PagerDuty, Inc.

Good afternoon, and thank you for joining us to discuss PagerDuty's second quarter fiscal year 2026 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, 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 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.

Thank you, Tony. Good afternoon, and thanks for joining us today. In the second quarter, PagerDuty delivered revenue of $123 million, representing 6% growth year-over-year. Most notably, we achieved gap profitability for the first time in our company's history, while our non-gap operating margin reached 25%, exceeding both guidance and year-over-year expansion by 800 points. These milestones demonstrate our focus on driving profitable growth, our consistent operational discipline, and the fundamental strength and durability of our business model. Annual recurring revenue increased to $499 million, representing 5% year-over-year growth. Our ARR performance and dollar-based net retention of 102% reflect elevated churn and downgrades. Despite the decline in DB&R, driven largely by customer receipt optimization and cost containment initiatives, several encouraging trends are emerging that demonstrate expansion in our customer base and position us for future growth. First, new and expansion bookings increased by more than 15% sequentially. Second, similar to Q1, net new customer additions were strong, raising the first half total to 208, nearly three times the customer ads of fiscal year 25. And third, our high-value customer base spending over $100,000 expanded to 868 customers, increasing by 20 customers sequentially and 48 year-over-year. The underlying demand for our platform continues to expand significantly, with usage growing over 25% year-over-year, demonstrating the critical role the operations cloud plays in enterprise infrastructure. Even as revenue growth has been tempered by seed optimization initiatives across our customer base, this divergence between platform utilization and seed count validates our strategic shift towards usage-based pricing models that better align our revenue to customer value realization. Several initiatives underpinning these encouraging trends include usage-based AIOps, which is growing above 60%, flexible enterprise licensing, and AI automation capabilities now integrated across all operation cloud plans. This comprehensive approach creates a natural expansion opportunity that help drive cross-selling of our generative and agentic AI offerings while ensuring customers can scale their usage in alignment with their needs. We advanced our enterprise go-to-market transformation in Q2 with marked improvement across our international theaters, demonstrating continued platform demand and improving sales execution. Our sales team continues to mature and ramp, with over 60% of our enterprise reps now tenured at least one year. However, our America's sales leader performance has been inconsistent, prompting us to appoint a new leader in North America sales in late July and implement organizational changes flattening our structure to increase agility and to accelerate decision-making and customer responsiveness in this critical market. Platform usage growth in both volume and use case diversity demonstrates that the work itself is mission critical for enterprise operations. In fact, one of PagerDuty's key differentiators, our ability to orchestrate and automate the resolution of incidents, is more valuable than ever in a world where complexity is increasing. We are becoming the central nervous system for the AI-native ecosystem. From frontier models to code assistants and agents, the growth in the volume of code, applications, services, systems, and agents, along with the unpredictability of these environments, requires an operations platform that anticipates complexity, mitigates risk, and automates at a very different scale than we have seen historically. PagerDuty does this today. Our traction with native AI companies illustrates this point and validates our mid-term growth acceleration thesis. As a segment, native AI leaders now contribute 2% of total ARR and is growing rapidly. These companies represent the entire AI value chain from infrastructure to application and agentic delivery, They are choosing PagerDuty for our proven scaled resilience and ability to anticipate the enormous technical and customer demands of this evolving market. Central to acquiring and expanding customers is product innovation. In addition to ongoing releases in automated incident management, our four new AI agents, Shift, Scribe, Insights, and SRE will GA this quarter. Early access customers have provided encouraging feedback as we focus on customer adoption. All agents will be released with usage-based pricing models. Our ecosystem has advanced through strategic partnerships. Most notably, Amazon Q reached general availability as our first agentic AI partnership. The Amazon Q integration offers over 40 data connectors, enabling customers to leverage their enterprise data and knowledge bases through PD Advance, our chat assistant, and our agents. We are uniquely positioned as the incident automation platform that's integrated with Amazon Q, enabling customers with both solutions to leverage additional data as part of the operations lifecycle, from diagnosis through triage to resolution. We continue to have the depth and breadth of integrations with more recent additions for Backstage, Azure SRE, Arise, and more. We've unlocked new ecosystem use cases with the recent release of our model context protocol, our MCP server. For example, incident responders use our advanced chat assistant to correlate incidents with related GitHub deployments, Salesforce customer tickets, and dependent service impacts, providing comprehensive situational awareness that accelerates resolution. We are enhancing strategic partnerships, leveraging MCP with Microsoft Azure, Amazon CloudSmith, and observability vendors to incorporate Azure resources and telemetry data into agentic diagnostics and SRE agent remediation. Our customers continue to optimize their digital operations, improving customer experience and mitigating the escalating cost of disruptions. In the rapidly evolving AI space, a specialized cloud infrastructure provider for AI and machine learning workloads selected PagerDuty with a six-figure multi-year commitment. This customer was navigating daily high event volume while working to meet its availability commitments for compute intensive workloads. Growing event volume made it noisy and incredibly difficult to prioritize what matters most, a problem that traditional monitoring solutions couldn't effectively handle. PagerDuty's AIOps is a game changer with automated intelligent correlation and orchestration, transforming overwhelming event volume into actionable insights and service recovery. AI augmented event correlation helped ensure reliable AI infrastructure services for the company while dramatically improving operational efficiency. This strategic relationship validates PagerDuty's central role in the emerging AI ecosystem and demonstrates the relevance of our proven resilience and effectiveness in addressing the most complex challenges facing native AI companies today. In the highly regulated telecommunications sector, a Singaporean telco leader selected PagerDuty's Operations Cloud for a transformative six-figure, three-year IT modernization initiative. With PagerDuty, the customer is addressing critical inefficiencies that led to customer experience issues and regulatory risk, instigating funding of their first major investment in modern incident management. This comprehensive deployment of enterprise incident management, AIOps, and gold services automated their incident response workflows, reducing time to resolution from 30 to 40 minutes to just two minutes, delivering significant annual cost savings that far exceed their platform investment. Their P2D deployment not only enhances their existing ITSM investment, but also ensures regulatory compliance with evolving Singapore teleco standards, positioning them for continued innovation in the competitive Southeast Asian market. This selection validates our enterprise-grade capabilities in a mission-critical infrastructure environment where reliability and rapid response are paramount. A global financial infrastructure and data provider expanded their PagerDuty relationship with a significant six-figure agreement to modernize their operations capabilities and support their zero-risk operational objective. Given that disruptions impact global markets and create regulatory risk, this customer required enterprise-grade incident lifecycle management that could seamlessly integrate with their existing technology. PagerDuty's comprehensive platform integrations and automated incident management directly address this critical requirement. This strategic expansion instantiates pager duty as the central nervous system for their complex multi-vendor operational environment, helping them to deliver against arduous regulations and reduce enterprise risk. The customer's decision to deepen their pager duty investment exemplifies our market leadership in the most sophisticated and demanding environments. On the innovation front, PagerDuty was named AIOps Platform of the Year in the 2025 AI Breakthrough Awards and was shortlisted for the 2025 SAS Awards in multiple categories, including Best AI-Powered SAS Solution and Best Enterprise-Level SAS Product. PagerDuty.org continues to grow its customer base, now serving more than 650 nonprofit organizations globally. Reflecting these efforts, PagerD was honored with the 2025 Trust Radius Tech Cares Award, recognizing our meaningful contributions to communities, employees, and the environment. We are pleased to announce the appointment of an exceptional enterprise-focused leader to accelerate our go-to-market transformation. Todd McNabb will join our leadership team as chief revenue officer later this month. Todd brings more than 25 years of experience scaling companies across diverse industries with a proven track record of driving growth within enterprise organizations. He will lead our global go-to-market organization, including sales, service, customer support, and success. Todd's addition to our leadership team represents another significant step forward in our growth trajectory and reinforces our dedication to building a world-class organization serving the most important enterprises of our time. Our strengths are clear, a strong and growing customer base, an unparalleled track record of resilience at scale, an industry-leading, innovative platform for managing mission-critical operational risk. Our leading indicators demonstrate improved execution this past quarter, including a second quarter of strong paid account additions, growth in $100,000 accounts, and international performance that exceeded our targets. Moreover, our focus on profitable growth and operational execution is driving significant expansion in margins, providing consistent cash flow, and supporting our expanded capital return authorization. As we advance our enterprise transformation, the fundamental strengths of our business underscoring our progress are expanding margins, our first gap profitable quarter, and disciplined capital allocation that mitigates dilution while positioning us for growth reacceleration. These results, coupled with the compelling demand trends we see in platform usage, demonstrate our critical position in the emerging AI ecosystem and reinforce my confidence in our outlook. Thank you to our customers for your loyal partnership, our shareholders for your ongoing investment in our future, and our employees for your dedication. With that, I'll turn the call over to Howard, and I look forward to your questions.

