PagerDuty, Inc.

And thank you for joining us to discuss PagerDuty's third 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 in 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.

Thank you, Christine. Good afternoon, and thanks for joining us today. In the third quarter, PagerDuty delivered revenue of $125 million, up 5% year-over-year. Non-GAAP operating margin of 29% exceeded guidance, expanding 750 basis points over last year. We also achieved GAAP profitability for the second consecutive quarter, evidence of disciplined execution and a durable, profitable growth model. Annual recurring revenue of $497 million represents 3% year-on-year growth. New and expansion bookings were consistent with the first half, offset primarily by customers right-sizing seat licenses amidst budget caution. We accelerated our product innovation and operational efficiency in the market, which extends our leadership in the increasingly important and complex digital and emerging AI operations space. In order to build long-term and near-term shareholder value in an evolving budgetary environment, we're focused on three objectives. One, expanding operating and free cash flow margins as we further increase operational efficiency. Two, extending our product advantage and service area in AI operations and incident management. And three, scaling the initial successes in our go-to-market transformation to drive faster adoption of the full PagerDuty Operations Cloud and effectively monetizing the value we create for customers. This will be our sixth consecutive year of expanding operating margins as part of our commitment to profitable growth. Structural efficiency initiatives are accelerating product and business execution while lowering our cost base. With the added benefit of modern software and AI, we expect to continue expanding operating margin towards our long-term target of 30%. Demand for our platform remains strong, with double-digit year-over-year growth in new customer acquisition and in total paid and free customers. Customer retention and growth remain our top priority. While the number of customers expanding with us each quarter has remained consistent throughout the year, we're focused on increasing our average transaction size by more effectively attaching new usage-based products like AIOps and PagerDuty Advanced, and by driving adoption through new professional services and customer success playbooks. Targeted customer retention efforts, including a more efficient, proactive coverage model, delivering high-demand features, and flexible pricing have stabilized customer load retention. That said, seat license compression continues to be our most significant challenge in large enterprises, where budget caution and rate sizing have had the most impact on our incident management business. During the quarter, we mitigated longer-term risk by leveraging multi-year agreements, expanding to a broader product footprint, and including professional services to ensure fast time to value. We are scaling this motion with a refined adoption and value realization program through the customer success team, while at the same time enabling the field to focus on our agentic offering, both of which will support improved retention and growth over time. We have also sharpened renewal forecasting to identify, measure, and address risk earlier in what is now a multi-quarter cycle. On a strong foundation of financial and operational discipline, we extended our product advantage in end-to-end incident management and AI and agentic operations. In the past, AIOps referred to modern event management techniques that support root cause analysis and incident triage. Now, in an environment where trillions are being deployed on AI investments, yet enterprise resilience is more important than ever, the need for a new operating model has emerged. Agentic orchestration is one of many new operational aspects that enterprises must manage. The new ecosystem required to support AI includes energy, storage, compute, data management, large language models, applications, agents, and the systems to test, control, and run AI solutions safely and responsibly. Connected intelligent orchestration and operations of the entire AI stack and the functional automation applications across a business create new surface area that PagerDuty is uniquely positioned to support. The operations cloud connects seamlessly via our integration ecosystem and our model context protocol, or MCPs. It intelligently detects potential disruptions and risks and orchestrates human-led, agent-based, and model-centric events to prevent and resolve issues. This is the new era of AI operations, real-time orchestration and action across AI agents, applications, and infrastructure. We continue to invest in our roadmap to ensure our position as a central nervous system for both digital and AI operations going forward. PagerDuty pioneered and defined the incident management space, starting in DevOps and expanding to enterprise IT, security, and business operations in service of supporting the largest and most innovative companies in building resilience at scale. In October, we leased over 150 platform enhancements and the industry's first agentic end-to-end incident management offering. Customers can now leverage PagerDuty Agents to address unstructured, high-value, time-critical work at every point in the value chain. PagerDuty Agents have the unique advantage of being built on our open and neutral ecosystem of more than 700 integrations, leveraging the broadest context on causes and resolution of incidents in order to take the most effective actions. Early traction and positive customer feedback on PagerDuty's agents demonstrate the need for agentic solutions to scale operations effectively. This is especially critical as a higher volume of code is being shipped with AI. We deepened our AI ecosystem leadership in the quarter with an initial partner as an initial partner in the Glean MCP directory. This enables teams to adopt and accelerate value realization of the operations cloud. PagerDuty is also the first incident management and operations platform integrated into Spotify's developer portal for Backstage, which positions us at the forefront of modern development. Spotify noted that this fundamentally helps organizations shift from reactive to proactive issue prevention. Developers can now initiate, triage, escalate, and resolve incidents without leaving their workflow. Our roadmap prioritizes standards-based enterprise-grade interfaces for discovery and control, deep workflow integration in developer, agentic and