Good afternoon and thank you for joining us to discuss PagerDuty's Third Quarter Fiscal Year 2023 Results. With me today -- with me on today's call are Jennifer Tejada, PagerDuty's Chairperson and Chief Executive Officer and Howard Wilson PagerDuty's 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 in future revenue 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 as 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.

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 and 10-Q, as well as our subsequent filings made with the SEC. With that I will turn the call over to Jennifer..

Thanks, Tony and thanks everyone for joining us today. We are pleased to report another quarter of strong results as we continued to execute on our Operations Cloud. Revenue grew 31% year-over-year to $94 million above the high-end of our guidance and marking our 6th straight quarter of growth above 30%.

In Q3, we achieved non-GAAP profitability a quarter ahead of our previous guidance with $3 million in operating income, an improvement of 1,000 basis points over Q3 last year. We exceeded the high-end of our guidance ranges for both top and bottom line and realize our profitability milestone a quarter ahead of schedule.

We continued to see strength in our focused segments, mid market and enterprise, our customer cohorts spending over $100,000 in ARR grew 31% over last year. Total free and paid customers on our platform grew 22% year-over-year, dollar-based net retention was 123% as our customers continued to expand users and adopt more products and services.

In the quarter, more than half of our ARR came from customers with two or more products. While the macro environment is likely to remain a headwind for our business in the near-term, we continued to see positive trends underpinning our performance and remain bullish about both long-term opportunities and our balanced growth investment plans.

First, we continued to see strong growth in incident response. Cloud adoption and digital acceleration are enduring multiyear initiatives, DevOps transformation is now required to achieve the efficiency demanded by this macro environment.

PagerDuty is essential infrastructure leading to some large digital transformation wins in traditional industries, which I will discuss later.

Second, we saw solid adoption of new products, especially automation and our AIOps solution, where customers chose the efficiency and effectiveness of our integrated operations cloud offering ahead of point solutions.

Third, our low cost of ownership and fast time to return on investment makes PagerDuty more attractive to customers than expensive long deployment solutions. Our sales pipeline is strong heading into Q4 for both incident response and new products.

Finally, we have positioned ourselves well to navigate the challenging macro environment, achieving profitability by improving our cost structure such that we can continue to invest in growth capacity and product innovation.

During Q3, we extended our competitive lead as we balanced strategic investments in product innovation growth, while also significantly improving operating leverage. Our results this quarter demonstrate the continued strength of our value proposition for enterprises and our team’s ability to execute with an increasingly efficient go-to-market motion.

PagerDuty's Operations Cloud underpins operational resilience and digital maturity for our customers in a moment when they need it more than ever.

Automation capabilities integrated across every aspect of the platform reduce time and effort spent by technical employees managing interrupt work and translate to both money saved and better experiences for their customers.

Our ability to orchestrate digital operations across the entire enterprise makes PagerDuty the platform onto which companies are consolidating previously fragmented [tech] (ph) spending.

As organizations come under pressure to protect revenue, prioritize IT spending and do more with less, our customers have made it clear they consider PagerDuty essential.

This was validated as we closed a record number of mid-market and enterprise expansion transactions, manage churn well below 5% of starting ARR and increased both average revenue per user and average revenue per customer.

Our mission to revolutionize operations has always been grounded in building a durable growth company, while improving the efficiency of our go-to-market and G&A spend.

We are investing to deepen our competitive moat through innovation in AIOps, automation, customer service operations, and flexible workflows that help teams across the enterprise manage interrupt work.

Our efforts over the past year to sustainably lower our cost base, our cost structure with new lower cost, high talent locations like Lisbon will enable ongoing operating leverage improvement similar to the pace we have delivered this financial year.

In a volatile macro environment, we are controlling the controllables with the objective of continuing to make demonstrable progress from the early 30s towards operating as a Rule 40 company.

Given our role as essential infrastructure, our loyal customer base and our competitive track record and our innovation roadmap, we are positioned to weather this environment well, we are confident that we will emerge stronger as a high performing profitable growth company, the leading operations cloud for modern enterprises.

In November, we announced early availability of more flexible incident workflows that enables PagerDuty customers to tailor workflows to different use cases and automate steps when a major incident occurs. We launched capabilities to reduce noise and improved developer productivity. So our customers can take back hours of engineering time.

Overtime flexible workflows will be the primary solution to enable non-technical teams to manage Interrupt Work. Earlier this year at AW -- earlier this week at AWS Reinvent, we also announced automation actions for PagerDuty AWS customers. These capabilities improve resiliency and increase the use of best practices, all while saving developer time.

FreedomPay, a data-driven commerce platform is saving the equivalent of four peoples dedicated time, making their critical processes more reliable and removing the risks of human error by automating tasks with PagerDuty.

During Q3, a Fortune 100 global security and aerospace company nearly doubled it’s PagerDuty using footprint on digital operations and signed a multi-year contract. This long-term PagerDuty customer is realizing a return on investment in excess of 30 times its annual spend with us.

