PagerDuty, Inc. (PD) Earnings Call Transcript & Summary

Why don't we get started? So I am Sanjit Singh. I do the infrastructure and analytics coverage at Morgan Stanley. Very pleased to have Jennifer Tejada, CEO of PagerDuty. PagerDuty is one of the companies that's sort of pioneering digital operations management, had a successful IPO last year. Before we start the conversations, let me just get through these disclosures superfast. Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures, or you can find that at the registration desk.

So thank you, Jen. Welcome to your first TMT Conference, at least as a public company. Maybe to kick off the conversation for those who are new to the PagerDuty story. Can you explain what digital operation management means in terms of what that entails in terms of solving those pain points for your customers? You could sort of frame out what customers are going through and what you're helping them solve.

Sure. Well, thank you so much for having us, and I just want to remind everybody, we're in a quiet period right now. We report on March 18, which we're always excited to do. So digital operations management is really the culmination of all of the technology systems and ecosystems associated with companies doing business with their end consumers and the teams that manage them. In a world that is always on, where you as a consumer expect nearly instant gratification in any type of transaction or engagement that you have with a brand or a company or a service, there is an increasingly complex set of systems and teams associated with delivering that experience. And when that experience is not perfect, customers leave, brands are damaged, revenues lost and cost can escalate. And so digital operations management is really the processes and the people the teams are associated with keeping the world always on in a seamless way, even though that complexity is really changing. And that complexity and the proliferation of that complexity is driven by things like distributed architectures, by the fact that the world has really moved to an omnichannel mobile environment. You have people who will -- doing a transaction in e-commerce or to book travel or to do work will switch between a mobile device, an iPad, their phone, a PC, desktop, et cetera and maybe also have in-person communications or chat. And being able -- for a company to be able to manage that is quite hard. We don't see companies worrying so much about their sites going down. Slow is the new down. And so it's about trying to help these teams move from firefighting and reacting more effectively to unplanned work and unplanned issues that arise every minute of every hour of every day to be proactive and starting to be able to see some of these issues coming and preventing them from becoming full-scale incidents. So in the past, incident management was really limited to the IT team or the Devs community or DevOps. Now we see customer support playing a role, security teams playing a role, customer-facing teams playing a role. So again kind of digital operations management more -- is more broad and inclusive to those teams across the business that are associated with that customer experience.

Got it. Can you walk us through maybe a real-life customer example that sort of highlights the criticality of PagerDuty to that particular customer and where maybe the deployments were -- spans these multiple channels sort of highlighted?

Sure. So there is a well-known fintech company that has been a customer of ours since 2010. They process billions of transactions for their consumer and business customers. When they started with PagerDuty, they started in the development team, the developers who are responsible for customer-facing apps in a highly regulated environment. So truly mission-critical, business-critical and customer-critical applications. They then adopted PagerDuty across the rest of their operations team, IT operations. And then their security -- physical security teams use PagerDuty to manage physical security incidents. Their legal team uses PagerDuty to manage real-time work associated with time-sensitive contract negotiations or time-sensitive issues within the business. And they're just a good example of a company that's, not only using us for incident response and incident management, they're also using us to manage unplanned, unpredictable or spontaneous work across the company that needs to be done in a very timely manner, and usually includes cross-functional teams that are distributed in different places around the world.

Right. I think going back to the time around IPO, we have one of our clients asked me, it's like, "Sanjit, I read the S1. This sounds like, I thought the Company X did this, and Company Y did this." And typically, it's either some of the monitoring vendors or an IT service desk player. Can you sort of clean that up for us in the sense of where do you sort of fit in the architecture? Who are your -- what -- who are competitors necessarily? And who are more of your partners?

