PagerDuty, Inc.

Good afternoon, and thank you for joining us to discuss PagerDuty's fourth quarter and full year fiscal 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 adjustable market, among others, and represent our management's beliefs 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. The 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'll turn the call over to Jennifer.

Thank you, Christine. Good afternoon, and thanks for joining us today. Fiscal 2026 was a transformational year for PagerDuty. We stabilized ARR in Q4 and accelerated new and expansion business, ending the year with solid fourth quarter results. In our first GAAP profitable year, we continued to increase operating margin through disciplined execution while advancing our AI-first operations for mission-critical work. In Q4, we delivered $125 million in revenue, up 3% year-over-year, and 24% non-GAAP operating margin, both above our guidance ranges. Total annual recurring revenue ended the year at $499 million, with an increasing contribution from enterprise customers. Throughout the year, we expanded non-GAAP operating margin by nearly 700 basis points through consistent discipline, structural efficiency initiatives, and AI adoption. We see a clear path to our long-term target of 30% non-GAAP operating margin as we increase our own operational AI leverage and drive our customers' consumption of our AI platform. Lean growth indicators in the quarter were increasingly encouraging. Total platform customers grew significantly to over 35,000 total paid and free customers, up 14% year-over-year. Improved conversion from both free-to-paid and total top-of-funnel led to over 600 new customers, including AI natives and enterprises, accelerating 17% year-over-year. These segments combined are high value and high propensity to grow. We expanded with AI natives and AI-first companies like Endural, CoreWeave, Snowflake, and ScaleAI. Companies across the globe demonstrated deep trust in PagerDuty. Inomiya, Banco Santander, VUPA, and Vodafone are just a few that expanded. Likewise, our Asia, PAC, and Japan teams experienced success through strategic deals, including an expansion with JR East Railway Information Systems and one of Australia's largest banks. New and expansion performance in the quarter was our strongest for the fiscal year, up 6% from the previous year and sequentially up 37%. underpinning our q4 new and expansion bookings momentum were large six and seven figure opportunities we signed over 40 deals worth 100 000 or more in the quarter almost twice the average of prior quarters in the year showing progress towards re-accelerating growth By year's end, the cohort of customers spending $1 million or more in ARR has increased to 79, up 10% year-over-year, while 861 customers now spend over $100,000 annually, an increase of 1% year-over-year. This segmentation is important. The modest growth in the $100,000 customers reflects churn in the mid-size spend range, but double-digit growth at the $1 million range shows we're making real progress with our highest-value enterprise customers, exactly where we're focused for growth. While fee-based compression continued to impact some of our install-based, we're attracting customers that are higher propensity to grow on the platform with flexible consumption-led pricing. Our new pricing model makes it more compelling for customers to launch new business and expand existing accounts on the platform. As a result, in Q4, we secured several large multi-year agreements with new pricing. Our flex pricing enables frictionless scaling between human responders, agents, and automated solutions, as well as access to new products, better aligning value to business outcomes. One of the world's largest toy makers was seeking resilience at scale after a $10 million loss in both revenue and costs caused a manufacturing outage, caused by a manufacturing outage. In Q4, they signed a $4.5 million TCV multi-year renewal with PagerDuty leveraging our flex pricing. In North America, we signed a $2.7 million multi-year expansion with one of the world's leading telecommunications providers, more than doubling their ARR with PagerDuty. By aligning the platform with the customer's highest priority challenges, driving cost efficiency across networks, and capitalizing on AI goals, PagerDuty is now their AI operations platform, addressing both enterprise efficiency and AI risks. PagerDuty was built for a world where every business is digital, and every digital business at scale needs to anticipate and respond to urgent, critical operational challenges immediately, intelligently, and automatically. That need is not going away. What is changing is that AI is the new operational risk layer for business, where resilience and automation are paramount. Customers must improve their resilience posture in a more volatile operating environment. PagerDuty meets the rising standards for platform resilience that large enterprise and AI leaders expect. They trust PagerDuty because we provide the platform to solve these problems. Incident response, while powerful, is no longer sufficient. Customers need an enterprise-grade platform that automatically and accurately detects and diagnoses issues. Large enterprises and high-growth AI natives require resilience at scale to engender both customer trust and revenue continuity. PagerDuty provides an autonomous cloud-native engine for mission-critical operations. By unifying incident, event, and service management, PagerDuty drives efficiency in high-stakes enterprise environments. PagerDuty's customers are consolidating their AIOps, alerting automation investments into the operations cloud, reducing their need