Everyone for joining here in person or live over the webcast. Just to kick things off, my name is Jake Roberge. I'm the research analyst here at William Blair that covers PagerDuty. For a full list of our research disclosures, please visit our website, williamblair.com. But with that, really happy to have Howard Wilson here, Chief Financial Officer of PagerDuty. I know Howard's gonna kick off the presentation with just sharing one slide and just giving an overview of PagerDuty, the market opportunity that they see, and where they're really positioned in the market, and then we'll dig a little bit deeper in with a fireside chat.
Sounds good. Yeah, well, thanks, thanks so much, Jake, and I'll sit down. Folks, you can hopefully see the slide. It's a slide out of our investor deck. But I thought it would be a good way to set the scene around PagerDuty, who we are and what we do.
Is this causing issues?
I think... All righty. Okay. It's a little bit of feedback. Okay, I think we're good there. So PagerDuty is a digital operations management platform that is intended to help customers revolutionize their operations. So our goal is to make sure that our customers are put in a good position to manage their customers and deliver a good experience to their customers. And the way that we do this is via the PagerDuty Operations Cloud. So the representation that we have within our investor deck endeavors to just simplify what exists in terms of the Operations Cloud. So when we look at the characteristics of it, PagerDuty sits at the center of an ecosystem, and we integrate to over 700 different applications and products and systems. And these are typically the applications and products that your typical enterprise would get to use.
So they cover the range of monitoring and observability products, security products, those associated with the DevOps lifecycle, those associated with managing data or data operations, customer service, business operations, IoT, as well as popular ChatOps and collaboration tools, and then a range of applications or products within the ITOps and ITSM space. So if you had to kind of put this all on a picture, it would be difficult to read with 700 of these, but we try to choose a few of the main buckets that represent some of the key integrations into PagerDuty. Some of these integrations are integrations where data or signals are simply sent into PagerDuty, and others are bidirectional, where there is a movement of data between the two different applications.
So we accomplish our goal to revolutionize operations around providing customers with four product pillars, and these four product pillars have distinct capabilities that allow the customer to effectively address a number of different business problems in their space. So if I start with the first one, which on the lower left, which is PagerDuty AIOps, this is a solution that's helped a customer deal with a high volume of signal or data ingestion in order to be able to draw useful conclusions based on that.
So we use our AI, which is our predictive and analytical AI, which has been in place for eight years now, to be able to help customers make the right decision around preventing incidents from occurring, or being able to respond really quickly based on rich contextual data on the most comprehensive picture that they can get, helping them identify where there is probable cause, do detailed analysis, and ensure that they're in a position to have the best understanding, and then take a forward-looking view around how they can prevent incidents from occurring. The second area to highlight is the PagerDuty Incident Management on the right-hand side.
So that is for when a customer is in the situation where a situation is developing, which could become a customer-facing incident, or when an incident has already occurred, and that could be a degradation of performance in terms of the customer's application. And this is. When I'm talking about application, these are the applications that you use every day. Maybe you're trying to transfer money in a banking app or trying to listen to music or trying to book travel, or any number of applications that you might use here. PagerDuty is often behind those applications in terms of allowing companies to respond quickly before it becomes an issue where you get the spinning spiral of death or nothing happening, but where they can actually respond in a timely fashion.
And then our automation allows you to create reusable pieces of functionality that can be used either on demand or triggered by an event to be able to run diagnostics or perform useful tasks within managing your digital operations. And then uniquely, we have Customer Service Operations. So a lot of our discussion around AIOps and around incident management focuses on capturing signals from the telemetry of the customer's environment, so observability tools and so forth. But with Customer Service Ops, we integrate into Salesforce Service Cloud, ServiceNow CSM, Zendesk, and we're actually taking signals that come from customer service agents that highlight where a potential issue might happen.
So our goal is to capture all of those signals, so we can orchestrate work in a timely fashion to either prevent an incident from happening or in order to ensure that, when there is an incident, that we're able to orchestrate the right people to deliver an effective response. And this then ties to delivering some very real business results for customers. It means that it's protecting their revenue... in terms of ensuring that they're continuing to capture revenue through their, their, their business applications. It also helps us manage their risk, because often their compliance requirements, if you fail to meet certain conditions, and we help manage the compliance. It also helps customers be more efficient or effective, so contributes to their productivity and helps them save costs, because often these issues can, can cause, a huge diversion of resources and costs associated with that.
