PagerDuty achieves profitability a quarter ahead of expectations

Digital operations and incident response vendor PagerDuty continues its streak of strong results this year as CEO Jennifer Tejada announced that the company had achieved its profitability milestone a quarter ahead of expectations, sending its share price trending upwards in recent days. 

Tejada said that PagerDuty was also eyeing becoming a ‘rule of 40’ company, which means that its combined growth rate and profit margin would exceed 40% - although that’s still a way off and not guaranteed. 

PagerDuty essentially operates as an integration platform across a company's operations, which allows for the automation of incident response. This is a challenge that is now getting board level attention, as leaders prioritize system uptime, improved cyber security and proactively tackling customer service issues.

The vendor is also getting attention from customers that seek efficiencies from their operations, given the macroeconomic headwinds currently at play. 

Speaking with analysts, Tejada said: 

In Q3, we achieved non-GAAP profitability a quarter ahead of our previous guidance with $3 million in operating income, an improvement of 1,000 basis points over Q3 last year. We exceeded the high-end of our guidance ranges for both top and bottom line and realized our profitability milestone a quarter ahead of schedule.

We continued to see strength in our focused segments, mid market and enterprise, our customer cohorts spending over $100,000 in ARR grew 31% over last year. 

Total free and paid customers on our platform grew 22% year-over-year, dollar-based net retention was 123% as our customers continued to expand users and adopt more products and services. In the quarter, more than half of our ARR came from customers with two or more products.

These are all strong metrics. It’s always worth paying attention to the figures that signal customers buying product bundles and the expansion of a vendor’s enterprise buyer base - all of which PagerDuty is performing well in. 

The key numbers released for Q3 2023 are:

• Revenue was $94.2 million, an increase of 31.3% year over year.

• GAAP operating loss was $32.5 million; GAAP operating margin of negative 34.5%.

• Non-GAAP operating income was $3.0 million; non-GAAP operating margin of 3.2%.

• Finished the third quarter with 15,265 total paid customers as of October 31, 2022, compared to 14,486 in the year ago period.

• Reported 710 customers with annual recurring revenue over $100,000 as of October 31, 2022, compared to 543 in the year ago period.

• Customer wins and expansions in the period included Centene Corporation, Gong, IBM, OSI Systems, PG&E, Samsung, Solera Holding, Vanguard, Worldline, and Zoom.

Commenting on market uncertainties, being driven by high inflation, the ‘great resignation’, and supply chain woes, Tejada said: 

While the macro environment is likely to remain a headwind for our business in the near-term, we continued to see positive trends underpinning our performance and remain bullish about both long-term opportunities and our balanced growth investment plans. 

First, we continued to see strong growth in incident response. Cloud adoption and digital acceleration are enduring multiyear initiatives, DevOps transformation is now required to achieve the efficiency demanded by this macroenvironment. 

Second, we saw solid adoption of new products, especially automation and our AIOps solution, where customers chose the efficiency and effectiveness of our integrated operations cloud offering ahead of point solutions.

Third, our low cost of ownership and fast time to return on investment makes PagerDuty more attractive to customers than expensive long deployment solutions. Our sales pipeline is strong heading into Q4 for both incident response and new products.

Finally, we have positioned ourselves well to navigate the challenging macro environment, achieving profitability by improving our cost structure such that we can continue to invest in growth capacity and product innovation.

Organizations under pressure

Tejada explained that PagerDuty is helping organizations’ technical employees spend less time and effort fighting fires across their operations environments and is resulting in both money saved and better experiences for customers. 

This plays well into companies’ current priorities of protecting revenue, investing in technology and ‘doing more with less’, she added. 

Commenting on some recent customer stories, Tejada said: 

During Q3, a Fortune 100 global security and aerospace company nearly doubled its PagerDuty using footprint on digital operations and signed a multi-year contract. This long-term PagerDuty customer is realizing a return on investment in excess of 30 times its annual spend with us. In the last 18-months, this customer significantly reduced its time to resolve incidents, translating into tens of millions of dollars in savings, their expansion with PagerDuty was explicitly due to our ability to reduce their costs, while also freeing up time for their innovation teams.

In the quarter, an Australian-based home improvement retailer in the midst of a large-scale digital transformation expanded its investment with PagerDuty. The customer has nearly doubled its PagerDuty footprint since its initial deployment in 2020. 

This quarter, we adopted PagerDuty process automation to address more advanced use cases, including automated diagnostics and auto remediation, they expect to increase engineering productivity and resolve incidents faster as we advance their digital maturity.

Tejada explained that PagerDuty has implemented “structural changes” throughout the past several years, in pursuit of profitable growth. These have included efficiency initiatives, such as standardizing go-to-market activities across regions, as well as opening lower cost, high talent employee locations, such as in Lisbon. She added: 

We continue to expand our operating margins as we move forward into the next fiscal year. We are executing well on our long-term operation cloud strategy balancing growth and profitability.

In a volatile macro environment, we are controlling the controllables with the objective of continuing to make demonstrable progress from the early 30s towards operating as a rule of 40 company. 

Given our role as essential infrastructure, our loyal customer base and our competitive track record and our innovation roadmap, we are positioned to weather this environment well, we are confident that we will emerge stronger as a high performing profitable growth company, the leading operations cloud for modern enterprises.