PagerDuty, Inc.

Good afternoon, and thank you for joining us to discuss PagerDuty's first quarter in fiscal 2022. 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 beliefs and assumptions only as of the date such statements are made and we undertake no obligation to update these. 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. With that, I'll turn the call over to Jennifer.

Thank you, Christine, and thank you to all of you for joining us today. What a difference a year has made for PagerDuty. We're seeing industries, companies, and communities actively recovering after more than 15 months of hardship and uncertainty. We also recognize the effects of the pandemic continue to challenge many regions around the world. Yesterday, PagerDuty, along with coalition partners, launched the Go Give One Challenge to raise $5 million for international COVID-19 vaccine distribution. Thank you for joining us today. Building off a strong close to fiscal 2021, we beat both our top and bottom line guidance for the first quarter. Year-over-year revenue growth was 28%, demonstrating the resilience of our business through the pandemic. Total dollar-based net retention was 121%, and enterprise dollar-based net retention was above 125%. As we progress to a post-pandemic world, PagerDuty is well positioned as one of the few key platforms that CIOs and CTOs are investing in for the future. We are on a path to becoming a $1 billion leader focused on modern digital operations. This success is a testament to the ingenuity of our customers, our users, our partners, and our employees. We deeply appreciate their trust, confidence, and dedication. Thank you for joining us. As a result, our deal sizes are growing. Compared to the same period a year ago, the number of customers investing more than $1 million is up 55%, and customers investing more than $100,000 with us are up 32%. The macro environment and market landscape continue to move in our favor. We're deepening the trust and loyalty of our core developer users, while many customers expand the use of PagerDuty for customer service and SecOps teams. Our investment in AIOps and automation enables teams to prevent unnecessary work and empowers our users to intelligently mobilize their teams in critical moments. These and other new capabilities provide unmatched real-time context and visibility around incidents. Our vision to move teams beyond incident response towards proactive orchestration of their expertise on time-sensitive, mission-critical challenges is fast becoming a reality. PagerDuty is evolving into the leading ubiquitous platform for real-time work as users and teams apply our technology to a diverse and growing set of use cases across teams and functions throughout a business. Our growth in enterprise reflects these advantages, with average revenue per user in expansion transactions up approximately 40% over last year, returning to pre-pandemic levels. Our capabilities fortify organizational resiliency, just as over 70% of IP decision makers have named digital resiliency as a top priority for this year, according to a recent IDC survey. This is true across vertical industries where we've continued to see momentum, including financial services, software and internet, automotive, e-commerce, and more recently, healthcare and biotech. Our freemium offering continues to drive new platform usage. New free and paid accounts on the platform grew by nearly 30%. We saw particular strength in mid-market with new logos up 33% over last year and new users per logo at the highest point in three years. Our land and expand flywheel continues to deliver growth with both disruptive innovators and industry leaders due to our thought leadership and credibility within the developer community. In Q1, we added new enterprise customers, including Albertsons, Jaguar Land Rover, and Truist Financial. Startups Drizzly, Lunchbox, and Pony.ai became PagerDuty customers this quarter as well. We expanded our relationship with customers including Bell Canada, KPMG New Zealand, and LegalZoom. It's especially encouraging to see our largest customers expand their investments in PagerDuty at the fastest rate of all of our customer segments. Total ARR for customers investing over $1 million with us grew by 59% year-over-year and 13% quarter-over-quarter, demonstrating the significant expansion opportunity with existing customers as we expand across functions managing different kinds of real-time work. Several cryptocurrency companies now leverage PagerDuty to ensure uptime and reliability of critical customer-facing services, apps, and transactions. For blockchain companies, uptime is money. The world's largest cryptocurrency business based in the U.S., eToro based in the U.K., and Maltz's Binance have all adopted our platform. They're using PagerDuty to coordinate teams managing the urgent real-time work that ensures the viability of the world's newest currencies. These teams are decentralized and