Good afternoon and thank you for joining us to discuss PagerDuty's Third Quarter 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 beliefs 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. A reconciliation between GAAP and non-GAAP financial measures is 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-K as well as other subsequent filings made with the SEC. With that, I will turn the call over to Jennifer.

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. Crossing this operations CASM is critical to protect and grow revenue in an increasingly digital on-demand marketplace. Second, 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 third, 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. New customer and acquisition in enterprise and mid-market and strengthen strategic customer expansions were the highlight of the quarter, surpassing results from Q1 and Q2 of this fiscal year. Along the contributions to strengthen new business was a record-setting win with a long-standing enterprise software customer. This operations cloud expansion included all four products: incident management, AIOPs, automation, and customer service ops. Two, at over $1 million of ARR each and showcases Pat'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…

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 continued to impact SMB and caused increased negotiation around renewals. However, several large six- and seven-figure transactions this quarter are providing evidence of PagerDuty's key role in enabling our customers to mature and modernize their technology environments. Our multiyear initiatives focused on profitable growth continued to deliver operating margin improvements with over 1,000 basis points improvement 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 million in the third 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 million. We delivered 110% dollar-based net retention in Q3 compared to 123% in the same period one year ago. Our DBNR 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 VSB accounts remain uneven. Free and paid customers on our platform, however, grew to over 27,000, an increase of approximately 18% compared to Q3 of last year. Q3 gross margin was 85% and within our 84% to 86% target range. Operating income improved by over 1,000…

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

Thank you, guys. Can you hear me okay?

Yes, we can.

Okay. Great. I apologize for the bad connection and I'm going to keep myself off video. Hi Jen, Hi Howard. So I'll squeeze in two quick ones and then I'll mute out in case I'll lose the connection. So the first, Jen, is on just your comments around green shoots. I was wondering if you could add a little bit more color now you mentioned enterprise and just like that's a statement we've heard from a couple of people this week. And I 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? 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.

No worries. Thanks for the question, Rob. I've been spending a lot of time with customers. I've seen over 100 customers in the last couple of quarters. I just came back from AWS' re:Invent in Las Vegas, this week. 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 what 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. And I talked about a record deal and a very significant operations cloud expansion and that we did in my prepared remarks. So just when I think about the large 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, we see more of that in SMB and lower mid-market and more reengagement 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.

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 quarters. And there were really two 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. But when I look forward and particularly into Q4 and into next year, we've really laid the foundation 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 $100,000 cohort.

Next, we're going to Canaccord Genuity with Kingsley Crane.

Good to see everyone. Yes, good to 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?

Yes, it's going well. I mean when we do a good job of positioning pricing and packaging for volume and growth, our customers don't really think about feed-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 head count growth, for instance, seat-based pricing can be a headwind. But I think, we're managing that and adapting to that quite well. And you see that in some of these strategic large expansion deals that are multiproduct where we're getting beyond the fray sort of just licensing the estate, but actually instantiating ourselves as a platform for action.

Okay. Yes, 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. But I 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 AI Ops?

Yes. Remember that AI has been foundational in 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 run books 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 cube 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. 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, we will start to surface some of the pricing and packaging for those products and services in the future.

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

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 deferred into the fourth quarter here and just billings growth overall.

Yes, sure. So as you know, Chad, billings growth for us has fluctuated a lot from quarter-to-quarter, which is partly why we tend to focus more on the trading 12-month metric as a way for us to try and get some of the noise out of that. 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 was a metro upfront payment. 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.

Okay. But I mean, is it fair to say that probably there's more pressure on billings in the fourth quarter on a year-over-year basis than third?

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 quarter for us. So, there is from a compare perspective, that will be tougher.

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 -- or enterprises 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?

No. That's -- 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, we do have a large customer that decides to like shorten or invest less with us in a renewal. I usually reach out and try and understand 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 head count 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 has 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. 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 areas 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, head count reduction.

And I think I'll just add one thing, Chad, to Jen's 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 use of a 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. 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 and 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.

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

Yes. It's Oscar Saavedra on for Sanjay. 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 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?

Howard, if I can jump in, I would say, one, 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 mid-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, 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.

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 it, 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. So when I look at Q4, I think there are a couple of things to keep in mind. We put an increased process 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 at 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, we have a few elements that react positively to revenue within the quarter. For example, if we -- 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 gave. It's not purely a straight flow through from the ARR.

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 Anushtha Mittal.

Thanks for taking my question. This is Anushtha Mittal. I have to -- maybe just to start with -- can you talk more about the acquisition of Jeli and how that adds value to the PagerDuty platform? And then how should we think about its contribution from a revenue or margin perspective?

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 Jeli into the PagerDuty fold, mostly because our customers are super excited about it. We've had a strong cadence of making strategic acquisitions that both accelerate our road map and give us access to fantastic technical talent. And Jeli ticks both those boxes. But even I have been like positively surprised by how excited our customers are about this. 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 Jeli. What Jeli 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 and 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 Jeli Slack integrations for instance, that our customers have been asking for. So, it really did accelerate a lot of efforts that we were going to invest anyway. But the strong sort of brand preference that Jeli has in the market, that connection to developers and sort of the immediate ROI they see from Jeli 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 will be immaterial to revenue, but we do expect that it's going to help us advance our overall incident management posture and growth in the future.

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. 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 leveraging our go-to-market capabilities, along with the really great technology that the Jeli team has built will, in fact, allow us to accelerate the use of Jeli, and that will be positive to us from a sales perspective.

Got it. That's helpful. And then one more. On fiscal '25, I know you're not providing official guidance on it yet. But can you provide any guide post or building blocks we should think -- we should keep in mind as we think about next year's model?

Yes. Sure, Anushtha. 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-month 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 are ending this year. 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.

Okay, team. I think that does it for us close with questions. Jennifer, will turn it back over to you for any final comments, please.

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.