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PagerDuty (NYSE:PD) Q3 Sales Beat Estimates, Stock Jumps 13.1%


Full Report / December 07, 2021
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IT incident response platform PagerDuty (NYSE:PD) beat analyst expectations in Q3 FY2022 quarter, with revenue up 33.4% year on year to $71.7 million. Guidance for next quarter's revenue was $76 million at the midpoint, 3.14% above the average of analyst estimates. PagerDuty made a GAAP loss of $26.3 million, down on its loss of $20.6 million, in the same quarter last year.

PagerDuty (PD) Q3 FY2022 Highlights:

  • Revenue: $71.7 million vs analyst estimates of $70.1 million (2.29% beat)
  • EPS (non-GAAP): -$0.07 vs analyst estimates of -$0.09
  • Revenue guidance for Q4 2022 is $76 million at the midpoint, above analyst estimates of $73.6 million
  • Free cash flow of $1.78 million, up from negative free cash flow of $12.8 million in previous quarter
  • Customers: 14,486, up from 14,100 in previous quarter
  • Gross Margin (GAAP): 83.2%, down from 85.7% same quarter last year

Started by three former Amazon engineers, 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 very strong over the last year, growing from quarterly revenue of $53.7 million, to $71.7 million.

PagerDuty Total Revenue

And unsurprisingly, this was another great quarter for PagerDuty with revenue up 33.4% year on year. On top of that, revenue increased $4.22 million quarter on quarter, a solid improvement on the $3.94 million increase in Q2 2022, and even a sign of slight acceleration of growth.

Analysts covering the company are expecting the revenues to grow 22.8% over the next twelve months, although estimates are likely to change post earnings.

Customer Growth

You can see below that PagerDuty reported 14,486 customers at the end of the quarter, an increase of 386 on last quarter. That is a little better customer growth than last quarter and quite a bit above the typical customer growth we have seen lately, demonstrating that the business itself has good sales momentum. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is working very well.

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, licenses, technical support and other necessary running expenses was at 83.2% in Q3.

PagerDuty Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.83 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is 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 Q3 Results

With a market capitalization of $2.68 billion PagerDuty is among smaller companies, but its more than $359.7 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.

We were very impressed by PagerDuty’s very strong acceleration in customer growth this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company is up 13.1% on the results and currently trades at $37.96 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. Although we have other favorites, we understand the arguments that PagerDuty is not a bad 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 8.9x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that PagerDuty doesn't trade at a completely unreasonable price point.

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