PagerDuty, Inc.

Good afternoon. My name is Chantelle, and I'll be your conference operator today. At this time, I would like to welcome everyone to the PagerDuty fourth quarter 2020 earnings 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. You will need to press star 1 on your today's conference is being recorded. If you require any further assistance, I will now turn the conference over to Stacey Feinerman, Vice President, Investor Relations. Please go ahead.

And thank you for joining us on today's conference call to discuss PagerDuty's 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. I would also like to mention that we are joining you remotely today from our home offices. I have been informed from our conference call provider that there have been some technical difficulties with the increased Internet use. We apologize for any difficulties, and if there is any clarification needed, please reach out to us at investor at pagerduty.com. Statements made on this call include forward-looking statements. Forward-looking statements involve known and unknown risk 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 belief and assumption 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 equivalents. For example, other companies may calculate non-GAAP financial measures differently or may use 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 recently filed Form 10-Q, previously filed with the SEC. Now I'd like to turn the call over to our CEO, Jennifer Tejada. Jennifer?

Thank you, Stacey. We are all living and working in an unprecedented environment as we confront the evolving global impact of the COVID-19 pandemic. We hope you are all safe and well and appreciate you being on the call today. At Patriot Duty, we've undertaken a number of measures to manage effectively through this, especially as it relates to protecting our people, engaging our customers, and supporting them as they respond to the people, economic, and business impacts, and also doing what we can to support our communities as slow the spread of the virus. On March 10th, we enacted a mandatory work-from-home policy alongside travel and event restrictions already in place, and we have enacted a crisis governance operating framework. Given we design products for unsigned work and infinite response, we were well prepared to a great extent for remote distributed work such that we are able to focus on helping our customers as many of them transition to work from home. As developer and operations teams shift to distributed working, we have seen some interest in leveraging pay-per-duty to ensure ongoing digital performance and uptime. In addition to sharing best practices with our community, we've kicked off several philanthropic initiatives through our social impact program, PagerDuty.org. Today, we are announcing that we are providing 20 free platform team licenses to healthcare companies to aid them in managing surge in their digital environments and supporting them and their crisis response teams. The last few days have been extraordinary, culminating this week in metro area lockdowns, federal travel bans, and record-setting market disruption. It's too early in the cycle to have clarity on the true medium and long-term impact of the fluid macro environment. This makes it increasingly difficult to forecast the market and the subsequent impact on our business. This is a situation that's changing some early indicators of changing demand signals. We see nothing material to date. While our business concentration outside of software and tech, which represents a third of our revenue, We have a meaningful business in retail, e-commerce, and financial services. Additionally, we cannot measure or ignore the potential for disruption or market productivity decline that may come from ongoing mandatory work-from-home policies, school and business closures, and illness. We remain unwavering in our mission to help companies manage their digital operations more effectively. Thank you for joining us. to manage mission-critical, unplanned work now more than ever. We've recently seen examples of customers self-serving licenses to expand new teams rapidly, but it's too early to tell whether this is material or coincidental. What we do know is our customers trust us and value the efficiency, cost savings, and customer experience assurance we help them achieve. Turning to the quarter, we are proud of our strong year-end results, with Q4 revenue increasing 36% year-over-year and full-year revenue growing 41% over fiscal 2019. We recently achieved a major milestone surpassing 500,000 users on our platform with our average revenue per user increasing again this year for the third consecutive year. This underscores both the value that PagerDuty delivers to users and the successful adoption of our platform by customers of all sizes across verticals and geographies. Cloud adoption, the need to manage increasing complexity, Mainstream DevOps adoption and progressing digital transformation continued to create tailwinds for us in fiscal 2020 as we extended our lead in digital operations management. As trust is increasingly a valuable currency for consumers, PayDuty helps our customers establish and sustain trust with their customers. During the year, we also saw a meaningful uptake of our new products. As a reminder, these include modern incident response to orchestrate real-time work across distributed teams, our AIOps solution event intelligence, visibility for situational awareness, and our advanced analytics solution for optimizing operational and team health and productivity. Demand for all of our new products was particularly as they leverage unique data, automation, and learning from our platform. Of the top 100 new customers we partnered with in fiscal 2020, 68 of them subscribed to more than one product. In Q4, we're in our competitive modes. We deployed new market-first features in our service directory, a signal by which accelerates full-service ownership across teams. This includes new information objects like current service ownership, service-specific incident history, event rules, and new runbooks. We released the latest version of our Salesforce integration, opening up several new use cases by enabling Salesforce customers to go beyond connecting PagerDuty to Salesforce Marketing Cloud, Commerce Cloud, Quip, and more. We also released new enhancements to make real-time workflows more customizable and flexible for various teams and operating models. These enhancements address the challenges of hybrid ops environments where companies have both centralized IT teams and DevOps. This allows DevOps teams to leverage Agile for distributed work and some centralized IT apps teams all on the PagerDuty platform. This is a new feature that's particularly relevant. This response allows stakeholders like leaders and senior management to receive context on the health of business services in real time in an easy-to-use app on their mobile device. We launched this functionality in July and have already seen 60% of eligible customers use this feature set. In Q4, we continued to make progress in enterprise while also serving the world's most innovative companies. We landed or expanded business with Anheuser-Busch, Booking.com, American Express, Netflix, Vanguard, CrowdStrike, ADP, Snowflake, Peloton, Autodesk, Shopify, and TripActions to name a few. In enterprise, we signed an expansion deal with the top 20 internet retailer and Fortune 500 company, was already using modern incident response. Knowing for its ability to delight customers looking for variety in stylish, affordable home furnishings, the customer was using a homegrown system that was manual, disjointed, and time-consuming. The new CTO led the initiative to transform legacy systems to