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

Good afternoon, and welcome to PagerDuty's call to discuss its intention to acquire Rundeck. I'd like to remind everyone that this call will be recorded. And now I'd like to hand the call over to Willa Mcmanmon, Investor Relations at PagerDuty.

Thank you, Matt. Before market today, PagerDuty announced that it has entered into an agreement to acquire Rundeck. The details of this transaction can be found in a press release issued this morning and an 8-K filed with the SEC. Jennifer Tejada, our Chair and CEO; and Howard Wilson, our CFO, will discuss the strategic rationale behind the acquisition on today's day call. After our prepared remarks, we'll open the call to questions from our analysts. Today's prepared remarks and responses to questions may contain forward-looking statements related to PagerDuty, Rundeck and the acquisition of Rundeck that involves substantial risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed or implied by such statements. All statements other than historical facts in our discussion including, but not limited to, statements regarding the timing and closing of the transaction; the potential benefits and financial impact of the transaction; and any plans, objectives, expectations and intentions surrounding the transaction and subsequent integration are forward-looking statements that contain risk and uncertainty. Should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, actual company results and effects of the transaction could differ materially from those forward-looking statements. A discussion of risks, uncertainties and assumptions related to the acquisition as well as other information on potential risk factors that could affect our financial results are included in reports failed by -- filed by PagerDuty with the SEC, including our company's reports on Form 8-K, 10-Q and 10-K, particularly under the heading Risk Factors. With that, let me turn the call over to Jennifer.

Thank you, Willa. We're delighted to discuss our agreement to acquire Rundeck as we kick off the first day of our fifth annual Summit industry conference. This morning, I shared news in my keynote at Summit with over 10,000 registrants and over 4,000 live participants attending online, featuring Andy Jassy, the CEO of AWS; Paul Cheesbrough, the President of Digital and CTO of Fox; Diya Jolly, the Chief Product Officer at Okta; and Salesforce's President and COO, Bret Taylor, as well as the CEO of Philanthropy, Ebony Beckwith. My comments, which focused on the imperative and challenges of digital acceleration and PagerDuty's new platform releases in AIOps, automation for DevOps, customer service, analytics and collaboration, were great TF for the Rundeck announcement. Rundeck, a California-based start-up, extends PagerDuty's AIOps capabilities by enabling intelligent, machine-centric automation for ops teams to increase the efficiency of their resolution and recovery efforts. With Rundeck's automated runbooks, frontline employees can diagnose and resolve issues at the push of a button without the need to escalate to a subject-matter expert. Together, we can now automate unpredictable emergent work for people and machines, from detection to diagnosis to recovery, remediation and learning, providing a truly end-to-end real-time incidence response platform. By intelligently automating real-time unplanned work, we can help our customers reduce manual repetitive efforts, create standard operating procedures, resolve incidents faster and ultimately, improve top and bottom line business outcomes. Rundeck and PagerDuty are both category creators with customer-obsessed DevOps leaders and nimble, passionate cultures. Rundeck's high-growth rate and early penetration with their paid enterprise version validates strong product to market fit. Along with their active open source community of 60,000-plus free users, Rundeck complements PagerDuty's strong developer community and enterprise base. We are thrilled to welcome Alex, Damon, Greg and the Rundeck team to PagerDuty, and we look forward to leading with innovation as we jointly enable our customers to save time and money through intelligent automation. PagerDuty and Rundeck already have an integration available in the market, so we are familiar with their team and technology. As we move forward with the deal, we spoke with customer CIOs and CTOs who validated PagerDuty and Rundeck's combined value proposition. What enterprise customers told us and what drives our strong combined market fit is that the burden of manual processes is one of the most significant barriers to recovery and the biggest bottleneck draining productivity and putting business outcomes at risk. These customers consistently shared that an end-to-end platform with the ability to provide enriched context around events and incidents, auto-remediate and self-heal is a game changer for them. They see the transformative potential of PagerDuty with Rundeck. We are both on a -- we are both built from a foundation of real-time problem-solving by democratizing insights and actions, and we look forward to bringing our combined capabilities to the market to service our customers. With that, I'll turn it over to Howard.

Thank you, Jennifer. We are certainly thrilled to welcome Rundeck to the PagerDuty family as we continue to transform the digital operations management landscape. As you saw in this morning's press release, the purchase price for Rundeck, which is expected to close in October, is approximately $100 million, subject to adjustments. This is to be paid approximately 60% in cash and 40% in common stock. Rundeck is a high-growth start-up with around 40 employees and revenue in the high single-digit millions of dollars. We don't expect Rundeck to be material to our guidance in fiscal 2021, and we expect it to have a positive top line impact on fiscal '22 results. When we give fiscal '22 guidance on our Q4 call, we'll provide more color on expectations for Rundeck's long-term contribution. We're super excited to welcome the entire Rundeck team and look forward to working together to bring best-in-class, real-time automation to our enterprise and mid-market customers. With that, I'll turn the call over to Matt to begin our question-and-answer session.

