Good afternoon. My name is Ian, and I'll be your conference operator today. At this time, I would like to welcome everyone to the PagerDuty Third Quarter 2020 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the conference over to Stacey Finerman. Please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss PagerDuty's fiscal third quarter financial results. With me on today's call are Jennifer Tejada, PagerDuty's Chairperson and Chief Executive Officer; and Howard Wilson, the Company's Chief Financial Officer. Statements made on this call include forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Forward-looking statements represent our management's beliefs and assumptions only as of the date such statements are made, and we undertake no obligation to update these forward-looking statements. In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their closest GAAP equivalents. For example, other companies may calculate non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation between GAAP and non-GAAP financial measures is available in our earnings release. Further information on these and other factors that could affect the company's financial results are included in filings we make with the Securities and Exchange Commission from time to time, including the section titled Risk Factors and the company's most recent quarterly Form 10-Q previously filed with the SEC. Now I'd like to turn the call over to our CEO, Jennifer Tejada. Jennifer?

Thank you, Stacey, and thank you, everyone, for joining us this afternoon for our third quarter earnings call. Q3 was a strong quarter as revenue grew 37% year-over-year to $43 million. I'd like to share three highlights in the quarter. First, customer growth remains consistently strong as we scale. We ended the quarter with over 12,400 customers, up 15% year-over-year and growth has remained remarkably steady over the past seven quarters. We also saw sustained robust growth with our enterprise and mid-market customers that have annual recurring revenue or ARR above $100,000 growing 49% year-over-year, similar to the growth we delivered in the second quarter. These two customer metrics that show a sustained growth rate on an increasing base demonstrates the durability in our revenue growth. Next, we close some terrific large strategic deals in the quarter continuing to solidify our leadership position in enterprise. We're now partnering with two of the three largest contract -- defense contractors in the world and two of the five largest investment banks after new wins in each of these sectors. These wins, both Fortune 100 companies have a combined value of almost $2 billion [ph] in ARR. The requirements to do business in huge multinational, highly regulated verticals are not in consequential and our multiyear enterprise tech investments born in the cloud architecture and go-to-market models set us apart. Both companies show us progress of our platform, especially our machine learning and automation based features, our ease-of-use, our proven resilience in security and scale and our referenceable enterprise track record for value realization. Our go-to-market teams continue to win expansion business in our base through a laser focus on customer success, resulting in an 81% increase in customers that spend over $500 thousand in ARR a year with us. This quarter we won…

Thank you, Jennifer. We're pleased with our third quarter of fiscal 2020 results. Revenue for the third quarter increased 37% year-over-year to $42.8 million beating the high end of our guidance. Strong new customer acquisition, new product adoption and healthy growth in international geographies particularly EMEA, all contributed to our strong results. Our non-GAAP gross margins which are industry-leading remain strong at 85%. Our Non-GAAP EPS came in at negative $0.10 per share in line with our guidance. We continue to add to our track record of managing capital efficiently generating positive cash flow again this quarter. We saw 15% increased in total customers on a year-over-year basis to 12,436 customers. We were pleased to see further evidence of our success in the enterprise with customers above a $100 thousand in ARR, up 49% year-over-year to 303 customers. As Jen mentioned growth in both total customers and larger customers were in line with the growth rates we've exhibited for several quarters now demonstrating our ability to grow of a bigger base. Our dollar based net revenue retention for the quarter was 129%. This metric will fluctuate relative to the amount of new business versus expansion we do in a quarter and the variabilities of customer buying patents. As Jen mentioned in her remarks, some of the challenges we faced with ramping new sales reps has led to suboptimal execution on the expansion opportunity in our installed base, which has created some downward pressure on this metric. However, we're pleased to see our tenured sales reps continue to drive significant new and expansion deals. For example, we added two new customers in the Fortune 100 bringing us to 58 and increase the number of customers who spent over $500,000 in annual recurring revenue with us by 81% year-over-year. In fact this…

