PagerDuty, Inc.

Good afternoon, and thank you for joining us to discuss PagerDuty's first quarter fiscal year 2023 results. 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'll turn the call over to Jennifer.

Thank you, Christine. Our strong FY23 Q1 results extended our momentum from last fiscal year. Revenue grew 34%, an acceleration from Q1 and FY22, and our fourth consecutive quarter of growth over 30%. Our operating leverage is increasing as we scale, with operating margin improving over 600 basis points year on year as we progress towards our goal of profitability for the full year FY24. Our long-term tailwinds, digital acceleration, cloud adoption, and DevOps transformation are top priorities for organizations worldwide. We continue to capture demand from a large TAM as companies strive for efficiency and productivity. As a result, we are raising our full year top and bottom line guidance ranges. I want to thank our teams around the world who remain laser focused on measurable customer success or measurable customer outcomes and continue to execute well. As always, I want to recognize our customers and partners. They place their trust in PagerDuty and our success is driven by their success. Our customers are incredibly loyal. Our gross retention remains above 95%, as it has for over five years. Customer expansion was also strong during the quarter, with dollar-based net retention increasing to 126%, above 120% for the sixth consecutive quarter. The mid-market and enterprise segments continue to drive growth, with customers spending more than $100,000 annually in ARR, up 43% year-over-year. These consistently strong results are driven by a robust demand environment, market-leading multi-product platform innovation, and in-period field execution from our go-to-market teams. Our customers' digital transformation and cloud adoption initiatives are strategic multi-year projects. In order to innovate to deliver superior customer experiences and optimize talent, they require a platform for action that orchestrates and automates their digital operations. PagerDuty is essential infrastructure in their drive towards digital maturity and a strategic partner accelerating long-term digital transformation. Our market conditions remain favorable. Digital infrastructures are increasingly more complex and interdependent, driving demand for our platform throughout our customer base and across our target markets. Digital transformation is often underpinned by distributed architectures, data density, and continuous deployment. resulting in service proliferation outpacing human capacity. Developers, SREs, IT and security teams, and leadership are overwhelmed. Interrupt work, which is unplanned, unstructured, time sensitive, yet often mission critical, has quickly emerged as the standard mode of operations for knowledge workers. Surging incidents, customer expectations, and demand for innovation all compete for developer attention, where manual firefighting is the enemy of innovation. Unmanaged, this interrupt work and its impact on in-house experts can hamper growth and stifle strategic high-value initiatives. Built on the foundation of our digital operations platform, PagerDuty's Operations Cloud enables both orchestration and automation for all types of interrupt work by leveraging our proprietary data set and extending our integration ecosystem. The operations cloud is quickly becoming the standard for modern work. 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. PagerDuty is the most trusted and resilient digital operations platform at scale with nearly 670 integrations serving both traditional DevOps use cases and new ones like robotics and data operations. Our AI-based insights and workflow automation rapidly identify time-sensitive opportunities and incidents while freeing up capacity and improving efficiency. In this tight talent environment, this has become increasingly important. During Q1, a leading online recruiting platform significantly expanded their deployment with us. As typical with our customers, they initially implemented PagerDuty for their site reliability engineering teams in 2014. They upgraded to our digital operations plan this quarter on the back of several user expansions. With the addition of event intelligence, they've already achieved 22% reduction in events. We project an expected ROI of nearly $2 million in the first year. This rapid speed to value is a hallmark of PagerDuty products. In our March product release, we highlighted new process automation solutions now generally available. Process automation on-prem 4.0 enhances security, stability, and usability, while making it simple for our customers to handle incident response and service request use cases across geographically distributed infrastructure, including those who require zero trust communication. We also released PagerDuty Runbook Automation, a new cloud native SaaS offering that provides customers with a fast start to process automation that is both highly secure and available without having to manage automation infrastructure. These releases build on our incident response and AIOps offerings and enable enterprises to accelerate their digital operations from manual and reactive towards proactive and preventative. PagerDuty is the only cloud native digital operations platform to combine automation across observability, engagement and action with the ability to service diverse teams across the enterprise. The integration of automation is an essential step in bringing customers along their digital operations maturity journey. Our process automation customers start by using