PagerDuty, Inc. Q2 FY2023 Earnings Call

Thank you, operator. And good afternoon and thank you for joining us to discuss PagerDuty's Second Quarter Fiscal Year 2023 Results. 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 and 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 this 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. 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 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 continue to execute well in Q2, exceeding the high end of both our top and bottom line guidance ranges. In another quarter of strong growth and improving efficiency, revenue grew 34% year-over-year, and non-GAAP operating margin improved by more than 1,000 basis points. This is the fourth consecutive quarter at or above 32% growth and an improvement in year-over-year operating margin for PagerDuty. These consistent results illustrate the durability of our growth, our multibillion-dollar market opportunity, and our ability to capture efficiencies as we scale. At a moment when our customers must ensure seamless digital experiences while improving operating efficiency, PagerDuty's Operations Cloud is essential infrastructure that enables developers to balance both priorities. Our platform accelerates their journeys towards greater digital maturity in service of their business goals. We remain on track to deliver non-GAAP profitability in Q4 this year and for the full year profitability for next year, FY '24, thanks to continued demand and trust from our customers and partners as well as the dedication and focus on continuous improvement from our teams around the world. We are incredibly proud of the trust our customers place in us. ARR churn remained below 5%, and we achieved the seventh consecutive quarter of dollar-based net retention above 120%. The combination of rapid implementation, higher return on investment, and an average payback period of 2 months puts PagerDuty in a position of strength, especially in an uncertain macro environment. Our land-and-expand motion drove accelerated year-over-year growth in total paid accounts as well as in accounts spending more than $100,000 annually with PagerDuty. Even with the current macro uncertainty, we see strong demand and in a favorable competitive environment as our teams generated a healthy pipeline across our customer segments and regions. We saw longer sales cycles for some larger deals often in process automation, and we did experience more diligence on contracts in EMEA. The digital operations business, however, which includes incident response and AI ops, performed exceptionally well, growing faster year-over-year. Our primary growth driver remains our high-velocity land-and-expand business, which grows consistently and reliably quarter after quarter. Developers continue to champion PagerDuty as the DevOps platform of choice inside their companies. Our long-term tailwinds, digital acceleration, cloud adoption, and DevOps transformation remain top priorities for enterprises. Digital infrastructures are increasingly complex, interdependent, and central to key business priorities. We have set the enterprise standard for digital operations management, and we continue to expand our competitive advantage through product innovation. During our hybrid Summit series in June, I highlighted the rise of interrupt work across the enterprise. Our core developer user base is already familiar with the challenges of keeping digital services running, customer experience intact, and finding time to innovate. Today, PagerDuty's Operations Cloud is uniquely capable of detecting, orchestrating, and automating all types of interrupt work across our customers' digital operations. We connect to tech stacks in every corner of the enterprise, making our platform indispensable for our customers from developers to IT, security, and customer service. The 3 recent product announcements demonstrate the power of the Operations Cloud for modern enterprise. First, we made service standards generally available to PagerDuty customers. Service standards enable organizations to rapidly advance their digital maturity by easily adopting best practices for incident response. Developers, SREs, service owners, and those responsible for availability and reliability can set up and monitor operational quality standards for service. Second, we announced incident workflows, making our platform more flexible and extensible by enabling rapid design and deployment of no-code flexible, automated steps for major incident response. Many of our customers have asked to customize their incident processes. For instance, creating an incident-specific Slack channel or starting a Zoom call and then sending a status update every 15 minutes. With incident workflows, customers can use an out-of-the-box process or to define their own with the building blocks we now provide. Finally, automation actions are now integrated across the entire PagerDuty platform. Automation capabilities are available at the time when events are first processed and available to all PagerDuty users, including customer service teams to validate, diagnose, and remediate issues without additional human intervention and eliminate the need to wake up the experts to run their specialized scripts. As businesses seek efficiency in their digital operations while confronted with increasing incidents and leaner