Q3 2025 PagerDuty Inc Earnings Call
And we make 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 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 the filings, we make with the Securities and Exchange Commission, including our most recently filed Form 10-K, a as well as other subsequent filings made with the SEC.
Jennifer: With that I will turn the call over to Jennifer.
Thank you Tony good afternoon, and thanks for joining us today, <unk> delivered a solid quarter with revenue and non-GAAP operating income well above our guidance ranges.
Jennifer: Revenue growth increased to 9% and non-GAAP operating margin expanded to 21%.
Jennifer: Net new <unk> of $9 million in the quarter was the 21% increase over Q3 of last year.
Jennifer: Total annual recurring revenue increased $483 million growing 10% year over year for the fourth consecutive quarter.
Jennifer: We were pleased to see stabilization across all segments in the quarter with retention improving across the board that said, we remain focused on growth re acceleration and there is room for improvement, particularly on large deal conversions. We had an unusual number of large Q3 opportunities differ and while they are not lost these will delay.
Jennifer: They are our acceleration into FY 'twenty six.
Jennifer: Nonetheless, we are encouraged by improvements in several key indicators, including dollar based net retention multi product adoption enterprise contract duration and total pipeline growth.
Jennifer: Converting these multi year multi product agreements is a top priority as the benefits compound in future quarters and represent the manifestation of our customers aligning with us on a joint vision for a more resilient future over a longer commitment period. The comprehensive agreement fleet security earlier in the year laid the foundation for sequential improvements.
Jennifer: In both enterprise and commercial gross retention, leading to dollar based net retention of 107%.
Jennifer: As our ramped capacity has increased throughout the year. The number of accounts that are greater than $500000 has risen by approximately 20% driven by product upsell and cross sell in Q3, AI ops automation and customer service apps contributed more than 40% to incremental <unk>.
Jennifer: In October Forrester quantified the monetary benefits of the operations cloud through research with our enterprise customers as more enterprises adopt multiple products across a broader platform. They realized an average return on investment of nearly 253, 250% over three years with a payback period of less than one year.
Jennifer: This adoption enables enterprises to achieve high availability and significant financial returns.
Jennifer: Product development during the quarter continued to deliver innovation across our platform further enhancing the value customers realize from the operations clouds. We are addressing several CIO imperatives, including incident management transformation Operation Center modernization and automation standardization Pedro <unk>.
Jennifer: Van our generative AI offering is now integrated across the platform to automate triage expedite incident response summarize communications and reduce the cost and time to take action.
Jennifer: Regenerative AI assistant Leverages, an extensive proprietary data model along with the context of an incident lifecycle to make recommendations and answer common questions. This new unified chat experience with Pedro duty advanced built in enables teams to manage an entire incident from within slack or Microsoft teams. It was.
Jennifer: Encouraging in the quarter to close our first paid Pedro duty advanced customers.
Jennifer: Our new version of the operations console supports operations center modernization by providing comprehensive visibility, which minimizes context switching and enhance this focus the latest version of global intelligent alert grouping is generating significant interest by leveraging neural networks to deliver heightened precision.
Jennifer: Secondly, isolating signals and accelerating resolution.
Jennifer: Recognizing that many of our largest customers are investing in automation standardization, we expanded our automation library. In Q3. This includes more templates and workflows as well as run books that automate common Dev and <unk> activities.
Jennifer: These enhancements address manual repetitive and time consuming tasks, such as consolidating <unk> diagnostics container management and database management.
Jennifer: Industry analysts continue to recognize our product leadership as our customers adopt new and existing capabilities of the operations cloud, especially AI ops recently were included among the top 25 solutions and our Foresters AI ops landscape report and Giga AUM named Patriot duty as a leader for the third consecutive year in its annual <unk>.
Jennifer: AUM radar for AI ops.
Jennifer: <unk> and automation are vital as data driven decision, making and advanced analytics set new standards for operations. These trends are accelerating the pace and precision of corrective actions and it will.
While paving the way for long term preventative solutions.
Jennifer: The enterprise segment continued to grow above the average with particular strength in our core verticals software and technology financial services and telecommunications from a geographical from a geographic perspective EMEA is emerging as a source of stability that we believe is building a foundation for higher growth in FY 'twenty six.
Jennifer: Customers within our high value segments continue to consistent trend of six figure expansion during the quarter. For example, a leading digital travel companies strengthen its partnership with Pedro duty through a multiyear renewal and expansion agreement. This renewal strengthens our long term partnership, allowing both organizations to continue collaborating effectively the <unk>.
Jennifer: Company Leverages the operations cloud for scaled service ownership aligning with its build it and own it culture.
Jennifer: Top tier financial services firm also expanded its relationship with page ADT selecting us as their incident response platform, our unique ability to support both central and distributed teams elevated page 80 to become their preferred platform. This marks the sixth expansion in five years with the organization increasing users by nearly three times over this period.
Jennifer: Continuing to lead through innovation cyber security firm has expanded its use of page 80 twice in the last year integrating products, such as AI ops incident management and customer service to transform their incident management workflow the decision to standardize on paid your duty was driven by the need to prevent and reduce outages provide quicker cut.
Jennifer: <unk> updates and increase operational resilience by moving away from multiple tools and manual processes, our customers standardize the resolution process, resulting in reduced operational costs improve efficiency and a risk reduction to the overall business.
Jennifer: During the quarter, we welcomed two new leaders to Pedro duty Rukmini ready SVP of engineering, and British correct, Chief Information Security Officer, <unk> brings a wealth of experience. Most recently as the SVP of engineering at flat for the past four plus years protest joins us from <unk>, where he was the Chief Trust and security officer and SVP of.