In the last 18-months, this customer significantly reduced its meantime to resolve incidents, translating into tens of millions of dollars in savings, their expansion with PagerDuty was explicitly due to our ability to reduce their costs, while also freeing up time for their innovation teams.

In the quarter, an Australian-based home improvement retailer in the midst of a large scale digital transformation expanded its investment with PagerDuty. The customer has nearly doubled its PagerDuty footprint since its initial deployment in 2020.

This quarter, we adopted PagerDuty process automation to address more advanced use cases, including automated diagnostics and auto remediation, they expect to increase engineering productivity and resolve incidents faster as we advance their digital maturity.

Also during the quarter, a multinational Fortune 200 wireless technology innovator turned to PagerDuty to consolidate digital operations on an integrated platform for action.

The company sought a more flexible solution that can provide faster time to value, lower maintenance costs, visibility across multiple departments, and ultimately consolidate their tech spend.

They had been using a point solution for AIOps in their IT service center for several years, but upgraded to PagerDuty digital operations, automated actions and event intelligence replacing that vendor and signing a multi-year six figure investment.

Their expansion to PagerDuty enables them to automatically detect, action and manage all in the same platform. PagerDuty is central to their technology strategy to exponentially scale services, while keeping service costs low. They anticipate payback in less than a quarter and a return on investment of nearly 500% within the first year.

Our value proposition has proven resilient even as decision making within organizations becomes more cautious. PagerDuty's Operations Cloud is the only platform integrating incident response, AIOps and automation.

We deliver tangible ROI and fast time to value, help mature our customers’ digital operations and deliver operational resilience, which is critical in today's environment. As customers realize the initial value, they adopt new products, expand users and move towards more advanced use cases.

In an environment where it's much easier to sell more to the current customers than find new ones, we have several new products to attach as the result of our recent innovation and a large underpenetrated opportunity within our installed base.

The operating leverage PagerDuty exhibited during the third quarter is the outcome of structural changes implemented throughout the past several years to generate profitable growth.

We have responded to the recent changes in the demand environment by accelerating the implementation of several efficiency initiatives, including standardizing our go-to-market motions across regions, opening lower cost, high talent employee locations, improving our digital marketing returns and are finding our R&D investments.

We continue to expand our operating margins as we move forward into the next fiscal year. We are executing well on our long-term operation cloud strategy balancing growth and profitability. We're recently recognized on several fronts for progress that will also support success in FY ‘24.

Earlier this week, we were honored at AWS Reinvent to receive the Rising Star award celebrating significant year-over-year growth in our business on the AWS marketplace and we expect our momentum with AWS to continue.

Our investment in attracting and retaining top talent, creating an exclusive workspace and ensuring a healthy company culture manifest in the success of our teams. During the quarter, we won multiple Stevie Awards including for special achievement in workplace health and well-being and for best Corporate Social Responsibility strategy.

This fall Trust Radius recognized PagerDuty as a tech care awards winners for our ongoing commitment to corporate social responsibility. Finally, G2 named PagerDuty a leader in incident response, AIOps and workload automation.

Our results from Q3, the persistence and long-term tailwinds and customer demand for our high ROI, fast time to value platform reinforce our confidence in our ability to both execute well in the near-term and emerge even stronger. Even as we scale efficiently, we know that innovation fuels our competitive advantage.

PagerDuty is the partner our customers trust on their worst days, it is our responsibility and our privilege to deliver for them. As we move into FY ’24, we expect to continue monetizing our product investments as customers see value from PagerDuty's Operations Cloud.

I want to thank our customers for their trust and partnership and I want to recognize our global [indiscernible] for their dedication to championing our customers for their resilience and for their great execution this quarter. With that, I will turn the call to Howard and look forward to your questions..

Thank you, Jen, and good day to everyone joining us on this afternoon's call. Our third quarter results demonstrated the agility of PagerDuty and our commitment to profitable growth.

The combination of our ongoing programmatic efforts, as well as our operational agility enabled us to reach the profitability target put forth during our Q4 FY ‘22 call one quarter earlier, while preserving our strategic growth investments.

Evidence that PagerDuty's Operations Cloud is well positioned to meet our customers’ challenges reducing cost, protecting revenue, and retaining talent and enabling them to do more with less.

Unless otherwise stated, all references to our expenses and operating results are on a non-GAAP basis and are reconciled to our GAAP results in the earnings release that was posted before the call. Revenue was $94 million in the third quarter, up 31% year-over-year.

The contribution from international was 23% of total revenues, compared to 24% in Q3 of last year, reflecting the challenging economic environment in Europe. Our customers continued to expand with us adding new users and new products. We had a record number of customers expand with us this quarter.

While many of these transactions were on the smaller side, the volume of customers demonstrating their reliance on PagerDuty even in a challenging environment is a further testament to our durable growth. We saw the most strength in our North American mid-market and enterprise business and PagerDuty online our self-service business.