Thanks Howard. In closing I've just spend the last three days in Las Vegas with our partner Amazon Web Services, and a number of our largest and most innovative customers at AWS Reinvent. Every conversation reinforced the importance of cloud adoption and digital transformation. Andy Jassy also reminded us in his keynote Tuesday of how early we are in the cloud migration journey with only 3% of the world's $3.7 trillion IT spent in the cloud today. 97% of that market is still on-prem and with cloud migration being one of PagerDuty's most popular customer use cases I've never been more optimistic about the opportunity we have in front of us. We are focused on the long game of building a company that generates measurable value for our customers through innovation that solve big problems and on delivering durable growth on a cash efficient business model. Given the innovation we continue to build into our platform. This quarter's uptake on digital operations management and our growth in enterprise is truly an exciting time for PagerDuty. Operator, you can now please open the call up for Q&A. We're happy to take your questions.

Hey guys. Thanks for taking my questions and congrats on the David Justice hire. Obviously he did great things at Cisco and Salesforce, so that should bode well, so nice job there. I guess, I want to touch on sales and sort of the things you've brought up here in terms of execution. And as you guys think about building a business for the long term I don't care about the next couple of quarters because these things do take some time. But as you look at the pieces playing out over the next say 12 to 24 months maybe a couple of years, love to get some color or understanding of your confidence levels of returning to sort of the NDRR growth rates you had and net dollar retention rate you had and the growth rates you had driven by sort of that improvement in sales price. Just some understanding of how you think that will play out over the next 12-24 and sort of what gives you confidence in those returning those rates? Thank you

Sure. I'll start with market demand and the market opportunity, because we're in a very strong leadership position that we're extending particularly as it relates to mid-market and enterprise where our direct go-to-market motion is unique. In that we can land customers through self-service, expand them rapidly at lower values, but then deploy a direct sales organization that really provides a strong focus on customer success. And when you start with a strong market position in a market where there is credit like growing demand in my view and then add to that the fact that we are going from strength to strength from a product perspective where we've built the trust and the foundation of our business on our first product on call management, but are starting to see real validation of our ability to expand the platform to help companies solve problems beyond DevOps and IT in areas like customer service and security and others. We're very excited about that opportunity to grow within the base that we've already landed and not a single one of those customers is sold out. It's early days in the journey with all of them. So bringing on a strong leader like Dave who comes to us with significant at scale global leadership experience, but also the technical domain expertise, I think it presents a really unique opportunity. It gives me a lot of confidence. I'd also mentioned that our sales team is doing a very good job. We still had a terrific quarter growing at 37%. We're still very efficient in the way we go about it. And we're landing larger deals. You look at our customer cohort up over a 100,000 growing at 49% and customers over 500,000 growing at 81%. That's a very strong base to drive our execution improvement on top of it. So I feel I feel very optimistic about our ability to stabilize that net dollar retention rate and continue to build our position in what I think is a very early but exciting market.

Got it. Got it. And then one quick follow-up. Obviously you started rollout a number of very compelling use case based solutions basically for cloud operations, made duty for customer business intelligence, business response sorry. I just want to understand early interest in our solutions and the pricing monetization strategy for those solutions? Thank you.

