PagerDuty Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 30, 2023

There are 9 speakers on the call.

Operator

Q3 fiscal year 2024 results. With me on today's call are Jennifer Tejada, PagerDuty's Chairperson and Chief Executive Officer and Howard Wilson, Chief Financial Officer. Before we begin, let me remind everyone that statements made on this call include forward looking statements based on the environment as we currently see it, which involve known and unknown risks and uncertainties that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward looking statements. These forward looking statements include our growth prospects, future revenue, operating margins, net income, cash balance and total addressable market among others and represent our management's belief and assumptions only as of the date such statements are made, and we undertake no obligation to update these. During today's call, we will discuss non GAAP financial measures, which are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP.

Operator

A reconciliation between GAAP and non GAAP financial measures who's available in our earnings release. Further information on these and other factors that could cause the company's financial results to differ materially, are included in filings we make with the Securities and Exchange Commission, including our most recently filed Form 10 ks as well as other subsequent filings made with the SEC. With that, I will turn the call over to Jennifer.

Speaker 1

Good afternoon, and thank you for joining us today. PagerDuty delivered solid Q3 top and bottom line results above the high end of our guidance ranges, with 15% revenue growth and a non GAAP operating margin of 14%. Year over year operating margin expanded by over 1,000 basis points as we continue to demonstrate our commitment to profitable growth. Long term demand remains strong as all enterprises seek to address similar high priority challenges. First, their customers are digital and expect real time modern experiences and services, but their operations are antiquated command and control and manual.

Speaker 1

Crossing this operations chasm is critical to protect and grow revenue in an increasingly digital on demand marketplace. 2nd, all businesses seek to do more with less in the face of an ongoing skill shortage. This has led to an increased appetite for automation and demand for generative AI in order to reduce costs and achieve operational efficiency at scale. And 3rd, tech debt and complexity continue to rise, creating material risk of operational and business failures, driving demand for automated and intelligent incident management solutions. Solving these priorities is critical for technology and business leaders, especially in enterprise and has increased the demand for the PagerDuty Operations Cloud.

Speaker 1

New customer acquisition in enterprise and mid market and strength in strategic customer expansions were the highlight of the quarter, surpassing results from Q1 and Q2 of this fiscal year. Among the contributions to strength in new business was a record setting win with a long standing enterprise software customer. This operations cloud expansion included all four products, incident management, AI ops, automation, and customer service ops, 2 at over $1,000,000 of ARR each and showcases PagerDuty's platform value proposition to increase productivity, protect revenue and reduce risk by advancing operational maturity and resilience for enterprises. Enterprise, our strongest performing segment during the quarter, remains our strategic focus. Notwithstanding a few unusual Renewal issues in Q3, enterprise dollar based net retention was more than 500 basis points above that of SMB.

Speaker 1

Customer retention and growth in enterprise have also been more resilient over the past 12 months. These key metrics reinforce our prioritization of resources and our confidence in our global enterprise strategy, product development and go to market efforts. Macro volatility and uncertainty Our customers remained highly engaged with nearly a third of enterprise and mid market customers standing with us in the quarter. They continue to apply conservatism to expansions and seek ways to reduce overall IT spend while protecting investments for critical functionality and operations. In the past, we've seen similar behaviors.

Speaker 1

We were rewarded by focusing on long term relationships rather than short term gains, and that will continue to be our approach. New and expansion ARR was the strongest of the fiscal year, reinforcing that even in a challenging operating environment, the operations cloud value proposition resonates. That said, churn and downgrade dollars were unfavorable to our target and created a headwind to total business generated during the quarter. We are addressing the higher risk of downgrades and churn by first systematically identifying risk and engaging with customers earlier in the renewal lifecycle. Second, by providing flexible multiyear pricing solutions for customers who demonstrate need and third, working with customers to optimize their use of the operations to maximize business value.

Speaker 1

As centralized decision making has become the norm for our customers, we continue to evolve our enterprise motion. This has included increased focus on C suite buyers with centralized purchasing authority, positioning centered around the financial value proposition of the Operations Cloud and Enterprise Pricing to support scaled expansion across all products. This account management approach complements our high velocity land and expand motion the focus is on technical champions and practitioners and has enabled us to methodically improve the quality and quantity of enterprise wins. The focus on enterprise leadership with our persistent pace of innovation underpins an increasingly efficient enterprise go to market practice. During the Q3, our generative AI program continued to advance.

