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

I'm part of the Morgan Stanley equity research software team. We are really pleased to have the management team from PagerDuty, CEO, Jennifer Tejada; and Chief Financial Officer, Howard Wilson. Jen and Howard, thank you again for showing up and joining us at the TMT Conference again this year.

Well, we're thrilled to be here. Thank you so much for having us.

[ Same. ]

Well, we look forward to having -- thank you, Howard. We look forward to having an interesting conversation, get a catch-up on all things PagerDuty. Before we start the conversation, let me quickly go through some disclosures. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

And so to start the conversation, Jennifer, I wanted to just hit on here, you did your IPO not that long ago. So for people who are unfamiliar with PagerDuty, can you describe what the problem or what was sort of the thesis of the mission statement behind the company initially? And then as you sort of progress and scale and become a larger business, how have those problem -- how are the types of problems you're solving for evolved?

Yes, well in our case, our IPO was actually 2 years ago this April. So -- but it feels like it was just yesterday. And at that time, we were talking about our founding story. 12 years ago, we were founded on the premise that developer communities needed better solutions to help empower people closest to the information in the events that can impact customer experience or the technology reliability and availability that the whole world was starting to rely on. And we did that at first by automating on [ fall engineering ], an early DevOps practice that sees developers use technology to detect issues, to orchestrate work, unplanned, unstructured or mission-critical work to cross-functional teams and to resolve those issues quickly. Now over time, we have invested significantly in innovation around several areas: one, leveraging our data. So we have been collecting data about events, about workflows, psychological behavior of responders, et cetera, to automate more and more of the incident response process, thus making it more proactive. With the idea that if you can get in front of issues before they impact the customer, you cannot only protect and improve revenue, you can also improve efficiencies, whether it's labor costs or create more space for innovation in dev teams. What we've seen over the course of the last decade is this concept of distributed teams and distributed work that was really led by the developer community has become more mainstream, certainly, no more true than in this last year when everybody has been remote. And yet, the traditional solutions that were available to teams to try and solve time-sensitive, mission-critical problems are linear ticketing processes. They're slow, they're [ manual control-based ]. They don't empower people in milliseconds and seconds to make really important decisions. And this has become a lot more important as everything has become digital. I mean the way we think about is that in a world of digital everything, you need to be prepared for anything. And a human being is not in that position. We need to leverage technology to automate that entire life cycle.

That's a great overview. And as we came into 2020, sort of before the pandemic, things like ensuring a flawless digital experience, the DevOps movement was sort of rising in importance, and then we sort of hit the pandemic. And so the question is, Jen, what has been -- how has the pandemic changed your view about the current market opportunity and some of these priorities around digital experience and then sort of the DevOps movement?

Well, I want to acknowledge that as we talk about the business of the pandemic, it has been very difficult for many people around the world. And I feel fortunate that I have a job and a career and a team that is healthy and able to continue to build products and solutions that serve people in this environment. But I think what the pandemic did was, one, it accelerated digital transformation. We all know that. I think that is going to continue into the future and that was not a sort of 1 year thing. What we're seeing is initiatives that would have taken 10 years are going to take 2 or 3 years, initiatives that were planned for 12 months got done in 3 months purely out of necessity because of the remote working situation and the need for companies to support their remote workers and support their customers, given the conditions of the pandemic. That has been a tailwind for us. The other thing that we've seen is DevOps transformation is really becoming mainstream. I mean before the pandemic, we talked about how big that market is, the DevOps opportunity, and yet how early it is. I mean many traditional industries are still just getting started. Just thinking about [indiscernible] teams trying to start to give developer teams some ownership over their services in production, but they still have traditional centralized and ops teams. So again, another macro trend that is accelerating that we believe is a tailwind for PagerDuty. And I think the most significant of all is cloud, meaning cloud computing. We knew it was here to stay before the pandemic, but the adoption of cloud computing has definitely accelerated the understanding of the value and the opportunity that exists when you leverage the cloud, and even the move towards cloud-native environments are all, I think, macro trends that serve us very well. And I anticipate will continue for many years to come. So we believe the TAM continues to be massive that we continue to be early in this cycle. That means there's a lot of education to be had. But in many ways, the pandemic helps our market understand how important our platform is. And I'll tell you that the platform was tested, over the course of the last year, we saw more than a 30% increase in traffic and stress on our platform and yet incident response times improved by more than 15%. So the platform under pressure is working. And that really matters because reliability and resilience at scale is a very important value proposition for our customers and one area where we have a deep competitive role because we've been able to prove the resiliency of our platform to the largest enterprises in the world under the most significant stress that I have seen in my working lifetime.

