Hello everyone, and welcome to PagerDuty Second Quarter Fiscal Year 2021 Earnings Call. I would like to remind everyone this call is being recorded. And at this time, I want to hand it over to Willa McManmon, Investor Relations at PagerDuty.

Good afternoon and thank you for joining us to discuss PagerDuty’s second quarter fiscal 2021. With me on today’s call are Jennifer Tejada, PagerDuty’s Chairperson and Chief Executive Officer; and Howard Wilson, our Chief Financial Officer. Statements made on this call include forward-looking statements 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. Forward-looking statements represent our management’s belief and assumptions only as of the date such statements are made and we undertake no obligation to update these. In addition, 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. There are a number of limitations related to the use of these non-GAAP financial measures versus their closest GAAP equivalents. For example, other companies may calculate non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as a tool 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 most recently Form 10-Q. With that, I will turn the call over to Jennifer.

Thank you, Willa, and thank you all for joining us on Zoom today. We are thrilled to see you and appreciate our partner Zoom for enabling us to engage with you face-to-face. I’m grateful, our team and our employees are healthy and I hope you all are well too. We recognize how fortunate we are and our thoughts go out to all those who are affected by COVID and the current environment. While acknowledging the unprecedented near-term market uncertainty, today I will focus on the elements of our business we can control and how we are strengthening our company as we, again, execute against our strategy to become the de facto platform for digital operations. Despite extraordinary market dynamics, our customers remain loyal as reflected in our retention rates and revenue growth. Digital transformation is accelerating, becoming an imperative for our customers as they shift to an e-commerce led business model. McKinsey recently reported that e-commerce penetration has grown by 10 years in the last three months. Literally, overnight, many of our customers have been faced with two competing imperatives, rapidly accelerating their digital initiatives and cutting costs. We see customer's responses to this on a continuum from the most impacted customers reducing users to some simply applying conservatism by delaying user expansion or pausing new initiatives. At the other end of the spectrum are many teams leveraging the situation as an accelerator for change and doubling down on PagerDuty as a foundational operations platform. PagerDuty is essential to online business where the stakes are now higher than ever. We are building from a foundation of trust where our platform has reliably supported unprecedented scaling in video conferencing, e-commerce, telemedicine, communication, software and home delivery services. As the central nervous system for our customers digital ecosystem, PagerDuty is the first…

Thank you, Jennifer and thank you all for joining us today. Revenue for the second quarter increased 26% year-over-year to $30.7 million. As Jen discussed, we're optimistic about the tailwinds we are seeing, but the macro environment remains challenging and uncertain. As the quarter progressed, we noted strong bookings momentum and strong pipeline generation. We saw a particular bright spot in international with revenue growing 34% year-over-year, driven specifically by strength in EMEA. We added over 1,300 customers year-over-year, closing the quarter with 13,346 customers, an increase of 11% in a challenging macro environment. We continue to see strong growth in large customers with those above a $100,000 in ARR, growing 35% year-over-year to 369. We were delighted with the efficiency we're seeing in the business across a number of fronts. In the quarter, our non-GAAP gross margin was 87%. We also saw a significant improvement in our non-GAAP operating margin to just under negative 7% versus negative 18% in the prior year. And non-GAAP EPS came in at negative $0.04 per share, well ahead of our guidance. This, as we continue to manage expenses prudently, invest in innovation in R&D and growth in go-to-market. In four of the last five quarters, including in Q2, we've delivered positive operating cash flow with positive cash flow of $2 million in the second quarter. Our dollar based net retention rate for the quarter was 116%. COVID related churn and downgrades impacted the rate by at least 2 percentage points. So we estimate that our underlying rate was at least 118%. We saw a number of customers in the quarter with clear financial hardship, who we supported in recognition of our long-term relationship, although this has a short-term top line impact. Our customers rely on PagerDuty and we believe demonstrating partnership now will…

Our first question is from Sterling Auty with JP Morgan.