Speaker 1

We now have 4 intuitive features in early access, including AI generated runbook automation, status updates, postmortems and a new Slack based chat interface to make it even easier to engage with our capabilities. These capabilities are the first of the family of generative AI use cases we're calling PagerDuty Copilot and make it possible for PagerDuty customers to use generative AI across the operations cloud from event ingest to resolution. Our strategy is to take a platform approach to leveraging generative AI across all products, instantiating it as a core primitive developers and employees can build upon with a common secure gateway and customer opt in interface packaged as PagerDuty Copilot. Our current primary goal is customer engagement and input available through our early access program. To date, the feedback on design and usage Have been very positive.

Speaker 1

Also in Q3, we expanded our customer service operations solution to include private status pages and ServiceNow CSM case automation. These enhancements immediately connect customer service agents to PagerDuty in product, enabling customer facing teams to more quickly close customer cases without context switching. This level of and engagement into live incident management is a workflow requested by our largest and most complex customers. In AIOps, we rolled out several significant enhancements specifically for central IT teams, including Network Operations Centers and Site Reliability Engineering teams. These additions enable teams to improve operational resilience using automation to analyze and action vast volumes of data immediately with measurable results.

Speaker 1

During the quarter, these went into early access and are oversubscribed. And finally, on the product development front, we closed the acquisition of Jelly earlier this month. And I want to welcome Nora Jones and the team to PagerDuty. Incorporating Jelly's talented team and technology will further differentiate the operations cloud as a system of action, going beyond instant response to drive quantifiable improvements in productivity and resilience. JELI turns every incident into a learning opportunity By completing the lifecycle of incident management, particularly for service reliability management in IT, with deep actionable analysis, enriched learning and proactive improvement.

Speaker 1

Customer reaction to this combination has been incredibly positive, and we look forward to expanding our incident management offering rapidly as a result. Incorporating product innovation into our enterprise go to market produces enduring customer commitments to the operations cloud. Recall that in Q2, a global semiconductor supplier identified our no code workflow automation as the unique solution to reduce manual work and human error in pursuit of eliminating tens of 1,000,000 of dollars in non value added annual costs. Our focus on enterprise continued to scale in Q3, resulting in a multiyear 8 figure record setting win as well as an additional 7 figure operations cloud expansion. In both cases, strong executive alignment combined with a proven track record in serving technical champions proved instrumental in navigating their decision making processes.

Speaker 1

With a large enterprise software customer, we tightly aligned across multiple business units on their service ownership journey to save tens of 1,000,000 of dollars in operational costs and provide a best in class customer experience for their end users. Our team identified high priority business problems in collaboration with executives to anchor PagerDuty as a strategic partner to scale across technology and customer service teams. We estimate $25,000,000 in annual savings through operational efficiency, reduction in manual work and revenue protection from churn. A rapidly growing global cybersecurity leader also with PagerDuty to reduce the strain on its teams by increasing productivity through automation. This aligned with the CEO's objectives to improve customer service and reduce manual processes throughout the organization.

Speaker 1

These examples are representative of a growing number of strategic wins. Our competitive differentiators, including our functional advantage, resilience at scale, short term short time to value and low total cost of ownership, provide an ROI that we believe outpaces the narrow set of use cases served by homegrown low cost and platform competitors. We've begun piloting new bundling and pricing strategies to support more seamless user adoption and expand the surface area of the operations cloud within our customers. In some cases, this has reduced sales cycle time, generated pipeline and reduced retention risk. We plan to scale several initiatives over the next two quarters.

Speaker 1

Earlier this week at AWS re:Invent, PagerDuty was recognized as the AWS Marketplace Partner of the Year for North America. This honor recognized us as a partner whose business model embraces specialization, innovation and cooperation over the past year. This recognition validates the strategic nature of the operations cloud in modernizing operations. We plan to refine and deepen our technical and consulting partner relationships across the globe to unlock more value as we scale partnerships in FY 'twenty five. During Q3, we also welcomed Eric Johnson as our new CIO.

