Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the PagerDuty 1Q FY2020 Earnings Conference Call. [Operator Instructions] After the speakers remarks there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Karen Walker, SVP of Finance of PagerDuty. You may begin your conference.

Thank you, Mike. Good afternoon and thank you for joining us on today’s conference call to discuss the financial results of PagerDuty’s first quarter of fiscal 2020. With me on today’s call are Jennifer Tejada, PagerDuty’s Chairperson and Chief Executive Officer; and Howard Wilson, the company’s Chief Financial Officer. Statements made on this call include forward-looking statements. Forward-looking statements 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 such statements. Forward-looking statements represent managements beliefs and assumptions only as of the date such statements are made, and we undertake no obligation to update these forward-looking statements. In addition, during today’s call, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. There are number of limitations related to these non-GAAP financial measures. First is their closest GAAP equivalent. For example, other companies may calculate non-GAAP financial measures differently or may use other measures to evaluate our performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation between GAAP and non-GAAP financial measures is available in our earnings release. Further information on these and other factors that could affect the company’s financial results are included in filings we make with the securities and exchange commission from time to time. Including the section titled risk factors in the company’s Form S1 previously filed with the SEC. Now, I’d like to turn the call over to our CEO, Jennifer Tejada. Jennifer?

Thank you, Karen. And thank you everyone for joining us today on our very first earnings call. We had a strong start to our first fiscal quarter as a public company and we’re excited to share our Q1 results with you. I’ll start with a few financial highlights then provide an overview of our business model and finally discuss our engines for growth. Our year-over-year revenue growth continued to accelerate in Q1 to 49%, delivering a record $37.3 million in revenue and robust 85.7% non-GAAP gross margins, an improvement of 100 basis points over the same year ago period. These solid results were driven by continued demand and execution across industry verticals and customer segments, especially enterprise. We ended the quarter with 11,680 customers, adding a record 468 net new customers complemented by consistently strong expansion within existing accounts. Overall, it was a terrific start. I’m both appreciative of our customers trust and loyalty and proud of our team and their execution. We pioneered the digital operations management category and this quarter's results provide compelling validation of our continued leadership. The growing demand for digital operations management, the fundamental need to orchestrate real-time critical work is driven by a number of macro trends. First, the modern consumer is experience driven and impatient. Companies must meet consumers’ increasing expectations for a perfect experience. Second, every company is becoming a software company. Digital transformation has become a top three CEO priority at not only large companies, but also at mid-size and late stage group companies. Third, companies are migrating their digital operations to the cloud and building cloud infrastructure. This is very powerful, but it is hard, and it increases complexity and requires companies to change the way they do things. Fourth, DevOps is increasingly mainstream and proving to be a strategic…

Thanks, Jennifer. And thanks again to everyone for joining us today. Since today's earnings conference call is our first, I’ll start by providing a brief overview of our financial model and then I’ll go through our first quarter fiscal 2020 results in detail before moving on to guidance for the second quarter and the full-year fiscal 2020. We offer a cloud-based platform to assess model and we generate revenue primarily by setting one-year subscriptions to our top-grade platform. There are a number of levels to drive our growth, including acquiring new customers, expanding the number of users within a customer and cross-selling additional products. Our subscription fees are based on the products the customer is using and the number of users on the platform. We target businesses of all sizes from SMB to enterprise that are in various stages of their digital revolution from innovative disruptors to large industry leaders. Customers today purchase our offerings through either self-service or direct sales. Our self-service channel allows customers to buy online. This can be customers of any size industry or location. Most of our initial customer lands come through the self-service channel. All of our customers are able to expand a footprint online adding users of new products. We complement this with a high velocity inside sales team that is focused on landing and expanding SMB and midmarket businesses. The sales rates typically target existing customers that have the potential to expand through either upsell or cross-sell or selective new customer acquisition. In addition, we have a field sales team that focuses on high-value relationships with enterprise customers that is companies greater than a billion dollars in revenue size. Similar to the inside sales team, the field sales [team] is typically targeting these customers that have the potential to expand further whilst…

[Operator Instructions] Your first question comes from Sanjit Singh from Morgan Stanley.

Hi, thank you taking the questions, and congrats Jennifer and Howard on a successful IPO and welcome to the public market. Maybe just to start off and since it’s the first call, maybe just start from the high-level Jennifer as coming out of the IPO starting, just completed in Q1, what are the milestones for fiscal year 2020 that you are looking to achieve that you set for your team and for the organization?

