PagerDuty, Inc.

Hello, everyone, and welcome to PagerDuty's second quarter fiscal year 2021 earnings call. I'd like to remind everyone this call is being recorded, and at this time, I'm going to hand it over to Willa McMammon, investor relations at PagerDuty.

Good afternoon, and thank you for joining us to discuss PagerDuty's second quarter fiscal 2021. With me on today's call are Jennifer Tejada, PagerDuty's chairperson and chief executive officer, and Howard Wilson, our chief financial officer. Statements made on this call include forward-looking statements which involve known and unknown risks and uncertainties that may cause our actual results, performance, or achievements to be materially different from those expressed or implied by the forward-looking statements. Forward-looking statements represent our management's belief and assumptions only as of the date such statements are made, and we undertake no obligation to update these. In addition, 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. 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 other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as a tool 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 form, 10Q. With that, I'll turn the call over to Jennifer.

Thank you, Willa, and thank you all for joining us on Zoom today. We are thrilled to see you and appreciate our partner Zoom for enabling us to engage with you face-to-face. I'm grateful our team and our employees are healthy, and I hope you all are well, too. We recognize how fortunate we are, and our thoughts go out to all those who are affected by COVID and the current environment. While acknowledging the unprecedented near-term market uncertainty, today I will focus on the elements of our business we can control and how we are strengthening our company as we execute against our strategy to become the de facto platform for digital operations. Despite extraordinary market dynamics, our customers remain loyal, as reflected in our retention rates and revenue growth. Digital transformation is accelerating, becoming an imperative for our customers as they shift to an e-commerce-led business model. McKinsey recently reported that e-commerce penetration has grown by 10 years in the last three months, literally overnight. Many of our customers have been faced with two competing imperatives, rapidly accelerating their digital initiatives and cutting costs. We see customers' responses to this on a continuum. from the most impacted customers reducing users to some simply applying conservatism by delaying user expansion or pausing new initiatives. At the other end of the spectrum are many teams leveraging the situation as an accelerator for change and doubling down on PagerDuty as a foundational operations platform. PagerDuty is essential to online business where the stakes are now higher than ever. We are building from a foundation of trust where our platform has reliably supported unprecedented scaling in video conferencing, e-commerce, telemedicine, communication, software, and home delivery services. As the central nervous system for our customers' digital ecosystem, PagerDuty is the first line of defense in protecting revenue. We have emerged as the central aggregator for nearly all signals across the digital landscape from monitoring and observability to security, logs, tickets, and even sentiment. PagerDuty is the only platform that aggregates signals, analyzes events, and intelligently orchestrates real-time work across different teams to close the loop and ensure a perfect digital experience every time. In today's world, trust is the most valuable currency between brands and consumers and companies and their employees. PagerDuty operationalizes customer trust for the companies we serve. This is why we are fast becoming a business priority for CTOs and CIOs, where DevOps and IT underpin digital business revenue and customer experience. This quarter, we demonstrated strong revenue growth of 26% despite a tough market. as well as demonstrable product leadership with our average revenue per customer growing for the 14th consecutive quarter. We achieved an 87% non-gap gross margin, demonstrating the value of the PagerDuty platform, and we've made solid progress upselling our digital operations package with seed expansion up 179% year-on-year, now comprising 15% of total ARR. While investing in growth, we again increased our operating leverage, achieving year-over-year operating margin improvement of 11 percentage points and positive operating cash flow of $2 million. We also strengthened our balance sheet through our convertible debt offering, augmented by improved operating efficiencies. This financial wherewithal affords us the opportunity to extend our market position in an uncertain economy, where return on investment is paramount to customers. We are progressing well against our increasingly relevant strategic priorities, the first of which is winning in the enterprise segment. Never have large companies been under more pressure to modernize IT supporting the shift in revenue mixed to digital. We are seeing evidence of this with customers like Comprehensive Health Management and The New York Times upgrading to our Digital Operations Management Plan in this quarter, and SAP, who expanded their digital ops users. Second is validating our position as the de facto platform for real-time work. With everyone living, working, and learning online, incident volume has skyrocketed, and work has become increasingly unstructured and unpredictable. In fact, customers are using our platform more and resolving incidents more quickly. We've seen a steady increase in incidents since the beginning of shelter in place with the cost of every minute of disruption on the rise. Despite this increase, our customers have leveraged our platform to reduce their average time to resolve incidents by approximately 15% over the same period. Our ROI has never been more clear, validated in Q2 expansions by customers benefiting from the macro trends like DoorDash, Nordstrom, One Medical, Peloton, and Coursera. Finally, we continue to expand our reach beyond DevOps, our primary focus and first use case, with engineers championing PagerDuty up and across their organizations. Digital acceleration means all hands on deck for SRE, IT, customer support, and ultimately leadership, which long-term bodes well for us. Within the enterprise, PagerDuty adopters such as Cisco, Electronic Arts, NVIDIA, and Vanguard continue to advance their operational maturity, adding users on our platform as we help them improve labor productivity and incident response time as well as incident prevention. In fact, we've seen expansion across approximately one-third of our enterprise customer logos in each of the last six quarters. Lowe's, a new logo for the quarter, uses PagerDuty to support their engineering and ops teams in managing the challenges that come with increased online demand from homeowners retrofitting