We did notice an increase in customer approval requirements, particularly with large deals. We delivered dollar-based net retention in Q3 of 123%, compared to 124% in the same period one year ago. We expect dollar-based net retention to be at or above 120% for Q4.

Customer spending over $100,000 in annual recurring revenue grew to $710,000, and up 31% from a year ago, demonstrating our ongoing strength in mid-market and enterprise. Total paid customers increased by 5% annually to 15,265, compared to 6% in the year ago period.

Free and paid companies on our platform grew to over 23,000, an increase of approximately 22%, compared to Q3 last year. Q3 gross margins of 85% remained within our target range of 84% to 86%. Operating income was $3 million or 3% of revenue, an improvement, compared to a loss of $5 million or negative 7% of revenue in the same quarter last year.

Please note the fully diluted share count associated with Q3 profitability was $101 million weighted average shares.

Operating margin outperformed by 600 basis points, compared to the high-end of our guidance range for the quarter as we accelerated our scaling initiatives refining our go-to-market model, leveraging our global locations and increasing use of automation. We usually experienced a sequential improvement in operating income from Q3 to Q4.

However, this year, we expect operating income to decline marginally in Q4. This is primarily due to our investment in AWS Reinvent, as well as the full quarter of expenses from third quarter hires. Now to cash, third quarter cash from operations was nearly breakeven at negative $0.4 million, compared to $3 million in Q3 of last year.

Free cash flow was negative $2 million, compared to positive $2 million in the year ago period. We expect positive free cash flow in the fourth quarter. Turning to the balance sheet, we ended the quarter with $459 million in cash, cash equivalents and investments. Total deferred revenue ended the quarter at $180 million, up 26% year-over-year.

Quarterly calculated billings were $104 million, which was an increase of 29% year-over-year ending above the 20% to 25% range provided during last quarter's call. This result includes approximately $2.6 million in prepaid multi-year billings. Adjusting for this the increase was 26% and also above the range provided.

Last year in Q4, we had strong 30% billings growth that included a $3.2 million of multi-year prepaid contracts that are not available for renewal this period. Given a tougher compare and adjusting for the volatile macro, we expect billings growth for Q4 to be approximately 20%.

Given quarter-to-quarter fluctuations in billings associated with our culture and practices, we focus on trailing 12-months billings. On a trailing 12-months basis, billings were $385 million, an increase of 30%, compared to a year ago and above the 27% estimate previously provided.

We expect trailing 12-months billings growth exiting the fourth quarter to be at or above 25% over last year. Turning now to our guidance. Our guidance reflects our understanding and consideration of the impacts of the current evolving uncertain macro environment.

For the fourth quarter of fiscal 2023, we expect revenue in the range of $98 million to $100 million, representing a growth rate of 25% to 27% and net income per diluted share, attributable to PagerDuty. Inc. in the range of $0.02 to $0.03 with fully diluted shares outstanding of approximately $102 million.

This implies an operating margin in the range of 1% to 2%. For the full fiscal year 2023, we expect revenue in the range of $368 million to $370 million, representing a growth rate of 31% and we’re improving guidance for net loss per share attributable to PagerDuty, Inc.

to $0.01 to breakeven with basic shares outstanding of approximately $90 million and fully diluted shares outstanding of approximately $101 million. This implies an operating margin of negative 1% to breakeven for the year.

Before I close, I would like to thank our customers for their continued partnership and for our teams across the globe who championing. Our rapid pace of innovation positions us to realize our vision to transform critical work and revolutionize operations.

We remain confident in our Operations Cloud strategy, the market opportunity and our performance as we continued to demonstrate profitable growth, expanding our operating leverage in Q4 and in a strong position to achieve a similar level of improvement in the next financial year. With that, I will open up the call for Q&A,.

Okay. And it looks like several of our analysts have queued for questions already. We will start with Joel Fishbein from Truist. Joel, if you'd like to kick us off? Okay. Actually, let's move over to Sanjit, Sanjit at Morgan Stanley. Do you want to kick us off in our Q&A session, please..

Yes. I'll try.

Can you hear me?.

We've got you..

Awesome, well, congrats to the team on achieving profitability, a quarter ahead of time, it's very nice to see.

Jen, on -- in your script, you said, you had a phrase that I love controlling the controllables, as well as talking about sort of targeting, kind of, Rule of 40 type growth versus profitability and if I sort of look at it, this quarter of 31% growth, 3% operating margin, certainly making progress? When we think about 2023 -- calendar ‘23, it looks like, it's going be a pretty uncertain year across software and that's the uncontrollable piece.

And so as you think about that 40% Rule of 40 type framework how is -- what sort of the operating plan? And what's -- how are you sort of going to manage making progress on that going into next year and beyond?.

Thanks for the question. And we are really proud of the quarter.