Well, hi Sanjiv, and thank you for the question. I appreciate you being on the call today. I think in terms of, following the IPO, which as you know is a decent undertaking for a company, we’re really focused on continuing to execute the strategy and the plan that we share with all of you on the road so effectively. Some of the milestones that we think about in that process are: One, ensuring that we have well enable productive capacity in our field to execute on the plan; Two, making sure that we are hitting our product innovation timelines effectively, and I’ve been very proud of the cadence with which the team has rolled out new products and new features, including the security effect that I referred to that we announced at MSA, our hybrid ops solutions that we announced recently as well. And we’re ramping of for our annual industry event, which happens in September, this year September 23 through the 25th. So, they are some of the bigger milestones. We’re paying a lot of attention to new products attached, which again we feel is going well, but it’s still early and we’re also focused on continuing to ramp our effectiveness in business in new markets, particularly [EMEA and APJ], which again is going well today, but still early days for us.

That makes a lot of sense Jennifer, and if I could just unpack some of your comments on new product attach, from your perspective or maybe let me ask it this way, what’s the highest attaching product outside of management today, which were the products you think are the biggest opportunities in driving growth maybe over a multiyear timeframe?

Yes, thanks Sanjit. With regards to new products, we aren't sharing data specifically around the mix of attachment or how those products are coming together. And as I mentioned, we announced Event Intelligence visibility and analytics quite recently in the middle and late last year. We do see a lot of promise in Event Intelligence in particular, because Event Intelligence leverages the 10 years of data that we have collected across human response behaviors, signals and events, as well as workflows and metrics. And what it really enables and empowers is the shift from just responding more effectively and being reactive, which is what [core on-call] management really drives to being predictive and preventative and proactive for team. It also reinforces our orchestration capabilities. So, not just finding signal and the noise of the events coming in, but actually orchestrating the right team, the right people on the right people and the right moment as opposed to getting a bunch of people on the role and trying to manually figure out and triage what’s happening. The combination of Event Intelligence and modern incident response [indiscernible] our customers being able to: one, recognize that certain events are storming to become a particular incident before they see the business or the customer impact. And two, to recognize issues that haven’t risen before and automated some of the resolution realty reducing the triage and the time that it takes to sort of supplement this is impacting customers. So, we’re excited about those two products. Likewise, analytics really helps leadership look back historically at how their teams are operating and functioning together and gives them a little sense of the difference between services that are efficient and effective and operate well and teams that are efficient and operate well. And certainly. help leadership see the tenancy and the relationship between teams and the services that they are responsible for. In a digital ecosystem that is constantly changing in companies that are going through digital transformation there is very little visibility into those relationships. So that is the becoming increasingly important to our customers. And analytics also gives a leader a sense of efficiency and effectiveness of their entire environment which is important as you are trying to thing about how to allocate capital between legacy systems and underpinning architecture and infrastructure or architecture changes or new application development.

Got it. If I can sneak in just one last one before I leave the floor. And that is sort of on the competitive environment particularly as PagerDuty makes its journey into the larger enterprise space, so as you go into larger customers who are you seeing – most frequently are you seeing custom solutions or legacy players or you begin to see [indiscernible] world come up marketing, so just a sense of who you are seeing as you move up the market? And that will be all from me. Thank you.

Sure. That’s a great question Sanjit, thanks. From an enterprise perspective I’d say a couple of things. One is, it is a very early market, a lot of customers are still just pulling together automated into the management processes so the vast majority of our lands are uncontested. They are greenfield over replacing a legacy environment and that could be anything from something as simple as a 150 people in a WhatsApp channel to phone trees and email distribution to more traditional on prem solutions that just don’t serve the modern digital ecosystem, but most of those deals are uncontested. So, we don’t see a significant amount of competition in enterprise and as we moved into areas like Event Intelligence that’s even less the case.

Your next question comes from the line of Sterling Auty from JP Morgan.

Thanks. Hi, guys. You mentioned the pick-up in the new customers, look at the new customer trial, is there anything to read into either in terms of the used cases or traction on some of the marketing programs, what drove that performance in the quarter?

Sure. Hi, Sterling. Thank you for the question. In terms of, one we’re really proud of the record outcome in terms of new customer ads. We’ve continued to see momentum and acceleration there. and it’s an important growth engine for us. What’s interesting about the new customer acquisition is we see it across all of our segments and across all verticals. We’ve recently seen some momentum for incidence in financial services enterprise which is a harder vertical to crack because of highly regulated it is and how conservative some of those IT and developer organizations are and at the same time we are really excited by the fact that while we continue to see a shift in mix to enterprise we are still landing some of the most innovative disruptive small startups. And so, there really isn’t a signal coming from how those customers look different. I do think the process of preparing for our public offering and the brand awareness that has created for us has helped to extend our brands more broadly into the market, but it often reinforce the fac that the product has an offering that applies to any company that is going through any kind of digital transformation, cloud migration, trying to step up their security stands, modernize the IT, or really invest in DevOps. So, there is this broad applicability across the market.

Great. And then one quick follow-up. This year, I think two of your customers actually acquired competitor companies or yours, are they still on your platform?