teams, intelligent automation is essential. Both automation actions and incident workflows will be generally available later this year. The PagerDuty ecosystem continues to grow, now above 700 integrations. In August, we launched AWS plug-ins for automated diagnostic actions. These out-of-the-box automations install in minutes and can gather deep telemetry into PagerDuty's incidents for AWS services. We also launched automation actions applications for Salesforce and Zendesk. You'll hear a lot more about the expansion of our customer service operations offering later this month at Dreamforce. In Q2, a global online travel shopping platform renewed and expanded its relationship with PagerDuty after realizing an ROI in excess of 300% in the first year. Travel continues to trend up 75% year-over-year in 2022. For travel companies, that means opportunities for revenue growth, where they have higher stakes in the event of outages and disruptions. As the company navigates the post-pandemic rebound in travel, they renewed for a 3-year term with more than 5,000 users and joined our customer cohort spending more than $1 million annually. Automated incident response enables increased developer productivity and improved availability to ensure great customer experiences. We saw similar trends in global e-commerce, where a leading Australian retailer utilizes PagerDuty for its service delivery and reliability center of excellence. In Q2, the customer grew from 30 to more than 250 users across its e-commerce, data, and customer divisions. The customer realized a $1 million benefit in productivity gains in just 6 months through more efficient interactions between employees and customers. With PagerDuty's process automation, the retail giant is now able to update thousands of Android devices across more than 2,000 stores every night, driving better customer experience and delivering a 400% return on their investment. The thousands of users across these 2 customers comprise a small portion of more than 1 million users on our platform today. We currently estimate our total global penetration to be below 5%. We have a large and growing total addressable market, compelling unit economics, and we continue to invest while improving both operating leverage and our business model. Our state of digital operations report released in June and recent research conducted by IDG both underscore the demand for and benefits of our Operations Cloud. The problems we solve span the enterprise from developers to IT to security and customer service teams. Industry leaders and innovative startups alike across travel and hospitality, financial services, retail software and technology, and telecom all face increasing complexity, more incidents, more disruptions, and more off-hours interruptions. The most digitally mature organizations are better positioned to manage this work, and PagerDuty advances operations' maturity to improve mission-critical outcomes. More mature organizations acknowledge incidents 7 minutes faster on average. They mobilize responders 11 minutes quicker. They resolve incidents 2 hours sooner, and they experience 14 fewer hours of downtime every month. For a typical top-tier PagerDuty customer with an average of 2,500 responders, these time savings translate to better customer experience, annual savings of up to $9 million, and a return on investment of 680%. Our customers tell us that investments in digital transformation remain mission-critical rather than discretionary. We see companies across segments and verticals continue to invest in accelerating the resiliency and maturity of their operations while improving employee productivity and efficiency in this economic climate. PagerDuty is the platform they trust to power their transformation. Championing the customer, leading through innovation, transforming inclusion, diversity and equity, and building trust are all cornerstones of PagerDuty's legacy. During the quarter, we earned recognition on several fronts. GigaOm named PagerDuty a leader in its radar for AIOps Solutions. G2 named PagerDuty to be the best incident response platform, including individual awards for best usability, best results, and best return on investment. Fortune Magazine named PagerDuty one of the Best Places to Work in the Bay Area. We also welcomed former Okta's CFO, Bill Losch, to the PagerDuty Board. Bill brings financial expertise, deep enterprise background, and an operational understanding of security and DevOps. The shortage of technical talent continues while demands on developers rise, all while enterprises are under more pressure than ever from customers. For PagerDuty, this is manifesting in a robust market opportunity. Our high return on investment solution designed to solve a mission-critical problem where customers are losing revenue on every incident is essentially self-funding. We remain confident in our ability to execute, capture share, and increase our operational resilience. We remain focused on sustaining high growth while accelerating our path to profitability as we progress to our goal of $1 billion of revenue. I want to thank our customers for their trust and loyalty, our partners for their support, and our teams for their ingenuity, dedication, and drive to solve our customers' greatest challenges. With that, I'll turn the call over to Howard and look forward to your questions.