Yes. So we sit centrally as the kind of central nervous system for the modern technology ecosystem, and that technology ecosystem continues to evolve. You see APM players consolidating, but you see new players emerging in security or observability. You see ticketing systems that are really for -- queued and often employee-facing work as opposed to consumer-facing work. You see the IoT environment throwing off a lot of data that -- because anything can be instrumented today by software, which means a lot more of the physical and virtual ecosystem is being monitored. And unfortunately, what happens is all these systems are sending signals to humans, and no one is really great at helping the human, one, find signal in that noise, but then, two, determine what they need to do, who else they need to help them and then how to orchestrate that work very quickly across an organization. That's really PagerDuty's specialty, is using machine learning and 11 years of data to get the right set of tasks or jobs to be done to the right humans with the right skill set or responsibility and accountability in the moments that matter. And we're talking about seconds and minutes, not weeks and months, where if you have a printer that runs out of toner, that can go into a ticketing system that may queue for a while. It's not business critical. If your pay wall goes down on Black Friday, that's really problematic. If you have an issue in an app environment that sees you out of compliance in a regulatory environment in health care, financial services, that is a right now issue. And you don't just need the IT team or a NOC to help you, you need the developer who built it, you might need risk management to look at it, you might need customer support involved as well. So PagerDuty is really becoming the platform for action and autonomy across businesses. Because instead of a signal just going to one person and that person figuring out what do and spinning up a call and getting 100 other people involved, PagerDuty is determining who and which teams needs to be involved, getting the 1 or 2 pizza-size team together in moments helping with the triage by recognizing previous incidents or similar issues that have occurred in the past using machine learning and providing answers as opposed to just, hey, this is detecting an issue, right? And that means that the response process can go from 3 hours to 3 or 30 minutes. Very quickly. I think it's also important that we are independent and neutral. So as the market starts to consolidate, our customers increasingly want one neutral party that's helping them get visibility to everything that's happening, but then also orchestrate the people and automate some of those people's work as well. And we often, say technology problems or easy human behavior is actually really hard to manage. So an important part of our data set is the human behavioral information and learnings that we have and how people respond and behave under time pressure, who, in particular, in the organization has a certain level of expertise to solve a problem very quickly, what they did in the past that could be then repeated as an automated play to address an incident. And increasingly, seeing events coming in and storming from lots of different technology providers within this ecosystem and recognizing that not only are they related, they are a typical kind of mix or cocktail of issues that the system has seen before. And recognizing that if they are not intervened, that will become a major incident. So again, that shift from reactive to proactive. So we partner with all of the players that you're talking about through integration. The vast majority of them actually use PagerDuty themselves to orchestrate work, which I think is really important. And there's actually a lot of interoperability that customers frankly expect. So we have players that have tried to follow us into our first market, which was on-call notifications, where we automated on-call engineering, and really created and pioneered that market. But nobody has really followed us into digital operations management, where we're applying Event Intelligence, AIOps, analytics and machine learning to, again, getting the right people on the right problem in the moments that matter and then starting to automate the triage all the way through to resolution. It's probably important to point out, and I heard New Relic talking about this as we walk into the room, it is a massive market and it's early. And we articulated massive -- I'm staring at our legal team here. We articulated massive as being $25 billion for incident management, but as big as $100 billion when you think about all the users involved in digital operations. And that means that we're early, we're less than 5% penetrated in the market that's still growing. One of our most popular use cases, new land use cases is some form of cloud migration or cloud adoption. And if you listen to the large cloud providers, they would also say it's very early in what they think is a very, very big market. And PagerDuty is proven and known for accelerating cloud migration at reducing the risk associated with cloud transformation and digital transformation and making it less costly. Because you make less mistakes, you can move workloads faster. You learn from every workload you move on PagerDuty and you start to really get better and better at it over time.

You hit on the TAM and talked about that $25 billion. So unpack that a little bit. I think the S1 did a good job of talking about 20 million to 25 million developers, 19 million IT and security professionals out there, 45 million in customer support. Where are we today in terms of penetration of that users? You mentioned an overall sort of being 5%. Who are your core users today? Who are you seeing good traction as we look at the past couple of quarters over the past years? And who is the customer that you think you can go out -- or users you can go out and get in the next year or 2?