Thank you, Jen, and good day to everyone joining us on this afternoon's call. Before reviewing our second quarter financial results, I want to highlight our strong operational discipline, translating to our first quarter of GAAP operating margin profitability. We expect to be at or near this level in the second half before being GAAP profitable for the full year next fiscal year. And now, 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. Moving to results. Revenue for the quarter was $123 million, up 6% year over year. International revenue increased 12% annually, contributing 29% of total revenue. Annual recurring revenue exiting Q2 grew 5% year-over-year to $499 million. In the second half of the fiscal year, we expect incremental ARR to be significantly higher than the first half. The maturing of our enterprise sales motion in conjunction with our new North America leader and a more agile structure underpins this expectation. We delivered 102% dollar-based net retention compared to 104% in Q1. DBNR was negatively impacted by lower gross retention, largely as a result of downgrades. We expect dollar-based net retention to remain at this level in the second half as our pricing and packaging becomes better aligned with customer value realizations. Customers spending over $100,000 annually in annual recurring revenue increased by 20 from Q1, or up 6% euro per year, resulting in 868 by quarter end. Total paid customers grew to 15,322 in Q2, adding 75 net new customers. Free and paid companies on our platform grew to over 33,000, an increase of approximately 13% compared to Q2 of last year. Q2 gross margin was 86% at the high end of our 84% to 86% target range, reflecting the uniquely efficient technical architecture we have developed to service our customers. Operating income was $31 million or 25% of revenue compared to $20 million or 17% of revenue in the same quarter last year. The outperformance reflected our focus on increased efficiency and operation execution with lower payroll and other personnel costs. In terms of cash flow for the quarter, cash from operations was $34 million or 28% of revenue and free cash flow was $30 million, or 24% of revenue. Turning to the balance sheet, we ended the quarter with $568 million in cash, cash equivalents, and investments. During the second quarter, we retired the remaining $58 million of convertible debt issued in June 2020. we are generating significant consistent cash flow, which leaves us well positioned to execute our enterprise transformation while also returning capital to shareholders. The board has expanded our current share repurchase program to $200 million, providing us with increased flexibility to opportunistically repurchase shares in the open market, subject to market conditions and legal constraints. On a trading 12 months basis, billings were $496 million, an increase of 6% compared to a year ago, just below our target of 7% for the quarter. With respect to Q3, we anticipate trading 12 months billings growth to be approximately 7%. At the end of Q2, total RPO was approximately $425 million, increasing 5% year over year. Of this amount, approximately $295 million, or 69%, is expected to be recognized over the next 12 months. $100 million, or 24%, over months 13 to 24, and the remainder thereafter. Now turning to guidance. For the third quarter fiscal 2026, we expect revenue in the range of $124 to $126 million, representing a growth rate of 4 to 6%. A net income per diluted share attributable to PageDuty Inc. in the range of $0.24 to $0.25. This implies an operating margin of 21%. For the full fiscal year 2026, we now expect revenue in the range of $493 to $497 million, representing a growth rate of 5% to 6%. This compares to the range previously provided of $493 to $499 million. A net income per diluted share attributable to PagerDuty Inc. in the range of $1 to $1.04, This implies an operating margin of 21% to 22%. This compares to our prior guide of $0.95 to $1 and 20% to 21% respectively. We remain focused on the path to accelerating ARR growth, confident in continuing to expand margins and achieve gap profitability in FY27, and with consistent cash flow being able to return capital to shareholders online. all while delivering market-leading innovation. With that, I will open up the call for Q&A.

