PagerDuty, Inc.

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 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 10K, as well as our subsequent filings made with the SEC. With that, I will turn the call over to Jennifer.

Good afternoon and thank you for joining us on the call today. PagerDuty delivered solid second quarter results, exceeding our top and bottom line guidance with 19% revenue growth and a non-GAAP operating margin of 13%. Year-over-year operating margin expanded by 1,700 basis points due to disciplined execution as we remain committed to durable, profitable growth. Our customers continue to choose the Operations Cloud to protect and grow their digital revenue, reduce operating expenses, and more efficiently ensure customer experiences and trust. While customer spending was still measured, our low cost of ownership, quantifiable high return on investment, and short payback period resonated as Banco Santander, Cisco Systems, Confluent, DocuSign, Grammarly, HubSpot, and Nvidia chose PagerDuty as their real-time operations platform. Our enterprise and mid-market customers, which combined account for more than 80% of our ARR, remained highly engaged throughout the quarter, with nearly 30% expanding their partnership with us. Several customers made six and seven figure investments in the operations cloud, contributing to total ARR growth of 17%, with travel and hospitality, software and technology, and financial services all growing at a faster rate. Despite budgets remaining under pressure, Our enterprise customers demonstrated their clear priority to improve their resilience by utilizing our cloud native platform. The operations cloud's four core solutions, incident response, AI ops, process automation, and customer service ops enable them to meet their cost savings objectives by automating traditionally manual efforts and accelerating digital transformation, leveraging AI. Our enterprise segment has been markedly resilient in terms of logo counts and dollar-based net retention. In Q2, enterprise DVNR and logo growth rates were above the company averages and also performed better on a year-over-year basis. We continue to align our strategy, product development, and go-to-market efforts around capturing enterprise demand to grow profitably. Enterprise customers are increasingly interested in leveraging automation through the operations cloud to improve the productivity and efficiency of their technology ecosystems, their processes, and their people. During the quarter, a global semiconductor supplier and longstanding customer expanded their investment with us to seven figures by incorporating our no-code workflow automation to reduce manual work and human error. eliminating tens of millions of dollars in non-value-added annual costs. PagerDuty's process automation enabled several teams to build and deploy custom automation workflows across multiple data sources within weeks of implementation to both reduce costs and increase productivity. The operations cloud has also become integral to the real-time operations of a global financial institution. After replacing point solutions with PagerDuty earlier this year, the customer, who is among our million-dollar cohort, continued to grow with us. By using incident response, AIOps, and process automation in concert, we are expecting to generate savings over $16 million per year. While many of the macro trends we mentioned last quarter persist, we adapted quickly to these conditions and increased pipeline generation and conversion. In addition, we improved large contract execution and stabilized the number of paid customers. As evidence of the value of the PagerDuty platform, total customers, free and paid, grew by 19% year over year. We continue to expand our competitive advantage through innovation, taking a long-term view on capturing our $38 billion TAM, and our ability to transform our customers' operations is being recognized. Year to date, Gartner hype cycle reports have recognized PagerDuty across nine unique categories, highlighting the breadth of our offerings. We were also named a leader in Forrester's first ever process-centric AIOps wave, making it the third industry AIOps evaluation to put us in the leader category. Achieving FedRAMP in process status was an additional milestone reached during Q2, which will enable US federal government agencies and large commercial customers who require FedRAMP to partner with us and streamline their operations and automate unplanned work. We remain bullish on the opportunities that generative AI brings to our business. Its rapid adoption and incorporation into the tech toolkit creates two tailwinds for us. First, its ease of use and broad applicability lower the barriers to building software. And more software equates to greater complexity for companies already struggling to cross the operations chasm. Second, generative AI makes the benefits of automation very tangible for companies. The time savings and cost efficiencies are immediate and concrete. And in a macro client where CIOs are being asked to do more with less, the early wins they see with generative AI are driving leaders to ask what else across their business can be automated. The three generative AI use cases we shared last quarter offer intuitive examples of the value unlock that comes with AI and automation more broadly. AI-generated status updates and postmortems are now in customer preview. Our AI-generated runbooks offering, which offers natural language prompts combined with automated prompt tuning, is now in early access. All three have been well received by our customers and additional use cases are in development. During its first quarter of availability, our latest version of AIOps exceeded our goals with nearly 100 customers opting into our consumption-based package. While still early, the expanded capabilities, including AI-enabled global event orchestration, now support both the developer community as well as centralized teams in network operations, site reliability engineering, and ITOps. Making the operations cloud the standard for different types of high value critical work across the enterprise is key to us revolutionizing operations. This quarter, we made further progress through the general availability of custom fields and incident workflow templates. With custom fields, we are widening the aperture of use cases for the operations cloud to teams beyond engineering. For example, customer service teams can define an incident type in order to trigger different types of incident workflows. A security team can trigger an incident for a data breach, which will loop in PR and legal. These capabilities mark exciting progress against our long-term vision for pager duties offering across the enterprise and expand the monetization opportunity for our higher value plan. Additionally, the powerful new analytics capabilities we announced today are available to all paying customers. PagerDuty's insight reports provide teams with more granular visibility and control over operational health and maturity, specifically designed with technology executives in mind. These reports provide leaders with real-time critical insights into the state of their operations, including which services are most impacted, achievement against SLAs, and overall team health. Automation is also embedded in how PagerDuty empowers mission-driven teams to build a more equitable world and sustainable future. This quarter, our social impact team leveraged our no-code workflow builder to automate the capture of employee volunteer hours. Our employees remain invested in their communities, posting more than 80% volunteer participation in the quarter. For the second consecutive year, the San Francisco Business Times recognize PagerDuty as one of the top 100 corporate philanthropists in the Bay Area. Additionally, PagerDuty was named 2023 top 50 inspiring workplace in North America and as one of Fortune's best workplaces in the Bay Area and best workplaces for millennials. Moving forward, we intend to maintain the go-to-market and product development rigor that enabled us to deliver non-gap profitable growth during the second quarter. Gartner estimates spending on cloud application and services will exceed $240 billion in 2024, and we believe this indicates a significantly larger opportunity available to us long term. We're successfully undertaking more strategic conversations within enterprises, standardizing the operations cloud go-to-market playbooks, and accelerating awareness through demand gen and partnership events. The structural initiatives implemented throughout the past two years codified a profitable framework for delivering consistent innovation required by businesses to cross the operations chasm. We believe this positions us to monetize the operations cloud and achieve our long-term operating targets. I want to thank our customers for their loyalty and our teams for their focus and enduring commitment to championing our customers. With that, I'll turn the call to Howard and look forward to your questions.

