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 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, 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 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 will turn the call over to Jennifer.

Thanks, Tony. Good afternoon, and thank you, everyone, for joining us today. In the first quarter, PagerDuty delivered revenue of $120 million, representing 8% growth at the top of our guidance range. Our relentless focus on disciplined cost and investment management continued to yield results with non-GAAP operating margin reaching 20%, exceeding our target by 500 basis points. Given the substantial process we have made on optimizing our bottom line performance, we have a clear path to GAAP profitability. annual recurring revenue increased to $496 million with 7% growth year over year. Dollar-based net retention was 104%, reflecting higher than expected customer downgrades in our enterprise segment and elevated churn in our commercial business. These results reflect transitional dynamics in our go-to-market motion and are not at the standard that we expect from ourselves. We are collectively committed to more consistent sales and marketing execution and efficiency, and have taken immediate and comprehensive action to improve overall top line results. We did achieve significant improvement in net new paid customers driven by our new commercial digital acquisition strategy, leading to our largest increase in eight quarters. While many of our enterprise relationships span several years, we're evolving our coverage model. We're moving from a tactical and transactional approach to building more strategic cross-company relationships with our customers. This transition requires us to more effectively scale our pre- and post-sale practices, including more comprehensive customer roadmap planning and more structured professional services and product adoption frameworks. In addition, we must progress in leading with AI from a platform perspective and developing deeper and more senior relationships from a customer perspective. While we do this well in many large accounts, we can and will scale it more effectively. This is a critical focus for our sales, marketing, and customer success organizations. Under the leadership of our new chief customer officer, we're executing on this transformation through enhanced post-sale enterprise engagement. These improvements, combined with streamlined upgrade migration planning, will enable our enterprise customers to accelerate value realization while leveraging more of our platform. While these changes will take time, we're confident they will strengthen enterprise relationships and drive adoption of our advanced capabilities, including enterprise incident management and our AI solution set, PagerDuty Advanced. Our platform's strategic value continues to resonate with customers as demonstrated by expansion activity across approximately a quarter of our enterprise accounts in Q1. This broad-based expansion reflects the ongoing adoption of PagerDuty's Operations Cloud across our customer portfolio and provides a foundation for future growth as these customers mature their digital operations journey. One critical milestone in our enterprise sales transformation is approaching as more than 60% of our enterprise reps will have been in their role for at least a full year by the end of Q2. This shift reflects our ongoing efforts to expand our sales rep profile to that of a modern enterprise value-centric sales executive. Based on our historical sales ramping data and the anticipated appointment of a new chief revenue officer, we expect the increased seniority and experience of our maturing sales force to drive meaningful improvement in enterprise contribution through the second half of the fiscal year. We also strengthened our strategic partnership with AWS, announcing our collaboration agreement and expanding our integration capabilities earlier this month. Our platform now seamlessly integrates with Amazon Q Business, Amazon Bedrock, and AWS Incident Manager, serving nearly 6,000 joint customers. A compelling example of this is TUI Group, the world's largest integrated travel company, which achieved a significant reduction in incident recovery time through our integrated solutions, with the cost of a single disruption for an enterprise typically costing nearly $800,000. Our public sector expansion achieved FedRAMP low authorization, enabling federal agencies to leverage our AI and automation capabilities while meeting stringent security requirements. We're actively pursuing FedRAMP moderate authorization to further expand our public sector presence, where we already serve over 700 entities. In addition, we have engaged new partners to support our public sector strategy, including federal, state, and local entities. We hosted PagerDuty on Tour 2025, our global customer event series in Q1 to drive demand for the back half of the year. Attendance increased 40% year over year, and we were pleased with the positive response to our expanded platform value proposition, as well as the significant interest in our new AI products. From