PagerDuty, Inc.

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 an 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, which can be found on our investor relations website. Further information on these and other factors that could cause the company's financial results to differ materially are included in the filings we make with the Securities Exchange Commission, including our most recently filed Form 10-K-A, as well as our other subsequent filings made with the SEC. With that, I will turn the call over to Jennifer.

Thank you, Tony, and good afternoon, and thanks for joining us today. I'm proud to share that PagerDuty delivered our third consecutive year of non-gap profitability, demonstrating the fundamental strength and durability of our business model. We achieved 9% annual growth in both revenue and ARR while expanding our non-gap operating margin by nearly 500 basis points to 18%. With free cash flow margin expanding from 15% to 23%, we see the culmination of the fiscal year as a clear testament to our operational discipline and efficient growth strategy. Looking at Q4 specifically, I'm pleased to report we exceeded our guidance ranges, delivering $121 million in revenue and a strong non-GAAP operating margin of 18%. We added $11 million in incremental ARR, bringing our total annual recurring revenue to $494 million. While we're seeing some near-term moderation and growth as we evolve our enterprise sales transformation, the fundamental drivers of our business remain strong. Our strategic position at the center of digital operations gives me confidence in our ability to build momentum into the second half of the fiscal year. Enterprise traction continues to improve as we execute on our strategic shift towards multi-year, multi-product platform partnerships. The power of our operations cloud is evident in expanding product adoption, with multi-product customers now driving 65% of total ARR, up from 62% last year, and marking a substantial 7 percentage point increase since fiscal 2023. These customer relationships continue to validate our strategy, with 72 customers now exceeding $1 million in ARR and 849 customers investing more than $100,000 annually. Most notably, ARR from customers spending over $100,000 grew 12% year-on-year, now representing 71% of total ARR. The combination of our expanding platform capabilities, strong customer relationships, and significant headroom for growth within our install base underscores the opportunity ahead of us. Let me share the three catalysts that will drive further ARR growth and diversification, particularly in our strategic accounts spending more than $100,000. First, we're laser focused on optimizing our field organization's efficiency. This includes executing an enterprise sales transformation and ensuring our new strategic reps reach full productivity. Second, we've delivered new platform monetization strategies that further extend our competitive differentiators and better align with the transformative value we deliver to customers, including our new AI capabilities and frictionless packaging structure. Third, we're building momentum in our commercial segment through targeted digital acquisition and proven retention programs that consistently delivered results. The fundamental opportunity ahead remains robust. We continue to see a $50 billion total addressable market as organizations accelerate their digital operations modernization to avoid the escalating cost of a disruption. We successfully executed several key initiatives in fiscal 2025, but I want to be clear, our revenue performance did not meet our initial expectations, primarily due to go-to-market execution that fell short of our historically high standards. While we are in a meaningful transition to an enterprise focused top down value selling motion, we also adapted to a volatile macro environment. We've seen encouraging proof points with several strategic wins. However, we haven't scaled this motion across our entire enterprise organization at the pace we intended. This transformation of our go to market approach in the face of these macro headwinds has created near term pressure on growth. While this transition hasn't been easy and we still have work ahead, the early success we're seeing from our ramped enterprise representatives is a strong signal that we're on the right path. As you know, I spend a significant portion of my time with customers, and what's encouraging and becoming increasingly evident is that operational maturity and resilience are no longer nice to haves. They're becoming central to the enterprise business strategy and to revenue acquisition. We're seeing this play out in compelling new use cases, customers leveraging our platform for customer service operations, using PD Advance for predictive incident management, and implementing automated remediation at scale. The addressable market is substantial, and we're still in the early innings of this opportunity. The numbers tell a compelling story. AIOps, automation and customer service operations maintained over 40% contribution to incremental ARR for two consecutive quarters. This validates our platform strategy, widens our competitive modes and shows how our product creates tangible value for customers. While market demand remained strong, we instituted