Speaker 1

Eric comes to us from SurveyMonkey and is focused on leading PagerDuty's critical IT infrastructure, Data Management, Enterprise Systems and Evangelism with fellow CIOs. Prior to this, he had served as the CIO and Senior Vice President at both DocuSign and Talend. We were honored to be recognized by Fortune in 3 best places to work categories this quarter, including best workplaces in technology, Best Medium Workplaces, and PagerDuty's employees ranked us as a great place to work. Additionally, PagerDuty was named one of the top 10 companies to work for in Portugal. Finally, we were named the definitive leader in Giga Ohms incident response radar.

Speaker 1

To summarize, while the environment remains tough, we've significantly advanced the operations cloud and enterprise and saw momentum in expansion ARR. While it's too early to call a market recovery, we do see several green shoots, including enterprise and mid market stabilization and demand for strategic operations cloud engagements. We are proud of our operating margin improvement and intend to continue to drive further margin expansion. But make no mistake, we are focused on growth. We expect the initiatives we have in place to position us well for growth reacceleration during the next fiscal year.

Speaker 1

We've made great progress on our mission to revolutionize operations. And I want to thank our teams for their commitment and our customers who trust PagerDuty to manage and automate their most critical work. With that, I'll turn the call over to Howard and I look forward to your questions.

Speaker 2

Thank you, Jen, and good day to everyone joining us on this afternoon's call. In Q3, we delivered solid results above the guidance ranges we provided for both the top and the bottom line. We continue to adjust effectively to the economic environment with improvement in new business in enterprise and mid market, both in terms of new acquisition and expansion. Cautious spending by customers continue to impact SMB and caused increased negotiation around renewals. However, several large 6 and 7 figure transactions this quarter are providing evidence of Pageducity's key role in enabling our customers to mature and modernize their technology environments.

Speaker 2

Our multiyear initiatives focused on profitable growth continued to deliver operating margin improvements with over 1,000 basis points improvements this quarter. Unless otherwise stated, all references to our expenses and operating results are on a non GAAP basis and are reconciled to our GAAP results in the earnings release that was posted before the call. Revenue was $109,000,000 in the 3rd quarter, up 15% year over year. The contribution from international was 27% of total revenues, an increase from the 23% seen in Q3 of last year. Annual recurring revenue exiting Q3 grew 13% year over year to $439,000,000 We delivered 110 percent dollar based net retention in Q3 compared to 123% in the same period 1 year ago.

Speaker 2

Our DB and R expectation for Q4 is approximately 106%. Customers spending over $100,000 in annual recurring revenue grew to 778, up 10% from a year ago. Total customer count of 15,049 declined year over year by 1% as demand among SMB and VSP accounts remain uneven. Free and paid customers on our platform, however, grew to over 27 an increase of approximately 18% compared to Q3 of last year. Q3 gross margin was 85% and within our 84% to 86% target range.

Speaker 2

Operating income improved by over 1,000 basis points to $15,000,000 or 14 percent of revenue. This compares to $3,000,000 or 3% of revenue in the same quarter last year. Revenue upside, along with a 1 quarter delay in realizing approximately $2,000,000 of non recurring expenses, contributed positively to the operating income results. In terms of cash flow for the quarter, cash from operations was $17,000,000 or 16 and free cash flow was $15,000,000 or 14% of revenue. Turning to the balance sheet, we ended the quarter with $575,000,000 in cash, cash equivalents and investments.

Speaker 2

Total deferred revenue ended the quarter at $196,000,000 up 9% year over year. Quarterly calculated billings were $109,000,000 an increase of 4% year over year and below the range of 8% to 10% provided during last quarter's call. On a trailing 12 months basis, billings were $437,000,000 an increase of 14% compared to a year ago and in line with our estimates. With respect to Q4, we expect 12 months billings growth to be approximately 10%. Turning to our guidance.

Speaker 2

For the Q4 of fiscal 2024, we expect revenue in the range of $111,500,000 representing a growth rate of 8% to 10% and net income per diluted share attributable to PagerDuty Inc. In the range of $0.14 to $0.15 This implies an operating margin of 8% to 9%. For the full fiscal year 2024, we're increasing our revenue expectation to a range of $429,000,000 to $431,000,000 representing a growth rate of 16%. This compares to the range previously provided of 4.26 to $430,000,000 Our net income per diluted share attributable to PagerDuty Inc. Remains between $0.72 $0.73 This implies an operating margin of 13%.

