PagerDuty, Inc.

Good afternoon, and thank you for joining us to discuss PagerDuty's first quarter fiscal year 2024 results. With me on today's call are Jennifer Tejada, PagerDuty's chairperson and chief executive officer, and Howard Wilson, 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. For further information on these and other factors that would cause the company's financial results to differ materially are included in filings we make with the Securities and Exchange Commission, including our most recently filed Form 10-K, as well as our subsequent filings made with the SEC. With that, I'll turn the call over to Jennifer.

Good afternoon, and thank you for joining us on the call today. PagerDuty delivered solid 21% revenue growth in line with guidance and record non-gap operating margin well ahead of our range at 16%. Year-over-year operating margin expanded by more than 1,800 basis points as we balance growth with profitability in an increasingly challenging macro environment. Enterprise and mid-market customers exhibited resilience, contributing to our stable ARR turn rate of less than 5% and a 17% increase in accounts spending over $100,000 in ARR. Total customer count was up marginally year-over-year as we saw more pronounced headwinds in SMB acquisition and retention. From a pipeline perspective, total ARR and mix from new products improved meaningfully during the quarter, a positive demand signal, especially in a more conservative spending environment. We entered the first quarter with ramped capacity and pipeline value at their highest levels in several quarters. This combination generated strong transaction volume. However, customer spending was more centralized and rigorous, which lengthened sales cycles and put pressure on average deal sized, and conversion rates, especially for in-quarter created and closed business. At a high level, we saw stability in our enterprise and upper mid-market base, but more cost-constrained behavior and reduced budgets for new services while customers progress cloud and IT optimization efforts. S&B, which represents a high percentage of our customer mix, but only 20% of our ARR saw higher than historical churn, with customers primarily moving to homegrown or free solutions. Free accounts on our platform grew by 65% year over year. Platform usage grew in the quarter, demonstrating the essential nature of the operations cloud and criticality of incident response. The competitive environment remains stable as PagerDuty continues to widen the gap through innovation in AIOps and automation. We are adapting to our customers' evolving needs by ensuring full utilization and value realization from current deployments. In terms of demand creation, teams are enabled to cross-sell our newest AIOps solution while continuing to emphasize automation and the operations cloud as a means to achieving more with less. During the quarter, we continue to ship high impact innovation for our operations cloud platform. We released incident workflows for general availability, enabling teams with a no code workflow builder to customize their incident responses and expand the use of automation across departments. We added several new features to our cloud-based process automation SASH solution, which allows teams to leverage runbook automation in zero trust environments, critical given cybersecurity risk for enterprises. Our new AIOps solution includes global event orchestration specifically for IT and central infrastructure teams, complementing our existing developer-centric offering with flexible consumption-based pricing. AIOps is well-suited to address challenges our customers face in a more cost-constrained environment with value realized in days, not months. The solution complements our existing developer-focused offering to address the specific needs of centralized teams in network operations, site reliability engineering, and IT ops, which represent approximately 21 million global professionals. Adjusting to the market and aligning with the value of reducing incident noise, we now offer this SKU on a consumption basis. This pricing model gives customers scalability and flexibility while enabling PagerDuty to capture demand from a greater number of use cases quickly. AI has been a mainstay alongside automation in every part of our platform, and we continue to invest in it. PagerDuty was early in building a foundational data model to support our customers in moving from simply responding faster to issues to proactively preventing them from becoming major business and financial disruptions. This has been achieved by leveraging AI in incident response, AIOps, in process automation, and increasingly in customer service operations. The advent of generative AI represents a tremendous opportunity for PagerDuty and for our customers. The ease and elegance of engaging with generative AI, its fundamental intuitiveness through a natural language interface, creates a step function opportunity to unlock the full potential of the operations cloud. Generative AI brings a consumer-style simplicity to enterprise-grade automation and makes the realization of automation's potential a reality. With generative AI, the pace of software development will only accelerate, and more software means more complexity, which makes DevOps more important than ever. We see a vast number of use cases for generative AI across the operations cloud that will increase efficiency, improve team productivity, and delight users. Today, we announced early access for three use cases, including AI-generated status updates, incident postmortems, and