PagerDuty, Inc. Q4 FY2024 Earnings Call

Good afternoon, and thank you for joining us to discuss PagerDuty's Fourth Quarter and Full Fiscal Year 2024 Results. With me on today's call are Jennifer Tejada, PagerDuty's Chairperson and Chief Executive Officer, and Howard Wilson, our Chief Financial Officer. Before we begin, let me remind everyone that statements made on this call include forward-looking statements based on the environment as we currently see it, which involve known and unknown risks and uncertainties that may cause our actual results, performance, or achievements to be materially different from those expressed or implied by the forward-looking statements. These forward-looking statements include our growth prospects, future revenue, operating margins, net income, cash balance, and total addressable market, among others, and represent our management's belief and assumptions only as of the date such statements are made, and we undertake no obligation to update these. During today's call, we will discuss non-GAAP financial measures, which are in addition to, and not a substitute for or superior to, measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in our earnings release. Further information on these and other factors that could cause the company's financial results to differ materially are included in filings we make with the Securities and Exchange Commission, including our most recently filed Form 10-K as well as other subsequent filings made with the SEC. With that, I will turn the call over to Jennifer.

Thank you, Tony. Good afternoon, and thank you for joining us today. PagerDuty delivered a solid fourth quarter to cap off another year of growth and substantial operating margin expansion. We demonstrated operating efficiency throughout the year and completed our second consecutive year of non-GAAP profitability. On a full-year basis, revenue grew 16% year-over-year and non-GAAP operating margin expanded by over 1,200 basis points to 13%. In the fourth quarter, revenue grew 10% to $111 million, at the top end of our guidance range. Non-GAAP operating margin of 10% exceeded the high end of guidance, with a year-over-year expansion of nearly 400 basis points. Our steady progression upmarket underpinned our solid results. Expansion ARR, $100,000 transaction volume, and average deal size each improved sequentially. And with a higher mix of ARR coming from our enterprise segment, the visibility and predictability of our business also continue to improve. We achieved dollar-based net retention 1 point above our expectation, and we see it improving in FY '25 along with total ARR growth. We added $13 million of net new ARR in Q4 and grew total ending ARR 10% to $452 million. Customers with two or more products contributed 62% of the total, an increase of 4 percentage points over the prior year. To a large extent, the growth in both metrics was driven by increasing momentum in enterprise engagements, resulting in several multi-year Operations Cloud deployments within the Global 2000. During the fourth quarter, we gained traction within our enterprise segment, demonstrated by annual net new additions to our cohort of customers who spend more than $100,000, which doubled quarter-over-quarter. On an annual basis, our $1 million cohort increased 16% to 58. These results demonstrate the strong market fit of PagerDuty's Operations Cloud for the world's leading brands seeking to modernize their operations. ARR from both new and existing customers exceeded Q3 levels in Q4, and we remain confident in delivering accelerated net new ARR growth in FY '25. We shipped innovation across all four of our product pillars in FY '24 and started FY '25 with markedly higher pipeline across Automation, AIOps, Incident Management, and Customer Service Operations, representing a strengthening demand signal from CIOs and CTOs with mandates to protect revenue, increase innovation velocity, improve productivity, and mitigate risk. For example, our AIOps solution introduced during the first half of FY '24 is designed specifically for centralized IT teams network operations, site reliability engineering, and IT ops, which comprise approximately 21 million global professionals. A complement to our developer-focused solution that was already in market, AIOps applies machine learning to reduce noise, surface real-time content, and automate a wide variety of manual activities. Unlike other AIOps solutions in the market, PagerDuty's solution is integrated to automated workflows, enabling customers to auto remediate more and more of their ecosystem, reducing reliance and the cost of manual processes and people. Our cloud-based Process Automation solution reached