Our first question is from Rob Oliver with Baird.

I had one for Jennifer and then a quick follow-up for Howard. Jen, you mentioned how customers had validated this acquisition. I was hoping you could touch a little bit more about the strategic rationale. As a public company, you guys have resources, a lot of directions you guys could have gone. Why was it that kind of task managers and schedules were kind of the area that you felt could help build out the PagerDuty platform and incident response? So I'd love to hear a little bit more about why that move, and then a quick follow-up.

Sure. One of the things that we saw was the desire on the part of our customers to try and automate more of the machine-based part of resolution and healing as opposed to the people-based part of the incident response process, which is where our strength historically has been: detecting that alert, orchestrating that real-time work to the right teams and people, helping them to diagnose and start to resolve issues. But then we're trying to reduce the manual toil at the end of that product as well. Rundeck was unique in its very strong DevOps focus from the very beginning. They do help us to automate that entire workflow. They have a very similar land and expand motion and a similar connection with their customers. One of the things we heard frequently was it just works. It's easy to use. It's easy to deploy. And incident management is just one of their many use cases. So we think there's opportunity beyond that as well. Increasingly, automation is foundational to AIOps. And what I heard from executives and users alike is anywhere where they can automate manual work to reduce repetitive work but also institutionalize the learning from these processes also helps them shift from being reactive to proactive. And there was a really good fit in that regard as well.

That's great color, Jennifer. And then Howard, just as a follow-up, I just was wondering -- appreciate the metrics that you gave around them. I was wondering if you could perhaps give us a customer count on Rundeck. I think it's probably fairly high.

Yes. So today, Rundeck in terms of their Community edition has about 3,000 companies that are using their Community edition. And today, on their Enterprise or their paid edition, they have over 150 customers.

Our next question is from Sterling Auty with JPMorgan.

Jennifer, when I look at Rundeck and kind of the way that it was marketed for use cases, it really looked like a job scheduler and something that is tightly integrated, especially in the continuous deployment part of the CI/CD pipeline. And what I'm wondering is, as you mentioned, the additional use cases. Is this the first step of PagerDuty looking to expand back into that CI/CD pipeline? Or where directionally is this suggesting the strategy for PagerDuty is headed?

Well, it's not the first step for us to engage in the CI/CD pipeline because we announced today some features that support change, driving incident resolution and information from incident records into the change management process. We know from customers and from research that over 80% of incidents are caused by change. So it's a really important part of the incident response life cycle and an important challenge that our customers face, whether they're small innovators or large enterprise companies. But what really drew us to Rundeck initially was their use case in -- within incident response and their use case focused on DevOps and really the service ownership part of DevOps, which is where we see all of our customers trying to get to.

That makes sense. And then just a follow-up, Howard, for you. Just -- can you give us an employee headcount for Rundeck? And will all of them be joining once closed?

Yes, sure. So right now, Rundeck has around 40 employees, and our expectation is that they will all be joining PagerDuty.

Next question is from Joel Fishbein with SunTrust Robinson Humphrey.

Congrats on the deal. Howard, just one quick one for you. Thank you for the color about the revenue run rate. I just wanted to know how you think about this impacting your cash flow going forward, just a little bit more color on that. Particularly, I know you're not giving guidance, but into '22, that would be really helpful.

Yes. So I mean I think just a few comments on the financial aspect of this deal, that I think when we looked at the profile of this business, we felt that we could fit it in quite neatly into the PagerDuty model. We can still support gross margins in our target range. We can actually leverage our own expense structure today to be able to help Rundeck, which is still an early company. And so if you think about a lot of the G&A investments, those have all been relatively light. And from a go-to-market perspective, we expect that we will be able to manage to assist them. So we sort of think that it puts us in a good position. From a cash flow perspective, we're not expecting any material change from this acquisition. Obviously, we will be -- we're not providing guidance at this time. But in the near term, we're not expecting any significant impacts.

Okay. One more -- one quick follow-up. Just in terms of the last question, I think in terms -- is there a lot of customer overlap in terms of their customer and your customer base, particularly around the enterprise?

So today, there is some overlap in those paying customers, but there's definitely opportunity both in terms of some of those customers are not PagerDuty customers today. And for some of those customers who are PagerDuty customers, there is still the opportunity for significant expansion with them as early users of Rundeck.

I'd add to that, Joel, that Rundeck also creates a new land motion for us. So today, all of our customers have to land in PagerDuty and then expand to new products from the core. This gives us an opportunity to land customers in Rundeck and then move them into PagerDuty. So I think it creates a nice potential to gain market share that way.

Yes, particularly also around the community, too, right? That's another area for you to land as well, right?

100%. And there is really a strong alignment between their open source community and our developer community.