PagerDuty (PD)

Digital operations platform PagerDuty (NYSE:PD) met Wall Street’s revenue expectations in Q2 CY2025, with sales up 6.4% year on year to $123.4 million. The company expects next quarter’s revenue to be around $125 million, close to analysts’ estimates. Its non-GAAP profit of $0.30 per share was 49.3% above analysts’ consensus estimates.

Company Overview

Born from the frustration of developers being woken up by unprioritized alerts, PagerDuty (NYSE:PD) is a digital operations management platform that helps organizations detect and respond to IT incidents, outages, and other critical issues in real-time.

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.

PagerDuty competes with incident management and IT operations platforms including Atlassian's Opsgenie (NASDAQ:TEAM), Splunk (NASDAQ:SPLK), ServiceNow (NYSE:NOW), and Everbridge (NASDAQ:EVBG), as well as offerings from companies like Red Hat (part of IBM) and xMatters (acquired by Everbridge).

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last three years, PagerDuty grew its sales at a 14.1% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the software sector, which enjoys a number of secular tailwinds.

This quarter, PagerDuty grew its revenue by 6.4% year on year, and its $123.4 million of revenue was in line with Wall Street’s estimates. Company management is currently guiding for a 5.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 6.3% over the next 12 months, a deceleration versus the last three years. This projection doesn't excite us and suggests its products and services will see some demand headwinds.

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 $113.9 million in Q2, and over the last four quarters, its growth was underwhelming as it averaged 6% year-on-year increases. This alternate topline metric grew slower than total sales, meaning the company recognizes revenue faster than it collects cash - a headwind for its liquidity that could also signal a slowdown in future revenue growth.

PagerDuty reported 15,322 customers at the end of the quarter, a sequential increase of 75. That’s a little worse than last quarter but quite a bit above what we’ve observed over the last 12 months. We’ve no doubt shareholders would like to see the company accelerate its sales momentum.

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 16.4 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 83.8% gross margin over the last year. That means PagerDuty only paid its providers $16.19 for every $100 in revenue.

In Q2, PagerDuty produced a 84.6% gross profit margin, marking a 1.9 percentage point increase from 82.7% in the same quarter last year. PagerDuty’s full-year margin has also been trending up over the past 12 months, increasing by 1.6 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).

Although PagerDuty was profitable this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 5.9% 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 14.6 percentage points. Still, it will take much more for the company to show consistent profitability.

This quarter, PagerDuty generated an operating margin profit margin of 2.9%, up 16.7 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

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 22.2% 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 $30.21 million in Q2, equivalent to a 24.5% margin. The company’s cash profitability regressed as it was 4.2 percentage points lower than in the same quarter last year, but it’s still above its one-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends are more important.

Over the next year, analysts predict PagerDuty’s cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 22.2% for the last 12 months will increase to 23.8%, giving it more flexibility for investments, share buybacks, and dividends.

Companies with more cash than debt have lower bankruptcy risk.

PagerDuty is a well-capitalized company with $567.9 million of cash and $398.2 million of debt on its balance sheet. This $169.7 million net cash position is 11.8% 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 convincing operating profit beat despite just in line revenue in the quarter. On the other hand, billings fell short of Wall Street’s estimates and the company's EPS guidance for next quarter missed. Overall, this was a softer quarter. The stock traded down 6.5% to $14.60 immediately following the results.

Updated: November 8, 2025 at 9:16 PM EST

Before deciding whether to buy PagerDuty or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

PagerDuty isn’t a terrible business, but it doesn’t pass our quality test. Although its revenue growth was solid over the last five years, it’s expected to deteriorate over the next 12 months and its ARR has disappointed and shows the company is having difficulty retaining customers and their spending. And while the company’s efficient sales strategy allows it to target and onboard new users at scale, the downside is its operating margins are low compared to other software companies.

PagerDuty’s price-to-sales ratio based on the next 12 months is 2.9x. While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $18.88 on the company (compared to the current share price of $15.55).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.