a product standpoint, we're evolving our pricing to reduce friction and increase flexibility for customers to leverage all the products on our platform. The evolution of our pricing and packaging includes flexible enterprise pricing and the inclusion of AI and automation capabilities across all of our incident management plans. Building on our spring release momentum, we're expanding our AI offering through the partner ecosystem. Our new solutions leverage generative AI to automatically summarize incident notes and post-incident reviews, enabling faster issue resolution and organizational learning. Our new AI scribe agent leverages transcripts from Zoom and Microsoft Teams to help operations teams summarize calls for better execution, faster resolution, and protecting revenue and reducing costs. We remain on track to launch three additional AI agents this quarter, furthering our commitment to enhance operational maturity and effectiveness for our customers through AI and automation. Our experienced enterprise sales reps routinely land platform commitments by leveraging the value proposition of the operations cloud. The traction we're gaining in emerging native AI vertical, in the emerging native AI vertical, demonstrates that our platform is mission critical infrastructure for companies building and scaling AI operations. While we believe the TAM supports multiple winners, our roadmap of innovation and proven resilience at scale continue to differentiate us in the market, particularly given the significant greenfield opportunity ahead. Let me share a few examples that demonstrate our enterprise momentum in strategic sectors. In the rapidly expanding native AI segment, a leading AI research and development company selected PagerDuty for a six-figure multi-year commitment. This win underscores the platform's ability to support mission-critical AI operations, including LLMs and agents, while meeting the most demanding scale, security, and reliability requirements. Their selection of PagerDuty over other vendors validates the strength and scalability of our enterprise-grade platform and strategic relevance in this transformative market. In financial services, a major enterprise customer expanded their PagerDuty deployment with a significant six figure upsell to an existing million dollar customer as part of their operations modernization initiative. We successfully defended and expanded this relationship, winning against both established platform players and emerging challengers. The competitive win is particularly meaningful as this customer is known for early adoption of innovative technologies and their selection of PagerDuty as their strategic platform for digital operations validates our market leading position. The trust we've built through consistent platform performance and deep customer engagement combined with our proven ability to increase engineering productivity at scale enabled us to win additional business. In a landmark land, a global financial market infrastructure company, which processes quadrillions of dollars in security transactions annually, chose PagerDuty for a seven-figure multi-year digital operations transformation. This strategic displacement of several vendors validates our enterprise platform's unique combination of AI ops, automation, incident management, customer service ops, and differentiate value proposition in the most sophisticated operating environments. The customer's decision to consolidate their digital operations on our platform for automation and incident management exemplifies our market leadership in mission-critical enterprise environments where reliability and security are paramount. Our international execution exhibited steady progress as well, evidenced by a major expansion with Europe's leading payment services provider and a competitive platform win with a prominent Japanese education leader, both representing meaningful six-figure commitments. During the quarter, we continue to support our impact partners, including WatchDuty, a mobile app and web platform that provides real-time wildfire information and safety alerts in over 22 states and to more than 16 million active users who rely on PagerDuty to ensure we can support them in achieving their life-saving mission. Our social impact work aligns with our mission to revolutionize operations and supports our ability to hire and retain great talent. We're progressing and meeting the sustainability requirements of our large enterprise customers, including achieving a 90% reduction in our Scope 1 and Scope 2 carbon emissions against the FY23 baseline this quarter. We recently welcomed Don Carty to PagerDuty's Board of Directors. Don brings deep operational and financial expertise from his extensive executive leadership experience, including his roles as the Chairman and CEO of American Airlines and Vice Chairman and CFO of Dell. His deep understanding of enterprise transformation and operational excellence are invaluable as we execute our platform vision and enterprise growth strategy. Our search for a new chief revenue officer is progressing well with several accomplished enterprise leaders in advanced