PagerDuty, Inc.

Good afternoon, and thank you for joining us to discuss PagerDuty's third 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. Before we begin, let me remind everyone that 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. 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, everyone, for joining us today. Q3 was an outstanding quarter for PagerDuty, delivering record revenue of $72 million, growing 33% year over year with continued momentum, especially in enterprise and mid-market. Dollar-based net retention remained above 120% for the fourth consecutive quarter. Our product, sales, and marketing teams delivered an outstanding quarter across the board, and I am especially appreciative to our customers who continue to demonstrate their trust and loyalty in PagerDuty by expanding their relationships with us. During the quarter, we increased our surface area across customers' digital operations and demonstrated the value of PagerDuty as the operations cloud for the modern enterprise. Importantly, we drove strong performance across all product lines, including incident response, AIOps, automation, and saw landmark success with our customer service operations offering. PagerDuty's Digital Operations Cloud empowers enterprises to deliver superior customer experiences by providing intelligent incident response and operational automation that increase uptime, reduce costs, and improves customer satisfaction. As customers expand their use of PagerDuty beyond DevOps, the platform tackles workflows across the enterprise and for multiple personas, technical, executive, back office or front office, wherever critical unstructured work arises. This enables leaders to keep their teams focused on forward-looking innovation that drives end customer trust and ultimately revenue and growth. We innovate successfully across use cases and departments. And as we do that, PagerDuty grows from the foundation of digital infrastructure to enterprise wide operations cloud, a company's primary platform for engagement. Our platform is seamless to deploy and purpose built to manage the increasingly complex environments and time critical challenges underpinning the digital economy. In Q3, we continue to grow both our foundational presence in DevOps and IT and our functional use cases horizontally and vertically up to executive leadership. We successfully executed against the $36 billion total addressable market within our customer base and have created multiple engines for durable growth as well as deepened our competitive moats. Increasingly effective execution of our land and expand motion against strong demand from enterprise and mid-market, as well as a favorable competitive environment, saw third quarter financial results exceed the high end of our guidance ranges and consensus, with revenue for the quarter at a pager duty record $72 million, and our non-GAAP operating margin improving by 400 basis points over last year, also ahead of guidance and consensus. In addition, new customers in the enterprise and mid-market segments grew 13% year-over-year during the quarter, and the number of customers spending more than $100,000 in ARR with pager duty grew 35% year-over-year. With the backdrop of favorable macro conditions, including digital acceleration, the talent shortage requiring increased productivity, increasing cyber threats, and ongoing cloud migration trends, we are confident this momentum will continue and are therefore raising our top and bottom line guidance for the full year. Companies across all industries continue to adopt a digital-first outlook and invest to progress their digital operations, with the software, retail, and financial services verticals driving PagerDuty's growth in Q3. Broad industry traction, almost immediate time to value, clear monetization of new products, and renewal rates above 95% form the foundation of our durable revenue growth as we scale. More than 19,000 free and paid customers, both the largest companies and the most disruptive startups in the world, now run on pager duty. The introduction of our free tier last year removed barriers to entry for startups and small businesses while enabling our go-to-market teams to focus on high-value mid-market and enterprise customers. According to research from our recent survey of global technology industry leaders, 72% indicate they are accelerating digital transformation in their organization. PagerDuty helps customers address the challenges of digital acceleration by operationalizing customer trust. In Q3 alone, two Fortune 200 companies turned to PagerDuty, a consumer financial services company that deployed our platform to drive standardization and a public utility that introduced PagerDuty to leverage automation for a better customer experience. These clients predict ROI between 400 and 650% within three years with payback periods as short as three months. In addition, a multi-billion dollar automotive technology company now relies on PagerDuty to unify its incident management practices. Time to value is a competitive advantage for PagerDuty as the platform can be deployed within minutes due to ease of use and native interoperability with today's complex systems. Through first-class APIs, it connects to services across an enterprise's ecosystem immediately, providing visibility, workflows, insights, and automation that translate to value in days and weeks rather than years. With more than 625 pre-built platform integrations, PagerDuty quickly becomes embedded in and automates our customers' operational systems, workflows, software telemetry, and culture, And no other platform is more reliable, secure, and resilient at scale than PagerDuty. Enterprises trust PagerDuty because we continually demonstrate increasing value and reliability, delivering rapid ROI, and earning the confidence of senior leaders. Developers choose PagerDuty because of our relentless focus on not only their organization's goals, but also the user experience that improves their quality of work and life. Over time, these have proven to be deep, sustainable, competitive modes for us. PagerDuty has powered digital-first businesses for over a decade, freeing teams up to focus on innovating for their customers by