Thank you, Jen, and good day to everyone joining us on this afternoon's call. Second quarter results demonstrated the strength of our digital operations platform and our operational agility while sustaining growth of 34%, accelerated progress against our plan to be profitable in Q4. We believe companies want a partner they can trust to innovate and perform at scale in order to enhance the competitiveness of their business, and that's what PagerDuty delivers. As I present our results for the quarter, 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 $90 million in the second quarter, up 34% year-over-year, a modest acceleration over Q2 of the prior fiscal year. International revenues were 23% of total revenues. We delivered dollar-based net retention in Q2 of 124% compared to 126% in the same period last year. This marks the seventh consecutive quarter of dollar-based net retention above 120%, and we expect to continue to be at or above 120% throughout this fiscal year. Q2 ended with 689 customers with annual recurring revenue or ARR over $100,000, up 38% from a year ago. Total paid customers increased by 7% annually to 15,174 compared to 6% in the year-ago period. Free and paid companies on our platform grew to over 22,000, an increase of 23% year-over-year, with free continuing to provide a funnel for future paid growth. Q2 gross margin of 84% remained within our target range of 84% to 86%. Our operating loss was $3 million or negative 4% of revenue, an improvement compared to a loss of $10 million or negative 15% of revenue in the same quarter last year. Compared to our second quarter guidance, operating margin outperformed as we accelerated our scaling initiatives and lower-than-expected in-quarter program expenses. As Jen noted, we expect to deliver a better than breakeven Q4 and a profitable FY '24. Now to cash. Second quarter cash from operations was $3 million compared to a loss of $12 million in Q2 of last year. Free cash flow was $1 million compared to an outflow of $13 million in the year-ago period. Both cash measures were better than expected, primarily due to three factors: a mixture of collections that had shifted from the first quarter to Q2, a modest reduction in days sales outstanding, working capital favorability, and lower overall expenses. For the second half, we expect free cash flow to be slightly negative in Q3 and breakeven or better in the fourth quarter. Turning to the balance sheet. We ended the quarter with $471 million in cash, cash equivalents, and investments. Total deferred revenue ended the quarter at $170 million, up 27% year-over-year. Quarterly calculated billings were $92 million, which was an increase of 23% year-over-year, ending below the 25% to 30% range provided during last quarter's call. An elongation of sales cycles reduced our initial expectations for bookings, which is more common with high-dollar opportunities. Europe also experienced a bit more softness in other geographies. We expect billings growth for Q3 to be in the range of 20% to 25%. This range extrapolates July trends into Q3, which we feel is appropriate given the uncertain economic environment. On a trailing 12-month basis, billings were $361 million, an increase of 30% compared to a year ago and met the estimate previously provided. We expect trailing 12-month billings growth exiting the third quarter to be at or above 27% over last year. Turning now to our guidance and factoring in the current economic conditions. For the third quarter of fiscal 2023, we expect revenue in the range of $92 million to $94 million, representing a growth rate of 28% to 31%; net loss per share attributable to PagerDuty, Inc. in the range of negative $0.04 to negative $0.03 with basic shares outstanding of approximately 89 million. This implies an operating margin in the range of negative 4% to negative 3%. For the full fiscal year 2023, we now expect revenue in the range of $365 million to $370 million, representing a growth rate of 30% to 31%. We're improving guidance for net loss per share attributable to PagerDuty, Inc. to $0.12 to $0.10 with basic shares outstanding of approximately 89 million. This implies an operating margin of negative 3% to negative 2%. Before I close, I would like to thank our customers for their continued partnership and for our teams across the globe who champion them. Our rapid pace of innovation is designed to actualize our vision to transform critical work and revolutionize operations. We remain confident in our business and performance as we continue to scale towards non-GAAP profitability. With that, I will open up the call for Q&A.