Speaker 2

The changes we have made adjusting to the macroeconomic environment over the past 2 quarters are yielding results. We are driving a new level of engagement with our customers outside of the renewal cycle to ensure they are successful and support their business priorities. In enterprise and mid market, our investments enablement are leading to improve new customer acquisition, stronger expansion metrics, increase in larger multiyear commitments and strategic operations cloud multi product transactions. Our long term view of the business has us focused on continuing to deliver profitable growth as we revolutionize operations with our customers. With that, I will open the call for Q and A.

Speaker 3

Okay. Thank you, team. And we're going to hear first from Rob Oliver. Rob, please go ahead.

Speaker 4

Great. Thank you, guys. Can you hear me okay?

Speaker 1

Yes. We can.

Speaker 2

We can

Speaker 5

hear you. Okay.

Speaker 4

Great. I apologize for the bad connection, and I'm gonna So I'll squeeze in 2 quick ones and then I'll mute out in case I lose the connection. So the first gen is on Just your comments around Green Chutes. I was wondering if you could add a little bit more color. I know you mentioned enterprise and just What you know, that's a statement we've heard from a couple of people this week, and I just would love to hear what it is that gives you kind of the comfort to kind of call that out, whether it be pipelines, conversations.

Speaker 4

And then my follow-up is for Howard, just around the slowing in the 100,000 customers. You headed into your final fiscal quarter of the year, if there's any comments around pipeline. I know sort of last quarter the thought was Perhaps the setup was a bit conservative when you guys didn't pass through the beat. So just wondering if there was any change in the macro or how we should think about that number. Sorry to squeeze in both and thank you guys very much.

Speaker 1

No worries. Thanks for the question, Rob. I've been spending a lot of time with customers. I've seen over 100 customers last couple of quarters. I just came back from AWS's re:Invent in Las Vegas this week.

Speaker 1

And I'm tremendously encouraged by just the level of engagement around more strategic operations cloud discussions. I think the while the operating environment continues to be demanding, It's actually driving this focus on doing more with less, and it's really wet people's appetite for automation. And I think the long term relationships that we've had with customers has led to them really turning to us as they understand what's available to them in the broader operations cloud platform. Secondly, we've seen enterprise and mid market really stabilize and continue to perform. We saw really great new and expansion this quarter from an enterprise perspective.

Speaker 1

And I talked about a record deal and a very significant operations cloud expansion that we did in my prepared remarks. So just when I think about, the larger deal opportunity and more strategic Operations Cloud Opportunities. We see the initiatives that we've had underway for several quarters taking hold and resulting in stronger big deal pipeline. I'd also say that our customers are starting to get a handle on their budgets. And while the market is still volatile and that causes some cautious spend behavior.

Speaker 1

We see more of that in SMB and lower mid market and more re engagement around strategic discussions in enterprise. And so that along with the way our teams are adapting well to the environment is encouraging and gives us a lot of confidence.

Speaker 2

Yes. And Rob, just to pick up on that because that actually ties in Jen's comments ties into your question around customers above $100,000 So we saw a 10% growth in customers above $100,000 which is a little slower than what we've seen in prior And there were really 2 dynamics at play in this. The one is that we did see strong expansion growth and strong new acquisition in the enterprise and mid market, which was positive in terms of helping customers matriculate into that space. But at the same time, we have seen some customers having to constrain their spending at renewal. And as a result of that, that has meant that we haven't seen the same level of growth or expansion into that cohort.

Speaker 2

But when I look forward and particularly into Q4 and into next year, we've really laid the foundations For being able to improve our performance in the enterprise and mid market. Enterprise today is 60%. It's approaching 60% of our ARR. This is a customer base where we have we see gross retention above 90%. And so it's an area of focus for us and that will contribute positively as we expand those customers into increasing the number within the above 100 ks cohort.

Speaker 3

Okay. Rob says thanks via chat. Thanks so much, Rob Oliver. Next, we're going to Canaccord Genuity with Kingsley Crane. Kingsley, please go ahead.

Speaker 6

Hey, thanks. Good to see everyone.