PagerDuty to capture and automate common repetitive tasks and to diagnose and remediate recurring incidents. For example, automating diagnostics to fix an online shopping cart failure. Quantifiable cost savings and efficiency gains then spur expansion of PagerDuty beyond DevOps, IT, and SRE teams to realize gains in other areas of the business, most commonly security and customer service. SailPoint, an identity security platform, has been a PagerDuty customer for nearly a decade. This quarter, they deployed PagerDuty event intelligence in addition to expanded use of incident response for their customer support teams. This enabled them to consolidate what were 50 individual incidents into a single incident and achieve an 85% reduction in overall incidents while improving their time to acknowledge and resolve them. PagerDuty is helping SailPoint achieve their true service ownership and to communicate to customers more proactively during incidents. Regardless of company size or existing commitments, our customers tend to repeatedly expand our relationship as they move up the digital operations maturity curve. Even our largest customers expand their investment in PagerDuty through new product adoption, user expansion, and new use cases. Every customer presents a new expansion opportunity as digital acceleration initiatives span the entire enterprise. Demonstrating this land and expand motion, a leading financial service institution launched PagerDuty in 2019 with an initial purchase for group delivering applications for high value clients, then expanded rapidly across other teams through several additional purchases to over 1 million in ARR. As it became evident that teams on PagerDuty resolving issues up to 75% faster, they made an additional seven figure investment this quarter. They added thousands of new users, standardizing on pager duty for incident response, and deployed AIOps and automation across multiple teams. Relationships like this drive our high dollar-based net retention rates, a measure of our durable and growing relationships with our customers. PagerDuty's Operations Cloud now offers four land products and multiple cross-sell and up-sell expansion opportunities, while delivering value for customers at all five stages of their digital maturity curve, be it manual, reactive, responsive, proactive, and preventative. This quarter, we bolstered our executive leadership team with two key hires. Catherine Calvert joined PagerDuty as our chief marketing officer, bringing deep experience in brand building and go-to-market execution for award-winning SaaS companies. She owns extending our leadership by developing brand awareness, trust, and demand for PagerDuty's operations cloud in the Suite C suite and with developers across the world's most innovative startups and largest industry leaders. We also appointed Shelly Webb as the company's new Senior Vice President and General Counsel. Shelly fortifies our position around security and privacy. She has deep leadership experience in legal and policy strategy across litigation, contracts, M&A, and compliance, while being highly regarded for driving impactful business results with top customers and strategic partners. In April, Patriotry released our second annual impact report, detailing the company's ongoing commitment to philanthropy, our employee engagement and volunteerism, and our ESG commitments. In 2021, we deployed funding to more than 660 organizations globally, 75% of which were led by women and leaders of color. 92% of Daytonians volunteered time or donated to a cause, resulting in more than 5,000 volunteer hours. We also announced the launch of PagerDuty Impact Labs, a new program that provides funding, product credits, volunteer technical support to time critical health partners with a specific focus on leveraging our product and technical expertise to ensure critical time sensitive care to patients in need. Our social impact work also reminds our teams that success for our customers extends beyond financial returns. PagerDuty customer Cambridge Cognition is a UK-based neuroscience company that quantifies the cognitive health of patients for healthcare organizations. PagerDuty enables them to quickly identify suicide risk factors through patient survey data and engage clinicians if patients need immediate attention while ensuring HIPAA and GDPR compliance. Using PagerDuty, Cambridge Cognition delivers real value and saves lives. Our mission to revolutionize operations and build customer trust by anticipating the unexpected in an unpredictable world has never been more timely or relevant. Given the economic background, companies need to grow profitably by both increasing their velocity and improving their efficiency. We are in the best position at the right time with a proven, resilient, scaled cloud native platform to address the needs of the digital first economy. The current environment calls for heightened financial discipline and we are actively evaluating our expenses to ensure an agile lean cost structure that supports our ongoing investments in innovation and growth. We are committed to delivering both durable top line growth while improving our operating leverage as we scale and to become profitable in Q4 and for the full year in FY24. Our focus will remain on customer success. We exist to empower teams with the time and efficiency to build the future. We anticipate sustained demand for our products and services as our customers seek to efficiently accelerate their digital businesses and more efficiently manage their operations in an evolving macroeconomic climate. Traveling to see our teams and customers has reinforced my confidence in our people, our customers and partners, and our multiple engines for growth. Our vision for an equitable world where we transform critical work so all teams can delight their customers and build trust is realized more each day. We're excited to share more about PagerDuty at our annual summit series beginning on June 7th and encourage our investors to join us virtually. 