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

Hello, everyone. Welcome to the Jefferies software virtual conference. I hope you and your families are staying safe and healthy. My name is Luv Sodha, and I'm part of the Jefferies software equity research team. Please join me in welcoming the PagerDuty team. PagerDuty is a leading platform for real-time operations. Representing them today are Jennifer Tejada, CEO; and Howard Wilson, CFO. So thank you both for joining us in these very difficult times. I know you guys are joining us from the West Coast. So hopefully the wildfires out there are subsiding a little bit. And maybe to start out with just a quick question to level set all investors at a high level. Maybe could you guys talk about what is PagerDuty's vision as a company? And what is the company's true north?

Well, thank you so much for having us, and I appreciate everyone joining us today for Jefferies' virtual conference. I wish we could all be together. I'm getting pretty tired of this virtual thing, despite not missing my commute. I actually could go for a 5-hour flight where I could get some deep thinking done and not be bothered by family members or my dog. So let's talk a little bit about PagerDuty. Now PagerDuty is nearly a 12-year-old company. And it was founded on the idea that you should be able to leverage machine learning and software detection to identify critical issues or challenges within your business and orchestrate work across the right individuals on the right teams, as opposed to kind of the one-in all-in that we often see around incident and crisis management. And that has really evolved over the last decade as DevOps has become mainstream culture and methodology within technical communities, both at start-ups and innovative cloud-native companies but also in large, more traditional transforming enterprises. And PagerDuty today serves nearly 60% of the Fortune 100. And I think that is because you see all of these organizations that are really transforming and modernizing their IT environments, in service of the customer who's frankly going to almost always now meet them online. And the nature of online consumer behavior is that consumers want a perfect experience. They want it in seconds, not minutes. And if it doesn't work out, they'll choose another competitor. They'll delete your app. And unfortunately, the technology that delivers that type of experience has become increasingly more complex with cloud migration, distributed architectures, even SaaS applications. It's getting harder and harder for development and technology organizations to manage the complexity that's proliferating in the digital ecosystem to support those consumer experiences. So PagerDuty's north star is our customers and their success, and you can see that in the loyalty of our customers. So we see less than 5% of starting ARR churn in any given year, and that's been true about our business since the very beginning. And I think the reason for that is because, one, PagerDuty is -- has -- we invested a lot of time and energy in architecting for resiliency and high security at scale. We have to be up when the rest of the world is down. PagerDuty gets the right signals to the right person or the right team at the right time, so you don't get false positives. You don't get notified for something that isn't important or isn't specific to you. And that is increasingly important in a world that's gotten very noisy. Our vision over time is that PagerDuty really becomes the platform of record for all real-time work across the business. And I want to talk a little bit about the future of work because we used to go into the office and look at our calendar and do what our calendar said and deal with very structured predictable projects and working environments. And if something went wrong, you had days or weeks to solve it. You raise a ticket, you work with a team of people, and you would eventually sort that out. Increasingly, more of our work is unpredictable. It's emergent. It happens in a spontaneous way. Our teams are distributed, so it's hard to determine who you need to help you support managing an issue that's come up that may be affecting a high proportion of your top line revenue or your brand reputation or the customer experience. And so we've really built a platform that detects that work, automatically orchestrates the workload and the process to get the right teams and the right problems coordinated and working together to solve them. And increasingly we're automating more and more of the resolution so that that organization can get to recovery and hopefully deal with an issue before it becomes a customer problem, before a customer's tweeting around Twitter. And we see our customers adopting new use cases beyond the developer community in IT, in IT ops, in security and increasingly in customer service. Because these teams are inextricably linked, and yet historically they've worked on different platforms within different cultures using different methodologies. And that does not serve this real-time customer problem very well. So that's a little bit about where we're going.

Perfect. That's awesome. Maybe could you talk a little bit about the opportunity ahead, the TAM of the company, if you will? And you mentioned a little bit about the core customers in the IT users. But how has the product evolved over time to service the broader range of customers you mentioned?

