PagerDuty, Inc.

Good afternoon, and thank you for joining us to discuss PagerDuty's second 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. Statement 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. These forward-looking statements include our growth prospects and future revenue, among others, and represent our management's belief 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 thanks to everyone for joining us today. Q2 was an outstanding quarter for PagerDuty, exceeding guidance and consensus for both top and bottom line results. We continue to benefit from strong demand in enterprise and mid-market, COVID tailwinds, a favorable competitive environment, and a positive response to our product innovation in automation, AIOps, and customer service. I'm so proud of the acceleration we've delivered and especially grateful to our customers, partners, employees for their resilience and loyalty. For the second quarter of fiscal 2022, revenue growth accelerated to 33% year over year to $68 million, with trailing 12 months billings up 30%. Total dollar-based net retention accelerated to 126% and enterprise dollar-based net retention accelerated again to reach 130%. As the world's greatest enterprises transform into digital leaders, PagerDuty has become the operations cloud for the modern enterprise, demonstrating customer loyalty, durable growth, and progress in building leadership share in a growing total addressable market. As our customers leverage PagerDuty across many new use cases, platform usage continues to accelerate with total year-on-year paid user growth up over 50%. Our solid top line beat was driven by accelerating demand for both our new automation offering and our comprehensive digital operations plan, especially in the enterprise and mid-market segments. To date, 15% of our mid-market and enterprise customers have attached digital ops, event intelligence, or automation. Annual recurring revenue for our digital ops plan was up over 100% and now represents more than 20% of our total ARR. Customers spending more than $1 million with PagerDuty are up 63% year over year. The number of customers investing more than $500,000 with PagerDuty is up 34%, and those investing more than $100,000 are up 36%. Nearly 18,000 companies now run on PagerDuty, including over 65% of the Fortune 100 and over 45% of the Fortune 500. Within our largest customers, we still see significant room to grow, both within and beyond engineering and IT. PagerDuty continues to focus on and influence the developer community in both large companies and startups. While many others have and will attempt to enter our market, our competitive differentiation is stronger today than it has ever been, and we continue to innovate and extend our leadership. For over a decade, we've innovated on behalf of developers and their interests while delivering unmatched resilience at scale for large enterprises. Our technology ecosystem, now over 600 integration strong, is supported by recent investments in automation and 12 years of proprietary data driving our machine learning models. These are deep, durable, competitive advantages that have established loyalty with our large and growing customer base. PagerDuty has strengthened its position as the leading choice for the most disruptive founders. Our startup and small business segment performed exceptionally well after being impacted by COVID uncertainty last year. In Q2, SMB annual recurring revenue for both new business and expansion came in well above pre-COVID levels. While the pandemic continues to disrupt organizational plans, adaptability, flexibility, and proactive operations have become core business imperatives. PagerDuty is essential infrastructure for managing increasing complexity in the service of customer experiences. And while nothing is certain, we expect post-pandemic benefits, including the builder economy and headcount growth to continue to fuel our momentum. Across our annual summit and investor day in June, we highlighted PagerDuty's original total addressable market, starting with the $25 billion TAM for on-call automation, incident management, and DevOps. Our entrance into the broader automation market has expanded that TAM to $36 billion. This significant investment in automation capabilities has fueled our growth along with customer service, security operations, and AIOps, and enabled our customers to apply our platform to an even more diverse set of use cases. Q2 provided more evidence that the trends driving PagerDuty success continue to accelerate. Companies are moving to a digital first orientation to match the needs and expectations of their customers. This evolution is a multi-year effort for most large companies, even with the acceleration we saw during the pandemic. We measure this transition for our customers using an operational maturity framework. Simply put, operational maturity determines an organization's readiness and ability to shift from reactive mode to proactive and increasingly predictive operations. Most large organizations start on the far left with central IT app centers standing at the ready to react and to manually manage issues as they arise. The most innovative and operationally mature companies identify patterns through automation, predicting potential issues, and then leveraging teams to prevent these issues from impacting their customers and