Good afternoon, welcome to PagerDuty's call to discuss its intention to acquire Rundeck. I'd like to remind everyone that this call will be recorded. Now I'd like to hand the call over to Willa McManmon, investor relations at PagerDuty.
Thank you, Matt. Before market today, PagerDuty announced that it has entered into an agreement to acquire Rundeck. The details of this transaction can be found in a press release issued this morning and an 8-K filed with the SEC. Jennifer Tejada, our chair and CEO, and Howard Wilson, our CFO, will discuss the strategic rationale behind the acquisition on today's call. After our prepared remarks, we'll open the call to questions from our analysts. Today's prepared remarks and responses to questions may contain forward-looking statements related to PagerDuty, Rundeck, and the acquisition of Rundeck that involve substantial risks, uncertainties, and assumptions that could cause actual results to differ materially from those expressed or implied by such statements.
All statements other than historical facts in our discussion, including, but not limited to, statements regarding the timing and closing of the transaction, the potential benefits and financial impact of the transaction and any plans, objectives, expectations, and intentions surrounding the transaction and subsequent integration, are forward-looking statements that contain risk and uncertainty. Should any of these risks or uncertainties materialize, or should our assumptions prove to be incorrect, actual company results and effects of the transaction could differ materially from those forward-looking statements. A discussion of risks, uncertainties, and assumptions related to the acquisition, as well as other information on potential risk factors that could affect our financial results, are included in reports filed by PagerDuty with the SEC, including our company's reports on Form 8-K, 10-Q, and 10-K, particularly under the heading Risk Factors. With that, let me turn the call over to Jennifer.
Thank you, Willa. We're delighted to discuss our agreement to acquire Rundeck as we kick off the first day of our fifth annual Summit industry conference. This morning, I shared news in my keynote at Summit with over 10,000 registrants and over 4,000 live participants attending online, featuring Andy Jassy, the CEO of AWS, Paul Cheesbrough, the President of Digital and CPO of Fox, Diya Jolly, the Chief Product Officer at Okta, and Salesforce's President and COO, Bret Taylor, as well as the CEO of Philanthropy , Ebony Beckwith.
My comments, which focused on the imperative and challenges of digital acceleration and PagerDuty's new platform releases in AIOps, automation for DevOps, c ustomer service, analytics, and collaboration, were a great tee-up for the Rundeck announcement. Rundeck, a California-based startup, extends PagerDuty's AIOps capabilities by enabling Intelligent Machine-Centric Automation for Ops Teams to increase the efficiency of their resolution and recovery efforts.
With Rundeck's automated runbooks, frontline employees can diagnose and resolve issues at the push of a button without the need to escalate to a subject matter expert. Together, we can now automate unpredictable emergent work for people and machines, from detection to diagnosis, to recovery, remediation, and learning, providing a truly end-to-end real-time incident response platform. By intelligently automating real-time unplanned work, we can help our customers reduce manual repetitive efforts, create standard operating procedures, resolve incidents faster, and ultimately improve top and bottom line business outcomes. Rundeck and PagerDuty are both category creators with customer-obsessed DevOps leaders and nimble, passionate cultures. Rundeck's high growth rate and early penetration with their paid enterprise version validates strong product to market fit. Along with their active open source community of 60,000+ free users, Rundeck complements PagerDuty's strong developer community and enterprise base.
We are thrilled to welcome Alex, Damon, Greg, and the Rundeck team to PagerDuty, and we look forward to leading with innovation as we jointly enable our customers to save time and money through intelligent automation. PagerDuty and Rundeck already have an integration available in the market, so we are familiar with their team and technology. As we moved forward with the deal, we spoke with customer CIOs and CTOs who validated PagerDuty and Rundeck's combined value proposition.
What enterprise customers told us and what drives our strong combined market fit is that the burden of manual processes is one of the most significant barriers to recovery and the biggest bottleneck draining productivity and putting business outcomes at risk. These customers consistently shared that an end-to-end platform with the ability to provide enriched context around events and incidents that auto-remediate and self-heal is a game changer for them. They see the transformative potential of PagerDuty with Rundeck. We are both built on a foundation of real-time problem-solving by democratizing insights and action, and we look forward to bringing our combined capabilities to the market to service our customers. With that, I'll turn it over to Howard.