Sure. There's been very strong interest in those solutions because they were built on the basis of customer demand. Our customers told us things like when we're working through an incident that has the technology-centric origin we need to be able to communicate with the balance of the business so that they can start to execute on the commercial response whether that's communicating with their customers, managing the legal or the public risks associated with these incidents that can have a material impact on business. And so business response, for instance was designed to take the intelligence that's happening within a response automate the communication of that intelligence. You don't take responders away from solving really big important problems, but give stakeholders in the loop quickly so that they can take action. And I think the important thing there is that it is about the ability to drive action automatically through the right people in the right moments. And so we're talking about microseconds seconds and minute. So there has been strong interest in that. There's been very strong interest in PagerDuty for security. In fact, that again came from demand where customers are already using us in security even though we weren't designed for that. So we've really built out our integration stack there to support those teams who are trying to work collectively with the IT and DevOps organization to make sure they're coordinated and improving their response times and reducing the threat of business loss within their businesses. And what we're seeing -- the other thing I would just add is, as we develop our ability to engage more effectively with senior leadership across our customer base and we're talking about CIOs, CTOs even in some cases CFOs, they're asking for a broader platform of services where they can take the success they've seen within the developer and IT community and drive that kind of efficiency, operational improvement and execution capability across to other teams within their organization. And I think that conversation tends to start with trust on the basis of the users that are already using PagerDuty, loved PagerDuty and they want to see that business impact in other parts of the organization.

And then Bhavan, this is Howard. I might just comment on the pricing aspect of this. In terms of platform is not -- this doesn't represent new products for us. This is the great thing about these new used cases as they emerge. The platform being a horizontal platform that can be applicable to any number of used cases, means, that the same pricing applies regardless of the use case. And so we -- essentially the work that we do is to ensure that we have the right kinds of integrations available to support this use case or we work with customers as they build custom integrations using our open API to be able to access the platform appropriately.

And suffice to say, you can expect us to monetize through the expansion of new users in new teams and new functions or divisions in a business that we don't serve today. And in some cases in services where we're going those organizations get up and running.

Got you. Very helpful. Thanks guys. Appreciate it.

Thank you.

Thanks Bhavan.

And your next question is from the line of Matt Hedberg from RBC Capital Markets.

Okay guys. Thanks for taking my question. Jen, it looks like it looks like Dave is a great addition to the team. And it was certainly good to see the growth in large deals. I think that was really impressive, obviously growing a lot faster than even revenue. I'm curious on the sales reps productivity obviously you noted that they aren't ramping quick enough but tenured reps are doing better. I'm curious, if you can comment on with the capacity that you've added, do you have the right mix of newer reps, I guess secondarily how quickly do you expect this cohort to ramp under Dave's leadership? And are there any other broader changes that Dave needs to make to really position yourself for this next leg of growth?

I think we need to continue to do what we do well and but do very efficiently and quickly. So we front-loaded the hiring in the first two quarters of the year and it did not digest the elephant fast enough. And so, it took some of our reps a longer period of time to ramp. But having said that, I'm really pleased with their progress and how they are coming up to speed. Some of the deals we mentioned today came from relatively new reps who are working under more tenured managers. And so I think that creates a platform for us to continue to improve. And I think Dave will come into the business and look to lean into things that we do well and identify new process, new opportunities to improve and build process where we don't have process and ensure that the way we go-to-market and engage with our customers continues to be focused on their success and on value, but really continuing that shift from selling on the basis of technology and feature and function to selling on the basis of driving business outcomes and realizable quantifiable value. But I think it's like any other fast-growing business. There are always new things. You have to learn how to do as you get bigger and things that we can be better at and be smarter. And despite the execution issues we have and we delivered a terrific quarter and I'm very proud of that. I think it gives Dave of really good foundation to start from and hit the ground running.

That's helpful. And then the digital operation disclosure was super helpful. I'm wondering can you talk about what happens to spend when a customer moves to more of this platform approach. And maybe what the sales cycles looked like? I assume this is more of like an up-sell or maybe there's a new cell into a new account, but curious on kind of the sales cycles for these broader platform sales versus point-based sales?