So we see customers getting returns from using PagerDuty, ROIs of, you know, in excess of 200, 300, 400% as a result of using PagerDuty. So hopefully that just gives you a quick overview of the PagerDuty Operations Cloud, our platform with our offerings, and also just sets a little bit of the context of the environment that we operate in.
Yeah, that's really helpful starting point for the presentation. I guess, maybe to kick things off, you've gone... You highlighted a lot of those new products, and you've gone from being kind of a pure play incident response or on-call product five or so years ago to really offering more products in the digital operations ecosystem. Maybe talk about how large are those new products, AIOps, customer service, automation, and just how you've gained traction with those solutions over the past few years.
Yeah, sure. So, we've seen these products have come to market in recent years, as you rightly pointed out. The first one to come to market after incident management was AIOps, and then, automation, and then customer service ops, and that's almost the scale of those. So relatively, when you think about it, our incident management component of our annual recurring revenue as of the end of this last fiscal year was 72% of our annual recurring revenue. So the, the balance is made up of the other three products, with AIOps having the larger component. When we look at even this most recent quarter, our net new ARR from, bookings and activity within the quarter, 60% of that came from products outside of incident management.
We're seeing good traction in terms of being able to get these new products into the hands of customers.
Yeah, that's helpful. And then thinking about the competitive ecosystem, who do you compete against most, and what's your differentiation against... We've obviously heard of some of the larger observability vendors or ITSM vendors launching some products in the space. So what's your kind of competitive mode against them, moving forward?
Sure. So when I think about competition, I like to think about it in terms of: What does the landscape look like for a customer? Like, what could they do-
Yeah
In terms of resolving this issue of the operational chasm as we think about it? So sometimes customers might try and assemble a collection of, call it, you know, point solutions to address what we can do with the Operations Cloud. And that might be in those circumstances, they could have, you know, an AIOps vendor, they could have an incident analysis vendor, they could have someone that manages on call or some notification piece. But those tend to be smaller players that they would use in that space. Or in some cases, we have customers who have largely a homegrown environment. And amazing as this might seem, the majority of our new lands in the enterprise, we're not replacing another vendor that's directly in the space.
It's often homegrown systems or manual processes that they're using, or a combination of smaller tools, and sometimes they may leverage a larger platform in terms of some basic functionality that they might pull out of that. And then, if they want PagerDuty, we're differentiated in that we're the only platform that will take you all the way from detection of a potential issue, all the way through being able to run diagnostics, run a response, manage the incident, resolve the incident, do that with auto remediation, drive the incident analysis, post the incident, and then drive the learnings of that into an opportunity to drive resilience in your operations. So that is typically how I would see it.
The observability players, sometimes there's, call it, messaging overlap that occurs in terms of what they do, but we, in fact, integrate with them and have technology partnerships with them because the nature of what we do is so critical to turn the signals that they create into action.
Yeah, that makes sense. And I mean, you, you've even called out some of the largest observability vendors or even customers of your platform.
Exactly.
But, just curious, how do you see the relationships or the partnerships with those observability vendors evolving over the next few years?
Yeah. So we have a highly complementary relationship. I think the nature of that is around us being able to... We both, you know, us and the observability players are working in service of the customer, and I think the integrations that we've built and we continue to refine help us, in fact, ensure that what we're doing is helping our customers deliver the best experience. So we take a proactive view on that. In fact, the reason why we have 700 integrations is because we take technology partnerships seriously.
Yeah, that makes sense. And then you talked about majority of bookings in the enterprise still being largely greenfield, manual-
Yeah
Homegrown processes. How has that changed over the last few years in terms of your net new bookings? Like, how much of the market is still greenfield today, versus maybe more in replacing incumbent solutions?
Yes. I mean, when I look at it, you know, the work that we've done around sizing our TAM, obviously a lot of that has been bottoms-up because we're not in a, you know, a typical defined category that Gartner or IDC would look at. You know, we evaluate that TAM as being a $38 billion TAM. And if we look at, you know, our company now approaching, you know, call it half a billion in ARR, there's still a lot of opportunity in that, in that space. So we feel that we're still early. I think one of the contributing factors to that is... For many companies, if you think about tech debt in general that exists within companies, often people are aware of the fact that, oh, yes, we have, you know, we have these systems that are aging.
