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Hello, ladies and gentlemen. Thank you for standing by, and welcome to PagerDuty's Third Quarter Fiscal Year 2026 Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the call over to your host, Christine Cloonan.

Good afternoon, everyone, and thank you for joining us to discuss PagerDuty's Third Quarter Fiscal Year 2026 Results. With me on today's call are Jennifer Tejada, PagerDuty's Chairperson and Chief Executive Officer; and Howard Wilson, our Chief Financial Officer. Before we begin, let me remind everyone that statements made on this call include forward-looking statements based on the environment as we currently see it, which 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. These forward-looking statements include our growth prospects, future revenue, operating margins, net income, cash balance and total addressable market, among others, and represent our management's belief and assumptions only as of the date such statements are made, and we undertake no obligation to update these. During today's call, we will discuss non-GAAP financial measures which are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in our earnings release, which can be found on our Investor Relations website. Further information on these and other factors that could cause the company's financial results to differ materially are included in filings we make with the Securities and Exchange Commission, including our most recently filed Form 10-K as well as our subsequent filings made with the SEC. With that, I will turn the call over to Jennifer.

Thank you, Christine. Good afternoon, and thanks for joining us today. In the third quarter, PagerDuty delivered revenue of $125 million, up 5% year-over-year. Non-GAAP operating margin of 29% exceeded guidance, expanding 750 basis points over last year. We also achieved GAAP profitability for the second consecutive quarter, evidence of disciplined execution and a durable profitable growth model. Annual recurring revenue of $497 million represents 3% year-on-year growth. New and expansion bookings were consistent with the first half, offset primarily by customers rightsizing seat licenses amidst budget caution. We accelerated our product innovation and operational efficiency in the market, which extends our leadership in the increasingly important and complex digital and emerging AI operation space. In order to build long-term and near-term shareholder value in an evolving budgetary environment, we're focused on 3 objectives: One, expanding operating and free cash flow margins as we further increase operational efficiency; two, extending our product advantage and surface area in AI operations and incident management; and three, scaling the initial successes in our go-to-market transformation to drive faster adoption of the full PagerDuty Operations Cloud and effectively monetizing the value we created for customers. This will be our sixth consecutive year of expanding operating margins as part of our commitment to profitable growth. Structural efficiency initiatives are accelerating product and business execution while lowering our cost base. With the added benefit of modern software and AI, we expect to continue expanding operating margin towards our long-term target of 30%. Demand for our platform remained strong with double-digit year-over-year growth in new customer acquisition and in total paid and free customers. Customer retention and growth remain our top priority. While the number of customers expanding with us each quarter has remained consistent throughout the year, we're focused on increasing our average transaction size by more effectively attaching new usage-based products like AIOps and PagerDuty Advance and by driving adoption through new professional services and customer success playbooks. Targeted customer retention efforts, including a more efficient, proactive coverage model, delivering high demand features and flexible pricing have stabilized customer loyalty and retention. That said, seat license compression continues to be our most significant challenge in large enterprises, where budget caution and rightsizing have had the most impact on our incident management business. During the quarter, we mitigated longer-term risk by leveraging multiyear agreements, expanding to a broader product footprint, and including professional services to ensure fast time to value. We are scaling this motion with a refined adoption and value realization program through the customer success team while at the same time, enabling the field to focus on our agentic offering, both of which will support improved retention and growth over time. We have also sharpened renewal forecasting to identify, measure and address risk earlier in what is now a multi-quarter cycle.