Yes. thanks. Hi guys. So in terms of what you're seeing in macro and what you're seeing in close rates, et cetera, I guess that the question is as we move past COVID, would you expect re-acceleration in the business.

Sterling, thanks for that question. I think that, given the environment that we're in, we've seen tremendous utilization of our platform. It's up from the level of utilization in our platform is up dramatically and it's working very well under huge pressure. And we think that creates a major tailwind for long-term demand, even if it's not resulting in immediate revenues. Our platform over the last several months has scaled to support macro benefit beneficiaries like Zoom and Twilio, DoorDash, Okta, Zscaler, CrowdStrike to name a few. We also saw a third of our midmarket and enterprise customers still expanding in the corner. And they have been doing that over the last six quarters like clockwork. So we feel like we're in a stronger position to benefit from those tailwinds long-term. We've also improved our business execution and our maturity across the board, especially where our sales execution is versus a year ago. And we've seen a lot of large enterprise customers continue to invest. So while it was a challenging quarter at the beginning, we've seen the momentum building month-on-month. We entered August with a very strong pipeline. And as I mentioned in my prepared remarks, landed a very large strategic enterprise deal in the month. So we feel like we're in a very good position long-term, and that it's a durable business long-term that we'll be able to weather the storm. And like I said, benefit from those tailwinds over time.

Our next question is from Bhavan Suri with William Blair.

Hey guys, thanks for taking my question. And really nice show on the bottom line too, given this environment. Apologize for the background noise, it's going on somewhere in the house.

That’s okay.

But I did want to talk about your comments about the pipeline and coverage. You obviously seen it grow linearly, some sense of what is the coverage ratio look like prior to COVID. So in comparison to are we there. And as the pipeline where you'd like it to be, or how close are we to getting to sort of a more normalized pipeline cadence, especially given the ramp that David Justice and team have done?

Yes, we're -- like I said, our new reps are ramping much more effectively than they did in the past. And we are seeing -- we are -- we do continue to see some of our more successful teams continue to perform very well. Pipeline coverage is very strong going into the quarter. So we feel confident that we can deliver a good outcome in the quarter. I think, what I would say is it's too early to call a recovery because of the uncertainties in the macro environment, as opposed to our ability to execute. But I am encouraged with what I'm seeing in terms of our competitive win rates, for instance, in midmarket and the fact that those have been going up and at the same time, the fact that we're seeing really strong product attach for digital operations management, we saw 18% product attach on the digital ops plan this quarter. And we will also continue to see momentum around new use cases. Customers with use cases outside of DevOps are roughly around 18% as well.

Got it. Got it. Maybe …

Yes. Maybe Jen, I can just add, one of the things that we did notice with COVID, obviously we've had to make a shift from pipeline generating field-based events. And we did one of our first major online or virtual events with our EMEA summit, where we had over a thousand registrants from 70 countries. And we saw that having a very positive impact on pipeline out of the gate. And so as we've made this transition to doing far more virtually, we've seen some very positive momentum in terms of pipeline build even in the absence of traditional field events.

Got it.

Yes, in fact while we've been on the call today, the team texts me, we went over 5,000 attendees today. So we're expecting good -- a good audience for the summit in later this month.

Oh, that's awesome. And I appreciate the color on the pipeline. That's really helpful. One other question, Jen, you focused a lot on mid-market and in the past we've talked about sort of yes, this online piece and we've got enterprise, but the attach rates in midmarket -- so maybe give us a little color of sort of, if you've got a change in sales presence. As David sort of saying, there's a piece of this market that's really interesting in the middle. That's never thought about this or is that just doing better, the enterprise, just some color of why the choice to focus on that or what's going on.

I don’t want you to misunderstand, I mean, our focus continues to be in enterprise and midmarket, and we had some I think really nice expansions in enterprise. I mentioned EA and Cisco and a number of others. What was interesting about midmarket is, I think, like I said, we are competing more effectively. We had a shift to value selling, and we're starting to see midmarket customers really adopt a more strategic transformational position on leveraging PagerDuty. So starting to move up our product set and across use cases, and I think that's just been an encouraging sign particularly in North America this year -- this quarter, sorry.