Well we have seen those customers try and move a number of their users off the platform and we saw a chunk of that this last quarter, but we do still have companies that have acquired competitors that remain users within our platform.

Alright, thanks. I appreciate it.

Your next question comes from Bhavan Suri from William Blair.

Hi guys, thank you taking my question and congrats on just a good quarter and a good outcome coming out of the IPO. I just wanted to touch on used cases specifically here. You currently achieved the broader set of applications for core used cases, so the on-called management developers etcetera, but the nature of the platform, the horizontal nature opens it up to – plenty about the used case on security IoT, the customer has kind of realized that broad applicability of tapping themselves whereas that we are [indiscernible] to doing sort of has to drive the initial conversations and then a quick follow-up to that is, are you seeing those used cases broaden up and sort of what are the ones you are seeing? Thanks.

Sure. Thank you Bhavan. In terms of used cases, our customers really find those applications for our technology to problems they are trying to solve within their organization themselves. We don't have a specific product organization that drives that or a specific sales organization that does that. And in fact, it underscores our intent to continue to improve the usability of our product and made it very easy for customers to apply PagerDuty and its platform to any real time issue or opportunity that can be signaled through machine data and where work needs to be orchestrated across disparate team, and we're learning from that process can be useful in the future. So, some of the used cases that we see are sort of naturally adjacent to IT and development. For instance, security response management where there is a security threat that that response looks a lot like a traditional technology infinite response so that’s naturally adjacent. Customer support team that come on to our platform because they’re part of an incident response. Workflow also are using PagerDuty for case revolution because that’s also, consumers are getting more and more impatient and that’s a real time work orchestration challenge, but increasingly we see teams doing things like using PagerDuty to put teams on call instead of staff teams in three shifts 24x7 to cover work that they can’t measure or predict ahead of time. We’re seeing some really interesting used cases come out of nonprofits and some of the more industrial customers like we have as, like the example I mentioned of nearly gas customer that we talked about or Cemex in Mexico, but one of my favorite used cases is site life, which we spoke about in the IPO where they’re leveraging the PagerDuty platform to manage the entire set of workflows from identifying that cornea has become available through a donor all the way through to transiting and preserving and transplanting that cornea in a recipient. And that has nothing to do with the technology signal and we certainly didn’t have a product management organization or a sales organization driving that. So, it speaks to the nature of one, call how infinite the number of potential problems are opportunities that are truly real time, time sensitive in nature that companies have, and two the easier the product is to use, the easier it is to apply, which makes our investment in integrations, which we advanced in more than 350 that’s called very important. And the ease of the API environment for customers to build their own integrations is important. We continue to see new cases as a great growth engine for the business.

Got it. That’s really helpful. Thanks again, and congrats.

Your next question comes from Matt Hedberg from RBC Capital Markets.

Hi, guys. Thanks for taking my questions. Well done on your first quarter out. Jennifer, I wanted to ask you a little bit more on SecOps, you talked a little bit on this call, but you guys announced security operations earlier to this year, could you just give us a little sense I know obviously you’ve got a huge opportunity within your core market of [indiscernible], but sort of balancing continued expansion in sort of your core IT on call management product with some of these new and emerging opportunities and SecOps, and maybe how far can you go in that category because it seems like it’s a great opportunity for you guys?

Thank you. Thanks for the question with regard to security. Not unlike any other team in an organization, I think security teams are under increasing pressure to one: understand any given moment what’s happening not just across the technology ecosystem, but across the employee base and even fiscal security; and two, be able to quickly identify an issue or an opportunity as it arises. And historically the way that used to happen was through a human noticing by monitoring somethings manually and either raising a ticket or manually kicking off a process. So, you can imagine how consuming machine signal correlating that signal with other signals to determine if indeed there is an issue and who needs to will be made aware of that issue and what action they should take on that issue, how automating that would become really valuable for security teams. So, what we’ve seen, which is an interesting to me is that security teams are already using the most basic product from PagerDuty for many years and just started popping on to some of our more advanced capabilities, and doing it themselves and then as IT teams and DevOps teams and DevSecOps started to emerge, you started to see more usage across multiple teams were orchestration becomes more important. And the idea is, you don't want to distract the whole business with something as it comes up, particularly as you’re [triaging it], you just want the right people working on at the right time and getting to an answer and a resolution quickly. So, we think that is a broad opportunity among a number of other used cases that we’re excited about.

That’s great. And then maybe one for Howard. The way that the Street has modelled you guys right now, it looks like sort of hitting free cash flow in a modest free cash flow generation exiting fiscal 2021, could you talk about sort of how you think about the financial model, I mean you’ve got, obviously large opportunity, growth opportunity, but maybe offset that with kind of how you think longer-term about margin expansion?