functional parity with our self-managed on-prem offering during FY '24, addressing numerous new IT use cases across service management and IT operations. In addition, several new features enabled teams to leverage Runbook Automation in zero-trust environments, mitigating cybersecurity risks for enterprises, a large and growing investment area for our customers. Customer service operations added workflow automation capabilities from Salesforce Service Cloud, ServiceNow CSM, and Zendesk, unifying customer service teams and agents with technical teams that manage critical services and customer-facing applications. Private Status Pages, along with PagerDuty's generative AI-based copilot, enable companies to consolidate point solutions to save significant time and more effectively manage communications while responding to an incident. The acquisition of Jeli further differentiates our automated Incident Management solution from low-value, price-led on-call solutions and less scalable workflow tools. Today, our robust combined offering enables organizations to rapidly transform the learnings from incidents into a knowledge base for timely, informed operational decisions. End-to-end Incident Management includes AI-assisted automated post-incident analysis and learning integrated into the CI/CD process, which helps customers continuously improve the efficiency with which they respond to and prevent further incidents. The innovation we delivered across the Operations Cloud platform addresses some of the enterprise's highest priority budgeted business initiatives, including digital business resilience, modern service management, customer experience management, and network operations center modernization. In fact, several Q4 wins validate our platform to problem fit, namely seven-figure CIO- and CTO-sponsored multiyear platform engagements at Global 2000 companies. For instance, a customer within our software and technology vertical expanded to the full Operations Cloud footprint with us. Already a $1 million customer, this well-known enterprise doubled down on PagerDuty when they understood the opportunity to protect revenue and mitigate risk by connecting their customer support team with their infrastructure, site reliability, engineering, and business technology units. Before PagerDuty and despite significant investments in observability, over 20% of incidents were still being reported by customers, putting their customer SLAs and retention at risk. They recognized the need to transform their customer experience while reducing operational risk, replacing point solutions to address fragmented operational gaps. Today, this customer has deployed all four product pillars of the Operations Cloud in a multiyear commitment, expanding to nearly twice the ARR. An entertainment and media company with a significant global presence increased its ARR beyond $2 million per year on a three-year term. This is a large global enterprise managing operational complexity across a diverse set of use cases from retail operations and on-property experiences to digital streaming in a corporate culture where customer experience is at the very heart of their brand. In navigating top-down pressure to reduce costs and consolidate platforms, PagerDuty's proven ROI was central to the customer's decision to expand with us. They are now using the full Operations Cloud to improve digital resilience across all of their major business units and to protect their customer experience. Our partnership with AWS and the ability for customers to leverage the AWS Marketplace was another key factor in this multiyear, multimillion dollar win. In Q4, we also expanded on a win we mentioned in Q2, the global semiconductor supplier who selected PagerDuty's workflow offering to standardize and better orchestrate their enterprise-wide automation efforts. This has become a common enterprise challenge. Islands of automation that pop up across teams and functions hinder a company's ability to scale efficiently. In Q4, we expanded our relationship with this multibillion-dollar company, and we now support them with enterprise-grade Incident Management seamlessly integrated with automated workflows. Our fast time to value in Q2 earned us the right to solve even bigger problems with the Operations Cloud as they navigate ever-increasing complexity in pursuit of capturing an outsized share of the generative AI market. This customer's use case is an appropriate analog for the long-term tailwind generative AI presents for our business. With the added complexity caused by both the volume of software created and the frequency of code updates that generative AI enables, we see generative AI fostering demand