Sure. Well, we think the TAM is huge, and frankly very nascent and early. And the reason I say that, when we went public, we actually did a number of research work, a lot of research work to determine the TAM purely for incident management and incident response. And that TAM on its own is $25 billion. And we broke that down to the number of users available to us in engineering communities and IT organizations, et cetera. And what we find in customer engagements is that most of the time, we are not replacing another solution within a customer. They are engaging in DevOps and automating their incident response processes for the first time. We're often replacing manual solutions, phone trees, email distribution list, WhatsApp channels, et cetera. So I think the market is actually just starting to meet us in terms of recognizing that this process of incident response, of detecting an issue and automating the orchestration of work and teams to manage that issue and then resolving that issue, that automation is becoming increasingly important because the technology they're dealing with is too complex to manually handle anymore. The stakes are getting higher. I talked a little bit about the consumer experience. And we know that for e-commerce players, a minute of disruption, not downtime, but just your -- the cash register is not working the way it's supposed to online, can cost over $0.5 million a minute in lost revenue and unplanned labor costs, not to mention it being very counterproductive. And I believe that number is going up, given the fact that most of our customers have shifted from being partially online to almost entirely online. So as the mix of their revenue shifts to digital, we think those stakes get even higher, so this has become increasingly important. You need AI and machine learning to make sense of all the data. You'll hear a lot from the APM providers, the observability, et cetera. And they're producing a lot of information and a lot of data, but they're not actioning it. We actually orchestrate the action around a highly correlated well-filtered signal. So instead of sending many alerts to many teams and having those teams try and figure things out, we send the one notification and the set of work instructions that matters to the team of 6 or 8 that needs to -- that has the expertise and the ownership of those services to deal with them effectively. And that is a very new and modern approach, very different from ITIL, which is command and control, very sequential, requires a lot of time, but really not built for a real-time environment. So we can automate a lot of basic work, the mundane work. And increasingly we're using machine learning and nearly 12 years of data in our platform to automate some of the harder stuff as well. So you'll hear us talking a lot about automation, how we're leveraging AI and machine learning to do that in the future. But I think it's a very early opportunity. I think it's an early TAM. I think COVID caused people to take a step back for a moment to get their remote workers deployed with laptops, to make sure they had their security environments up and running, et cetera. But we think COVID is actually accelerating cloud adoption, cloud migration and digital transformation, and that long term that's a tailwind for us.

And I would just add in terms of as Jen mentioned, at IPO we did some detailed work on trying to understand what the opportunity looked like. And we identified that there's about 22 million developers who could be potential users of PagerDuty, 19 million folks in IT and security ops and another 44 million in customer service. And the reason we selected those groups is because we already see traction. Of course, most of our users today sit in dev and IT, but we're already seeing 80% of our customers, in addition to using us in dev and IT, are also using us in other use cases like security and customer service. So that was the buildup for us, so 85 million users at least was the starting point.

Perfect. Thank you for the color there. Maybe -- so you guys both mentioned that we are living in unprecedented times today. You guys are seeing tailwinds to your business from the acceleration we've seen in digital transformation and remote work. That positive impact has been offset to a certain degree by reduced spending in certain verticals. And you noted this past quarter that you're progressively seeing stronger pipeline activity as things come back online. And so could you provide more color as to what you're seeing out in the field? Has the sequential improvement that you noted in your remarks during the earnings call, has that sustained? And in your case, do the positives sort of outweigh the negatives?

Well, I definitely think long term, the positives outweigh the negatives. Because to my point earlier, I think everything that we're seeing this transition to businesses really going online as their primary platform for doing business, it kind of makes digital the new operating system. And that bodes very well for us because we essentially help customers, whether they're hybrid and they have on-prem and legacy environments to manage and bricks-and-mortar store environments, or they're cloud-native digitals and they really want to make sure that everything they do delivers a great outcome for customers. We're very, I think, strongly positioned in both of those types of environments. And so as what we've seen is a very strong pipeline coming into this quarter. And as the quarter has begun to unfold, some continued momentum and a lot of interest from customers in terms of really turning to, "Okay, now that I've gotten sort of the initial survival issues out of the way, how do I now transform my dev and my IT organization to support this new world, which looks like it's going to be our new world going forward?" And so I think we feel good about that from a long-term perspective. Howard, anything you want to add there?