Thank you, Jennifer. We are certainly thrilled to welcome Rundeck to the PagerDuty family as we continue to transform the digital operations management landscape. As you saw in this morning's press release, the purchase price for Rundeck, which is expected to close in October, is approximately $100 million, subject to adjustment. This is to be paid approximately 60% in cash and 40% in common stock. Rundeck is a high-growth startup with around 40 employees and revenue in the high single-digit millions of dollars.
We don't expect Rundeck to be material to our guidance in fiscal 2021, and we expect it to have a positive top-line impact on fiscal 2022 results. When we give fiscal 2022 guidance on our Q4 call, we'll provide more color on expectations for Rundeck's long-term contribution. We're super excited to welcome the entire Rundeck team and look forward to working together to bring best-in-class real-time automation to our enterprise and mid-market customers. With that, I'll turn the call over to Matt to begin our question and answer session.
Our first question is from Rob Oliver with Baird.
Great. Thank you guys very much for taking my question. I had one for Jennifer and then a quick follow-up for Howard. Jen, you mentioned how customers had validated this acquisition. I was hoping you could touch a little bit more about the strategic rationale. As a public company, you guys have resources, a lot of directions you guys could have gone. Why was it that task managers and schedulers were the area that you felt could help build out the PagerDuty platform and incident response? I'd love to hear a little bit more about why that move, and then a quick follow-up.
Sure. One of the things that we saw was the desire on the part of our customers to try and automate more of the machine-based part of resolution and healing as opposed to the people-based part of the incident response process, which is where our strength historically has been, detecting that alert, orchestrating that real-time work to the right teams and people, helping them to diagnose and start to resolve issues. We're trying to reduce the manual toil at the end of that product as well. Rundeck was unique in its very strong DevOps focus from the very beginning. They do help us to automate that entire workflow.
They have a very similar land and expand motion and a similar connection with their customers. One of the things we heard frequently was it just works. It's easy to use, it's easy to deploy. Incident management is just one of their many use cases. We think there is opportunity beyond that as well. Increasingly, automation is foundational to AIOps, and what I heard from executives and users alike is anywhere where they can automate manual work to reduce repetitive work, but also institutionalize the learning from these processes also helps them shift from being reactive to proactive. There was a really good fit in that regard as well.
That's great color. Thanks, Jennifer. Howard, just as a follow-up, I just was wondering, I appreciate the metrics that you gave around them. I was wondering if you could perhaps give us a customer count on Rundeck. I think it's probably fairly high. Thanks. Yeah.
Today, Rundeck, in terms of their community edition, has about 3,000 companies that are using their community edition. Today on their enterprise or their paid edition, they have over 150 customers.
Okay. Thank you, guys.
Our next question is from Sterling Auty with JP Morgan.
Yeah, thanks. Hi, guys.
Thanks, Sterling.
Jennifer, when I look at Rundeck and the way that it was marketed for use cases, it really looked like a job scheduler and something that's tightly integrated, especially in the continuous deployment part of the CI/CD pipeline. What I'm wondering is, as you mentioned the additional use cases, is this the first step of PagerDuty looking to expand back into that CI/CD pipeline? Where directionally is this suggesting the strategy for PagerDuty is headed?
It's not the first step for us to engage in the CI/CD pipeline because we announced today some features that support change, driving incident resolution and information from incident records into the change management process. We know from customers and from research that over 80% of incidents are caused by change. That's a really important part of the incident response lifecycle and an important challenge that our customers face, whether they're small innovators or large enterprise companies. What really drew us to Rundeck initially was their use case within incident response, and their use case focused on DevOps and really the service ownership part of DevOps, which is where we see all of our customers trying to get to.
That makes sense. Then just a follow-up, Howard, for you. Can you give us an employee headcount for Rundeck and will all of them be joining once closed?
Yeah, sure. Right now, Rundeck has around 40 employees, and our expectation is that they will all be joining PagerDuty.
All right, great. Thank you.
Next question is from Joel Fishbein with SunTrust Robinson Humphrey.
Hello there. Congrats on the deal. Howard, just one quick one for you. Thank you for the color about the revenue run rate. I just wanted to know how you think about this impacting your cash flow going forward. Just a little bit more color on that. Particularly, I know you're not giving guidance, but into 2022, that'd be really helpful.
