PagerDuty, Inc.

Good afternoon, and thank you for joining us to discuss PagerDuty's first quarter fiscal year 2025 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 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-A, as well as our subsequent filings made with the SEC. With that, I will turn the call over to Jennifer.

Good afternoon and thanks for joining us today. PagerDuty delivered a solid first quarter with revenue growth near the midpoint of our guidance range at 8% and non-GAAP operating margin four points above the range at 14%. This was our seventh consecutive quarter of non-GAAP profitability. We increased annual recurring revenue by approximately $11 million to $463 million. ARR growth stabilized at 10% for a second consecutive quarter, strengthened by improving new and expansion ARR. We continue to see momentum in large multi-year, multi-product contracts with customers spending more than $100,000, growing 6%, while both customers spending more than $500,000 and $1 million grew in the high teens. The impact of the macro environment can be seen in pressure on gross retention due to capital constraints, particularly in SMB. However, Continued improvement in large deal execution as enterprise customers embraced the operations cloud again this quarter demonstrated both product to market fit and the potential for upside as the macro improves. Dollar-based net retention came in as expected at 106. Based on our net new ARR momentum and current retention, we remain confident that both DB&R and ARR growth will strengthen in the second half of this year, enabling the business to exit the year above Q1 levels. The success of our go-to-market teams in providing multi-product solutions to large customers is evidenced by more than 60% of our net new ARR for the quarter composed of customers investing in products in addition to incident management, such as AIOps, automation, and customer service ops. Our platform enables enterprises to modernize their business and technology processes and culture, standardize automation practices, transform incident management, and automate operations. This solution to market fit enabled strong multi-product pipeline creation in Q1, supporting our confidence in improving both growth and productivity throughout the remainder of the year. In March, we introduced a new enterprise plan for incident management. This solution incorporates our market-leading incident response offering, select AIOps features, and Jelly's opportunity analysis and deep Slack integration into a single end-to-end offering. Jelly enables teams to automatically assess previous incident response efforts and apply insights immediately to improve future outcomes. The resulting integrated solution builds an automation artificial intelligence to guide detection, diagnosis, remediation, and learning, reducing the cost and impact of current incidents while improving resilience and preparedness for future issues. Completing the acquisition only a few months ago, our teams have quickly demonstrated Jelly's applicability by displacing point solutions and exceeding our error contribution target for this new SKU. A multi-billion dollar SaaS customer chose PagerDuty's enterprise incident management plan as a more cost efficient and effective alternative to a combination of less scalable point solutions. The integrated feature set led to a six figure expansion justified by measurable productivity improvements. We continue to align with enterprise executives more effectively to support their objectives to protect revenue, increase innovation velocity, and improve operating efficiency. Today, over half of the ARR from enterprise customers is multi-year, and the mix continues to trend favorably. We have achieved this through shifting from pure seat-based licensing to flexible pricing and contracting models that reduce friction for customers and expand their use of the operations cloud. For example, a leading global athletic apparel company who has been a PagerDuty customer for more than a decade had a corporate mandate to reduce operating expenses. Teams were overwhelmed by unfiltered events which required manual handling by an outsourcing partner. We identified an opportunity for the customer to save more than a million dollars annually and proposed a flexible pricing arrangement for our AIOps solution, which included the use of our professional services. This consolidated IT spend, displaced a point solution, automated manual third-party effort, and supported the customer in improving their operations resilience. A multinational home improvement retailer selected the PagerDuty Operations Cloud this quarter as a strategic platform to underpin an initiative to automate work across thousands of store locations. Our event-driven automation and seamless collaboration were a compelling consideration during the proof of concept. The scalability and reliability of our platform, broad integration ecosystem, and ability to measurably improve productivity led to a three-year commitment valued over $6 million. One of the largest health insurance providers in the US partnered with us to transform their incident management processes to drive standardization and increase operational resilience. This is one of our largest lands in the healthcare sector with a three-year operations cloud agreement valued over $3 million. Outside of North America, we're also showing signs of stabilization in our enterprise business with several six-figure contracts across EMEA and APJ. In Europe, a leading telecommunications company in the process of scaling its architecture to improve the efficiency of their operations, increase their usage of incident management, AIOps, and automation during the quarter. We estimate the Operations Cloud will deliver an ROI of 200% annually through a reduction in incident volume and more efficient incident routing. During the quarter, one of Japan's top logistics companies expanded their deployment of AIOps and incident management. This decision was the result of compelling ROI of 175% delivered in a single year using the platform. PagerDuty is now central to this million-dollar logistic firm's operational resilience as they look to automate more manual processes and reduce outsourcing as their business scales. To capitalize on our momentum and drive greater international growth, we appointed Eduardo Crespo as our new leader in EMEA earlier this month. Eduardo has a strong track record building successful regional teams and executing integrated go-to-market strategies. From a product perspective, we announced the spring release of the Operations Cloud last week, which highlighted several new capabilities across the platform. Our AI Assistant now addresses many new use cases. We are able to leverage insights from our experience over more than 15 years as an industry leader in incident management to design offerings that utilize a customer's own data to generate rich, contextual, actionable insights to automate and expedite issue diagnosis and resolution. Our newest use case, helping responders or executives come up to speed during a major incident, leverages AI-assisted auto-summarization, utilizing a simple catch-me-up prompt. This saves companies significant labor cost by summarizing incident details, messages, attempted automations, and customer impact in a moment. Our AI assistant will be