I think we did a great job of executing in a relatively uncertain environment and you sort of saw customers continue to demonstrate their demand for a platform like ours with record expansion -- record number of expansion transactions and our large customer cohort, customers spending over $100,000 and ARR growing 31%.

So, we still feel like the topline is strong, because we are a platform that delivers very fast time to value and higher ROI.

Having said that, I mean, we've been in process underway now for several quarters to improve the overall efficiency and productivity of our business and we're starting to see that come together in just the efficiency, the improved efficiency and go-to-market, especially marketing and sales where we are seeing us still drive that growth and drive that demand and continued to build loyalty within the customer base, but do it with much better operating leverage.

So I think we've put ourselves in a really good position that regardless of what we see happen from a macro perspective, we can continue to manage to improve the efficiency and the productivity of the company. And while we're not giving any guidance for FY ‘24, Rule 40 is a really important goal for me and for the team and we're laser focused on it..

Makes total sense, and just as a follow-up as we think about some of the components that drive growth at PagerDuty in a seat-based model, you've seen a lot of headlines in terms of pretty sizable layoffs with the big tech, if the overall employment picture across United States is still looking pretty solid, so how do we think about when we see layoffs within engineering departments with big tech, is that something that's going to be a modest impact or more noise? And we should look at the broader employment picture to assess that risk in terms of the expansion opportunities within the PagerDuty model? Or is it something to be more concerned about as we see some of these layoffs accelerating among tech and other companies?.

Well, there are three characteristics of our business, I will point you to one is we have a very diverse customer base. So while we do have customers in high tech that represents a portion of very, very diverse set of verticals, and in the quarter, we saw tech retail, financial services, other verticals perform quite well.

So the diversity of our customer base, I think is a strength in an environment like this and it certainly was during the pandemic. Second, I would say when you look at our customer base and you look at the number of tech workers within our customer base, we're largely underpenetrated in that total addressable market.

And so even if we were to see headcount compressed much more dramatically, we still have huge opportunity just within the installed base from a headcount perspective, but also from a new product attach and new use case attach. And so we don't see layoffs for instance as having a material impact on demand.

The last thing that I would say is when you look across the developer community, I mean, the TAM that we measure is 25 million developers around the world and we are in single-digits of penetrating that TAM. So I would just come back to kind of what we've always said, this is an early and nascent category.

We think it's a huge opportunity, developers tend to be the last heads to go when you do see customers taking action into your point when you look at the broader employment situation across the market, the diversity of our customer base.

I really -- I think puts us in a good position, but at the end of the day, it really comes down to that TAM inside our installed base is still very, very large..

I appreciate the thoughts there. Congrats on the quarter..

Thank you..

Okay. Next we'll hear from Matt Hedberg at RBC. Matt, you can go ahead..

Sure. Thanks for the question. Jen, a go blue..

Go blue, did anybody seen my [indiscernible].

Okay, that was exciting stuff for a big, kind of a fan, certainly fun to see, so congrats on that, congrats on the quarter. Howard, maybe a question for you, could you tell -- good results I think in a really challenging environment.

Could you talk a little bit more about the linearity of the quarter? And maybe how is November trended thus far versus maybe past Novembers?.

Yes. So the pattern of linearity when we look through Q3, it was not unlike what we saw in Q2.

I think some of the factors that we saw that we referenced even in our call on Q2 played out in Q3 in terms of just some of the decision-making processes within the customer base, took a little bit longer, but there was at least a steady momentum as we move through the quarter, particularly in the last month of the quarter, so that was pleasing.

I think the thing that really stood out for me was that our customers are doing so many different expansion transactions with us whether it's adding users or adding product.

So we had a record number of expansions for the quarter, but those tended to be smaller and that really indicated though that our customers are applying a level of consideration to the purchases they make, but we’re going to charge durable growth, they continued to make those purchases and continuing to grow with PagerDuty.

So that was for us was a really positive sign and we expect that trend to continue..

Got it. Maybe just one other guidance question. I appreciate the billings guide for Q4 and normalizing for the multiyear prepay.

Yes, I guess thinking more about the assumptions in your guidance, are you assuming that we kind of get a December and in your case January budget flush? Just sort of curious, are you assuming things kind of stay the same from a demand perspective? Just a little bit more perspective on that?.

Yes, I mean we typically do see that for companies with calendar year ends that there is a certain amount of increased activity in December, so December is never a quiet month for us, even with the holidays and January again ends up being for those companies that are able to gain access new budget tends to also create a fair amount of momentum for us.

We're still expecting that trend to continue even within the current macro environment on how that plays out exactly in terms of what people are prepared to spend and the size of checks they're prepared to write, that we'll have to see.

But certainly our pipeline is really strong coming into Q4 and we certainly are seeing that customers interest particularly in our platform as a mechanism to be able to help them reduce, spend or for them to be able to be more efficient or consolidate spend across a number of niche vendors is coming to the full..

Got it. Thanks a lot. Congrats guys..