Yes, the theme around resilience and the importance of building resilience, it's a theme that we talk about within Morgan Stanley when we talk to some of our tech leaders. So it's something I think that's only going to be more prominent in discussions going forward. I do want to lay out the road map for growth going forward, but I wanted to hit on a couple of recent things, looking back to last quarter. Maybe this is a good point to bring in Howard into the conversation. Howard, Q3 was a good quarter last quarter. There was -- we saw a couple of inflections in the business, particularly around the expansion rate. But can you sort of walk us through Q3 in terms of what things got better specifically that had probably had been in the work for some time but came to fruition? And what were some of the lingering constraints or headwinds on the business as we look back to Q3 results?

Yes, sure. So I think we started making changes in terms of improving sales execution right at the beginning of the year. And that's sort of collided a bit with some of the headwinds of COVID. But we certainly saw the improvements that Dave Justice, our CRO, introduced certainly coming to fruition in Q3 and a steady pattern of engagement with our customers, particularly in the enterprise and mid-market. We have a really good trend of seeing about 1/3 of our enterprise customers expand with us each quarter. And that was certainly a trend that we noticed within Q3 as well. So certainly, strong execution is building out a really strong leadership team, and we're seeing the results of that coming to fruition in the 26% revenue growth rate in Q3. When we look to the future, obviously, there's some sense of uncertainty out there because this pandemic isn't over. But what we have seen is businesses returning to more of what we see like a new normal. And that was clear in Q3 where large enterprise companies that had cut back on their spending in the early part of the pandemic started returning to more regular patterns of spending. And we also saw customers being far more willing to contemplate larger projects then.

Yes. I would add to that, that the types of conversations that we had with customers in Q3 were much more transformational, much more strategic. We've seen very strong uptake for Event Intelligence in the digital operations package, even from our smaller mid-market customers, not just in enterprise, which I think really validates some of the comments that I made earlier about these macro trends that are changing how buyers and users are approaching, selecting their platform partners.

And you talked about the conversations becoming more transformational in Q3. I guess the question is that it's like, why Q3? I'm sure that was like an effort that you've been building on for many quarters. But what do you think sort of led to that starting to manifest in a more pronounced way last quarter?

I think it was -- I think, one, I think people just got used to making more radical changes to the way they work in short periods of time. They got some practice doing that in Q1 and Q2 and realize that it's -- the action can be done quickly and ripping the Band-Aid off can be a good idea. So we saw some companies really move aggressively towards trying to develop a DevOps culture and empower developers to have full-service ownership of their solution. I think we also saw businesses that really needed to protect the customer experience and revenue and reduce their costs. And PagerDuty has a phenomenal return on investment, a very short payback period of a couple of months and an ROI of over 700%. So it's a really straightforward quantitative value proposition in that regard. So the need to do more, move faster, advance and transform your digital environment but do it in a more cost-efficient way, it was really, really clear. And I think people were on the lookout for that, and our track record really held up there. And then lastly, I do think that the divide between business people and technical teams historically around how all of the complexity that supports that perfect customer experience, that supports revenue generation and ongoing growth for our company, the company has closed because leaders having to work remote at home and having to see what happens when their platform is deluged with consumers and high-traffic spikes and some of the anomalies we saw in the last year, how to educate them on the importance of taking a proactive approach to managing the complex like proliferating distributed technology environment that supports their business. And that business is now almost entirely digital. And that also, I think, really helped that transitioning. Took a couple of months as people got their employees home, have got their laptops to them, got their security locked down to then start looking at, okay, what are some of the more strategic moves that we need to make to operate like a digital entity going forward.

And to key off of what you were mentioning there, Jen, I wanted to also hit on the other update in the business, which is the webdeck (sic) [ Rundeck ] acquisition. And so can you talk to us about why you acquired that company? What does it mean for the platform and what [ kind ] of capabilities it's going to enable for your customers?