distributed, so they turn to PagerDuty to streamline their incident response across the organization and move from reactive operations to preventative ones. Automotive is another emerging growth sector for PagerDuty. One of the most admired automotive companies in the world is steadily expanding its reliance on our digital operations platform. We now support the critical customer-facing services delivered in-vehicle and on-app for this Global 500 connected car company. As the company adopts full agile development across geographically diverse product and engineering teams, they leverage PagerDuty to ensure a delightful customer experience. Last year, a Fortune 500 auto parts company introduced contactless pickup across its 5,000 retail locations. Riding a wave of increased demand, they rolled out a new mobile application and made multi-million dollar investments in digital channels. As the company pivoted its business model, it chose PagerDuty's platform, including event intelligence, to manage a small pilot with their cloud team to prioritize incident management. Since then, the company has expanded multiple times across its cloud and central IT teams, driving a projected annual return on investment of over 250%. One of the largest freight rail lines in the US adopted PagerDuty in Q1. This Fortune 200 logo is using a new digital platform to manage the operations of 8,000 locomotives and 32,000 miles of railways. PagerDuty is the real-time operations platform they've selected to empower their teams with full service ownership. Thank you so much for joining us. Each of these businesses are undertaking their own journeys towards thriving in a digital-first world, and PagerDuty is a critical part of that journey. In addition to new logos, we're also expanding our reach across companies with new use cases identified and adopted by our users. The number of customer service users is up 41% year over year. During the quarter, we launched new features to the PagerDuty for Zendesk application, which now delivers real-time updates and visibility directly to agents within Zendesk. This allows teams to proactively communicate with customers as soon as the service is impacted. Teams at DoorDash, Netflix, and OutSystems have all adopted our customer service offering this quarter. Customers including Okta, Cisco, and Zscaler also expanded their customer service team's use of PagerDuty. Product innovation and expansion is our most exciting growth engine, especially AIOps, automation, and our integration ecosystem, which connects us as an operations hub to all things digital. We are seeing strong demand for our automation solution, with Rundeck now integrated into our global sales motion, enabling cross-selling. PagerDuty Rundeck customers are able to solve problems through automation in real time, innovating faster while improving their margins. Rundeck is performing well, landing new enterprise customers, including Fortune 500 health information company and an international land with a large enterprise utility business based out of Australia. We continue to see strong uptake of PagerDuty security offering as SecOps teams are confronted with ever increasing phishing, malware, and ransomware attacks. One SecOps team at a large online education platform uses PagerDuty to guard against more than 7,000 different phishing variants per month. These teams now fully automate blacklist updates without the need for expert knowledge or admin access, significantly reducing enterprise risk while saving valuable time. ARR for our digital operations platform increased 93% over last year, with ARR for event intelligence growing 200% year over year. In the first quarter, we announced a number of features to build on the already powerful services in event intelligence, including next-generation service dependencies, providing context and visibility both upstream and downstream based on past incidents. PatriotDuty automatically advises operators on resolution next steps, saving time and improving customer satisfaction. Our automated triggers, also new this quarter, automate tasks using custom actions that allow responders to orchestrate work across teams, reducing time spent on resolving incidents, and improving service availability. During the quarter, we expanded our digital ecosystem. Thank you for joining us. These include new integrations with JFrog Pipelines for change events, CrowdStrike for SecOps, and Monte Carlo for data observability. These integrations demonstrate our scalability and extensibility and are a key reason why our customers choose us as essential infrastructure for their digital operations. Our social impact, inclusion, diversity, and equity efforts across the company and community remain core to our culture and our success. This quarter, we contributed both time and money to advance equality for Asian American and Pacific Islanders. We also celebrated Black Futures Month, led by the efforts of our Array Employee