Thank you. And to our analysts on the line, please feel free to raise your hand so that we can cue you for our Q&A period here. Our first question will turn to, well, we had a hand up from Sanjit Singh over at Morgan Stanley. Please go ahead.

Hi, thank you. Apologies for not being able to hear you. Can you hear me now, Jennifer?

Yes, thank you.

Yeah, sorry about that. Apologies. My video is not working for whatever reason. Nothing to look at anyway.

No, we know what you look like.

When we think about, like, the trend line of the business, I guess the message that I'm hearing specifically with the gap profitability targets is that this can be a much more profitable business going forward. I totally hear you on the second half improvements in terms of ARR. When I think of, like, the IT operations category, which includes incident management, AI ops, Obviously, the observability guys. When I look at some of the other parts of ITOps, it sounds like business is stabilizing. Some of that's due to AI-native customers and their customer bases ramping like it is for you guys. Why do you feel like in this segment of the market, growth is on an absolute basis lower and maybe quicker to, let's say, rebound versus some of your peers in adjacent markets?

Sure. Thanks for the question. I mean, the things that I see that are very encouraging that give me confidence are our success during the quarter in new and expansion revenue and new logo ads. So we are starting to see that recovery and interest in the base. New and expansion was up 15% sequentially for the quarter. And as I mentioned, new customer logos were up over – I've got to find the number, 200, but more than 3X of what we saw in the full year last year, and we're only halfway through the year. So we are seeing the new and expansion muscle flexing again. We also saw very promising progress in our international regions who contributed above target for the quarter. It's really been North America that we're still in progress in terms I think, developing some improvements. And what I'd say is happening there where the retention pressure has been is that majority of that is seat-based optimization-driven downgrades as opposed to customers leaving the platform. So this transition that we're making to usage-based pricing is both important but also a much better way to align value that customers realize on the platform with monetization. You know, one of the things that gives me confidence there is when I look at actual platform usage and the demand signals that show what our customers are actually doing on the platform, in our core products, things like event flows, automated incident workflows, we see platform usage growing more than 25%, and in some cases over 100%. And this is not new products that I'm talking about. These are new features in automation. that we've delivered into the platform on the core automated incident management lifecycle. So as we better align monetization or pricing mechanism to that value realization, you know, I see that as a path to recovering and re-accelerating growth in FY27.

That's great. It's really encouraging to hear the progress on the new logo front for the first half of the year. I guess my follow-up to this question is congrats on the hire of the new chief revenue officer. In terms of how you think about the sort of mission statement for him in the first six months for the balance of this fiscal year, And then going into next fiscal year, can you talk about some of the initiatives and potentially the magnitude of change on the sales force and whether any potential sort of disruption is sort of embedded in the outlook?