Well, one of the things that we've learned over the years is we can leverage the data from all of our customers across the platform to help them, our users, make better decisions faster and to automate away some of the toil that keeps them from building brilliant products and solutions, from managing their services effectively and from, like I said, ultimately delivering that perfect customer experience for their end user. And I will tell you that we used to talk about things in terms of availability, is the app up? Is the website up? But now the consumer has one -- gives around one or 2 minutes for the entire transaction to be perfect and seamless, regardless how many devices are involved in that journey, regardless of how specific their needs are, et cetera. And the level of complexity to deliver that experience from discovery, all the way through to the end product being consumed, has gotten very complicated. And it's hard for all of the cross-functional teams to manage this effectively. And so that, I think, is where PagerDuty has really made an important stride in not just using software and our API platform to detect issues, but using machine learning to intelligently orchestrate that work to the right small teams that can actually impact and make a difference for that end user, for that customer and the employee on the other end of the experience. And then we realized there's a lot of this that still needs to be automated in the resolution. So we started looking at how quickly could we automate more and more of the resolution process in a way that would still underscore the trust in the relationship that we have with our developer communities. And developers do not like black-box solutions. They don't want to click a button that magically does something that they cannot roll back. So runbook automation, and more broadly, automation that allows teams to engage in what we think of as safe self-healing became a really important opportunity for us. And Rundeck are the best at this. They have a phenomenal sort of DevOps mindset from the very beginning of their business. Their environment is very easy to use and comes with a lot of input from developers through their initial open source project, but they have scaled into enterprise effectively and have great customers and a number of customers that are complementary to us. So we really felt like it was a great fit. And it also allows us to take a position behind the firewall because you can run Rundeck in an environment behind the firewall or deploy it in the cloud. And so that also increases the sort of number of use cases that we can go after from an automation perspective. And I'll just say one last thing about use cases. I mean that is one of our big growth drivers, is the fact that PagerDuty is so easy to deploy and so easy to use, the quick time to value is highly quantifiable and, I think, best-in-class, that's why you see that strong bottoms-up adoption from developers, IT teams, security teams and even customer service teams. But everything we do needs to be easy. Everything we do needs to live up to that sort of value profit customers have grown to rely on us for. And Rundeck [ really is that builder ]. There are more complicated solutions out there, but we were looking for something that could be readily deployed where it could be applied to different use cases across the business without a lot of new product development to support that and Rundeck is applied to more use cases than even PagerDuty. So we think there's an opportunity from an expansion perspective there.

I'll be really eager to see how that -- how Rundeck evolves and integrates with the PagerDuty platform. Let's talk a little bit about like the growth opportunity ahead. And even going back to the IPO, you sort of framed out the opportunity around penetration within the engineering team, product engineering, DevOps teams, customer support and security. Maybe can you sort of give us an update across those 3 dimensions? Where do we stand in terms of runway and penetration rates between DevOps teams, customer support and then around security?

Sure. I'll start with the market segment that is important to us, and that is enterprise and mid-market. I think we have seen really strong success in scaling up into enterprise and doing that reliably, cost efficiently and effectively. And some of the largest enterprises in the world, nearly 60 of the Fortune 100 trust PagerDuty to leverage their products and services. And when you hear us in earnings, and we've got an earnings call coming up later this month, you'll hear us talk about large customers that quarter-after-quarter continue to expand with PagerDuty. And that expansion often comes from user growth across new teams or new use cases. So we often start in the developer community. And as with many things, developers are leading the way inside of their enterprises and their businesses on how to do things better, smarter and faster. We then are sort of an obvious adjacent, I think, offering for security teams. And security is top of mind for every business. With the SolarWinds breach, we've seen that become even more front of mind. And security teams know that if they need to engage with developer teams, PagerDuty is the platform that will ensure that happens seamlessly, quickly and that the platform will learn and help them get better and smarter with every incident that they work on. Customer service was a little less obvious, but what we saw was, as the world became more digital, customer service teams needed on the minute information on what was happening so that they could engage with their end consumers effectively because if you don't, there's someone on Twitter, there's someone on Reddit, there's someone out there that can damage your brand or really create bigger challenges for our business. And so by working with customer service and integrating them into the way the developer community, IT and the security communities work, it allows them to do their job more quickly and more effectively without a lot of contact-switching between platforms and waiting for e-mails and tickets to help them get the answers that they need to do their jobs effectively. And so while I -- because we're in a quiet period, I can't talk to an update on penetration rate. I will say that as of Q3, we continue to be very pleased with how naturally that organic expansion happens within organizations and how increasingly leadership is saying, I want every person in my organization on PagerDuty because my customers are important to me. And when we are not the way -- [ we're not presenting ] the way we need to be for our customers, I need the organization rallying around it, and it needs to be managed proactively, not reactively.