Sure. As far as we are pointing out that we see ourselves as a horizontal platform both in terms of the types of companies and the industries that we serve, I mean a lot of our growth recently, we spoke in the last earnings call, has come from highly regulated industries like financial services and even defense contractors. And so there isn't really a barrier. There's real-time, spontaneous, unplanned work that's happening everywhere. For each of you, if you think about how you used to be able to come into the office and your day was pretty well planned, you had a calendar and things went as expected, the mix of work is really shifting to being unplanned, unpredictable and you needing to respond more effectively, which takes you away from meaningful, purposeful kind of high order work. And so part of PagerDuty's mission is to return to that work really quickly by reducing the impact on people from unplanned work. And that is horizontal in terms of functions within an enterprise. So we generally start -- I think of the developer community and DevOps as the sort of entry ramp onto the digital ops auto bond because it tends to start there because developers are progressive. They're early adopters. They require easy-to-use but sophisticated applications that have a high level of resiliency and trust. And so one of the things PagerDuty is known for is not sending you a false positive, and you can't say that about other segments within technology. If PagerDuty sends you a set of work or tasks or notification, you know it's real because we've proven over more than a decade to be very good at that, right? And that gets harder and harder to do as you scale, which creates a bit of a competitive moat for us. Once you're within that on-ramp, what you find is if there's a customer-facing issue, your e-commerce app goes down, your smart card company and there is an issue, et cetera, it radiates in an organization to security, to customer support, to other parts of IT, potentially to the executive team, to legal, go-to-market, et cetera. And that drives virality for our product as well. But we generally start in developer community because they know us, and that's where we have the strongest brand preference. I think the most natural adjacencies there are security. When I joined PagerDuty 4 years ago, the team told me, "Oh, we're not for security." But then when we would interview security people, they're like, "Yes, I've been using PagerDuty for 8 years." Right? So it kind of speaks to the nature of if it's a consumer-grade user interface, if it solves a real media problem that the individual person feels, it almost operates from an acquisition perspective like a consumer app. You can -- that you can find it easily online, you can try it, you can be up and running, integrated into the systems that you support or the applications that you support that are part of your job inside of 5 minutes. And it's very easy to add team members, and yet, the security, the system and technology that backs PagerDuty up is highly resilient at scale. We have customers that have tens of thousands of users, and we actually continue to improve our published reliability and availability, not just in terms of is the site up, but our transactions moving across the platform, our notifications moving. So we put our money where our mouth is there.

Got it. In terms of -- is there an inflection point that happens whether a certain percentage of workload during the cloud where it's sort of drive that expansion into these other departments and to these users sort of outside of the core DevOps community? Is that like a framework on how to think about it? Or is it just a function of just steady progress? What do you see the sort of the slope of that adoption?

It depends on the industry. In more regulated industries where there's a lot of oversight in technology buying, it tends to start small in an organization like development. They then champion the need for the solution, either engineering-wide or IT-wide or based on the back of an initiative, which can be an inflection point like a cloud project or an application development project. In the financial industry, you see investment banks launching consumer credit cards, and that could be an example where they suddenly feel the need in app development for PagerDuty, and then IT starts looking at and thinking, actually, this could replace a lot of legacy and homegrown stuff that we've built, and you start to see more of a centralized buying behavior. In less regulated industries, it tends to be more viral and just gradually, where app developers will start using it and DevOps teams will use it, then maybe centralized IT will use it for employee-facing application environments, and then maybe customer support or customer service picks it up and so on and so forth. And when we start to see those inflection points, that drives some of the strategy behind where we'll double down on certain API investments or integration. So for instance, customer service has become quite popular, and what customer teams tell us is they start using PagerDuty because they need visibility into what's going on when the -- an app for a music service is down. They're paying engineering and IT to find out when is it going to be up, what's going on, what's the issue, how many customers are affected, what can I tell my customers. So they start for visibility in kind of stakeholder engagement and then they watch how the developers use PagerDuty and say, "Well, this customer service like case resolution process, looks a lot like incident resolution. Could we automate more and more of what we're doing very manually across multiple systems with PagerDuty?" And as a result, we made some significant investments last year with Zendesk and Salesforce to start to integrate into their platform so that a customer, service rep or administrator can use PagerDuty in sync without contact switching between, say, their sales force environment or their Zendesk environment, and that's becoming more popular.

Another way to sort of frame out the opportunity, just how many customers are up for grabs. You guys have about 12,000 customers. That's up 15% year-on-year as of the last quarter. You have 300 customers spending more than $100,000 annually on PagerDuty. When you think about how many sort of customers are up for grabs, do you think incident response, digital ops management is a sort of mass market opportunity from technology, brand-new start-up all the way to large enterprise? How do you sort of view -- how many logos are up for grabs? And then do you have a view on which segments that you guys are going to focus on? Are you going to try and go after it all? Or is it more of a -- are we going to -- PagerDuty is going to move more upmarket and have some of your competitors focus on the lower...