a number of changes during the second half of FY25 to improve our execution. In addition to sales leadership improvements across most of our theaters, I became more directly involved with the teams to drive three key improvements, transforming our go-to-market practices, redefining our approach to sustainable value capture, and sharpening our product team's focus on monetizing our innovation. That said, I want to be clear that while we're executing with urgency and the majority of these changes are underway, we expect the financial impact to materialize gradually over time. Given this reality and our commitment to operational discipline, we've taken a pragmatic approach to our full year outlook. The pace of our platform innovation also represents our sense of urgency and commitment to building on our leadership position. Just weeks into FY26, we announced a game-changing expansion of our AI capabilities that puts PagerDuty at the forefront of intelligent operations with new PagerDuty AI agents. These AI agents aren't just another chat bot or basic automation tool. They're sophisticated partners that work alongside human responders to intelligently identify, triage, and resolve high-value operational issues. We're launching these three specialized agents, one focused on site reliability engineering, another on operations analysis, and a third on scheduling optimization, all powered by our proprietary technology, our foundational data model, and deeply integrated into our automation workflows. What's exciting is how these innovations align with what our enterprise customers are telling us they need, intelligent automation that enhances human capability on a highly secure and resilient platform. Our customers now partner with us to mature beyond response to prevention and revenue optimization. To accelerate adoption, we've democratized access to our AI and automation capabilities by streamlining our incident management plans. This advance embeds these powerful features across all paid tiers because we believe every organization, regardless of size, should have access to enterprise-grade, AI-centric digital operations capabilities within a single, secure, and scalable platform. We also introduced an AI use case library featuring field-tested prompts and deepening our integration with several key ecosystem partners, including Slack, Zoom, and Amazon Q. These integration partnerships are key differentiators and exciting because they seed new use cases across our customer base. Our platform innovation strategy coupled with our maturing solution selling approach contributed to a sequential improvement in large deal momentum in Q4. This performance demonstrates our position as the digital operations leader trusted by the world's largest and most innovative companies. Let me share a few customer highlights from the quarter that showcase how enterprises are expanding their use of PagerDuty and the measurable value we're delivering. One of North America's largest financial institutions, a longstanding customer, recently made a significant three-year enterprise-wide commitment to pager duty following their successful initial deployment of AIOps across digital, wealth management, and capital markets. The results speak for themselves, a 28% reduction in incident duration and 43% decrease in human effort. through our AI-driven automation capabilities. With a projected ROI of 400%, this expansion across the full PagerDuty Operations Cloud validates PagerDuty's strategic role in digital operations and demonstrates how our platform drives measurable value at scale. I'm excited to highlight a global semiconductor supplier, a leader in AI innovation who significantly expanded their partnership with PagerDuty to standardize incident management across their AI, cloud, and data center operations. What's compelling about this expansion is how they're leveraging our platform to automate real-time response, to improve system resilience, and to reduce overall operational overhead. all critical capabilities for supporting their groundbreaking AI initiatives. The scale of this commitment, more than tripling their seven-figure investment in less than two years, is impressive. It's exactly the kind of strategic partnership that demonstrates the transformative value we deliver to the world's largest and most innovative companies. In Europe, I'm thrilled to share that a major telecommunications provider scaled to become a million-dollar ARR customer in just their first year with PagerDuty. What's noteworthy about this win is that they chose to expand with us over incumbent consolidators, specifically because of our platform's ability to deliver rapid time-to-value, manage unstructured data, and deliver superior operational outcomes. Within just six months, we successfully integrated with their existing ITSM infrastructure and automated end-to-end incident workflows across IT and network operations, supporting hundreds of responders without requiring additional headcount. This is a perfect example of why customers choose PagerDuty over legacy vendors. We deliver specialized operational intelligence and automation that generic IT tools simply cannot match. Our seamless integration with existing tools continues to be a key differentiator in these competitive enterprise