Sure. It depends -- I think it varies from one customer to the next. So one example I can think of with a large retailer. They started on our first solution with several 100 users. They expanded to over a thousand users. They started to see the benefits of Event Intelligence in particular in a trial, the benefits of automation and machine learning which allow you to do things like see a series of alerts that would historically be treated like five or six separate work streams. Using machine learning we consolidate those alerts and recognize that they are actually one particular issue and get that to the small cross-functional team that can resolve than instead of getting a 100 people involved in a process which is inefficient and takes a long time. And so they saw through a trial of benefit of that simple example of machine learning and automation and that led to them exploring other solutions in the platform. The other area where we see a lot of interest particularly from leaderships CIOs and CTOs is in our analytics product, which helps you understand that the true cost of your operations in the house. So for instance, we see a lot of customers that use the cloud to abstract legacy system so that they don't have to invest dollars and re-platform there and can shift that investment into new customer facing application innovation. Unfortunately, what can often happen is those legacy platforms are actually creating drags for all of their other new services and you think you may be saving yourselves $5 million year-over-year you're actually costing yourself $30 million in unplanned work and lost revenue due to disruption. So analytics brings all of that to the surface and also can help you heat map the health…

Super helpful. Thanks a lot.

Thank you.

And our next question is from the line of Rishi Jaluria from DA Davidson.

Hi guys. This is Hannah [ph] on for Rishi. Thank you for taking my questions. Just first, I was wondering if you could talk about traction with your PagerDuty for customer service and what expectations you have for the next 12 months?

Thank you for the question Hannah. It's nice to hear a female voice in the Q&A queue. I would say that we've had very good traction. We only just released to PagerDuty for customer service in September at our event. And I think both we, Zendesk and have been very encouraged by the results. I think within the first few weeks we saw over 30 new customers sign up to those services and these are customers that hadn't been using us within their customer service teams in the past. So I think that's really good early indicator. But we won't be providing detail on that as a separate line item in the future. Having said that, if you just think about how these set of problems play themselves out in customer service. Identifying a customer issue before the customer does it for you is really important value proposition for our customers and then resolving customer cases. That process that you need to go into. One looks a lot like an incident resolution process, so our customer service teams kind of see that as being analogists and leverage what they're learning from their developer counterparts. And two, more and more of the problems that customer service teams are trying to solve for their end customers have a technology-centric origin, something in the app didn't work. My order didn't deliver it as it arrived. My car didn't show up, whatever the case may be. The customer services are now inextricably linked with the app development and IT teams in the business and that's providing a lot of momentum there for us.

Okay, great. That's helpful. And then it sounds like you have a lot of opportunities both inside the base and with new customers. Wondering if you could talk about how you prioritize these two in balance?

Yes. Well, the good thing is because we have self-service land motion through our digital marketing engine, there you don't always have to trade-off one for the other. The vast majority of our customers land by coming to us through a qualified search. They already have a set of problems. They know our reputation. They start with a trial and experienced the product and then they swipe a credit card and go. And so that doesn't take time away from a sales rep. And then our sales teams are more focused on pure expansion and really driving upside. And occasionally our sales teams will engage with the new lands like are the large defense contractor I mentioned where they wanted more help. They didn't want to start with an online trial. They really wanted to be handheld through the process and in that particular case we came out with a much larger land. So, it's sort of various. But we see both landing new customers especially in mid-market and enterprise where the expansion opportunity is much larger as an area where we want to continue to focus by simplifying what our product does and how it works and driving account-based marketing into prospects that we think could be interesting. And at the same time continuing to make it really easy for both customers and prospects alike to discover our product, discover new products and try them online if they don't want to engage with a salesperson. And if you've met developers, they often don't really want to talk to sales people. They just want to use the product and go. And so I think the last thing I would underscore there is our growth is product lead and we win on the basis of the breadth of our platform, the depth of our technology and our track record for delivery. And that's something that will not continue to change. We're very focused on innovation on listening hard to what customers are asking us for, but also thinking about what's around the corner from them and pre-empting some of the things that we think they're going to need in the future.

Great. Thank you guys so much.

And our next question from the line of Keith Weiss from Morgan Stanley.