Jennifer: Engineering their contributions will enable us to continue positioning the operations cloud as a strategic asset for all of our customers.
Jennifer: Forces best workplaces recognized us as a top 25 company for women in their small and medium designation. We also continue to make progress with impact customers with over 500 from the nonprofit sector as of Q3, and we received validation from the science based targets initiative for our commitments to reduce our operational and supply chain carbon emission.
<unk>.
We are well positioned to exit FY 'twenty five with air art growth poised for Reacceleration supported by rising retention high caliber sales hiring and a robust pipeline.
Jennifer: Following several quarters of stability. Our primary focus is to deliver a strong fourth quarter is to deliver a strong fourth quarter net new air are and to carry this momentum into FY 'twenty six.
Jennifer: I look forward to seeing many of you at AWS re invent next week, where I'll be speaking during that garments keynote about our long standing partnership and co innovation I want to thank our shareholders customers partners and employees for their continued support with that I will turn the call to Howard and look forward to your questions.
Howard: Thank you Jane and good day to everyone joining us on this afternoons call.
Howard: This 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.
Howard: Before the call.
Howard: In the third quarter, we continued to solidify our enterprise motion and stabilize the contribution from our commercial segment. This success along with strong operating margin expansion and improved visibility on building a robust Q4 pipeline with key highlights for the quarter.
Howard: Revenue for the quarter was $119 million up 9% year over year.
Howard: Contributing from international was 28% of total revenues up from 27% in the year ago period.
Howard: Annual recurring revenue exiting Q3 grew 10% year over year to $483 million.
Howard: We anticipate a similar growth rate in Q4 slightly below the 11% range, we have been tracking toward.
Howard: As our business becomes increasingly focus on the enterprise segment, we continue to learn and adjust our expectations regarding typical seasonality.
Howard: Precision and handling large deals is improving as enterprise momentum boats.
Howard: We delivered 107% dollar based net retention above our Q3 expectation and in line with our expectations on a full fiscal year.
Howard: Similar to last quarter Enterprise <unk> remained 10 points above all commercial segment.
Customer spending $100000 in annual recurring revenue grew to 825 up 6% from a year ago.
Howard: Total paid customers remained relatively flat year over year at 15050 as growth in enterprise was offset by a modest decline in the number of commercial accounts.
Howard: Free and paid companies on our platform grew to over 30000, an increase of approximately 11% compared to Q3 of last year.
Howard: Q3 gross margin was 86% at the high end of our 84% to 86% target range.
Operating income was $25 million or 21% of revenue compared to $15 million or 14% of revenue.
Howard: Same quarter last year.
Howard: The outperformance relative to our guidance was driven by delays in head count starts and timing of marketing and consulting expenses.
Howard: In terms of cash flow for the quarter cash from operations was $22 million or 19% of revenue and free cash flow was $19 million or 16% from revenues.
Howard: Continue to expect free cash flow margin for the full year to be ahead of our operating margin by a couple of percentage points.
Howard: Turning to the balance sheet, we ended the quarter with $542 million in cash cash equivalents and investments in.
Howard: In Q3, we repurchased three 8 million shares for about $100 million repurchase plan and at the end of the quarter, one and a half million dollars.
Howard: The amount authorized to be repurchased remain available.
Howard: On a trailing 12 months basis billings were $478 million, an increase of 9% compared to a year ago slightly below our 10% target.
Howard: With respect to Q4, we anticipate trailing 12 month's billings growth to be approximately 9%.
Howard: At the end of Q3 total ARPA was approximately $405 million of this amount approximately $278 million or 69% is expected to be recognized over the next 12 months.
Howard: As a reminder, as of FY 'twenty five RPI disclosure in foods contracts within the original time uplifts in 12 months.
Howard: The current definition to the year ago period total ARPA increased 35% on a like for like basis. The Q3, FY 'twenty, four which would have been $298 million.
Turning to our guidance.
Howard: For the fourth quarter fiscal 2025, we expect revenue in the range of 118, and a half to 120 and a half million dollars.
Howard: Representing a growth rate of 7% to 8%.
Howard: And net income per diluted share attributable to HDD, Inc. In the range of 15 to 16 cents. This implies an operating margin of 13%.
Howard: For the full fiscal year 2025, we are raising the midpoint of revenue with an updated range of 464, and a half to 466 and a half million representing a growth rate of 8%. This compares to the range previously provided a $463 million to $467 million.
Howard: And we are increasing our expectation for net income due to chance you'll be able to pay the duty Inc. To <unk> 78 to 79 cents. This implies an operating margin of 16% and compares to our prior guide of 67% since two and 14% respectively.
Howard: Reflecting on the ESI fall, we have stabilized here all growth at 10% maintained steady DNR and moderated growth headwinds in the commercial segment. Additionally, we've significantly expanded our operating margins, while continuing to mature and grow our enterprise pipeline.
During the year with a 10% are all cross screen provides a strong foundation for the upcoming fiscal year.
Howard: That I will open up the call for Q&A.
Howard: Okay.
Howard: Okay.
Howard: Josh are you going to Q.
Howard: Oh excuse me folks.
Yes of course here, we are in our Q&A. Thank you sounded the same we're going to start with you. If you can go ahead and on mute. Please.
Speaker Change: Yes, Hi can you hear me yes.
Speaker Change: Yes, we can hi, Andrew Yes, hi.
Speaker Change: Good to hear from you again.
Speaker Change: Sorry.
Speaker Change: I'm not sure why the videos of our thinking was.
Speaker Change: Okay, hopefully that's better.
Speaker Change: When we think about like how the year has trended and where we're sort of expecting acceleration in the back half. If you look at the broader ecosystem political we called the Dev ops ecosystem or look at what some of the observer ability players none of them are accelerating but they all seem to be talking about.