for high-cost service desks, people-laden operations centers, and multiple observability vectors. Our AI value proposition resonates, and customers are doubling down. What differentiates PagerDuty as a platform for action is how we integrate agents, data, governance, teams, and workflows in real-time autonomous operations. PagerDuty does the work for customers, dramatically reducing observability costs by eliminating noisy duplicative alerts. Our platform acts immediately on the high-fidelity signals that matter, automatically and responsibly. AI hyperscalers, including a large cloud and edge computing platform, a frontier large language model provider, and the leading unified data and AI platform provider, didn't just choose us. They expanded multiple times throughout the year. Likewise, AI startups like Decagon, Etched, and Rogo continue to scale on pager duty. This repeat expansion is a compelling leading indicator that AI is a net tailwind for as to how OpsCloud and expansion consumption-based pricing drives growth. During the year, we expanded our relationship with a longtime customer, the world's largest digital infrastructure company. They signed another seven-figure multi-year expansion, deploying PagerDuty's process automation as the central orchestration platform for their new global automation architecture. We won the business because the platform demonstrated both technical security and also met their stringent security and compliance requirements. Our past innovation led to category creation and leadership in DevOps and digital ops. We're executing on a similar long-game opportunity, pioneering the AI ops category for enterprise. Once again, we have a deep moat, context. Competitors can imitate features or build limited agents on public LL apps, but without PagerDuty's decade-plus advantage of data, incident, and service context, they cannot reliably deliver accurate, high-fidelity, and resilient outcomes. Our combination of historical incident data and AI agent context gives our customers the benefit of deep operational history and shared agent-to-agent memory in every response. Last year alone, our platform processed billions of events, nearly a billion incidents, and millions of incident workflows. This proprietary context advantage combined with our growing AI ecosystem positions PagerDuty uniquely, especially in the large enterprise segment. Case in point, a global semiconductor supplier that is pioneering agentic automation selected PagerDuty in a landmark $1 million AI-driven expansion on a multi-million dollar base. More than half of the investment is attributed to our agentic capabilities as the customer transforms incident management to an AI-orchestrated workflow and also uses PagerDuty to streamline supply and GPU utilization. This deal demonstrates the dual AI opportunity we're capturing. Our agents automate incident management while PagerDuty serves as the control plane for AI operations more broadly. Two different use cases, both mission critical, both expanding. AI is the new risk layer for enterprise. It's more complex and it fails differently than traditional software. And our platform is designed for the unique scale and materiality of AI operations. It automatically surfaces the relevant data and context to prevent failures before a human can even engage. We were first to market over six months ago with the capability of our model context protocol server and agent-to-agent functionality, advancing AI orchestrations to correlate events and drive automated actions. Early adopters from complex enterprises like NVIDIA are using PagerDuty Advanced to speed resolution. IDC's recent report on AI agents in IT service management names PagerDuty and confirms what we're hearing from customers. Organizations prioritize AI agents that can reason, plan, and take action reliably, exactly what our four agents deliver. By enabling customers to operate their critical AI investments, including models, infra-environments, and agents, resiliently and confidently, our agents take enterprises to the next frontier of AI operations. Our SRE agent now acts as a virtual responder for hundreds of clients. It resolves incidents autonomously. It learns from past incidents, it predicts failures, and it progressively automates work. As these customers burn down their initial credits, ongoing consumption becomes a growth engine. Today, we announced the expansion of our AI ecosystem. Our platform agents now seamlessly engage with leading AI data platforms and enterprise applications, including over 30 new AI partners. Three marquee partnerships demonstrate the power of the ecosystem in action. Anthropic, Claude, Cursor, and Langchain. Through these partnerships, PagerDuty handles increasing complexity in customer environments, solves problems faster, and delivers a complete platform based on a level of intelligence no other competitor can match. AI is transforming digital operations to proactive operations. Issues need to be caught earlier and resolved faster because the complexity, cost, and blast radius of AI failure is higher. AI workloads provide challenges only solvable by a platform offering real-time orchestration and operational maturity. In fiscal year 2026, the diversity of wins across the AI ecosystem, infrastructure leaders, emerging startups, and AI-enabled enterprises demonstrate PagerDuty is the operations platform for choice for AI data to ensure their products scale reliably and responsibly. PagerDuty is the new control plane for AI operations in the enterprise. In Q4, we strengthened our leadership with the appointment of Scott Aronson to our board and Chris Farrell as our chief legal officer to our executive