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 on this afternoon's call. We continued our cadence of strong quarterly execution and delivered rock-solid financial results in the first quarter of fiscal 2023. In an environment of scarce talent and rising costs, the expanding functionality of the PagerDuty Digital Operations Management Platform covering the full cycle of detection to auto-remediation is allowing customers to revolutionize their operations. Overall, the value proposition of our platform in incident response, AI ops, customer service ops, and automation continues to resonate with customers who are intent on driving innovation, efficiency, and productivity. As we expand our platform, we open up new avenues for both land and add-on opportunities, such as with our new process automation releases this past quarter. As I go through our results for the quarter, unless otherwise stated, all references to our expenses and operating results are on a non-GAAP basis and are reconciled to our GAAP results in the earnings release that was posted before the call. Revenue was $85 million in the first quarter, up 34% year over year, an acceleration of more than 600 basis points over Q1 of the prior fiscal year. International revenues remain sequentially unchanged at 24% of total revenues. We delivered dollar-based net retention in Q1 at 126% compared to 121% in the same period one year ago. This marks the sixth consecutive quarter of DBNR above 120%, and we expect to continue to be at or above 120% throughout this fiscal year. Q1 ended with 655 customers with annual recurring revenue, or ARR, over $100,000, up 43% from a year ago. We ended Q1 with 15,040 paid customers, up 8% compared to a year ago, our second quarter of sequential increase. Free and paid companies on our platform grew to over 21,000, an increase of 26% year over year, with free continuing to provide a funnel for future paid growth. Our Q1 gross margin at 84% was once again within our target range of 84 to 86%, and we expect gross margin for Q2 to be at a similar level as Q1. Our operating loss was $2 million or 3% of revenue, an improvement compared to a loss of $6 million or 9% of revenue in the same quarter last year. Compared to our first quarter guidance, operating margin was favorable due to improved sales and marketing efficiency and headcount growth shifting materially to the second quarter. We reiterate our expectations for better than break evening Q4 and non-gap profitability in FY24. One final note on operating margin before moving to cash. The joint venture announced after the close of Q1 to establish PagerDuty Japan with our partner JapanCloud is expected to reduce full fiscal year operating margin by approximately 100 basis points. Now to cash. First quarter cash from operations was negative $3 million and free cash flow was negative $6 million. As a reminder, Q2 is seasonally our highest cash consumption period due to outflows from ESPP, annual vendor renewals, payments on the convertible debt, and summit. Similar to last year, we expect operating cash flow and free cash flow to improve in Q3 and Q4. Turning to the balance sheet, we ended the quarter with $467 million in cash, cash equivalents, and investments. The sequential decrease in this metric is from our acquisition of Catalytic, which closed during Q1. Total deferred revenue ended the quarter at $167 million, up 33% year-over-year. Quarterly calculated billings were $82 million, which was an increase of 38% year-over-year, exceeding the high end of the range we provided during last quarter's call. This included approximately $3 million of benefit from early renewals and revenue from catalytic. We expect Billings growth for Q2 to be in the range of 25% to 30%. On a training 12-month basis, Billings were $344 million, an increase of 34% compared to a year ago and above the estimate previously provided. We expect trading 12-month spillings growth exiting the second quarter to be at or above 30% over last year. Turning now to our guidance. For the second quarter of fiscal 2023, we expect revenue in the range of $87 to $89 million, representing a growth rate of 29% to 32%. Net loss per share in the range of $0.09 to $0.08, with basic shares outstanding of approximately $88 million. This implies an operating margin in the range of negative 9 to negative 8%. For the full fiscal year 2023, we're increasing revenue guidance to $364 to $369 million, representing a growth rate of 29 to 31%. We are improving guidance for net loss per share to 21 to 17 cents with basic shares outstanding of approximately 89 million. This implies an operating margin of negative 5 to negative 3%. We continue to deliver strong revenue growth while actively driving efficiencies across the company. We've improved operating margin year over year and will continue to do so each quarter. Ensuring a lean cost structure so we can continue to fund innovation is a leadership priority. I want to thank our customers for their trust in us and our team for delivering another outstanding quarter of product innovation and go-to-market execution. I remain confident in our business and performance given the current 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.