Thank you, Howard. Jen will join you on the screen now. Keith Weiss, you will be our first question.

Very nice quarter and a really nice progress on profitability, just kind of feel good to have positive free cash flow coming into the system. I wanted to ask about the guide and sort of the conservatism in that guide. I think that's a key question a lot of investors are wondering about our numbers coming down low enough. So Howard, I was wondering if you could talk us through kind of the guidance methodology, where is there excess conservatism? How can we get comfortable that this is like the right guide for the full year is not going to come lower? And then on the other side of the tent, how much flexibility is there on OpEx to protect that path towards profitability? And sustain that profitable stance for FY '24? Is there room to perhaps flex OpEx down further to sustain that? Or do you need these investment levels for the long term, and this is kind of where you're going to be investing on a go-forward basis?

Yes. Well, thanks, Keith. There's a lot in that question. So I'll try and unpack that piece by piece. So at the outset, what I would say is from a guidance perspective, we haven't changed our approach. What we are looking at when we contemplate the rest of the year, we know that the tailwinds that have always driven our business remain the tailwinds, whether that's digital acceleration, DevOps transformation, or cloud adoption or migration. Those still remain true, and so we're seeing a strong demand signal, and we're balancing that with some of the elongation we're seeing in sales cycles for larger deals. So we have factored into our guidance for the full year that there is some duration extension in terms of deals. And just as a reminder, most of our deals actually close within 90 days whereas the larger deals, of course, can take longer. And those are the ones that we're seeing are being subject to increased scrutiny or maybe higher levels of diligence or where the deals are still there, but the process of prioritization of that work is changing. So we're seeing a little bit of that, and we factored that into the view that we've taken from a top line perspective. What I would say in terms of OpEx and from an efficiency perspective, this is not something new for us in terms of how we've been thinking about the path to profitability. We've been progressively over the last few quarters, and you've heard me talk about this, been thinking about how do we put in place structural change that helps us be more efficient. So this is not just a one-off event. So we've been using an increasing amount of automation within our G&A functions. We've been creating incremental capacity through exploring options for lower-cost locations, and we're rapidly ramping in those areas. So that allows us to build capacity that we need to drive the business. So a number of initiatives on that front to help us have confidence in the view that we've expressed around Q4 being profitable on a non-GAAP basis, setting us up to be profitable on a non-GAAP basis next year.

Got it. And if I could sneak one in for Jen, just on the competitive environment. It seems like some of the IT operations management vendors and ITSM vendors out there are talking more about in-service response and trying to kind of close the loop and help close the loop for their customers. Is there any change that you're seeing in that competitive environment? Or is that the digital operations platform that you guys are putting out there just so far ahead of what the more basic functionality that some of these guys have that is not really competitive environment as of yet?

I believe the key aspect of your question is communication. There has always been a lot of discussion about participating in this market. I feel like I've mentioned this every quarter, but I must reiterate, I've never encountered a more favorable competitive landscape because we continue to enhance our advantage through product differentiation and rely on a long-standing foundation of trust focused on resiliency. When we consider our 700 integrations, we've established significant barriers from a product standpoint. In this environment, that is increasingly crucial because the resiliency and availability of customer service to maximize every dollar of revenue is vital, along with the productivity and efficiency of those workers. While I believe that employee retention, especially among technical employees, has improved and the talent market is gradually getting better, I would still say that there is a significant shortage of technical talent for our customers. Therefore, they want to boost productivity and ensure their teams are focused on product development and customer-facing projects, avoiding losses in time, trust, and revenue due to major incidents.

Okay. Next, going to Joel Fishbein with Truist.

Excellent execution, and congrats to you guys. I wanted to ask about the ROI story that you were telling, Jennifer. I thought that, that was pretty intriguing. And I know you called out customers, but I think that there's probably a lot more that you can talk about. Can you talk about how you're measuring ROI and what they're using prior to beginning in PagerDuty and helping us with that because I think that, that really tells the story and the importance of maybe weathering through some of this choppy team if none of us can control, that would be helpful.

Absolutely. One of the key benefits of SaaS platforms is their ease of deployment and intuitiveness. PagerDuty operates almost like a consumer application, but it has a robust enterprise infrastructure supporting it. This design allows our customers to implement our platform remarkably quickly, in contrast to traditional enterprise software that can take years to deploy. Typically, our implementations can occur within hours, days, or weeks, leading to almost immediate return on investment. For instance, we recently participated in a competitive evaluation with a customer, and they experienced a 50% improvement in mean time to acknowledge and mean time to respond compared to another provider, all without needing customizations in the initial days of usage. This swift ROI fosters significant trust, with an average payback period of just two months. The example I provided reflects our top 100 customers—those making substantial investments that yield significant returns in a short time. This appeals to customers seeking immediate ROI and measurable efficiency improvements. Our value lies in reducing manual work for developers, allowing them to focus on innovation, minimizing downtime and revenue risks during outages, and helping customers consolidate their various service providers. We offer a unified view of all observability tools, automate workflow across teams, and facilitate not just response but resolution and learning from issues, driven by the automation we’ve integrated into our platform.

And next, we'll move to Matt Hedberg with RBC.

Jen, you said something interesting. You said we're part of the mission-critical infrastructure for a lot of organizations. And I think in time, maybe more scrutiny. Can you double click on that just because I think it's a really important point?