Resource Group. Our social impact arm invested $1 million towards equitable COVID-19 vaccine access and distribution, committing financial support alongside product credits and technical expertise. Three of these grantees, International Medical Corps, Trek Medics International, and NextLeaf Analytics, are already leveraging PagerDuty's platform in their life-saving work. Trek Medics Executive Director said, It's clear we've got eyes out for us in both expected and unexpected places with PagerDuty, making our systems more resilient. For an organization where a resilient platform can make the difference in delivering time-critical care, it's exactly the type of impact we're proud to make. In the quarter, we added 15 new impact customers. These nonprofit mission-driven organizations work in lockstep with our time-critical health grantees and leverage PagerDuty's platform in their life-saving work. A recent IDC report cited PagerDuty's commitment to social impact as setting an industry standard. We will continue to make this a pillar of our culture. Finally, we are looking forward to our annual PagerDuty Summit, which kicks off a little earlier this year on June 22nd. We're expecting more than 15,000 attendees from across the globe at this all-digital and free event. We're thrilled to welcome global thought leaders, including David Solomon, the CEO of Goldman Sachs, Clara Shee, the CEO of Service Cloud at Salesforce, Eamon Dadger, the co-founder and CTO of HashiCorp, and Adam Grant, best-selling author, host of the Work Life podcast, and leading organizational psychologists. Over three days, we'll host conversations on the future of work, the future of business, and the future of PagerDuty. We're hosting a Financial Analyst Day on June 24th, where we will share more detail on our summit announcements, as well as on our roadmap to becoming the 1 billion ARR business. With that, I'll turn the call over to Howard.

Thank you, Jane. We started the year strong with results that exceeded the high end of our guidance and our momentum continues. The last three quarters of solid execution and robust business momentum gives us confidence we can accelerate the top line while maintaining best-in-class gross margins and improve operating margins over the long term. Revenue of $64 million grew 28% year-over-year, driven by strong expansion, particularly in the enterprise and mid-market. with customers adding users, adding new products, and upgrading to our digital operations plan. We continue to see strong growth in software and technology, financial services, retail, media and entertainment, and telecommunications with above average growth in healthcare, life sciences, and biotech. The transportation sector, negatively impacted by the pandemic, is showing evidence of recovery, but travel and hospitality seems to be taking longer. International revenue grew 38% year-over-year to a total 25% of our revenue. A major contributor to our growth is expansion within our existing customer base. Our EMEA region was particularly successful driving high rates of adoption of the Digital Operations Plan this quarter, and we saw predictable user expansion in APJ, with one example being a large enterprise bank growing with page duty for the fourth consecutive quarter. As we continue to move upmarket, we see two strong trends. Firstly, customers are moving toward longer-term contracts. For the ninth consecutive quarter, the positive shift of month-to-month to annual contracts continued. Annual contracts comprised 87% of our revenue versus 85% a year ago and 79% two years ago. Our remaining performance obligations, which grew 52% versus the same period a year ago, reflect momentum in multi-year deals. Secondly, our average revenue per customer has increased for each of the last nine quarters. Our enterprise dollar-based net retention was once again above 125%, with overall dollar-based net retention of 121%. As a reminder, for fiscal year 2022, We expect dollar-based net retention to vary by quarter in the range of 118 to 124%. Trailing 12-months billings of $257 million grew 23% from a year ago. Courtly billings grew at a more modest 11% due to several large early renewals that were executed in Q4, as we mentioned in prepared remarks last quarter. As we previously said, we look at trading 12-months billings to eliminate some of the noise associated with the variable timing of renewals and co-turns. We expect Q2 billings growth to be between 25 and 35% and trading 12 months billings exiting Q2 to be at or above 27%. The number of companies on the platform, both paid and free, grew by close to 30% for the same period a year ago. Although it's in its early stages, our free offering is creating a larger funnel for customer acquisition, and the conversion rates from free to paid are better than we expected. Total paid customer growth increased 7% year-over-year with solid performance in enterprise and mid-market. Customers spending over $100,000 a year