PagerDuty (NYSE:PD) reported first-quarter financial results on Thursday. The transcript from the company's first-quarter earnings call has been provided below.

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The full earnings call is available at https://pagerduty.zoom.us/webinar/register/WN_gwDj9uX9RY-EWu6DK_WL9Q

Summary

PagerDuty Inc announced a leadership transition with Jennifer Tejada stepping down as CEO and John DiLullo taking over the role.

The company reported Q1 revenue of $121 million, a 1% year-over-year increase, and an annual recurring revenue of $496 million, flat compared to the previous year.

Non-GAAP operating margin improved to 25%, with a goal of reaching 30% long-term, driven by efficiency initiatives and AI adoption.

The transition to a usage-based pricing model is underway, with usage-based products now accounting for nearly 10% of total ARR.

PagerDuty introduced the Operations Cloud offering, which has led to increased customer engagement and larger multi-year commitments.

The company acquired over 600 new customers for the fifth consecutive quarter, with total customers growing 14% year over year.

Q1 GAAP net income was $10.2 million, marking the fourth consecutive quarter of GAAP profitability.

PagerDuty completed a $200 million share repurchase program and announced an additional $100 million buyback initiative.

Guidance for Q2 FY27 expects revenue between $122 to $124 million and an operating margin of 22-23%, with full-year revenue guidance remaining flat year over year.

Full Transcript

OPERATOR

Good afternoon and thank you for joining us to discuss PagerDuty's first quarter and fiscal year 2027 results. With me today on today's call are Jennifer Tejada, PagerDuty's Executive Chair, John DiLullo, PagerDuty's Chief Executive Officer, and Howard Wilson, our 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 these 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, which can be found on our Investor Relations website. 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 and our subsequent filings made with the SEC. With that, I will turn the call over to Jennifer.

Jennifer Tejada, Executive Chair

Thank you, Christine. Good afternoon and thanks for joining us today. Before we discuss our results, I want to acknowledge the leadership change we announced mid-May. After 10 years as CEO, I've transitioned to Executive Chair, and today I'm pleased to introduce PagerDuty's new CEO, John DiLullo. We're already partnering well, and the transition is off to a great start. John's appointment is the result of a deliberate and comprehensive succession process that I initiated with the Board some time ago.

John stood out as a proven leader with a unique combination of technical depth, operational discipline, and go-to-market experience. Prior to joining PagerDuty, he served as CEO of both public and private companies, most recently Deepwatch and previously LiveVox and Lastline. Having been a customer and a partner in the past, he brings firsthand knowledge of PagerDuty's role in our market, of our potential, as well as an understanding of how our customers operate in increasingly complex mission-critical environments.

With the business poised for profitable growth acceleration, now is the right time for this transition. The Board and I are confident John is the right leader to build on PagerDuty's momentum towards our next phase of growth. I'll turn it over to John for his brief remarks.

John DiLullo, CEO

I am very excited to join you today. As Jen mentioned, I've known and followed PagerDuty for years as both a customer and as a partner, and I've long admired the role that the company plays at the center of modern digital operations. That perspective has only deepened in the weeks since I joined as I spent time with Jen, the board, and the broader team. What stands out to me is the strength of the foundation, a trusted brand, an enviable customer base, and a platform that sits at the core of real-time mission-critical operations.

As digital environments become more and more complex and the pace of innovation accelerates, with AI and automation volumes climbing, we expect platform usage to continue to grow. With our transition to usage-based pricing underway, usage growth should translate to revenue growth over time, and I believe PagerDuty is exceptionally well-positioned to extend its leadership. In my past CEO and leadership positions, I focused on scaling organizations, strengthening execution, and aligning closely with customer needs.

That experience has illuminated for me a clear opportunity to build on the momentum already underway at PagerDuty. In the near term, my priority is simple: Listen, learn, and engage. I'm spending time with employees, with customers, and with partners to deepen my understanding of our market and our business. I'm incredibly excited about what lies ahead and confident in our ability to capture the opportunity in front of us. I look forward to spending time and partnering with our analysts and shareholders frequently in the quarters ahead.