Matt, I think what you asked is that you're hard to hear. I believe you inquired about my remarks regarding being part of a mission-critical decision, and I've also discussed essential infrastructure and what that entails. Is that correct?

That's correct.

Okay. So when you think about incident response, right, it's become more and more important to our customers because their consumers, their end users' demands have risen. They are less patient when something goes wrong. They will quickly switch the cost to change for them, particularly in the consumer space is much lower. So they'll switch to a competitor if their experience is not good. And as I mentioned to Joel's question, like revenue can be lost very quickly. And so availability and uptime reliability of the digital products and services that really define your brand, but also deliver your revenue has become if not job one, job two, right up there with security is the way I would think about it. And it's getting harder and harder to manage. So most of our customers are seeing an increasing number of incidents because they're dealing with more complexity in their infrastructure, in their digital operations environment. And I'd even argue that with the great resignation of the past, there's also a lot of new employees in organizations. So ramping employees to understand the technology gets harder. So anywhere you can automate the work to detect issues before they become revenue-impacting incidents to manage those incidents well when they do occur and to learn from them and prevent that very costly incident from happening in the future is a really important investment and not something that we're seeing our customers back away from at this moment. The second thing that I would say is developers actually care deeply about the kinds of tools they're asked to use in their environment. And if you put them on a mission-critical job and say this product can never go down, this platform must be available all the time to our users, to our customers. But then you say, here's some subpar tools or we're going to have you manage this with an Excel spreadsheet and a phone tree, like they are very unhappy. So a lot of our developer community, champion PagerDuty all the way through their senior management because they trust it, they want to work with it, and it enables them to do their jobs more effectively. And so again, in the talent war that we've been in, it's really important to make sure that your technical community has the products and services they want to use and that will enable them to be more effective and more productive in their jobs. And one of the things I loved about PagerDuty when I first learned about it when I joined over 6 years ago was how quantifiable the ROI is, how easy it is to identify the waste that we reduce in terms of employee productivity, the efficiency that we create in terms of how employees identify and address and learn from incidents that happen. But most importantly, the way it can improve revenue generation and protect revenue in terms of managing the customer experience.

That's super helpful. And maybe it was a nice segue into my second question. You talk about the importance of uptime and reliability, and you also said the competitive environment has never been better. I think one of your larger competitors had an outage at some point here not long ago. When things like that happen, does that bring even more customer inquiry your way?

All software is imperfect, and everybody has outages and incidents, and so we try and live up on the high road when it comes to talking about these sort of issues. But for sure, trust in a platform like ours is paramount, and I think it only takes a single incident that isn't well responded to, to leave the customer wondering if they have the right partner. And that, of course, creates opportunities for us. Having said that, I think that there are other ways to identify customers. We've certainly seen customers coming to us because of the influx and demand for a platform that does more than just on-call, right, more than just moving the work around, actually automating the work itself, actually helping customers become proactive and prevent incidents from happening, not just responding to them faster but truly resolving them and preventing them from causing you problems in the future. And this is where, when I talk about expanding our lead through innovation, we started in on-call many, many years ago, 13 years ago. We added automated incident response. We've built on top of that AIOps including analytics, and then deployed automation into almost every part of our platform. And this is the automation of complex challenges in the business. It's not like robotic process automation, where you're simply automating workflows or mundane tasks. We're actually learning from the events that flow through those 700 integrations and enabling teams to get better and better with each incident that occurs.

Congrats on the results.

Next, we'll now hear from Rob Oliver at Baird.

Can you guys hear me okay?

Yes. Nice to see you.

Okay. Great. Just my question is actually for you and just a little bit more color around some of your commentary relative to EMEA and some of those elongated sales cycles. There certainly appears there's an element of counter-cyclicality to your business, which is solid. On the other hand, you guys are not immune to some of these macro impacts. So I'm wondering in terms of more color, was that new logos? Was it expansions? And anything else you might add there? And then on top of that, obviously, in his time with you guys, David Justice has done a great job. And are there any adjustments or changes on the fly that you're seeing your team make to adjust to this new environment?