We tend to -- because we -- because our acquisition motion is through digital e-commerce, it's frictionless, the demand signal tends to be users that enter through -- by coming online, they search for a solution. They come into our web app, they start a trial, they start using PagerDuty, they swipe a credit card to get going. And that tends to give us a very strong demand signal in terms of where the interest is. And frankly, it's pretty ubiquitous, like we're often surprised by some of the customers that use PagerDuty. And one of my favorite is a company called SightLiFe that uses PagerDuty to manage corneal implants and donation. So when a donor is made available, that becomes an incident in PagerDuty. The process of extracting that cornea from the donor, getting it to finding the right recipient, getting a corneal team to transplant it -- transfer it and transplant it inside 72 hours. It's all managed on PagerDuty because it's time-critical and it's business-critical. And that happened not because we were running Google Ads for organ transplant. The industry happened because the developers at SightLife were using PagerDuty and said this could service to manage the logistics in this time-sensitive workflow much better than the way we're trying to do it today, and they couldn't find anything else out there that was easy to use and to do it. Having said that, we see a very big opportunity in enterprise because we don't see much competition there. I mean it's -- we're mostly replacing greenfield. Customer -- a lot of customers are still very early in their transition to even agile and DevOps culture and much less continuous deployment, continuous integration, et cetera. So we have 58 of the Fortune 100. And if you look at the other 62, many of them are just going through digital transformation, but they're starting to see more and more of their revenue rely on technical applications to engage with consumers or engage with their business partners or their employees, et cetera. And so those become bigger opportunities. I mean defense contracting was not an industry that we put on our target vertical list at any point in time. But if you think about the complexity of the technology in those environments and all the instrumentation in IoT and how much software is now running their assets, it kind of makes sense. So I think the verticals where we've naturally seen a lot of traction has been verticals that you as a consumer would recognize are investing in apps on your phone. That's a simple way to think about it. So whether it's entertainment and media or it's software, Internet, e-commerce, food delivery, travel and hospitality, et cetera, you name it. But we find ourselves in education and resources, and we talked about our resources customer who uses PagerDuty to manage fuel trucking terminals. So they instrument both their -- the logistics system to understand what's inbound and then their supply chain to understand where it needs to go and the status of those fuel loading terminals and they optimize how they move assets around as a result of leveraging PagerDuty. And again, it's time-sensitive because they're all associated with commodities contract. So just net out that answer, I mean, I think -- again, we think it's horizontal that we think enterprise and upper mid-market present pretty significant opportunities because we've seen really strong growth in that space. But we're still part of the start-up toolkit for technology start-ups as well.

As you can imagine, one of the most popular questions that I get asked about in public topics is sort of around competition. And as you pointed, Atlassian sort of acquired into your space in 2018. And so the question is, to what extent are they having an impact on your top line growth, your customer logo acquisition. And maybe also if you can give us a sense of -- you sort of hinted at your last answer, how much of the market is greenfield, where you're not necessarily going on head-to-head bake off?

Yes. I think we'd all agree that most of the market is greenfield. It's a big market, and there's room for multiple players. Having said that, I think we're quite differentiated in terms of the depth and the breadth of our platform as opposed to just being a learning solution. And yet, our alerting and notification solution is the best in the business and has, I think, a strong technical lead on the rest of the competition. We've consistently grown our customer count by 14% to 15% a year, and that hasn't changed as a result of competition. And so the best way I could describe the competitive environment for us is it really hasn't changed since we were competing with those start-ups when they were independent as opposed to when they become -- became part of the companies that you mentioned. What has changed is the customer is paying attention to what else is out there, and they're going to hold us accountable to continuing to innovate our road map. They want to make sure that they understand the value that PagerDuty is providing them. And I think that, that's been a big area of focus for us with our sales and go-to-market organization, is to shift from kind of technology-centric selling features and bells and whistles to value selling, what's the value of PagerDuty. So we talked earlier -- last fall, last winter about some of the ROI studies that we've done and the fact that PagerDuty customers -- enterprise customers tell us they've seen a 730% plus return on investment over just 4 months. So we have customers that spend millions of dollars with us. We have customers that start with us at $2,000. It kind of runs the gamut. But I think it's getting easier to demonstrate the value of the process because customers can increasingly tell us that they know what the value of a minute is for their top line business, and that wasn't always true. We would have technology people like, do you know how much a minute of disruption cost to your company, and some of them would be like, I don't even know who the people are in my companies that know that. Now our e-commerce companies can tell us it's anywhere between $200,000 and up to millions of dollars a minute when something goes down. All of you have tried to watch something new on Netflix or HBO or Disney+, and it hasn't downloaded properly or hasn't been there, and you know how frustrating that is and how easy it is to cancel a subscription. And so as that value proposition becomes more inextricably linked to what we do, I think that creates more opportunity for PagerDuty.

And maybe just one follow-up on the competitive environment. Probably one of the most natural integration is between the service desk and you guys responsible as well as the monitoring guys. How do you guys think about IT -- the IT services management guys as competitors? And conversely, why wouldn't PagerDuty want to think about having their own? Because that's a natural bidirectional flow with...