best-in-breed platforms. Now, event intelligence automatically groups incidents, substantially reducing the time to mobilize a team, resulting in significant cost savings which we estimate to be over $2 million in labor costs alone per year. The CTO advised us that competitors could not offer these capabilities or comparable cost savings. Last quarter, we also built on our strong leadership foundation, hiring Joe Militello, formerly at Pivotal, as our first chief people officer to help us deliver on our people-first cultural value while scaling the business. Dave Justice, our new Chief Revenue Officer, started in December and has been focused on sales leadership and execution, especially in the enterprise and the market. Dave is partnering closely with Julie Herringdane, our CMO, and already strengthening our high-velocity land and expand go-to-market motion. On this note, I'm pleased that performance for tenured salespeople remains strong and that the initiatives we put in place in the past two quarters, including new sales enablement programs and tools to support overall rep effectiveness, are bearing positive results. Dave has recently hired a new head of sales operations and has applied increased standardization and rigor to our sales process. In Q4, we saw several teams deliver excellent performance, and we continue to focus on bringing all of our teams up to the same high standards. Looking to fiscal 2021, we remain focused on the tremendous opportunity ahead of us while we see both challenge and opportunity in the current environments. In order to extend this lead, we are focused on three priorities. First, continuing to win in enterprise and mid-market. Second, becoming the de facto platform for real-time work. And third, continuing to expand our reach beyond DevOps and IT teams. First, the world's largest companies rely on PagerDuty. With nearly 60% of the Fortune 100 and 9 of the Fortune 10 as customers, enterprise and mid-market continue to present significant growth opportunities. PagerDuty is uniquely positioned to solve the complex problems of the world's largest companies, balancing being easy to use and deploy with demands of scaled resilience and security and advanced features that speed automation and transformation. Our user-friendly e-commerce model, combined with our platform approach, has led to both rapid growth and retention in the high 90s as industry leaders tightly integrate to and standardize on the PagerDuty platform. Our success in enterprise demonstrates that PagerDuty has become an essential component of the world's enterprise infrastructure. For example, a Fortune 500 human resources software company began using PagerDuty two years ago, growing from a 20-user self-service LAN to 2,500 users this year. It started like many of our large customers do, in a team of developers responsible for mobile applications. However, as the company continues its digital transformation journey, They require a platform to enable them to innovate faster, orchestrate and automate urgent mission-critical work, and provide great customer experiences in every moment. In anticipation of a strategic product launch, they sought an enterprise-grade platform that could scale with their growth and replaced a lower-cost, less feature-rich solution with PagerDuty's Digital Operations Management Bundle. Adopting our incident management product as well as visibility and analytics, gives leaders and stakeholders real-time context into performance and reliability at all times. Second, we are focused on becoming the de facto platform for real-time work across small, medium, and large companies. As we've discussed before, there are many providers that help companies monitor infrastructure and analyze logs to understand the health of parts of IT or services, or that route standardized, non-critical workflows with ticketing solutions. These are all valuable services, some of which we use in our day-to-day operations. However, when companies face issues that are unpredictable, customer-facing, and time-sensitive, they need a real-time solution that orchestrates teams, machines, and data in a coordinated, automated way. This is especially important for distributed teams and for teams responsible for revenue-generating applications and technology. PagerDuty uniquely addresses these needs by leveraging machine learning A decade of data and best practices automatically bring together the right people with the right information to solve problems and address opportunities as they occur. To date, our competitive modes include our trusted reputation for delivering resilience at scale, PagerDuty's ease of use, and the platform's security and out-of-the-box interoperability across cloud and on-prem technology environments. In FY20, we deepen these modes, investing in business response, service directory, and a best-in-class mobile user experience, and the largest integration ecosystem in the category. We continue to execute on an ambitious roadmap this year, further leveraging machine learning in new ways, building additional automation and auto-remediation features, improving our user experience, and expanding our application ecosystem to support developers and users across functions. These product investments address critical challenges that our customers face in digital transformation, including DevOps, ITOM, and AIOps. Our third priority is to continue expanding our platform beyond DevOps and IT teams. While customers usually initiate service with PagerDuty within DevOps, 16% of our customers apply PagerDuty to additional mission-critical work in other functions, like security and customer service. especially when issues that impact reputational risk come into play. As we've seen increasing demand, we've invested in integrations and workflows to support new use cases like PagerDuty for customer service in partnership with Salesforce and Zeta as well as PagerDuty for security operations. You can expect to see us advance our roadmap in these areas through continued investment in our robust APIs, our developer ecosystem to encourage devs to build more functionality on top of PagerDuty and in strategic partnerships. An example of this is a global enterprise software company used by property and casualty insurance carriers that provides essential information for its customers to power their businesses. Reliability is of the utmost importance as their customers expect perfection from this long-time PagerDuty customer. They started using PagerDuty in their cloud operations team, then expanded to product development and engineering to support the company's cloud adoption initiatives. More recently, the company rolled out PagerDuty to their customer support representatives who are now empowered with real-time contacts and information to manage inbound inquiries from their customers more quickly and effectively. In the midst of an unpredictable macro environment and the coronavirus pandemic, PagerDuty's heritage as a distributed company built for real-time, unpredictable incidents and unpredictable incidents sees us well prepared to maintain business continuity as all of our teams now work remotely. To date, the coronavirus situation has not diminished our ability to provide services to customers, and we remain committed to the high levels of service and reliability our customers expect. PagerDuty is for people, and we are at our best when the rest of the world is down. In uncertainty and volatility, we still see opportunity. We are clear-eyed and pragmatic. We remain focused on our long-term objective of building an enduring company and are optimistic about the large market that remains in front of us. With that, I'd now like to turn the call over to our CSO, Howard, who will walk us through the financial results. Howard?