On a strong foundation of financial and operational discipline, we extended our product advantage in end-to-end incident management and AI and agentic operations. In the past, AIOps referred to modern event management techniques that support root cause analysis and incident triage. Now in an environment where trillions are being deployed on AI investments, yet enterprise resilience is more important than ever, the need for a new operating model has emerged. Agentic orchestration is one of many new operational aspects that enterprises must manage. The new ecosystem required to support AI includes energy, storage, compute, data management, large language models, applications, agents and the systems to test, control and run AI solutions safely and responsibly. Connected intelligent orchestration and operations of the entire AI stack and the functional automation applications across the business create new surface area that PagerDuty is uniquely positioned to support. The Operations Cloud connects seamlessly via our integration ecosystem and our model context protocol, or MCP. It intelligently detects potential disruptions and drifts and orchestrates human-led agent-based and model-centric events to prevent and resolve issues. This is the new era of AI operations, real-time orchestration and action across AI agents, applications and infrastructure. We continue to invest in our road map to ensure our position as a central nervous system for both digital and AI operations going forward. PagerDuty pioneered and defined the incident management space starting in DevOps and expanding to enterprise IT, security and business operations in service of supporting the largest and most innovative companies in building resilience at scale. In October, we released over 150 platform enhancements in the industry's first agentic end-to-end incident management offering. Customers can now leverage PagerDuty agents to address unstructured high-value time-critical work at every point in the value chain. PagerDuty agents have the unique advantage of being built on our open and neutral ecosystem of more than 700 integrations, leveraging the broadest context on causes and resolution of incidents in order to take the most effective actions. Early traction and positive customer feedback on PagerDuty's agents demonstrate the need for agentic solutions to scale operations effectively. This is especially critical as a higher volume of code is being shipped with AI. We deepened our AI ecosystem leadership in the quarter with an initial partner -- as an initial partner in the Glean MCP directory. This enables teams to adopt and accelerate value realization of the Operations Cloud. PagerDuty is also the first incident management and operations platform integrated into Spotify's developer portal for Backstage, which positions us at the forefront of modern development. Spotify noted that this fundamentally helps the organization shift from reactive to proactive issue prevention. Developers can now initiate triage, escalate and resolve incidents without leaving their workflow. Our road map prioritizes standards-based enterprise-grade interfaces for discovery and control, deep workflow integration in developer, agentic and operations tooling and an automation fabric that seamlessly weaves human responders and autonomous agents together. Compared to point solutions, PagerDuty capabilities and use cases span functions such as supply chain, IoT, storage and security. Recent global infrastructure outages also highlight the differentiated resilience that we provide every day.

Go-to-market excellence is critical to our success. We're transforming the way we go to market, especially in enterprise, where we've seen ongoing customer budget caution and organizational rightsizing and change. Over the midterm, we are establishing PagerDuty as the enterprise operations platform for AI. In the near term, we're transitioning from a traditional single-year seat-based license model to a multiyear platform usage model. On a year-over-year basis, our go-to-market execution has improved. In Q3, we advanced customer acquisition, adding 284 net new customers year-to-date, nearly 4x the total in FY '25, validating demand for our products and services. Leading AI native companies like Perplexity and Anyscale continue to choose PagerDuty as their primary operations platform. We've also continued to grow our high-value customer base, those spending over $100,000 per year with us by 5% year-over-year to 867 customers. During the quarter, we welcomed Todd McNabb to PagerDuty as our Chief Revenue Officer. He and the team are focused on accelerating this transformation to improve our land, realize and expand motion, activating new partners to support this effort. In his first 30 days, we have seen nearly 40 customers together and expect to see over 100 by the end of the year. It's clear from those conversations that our customers want to do more with us and need both our expertise and support to realize the full value of our platform. Initial progress in our shift from seat-based to usage-based pricing is encouraging. Flexible Operations Cloud packaging enables customers to seamlessly scale between human responders, agents and automated solutions without needing to precisely predetermine users and product mix. This better aligns with our customer investments to business outcomes rather than head count and licenses. In the quarter, customers across industries made multiyear commitments to PagerDuty. A leading AI native company's multiyear renewal and expansion this quarter demonstrates the need for best-in-class and AI operations -- digital and AI operations in a high-growth segment, where proven scale, resilience and strategic partnership are required. PagerDuty safeguards enterprise resilience at a global scale that competitors cannot match as the company's engineering footprint expanded rapidly from research focused to a global production platform supporting hundreds of millions of users. They required a strategic partner to support their unprecedented operational scale. As AI has accelerated, they have joined our $1 million ARR cohort. A Fortune 25 global automotive leader selected PagerDuty for a multiyear agreement as it modernizes enterprise operations, optimizes manufacturing operations and advances electric and autonomous vehicle initiatives. PagerDuty won via executive alignment and enterprise-grade capabilities to support operations beyond software teams to manufacturing and the dealer network. Critical to our selection was fast time to value, integration with their native ITSM system, Slack-first workflow automation and our strong track record of scale deployments in manufacturing. One of Australia's largest banks and a PagerDuty customer since July 2024 expanded for the second time this year during Q3 to support their ambitious growth goals. The bank added several thousand enterprise incident management licenses in a multiyear partnership, increasing their investment by nearly $1 million in ARR. The deployment is transforming operations from reactive and manual to preventative with scaled service ownership across the entire organization. PagerDuty is the bank's enterprise platform for AI. In the competitive gaming industry, a leading digital entertainment platform with millions of daily active users selected PagerDuty's Operations Cloud with flexible pricing to enhance operational resilience. Moving beyond seat-based licensing constraints, the customer chose PagerDuty's usage-based offering to reduce expansion friction and to better align their investment with business value, automating more work as they target 99.99% availability and reduced operational toil by 20%. Developers can now focus on innovation rather than operational issues. Our focus and sustained investment continue to yield returns in talent, critical drivers of long-term value creation. PagerDuty's recognition among Fortune's Best Workplaces Top 50 included this quarter's placement in the small and medium company list in technology and validates our ability to attract and retain the high-caliber employees essential to deepening our competitive moat in digital operations and expanding our offerings in AI operations. Building on the digital operations category we pioneered, AI operations is a natural growth platform to support our long-term strategy and profitable growth goals. Progress in our go-to-market transformation, along with flexible enterprise and usage-based pricing support both midterm growth and ongoing margin expansion. While these efforts will take time to be fully realized, we're executing from a position of strength, including product leadership, expanding operating margins and a strong balance sheet. Our unique platform offering and improvements in underlying execution underpin our confidence in accelerating profitable growth. I'd like to share one additional leadership update that Howard Wilson, CFO, has decided to retire during the next financial year. Howard has been at PagerDuty for 9 years and has been instrumental in growing the business to nearly $500 million in ARR. His impact has been deep and broad as he's led PagerDuty through our successful 2019 IPO and in achieving critical milestones, including positive cash flow, significant operating margin expansion, profitability and in recent quarters GAAP profitability. During his tenure, Howard has built and led incredibly capable teams in finance, corporate strategy, operations and customer success. He has opened international markets, helped to shift PagerDuty from product to platform and led us in acquiring several companies. We have started the search for a new CFO and Howard is committed to supporting a smooth succession during the 2027 financial year. With that, I'll turn it over to Howard, and we look forward to your questions.