They're 10, 20, 30, 40 years old, and we should do something about it. But, but sometimes there's inertia around driving that change, or there's lack of visibility around how do they actually move forward. And one of the things that we've found is, through the research that we've done, with a third party, is sometimes customers don't even know that there is a solution like the PagerDuty Operations Cloud to, to help them with their operations challenges. And so part of our marketing efforts, particularly of late, have been focused around helping highlight the problems that we solve, as opposed to describing what our technology does.
Yeah.
And that, I think, is resonating well with customers.
That's helpful. And then just shifting gears over to the topical conversation of AI: So how is GenAI impacting PagerDuty? And maybe help us understand what you've historically done with AIOps. You talked about-
Yeah
That being your second-biggest product versus, what the new opportunity is with generative AI.
Sure. So if I look at, I'll look at it from the PagerDuty perspective, first of all, in terms of what we've been doing. So, as I mentioned, like, we've been using AI and machine learning models for eight years now. It's been at the heart of both our overall incident management platform and our AIOps offering, specifically. And we continue to advance that because we think there's so much power that we can leverage using AI. One characteristic that is important around our platform is that we are regarded as the standard for resilience and high fidelity. Like, if you're thinking about an environment where you're managing your critical infrastructure, you don't want to be able to give in a false alarm.
You want to make sure that when you receive a notification or you get, PagerDuty wants you to orchestrate you into activity, that it's real work, that it's not a false alarm. So we take fidelity really seriously. So over the last year, we've been running a series of early access programs with a few hundred customers around different aspects of how we can use generative AI. Because we love the fact that generative AI creates an intuitive interface to be able to connect with the data that exists in our platform, but also, we appreciate that it has a huge productivity gain for the individual users.
So our approach to generative AI is now culminating in a GA release this summer that will focus on features such as one that helps you to easily push updates to stakeholders during an incident. Or after an incident has occurred, a major incident, companies typically want to do, call it an after-incident review or a postmortem. That can sometimes take days to actually consolidate all of that information and build that information timeline and stream, and that's done in minutes by our generative AI. So the AI assistant will help create that view. For our customers that are looking at doing more of the professional coding around runbooks, we have an AI assistant feature that or capability that will allow them to author those runbooks or co-author those runbooks.
And the one capability that I actually love is called Catch Me Up, which has again created a Slack-like interface into, into, PagerDuty's platform that... where I can ask questions like, "So, you know, tell me what's happening on this incident," or, "How's the service running?" And, you know, "Tell me, you know, what are the, what's the most recent change?" So those are some of the capabilities, and we think that that will help drive further productivity for individual responders and the other stakeholders around an incident. So that's kind of the PagerDuty piece. If I think about generative AI more broadly, I think that the increasing use of AI will bring more complexity into our infrastructure environments that are already highly complex.
With that complexity, I think it'll result in more incidents, which will require the need to orchestrate more resources around being able to respond in a timely fashion.
No, that makes sense. And then just shifting gears to the macro environment, it's obviously been a bit variable over the past year or so. You have some SMB exposure. You've seen some kind of headwinds on large deal activity early on.
Yeah
But it seems like that's starting to stabilize. So maybe walk us through what's happened over the last few years and how that's changed over the last few quarters on the macro front.
Yeah, sure. So I would say that for the last five quarters, we've definitely seen an increase in the SMB market being more challenging.
Mm.
We've seen, you know, higher levels of churn and downgrades, and for a while that, the SMB segment for us, actually contracted. It has, over the past few quarters, stabilized, and so it's a headwind to growth in that it's no longer growing, you know, no longer growing but staying flat. That is consistent with a lot of the external data that we've seen around, you know, access to capital for, particularly startups, and a lot of our SMB space has been made up with, within the software and technology space. So those startups were either have gone out of business or haven't had access to capital. So that's kind of the one theme.
If I look at the enterprise segment, we certainly felt, going back about a year or so, that there was a sudden constraint on spending in that area as people were reevaluating kind of where they were going to spend. The economic uncertainty, thinking about what they needed to allocate to AI, all of those considerations meant that there was, in some respects, like a real slowdown or constraint on spending. We've navigated through that by changes that we've made in our approach to customers, our go-to-market, our positioning, and that has resulted in us being able to drive strong results in terms of new and expansion into those accounts as we orient around solving big problems for our big customers. So that piece of it, I think, is going really, really well.
