need to make how do I prioritize mitek that burn down and what we saw during the incident that took place in July.
Speaker Change: <unk> was a lot of senior leaders, reaching out to us for best practices for support not just in the response, but for advice on where to go from here. We also saw the differences between customers that have adopted the operations cloud and mature their operations, who found who discovered the issue very early and we're entirely back online.
Line by the time, the Sun Rose and customers, who are manually processing secondary and tertiary incidents that took days to get back you know full in full operations, which has a huge cost of revenue not to mention <unk>.
Speaker Change: Last time, and an excess opex in terms of labor and so I expect that we'll continue to see more and more of these strategic deals show up in the pipeline and I.
Speaker Change: That will that we will see them more protection around investment and the budget for Patriot, That's where we're anecdotally seeing shoe early to see it really show up in pipeline, but it's already showing up in customer conversations.
Speaker Change: Understood. Thank you.
Doug: Thank you Doug.
Speaker Change: Next question will go to bank of America.
Speaker Change: Koji. Please go ahead, yeah, hey, guys. Thanks for taking the questions I wanted to ask.
Koji: Maybe some thought process into into fiscal 'twenty six from a very very high level, just thinking about the billings growth decelerating this quarter, but the guidance implying acceleration in the second half and competence and D. A R. But then Jennifer also you mentioned a little bit more of seasonality versus linearity.
Speaker Change: How should we think about kind of the exit rate of calendar two I'm, sorry fiscal fiscal fourth quarter of this year into next year and do those seasonality type trends continue.
Jennifer: Yeah, well the good news is some of that seasonality is driven by the fact that we're doing more multi year multi product deals that require a different level of approval and.
Jennifer: Scrutiny from the customer base and so we're seeing as a result, you know we saw a record number of large multi product multi year deals this quarter and we also renewed.
Jennifer: Renewed 30% of our air are available to renewed and multi year, which takes pressure off of retention in the future enables us to focus on growth. So I think fundamentally that puts us in a better place, but I'll, let Howard comment on 2000 22026.
Howard: Yes, so we haven't provided any specific guidance on FY 'twenty six but.
Howard: Our expectation is that that <unk> growth rate will be above the 10% Mark if we look at where we think trailing 12 month's billings will be backed off actually pick up to approximately 10% if you're looking at the billings number for Q3, we look at it on a trailing 12 months basis.
Howard: And the way that I would think about it is we are.
Jane: To Jane's point, where from a retention perspective, the efforts that we've made around doing multiyear arrangements with customers removed.
Some of the downgrade and turn risk out of the successive year, which creates a really strong platform for future growth. So we would expect that as we go into next year, we're in a better position from a fundamental let's say.
Jane: Active but also that the seasonality that we've started to see emerge as we focus on the enterprise that's likely going to remain and that will mean that that the third month of every quarter is going to be more heavily weighted and it would mean that as we progress through the year like other companies, probably your fourth quarter ends up being the biggest quarter.
Got it. Thank you so much for taking the questions I appreciate it thanks guys.
Speaker Change: Next up let's go to William Blair.
Cheeky perfect. Thanks Sig. Please go ahead.
Speaker Change: Thanks for taking the questions just from an expectations perspective is there anything different about the guidance you are putting out today versus last quarter as it relates to kind of when those large deals start to close are some of the SMB churn that youre seeing just just trying to understand if there's kind of different puts and takes that you put into the guidance.
Speaker Change: Kind of account for some of these issues.
Speaker Change: Yeah, I I can break it down a little bit Jake I paint the one element that is.
Speaker Change: Led to a change in the guidance is this lag that we're seeing in professional services attached which is not happening later as these deals with law.
Speaker Change: The longer sales cycles are happening it means and our ability to deliver that revenue gets delayed and that's taking a couple of million dollars out.
Speaker Change: Office, Yeah, when we look at some of the phasing that we had even within.
Speaker Change: The first half of this year some of that linearity change.
Speaker Change: Two less revenue being recognized in Q1, and Q2 and so we've taken that out of the the full the full year, but then when we look at the back half. We're expecting that Q3 is probably going to have a similar complexion in terms of net new <unk> as we saw in in Q2 and that they will be again more of a.
