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PagerDuty (NYSE:PD) Exceeds Q2 Expectations, Stock Soars


Full Report / September 02, 2021
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IT incident response platform PagerDuty (NYSE:PD) reported strong growth in the Q2 FY2022 earnings announcement, with revenue up 33.1% year on year to $67.5 million. PagerDuty made a GAAP loss of $29.6 million, down on its loss of $14.6 million, in the same quarter last year.

PagerDuty (PD) Q2 FY2022 Highlights:

  • Revenue: $67.5 million vs analyst estimates of $65.5 million (3.08% beat)
  • EPS (non-GAAP): -$0.13 vs analyst estimates of -$0.15
  • Revenue guidance for Q3 2022 is $70 million at the midpoint, above analyst estimates of $68.3 million
  • The company lifted revenue guidance for the full year, from $269.5 million to $274.5 million at the midpoint, a 1.85% increase
  • Free cash flow was negative $12.8 million, compared to negative free cash flow of -$350 thousand in previous quarter
  • Customers: 18,000, up from 16,800 in previous quarter
  • Gross Margin (GAAP): 82.2%, down from 83.6% previous quarter

Founded in 2009, PagerDuty (NYSE:PD) is a software as a service platform that helps companies respond to IT incidents fast and make sure that any downtime is minimized.

What started as a plan to build a bootstrapped software company, retire early and sip drinks on the beach has very quickly outgrown the wildest dreams of the three ex-Amazon founders.

The name PagerDuty comes from a software engineering practice which used to literally involve a pager on your belt that went off when the piece of the software you were responsible for broke and you were on-call to fix it, even in the middle of the night.

Today the methods of communication have changed but the principle stays the same. If a part of a website goes down, PagerDuty helps teams identify the source of the problem, alerts the engineers who are on-call to fix it, informs relevant stakeholders and provides collaborative space to work on the issue. This ensures that there is a clear accountability for incident response and that any issues are fixed fast.

The on-call incident response practice is something that pretty much every large engineering team has to establish and they either build the tools for it internally or use a third party tool like PagerDuty.

Software is eating the world, and as the number of enterprise apps grows, so does the need to effectively monitor them and keep them online.

As PagerDuty invests in gaining more market share, we expect it to come up against competition from Splunk (NASDAQ:SPLK), Dynatrace (NYSE:DT), Datadog (NASDAQ:DDOG) and Atlassian (NASDAQ:TEAM).

Sales Growth

As you can see below, PagerDuty's revenue growth has been strong over the last year, growing from quarterly revenue of $50.7 million, to $67.5 million.

PagerDuty Total Revenue

And unsurprisingly, this was another great quarter for PagerDuty with revenue up an absolutely stunning 33.1% year on year. Quarter on quarter the revenue increased by $3.94 million in Q2, which was in line with Q1 2022. This steady quarter-on-quarter growth shows the company is able to maintain a strong growth trajectory.

Analysts covering the company are expecting the revenues to grow 23.2% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

Customer Growth

You can see below that PagerDuty reported 18,000 customers at the end of the quarter, an increase of 1,200 on last quarter. That is a bit slower customer growth than last quarter but quite a bit still above what we have typically seen over the last year, suggesting sales momentum is coming off slightly after a stronger quarter.

PagerDuty Customers

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. PagerDuty's gross profit margin, an important metric measuring how much money there is left after paying for servers, licences, technical support and other necessary running expenses was at 82.2% in Q2.

PagerDuty Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.82 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it going down over the last year, this is still a great gross margin, that allows companies like PagerDuty to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.

Key Takeaways from PagerDuty's Q2 Results

With a market capitalization of $3.66 billion PagerDuty is among smaller companies, but its more than $354.5 million in cash and the fact it is operating close to free cash flow break-even put it in a robust financial position to invest in growth.

PagerDuty' revenue guidance for the next quarter looks quite a bit better than what the analysts were expecting. And we were also excited to see the really strong revenue growth. On the other hand, it was unfortunate to see the slowdown in customer growth and gross margin deteriorated a little. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is up 8.2% on the results and currently trades at $47.87 per share.

Is Now The Time?

When considering PagerDuty, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think PagerDuty is a solid business. Its revenue growth has been strong. And while its customer acquisition costs are higher than we like to see, the good news is its impressive gross margins are indicative of excellent business economics.

PagerDuty's price to sales ratio based on the next twelve months is 12.4, suggesting that the market is expecting more steady growth, relative to the hottest tech stocks. There are definitely things to like about PagerDuty and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.

The Wall St analysts covering the company had a one year price target of $50.6 per share right before these results, implying that they saw upside in buying PagerDuty even in the short term.

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