PagerDuty, Inc.

Good afternoon, and thank you for joining us to discuss PagerDuty's fourth quarter and full fiscal year 2024 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, future revenue, operating margins, net income, cash balance, and total addressable market, 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 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 other subsequent filings made with the SEC. With that, I will turn the call over to Jennifer.

Thank you, Tony. Good afternoon, and thank you for joining us today. PagerDuty delivered a solid fourth quarter to cap off another year of growth and substantial operating margin expansion. We demonstrated operating efficiency throughout the year and completed our second consecutive year of non-GAAP profitability. On a full year basis, revenue grew 16% year over year, and non-GAAP operating margin expanded by over 1,200 basis points to 13%. In the fourth quarter, revenue grew 10% to $111 million at the top end of our guidance range. Non-GAAP operating margin of 10% exceeded the high end of guidance with a year-over-year expansion of nearly 400 basis points. Our steady progression at market underpinned our solid results. Expansion ARR, $100,000 transaction volume, and average deal size each improved sequentially, and with a higher mix of ARR coming from our enterprise segment, the visibility and predictability of our business also continues to improve. We achieved dollar-based net retention one point above our expectation, and we see it improving in FY25, along with total ARR growth. We added $13 million of net new ARR in Q4 and grew total ending ARR 10% to $452 million. Customers with two or more products contributed 62% of the total, an increase of four percentage points over the prior year. To a large extent, the growth in both metrics was driven by increasing momentum in enterprise engagements, resulting in several multi-year operations cloud deployments within the global 2000. During the fourth quarter, we gained traction within our enterprise segment, demonstrated by annual net new additions to our cohort of customers who spend more than $100,000, which doubled quarter over quarter. On an annual basis, our $1 million cohort increased 16% to 58%. These results demonstrate the strong market fit of PagerDuty's Operations Cloud for the world's leading brands seeking to modernize their operations. ARR from both new and existing customers exceeded Q3 levels in Q4, and we remain confident in delivering accelerated net new ARR growth in FY25. We shipped innovation across all four of our product pillars in FY24 and started FY25 with markedly higher pipeline across automation, AIOps, incident management, and customer service operations, representing a strengthening demand signal from CIOs and CTOs with mandates to protect revenue, increase innovation velocity, improve productivity, and mitigate risk. For example, our AIOps solution introduced during the first half of FY24 is designed specifically for centralized IT teams and network operations, site reliability engineering, and IT apps, which comprise approximately 21 million global professionals. A compliment to our developer-focused solution that was already in market AIOps supplies machine learning to reduce noise, surface real-time content, and automate a wide variety of manual activities. Unlike other AIOps solutions in market, PagerDuty solution is integrated to automated workflows, enabling customers to auto-remediate more and more of their ecosystem, reducing reliance and the cost of manual processes and people. Our cloud-based process automation solution reached functional parity with our self-managed on-prem offering during FY24, addressing numerous new IT use cases across service management and IT operations. In addition, several new features enable teams to leverage runbook automation in zero-trust environments, mitigating cybersecurity risks for enterprises, a large and growing investment area for our customers. Customer service operations added workflow automation capabilities from Salesforce Service Cloud, ServiceNow CSM, and Zendesk, unifying customer service teams and agents with technical teams that manage critical services and customer-facing applications. Private status pages, along with PagerDuty's generative AI-based co-pilot, enable companies to consolidate point solutions to save significant time and more effectively manage communications while responding to an incident. The acquisition of Jelly further differentiates our automated incident management solution from low value, price-led on-call solutions and less scalable workflow tools. Today, our robust combined offering enables organizations to rapidly transform the learnings from incidents into a knowledge base for timely, informed operational decisions. End-to-end incident management includes AI-assisted automated post-incident analysis and learning integrated into the CICD process, which helps customers continuously improve the efficiency with which they respond to and prevent further incidents. The innovation we've delivered across the Operations Cloud platform addresses some of the enterprise's highest priority budgeted business initiatives, including digital business resilience, modern service management, customer experience management, and network operations center modernization. In fact, several Q4 wins validate our platform to problem fit, namely seven-figure CIO and CTO-sponsored multi-year platform engagements at Global 2000 companies. For instance, a customer within our software and technology vertical expanded to the full operations cloud footprint with us. Already a million-dollar customer, this well-known enterprise doubled down on pager duty when they understood the opportunity to protect revenue and mitigate risk by connecting their customer support team with their infrastructure, site reliability engineering, and business technology units. Before pager duty, and despite significant investments in observability, over 20% of incidents were still being reported by customers, putting their customer SLAs and retention at risk. They recognize the need to transform their customer experience while reducing operational risk, replacing point solutions to address fragmented operational gaps. Today, this customer has deployed all four product pillars of the Operations Cloud in a multi-year commitment, expanding to nearly twice the ARR. An entertainment and media company with a significant global presence increased its ARR beyond $2 million per year on a three-year term. This is a large global enterprise managing operational complexity across a diverse set of use cases, from retail operations and on-property experiences to digital streaming in a corporate culture where customer experience is at the very heart of their brand. In navigating top-down pressure to reduce costs and consolidate platforms, PagerDuty's proven ROI was central to the customer's decision to expand with us. They are now using the full operations cloud to improve digital resilience across all of their major business units and to protect their customer experience. Our partnership with AWS and the ability for customers to leverage the AWS marketplace was another key factor in this multi-year, multi-million dollar win. In Q4, we also expanded on a win we mentioned in Q2, the global semiconductor supplier who selected PagerDuty's workflow offering to standardize and better orchestrate their enterprise-wide automation efforts. This has become a common enterprise challenge, islands of automation that pop up across teams and functions, hindering a company's ability to scale efficiently. In Q4, we expanded our relationship with this multibillion-dollar company, and we now support them with enterprise-grade incident management seamlessly integrated with automated workflows. Our fast time to value in Q2 earned us the right to solve even bigger problems with the operations cloud as they navigate ever-increasing complexity in pursuit of capturing an outsized share of the generative AI market. This customer's use case is an appropriate analog for the long-term tailwind generative AI presents for our business. With the added complexity caused by both the volume of software created and the frequency of code updates that generative AI enables, we see generative AI fostering demand for the operations cloud as it improves efficiency for developers, but also proliferates complexity and risk. In turn, we continue to expand our own generative AI offerings with PagerDuty co-pilot features across our platform slated for general availability in the first half of this year and expected to contribute pipeline in the second half. These capabilities augment our existing AI and machine learning functionality, which built on our proprietary and foundational data set have been part of our value proposition for nearly a decade. In line with our mission to lead the market in innovation in order to revolutionize customer operations, we welcome Jeff Hausman as our Chief Product Development Officer. His extensive enterprise product development experience in service management, ITOM, and cybersecurity, and deep domain expertise in enterprise position us well to continue our rapid innovation cadence and platform expansion. During the year, we also progressed our FedRAMP status to in-process, and we expect FedRAMP certification in the first half of FY25. In support of our expansion into the U.S. public sector and our ongoing focus in enterprise, we are thrilled to welcome Teresa Carlson, former longtime AWS public sector business leader, to our board of directors. By efficiently controlling the controllable elements of our business, we have solidified a scalable structure for growth, demonstrated enterprise platform fit, and entered the year with healthy go-to-market capacity poised to accelerate growth. The Operations Cloud platform resonates with executives due to its proven ability to reduce operational expenses, protect revenue, mitigate risk, all while improving innovation velocity. Developers remain at the forefront of both the customer experience and operational resilience. Our customers continue to face pressure to grow margins while also accelerating time to market in the face of an ongoing skill shortage. And developers confront the challenge of doing more with less, yet managing increasingly fragile tech stacks. Not surprisingly, operational complexity is rising, and automation and generative AI are becoming core to operating with speed at scale. We expect developer experience and efficiency to continue to be critical to business success for the world's most important brands, remaining a long-term tailwind for PagerDuty as we set the standard for developer best practices inherent in our platform. Our leadership position continues to be validated and reinforced by industry analysts. Earlier this year, Forrester and GigaOM named PagerDuty AIOps a leader in their wave and radar reports in the fast-growing AIOps market. In Q4, GigaOM also named PagerDuty the overall leader in their radar evaluation of incident management platforms. Additionally, Gartner highlighted the PagerDuty Operations Cloud in a new market category in their market guide for artificial intelligence applications in IT service management. Lastly, our process automation offering is consistently ranked number one overall by users on G2 in their workload automation category and grid report. Investing in and supporting our communities through social impact programs is a mainstay in our culture and FY24 was no different. PagerDuty.org made more than $1 million in grants to impact partners, including our partners in the time-critical health space. These impact partners leverage PagerDuty's platform to advance their operations to drive improved health outcomes within their community. Additionally, almost 100% of our employees volunteered or donated to a cause last year, representing a third consecutive year of greater than 90% participation. While the volatile economic environment was challenging during FY24, we have emerged stronger, more profitable and well poised for accelerating growth during FY25. Our confidence is founded in improving leading indicators like large deal pipeline and conversion rates stabilizing customer retention in mid-market and enterprise, an increased mix of multi-product, multi-year ads and expansion, and improved sales productivity. Our cost structure enables continued growth in both profitability and cash flow, reinforcing our position as a durable, profitable growth business. In my daily engagements with our largest customers, I see increased budget certainty and confidence in more strategic long-term investments in our platform. If we learn nothing else this year, we must anticipate the unexpected and our customers' demand for our integrated platform combining automation, AIOps, incident management, and customer operations is increasing. With that, I'll turn the call to Howard and I look forward to your questions.