opportunities. One final example comes from a global media enterprise that expanded to become a multimillion-dollar partner. Their relationship is compelling, given how they've leveraged the capabilities of PD Advance to transform their digital operations. This customer journey illustrates well how our investments in enterprise incident management, from enhanced security and authentication to AI and advanced workflow capabilities, are meeting the sophisticated needs of complex large-scale operations. This pattern of expansion isn't unique. In highly regulated industries, operational resilience is mission critical. Organizations are choosing PagerDuty not only for incident management, but as their strategic platform for intelligent digital operations. Turning to our market momentum, we kicked off PagerDuty On Tour 2025 in London last month with upcoming events across Sydney, Tokyo, and San Francisco, markets that represent significant enterprise opportunities. These events are powerful forums where enterprise leaders and practitioners experience firsthand the full capabilities of our Operations Cloud platform. Featured at these events are the testimonials of our customers who are leveraging our latest innovations to drive compelling operational transformation. We intentionally shifted the series to Q1 this year, positioning us to build pipeline momentum early and capitalize on the growing enterprise demand we're seeing across these key regions. The timing is especially important as we continue to evolve our enterprise go-to-market motion. These events give us the opportunity to engage directly with both executives and users, demonstrate our expanded platform value proposition, and reinforce our position as the leader in digital operations. Our culture of community responsibility earned notable recognition again this quarter, including Fortune's Best Workplaces for Parents and the 2025 Big Innovation Award. Our impact segment serving education and nonprofit customers grew 25% to nearly 600 organizations globally. I'm excited about the most recent additions we've made to strengthen our leadership team. We welcome David Williams as SVP of Product to drive our AI and automation initiatives, bringing his exceptional experience in scaling enterprise SaaS platforms and deep AI expertise from his entrepreneurial background. And this week, we announced Allison Corley as our Chief Customer Officer with nearly three decades of customer success leadership from companies like Smartsheet, Workday, and Microsoft. Additionally, Sarah Franklin joined our board in December with her impressive track record as the CEO of Lattice and former President and Chief Marketing Officer of Salesforce, where she helped scale the business while building the vibrant Trailblazer community. These appointments come at a pivotal time as we innovate on PD Advance and accelerate enterprise expansion. I'm confident the combined experience will support us in our pursuit of the significant market opportunity ahead. Lastly, we've initiated a search for Chief Revenue Officer as part of our ongoing effort to refine our revenue strategy and to ensure our leadership, people, processes, and systems are optimally positioned to sustain and grow our market share. As a part of this transition, Jeremy Komet, our SVP of Global Field Operations, will be leaving PagerDuty at the end of Fiscal Q1. Over the past eight years, Jeremy's been an invaluable leader, and we're grateful for his dedication, his vision, and the strong foundation he has helped to build. While we face some execution challenges, we've taken decisive action to improve sales efficiency and fully capture the value of expanding our operations cloud platform. The catalysts for growth are in place. We've strengthened our leadership team, enhanced our go-to-market motion, and we're seeing strong early interest in our AI agents from enterprise customers. Looking ahead, I'm confident in our strategy and our ability to execute. We're laser focused on three priorities, building and converting a robust pipeline, accelerating enterprise adoption, and demonstrating how our platform innovations drive measurable customer value. The fundamentals of our business remain strong with the strategic initiatives we put in place, combined with our track record for operational discipline, we're well positioned to capture the significant market opportunity ahead. I'll close by thanking our customers who are achieving remarkable results with our platform. and our dedicated employees who make these outcomes possible, our strategic partners, and our shareholders for their continued support as we accelerate our enterprise transformation. 