for the Operations Cloud, as it improves efficiency for developers but also proliferates complexity and risk. In turn, we continue to expand our own generative AI offerings with PagerDuty copilot features across our platform, slated for general availability in the first half of this year and expected to contribute pipeline in the second half. These capabilities augment our existing AI and machine learning functionality, which builds on our proprietary and foundational dataset and has been part of our value proposition for nearly a decade. In line with our mission to lead the market in innovation in order to revolutionize customer operations, we welcome Jeff Hausman as our Chief Product Development Officer. His extensive enterprise product development experience in service management, ITOM, and cybersecurity, and deep domain expertise in enterprise positions us well to continue our rapid innovation cadence and platform expansion. During the year, we also progressed our FedRAMP status to in-process, and we expect FedRAMP certification in the first half of FY '25. In support of our expansion into the U.S. public sector and our ongoing focus in enterprise, we are thrilled to welcome Teresa Carlson, former long-time AWS Public Sector Business leader, to our Board of Directors. By efficiently controlling the controllable elements of our business, we have solidified a scalable structure for growth, demonstrated enterprise platform fit, and entered the year with healthy go-to-market capacity poised to accelerate growth. The Operations Cloud platform resonates with executives due to its proven ability to reduce operational expenses, protect revenue, mitigate risk, all while improving innovation velocity. Developers remain at the forefront of both the customer experience and operational resilience. Our customers continue to face pressure to grow margins while also accelerating time to market in the face of an ongoing skills shortage. And developers confront the challenge of doing more with less, yet managing increasingly fragile tech stacks. Not surprisingly, operational complexity is rising and automation and generative AI are becoming core to operating at speed and scale. We expect developer experience and efficiency to continue to be critical to business success for the world's most important brands, remaining a long-term tailwind for PagerDuty as we set the standard for developer best practices inherent in our platform. Our leadership position continues to be validated and reinforced by industry analysts. Earlier this year, Forrester and GigaOm named PagerDuty AIOps a leader in their Wave and Radar reports in the fast-growing AIOps market. In Q4, GigaOm also named PagerDuty the Overall Leader in their Radar Evolution Evaluation of Incident Management Platforms. Additionally, Gartner highlighted the PagerDuty Operations Cloud in a new market category in their Market Guide for Artificial Intelligence Applications in IT Service Management. Lastly, our Process Automation offering is consistently ranked number one overall by users on G2 in their workload automation category and grid report. Investing and supporting our communities through social impact programs is a mainstay in our culture and FY '24 was no different. PagerDuty.org made more than $1 million in grants to impact partners, including our partners in the time-critical health space. These impact partners leverage PagerDuty's platform to advance their operations to drive improved health outcomes within their community. Additionally, almost 100% of our employees volunteered or donated to a cause last year, representing a third consecutive year of greater than 90% participation. While the volatile economic environment was challenging during FY '24, we have emerged stronger, more profitable, and well poised for accelerating growth during FY '25. Our confidence is founded in improving leading indicators like large-deal pipeline and conversion rates, stabilizing customer retention in mid-market and enterprise, an increased mix of multi-product, multi-year adds and expansion, and improved sales productivity. Our cost structure enables continued growth in both profitability and cash flow, reinforcing our position as a durable, profitable growth business. In my daily engagements with our largest customers, I see increased budget certainty and confidence in more strategic long-term investments in our platform. If we learn nothing else this year, we must anticipate the unexpected and our customers' demand for our integrated platform, combining Automations, AIOps, Incident Management, and Customer Operations is increasing. With that, I'll turn the call to Howard, and I look forward to your questions.