Awesome. Awesome. Thank you, guys. Thanks for taking my questions. I appreciate it.

Thanks, Bhavan.

Our next question is from Rob Oliver with Baird.

Right. Thank you guys very much for taking my question. Jen, one for you. At the EMEA summit, you guys spent, it seemed to us anyway, a lot of time focused on the ROI and the message around ROI with the customers. And I know you had said on the last quarter's call that, you guys weren't seeing any competitive issues at enterprise. So I guess I'd ask for just an update on, how the competitive landscape looks in enterprise? And how is that ROI message resonating with those most important enterprise customers. And then I just had a very quick follow-up.

Yes. I think ROI has become increasingly important because you have these customers that are trying to adjust to supporting remote workers, at the same time, they're shifting their business to digital. They're having to accelerate a bunch of transformation that they had planned over years into months. And at the same time, the complexity of the digital ecosystem, they're building all of this on, is getting more complicated, it's proliferating. And so I think our ROI has become more pronounced in that environment, not less, but I think in the past, we were a little shy about sharing like what are the labor and productivity savings that you get as a result of reducing the amount of noise coming into a team, reducing the number of people that have to be made available for incidents and really shifting from being reactive and trying to respond more quickly to being proactive. So I think ROI has become more and more important as customers are looking to also find cost savings in this environment. We found that approvals are moving up the stack. And so making sure that you have a business case for PagerDuty over the long-term is really important. And the last thing that I would say is that our ROI is actually very measurable. It's very tangible. You can look at what the cost of a minute is in a digital business and demonstrate real returns, if you reduce the time it takes to respond and resolve an incident, if you reduce the number of people that need to be leveraged to do that, if you automate more and more of that process. So what we're really trying to do is quantify that automation and our customers really appreciate that.

Great. That's helpful, Jen. Thank you. And then, Howard, I just had a very quick follow-up for you. You guys are clearly sound as if the quarter got a lot better and indeed likely the beginning of this quarter with the close of the big -- I believe it was mortgage provider. And Jen had mentioned green shoots and I think, some of the questions that came prior to me from veteran analysts, like everyone's trying to figure out sort what the normalized gross rate is here. So, Howard as you look at kind of the back half of the year, guidance, obviously we're in a pandemic, but just trying to get a sense for with the green shoots and with the linearity improvements throughout the quarter, how you might speak to that -- to that guide. Thanks.

Yes, sure. Thanks, Rob. I'm really confident in the guidance that we provided for the quarter and for the full year. We have been prudent and balanced as we've demonstrated throughout our short history as a public company in terms of not knowing what we don't know in terms of the macro environment. So we have had to look at the environment within that context. But we are very happy with the momentum that we're seeing in the business. The things that Jen alluded to both in terms of improvement around sales pipeline, generation and sales execution, all of those bode well for us as a company.

Great. Thank you, guys, very much.

Thanks, Rob. Nice to see you.

See you.

The next question is from Sanjit Singh with Morgan Stanley.

Hi, Jennifer. Hi, Howard. It's good to talk to you both again. My question is just sort of a comparing contrast Q1 versus Q2, in terms of what you saw on the enterprise versus the digital engine versus midmarket. What were the -- what was different about Q2 versus Q1? And then as the quarter started to improve, where was that strength in terms of those various segments? Was it the cohorts that were weaker to start the quarter that started to improve? Like what segment of the business started to see better conversion?

