PagerDuty, Inc.

Good afternoon, and thank you for joining us to discuss PagerDuty's fourth quarter and fiscal full year 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 based on the environment as we currently see it. 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. 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 will turn the call over to Jennifer.

Thank you, Tony, and thank you to everyone for joining us today. Before I speak to our results, I want to acknowledge that our thoughts and support are with the people of Ukraine and those impacted by the ongoing conflict there. In a challenging macro environment, we continued to deliver consistent growth and strong results across the board, closing a terrific Q4 on a tough comp and a fantastic full year result that exceeded our top and bottom line guidance. We entered the new fiscal year with great momentum. Strong demand for our digital operations platform persists, driven by long-term tailwinds, cloud adoption, DevOps transformation, digital acceleration, and the increasing appetite for automation in light of rising costs and a tight talent market. PagerDuty's Q4 results continue a trend of consistently strong company performance over the last several quarters, with the hallmarks of growth acceleration and improved operating leverage. Q4 revenue grew 32% year-over-year to $79 million, our third consecutive quarter of growth above 30%. FY22 total revenue was $281 million, also growing 32%, compared to 28% growth in the prior year. For the fifth consecutive quarter, we achieved dollar-based net retention above 120%. Our accomplishments this quarter and throughout FY22 are a testament to our leadership and to our teams anticipating the needs of our customers. PagerDuty's digital operations platform is central to our customers' growth strategies, helping them advance their digital maturity. We are efficiently capturing demand through product innovation as well as a sustained focus and execution of our customer-facing teams whose daily efforts drive loyalty and expansion within our customer base. Exceptional results in Q4 were driven by an increase throughout the year in multi-product adoption, incident response user expansion, and customer loyalty with gross retention rates consistently above 95%. In short, we are building momentum in our business by closing larger and more comprehensive deals. More than half of our annual recurring revenue now comes from customers utilizing two or more PagerDuty products. Both event intelligence and automation are each growing at 70% or more year over year. As PagerDuty customers realize rapid time to value, they expand their use of our platform across the enterprise, beyond their DevOps teams, and they upgrade to advanced functionality like AIOps and automation that deliver compounding return on investment. Through consistent product innovation and go-to-market execution, we've built a foundation for durable, efficient growth. Average ARR per customer increased during each quarter of FY22 and exited the fourth quarter above $20,000. Customers spending more than $100,000 annually with PagerDuty grew 39% year-over-year, and those spending more than $1 million grew by 65%. The continued shift towards digital first across industries creates more opportunity for increased penetration within all of our customer verticals. As businesses navigate a hybrid work environment, our customers prioritize investment to better manage mission-critical work. This work is urgent, unstructured, and underserved by current IT service management or traditional automation solutions. Other platforms rely on humans to detect or identify issues and fail to account for the complex dependencies in modern digital infrastructure. Modern work is no longer ticket-based. It's driven by events and incidents. PagerDuty is purpose-built to efficiently facilitate and automate the type of work that's essential to modern business success, who needs to perform it, and how it will be managed. We're investing in more flexible workflow automation that serves new use cases and augments our current offerings for dev and IT teams. With our acquisition of Catalytic, we complement our leadership in DevOps workflow automation with a no-code offering that brings the same value to teams in business functions like sales, marketing, and finance. We're thrilled to welcome Sean, Ravi, and the entire Catalytic team to PagerDuty. An IDC survey released at the end of 2021 reinforces the need for this approach. More than half of all developers surveyed reported their organizations have more than 100 services in production at any given time. Service proliferation is rapidly outpacing the capacity of technical workers as talent becomes more expensive and difficult to acquire and hard to retain. These trends underscore the need for machine learning and automation that offer productivity, efficiency and innovation. Our focused innovation has cemented PagerDuty as the market standard for both DevOps automation and digital operations. We've expanded our reach to customer service operations, IT, and more broadly, process automation. Increasingly, our customers deploy two or more PagerDuty products, relying on our platform to mature their digital operations. PagerDuty's combination of incident response, AIOps, customer service ops and automation provides the time and efficiency for our users to prioritize both innovation and availability. In a world of unstructured data from a wide range of sources, we now enable more than 650 integrations, converting data to high fidelity, actionable signals, orchestrating and automating time sensitive work across the business. In Q4, we ship general availability for both event orchestration and round-robin scheduling. Event orchestration