process automation. We recognize from experience one of the challenges for AI in our space is that our customers expect a very high level of signal fidelity, accuracy of work orchestration, and automated actions. Trust is paramount during critical, time-sensitive crisis response, and the narrow margin for error means there is low tolerance for hallucination or false positives. the human in the loop of automated incident response will continue to play a critical expert oversight role. More broadly, the foundational data model that we've developed over a decade positions us well to continue to leverage AI and machine learning across the platform to automate solutions to big challenges where our customers are seeking productivity and efficiency. Ultimately, we see generative AI expanding our TAM because more software is generated faster, increasing the complexity and the volume of the software ecosystem, widening the digital operations chasm, and driving a greater need for PagerDuty's Operations Cloud. Our mission remains unchanged, to revolutionize operations and build customer trust by anticipating the unexpected in an unpredictable world. Protecting digital revenue remains a compelling value proposition for our customers and is increasingly relevant in the digital always-on world where most of our customers rely heavily or almost entirely on e-commerce for customer acquisition and revenue. During the first quarter, we secured a multi-year engagement with a premier online travel and hospitality brand. The multi-million dollar ARR contract includes three operations cloud products, Incident Response, AIOps, and process automation. Our projection of a 400% customer ROI equates to tens of millions of dollars in annual savings. Consistent with the purchasing rigor I mentioned earlier, alignments span multiple teams, ranging from developers to executive leadership. We continue to win in financial services during the quarter where the strength of our integrated operations cloud platform displaced point solutions for an enterprise in the midst of a multi-year cloud transformation. Standardization of pager duty at this customer increased ARR to over a million dollars. Our 700 plus integration ecosystem and several deep integrations were unique differentiator for closing this deal. Among the integrations required were Amazon CloudWatch, Datadog and ServiceNow. The automation of incident escalation across the customer's business has a projected return on investment of over 300% and a short three-month payback period. Championing our customers also means building an equitable company that reflects the global and diverse users, customers and communities we serve. This quarter, we released our FY23 impact report, detailing last year's progress on social impact and ESG. Our carbon footprint now includes a more comprehensive measurement of our value chain emissions in preparation for announcing our science-based climate targets. Our social impact continued in Q1 this year as well. During the quarter, we were recognized for our ongoing support of women at all levels. In Q1, 50-50 women on boards recognized PagerDuty for having a gender balance board, one of only 327 companies in the Russell 3000 to achieve this distinction. Our long-term strategy and value proposition are increasingly relevant as our customers struggle to cross the operations chasm and address technical debt while their customers demand perfection in every digital moment. Even as companies focus on cost containment and efficiency, we see event volume continuing to rise and very high utilization rates across our installed base of over 15,000 paid accounts. We expanded our value proposition during Q1 by delivering three significant product innovations, incident workflows, process automation, and AIOps. For enterprises seeking to optimize their potential through digital innovation, the PagerDuty Operations Cloud is a game-changing essential platform. We continue to execute well, unscaling efficiently, consistently and significantly improving our operating margins. Sustainably improving our cost structure supports our long-term strategy, our investments in innovation, and pipeline generation to drive growth in this environment. The customer stories I referenced earlier are indicative of the opportunities emerging for the operations cloud and underpin my conviction in our ability to deliver against the outlook provided today and in our long-term opportunity as a durable, profitable growth company. I would like to thank our customers for their continued trust and recognize our global teams for their resilience and dedication to our mission. 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. In Q1, we delivered solid revenue growth in line with guidance at 21% and record non-gap operating margin well ahead of our range at 16%. It was a quarter with significant operations cloud product innovation releases each month with general availability of flexible workflows in February, cloud-based process automation in March, and the next version of our AIOps solution in April, which provides complex support for both developers and centralized ITOps teams. Q1 also saw large enterprise customers continuing their operations cloud journey, embracing our more advanced product offerings with large expansion deals. In the quarter, we generated standout sales pipeline with a strong focus on multi-products. And we saw high levels of customer engagement reflected in a high volume of expansion transactions and high usage of our platform. In enterprise and mid-market new customer acquisition remains strong. The enterprise and mid-market segments continue to contribute to more than 80% of our annual recurring revenue. In some respects, Q1 proved to be a challenging quarter where we noted an increased focus by customers in cost containment, either making decisions to defer spend or looking for ways to reduce cost in the near term. Sales cycles continue to lengthen as deals required higher levels of justification and more approvals. This was particularly pronounced in the back half of the quarter where more deals were pushed, deal sizes decreased, and conversion rates came under pressure compared to our historical trends. We have made operational adjustments in response to the changes we're seeing in customer buying behavior, as well as revising some of our estimates for the rest of the year. 