Yeah. I think just a few comments on the financial aspect of this deal, that I think when we looked at the profile of this business, we felt that we could fit it in quite neatly into the PagerDuty model. We can still support gross margins in our target range. We can actually leverage our own expense structure today to be able to help Rundeck, which is still an early company. If you think about a lot of the G&A investments, those have all been relatively light. From a go-to-market perspective, we expect that we will be able to manage to assist them. We think that it puts us in a good position. From a cash flow perspective, we're not expecting any material change from this acquisition. Obviously, we're not providing guidance at this time, but in the near term, we're not expecting any significant impacts.
Okay. Thank you. One quick follow-up. Just in terms of the last question, I think, is there a lot of customer overlap in terms of their customer and your customer base, particularly around the enterprise?
Today, there is some overlap in those paying customers, but there's definitely opportunity both in terms of some of those customers are not PagerDuty customers today. For some of those customers who are PagerDuty customers, there is still the opportunity for significant expansion with them as early users of Rundeck.
Thank you.
I'd add to that, Joel, that Rundeck also creates a new land motion for us. Today, all of our customers have to land in PagerDuty and then expand to new products from the core. This gives us an opportunity to land customers in Rundeck and then move them into PagerDuty. I think it creates a nice potential to gain market share that way.
Yeah, particularly also around the community too, right? That's another area for you to land as well.
100%. There is really a strong alignment between their open source community and our developer community.
That's great. Congrats again.
Thank you.
Our next question is from Matt Stotler with William Blair.
Hey, guys. Thanks for taking my questions. I guess first off, as you mentioned, you already had an integration with Rundeck. I guess first, was there any deeper components of that partnership or was it just a simple integration? Then, I guess, what drove the decision to acquire the company rather than continue to partner as you've been doing?
Sure. Well, initially, this started with our strategy to expand our automation offering in general. We see AIOps as a really important area of problem-solving for our customers, particularly our large enterprise customers. You may be aware, last quarter we announced a number of new integrations in the automation space. Rundeck is clearly the leader in that space in our view, and we found that our technology is not only well-aligned, but our cultures and our roadmaps are well aligned. We think this accelerates our ability to bring enterprise-grade automation to our enterprise customers and enterprise prospects going forward.
Got it. That's helpful. Maybe one for Howard. Helpful metrics that you gave. Anything you could speak to in terms of how you're thinking about potential revenue or cost synergies at this point?
Yeah. From a cost perspective, with Rundeck being a relatively small company or startup, our expectations around typical synergies are fairly low. Certainly, we think that the opportunity for leverage is high. Both with our own more mature go-to-market motion that we have as a company that's been around for some time, we think that putting the two together will give us immense opportunity both from a marketing and sales perspective.
Got it. Helpful. Thanks again, guys.
Thanks, Matt.
Our next question is from Matt Hedberg with RBC.
Oh, hey, guys. Thanks for taking my questions. Jen, could I start with you? In terms of the pricing for Rundeck, can you kind of talk through how it was historically priced and perhaps how you're thinking about it once the acquisition is complete?
I'm not going to comment on pricing because we are still looking at what we intend to do. Rundeck's going to run like a business unit within PagerDuty, and we're going to allow them to continue to go to market with their current motion and not try and disrupt the momentum that they have. Howard can speak more specifically to some of the pricing changes within PagerDuty that we've alluded to and talked about in the past, if that's what you're getting at.
Yeah, I think just, Matt, if your question is around how they price their product today, they typically price on a per user basis, they also have this concept of a cluster charge, which they then charge for an enterprise customer, which gives them a certain amount of capacity. We would review that over time. Right now, it's effectively like a base charge with a per user charge on top.
Got it. Yeah. Howard, thanks. That's what I was trying to get at.
Sorry about that.
No, that's fine. I guess, piggybacking on Sterling's question earlier, it feels like it's got a very DevOps centric focus today in terms of automation through remediation. Even expanding it a little bit further, could this ultimately be used for customer service security areas outside of DevOps, which I know is an emerging focus for you guys?