intelligently suppresses noise so teams can focus on the most critical signals and enables automated incident diagnoses and remediation. This lowers the cost of the response and the risk of the incident itself. Round-robin scheduling allows centralized and decentralized teams to implement flexible automated on-call responsibilities. We believe no other platform is more flexible and resilient at scale than PagerDuty or provides quicker time to value with compounding return on investment over time. We deployed new capabilities throughout the fiscal year, extending our incident response, AIOps, and process automation solutions, which are now leveraged by teams in DevOps, ITOps, security operations, and business operations. Our fourth paid offering, customer service operations, continues to gain market traction with several high-value deals closed in the second half of FY22. This further diversifies our product revenue by addressing a substantial market opportunity with customer support teams. The integration of Catalytic into our platform accelerates our product roadmap and opens new addressable opportunities within our customer base. As our platform serves more needs across enterprises, we expect multi-product adoption to continue its upward trajectory in FY23. With customer ops and flexible no-code workflows, non-technical employees, citizen developers, and leaders across the entire business can leverage PagerDuty to anticipate and manage their most critical work. This will enable more accessible, agile, and scalable workflows to operations outside of DevOps IT and security. We increasingly see this with our customers. In Q4, we significantly expanded our work with a cloud-native digital marketplace customer operating in more than 460 cities across Asia with ambitions to enter additional markets in the coming years. The organization has been a PagerDuty customer since 2014, and including its activity in the last quarter has expanded its business with us more than 70 times, purchasing additional licenses, upgrading to digital operations, and more recently, adding our enterprise automation product. They currently utilize over 800 integrations between PagerDuty and other services within the company's ecosystem. As a result, the company has realized an annual benefit of $3.4 million with PagerDuty. Looking forward to FY23, we're focused on advancing our mission to revolutionize operations and build customer trust by anticipating the unexpected in an unpredictable world. Time has never been more fleeting or valuable, and talent comes at an increasingly high price. It's more important than ever for customers to identify mission-critical, time-sensitive opportunities and manage the complex data and systems that underpin their products and end customer experiences. The Operations Cloud is built on the foundation of PagerDuty's digital operations platform, extended by our integration ecosystem, leveraging our proprietary dataset, and enabling both orchestration and automation. We believe the Operations Cloud will rapidly become the standard for modern enterprises. It's cloud native, designed to simplify the complex, built for distributed organizations, easy to deploy, and trusted by developers and technical leaders behind your favorite brands. We continue to scale efficiently and improve our operating leverage and expect to be non-GAAP profitable for the full year FY24. We expect to realize this goal through continued investment in product-led growth, our land and expand flywheel, and activating new routes to market. PagerDuty remains the only cloud native platform that combines real-time incident response with time-critical AIOps insights and automation to help teams across leading enterprises revolutionize their operations. Our exceptional results and momentum over the last several quarters demonstrate durable multi-engine growth. Our vision for an equitable world guides our strategy, our investments, and our focus on our customers and our users. We will continue to develop our inclusive culture and to lead with our values, delivering great products for our users and high performance for our stakeholders, while working to improve the communities around us through our social impact programs. In FY22, 92% of Daytonians volunteered their time or made charitable contributions, including to several causes matched by the company. Through PagerDuty.org, we acquired new nonprofit customers focused on disaster response, addressing homelessness, and child literacy. I encourage you to learn more about our efforts in our upcoming annual impact report. This week also recognizes Equal Pay Day in the United States. I'm incredibly proud of our commitment to and our success in achieving pay equity within one penny between male and female employees and within two pennies across race and ethnicity and hope others will follow our lead. We enter FY23 with incredible momentum, a testament to not only our leadership team, but to the incredible work of Daytonians around the globe. Throughout FY22, our teams ran together to innovate relentlessly in service of our customers, demonstrating the value of new products as they gained traction in the market and built the foundation for further growth. I deeply appreciate the leaders who bet on us, our more than 1 million users, and our customer champions. In an unpredictable and fast-changing environment, they place their trust in PagerDuty to drive their digital transformation and maintain the integrity of their operations. Given long-term tailwinds and consistently strong execution, I am very confident in our ability to continue growing efficiently and sustainably as the operations cloud becomes the standard for modern enterprises. With that, I'll turn to Howard, and I look forward to your questions.