Thank you, Jen, and good day to everyone joining us on this afternoon's call. Before reviewing our third quarter financial results, I want to highlight our strong operational discipline reflected in our second quarter of GAAP operating margin profitability. We expect to be GAAP profitable for the full year next fiscal year. And now, unless otherwise stated, all references to our expenses and operating results on this call are on a non-GAAP basis and are reconciled to our GAAP results in the earnings release that was posted on our Investor Relations website before the call. Moving to results. Revenue for the quarter was $125 million, up 5% year-over-year. Q3 GAAP net income was $160 million. This includes a onetime income tax benefit of $154 million from the release of the valuation allowance. International revenue increased 7% year-over-year contributing 29% of total revenue. Annual recurring revenue exiting Q3 grew 3% year-over-year to $497 million. Although we expected incremental ARR to be higher, there was more pressure on seat licenses and smaller expansion deal sizes this quarter. We delivered 100% dollar-based net retention compared to 102% in Q2. DBNR was negatively impacted by lower gross retention. We expect this pressure on DBNR to continue in Q4. Customers spending over $100,000 in annual recurring revenue increased 5% year-over-year, resulting in 867 by quarter end. Total paid customers grew to 15,398 in Q3, growing 2% year-over-year. Paid and free customers on our platform grew to over 34,000, an increase of approximately 13% compared to Q3 of last year. Q3 gross margin was 87%, above the high end of our 84% to 86% target range. The overachievement demonstrates PagerDuty's ability to drive its own operational efficiency, while ensuring that the platform improves that of our customers. We expect gross margin in the long term to return to within our target range as we invest further in customer success management. Operating income was $36 million or 29% of revenue compared to $25 million or 21% of revenue in the same quarter last year. The outperformance reflected our focus on increased productivity and operational execution with lower payroll and other personnel costs. In terms of cash flow for the quarter, cash from operations was $25 million or 20% of revenue, and free cash flow was $21 million or 17% of revenue. Turning to the balance sheet. We ended the quarter with $548 million in cash, cash equivalents and investments. In Q3, we repurchased 2.4 million shares under our $200 million repurchase plan. And at the end of the quarter, $162 million of the total amount authorized to be repurchased remained available. Consistent cash generation and a strong cash position provides a solid foundation for us to advance our enterprise transformation while returning capital to shareholders. Trailing 12-month billings were $496 million, an increase of 4% compared to a year ago. With respect to Q4, we anticipate trailing 12 months billings year-over-year growth to be flat. At the end of Q3, total RPO was approximately $450 million, increasing 2% year-over-year. Of this amount, approximately $287 million or 69% is expected to be recognized over the next 12 months, $101 million or 24% over months 13 to 24 and the remainder thereafter. Now turning to guidance. When we provided guidance at the end of Q2, we underestimated the current headwinds to retention. Although the number of customers churning and downgrading is trending downwards, the dollar value of the contraction, driven by seat-based reductions and customer budget caution has been larger than we forecast. As a result, we are lowering our top line guidance. To improve visibility, we have made changes to our renewal process and implemented operational changes to drive earlier customer engagement. In addition, in line with our ongoing focus on efficiency, we are increasing our full year net income and operating margin guidance. So for the fourth quarter fiscal 2026, we expect revenue in the range of $122 million to $124 million, representing a growth of 0% to 2%. And net income per diluted share attributable to PagerDuty, Inc. in the range of $0.24 to $0.25. This implies an operating margin of 21%. For the full fiscal year 2026, we now expect revenue in the range of $490 million to $492 million, representing a growth rate of 5%. The compares to the range previously provided of $493 million to $497 million. And net income per diluted share attributable to PagerDuty, Inc. in the range of $1.11 to $1.12. This implies an operating margin of 24%. This compares to our prior guide of $1 to $1.04 and 21% to 22%, respectively. This quarter, we expanded margins beyond targets, delivered our second consecutive quarter of GAAP profitability and generated strong cash flow capital we've been returning to shareholders. At the same time, we are making the strategic investments that position the business to reaccelerate ARR growth while maintaining our disciplined financial profile. In summary, we are expanding margins, generating cash and progressing the pricing and go-to-market transitions that support durable growth. We are executing from a position of strength with product leadership, disciplined capital allocation and a strong balance sheet, while staying tightly aligned to customer outcomes. On a personal note, as Jen mentioned, I intend to retire next year. My journey at PagerDuty has been one of incredible growth, and I'm proud of what we have accomplished. I appreciate our customers, partners, investors and our employees for their support, and I'm committed to supporting Jen and team in a smooth succession. With that, I will open up the call for Q&A.