stages of consideration. As we look ahead we're focused on three key priorities first demonstrating product market fit for our Ai offerings through monetization. Second, enhancing our enterprise engagement model to drive improve retention and expansion with our strategic accounts and third leveraging automation and Ai within our own operations to scale more efficiently. and accelerate our path to durable growth and gap profitability. This balanced approach helps us to capture the significant enterprise opportunity ahead. While this quarter's results reflect both organizational transitions and go-to-market execution challenges, we've taken decisive actions to strengthen our go-to-market motion and improve the return on sales and marketing investments. The fundamental drivers of our business remain strong as PagerDuty continues to differentiate itself as the trusted enterprise operations platform, enabling customers to scale their AI and automation initiatives. We are confident that our enterprise strategy, combined with our demonstrated commitment to operational discipline and strategic capital allocation, will drive long-term value creation. I want to thank our customers for their continued partnership and our shareholders for their support, as well as our employees for their customer focus and dedication. And 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 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. Before reviewing our first quarter financial results, I want to highlight a meaningful inflection point in our business model transformation. More than 60% of our enterprise reps will have been with PagerDuty for at least a year by the end of the second quarter, reflecting our strategic investment in experienced enterprise talent focused on higher value, more profitable customer relationships. Combined with our strong operational discipline, evidenced by non-GAAP operating margins of 20% this quarter, we expect these maturing investments to drive meaningful improvement in our financial performance and advance our steady progress toward GAAP profitability next fiscal year. Moving on to results. Revenue for the quarter was $120 million, up 8% year over year. International revenue increased 11% annually, contributing 28% of total revenue. Annual recurring revenue exiting Q1 grew 7% year over year to $496 million. We delivered 104% dollar-based net retention. DBNR was negatively impacted by lower gross retention in the enterprise segment. We expect dollar-based net retention to remain between 103 and 105% throughout fiscal 2026. Customers spending over $100,000 in annual recurring revenue is up 5% year over year, resulting in 848 by quarter end. Total paid customers grew to 15,247 in Q1, adding 127 net new customers, our strongest quarterly customer acquisition in eight quarters. This improvement was driven by targeted enhancements in our commercial segment, where we launched a new digital acquisition program and lowered the cost to acquire. Free and paid companies on our platform grew to over 32,000, an increase of approximately 9% compared to Q1 of last year. Q1 gross margin was 86% at the high end of our 84 to 86% target range. Operating income was $24 million or 20% of revenue compared to $15 million or 14% of revenue in the same quarter last year. The outperformance compared to our guidance was primarily due to lower payroll and other personnel costs. 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 $597 million in cash, cash equivalents and investments. On a trailing 12 months basis, billings were $492 million, an increase of 7% compared to a year ago, in line with our target for the quarter. With respect to Q2, we anticipate trailing 12 months billings growth to be approximately 7%. At the end of Q1, total RPO was approximately $430 million, increasing 11% year over year. Of this amount, approximately $302 million, or 70%, is expected to be recognized over the next 12 months. Now turning to guidance. For the second quarter of fiscal 2026, we expect revenue in the range of $122.5 to $124.5 million, representing a growth rate of 6% to 7%. And net income per diluted share attributable to PagerDuty Inc. in the range of 19 to 20 cents. This implies an operating margin of 17%. For the full fiscal year 2026, we now expect revenue in the range of $493 to $499 million, representing a growth rate of 5% to 7%. This compares to the range previously provided of $500 to $507 million. A net income per diluted share attributable to PagerDuty Inc. in the range of $0.95 to $1. This implies an operating margin of 20% to 21%. This compares to our prior guide of 90 to 95 cents and 19 to 20% respectively. Looking ahead, our strong balance sheet with nearly $600 million in cash and investments provides us significant flexibility to execute on our priorities while returning capital to shareholders through our $150 million share repurchase program. This balanced approach to capital allocation combined with improving sales and marketing efficiency as our enterprise reps ramp positions us well to deliver improved growth in the second half of fiscal 2026. With that, I will open up the call for Q&A.