Thanks. Thanks, Matt..

Thanks, Matt..

Okay. Next, can we hear from Mr. Fishbein Joel at Truist. If you would like to go..

Apologies for the technical difficulties earlier and congrats on the great results and on the operating margin surprise. Howard, great work. Just on that vein, Jennifer, in this challenging environment and Howard, obviously the macro uncertainty is out there, you've highlighted that on the call.

How are you thinking about optionality with regard to balancing growth and profitability at this point? And how are you -- how should we be thinking about margins in the future? I mean, I know that we always ask for more and more and more so I figured, I'd throw that out there, but I mean the fact that you guys have big milestone for you guys, love to just hear directionally how we should be thinking about that? Thank you..

Well, I'll take a crack at that and then Howard you can jump in. First of all, we are incredibly proud to hit the profitability milestone this quarter, quarter early, it was a lot of work from a lot of people across the organization to structurally improve our cost base, not just make sweeping headcount changes for instance.

And I want to congratulate our teams, because they've been incredibly disciplined with our capital allocation, which has enabled us to continue to invest in innovation and you've seen a slew of new products and services that we've come out within the last couple of quarters.

We now have an installed base that is available for us to attach those products and services. So from a growth perspective, a lot of that investment is right time, right place for us to go-to-market in an environment where our offerings which improve efficiency, improve productivity, reduce revenue risk, are very relevant and timely.

So I feel like we've put ourselves in as good a position as we can be in given the macro and while I can't see the future or tell you what's going to happen next week or tomorrow. What I can tell you, is our customers are incredibly engaged. I've been spending a lot of time with customers.

In the last couple of weeks, we had a large team at Reinvent where customers really want to learn about automation, it was a strong quarter for automation, for instance. And you see that in that large cohort -- large customer cohort of customers over 100 -- spending over $100,000 growing 31% and also the expansion volumes.

So we are absolutely still investing in growth, but being very disciplined and balanced around capital allocation to make sure we can progress against our Rule 40 goal and that we can demonstrate that we are a profitable, durable growth company long-term..

Yes, and I think what I would add to Jen's comments, is, if you have a look at the achievement this year where our guide points to 700 basis points to 800 basis points improvement over last year, we've really laid the foundation to continue to improve and expand our margins into next year and I don't expect the rate of change around that improvement to slow down.

And along with that, even this year, we expect our free cash flow to be one or two points better than where we end from an operating margin perspective. And for us that becomes a point of focus for next year. Like how do we ensure that our free cash flow margins are also continuing to be strong, so I think we've laid really good foundation.

So, we will give you more detailed guidance, of course on our Q4 call, but you can see from the pattern that we've been following how we expect to continue to execute..

Okay. Just to follow-up real quickly, just makes it sound like, just to be clear that you are not giving up any growth for the fact that you're profitable, so that we can continue to see some leverage and the strong growth that you've been delivering..

Yes. So we're not providing any specific guidance on growth for next year. We provided the guide for this year, but we certainly again to Jenn's comment control in what we can control. We know that we have created a -- an operating model that is sustainable for the long-term and we expect to be sustainably profitable and to be a profitable grower.

Of course, the macro is an environment that is subject to all kinds of things..

Thank you so much..

Thanks, Joel..

Thanks, Joel..

Okay. Next we'll hear from Chad with Craig Hallum. Chad Bennett, go ahead..

Yes, great. Thanks for taking my questions.

Kudos also on the quarter and profitability and all that good stuff, so just thinking about your commentary around new logos, seemed to be a bit more challenging in this environment for anybody, and your net new customer add number, I think was kind of down relatively speaking to prior quarters and so forth, but you speak -- spoke very bullishly about cross-sell upsell expansion and so forth and the pipeline there? Net expansion is coming in a little bit, obviously it's comping against really good numbers, but how should we think about overall relative growth, overall revenue growth relative to net expansion in that delta from where it is today to maybe in a tougher environment for new logos? And I know there is a timing difference in everything and so forth, but should we expect less from new logo contribution if we look out over the next three to four quarters?.

Yes. So, Chad. I think what I would say is that if you look at our business, our growth primarily comes from expansion. So we tend to have a small land and customers grow with us over time, so lands are important but expansion is always the near-term opportunity for us from a growth perspective.

When we look at lands what's also important for us is the right kind of lands, so this last quarter, we had over 100 enterprise and mid-market lands that we saw was really healthy and strong which lays, a good foundation for us for the future. So the contribution from new -- within the first year always remains relatively small new logos.

For us, of course, the fact that we do have such a strong installed base that is able to take up new products and add users and can do that with ease and can get to value really quickly, there is a total cost of ownership equation there that doesn't require a whole lot of effort or so, this is to be able to get up and running, I think puts us in a good place..

Got it. And then maybe, any more color, we've heard from a lot of calls in this space, just on renewal and expansion conversations with customers and how customers are being a little more cautious on seat expansion and so forth.

