PagerDuty, Inc. (NYSE:PD) Q4 2024 Earnings Call Transcript

PagerDuty, Inc. (NYSE:PD) Q4 2024 Earnings Call Transcript March 14, 2024

PagerDuty, Inc. misses on earnings expectations. Reported EPS is $-0.33235 EPS, expectations were $0.15. PD isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Tony Righetti: Good afternoon, and thank you for joining us to discuss PagerDuty’s Fourth Quarter and Full Fiscal Year 2024 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 make — 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. 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 other subsequent filings made with the SEC. With that, I will turn the call over to Jennifer.

Jennifer Tejada: Thank you, Tony. Good afternoon, and thank you for joining us today. PagerDuty delivered a solid fourth quarter to cap off another year of growth and substantial operating margin expansion. We demonstrated operating efficiency throughout the year and completed our second consecutive year of non-GAAP profitability. On a full-year basis, revenue grew 16% year-over-year and non-GAAP operating margin expanded by over 1,200 basis points to 13%. In the fourth quarter, revenue grew 10% to $111 million, at the top end of our guidance range. Non-GAAP operating margin of 10% exceeded the high end of guidance, with a year-over-year expansion of nearly 400 basis points. Our steady progression upmarket underpinned our solid results.

Expansion ARR, $100,000 transaction volume and average deal size each improved sequentially. And with a higher mix of ARR coming from our enterprise segment, the visibility and predictability of our business also continues to improve. We achieved dollar-based net retention 1 point above our expectation, and we see it improving in FY ’25 along with total ARR growth. We added $13 million of net new ARR in Q4 and grew total ending ARR 10% to $452 million. Customers with two or more products contributed 62% of the total, an increase of 4 percentage points over the prior year. To a large extent, the growth in both metrics was driven by increasing momentum in enterprise engagements, resulting in several multi-year Operations Cloud deployments within the Global 2000.

During the fourth quarter, we gained traction within our enterprise segment, demonstrated by annual net new additions to our cohort of customers who spend more than $100,000, which doubled quarter-over-quarter. On an annual basis, our $1 million cohort increased 16% to 58. These results demonstrate the strong market fit of PagerDuty’s Operations Cloud for the world’s leading brands seeking to modernize their operations. ARR from both new and existing customers exceeded Q3 levels in Q4, and we remain confident in delivering accelerated net new ARR growth in FY ’25. We shipped innovation across all four of our product pillars in FY ’24 and started FY ’25 with markedly higher pipeline across Automation, AIOps, Incident Management, and Customer Service Operations, representing a strengthening demand signal from CIOs and CTOs with mandates to protect revenue, increase innovation velocity, improve productivity, and mitigate risk.

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Q&A Session

For example, our AIOps solution introduced during the first half of FY ’24 is designed specifically for centralized IT teams network operations, site reliability engineering, and IT ops, which comprise approximately 21 million global professionals. A complement to our developer-focused solution that was already in market, AIOps applies machine learning to reduce noise, surface real-time content, and automate a wide variety of manual activities. Unlike other AIOps solutions in market, PagerDuty solution is integrated to automated workflows, enabling customers to auto remediate more and more of their ecosystem, reducing reliance and the cost of manual processes and people. Our cloud-based Process Automation solution reached functional parity with our self-managed on-prem offering during FY ’24, addressing numerous new IT use cases across service management and IT operations.

In addition, several new features enabled teams to leverage Runbook Automation in zero-trust environments, mitigating cybersecurity risks for enterprises, a large and growing investment area for our customers. Customer service operations added workflow automation capabilities from Salesforce Service Cloud, ServiceNow CSM, and Zendesk, unifying customer service teams and agents with technical teams that manage critical services and customer-facing applications. Private Status Pages, along with PagerDuty’s generative AI-based copilot, enable companies to consolidate point solutions to save significant time and more effectively manage communications while responding to an incident. The acquisition of Jeli further differentiates our automated Incident Management solution from low value, price led on call solutions and less scalable workflow tools.