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. Unless otherwise stated, all references to our expenses and operating results on this call are on a non-GAAP basis and are reconciled to our GAAP results in the earnings release that was posted on our investor relations website before the call. As Jen articulated, we expect the catalyst for high performance to be consistent improvements in sales productivity. Over the past 12 months, we have successfully reconfigured our sales organization to be an enterprise-focused sales team, hiring to the right profile of quota carriers while remaining within the existing expense envelope, a strategy we will maintain throughout FY26. With a significant portion of quota carriers joining in the second half, our focus has shifted from hiring, onboarding, and enablement to rigorous account management and sales execution. As a greater mix of our field becomes fully ramped in proactively championing the operations cloud, we are laying the foundation for increased momentum in the second half. Today's announcement of a new $150 million share repurchase program is a clear signal of confidence from our board and management team in the FY26 plan and the durability of our free cash flow. Please note the $100 million repurchase program announced in Q2 of FY25 was completed during the fourth quarter. Moving to results. Revenue for the quarter was $121 million, up 9% year over year. International revenue increased 10% annually, contributing 28% of total revenue. Annual recurring revenue exiting Q4 grew 9% year over year to $494 million. We delivered 106% dollar-based net retention, fractionally below our expectation for the full fiscal year. I'm encouraged by the improving trend of annualized gross retention over the past four quarters, as well as enterprise dollar-based net retention continuing to outpace the commercial segment by approximately 10 percentage points. Customers spending over $100,000 in annual recurring revenue grew to 849, up 6% from a year ago. This was our strongest quarterly performance of the fiscal year with 24 additions to the cohort. Total paid customers increased by 64 to 15,114 in Q4. Free and paid companies on our platform grew to over 31,000, an increase of approximately 10% compared to Q4 of last year. In terms of metrics that we provide on an annual basis, headcount increased to 1,242, up 5% year over year. Customers with annual recurring revenue over $1 million increased to 72, up 24% compared to Q4 of last year. Annual recurring revenue from customers using two or more paid products was 65%, up from 62% in FY24. Annual recurring revenue contribution from incident management was 70% of the total, compared to 73% in FY24. And the contribution from our $100,000 cohort was 71% up from 70% in FY24. Q4 gross margin was 86% at the high end of our 84 to 86% target range. Operating income was $22 million or 18% of revenue compared to $11 million or 10% of revenue in the same quarter last year. The outperformance relative to our guidance was driven by delays in headcount starts and timing of marketing and consulting expenses. In terms of cash flow for the quarter, cash from operations was $31 million or 26% of revenue and free cash flow was $29 million or 24% of revenue. 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 $485 million, an increase of 8% compared to a year ago. With respect to Q1, we anticipate 12 months billings growth to be approximately 8%. At the end of Q4, total remaining performance obligations was approximately $440 million. Of this amount, approximately $302 million, or 69%, is expected to be recognized over the next 12 months. As a reminder, as of FY25, our RPO disclosure includes contracts with an original term of less than 12 months. Applying the current definition to the year-ago period, total RPO increased 21% on a like-for-like basis over Q4 FY24, which would have been $364 million. To provide some context before turning to guidance, Importantly, we have daily revenue recognition and Q1 of FY26 is three days shorter than Q4 of FY25. The impact of this is approximately $3 million less revenue in Q1 and $3 million higher revenue in the remainder of the year. For the fiscal quarter, For the first quarter fiscal 2026, we expect revenue in the range of $118 to $120 million, representing a growth rate of 6 to 8%. And net income per diluted share attributable to PagerDuty Inc. in the range of 18 to 19 cents. This implies an operating margin of 15%. For the full fiscal year 2026, we're initiating guidance of revenue in the range of 500 to $507 million, representing a growth rate of seven to 8%. And net income per diluted share attributable to PageDuty Inc in the range of 90 to 95 cents. This implies an operating margin of 19 to 20%. Before moving to questions, I would like to provide assistance with modeling FY26. Firstly, we plan to fully update and share our long-term projections later this year. However, in advance of doing that, we have updated our long-term operating margin target, increasing it from 20% to 30%. Specifically with respect to FY26, our EPS guidance incorporates a non-GAAP tax rate of 22% for each quarter of FY26, which represents approximately 4 cents of EPS in Q1 and 21 cents in FY26. Interest payments on our 2028 convertible notes are made semi-annually in arrears in Q1 and Q3. and the remaining balance of $58 million from our 2025 convertible notes is due in the second quarter. Reflecting on the fiscal year, we encountered certain challenges. However, we strategically implemented targeted initiatives that have enabled us to eliminate inefficiencies and deliver enhanced capabilities across the operations cloud. While we expect revenue momentum to build steadily, our focus on driving incremental ARR across both enterprise and commercial segments positions us with a resilient foundation for sustained long-term growth this fiscal year. With that, I will open up the call for Q&A.