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 103 million in the first quarter, up 21% year over year. The contribution from international was 28% of total revenues, an increase from the 24% seen in Q1 of last year. We delivered dollar-based net retention in Q1 of 116% compared to 126% in the same period one year ago. DBNR came in just below the lower end of the full year range of 117 to 120%. Customers spending over $100,000 annual recurring revenue grew to 764, up 17% from a year ago. Total paid customers increased to 15,089 compared to 15,040 in the year-ago period. New customer acquisition for enterprise and mid-market were in line with our expectations, but we believe the macroeconomic climate had an outsized impact on our small business segment where slower acquisition and higher churn was evident. We think the 65% growth in free is indicative of the cost constraint SMB customers are under in particular. Free and paid companies on our platform grew to over 25,000, an increase of approximately 19% compared to Q1 of last year. Q1 gross margin of 87% above our target range of 84 to 86% was driven by infrastructure cost optimization and improved headcount utilization. Operating income improved over 1800 basis points up to $16 million or 16% of revenue compared to a loss of $2 million or negative 3% of revenue in the same quarter last year. The annual improvement was driven by additional efficiency within sales and marketing and scale across G&A. In terms of cash flow for the quarter, cash from operations was $22 million, or 21% of revenue, and free cash flow was $21 million, or 20% of revenue. Q2 is expected to be our lowest free cash flow quarter of the year, potentially negative, given the strong working capital performance in Q1 and the seasonality of our billings. And for the full year, we still expect free cash flow margin to be at least a couple of points better than our operating margin. Turning to the balance sheet, we ended the quarter with $495 million in cash, cash equivalents and investments. Total deferred revenue ended the quarter at $202 million, up 21% year over year. Quarterly calculated billings were $96 million, which was an increase of 16% year over year, below the guidance of approximately 20% provided during last quarter's call. Adjusting for multi-year billings, billings growth would also be approximately 16%. Given quarter to quarter fluctuations in billings, we report billings on a trailing 12 months basis, which were $423 million, an increase of 23% compared to a year ago. On last quarter's call, we provided an expectation of approximately 24%. As a reminder, the comparable period Q1 of FY23 included $3 million of benefit from early renewals and revenue from catalytic. In updating our guidance, we have factored in continued macroeconomic volatility manifested in constrained buying behavior, which leads to longer sales cycles and smaller than historical purchases. For the second quarter fiscal 2024, we expect revenue in the range of $103.5 to $105.5 million, representing a growth rate of 15% to 17%. and net income per diluted share attributable to PageDuty Inc in the range of 10 to 11 cents. This implies an operating margin of 7%. For the full fiscal year 2024, we now expect revenue in the range of 425 to $430 million, representing a growth rate of 15 to 16%. This compares to the range previously provided of 446 to $452 million. and net income per diluted share attributable to PagerDuty Inc. of 60 to 65 cents. This implies an operating margin of 11 to 12%. Our revised bottom line guidance is an improvement compared to prior guidance of 45 to 50 cents and 8 to 9% respectively. In line with this guidance, we're providing the following updates to our estimates. Given our revised expectation for pipeline conversion rates, we now expect DBNR to be at or above 110% for the remainder of this fiscal year. In anticipation of continued pressure on the SMB segment, we're revising our total paid customer growth expectations to low single digit growth by the end of the year. With respect to billings, we expect billings growth for Q2 to be in the range of 12 to 15%, with trading 12 months billings growth exiting the second quarter to be approximately 20%. In what continues to be an uncertain economic environment, I would like to thank our customers for their loyalty and continued partnership. Our expanding operations cloud offerings that help our customers transform critical work, our high retention rates, and demonstrated operational efficiency put us in a strong position for the long term. We are poised to manage ongoing volatility effectively, while also well positioned to respond quickly to any improvements in the macro, and we'll continue to expand our operating margin significantly this year. With that, I will open up the call for Q&A.