Thank you, Jen, and good day to everyone joining us on this afternoon's call. 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. Our enterprise motion continued to show strength in the fourth quarter. Customer commitments lengthened across our base as our go-to-market team leveraged flexible enterprise pricing and increased attached rates of AIOps and our other products. These efforts resulted in our best quarter of new and expansion ARR in Q4 for the year. Companies with less than $50 million in revenue, our SMB segment accounted for 16% of ARR at the end of FY '24, while a relatively small mix of our business, a decline in net new customers and dollar-based net retention was a headwind to both quarterly and annual results this fiscal year. This adverse trend persisted in the fourth quarter, but we believe the headwind will be less severe in FY '25. Revenue was $111 million in the fourth quarter, up 10% year-over-year. The contribution from international was 28% of total revenues, an increase from 24% compared to FY '23. Annual recurring revenue exiting Q4 grew 10% year-over-year to $452 million. We delivered 107% dollar-based net retention, 1 point above our expectation in Q4 and compared to 120% in the same period one year ago. Our DBNR expectation for Q1 is approximately 106% and is expected to mark the floor for this metric, moving higher in the second half of FY '25. Customers spending over $100,000 in annual recurring revenue grew to 804, up 7% from a year ago. Total customer count of 15,039 declined year-over-year by 1%, primarily due to the challenging environment for subscale businesses. Free and paid customers on our platform grew to over 28,000, an increase of approximately 17% compared to Q4 of last year. In terms of metrics that we provide on an annual basis, customers with ARR over $1 million increased to 58, up 16% compared to Q4 of last year. ARR from customers using two or more paid products was 62%, up from 58% in FY '23. And to provide additional transparency on product mix, the ARR contribution from incident management was 73% of the total compared to 77% in FY '23, as customers adopt multiple products in our Operations Cloud platform. Q4 gross margin was 85% and within our 84% to 86% target range. Operating income was $11 million, or 10% of revenue compared to $6 million, or 6% of revenue in the same quarter last year. In terms of cash flow for the quarter, cash from operations was $22 million, or 20% of revenue, and free cash flow was $20 million, or 18% of revenue. For the full fiscal year, revenue was $431 million, up 16% year-over-year; gross margin was 86%, up slightly year-over-year; operating income was $56 million, or 13% of revenue compared to $3 million, or 1% of revenue a year ago. Operating cash flow was $72 million compared to $17 million a year ago. Free cash flow was $64 million compared to $9 million in fiscal 2023. And headcount increased to 1,182, up 1% year-over-year. Turning to the balance sheet, we ended the quarter with $571 million in cash, cash equivalents, and investments. On a trailing-12 months basis, billings were $450 million, an increase of 10% compared to a year ago and in line with our estimate. With respect to Q1 FY '25, we expect trailing 12-month billings growth to be approximately 8%. To provide some context before turning to guidance, as I mentioned, annual recurring revenue ended FY '24 at 10% growth. We expect ARR growth to accelerate in FY '25, particularly in the second half. Our guidance reflects this gradual growth acceleration. Importantly, we have made a change from monthly to daily revenue recognition, which creates a shift in revenue out of Q1 to the rest of the year. We expect to continue to expand operating margin in what will be our third year of non-GAAP profitability, and our EPS guidance for the first time includes a non-GAAP tax rate of 23%. So, looking at our guidance for the first quarter fiscal 2025, we expect revenue in the range of $110.5 million to $112.5 million, representing a growth rate of 7% to 9%, and net income per diluted share attributable to PagerDuty, Inc., in the range of $0.12 to $0.13. This implies an operating margin of 9% to 10%. For the full fiscal year 2025, we expect revenue in the range of $470 million to $478 million, representing a growth rate of 9% to 11%, and net income per diluted share attributable to PagerDuty, Inc., in the range of $0.65 to $0.70. This implies an operating margin of 13% to 14%. Before moving to questions, I would like to provide assistance with modeling FY '25. We changed from ratably recognizing subscription revenue on a monthly basis to a daily basis in FY '25. The impact of this is approximately $3 million less revenue in Q1, and $3 million higher revenue in the remainder of the year due to Q1 having fewer days. Our EPS guidance now incorporates a non-GAAP tax rate of 23% for each quarter of FY '25, which represents approximately $0.04 of EPS in Q1, and $0.21 in FY '25. Non-GAAP gross margin is expected to remain within our target range of 84% to 86%, but trend toward the low end of the range as we invest in our services capacity for enterprise customers. For reference, Q1 of the prior fiscal year incremental ARR was $12 million. And as a reminder, interest payments on our 2028 convertible notes are made semi-annually in arrears in Q1 and Q3. The business momentum we carry into FY '25 is a direct result of the long-term oriented investments in the Operations Cloud to solve the complex operational issues of large enterprises, accelerating our move upmarket. The annual increase in multi-product customer ARR and multi-year commitments, the increasing volume of large deals, and improved annualized gross retention this past quarter gives me confidence in our ability to accelerate growth this year. With that, I will open up the call for Q&A.

