Welcome, everybody, to day two of the B of A Technology Conference. My name is Koji Ikeda. I am one of the Software Analysts here on the B of A Tech franchise. I am super thrilled to have PagerDuty here for a fireside chat, CEO Jennifer Tejada, and Howard, how you do? CFO, how are you guys doing?
He's like Madonna, he doesn't need a last name.
Yes, I'm just known as Howard.
I guess to kick it off, you know, for maybe those in the room or on the webcast that are unfamiliar with PagerDuty, we'd love to hear what PagerDuty does, kind of in like a timeline perspective. You know, what was the original problem that you guys solved? What problems are you solving today? More importantly, what are the problems of the future that PagerDuty is going to be solving?
Sure. Today, PagerDuty is the most resilient and secure and scalable digital operations platform available to large enterprises and highly innovative new technology companies. We started out in the developer community providing on-call automation that enabled developers to go from a very manual process of identifying problems in the tech stack or the tech ecosystem to a very automated process where instead of people or customers letting you know that there's a problem with your technology stack, we have over 700 integrations in an ecosystem around a first-class API that automatically identifies challenges, can prioritize and triage them, and can automatically orchestrate them to the right people, or increasingly the right agents or machines, to then triage, diagnose, and resolve issues before they cause business impact.
I think general business people have begun to really understand that major incidents, not unlike cybersecurity breaches, can cause tremendous business impact because almost every company now runs on a modern technology stack. That is becoming even more true with the advent of using both Generative and Agentic AI. In fact, operating your AI investments and your AI operations has become one of PagerDuty's newest use cases, both where we're seeing more success in landing what I would call native AI companies. This last quarter, we talked about Anthropic, Anduril, and Scale AI, but also helping large enterprises manage the quality, the reliability, the resilience, and the security of their AI investments in production.
It is very early days as far as AI usage is concerned, in my view, because I think we're just tip of the iceberg in terms of understanding the potential productivity gains, but there's a huge opportunity.
Over the course of the almost nine years that I've been in the business and the 16 years that the business has been around, we've gone from this single, simple, but very reliable and easy-to-use solution around on-call to a modern automated incident management platform, to then covering more and more use cases across the modern operations of a company, including AI Ops automation across different real-time, unstructured, but mission-critical and high-value type of operational problems to increasingly prevention and supporting, bringing together the islands of automation inside of a company where you might find out about a problem through your customer service team, but that customer service team is on a different tech stack than the developer or the IT team that could actually address that issue.
It's about bringing those islands of automation together so that the customer, you know, the end customer experiences a seamless execution of the transaction that they're trying to complete. That impacts revenue and operating expenses. What we're helping our customers do ultimately is increase their pace of innovation themselves, enable them to develop and deliver more products and services through their technology. We're enabling them to protect and grow their revenue, particularly from an e-commerce standpoint, and enable them to reduce their operating costs because with automation, you need less and less human beings involved, then you have less risk to mitigate when you can prevent major incidents from happening.
Got it. Got it. No, thank you for that. You mentioned a couple of pretty big logos right there, Anthropic, Anduril, Scale AI. One of the questions or debates that I often get within infrastructure software as a whole is, why can't AI just do what you do? Here you're helping two pretty big AI companies out there right now. Tell me a little bit about why AI can't displace you tomorrow.
Part of it is the data. We have 15 years of proprietary data that includes both infrastructure, application, UI-level events that stream in and help us understand how systems work and how systems are related, where dependencies live, but also where fragility lives, and also helps us to understand patterns, like why certain combinations of technology issues lead to major incidents or why certain dependencies lead to more fragility or cost. We also have a lot of information around workflows, why some workflows solve major incidents faster than others, why some teams are more successful and efficient than others, why some machines are more reliable or resilient than others.
When you take all of that together, it enables us to quickly surface automatically in seconds what is the most important problem that needs to be dealt with, what are potential solutions to that problem, recommendations on how to address it. It captures all the information on how you addressed it so that the next time a similar incident comes up, it recognizes the similarity in that problem and it can start to auto-remediate that issue. You go from orchestrating events and problems and people to eventually getting to what we call event to code, identifying event in flight and dispatching the code automatically to prevent it from becoming a major incident. As, like I said, general business people, not only CTOs and CIOs, sort of understand the cost of not preventing these things from happening, that investment becomes important to them.