Sure, thanks Matt. The approach that we’ve taken is really around being prudent in how we balance both the growth opportunity that’s out there, which we see as being a large opportunity and untapped market with potential time of $25 billion together with an approach around how we manage our expenses in a way that’s going to help us. One, get to the right cadence in terms of operating cash flow positive and free cash flow positive. So, for us it’s really a case of keeping a close eye as we move through each quarter on whether the growth rates on the top line justify of continuing to invest in the expense line, and leveraging the fact that we have a really good growth margin as the basis or the platform for us to move forward. So, we expect to, much likely that in FY 2019, we had a couple of quarters that were OCF positive and we had a couple of quarters that were either a positive from a free cash flow or very close perspective in FY 2019. We expect to see a similar pattern develop, but we will be keeping an eye on where the investment is going to make sense.

That's great. Thanks a lot, guys. Well done.

Your next question comes from Rob Owens from KeyBanc Capital Markets.

Great and thanks for taking my question. Give us a little bit just on the pricing environment, clearly there is a strong ROI for your solution given the promise that you're solving for end customers, but it’s a bit of an evangelical sale as well. So, just some puts and takes around what you're seeing in terms of the pricing environment. And then I know it’s still a little bit early for those new modules, but what type of pricing left you typically see when you sell those and as well? Thanks.

Thanks Rob. Great questions. In terms of pricing, as Howard mentioned, we offer our products and services in four different packages, which gives customers a lot of flexibility to move at the pace that works for them, and what we find is that our customers live and very different places on a continuum of operational maturity and like I said, some of them are still using manual phone trees and some of them are using automation and machine learning every – and their business are 100% full service ownership in terms of DevOps et cetera. And so, we found that we need to have flexible offerings that allow them to move at their own pace, and in fact try and continue to ensure that we don't either add and reduce friction for them to either add new features or add new products or bring users or teams onto the platform. So, we try and keep the barrier to entry reasonably low on our basic standard first Q, but then as they take on products and services that let to create more value for them there is a little bit of an uptick in cost. And we find that the value proposition for some of our more expanded services on the platform is highly quantifiable because you can measure it in terms of forensic and the cost associated with a minute of downtime. We’ve had retailers tell us that can be $200,000 to $500,000 a minute range. So, time is saved. People's ways to time reduced, being able to reduce outages. We saw a recent outage this weekend where large a cloud provider was down for several hours and during that we saw traffic on our platform increase over 300% every hour and still had to maintain several lines of reliability and availability through that processes and the cost to support that infrastructure, but we think we’ve found sort of a fair relationship between the value and the price that’s out in the market. In terms of new products, they do create some price and margin expansion for us for our customers, but they are not the only driver and like I said, they are early driver. What happens in most customers is they start with a very small team that lands at a very low price point and lower expenditure. They grow from one team to the next. From one department to the next and often a top-down initiative like digital transformation or card migration will meet the bottoms up growth of the product within their company and we’ll start to see their investment grow with us. But that doesn't happen overnight, it tends to happen gradually as these teams mature and how they are digitally transforming or investing in their cloud migration or modernizing IT.

Thank you.

And your next question comes from the line of Dylan Reider for Alex Zukin from Piper Jaffray. Your line is open.

Thanks for taking my question guys, and congrats on a great first quarter. Just one question from me on the international effort’s you guys discussed. Any particular geographies that you are focused on and any differences in the way that you think about going to market, and the competitive landscape abroad versus domestically? Thanks.

Thank you so much Dylan. In terms of international expansion, we have seen really positive or early signs in EMEA. We kicked off our presence in that market in London, but in recent quarters we’ve seen really good traction and momentum in continental Europe, and so we continue to be excited about that. This could be markets like the Amsterdam or Germany France et cetera. In APJ, we initially wanted to sort of start small and grow in that market. So, we really started out purely focused on Australian and New Zealand and had a strong demand signal there with a number of large ASX listed companies within our customer base, but we've recently seen quite a bit of momentum in Japan even servicing that through a Japanese speaking team out of Sydney. So, we’re excited about the momentum there as well, but trying to be pragmatic in terms of how we invest the return and then invest with the [return integral].

And I think I would just add one thing to that [indiscernible] the nature of the offering being customers can acquire offering online. We actually find that we have a demand signal before we actually put teams in market. So, before we even opened up offices in Australia or in the UK, we already had hundreds of customers that was an indication that there was – could make good sense for us to put a team on the ground, and so that strategy is one that will continue to execute upon.

Got it. Thanks guys.

And that was our last question. At this time, I will now turn the call back over to management for closing remarks.

Well thank you everybody for taking the time to join our first call today. And a special thanks to the entire PagerDuty customer and user community, and the team for a solid execution during our first quarter as a public company. We look forward to seeing all of you at upcoming investor conferences and hope you have a great day. Thank you very much.

This concludes today's conference call. You may now disconnect.