team. Both bring functional and business expertise essential to our operational performance. Our search for a new financial officer is progressing well with several accomplished financial leaders in advanced stages of consideration. We expect to appoint a candidate in Q2. In the meantime, Howard remains steadfast in his commitment as CFO and to support a smooth succession during the year. Our innovation and culture earns significant industry recognition again. PagerDuty ranks number one in built-in's best places to work list. Gartner named PagerDuty as a representative vendor in two recent research reports focused on AI agents for site reliability engineering. This recognition reflects our position as a credible enterprise-ready platform as AI SREs approach mainstream adoption. PagerDuty now serves more than 650 nonprofit organizations worldwide. Serum, the largest redistributor of surplus medicine, uses our operations cloud to avail over $300 million in medicine to more than 500,000 patients across the country. Other leading nonprofits across critical sectors, including emergency response, healthcare, and education, are leveraging our AI platform to schedule and strengthen their impact. Throughout the year, we continued to invest in product priorities that drive long-term customer value. First, deepening our AI capabilities and integrating them seamlessly into the platform. Second, expanding automation. And third, broadening the ways customers can use PagerDuty across their organizations. We see meaningful opportunities to extend our platform, beyond its perception as an incident response solution, into an AI operations platform for broader operational workflows, like manufacturing throughput, network reliability, AI infrastructure utilization, and FinOps, to name a few, where urgency, intelligent orchestration, and accountability are critical. So as we look to FY27, our business priorities are clear. First, we continue to strengthen our core franchise, digital operations management, where brand, scale, and enterprise trust remain significant advantages. Second, we continue embedding AI and automation into the platform to drive better customer outcomes and increasing differentiation. Third, we are expanding the role that PagerDuty plays across enterprise by addressing a broader set of urgent high-value operational use cases, including AI operations. And finally, we do all of this with continued discipline, leveraging AI ourselves in our own operations to expand capacity and efficiency. PagerDuty drives enterprise resilience with a compounding advantage where context drives better automation, agents take smarter action, and customers move closer to autonomous operations. We made significant advancements in our platform and are optimistic that our reinvigorated go-to-market team continues to build momentum in new and expansion business while also improving gross retention. The long-term opportunity in front of us is compelling. Modern organizations depend on resilient digital and AI operations, and that challenge is only growing for our customers. PagerDuty is positioned to successfully support customers and their leadership teams in navigating AI complexity, mitigating risk, and capitalizing on transformational growth. As we enter FY27, I'm confident in our people, our strategy, our execution, and our position in the market. We have a category-leading platform, a proprietary data advantage, accelerated product innovation, and a go-to-market transformation that is bearing fruit. FY27 is about scaling what's working and capturing that opportunity ahead. And with that, I'll turn it over to Howard.

Thank you, Jen, and good day to everyone joining us on this afternoon's call. Unless otherwise stated, all references to our expenses and operating results on this call are on a non-GAAP basis and are reconciled to our GAAP results in the earnings release that was posted on our investor relations website. Before reviewing our fourth quarter and full year financial results, I want to highlight the durability of our business model. We achieved our first full year of GAAP profitability, a testament to our operational discipline. We expect to maintain full-year gap profitability in FY27. This financial strength allows us to return capital to shareholders while simultaneously funding our transformation. In FY26, we repurchased approximately 10 million shares under our $200 million repurchase plan, leaving roughly $63 million of the authorized amount available at quarter end. Our consistent cash generation and a strong cash position allow us to advance our enterprise transformation and invest in AI regardless of the macro environment while returning capital to shareholders. Moving to results for the quarter. We delivered revenue of $125 million, up 3% year-over-year, with international revenue increasing 6% year-over-year, contributing 29% of total revenue. annual recurring revenue exiting Q4 grew 1% year-over-year to approximately $499 million. Despite the macro headwind of seed compression in some of our customers, our enterprise strategy is working. Customers spending over $100,000 in annual recurring revenue grew to 861, up 1% year-over-year. More importantly, the ARR from this cohort, including our largest, most strategic customers, increased to 72% of total ARR. Customers with ARR over $1 million increased to 79%, up 10% year-over-year. This shift toward larger, stickier enterprise relationships is central to our long-term growth thesis. Moving to profitability, GAAP net income was $11 billion, our third consecutive quarter of GAAP profitability. We're continuing our progress on the path to sustained GAAP profitability. Dollar-based net retention