Thank you, Howard. As we turn to questions, we'll hear first from Sanjit Singh. Sanjit, if you go ahead and unmute.

Great. Can you hear me?

Go ahead.

Thank you for taking the question. Jennifer, considering the aspects that are within the team's control, you had a remarkable year regarding operating margin and profitability. I'd like to hear your thoughts on the sales execution as we reflect on fiscal year '24. With the observed slowdown in growth, do you attribute this primarily to macroeconomic factors, or were there areas where the team could have performed better? Additionally, how does this shape your growth expectations for the upcoming year? I recall you mentioning that sales productivity might be on the rise as we finish this fiscal year and move into fiscal year '25. I would like to get your perspective on where execution is strong and where it could improve.

Sure. Well, first of all, I appreciate the comment. We have been working for several years to put a structural set of programs in place to improve the efficiency and the operational resilience of the company through both profitability and cash flow. And I think we've done a good job there of controlling the controllables. In addition, we also invested quite a bit of time in enabling the salesforce to move upmarket selling to a new type of buyers. So, one of the shifts we saw in the macro was this move away from bottoms-up buying through the developer community to a top-down, more centralized, procurement-led purchasing process. And we had to enable the salesforce to manage that effectively. Fortunately, we're in sort of the right place at the right time with the Operations Cloud platform, which is really directed towards business objectives of improving productivity, improving cost efficiency while increasing time to market, and protecting the customer experience and growth. I think what we really saw in the first half of the year was a pretty significant change in the demand signal as customers retrenched thinking through their headcount investments, their budget investments. But what we've seen stabilized towards the back half of the year is more confidence around the budget envelope that our enterprise customers have to work within, and more of a willingness to engage with us in multi-year, multiproduct deals. And you can see that in some of the examples that we've mentioned. And we've seen a real improvement and sort of shift in the sales organization's behavior to go from that transactional created in quarter sort of expansion motion to really a top-down, value-driven sales motion that really supports and underpins the better together story for the platform. And so, I would say it's less about execution and more about making that transition, which was where the requirement was accelerated by the change in the macro.

That's great context...

I might just add to that in terms of the progress that we've seen with being able to do these larger seven-figure deals with large companies where it's CIOs-, CTOs-sponsored deals has led to a more strategic relationship with our customers. And those multi-year agreements are showing up in our RPO. RPO grew over 30% this quarter. So that is a sign that the move that we're making in that direction is yielding the right kind of results. It also gives us reason for confidence because we look at the pipeline and now we have pipeline visibility beyond just next quarter. So the deals that our sales team is working on now stretch out multiple quarters ahead. So, we're getting a better view of the deals that are being developed and being worked on because they're more strategic in nature and they have higher value and they are going to deliver higher value to the customer. That gives us a better view on how things will play out in the year.

Just one more follow-up, Howard, and then I'll give the floor back to you. Regarding the timing of the reacceleration, which you suggested might happen in the second half, how much of that is dependent on hiring? We've noticed that software development projects are coming back online, but the hiring environment in both tech and non-tech sectors still appears to be quite sluggish. Do we need to see a significant recovery in hiring before PagerDuty can benefit from improved growth?

Yes, Sanjit, we haven't taken into account improvements in the macro environment through additional hiring in tech. We've assumed the macro remains unchanged. Our approach is to provide value to the customer that is not reliant on their headcount. Therefore, we are truly focused on delivering business value.

I take that one step further and say, if the macro did improve, we would see that as upside.

Okay. That's a great way to frame it. Thank you, Jen. Thank you, Howard.

Okay, thank you. Next we'll hear from Joel Fishbein at Truist.

Thank you for taking my question. And I have a follow-up to Sanjit's question about some of these large customers that you signed, I thought that was one of the most interesting takeaways. If you can peel the onion back just a little bit on the seven-figure multi-year deals that CTO-sponsored, did this involve the entire Operations Cloud? Number one. What were the competitive dynamics around those deals? And then, the third is, were there any tools that you can say that you've consolidated as part of that? I know a lot of it's DIY, but if there's anything you can point to that'd be really helpful. Thank you.

Yeah, I appreciate the question. In most of the examples we shared in prepared remarks, the software company that we talked about that expanded in the quarter, they adopted all four pillars of the Operations Cloud. That's Automation, AIOps, Customer Service Ops, in addition to Incident Management. And in that case, we did displace a point solution in the AIOps space. And one of the trends that we're seeing is this realization that insight is just insight if you don't have the ability to act on it. And the fact that our AIOps solution now serves centralized teams like SRE, like NOCs or IT operations, but also is integrated into workflow automation. So, you can go from learning to change immediately, really streamlines the process of improving the resilience of your technology ecosystem. And that has kind of become, I think, a really important sort of characteristic that's driving more demand for the Operations Cloud. Another example I would point to is the entertainment and media company that we described where they adopted all of the Operations Cloud capabilities, but across multiple use cases, retail operations, on-property customer experience, as well as digital resilience, which is something they had been focused on previously with IM. I think what's unique about these two cases, as well as the semiconductor customer we talked about is they all expanded on top of previous commitments to Incident Management or Incident Management plus Automation, but also took on longer-term commitments. And in many cases our customers are asking for those. It's not just us enabling the sales force to position that opportunity. They're doubling down and saying this is going to be my platform for real-time operations. And that has been super encouraging, and what we're also seeing in the pipeline, stronger multi-product pipeline to start the year, capacity, sales capacity that positions us to exceed targets. So, we're still investing in growth but with, I think, the momentum of some of these proof points with other customers in hand.