accelerating and transforming their digital operations from reactive to proactive and preventative. By applying AI to harness both a deep understanding of human workflows and our rich proprietary data set combined with automation and event intelligence, PagerDuty reduces both the volume of work and the time it takes to complete tasks. This quarter, we saw new customers such as Burberry launch PagerDuty to reduce response times to customer issues and improve the consumer experience. In a digital-first economy, the way we work has changed permanently. Now mission critical work is managed by teams distributed across geographies and time zones, underserved by traditional ticketing workflows. PagerDuty uses machine learning to anticipate the needs of our customers and identifies, escalates, automates, and resolves critical issues for these businesses before customers, employees, or the business's reputation are impacted. This quarter, a Fortune 50 global technology company expanded their relationship with PagerDuty, adopting our customer service operations offering in an effort to continually improve the quality of their customer service and experience. Previously, the customer was unable to manage code red incidents effectively, leading to customer escalations that reached its senior executives. Customer service leadership at the company chose PagerDuty to help them improve service levels for premium customers. Our pace of innovation continues to accelerate with product teams launching new PagerDuty applications for Salesforce Service Cloud and Datadog in the quarter. We kicked off Q4 with our fall product launch, which extends our platform to include intelligent automation, injecting control and logic at the event layer. PagerDuty's new event orchestration differentiates our AIOps offering, reducing manual processes to gain operational efficiencies, while our just launched service standards enables account owners to enforce best practices at scale for all of their managed services. PagerDuty Automation can currently be deployed in a customer's environment, and it's also now available as a cloud service, providing the high availability, security, and scalability our customers expect from us. We now provide the only cloud-native platform that combines real-time incident response with time-critical AIOps insights and automation to help enterprises more quickly realize their digital-first strategies. Typically, our customer cohorts follow an adoption pattern that maps to a digital operations maturity curve. Most organizations start by manually and reactively managing issues as they arise. The most mature companies predict and prevent issues before they even impact customers or the bottom line. Most PagerDuty customers are still early on this curve, providing a long runway for growth within our existing customer base. Our platform accelerates the speed with which enterprises evolve their digital operations. And as customers move up the curve from manual to reactive towards proactive and preventative, both their annual investment with PagerDuty and their ROI expand. As our product expands virtually across use cases, PagerDuty emerges as the operations cloud and a standard platform for engagement across the enterprise. Guidewire, a nearly $10 billion technology platform that serves the property and casualty insurance industry, has been a PagerDuty customer since 2013. In Q3, Guidewire expanded their use of event intelligence and deployed our customer service operations application for Salesforce Service Cloud to support ongoing cloud migration efforts and to streamline operations in order to meet rising customer expectations. Guidewire's customer and cloud operations organization needed a comprehensive and reliable system to manage their increasingly complex digital operations. PagerDuty is their central partner. to detect and resolve issues before their customers experience them. Today, 17 teams at Guidewire, including the senior executive team, use PagerDuty to centralize and integrate all of their monitoring tools, increase cross-team collaboration for time-sensitive incidents, and automate action on mission-critical items. This is a typical customer journey across our installed base. Initial deployments rapidly demonstrate value, leading to expanded PagerDuty use across multiple teams within the organization. Last week, we released PagerDuty's second annual inclusion, diversity and equity report. Our company's commitment to equity remains unwavering as it's foundational to our values, part of our mission and culture and embedded in our business strategy. We are more innovative, higher performing and more successful when we reflect the diverse communities we serve. The report is a transparent account of our progress in building an equitable, diverse and inclusive board, company and culture which we share both to hold ourselves to high standards and to hopefully inspire other companies in their own ID&E journeys. While I'm proud of some of the milestones we have achieved, like gender pay equity and one of the most diverse boards in the industry, we have more work to do and remain committed to leading the industry by example. Finally, PagerDuty is poised for a record revenue result in FY22 with annual growth accelerating, a $36 billion TAM, and a strong demand environment in front of us. We have an incredible team, terrific partners, and customers we admire. While our results speak for themselves, I wanted to reiterate our vision, the mission we are on, and our purpose, which inspire our innovation and our drive to ensure our customer success over the long term. We envision an equitable world where we transform critical work so all teams can delight their customers and build trust. We're on a mission to revolutionize operations and build customer trust by anticipating the unexpected in an unpredictable world. And importantly, our greater purpose is to empower teams with the time and efficiency to build the future. Trust is central in all of this. something we seek to earn every day. And I want to thank our customers, our Newtonians, our partners and shareholders for placing their trust in us. With that, I'll turn the call over to Howard and I look forward to your questions.