Speaker Change: When it comes to seed expansion stable quarter on quarter trends.
Let's look at the Hyperscale is all growing solidly in the double digits observe ability guys growing in the double digits.
Speaker Change: The Dev ops platforms growing solidly in the double digits and so when you think about like why we're still sort of at least in revenue high single digit territory and <unk>.
Speaker Change: 10%.
What do you think is the disconnect there with where you guys are playing versus some of the.
Speaker Change: Adjacent markets that you guys are pretty pretty pretty close too.
Speaker Change: Well thanks for the question Sanjay I mean first of all I would say there were a lot of positives in the quarter, we did see stabilization across all segments, including commercial which has historically been a bit of a headwind. We saw improved dollar based net retention and strong transaction volume in our 100 K plus cohort.
Speaker Change: We're an enterprise I'll just remind you is continuing to grow well above the average growth customers, who spend more than 500 K grew over 20, or sorry grew 20% in the quarter the verticals in enterprise.
Speaker Change: Tech financial services and Telco were also very strong and we continue to see competitive win rates be very good.
Speaker Change: I would say in this quarter, the one area, where I would like to see improvement in the future is large deal conversions. So unlike many of the past quarters. We saw a handful of large deals push they are not lost but they did defer which differ some of that reacceleration, but having said that I think you really need.
Speaker Change: Look at the enterprise business and see how that's growing as as commercial becomes less and less of a headwind to the business. So we were pleased to see that segment stabilize this quarter end and even returned to growth.
Speaker Change: Yes.
Speaker Change: I appreciate the context I wanted to talk a little bit about our Patriot duty events I know, it's super early but if you could just sort of lay out like the sort of customer adoption strategy. How you are trying to fuel that and then ultimately when we get to monetization for Patriot TD advanced.
Speaker Change: What potential.
Speaker Change: <unk> uplift or uplift do you anticipate incident management customers and customer services customer service customers take on.
Speaker Change: The advanced capabilities sure so.
Speaker Change: As a reminder, it like we have been deploying machine learning and AI and our platform for many years not the least of which an AI ops, which has been a continued sort of new product strength for our business and also a differentiator for the operations cloud and that is built on our proprietary data model.
Speaker Change: And that creates a pretty significant.
Speaker Change: Significant moat for us in terms of our platform is the ability to make recommendations to leverage now generative AI chat capabilities for us to seed features across the platform. So it can be simple things like asking the platform when an incident starts what's changed right where it is.
Speaker Change: Surely that would take many many minutes you know maybe several hours to figure out the platform can surface that almost immediately and as you know in incident response time really is money. So I think.
Speaker Change: When we think about the opportunities in generative AI, it's continue to land.
Speaker Change: AI ops and attach it to our core incident management customers to start to drive usage across the entire platform through these generative AI features that simply reduce the time associated with Triaging and resolving an incident, but also reduce the number of people that need to be involved in that incident itself.
And then probably the single biggest opportunity as it relates to generative AI is is the core operations cloud use case for AI operations within a customer our customers are deploying llm's, they're deploying their own rag models, we're starting to see the launch of <unk> AI and <unk>.
Speaker Change: And send us and the customer and all of those initiatives create risk because they have operational risk associated with them that technology needs to be monitored and needs to be managed and it's proliferating at a much faster scale than traditional software and so the use case around our customers use.
Speaker Change: <unk> of.
Speaker Change: Gentex and generative AI I think represents a growth opportunity on the core operations cloud and and that I think over time will give us both a competitive a competitor strong competitive positioning because of all the things we do across a multi product platform, but also some pricing.
Speaker Change: You're through that differentiation in those use cases.
Speaker Change: Yeah, maybe I can just follow on on the specific area that you covered around AGA into the AI and the model that we're using there. So when we moved this to general availability a few months back we allowed customers on certain plans the option to opt in to the.
Speaker Change: Today, <unk> advance and the motion that we have is that they start off with a certain amount of free credits. If you like that allow them to get started and actually try out the.
The the capabilities and we've had a really good response from customers on that and Thats led to main customer is actually contracting with US we had our first customer this quarter, we've actually contracted to be able to have the ongoing use beyond the reallocation if you like.
Speaker Change: And at this stage because it's not linked only to incident management, but really it's across the platform means that someone who is using the operations cloud across automation across AI ops and incident management. They have access to a capability that that response relative to the platform that they're using so with prospects.
Speaker Change: Independently and not as a as a factor of the products that they have.
Speaker Change: Understood. Thank you Howard.
Speaker Change: Thank you.
Speaker Change: Thanks, Andrew.
Speaker Change: Thank you and next we're going to hear from Rob Oliver with Baird go ahead, Rob.
Rob Oliver: Hi, Good afternoon can you guys hear me, Okay, Yeah, Hi, Ralph Yes, Hi, John Hi, Howard Emphysema. Thanks for your time, a couple from me one.
Speaker Change: Jen <unk>.
Speaker Change: Just on the top.
Speaker Change: Enterprise customer conversions, which you called out.
I sounds you'd alluded to earlier also not uncommon right now we're hearing salespeople need to be experts in procurement and legal and all of these things and it's really challenging I was just wondering if there is any commonalities or anything you can call out, particularly when juxtaposed with like say for example, the Forrester ROI study, which is like the top thing we.
Here in these deals just like the ROI, having to be absolutely crystal clear so any color around kind of what you're hearing around those deals and perhaps why they were pushed would be helpful. And then I had a follow up for Howard.
Speaker Change: Yes, I think in this kind of market environment, I think Rob you're right you almost have to plan for perfection and nobody's heard of it but I would tell you that from a proof of value perspective, we get very strong feedback there and then it's the process of helping our our economic buyer or executive sponsor through their own process and making.