Thank you, Jen, and good day to everyone joining us on this afternoon's call. 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. Our enterprise motion continued to show strength in the fourth quarter. Customer commitments lengthened across our base as our go-to-market team leveraged flexible enterprise pricing and increased attach rates of AIOps and our other products. These efforts resulted in our best quarter of new and expansion ARR in Q4 for the year. Companies with less than 50 million in revenue, our SMB segment, accounted for 16% of ARR at the end of FY24. While a relatively small mix of our business, a decline in net new customers and dollar-based net retention was a headwind to both quarterly and annual results this fiscal year. This adverse trend persisted in the fourth quarter, but we believe the headwind will be less severe in FY25. Revenue was $111 million in the fourth quarter, up 10% year over year. The contribution from international was 28% of total revenues, an increase from 24% compared to FY23. Annual recurring revenue exiting Q4 grew 10% year over year to $452 million. We delivered 107% dollar-based net retention, one point above our expectation in Q4, and compares to 120% in the same period one year ago. Our DBNR expectation for Q1 is approximately 106% and is expected to mark the floor for this metric moving higher in the second half of FY25. Customers spending over $100,000 in annual recurring revenue grew to 804, up 7% from a year ago. Total customer count of 15,039 declined year over year by 1%, primarily due to the challenging environment for subscale businesses. Free and paid customers on our platform grew to over 28,000, an increase of approximately 17% compared to Q4 of last year. In terms of metrics that we provide on an annual basis, customers with ARR over a million dollars increased to 58, up 16% compared to Q4 of last year. ARR from customers using two or more paid products was 62%, up from 58% in FY23. And To provide additional transparency on product mix, the AR contribution from incident management was 73% of the total compared to 77% in FY23 as customers adopt multiple products in our operations cloud platform. Q4 gross margin was 85% and within our 84 to 86% target range. Operating income was $11 million or 10% of revenue compared to $6 million or 6% of revenue in the same quarter last year. In terms of cash flow for the quarter, cash from operations was $22 million or 20% of revenue and free cash flow was $20 million or 18% of revenue. For the full fiscal year, revenue was $431 million, up 16% year over year. Gross margin was 86%, up slightly year over year. Operating income was $56 million, or 13% of revenue, compared to $3 million, or 1% of revenue a year ago. Operating cash flow was $72 million, compared to $17 million a year ago. Free cash flow was $64 million compared to $9 million in fiscal 2023. And headcount increased to 1,182, up 1% year over year. Turning to the balance sheet, we ended the quarter with $571 million in cash, cash equivalents, and investments. On a trading 12 months basis, Billings were $450 million, an increase of 10% compared to a year ago and in line with our estimates. With respect to Q1 FY25, we expect trading 12 month Billings growth to be approximately 8%. To provide some context before turning to guidance, as I mentioned, annual recurring revenue ended FY24 at 10% growth. We expect ARR growth to accelerate in FY25, particularly in the second half. Our guidance reflects this gradual growth acceleration. Importantly, we have made a change from monthly to daily revenue recognition, which creates a shift in revenue out of Q1 to the rest of the year. We expect to continue to expand operating margin in what will be our third year of non-GAAP profitability And our EPS guidance for the first time includes a non-GAAP tax rate of 23%. So looking at our guidance for the first quarter fiscal 2025, we expect revenue in the range of $110.5 to $112.5 million, representing a growth rate of 7% to 9%. and net income per diluted share attributable to PageDuty Inc. in the range of 12 to 13 cents. This implies an operating margin of 9 to 10%. For the full fiscal year 2025, we expect revenue in the range of $470 to $478 million, representing a growth rate of 9 to 11%. and net income per diluted share attributable to PageDuty Inc in the range of 65 to 70 cents. This implies an operating margin of 13 to 14%. Before moving to questions, I would like to provide assistance with modeling FY25. We changed from ratably recognizing subscription revenue on a monthly basis to a daily basis in FY25. The impact of this is approximately $3 million less revenue in Q1 and $3 million higher revenue in the remainder of the year due to Q1 having fewer days. Our EPS guidance now incorporates a non-GAAP tax rate of 23% for each quarter of FY25, which represents approximately 4 cents of EPS in Q1 and 21 cents in FY25. Non-GAAP gross margin is expected to remain within our target range of 84 to 86%, but trend toward the low end of the range as we invest in our services capacity for enterprise customers. For reference, Q1 of the prior fiscal year, incremental AR was $12 million. And as a reminder, interest payments on our 2028 convertible notes are made semi-annually in arrears in Q1 and Q3. The business momentum we carry into FY25 is a direct result of the long-term oriented investments in the operations cloud to solve the complex operational issues of large enterprises, accelerating our move upmarket. The annual increase in multi-product customer ARR and multi-year commitments, the increasing volume of large deals and improved annualized gross retention this past quarter gives me confidence in our ability to accelerate growth this year. With that, I will open up the call for Q&A.