It's also our customers get the benefit of our learning from others' events, our root cause analysis across the industry, across their vertical, not just their own customer data, and yet we're able to manage how we use data very effectively. The last thing that I would say is scalability, security, and resilience are incredibly important, and customers are often having a failure in the platform that they would be using to detect failure in their environment. You actually need a third-party platform on top of your own business to monitor, measure, and manage incidents when your own environment is down. There is actually a first principle need to have a third party involved in securing and stabilizing the resilience of your operations, particularly as more and more of your operations rely on technology.
The other thing I would say is every company that's more than two years old has some form of tech debt, and it's hard for them to prioritize how they burn that tech debt down to prevent fragility in their operations. Our AI Ops solution, along with the rest of our Incident Management platform, helps customers prioritize that tech debt, but also understand where that risk and fragility is so that they have a higher level of awareness or better triage systems to support those dependencies and that fragility. It's sort of like when you go into a hospital, not every part of the hospital and all the equipment in a hospital is brand spanking new.
There are things that have been around for a very long time that still need to work to keep that hospital working, including like their HVAC system or the electricity feed or Wi-Fi, right? You might not think about it, but you may need Wi-Fi to operate a surgical robot. If the Wi-Fi goes down, that's maybe older tech debt and maybe an older installation, but it's going to impact the end -patient in that surgery. We see the same thing inside corporations. The last thing I would say about our native AI customers is incident management is not their core competency, and nor do they want to be distracted by having to invest in or build that.
While you can leverage AI to do certain things, you still have to manage how that AI operates, and you have to continue to build upon it, learn from it, and iterate it. It can be a very big distraction and require a lot of resource investment.
That makes a lot of sense. Yeah. You guys reported results last week. Maybe from a high -level, you know, what were the recaps from the call and high-level big takeaways? I got a bunch of other questions to kind of follow up on that. Yeah, high-level takeaways.
Sure. Revenue grew 8%, came in at the top of our guide, and we beat on both EPS and earnings, I think 800 basis points.
We were 500 basis points.
500 basis points. Sorry. He's the guy who keeps me honest. It was our best quarter in eight quarters for new customer logos. On the flip side, it was challenging in terms of enterprise retention in particular. We had some unexpected downgrades in enterprise that we weren't anticipating that led to some decline in dollar-based net retention. We don't believe that is a systemic problem. In fact, we think it was really oriented around our own execution. We are undertaking quite a significant amount of transition in our enterprise business. We announced last quarter that we have a search running for a new CRO. Howard and I have been making some pretty significant changes in terms of the profile of the type of reps that we bring into the company, how quickly we ramp them, what we're enabling them to do.
On one hand, we were disappointed with our execution around enterprise retention in the quarter. On the other hand, by the end of this quarter, more than 60% of that new profile of rep that really is truly an enterprise sales executive understands how to sell top-down platforms, has relationships in the CIO, CTO community, they will be entering into their second year and be more ramped into the back half. We are encouraged by that. We also know that we continue to see success with very large platform lands. We talked about a customer that is a financial market infrastructure provider. It was a seven-figure land, all products in the Operations Cloud, including services.
We have a number of very successful reps that are demonstrating the ability to routinely deliver these kinds of services, but we have to scale that through the rest of the sales organization. If you're not familiar with PagerDuty, it's worth noting that we came from and grew up in a bottoms-up developer land and expand motion that successfully got us into enterprise. The majority of our ARR does come from enterprise today, but that motion of small patient growth from the bottoms up no longer really supports the way enterprise businesses are buying now. There's much more scrutiny and effort on behalf of strategic sourcing or procurement. CIOs and CTOs, CFOs are signing a lot of even small contracts at this point.
We have really had to transition from what had been a successful land and expand model at the same time that the market has been in some transition. The other thing that I would say is we have been evolving our pricing. Our pricing historically was 100% seat-based. In a world where our customers are looking to automate more and more of what they do, but where the value of preventing business impact from major incidents is getting higher and higher, seat-based licensing is not as well aligned to value as it could be. All of our new products, AI Ops, Customer Service Ops, Automation, and PagerDuty Advance, our AI solution, are all consumption-based. We have been providing more and more flexibility for our customers around how they get to an effective price such that the number of people using the product matters less and less to them.