Speaker Change: Waiting to the third month in in Q3, and we expect that for Q4, it will be a bigger quarter put enormous LIFO, but certainly a bigger quarter than thank to Q3, but again with that weighting towards the back half.
Speaker Change: Yeah, and I'd, just add to that Jake we do have very good visibility to the pipeline in place to deliver the back half.
Speaker Change: Our visibility is improving as we've gotten used to these sales cycles with larger more strategic deals and then we also as you know have been evolving our go to market organization over many quarters and we're really starting to see the execution behind all of the enablement, we've done around top down.
Speaker Change: About land and expand the multi product multi year platform versus the bottoms up start with incident response expand surface area and then start adding new products. The success. You know there has led to a very strong quarter for AI ops growing over 20% or about 20%.
Speaker Change: Year on year and customer service apps growing over 50% year on year. So we're seeing that evolution. In addition to now having new leaders in place in some of our largest markets, where there are hitting the ground running and driving both improvements in churn and more productivity around some of these renewals and that's in EMEA.
In North American Enterprise and federal so just feeling like we're coming from a stronger foundation as we look towards the back half of the year with like I said quite a bit of confidence in the pipeline, but also seeing that cadence of large deals our growth in the customer value segment spending over 500 K.
Speaker Change: It was more than 20% so continuing to see that momentum there in enterprise and overtime F&B represents less and less of the total IRR.
Speaker Change: Yeah very helpful. And then just really interesting comment about the 400% increase in incidence during the quarter. It sounds like theres been some good top of funnel activity since the crowd Schrader outage, but just given it's still kind of early days when would you expect those that early pipeline to start actually layering into the business.
Speaker Change: Is that kind of a.
First half of next year back half of next year, just would love that kind of understand how youre thinking about that traction we're not modeling in you know new pipeline as a result of of what we've seen in the last quarter in terms of major incidents you know what I would anticipate is first we will see it in conversations than we will see it in approval processes.
Speaker Change: And just the breadth of what customers are buying in one of those trends. We've already seen is that when a customer really understand the cost of of a major incident on average $800000. In incident. If you can compress the incident duration by half and that becomes $400000 like that has real financial business and.
Customer and customer value show the faster leadership understands that the faster our champions can often move to get a multi product multi deal done and so the biggest I think tailwind that we've already seen is just awareness just now Ceos and cfos really understanding.
Speaker Change: That if you.
Speaker Change: Scrimped on infrastructure and on having platforms to really detect orchestrate and automate. The response when these major incidents happened because they will youre going to pay for it in phase later, and so that sort of I think that short term thinking is going to manifest more long term.
Speaker Change: Investment in long term investment mindset, and then and then I expect that after we see it in terms of sales cycles, we'll start to see it in and adds but I you know I can't predict how long that's going to take to manifest some of our customers move really quickly on the back of an issue like this you know coming recovering from a major incident has long been our primary use case.
Speaker Change: For page degree and some of our customers take longer to transform their thinking internally.
Speaker Change: Thanks for taking the questions.
Speaker Change: Alright. The next question will come from TD Cowen.
Speaker Change: Andrew Please go ahead Sir.
Andrew: Great. Thanks, Tony I guess.
Speaker Change:
Andrew: Wed love to hear how the flexible enterprise pricing is tracking what has feedback been from customers as a result.
Speaker Change: Driving the expansion in the quarter or what are you expecting from us in the second half to help with those deals.
Speaker Change: Feedback has been very positive and it has really enabled some of the big deals that we shared in prepared remarks, and I know some people some time to get into the call. So we talked about our North American and global Bank that was already a seven figure customer that's expanded beyond that add AI ops as well as custom.
Speaker Change: Service ops, we've talked about them the global nature of the financial services industry. The Thunder heightened regulation around customer service incident response regulation like Dora in the EU and increasingly diverse regulation around data and privacy that means the genesis of incidences is emerging areas.
Speaker Change: <unk> and changing and that is leading to leadership coming to us and saying look weak.
Speaker Change: We we know kind of understand the value of doing that is how do we expand with you and it's less about it's just as many users and this.