I'm very encouraged by the strong demand we continue to see for all our products and services. This is a testament to our product-led growth strategy, where our offerings drive significant demand. I'm also excited about welcoming our new CMO, Katherine Calvert, who has been with us for about a quarter. We have seen great execution in our velocity land-and-expand strategy, which has become predictable and reliable. Our digital operations business, including incident response and AIOps, performed exceptionally well this quarter. In EMEA, we noticed increased diligence in deals, driven by factors like inflation, a strong U.S. dollar, and the ongoing conflict in Russia, which creates uncertainty. We still closed large deals, but some took a bit longer than expected. While our typical sales cycles are around 90 days, it is notable that some large deals are experiencing delays, though I’m not talking about months or years, just additional days. Our leadership team has remained focused on the course we've been on since the early days of COVID. The current macro uncertainty, while tricky, is not as severe as what we faced in the first quarter of COVID. Our customers have plans in place; they are equipped to operate in a hybrid environment and continue to face a challenging talent shortage. Unlike that earlier environment, our team is committed to improving efficiency, investing in sustainable high growth, and driving innovation to maintain our competitive advantage. Much of our focus is on automation across the platform, including process automation. The plans we’ve implemented in recent quarters have positioned us strongly to handle whatever challenges come our way.

That's really helpful information. I have a quick follow-up for you, Howard. I know you've mentioned some details about the lower in-quarter expenses. Could you elaborate on the sources of margin leverage, specifically where they are coming from, such as hiring, buildings, infrastructure, and other areas where you can enhance the path to profitability? Thank you.

We've really focused on enhancing sales productivity. Our goal is to make it easier for our sales team to sell and to create the necessary capacity to support that effort globally. We aim to find the right balance between quota-carrying and non-quota-carrying staff. In fact, Q2 was our best hiring quarter, and we've continued to hire thoughtfully. We're leveraging automation in many of our functions, especially in G&A, which allows us to accomplish more without significantly increasing headcount. Our location strategy, particularly with new offices in Lisbon and Chile, has also expanded our talent pool and improved our ability to adopt a follow-the-sun model. These various efficiency measures are structural and designed for the long term. The changes we're implementing to make our organization more resilient and agile are positioning us well for the future.

We will go next to Chad Bennett with Craig-Hallum.

So just following up on the last question, I'm not sure if I heard the answer or not. Jennifer, regarding the elongated sales cycles on the enterprise side and the issues you observed in EMEA or the additional sign-offs there, was that primarily driven by new logos or by expansion?

No. Generally, I think our sales team spends most of their time on expansion. However, for context, when we mention that some of our larger deals are taking longer to close, it doesn't necessarily mean they are enterprise deals. Many of our biggest enterprise customers start small and place multiple purchase orders over time. This aspect of our business contributes to our resilience in the current environment, as we don’t depend on large deals in any segment to achieve success.

Yes. And just because if you look at the $100,000-plus customer growth, I'm not sure kind of what internal expectations were, but it looked pretty solid year-over-year and so just trying to reconcile. And also, if you think about not that you guide for quarterly billings or you guide for quarterly billings, but we don't know what your guide would have been for this quarter, all else equal. I mean the 20% to 25% growth versus maybe a 25% to 30% in normal times, is that kind of 5% delta? Again, you don't guide. But 5% delta, is that encompassing kind of everything you're seeing today or you saw in the quarter? Or is it assuming things get even a little bit worse? Is there any color there?

Yes. So Chad, I'll jump in on that one. The approach that we've taken there is that in the back half of the last quarter, we started seeing a little bit of this effect for some of these deals. And to Jen's point, a lot of those customers, we saw a 38% growth in customers above $100,000. A lot of those customers get above $100,000 there doing lots of smaller deals. So our high-velocity transaction business across all segments remains strong. What we did see is that some of those larger deals took longer. And so in coming up with our estimate with respect to billings for this quarter, we did extrapolate some of the extension in duration that we had started to see into the view that we have with it.

Nice job on the quarter.

Next, we have Andrew Sherman with Cowen.

It's Andrew on for Derrick. So Jen, you guys sell mostly into developers but also customer service. Does it feel like budget priority within the developer in DevOps arena is more resilient than other buying centers? And what's your sense on where budget priorities are the highest right now?

