IT incident response platform PagerDuty (NYSE:PD) reported Q3 FY2024 results beating Wall Street analysts' expectations, with revenue up 15.4% year on year to $108.7 million. The company expects next quarter's revenue to be around $110.5 million, in line with analysts' estimates. It made a non-GAAP profit of $0.20 per share, improving from its profit of $0.04 per share in the same quarter last year.
PagerDuty (PD) Q3 FY2024 Highlights:
- Revenue: $108.7 million vs analyst estimates of $107.7 million (0.9% beat)
- EPS (non-GAAP): $0.20 vs analyst estimates of $0.14 (43.7% beat)
- Revenue Guidance for Q4 2024 is $110.5 million at the midpoint, roughly in line with what analysts were expecting
- Free Cash Flow of $15.23 million, up 74.3% from the previous quarter
- Customers: 15,049, down from 15,146 in the previous quarter
- Gross Margin (GAAP): 81.9%, up from 80.9% 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 this challenge, companies and their engineering teams have turned to a range of cloud monitoring tools that provide them with the visibility to troubleshoot 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).
As you can see below, PagerDuty's revenue growth has been strong over the last two years, growing from $71.76 million in Q3 FY2022 to $108.7 million this quarter.
This quarter, PagerDuty's quarterly revenue was once again up 15.4% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $1.10 million in Q3 compared to $4.37 million in Q2 2024. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.
Next quarter, PagerDuty is guiding for a 8.6% year-on-year revenue decline to $110.5 million, a further deceleration from the 28.6% year-on-year decrease it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 11.8% over the next 12 months before the earnings results announcement.
PagerDuty reported 15,049 customers at the end of the quarter, a decrease of 97 from the previous quarter. That's slower customer growth than what we've observed in past quarters, suggesting that the company's customer acquisition momentum is slowing.
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 81.9% in Q3.
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. PagerDuty's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity. It's also comforting to see its gross margin remain stable, indicating that PagerDuty is controlling its costs and not under pressure from its competitors to lower prices.
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 $15.23 million in Q3, turning positive over the last year.
PagerDuty has generated $60.39 million in free cash flow over the last 12 months, a solid 14.4% 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 Q3 Results
With a market capitalization of $2.05 billion, PagerDuty is among smaller companies, but its $575.3 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.
It was great to see PagerDuty blow past analysts' EPS and free cash flow estimates this quarter. That really stood out as a positive in these results. On the other hand, its customer growth slowed, but at least the revenue coming in from existing customers was strong enough to let the company slightly beat Wall Street's expectations.
In terms of company updates, three key events occurred during the quarter: 1) PagerDuty closed a $350 million convertible senior note offering, 2) It acquired Jeli, an all-in-one incident management solution, and 3) It appointed Eric Johnson, previously Chief Information Officer (CIO) at SurveyMonkey, as its CIO.
Overall, this was a mixed quarter for PagerDuty, but the stock is up 5.7% after reporting, likely because of its EPS and free cash flow performance. It currently trades at $23.05 per share.
Is Now The Time?
PagerDuty may have had a bad 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.
PagerDuty's price to sales ratio based on the next 12 months is 4.3x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. In the end, beauty is in the eye of the beholder. While PagerDuty wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.
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