Great. Thanks so much, Howard and Jen. And to our panelists, please feel free to raise your hand, analysts, if you want to be cued for questions. We're going first over to Matt Hedberg with RBC.

Oh, hey, great. You guys, can you hear me okay?

Yes. Hi, Matt.

Great. Hey, guys. Thanks for taking my question. So maybe I wanted to start with a macro question, and then I had an AIOps question. But You know, on the macro, you know, relative to the guide 90 days ago, I mean, did things deteriorate as kind of Q1 progressed that caused kind of that lower view for the full year? I just want to maybe better understand that macro element in terms of did things deteriorate further here?

They did. In fact, you know, when we set our guidance at the beginning of the year, we were looking at trends from the back half of last year. And macro trends seem to have stabilized in Q4, but then deteriorated further in Q1. I mentioned that we entered the quarter with very strong pipeline and probably the best level of ramp reps we've seen in several quarters, but the changes in our customer spending patterns really put pressure on the business. And that included them taking longer to get deals done, deal sizes being smaller. And we're now adjusting to a macro where we require higher than historical pipeline coverage. So we are being somewhat conservative in our guidance. This is an outlook that gives us cushion as it contemplates the macro either staying the same or potentially getting worse. but we're also still investing in making sure that we have capacity available, innovation available. Should the macro improve, we can take advantage of that situation.

Got it. Thanks for that, Jen. And then, you know, on the AIOps consumption pricing model, I'm curious, you know, how you think that ultimately impacts the model longer term. To me, it feels like it could be an easier on-ramp for customers taking it. You know, maybe some customers spend more, some less, but just sort of wondering like how you think about it being sort of a potentially accretive to growth a longer term.

I think you really nailed it when you said it's an easier on-ramp. We think it will be a net positive over time because instead of having to license your whole organization for AIOps, you're going to license based on the events you consume or the events you push into the platform, what we call events that are accepted by the platform. And that means small teams that generate high demand on the platform, but also get high value are going to be charged accordingly. The pricing and value will be better aligned than simply you've got to license this number of heads. I think that bodes very well for centralized teams like security teams, network operations, SREs, et cetera. And really, this was driven by feedback that we got from our customers over the course of the last several quarters. The other thing we've done is improved our global event orchestration, which means these centralized teams can manage events across many parts of the business, across the infrastructure at a much higher reliability and scale than a single developer managing their particular service. So there's also pretty significant product enhancement that goes along with this. So something we're really excited about and is competitively differentiated because it leverages our foundational data model.

Thanks a lot, guys.

Next, we're going to hear from Joel Fishbein at Truist. Joel, go ahead.

Hey, good afternoon, and thanks for taking my question. Jennifer, another one for you as well on the AI front. I would love to hear how, you know, you mentioned a little bit on the call, but how generative AI is going to impact the space in general. Obviously, there's a lot of noise, a lot of fundraising going on right now. Just take a step back, a bigger picture, and give us your thoughts on, you know, how generative AI is going to impact the industry and how PagerDuty is positioned to deal with it.