Thank you, Jen, and good day to everyone joining us on this afternoon's call. In Q2, we delivered solid results ahead of both our revenue and non-GAAP operating margin guidance as we continue to adjust to the economic environment. Our enterprise and mid-market customers, where the cost and risk of operational failure is high, continue to choose the Patriot Duty Operations Cloud to mature, modernize, and scale their digital businesses. 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 $108 million in the second quarter, up 19% year over year. The contribution from international was 27% of total revenues, an increase from the 23% seen in Q2 of last year. We delivered 114% dollar-based net retention in Q2 compared to 124% in the same period one year ago. Our DBNR expectation for the second half remains at or above 110%. Customers spending over $100,000 in annual recurring revenue grew to 773, up 12% from a year ago. Total paid customers increased sequentially by 57 to 15,146. In Q2 of the prior year, the count was 15,174. Free and paid customers on our platform grew to over 26,000. an increase of approximately 19% compared to Q2 of last year. Q2 growth margin was 86% at the top end of our target range of 84 to 86%. Operating income improved 1700 basis points to $14 million or 13% of revenue compared to a loss of $3 million or negative 4% of revenue in the same quarter last year. In addition to revenue outperformance, this metric was above our initial expectations due to a few million dollars of non-recurring expenses related to consulting engagements and marketing program spend shifting from Q2 to Q3. In terms of cash flow for the quarter, cash from operations was $11 million, or 10% of revenue, and free cash flow was $9 million, or 8% of revenue. The shift of expenses I just mentioned also led to an improvement to free cash flow. As a result, we now anticipate Q3 to be the low point this year for cash, but remain positive. Turning to the balance sheet, we ended the quarter with $504 million in cash, cash equivalents, and investments. Total deferred revenue ended the quarter at $197 million, up 16% year over year. The seasonality of our renewals, along with our standard co-terming practices, creates fluctuations in our quarterly billing. In quarters where we have a high volume of smaller expansion transactions, while not impacting contractual arrangements, does reduce the predictable nature of billings. This has been evident over the past two quarters, and we expect to see this trend of a high volume of smaller transactions continue. To provide additional transparency during this period, we will be providing more frequent updates on quarter end annual recurring revenue, or ARR. ARR exiting Q2 grew 17% year over year to $431 million. For consistency with prior calls, quarterly calculated billings were $102 million, an increase of 11% year over year, and below the range of 12% to 15% provided during last quarter's call. On a trading 12-month basis, billings were $433 million, an increase of 20% compared to a year ago and in line with our estimates. With respect to Q3, we expect calculated billings growth to be between 8 and 10% and trading 12 months billings growth to be approximately 14%. Turning to our guidance. For the third quarter fiscal 2024, we expect revenue in the range of $106.5 to $108.5 million representing a growth rate of 13 to 15%, and net income per diluted share attributable to PageDuty Inc. in the range of 13 to 14 cents. This implies an operating margin of 8 to 9%. For the full fiscal year 2024, revenue is expected to be in the range of $426 to $430 million, representing a growth rate of 15 to 16%. This compares to the range previously provided of $425 to $430 million. A net income per diluted share attributable to PagerDuty Inc. remains between $0.60 and $0.65. This implies an operating margin of 11% to 12%. We remain focused on the long term, building on the trust our customers place in us, and committed to durable, profitable growth. I would like to recognize our teams across the globe for their dedication to our vision and for providing the continuous innovation required to transform critical work and revolutionize operations. With that, I will open up the call for Q&A.