Thank you, team. We have a number of hands raised already. Analysts, please feel free to raise your hand to be added to the queue. First, we'll hear from Jeff Van Rhee. Jeff, can I have you open up your line, joining us from Craig-Hallum.

Yes, there we go. I appreciate you taking the questions. And Howard, congrats, 9 years, great run. Wish you all the best. I hope you're doing what you do coming out of here. So Jen, just talk to me about the DBNR, the trend of deceleration there or declines and as Howard addressed, some gross churn issues that sounds like you're trying to figure out, how do you, from a leadership standpoint, evaluate what's going on there and compare it maybe to past periods where you've seen buyers be more cautious about spend, pulling in the reins to say, "Okay, this is like something we've seen before," or "Hey, this is something different here. What's going on?" And how is that thought process for you right now?

Yes. Thanks for the question, Jeff. And as we said, like we have a lot to be proud of in the quarter with a very strong bottom line results, 29% op margin, up 800 basis points over -- year-over-year, 70% free cash flow. But we're unsatisfied with our retention effort at this -- or our retention outcome from this quarter. It is a little different than anything that we've seen in the past in that what we saw this quarter was improvement around logo retention, so less customers leaving the platform and actually less absolute customers downgrading, but the customers that did downgrade tended to be larger downgrades in size tied to pretty significant reorganizations. And those reorganizations, you're hearing about them in the news every day, they come with sometimes thousands of jobs leaving a business, a lot of leadership turnover and change. And that's made it hard to anticipate the scale and scope of those. Having said that, some of the things that we have done to better understand what's happening in those customers is, one, take a multi-quarter view on renewal planning with the customer so that as those customers make changes, we're moving in lockstep with them. Two, giving them an alternative from a flexible pricing perspective. I talked about a gaming platform in prepared remarks, where they came to us with this challenge, we're changing our organization pretty significantly and want to reduce seat-based licensing. And by moving the seat-based licensing conversation off the table, in service of usage and a platform license, we're actually able to expand within in the quarter. So as we scale that motion, we expect this to improve as well. But overall, I'm confident in the long-term outlook because we see the same customers increasing their usage on products and features. So even though there may be less seats in the renewal, their actual usage of the platform is actually improving. And we've seen several examples of that. In addition, you've seen we've really upped our focus on new customer acquisition. And that really I think, reinforces our product leadership and our market leadership, not just in digital operations, but also in this broader new evolving category called AI operations, where I think we're going to continue to be the choice of not only AI natives who can find less expensive offerings in the market, but also large enterprises that want to grow with us. So we are really focused on those large customers and making sure we can anticipate any changes that might be coming and focus on flexible pricing and multiyear agreements to support them and to reduce risk over time with those longer-term agreements.