Thank you, Jennifer. We are pleased with our fourth quarter fiscal 2020 results. Revenue for the fourth quarter increased 36% year-over-year to $45.9 million, beating the high end of our guidance. Growth was driven by new customers, new users, and new product adoptions. Our non-GAAP gross margins, which are industry-leading, were at 87%. Our non-GAAP EPS came in at negative 3 cents per share ahead of our guidance. Once again, we managed cash with operating cash flow of $2 million in the fourth quarter. We saw a 14% increase in total net customer additions on a year-over-year basis to 12,774 customers in line with the growth rates we've seen over the last two years. We had 20 more customers with ARR above $100,000 in Q4, taking us to 323 customers, a growth rate of 42% year-over-year. Customers with over $1 million in ARR increased by 50% year-over-year to 18 in the quarter. Both of these metrics demonstrate our strength in upper mid-market and enterprise. Our dollar-based net retention rate for the quarter was 122%. This healthy net retention rate represents our high renewal rates and low churn. We attribute most of the decline from the third quarter number to pockets of sales execution in specific territories, existing accounts as effectively. From a competitive perspective, we're pleased to see churn remaining below 5% on an annualized basis. Annual revenue Average revenue per customer increasing for eight successive quarters with average revenue per user continuing a two-year positive trend and our non-GAAP gross margins continuing above 85%. We continue to drive our programs to improve sales, productivity, and ramp so that our newer sales reps can perform as well as our more experienced reps who have continued to perform at high levels of productivity. With the improvements we are seeing, we expect dollar-based net retention in the first quarter to land within a range of 120% to 123%. Our international revenue grew 52% year-over-year in line with last quarter. Once again, we had another exceptional quarter in Europe, an example of a territory where our sales team continues to perform well and where we continue to invest in sales. I will now turn to the details Our GAAP financial results, along with the reconciliation between GAAP and non-GAAP results, can be found in our earnings release. Non-GAAP gross margin was 87%. We are proud to bring a highly scalable, reliable, resilient, and secure platform to over 12,700 customers around the world in a complex technology environment supporting over 350 Our best-in-class growth margins are made possible by our cloud-native architecture, our DevOps approach to production, and programmatic approach to customer success and support. We anticipate continuing to deliver growth margins between 84% and 86%. We look to invest in areas that help capture share. However, over the long term, as we scale, we expect to reap the benefits of our operating leverage. In the fourth quarter, non-GAAP operating expenses were $44 million compared to $32 million in the fourth quarter of fiscal 2020, which was in line with our revenue growth of 36%. Non-GAAP research and development expenses for Q4 were $12 million in the same year-ago period, representing an increase of 46%. As Jen mentioned, two of our priorities are to be the de facto platform for real-time work in digital operations and expand our reach beyond DevOps and IT teams. Therefore, we will continue to invest in product. Non-GAAP sales and marketing expenses and group by 41% of $16 million. On an absolute basis, this number came Thank you for joining us. for the quarter and increased 16% year-over-year. The 16% year-over-year increase we reported in the third quarter. Our non-GAAP operating loss compared to a loss of $3 million in the second quarter. Our non-GAAP operating margin was negative 9% in Q4 and negative 9% in the same period of last year. Non-GAAP net loss of $3 million or a net loss of $0.14 per share in the fourth quarter of last year. We generated $2 million in operating cash flow in the fourth quarter compared to just over $600,000 in the prior year. This represents three straight quarters of positive operating cash flow. Free cash flow was negative 100%. Free cash flow margin was slightly negative at 0.4% compared to negative 0.6% in the same quarter last year. As we previously mentioned, capital expenditures did increase by 1.2 million to almost 2 million for the quarter. Turning to the balance sheet, we ended the quarter with This is primarily driven by proceeds raised in our initial public offering as well as positive working capital. Before moving on to guidance, I would like to make a comment on the impact of the coronavirus. We have not seen any direct coronavirus. Thank you for joining us today. From top of funnel to bookings to revenue to capital allocation and look at the full year, we have assessed the exposure of our business to some of the highly impacted industries such as travel and hospitality, manufacturing and energy today. We have also reviewed daily and weekly trends in division and pipeline and have seen no material change at the current time. Given the uncertainty at this time, it is very difficult to assess the potential future macroeconomic shifts that could arise from coronavirus. Our guidance for revenue, the first quarter of fiscal 2021, revenue is expected to be in the range of $1 million, representing a Thank you for joining us. Basic shares outstanding for Q1 and the full year fiscal 2021 are expected to be $78 million and $70 million. I want to make a few additional remarks about guidance. The fiscal year assumes a non-gap operating margin of negative 10 to negative 12% for the fiscal year. This represents an improvement of six points at the midpoint Over the negative 17% we posted in fiscal 2020. Although we plan to increase our machine R&D as well as go to market, we will be prudent in managing our costs. Our current EPS guidance for the year also assumes a significant decline in fiscal 2021. Owing to a lower interest rate environment, an increase in interest expense related to the adoption of the new lease standard and increases in taxes. With that, I will open up the call for Q&A.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please stand by while we compile the Q&A. Your first question comes from Matt Hedberg with RBC Capital Markets. Your line is open.