Speaker Change: I'm sure that you know, we we get through every hurdle have a re conversation et cetera, and and as I said, we've been performing pretty consistently there over the last several.
Speaker Change: Several quarters and in fact, when I look at like our large customer cohorts are customers that spend over 500, K with us grew 20% in the quarter and even the number of transactions that we did this quarter over 100, K, we still very consistent so we're getting those larger deals done it was the largest of the large.
Some of them just pushed pushed out into into the future having said that we have.
Speaker Change: <unk> gotten very good feedback about competitive positioning about AI ops customer service ops, and and new features around generative AI, which people are really excited about it and they go beyond what I would call user delighted to really significant time savers in the in the incident risk.
Speaker Change: Hans process, having said that we're going to continue to push for improvement around one pipeline generation. So we come into the quarter with very strong pipeline, we're coming into Q4 with the strongest pipeline I've seen in many many quarters.
Speaker Change: To also just managing that pipeline very rigorously to make sure that you know we are in a strong position to close when we commit these deals to be closed and then the last is I'm personally spending a lot of time on executive sponsorship, we put a new executive sponsor program into place so that we have.
Speaker Change: More than just the sales team engaged in these deals. We've got are really our whole executive team has got their hands and in different relationships across our customers and prospects to try and make sure we can anticipate.
Speaker Change: Any new challenges that may crop up during the during the purchase process.
Speaker Change: Great that's.
Speaker Change: That's helpful and good color on executive sponsorship programs, while I appreciate that.
Speaker Change: Howard just just a follow up and corollary to that I mean nice.
Speaker Change: Nice beat on the quarter and I think you guys have been.
No issue at all with Prudence, you guys haven't had an opportunity for that full year range to maybe come up a little bit it came up at the low end, but.
Speaker Change: I was sort of tightened just wanted to understand maybe some of the puts and takes there again.
Speaker Change: Totally fine, but I just wanted to understand like is there any anticipation that perhaps those deals.
Speaker Change: Which jen and I were just talking about maybe move into FY 'twenty six and some more conservatism around that or how should we think about that thank you guys. So I guess rabat.
My approach is really to try and take a prudent view on this because obviously within in this environment.
Speaker Change: We wanted to make sure that we are able to put out numbers that we have high confidence behind them. So we have taken into account by fee. If you like the deals have you already have from a subscription perspective, some of our variability comes in from a month to month transactions and from.
Professional services business based on the delivery.
Speaker Change: So over this quarter, we have to look at given the holiday period, what would be the delivery sequence of what can actually be down in the period and then we have another variable around sometimes that process automation. The self managed deals can create lots of variation in the revenue. So when I take all of those factors into account.
Speaker Change: It gives me a range, where we were glad that for the full year, we were able to pass some of that beat onto moved the midpoint up but we're looking at Q4 with that same prudent plans.
Speaker Change: Great. Okay. Thanks, guys I appreciate it good luck and thanks Robert.
Speaker Change: Yes.
Speaker Change: Thank you team next we're going to hear from Koji Ikeda from Bank of America.
Speaker Change: Hey, Jennifer Hey, Howard Thanks for taking the questions Hi, good couple.
Speaker Change: Couple of questions for me Hi, Jennifer.
Speaker Change: I wanted to dig in a little bit more on the deal differed.
Speaker Change: Yield deferrals and the fact that it gets me a little bit worried when I think about it.
Deferred deals and the compounding effect, if it doesn't get back to some sort of normalized closer level and so what's kind of giving you that confidence that the deal deferrals that youre seeing today or youre going to be able to get back to closing them sometime in the next I don't know a months or quarters or whatever it may be well, we've already closed some of them man I would also say.
Speaker Change: That what like this is something that we have done consistently well over the past many quarters and like I said.
Speaker Change: Our transactions above a 100 K were very strong. So it's just some of our largest deals.
Speaker Change: That just took a lot longer or than we had potentially anticipated or have been broken apart into multiple transactions over a short period of time and so we're really as we've said in the past we're trying to demonstrate to our customers flexibility to do business. The way they are able to do business right now.
Speaker Change: And to play the long game in terms of the relationship. The other thing that I would say is even in the in the backdrop of what has been you know a pretty challenging macro over the last several quarters, we've been improving our execution on multi year multi product deals, which demonstrate our ability to engage customers.
Speaker Change: In a multi year long term relationship, which gives us more opportunity to cross sell and up sell through the period and so even while some of those larger deals.
Speaker Change: It Didnt close in this period, we saw a number of solid six figure expansion with large customers who have expanded many times over the past couple of years. So if you remember like our business in the past has grown well through the volume of expansion not just you know lumpy lumpy large deals in that that core enterprise does it still is perf.
Speaker Change: Forming performing well and in a pretty disciplined way.
Speaker Change: In terms of opportunities for improvement we are going to continue to focus on rigor around pipeline management I mentioned, our executive sponsor program. We're also looking at how we can ramp our capacity more efficiently and more effectively through a combination of enablement.
Speaker Change: And in improving our upgrading managements, we have a number of new theater leaders that have now been in seat for a couple of quarters in a ramp themselves and so I have I have a lot of confidence in the team's ability to convert that pipeline that we have in front of which as I said is very strong this quarter.
Speaker Change: Got it.
Speaker Change: I would just jumping in accidents Koji, we've made a number of investments in terms of sales leadership. This last year, we have a new CFO to lead in the last kind of six months for EMEA for North America and for public sector, and we've hired strong enterprise leaders and they certainly making a difference in term.
Speaker Change: Helping build sales capability and when I just look at the pipeline numbers for example from Q1 for next year. The pipeline as we go into Q1 for next year is almost 50% higher than what it wants to sort of Q1 last year.