Speaker 2

Good to

Speaker 6

see you. So a similar theme. Last quarter, we discussed how Seat Growth had traditionally created a nice catalyst for upsell. Now that you have more headwinds in seat growth, it's now requiring some more strategic repositioning from the sales force. Just from a process standpoint, how do you feel like that's going and then how receptive have customers been to that?

Speaker 1

Yeah, it's going well. I mean, when we do a good job of Pricing and packaging for volume and growth. Our customers don't really think about seed based pricing because they're already bought into PagerDuty as their standard for real time operations across either their engineering, IT or security organization. And I think we're getting better and better at meeting customers where they are. I mean, no question in a down market where you're seeing less headcount growth, Since seat based pricing can be a headwind, but I think we're managing that and adapting to that quite well.

Speaker 1

And you see that in some of these strategic large expansion deals that are multi product, where we're getting beyond the fray sort of in just licensing the estate, But actually, instantiating ourselves as a platform for action.

Speaker 6

Right. Okay. Yeah, that makes a lot of sense. And then the second one would just be on CoPilot. It looks like a great packaging for a set of a few great products.

Speaker 6

But just want to be clear, I mean, like, do you have any initial thoughts on pricing and the contribution to revenue? Is there any overlap with AIOps?

Speaker 1

Yeah. And remember that AI has been foundation on our platform for more than a decade. As you think about AIOps and how we help customers consolidate and Correlate events automatically, how we automatically and intelligently orchestrate work to the right small few people instead of hundreds of people on a live call, and even how we automate runbooks or how we are increasingly automating an entire resolution. Monetizing AI is not new to us and there's still a lot of opportunity just within the core platform from a monetization perspective, in particular with our new AI SKUBA that's been out since April. From a generative AI perspective, our goal is to get input and make sure that we can deliver generative AI capabilities with the level of fidelity that our customers expect From a high resilience platform that they use when things are not going so well.

Speaker 1

So we really want to make sure we're managing noise effectively before We GA any of our features. And we're also looking at generative AI as a way to engage users across all of the different feature sets in the platform. So engagement and usage is our first priority. And as we learn, and we will start to surface some of the pricing and packaging for those products and services in the future.

Speaker 6

Okay, really helpful. Thanks for the time.

Speaker 1

Thank you.

Speaker 3

Moving right along, next to Craig Hallum, we have Chad Bennett. Chad, if you want to switch on and go ahead.

Speaker 7

Thanks for taking my questions. So just curious, I know you've talked about Howard, kind of billings growth a quarter ahead, the last few quarters at least. I'm just curious kind of how you're thinking about seasonality of Fird's into the Q4 here and just billings growth overall.

Speaker 2

Yes, sure. So as you know, Chad, Billings growth for us does fluctuate a lot from quarter to quarter, which is partly why we tend to focus more on the trading 12 months metric as a way for us to try and get some of the noise out of there. When we look into Q4, this is our biggest quarter from a renewals perspective. So a high volume of renewals take place in Q4. And the other thing that we are factoring in is just the momentum that we're Seeing around doing these larger deals that are often multiyear deals, some of them with a measure of upfront payment.

Speaker 2

Those are giving us a view on how we think about billings for this quarter and also the setup that, that gives us for next year.

Speaker 7

Okay. But I mean, is it fair to say that probably there's more pressure on billings in the Q4 on a year over year basis then third.

Speaker 2

I think like from a comparison perspective, it tends to be Q4 is a large Quarter for us and Q4 last year was a large billings quarter for us. So there is from a compare perspective that will be tougher.

Speaker 7

Got it. And then maybe just one in terms of the insight you've gleaned, and I know you gave some of it on the call, but just on the headwinds on the renewals and kind of the seat moderation and then maybe a little bit of just scrutiny on spend. I guess, is there any feedback you've received, I'm not sure how much you receive on renewals, of people just our enterprise is just indicating, hey, maybe we don't need as many developers On this tool or on this platform as we thought we did. And maybe we can do more with less. Is that part of it or not so much?

Speaker 1

No. Thanks for the question, Chad. That's not what we're hearing. And I'm involved in a lot of our large renewals. And in fact, You know, we do have a large customer that decides to, like shorten or invest less with us in a renewal.