Jennifer Tejada, Executive Chair

Thank you. Thank you, John. I look forward to connecting John to our shareholder community in callbacks and at our next investor conference. With this leadership transition, I have reflected on my time at PagerDuty. Over the last decade, we've evolved from a company with a single product, less than 50 million in revenue and a few thousand customers to the leading AI-first operations platform, generating nearly 500 million in profitable revenue. We strengthened our core franchise, digital operations management by embedding AI and automation into the platform, driving greater customer outcomes and increasing differentiation.

In doing so, we have become a strategic partner and the AI control plane for our clients. In Q1, PagerDuty delivered results that exceeded the top end of guidance for both revenue and non-GAAP operating margin. Quarterly revenue was $121 million, up 1% year over year, and annual recurring revenue was $496 million flat. Year over year, we grew non-GAAP operating margin to 25%. Through consistent discipline, structural efficiency initiatives and AI adoption, we see a clear path to our long-term target of 30% non-GAAP operating margin as we increase our own operational AI leverage and drive customer usage of our AI platform.

We are confident that our product enhancements and pricing improvements initiated last year, notably the introduction of the new usage-based operations Cloud and PagerDuty advanced pricing and packaging, will accelerate revenue growth. As a reminder, we have historically offered individual products, enterprise incident management, customer service operations and runbook automation via seat-based licensing. While we sell event intelligence and AI products through a usage-based model, our full suite of products are now available through an integrated platform with usage-based pricing.

Usage-based products which include AIOps, PagerDuty advance and Operations Cloud now account for nearly 10% of our total ARR to date. Early customer adoption of the new Operations Cloud plan has unlocked more value for customers and grown ARR because it incentivizes the use of multiple products. This underscores the large opportunity ahead of us with our new pricing framework as a key driver of ARR growth acceleration. The new Operations Cloud offering deployed with professional services and support plays a critical role in helping expand customers' use of the full platform.

Customers who choose the Operations Cloud gain new access to all of our products via a more flexible platform license, removing the friction related to adding users across departments. This leads to new operational use cases which ultimately drive increased usage. Our usage-based model is also predictable for customers. They start with a level of usage across the integrated product lines which can increase the value realized during the term of the contract.

Usage elements include events, AI actions and automated workflows as customers automate more work. PagerDuty scales with the value delivered through AI, event intelligence and automation while mitigating the risk associated with a customer needing to reduce user count. In addition, customers who deploy the Operations Cloud with our new professional services model see an over 80% improvement in time to value and 50% higher product engagement compared to those who self-implement.

We are encouraged by these results and the initial customer conversions this year which are leading to larger multi-year more strategic commitments. The customers who have adopted the new OPS cloud offering experience broad platform engagement. The majority of our early cohort are actively using more capabilities across incident management, incident workflows, event intelligence and agents. With teams broadening both the breadth of features they rely on and the number of users operating within the platform day to day, these customers are integrating the Operations Cloud more deeply into how their organizations work, reflecting the value of a deliberate customer-first approach to migration and onboarding. One of the clearest signals of customer momentum in Q1 came from a Fortune 500 automotive manufacturer, previously a customer on a fleet-based plan that migrated to the operations cloud offering. Within weeks of closing, the customer realized the value of their initial purchase. With expansion into a subsidiary, we expect that customer to purchase even more usage during their contract term. Leading growth indicators continue to underpin momentum giving us confidence in both ongoing demand and increasingly successful traction with our strategies to accelerate growth including refining our enterprise sales motion, flexible usage-based contracts and significant new platform feature releases like our Chat First Incident Management and our SRE agent. Recent product innovation has led to strategic wins as more established highly regulated businesses like banks operate more like tech companies. A Fortune 100 financial institution expanded with us to support a new SRE model deployment. PagerDuty's ability to support the company's high-efficiency operational goals and the bank's shift towards a modern SRE model led to a six-figure early renewal and enterprise-wide expansion.

Strategic wins like these underscore why we continue to win new customers. For the fifth consecutive quarter, we acquired over 600 new customers and total customers on the platform grew 14% year over year. We continue to see progress in our international markets, specifically Asia Pacific and Japan where enterprise focus has led to a marquee land of a television broadcasting and media company which we expect will expand over time in the North American and EMEA markets.