Sure. I'll take a crack at that. And then Howard, if you want to jump in any time, let me know. It's nice to see you Sanjit. What I would say is early in the quarter, we started to see more significant churns and contraction than we've seen in the past. And as you know, our churn is still best-in-class, very limited, very high retention rate amongst our customers. But more contraction, particularly in small business and in affected industries. And also starting to see in the quarter we saw some of our sales cycle -- cycles lengthen. So pipeline pushing, for instance. As the quarter progressed, we saw pipeline start to build more like what we're used to, and we're also starting to see churn and contraction start to return to more typical rates within the business. But again, just given where the market is and the macro, it's hard to know whether that is a long-term trend or if that's something that is happening at the moment. So we're watching that very carefully. September typically is a very good month for building pipeline for us because of summit. So we're very excited about that and we have some really incredible product announcements coming as well. And a number of customers that will be sharing their stories and their best practices really around that ROI that we're getting in. And what we're increasingly excited about is the progress that we're making on the digital operations management SKU. So to your point, Q1 versus Q2, we saw stronger attach rate on digital ops. We're starting to see that market start to really look at event intelligence and digital ops as more strategic and more transformational. We continued to see strong performance in EMEA. That's been a really, really good market for us. And in certain segments within enterprise, we're really pleased to see the consistency of expansion. Having a third of our midmarket and enterprise customers expand every quarter, including last quarter for the last six quarters, I think bodes really well for sort of the long-term relationship that we have with customers. So, I would say, again, saw improvement in the momentum over the course of the quarter and a strong start to this quarter. So kind of looking forward to leaning into that momentum and trying to continue that throughout the quarter.

Okay. And maybe I can just add to that just for folks to be clear when we think about our segments, SMB for us represents companies that have got $50 million or less in annual company revenues. And that represents 20% of our business today. That was an area that was -- we started to see that being coming under pressure in Q1, and that continued into Q2. But we are starting to see some improvement in that segment, which was one of the segments that -- just because of the macro experienced a significant amount of pain.

That's super helpful. And then as my follow-up question, Jen is, one of the things we've been talking about software is that digital, because more important customers sort of accelerate to the cloud, at least that's the intention and that's the hope. So without being playing economic forecaster, when the economy does recover, what data points are you guys looking at internally to give you confidence that that's going to play out in a positive way for PagerDuty in terms of those being accelerators for the business? Is it what, Dave Justice is doing? Is it some of the product announcements that are coming out with that sort of hit on those points? What are you guys looking at internally that says when the economy does recover, we're going to be in a stronger market position.

Sure. Well, you mentioned Dave Justice, I mean, he's now been in the business for a couple of quarters and he has really deepened the leadership bench for us. Manjula Talreja, for instance, who now leads customer success. I mean, that's a really important part of driving expansion is making sure the customers are successful with the license that they acquire and that they know how to adopt and leverage best practices to get -- to maximize their ROI. He's really built a strong leadership team. That's not just improved the rigor in the business, but the focus on pipeline on long-term customer value. And I'm encouraged by the new customer lands. That could be a lot worse than it is and seeing some of the more strategic customers land, Genentech in the quarter as well as the large mortgage company that we mentioned this last month. Like it's good to see that those investments are still happening. And I think it just comes down to how well we can progress opportunities in the pipeline and likewise how well we can create demand. So we look at top of the funnel pretty carefully. And the last couple of months are really encouraging, right? In terms of what we're seeing. There's no doubt that our customers have been preoccupied with the shift of working from home and a very quick shift to being a 100% e-commerce. And as that starts to become the new normal, I think they get back to more strategic infrastructure investments and strategic DevOps investments. I'm also really encouraged with what we're seeing in security use cases and customer service, and that's still very nascent to us. But when you sort of put that together with digital ops and new use cases that increases our stickiness. And then finally you're going to hear us talk more about this and we did in the last quarter as well, but yes, ops and event management continues to be, I think, an important control plane for our business in an area where we have a different philosophy from a product perspective, instead of a small team and a central IT organization analyzing past events. We're democratizing event management and analytics and predictive analytics to everybody on the platform, so that they can prevent major events from becoming incidents. And that in and of itself, I think has a terrific ROI as everybody moves to digital.

Appreciate it. Thank you, Jen.