Yes. I think the other piece that's been an indicator for us of some strong momentum is really just the fact that our customers are using the platform in earnest, right? So since the beginning of the pandemic, we've seen close to a 40% increase in the usage of our platform in terms of the number of incidents that have been created. So that's a clear signal to us that our customers are using the platform. What we find even more compelling is the fact that their time to resolve incidents has actually improved by nearly 15% over that same time period. So clearly customers are getting value out of the platform. And we also see customers continuing to grow and expand with us. So now consistently every quarter, we see roughly 1/3 of our customers in the mid-market and enterprise do some sort of expansion transaction with us. The one thing we did note as the pandemic and recession has started to unfold, there has been smaller transaction sizes, but the momentum there of continuing to expand is very encouraging. And we see the confidence and the trust. We sometimes use the term we've operationalized the trust that our customers put in this. And that's certainly evident. We're helping them in what's really a critical time.

Perfect. Maybe -- so one thing that Jen mentioned earlier was that obviously you guys help some of your customers through the cloud migration journey. One thing that we've noticed as we've done -- hosted multiple CIOs is that the pandemic really has accelerated that migration to the cloud. So maybe could you walk us through like a customer example of how you've assisted a customer who is going through that cloud migration journey? And then do you work with all of the cloud service vendors, or you work well with some specifically?

Yes. I'll tackle that. Howard, feel free to jump in. Well, we service customers in any cloud environment. And in fact we integrate to over 370 solutions and also allow customers to build integrations themselves using our API. So we're integrating to customers that are using GCP, Oracle, Amazon and Azure. Zoom is a really great example of a customer that had to undertake some very rapid scaling and cloud migration to support that. And Eric always refers to himself as PagerDuty employee 550. He is a tremendous fan of PagerDuty because they are very reliant on us, not to just manage incidents, and in their case incidents have been up significantly, but also to leverage our event intelligence to see events storms coming, to forecast and predict issues and manage those issues before they become broad-scale problems. And I think Zoom is probably one of the best examples of a company that has truly been tested by unique unprecedented demand as a result of this. And they definitely see us as someone who helps them operationalize the trust they have with their customers, many of which are new. They're children going to school. They are people working online. They're communities trying to get together. So as they brought in Oracle, as they broadened their cloud footprint, we've been with them every step of the way. Another example I can think of is a large U.S. broadcasting company that's really shifting its business model to online streaming and digital. And they're really leveraging PagerDuty as the backbone or the spine for their entire modern operations environment as they leverage cloud, but still have to manage their internal networking resources in their internal data centers. And so there's an example where we're helping someone straddle kind of the old world and the new world successfully, both when hundreds of millions of dollars are on the line in terms of online advertising during big moments in sports and entertainment. And I think the best way to think about cloud migration and how we leverage it is if you look at our customer base, what you'll see is we have very early innovators, people who are progressively pushing cloud to the limit, using PagerDuty from the very beginning. And at the same time, you'll see more traditional companies like Nordstrom or the New York Times that are making a transition; or NVIDIA who was a very ambitious plan to really support AI and computing in the future. So a really nice blend. And then we also saw a lot of what I think of as stay-at-home beneficiaries that have continued to expand with PagerDuty during this time. Peloton would be a great example. DoorDash, Shopify, and Electronic Arts where people are at home gaming. So I think when you see some of these expansions that happen repeatedly over time, and you see customers continue to double down with us, it's very encouraging, particularly when we look at new product attach as well. So we've seen, I think very strong new product attach in the last quarter, 18% of our customers attaching new products. And that's also a good sign that some of the more strategic initiatives we've invested in are starting to take hold in the market.

Perfect. Did you have anything to add, Howard?