Yeah, and I'll just add to that. Joel, you asked a question about competition. Yes, we are displacing competition, particularly in the area of AIOps. So since we introduced our new AIOps offering in April of last year with the consumption-based metric, we're actually now at over 250 customers who are using that SKU and we are displacing other competitors with that. And that was because that's an offering that is really geared towards centralized teams that are managing high volumes of data and information having to action at speed.

And are the margins similar in that SKU as to the other SKUs that you have, Howard?

Yeah. Even with the consumption-based metric, we managed to maintain a gross margin of 85% this quarter.

Great, thank you. I'll cede the floor. Thanks.

Okay. Next, we'll hear from Rob Oliver at Baird. Rob, please go ahead.

Great. Hey, good evening. Hi, Jen. Hi, Howard.

Hi, Rob.

Hi, thanks for taking my questions. I had two. So Jen, one for you or Howard as well. Just on the sales pipeline for this year, which clearly you guys are more optimistic about and sounds like a lot of that is stuff that you guys have put the work into control. Can you talk maybe a little bit of how we should think about the breakdown between expansion deals, where it sounds like you guys have a really nice opportunity versus new logos, recognizing that the headline customer logo numbers are impacted by the low end. Really I'm just asking about kind of larger customers here. And then I have a follow up.

Yes, thank you for the question. In the mid-market and enterprise sectors, we've seen growth in customer logos and continue to attract new customers who are seeking ways to improve cost efficiency while accelerating their innovation and time to market. I'm optimistic for a few reasons that I observe when engaging with our customers as well as in our leading indicators. First, technology is now seen as a value driver rather than just a cost center across various industries, including healthcare, manufacturing, travel and hospitality, and retail. Second, there is clarity around budget constraints, and the Operations Cloud addresses high-priority, budgeted initiatives that our customers are pursuing. We are aligning more effectively with these initiatives rather than solely focusing on selling technical features and functions to developers. This represents a significant shift for our business. From a leading indicator standpoint, our large deal pipeline has improved significantly, and conversion rates have returned to pre-dislocation levels. We are also observing an uptick in both multi-product and multi-year deals, evidenced by RPO growing over 30%. Looking ahead to the next year, as Howard mentioned, we aren't counting on macroeconomic improvement, but there is potential upside. If we could accelerate our federal strategy sooner or if generative AI adoption progresses more quickly, we believe these could create opportunities for increased complexity and software proliferation, leading to more incidents. These are all potential advantages we are not including in our current guidance.

Great. That's really helpful. Thanks, Jen. And Howard, for you, just recognizing the sort of dichotomy between the Q1 guide and the applied acceleration for the rest of the year, and you guys have talked about it. And, Jen, just in response to my first question, talked about some of what gives you the comfort there. You did say that you're not expecting an improvement in macro. I think I also heard you say that the low-end pressures will ease a bit. And if I heard that correctly, I just wanted to understand a little bit better why that is. Is that better free to paid conversion, better visibility into the cohorting of those customers, something you guys are controlling? Any color there would be helpful. Thanks.

Yeah, sure. So, when we look at that SMB segment, we've been tracking very carefully what's happening with respect to churn and downgrade in that segment. We saw that really spike, grow and accelerate through this past year. But we saw that stabilize and get a little bit better in Q4. So that gives us a view that we expect that this year, a lot of that dislocation that happened around subscale enterprises has pretty much happened. And that means that that the impact will be less. We've also reduced our exposure to that segment by focusing on our growth in the enterprise and mid-market. So, whereas that segment has typically been close to 20%, that's now around 16% of our ARR, and we are steadily moving upwards. And in fact, even with new customer acquisition, you asked the question right around enterprise and mid-market, whilst we have seen impact of churn in the SMB segment, we've seen high-single-digit growth in the enterprise and mid-market segment through this year.

Great. Really helpful. Thanks to you both.

Thank you.

Okay. Next, we'll hear from Kingsley Crane with Canaccord Genuity. Kingsley, please go ahead.