was 98%, impacted by lower gross retention as we had anticipated going into the quarter. However, we have implemented specific programmatic renewal initiatives and strengthened customer management to reverse this trend. We expect gross retention to improve in Q1 with steady progress through the year. Consequently, we expect DB&R to stabilize in Q1 and increase gradually throughout the year. Total paid customers grew to 15,351, representing a 2% increase year over year. Free and paid companies on our platform grew to over 35,000, an increase of approximately 14% year over year, providing a healthy funnel for future conversion. Continuing with Q4 results, non-GAAP gross margin was 87%, exceeding the high end of our 84% to 86% target range. Non-GAAP operating income was $30 million, or 24% of revenue, compared to $22 million, or 18% of revenue, in the same quarter last year. The outperformance is not accidental. It reflects our rigorous focus on efficiency and operational execution. In terms of cash flow, cash from operations was $25 million, or 20% of revenue, and free cash flow was $23 million, or 18% of revenue. This strong cash generation gives us the financial flexibility to invest in our go-to-market transformation and AI product development while maintaining our commitment to shareholder returns. Turning to the balance sheet, we ended the quarter with $470 million in cash, cash equivalents and investments. During the quarter, we repurchased 8 million shares for $99 million. We view our current valuation as a compelling opportunity, and we're utilizing our cash position to reduce share count. On a trading 12-month basis, billings were nearly $496 million, an increase of 2% compared to a year ago. At the end of Q4, total RPO was approximately $449 million, increasing 2% year over year. Of this amount, approximately $314 million, or 70%, is expected to be recognized over the next 12 months, $106 million, or 24%, over months 13 to 24, and the remainder thereafter. For the full fiscal year, revenue was nearly $493 million, up 5% year-over-year. Gross margin was 86%, in line with the year-ago period. GAAP net income was $174 million. This includes a one-time income tax benefit of $169 million from the release of a valuation allowance. Operating income was $121 million or 25% of revenue compared to $83 million or 18% of revenue a year ago. This marks our fourth consecutive year of increased non-GAAP profitability, and we are closing in on our long-term non-GAAP operating margin target of 30%. Operating cash flow was approximately $115 million, or 23% of revenue, compared to $118 million, or 25% of revenue in the year-ago period. Free cash flow was nearly $103 million, or 21% of revenue, compared to $108 million, or 23% of revenue in the year-ago period. In terms of metrics that we provide on an annual basis, ARR from customers using two or more paid products was 66%, up from 65% in FY25. ARR contribution from incident management was 70% of the total, in line with FY25. Validating our enterprise focus, the contribution from our 100K cohort was 72%, up from 71% in FY25. We have made sustainable operational progress by transitioning customers to flexible usage-based pricing and programmatic renewal management, which we expect to improve retention. While overall paid users on our platform increased modestly year over year, we anticipate that the macro trends around seat compression will impact some of our customers in the near term. Our fiscal 2027 outlook reflects a prudent view of this environment. However, the early adoption of our operations cloud usage-based pricing and our new AR products gives us confidence that we will partially offset seat compression and drive gradual ARR improvement through the year as customers transition and scale. Essentially, we are transitioning the business model to be less reliant on seats and more driven by consumption and value. As a result, for the year, the midpoint of our revenue guide is represents essentially flat growth, but with a higher quality of earnings and continued margin expansion. We're expecting modest operating margin improvements and an 8% increase in EPS. For the first quarter fiscal 2027, we expect revenue in the range of $118 to $120 million, with the midpoint essentially flat year over year. and net income per diluted share attributable to PageDuty Inc. in the range of $0.23 to $0.25. This implies a non-GAAP operating margin of 19% to 20%. For the full fiscal year 2027, we are initiating guidance with revenue in the range of $488.5 to $496.5 million, with the midpoint essentially flat year over year. Net income per diluted share attributable to PageDuty Inc. in the range of $1.23 to $1.28. This implies a non-GAAP operating margin of 24% to 25%. Before moving to questions, I would like to provide assistance with modeling FY27. On cash flow, we expect free cash flow margin to be approximately 2-4 percentage points lower than FY26, primarily due to lower interest income, high facilities capex and timing of payments. Our EPS guidance now incorporates a non-GAAP tax rate of 20% for each quarter of FY27. The fundamentals of our business are strong. We have a durable balance sheet, expanding operating margins, and a clear strategy to navigate AI taking center stage. The go-to-market changes we've made, combined with our product innovation in AI operations, positions us to capture the significant opportunity ahead. In FY27, we are laser-focused on steady improvement in retention, re-accelerating ARR growth, expanding margins, and achieving full year-cap profitability. I'm confident in our people and super excited about the future for PagerDuty. With that, I will open up the call for Q&A.