Speaker Change: Building that pipeline into future quarters at our high value. That's what gives it gives us greater certainty on the ability to execute against those larger deals.
Speaker Change: No that's a nice data point on the pipeline and so a follow up question here is on your target operating model and maybe for Jennifer or Howard whoever wants to take it I'm looking at the slide in the deck and you guys are essentially.
Speaker Change: Your target operating model and so I am a believer in the Tam that you guys are addressing I do believe theres the potential here for you guys to accelerate growth here sometime over the medium term and so how do you think about kind of balancing being at the target operating model with its growth opportunity ahead of you or we essentially at peak margins.
Speaker Change: For a while and incremental upside to be invested into growth or I guess, how do we think about that balance and why don't I start by just saying I'm encouraged by the stabilization across all segments remember that.
Speaker Change: Our business you can kind of split our business up into two segments enterprise, which has been.
Speaker Change: Where we've gone through a pretty significant transition in the in the enterprise with the backdrop of a tough macro but we now have I think a really strong narrative around the operations cloud solution selling is now our standard way of going to market and we've refined our rep profile, so that from a strategic selling perspective.
Speaker Change: We're executing better than than we have in the past and we start to we're seeing that prove itself out through really strong competitive win rates.
Speaker Change: At the same time, we believe in continuing to improve how quickly we can ramp our capacity and how efficiently. We can ramp that capacity. So we intend to be a profitable growth business and we're focused on reacceleration, but as as you know we also are.
Speaker Change: He's looking for opportunities to drive more efficiency across the business in commercial we're starting to see I think that stabilization of of the commercial space better retention rates and even a return to growth in the small end of the business and so those those give us optimism around our ability to reaccelerate growth.
Speaker Change: Into next year, but also also continued to manage operating margins effectively and Howard.
Speaker Change: I'll, let you add there yes, so I think just to bolt on what Jane said kind of <unk>, we see that the market opportunity is still strong and we see the opportunity to react.
Howard: Reaccelerate growth and so when I think about.
Howard: Long term model.
Howard: We certainly are getting close to that operating margin.
Howard: On an annual basis and so we would we would continue to look at how do we balance growth with profitability. We want to continue to make progress in terms of expanding operating margins even into next year, but not at the expense of being able to feed the growth even through this year and.
Howard: What has been.
Howard: Tougher economic environment, we continue to invest in sales and investing capacity because we have confidence in the ability to in fact go after more business in the market.
Speaker Change: Thank you thanks, so much.
Thanks.
Speaker Change: Next we'll hear from Jeff Van <unk> at Craig Hallum, Jeff. Please go ahead.
Great. Thanks, I'll add my congrats and thanks for taking the questions you called out EMEA as being a bright spot would you called out was really macro driven sales execution talk a bit more about what what's going on there what's driving the improvement now we have a new leader in the EMEA theater and he has really brought a lot of rigor.
Speaker Change: And a real focus on pipeline generation.
Speaker Change: And standardizing our go to market motion there in a way that is.
Speaker Change: Is demonstrating results across across segments in the market and I do think that the macro is easing.
As well and so those two things together, good execution and and potentially in an easing macro across.
Speaker Change: Both large enterprise and the commercial segments are really the first time, we've sat in several quarters that were excited about EMEA. So that's great to hear yeah, no doubt no doubt.
Speaker Change: And sort of along those lines I think last quarter. You gave an early glimpse into 26, I think you said hey, our billings growth of over 10% I think Howard you just commented a little bit about margins any other color even at the fringes you'd be willing to share about how we should be thinking about 26 at this point.
Speaker Change: Yes over and above what we've shared our philosophy is we need to think about how do we increase.
Speaker Change: Our growth rate above 10% into into next year, but also continuing to expand operating margins. Obviously, the timing of the IRR growth acceleration is a little bit variable and we havent given any fixed timeline on that piece.
Speaker Change: Certainly the parameters to think about exiting this year.
At 10% IRR growth just a reminder of course, whilst out businesses, mainly subscription we do have a portion that has been growing around services as we deliver more professional services into.
Speaker Change: Into our customer base that are longer term services as opposed to short term tactical services, but thats sort of what that will help you frame the complex.
Speaker Change: That revenue could call out Okay. Alright, then just last for me.
Speaker Change: The commercial side when you look at the potential drivers for that business. I mean are we talking heavily heavily weighted to employment in the tech sector. How do we think about drivers to accelerating that growth and how much you can control versus how much is waiting for employment to improve yeah. We we're not waiting for employment to improve we're really just looking at the <unk>.
Speaker Change: Leading indicators.
Speaker Change: In the commercial segment, where we're seeing better retention and customers that are demonstrating they see clear benefits from our value proposition around our some of the some of the additions we've made to the incident management.
Speaker Change: Product, including adding jelly, our postmortem automation and sort of chat experience and so what we do I mean parts of that market, particularly VSP and F. N b can be very price sensitive and are the most exposed to capital constraints, but it's really nice to see that that.
Speaker Change: Environment, stabilizing and where we have sales assist motions in commercial we're actually seeing very strong competitive win rates are which is nice to see as well so we.
Speaker Change: We see a lot you know any any any business. That's digital you know you can find from a vertical standpoint in the mid market segment, we're not.
Speaker Change: Completely focused on tech there that would be more true in the smallest segment like in our very small startups. The other thing that I would add as we see strength in sub segments like native generative AI startups, which are very well funded.
Speaker Change: Crypto, which is another space, that's doing well online travel and hospitality ecommerce et cetera. So even within the commercial segment, we have quite a lot of vertical diversity and and not a ton of customer concentration there.