Hi, Jen. Hi, Howard.

Hi, Kingsley.

Hi, Kingsley.

Thank you for your question. It's interesting to note that, based on the industry analyst materials provided, you seem to be competing closely with some large traditional IT operations companies. You've always set yourself apart in the real-time operations use case. However, as you continue to secure these $1 million deals and engage in top-down selling, how frequently are you encountering these companies, which may be the competition you referred to earlier, compared to still operating in greenfield areas?

We still observe that the majority of customer engagements, regardless of the segment, tend to be in greenfield areas because many customers lack an Incident Management or automation platform to address unstructured and unpredictable incidents. These types of incidents are often high-value and mission-critical to resolve. Additionally, many large companies that offer ticketing systems or workflows are designed for longer timelines and lower criticality issues. Consequently, by the time a ticket is raised and goes through the command and control approval process, companies could be losing transactional revenue, exposing themselves to compliance risks, or forfeiting customer subscriptions in mere seconds rather than minutes or hours. This creates a need for a different application focused on higher value but shorter timeline use cases. Under this definition of real-time work, we could include areas like cybersecurity, risk mitigation associated with regulatory compliance, Incident Management, and the management of large language models and AI-based products and services, as well as physical security. All of these require timely management and do not fit well within a sequential decision-making process, especially one that depends on knowing where the subject matter expertise resides within an organization. By applying AI and automation throughout the value chain—from event detection to work orchestration, whether involving people or automated runbooks, to diagnostic automation and even self-healing or auto-remediation of the technology ecosystem—we take a different approach. Meanwhile, the market has become more receptive to automation compared to a year ago, when the focus was more on job protection. Most leaders we engage with are actively seeking ways to reduce human involvement in these processes and enhance automation levels. A common question I receive is about the percentage of their infrastructure that we can help automate, which is not something achievable with a workflow solution that relies on human knowledge and approval processes.

Right. No. Very helpful. Well said. So, Howard, for you, just on the 9% to 11% growth guidance, any way to think about seat growth versus ARPU growth within that?

Yes. So, when we have a look at our model for growth with our customers through this year, we obviously have multiple levers, which is user or seat growth has been one of the primary mechanisms for us. But increasingly, we're seeing customers adopting the Operations Cloud. So the contribution from new product, if you like, from AIOps, from automation and from customer service ops, we expect that to continue to be a large contributor. And as we mentioned in the prepared remarks, we now have Incident Management at 73% of our overall ARR. So, the contribution from the other products is increasing.

Okay. Thank you. Very helpful.

Thank you so much. Next, we're moving to Andrew Sherman with TD Cowen. Andrew, please go ahead.

Great. Thanks. Hey, congrats. Howard, so ARR is going to be addressed by Andrew, who is speaking on behalf of Derrick.

Hi, Andrew.

Hi, Andrew.

So, ARR is going to be your leading indicator here in the second half. Any color on how much you think that can accelerate as we get into the second half?

We haven't provided any specific guidance on that, Andrew, but our view is that we will see acceleration on that in the back half of the year. And part of that is because we have so much that's in place that we've already been able to demonstrate around being able to do these larger six- and seven-figure deals, get customers to take multiple products, have them commit to multi-year arrangements. And in fact, our new ARR this past quarter was the best it's been in six quarters, and our expansion ARR was the best it had been in four quarters. And our pipeline conversion improved from the real low in Q1 of last year right through back to the typical levels in Q4. So, we believe that the changes and the adjustments that we've made have put us in a good place. Now obviously, we have pipeline that goes out much further than we had historically. Instead of just the next quarter, we're looking two, three, four quarters out now. And that means that our ability to manage that is different, improved visibility, but also the opportunity to drive incremental growth given the gestation of those deals.

That's great. Thanks. And Jen, you just had a big renewal quarter here. How would you characterize the behavior of that group versus your expectations going in? And is the top-down C-level approach kind of helping you drive these larger deals? And it sounds like budgets have improved, so you kind of see that continuing here in the next couple of quarters.