business. The vast majority of enterprises are very early in this journey, creating a long runway for growth for PagerDuty. Our TAM now includes both upstream and downstream automation within and beyond incident management, allowing for an infinite number of critical work use cases. PagerDuty's automation solution performed exceptionally well this quarter with new, unique customer lands like Citigroup and Specsavers and cross sales into existing PagerDuty customers, FedEx, Discovery, Netflix, Bose, and one of the largest communication companies in the world. We added over 250 net new paying customers to our platform in the quarter. Our free offering has reduced friction for customers in low value segments. And while this has impacted the total paid customer growth rate, it has expanded total companies on our platform by nearly 33% year over year, and also has enabled us to shift our paid customer acquisition focus to much higher value mid-market and enterprise segments. New customers include a Fortune 100 industrials company, Greyhound Bus Lines, and UserTesting, a late stage private consumer insights startup, which was also a win back from a competitor. During the quarter, thousands of our existing clients expanded their business with PagerDuty, including Anheuser-Busch, Carvana, FedEx, MasterCard, TripActions, Snowflake, and a Fortune 200 fast food leader. One of the three largest communications companies in the world has leveraged PagerDuty for IT and engineering, and this quarter added automation to improve customer service for over 200 million visitors to their web app. In the first rollout, PagerDuty automation reduced critical incident response from several hours to under an hour, which is projected to save the company millions in costs and revenue improvement. A Fortune 200 asset manager expanded during Q2 from a traditional incident response use case in engineering to implementation across data operations, site reliability engineering, and their central command center. This customer now leverages PagerDuty to support 55,000 internal investment professionals. Regional expansion remains a terrific growth engine with significant upside for our team. International revenue grew 41% year over year, up from 38% last quarter, and now accounts for about a quarter of our total revenue. Magnitude Software in the Netherlands, New Zealand's KiwiRail are now both part of our customer base. We also added Brazil's largest electronics and furniture retailer. International expansions included a Fortune 100 European-based multinational healthcare innovation company. Bunnings Group, Australia and New Zealand's leading retailer of home improvement and outdoor products, and one of Canada's largest banks, Scotiabank. In August, we appointed Jill Brennan to vice president of PagerDuty's EMEA region. Jill previously led the $3 billion hybrid cloud software group for IBM across 26 countries and was most recently the SVP for EMEA sales at Metadata. Accelerating the journey to operational maturity for our customers is the objective of our four strategic product pillars highlighted at investor day by our chief product officer Sean Scott. Each of these pillars deliver flexibility connect everyone connect everything and automate everything drives our product development. Delivering flexibility means effectively orchestrating critical work in real time with a distributed workforce. The ability to assemble teams across DevOps, IT, SecOps, and customer service is the only way to address critical issues that affect the customer experience. This quarter, one of the world's most well-known fast food companies implemented PagerDuty's digital operations plan to automate drive-through order taking, accelerate revenue, and reduce customer wait times. Modern enterprises demand flexibility and connection. Cloudflare runs one of the world's largest networks to help make the internet faster, safer, and more reliable for millions of businesses. They are a longtime PagerDuty customer with their entire engineering organization on the platform. Cloudflare adopted PagerDuty for customer service along with our Salesforce application, so now customer-facing teams can mobilize in real time. PagerDuty for Customer Service connects service teams, those on the front lines of the customer experience, with engineering teams in order to both address incidents quickly and communicate effectively to customers. This is just one more way PagerDuty supports Cloudflare's mission of helping to build a better internet. During the quarter, we published new capabilities to empower full service ownership. Dynamic Service Graph enables our users to instantly map, visualize, and act on business and technical service dependencies across their entire digital environment. PagerDuty customers with Service Graph gain visibility into the health of their organizations, the ability to assess the impact of an incident, and quickly identify probable causes. We link teams and data streams to derive insights that spur intelligent action. Connecting everything means layering traditional observability and monitoring functions from diverse data sources, prioritizing the real-time actions that matter the most. Our ecosystem of now over 600 active connectors is unmatched, enabling us to act as the central nervous system for our customers while making life easier for developers. The combination of our