Speaker Change: Price tag for those users are AI ops.
Howard: Business, which like I said grew about 20% this quarter that's consumption based pricing so were getting I think a warm reception to that but also flexibility in terms of thinking about how customers are going to grow their adoption across our products and services Howard anything that that you want out there.
Howard: I think you've covered having a J.
Howard: Okay. Thanks, and then.
Howard:
Howard: Howard.
Howard: The.
Howard: I think we all understand that.
Speaker Change: Youre more Q4 weighted though but how have you factored in the fact that these deals are larger.
Speaker Change: Longer to close than anything.
Speaker Change: Or anything has changed as far as your assumption on close rates for Q4, and then how power of their renewals trucks as well versus your expectations, yes, sure. So from a guidance perspective part of the reason why we made the adjustment to our guidance just because we took into account.
Speaker Change: Our most recent history in terms of seeing how these deals are closing and the timing and also anticipating that some of these deals may end up taking longer. So that's that's been accounted for.
Speaker Change: That being said the approach that we're taking in terms of how are we managing our pipeline is certainly around our sales team being incentive to get these deals closed.
Speaker Change: Hum.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: We've read about.
Speaker Change: Improving the level of scrutiny on the quality of those deals so that improving level of confidence.
Speaker Change: So you have to think about.
Speaker Change: Visibility to the deal type both in Q3, and Q4 and into next year.
Fundamentally from a renewal aspect.
Speaker Change: We thought it'd be initiative.
Speaker Change: A year ago.
Speaker Change: To really.
Speaker Change: Q4 of last year in earnest too.
Speaker Change: Get customers onto multiyear.
Speaker Change: Hi management at renewal Mark just when we did the new deal and that's fine too.
Speaker Change: <unk> results in that when we look at it.
Speaker Change: And whats available to renew within Q4 this year, it's a lot less than what it was in in Q4 of last year. So that means that we are in a position to manage any potential risk on the ranch apart.
Speaker Change: More more effectively.
Speaker Change: Great. Thank you very much.
Alright next up Craig held them. Please.
Craig Heldman: Please go to <unk>.
Speaker Change: Henry.
Great. Thanks, Tony Hey, guys. So two.
Speaker Change: One question for me I, just want to read this back to make sure I understand it.
Speaker Change: It's reduced by $9 million I think Howard you mentioned, if I caught it but you think PFS is a couple million you mentioned seasonality and a bunch of other factors, but just simply put we're seeing longer cycles than yours, Bakken more backend loaded, but youre going to get to the same area or are just going to happen later in the year is that a is that a fair read back.
Howard: That is correct with the exception of the revenue that specifically professional services related our expectation is that that in terms of what we would expect to book in terms of net IRR will still get us to that.
Howard: Bob the 10% growth rate by the end of the year, yes, yes.
Speaker Change: Yes got it Okay, and then from a competitive win rate. When you look at deals that are just incident management I realize youre going with a much broader proposition to Jennifer you talked about the attach rates of some of the incremental products, but when you're in just an incident management deal what are win rates look like now versus a year ago.
Speaker Change:
Speaker Change: We haven't published our win rates, obviously, but that part of the market hasn't changed meaningfully I think that customers are more price sensitive in some in the lower end of the market, particularly SMB, but also to some extent mid market and.
Speaker Change: They also like we arent seeing the level of head count growth.
Speaker Change: That we've seen in those segments compared to the past so that puts some pressure on both growth and renewals, but from a competitive standpoint like it's not a zero sum market and I think what you saw it with a major outage like what happened on July 19th one thing that works in our favor even in our incident man.
Speaker Change: <unk> as a standalone offering is there are still a lot of large companies out there that have manual processes that use very little automation and detection that have more than 10 observer ability players that are not correlating that information right and need the support of our platform just to even get to responding.
Speaker Change: More effectively and then I would also say that even our incident management platform is built on a on an AI based.
Speaker Change: Foundation, a proprietary dataset that is distinctly different to anything else that's out there and that we have data on the events coming in the incident workflows themselves and then also more and more automation around the response, including the generative AI based features that I mentioned in prepared remarks I'm one of the.