Yes. Well, having been the interim CRO for the last quarter, I'm sure the sales teams are very excited about their new boss. But it did give me an opportunity to gain a number of valuable insights. I mean, one is we have to accelerate our transformation in enterprise and meet our customers where they are, anticipate their needs, and demonstrate consistent account coverage. with our economic buyers, but also continue to serve the needs of the developer community that uses our product. For Todd, I think job one will be to continue that enterprise transformation and drive more consistency in the performance of the team. But we have made a number of changes in the last quarter that lend themselves to a more efficient and more agile sales organization. We reduced some layers of And we've also done some work to make sure that we have more consistent alignment of our account executives and our customer success managers with our most important and our growing accounts. So I think that we've created a good timeline. kind of landing spot for Todd. And I also think Todd, with his domain expertise, having worked in the AI ops space, having worked in infrastructure, in VMware, in large enterprise, in global strategic accounts, he really is the right CRO for the moment. And we undertook an extensive search. So I'm really excited to see him starting later this month. And, you know, as I said, I think the priorities will be leading us through that enterprise transition and really taking what we've learned and where we're seeing progress in the international markets and working with our new North American leader to ensure we can also drive that improvement in North America. The teams are working really hard there, and I think we're going to see progress. that market start to show progress, really focus on customer love and customer retention, working closely with our chief customer officer who's now, Allison's now been in the seat for over a quarter. So retention is the second thing. And the third thing is instantiating the adoption of our AI-led products in the market. We're going to be in the market in GA this quarter with our four new agents alongside of PagerDuty Advance, and that's an exciting monetization opportunity for us.

Appreciate those thoughts, Jennifer. Thank you.

Yeah, thanks, Sanjay.

Thank you. Next, we're going over to Koji Kida from Bank of America. Please go ahead.

Yep. Hey, guys. Thanks so much for taking the questions. The first question I have for you is about quality of ARR. You know, you just hit 500 million or just about 500 million this quarter. And when I look back in the model, you were at a little over 400 million at the end of fiscal 23. And so how would you categorize the quality of the components of ARR today, which I think can help frame how NRR and other growth metrics like billings can stabilize and improve from here?

I mean, I'll start and then Howard can jump in. You know, we have made a significant shift in our business towards what I think of as large, long-term, profitable customers being the largest enterprise companies in the world. And we've had to learn a lot of new things as we've made that transition in a market that has been, you know, somewhat uncertain and volatile and exciting in many ways. And at the same time, like, those customers are the ones that rely heavily on us for managing their own products and services and operational environments in an ecosystem that's becoming more complex and more unpredictable. And, you know, the other thing that I would say is we're starting to see really large companies that come out of, more traditional technology backgrounds moving into this market and investing in incident management for the first time. So I talked about one of those companies today, but we also have seen a large pharma organization investing for the first time with us in the last few quarters doing a large expansion this quarter. And, you know, in the past, that was not even a vertical that was in our focus, and we started to see larger lands in pharma and healthcare, for instance. So I do think the quality of ARR improves because we are landing and expanding in more of these large enterprise customers, complemented by the success that we've had in the native AI segment, where now more than 50%, Half of the Fortune 50 AI companies are PagerDuty customers. These are companies like Anduril, Anthropic, Scale AI, CoreWeave that are also continuing to expand as they grow with us. So, you know, that's what I would offer you. Howard, anything you want to add there?

Yeah, and I would say, Koji, when I think about it, over that period, we've expanded our presence in the enterprise. So when we look at our ARR today, more than 75% is coming from what we would term enterprise companies. So those are customers that have revenues over $500 million. So we've seen that shift. and so our exposure to the SMB market, which has been more volatile, we've been able to manage that to some extent while still being able to attract and bring those folks on board. The other aspect that I would say is that we've become increasingly... So we have more than 65% of our ARR is coming from customers with two or more products. So we've had success in getting these other products into more of the customer base, and that bodes well in terms of being able to expand our footprint with our customers as we bring on our agentic offerings and our other ARR-based products. And then further I would say that when I look at it from a product perspective, and we've shared this number previously, today around 70% of our ARR is coming from incident management, so we have a growing portion that's coming from those other products as well. The other characteristic that I think is worth noting is that we've made a concerted effort to move more routinely, particularly for larger deals, to multi-year. We've seen a steady improvement in terms of the number of our contracts where customers are making arrangements for multi-year, two- or three-year agreements.

And so thank you for that. And maybe the follow-up here, which I think you gave the answer to, but I just want to make sure that it's addressed, is that, you know, you did kind of bring in the top end of the guide a couple million, but, Howard, when I listened to your prepared remarks, you're essentially guiding trailing 12-month billings to accelerate from the second quarter. And so I guess is there anything more specific or anything else that you needed to call out that's given you the confidence that trailing 12-month billings could accelerate from here?