Helpful if I could sneak one other in. From a sales standpoint, not long ago, I know you were watching the maturity of the sales reps as what you thought would be kind of a key indicator when they hit their productivity. I think 60% at that time had been there a year. And I'm curious, now, you obviously have got some new leadership, relatively new in the sales or when sitting in the CEO chair, what are the indicators that you're watching most closely there for sales? What are you expecting? What are you looking for there?

Number one is what are customers telling us? What are they telling us about their ability to leverage and get value from the platform? How do they feel about their account coverage and continuity in terms of their engagement with PagerDuty? Are they getting the support that they need, both pre and post sale? And so Todd and I have really been focused on listening to and getting out and talking to our largest customers, and that's been not only very well received, but we've been, I think, pleasantly surprised by the love people have for our products and services, but also the admission that some of the challenges with adoption and realization is not purely due to PagerDuty's engagement model, but also the fact that their organizations are changing pretty rapidly. So they're asking for more proactive help in that area. From a field perspective, I think Allison Corley, who joined us a few quarters ago as Chief Customer Officer, has really gotten their legs under the desk and has really gotten customer success oriented around a much deeper understanding of how customers are actually faring from a pure platform health perspective, and that's enabled us to have higher-level conversations with customers earlier in the process, but also to swarm customers with the care they need, even if their organizations have changed meaningfully. And in the sales organization, Todd is really doubling down on what we call land, realize and expand, making sure that our reps who have ramped have the support that they need to really go after growth and expansion, focus on new product attachment, particularly those usage-based products, but also services attachment to ensure faster time to value for our large customers as we close and move on. And we've seen that result in some really great wins this quarter. I talked about an automotive manufacturer that's doing some really interesting stuff with us and that's a ramped rep who really understands the platform, but is also leading into not just our core incident management, but our new AI and automation features.

Next, we'll turn to the representative from RBC. Could you please introduce yourself and join the call.

It's Mike Richards on for Matt. I guess just to start understanding that you're making these changes to sort of get ahead of renewals moving forward. I was wondering maybe -- and it's early with these seat-based compressions, is there an opportunity to go back into these accounts before their next renewal to offer the usage-based pricing or services where you can sort of get back what you lost...

Absolutely. The -- one of the benefits of longer-term agreements is it gives us more time to go in during the period proactively with not only new pricing and packaging offerings, but also more flexibility to get across products and new add-ons. And we have seeded several thousand customers with our PagerDuty Advance products and services and seeing really good engagement there. And in fact, had a lot of success with our SKU that you're aware of called AIOps, which is really about event management, event correlation and root cause analysis, but that is -- that was our first usage-based pricing offering, and that's growing over 50% year-over-year, and it's been consistently growing on a solid base. It's not a small revenue product. So absolutely, this gives us an opportunity to be more proactive. And in fact, the vast majority of customers that Todd and I have seen together are nowhere near a renewal. We're talking about getting feedback on the product, how can we help them attach to new use cases, how do we understand what they're trying to accomplish. And they're telling us a lot of the same things. One, we're actually starting -- we're moving from experimentation to deploying AI investments, and we need to do that in a safe and responsible way, and we need your help doing it. A lot of interest in the MCP, which was released for general availability earlier in the quarter. And also a lot of positive feedback in a very significant feature-based release across our entire platform. I think this is the largest release in the company's history, frankly, and that has been made possible through our developer's own use of AI. So absolutely proactive. It's a team sport, and we have Allison, Todd and their teams, along with Katherine, who leads our digital-first business, and all of the executive sponsors in the business really focused on making sure that there are no surprises, and we're not turning up to the party late.

That's great to hear. And then, Howard, just a quick one for you. Just in terms of guidance assumptions, are you assuming that the dollar-based churn that you're seeing now from seat-based compression is sort of stabilizing from here? Or are you assuming that it continues to worsen?