Oh, hey, guys. Thanks for taking my questions, and obviously our thoughts go out to everybody. ...impacted by COVID at this point. You know, Jen, you know, I wanted to just drill into a comment you made earlier. I mean, obviously you guys had good results this Q4, and you said that there's maybe some early indication of a change in demand, but then you said, you know, there's nothing much more, you know, not much to note, I believe you said. I'm wondering, and also, you guys have a strong e-commerce model. Maybe talk to us about how you're set up to do better than others.

Hi, Matt, and thanks so much for your question, and I hope all of you are well and safe as well. We appreciate you being with us today. We know that it's a pretty challenging time out there in the market. Regarding that, we look at our pipeline on a daily basis. We look at things like our web traffic as well as our trials and the conversion rate on those trials. and all of that looks healthy and frankly looks great. In some cases, we've even had customers reaching out to us through self-service to buy emergency because they're now distributed or because they're using us for crisis response. On the other hand, we've had a very small number of deals delay or push out a month because either their legal teams are super busy or or they have budget uncertainty, but that's no different than what we would see in any quarter. So again, like not material could be coincidental. So we just want to be transparent, but at the same time say we can't find a material change today. We feel good about the health pipeline we have going to Q1. And frankly, it's been interesting in talking with the sales team over the last couple of days. There's a lot of activity there. are setting a lot of virtual meetings in the last couple of weeks. And to your point, the benefit of being self-service is that our customers don't require a sales rep if they want to add new teams or spin up new capability with new licenses. And likewise, the vast majority of customers, and in times like this, when you're looking for a platform that can help you manage surge because you're a food delivery service or because Your team is now distributed. PagerDuty fits squarely in that space and has, I think, a very strong reputation for reliability in an environment that's increasingly uncertain.

That's great. I mean, I think it really speaks to, I think, how mission critical your platform is for people getting work done. And I think it'll be great to see how it performs here. And maybe, Howard, a follow-up for you. and a question that we get, and I know you get all the time, is the competitive landscape. It doesn't appear to me that there was really any impact from discounting, just kind of given your strong gross margins, but maybe can you talk a little bit more, everybody always asks about Splunk and Atlassian, maybe a little bit more than the pricing perspective that you're seeing.