Yes. We -- today, we see them as integration partners, just like the other 350-plus technology companies that we integrate to because they serve a very different problem than we serve. The problem that we primarily serve is around instantaneous, time-critical customer-facing issues that generally start in the tech stack somewhere that impact human beings, right? Now you can take our solution and you can apply it to longer cycle work and employee-facing environments, and some of our customers do, do that. But we are really designed for people who are responsible for time-critical problems and what we call real-time work or immediate unplanned work, right? From a service desk perspective, you tend to be dealing with longer cycle issues that aren't as business critical, like getting someone a new laptop or fixing the printer cartridge or getting the Wi-Fi turned on or ensuring that some changes have taken place after the immediate issue is resolved. And like I said, some customers apply us for those problems, but a lot of customers have deployed service desk environment years ago in very centralized IT environments, where they still have -- they're still using people to do things that PagerDuty actually automates. So a network operations center is often a place where people sit and they wait for the walk, they look at dashboards, and they wait for issues to come up and then they personally escalate and try and assign work to others. PagerDuty uses machine signals to do that. And some companies, they're not in the cloud, they're on-prem, they're not ready, their operational maturity is such that they may not be ready to start to automate that because they don't have a DevOps culture where like you code it, you ship it, you own it. We, on the other hand, have a very different philosophy, which is that you should deploy the power and the information immediately to the people closest to the opportunity to drive change, right, which requires trust, requires a different culture than the command and control culture where many companies still run and built their tech stack. So I think it's more an issue of maturity and where the customer is. But we have a lot of technology companies that will say to us, why should I ever have a service desk because I can just use PagerDuty to do that. And so I think it's an opportunity, but it's, again, not what we designed for and not what we've been focused on in the past.

Just got a minute left. So I'm going to come bundle 2 questions. I wanted to hit on both of these topics. Got a new Chief Revenue Officer, Dave Justice, great background. Can you just...

Yes. He flew from Toronto within this morning at 2 a.m. It was great.

Can you -- so what's Dave sort of initiatives going into next year? What sort of his mission statements? How do we think about some of the changes that would be in the organization? And the follow-up question was sort of you have visibility, analytics, digital operations management, that suite of products. Where can these attach rates go from where they sit in? What's the potential? Do you imagine that most of your customer base will drop multiple of these products over time?

Sure. Dave is 7 weeks with the business, so he can kind of find its way around the office and stuff, and we just hosted sales kickoff last week. And I -- the feedback from our sales team and our leaders in the company was that there's just a lot of clarity around what's important. Some of the things that Dave is prioritizing is brilliance in the basics, the idea that standardization and rigor in the way we go to market and the way we do things and the way we measure our activity, et cetera, is really important. And as you scale, that's really important. So coming out of Cisco and Salesforce is a very strong operational background, and that's one area. The second is really around value in service of the customer. So how do we really articulate more effectively the value for both the user who is often the starting point that all the way up to the senior-most leader who could become the economic buyer or the approver over time and really starting to see the world through a persona lens. Because we, historically, had the luxury of kind of having a one-size-fits-all message because we were primarily speaking to the developer in the DevOps community. And as we become more important to large companies, their senior executive, CEO, CFO signing our contracts, and so we really have to think about how we do that well. And the other thing I really have enjoyed seeing Dave bring to the organization is a really strong competitive spirit. We are founded by Canadians. I'm from Minnesota. He introduced cultures, frequently described as nice and very cooperative and kind, and he's a fighter, and he's a winner. And I think that there was a lot of embracement for kind of that mindset. There's also a real sense of urgency. So when you've been a growth company your whole life, reminding people that you can't get complacent, that you've got to continue to stretch and kind of raise the bar as opposed to just continue to do well what you've always done well, I think it's been really important. He's a great cultural fit. He's very well connected to our customers. And so far, the response internally and externally has been very positive. But it's early, early days. Your question around...

Attachment.

Attachment. Event Intelligence has been probably the most exciting product for us. We talk a lot about that. It tends to drive the upgrade from just core notification and alerting to the digital operations management skew where we talked last quarter about seeing a lot of traction there. And if we can -- we like it when customers engage at the platform level and then the owners must ensure that they're getting value from the whole platform. And Event Intelligence, where our first -- which was our first entry into machine learning-centric products really demonstrates value very quickly. And what's important to understand compared to the other AIOps product that you might hear about is if you're a PagerDuty user with existing integrations and existing people in PagerDuty, you literally can just turn the Event Intelligence on. You don't have to get a systems integrator. You don't have to do training. It literally will just start doing some of the work for you. And so marketing awareness, discovery is important for us.

Great. Well, we'll leave it there. Thank you so much, Jennifer.

Thank you for having me. I really appreciate it. Thanks for being brave and coming back to this conference to see us.