Thank you, Jen, and good day to everyone joining us on this afternoon's call. We're proud of our outstanding fourth quarter and full fiscal year results. The growth demonstrates our success in growing our mid-market and enterprise segments, expanding number of use cases for the PagerDuty platform, and traction for our new products, including event intelligence, automation, and customer service operations. Revenue was $79 million for the fourth quarter, up 32% year over year, an acceleration of 300 basis points over Q4 of fiscal year 2021. International revenue grew at 32% and represents 24% of total revenues. Our dollar-based net retention rate in Q4 was 124%, compared to 121% in the same period one year ago. We have delivered DBNR above 120% for five consecutive quarters and expect to be at or above 120% over the next year. We continue to gain momentum in mid-market and enterprise through ongoing strong innovation and go-to-market execution. Q4 ended with 594 customers with ARR over $100,000, up 39% from a year ago. Additionally, our customers with ARR over a million dollars increased to 43, up 65% compared to Q4 of last year. This is the number we provide on an annual basis. We ended Q4 with 14,865 paid customers, up 7% compared to a year ago. This is a moderate acceleration sequentially, and it is worth noting that Q4 anniversary is the introduction of our free tier, which was first offered late in Q3 of FY21. Free and paid companies on our platform grew to over 20,000, an increase of 27% year over year, with free continuing to provide a funnel for future paid growth. Our highest tier plan digital operations increased to 23% of our total ARR, up from 21% a year ago, This metric is the conservative proxy for platform adoption, but it does not entirely capture customers using more than one paid product. Our professional and business plans can be augmented with event intelligence and process automation and customer service are available on a standalone basis. To that end, and to provide some additional insight, approximately 51% of our ARR comes from customers using two or more paid products. This is up from 47% in FY21 and from 32% in FY20. We will update this metric on an annual basis. Our Q4 non-GAAP gross margin was 84% and within our target range. This percentage is down marginally on a sequential basis due to a slight uptick in hosting and messaging fees during the quarter. Non-GAAP operating loss improved to $2 million or 3% of revenue compared to a loss of $5 million or 8% of revenue in the same quarter last year. Primarily, the result of sustainable sales and marketing efficiency gains and economies of scale across GNA. In terms of cash flow for the quarter, cash from operations was $1 million, and free cash flow was negative $1 million. Now for the full fiscal year. Revenue was $281 million, up 32% year over year, as we accelerated growth from 28% last year. Non-GAAP gross margin was 85%, down approximately 200 basis points from 87%. Non-GAAP operating loss was $23 million or 8% of revenue compared to a loss of 18 million or 8% of revenue a year ago. This year includes approximately $4 million of expenses related to a limited return to office and increasing travel compared to the prior year, which was the first year of the pandemic. Operating cash flow was negative $6 million compared to $10 million a year ago. Free cash flow was negative $30 million compared to positive $5 million in fiscal 2021. And headcount increased to 950, up 21% year over year. Turning to the balance sheet, we ended the quarter with $543 million in cash, cash equivalents and investments. Total deferred revenue ended the quarter at $170 million, up 31% year over year. Quarterly billings were $106 million, which was an increase of 30% year over year, exceeding the high end of the range we provided during last quarter's call. This included approximately $2 million of early renewals. We expect billings growth for Q1 to be in the range of 25% to 30%. On a trading 12 months basis, billings were $322 million, an increase of 28% compared to a year ago and above the top of the range provided during our last call. As a reminder, the comfortable period Q4 of FY21 included a one-time benefit of approximately $6 million from early renewals. We expect trading 12 months billings growth exiting the first quarter to be at or above 30% over last year. Before moving on to guidance, I would like to introduce the second annual metric, annual recurring revenue, or ARR. Given the increasing scale of pager duty and inherent fluctuation in quarterly billings, we wanted to provide additional color on the fiscal year. We exited Q4 with $326 million in annual recurring revenue, which was an increase of 32% year over year. Turning now to our guidance, which includes top and bottom line considerations for the acquisition of Cadillac, which closed on March the 8th, as well as our expectations for increases to certain line items that were suppressed during the past year owing to the pandemic. For the first quarter fiscal 2023, we expect revenue in the range of $81.5 to $83.5 million, representing a growth rate of 28% to 31%. non-GAAP net loss per share in the range of $0.09 to $0.08, with basic shares outstanding of approximately $87 million. This implies a non-GAAP operating margin in the range of negative eight to negative seven. For the full fiscal year 2023, we're initiating revenue guidance for the full year of $360 to $366 million, representing a growth rate of 28 to 30%. We expect non-GAAP net loss per share of 23 to 17 cents, with basic shares outstanding of approximately 88 million. This implies a non-GAAP operating margin of negative 6 to negative 4%. Before moving to Q&A, I would like to provide some details to assist with modeling FY23. Non-GAAP operating margin is expected to turn positive in the fourth quarter as merit increases, payroll taxes, summit, our annual user event, our first half occurrences. To put a finer point on the trend, we expect each quarter of FY23 to be an improvement of the corresponding FY22 quarter. We expect cash from operations and free cash flow to follow a pattern similar to last year, with Q2 being the low and Q4 the high. Seasonal factors influencing cash during the first half are bonus payouts in Q1, interest payments on convertible debt, annual merit increases, and ESPP. And we expect non-GAAP gross margin to be in our target range between 84% and 86%. I want to thank our customers for their trust in us and our team for delivering an outstanding fiscal year of product innovation and four quarters of terrific go-to-market execution. Our innovation investments are designed to actualize our vision to transform critical work and revolutionize operations as the operations cloud for the modern enterprise, while continuing to scale toward non-gap profitability. I continue to remain confident in our business and performance, given the market demand, the acceleration of our product innovation, strong tailwinds, and our consistent execution. With that, I will open up the call for Q&A.