Yeah, well, thanks, Matt. You know, there's really been no material change in the environment in terms of pricing or competition. Obviously, there's always some Thank you very much. and the angle that we compete on value. And I think even some of the studies that have been done, you know, we had IDC do a study for us where it showed that for enterprise customers that they could achieve over 3.56 million in annual business value in 31%. So I think there's a clear business value case and particularly when you, you know, are dealing with those larger enterprises.

Thanks a lot, guys. Best of luck. Thanks. Thanks, Matt.

Your next question comes from Sterling Audie with J.P. Morgan. Your line is open.

Yeah, thanks. Hi, guys. Both in your prepared remarks and in your answer to Matt, I guess I walk away thinking that you didn't actually, you know, provide any cushion in the numbers from COVID-19. Or did you estimate, you know, especially with some of the exposures, even in those smaller industries, Did you actually build in some impact into the guidance?

Hi, Sterling. This is Jen. I'll start off, and then Howard can jump in if he'd like. It's a great question, and I will tell you that we have been modeling scenarios day in and day out for the last several days. The market has been Thank you. Thank you. Going into Q1, what we've tried to do is be very balanced, but I will tell you that initially we were looking at a higher guide, and just given the nature of what's happening in the market, where we think there could be risk around employee productivity across the industry or cost-cutting measures, et cetera, we just applied some balance in thinking about that, but we feel good. Good about the prudent and balanced guidance we put in place.

I was just going to add, the one thing, we have taken a very specific look at industries and obviously something like travel and hospitality and energy are areas of exposure, maybe parts of manufacturing. But when we look at travel and hospitality and energy, that's kind of less than 3% of our revenues today. We have sort of tried to factor in some modest changes, but obviously we haven't been able to build guidance around some dramatic macro change.

That makes sense. And then just one follow-up, net dollar retention. Thank you for the guidance, by the way. I think that makes sense. But how much of that is where it's kind of settling out? is that you are starting to see those larger deal size initially, so maybe taking some of the expand and putting it in the land versus anything else, because it sounds like your gross retention was very high.

Yes, so I think you point to a couple of things. I think we have definitely seen, and I think I might have mentioned this on the last call, we have seen an increase in larger lands, which means that the runway for the expand changes, particularly as we move more of our businesses. into the enterprise. So that's a positive for us as a company since we've seen good traction in terms of our new business. And that does mean that that window for expansion is a little bit longer. That being said, we have been transparent about the fact that we did have, with some of the changes that we made in the sales team in the early half of the year, which have now started to settle down, we did have some pockets of sales territory that We're not being covered as effectively as we would like.

Makes sense. Thank you.

Your next question comes from Rob Oliver with Baird. Your line is open.

Thank you very much for taking my question. Just a couple. First, for Jen, Jen, I know Howard got a question earlier on the competitive landscape regarding pricing, but I just wanted to maybe dive in a little bit deeper on last quarter's call you had mentioned, I believe, that the competitive landscape had gotten a bit noisy. You did not use that term this quarter, and I just wanted to get a sense for if you've noticed any change in the competitive landscape and certainly sounds as if you guys feel a little bit more confident about it and just wanted to see what, if in fact, changed. Thanks.

Thank you, Rob, for your question, and I hope you're doing well. We We have not seen a significant change, and in fact, I think we're starting to hit our stride in being more articulate about the digital operations management category and about our positioning in terms of what we do from a real-time work perspective compared to others out there that help reduce some of the confusion in the market. We are very consistent in the fact that we usually land within the developer community and then start to expand beyond DevOps to security and IT and customer service and other areas. I would say that there's a great network effect that we're starting to see where customers who've used PagerDuty at one company become leaders at a large enterprise that's going through transformation and they see PagerDuty as a must-have. And I also think that the market increasingly is getting Thank you so much. A tremendous amount of opportunity.

Thanks, Jen. Appreciate it. And then, Howard, one for you. I know you've been pointing us towards those enterprise deals, which constitute a larger upfront land. As we look at the billings growth this quarter, which was solid, we saw a jump in long-term deferred revenues. And just Curious if that's consistent with the move towards the enterprise, if that's something we should expect to continue or if there were any other factors at play in that mix of short-term and long-term deferred. Thank you guys very much and appreciate it.

Sure. Thanks, Rob. So, Rob, I think in terms of obviously when we look at the growth of the number of customers that we have above 100K, we now have 323 there. We saw Thanks again, Gus.

Your next question comes from Sanjit Singh with Morgan Stanley. Your line is open.