Yeah. I mean, there's no such thing as an overnight success in software, I don't think. But so, it's been several quarters of working with customers. And, in fact many of our customers have trusted us for years, but just now have the budget capacity, and the confidence in managing their own business volatility to make more strategic longer-term agreements. And they see the platform opportunity as a way to consolidate some of the point solution players that are using for different things across the business. The other thing that we're seeing customers realize is that despite spending millions of dollars on observability, they're still learning about major incidents from their customers. In some cases, it's 20%, in other cases, it's a significantly higher percentage. And so, they're coming to us for AIOps. And just in mid-market and enterprise, we now have over 250 customers using our AIOps solution and in most cases integrating that as part of the Operations Cloud. So, from my perspective, when I look at the promise of this change in behavior and kind of willingness to engage with us on a long-term basis, the way I think about it is it's a huge TAM. It's still a very early market. And you all know me, like, I'm not going to be happy with 20% growth. Like, we see ourselves as a growth company. We're putting ourselves in a position to be durable from a profitability perspective to produce cash flow. And, I think we've emerged from a hard year much stronger and in a much more resilient operational position with the growth investments in place and the capacity to reaccelerate growth.

Excellent. Thank you.

Okay. Thank you, team. Next, we're going to hear from Jacob Roberge with William Blair. Excuse me.

Hey, thanks for taking questions.

Hi, Jacob.

Hi, how are you? Just wanted to follow-up on that renewal question from Andrew. I know you called out some larger customer downgrades last quarter and Q3. Did that stabilize in Q4 and kind of at the start of Q1, or were those still present throughout the quarter?

We definitely saw an improvement in Q4, largely due to the measures we implemented a couple of quarters ago. These measures included engaging with customers earlier in the renewal cycle and focusing more on how they were using the product and the value they were getting from it. As a result of these changes, we were able to enhance our gross retention in Q4, which is our most important quarter for renewals. These initiatives are still ongoing, and we will continue with this program to maintain high levels of gross retention.

Okay, helpful. And then, great to hear that net new ARR was the best in a few quarters. Can you talk about what drove that performance? Was that mainly just stabilization in the core Incident Management business, or was that more driven by some of those larger platform deals that you called out during the quarter?

It was definitely driven by an improvement in cross-selling and upselling. So, I think we mentioned earlier that now 62% of our ARR comes from customers with two or more products. That's a 4 percentage point improvement over the previous quarter. And I see that as early momentum. When you look at some of these larger deals that we've been able to close over the last quarter, we feel confident that that is a trend that should continue over time, particularly as we've done a better job, I think, than we had in the past of driving awareness around what the Operations Cloud actually is, what it can do, and why bringing those four pillars together in an integrated platform is greater than the sum of the parts. And we've also invested in branding around this, and invested in enablement and helping our sales reps make that transition from that more transactional, functional and technical sale to a technical individual or mid-level manager to more of a business-centric, value-driven conversation with a CIO and a CTO. And one other thing that I noticed is that the technology leaders that we're working with in the largest companies of the world are more technical than they used to be. So, we deal with a CIO at a large investment bank who actually came out of a cloud-based business as opposed to somebody who came out of procurement or program management business, and that is a trend that I like seeing in the customer base.

Very helpful. Thank you.

And I think I'd just add to that, Jacob. That 62% of our ARR coming from customers with more than two products, that was an improvement from 58% a year ago. And the way that that shows up is that when we look at the net new ARR within the quarter, we're seeing a much larger contribution coming from products outside of Incident Management to the extent that now we're seeing this dynamic as customers adopt the Operations Cloud where the Incident Management portion is smaller than the portion that's coming from the AIOps, Process Automation or CSR space.

Great, and thank you. From BofA Securities, and for Koji Ikeda, I believe. Let me go ahead and bring you on screen.

I think you might be on mute.

Oh, is your headset muted? It looks like Zoom has you unmuted.

No audio.

Well, Jennifer, what do you say? Should we close it up?

I'm happy to take a question in chat or we can wrap things up. Koji, we're unable to hear you.

Okay. Jen, over to you for the final comments. Thank you so much.

Well, look, I just want to thank everybody for joining us today. I am really proud of the operational resilience our teams continue to demonstrate, and I'm encouraged by the stability and the momentum emerging from our enterprise focus. More than anything, I appreciate the loyalty and our partners and the partnership our customers and our users have demonstrated over the last year. And we look forward to building on our long-term vision to revolutionize operations. Thank you very much for joining us today.