I don’t think we’ve seen a shift in demand or budget across our different personas. However, this is more about the problems we solve rather than the personas themselves. One significant change in recent years is that our customers, right up to the CEO and even the Board of the Audit Committee, have come to realize that incidents are costly, with some expenses measurable in both the immediate and long term. The long-term trends we’ve consistently discussed, such as digital acceleration, cloud adoption, and DevOps transformation, remain strong in this environment. No one is halting or slowing down their projects in these critical areas. Additionally, due to the more than 700 applications, monitoring systems, observability, and cloud providers we connect with, we are well integrated with our customers. We have become essential infrastructure, as reflected in our gross retention, low churn, and improving net dollar retention. Unlike during COVID, when many buying centers froze to evaluate the situation, we are not observing that behavior now. Having worked across various software sectors throughout my career, I would not want to be selling discretionary applications or those that are merely features without solving mission-critical problems. Incident response, security, and customer service will continue to be vital because most of our customers' revenue generation now relies on their digital products and services, making these issues increasingly important for them.

Great. And then, Howard, I wanted to ask about the price hikes and if there's any contribution from that in the back half implied in guidance. And I think 20% of customers are billed monthly. So did that have any impact on Q2? And how should we think about the impact of those rolling in over the next few quarters?

Sure. On the pricing side, there are two aspects to consider. We implemented a price increase back in March, aimed mainly at new customers, which has positively influenced our customer acquisition efforts. Additionally, we made slight increases for renewals, as we discussed last quarter, and that process is ongoing and working well, which we've included in our outlook for the end of the year. Now, regarding your final question, Andrew?

Just impact of how they'll roll out over the next few quarters.

Yes. I think both of these initiatives are progressing well. Their mechanisms are functioning effectively, and the value we provide to our customers is clear. The ROI information that Jen shared highlights the significant value we're delivering to customers, and we're not encountering any resistance.

Matt Stotler, we're going to come over to you. Matt with William Blair.

Maybe just one to start off with on the kind of free to paid customer conversion. Obviously, you guys haven't talked about specific rates, but are you seeing any change in that rate of conversion or the ability to convert customers in this environment? Do you have any thoughts on how it's going to trend going forward?

So Matt, this has always been a long-term program for us regarding free and conversion, aiming to capture developers early in their use of PagerDuty or other potential responders, and ensuring they have such a good experience that they convert. We have seen good, healthy trends in terms of new customer acquisition, and that funnel is still effective for us. We take a long-term view on this because we know our expectation isn't for a rapid transition from free. However, when we look at our mid-market and enterprise segments, which free has allowed us to concentrate on, we observed very strong customer acquisition in both the mid-market and enterprise in this last quarter.

That's helpful. I have a quick follow-up regarding the partner ecosystem. While it may not be a significant contributor at the moment, it's an area you've mentioned investing in. As you look ahead and seek efficiencies while continuing to invest in go-to-market strategies, how does the partner channel align with that? What are your priorities in this area given the current environment?

Sure. I mean, I think we talked in the past about our partnerships with AWS and Salesforce, particularly around DevOps for AWS and then our customer service ops solution for Salesforce, and those will continue to be both product and go-to-market partners that are important to us and that we're spending a lot of time with. I mentioned Dreamforce, I think, on the call. And we'll also be spending quite a bit of time at Reinvent. I always tell Andy and Adam that Reinvent is like where our people are. It's like coming into our own village, all the developers there. But we also think about our technology partners, so we talk about integrations every quarter. I think sometimes it's easy to underestimate how expansive that is for our ecosystem, the fact that we don't have to build all those integrations that a customer may have a use case and use our API to build their own integrations, which then opens opportunity up for other customers and users. And so that will continue to be an important area of investment for us. And then increasingly, as we look at expanding into new regions and new verticals, partners become more and more important. So we have put a venture together with a partner in Japan to try and accelerate our expansion into that market, for instance. But I would say that we try to be very focused in this area as opposed to sort of the spray-and-pray model. Because in my experience, a lot of partner efforts have been measured by activity, not output, and I'm really looking to figure out how we impact our overall customer experience and grow the effectiveness and efficiency of our go-to-market organization by having the right blend between direct and channel partnership.

It looks like we have exhausted our questions today. I want to thank everybody for your participation. Howard, thank you. Jen, can I pass it over to you for any final thoughts for this quarter?

Yes. So, I just want to say thank you, everyone, for joining us. We remain very positive on the demand that we see going forward and very proud of our execution, and we just appreciate the trust that our customers place in us, and I want to thank all of the PagerDuty employees for all of their hard work and wish everybody a safe and long holiday weekend. Thank you.