domain-agnostic approach to AIOps, our technology ecosystem, and up and downstream automation positions us to be the operations cloud for modern enterprises. We continually expand our relationships with leading technology partners like Cisco, who recently featured its partnership with PagerDuty in Times Square. Our event intelligence solution draws connections between the incidents that can interrupt business operations and their likely cause. Here we focus on speeding mean time to resolution, reducing interruptions and delivering return on investments. An IDC study from earlier this year calculated PagerDuty's customers gain an average annual benefit of nearly $3.5 million per organization and almost 800% ROI with a payback period of two months. Our final product pillars automate everything. We're reducing toil and further speeding response times by delivering intelligent automation that frees human experts to spend time innovating instead of responding. This quarter, the autonomous car unit of a Fortune 50 automobile manufacturer deployed PagerDuty Automation. Previously, their small IT ops team supported more than 2,500 employees. The group spent the majority of their time on IT tickets and low value activities. With PagerDuty, they're projecting improved mean time to resolution, additional flexibility to meet global scalability needs, and projecting average return on investment of more than a quarter of a million dollars in year one. We are very proud of our results for Q2, accelerating our growth to 33%, and we remain very confident in our momentum that it will continue as the market meets our leading product vision to be the operations cloud for modern enterprise. We also acknowledge many of the communities we work with still face the devastating impacts of COVID, and more recently, those from fires and weather. In July, PagerDuty deployed $1 million in funding, product credits, and volunteer technical assistance to support organizations working to equitably deliver COVID vaccines and vaccine education in underserved communities. We continue to build on our commitment to inclusion diversity and equity as a business foundation for pager duty last week we appointed our first chief diversity officer to our leadership team roshan kindred. In early October, we will release our second annual ID report a transparent look at our employee composition pay equity and diversity initiatives. In summary, Q2 was an inflection point for PagerDuty, with our acceleration illustrating the durability of our growth, the long-term potential for our platform, and the legacy that we are building. PagerDuty is ushering in a new operating model for the modern enterprise. One focused on predicting and proactively managing issues as they arrive. One that relies on automation versus people to detect and address critical work that drives business outcomes. One that requires a powerful combination of AIOps and automation on a digital operations platform that is easy to use, fast to deploy, delivers payback in weeks, not years, and delivers market-leading return on investment. We've spent over a decade earning the trust of our users and our customers, something we seek to earn every day by ensuring their success. Thank you to our incredibly talented Duttonians who work very hard to make these results look easy. Over to you, Howard.

Thank you, Jane. Our financial results for Q2 demonstrate our success in building the operations cloud for the modern enterprise. Once again, pager duty exceeded the high end of our guidance as top-line growth accelerated. Our reliable execution in the face of a pandemic was bolstered by tailwinds, including cloud adoption, DevOps transformation, and digital acceleration. And this gives us confidence in our plans to become a billion-dollar SaaS company. Revenue of $68 billion grew 33% year-over-year, driven by consistent execution in the enterprise and mid-market segments. New logos and familiar Fortune 500 names added users to the platform, including Abbott Laboratories, S&P Global, and Booking Holdings. We added a six-figure expansion deal with one of the world's largest airline carriers, who are projecting higher developer productivity accelerated migration to the cloud, and a six-month payback with a 449% ROI as a result of using our platform. PagerDuty drives value across all verticals, but we continue to see strength within software and technology, financial services, and retail and wholesale. We also see continued new use case adoption. across different teams, with 12% of our paid customers using us for customer service and 20% using us for security use cases in addition to development or IT. International revenue, one of our four levels of growth, grew 41% year over year. International has grown from 23% of total revenue a year ago to nearly 25% this quarter. As the macro trends of digital transformation, DevOps adoption, and cloud migration accelerate globally, companies in the international markets are using PagerDuty to overhaul legacy and manual processes. Some highlights in the quarter include a new six-figure land in the EMEA region with a large media and broadcast company and a large six-figure multi-year deal in APJ transacted through our partner, AWS, with the Royal Automobile Club of Queensland, a hundred plus year old motoring advocacy group in Australia. As we continue to gain share in enterprise and