Today, our robust combined offering enables organizations to rapidly transform from learn — rapidly transform the learnings from incidents into a knowledge base for timely, informed operational decisions. End-to-end Incident Management includes AI-assisted automated post incident analysis and learning integrated into the CICD process, which helps customers continuously improve the efficiency with which they respond to and prevent further incidents. The innovation we delivered across the Operations Cloud platform addresses some of the enterprise’s highest priority budgeted business initiatives, including digital business resilience, modern service management, customer experience management, and network operations center modernization. In fact, several Q4 wins validate our platform to problem fit, namely seven-figure CIO- and CTO-sponsored multiyear platform engagements at Global 2000 companies.

For instance, a customer within our software and technology vertical expanded to the full Operations Cloud footprint with us. Already a $1 million customer, this well-known enterprise doubled down on PagerDuty when they understood the opportunity to protect revenue and mitigate risk by connecting their customer support team with their infrastructure, site reliability, engineering, and business technology units. Before PagerDuty and despite significant investments in observability, over 20% of incidents were still being reported by customers, putting their customer SLAs and retention at risk. They recognize the need to transform their customer experience while reducing operational risk, replacing point solutions to address fragmented operational gaps.

Today, this customer has deployed all four product pillars of the Operations Cloud in a multiyear commitment, expanding to nearly twice the ARR. An entertainment and media company with a significant global presence increased its ARR beyond $2 million per year on a three-year term. This is a large global enterprise managing operational complexity across a diverse set of use cases from retail operations and on property experiences to digital streaming in a corporate culture where customer experience is at the very heart of their brand. In navigating top down pressure to reduce costs and consolidate platforms, PagerDuty’s proven ROI was central to the customer’s decision to expand with us. They are now using the full operations cloud to improve digital resilience across all of their major business units and to protect their customer experience.

Our partnership with AWS and the ability for customers to leverage the AWS Marketplace was another key factor in this multiyear, multimillion dollar win. In Q4, we also expanded on a win we mentioned in Q2, the global semiconductor supplier who selected PagerDuty’s workflow offering to standardize and better orchestrate their enterprise wide automation efforts. This has become a common enterprise challenge. Islands of automation that pop up across teams and functions hindering a company’s ability to scale efficiently. In Q4, we expanded our relationship with this multibillion-dollar company, and we now support them with enterprise-grade Incident Management seamlessly integrated with automated workflows. Our fast time to value in Q2 earned us the right to solve even bigger problems with the Operations Cloud as they navigate ever-increasing complexity in pursuit of capturing an outsized share of the generative AI market.

This customer’s use case is an appropriate analog for the long-term tailwind generative AI presents for our business. With the added complexity caused by both the volume of software created and the frequency of code updates that generative AI enables, we see generative AI fostering demand for the Operations Cloud, as it improves efficiency for developers, but also proliferates complexity and risk. In turn, we continue to expand our own generative AI offerings with PagerDuty copilot features across our platform, slated for general availability in the first half of this year and expected to contribute pipeline in the second half. These capabilities augment our existing AI and machine learning functionality, which builds on our proprietary and foundational data set have been part of our value proposition for nearly a decade.

In line with our mission to lead the market in innovation in order to revolutionize customer operations, we welcome Jeff Hausman as our Chief Product Development Officer. His extensive enterprise product development experience in service management, ITOM, and cybersecurity, and deep domain expertise in enterprise position us well to continue our rapid innovation cadence and platform expansion. During the year, we also progressed our FedRAMP status to in-process, and we expect FedRAMP certification in the first half of FY ’25. In support of our expansion into the U.S. public sector and our ongoing focus in enterprise, we are thrilled to welcome Teresa Carlson, former long-time AWS Public Sector Business leader, to our Board of Directors. By efficiently controlling the controllable elements of our business, we have solidified a scalable structure for growth, demonstrated enterprise platform fit, and entered the year with healthy go-to-market capacity poised to accelerate growth.