PagerDuty, Inc. (PD) Earnings

Management highlights

- Leadership Transition - After 10 years as CEO, Jennifer G. Tejada transitioned to Executive Chair, and John DeLullo joined as new CEO following a deliberate board succession process - DeLullo has prior public and private company CEO experience, and has been a PagerDuty customer and partner, bringing firsthand industry and product knowledge - The transition is viewed as timely to drive profitable growth acceleration, with Tejada retaining full support for the new leadership - Product and Business Model Transformation - The company completed its first full quarter of limited general availability for the new usage-based Operations Cloud pricing and packaging; ARR from customers on this model nearly doubled between Q4 and Q1 - Over 15 customers spending over $100 thousand annually have transitioned to the new model; usage-based products now represent nearly 10% of total ARR - The new model removes friction for cross-departmental adoption, unlocks access to all PagerDuty products, and incentivizes multi-product use, leading to larger, multiyear strategic customer commitments; early adopters see over 80% faster time to value and 50% higher product engagement compared to self-implementation - Customer Growth and Strategic Wins - PagerDuty added over 600 new customers for the fifth consecutive quarter; total free and paid platform customers grew 14% year over year to over 36 thousand, with total paid customers reaching 15.4 thousand - Multiple high-profile strategic wins were secured across sectors: a multiyear 7-figure competitive displacement win with a North American long-term retail customer, a 6-figure enterprise expansion with a Fortune 100 financial institution, a 7-figure multiyear new deal with Australia's leading digital bank, and a multimillion dollar expansion with a North American non-profit financial services organization - AI-native companies (including Lightspin, Drop Zone AI, Semblance AI, CoreWeave and Anduril) are increasingly adopting PagerDuty, as AI deployment at scale creates new, higher-complexity operational risk that PagerDuty is positioned to address - Platform and AI Strategy - PagerDuty positions itself as the AI control plane for autonomous operations, with a 3-pillar platform strategy focused on AI and automation, full lifecycle incident management, and platform ecosystem extensibility - Recent innovations include the SRE Agent (a virtual AI-powered incident responder with chat-native integration in Slack and Microsoft Teams) and chat-first incident management, with strategic partnerships with major AI ecosystem players including Anthropic, Claude, Cursor, and LangChain - The company has built a competitive advantage from over a decade of proprietary incident and workflow data that informs its AI models, and uses internal AI to boost development velocity and operational efficiency - Financial Operational Highlights - Q1 non-GAAP operating margin reached 25%, up 5 percentage points year over year, driven by structural efficiency initiatives; GAAP profitability was achieved for the fourth consecutive quarter at $10.2 million - Gross retention improved sequentially quarter over quarter; dollar-based net retention (DBNR) was 97% in Q1 - Cash from operations was $44 million (37% of revenue), and free cash flow was $41 million (34% of revenue); the company ended Q1 with $444 million in cash, cash equivalents and investments - The company completed its $200 million share repurchase program and announced a new $100 million repurchase program

Guidance

- For Q2 FY25, management expects revenue in the range of $122 million to $124 million, with the midpoint flat year over year; diluted net income per share is expected between $0.29 and $0.31, implying a non-GAAP operating margin of 22% to 23% - For full-year FY25, the revenue guidance range of $488.5 million to $496.5 million (midpoint essentially flat year over year) is maintained, matching the previously provided range - Full-year FY25 diluted net income per share guidance is raised to $1.27 to $1.32, driven by a reduced share count from the completed share repurchase program; the guidance implies a non-GAAP operating margin of 24% to 25% - Management expects gross retention to gradually improve through the year, and DBNR to stabilize and gradually increase as the usage-based pricing transformation progresses

Segment performance

The transcript does not break out financial performance for distinct product segments. It notes that usage-based products (AIOps, PagerDuty Advance, Operations Cloud) account for nearly 10% of total Annual Recurring Revenue (ARR). International revenue contributed 29% of total Q1 revenue, growing 3% year over year. Total Q1 revenue was $121 million, up 1% year over year, with total ARR of $496 million, flat year over year.

Risks & headwinds

- The business faces short-term retention pressure from the ongoing transition from legacy seat-based licensing to the new usage-based pricing model, as some customer segments (such as midsize SaaS) face ongoing financial pressure that can drive near-term seat compression - AI deployment at scale introduces new, less predictable and less visible operational failure risks for customers, though this dynamic also increases demand for PagerDuty's platform - Forward-looking statements are inherently uncertain, and actual results may differ materially from guidance due to known and unknown risks and uncertainties; the company undertakes no obligation to update forward-looking statements

Analyst Q&A

• Q: Gross retention improved sequentially, but net retention stepped down quarter over quarter. What gives management confidence that retention will stabilize and recover? /

  A: Early results from the usage-based pricing transition are encouraging: customers that previously planned potential downgrades under seat-based licensing have expanded after moving to the flexible usage model. The company continues to see strong new customer demand, with over 600 new logos for five straight quarters, and these new customers (especially AI-native startups) typically grow organically as their businesses scale. Improved renewal processes focused on multiyear, multi-product agreements are also mitigating retention risk, and growing AI production deployment will create long-term tailwinds for investment and retention as operational complexity increases. Platform usage continues to grow among customers who have transitioned to the new model, validating the approach. The transition is ongoing, with mixed near-term dynamics across different customer segments, but early results confirm the new model creates a foundation for higher retention and expansion over time.

• Q: It is still early for new CEO John DeLullo: what are your initial key learnings and top priorities? /

  A: As a former PagerDuty customer, DeLullo already has firsthand understanding of how deeply integrated the platform is into leading companies' core operations. He confirms that current market dynamics are extremely favorable for PagerDuty: AI is accelerating automation, increasing software complexity and the need for real-time operational resilience and orchestration, which is PagerDuty's core strength. In the near term, DeLullo's top priority is listening, learning, and engaging with employees, customers, and partners to deepen his understanding of the business and market. He believes the company is currently underappreciated by investors, and there is a clear opportunity to unlock shareholder value.

• Q: How does PagerDuty balance the need for R&D velocity on new agentic AI products with the commitment to expand operating margins to 30%? /

  A: PagerDuty has been building AI into its platform for several years, and already has a major competitive advantage from over a decade of proprietary operational incident data that trains its models. The company uses AI internally across its development organization to boost velocity and efficiency, allowing it to ship new features at a faster pace on a lower cost base than in the past. PagerDuty maintains best-in-class gross margins around 85-86%, which creates room to continue investing in R&D while expanding operating margins over time. Capital allocation is balanced by reorienting investment priority within the organization rather than just adding headcount, and long-standing structural efficiency programs create the flexibility to invest in innovation while hitting margin targets.

• Q: What is the target for usage-based ARR penetration by end of year, and which customer cohorts are being prioritized for transition? How receptive are customers to the new model? /

  A: Management has not released a specific end-of-year penetration target, but growing adoption of the usage-based model is a core company priority. Customers report strong receptiveness, as the model delivers significant value via full platform access and removed friction for cross-departmental adoption. The primary focus for transition is customers spending over $100 thousand annually, who see the largest benefits from the model, but adoption is open to a broader set of customers. The company expects to make meaningful progress throughout the year, and will provide periodic updates on transition progress, rather than quarterly updates.