mid-market, we are seeing three underlying signals of strength. Firstly, durability in our revenues with customers on term arrangements representing 87% of our revenue versus 86% a year ago and 80% two years ago. Second, our remaining performance obligations, which grew 45% versus the same period a year ago, reflect momentum in multi-year deals. Third, we are seeing customers predictably increase their investment in page duty. Customers spending over 100K a year and customers spending over 500K a year grew by 36% and 34% respectively. And our average ARR per customer increased again for the 18th consecutive quarter. Our dollar-based net retention increased to 126%, up 10 percentage points year over year, and 5 percentage points quarter over quarter. And our enterprise dollar-based net retention increased to 130%. For fiscal year 2022, we expect total dollar-based net retention to vary by quarter in the range of 118% to 124%. Trading 12 months' billings of $277 million grew 30% from a year ago and up to 7 percentage points sequentially, making this the highest year-over-year growth since Q1 of FY21. Quarterly billings increased 36% year-over-year. However, as a reminder, we focus on trading 12-months billings to eliminate some of the noise associated with the variable timing of renewals and co-turns. We expect Q3 billings to grow between 25% and 35%, and trading 12-month billings exiting Q3 to be at or above 29%. The number of companies on the platform, both paid and free, grew by close to 33% from the same period a year ago. The conversion rates from free to paid continue to be better than expected, and the offering is creating a funnel for paid customer acquisition. A few recent examples of conversions are the Massachusetts Port Authority and Oz Minerals, who joined our platform through the freemium funnel and have converted to paying customers. I will now turn to the detailed non-GAAP financial results. Our EPS loss was 13 cents and our operating margin was negative 15%, both ahead of our Q2 guide and ahead of consensus. Gross margin remained best in class, above 84% for the quarter, consistent with our target range of 84 to 86%. For the quarter, our operating expenses were $67 million compared to $48 million a year ago, primarily due to investments in sales and marketing and product development. Research and development expenses were $17 million or 25% of revenue compared to $13 million or 26% of revenue in the same period a year ago. We continue to invest in expanding our platform, including the areas of AI ops, automation, customer service, and our integration and workflow ecosystem. Sales and marketing expenses were $36 million or 53% of revenue compared to 25 million or 48% of revenue in the prior year. As we discussed on our last poll, marketing expenses increased in the quarter, primarily due to our annual page duty summit, as well as the launch of our brand campaign. We expect sales and marketing as a percentage of revenue to be lower in the remainder of the fiscal year. General and administrative expenses were $15 million for the quarter or 22% of revenue compared to $10 million or 20% of revenue in the prior year. This increase was a result of a one-time non-recurring strategic consulting fee We anticipate exiting the year with an expense to revenue ratio for G&A in the high teens. Our Q2 operating loss was $10 million compared to a loss of $3 million in the same quarter last year. Our operating margin was negative 15% compared to negative 6% in Q2 fiscal 2021. Q2 net loss came in at $11 million, a net loss of 13 cents per share, compared to a net loss of $3 million and net loss of 4 cents per share in the second quarter of last year. Turning to the balance sheet, we ended the quarter with $547 million in cash, cash equivalents, and investments. Net cash used in operations was $12 million, or negative 17% of revenue, compared to net cash provided by operating activities of $2 million, or 4% of revenue in the same quarter a year ago. Free cash flow was negative $13 million or negative 19% of revenue compared to $1 million or 3% of revenue in the second quarter of fiscal 2021. As a reminder, there were significant movements over Q2 last year, which we previewed. We brought forward our largest pipeline generating event, PagerDuty Summit, from Q3 to Q2, made the semi-annual interest payment on our convertible debt, and were impacted by timing of some payments for standard operational items in Q2. Turning now to our guidance. For the third quarter fiscal 2022, we expect revenue in the range of 69 to $71 million, which at the midpoint represents a 30% year-over-year growth rate. Non-GAAP net loss per share in the range of 9 to 10 cents, with basic shares outstanding of approximately 85 million. This implies a non-GAAP operating margin in the range of negative 9 to negative 11%. For the full fiscal year 2022, we expect revenue of 273 to 276 million, which at the midpoint represents a 29% year-over-year growth rate. Non-GAAP net loss per share of 35 to 39 cents, with basic shares outstanding of approximately 84 million. This implies a non-GAAP operating margin of negative 10 to negative 11%. We look to Q3 and the rest of the year with confidence given our leadership position, the market demand, and the demonstrable value we deliver to our customers, as shown in this quarter's results. With that, I will open up the call for Q&A.