IT incident response platform PagerDuty (NYSE:PD) reported Q2 FY2024 results beating Wall Street analysts' expectations, with revenue up 19.2% year on year to $107.6 million. The company also expects next quarter's revenue to be around $107.5 million, in line with analysts' estimates. Turning to EPS, PagerDuty made a non-GAAP profit of $0.19 per share, improving from its loss of $0.04 per share in the same quarter last year.
PagerDuty (PD) Q2 FY2024 Highlights:
- Revenue: $107.6 million vs analyst estimates of $104.9 million (2.59% beat)
- EPS (non-GAAP): $0.19 vs analyst estimates of $0.11 ($0.08 beat)
- Revenue Guidance for Q3 2024 is $107.5 million at the midpoint, roughly in line with what analysts were expecting
- The company reconfirmed its revenue guidance for the full year of $428 million at the midpoint
- Free Cash Flow of $8.74 million, down 58.1% from the previous quarter
- Customers: 15,146, up from 15,089 in the previous quarter
- Gross Margin (GAAP): 81.6%, up from 79.7% in the 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, increasing organizations’ reliance on digital-only solutions. As more workloads and applications move to the cloud, the reliability of the underlying cloud infrastructure becomes ever more critical, and ever more complex. To solve the challenge, companies and their engineering teams have turned to a range of cloud monitoring tools that provide them with visibility to troubleshoot the issues in real time.
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 two years, growing from $67.5 million in Q2 FY2022 to $107.6 million this quarter.
This quarter, PagerDuty's quarterly revenue was once again up 19.2% year on year. We can see that PagerDuty's revenue increased by $4.37 million quarter on quarter, which is a solid improvement from the $2.28 million increase in Q1 2024. Shareholders should applaud the acceleration of growth.
Next quarter's guidance suggests that PagerDuty is expecting revenue to grow 14.1% year on year to $107.5 million, slowing down from the 31.3% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 13% over the next 12 months before the earnings results announcement.
Customer Growth
PagerDuty reported 15,146 customers at the end of the quarter, an increase of 57 from the previous quarter. That's a little better customer growth than last quarter and quite a bit above the typical growth we've seen in past quarters, demonstrating that the business has strong sales momentum. We've no doubt shareholders will take this as an indication that PagerDuty's go-to-market strategy is working very well.
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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 81.6% in Q2.
That means that for every $1 in revenue the company had $0.82 left to spend on developing new products, sales and marketing, and general administrative overhead. Despite its recent drop, PagerDuty still has an excellent gross margin that allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. PagerDuty's free cash flow came in at $8.74 million in Q2, up 762% year on year.
PagerDuty has generated $42.9 million in free cash flow over the last 12 months, a solid 10.3% of revenue. This strong FCF margin stems from its asset-lite business model, giving it optionality and plenty of cash to reinvest in its business.
Key Takeaways from PagerDuty's Q2 Results
With a market capitalization of $2.37 billion, PagerDuty is among smaller companies, but its $504.5 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
We were impressed by PagerDuty's strong growth in customers this quarter. We were also glad that its revenue outperformed Wall Street's estimates. On the other hand, its gross margin fell. With regards to guidance, next quarter's revenue guidance was in line while non-GAAP EPS guidance was slightly below. Full year guidance was largely maintained. Overall, we think this was mixed but overall good quarter that should please shareholders. The market was likely expecting more, however, and the stock is down 2.33% after reporting, trading at $25.13 per share.
Is Now The Time?
PagerDuty may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity. Although we have other favorites, we understand the arguments that PagerDuty isn't a bad business. We'd expect growth rates to moderate from here, but its revenue growth has been solid over the last two years. On top of that, its impressive gross margins indicate excellent business economics.
The market is certainly expecting long-term growth from PagerDuty given its price to sales ratio based on the next 12 months is 5.2x. 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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