It reduces friction in terms of expanding across teams, but also how they have flexibility to move between products and services. You should expect to hear us continue to update and iterate our pricing in service of making it more flexible and easier to use and more aligned to the value we're creating for customers. In the last quarter, we announced that we were offering AI and advanced features in every package. We currently have a good, better, best sort of pricing offering across all of our products. We think that has led to some of the success that we had in new logo acquisition this quarter because we're just deploying and enabling discoverability in even the lowest cost offering.
Got it.
Maybe, Koji, even just from a financial side, because Jane focused a fair amount there on what's happening from a customer and from some of the transition. We delivered non-GAAP operating margins of 20%, which was higher than the guide that we provided. We also, in this last earnings call, pointed to not only did we raise our guide in terms of operating margin for the full year to 20%-21%, but we also have a clear path to GAAP profitability in the next fiscal year. Our view on that has really been around a very concerted effort to manage both dilution and stock-based compensation. Improving the profile of the business, we delivered free cash flow margins of 24% in Q1 and continue to generate healthy cash flow.
Let's stick with you, Howard, for a second.
Oh, let's.
You're in control of the guidance. You did take down the guide a bit. I think there's some considerations for enterprise and commercial, which we'll touch upon in a second. As you construct the guidance methodology, how much more conservative or not is the guidance from an overall leverage perspective when you did it this quarter versus 90 days ago?
Yeah. We certainly looked at it in the light of the Q1 performance. Being a subscription business, obviously incremental bookings that we do within Q1 has a flow-on revenue effect through the rest of the year. In contemplating that and the transition that we were going through, I felt it was prudent to take a look at the year and anticipate that the economic environment is the economic environment will continue to do what it's doing.
We have execution opportunities that are within our control, particularly within the enterprise that we see that transition, looking at ways in which we can accelerate that. Applying a similar level, if you like, of conservatism on the full year, but taking into account that this transition that we're going through has taken a little longer than we had anticipated.
Okay. Okay.
Yeah. I'd also add that we expect the macro to continue to be uncertain. Yeah. As we've moved into landing and expanding larger enterprise deals, our quarters, which had historically been pretty even from month one to month three, have become more back-end loaded, where the third month of the quarter sees a lot of your bookings come in. Liberation Day was right at the beginning of that third month. It was weird. That's the only way I can describe it. You have customers who will use uncertainty against you in some cases. They use it as a reason to negotiate more. They use it as a reason to delay things, et c.
We just expect, given what's going on with the tariff war environment, the geopolitical environment, currency, etc. , for the market to continue to be uncertain, whereas six months ago, I think people were more optimistic about what this year was going to look like.
Yeah. I think just to add, Jane mentioned the fact that by the end of this quarter, Q2, we'll have 60% of our quota-carrying reps who've been with us for a year or more. What we have seen by doing the analysis is that once reps have been with us for 12 months, their yield improves. That's given us a basis for confidence in seeing improvements in incremental ARR through Q3 and Q4.
I'm going to try and get it out of you. You said April weird. May still weird or less weird?
It's funny because I think you get that first weirdness, and then you just sort of acclimate to it. Yeah. I think it's the same.
Okay.
It's just this uncertainty is the name of the game. I was talking to a customer the other day, and he said, you know, I just wake up in the morning, and I just don't want to turn on the TV anymore. I just don't want to hear what's going on because I just need to get shit done at work.
Yeah.
I think there's some volatility fatigue in the market, right? At the same time, what's really unique about the market that we're in is while there's this uncertainty, there's also one of the most transformative technology opportunities we will see in our lifetimes.
People are experiencing this sort of interesting emotional mix of uncertainty around the macro and like, what am I going to have to deal with next that was not built into my original plan? At the same time, this is just such an incredible opportunity. When it catches on, I mean, we have even seen it in our own internal organization. The vast majority of our engineers are using code assistance and more than one. All of our employees have access to a secure proxy environment where they can use generative AI tools to do their work. It sort of catches on like wildfire. They get really excited about it. You just start to see these new use cases and new capacity. That is contributing to our efficiency gains as a company. We are seeing that with customers.
It's kind of this weird juxtaposition of the externalities are uncertain, but internally, you have so much opportunity, both from a product and from an internal use of AI, that it's inspiring. There's probably a lot of mood swings going on in the marketplace.
On the enterprise segment, you did mention some downsells happening. What does it take to get these customers that have downsold back up to par and maybe expand?
