PagerDuty (PD)

IT incident response platform PagerDuty (NYSE:PD) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 7.8% year on year to $119.8 million. The company expects next quarter’s revenue to be around $123.5 million, close to analysts’ estimates. Its non-GAAP profit of $0.24 per share was 28.3% above analysts’ consensus estimates.

Company Overview

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.

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.

A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last three years, PagerDuty grew its sales at a 16.2% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds.

This quarter, PagerDuty grew its revenue by 7.8% year on year, and its $119.8 million of revenue was in line with Wall Street’s estimates. Company management is currently guiding for a 6.5% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 8.5% over the next 12 months, a deceleration versus the last three years. This projection is underwhelming and implies its products and services will face some demand challenges.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

PagerDuty’s billings came in at $113.4 million in Q1, and over the last four quarters, its growth was underwhelming as it averaged 7% year-on-year increases. This performance mirrored its total sales and suggests that increasing competition is causing challenges in acquiring/retaining customers.

PagerDuty reported 15,247 customers at the end of the quarter, a sequential increase of 133. That’s a little better than last quarter and quite a bit above the typical growth we’ve seen over the previous year. Shareholders should take this as an indication that PagerDuty has made some recent improvements to its go-to-market strategy and that they are working well for the time being.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

PagerDuty is extremely efficient at acquiring new customers, and its CAC payback period checked in at 13.3 months this quarter. The company’s rapid recovery of its customer acquisition costs means it can attempt to spur growth by increasing its sales and marketing investments.

For software companies like PagerDuty, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

PagerDuty’s gross margin is one of the highest in the software sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in new products and sales during periods of rapid growth to achieve outsized profits at scale. As you can see below, it averaged an elite 83.3% gross margin over the last year. That means PagerDuty only paid its providers $16.67 for every $100 in revenue.

PagerDuty produced a 84% gross profit margin in Q1, marking a 1.3 percentage point increase from 82.6% in the same quarter last year. PagerDuty’s full-year margin has also been trending up over the past 12 months, increasing by 1.4 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

PagerDuty’s expensive cost structure has contributed to an average operating margin of negative 10.2% over the last year. Unprofitable software companies require extra attention because they spend heaps of money to capture market share. As seen in its historically underwhelming revenue performance, this strategy hasn’t worked so far, and it’s unclear what would happen if PagerDuty reeled back its investments. Wall Street seems to think it will face some obstacles, and we tend to agree.

Over the last year, PagerDuty’s expanding sales gave it operating leverage as its margin rose by 13.1 percentage points. Still, it will take much more for the company to reach long-term profitability.

PagerDuty’s operating margin was negative 8.6% this quarter. The company's consistent lack of profits raise a flag.

If you’ve followed StockStory for a while, you know 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 has shown robust cash profitability, driven by its attractive business model and cost-effective customer acquisition strategy that enable it to invest in new products and services rather than sales and marketing. The company’s free cash flow margin averaged 23.2% over the last year, quite impressive for a software business. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

PagerDuty’s free cash flow clocked in at $28.99 million in Q1, equivalent to a 24.2% margin. This cash profitability was in line with the comparable period last year and above its one-year average.

Over the next year, analysts’ consensus estimates show they’re expecting PagerDuty’s free cash flow margin of 23.2% for the last 12 months to remain the same.

Companies with more cash than debt have lower bankruptcy risk.

PagerDuty is a well-capitalized company with $597.1 million of cash and $451.4 million of debt on its balance sheet. This $145.7 million net cash position is 9.8% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by PagerDuty’s strong growth in customers this quarter. We were also glad its full-year EPS guidance trumped Wall Street’s estimates. On the other hand, its full-year revenue guidance was lowered and came in below expectations. The company's EPS guidance for next quarter also fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 2.6% to $15.69 immediately after reporting.

Updated: June 23, 2025 at 10:05 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

PagerDuty has a few positive attributes, but it doesn’t top our wishlist. Although its revenue growth was a little slower over the last three years and analysts expect growth to slow over the next 12 months, its efficient sales strategy allows it to target and onboard new users at scale. Tread carefully with this one, however, as its operating margins are low compared to other software companies.

PagerDuty’s price-to-sales ratio based on the next 12 months is 2.5x. This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $18.45 on the company (compared to the current share price of $14.29).