Yes. So what -- our guidance has factored in sort of the visibility that we have today around dollar-based net retention through Q4, and that is driven primarily by the renewal rate. And we -- the visibility that we have around those renewals is now sort of taking us out further and earlier into the process. So that gives us a lot of confidence in the guidance that we've given. So we haven't provided a specific number around dollar-based net retention, but we do expect that some of the seat-based pressure that we've had will continue in Q4.

Turning next to Andrew Sherman with TD Cowen.

Great. Good to see you. How much -- Jen, how much of the surprise in the quarter from some of the reorgs and the layoffs? It sounds like the pressured seats, how much of that do you view as like one time because some big companies had layoffs? And how much is -- like is all of this kind of out of your control? Or are there things that you can do to kind of pinpoint this? It sounds like some of the earlier renewals will help. And I know there's a big renewal base in Q4. So how do you kind of prevent that happen in Q4, too?

A great question, Andrew. And it's nice to see the real Andrew Sherman. We see a name and then see a different face. So thanks for being here today. We already are making some progress by being more proactive and explicit in going to customers before they come to us to say they have problems. And I mentioned earlier that the absolute number of customers downgrading and of customers leaving the platform has improved and has decreased over the quarter. So that is, I think, a good leading indicator. We also are not waiting for customers to tell us that they've got challenges. We're in there all the time asking questions with the pod model now that includes the sales rep, the solutions consulting, in some cases, their first-line managers as well as the customer success manager. And where we're engaging with premium support and professional services that also gives us better visibility, So we do expect that to improve. What we're also seeing generally is just what our customers sort of referred to as being cautious about their budget because they just don't -- they're uncertain about where that's going to be in the next couple of quarters. So by getting further out in advance of renewals, we also can capture budget even ahead of renewal timing. So like I said, we do expect it to improve. I don't expect the macro to change meaningfully, and we're prepared. And I think in a very strong position from a financial perspective with the durable balance sheet, very strong operating margins and free cash flow to work through this process with our customers.

Okay. And then on the consumption change, you talked a bunch about it last quarter, too, but it sounds like consumption of the platform was still healthy. Is that the case? And how are you kind of -- how quickly can you move to this consumption model so that the seat pressure becomes less and less of a headwind?

Yes. We're seeing usage go up across almost every usage metric on the platform and also that new customer growth that we talked about earlier, both in terms of new logo lands as well as net new customers and new -- and free and paid customers all growing in double digits. That is heartening in terms of demand for the product. And I would just remind you that it's not a one-dimensional shift from seat-based to usage-based because we have a lot of new customers and frankly, growing customers that are very happy on a seat-based model where we don't see these tailwinds. We're really seeing them the most pronounced in the very largest customers. We have thousands and thousands of employees and therefore, reorganizations that might impact thousands of employees that then cause seat-based compression for us. The other thing that I would say is as we move from single year to multiyear again, that gives us more time to seed some of these usage-based products. And a number of our customers who are engaging in usage-based have credits that they'll be burning down which we expect will then convert to ARR. So we'll get some benefit as those customers spend more time and have more experience with these usage-based solutions. And with our agentic incident management suite now in the marketplace, that gives us more surface area to grow in.

Maybe just to emphasize one of the points that Jen made there, when we see these customers who had the seat reductions, the good thing is that they're staying with PagerDuty because they recognize us as the leader in terms of how they manage their AI operations today. What we have seen is that as we start moving them to our flexible licensing model, they have access to more product footprint than they would have been in the past. And as they have access to more of that product footprint, it allows them then to use more of the platform. And that we expect over time is going to then lead to them growing with us further. So whilst their base might have shrunk for now, in fact, they're setting themselves up with the foundation to really grow as they continue to scale their operations.

Next, from Truist, we have Miller Jump.

Howard, congrats on your next steps. I'm going to annoy you guys and ask another question about the seat count headwinds. But I guess the question is really, it sounds like it's purely layoff driven. And from that perspective, would you characterize all of these as businesses that are more challenged or was there any evidence you're starting to see that AI is potentially pushing out investments in head count in some of these businesses?