and customers spending over $1 million a year grew by 32% and 55% respectively, another proof point of our strength in enterprise and mid-market. Our non-GAAP EPS loss was $0.08 and our non-GAAP operating margin was negative 9%. Ahead of our Q1 guide and ahead of consensus, non-GAAP gross margin remained best in class above 85% for the quarter, consistent with our target range of 84% to 86%. I will now turn to the detailed non-GAAP financial results. For the quarter, our non-GAAP operating expenses were $60 million compared to $47 million a year ago, primarily due to investments in our go-to-market strategy and product development. Research and development expenses were $16 million or 24% of revenue compared to $13 million or 26% of revenue in the same period a year ago. R&D expenses are up 21% as we continue to invest in expanding our platform in the areas of AIOps, automation, customer service, and our integration and workflow ecosystem. We expect to grow our investment in R&D during this year. Sales and marketing expenses were $32 million or 51% of revenue compared to $24 million or 49% of revenue in the prior year, up 33% year-over-year as we invested in go-to-market resources and marketing programs. We expect a noticeable increase in marketing expenses in Q2 of this year as we move our user conference, PagerDuty Summit, which was typically held in Q3, to the end of June. In addition, We launch a brand campaign which will increase above-the-line advertising costs. We expect sales and marketing as a percentage of revenue to be lower in the back half of the year. General and administrative expenses were $12 million for the quarter, or 19% of revenue, compared to $10 million, or 20% of revenue, in the prior year. We anticipate exiting the year with a lower expense-to-revenue ratio for G&A. Our Q1 non-GAAP operating loss was $6 million compared to a loss of $4 million in the same quarter last year. Our operating margin was negative 9% compared to negative 8% in Q1 of 2021. Our Q1 net loss came in at $6 million, a net loss of $0.08 per share, compared to a net loss of $3 million, a net loss of $0.04 per share in the first quarter of last year. Turning to the balance sheet, we ended the quarter with $557 million in cash, cash equivalents and investments, with improvements in both operating and free cash flow. Operating cash flow was $2 million, compared to negative $185,000 in the same quarter a year ago. Free cash flow increased by nearly 90% to negative $350,000 in the first quarter, driven by improvements in working capital and the deferral of investments in new and existing offices. That said, we expect to dip in and out of positive operating cash flow during FY22. In particular for Q2, with the increased spend in sales and marketing referenced earlier, interest payments on our convertible debt, and prior acquisition-related payments, we expect operating and free cash flow to be negative. With increased sales and marketing spend to support the shift in timing for our user conference and brand campaign investments, we expect an increase in our operating loss in Q2, and therefore lower operating margin than Q1. However, we expect our operating margin to improve in the back half of the year, so we exit the year in line with our full-year guidance. Turning now to guidance. For the second quarter fiscal 2022, we expect revenue in the range of $64.5 million to $66.5 million, which at the midpoint represents a 29% year-over-year growth rate. Non-GAAP net loss per share in the range of 15 to 16 cents, with basic shares outstanding of approximately $84 million. This implies a non-GAAP operating loss margin in the range of 18 to 20%. For the full fiscal year 2022, we expect revenue of $267 to $272 million, which at the midpoint represents a 26% year-over-year growth rate. Non-GAAP net loss per share of $0.36 to $0.42 with basic shares outstanding of approximately $84 million. This implies a non-GAAP operating loss margin of 10% to 12%. Before I turn to Q&A, I'd like to remind you of the tailwinds that drive our business. Digital acceleration, cloud migration, and DevOps transformation are imperatives critical to our customers' success. PagerDuty's platform plays a unique role at the center of these shifts, redefining workflow, moving teams from an old way to a new way of doing things. Our platform prevents unnecessary work through multiple levels of automation, creates unequal context across the customer's environments, and orchestrates work with precision. We reduce complexity, improve productivity, and ensure top-line business outcomes. This gives me confidence that the momentum we've seen in the past three quarters is set to continue, and we are well positioned to see sustained, robust growth. As Jen mentioned, we're excited to update you in more detail at our Analyst Day on June 24th, and hope that you'll be able to join us at our Summit Conference earlier that week. With that, I will open up the call for Q&A.