Yeah, so we expected even coming into this year that by the end, by the back half of the year, we would have more of the building blocks in place in terms of our enterprise transition. So when I look at the incremental ARR expectations for the back half of the year, we expect those to to be significantly higher what they were in the first half of the year. So that contributes to improved billings performance. We also have Q4 as a large billings quarter for us because from a seasonality perspective, that is one of our biggest quarters for renewals. So those things contribute to our view on the trade in 12 months billings. So we expect that to be around 7%. Got it. Thank you.

Thanks, Koji.

Next, we'll hear from Jacob Robert with William Blair. Jacob, please go ahead.

Yeah, thanks for taking the questions. You all talked a lot about needing to transition to more of a usage-based model. I guess the question is, how do you see that progressing over the next few years? And then for customers that you've spoken to about that transition, what's been the feedback thus far? Is this something that they're ready and willing for, or will there be a bit of an education period for customers?

Well, obviously, we won't be able to move all customers at the same time because customers tend to like to make these transitions in their renewal cycle. So this will be a gradual process over the next couple of years, particularly given, you know, a lot of our customers are now multi-year. I think this quarter, 45% of our revenue was multi-year. And so – but I would tell you that customers are very open to it, and we can see that – in our existing usage-based pricing where our products that have usage-based pricing grew 60% in the quarter. So what we try and do is seed a customer with a starting point and then give them the opportunity to grow their usage as they need it. as opposed to it being associated with the number of people on the platform. And the reality is, as we've added more and more automation to the platform, the platform is doing some of the work of the people that customers are licensing, and they understand that, right? It's also easier for them to articulate the business case for the investment in our platform if it is tied more directly to value realization. So, so far, you know, I would say that customer feedback has been encouraging and And, you know, we're already into that process to some extent because all of our new products over the last 18 months, two years, including PagerDuty Advance and our agentic offering that is GAing this quarter are usage-based along with AIOps. Plus, we've been working with our large customers to deliver more flexible custom pricing, particularly as it relates to helping them leverage flexibility across products so that they're not licensed specifically one single way for everything and have to try and administer those tradeoffs themselves. So as we've opened up to more flexible licensing engagements. That's also opened up the discussion for what customers are looking for, and that's really educated us in terms of, you know, what our offering needs to look like going forward.

Okay, that's helpful. And then you talked about the second half improvements in that you are being based on the recent go-to-market changes, increasing rep tenure, and then some of those net new comments. But just in terms of the larger renewals that are coming up in the back half of the year, given that transition to the usage-based model might take some period of time, is there anything that you're looking to do to help mitigate some of the seed downgrade issues that you saw that this quarter as you're making your way through that transition?

Sure. And I'm frustrated by the downgrades. I think we can always do a better job of delivering consistent account management, making sure our customers are successful in the first 14 or 90 days and every day of their contract lifecycle, making sure that we do a better job of monetizing, growing usage and value creation for our customers is, is super important. But I'm also excited to see that our usage-based products are growing even within our base and that usage of the platform is growing because that lends itself, to your point, to more retention within the base. And, you know, having Allison Corley, our Chief Customer Officer, now in seat for more than a quarter. She's actually with our customers in Europe this week. She's also putting more rigor and discipline around getting ahead of these renewals and planning for them and working jointly with customers on a roadmap to growth. And there will always be challenges. I mean, not all of our customers have businesses that are going well. Some customers are still looking for cost optimization. But what's really encouraging is the fact that at the same time, We're focused on improving retention and working through this monetization transition. We're also seeing new and expansion strengthening, right? That 15% sequential growth, the 200-plus net new logos in the first half, and the fact that that's 3X what we saw last year. For me, that gives me a lot of confidence in our path and the fact that we're able to continue to have strategic conversations with our customers even when sometimes things The short-term impact is not what we'd like. The long-term relationship is growing. So overall, I'm really encouraged. And, you know, we've got a lot of work to do in the back half, but we've got the right team to do it. And our go-to-market organization, as well as our product innovation teams, are working really hard.

And Jacob, I would just add from a pricing perspective, one of the aspects of the new pricing models that we are rolling out are about increasing flexibility for the customer. So historically, when our customers purchased, they were buying, if you like, a narrow product or a narrow plan. We've been upgrading our packaging progressively to be able to see different aspects of our platform, whether it's the incident management, the AI, AI ops, automation across multiple plans. And included in this initiative, particularly around renewals as we go into Q4, is to help customers take advantage of the flexible licensing, which would then give them access to more product and which would then also allow them to mitigate, if you like, some of the impacts of potentially less users because they'd be gaining access to more products, and that would deliver greater value to them. Very helpful. Thanks for taking the questions.

Thanks, Jacob. Thank you.

And I'd just remind our analysts on the call, go ahead and raise your hand to be cued to bring your question to the group. Andrew Sherman, we're going to you with T.D. Cowan. Go ahead, please.

Great, thanks. Good to see you all. Congrats on the – good to see the better execution in the quarter. We'd love to dive a little deeper, Jen, into the second-half drivers that you're talking about here. Is the shift to consumption going to start for some customers in the second half, and that can start to help drive some better growth out of them, or maybe that's more of a next-year event? I think you made a comment that it can help accelerate that. growth next year? And then what signals in the pipeline or aspects about your renewal cohort in Q4 are giving you the confidence that a lot of these deals can close?