It's purely engagement. Some of them shouldn't have happened in the first place. One of the things that we did in the quarter, in some cases intentionally, in other cases unintentionally, was we transitioned a lot of reps. We took some low performers out of the business. We moved reps that had a profile more suitable to mid-market into different roles. We are ramping new, kind of more traditional enterprise-style reps into our bigger territories. At the same time, at the beginning of the year, you often have a territory reallocation exercise that you go through. In doing so, while also transitioning, ramping a new Chief Customer Officer, we created some unintentional coverage gaps. That's not the right thing to do for the customer. It's not the right thing to do from an execution. It's not the right thing to do for investors.
We're on top of that. Those coverage gaps led to some surprises in downwards that I think could have been avoided. It's about, one, making sure that our customers are using the product that they've paid for effectively, that they're well deployed, but also importantly, that they understand the value they've realized from that product. Oftentimes, the CIO doesn't realize that the use of the platform reduced the number of major incidents that they had in the quarter or in the period because nobody wants to tell them how many bad incidents they had before. They don't want that information getting to the bosses. You have to be really intentional about making sure that both the product and your post-sale team helps customers understand their value realization. The second thing is we have to be more programmatic.
We're maturing our post-sale deployment capability, our professional services capability, our work with customers, and our customer success for large, complex enterprise deployments. What I would say is our product is not meaningfully complex, and our product's still relatively easy to deploy, but our customers are more and more complex. The change management required, the way they work across regions, across departments, the increasing number of use cases that they're using us for require a more mature kind of typical enterprise professional services and delivery or implementation motion, which we didn't require in the past when we were primarily a single incident management offering with just a small handful of use cases.
It sounds like within the enterprise, a lot of CIOs, CTOs, Head of Dev, and Second Ops are underappreciating the ROI that you guys are giving them.
Yeah. I mean, it's really interesting. The ones who are on top of it are unsolicitedly raving fans. The other thing I would say is if you look across large enterprise, there's sort of two kinds of technical leaders right now. There are deep technologists in the top technology role, and then there's sort of more the business consultant style of program management leader, and they are playing catch-up, trying to figure out how AI is going to work in their environment, how they should be managing their budget across organizations. We tend to see that that more technical leader, because they do come out of a developer or software engineering background, they actually understand and appreciate our ROI, the low cost of ownership, the quick time to value more readily than maybe the more traditional CIO persona that is used to big ERP platforms, big ITSM solutions.
When we go to them and say, "It's only going to cost you this, but it's going to deliver this, and it's going to do it in five quarters," they're like, "What?" because they don't come from that software engineering background. We have to do a better job of starting there and having that conversation. Our newer profile of reps that do that, that's where you're seeing large lands that we've talked about, like the financial market infrastructure company or the healthcare company we talked about a couple of quarters ago, the semiconductor company that we've spoken about that is a seven-figure deal. It's continued to expand over time.
That semiconductor business, for instance, is one where we're getting tailwinds from both the way they're using our automation for different use cases well beyond incident management, but also because they are investing heavily behind their AI investments and using us to operate all of their AI investments. We get kind of two tailwinds in an example like that. We're starting to see more and more of that, but we need our reps to recognize that opportunity and convert it.
Yeah. Yeah. Another segment of the business where you saw elevated churn in commercial. Maybe a few minutes there on what happened in commercial. How do you define commercial? All these software businesses define enterprise commercial differently. Maybe a definition there. Then why or why not, or why would the elevated churn in commercial continue in the future?
Yeah. We see sort of the tale of two cities in commercial. Commercial is customers with revenue under $500 million.
Yeah.
Thank you, Howard. One of the things we see is sort of two segments of that commercial space, which is really small and the lower end of the mid-market business for us. Traditional startups, and for us, this business has almost always been tech, e-commerce, online travel. You are kind of traditional digital-first, small-growing companies. There is one cohort of that business, our startups, that have sort of fallen or falling away. They were overvalued in 2018, 2019, through 2022. When the valuation multiples started to come down in the private market, they just are not able to grow into their valuation, and they do not have the cash to support that growth. We have just been seeing that cohort. Their headcount is contracting.
Their businesses are contracting. They're still going out of business at a much higher rate than they were five years ago. That cohort is really the haves and the have-nots. You've got companies that have been able to pivot and get cash flow positivity and continue to gain and get investment from their insiders and companies that are just sort of disappearing. We go through and we look at bad debt in that segment, and we'll lock customers who are not paying and things like that. Every now and then, you'll see a burst of elevated churn in that segment. On the flip side, which I don't think is systemic, we're seeing increased growth and interest from the generative AI segment, where those customers are very well-funded. They're growing fast. Some of them are getting very big, very fast.