Speaker Change: Okay great.
Speaker Change: One thing I would add Jeff is that when we look at our product portfolio across the operation Scott, we're not getting a little bit of a balance in terms of not everything is user base that we have products that are on a consumption basis, and then <unk> even in the commercial segment. So that does remove some of the direct relationship to user base strong employment growth.
Speaker Change: Yeah got it thanks, so much.
Speaker Change: Thank you. Thank you.
Thank you and just a reminder to our analysts on the call go ahead and raise your hand, if you have not already to be queued. We do have a few more handset mix returning to Andrew Sherman with TD Cowen go ahead Andrew.
Andrew Sherman: Alright, thanks, good to see you.
Andrew Sherman: So that's in a corner.
Speaker Change: 40% of February are from your new products. It was a strong healthy number.
Speaker Change: Maybe rank order, which products within that and kind of what's driving the strike behind those and should we expect to see attach rates.
Speaker Change: The increase in cannot help deals get bigger even as they're working through the pipeline.
Speaker Change: Well I'll start with yes that can help deals get bigger even as they're working through the pipeline and a lot of the expansions that we're seeing we're seeing multiple new product adds along with services and so that keeping paying close attention to attach rates within our existing base and how not just at renewal.
Speaker Change: But throughout the course of the contract we find opportunities to seed new products is really important part of the way. The team is executing I think I mentioned in prepared remarks that one of the frameworks. We're applying from a go to market standpoint is is really teaching and enabling the sales force to talk to customers about.
Speaker Change: Initiatives that we know they have funded initiatives like our incident management transformation or standardizing their automation practices. These are they are or modernizing their op centers. These are all things that we know are our CIO has particularly in enterprise and mid market have budget attached to so we didn't go.
Speaker Change: I didn't say, let us let US show you how we can help you do that in the AI ops is a big part of that automation is about bringing together the islands of different types of automation tools, you have across the business and customer service ops is about making sure that as you are improving the way you operate your customer facing agent meeting people.
Speaker Change: Our agents, meaning a gentex now have the ability to pass along information either back to teams that are solving for instance, or to customers trying to understand the status of incidents.
Speaker Change: And all of these products for seeding some of our generative AI features as well, which I think is driving curiosity and and Trialing some user engagement as well.
Speaker Change: That's great.
Speaker Change: Howard Great to hear the enterprise at our Ars 10 points higher.
Does that include midmarket or not as well.
Speaker Change: <unk> was 16% of our last Q4, it's obviously lower now, but when does that actually would be a drag and drop out of the model and that such that you're at IRR can float back up yes, yes. So when we when we were speaking about the enterprise.
Speaker Change: Dollar based net retention was really companies with revenues of about 500 million. So it's a little bit of an expansion of how we've previously spoken about the enterprise.
Speaker Change: Our sales team is now focused on those companies. So why do we think about enterprise so great to see and so that would incorporate what we've previously seen as being the upper end of mid market.
Speaker Change: The if I actually look at the commercial segment, which includes SMB, we starting to see that SMB.
Speaker Change: From this quarter do you know that we would have like full quarters of negative growth year over year.
Speaker Change: That's now been flattening out quarter over quarter. So we're getting to a point when the headwind from that is being being reduced so that puts us in a good place in terms of being able to.
Speaker Change: Leveraging the strength in the enterprise and then see commercial starting to to grow again that will certainly help the overall growth rate.
Right. Thank you thanks.
Speaker Change: Thanks Sandra.
Speaker Change: Thank you and next we'll hear from Jacob Brew Bearish with Williams.
Speaker Change: William Blair Jacob Please go ahead.
Speaker Change: Hi, guys. This is Jake.
So I think you've heard anything on that question.
Just wanted to touch on.
Speaker Change: Dynamics underway.
Speaker Change: Same thing on the molecule.
Speaker Change: Sorry about that.
Speaker Change: Are your customers so we know that.
Speaker Change: So have you seen a more than any color I'm going to raise here would be helpful.
Yeah. Thanks for the question Jacob I appreciate it.
Speaker Change: It's a big and early market, it's not a zero sum game and we're confident in our strength in enterprise, where our customers value. The fact that were neutral and independent that we ingest signals from all observer ability providers cloud hyperscale or ticketing systems et cetera.
Speaker Change: And then we can provide them with an independent view of what's happening in their organization, regardless of who they choose to invest in from a monitoring standpoint. We've also demonstrated our ability to be resilient at scale, even with the largest most challenging enterprises in the world and that matters when you're counting on our platform.
Speaker Change: Our incident management when things are not working and that has proven to be a difficult load for others, who have tried to come into this space to cross. We also benefit from 15 years of data that is now part of our foundational data model, where we have embedded machine learning and AI and frankly I you know I was spending.
Speaker Change: A lot of time with customers in the field I'm not hearing a lot about it.
Speaker Change: I do think that some of the work that we've done around multi year commitments and and multi product sort of long term relationship building with our customers also puts us in good stead now that that doesn't mean, there won't be customers, who are price sensitive that's always the case, but even the the lower end of the market from a commercial.
Speaker Change: Perspective seems to be stabilizing and and you know we're encouraged by the competitive win rates that we see there. So you know I'm I.
Speaker Change: I I always lived by the saying only the paranoid survive, but I've also been through this multiple times with players coming into the market and I think we have demonstrated.
Speaker Change: By proving that we are resilient secure and deliver high fidelity automation at scale and that is really important to our customers and they use cases, they leverage thus far.
Speaker Change: Got it that's it for me.
Speaker Change: Thank you.
Thank you.
Wonderful turning next to Nick Altmann with Scotiabank. Please go ahead.
Speaker Change: Awesome.
Speaker Change: Dynamic.