Our efforts to stabilize retention and accelerate new and expansion business are bearing fruit. Large enterprises in the retail and the automotive sectors as well as fast-growing native AI and defense tech companies like CoreWeave and Endural are benefiting from the value and resilience that PagerDuty provides. A long-term strategic retailer in North America executed a renewal and expansion with us on the operations cloud and runbook automation with a multi-year seven-figure agreement.

This win was also a total competitive displacement. PagerDuty aligned its integrated automation platform with the customer's executive leadership and corporate initiatives to support their objective of advanced operational efficiency. A leading global automotive manufacturer in EMEA turned to PagerDuty as they standardize incident management across their global IT operations. This expansion is critical as the company transitions to a fully electric vehicle range requiring always-on reliability to avoid costly plant disruptions.

Previously their incident response was fragmented across siloed teams which created operational blind spots. With PagerDuty, the customer benefits from standardized incident response, 24/7 global coverage and clear accountability for faster resolution times. The adoption of PagerDuty by native AI companies as new lands and expansions demonstrates how our platform meets the evolving needs of the AI era. Innovative AI startups who joined the platform during the quarter included LifeSpun, Drop Zone AI and Simile AI.

AI is the new operational risk layer for enterprise. It's accelerating software development and deployment at unprecedented velocity, leading to a new magnitude of complexity in the production environment. In addition to being higher in volume and more complex, AI-driven failures can be less predictable and less visible and no customer segment is immune. AI failure in large enterprises can become major operational failures due to automation. Even AI native firms are vulnerable to disruptions, eroding the trust in AI products.

This creates more demand for the PagerDuty platform, drives increased event and incident volume, and ultimately increases usage. There is no platform better positioned than the PagerDuty Operations Cloud to resolve these operational failures and even prevent them before the disruption happens. PagerDuty is at the forefront of autonomous operations. The three pillars of our platform strategy are AI and automation, full lifecycle, incident management, and platform and ecosystem extensibility.

Our SRE agent, launched in October, highlights our focus on AI and automation. Acting as a virtual responder, the SRE agent gathers signals across the tech stack, performs approved remediation and maintains an operational shared memory to learn from past incidents. The chat native interface in Slack and Microsoft Teams directly integrated to AI agents and post-incident reviews creates a full lifecycle experience and modernizes the responder experience.

Our AI ecosystem, supported by marquee partnerships including Anthropic, Claude, Cursor and LangChain, enables PagerDuty's agents to interact across whatever AI-enabled surface a developer chooses. PagerDuty has fast become the new control plane for AI, helping customers to orchestrate and manage agents with context, clarity and fidelity. That made us the category leader first for incident management and then for digital operations. Those agents are now running at machine speed where they can reason and act with or without human involvement.

According to PagerDuty's recent research, expensive cascading failure scenarios can cost enterprises more than $1 million an hour. PagerDuty is paving the way for unprecedented business continuity and resilience for customers moving towards autonomous operations. The operations cloud connects everything from developer tools, monitoring and systems of record. Then it intelligently orchestrates resources with AI to drive faster, smarter decisions so issues are identified even before code ships.

If and when a problem does arise in production, the platform analyzes the context and resolves issues expeditiously. It automatically updates systems of record for compliance and reporting. In this era of fast-moving technological disruption, intelligence and automation work together to keep operations running smoothly, protecting revenue and reputation. This product innovation and our new pricing combined have been key to attracting new customers and encouraging existing customers to expand.

Australia's leading digital bank became a new PagerDuty customer in the quarter on the platform with a seven-figure multi-year deal. This engagement underscores PagerDuty's position as a strategic operations partner. Prior to deploying PagerDuty, the customer experienced several major outages unmanageable with a homegrown incident management system. By adopting PagerDuty Incident Management, AIOps and Runbook Automation, the customer is reducing systemic risk.

A leading not-for-profit financial services organization in North America expanded its relationship with us in a multi-year multimillion-dollar contract for the PagerDuty Operations Cloud. Access to the full PagerDuty platform via the Operations Cloud offering enabled a customer to align its operational maturity goals to the platform's capabilities. The breadth of the platform gave the customer the confidence to consolidate multiple point solutions to spend with PagerDuty.