I think it will be transformative for the industry, and I think we're going to see the way people work change dramatically because of the consumability or the intuitiveness of how using a natural language engagement model enables everybody to participate in the benefits of generative AI. And so, for example, I think it's going to increase productivity and the cost efficiency of every worker by enabling them to do more with less, work faster, start things from a reasonable draft as if they had an assistant analyst helping them versus starting from scratch and being able to use their expertise to iterate and build higher quality products and services, whether we're talking about developers or marketers or DevOps engineers or IT operations people. For our space in particular, I think it is an accelerant and I think it will expand PagerDuty's TAM because as you know, many development teams are already leveraging generative AI to build software faster, to develop code more cost efficiently and more quickly. But just like distributed computing, that means we will see more services launched into an ecosystem that will generate more complexity. And it means I think a step changed in difficulty in managing the technology ecosystem, which is already fraught with technology debt today. So we think that is a net tailwind for PagerDuty, that that level of complexity, the expansion of the ecosystem means customers are going to need more automation and more support in identifying issues in automatically diagnosing those issues and auto-remediating those issues. And we've been using AI for quite some time and now generative AI in our platform to help teams do that, but with the expert human in the loop so that you're not reacting, making decisions, actioning, maybe inaccurate information, right? I think you're going to see a lot of, I think, fast iteration using generative AI, and you're going to see a lot of experimentation. And one of the things that's really exciting to me is that our customers are already experimenting with how to use generative AI alongside or in complement to our product. So I think there could be an explosive nature in use cases that comes from development not just be limited to us, but others building on the platform. So that's super exciting to me. But I say all that in, I think, the important context that we also understand how important fidelity, security, scalability, and reliability are to people using our platform. So that's why we're really thoughtful about how and where we apply generative AI into different workflows. But overall, I think it will be incredibly transformative for the industry and a net positive for the company.

Great. Thank you so much.

My pleasure.

Okay, great. Thank you. Next, we will hear from Tim Josipic. I hope I say that right. Tim, go ahead.

That's right. Thank you for taking the question. I was wondering, relative to the outlook you provided in March, your conversion rates have decreased as customers push out spending. Could you speak to what are the potential catalysts for customers to convert over the next couple of quarters versus continue to pause spending and hopefully get more visibility on the maximum environment?

Yes, thanks, Tim, for that question. First of all, I would start with, we already see customers engaging in large strategic investments operations cloud deals, and we talked about two earlier in the prepared remarks, where the actual cost pressure and the margin pressure to do more with less is actually, in some cases, the impetus for a customer to engage with us and expand their deployment from pure incident response to include the benefit of AI in our AIOps product and automation. So that is one area. And we also, as I mentioned, saw an improvement in the mix of new product versus more traditional incident response in both our pipeline and our AIR for the quarter. So that's a green chute that I think is sort of good news. I would also say that we've seen now four quarters of cost containment and trying to tighten budgets and manage headcount across the customer base, frankly, in every segment. And I do think that customers are starting to settle into where their budget may land and eventually may see more certainty around their budgets that enable them to, potentially invest more in future quarters, but that's outside of our control. What's within our control is enabling our sales force to adapt to a new way of buying, a buying that is more centralized, somewhat more rigorous, to anticipate more approvals, and higher level approvals for even smaller purchases. It also enables, it also means that we've had to adapt our marketing to think about our coverage ratios from a pipeline perspective and make sure that we have more coverage than we would have historically needed to get to our targets again in every segment. And I've said this in the past when we saw kind of a change during the first quarter of COVID, that we take the long-term view with our customers. And if it is better for them to move from free to paid in this environment, we're going to support them in that migration because we know they will be back when they do have access to capital to invest. And ensuring that our customers can get benefit from the investments that they've already made from the deployments they've already got. is priority number one for us, making sure that they continue to see that value. And I think that's one of the things that drives the resilience of our mid-market and our enterprise customer base.

Thank you. And then the follow-up, Howard, could you provide a little bit more color on what type of conversion rate your full-year revenue guidance assumes relative to the conversion rate that you see in this quarter?

Yeah, sure, Tim. So in looking at the full year guidance that we gave, we had a look at the most recent conversion rates that we'd seen within Q1. And we did a comparison looking at how things had played out within Q3 and Q4 when we'd seen a level of stabilization. So we have had a look at both how long deals are taking to close. So the the average days to close has lengthened. We've seen the percentage of pipeline that shifts and we've had a look at what the conversion rates look like. And some of these are multiples of what they would have been a year ago. And so we've adjusted accordingly to be able to take that into account. So our expectation is that As we look through the rest of this year, we've built some conservatism into that guide, expecting that things would stay the same or get worse. And that then gives us confidence in the range that we provide of the 425 to 430 for the year.

Thank you.

Next, we'll hear from Chad Bennett with Craig Callum. Chad, please feel free to go ahead.