Speaker Change: Things that is that I think what's really interesting about the July event as we saw like I said, a 14000 per cent increase them incident workflows running on the platform and suffered no disruption and no cost surge and there isn't another player incident management notifications alerting.
Speaker Change: Our ability that can I think attached to that kind of pressure alive. When the rest of the world and the largest companies in the world are suffering a major outage. So I think that reinforces our resilience at scale and the security of our platform even under a significant.
Speaker Change: Global outage or worldwide alloy outage. The last thing that I would say is and we've we have taken steps to try and support F&B in and mid market customers that are more price sensitive free is one of those we've made some some changes to pricing, but at the end of the day, even in this tough macro.
Darin: We're controlling the controllable and getting Darin and I, you know I am somewhat of an optimist like the tech industry will come back we will start to see venture funding back in F&B at some point in time, I'm, just not calling that in in our expectations like we expect that to continue for the current conditions to continue.
Darin: Sorry, John I'm going to have to do my CFO thing and say it was a 1400% metaphor.
John: I'm sorry.
John: [laughter] Hello.
John: There are a number of ways.
John: Yes.
That sounds fantastic.
John: Okay.
John: Okay.
Howard: Thank you one on one last from me if I could sneak it in on the on the SMB side, just two clarifications from Howard on the numbers on the customer count number I know theres, some pretty different trends within the enterprise versus SMB. The overall customer count was down but can you give a little more granularity of SMB versus enterprise and then just to be clear on the SMB side.
Speaker Change: It feels to me, maybe I'm splitting hairs when theres, a little more of a message of stability prior quarter and a bottom was in on SMB and it feels slightly more pessimistic if I'm reading it correctly, but you tell me if I'm wrong there.
Speaker Change: Yes.
Howard: <unk> B is has remained we've had elevated churn in downgrade. They now for four quarters in a row in fact, it's the fourth consecutive quarter of that contracting year over year, and so it's been a real headwind to growth.
Speaker Change: What I would say is that from a stabilization perspective, we see like elements will five with some level of stabilization from one quarter to the next but then that can reverse fairly quickly right in terms of of movement now.
From a customer count perspective, our customer count went down year over year again, the bulk of that churn is actually in SMB by far our number of accounts that are outside of F&B, but China is actually relatively small so.
Speaker Change: This is part of US also focusing more on the enterprise way.
Speaker Change: Landing enterprise and mid market logos is more important and so.
Given the volatility if you like within the SMB market in general specifically breast that means that we do expect to see high levels of trial.
Speaker Change: Okay I'll leave it there thank you.
Alright next we'll go to Canaccord Genuity and Kingsley.
Kingsley: Alright, thanks for taking my questions.
Speaker Change: Okay.
Sure.
Speaker Change: Competition, we've seen some of your smaller competitors combined.
Speaker Change: Some larger competitors reintroduced their broad slips.
The new bells and whistles. So just wanted to hear more about how the competitive environment has evolved and then more specifically, how you think about that affecting relative enterprise strength versus relative F&B softness.
Speaker Change: Yeah, I would say most of the most of the again not a zero sum market. Most of the competition that we see is in the mid market are below and F&B and that is because the the competitive offerings that are out there don't scale effectively into enterprise or purely price led versus feature labs.
Speaker Change: And I think if anything will be seen in the last quarter with worldwide outages is that this is an area where performance does matter and I think that will serve as a competitive driver for us in the future.
Speaker Change: On the other players that are out there have you.
Speaker Change: Much less functionality I'm very little AI supported throughout their platforms and are not proven and enterprise, which is very clearly our focus and so I mean, I I feel confident and I believe that we're going to continue to outpace the other players.
Speaker Change: And R&D perspective, and in terms of just delivering.
Speaker Change: The operations cloud platform not just in detection of incidents, but also the intelligent correlation of those events and orchestration them to the right teams and increasingly the right agents as AI starts to take more and more home more automation of the actual troubleshooting and diagnostic with the help of both.
Traditional AI and generative AI and faster resolution that compresses these large enterprise.
