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.