Speaker 1

I usually reach out and try and understand you know, what their issues were and we try and learn from it. And to be clear, when we talk about, churn and downgrades, it's primarily downgrades. It's primarily customers who are reducing their spend because either their headcount has actually declined as a result of the macro environment Or their access to funding from a budgeting perspective has actually been significantly constrained. In most cases, and I think Howard's mentioned this in the past, We've always encouraged our customers to add seats or add product as they need to. We've never tried to sell ahead of their demand.

Speaker 1

And in most cases, we see customers adding as soon as they have new budgets available. But PagerDuty absolutely remains essential infrastructure For our customers, and Howard pointed out that in enterprise, our gross retention remains above 90%. Oftentimes what we'll see customers do is They'll reduce their spend in certain area, but keep their most critical services on PagerDuty and then over the course of a couple of months or quarters come back to us and start adding some of those services back on. There will always be customers who are price sensitive and who may fall prey to a less featured lower cost offering, but it's usually more just about less access to capital cost of money, resources constrained or in some cases, headcount reduction.

Speaker 7

Got it. I appreciate the color, Jen. Thanks, Howard.

Speaker 2

You're welcome. And I think I'll just add one thing, Chad, To James' comment to think about because I've been involved in a few of these renewal discussions and I'm not saying that this is the trend across every customer, but We actually find some customers who need more users of PagerDuty, but they aren't in a position to actually increase their spend. So what we have attempted to do, much like we did in the early days of COVID, is we tend to be supportive of our customers. So sometimes we actually have to help them out whilst they're going through a tougher economic environment and be supportive so that they can, in fact, rather have more users on the platform rather than less. And that still works positively for us as a company.

Speaker 2

If I look at our average revenue per customer Has grown up every quarter since we went public. So we're continuing to see customers continue to expand with us, even if it's at modest levels and our view is really about trying to ensure that particularly for the enterprise in the mid market that we are providing them what they need to retain them as customers, because we know that economic cycles will change and their circumstances and needs will change and we want to be available.

Speaker 7

Interesting. Thank you much.

Speaker 3

Okay. Thank you very much, Chad. Next, we're going to the representative from Morgan Stanley. We believe that's Oscar Saavedra.

Speaker 5

Yes. Hey, guys. Thank you. It's Oscar Saavedra on for Sanjay. Hey, how are you?

Speaker 5

So thank you for taking my question and congrats on a good quarter. I want to touch back on the full year revenue guidance. So if I do the math, like, it looks like you've more than flowed through the beat in the quarter, but also your NRR declined by about 4% sequentially to 110. And now you're guiding to 106 for 4Q. So I'm just sort of wondering, like, No.

Speaker 5

Like, is that a function of the initial guidance just was super conservative when you cut it down back in Q1? Or are you seeing a better environment than you maybe did back then now and expecting to sign more new logos?

Speaker 1

Howard, if I can jump in, I would say, 1, I think we've adapted effectively to an environment that's Largely the same and we're seeing better results, and that's what's driving our confidence. Also, like I said, some of the green shoots that we talked about earlier, the operations cloud value proposition really resonating, stabilization in enterprise and admin market, and a number of some longer term initiatives that we've had in place taking hold, whether that's our operating margin improvement efforts or really enabling our sales organization to really sell to complement our land and expand high velocity motion with a top down, C level more strategic selling motion. And in fact, you know, we've been investing recently in branding and building more awareness around the Operations Cloud and PagerDuty as a platform for action. And we're starting to see a benefit as customers Really understand that we have far more to offer than simply incident response. Howard, I'll let you jump in.

Speaker 2

Yes, sure. And I think I was going to make some of the comments along. Our view is really about improving our execution. Our view has always been trying to control what we can control. And I think the adjustments that we've made over the past two quarters in particular have put us in a good place.

Speaker 2

So when I look at Q4, I think there are a couple of things to keep in mind. We've put an increased focus on customer acquisition in the mid market and the enterprise. So that's an area where we know for the long term, we're actually going to be able to sustain higher value and higher growth. So we expect that in Q4, there will be a positive contribution from landing those customers in the mid market and the enterprise and at higher values, but it doesn't contribute positively to dollar based net retention this year. We also do have from a revenue mix perspective.