Yeah, thanks, Sandra. Nice to see you. I would say one, we know coming into the back half that we have 60% of our enterprise reps already, you know, more than one year in tenure, whereas they were ramping in the first half. And that lends itself to stronger account coverage. higher quality pipeline and more liquidity in the pipeline. So that's something that we have been working towards now for some time. I think the usage-based pricing will take time to develop, but where we're already seeing early positive signs is in products, the new products, attached products that are out in the market, like AIOps. for instance, PagerDuty Advance. And, you know, we're starting to see some really exciting adoption of the four PagerDuty Advance agents, the Scribe, SRE, Insights, and I forgot one. Howard, jump in. Thank you. The Shift agent. And these things automate more and more of some of the toil and the arduous work that happens during a major incident, but also in advance of the incident, the sort of non-crisis work that goes on in the platform. And so that adoption, I think, will contribute to our ability to talk about broader platform opportunities. The last thing I would say is it's really encouraging to see new and expansion improve across the board, especially in our international regions. and new logo lands really showing up in the first half. And I think that's, you know, a demonstration of the cut through we're getting with native AI companies. So when you think about our traction with AI natives, The fact that we're demonstrating we're important and central to the emerging AI ecosystem, the strong adoption that we're starting to see in our EA, usage, growth on the platform, and making progress on this enterprise transition with the new CRO and the CCO&C, those are the things that are giving me confidence for the back half.

Yeah, that's great to hear. And on that AI natives, the 2% of ARR was interesting as well as the over half of the biggest 50 AI companies it sounds like. How quickly did some of these become customers? Was this part of this quarter itself? And maybe just talk about their usage of the platform, which products, how quickly they've kind of expanded already in some cases and and how this kind of validates the PagerDuty platform as central to AI, like you just mentioned.

Yeah, what's been really interesting is these customers span from the frontier models that we all know of, I mentioned Anthropic earlier, infrastructure solutions like Scale AI, some of the applications that sit on top, agentic platforms that we're seeing. And even, you know, we don't include this in the Forbes 50 AI companies, but even some of our more traditional customers are making significant investments in their agentic offerings. and looking for support to manage those solutions in production. But what we see is sometimes they may start with a lower cost solution and realize that it won't scale. Sometimes they're starting small with us in our digital first commercial. They come in through top of funnel and then grow over time. But what we're hearing is real deep interest in automation. The fact that it's an end-to-end solution, automated incident management solution and that we are leveraging AI as well and using our own proprietary model to help automate more and more of the solution. So they're not having to have hundreds of people involved in their incident response. It really does enable them to focus on research, to focus on innovation, to focus on product, but at the same time build trust because, as you know, When these models, these agents, when something goes wrong, and it does, you know, because you're shipping more velocity through the benefit of code assistance or, you know, using your own automation, you want to manage that effectively in the market and be able to transparently tell your customers that you're building a resilient offering. And so those are some of the... the trends we're seeing. But what I like about it is we're seeing a diversity of customers choose PagerDuty, like I said, from the models to the agents, the apps in the middle, and some of the most important infrastructure solutions. And those conversations have been great.

Great. Thanks, Jen.

Thank you, Andrew.

Next from CGF, we'll hear from Kingsley Crane. Kingsley, please go ahead.

Hey, great to see you all. Yeah, hi, Kingsley.

Hi, Kingsley.

So as you sell more strategic platform deals, I just want to check in on the user groups outside of IT and dev. Can you speak to the success you've had in customer service ops recently and just how core is that at this point to the strategy and re-excelling growth?

Yeah, we continue to see that as an add-on, particularly when our sales organization and the customers are aligning around the whole platform as a starting point. We used to sell sequentially. We used to start with almost on-call, then incident response, then a broader incident management offering, then AI ops, then customer service ops. And the new breed of sales reps are really going, you know, higher in the organization earlier on. having the conversation around, you know, different solution areas like IT modernization or improving the efficiency or automating the central IT operations center, even working with security teams or customer service to really just improve the automation of how quickly a customer can move from understanding they have an issue, and as you know from many calls, many of our customers experience learning about a major incident from their customers first despite the huge investment they've been making in observability and that continues to be a driver for the customer service ops solution so we are seeing that attached with operations cloud but i'm also really excited with the increased usage that we're seeing on pager duty advanced customers getting more used to using generative ai to kind of talk to the platform as it's working through as they're working through an incident and the response that we've seen to our PD advance agents, particularly the agentic SRE and agentic shift agent.

Yeah, that's really encouraging. And then on some of the J&A products, I think that you've incentivized customers with some credits that's resulted in some great responses. In many cases, customers have started to use more. So I'm just kind of curious what traction you've seen with that motion recently and how that's balanced with more of a product by nature.

