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


Full Report / September 16, 2022
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IT incident response platform PagerDuty (NYSE:PD) reported Q2 FY2023 results beating Wall St's expectations, with revenue up 33.6% year on year to $90.2 million. The company expects that next quarter's revenue would be around $93 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. PagerDuty made a GAAP loss of $38.5 million, down on its loss of $29.6 million, in the same quarter last year.

PagerDuty (PD) Q2 FY2023 Highlights:

  • Revenue: $90.2 million vs analyst estimates of $88.2 million (2.3% beat)
  • EPS (non-GAAP): -$0.04 vs analyst estimates of -$0.08
  • Revenue guidance for Q3 2023 is $93 million at the midpoint, above analyst estimates of $92.5 million
  • The company reconfirmed revenue guidance for the full year, at $367.5 million at the midpoint
  • Free cash flow of $1.01 million, up from negative free cash flow of $5.83 million in previous quarter
  • Customers: 15,174, up from 15,040 in previous quarter
  • Gross Margin (GAAP): 79.6%, down from 82.2% 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 very strong over the last year, growing from quarterly revenue of $67.5 million, to $90.2 million.

PagerDuty Total Revenue

And unsurprisingly, this was another great quarter for PagerDuty with revenue up 33.6% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $4.88 million in Q2, compared to $6.86 million in Q1 2023. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates PagerDuty is expecting revenue to grow 29.5% year on year to $93 million, slowing down from the 33.4% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 26.3% over the next twelve months.

Customer Growth

You can see below that PagerDuty reported 15,174 customers at the end of the quarter, an increase of 134 on last quarter. That is a little slower customer growth than what we are used to seeing lately, suggesting that the customer acquisition momentum is slowing a little bit.

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 79.6% in Q2.

PagerDuty Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.79 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 good 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.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. PagerDuty's free cash flow came in at $1.01 million in Q2, turning positive year on year.

PagerDuty Free Cash Flow

PagerDuty has burned through $4.42 million in cash over the last twelve months, resulting in a negative 1.35% free cash flow margin. This below average FCF margin is a result of PagerDuty's need to invest in the business to continue penetrating its market.

Key Takeaways from PagerDuty's Q2 Results

With a market capitalization of $2.28 billion PagerDuty is among smaller companies, but its more than $278.3 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.

It was good to see PagerDuty deliver strong revenue growth this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, there was a deterioration in gross margin and there was a slowdown in customer growth. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company currently trades at $24.6 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 5.2x, 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 it doesn't trade at an unreasonable price point.

The Wall St analysts covering the company had a one year price target of $36.7 per share right before these results, implying that they saw upside in buying PagerDuty even in the short term.

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