A global consulting company and customer since 2018 renewed a six-figure expansion this quarter. PagerDuty's best-in-class bi-directional interoperability with their system of record was the winning competitive advantage over an observability vendor. PagerDuty is improving the end-user experience by reducing downtime and driving operational transformation. Our platform mitigates systemic risk not only for our enterprise customers but also for our over 650 non-for-profit customers in turn helping them to amplify their mission-driven impact.

In Q1 we announced our latest impact cohort including grants to eight nonprofits focused on health care, humanitarian aid and crisis response. PagerDuty again was recognized for its workplace culture and industry leadership. Inspiring Workplaces named PagerDuty as an employer of choice. 2026 Gigaom Radar for incident response platforms named PagerDuty a leader and outperformer for the fourth consecutive year for teams dealing with noisy observability, coordination breakdowns or inconsistent response.

This acknowledgment is a clear signal that PagerDuty is leading the market and in the evolution to AI-first operations. In Q1 we improved gross retention sequentially, demonstrated ongoing new customer acquisition momentum, and delivered strong expansion in our key markets, large enterprise and AI natives. Our disciplined execution and product innovation led to consistent margin expansion. Before I hand it over to Howard, I want to thank all of our current and past coverage analysts and investors for your support and counsel.

This is my 29th and likely last earnings call with PagerDuty and while it hasn't always been easy. It has always been professional, constructive and even fun. You held us to a high standard and I've learned enormously from this community. I appreciate your investment in PagerDuty and both your past and ongoing support of our team. Leading PagerDuty for the last 10 years has been an honor and a joy. We have navigated countless market transitions while continuing to innovate for our customers, expanding our customer base from less than 5,000 when I started to more than 36,000 strong today.

Together we've shaped the industry, first as a leading voice for DevOps, then defining the digital operations category, and most recently leading the market in AI-first operations. We grew the company more than tenfold while expanding our profitability and we became the definitive category leader, one that evolved from a single cloud app to an AI-first platform. The most important and innovative companies in the world trust and rely on us. I'm incredibly proud of our people, past and current, and grateful to our customers, many of whom I've partnered with personally, for their trust in transitioning to Executive Chair.

I am incredibly grateful for the opportunity to be part of an outstanding team and I'm optimistic for the enormous opportunity ahead. I've had the opportunity to get to know John and we've already built a strong partnership. He has my complete confidence and support in leading the next chapter for PagerDuty and I believe he will earn yours too. Thank you.

Howard Wilson, CFO

Thank you, Jen, and good day to everyone joining us on this afternoon's call. Before I dive into the financials, I want to thank Jen for her exceptional leadership, partnership, and stewardship of PagerDuty over the years. I share her enthusiasm in welcoming John to the executive team. Unless otherwise stated, all references to our expenses and operating results on this call are on a non-GAAP basis and are reconciled to our GAAP results in the earnings release that was posted on our investor relations website before the call.

Before reviewing our first quarter financial results, I want to highlight a meaningful inflection point in our business model transformation. The operations cloud pricing and packaging completed its first full quarter in limited general availability. Early results showed traction. The ARR of customers on this model nearly doubled from Q4 to Q1. Of our customers spending over $100,000 a year, over 15 have transitioned to the model, which gives us confidence in the business model transformation to usage-based pricing.

Moving to results in the first quarter of FY27, we delivered solid performance exceeding our revenue and operating margin guidance ranges. We continue to see strong demand signals, in particular new customer acquisition, existing customer expansion, and platform usage growth. Our customer success and product initiatives contributed to an improvement in our gross retention from Q4 to Q1, and we expect this to gradually improve through the year. Revenue for the quarter was $121 million, up 1% year over year, with international revenue increasing 3% annually, contributing 29% of total revenue.

Q1 gross margin was 86% at the high end of our 84 to 86% target range. Operating income was $30 million or 25% of revenue, compared to $24 million or 20% of revenue in the same quarter last year. This margin expansion reflects our rigorous focus on efficiency and operational execution. GAAP net income was $10.2 million, our fourth consecutive quarter of GAAP profitability. We're continuing our progress on the path to sustained GAAP profitability.

Annual recurring revenue exiting Q1 was $496 million, in line with the amount in the year-ago period. Customers spending over $100,000 in annual recurring revenue was 860, up 1% year over year. Dollar-based net retention was 97%. We expect our continued customer success and renewal initiatives, along with our operations cloud pricing, to result in stabilization of DBNR and for it to gradually increase throughout the year. Total paid customers grew to 15,380 in Q1, adding 133 net new customers since the year-ago period.

