PagerDuty, Inc.

Good afternoon. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the PagerDuty third quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, simply press the pound key. Thank you. I will now turn the conference over to Stacey Feinerman. Please go ahead.

Good afternoon and thank you for joining us on today's conference call to discuss PagerDuty's fiscal third quarter financial results. With me on today's call are Jennifer Tejada, PagerDuty's chairperson and chief executive officer, and Howard Wilson, the company's chief financial officer. Statements made on this call include forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results, performance, or achievements to be materially different from those expressed or implied by the forward-looking statements. Forward-looking statements represent our management's beliefs and assumptions only as of the date such statements are made, and we undertake no obligation to update these forward-looking statements. In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their closest GAAP equivalent. For example, other companies may calculate non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation between GAAP and non-GAAP financial measures is available in our earnings release. Further information on these and other factors that could affect the company's financial results are included in filings we make with the Securities and Exchange Commission from time to time, including the section titled Risk Factors in the company's most recent quarterly form 10-Q, previously filed with the SEC. Now I'd like to turn the call over to our CEO, Jennifer Tejada. Jennifer?

Thanks, Stacey, and thank you everyone for joining us this afternoon on our third quarter earnings call. Q3 was a strong quarter as revenue grew 37% year-over-year to $43 million. I'd like to share three highlights in the quarter. First, customer growth remains consistently strong as we scale. We ended the quarter with over 12,400 customers, up 15% year-over-year, and growth has remained remarkably steady over the past seven quarters. We also saw sustained, robust growth with our enterprise and mid-market customers that have annual recurring revenue, or ARR, above $100,000, growing 49% year-over-year, similar to the growth we delivered in the second quarter. These two customer metrics that show a sustained growth rate on an increasing base demonstrate the durability in our revenue growth. Next, we close from terrific large strategic deals in the quarter, continuing to solidify our leadership position in enterprise. We're now partnering with two of the three largest defense contractors in the world and two of the five largest investment banks after a new win in each of these sectors. These wins, both Fortune 100 companies, have a combined value of almost a billion in ARR. The requirements to do business in huge, multinational, highly regulated verticals are not inconsequential, and our multi-year enterprise tech investments, born in the cloud architecture and go-to-market models set us apart. Both companies chose us for breadth of our platform, especially our machine learning and automation-based features, our ease of use, our proven resilience and security at scale, and our referenceable enterprise track record for value realization. Our go-to-market teams continue to win expansion business in our base through a laser focus on customer success, resulting in an 81% increase in customers that spend over $500,000 in ARR a year with us. This quarter, we won a significant expansion partnership with a large global software company headquartered in Europe. The relationship started with a U.S. subsidiary, and they have now expanded users and upgraded to the digital operations package in the European business to support their global growth and enhance the trust their customers place in their software and services. We continue to see growing demand for our digital operations offering as customers realize measurable value through reducing incidents and by advancing their digital transformation efforts. This underscored the expansive and early addressable market we see in digital operations management this quarter, where 45% of the net new error was attributed to the digital operations package. This bundle includes our platform, our workflows and modern incident response, our AIOps solution event intelligence, which leverages machine learning to automate work, visibility, which quantifies business impact in real time, and our analytics product, which provides recommendations on improving digital operations management and metrics to benchmark against other teams. We are proud of our revenue growth rate and net dollar retention, as they rank highly within our peer group. That said, we see an opportunity to stabilize our dollar-based net revenue retention. As we mentioned in Q2, we front-loaded sales hires in the first half of the year to increase our sales capacity. We didn't ramp those salespeople as fast and as effectively as we could have in territories with significant expansion upside. And this impacted sales productivity, which put pressure on our expansion revenue. This is an execution issue that we're working on, not a competition issue, evidenced by our customer retention rate that has remained constant at well above 95%, meaning we churn far less than 5% of customer error in any given year. And also validated by our gross margins that remain best in class at 85%, for the last six quarters. Over the last few months, we implemented the following initiatives that are delivering early but encouraging improvements in more effectively ramping salespeople. First, we doubled down on sales enablement leadership, programs, and tools to ramp new reps faster. Second, we continued our efforts to simplify and differentiate our platform and messaging in an increasingly noisy market, including more clearly articulating the return on investment for PagerDuty and making self-service and discovery of new products easier for all of our customers. Finally, I'm very excited to share that we have strengthened