Thank you, Howard and Jennifer. We're going to invite our panelists to ask their questions and we'll turn first to Mr. Rob Oliver over at Baird. Rob, if you'll come online with us.

You guys hear me okay?

We do.

Okay, great. Hi, Rob. Hey, how are you, Howard? Hi, Jen. I'm trying to turn on my camera and it doesn't appear to want to come on. there you are there you are moves a little slowly today um so uh thank you for taking my questions i guess um jen first question for you um you know obviously you guys called out the some of the enterprise pressure that you're seeing, you know, obviously the pace of innovation right now within the IT Sweden in particular within DevOps is pretty rapid given the emergence of generative AI. And I know you said, you know, proving market fit or the language that you guys used for your gen AI solutions is one of your goals. But, you know, talk a little bit about, you know, how much of this is execution and how much of this is people perhaps holding back and looking at what other solutions might be out there. Is there a little hesitancy on the part of some enterprises given just how rapid the evolution of this market is on committing to multi-year contracts? Anything you're seeing there would be helpful. And then I had a follow up for Howard.

Sure. Thanks for your question. It's primarily execution. We undertook and initiated significant transformation in the quarter. It led to some gaps in the way we engage customers. The combination of moving some reps out of the business, bringing new reps into the business, reassigning territories, as you often do at the beginning of the year, just led to some of those coverage gaps. And that's on us. I think that's an anomaly as opposed to an ongoing issue. And what we see, what I look at, what gives me confidence is the fact that new logo growth this quarter, which really signals demand, particularly from native AI companies, but also from large companies that are making investments in AI. AI infrastructure in AI offerings and even using AI internally, those new logos grew more than we've seen in the last two years, eight quarters. The changes in the investments that we're already making in sales are leading to early indicators of what I think will be stronger execution through the back half of the year. And as Howard mentioned, more than 60% of our reps in the back half will be entering their second year or more with us. So we're gaining experience and these are reps that come to us with more of a modern enterprise, sales capability, a value centric selling motion, and a top down to relationship driven capability with the C level folks that are making the decisions that you're talking about. We've proven, I think, the value of the operations cloud with these large transformative deals. I talked today about a financial market infrastructure company that did a seven figure deal with us, really leveraging the entire operations cloud. We talked about a a large LLM provider that also landed with us as opposed to working with potential other vendors out there. I don't think it's about the decision-making process. I think it's about us getting ourselves to the table and effectively demonstrating what we know works, replicating what we've done with transformative OpsCloud deals elsewhere and scaling that through the organization. As you know, we've had success in increasing the percentage of ARR that's covered in multi-year deals. The last thing I would say that gives me a lot of confidence around this and also has me very focused on execution is we've built a very strong financial base. So we will continue to focus on improving our efficiency. We have a clear path to gap profitability and sales and marketing efficiency and return on investment is a specific focus going forward.

Great. That's really helpful. Thanks, Jen. I appreciate it. And then Howard, I had a quick follow-up for you. And that was just around the full year guidance implies, you know, revenue growth exiting the year at 5%. So I'd just be curious to hear from you, you know, essentially how sort of de-risked that feels to you. I guess a different way of asking the question would be what sort of precautions or extra considerations did you take did you bring to bear in that guidance relative to where we were at the beginning of the year? Thank you both very much.

Yeah, sure Rob. I would describe the guidance that we provided as being prudent. The primary input to that was based on the organizational transitions and some of the go-to-market execution challenges we had in Q1. That obviously has a flow-on effect in terms of revenue through the rest of the year. So on the basis of that, I reviewed what our current view would be in terms of that transition and the pace of those transitions. And as a result of that have factored in that whilst we would see improvements in terms of bookings through the back half of the year, as our sales reps continue to ramp, that we would need to have a different guidance range to reflect some of the early part of the year.

Thanks, Rob.

Thank you, and next we'll turn to Sanjit Singh. Sanjit is with Morgan Stanley.

Great, thank you everyone. This is Jamie on for Sanjit. I guess it'd be great to just get a sense of what kind of adoption trends you're seeing in new modules such as PagerDuty Advanced and Enterprise Plus.