Yeah, one of the things we're seeing is an expansion of the ecosystem play. So I mentioned the MCP server opening us up to new use cases where, you know, our authentic solution can work with others, whether it's gathering information from a GitHub repository or working with a Salesforce ticket or, you know, engaging with customers' internal knowledge bases or information sources. So it allows you to do a lot more of the triage and research associated with managing an issue more effectively. It also enables you to automate more of the post-incident learning and preventing that fragility from appearing again in the form of of a major incident. So we're starting to see customers using us differently than they have in the past, and the GA of Amazon Q, the Amazon Q integration, I think was important in that regard this quarter.

Thank you.

Thanks, Kasey.

Next, with Craig Hallam, we have Jeff Van Rie. Jeff, please go ahead.

Great, thanks, Jen Howard. Thanks for taking the questions. How are you guys?

Hi, good, Jeff. How are you?

Yeah, doing great, thanks. So a couple for me. First, just a couple numbers questions. On the platform, I think you mentioned the usage was up 20% year-over-year this quarter. What was that in the prior few quarters?

So we haven't reported that on a regular basis, and we look at usage across a couple of different tenants. We look at event flow across the platforms, how much information and data are we managing. We also look at automated incident workflows and incidents that are running. And something that I have shared in the past is that The pure number of incidents is growing across the platform because complexity is growing. As you have customers who are using code assistance, they're simply shipping and deploying more change, and that has a tendency to drive both more events, but also those events conspire to become incidents. What customers are looking to do, actually, is reduce the number of major incidents and reduce the the time those incidents take to resolve and the blast radius associated with those incidents. So I talked about a customer earlier who went from mean time to resolution, which was 30 to 40 minutes, you know, down to a couple of minutes, right? And that's what you want. You want to really constrain the business impact of an incident by reducing the time that it disrupts your customer experience or creates inefficiencies across the business. some of the growth that we're seeing is increasing over time, particularly as it relates to automated incident workflows. And that's a sign that our customers have become more open to and are readily adopting and using automated incident workflows, where they historically were doing that manually.

Got it. You referenced, I think, in the past few quarters this, you know, we're going to get to 60% of our base sales reps being a year in tenure. That was going to be a very pivotal thing, and you got there, and it sounds like in some respects it did what you thought it was going to do. And then on the inverse of that, obviously made this leadership change in terms of North American sales. So help me just contrast those because it sounds like there certainly was some aspect of what's playing out in the sales organization that you weren't happy with in the North American markets.

Sure. I mean, I will tell you that the progress in the international markets has come sooner and faster than in North America. Now they are smaller, so potentially more agile in their ability to adapt and adapt to a different market environment. But at the same time, I think we had the opportunity to be more disciplined in terms of the way we manage customer continuity, account coverage continuity, scaling, retention or retention practices, anticipating some of the work that needs to be done ahead of renewals, and just demonstrating to our customers that, not only should they expect but also be able to realize significant value from our products and services. And so, you know, the person we brought in to lead North America came out of HashiCorp, VMware, runs a very disciplined sales model, and is very focused on reaccelerating growth.

Okay. And maybe just last for me, you mentioned these seed optimization issues that you're taking on from your customers. Just talk maybe just about some of the chronology there. How has that intensity played out? How did it play through the quarter? Where are we now? It's just been a steady level of intensity in terms of seed optimizations that peaked and some of that pressure lessening. How would you define that trend?

Yeah, you know, I think it's been pretty consistent this year, but it really is tied to the decline in new job growth, particularly across tech workers. And also, you know, in some cases, we have customers that are making significant headcount reductions as a result of either, you know, their financial goals or their use of automation as well. And And like I said, you know, when we're building automation on the platform, seats just isn't a great monetization metric for the value that we create through automating this work and getting people out of some of these workflows. I think we'll continue to see pressure on seat-based licensing over the next couple of quarters, but we're anticipating it more effectively and cross-selling more effectively. And likewise, it's a very large TAM. There's a big opportunity to land new customers, whether they're native AI companies that are growing very fast and are super well-funded and not so much worried about headcount, or even seeing some of these more traditional verticals coming towards us like healthcare and pharma. We haven't talked much about public sector or federal, but I think there remains opportunity there. And, you know, what I've seen, particularly from our international teams, is they're doing a really good job of starting with the operations cloud. I'm seeing, you know, usage-based AI ops attached to most enterprise deals. I'm seeing customer service ops. I'm seeing better attach on services, et cetera. So it also comes down to the quality of our execution and the scalability of that execution, how we engage with customers in a repeatable way. So having Allison here in the seat is helpful, too.

Got it.

Appreciate it. Thanks so much.

Thank you, Jeff.

Thanks, Chip. Thank you. Miller Jump with Truist. We'll go with you next, please.

Hey, thank you for taking the questions. So you talked about higher quality pipelines in the back half of the system. on the sales cycle or close rates? I imagine they're higher quality work, but also you're selling a different work in particular.