Thank you, Jen. And good day to everyone joining us. Our financial results for Q3 demonstrate our continued momentum and success in becoming the operations cloud for the modern enterprise. Consistent execution in the enterprise and mid-market led to another strong quarter with revenue of $72 million, an increase of 33% year over year and above the high end of our guidance range. International revenue grew at 36% and represents 24% of total revenues. Our high dollar-based debt retention rate at 124% is driven by consistent user expansion, plan upgrades, and new product purchases. Our rate of 124% compared to 119% in the third quarter of last year was at the high end of the range that we guided to in our Q2 call. We expect net dollar-based retention to fluctuate from quarter to quarter and are confident we will achieve at or above 120% in Q4. We ended Q3 with 14,486 paid customers, up 6% compared to a year ago. As a result of focused targeting of product innovation and go-to-market efforts, we saw paid enterprise and mid-market customers up 13% year over year. In addition, the number of total companies on the platform exceeded 19,000 at the end of the quarter, up 29% compared to a year ago. You may recall when we introduced our free tier a year ago, our intention was to drive focus on higher value logo acquisition in the enterprise and mid-market and remove barriers for entry in SMB. This is working well as we see good growth in enterprise and mid-market and strong growth in overall companies on the platform with a more efficient land motion for startups and SMBs. General strength and momentum in enterprise and upper mid-market continued in Q2 as 543 customers achieved more than $100,000 of ARR on pager duty, up 35% compared to a year ago. The growth in this cohort represents both new logos and expansions. Our digital operations plan, which bundles both our core and new offerings, including AIOps, but excludes automation, grew 65% year over year, representing approximately 22% of our total ARR, up from 18% a year ago, demonstrating success in upsell and expansion in our customer base, especially in the enterprise and mid-market. For Q3, our non-GAAP gross margin remained best in class as we scale at 85% within our target range of 84 to 86%. And this demonstrates the efficiency of our infrastructure, our differentiated, scalable, resilient architecture and programmatic approach to customer support and success. Non-GAAP operating income improved to a loss of $5 million or 7% of revenue compared to a loss of $5.9 million or 11% of revenue in the same quarter last year. Overall, our non-GAAP net loss per share was $0.07, a penny better than $0.08 in the third quarter of last year. In terms of cash flow for the quarter, cash from operations was $3 million and free cash flow was $2 million. We expect cash from operations and free cash flow to decline sequentially due to Q4 outflows attributed to our employee stock purchase program of $5 million and the semi-annual interest on our convertible debt of $2 million. Free cash flow will also include San Francisco-related leasehold improvement expenditures of approximately $1 million. Turning to the balance sheet, we ended the quarter with $545 million in cash, cash equivalents, and investments. Total deferred revenue ended the quarter at $143 million, up 33% year over year. Quarterly billings were $81 million, which was an increase of 34% year over year at the high end of the range we provided of 25 to 35%. As a reminder, in Q4 of FY21, total deferred revenue included a benefit of approximately $6 million from early renewals. This creates a tough comparison this year, as we anticipate these contracts to renew again in Q4, and we do not foresee any early renewal benefit again this fiscal year. Given this, we expect that quarterly billings growth will be in the range of 20 to 25%. On a training 12 months basis, Billings grew by 31% to $297 million compared to a year ago. We expect training 12 months Billings exiting the fourth quarter to grow at approximately 25% compared to Q4 of the prior fiscal year. Turning now to our guidance. For the fourth quarter fiscal 2022, we expect revenue in the range of $75.5 to $76.5 million, representing a growth rate of 27% to 29%. Non-GAAP net loss per share in the range of $0.05 to $0.06, with basic shares outstanding of approximately $86 million. This implies a non-GAAP operating margin in the range of negative four to negative six. For the full fiscal year 2022, we're increasing revenue guidance for the full year to $278.5 to $279.5 million, representing a growth rate of 30 to 31%. We expect non-GAAP net loss per share of 33 to 34 cents, with basic shares outstanding of approximately 84 million. This implies a non-GAAP operating margin of negative 9%. I want to thank our customers for their trust in us and our team for delivering continued momentum with a strong third quarter financial results, strengthening our position as the operations cloud for the modern enterprise. This underpins our confidence in continuing to deliver durable revenue growth. With that, I will open up the call for Q&A.