Hi, thank you for taking the question and hope everyone on the team is safe during this time. Jen, on your script you sort of mentioned some interesting metrics around the expansion outside of DevOps. I think 16% of customers outside of DevOps. You hit 500,000 plus users. And so as we sort of stand here, you know, A year plus out of IPO. Can you talk to some of the usage, use cases, the usage activity on the platform? Like how is usage of the PagerDuty platform different today versus a year ago, two years ago? What are sort of the emerging use cases that you're seeing?

Thanks for the question and I hope you're well. So I would just say two years ago, I think we were well known as being a solution for DevOps, for the developer community and operations teams for managing on-call management and automating real-time work within the developer community. I think as the engineering community has really led the way in helping other parts of the organization see the opportunity to leverage a platform that can connect into almost any modern software environment, help detect issues or opportunities, orchestrate the right people in moments to drive the right outcome for the business, and increasingly leverage machine learning to identify things before they become major issues, so start to move from being purely reactive to preventative, then the rest of the organization starts finding ways to apply that technology. where we have customers that are using our Salesforce integration within their customer service organization. And it starts with just being able to have visibility and context to application or consumer-facing digital product to realizing that the same platform that their developer peers use could be leveraged for reducing customer caseload or the response time to support customer issues. In security, we see many SecOps teams and DevSecOps teams using PagerDuty within their SOC, their Security Operations Center, but also from more of a distributed and proactive perspective to deploy kind of a DevSecOps mindset in everything that they do. And then we have really unique use cases. We've talked about one in the past where a large oil and gas organization uses us to manage the efficiency of their fuel trucking terminals. We have a payments customer that uses us for their physical security team as well as legal. We have a large software company that uses us to manage the real-time workflow across the legal team when they're trying to finalize contracts across business units. And the common stream is it's a real-time, unpredictable burst of work. In a distributed organization, you don't necessarily know who the right people are you need. PagerDuty figures that out for you. It orchestrates the work. It captures everything that goes on in that workflow and enables you to learn from that and go forward. And I think one of the things we did this year was really improve our mobile user experience. We are the only platform that allows you to run an entire incident from a mobile device, which makes it easier for more and more non-technical users to start leveraging PagerDuty. And, of course, recently we're hearing more and more stories about customers using us in their crisis response teams given what's going on and using us to try and spin up distributed tech ops teams who have historically been together in a network operations center.

Very interesting. It makes total sense. And then for my follow-up question for Howard, I guess I'm going to try and bundle two of these two questions into one if you don't mind, Howard. But what I'm trying to think through as we think about how the environment could unfold over the next decade or the next couple of quarters. When I think about the business being self-service and at the same time more of the business coming from larger customers, whether it's larger mid-market customers or enterprise customers, how do I marry those two things together in the sense that can and in a way that's meaningful to the business in terms of your new business via self-service motion or do they need Do they need more hand-holding, more direct sales presence? And the follow-up to that is, in a situation where things do take another leg down, what is sort of the contingency operating plan in terms of how you think about managing the model?

Well, thanks, Sanjay, and good to hear from you, as always. So I think you've hit on a very interesting topic. because I think, you know, just to remind folks, the majority of our lands actually come through a service model. And that's been something that's been kind of the mainstay of the business. What we did do about two years ago is we actually implemented the ability for customers to self-serve regardless of whether they were new or existing and being able to cover that regardless of whether they were existing. and more of our customers using that self-service motion to acquire. In fact, we had deals within the hundreds of thousands that were actually happening via self-service. So where the customer was actually making that purchase online and was able to then complete that transaction without having to sign an order form or do any paperwork. So we certainly had that capability there. I think we need to continue to educate customers Our customer base, and that that is a mechanism that they can stream. It's one of the things I watch every day. It's a steady stream of online. To your second question, in terms of trying to think about contingency in the model, obviously we've built out a number of scenarios. We don't have that crystal ball, which we did, but we've tried to build out a number of scenarios to help us assess how the But right now, it's just modeling. We don't have enough data of history of the company to know some of the impacts that we may see over time.

And by history, Sanjay, Howard means the company is not old enough to have been through the many recessions Howard and I have lived through. The one thing that's certain about a difficult environment is you know that at some point in time it will end. And I think a lot of what we're focused on is making sure we continue to think like a... We continue to invest sensibly in product innovation and sales and marketing, that we keep a very close handle on expenses and a watch... ...weekly on leading indicators... but know that at some point in time the certain thing about a market environment like this is it's going to end and we need to come out of it strong and continue on our path to building an enduring company.

The one thing I would just add is that we have the history of being really capital efficient. We have been very successful in terms of managing, even in periods of very high growth, managing our cash very carefully. We've had three quarters now of being cash flow positive If we look at the full year, we were almost cash flow positive for the full year. We were around 3% negative for the full year. So mentoring that approach, I think that puts us in good stead as things unfold in the economy.