On the hiring front, I know as a CEO of a public company, I know, Jen, you spent a lot of time thinking about recruiting top-tier talent. And you certainly seem to be doing that. I think last year, you brought on Dave Justice from Salesforce as your Chief Revenue Officer. Most recently, you brought on Sean Scott from Amazon as your Chief Product Officer. And so let's talk a little bit about these hires. And then start with Dave. And I guess it's a three-part question. When Dave got -- was brought on, what was sort of the mission statement you gave him going into 2020? And then how do you think -- how is he thinking about evolving that strategy as he gets in beyond his first year?

Well, as a small and early public company, job #1 is scale, right? And so I'm always looking for talented executives that the company can grow into versus the other way around. As Dave was someone who has demonstrated scaling as a leader in just about every sales environment you can imagine, plus he started in a high-velocity inside sales environment. So he has kind of great instincts around our high velocity transactional business. And at the same time, he has designed some of the largest and most, I think, interesting enterprise contracts on the planet. And so we needed someone that could help us deepen our bench strength from a leadership perspective, help us expand our global remit from a go-to-market perspective, bring the rigor, the operational rigor and predictability and reliability that you would expect from a scaled go-to-market organization, but also be smart enough and creative enough to sort of recognize the uniqueness in our platform and protect that, continue to develop and invest in our hybrid go-to-market model where we tend to do a lot via phone, chat, e-mail, et cetera. And at the same time, you'll see us delivering transformational large enterprise deals. And oftentimes, you find a leader that only knows one of those tricks, right? And Dave just has, I think, a really great mix in terms of experience. And I have just been thrilled with how the team has come along in terms of improving the ramp of our new reps, improving overall productivity, improving the consistency and the reliability of results across theaters. And so you'll hear us talk about that in earnings in the -- over the past year, in Q3, I think I mentioned this, our commercial mid-market team has continued to be very consistent despite the pressure, the macro pressure, on small and medium businesses. We've made great strides in really important vertical segments like financial services, for instance, and continue to be the de facto leader in technology, computer and Internet, I think, which is really important, seeing ongoing expansions there. And Howard always reminds me to say 1/3 of our enterprise customers expanded for the sixth quarter in a row in Q3. So I think that Dave's brought a lot of that rigor and hygiene, but at the same time, has really up-leveled the conversation that we're having with customers, brought in a great team and has also really developed some of the people that were here when he arrived. So I'm excited with how that's going. And then Sean, I think, hiring someone who comes out of Amazon, who spent 10 of his 14 years there running the e-commerce platform and the products page, which every single person tuning into this conference is using, I'm sure. You might wonder like what's that guy doing in an enterprise software company? Well, then he goes on to run their robotics process, Scout, the little robot that delivers packages to your front doorstep, that doesn't seem to make any sense. What I like about Sean -- there's a lot to like about him. But one of the things I really like about him is his strong pattern recognition and success in building e-commerce products that are really intuitive, really easy to use that drive cross-sell and upsell inside the product because that's -- PagerDuty at the end of the day is a self-service e-commerce product. And the more that we can do to drive its discovery and expansion in usage and engagement and happiness inside the product, the better because that continues to be a competitive moat we intend to deepen. Secondly, it's hard when you hire someone out of a large organization to really be sure whether they're going to survive outside of the system, much less thrive outside of a system like that. So the fact that he had to go build a robotic start-up from scratch inside that organization with some, I think, really tough characters judging his work, also gave us a really strong sense of this entrepreneurialism. And we've already seen that at work inside the product organization, and I'm very excited to share some of the things that we're doing in the future there.

Awesome. Can we talk a little bit about Amazon? Because I think that's a partnership and a relationship that's continued to progress. You have a great relationship with Andy Jassy. He got a little bit of a small promotion recently. Talk to us about how Amazon is driving maybe some customer acquisition or helping you sort of expand within customers. How is that relationship evolving?