Speaker Change: Great incidents that were seeing on a global basis.
Speaker Change: Great really helpful and then one for Howard.
Really made strides in expense efficiency over the past few or you're close to your long term model of the business has changed a lot since.
Since that was put out and I would say that youre, 85% plus gross margin per barrel suggests you could have a truck terminal Morgan.
Speaker Change: So just any more thoughts on more efficiencies you can fine. Thank you.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: And as you know, we've always taken a structure and a programmatic approach to how we think about.
Speaker Change: Moving.
Speaker Change: Our productivity and efficiency as a company and we blades really good foundations for that in terms of both our location strategy.
Speaker Change: Use of technology.
Speaker Change: Internal use of AI all of these things contribute to this so I think you would expect what you can expect to see more of the same so leveraging on those areas that we've already made those investments.
Speaker Change: We continue.
Speaker Change: Continuing to look at how can we more efficiently.
Speaker Change: Raise our brand and how we can more efficiently drive demand chain and at the same time drive efficiency into into our sales team. So I think the areas with it for the longer term, we still have the the most obvious opportunity is around G&A, and then sales and marketing.
Speaker Change: And then obviously from an R&D perspective, our goal is to try and maintain high levels of investment in R&D to support our innovation strategy.
Speaker Change: Okay. Okay. Thank you.
Speaker Change: And our final question comes from Scotiabank John Please go ahead.
Speaker Change: Hi, This is John got me this all for nickel harm and.
John: Thanks for taking the question. So when you talk of deals taking longer there can be a lot in there that's driving that you know larger deals the macro focus on enterprise customers. So what's been the biggest driver here and how are you guys feeling about the overall sales cycles are relative to prior quarters actually feel feel good about the sell side.
Speaker Change: <unk> I don't actually mind that the deals are taking little bit longer because they represent much larger larger average deal size multi product, which is stickier more flexible pricing, which also I think.
Speaker Change: Engender is like a long term partnership and relationship with the customer. So it's a very good investment in the long term foundational.
Speaker Change: Growth and strengthen the business.
Speaker Change: And as I said like our change in guidance is really about the timing of this kind of small transition to revenue, taking a little longer because of the less linearity and more seasonality, but at the end of the day.
Speaker Change: Long term, it's it's a tailwind because we are seeing more and more highly referenced more customers doing multi year multi year deals. So the guidance change is really about derisking, the full year and and articulating some conservatism, but also.
We are very confident in our ability to accelerate through the back half of the year and end the year at 107 dollar based net retention and as more and more of our business shifts to that focus on enterprise I think that is that's good for customers and good for shareholders long term so.
Speaker Change: I hope that's helpful.
Speaker Change: Yeah.
Speaker Change: Super helpful and obviously the somebody has been challenged but when we look at the second half or there are can you talk about the underlying assumptions for air are from SMB shall we expect that to continue to downtick or should that stabilize just just any color on the anticipated mix would be.
Speaker Change: Helpful.
Speaker Change: I heard you on mute.
Speaker Change: We're expecting.
Speaker Change: The bulk of our growth to be coming from the.
Speaker Change: The enterprise and mid market segments.
Speaker Change: We have the trends that we've seen around F&B being.
Speaker Change: Being being negative whilst we expect to see some stabilization.
Speaker Change: Youll see that as being a bit of a headwind even in the back half.
Speaker Change: Okay, let's turn it back over to management for closing comments. Please go ahead, Jim well first of all thank you for your patience as we got off to a little bit of a late start with some some technical glitches as proof that these incidents happen all the time.
Speaker Change: Everywhere and thank you to my team for a terrific incident response I. Appreciate it. Thank you all for joining US today are the increased recognition and our value proposition. Following the recent high profile. It outages Cup coupled with the record numbers of multi product and multi year agreements really underpins my confidence in our ability to surpassed 10%.
Speaker Change: Are our growth for the fiscal year as Howard said, we're going to continue to work on improving efficiency and most of all continue to focus on building trust and long term relationships with our customers. So thank you very much for your time and have a great rest of your day.
Speaker Change: With that our call concludes thank you very much.
Yeah.
Speaker Change: Yeah.