Free and paid customers on our platform grew to over 36,000, an increase of approximately 14% compared to Q1 of last year. In terms of cash flow for the quarter, cash from operations was $44 million or 37% of revenue, and free cash flow was $41 million or 34% of revenue. This strong cash generation gives us the financial stability and flexibility to continue to invest in our go-to-market, trends, and AI product development while maintaining our commitment to shareholder returns.

Turning to the balance sheet, we ended the quarter with $444 million in cash, cash equivalents, and investments. On a trailing 12-month basis, billings were $497 million, an increase of 1% compared to a year ago. At the end of Q1, total RPO was approximately $441 million, increasing 3% year over year. Of this amount, approximately $316 million or 72% is expected to be recognized over the next 12 months, $100 million or 23% over months 13 to 24, and the remainder thereafter.

During the quarter, we repurchased 8.5 million shares for $63 million and completed the authorized $200 million share repurchase program. We view our current valuation as a compelling opportunity. Looking ahead, our strong balance sheet provides us significant flexibility to execute on our priorities while returning capital to shareholders. And today, we have announced our latest $100 million share repurchase program. Now turning to guidance for the second quarter of fiscal 2027, we expect revenue in the range of $122 to $124 million, with the midpoint approximately flat year over year, and net income per diluted share attributable to PagerDuty Inc. in the range of 29 to 31 cents. This implies an operating margin of 22 to 23%. For the full fiscal year 2027, we expect revenue in the range of $488.5 to $496.5 million, with the midpoint essentially flat year over year. This is the same range as previously provided, and net income per diluted share attributable to PagerDuty Inc. in the range of $1.27 to $1.32, an increase based on the reduced share count as a result of the completion of the buyback program.

This implies an operating margin of 24 to 25%. Before moving to questions, I would like to provide assistance with modeling FY27 on cash flow. Q1 free cash flow was elevated primarily due to overperformance on collections, which we expect to normalize in Q2. On operating margin, part of the Q1 overperformance was due to marketing program spend, which we expect to deploy in Q2. Our Q1 performance demonstrates the rigorous focus on efficiency and operational execution that underpins our business, leveraging a solid balance sheet, healthy cash balance, and strong free cash flow generation.

We possess the financial agility required to fuel our AI product development and go-to-market transformation, all while supporting a seamless transition of leadership. With that, I will open up the call for Q&A.

OPERATOR

We are ready to move to questions from our analysts. As a reminder, please use Zoom to raise your hand to join the queue. We'll pause for just a moment as we compile the Q&A roster. Okay, and our first question comes from the line of Morgan Stanley's analyst Sanjit Singh. Your line is opened.

Kristin Darrow, Analyst at Morgan Stanley

Hi everyone, this is Kristin Darrow on for Sanjit. Thanks for taking the questions here. I want to ask about the net retention rates. Really nice to see the gross retention rate improvement that you called out, but the net retention rate did take a step down from last quarter. So just curious, what gives you that confidence on the recovery and the stabilization on the net retention side?

Jennifer Tejada, Executive Chair

Sure. Thanks for the question, Kristin. I really appreciate it. It's nice to see you. One, we have really started to see good progress with our early cohort in the pricing transition. So I spoke about a number of customers in prepared remarks who frankly had come to us with a view of potentially needing to downgrade as a result of seat-based pressure. Following their ability to understand the flexibility and access to new products on the platform, as well as the flexibility based on usage-based pricing, they actually expanded with us in the timeframe, and we're quite early in that transition, but it is progressing well.

As a reminder, we kicked off early access in Q3, limited general availability in Q4, and we've opened that up to a much broader set of customers this term, this quarter. In addition, we're seeing very strong demand signals. So Howard mentioned our fifth consecutive quarter of over 600 new customer logos. Those tend to be early adopters. They're a demonstration that our PLG motion is still a competitive advantage, but also that the most innovative developers and native AI startups are choosing PagerDuty.

And as we know from history, those types of new customers tend to grow organically as they expand their businesses themselves. And then lastly, what we're also seeing is the benefit of improving the way we renew customers, offering multi-year, multi-product agreements. So we started to mitigate.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.