Yes. I mean, I think I'm really pleased with the strategic nature of that relationship. Andy joined us this year for our first virtual ever summit, where we had 13,000 registrants. And one of the things he said was availability is so incredibly important. And if you're not using PagerDuty, you're missing the boat. And I think that's a pretty good endorsement from a guy who really understands this stuff really well, having built AWS from the ground up. What we've seen with AWS is an opportunity to get more exposure to the developer community through Marketplace, great collaboration through the AWS services team. And of course, a lot of product integration opportunities with things like GuardDuty, EventBridge, and more recently, DevOps Guru, their AIOps solution. And so there is just a lot of complement and -- in both our product environment, but also the cultures between our company and their company. And at the same time, they're one of a number of strategic partners we are really investing and doubling down on the partner ecosystem. We think that is an opportunity because, as you know, the vast majority of our revenue does come from our direct and inside sales organization. So that's a growth opportunity for us.

Excellent. We did get a question online, which is a pretty common question on PagerDuty, which is competitive landscape, how do you -- how do they fit in the bigger workflow automation versus platforms like ServiceNow? And so let's take that question, but also sort of put it in context of a landscape where when you look at the monitoring guys, you can look at security companies, everyone is building new capabilities, building, going into other people's markets. And so I was wondering if you could sort of frame out or give us the sort of latest update on how to think about the competitive landscape through PagerDuty's eyes, where I think Datadog's announcement starting to get a little bit into the instant management space. And you have security guys trying to get monitoring guys. Help us understand all the things that are happening from your lens.

Yes. I mean it's a very noisy competitive environment. But I think the things to anchor on are: one, PagerDuty is the hub that drives and orchestrates work for dev, IT, security and customer service teams. And by that, I mean, all of those companies you just mentioned, every monitoring company, every log-in company, every ticketing company, security environments, et cetera, they're integrating into PagerDuty. PagerDuty is consolidating and correlating that information using over a decade of data and machine learning to then find the most important signal in all that noise and intelligently route that work to the right small team of people. That part of the job, no one else does the way we do, and they cannot do it very well. That's why we haven't gotten into the monitoring business. There's plenty of people doing monitoring and observability. But how do you actually drive the value proposition, close the loop on that and take action? So we are the platform for action in all of that. And different from the ticketing and the workflow solutions, we've always been focused on mission-critical, time-sensitive, urgent, cross-functional, needs to be done in seconds and minutes, not weeks, days and years. And unfortunately, the traditional workflow and workflow automation tools, most of them are built for nontime-sensitive and nonemergent, they work for structured planned work, like onboarding a new employee or managing an IT ticket, et cetera, like your revenue is not going to burn while you're waiting for that to happen. But if your primary selling application or brand application goes down or your checkout goes down, your business comes to a screeching halt. And that is where we live and continue to invest. The other thing that I would say is if you look at some of these organizations that are trying to move into incident management or other adjacent spaces to us, we have the benefit of having a bottoms-up adoption model, where we start with user trust in very high-reliability, simple application, but that solves critical problems for users, and we go from there. So we're pretty deeply embedded not only within teams and cultures, but through our APIs and our integration ecosystem, we've become mission-critical infrastructure inside of our customers. So it's kind of hard to think about how you would replace that mission-critical infrastructure or even whether you would take the risk on the disruption to try and take that out and replace it. So that's also, I think, a competitive moat for us. That being said, we have our foot on the pedal on innovation, always have. And I think that's what's continued to help support our pricing power in the market is that we have continued to innovate and bring new solutions that leverage data, leverage machine learning and AI to serve teams in doing the work that they need to do better to serve businesses in protecting the customer experience, but doing it in a way that reduces labor costs and really supports building a better, stronger digital business. So I expect that the market is going to continue to evolve. I've said this before, competition is going to continue to be there. That's a great validation of the market, but it is a massive TAM. It is a huge opportunity, and we are still very early in that opportunity. So there's also room for multiple winners.

Great. Well, Jen, 30 minutes goes by pretty quickly. We got to hit on some topics, not all of them, but I think we did an okay job. So thank you once again, both Jennifer and Howard, for joining us at the TMT Conference. And for those listening online, thank you as well, and we still have a full slate of presentations that I hope will be interesting to everyone. Thank you, Jen and Howard, for joining us.

Thank you.