The biggest names in that sector are choosing PagerDuty as essential infrastructure, much in the way startups in the past have chosen us as part of the startup toolkit. Their requirements for security, for resilience, and for scalability are very different than the traditional small startups we used to start with because they're growing so fast. They're serving such large cohorts. The quality and reliability and resiliency of the actual product outcome, whether it's their LLMs, their AI infrastructure, apps, or agents, is very important to them because when customers experience hallucination or rogue agent behavior, they get very nervous about expanding the use of those solutions. We help them identify those issues early, move them very quickly, but most important, learn from them and get them to remove that problem from their systemic offering before it becomes a big problem.
In AI, those problems can spread faster than they could in kind of the traditional world. That part of the business is where we're seeing that cohort is where we're seeing new logo growth at a faster rate. We think that cohort has the ability to, the potential to, grow faster and more profitably than what we used to see in software startups. On the flip side, we think the other part of that cohort, the long tail, will continue to moderate over time. We're pleased to see in the last few quarters, the commercial business growing again, returning to growth. The other thing I would say is that our focus on new logo lands is in upper mid-market and enterprise.
We do not have new logo targets that are as high as they were four or five years ago when commercial was a bigger part of our business because most of our new logo lands are in enterprise, and they grow faster and more profitably.
Got it. Maybe a capital allocation question for Howard.
Yeah.
I know you guys got a share buyback in place. Maybe a quick reminder of how much is left. Then maybe going beyond share buybacks, how do you think about capital allocation and investments for growth?
Sure. We recently announced the authorization for a share repurchase. This is our second share repurchase. This one is for $150 million. That share repurchase program will be in effect this quarter. We feel capital allocation decisions need to be taken looking at what's in the best interest of the company and our shareholders or the stakeholders. Together with our board, when we reviewed this, we saw this is a good opportunity for us to be able to return capital. We obviously take a view looking at what the opportunities are for us as a company. We want to continue to grow. We see ourselves as a long-term profitable growth company. We're making the investments that will secure that future.
Got it.
Yeah. I think it's worth mentioning that we've demonstrated pretty consistent improvement in operating margin. Last quarter, we shared a long-term operating margin target of 30%. This quarter, we mentioned that we see a clear path to GAAP profitability. That requires us to continue to produce healthy cash flow, but also for us to focus on reducing dilution and stock-based comp. We've put in programmatic systems in place to just make sure that we can manage that more and more effectively each quarter.
Got it. I think one of the big themes is sales rejiggering of the organization.
Rejiggering.
A little bit. A little bit of a.
I think my teams would tell you they could feel the rejiggering.
You have a CRO that you're still looking for. Maybe just last question is, what kind of qualities are you looking for this CRO?
Yeah. I mean, no one is more motivated to find the new CRO than me because I'm the current CRO. I do have enterprise sales experience, so I guess that's a good thing. We're looking for someone who has global enterprise sales experience in large platform selling, someone who has experience standing up a partner channel, and someone who likes to win but hates to lose, someone who is a competitor. As we've expanded the products and expanded our platform, we've expanded our TAM and therefore have a higher number of competitors, which can be noisy. I want somebody that's used to winning in a more competitive market environment and stealing share of wallet from other people. We have this kind of nice Canadian culture, and we were sort of alone in our market that we created for a long time.
It's a cultural shift for our company to go top-down, to be selling, starting with a platform and value-driven vision, and to be really looking to be one of a handful of strategic players alongside of the, I think, the most valuable software platforms in the world. I'd also say that we're not waiting for that new CRO to step in. Already with a new Chief Customer Officer who's now ramped, Allison Corley, myself really driving a cultural change and an operational change, a higher set of standards and expectation, higher levels of inspection, and higher engagement. I mean, I have five C-level customer appointments this afternoon.
There's a lot of context switching going on, but there's just a different level of activity and a different pace and a different level of inspection already in place, which we expect to drive both leading indicators in this quarter and lagging indicators in the back half.
Yep. Got it. Makes sense.
Thank you.
We're all out of time.
Thank you for having me.
Jennifer, Howard, thank you so much for doing this. We appreciate it. Thank you so much.
Thank you.
Thanks for coming.