available for general release later this summer with consumption-based pricing. Another highlight from the spring release of the Operations Cloud includes unified visibility and control to support the modern operations center. Our AIOps product can now serve as a single source of the truth for newly created incidents and provides a live, shared view of operational health. In combination with this new operations console, we delivered additional enhancements to AIOps to better distill signals automatically from the ever-increasing volume of event noise. And collectively, our customers report They are better able to deflect issues, tickets, reduce noise, and improve decision-making using automation. Our automation offering in the spring release, designed to help customers scale and standardize automation across their digital operations, many of our large customers find themselves navigating islands of automation across disparate teams and tools, perpetuating inefficiency and risk. PagerDuty automation gives customers a common, flexible framework for automating across systems and teams. Our offering spans the full breadth of pro-code to no-code workflow automation to drive wider adoption and improve the return on investment on existing automation investments. In addition, we continue to advance our U.S. public sector business, obtaining Authority to Operate, or ATO, from the Department of Veteran Affairs, our U.S. agency sponsor. On the back of obtaining ATO, we closed our first-ever seven-figure deal in the public sector, which is an exciting early signal of our opportunity in that vertical. PagerDuty has a long history of serving the public sector, including federal, state, local, and nonprofit agencies. To ensure we're positioned to maximize the opportunity unlocked by FedRAMP, we've added Teresa Carlson to our board of directors in March, and we've hired an experienced leader to head up our public sector business who will join the team later this quarter. In addition to servicing public sector and nonprofit customers, we continue to progress our social impact efforts. In April, we released our fourth annual impact report, which is available on our investor relations website. I encourage everyone to learn more about our vision to empower mission-driven teams and a sustainable future. Given the progress we've achieved expanding into the Global 2000, the strong multi-quarter pipeline we are building, and our new and expansion business bookings momentum, I am confident in accelerating our FY25 ARR growth and remain focused on long-term margin improvement. I want to thank our customers for their trust, our shareholders for their support, and our employees for their commitment to our mission and our vision. With that, I'll turn the call over to Howard and 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. At a high level, the progress we're making in closing large multi-product enterprise deals, both new lands and expansions, and the improved visibility as we build a strong multi-quarter pipeline were highlights for the quarter. However, SMB continues to be a headwind to growth with high levels of churn and downgrades. International is showing signs of stabilizing represented by several six-figure deals in Europe and APJ with large enterprise customers. And our recent appointment of a new leader for EMEA will allow us to capitalize on the momentum. Revenue for the quarter was within our guidance range at 111 million, up 8% year over year. The contribution from international was 27% of total revenues, a modest change from the 28% seen in Q1 of last year. Annual recurring revenue exiting Q1 grew 10% year over year to $463 million. we delivered 106% dollar-based net retention in line with our Q1 expectation. Successful expansions with a number of key customers were somewhat offset by continued challenges in SMB and select downgrades in some larger customers symptomatic of cautious constrained spending consistent with the macro volatility. Our DB&R expectation of Q2 is to remain flat at 106%, with this metric moving higher in the second half of FY25. Customers spending over $100,000 in annual recurring revenue grew to 811, up 6% from a year ago. In addition, cohorts at the $500K and $1 million mark each grew in the high teens. Total paid customers increased to 15,120 compared to 15,089 in the year-ago period. Free and paid companies on our platform grew to over 29,000, an increase of approximately 18% compared to Q1 of last year. Q1 gross margin was 86% at the high end of our 84% to 86% target range. As a reminder, we anticipate increasing our services capacity during FY25 to support our growing enterprise base. We expect this to result in gross margin trending closer to 84% by the fourth quarter. Operating income was $15 million or 14% of revenue compared to $16 million or 16% of revenue in the same quarter last year. The outperformance compared to our guidance was partially the result of commissions paid to our customer solutions group becoming capitalizable and amortized over 48 months. The compensation plan now aligns more closely with net new ARR targets. In terms of cashflow for the quarter, cash from operations was $29 million or 26% of revenue and free cashflow was $27 million or 24% of revenue. Q2 is expected to be our lowest free cash flow quarter of the year, given the strong working capital performance in Q1 and the seasonality of our billings. On a full year basis, free cash flow margin is expected to remain at least a couple of percentage points better than our operating margin. Turning to the balance sheet, we ended the quarter with $593 million in cash, cash equivalents and investments. On a training 12-months basis, billings were $460 million, an increase of 9% compared to a year ago. Please note we decided to change the methodology for our remaining performance obligations disclosure to now include contracts with an original term of less than 12 months. At the end of Q1, total RPO was approximately $388 million. Of this amount, approximately $273 million, or 70%, is expected to be recognized over the next 12 months. With respect to Q2, we anticipate trading 12-month spillings growth to be approximately 8%. Turning to our guidance. For the second quarter of fiscal 2025, we expect revenue in the range of $115.5 to $117.5 million, representing a growth rate of 7% to 9%. And net income per diluted share attributable to PageDuty Inc. in the range of $0.16 to $0.17. This implies an operating margin of 13%. For the full fiscal year 2025, we are maintaining the revenue midpoint with an updated range of $471 to $477 million, representing a growth rate of 9 to 11%. And increasing our expectations for net income per diluted share attributable to PageDuty Inc. and now expect 66 to 71 cents. This implies an operating margin of 13 to 14%. Today, we announced that our board of directors have authorized a share repurchase program for up to $100 million of common stock. We believe that our business is well positioned for growth, and we will continue to generate meaningful free cash flow. And this program reflects our intent to manage dilution so as to increase shareholder value. The continued momentum we have seen in Q1 gives us confidence in accelerating ARR growth in the second half, and we remain committed to expanding operating margins over time. With that, I will open up the call for Q&A.