Hey, how are you guys yes.
Speaker Change: Great. Thanks for taking the question.
Speaker Change: John you've kind of talked in the past about how you guys are focused on controlling Lee and control. The margins have obviously improved a lot and you guys have also kind of talked about.
Speaker Change: Regardless of the macro environment.
Speaker Change: Celebration is still on your site and so <unk>.
Speaker Change: My question kind of builds off Cochise, but when do you think about the growth versus margin trade off.
Speaker Change: What would kind of cause you or what are the kind of signals that you could potentially see that wood.
Speaker Change: Make you guys sort of reinvestment product or go to market to maybe drive a sharper degree of Reacceleration, Yeah, I mean, I'm always watching our time to ramp capacity I'm watching sales productivity very carefully were looking for a longer longer contractor.
Speaker Change: Patients, which we've seen a lot of improvement on but also keeping an eye on sales cycle time, and just a reminder, like we've made very significant investments in new product and still have a lot of the truck to monetize them in terms of attaching to the customers that are very high.
Speaker Change: P with their their initial incident response investment, but opportunity to do more and I think AI ops customer service ops automation, all represent great opportunities to be growth drivers for us and equally I think generative AI is something that users are getting.
Speaker Change: More accustomed to and we're getting a lot of great feedback about.
Speaker Change: The ability to do things like just ask Pedro duty in a simple chat environment like what changed who is impacted where historically that would've been a treasure hunt involving five or six or 10 people, sometimes many more on a live calls so as we automate more and more of that I think it makes the product more interesting and and sticky across different <unk>.
Speaker Change: Use cases and across different functions.
Speaker Change: I'd love to invest behind improving sales productivity, a shorter ramp and shorter sales cycles and those are some of the leading indicators that I'm looking for but I'm also encouraged by the stabilization across all of our segments I am I think that the stabilization that we've seen forms a very.
Speaker Change: Wrong Foundation for growth Reacceleration, particularly in in upper Midmarket, and enterprise and and I. You know, we're going to continue to focus on the developer experience. So yeah.
Speaker Change: I'd love to be investing more in growth, but I want to make sure that we're executing well and are utilizing that capital very wisely.
Speaker Change: Awesome, Thanks, and then.
Speaker Change: The large deals sort of pushing you are taking longer to close but that makes a lot of sense. When you think about sort of the ECB expansion within those deals I know you had sort of mentioned that a couple had already close any sense just to kind of how that that expansion rate for some of these larger transactions kind of looks relative to large deal.
And in general.
Sorry, I lost the end of your question Nick I heard you asked something about the expansion rate.
Speaker Change: Alright.
Speaker Change: Connection seems to have gotten a little bit shaky sarine.
Speaker Change: Sorry, Nick do you want to just repeat that again.
Speaker Change: Yeah Yeah.
Speaker Change: Yes. So my question was around.
Speaker Change: These large deals that are getting pushed right. It makes sense maybe there's.
More products and longer duration contracts.
Speaker Change: When you think about just like the <unk> expansion of those deals can you just maybe talk.
Speaker Change: High level kind of the makeup of that and how that kind of looks relative to the IRR metric or even just kind of large deals in general.
Yes, I mean, I'll take a crack at that first gentlemen, great company.
Speaker Change: <unk>.
Speaker Change: There isn't one single Formula that describes what does ACB deals look like because the nature of where the customers coming from can often be quite different we always have a large population of our enterprise customers, who started with us in incident management and as they expand into things like AI ops and into.
Speaker Change: Automation, sometimes the value of those products can exceed what they spending an incident management.
Speaker Change: And we have other customers, who maybe have landed with us originally.
Speaker Change: Your automation segment, and then they move onto incident management and AI ops and in that case. The initial investment in automation ends up being smaller than the investment that they make in in the others, but what we have found is that the overarching theme is that as customers adopt more of the operations cloud they certainly.
Speaker Change: Get far more value from page of duty and one of the most recent studies that'd be referenced is the total economic impact report from Forrester.
Speaker Change: Which looked at enterprise customers and showed.
Speaker Change: 250% return on investment over three years with a payback period of less than 12 months those customers who are doing this effectively multi product adoption are seeing a lot more value and it's far more transformational for them and that tends to make those customers formal retentive, because they've seen the value set for us getting them onto the.
Speaker Change: Multi products and often multi year is an important part of our sales motion.
Speaker Change: Awesome. Thank.
Speaker Change: Thank you.
Speaker Change: Thanks, Nick thank.
Speaker Change: Thank you.
Speaker Change: Okay. We have a couple more hands free is still a Mr. Miller jumped over at truest coming up next let me bring you on go ahead Amy.
Speaker Change: <unk>.
Thank you for taking the question filling in for Joel Fishbein Tonight.
Speaker Change: So I guess I just wanted to double click on the pipeline commentary that you all have given a couple of times on this call. It's great to hear all the commentary around the volume that you're calling out in the quarters ahead.
Speaker Change: But I guess I'm, just trying to understand like where are we versus maybe a year ago in terms of visibility and then is that volume really attributed to like just more of these really large deal or is there something different about the deal composition.
Speaker Change: Yes.
Speaker Change: Pension way, we were a year ago our visibility.
Speaker Change: It's almost like night and day in terms of the improvement to visibility, we if I look back to last year. This time, we probably had visibility for Q4 and part of Q1, whereas now we have pipeline that stretches out into Q3 of next year.
Speaker Change: We're also seeing that we are in a position now the pipeline is building so that as these deals are being managed through <unk>.
Speaker Change: Through the lifecycle, we're getting better visibility into what's available for us in Q1, and Q2 of next year and then that again puts us in a in a different position in terms of how do we mature those deals how do we manage those deals we still seeing a good mix of deals across our pipeline because there's still a good volume of deals 50 to 100.