Hey guys. Thank you for taking the questions sitting in for Jen this evening. Nice quarter in terms of sort of new customer additions. Two questions I have, one was, in terms -- coming onboard. It sounds like he's an addition to the sales management team, kind of like being a top selling [ph] organization. What are the new kind of capabilities that you are looking for him to bring to the equation versus what you guys are looking for [Indiscernible]? What is it that he adds to the overall equation, number one? And number two, on the reduction in the net expansion rate some issues you are having there. I usually assume net expansion have been kind of moving between sales reps, again sales reps that sells into account and then a lot of the expansion comes from it and continuing to sort of switch forward with that account and then you find the opportunity. So I was wondering kind of like new sales rep ramping up would have issues with net expansion. What am I getting wrong in that equation in terms of the connection to kind of new guys?

So, I mean I'm gong to try and repeat your question because the lines was a little difficult to hear. I think your first -- the first part of your question was about what additional qualities or capabilities does Dave Justice bring to the table for our existing organizations? Let me start there. So first of all Dave brings not just sales leadership experience, but general leadership experience from two the best performing enterprise software companies on the planet. And whenever we look to bring a new leader into the organization it starts with company leadership. It starts with can we find someone who is a terrific fit to the culture, who can help us recruit the best talent, but more importantly, will also develop our talent internally. And Dave has very strong reputation for developing leadership within the organization that he's worked in. But as I mentioned also has the unique combination of both global go-to-market experience in all of the segments that we engage in, but also deep domain expertise. And those two things together are quite hard to come. He complements Steven Chung, who has been with us for some time, been largely focused on scaling a direct sales organization that frankly didn't exist when Steven got here. And some of our other leaders who have been at smaller companies or run smaller parts of the organization within those companies. Dave comes to us with significant scale. But within the large companies he's been and he's built a number of important businesses. So he led the security go-to-market organization for Cisco as it acquired a number of new businesses. It really started to build out more of a software footprint there. He is leading one of the largest parts of the go-to-market organization for Salesforce most recently and we think they are both terrific companies that we admire. So I think he brings scale. He's got a lot of experience in leading in the future that we want to build for ourselves, but it's also spent time in modern SaaS and sort of see the opportunity to build the machine that's unstoppable here. And I'm very excited about just his fit to our culture which has one that's very oriented around customer championship that is designed around taken the lead and not waiting to be asked and importantly, centers around inclusive leadership. So I think he's going to be a great addition to an already strong team that I'm very very proud. I think your second question was really hard to understand. So what I think I heard you say was can you break down what's driving some of the pressure on net dollar retention. Is that right?

Yes. I'm sorry about that background. So just want to understand the connection. I normally associate net expansion with like an existing sales rep has already sold an account and then he continues to see the accounts. So I was trying to understand why like new sales guys ramping up would be impact on net expansion versus kind of like new customer additions where it looks like you guys did really well?

So our direct go-to-market sales organization is not hundreds of people. It's pretty -- It's still emerging. And what I would say is as you grow a sales organization, scale an organization, you're changing territories and slimming those territories down and dividing them as you add more capacity. So you often have a new rep in a territory that another rep who has maybe been promoted into management has run in the past. So that new rep is essentially green with a new set of accounts and coming up to speed on the product and the services in the market and our buyers are very technical. So they also have to be deeply technically engaged as well. And historically our reps have ramped very efficiently and very quickly. But as we've added more reps I think we've just had to systematize that enablement process more effectively. And so that's been put some of the pressure on net dollar retention where the expansion opportunity is there. We're just not executing on it as quickly as we could and having to provide management oversight to help bring those reps up to speed faster. Our existing tenured reps who have been here one year, two years, three years and our existing reps, they're still performing at the same high productivity levels we saw in the past. So, we feel really good about our ability to get them there. We just needed to improve the process around it. And then the last thing that I mentioned that has some pressure on net dollar retention is just the flow-through of some of those large competitors that we mentioned last quarter that left the platform.

Got it. That's super helpful. Thank you, guys.

Thank you.