Hey, Jimmy, it's still early days. I mean, some of the things that we're seeing in terms of adoption of our generative AI solution is one, we have customers that are very willing to experiment and other customers have to go through a significant process to get permission to experiment. But when you look at the products themselves, I mean, one, they are class leading applications that now have a chat native experience and a lot of our customers are working in Teams or in Slack and really want to leverage best in class incident management and automation applications. We enable them to do that without moving around. We're bringing unmatched data and machine learning So other vendors will talk about incident management or automation, but their data set does not compare in terms of our ability to orchestrate the entire incident lifecycle by leveraging proprietary workflow event people and embedded machine learning data. to deliver that automation and response. And one of the things that we changed in the last quarter was we started to seed access to some of those newer features in all of our pricing packages. Historically, to discover and try some of those things, you had to be in one of the higher packages. And I think that's created, that's removed some friction from trial. We're also making it easier to access our AI products by enabling customers to opt out as opposed to requiring them to opt in. So that reduces some of the friction in the product-led growth flow. But the feedback from both our early access partners and customers who are using the generative AI products has been very strong. And these are products, generative AI products, It's a big time saver. It's additive to the humans that are under stress trying to respond to and diagnose an event. We're really excited about the agentic offering where you're going to be picking up whole tasks and workflows and really taking work away. off the plate of responders. And frankly, I think you'll need less responders and less people capacity being interrupted during their day to manage these big incidents. So excited about that. Overall, very good reaction. At PagerDuty on tour, it was probably the thing that we heard the most discussion about from customers. How do I get my hands on this? How do I get my team starting to use this? What do I need to do to make that work? So still early days for us, but we have a lot of confidence around the combination of our generative AI offering and our agentech offering that's coming out this quarter.

Great. Thank you so much. And then just as a quick follow-up, would you be able to just give any additional color on the demand trends you're seeing in the SMB portion of the business versus enterprise? Sure.

Yeah, we've seen, this is now two quarters of, I would say, an improving demand signal from SMB where over previous quarters, we were seeing a real deceleration. We're seeing new logos back, new customers landing again. And I think a big part of it is access to capital that we're seeing leadership from that segment of native AI companies that are well-funded, that are growing fast, that are adding employees quickly. but also are looking for a modern, highly scalable, highly secure operations platform because they can afford risk around operational issues associated with their agents, their applications, their infrastructure, their LLMs. And we've also seen that trend cross over into enterprise. You've heard us talk in the past about large semiconductor providers that are working with us and investing and expanding multiple quarters during the year. So from a sector perspective, I would say, you know, SMB continued to strengthen from one quarter to the next. I think us separating our commercial segment, which is really a digital first motion, and moving that under our CRO in order to refine our focus on enterprise is also important because it means we can continue to evolve our product-led growth motion that drives a lot of top of funnel acquisition and maturity, but also be laser focused on the enterprise transformation that we are working through.

Excellent. Thank you so much for the question.

My pleasure.

Okay, team. Next, we'd like to hear from Miller Jump at Truist. Miller, please go ahead.

Hey, thanks for taking the questions. So I guess I'd like to also just dig in a little bit more on the enterprise churn that you all have talked about. You know, particularly if you could give any more color on how broad based this was in the customer base, and then maybe just in terms of the scope of the deals, like, or from a linearity perspective, really, like, was this something that kind of popped up at the end of the quarter? Obviously, April was a crazy month. And you know, where you see it now? Thanks.

Lily, you were in the same April I was in. Just to distinguish the two. So we saw more churn, elevated churn in SMB. And that tends to be our long tail. Those are smaller customers, et cetera. In enterprise, the issue was downgrades. And I mean, we had some anomalistic things happen this quarter, for instance. We had a handful of customers where we saw downgrades in terms of seats because two companies merged together and those mergers were synergistic and resulted in just less total employees. And we saw that across several regions. I think it was more coincidence than a trend. We also saw some companies that I think were being more cautious because of just the ongoing uncertainty in the macro environment. I mean, I would say that the macro continues to be uncertain for some folks and a lot of it is driven by different reasons than maybe the uncertainty was driven by two quarters ago, but it's still uncertainty. And so we need to be more proactive in helping customers understand how we become part of that solution, help them find additional operating margin, help them create efficiencies, help them reduce the amount of people necessary to do things, free people up to build innovation and deliver top line revenue. And that's something that I'm confident our enterprise sales force is scaling towards and certainly our top reps do that very, very effectively. To your point on seasonality, you know, our quarters have become more back and loaded as we've shifted our focus to enterprise and April was a little bit of a weird month. But, you know, I would say that our performance really driven by our execution as opposed to anything macro related and we're committed to addressing that quickly.