I think we're doing in deals below 50 K.
Speaker Change: But the sales team tends to focus more of their energy on the larger deals, particularly about 500 K because those are the ones that end up being.
Speaker Change: The broader deals covering more of the products and where we are demonstrating a lot more value. So.
Speaker Change: Certainly it's been a.
Speaker Change: Mifid can shift for us to move into more of an enterprise selling motion along with that comes some of the enterprise seasonality that you have to deal with and also a different level of engagement from the customer ends up being pharma multi scripted.
Speaker Change: We have to be focused a lot more on the solutions that we bring to customers problems as opposed to.
Speaker Change: Just showcasing amazing product. So those are some of the thing, but the pipeline quality is certainly improving and our ability to manage that pipeline would that longer visibility as you said to giving us greater confidence.
Speaker Change: Understood and I'm actually going to come back to you for one more Howard.
Speaker Change: I know you all don't manage to it but I was just curious if you could talk about any changes you're seeing in contract terms as it maybe relates to billing just given you know, we're seeing a little bit lower billings growth and revenue and I would've expected almost the inverse given monthly contingent is actually becoming less significant overtime. Yeah. So billings is.
Speaker Change: Always a little bit.
Speaker Change: Tricky in terms of the fact that we.
Speaker Change: We signed I would get the benefit of customers doing multi year arrangements with us both on renewal and new but we also have a practice where customers are when they expand with US we co term typically to the anniversary date. So you can sometimes you end up with a quarter, where you have a high number of <unk> with <unk>.
Speaker Change: All growth rate is higher because it's actually been committing in terms of on annual recurring revenue, but it might be a four month or six month contract to align with their renewal so that creates the fluctuations in the in the billings, which is part of why we moved to giving I R. R.
Speaker Change: Because the the kind of having to triangulate between all the different factors that can help.
Speaker Change: Complicate our billings was is tricky to navigate for folks.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thanks Miller.
Speaker Change: Yeah.
Speaker Change: Okay folks we have one more hands raised some run this fall if you can go ahead and on mute.
Speaker Change: Hey, guys.
Speaker Change: I think yes, we can hear you hi, Simeon.
Hi, This is Sam on for Matt Hedberg Ah Congrats on the quarter and thanks for the question I just wanted to double click a little bit more on fourth quarter.
First Howard.
Speaker Change: As planned then so far a few weeks into November and then generally speaking how does linearity within Q4 look like and is there some risk that some of these larger deals with more engaged and they get pushed into next year.
Speaker Change: Just to round out what assumptions you've built.
Speaker Change: Inter pipeline conversion.
Speaker Change: Yes sure.
When we think about linearity in the quarter. We we have moved over the years from a company that was.
Speaker Change: It was previously high velocity high volume transactions with relatively no listings in quarter linearity as we've shifted to the enterprise, we certainly seen far more of the or shifting that linearity, where you end up with with mortgage business happening in the <unk>.
Speaker Change: End of the quarter, we have a lot of.
Speaker Change: Systems and processes in place now to try and balance that off so our goal is to try and ensure that we're doing call. It roughly half within the first two months of the quarter not all quarters will be equal, but we have set ourselves.
Speaker Change: <unk> and <unk> and put in place certain processes to to help us move towards that goal, we not expecting unusual linearity in Q4, but we do find that the holiday parents do tend to mess with the regular linearity. So November ends up being a little bit more challenging for North America.
Speaker Change: In terms of the holiday period, but it's fine for Europe. For example, so this is a bit of an unusual quarter with respect to that but we're not expecting anything too unusual but normally the third month is the biggest month for us.
Speaker Change: Okay, Okay, great and just one more when we think about the large deal.
Speaker Change: How does that customer journey, typically look like and what how long is the engagement generally for these customers.
Yeah, It really varies because it's rare that we would land a seven figure customer. It does happen has happened, but it's rare. It's generally easily the case, if we land a on a smaller basis and then grow through expansion over time, one of the things that I think has changed through our <unk>.
Speaker Change: <unk> to really focus on solution selling the operations cloud in the enterprise against some of these.
Speaker Change: But what I would call funded solution areas that CIO and CTO is have is that we're starting with a conversation about all of our products and services and how they can support initiatives that the customer already has underway as opposed to starting with one product and then trying to add products on on top of it and that means that we.
Speaker Change: Go as fast as the customer can go in some cases, the CTO will move really fast they've already chosen us as a standard and they're re platforming and they want an integrated platform and they don't have to jump through a lot of hoops in other cases in that that sometimes happens in the tech industry for instance in other cases in a more highly.
Speaker Change: Regulated environment like financial services or federal like it can take a lot longer.
Speaker Change: So there so I wouldn't say there is like sort of one way that.
Speaker Change: That happens, but I do think that through doing a better job of attaching services to our deals that gives us better visibility to what customers are looking at starting to work more effectively with systems integrators, and having them support us and in conversations around a large transformation initiatives.
Speaker Change: Health and multiyear agreements gives us the opportunity to grow and co term within that period of the contract period, which also creates growth over there over the period that.
Speaker Change: We have an engagement with the customer.
Speaker Change: Great. Thanks, guys Congrats again.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Okay team. Thank you that is all the handset we have raised today, Jennifer we'll turn to you for any final remarks, well see our turns I just would like to thank everybody for joining US today, we are both optimistic and confident that the stabilization that we're seeing builds a solid foundation a strong foundation for it.
Speaker Change: Growth re acceleration and I'm grateful to spend that this last hour with you and wish you all in North America, a happy Thanksgiving and the rest of you a happy holiday period over the next couple of months. Thanks.