I'd love your commentary on that, just kind of what you're hearing, but specifically in the tech sector where you're seeing some pretty healthy layoffs and whatnot and I know you guys are fairly horizontal from a vertical standpoint, but just any commentary on renewal discussion and seat expansion? Thanks..

Well. You saw -- like I said, I've been talking to a lot of customers lately. You saw that we continued to see churn below 5%, starting ARR.

So very strong retention of the base renewals, those conversations continued to go well, record number of expansions as customers are looking for new ways to automate more, because they are being asked by their own leadership to do more with less.

And so I think all of the automation we've built into the platform from detection to orchestration and all the way through to auto remediation is super relevant and timely in this moment. What I would tell you is it's more that, there are just more approvals in the process like we don't see deals moving out of the pipeline.

We don't see deals going to competition. We just see things taking longer, because there's more diligence associated with how these deals get done.

And in long-term, that actually may be good for us, because more and more senior people are going to understand what PagerDuty does and what our value proposition is et cetera, it is little annoying right now, and when you think you're done and then you find out there is two more approvers, you have never met us before that this has to go through just because they're trying to control and constrain spend at the top.

What this is definitely show me in the conversations that I've had with customers, we truly are essential infrastructure.

We saw that even in the pandemic when customers, sort of, pump the brakes while they were trying to figure out everything else that they had to figure out at the beginning of the pandemic, when you see those additional approvals come out, we ultimately sort of win the day. Like I said, it's just taking a little bit longer.

I really like what I'm seeing now in terms of engagement around, some are more advanced use cases, then I think the market probably doesn't understand yet how important flexible workflows are which we aid recently flexible workflows enable really opening -- big opening up of lots of different types of use cases that our customers are looking to leverage PagerDuty for, it's one of the most requested feature sets that we've been asked for over the years and it's really building catalytic capability and IP into the core platform.

So I'm really excited about the discussions that we're having there as well..

Got it. Well thanks, kudos again on the quarter..

Thank you, Chad..

Thank you, Chad..

Okay. And we'll hear next from Matt Stotler with William Blair..

Thank you for taking the questions. You know, Jen, that's actually a good segue, because my first question here is going to be on catalytic, right? Obviously, it seems like some pretty compelling, your capabilities that you acquired there.

So I would love to get an update kind of the overall integration progress timeline, but also how those capabilities are impacting the conversations you're having with customers and potentially contributing to the expansion, we're seeing in the user base at this point?.

Well, one of the critical success factors for us is always been to make the app that our users are engaging with a simple and usable as possible, because very often using us in a moment of significant duress or stress.

And so for me, it felt like a really natural next step to really move into no code or low code workflow automation, because you can't get much simpler than sort of drag and drop.

And what we've learned, particularly as we've gone into large, large enterprise, highly regulated industries, industries that have very specific requirements where they want to use us for risk mitigation or healthcare environment, et cetera.

They want to change what has been historically a very deterministic workflow and so flexible workflows and no code workflows really open up a lot of that opportunity for us and just make it easier for customers to deploy PagerDuty's automation into different types of incident response process and more broadly different types of interrupt work.

And I just can't tell you, I mean maybe that's because I'm from the Midwest and Catalytic as a Chicago company, but we're thrilled with that team. It's a great group of technologists, we're thrilled with how well they're advancing and progressing. And in fact our automation product had a much improved quarter this quarter as well.

And so we were last quarter I think we talked about automation deals being a little bit larger and taking a little bit longer. This quarter we saw strong attach there. So really good to see some of those inorganic investments starting to take hold within the broader business..

That's very helpful. And then maybe one on the federal vertical specifically, historically something you guys have talked about as a kind of a key parts that $1 billion growth as per aspiration.

Obviously with the government fiscal year ending Q3, we'd love to just get kind of a broader update on progress there, maybe contribution that you're seeing today..

Well, today Federal is a small part of our total ARR. We do see a lot of customers in the SLED, state and local government education and we are underway with our FedRAMP certification process, which will, I think open up more and more opportunities in Federal, so that's more of a forward-looking opportunity in my view.

We did -- I talked earlier in my prepared remarks about a large aerospace companies Fortune 100 company and what I loved about that deal is they are a customer that was able to tell us they realized tremendous return on investments 30 times their initial investment and a very high ROI and so they really doubled down on our products and services.

And we'd like to see that kind of advancement in these tightly regulated industries because it demonstrates how truly horizontal PagerDuty can be. I don't know, Howard, if you have anything to add there..

No, I think you've covered it..

Great, thank you again..

Okay. Thank you. And next, we would like to welcome Fred Lee from Credit Suisse..

All right, Hey Jennifer. Hey, Howard..

Hey, Fred how are you?.

Hey, Fred..

Hey, and getting go blue..

Go blue..

If you get the [indiscernible] here in Scottsdale, this week, but hopefully we'll see you in Phoenix at the game, right?.

Maybe, maybe, I hope so..