Generally speaking, what I'm seeing, if I try and correlate customers that are making changes to what we're seeing in their earnings announcements, et cetera, there's really a focus on improving operating margin, reducing costs and sort of rethinking how they might be attacking different efforts across the business. Frankly, we're also building more and more automation into the platform as well, right, which over time, means that seat-based licensing isn't really as well tied to the value proposition that we're delivering. So this is natural evolution, but it's more pronounced when you see a large customer with a significant head count reduction that come to us. So on one hand -- it's interesting. It's kind of a dichotomy even within some of the same accounts. On one hand, we'll see the rightsizing as a headwind, but the same customer will then come to us and say, "Our #1 priority is resilience. So now that we've gotten the contract rightsized, how can you help us improve?" And to Howard's point, we almost see immediate growth opportunities following that sort of resizing. And so I think it is a temporal thing because we've seen our -- we've even seen customers who have significantly reduced their spend with us come back a year later and only to build back up. We're also seeing a number of opportunities where we're winning competitor replacement even where the competitor was less expensive but not serving the resilience proposition. And if you think back just over the last 8 to 12 weeks, there have been a number of public service failures where we're the only platform that is still standing and resilient in those environments because of all of the architectural redundancy we've built into the product. And so that sort of reinforces the tailwind that is operational resilience as a priority.

Makes sense. I guess I want to ask one about the bottom line for Howard. Obviously, a big step-up that you're now projecting this year. Point well taken about 30% is kind of that long-term target that you're working towards. I know you're not guiding the year ahead, but can you talk about trajectory at all and just the potential for these types of gains in the future versus how you would expect it to ramp?

Yes. Well, thanks, Miller. We are proud of the properties that we've made. I mean this is like our sixth consecutive year of us continuing to drive that improvement in terms of operating margin. And we also have looked to cross the threshold around GAAP profitability for the full year next year. So this has been like a steady program that we've been running. We're not setting expectations for next year. But what I can tell you is that we remain committed to looking at ways in which we can optimize the spend within the business and deliver good results. So we're continuing to make investments in the things that are important for us in terms of our customers, our transition and our product, and you can expect to see more of that.

Next, we'll hear from the representative from Morgan Stanley. Again, please introduce yourself and ask your question.

I'm Oscar Saavedra on for Sanjit Singh. And congratulations from me to you, Howard, as well. Hope that you get to do some fun stuff in your retirement.

I'm planning to.

I guess my first question -- with regards to guidance for Q4 right now calling for 1% of growth at the midpoint. I was wondering like how much of that is based on what you're seeing in the pipeline in terms of the upcoming big renewal quarter versus maybe a bit more conservatism around maybe the time line to when that usage-based part of the model will begin to offset the seat pressure that you're seeing?

Yes, sure. So when we look at the guide that we provided for Q4, we have factored in the visibility we have around renewals. Q4 is our largest quarter in terms of renewals. We do expect that as we transition customers to the new pricing and packaging model that, that will mitigate the impacts of some of the contraction that we've seen and set those customers up for growth. We're not expecting that to have a major impact in Q4. So whilst we're moving customers to this new pricing, that obviously is not something that you just turn on instantly. But we're making good progress, and we're working with a large number of customers who have renewals in this quarter around moving into that new model. But we have factored in both looking at the engagement that we're having with customers and early engagement, we started with them now months ago with some of the changes we've implemented and also having a look at the customer's own state of usage and adoption of the platform to try and make sure that we can be really targeted to help drive and improve their adoption. So we are expecting some of the same patterns that were emerging in Q3 would still persist to some extent in Q4. We're still expecting to see stabilization in that the number of customers that are downgrading or churning, we've got a good handle on that. And we're looking at ways in which we can mitigate any contraction.

Got it. And maybe as a follow-up, Jennifer, you talked about improvement in customer logo retention and seeing less absolute customers downgrading in size. I was just wondering like if you can sort of -- how do you square that with the downticking we saw in the customer spending over $100,000 in ARR?

Yes. It really comes down to just the impact of downsells at the larger end of the market and customers, I think, are expanding at a similar rate that they have in the past, but they're smaller expansions and a little more cautious than they have been in the past. So it's on us to work with them to see the value from those investments quickly so that they can continue to build on them. I also believe that as Allison has gotten closer to the business, she's identifying more opportunity in the base, particularly, as it relates to giving customers exposure to new products and services across the platform, and that's something that we're working to do a better job of attaching.

And turning next to BofA. Again, please introduce yourself and ask your question.

It's George McGreehan on for Koji Ikeda. So I wanted to ask about the agentic suite and kind of the tailwind that, that might be to consumption as we kind of shift to consumption just among the products and features that are generally available today, MCP server, Shift Agent, et cetera. Do you kind of see any difference in the way that customers that are engaging with those products are using the platform today? Maybe any increase? Or is that early? And then also on the other hand, just in terms of how the suite further differentiates PagerDuty from the competition, do you see that kind of showing up in your competitive win rates today? Or is maybe that too early?