Yeah, and I would just add to that, Jen, we have introduced a number of post-sales changes since our chief customer officer joined us, which is really changing the way in which we think about renewal management in a far more proactive way. So I think those changes from an operational perspective will help mitigate some of the type of retention issues that we saw in Q1.

really helpful. If I could just sneak in one more for Howard, you know, given given, you know, pivot to enterprise, we've got, you know, I think really constructive pipeline commentary you gave at the beginning of this year, as well as, you know, reps becoming more mature as we move through this quarter. I'm curious just how that translates into your expectations for net retention rate as we move through the year and maybe what's baked into guidance there or any general characterization of that.

Yeah, sure. So the way that we're thinking about net retention for this year is we expect it to be in a range of 103 to 105%. Part of that is because when you look at net retention, it's a trailing metric for us. any shortfall that you might have in one period then carries through into the next period. So when we look at it, we've modelled into that the effects from Q1 through the rest of the year and taken into account how we would expect to see reps ramp as we go through Q2, Q3 and into Q4. And with that respect, we would expect to see some change or shift in the dollar-based debt retention through the year. What I would say is what's positive is that we have a lot of opportunity for expansion with our customers. So even in this quarter, we saw 25% of our enterprise customers expand with us, albeit small expansion. So the opportunity is there. I often look at our customers who spend more than 100K with us, and they only represent 6% of our total base. So the opportunity is there for us to get a whole lot more customers into that cohort spending more than 100k. So our enterprise sales team have a lot of opportunity ahead of them since we have this great base of customers today who are ripe for expansion. And that goes well with the increase that we see in terms of new customer acquisition. Thank you very much.

And next, thank you. We'll turn to Matt Bullock with B of A. Matt, please go ahead.

Great. Hi, Jen and Howard. This is Matt Bullock on for Koji Ikeda. Thanks for taking the question. I wanted to touch on billings. So It looked like a pretty strong quarter. Billings accelerated to 7% year over year versus 5% last quarter. But TTM Billings decelerated a tick. I know you guide to TTM Billings, but maybe could you help us think about what the better indicator is for the underlying strength of the business going forward?

Yeah, so the training 12 months billings tends to align more closely with our annual recurring revenue number. So that gives you a clearer picture than the quarterly billings because our quarterly billings are often subject to a lot of fluctuation because of the way in which we co-term with our customers.

Understood. Thank you.

Okay, next we are going to hear from Andrew Sherman at TD Cowan. Andrew, please join us.

Oh, great. Thanks, Jen, Howard. Good to see you. Hi, Andrew. Interesting win, Jen, on the AI research company, six-figure win, and maybe just some more color on how this deal came about. Is this a big household name we would all be familiar with? What products and use cases are they using? Is there room for additional expansion from here? Anything like that?

Yeah, we work with several of the household names that you would be familiar with in the AI world. And we're getting a lot of confidence from our ability to win. These folks are incredibly highly valued people. They have a lot on the line in terms of their delivery and execution, and they are pure tech companies. So the technology needs to work, and it's not perfect. I mean, we all know that all technology is complicated and increasingly more complicated. It doesn't work all the time. But when you're also dealing with the combination of LLMs, building infrastructure to support those LLMs, managing agents and applications associated with those LLMs, It's a new operating frontier, and we are perfectly poised to meet that challenge right now. So we're finding, as long as we are with the right technical leader who has a vision for what their operations need to look like, and is also thoughtful about end-user experience and the cost of failure and what that looks like, that there's a clear path. In this new set of use cases, around managing the operations of your ai investments whether they're your hardware investments or energy consumption or applications or agents uh is one of the things that is expanding our tam and so we're we're starting to see kind of traditional like i just need to manage my my platform my products and services well initially i need to have people well orchestrated if something does go wrong to wait How can I integrate directly into some of these products and services to improve the robustness and the reliability of the service to the end user themselves? And in some ways, you can think about it as an adjacent, very similar metaphorically use case to incident management, but the stakes are a lot higher. The technology is more complicated and time is much more important. The cost of time is much higher. And the last thing that I would say is there's a lot of scrutiny around the industry associated with security, reliability and resilience. And so some of the smaller players just can't rise to that occasion from a technology perspective.

Great. Makes sense. Nice. One more for you, Jen. How did the non-incident management products perform in the quarter that had been a pretty good growth driver for you most of last year? Just curious how that trended this quarter.