operations tooling, and an automation fabric that seamlessly weaves human responders and autonomous agents together. Compared to point solutions, PagerDuty capabilities and use cases span functions such as supply chain, IoT, storage, and security. Recent global infrastructure outages also highlight the differentiated resilience that we provide every day. Go-to-market excellence is critical to our success. We're transforming the way we go to market, especially in enterprise, where we've seen ongoing customer budget caution and organizational right sizing and change. Over the midterm, we're establishing PagerDuty as the enterprise operations platform for AI. In the near term, we're transitioning from a traditional single-year seat-based license model to a multi-year platform usage model. On a year-over-year basis, our go-to-market execution has improved. In Q3, we advanced customer acquisition, adding 284 net new customers year-to-date, nearly four times the total in FY25, validating demand for our products and services. Leading AI-native companies like Perplexity and AnyScale continue to choose PagerDuty as their primary operations platform. We've also continued to grow our high-value customer base, those spending over $100,000 per year with us, by 5% year-over-year to 867 customers. During the quarter, we welcomed Todd McNabb to PagerDuty as our Chief Revenue Officer. He and the team are focused on accelerating this transformation to improve our land, realize, and expand motion, activating new partners to support this effort. In his first 30 days, we have seen nearly 40 customers together and expect to see over 100 by the end of the year. clear from those conversations that our customers want to do more with us and need both our expertise and support to realize the full value of our platform. Initial progress in our shift from seat-based to usage-based pricing is encouraging. Flexible operations cloud packaging enables customers to seamlessly scale between human responders, agents, and automated solutions without needing to precisely predetermine users and product mix. This better aligns our customer investments to business outcomes rather than headcount and licenses. In the quarter, customers across industries made multi-year commitments to pager duty. A leading AI-native company's multi-year renewal and expansion this quarter demonstrates the need for best-in-class digital and AI operations in a high-growth segment where proven scale, resilience, and strategic partnership are required. PagerDuty safeguards enterprise resilience at a global scale that competitors cannot match. As the company's engineering footprint expanded rapidly from research-focused to a global production platform supporting hundreds of millions of users, they required a strategic partner to support their unprecedented operational scale. As AI has accelerated, they have joined our million-dollar ARR cohort. A Fortune 25 global automotive leader selected PagerDuty for a multi-year agreement as it modernizes enterprise operations, optimizes manufacturing operations, and advances electric and autonomous vehicle initiatives. PagerDuty won via executive alignment and enterprise-grade capabilities to support operations beyond software teams to manufacturing and the dealer network. Critical to our selection was fast time to value, integration with their native ITSM system, Slack-first workflow automation, and our strong track record of scale deployments in manufacturing. One of Australia's largest banks and a PagerDuty customer since July 2024 expanded for the second time this year during Q3 to support their ambitious growth goals. The bank added several thousand enterprise incident management licenses in a multi-year partnership, increasing their investment by nearly $1 million in ARR. The deployment is transforming operations from reactive and manual to preventative with scaled service ownership across the entire organization. PagerDuty is the bank's enterprise platform for AI. In the competitive gaming industry, a leading digital entertainment platform with millions of daily active users selected PagerDuty's Operations Cloud with flexible pricing to enhance operational resilience. Moving beyond seat-based licensing constraints, the customer chose PagerDuty's usage-based offering to reduce expansion friction and to better align their investment with business value, automating more work as they target 99.99% availability and reduce operational toil by 20%. Developers can now focus on innovation rather than operational issues. Our focus and sustained investment continue to yield returns in talent, critical drivers of long-term value creation. PagerDuty's recognition among Fortune's Best Workplaces Top 50 included this quarter's placement in the small and medium company list in technology and validates our ability to attract and retain the high-caliber employees essential to deepening our competitive moat in digital operations and expanding our offerings in AI operations. Building on the digital operations category we pioneered, AI operations is a natural growth platform to support our long-term strategy and profitable growth goals. Progress in our go-to-market transformation, along with flexible enterprise and usage-based pricing, support both mid-term growth and ongoing margin expansion. While these efforts will take time to be fully realized, we're executing from a position of strength, including product leadership, expanding operating margins, and a strong balance sheet. Our unique platform offering and improvements in underlying execution underpin our confidence in accelerating profitable growth. I'd like to share one additional leadership update that Howard Wilson, CFO, has decided to retire during the next financial year. Howard has been at pager duty for nine years and has been instrumental in growing the business to nearly $500 million in ARR. His impact has been deep and broad as he's led PagerDuty through our successful 2019 IPO and in achieving critical milestones, including positive cash flow, significant operating margin expansion, profitability, and in recent quarters, gap profitability. During his tenure, Howard has built and led incredibly capable teams in finance, corporate strategy, operations, and customer success. He has opened international markets, helped to shift PagerDuty from product to platform, and led us in acquiring several companies. We have started the search for a new CFO, and Howard is committed to supporting a smooth succession during the 2027 financial year. With that, I'll turn it over to Howard, and we look forward to your questions.