Great. Thanks for taking my question. So I didn't see in the press release or here on the call. Has have you guys taken any additional cost actions related to obviously a pretty material guide down for the year? And what is your if we're looking at kind of revenue or billings growth? you know, it's went from the low 30s to effectively mid teens in a year. Are you comfortable with the level in sales and marketing spend at that growth rate that you're running at?

Yeah, so thanks, Chad. In terms of, we haven't taken any incremental action apart from the action that we took in January of this year. We've been running a structured program over the last two years to be able to get to an efficient cost structure, and we're continuing to execute on that plan. We still retain a focus of being able to maintain our R&D spend in the 20s and you'll see that that's tracking around the 22 23 percent mark we're looking for continued scale in gna and those programs are working well and we think they will deliver more in this year hence the improvement in our operating margin guide for this year and from a sales and marketing perspective we have a plan that sees us improving our model whilst being able to still prioritize quota carrying reps so that as the macro improves, we're in a position to be able to take advantage of that. So we're balancing both the growth with the profitability and hence the improvement that we are guiding to in terms of operating margin is because we've seen a way to make sure that we can offset some of that top line movement with an improvement in terms of how we manage expects.

Okay. Then maybe one follow-up on generative AI and the impact. I saw the use cases you put out on your blog earlier today that were very interesting. But just kind of the broader picture of generative AI being a pretty significant tailwind to developer productivity in general and the whole thought of... you can do more with less, which I think you said, and that means maybe developer growth or seed growth moderates as generative AI is adopted. How do you balance that with kind of the automation AI ops aspect of You know, less seats, but maybe bigger deal sizes, more automation deals and so forth. Is it net net a tailwind or a positive? I understand the more software out there, more complexity and so forth. But I'm just wondering if net net it's it's it's a tailwind.

I think it's a more is more sort of a tale. It is definitely a tailwind because I think my experience with developers and I've spent a lot of time with developers is if you make them more efficient, they just build more interesting, more stuff, right? So I think both the quantity and the quality of the creativity on the part of the developer is, is gonna increase, right? And we know from the transition to continuous deployment that when you make developers more efficient, whether that's through the way the developer value chain works or how distributed compute and the democratization of compute freed up, capacity for developers or now generative AI, they just build more and they ship more and more amazing things. And if you sense a sort of excitement in my voice, that's because I really do think that this is going to be transformative, not just for the tech industry, but for every enterprise. that relies on technology to change the way they engage with their customers, to change their products and services. I mean, the amazing things that can be done in an IoT environment for a manufacturer now, in healthcare, in automotive. So I think we're going to see real breakthroughs in all industries, not technology. And all of those industries are going to leverage the breadth and capability and genius of developers to really advance their own business models and their own innovation. And remember that a lot of the work that a developer is responsible for is not creative work. It's maintenance engineering, it's testing, it's security management, right? It's operations in some case. So the more you can make that work efficient and free up time for them to ideate, to stay in flow, to build interesting and amazing things, to become phenomenal prompt engineers working in partnership with generative AI, the more benefit you're going to get as a business. So I really do think it's a net, net tailwind. And I'd also say, it's one of the many reasons why I'm confident about the long-term in our business. And I've been here a long time, seven years, and we do talk to you all every quarter, but I think about what is the value I'm driving for my customers over the long haul? We are still incredibly essential for our customers, an essential infrastructure. And we see that in the increase in utilization on the platform, in the increase in event traffic, which is one of the things that led us to start testing consumption-based pricing. Our tech lead has continued to grow. We continue to speed the innovation, and we've frankly never been in a better competitive position. With strong operating margins and the consistent expansion that you've seen in operating margins, that puts our cost base in a sustainable position that we can continue to invest. And should the macro improve, we will be in a good position with ramped capacity and marketing capability to really go and and prosecute those opportunities. And then, like I said, I think not only does generative AI expand our TAM overall, because more software, more complexity, more need for DevOps, more need for automation, it's really exciting what we're going to be able to do inside our own platform with generative AI and even what each of us as individuals can do by learning and experimenting. One of our executive assistants posted a note in LinkedIn today about how she's using generative AI to become more efficient. Like I sort of love that because it really is about harnessing the unique talent of your people and getting the machines to do the work that machines can do more effectively and more efficiently. And that's what's so interesting about the time that we're in. There's a lot to figure out in terms of safety, security, fidelity, reliability. And we have teams that are focused on that. And we take that very seriously. So I don't think we can run at this with reckless abandon, but it is very exciting. And I do think it's really positive for all of our customers and for PagerDuty.