our new reality. In addition, an existing customer, one of the largest home improvement retailers in the U.S., expanded to a multi-year enterprise agreement using PagerDuty's predictive analytics to ensure high reliability for their e-commerce systems and other use cases like real-time inventory orchestration. PagerDuty's insights are game-changing for traditional brick-and-mortar businesses as customers have become more conditioned to the what-you-want, when-you-want-it world. We also benefit from the secular transition across many verticals, like online education. In Q2, a UK-based education and publishing company who's evolved from a brick-and-mortar textbook producer to an online education platform adopted PagerDuty to unify their global monitoring, engineering, infrastructure, and operations teams, driving DevOps best practices, including service ownership across all IT services. PagerDuty brings engineering teams closer to business outcomes, shifting operations from reactive to preventative, and ensuring real-time operational visibility across all services like class registration and research downloads. There, PagerDuty integrates with many partners like Microsoft Teams, New Relic, Slack, and ServiceNow. In the quarter, A major US broadcast network expanded its relationship with us to minimize disruptions in live broadcasting services, to speed collaboration with their affiliates, and to improve the quality of their digital services. PagerDuty acts as their operations cloud to ensure customer-facing issues are resolved immediately, measured in seconds, not minutes. A Fortune 200 biotech company, another new logo, is using us for use cases that span multiple teams, including manufacturing at scale, working with process engineers and mechanics that operate their medical production equipment. We help them mitigate disruption by providing greater awareness and faster, better coordinated responses. We reduce costly manufacturing downtime, a return on investment that can be realized in as little as a day. In Q2, our total customers grew by 11% despite the macro environment. New customer wins and expansions resulted from positive strides in our go-to-market as evidenced by improvement in sales execution, including pipeline quality and close ratios. Our ramping rep productivity has improved dramatically, beginning in Q1 and improved sequentially as well, a positive validation that our efforts in enablement and shift to value selling are paying off. That said, we had a challenging start to the quarter with macro conditions driving conservatism on the part of enterprise buyers. We saw lower than typical pipeline conversion, some lengthened sales cycles, and higher than normal churn and contraction, especially in small business and hard-hit verticals. In these circumstances, we prioritize long-term customer relationship over short-term gains and work closely with our customers to help them navigate the crisis. The quarter got progressively stronger with momentum building in our pipeline as well. Growth in the quarter was driven in part by consistent strong execution in EMEA and a solid result in our North American mid-market segment where competitive win rates have increased as customers adopt products that deepen our moat like event intelligence, modern incident response, and the digital operations plan. This quarter, progressive mid-market customers like The RealReal upgraded to digital operations management in transformational strategic engagements. Coinbase, Fastly, Okta, Pinterest, Rubrik, Datadog, Monzo Bank, and Twilio continue to place their trust in PagerDuty with expansion in the quarter. While there are too many external uncertainties to call a market recovery, we entered August with better pipeline coverage and also saw one of our largest enterprise lands ever, the adoption of our digital operations management plan by one of the largest mortgage providers in the U.S. In addition, results from our first major virtual event, EMEA Summit in June, were promising, with over 1,100 registrants from more than 70 countries, more than three times the previous year. Going virtual extended our reach, and we expect another great response September 21st through the 24th for our North American Summit, with nearly 5,000 registrants confirmed, almost five times more than last year's attendance. We've planned over 35 sessions, a diverse lineup of speakers, and several exciting product announcements, including advances in AIOps, automation, enterprise collaboration, and customer service. For the first time, we will offer free PagerDuty University courses, including Incident Commander certification. The more integrations we provide to our customers, the more PagerDuty becomes essential infrastructure. We now offer over 370 integrations and a deep bench of product partners. In the quarter, we saw notable customer adoption of integrations in Dev and ITOps, Zendesk and Salesforce Service Cloud in the customer service space, and AWS in SecOps. In August, we expanded our integrations with Zoom, Microsoft Teams, and Slack. Security partners such as StackRox and HackerOne published new integrations for cloud security and DevSecOps as we continue to see security teams adopt PagerDuty to reduce cyber risk. During the quarter, we introduced new capabilities, including dependency-aware related incidents, which make it easier for responders to understand the scope of an issue, triage faster, and coordinate better. We also released an expanded analytics API, which provides more granular access to incident data, allowing customers to port it into business intelligence systems where they can manage and learn from incident history and trends. We continue to focus on our community in the quarter, with additional inclusion, diversity, and equity programs underscoring our commitment to expand diversity and representation in our employee base, our leadership team, and our board. Thank you. Thank you. Thank you. While we can't forecast the return to more predictable conditions, we continue to be well positioned to benefit from and see validation of the long-term tailwinds of digital acceleration, cloud migration, and DevOps. We are seeing green shoots as customers turn their focus to embracing the incredible velocity required by e-commerce, remote working, and digital acceleration, where we are truly their strategic long-term partner. We remain confident in our strategy and optimistic about our growth. We hope you will join us to learn more at Summit 2020, where you can hear from an incredible lineup of speakers and innovators, including Brett Taylor, the president of Salesforce, Nora Jones, co-founder and CEO of Jelly, Eric Yuan, the founder and CEO of Zoom, Derek Johnson, the president of the NAACP, and Stuart Butterfield, the co-founder and CEO of Slack. We look forward to updating you on our progress and appreciate your ongoing interest in partnership in PagerDuty. With that, I'd like to turn it over to Howard.