Yeah, AIOps continues to sort of be at the front of the helm, and it's interesting to me when people ask me about our AI products. There's a lot of currency and newness in that question, but we've been at this AI thing for now eight and a half years. Our AIOps offering is becoming increasingly mature and we're also seeing new use cases around it develop. And I'll give you an example of one where customers are asking us to help them understand or identify ways they can reduce the cost of observability spend. So, you know, people are writing huge checks for observability. There's a lot of signal coming in or a lot of events coming into their infrastructure teams and ops teams to try and manage. And not all of that event flow is signal, a lot of it's noise. And most of our customers are using five, 10, 15 observability players to try and manage their operational environment. So one of the use cases for AIOps is looking at how do I manage that cost better and that investment better, get a higher return on investment by really understanding where I'm getting signal versus where I'm sending noise unnecessarily. And so as that product matures, we're seeing more use cases than simply, during incident or post incident analysis. We're also seeing customers use AIOps to really try and stack rank and understand like where is their fragility or tech debt driving the most costs? What should they be prioritizing in terms of burning down that tech debt? Or, you know, where might they push or prioritize some investment to reduce operational risk across their technology ecosystem. And so even as I describe these use cases, customers are coming at it from very different places in the continuum of just getting started to being operationally mature and really fine tuning.

Excellent. Thank you.

No problem.

Thank you. And next from Craig Hellam, we'll hear from Daniel Hibschman.

Jen, Howard, good to see you. Hi, Daniel.

Hi, Daniel.

I just wanted to start off with just with the profitability guide. I don't think we've really touched on that too much yet. In terms of revising that upward, you know, is this cost cuts in certain areas? Is this not layering in, you know, investment previously expected, just costs coming in later? What if anything needs action? Just kind of walk us through that.

Yeah, sure. So Daniel, we have a track record of improving operating margins. So I take a long-term programmatic view around how do we help ensure that the investments we're making are delivering and that we're able to become more efficient over time. And so certainly as we've looked through the rest of this year and into next year, the investments that we've made to date still provide us with capacity to be able to exceed our growth goals, but also ensure that we continue to invest in innovation. So we've taken a view on operating margin for this year. And in fact, if you look at our long-term operating margin goal of 30%, we have a view around how do we in fact ensure that we're continuing to be a profitable growth company. That means that when I look through our sales and marketing from an efficiency perspective, we have an opportunity there to be more efficient. So that's an area that we will continue to focus on. And of course, for us, the bigger picture is that milestone around getting to gap profitability. And that really is reflective of us taking a serious look at how do we improve or reduce stock-based compensation. For example, we've seen a reduction even in this quarter, it was seven percentage points lower than what it was in Q1 of last year. And continuing to then manage things like dilution and share issuance as part of that process. So for us, it's a long-term view and continuing to put in place a programmatic, multifaceted approach to ensure that we get to improving operating margins.

Okay. Thanks, Howard. And then just in terms of clarifying the messaging around, you know, Robin, the first question was asking about in terms of the guide implying a bit of a decel in the revenue growth rate by the back half to around, you know, call it 5%, 6% by Q4. And we discussed on the call here some expected improvements through the back half from hopefully CRO coming in, reps ramping. Just talk me through there the message to get that clear in terms of expecting some of a decel in revenue, but also expecting improvement. Just where should we be looking for that improvement if not in the revenue top line? Is that internal things? Is that like quota attainment sales cycles? Should we be looking at an ARR? Just clarifying around that.

That is correct. So we would expect to see, because most of our revenue is subscription-based, we would expect to see improvements in the bookings, which won't translate into much benefit for revenue within this year. So just the nature of the The revenue recognition model means that what we get to recognize is reduced as we go further through the year and having the back half of the year expecting to see that improvement in execution reflected in bookings in ARR effectively in the back half of the year means that that revenue benefit largely flows into next year.

Okay.

That makes total sense.

Thanks, Arit.

Jen. Thanks, Daniel.

Thank you.

We do have a couple more analysts lined up. Just a reminder to our team out there, if you'd like to ask a question, please use Zoom to raise your hand if you're joined as a panelist, that is. Next, we're going to hear from Jayden Patel. Jayden is with, excuse me, JPMorgan.