Got it. Appreciate your thoughts. Thank you.

My pleasure. Thank you.

I'd like to hear next from Rob Oliver with Baird. Rob, go ahead when you're ready.

Great. Hey, guys. Thank you. Can you hear me okay?

Hi, Rob.

Okay, great. Hey, Jen. Hey, Howard. I had one for each of you, Jen. I'll start with you. I think, you know, part of the surprise here on the guidance, I think, for the full year, you guys had that kind of extra month being an off-quarter and sort of like an extra look. So I kind of want to dive a little bit deeper into what happened here and what transpired throughout the quarter. Certainly macro, which I think we all get, but there were some other things you guys had that I wanted to touch on and just see to the extent that they had impacted things. You did have a change in chief revenue officer, and I know David left in February. So I'd like to get your sense on how that transition to Jeremy is going to the extent in which that created potentially any disruption at enterprise, which of course is always a fear when you have this. And then secondly, I know you guys had raised some prices that were anniversary in those price increases and just wanted to get a sense for whether price, you know, is an issue or became an issue in any of your negotiations. And then Howard, I had a follow up for you.

OK, that was a lot of questions. I'm going to see if I can get to them all here. So we did have a look at May and May was largely similar to April. Right. And I think that that was important in helping us think about our guide and trying to be somewhat conservative in terms of looking at where the macro could go. We don't have a crystal ball, but we did see the macro deteriorate in Q1 compared to the data that we were looking at in Q3. And that is really, data is really what drives our guidance. In terms of the revenue leadership transition, that transition has gone exceptionally well. And it would be an easy scapegoat to say, oh, well, it's the transition and that was the challenge. But We really have an experienced veteran in Jeremy, and he's led the largest parts of our business over the course of the last several years. And management in mid-market and enterprise has not meaningfully changed. So we continue to, I think, go from strength to strength there. As I mentioned, entering the quarter with more ramp reps than in the past, with stronger pipeline than we have in the past. But when you see those conversion rates come down because it's taking longer to convert pipe because customers are taking longer to make decisions, to secure budgets, to make determinations around growth. That has been the bigger issue is the buying behavior.

Yeah, and I can maybe just jump out on the pricing side of things, Rob. So you're right, we did anniversary in March, some of the price increases that we introduced about a year ago. We haven't seen pricing play an outsized role in terms of of the decision-making. Obviously in this environment, people are looking at price carefully, but I would say that the value that we deliver, particularly in the enterprise where there's very strong ROI, still creates the compelling reason for customers when they're ready to act in this current environment. So we're positioning that value, but customers still have that constraint in terms of when they're ready to spend. But certainly the value that we deliver is clearly evident.

Great. OK, that's very helpful. Thanks, guys. And then, Howard, just a quick follow for you. I know you were clear and most of the cost actions that you guys had done were done back in January. I thought you had said in your prepared remarks that you did make some operational adjustments as a result of the new lowered outlook. And I think Chad may have asked about that. I apologize if I missed it, but just clarify what those were.

Yeah, so the operational adjustments really were not associated with any changes from a headcount perspective. So there hasn't been any incremental change in terms of a reduction in force. So we did one back in January, which we discussed on our prior poll. The operational adjustments that I was referring to were more around us having a look at the new data because we made decisions around our guidance for this full year based on the data we had from Q3 and Q4. We saw a change, a noticeable change in the data in Q1, particularly the back half of Q1, and that led to us making some decisions around how do we think about the pipeline that's required? How do we want to direct investment or capital into additional pipeline generation? What are the things that we can do to improve conversion rates, even in the current environment? So those were mainly adjustments that we're making from a go-to-market perspective in recognition of conditions essentially being worse for us in Q1 than they were in Q4.

Got it. Okay. Hopeful color. Thank you, guys.

Thanks, Rob. Thanks. Next, we have Matt Stotler with William Blair.