Thank you.

Our next question is from Joel Fishbein with SunTrust. Joel?

Are you there, Joel?

All right. We'll come back to you, Joel. Next question is from Hannah Rudoff with D.A. Davidson.

Hi, all. Thanks for taking my questions today. So Howard and Jen, you both talked about really strong attendance at your EMEA summit and the good pipeline that came out of it. I was wondering if you could talk about how maybe that pipeline coming out of the event compared to previous summits that you have had in person? And then maybe what learnings you took from that event that you're going to apply to the North American summit coming up? And then if you're worried about replicating things like networking online.

I miss seeing real life people, I got to tell you. I mean, this Zoom is a major improvement over the call, but I really liked to get out and see our customers and demonstrate our care for them personally. So I'm still very frustrated extrovert in that regard. But I would say getting a 3x registrant count and the engagement that we saw from customers at EMEA is very encouraging. And in fact, like I said, it's really -- we really expanded our reach as opposed to being limited to people who could make it to London in person, and the pipeline build, I think, has been commensurate with that. So we do expect -- I mean, I think about it, like we had just over a thousand attendees at San Francisco summit last year, and we're over 5,000 registrants, which is well ahead of, like I said, nearly 5x where we were last year. So we will look to convert that. And I think we're kind of in the right place at the right time with the sales team being a little bit more productive and being a little more focused with some exciting products coming out. In terms of replacing the networking, we've experimented with a lot of different things from wine tasting nights to you name it. And I think everybody would say they would rather be able to get together in person, but at the same time we get productivity gains. I can see -- I can talk to six customers in a day where I would have had to fly six hours to meet two, right, in the past. And that's just an example of the way my schedule has changed. So I think the ability, particularly for our enterprise team to get on Zoom with people and be able to discuss more strategic relationships, there's a little bit of a productivity upside there. But it's getting -- we're just getting used to the new normal. The good news about our business though is we do have this high velocity land and expand motion. And if you recall, the vast majority of our logos land through e-commerce. So that doesn't change. And so I think continuing to build PagerDuty's awareness, summit is a big part of that. It helps us to drive more demand and expand the customer base that we can build upon in years to come.

Great. That's helpful. And then just a question for you, Howard, are you thinking about cost savings exiting the pandemic? I know a lot of companies have talked about the fact that even when we're in a new normal, they're going to be doing less travel and more digital engagement. And Jennifer was just talking about how productive she's been without all the in-person travel. So wondering if you could share your thoughts on that.

Yes. So we've given this a fair amount of thought to date and it covers a number of different areas, even in terms of our approach to facilities. We've had have a number of offices that we have in major hubs, which has been kind of key to our growth and expansion from an employee base. And so we've looked at that, we've looked at travel. And so we are sort of doing some long range forecasting, both with the more return to something that looks more like we were used to versus where what we're seeing today. But certainly I think like most companies, we are rethinking our approach to work-from-home in terms of how do we get the benefits of what we've learned through this situation that we've been in with the pandemic, and try to maximize or optimize around that. But also then seeing how do we compliment that with the right kind of in-office experiences where it makes sense. So certainly from a cost perspective, we're looking at, what that could look like in a few -- in ranges of the model.

Great. Thank you.

So we have one more question, and it is from Brian White with Monness, Crespi. And I'll ask Brian to unmute. We might not have audio from Brian, and if not, that would be our last question. Brian, can you hear me? Okay. Well, I'm going to turn it over back to Jennifer for closing remarks. Well, thank you, Matt, and thanks again to the Zoom team for helping us make this possible. I know this is always a busy earnings day. There are many people going out, and so I really appreciate all of you spending time with us today. I would just reconfirm or reaffirm that we are very encouraged by the momentum we've seen in the last couple of months. We see this as a long game, and we're going to continue to focus on our customer success and helping them make the most out of both the opportunities and the challenges that they see in this environment. And we appreciate all of you being here and hope you stay safe and well. Thank you very much.