Yeah. Hi, Miller. We had a little static on your line, so I'm going to repeat the question. I think I got it. And you're asking, you know, given higher quality pipeline in the back half, what do we expect? Do we expect conversion rates to improve? How do we think about sales cycle time, et cetera? So... As you shift to more of an enterprise motion, you do tend to have more back-end seasonality in the year. The software industry has trained our customers over time that the bigger deals happen as the year progresses. So we do see improvement in the go-to-market organization forecasting and building deals multiple quarters out. I mean, just two years ago, half of our revenue was created and closed inside a quarter, right? And now more of our revenue is coming through multi-quarter pipeline opportunities that do take a little longer, but are strategic. We're even seeing some of our enterprise lands are a little larger than they've been in the past. So, you know, they're starting a little bigger. It might take a little longer, but then, you know, we expect that there is also more growth opportunity there. So I do think that conversion rates on the pipeline could improve through the back half, we would expect it to, given reps have ramped and more than 60% of our reps have been here for more than a year, and we've seen some of that conversion improvement already in the international regions. We are excited about some of the larger deals that are in the pipeline, and at the same time, we've got large renewals to work through, so there's a balance to be struck. But the most important thing to me is that Our sales teams are maniacally focused on customer engagement and on spending more time understanding their customers. We recently have insisted on a return to working in person again because our customers are working in person. And that uptick in customer engagement absolutely starts to show up in terms of more pipeline, higher quality opportunities, better managed opportunities, and that's something that I know Todd will continue to focus on as he comes on board.

Thanks. And if you can hear me, Howard, the final question is for you. Just if any of you can give us on the size of the pipeline and the size of the removal.

So I think, Mellie, your question was any commentary on the size of the pipeline and the... the renewal base right for the back half of the year. So just in terms of renewals, our Q3 and Q2 are typically of similar size, give or take a few million, but Q4 is our largest quarter in terms of renewals, but we are planning for that. In terms of pipeline, we've seen really good pipeline strong pipeline development particularly as these larger opportunities we anticipate that they will take longer to close and our team is anticipating that and the level of qualification around larger deals is improving we've actually seen in some regions, some improvement in terms of sales cycle, sales cycle getting a little shorter. When I see that over a couple of quarters, I don't know whether to believe it and see it as a trend, but certainly those disciplines are resulting in better management of deals. And particularly when I look up into Q4, we have a strong build of pipeline for the fourth quarter.

Okay, thank you, team, and I think we will round things out today. Hearing with a representative from RBC, if you could just identify yourself, I'll switch your name up.

Yep. Hey, guys. It's Mike Richards on for Matt. Thanks for taking the question. Yeah, it's encouraging to see you guys move to the usage-based pricing model. I think, you know, a lot of us agree that seed-based models need to move there over time. And acknowledging that a lot of the new product, if not all the new products, are usage-based already, you know, specifically how are you thinking about core incident management? Is it going to be full usage base? Is it going to be some combination of seats and usage? Just, you know, any specifics around what that'll look like for the core incident management products. Thanks.

Yeah, thanks, Mike. We're still working through that and having a lot of conversations with customers, but right now it looks like it'll be some form of platform-based and usage-based, and we're even using credits with some of our AI products. One of the things that we want to make sure we do is give our customers predictability. We've seen a lot of customers coming to us looking to try and reduce observability spend and avoid overages and lock in with observability players because of the unpredictability aspect of that spend and check size. And so we've tried to learn from a lot of the usage and consumption based models that are out there. But we have a pretty good track record so far with AIOps. Some of the things that take time to dial in is what's the right level of credits. If you give a customer too many credits at first, they grow slower. If you don't give them enough, you have a sort of upside surprise that they don't particularly like. So, but with incident management, because a lot of our incident management, we already track things like events and workflows, you know, platform usage, et cetera. We have a number of metrics that we can work with there. And we're also trying to look ahead at how will our AI-led products shape the way people use the platform. So, you know, that's why I would see this more as an iteration as opposed to like, one sudden event that happens. We've been working through this transition to usage-based now for more than a year with AIOps and PagerDuty Advance and now the agents. And we'll just continue to iterate as we learn. The other thing that we have done is seed a lot of our advanced products and services in all of our pricing plans so that customers get access to those AI-led features. They get access to automation even in our lowest plans. And finally, I think the team, particularly our commercial team, is doing a really good job in product-led growth. We spend a lot of time on these calls talking about sales-led growth because that's where enterprise is. But in terms of growth hacking, automating the customer journey, you know, driving free to paid conversion, we've seen some bright spots there as well. We're learning a lot from that motion, too. And that's where we sometimes meet the native AI folks for the first time.

Thanks, guys.

Thanks, Mike.

Thank you again, team, for the questions that rounds us out today. Jennifer, we'll turn it to you for any final comments.

Thank you, and thanks, everybody, for joining us today. We appreciate you sticking around the whole hour. I mean, our priorities, my priorities are obviously monetization to really capture that value that we see coming from growing demand on the platform, driving AI adoption with our customers, really focusing on retention and customer love. and making sure that as a result we are positioning PagerDuty as central to and the central nervous system for the emerging AI ecosystem. But we have a lot of confidence in our outlook. We're really encouraged by what we're seeing, and we appreciate the support from our investors and the trust from our customers, and also the incredibly hard work from our employees and partners. So thank you all, and have a great week.