Yes, we're seeing -- thank you for the question, George. We're seeing really positive response to the agentic suite for a couple of reasons. One, most agents that you'll hear about in and around the incident management space can only work across the environments that they're built in. And because of our 700-plus strong integration ecosystem and the data that we've built over many, many years focused on incident management, our agents are able to leverage a much broader context to determine what is truly a challenge to troubleshoot and triage that and ultimately resolve it. And with the benefit of MCP, can work hand-to-hand, agent to agent with other platforms, whether it's one of the cloud providers or hyperscalers or in the case of Glean, who we mentioned earlier, where the agents are able to work together seamlessly, right? The other thing is our products and services have always been human in the loop or human in the lead. And so the user can see the agent at work and engage in that process, which builds trust and what we're seeing is that then drives more usage and more adoption and then more usage. So it is a bit of a self-fulfilling cycle in that regard. And I think from a competitive standpoint, because -- it's not a single SRE agent. We have an agentic Scribe, an agentic Shift Agent that takes a lot of the pain out of scheduling and escalation development. We've got an agentic analyst that helps you understand actually what's going on during an incident, what's happened in the past and how you can apply some of those learnings very quickly, like during the incident instantaneously. And then, of course, the SRE who is doing some of the work. And you can imagine where this can go over time now that we're able to add and scale agents on this platform. So I do believe it's quite unique in the market, and also resilient like all of our products and services are. So that we're really excited about. And with other usage-based products like AIOps, what we saw was a pretty steady growth over a period of time by first seeing the product, getting customers to try it and use it and then getting them to consume, in the case of AIOps, more events in the case of the agentic suite, more credits. So we do we do expect to see those customers grow as they get a hang of using, not just the agents, but also our generative offering as well, which all lives under the PagerDuty Advance umbrella. And then to your question around where are we confident. One, it's just seeing the usage patterns even on a smaller base, healthy growth. Two, customers have helped us design these agents. So all of our PD Advance products and services started in an early design program. So they basically were built in service of what our customers told us they need. So we're meeting the demand in the market first in many cases. And likewise, they're more intuitive to sell, in some cases, than maybe some of our more technical automation offerings of the past. So the field is really excited, learning how to talk about them, how to show customers how to try them, get them enabled and get customers discovering them in product.

Okay. Team, I believe we have one more question queued up from William Blair. Is that Jacob on the line, feel free to turn your video on and unmute?

Yes. This is Jacob

Yes, this is one of the things that I look at every quarter. And frankly, we're seeing good new logo acquisition across all of our segments. And remember that the way we land customers is often through our digital-first or self-service environment and then they will either grow unaided within the digital-first organization or they will grow through the -- with the help and support of the go-to-market organization. So we're seeing both showing promising growth. And what I would say is I had a look last week at just the batch of new customers this quarter. And I was really pleased to see this balanced mix between new AI natives, some of the hottest companies you're hearing about, some of the fastest scaling companies in the world. I think we mentioned in Anyscale, you may be familiar with Ray and Perplexity. But also, we're really continuing to see a lot of diversity across industry verticals and digital-first customers as well as more traditional companies that are deep in the middle of transformation. In some of our markets, we've seen some really good competitive replacements where other point solutions have not served customers as they've scaled and we've been able to provide them with a much more resilient, broader product offering. So it really is a pretty balanced base of customers. Howard, anything that you would add there.

Yes. And I would say that the size of land can vary, as Jen said, like sometimes we have small customers where it may be a few hundred or a few thousand dollars, but within this quarter, we also had a few customers above $100,000. So lands that were large lands, so those tend to be in the enterprise segment, sometimes that's also a mix that can be a more traditional type of industry, but certainly, a lot of the software and technology and AI leaders also tend to come in at some of the higher values north of $500,000.

Got it. Just one more on my end. You had a meaningful decline in stock-based comp this quarter. I guess, as you're positioning for GAAP profitability, should we expect this level of stock-based comp like on a forward basis?

You can expect stock-based comp to decline. The rate of decline will be different as we sort of move forward through the end of this year and into next year, but that is the trend that you can anticipate.

Yes. And as you know, that's a lagging indicator. It's the result of pretty significant effort over the last several years that you sort of see show up in the out years. And we're continuing to be committed to managing stock-based comp effectively as part of our profitable growth ambition.

Howard, Jen, we've made it through another batch of questions. Jen, can I turn it over to you for any final remarks?