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PagerDuty (NYSE:PD) Q3 Sales Beat Estimates, Stock Soars


Full Report / December 01, 2022
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IT incident response platform PagerDuty (NYSE:PD) announced better-than-expected results in the Q3 FY2023 quarter, with revenue up 31.2% year on year to $94.2 million. The company expects that next quarter's revenue would be around $99 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. PagerDuty made a GAAP loss of $32.8 million, down on its loss of $26.3 million, in the same quarter last year.

PagerDuty (PD) Q3 FY2023 Highlights:

  • Revenue: $94.2 million vs analyst estimates of $92.8 million (1.51% beat)
  • EPS (non-GAAP): $0.04 vs analyst estimates of -$0.04 ($0.07 beat)
  • Revenue guidance for Q4 2023 is $99 million at the midpoint, roughly in line with what analysts were expecting
  • Free cash flow was negative $2.25 million, down from positive free cash flow of $1.01 million in previous quarter
  • Customers: 15,265, up from 15,174 in previous quarter
  • Gross Margin (GAAP): 80.8%, down from 83.2% 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 two years, growing from quarterly revenue of $53.7 million in Q3 FY2021, to $94.2 million.

PagerDuty Total Revenue

And unsurprisingly, this was another great quarter for PagerDuty with revenue up 31.2% year on year. But the growth did slow down a little compared to last quarter, as PagerDuty increased revenue by $3.95 million in Q3, compared to $4.88 million revenue add in Q2 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 26.1% year on year to $99 million, slowing down from the 32.4% 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 24% over the next twelve months.

Customer Growth

You can see below that PagerDuty reported 15,265 customers at the end of the quarter, an increase of 91 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 80.8% in Q3.

PagerDuty Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.80 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.

Cash Is King

If you have followed 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 burned through $2.25 million in Q3, with cash flow turning negative year on year.

PagerDuty Free Cash Flow

PagerDuty has burned through $8.46 million in cash over the last twelve months, resulting in a negative 2.42% 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 Q3 Results

With a market capitalization of $1.98 billion PagerDuty is among smaller companies, but its more than $262.3 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 glad to see the improvement in gross margin. On the other hand, it was unfortunate to see the 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 is up 5.93% on the results and currently trades at $23.9 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. We would expect growth rates to moderate from here, but its revenue growth has been strong, over the last two years. 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 4.7x, 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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