100%. One of the characteristics of Rundeck I really liked is the way it's very easy to use. It's self-installed. It makes it simple for customers and users to apply it to any repeatable workflows or problems that they want to automate. We think it has similar characteristics to the horizontal nature of applications within our platform, which will allow us to leverage it in other new use cases.
Great. Thanks a lot. Congrats, guys.
Thank you.
Thank you.
Our next question is from Brian White with Monness, Crespi, Hardt. Brian, are you there? All right, we'll move on to Rishi. The next question is from Rishi Jaluria with D.A. Davidson.
All right. Hey, Jennifer and Howard. Thanks for taking my questions. Wanted to start by maybe asking a little bit more about the open source approach for Rundeck. What differentiates the enterprise version from what's available in the community version? Maybe talk a little bit about how they've been operating their open source offering and any kind of changes that you might have to that. I've got a follow-up.
Well, I think one of the things that Rundeck has done well is be really thoughtful and intentional about feature gating between the open source version and the enterprise version, which is one of the things that you look for in terms of monetization or commercialization of an open source environment. They've also, I think, done a good job of controlling really the important commits to the open source product. While it's a very active open source community, they have significantly, I think, managed and innovated on that open source project into the enterprise offering.
I think that they also have a similar point of view around making it easy to integrate and easy to leverage across different products and solutions and applications within your environment, which has been very good. At the same time, that open source community creates a great opportunity for us to land and create adoption and engagement with users and create new customer opportunities. Again, our goal initially is to allow them, they're doing very well, they're growing very fast, to allow them to continue that momentum inside of PagerDuty, and not sort of get in the way of it, and at the same time, identify opportunities to cross-sell Rundeck to all of our customers and likewise, sell PagerDuty into their customer base.
Great. That's helpful. Just thinking through integration, I know in the press release about expected to close next month. Obviously there's already nice integration between Rundeck and PagerDuty. What work needs to be done both to integrate the product, I think, more natively on the PagerDuty platform, alongside that to integrate the companies? I know only 40 employees, not a massive undertaking, I'd imagine integrating a company into PagerDuty is hard and often to do so in this environment, probably even more difficult. Maybe if you could talk a little bit to that'd be helpful.
Sure. Well, it's funny, this is the first acquisition I've done where I've never been to the office of the company that I acquired. There was a meeting with a cold beer six feet away on a picnic table once, which definitely helped move the deal forward. It has been very interesting. Fortunately, the majority of Rundeck's employees are California-based, although many of them are remote. Remember, even prior to the pandemic, 20% of PagerDuty's employees were remote. We know how to operate in that environment. Alex, Damon, and Greg, the three co-founders, are all coming over to PagerDuty. Alex will lead the business unit within PagerDuty reporting into our head of products, which I think creates nice synergies.
Tim Armandpour, who leads engineering, and Dave Justice, who leads our revenue team, will be working closely with them to, like I said, support them and continue to build their business, but also make sure that we've got very good connection points to support our customer base. From a product perspective, like I said, there's already a successful integration where we have customers that I spoke to, in the diligence process that are using Rundeck and PagerDuty successfully together.
Over time, we will look to integrate that offering further, one, into a cloud-based model. Today, Rundeck can be installed on-prem, but it also can be offered as a managed service in the cloud. At some point in time, we would look to build more of a traditional SaaS offering there as well. What I would tell you about most open source solutions, and certainly automation within infrastructure, a lot of customers want to keep that on-prem. I think there will always be a requirement for that, and that is a complementary strength for us in that regard.
Great. Thank you.
That concludes the Q&A for today. I'll hand it back over to you, Jennifer, for closing comments.
I just wanted to say we're extremely excited to have Rundeck become part of the PagerDuty family. It's a team that we've had a lot of respect for, watching them innovate and grow over the last couple of years, excited to welcome Alex, Damon, Greg, and all the Rundeckers on board. It's also a really exciting day with Summit today. We announced a number of, I think, really significant platform releases, not the least of which our first offering for customer service, PagerDuty for Customer Service, which is a new SKU.
A number of platform releases really focused around freeing our customers from complexity and improving the orchestration of work across their incidents and across their cross-functional and distributed teams. It's a big day for PagerDuty and a big week, and I hope all of you will have an opportunity to tune in and either watch keynotes on demand that you may have missed, but enjoy the rest of Summit. Thanks so much for being with us today.