our senior leadership team in sales with the appointment of our first Chief Revenue Officer, Dave Justice, a high-caliber global sales leader from Salesforce and Cisco with significant depth in commercial and enterprise sales and experience in infrastructure, security and customer service. They will join us in early January, and I expect him to be an excellent complement and partner to our CMO, Julie Herondine, who has expertise in growth, digital, and high-velocity B2B marketing. We remain incredibly excited about our opportunity to extend our lead in digital operations management, a market where we see a total addressable market of at least $25 billion for incident response alone and $100 billion when you consider all the teams across the company that are part of managing digital operations. Let me explain what we mean by digital ops and why PagerDuty is in a unique position. An all-in-one world and customer impatience result in every company needing to be a technology company. As a result, our customers continue to move more of their services to the cloud, constantly iterating on their apps to provide the best customer experience. In parallel with this market transition, modern work has changed with mixed shifting from planned and structured work to emergent, mission critical, spontaneous, and unstructured work. PagerDuty is the only partner that leverages machine learning to orchestrate teams on complex issues across multiple business units and geographies, converting a deluge of data into insightful action in seconds and minutes. Digital operations are increasingly costly and complex to manage, and the stakes are high, where a minute of disruption can cost $200,000 to $500,000 in revenue. This requires a long-term partner that sits above the rest of the technology ecosystem, acting as a central nervous system, orchestrating all these critical workflows simultaneously and cutting through the noise. PagerDuty is in the unique position to work for large, complex enterprises as well as innovative startups because we've been architected for the cloud with enterprise-grade resilience and security at scale. While our customers frequently start with on-call management to accelerate their agile transformations, We increasingly see customers adopting our additional digital operations management products to support their digital transformation programs and business outcomes. The GAP initially started with 1,500 PagerDuty business platform seats to support a DevOps, you build it, you own it culture. Early success with PagerDuty led the company to add another 1,000 users. As we expanded our product capabilities with greater intelligence and automation, GAP saw that they could realize further value by leveraging our digital operations package to reduce major incidents that could cost millions of dollars. GAP now uses PagerDuty to directly connect product and IT teams as well as distribution centers, creating smarter, more streamlined approach to handling incidents. We estimate that this digital operations upgrade will save GAP millions of dollars per year. There are several great solutions in the market that address different and sometimes related challenges associated with digital transformation, including many of the companies that went public this year. We recognize it can be hard to discern how we complement each other. Some companies, like our customers Datadog, Cisco, AppDynamics, New Relic, show you the health of all your IT services in a single pane of glass. Others, like ServiceNow and SureWell, give you standard workflows to route your customer service and help desk ticketing. These are all valuable services, but when there is an unpredictable, customer-facing, time-sensitive, mission-critical work, Analytics and sequential ticketing are limited by manual detection, a lack of speed, inflexibility, and the absence of data-driven intelligent work orchestration. PagerDuty is different because we go beyond finding a signal in the noise to automate and orchestrate the cross-functional work of people all the way through to a resolution in service of the end customer experience. Only PagerDuty can do this because as the central nervous system of the software ecosystem, We consume a superset of data from all the different technology services our customers use through over 350 integrations to build a holistic understanding of our customers' digital health. When we recognize symptoms of a service becoming unhealthy, we pattern match the situation against 10 years of data on how IT services perform and how humans respond to them. So we can bring together a small team of only the right owners and subject matter experts armed with the right detailed technical and business context and help from AI-based automation to action solutions and resolve issues proactively. Our longstanding customer and partner Sumo Logic illustrates this point well. They expanded their use of PagerDuty in the third quarter by purchasing our digital operations package. As a SaaS business relied on heavily by developers to understand the performance of their applications, it's critical their platform is highly reliable at scale. They use PagerDuty to orchestrate teams for immediate response to incidents when seconds matter and they increasingly leverage PagerDuty to prevent events from storming to become major customer disrupting issues. Now that we've set the stage for you in terms of this sizable opportunity and explained why PagerDuty is in such a unique position, I'll talk about how we capture the opportunity by winning an enterprise, increasing our revenue from new products and validating our position as a horizontal platform. First, we need to win an enterprise where today we serve 58% of the Fortune 100 after adding another two companies this quarter, and 38% of the Fortune 500. In these accounts, significant expansion opportunity exists for both user upsell and new product cross-sell. Enterprise, like our other segments, is greenfield and a growing opportunity for us. Our deals are largely uncontested as our competitors lack the product