Great. This is Jayden on for Pendulum Bora. Thanks for taking the question. Just a quick one. I understand the trailing 12 month billing sky to 7% in Q2. But can you talk about how you're thinking about the rest of the year? You know, should we expect more stable trends there? Or could you see some acceleration? Thanks.

Yeah. Hi, Jaden. So in terms of Billings growth, we haven't provided any guidance beyond the numbers that we provided in terms of this next quarter on a trading 12 months basis. But directionally, the way that we're thinking about it is that in line with our sales reps ramping, we would expect to see overall better sales. bookings performance in the back half of the year than we would in the front half of the year. That typically translates into improvements from a billing perspective, and we would expect to see it show up in improvements from an ARR perspective.

Great. Thank you.

Okay, team, it looks like we're rounding it out with Jacob Zerbeb from William Blair. Jacob, if you'd like to join us.

Yeah, hi, team. This is Jacob Zerbeb for Jacob Bears, and thanks for taking my question. I just wanted to touch on what you're seeing in terms of visibility from a large customer. So you previously highlighted that multi-product deals are starting to give you more visibility into pipeline, but Just given some of the moving pieces in sales and the broader macro, has anything changed on that front?

No, I think the enterprise market environment and demand for the multi-product platform and, in fact, multi-year term deals continues to be strong. This is really about us executing. And the thing that gives me confidence is I look at some of the transformative deals we do each quarter and we talk about, you know, a few of them in prepared remarks. It really is about replicating and scaling the sort of recipe that works there. But there's the demand for our products and services, particularly AI enhanced incident management and AI ops, as well as automation, continues to be very strong. Some of our customers move faster than others. Some move slower than others and we saw some of that pace pick up in the native AI segment of customers and then we'll see some customers that mature much more slowly. But I think the opportunity to capture that demand is within our control. We've expanded our TAM by adding new products and services to the platform. We're seeing a lot of interest in our AI centric products, but we also see that new use case for helping our customers manage their AI product services and investments. So I'm very confident about our ability to accelerate growth in the back half and to do so while maintaining and delivering on our commitment to improve our efficiency, to get to gap profitability, and to increase the total shareholder return that we're delivering to our shareholders.

Got it.

Thank you.

Thank you.

Team, we had one more hand go up, if you'll allow it. I think we have a member in from Scotiabank. Let me add in for Nick. Nick? I just need to unmute. Thanks.

Hey, Jen and Howard. You have John Gomez on for Nick Allman. Thanks for taking my question. Hey. So as we think about the potential for AR to re-accelerate back to double digits, can you maybe just talk about what the biggest lever there is that needs improvement? Is it from gross expansion improvement? Is it more on the retention side? And the follow-up is the customer ads continue to be solid. So Can you just comment on how the net new AR from expansion and upsell should trend versus new customers as we think about the path to reacceleration?

Yeah, our customers tend to land small and grow over time historically in that transactional model that served us very well over many, many years. But as we've transitioned to more of a strategic enterprise motion, the lands are getting bigger, but they take longer. I think the area of focus for us very clearly is one, making sure that we retain our strategic customers and that we grow those customers through ensuring their value realization. And that's where having Allison, our new chief customer officer in place to sort of mature the post-sale services, post-sale adoption support that I think helps us get there. I think there is a tremendous amount of untapped value white space within our base alone, but we also rely on what has historically been a strong e-commerce kind of product-led motion for those lands. So I would never say it's one or the other, but retention and expansion of our most strategic large enterprise customers and execution around that demand that we see in the market is our focus. Doing that more efficiently is also important. Is that helpful?

Super helpful. Thanks, guys.

Great. Thank you.

Team, it looks like we've made it to the end of our questions. Jennifer, we'll turn it to you for any final remarks. Thank you.

Thank you all for joining us today. I know it's a busy earnings week and we just really appreciate your time. Most of all, I really appreciate our shareholders and our customers for their continued partnership and support and appreciate the customer obsession and dedication of our employees. So I hope you all have a great day. Thanks for joining us.