Hey guys, this is Alex on for Matt. Appreciate you taking our questions. So just one on the macro. Could you maybe just qualify the change in trends a bit more? Was it more of a few big deals falling out of the pipeline or was it just more due to a broader slowdown? Thanks.

Yeah, I can.

Oh, do you want to go, Jen?

No, you go ahead.

Yeah. This was, and thanks for the question. In terms of the change that we'd seen, these were generalized from a customer buying behavior pattern in terms of we noticed across segments, across verticals and across geographies that customer buying behavior became more constrained. And that was reflected again across those segments, doing smaller deals, taking longer for deals to close. And in some cases, deals being deferred or being pushed out. So it was not specifically related to only a specific segment.

Got it. Thanks for that. And then just switching gears a little bit. Regarding your pipeline for other new use cases such as SecOps, customer support, marketing, IoT, etc. What do you view as the most compelling with the most immediate market opportunity?

That's like asking me who my favorite child is. I mean, I would tell you, Gabriel, that I think the two biggest opportunities in front of us right now are AIOps and automation because they're the most intuitive, right? And because we're seeing an increased appetite for automation across the platform, but every single one of our products like customer service ops automates the engagement between customer service teams and the developer and tech community and so that they can collaborate more effectively in an automated way when there is an incident, for instance. So it's kind of hard to say, but I am very excited about AIOps. I think it will take time for the market to understand that product and see the opportunity. Long-term, I think that is a big opportunity for us. Automation continues to, I think, surprise us in terms of just the breadth of use cases that people are applying process automation to and the different types of customers. You don't have to be a big enterprise to leverage process automation. And now that we have parity in terms of the feature set in our cloud-based or SaaS version of process automation, it can be used in zero trust environments. And I think that is a great step forward. And the funny thing is when we look across all of our customers, whether they're enterprise, mid-market or SMB, they're at widely varying points in the operational maturity curve. Some of them are like literally just getting engineers on call. And some of them, like the online travel company we spoke about earlier, is really looking at how do they automate their entire digital operations environment from detection of an event all the way through to auto remediation. And ours is the only platform that you can do all of that on in a safe and scalable and secure way. And so... So not really a direct answer because I think there's opportunity in all of those products. But maybe one way to address your question is when you bring it all together and you leverage the power of the entire platform, you start to see very high ROI, tens of millions of dollars of ROI. And that's what we're starting to see in some of these bigger multi-year deals that we're doing.

Got it. Thanks. Appreciate it.

Thank you, Alex. And we're going next to Gabrielle Road Gomez.

Hi guys, how's it going? Thank you for coming in. So congrats on the quarter. So I have some, just two quick questions about the guidance or how do you guys expect costs to trend as the quarters progress towards the end of the year? So in the case of gross margins for efficiency, are you guys working on any initiatives there to drive the gross, to widen the gross margin or how should we expect that to trend as the quarters progress?

Yes, so Gabriel, we still would be thinking about gross margin being in our target range, which is 84% to 86%. All right.

And thank you very much. And then in the operating expenses, in terms of how, because you're guiding for 11% operating margin, you just deliver around 15%, 16%. So I was wondering how will the increasing capital expenditures or those expenses, how would they be distributed between sales and marketing research and G&A?

Sure. So the way that we think about this is we anchor around R&D and trying to keep R&D expense around the 22, 23% range. And then we're looking to drive for the full year continued improvements around G&A and sales and marketing. So if you look at where we ended for the full year last year, those are the two lines that you'd expect to see the most improvement while we try and keep the R&D line at the same level.

Awesome. Think of a clarifying there.

Folks, it looks like we've made it through all the questions. Jen, we'll turn to you for a final comment, please.

You might be on mute, Jen.

I'm just talking to myself. Thank you, Josh, and thank you all for your interest and attendance today. As I mentioned earlier, our mission to revolutionize operations is unchanged. We are focused on the long-term, building a durable growth company, and confident in our ability to execute. PagerDuty remains essential to our customers. Our tech lead continues to grow. Our strong operating margins lend themselves to sustainable investment in profitable and durable growth. And we're excited about the potential TAM expansion and possibilities that generative AI presents. Thank you and have a great evening.