Appreciate all the color, Jen and Howard. Thank you very much. Thanks, Sanjay.

Thanks, Sanjay. Your next question comes from Rishi Jaluria with DA Davidson. Your line is open.

Jennifer and Alex, thank you so much for taking my questions, and I'll echo my colleagues in hoping that everyone's doing well and staying safe. I want to start with a comment, Howard, that you made on travel, hospitality, energy being less than 3% of revenue. Maybe you could expand a little bit on that, the things that might be on the surface considered tech companies but under the hood are in fact Travel, Transport, Hospitality, etc. So if you think of a reference customer like Priceline or any of the OTAs, something like Airbnb or something like Uber and Lyft, again, we think of as tech companies on the surface, but under the hood are things that are going to be really impacted by social distancing and the fact that cities like ours are in lockdown mode. And then I've got a follow-up.

Yeah, sure Rishi, and I think you've hit upon an interesting thing, you know, it's a challenge of industry classifications, right, that comes in. So when we look at sort of those, when we're talking about travel and hospitality, it's those folks that would fall more fairly and squarely within the line, you know, within the likes of traditional travel and hospitality, hotel groups, airlines, those types of functions. Where you have that crossover platform type of companies like You know, the likes of the ride-sharing companies and so forth. They do fall within a different bucket. And from our perspective, what we're doing is the models that we've been running, the scenarios that we've been looking at, we're trying to sort of be fairly granular in terms of trying to pull those out. Okay. Got it. Got it. That's helpful.

And then in just thinking through the net expansion rate, you know, talked about 120 to 123%, we could see some stability or even at the high end of that range improvement. Maybe going beyond Q1, how should we be thinking about this metric and possibility to expect that number to tick up, you know, A, because of better safety, the fact that you're going to be lapping, you know, the impact of the Two large customers who moved off PagerDuty onto their own applied solutions.

Thanks. Yeah. So thanks, Rishi. You know, for now, we're taking the view that we would like to provide some or set expectations around what we'd see for this next quarter. Given the uncertainty in the current market, we feel that it would not be prudent for us to try and stretch beyond the

Thank you so much.

Again, if you would like to ask a question, press star 1 on your telephone. Your next question comes from Vansuri with William Blair. Your line is open.

Hey guys, thanks for taking my question. And obviously we're going through some crazy times, but I'd love to understand The conversations you might be having with large enterprises, existing or new, that say, okay, right now we can't do anything because we're dealing with our infrastructure, our demands, and remote people, but this is clearly something we should have had in place or should have in place coming out of it. And so sort of let's fast forward, and again, at some point in time, like when you look at the potential demand or the conversations or the interest What are customers saying? Are you seeing that from customers saying, hey, you know, a system that monitors all this and manages it for us and tells us what's going to happen, alerts us, is there sort of a conversation that's happening or is it still too early? I'd love to understand sort of how you might be thinking about that, how you're here about color. Obviously, we're all optimistic, but I'd love to understand what's actually happening.

Thanks for the question. We just had a conversation with a very large customer this past week, and the conversation went something like this. We're looking for other ways to find cost savings so we can invest more in PagerDuty because we think over time PagerDuty will reduce significant costs for us this year. So we're looking to deploy it more broadly across the organization than it has been in the past, and we're trying to accelerate that as a result of the current environment. Now that is one data point, and it is very early days. Another example I'll give you is a company that provides navigational capability that recently self-served tens of licenses, even though they're fully deployed on a recent purchase that they've done with the account team. And essentially, they have a new distributed team that used to be in a central NOC and is now out in the wild in their homes. and so they're bringing that team on to PagerDuty. We've also seen the acquisition, like the new logo engine is holding up, like I said, trials are holding up and there's a lot of conversation around using PagerDuty for DevOps and crisis response and I can speak to how we're using PagerDuty as an organization in this kind of environment. We're using PagerDuty within our crisis response governance team, so our crisis leadership team and the four work streams underneath that that include employees in public affairs, financial management, engaging our customers, and then product and system stability. All of those teams are on PagerDuty rotation such that if we needed to get immediate information across those teams quickly, to drive immediate action that will happen on the PagerDuty platform. It's not happening across 16 communication platforms, SMS, et cetera. It's also highly reliable so that we know we can get in contact with the right people for the right issues. And I do think that there's the potential to see more than that. But again, you know, I would just encourage everybody to be balanced in the way they think about this because it is early. We don't have a crystal ball. The way I thought about the world a week ago is different than the way I thought about the world yesterday, which is different today. And I think the most important thing is that we have a team and a culture, predictable, big incidents. And so we're pretty calm in this environment, even though it's psychologically, I think, difficult for most individuals. And I've been really proud of how our 24 hours notice on March 9th that they would work from home. And we really haven't skipped a beat. And that's not to say that it's not hard for folks. I mean, I see kids. People are staring into the Zoom machine hour after hour. Thank you, Eric, for making this possible for us. But I think, you know, we're in a better position than other companies might be just given our culture and the way we work.