Hey, listen, so actually apologies in advance if you addressed this already. I missed the first part of all.

Last quarter you called out the digital operations business accelerated year over year nicely and I was wondering if -- I was wondering how the business trended in the quarter and through the first month of this quarter if the shape of the uptake is changeable?.

Yes, so I can comment on that Fred. In terms of digital operations, right, digital operations skew if you like, is one of the opportunities for customers to acquire additional products.

So it's the add on from our business plan that allows customers to incorporate the event intelligence product amongst some other capabilities, so we continued to see strong demand for that, particularly as customers are trying to -- keen to leverage the capabilities of our event intelligence our AIOps solution, which helps them being more efficient and helps them respond more quickly to issues.

So this quarter, again, we saw a strong multi-product attach which is, Jen commented in her script that more than 50% of our ARR is coming from customers with two or more products and the product attach is across AIOps and across the process automation piece..

And just a quick follow-up, do you find that AIOps tend to behave from a demand perspective, more acyclical versus is it a response? Or are they more similar in terms of the pro-cyclicality relative to the environment? Thank you..

Yes, so I don't -- I'm not aware of any discernible difference in terms of how the buying behavior changes around that. I think it's often related to the maturity of the customer.

So we have a maturity model that we often discuss with customers that take them from being reactive to being predictive and as companies go through their own journey, the event intelligence AIOps products seem to fit in naturally with that progression.

So whether they were ready at that point or aspiring to get to being a level of being proactive, then the Event Intelligence product fits in really well. So, sometimes it's a function of that more than anything else.

Jen, if you have anything to add?.

No, I think you nailed it. It's more about digital maturity and how an organization is organized, some teams are early adopters of analytics in the flow of a production environment.

Others have more of a centralized mindset where they will analyze incidents after they happen and then try and affect learning by integrating AIOps into the core operations platform, it means you can do both.

And the product serves at high scale both distributed teams and centralized teams and where we -- I think saw some momentum this quarter, was a number of customers that have paid for point solutions in the AIOps space and seeing the value of being able to not only leverage AIOps from an analytics perspective and learning perspective, but being to action on that data and information immediately and inside the same platform without context switching, which is a huge time saver and money saver.

And potentially a way to get to predictive much faster because the idea of AIOps as you're looking at events and preventing those events storms from becoming major incidents as opposed to just learning from incidents after they happen.

So having AIOps incident response and automation all integrated into one platform is one of the things that makes us really unique and drives a lot of value..

Thank you very much and very nice quarter, especially in this environment..

Thank you..

Thank you, Fred..

Okay thank you. And next we're going over to Kingsley Crane with Canaccord Genuity.

Kingsley?.

Thanks for taking my questions. It seems like the business is holding up really well. So I want to touch on something that everyone has touched on a little bit but record number of expansions in the quarter, they tended to be a little bit smaller.

So how is the profile of those expansions changed over the past few quarters thinking about from a seat expansion versus a feature expansion standpoint?.

Yes, so I can comment on that.

To begin with, So what we have seen is that with customers with that change in profile, there has been, if you like a slower uptake of users or seats and the customers are making smaller purchases of seats than what they would ordinarily purchase, we have on the other side, the same customers being eager to adopt incremental products, which then helps them with their digital maturity that we just spoke about.

So it's a little bit of a mix, but I think the beauty of our model is that we allow customers to buy what they need when they need it like you don't have to sign like a large deal with us that you then drawdown over time.

We've been able to model supported by self-service regardless of where you are, what kind of size company you are, to acquire the seats or the users that you need, when you need them and we've certainly seen customers taking that approach of incremental purchases as they need them..

Right. Makes sense. And Jen, you mentioned customers looking to do more with less.

So in the case that a customer is slow in hiring or is not expanding seats as quickly? Could that be a catalyst to start looking at more automation features?.

And we definitely seen that, we've seen that both inside of IT and outside of IT. I think it creates a huge opportunity in Customer Service Operations.

I think it's going to create opportunities across the business, particularly with flexible workflows coming out, but for sure, we have definitely seen a transition in the conversation from, I just want to advance my DevOps transformation to how can you help me do more with less.

How can I reduce that toil on my precious developer team and enable -- not that they are precious but they are precious resources and enable them to more effectively focus on high value impact.

The other thing that I would say is that even in a difficult macro environment, incidents don't go away, and in fact they become much more expensive because it's harder to attract new customers for almost all businesses.

So if you've paid to get a new customer into your product experience, and then something goes wrong, that loss is much larger, the longer it takes you to detect it, to understand it and then recover from it.

And so I think that's one of the things, the fact that incidents are very expensive business for all of our customers that has made us essential infrastructure in an environment like this, and I would say there is just more of an appetite now even for individuals who historically might have been worried about being automated out of a job.

There's much more appetite for how can I demonstrate and more productive by using automation right we're even encouraging that across our own business like encouraging our employees to use automation instead of doing things manually to improve the productivity of their team, so that they can increase their own capacity..