Thank you, Jen, and good day to everyone joining us on this afternoon's call. Before reviewing our third quarter financial results, I want to highlight our strong operational discipline reflected in our second quarter of GAAP operating margin profitability. We expect to be 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 $125 million, up 5% year-over-year. Q3 GAAP net income was $160 million. This includes a one-time income tax benefit of $154 million from the release of the valuation allowance. International revenue increased 7% year-over-year, contributing 29% of total revenue. Annual recurring revenue exiting Q3 grew 3% year-over-year to $497 million. Although we expected incremental ARR to be higher, there was more pressure on seat licenses and smaller expansion deal sizes this quarter. We delivered 100% dollar-based net retention compared to 102% in Q2. DBNR was negatively impacted by lower gross retention. We expect this pressure on DBNR to continue in Q4. Customers spending over $100,000 in annual recurring revenue increased 5% year-over-year, resulting in $867 by quarter end. Total paid customers grew to 15,398 in Q3, growing 2% year-over-year. Paid and free customers on our platform grew to over 34,000, an increase of approximately 13% compared to Q3 of last year. Q3 gross margin was 87% above the high end of our 84% to 86% target range. The overachievement demonstrates PageBuddy's ability to drive its own operational efficiency while ensuring that the platform improves that of our customers. We expect gross margin in the long term to return to within our target range as we invest further in customer success management. Operating income was $36 million or 29% of revenue compared to $25 million or 21% of revenue in the same quarter last year. The outperformance reflected our focus on increased productivity and operation execution with lower payroll and other personnel costs. In terms of cash flow for the quarter, cash from operations was $25 million, or 20% of revenue, and free cash flow was $21 million, or 17% of revenue. Turning to the balance sheet, we ended the quarter with $548 million in cash, cash equivalents and investments. In Q3, we repurchased 2.4 million shares under our $200 million repurchase plan. and at the end of the quarter, $162 million of the total amount authorized to be repurchased remained available. Consistent cash generation and a strong cash position provide a solid foundation for us to advance our enterprise transformation while returning capital to shareholders. Training 12-month billings were $496 million, an increase of 4% compared to a year ago. With respect to Q4, we anticipate trading 12 months billings year-over-year growth to be flat. At the end of Q3, total RPO was approximately $415 million, increasing 2% year-over-year. Of this amount, approximately $287 million, or 69%, is expected to be recognized over the next 12 months. $101 million, or 24%, over months 13 to 24, and the remainder thereafter. Now turning to guidance. When we provided guidance at the end of Q2, we underestimated the current headwinds to retention. Although the number of customers churning and downgrading is trending downwards, the dollar value of the contraction driven by seat-based reductions and customer budget caution has been larger than we forecast. As a result, we are lowering our top-line guidance. To improve visibility, we have made changes to our renewal process and implemented operational changes to drive earlier customer engagement. In addition, in line with our ongoing focus on efficiency, we are increasing our full-year net income and operating margin guidance. So for the fourth quarter fiscal 2026, we expect revenue in the range of $122 to $124 million, representing a growth of 0 to 2%. and 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 $490 to $492 million, representing a growth rate of 5%. This compares to the range previously provided of $493 to $497 million. And net income per diluted share attributable to PagerDuty Inc. in the range of $1.11 to $1.12. This implies an operating margin of 24%. This compares to our prior guide of $1 to $1.04 and 21 to 22% respectively. This quarter, we expanded margins beyond targets, delivered our second consecutive quarter of GAAP profitability, and generated strong cash flow, capital we've been returning to shareholders. At the same time, we are making the strategic investments that position the business to reaccelerate ARR growth while maintaining our disciplined financial profile. In summary, we are expanding margins, generating cash, and progressing the pricing and go-to-market transitions that support durable growth. We are executing from a position of strength with product leadership, disciplined capital allocation, and a strong balance sheet, while staying tightly aligned to customer outcomes. On a personal note, as Jen mentioned, I intend to retire next year. My journey at PageDuty has been one of incredible growth, and I'm proud of what we have accomplished. I appreciate our customers, partners, investors, and our employees for their support and am committed to supporting Jen and team in a smooth succession. With that, I will open up the call for Q&A.