depth, track record, and resilience at scale to serve this segment. We're a cloud native, architected for highly resilient 24 by 7 operations, and have never had a maintenance window. We implement change in production because our customers can't afford even moments where they lack visibility and awareness of their digital operations. This is one of the many critical requirements to support the always-on world and is one of the reasons our customers continue to trust us as a mission-critical platform partner year in and year out. In addition to our strength in self-service and small and medium-sized businesses, we see significant upside in mid-market and enterprise. This is precisely where sales execution comes into play. Our enterprise sales motion builds on but differs from our frictionless direct-to-developer sales motion, with our field-based teams engaging with developer teams and senior leadership alike, addressing the strategic needs of economic buyers and the technical needs of product users. For our enterprise and upper-mid-market customers, realizing value quickly while meeting security, administration, and compliance requirements of large businesses is critical. Our solution meets these needs as illustrated by a recent IDC study that shows PagerDuty Enterprise customers averaged $3.6 million in annual business savings and revenue risk mitigation, a four-month payback period, and a 731% ROI over three years. As we strengthen our senior sales leadership with the appointment of Dave Justice as Chief Revenue Officer, we will help more of the Global 2000 manage their digital operations, optimizing revenue and customer experience, and significantly reducing operational expense in the process. Next, we are increasing our revenue from new products. Modern incident response, our AI op solution event intelligence, visibility for situational awareness, and analytics for measuring operational and team health and productivity, all of which build upon data and learnings from our platform. We also announced two new capabilities this quarter, intelligent dashboards and intelligent triage. Intelligence Dashboards is a newer analytics product and leverages 10 years of data through its Spotlight's recommendation engine that teams can use for future improvements such as stopping unactionable alerts, fixing repeat issues, and improving escalation practices. It also provides managers with built-in benchmarks to see how their teams compare to peers in the organization and across their industry. Intelligent Triage is new within event intelligence and provides additional context into issues so teams know how to prioritize their work and can reduce the time between detection and resolution of an issue, significantly cutting outage time and mitigating the risk of business impact. All of our products help businesses mature their digital operations and deliver greater return. When customers use these products, they mature from reacting to incidents more efficiently to proactively managing their digital operations and preventing problems before they arrive. As I mentioned before, we've also seen some great signals here recently with regards to our ability to upsell these products as 45% of the net new ARR we looked in the quarter was attributed to the digital operations bundles. Last but not least, we continue to validate our position as a horizontal platform. What we mean by horizontal is that customers increasingly apply our solutions to teams and challenges well beyond the purview of DevOps and IT. In the third quarter, we launched PagerDuty for customer service in partnership with Salesforce and Zendesk. This follows the launch of PagerDuty for security operations in February. Customer service management is a significant opportunity for us as those teams that are on the front lines of ensuring customer experience and rapidly resolving customer impacting issues is a cross-functional effort. Being a horizontal platform also means being applicable to all companies with time-sensitive critical work. That means that brings to mind another new customer partnership we initiated in the corner with a top 20 U.S. city municipality. Think about essential services like power, gas, and water. Where always on is both a physical and virtual must-have. Historically, the city would be notified of issues by a customer with little visibility into the underlying causes. Service outages were costly, and it would take upwards of 45 minutes to coordinate teams after a power outage before they even start to triage the issue. Using PagerDuty, the city redesigned its digital operations with the help of our expert services team, so they can address issues quickly and proactively. And PagerDuty Modern Incident Response, with PagerDuty Modern Incident Response, the city can automatically run response plays to resolve issues before customers are impacted, significantly reducing the time from detection to resolution and mitigating revenue impact. One additional highlight from the quarter was our annual Summit Industry Conference in San Francisco where we built significant sales pipeline valued in the millions. This is our biggest and best summit yet, with over 1,200 attendees, a 40% increase from the previous year. Customers were supportive and excited about the new innovations we announced and our investments in customer service through deeper integrations with Salesforce and Zendesk. As we close out the calendar year, we at PagerDuty want to wish our entire community of users, customers, employees, partners, and shareholders a safe, happy, and uneventful holiday period. Over the holidays, we will continue to help our customers reduce the financial, customer, and employee impact of emergent work. We're also keenly aware that the holidays can be difficult for those in need. So in honor of our customers, we're supporting the delivery of time-sensitive healthcare for those in need by donating $25,000 each to Village Reach and Medic Mobile, two of our pagerduty.org partners. With that, I'd like to turn the call over to our CEO, Howard Wilson. Howard Wilson.