Right. Really helpful. Thank you..

Thank you..

Okay. It looks like we're down to a couple more hands up, We have Andrew Sherman from Cowen. Andrew, go ahead please..

Great, thanks so much, [Derick] (ph). Congrats on the quarter Jen, the big aerospace win was impressive.

I think that kind of customer in industry is somewhat new for you, could this become a larger trend as those kinds of customers and industries grow their digital maturity?.

Well, we have definitely seen a lot of momentum over the last couple of years frankly in highly regulated more traditional industries as more and more of their business has become digital and it's that digital transformation is not something you can sort of stop midway through and kind of take a break, like it's something that's going on Rathi Murthy, who is the customer and a Board member who was talking about.

Expedia's digital transformation yesterday or two days ago on AWS stage, and I mean it's a multiyear, sometimes multi decade challenge.

Well, one of the things I like that I'm seeing about our business is even some of the most traditional industries that have historically been slow to adopt digital automations slow to shift the way, they do DevOps or SRE, are coming to PagerDuty and making big bets on us.

That deal In particular, one of the things I liked about it was total platform included automation and multiyear.

So that's a long-term partnership but we're going to learn a lot from that as well, but it was a customer who had been with us before, seen very immediate high value and made it -- made those discussions much easier in terms of how you expand on the renewal on the back of that..

Yes, that's great. And it sounds like the U.S. had a strong quarter.

But I wanted to ask about Europe and others performed relative to expectations? And what your expectations there are going forward?.

Yes. The Americas did have a good quarter and as I said earlier mid market and enterprise continued to post strong results.

Europe, as we mentioned last quarter, we definitely saw more pressure and more diligence deals there, but deals are getting done, I mean I just heard yesterday about a big customer, I'm not going to share all the details, so I can save some fun for next quarter but like I said, customers are very engaged.

It's just taking them a bit more time to get organized around how they're going to make investments and again from a European perspective, Europe represents about 13% of our revenue.

So again being diversified, making new investments in places like Japan that gives us the ability to continue to grow the business even as we see some mix in economic health or macroeconomic health around the world..

Great, thanks..

Thanks, Andrew..

Thank you..

Okay, we will round out today's Q&A with Rob Oliver with Baird. Rob, please go ahead..

Great.

Can you guys hear me okay?.

We can..

Yes. Hi, Rob..

Okay. Hey, Jen. Hey, Howard. Thanks for taking my question, squeezing me in here. Appreciate it. Hey, Tony. So I wanted to touch on the vendor consolidation point, which you guys touched on sort of second quarter in a row where you -- where Jenn, you've mentioned that a little bit in, I wanted to try to flush that out a little bit.

I mean, obviously, you have a lot of coverage I think, all of us are dealing with companies that could be pressure from that trend, potentially, if we get into tough environment, it seems like you guys are seeing potentially the other side of that.

And so, is that -- what areas is that in? Is that AIOps where we have a mixed system, private vendors and some public vendors trying to do it, where you guys have certainly a brand advantage and a platform advantage? Is it digital operations more broadly? Can you just -- any color you can add there would be great? Thanks..

Yes. We're seeing in AIOps for sure and more broadly in spaces across the incident response lifecycle or digital operations lifecycle where a lot of point solutions have popped up and they do one thing, maybe they do on call or maybe they do SRE or maybe they do AIOps or something else.

Even have customers that ask us to help them leverage our event intelligence data to understand which of their observability tools are adding the most value because they got a lot of observability and telemetry instrumentation in their environment, and they are looking for ways to reduce duplication.

And I think that is kind of a key theme is nobody wants to have three of the same thing if they could be effective with one, right? And I agree that with your thesis that we are benefiting from a consolidation perspective, I think it's not just because we have multiple solutions on the platform, it's because our platform is easy to deploy, fast time to value and frankly delivering a very high ROI in a short order.

And I think that's very attractive to our customers right now as opposed to some of the larger long cycle, long deployment environments they would need to be in, where they've got to bring in a lot of contractors to help them get up and running..

Got it, okay. I appreciate that color. Thanks guys for squeezing me in..

Thank you. It’s great to see you..

Good to see you..

Okay.

Jennifer, can we turn to you for final comments?.

Sure.

Well, I just want to say thank you so much for all of your questions, and to all of you who have joined us today on our earnings call, we are very proud of our results and we continue our track record of durable growth and our -- and I'm pleased that we're demonstrating that ability to balance growth with expanding operating margins and achieving profitability a quarter ahead of our previous guidance.

In this environment, I think PagerDuty's Operations Cloud is very well positioned, because we do help customers with mission critical challenges, we help them protect their revenue and reduce their own cost run rate, and importantly, I want to thank our customers for their trust in us and again just thank all of our lieutenants around the globe for their hard work, their resilience and for delivering another successful quarter for PagerDuty.

Thank you..