Speaker 2

We have a few elements that react positively to revenue within the quarter. For example, if we're delivering services within the quarter, it leads to some positive revenue or if we have our process automation, self managed environment deals done that also has a positive contribution to revenue. So we factor all of those in to the guidance that we give. It's not purely a straight flow through from the ARR.

Speaker 5

Got it. Thank you.

Speaker 2

Thanks, Oscar.

Speaker 3

Okay. And I do want to remind our analysts, feel free to raise your hand if you have Comments or questions for the team. Next, we're going to hear from RBC. We have Anushta Mittal.

Speaker 8

Hey, thanks for taking my questions here. This is Anushta from Matt Hedberg. I have 2.

Speaker 2

Hi, Matt.

Speaker 8

Hi. Maybe just to start with, Can you talk more about the acquisition of Jelly and how that adds value to the PagerDuty platform? And then how should we think about its contribution from a Revenue or margins perspective.

Speaker 1

Yes. I'll touch on the strategy of the acquisition and then Howard can touch on the financials. I mean, We are really thrilled, excited to bring Jellie into the PagerDuty fold, mostly because our customers are super excited about it. We've You know, had a strong cadence of making strategic acquisitions that both accelerate our roadmap and give us access to fantastic technical talent. And Jelly ticks both those boxes, but even I have been, like positively surprised by how excited our customers Are about this.

Speaker 1

One of the reasons I joined PagerDuty many years ago was because it was beloved by developers. And we're hearing a very Similar ethos from customers about Jelly. What Jelly does is it enables developers, IT personnel and SREs To learn immediately from an incident and apply those learnings to prevent those large major incidents from happening again, To improve the overall resilience of their operations in production going forward and to do it pretty seamlessly. And so far, I mean, it's only been a couple of weeks, but we're culturally really well aligned as companies. And There are a number of features, including some of Jelly's Slack integrations, for instance, that our customers have been asking for.

Speaker 1

So it really did accelerate a lot of efforts that We were going to invest anyway, but the strong sort of brand preference that Jelly has in the market, the connection to developers and sort of the immediate ROI they see from Geely, gives me a lot of encouragement and optimism about what the future could look like. It is a small, they're a very small company. And so I know Howard would say it'll be immaterial to revenue, but we do It's going to help us advance our overall incident management posture and growth in the future.

Speaker 2

Yes. Thanks, Jen. I'll just add a little bit of additional commentary. This was actually a Q4 event, so It will be reflected as a subsequent event in our 10 Q, which will be released within the next day or so, typically the day after earnings. So you'll be able to see some of the details on that.

Speaker 2

Just at a high level, from a materiality perspective, from a revenue contribution. It really is small, not doesn't really move the needle. And we factored in both the revenue and the expense components into the guide that we provided. But when I look at it, I'm more optimistic about what value it brings for us next year because we believe that that leveraging our go to market capabilities along with the really great technology that the Geli team has built will in fact allow us to accelerate the use of Geely and that will be positive to us from a sales perspective.

Speaker 8

Got it. That's helpful. And then, one more. On fiscal 'twenty five, I know you're not providing official guidance on it yet, But can you provide any guidepost or building blocks we should think we should keep in mind as we think about next year's model?

Speaker 2

Yes, sure, Anish. So we're not providing guidance yet, as you say, but this is how I would think about it. We're expecting to exit Q4 with trailing 12 months billings at around 10%. So I think that's a good place, a good starting point for you in terms of thinking about modeling. With the increase in demand that we're seeing and the improvement that we expect to see both in terms of our own execution, We are expecting ARR growth to accelerate over the year, so we will end up at a higher ARR growth rate exiting next year to where we our ending this year.

Speaker 2

So that's how we think about it from a revenue modeling, a modest improvement over that period of time. But we would certainly look as well to continue to expand our operating margins, not at 1,000 basis points a year, but certainly looking to continue the path of expanding our margins.

Speaker 8

Perfect. Thank you.

Speaker 1

Thank you.

Speaker 3

Okay, team. I think that does it for us. Close of questions. Jennifer, we'll turn it back over

Speaker 1

Sure. Well, I just want to thank you all for joining us today and remind you that we continue to be focused on the long term building a durable, profitable growth company. We're incredibly excited about the operations cloud opportunity and confident in our ability to execute. So thank you all for joining us and have a great day.

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Earnings Conference Call
PagerDuty Q3 2024
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