[Operator Instructions] Our next question is from the line of Rob Oliver from Baird.

Great. Thank you, guys for taking my question. One for Jennifer and then a quick follow-up for Howard. Jennifer you mentioned on the call and I think you mentioned last quarter as well that most of your deals are still uncontested. I'm assuming when you get to the sort of scale of the large banks and large aerospace and defense contractor that's probably not the case. And what I'm curious to know is where we're there are other vendors clearly in there, does you guys being an independent sort of neutral third-party resonate to the sale? And could we drill down a little bit more into the sales process. I also thought it was a really unique that the aerospace and defense contractor had not better customer before with the larger initial land. So I would love to get a little bit more color on those deals and the sales motion?

Sure. So a couple of things. One, thanks for the question because I actually like talking about this part of the process. So you're exactly -- you're absolutely right that our customers appreciate the fact that we are neutral third-party that we take singles from any software-enabled environment across not only the 350 plus out-of-the-box integrations we've built, but custom integrations that customers will build using our API keys. And they like the fact that they are coming in through kind of one catchment then being consolidated and correlated using our machine learning, our Event Intelligence to turn those events into insightful actionable work that then gets orchestrated the right people. So that neutrality we believe is very important and our customers reinforce that. The first part of your question though around the presumption that as you move into larger enterprise it's actually more competitive. The opposite is actually the case. As we move up into larger enterprise there's nobody else there, because there isn't another platform that has proven at scale with tens of thousands of users in highly regulated environment that does what we do and is liked by the user community. And so, we really don't see much competition there. In the case of the defense contractor that you mentioned it's a great example of one of our more tenured reps do has been tremendously successful selling our first product, but learn through some other customer relationships about the opportunity to go more broad in the account to new use cases and has taken that knowledge and applied it and been working with this particular contractor for a period of time and helping them to see, one, what's the size of the problem. Like how much does it cost you when something doesn't work the way it's supposed to work. And these could be machine automation system. These can be life and death situation not just IT and technology situation. So there is a high-stakes game. Reliability and trust becomes very, very important in that. And I think this particular salesperson who we're very proud of, leans hard into that value proposition, but also really through the process. I think one of the things I'm most proud of about our sales culture and the team that Steven and our sales leaders have built to-date is that these are people that genuinely want partner with their customers and help them be successful. They're in their effective partners and thought partners, they're often hands on helping customers get up and running and that lend to a long-term mindset and our long-term relationship that I don't think you can get to in a 100% frictionless environment. I think you need that kind of account management and relationship, but we try and do it in a very efficient way. Did I answer the whole question?

You did. Thank you. That's great. Jennifer, really appreciate the color. And then just a quick follow-up, Howard for you. You did call out EMEA as particularly healthy in the quarter. And I know it sounds like you guys signed up a pretty exciting deal with a large software company. Was it more broad-based than that? And can you talk a little bit to that as a trend or was it more of kind of that deal?

Yes. That's was actually interesting. This is a global software company where we were already broadly deployed within one of their subsidiaries. And they started a process with us which ended up being a little bit longer than our regular process because they were fairly rigorous in terms of the evaluation. Their subsidiary had been using more of our standard offering and hadn't taken the full set of offerings including the Event Intelligent and Modern Incident Response on those components. And so in this deal the team is very thorough intensive evaluating what they were going to get out of it in terms of both management capability and the ability to be more proactive with their business. And so, that was an example of a customer than who strategically find that for our digital operations plan with a view to being able to deploy across a fairly broad set of users at the outset, but with a very large population that we could still get to.

Great. Very helpful. Thank you both very much.

[Operator Instructions] And there are no final questions at this time. I will now turn the conference back over to Ms. Finerman for closing remarks.

Great. And thank you for everyone and thank you for taking the time for our call. I know lot of your busy with many other calls today. And have a great night, and happy holidays.

Ladies and gentlemen, this does conclude our call. You may now disconnect.