We have also had some challenges just given the economic environment around renewals being more, more, negotiated more highly. Because, again, companies have often had mandates around driving, you know, 15%-20% improvement in their expenses, and so that creates a discussion there. But we've taken a philosophy around wanting to ensure that we are maintaining customers 'cause we know that even if there's a downgrade, that'll be a short-term event, and over time they will grow back with us. But I think for me, the highlight has certainly been to see how we've adjusted to this new economic or this new normal around economic uncertainty, and certainly the way in which we've been able to align with our customers' strategic goals and the problems they're trying to solve has put us on a good path.
Yeah, that's helpful. Just to double-click in terms of the changes you're making-
Yeah
Upmarket to better address those customers, you're making some go-to-market changes. Maybe walk us through, like, what are the early changes that you're making there?
Yeah.
How have they been trending? Like, what's been the most successful to help kind of mitigate those issues in the enterprise?
Yeah, and those transitions are not rapid transitions, just to be clear. Like, you don't suddenly decide, "I'm gonna, you know, tweak with my sales model, and it's gonna be like a one-quarter thing." So first of all, what we recognized is that we came from a background where we were driven a lot by headcount growth within tech workers worked in our favor, and so we recognized that that growth was starting to contract or slow down. We also came from a bottoms-up motion that often then met a top-down motion, but we leveraged that bottoms-up motion.
Essentially, what we saw happen in Q1 of last year is that there was a lot of pressure in terms of the authority around developers to make purchases was curtailed, and we now were dealing with a lot more top-down purchase decisions. So we changed and re-educated our sales team around a new methodology called Command of the Message, which then helps them position value, right? Then on top of that, we felt it was important that we needed to equip them with the tools around: how do you actually tell the PagerDuty story in terms of the customer's problems? So moving from an orientation where we would describe, you know, "Here's our product and what it does," to understanding what the customer's problems and what would be the solutions that they need.
We've evolved a series of solution plays that are clearly focused on issues that customers are trying to look at, such as like, "Oh, I need to modernize my operations. How do I go about doing that?" Or, "I need to transform my incident management process because it's not delivering the responsiveness that I need," or, "I need to I have a huge volume of manual work that I need to automate away because I have less capacity." Putting it within those in that context, and our sales team has been successfully doing that. I think also selling the whole operations cloud to customers has also ensured that we are giving them a much broader vision of what they can do with the platform, and that is leading to increasing retention value or stickiness.
I think that multi-product business value-attached approach and just adjusting to the fact that we do have longer sales cycles is helping us be successful in that space. Too much talking today. I'm running out of voice.
There you go. Now, and then, I mean, SMB as a percentage of revenue has also been decreasing. The overall-
Right
... piece of the pie, like focused more upmarket. But you, you've called out stabilization recently, and we actually, for the first time in a couple quarters, saw total customers start to grow again. Would love to just get a sense of what you're seeing in those SMB trends and what that business means to you moving forward.
Yeah, sure. So SMB is now around 16% of our annual recurring revenue. We're still seeing activity in that space. We're still seeing new customer acquisition. We're still seeing expansions in that space, but that is also at the same time, concurrently with, you know, high levels of downgrades and some churn. When I look at our overall customer count, stabilizing and a slight modest growth over last year in terms of paid customers, that's positive to me in that that is a combination of us being successful with adding a smaller number of enterprise and mid-market customers that'll support our long-term growth, but also less churn within the SMB segment. So that's a positive sign.
I think our free offering has also created a great opportunity for smaller companies, those who have maybe churned off our paid plan, to be able to use our free plan, and also for newer entrants, newer, start-ups, to be able to have a vehicle with a, you know, highly resilient platform that they can use with a limited set of users to be able to at least get started. So we've seen the growth in the combination of our paid and free customers grow 18% year-over-year, which means that we have a lot more companies using the platform, and, and that's offering benefit to them at different levels.
Yeah, that makes sense. And then just thinking about the financial model, you've talked about kind of the expectation for growth to accelerate throughout the year, and that's kind of what you've reflected in the guidance. Maybe just help us understand what are the building blocks to that growth acceleration throughout the year that gives you confidence?