Yeah, no, I appreciate that. The calm even keel given the volatility, and we've all been in the background of the Zoom given circumstances. I guess one quick one for either you or Howard, but you've enacted a number of productivity measures, especially getting David Justice on board and everything else to address net retention. The guidance feels pretty stable. Where do you think you are in terms of rolling those out? Is this still pretty early? Do we expect net retention rates or expansion rates to potentially, again, ex-current COVID and everything else? Would you assume they go up? Do you think we're in the first inning? Do you feel those have been done well over this quarter? And do you think Q1 is a stable place? How should we think about those? Thank you.

I'll take a crack at that and then Howard can jump in. You know, Dave has been with us for eight weeks, but he's been just a fantastic add to the team. His priorities have been really focusing on finalizing some key leadership positions, on making investments in EMEA, which has performed really well in enterprise as well as customer success, making sure that we have very strong alignment in marketing with account-based marketing and as well as leveraging our self-service capability and really also bringing operational rigor to the table, which I think is super important as we look to become a more disciplined. Again, I will just say I'm really proud of our sales team. We were very fortunate that we were able to be together this year for sales kickoff. COVID-19 hit. And, you know, there's accountability and ownership. Really, I think a sense that we have the right product for the right set of problems in the right moment in the market. But looking past Q1 is just really hard to do given the level of uncertainty. So we're going to just continue to focus on executing on what's in front of us, on improving productivity and ensuring that our salespeople are are well equipped, that the marketing messaging we put out into the market is easy to understand, and that the product continues to be very easy to use, very secure, and very resilient in the current circumstances.

Yeah, and I guess just one quick comment. As I mentioned to Rishi, we see the 120 to 123 rate that we're providing for Q1 as being sort of the zone for Q1. We haven't provided any view yet and beyond that at this time.

Got it. Thank you, guys. Appreciate it.

Thank you.

Thank you.

Your next question comes from James Wing with ARK Invest. Your line is open.

Hi, Jennifer. You quoted the $100 billion TAM as your kind of long-term target for digital operational management. But right now, I think many people view PagerDuty as a fairly narrow slice of the product that's addressed. Do you maybe talk about kind of how the R&D, where that focus is, what you need to build out, what's kind of the ultimate vision for what you need to build to achieve to penetrate that 10?

Sure. Thanks for the question. As I said earlier, you know, one of our priorities this year is to become the de facto platform for real-time work. You know, that points to a couple of things. One, it's continual product company to a multi-product company. of the top 100 new customers we brought on board, 68 of them took more than one product. The digital operations management SKU, which really takes you from traditional on-call automation to proactive event intelligence, really leveraging predictive machine learning capabilities, visibility to give stakeholders across the business context in what's happening, and analytics, which really, truly help you understand the cost These are things that people are adopting as a part of that digital operations skew. So I actually think we actually feel really good about the progress that we're making there. And we also think it's okay that the entry point into our product is that core solution because it is the most reliable and I think most well known and functional solution out in the market. I think what's also interesting is as that solution becomes intertwined and part of core infrastructure for large companies, people are, you know, not looking to change it. They're looking to build on it. And our customers are talking to us about how they leverage more and more great platforms to serve them. And ours operates, interoperates very effectively with others. From a product innovation perspective, as I mentioned, Service Directory, which we announced last fall, is the first of its kind. It's a virtual dynamic directory of services. It was really important in distributed architectures where you're using virtualization. You may spin up services quickly and send them down when you no longer need them. What's really important about it is it also brings into account the people element, the people ownership of those services so that when you need to do something, you know who you need to do that. and then we're going to continue to invest in the developer ecosystem. One of the things that's maybe not well known about PagerDuty is developers build capabilities and applications on top of PagerDuty all the time and we haven't created an opportunity for them to expose those to other users and so the dev ecosystem I think will be important in the future as well to really bring the power of the community to the platform.

Thank you.

and there are no final questions at this time. I'll now turn the conference back over to Ms. Feinerman for closing remarks.

Thank you, Operator, and thank you all for joining us today. We did hear some comments that the call was choppy and some of you might have missed something. We will look to post a transcript of this call and you are always welcome to reach out to us at Investor at PagerDuty.com. Thank you very much and have a nice day.

This concludes today's conference call. You may now disconnect. Thank you.