PagerDuty, Inc. (PD) has demonstrated its ability to navigate the challenging macroeconomic environment, delivering solid financial results in its latest quarter. The company reported annual revenue of $430,699,000 and annual net income of -$81,757,000 for the fiscal year. Despite the difficult backdrop, PagerDuty has continued to execute on its strategic priorities, driving growth and profitability.

Business Overview

PagerDuty is a leading provider of digital operations management solutions, empowering enterprises to achieve operational efficiency at scale. The company's platform combines AIOps, Automation, Incident Management, and Customer Service Operations, enabling customers to modernize their business and technology processes, standardize automation practices, transform incident management, and automate operations. PagerDuty's solutions are designed to help organizations increase innovation velocity, protect revenue, reduce costs, and mitigate the risk of operational failures.

The company's land-and-expand business model has driven viral adoption of its products, with subsequent expansion into additional use cases and add-on offerings. PagerDuty has a strong focus on serving enterprise customers, with mid-market and enterprise customers accounting for the majority of its revenue. The company's go-to-market strategy is centered on selling the PagerDuty platform across IT, DevOps, and customer service operations teams.

Financials

In the latest quarter, PagerDuty reported revenue of $111,172,000, representing an 8% increase compared to the same period in the prior year. The company's annual revenue for the fiscal year stood at $430,699,000. PagerDuty's quarterly gross margin was 83%, consistent with the previous year's level, while the annual gross margin was also 83%.

PagerDuty's quarterly operating expenses increased, with research and development expenses rising 12% to $37,523,000, sales and marketing expenses increasing 11% to $48,499,000, and general and administrative expenses growing 16% to $27,540,000. These investments reflect the company's commitment to product innovation, go-to-market execution, and operational efficiency.

The company's quarterly net loss was $17,345,000, compared to a net loss of $12,838,000 in the same period last year. On an annual basis, PagerDuty reported a net loss of $81,757,000. However, the company's quarterly free cash flow was $27,098,000, representing 24% of revenue, and the annual free cash flow was $64,426,000, demonstrating its ability to generate strong cash flows.

Operational Highlights

During the quarter, PagerDuty continued to make progress in expanding its enterprise customer base, with customers spending over $100,000 in annual recurring revenue (ARR) growing 6% year-over-year to 811. The company also saw strong growth in its highest-spending cohorts, with customers spending over $500,000 and $1 million growing in the high teens.

PagerDuty's dollar-based net retention rate was 106% for the quarter, in line with the company's expectations. While the macroeconomic environment has put pressure on gross retention, particularly in the small and medium-sized business (SMB) segment, the company's focus on enterprise customers and multiproduct, multiyear contracts has helped offset these challenges.

The company's international business showed signs of stabilization during the quarter, with several six-figure deals in Europe and the Asia-Pacific region. PagerDuty's international revenue accounted for 27% of total revenue, a modest change from the 28% seen in the same period last year.

Product Innovations and Partnerships

PagerDuty continues to enhance its platform, with the recent introduction of a new enterprise incident management solution. This offering combines the company's market-leading Incident Response capabilities with select AIOps features and Jeli's opportunity analysis and Slack integration, providing customers with an end-to-end solution for incident detection, diagnosis, remediation, and learning.

The company also announced the spring release of the PagerDuty Operations Cloud, which included several new capabilities across the platform. These enhancements focused on areas such as AI-assisted incident response, unified visibility and control for modern operations centers, and a flexible framework for automating workflows across systems and teams.

In addition, PagerDuty made progress in expanding its presence in the public sector, obtaining Authority to Operate (ATO) from the Department of Veterans Affairs. This milestone has enabled the company to close its first seven-figure deal in the public sector, an exciting early signal of its opportunity in this vertical.

Guidance and Outlook

For the second quarter of fiscal 2025, PagerDuty expects revenue in the range of $115.5 million to $117.5 million, representing a growth rate of 7% to 9%. The company also anticipates net income per diluted share attributable to PagerDuty, Inc. in the range of $0.16 to $0.17, implying an operating margin of 13%.

For the full fiscal year 2025, PagerDuty is maintaining its revenue guidance with an updated range of $471 million to $477 million, representing a growth rate of 9% to 11%. The company has also increased its expectations for net income per diluted share attributable to PagerDuty, Inc., now expecting $0.66 to $0.71, which implies an operating margin of 13% to 14%.

Risks and Challenges

While PagerDuty has demonstrated resilience in the face of macroeconomic headwinds, the company is not immune to the broader economic uncertainty. The continued pressure on SMB customers and potential for further downgrades or churn among larger customers remain risks to the company's growth and profitability.

Additionally, PagerDuty operates in a competitive landscape, with both established players and emerging competitors vying for market share. The company's ability to maintain its technological edge, continue innovating its platform, and effectively execute its go-to-market strategy will be crucial in navigating this competitive environment.

Liquidity

PagerDuty ended the quarter with a strong balance sheet, holding $593 million in cash, cash equivalents, and investments. The company's annual operating cash flow was $71,974,000, and its annual free cash flow was $64,426,000, demonstrating its ability to generate substantial cash flows.

In October 2023, PagerDuty issued $402.5 million of 1.50% Convertible Senior Notes due 2028, further strengthening its liquidity position. The company also announced a $100 million share repurchase program, reflecting its commitment to managing dilution and increasing shareholder value.

Conclusion

PagerDuty has navigated the challenging macroeconomic environment with resilience, delivering solid financial results and continuing to innovate its platform. The company's focus on enterprise customers, multiproduct and multiyear contracts, and product enhancements have helped offset the pressure on its SMB segment. With a strong balance sheet, robust cash flows, and a promising outlook, PagerDuty appears well-positioned to capitalize on the growing demand for digital operations management solutions.