Yeah. So when I look at what we're expecting to see, we're expecting to see better management of churn and downgrades, across you know, all of our segments, which will then be a positive contributor to the ARR growth. But definitely the momentum we're seeing around new and expansion is, we expect that to continue. And we have much better visibility now than what we had, a year ago. We, you know, previously, we would have visibility of pipeline kind of current quarter and next quarter, but the changes we've made around account planning, positioning with the customer, being able to connect ourselves to their problems, has meant that customers are engaging us with some of their long-term plans, which means that we're now building pipeline around opportunities that runs into Q1 of next year.
So that visibility gives us the confidence in how we would see that play out for the rest of the year.
Yeah, that's helpful. And then you are also talking about the heightened emphasis on multi-year, multi-product deals.
Yeah.
How does that kinda influence your visibility into that, that growth acceleration as well?
Yeah, and that is... That's a really good point, Jake, because what that does is it helps give us certainty around, you know, churn and downgrade potential over time, right? Because I think the one thing is that when you have these multi-year agreements, you know they're not all up for renewal every year. Previously, we were heavily weighted to annual term agreements, and at least this gives us better certainty as we look out. The other piece I would say is that the multi-year, if you look at our RPO numbers, RPO for Q1 was $388 million at the end of Q1. On a comparative basis last year, that was $309 million. So we've seen a 26% growth in RPO.
A large contributor to that is the fact that since Q3, we've been doing a lot more of these multi-year engagements, which are contracted annually, but then that are contracted for the term but then billed annually.
Yeah, that makes sense. And then on the profitability side of the equation, you, you've done a nice job of expanding your margin profile over the last year or so. What have been the biggest areas of leverage in the model? And then how should investors think about the points of leverage moving forward?
Yeah, sure. So, I'd say that the initial improvements that we saw over the last two years, there was a large focus in sales and marketing in terms of driving efficiency in that model, and I think we've created a sustainable model for the future around how we organize our sales teams into pods and how they operate together with our customer success team. But we also drove a lot of value out of establishing locations outside of the US, so high-talent locations in Lisbon and Chile, which have given us access to talent and often at a more attractive cost differential. And we've also driven a number of programmatic improvements in terms of using automation, both in R&D and within G&A, that have helped drive improvements. So we expect to continue to see those improvements.
In terms of G&A is an obvious area where we see as we scale that will drive additional leverage. There's some room within R&D. But sales and marketing, we think that over the long term still represents an opportunity for us to drive additional leverage.
Yeah, that makes sense. And then, just thinking back to the acceleration as well, just, what are you considering in the guidance just from a macro perspective? How are you baking in some of the headwinds that may still be lingering around the model?
Yeah, so when we've looked at guidance, we've worked on the assumption that the macro doesn't improve and doesn't materially deteriorate, so essentially staying much the same. When we've looked at SMB, we've said, "Here's the reality: SMB, you know, is gonna remain, you know, with maybe, you know, with elevated levels of churn and downgrade." But the things that we can control in terms of driving higher renewal rates and driving success with the new and expansion deals based on the work that we've done to date, that's what gives us confidence in the guide.
That makes sense. And then I know we're coming up on time here, but just the last question on my end would be, you recently did a convertible note offering. Maybe walk us through how you're thinking about capital allocation moving forward.
Yeah, so we did the convert last year in, I think it was October, November timeframe. That was part of refinancing notes that were going to expire this, this coming year. That was really around us ensuring that we had the ability to make decisions. And, and this is really with- There are two elements to this. The one is that we're obviously looking at, continue to look at M&A from a technology perspective. How do we look at acquisitions like Jeli, which we did last year, and, and others that have helped round out our operations cloud?
But also, most recently, we made the decision, given our positive cash flow generation, to also announce a share buyback of $100 million, which is really to harness some of the free cash flow to allow us to manage dilution and deliver value to shareholders.
Great. Well, thanks, Howard.
Yeah.
Appreciate the time today, and thanks for everyone joining in the room or over the webcast. For the breakout session, we are the last presentation of the day, so we're actually just going to stay in here. So I've asked my questions. I can continue asking, but this is your time to, as investors, to start launching in some questions.