Good afternoon, and thank you for joining us to discuss PagerDuty's Third Quarter Fiscal Year 2025 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/A, as well as our subsequent filings made with the SEC. With that, I will turn the call over to Jennifer.

Thank you, Tony. Good afternoon, and thanks for joining us today. PagerDuty delivered a solid quarter with revenue and non-GAAP operating income well above our guidance ranges. Revenue growth increased to 9% and non-GAAP operating margin expanded to 21%. Net new ARR of $9 million in the quarter was a 21% increase over Q3 of last year. Total annual recurring revenue increased to $483 million, growing 10% year-over-year for the fourth consecutive quarter. We were pleased to see stabilization across all segments in the quarter, with retention improving across the board. That said, we remain focused on growth reacceleration and there is room for improvement, particularly on large deal conversions. We had an unusual number of large Q3 opportunities deferred, and while they are not lost, these will delay ARR acceleration to FY '26. Nonetheless, we are encouraged by improvements in several key indicators, including dollar-based net retention, multi-product adoption, enterprise contract duration, and total pipeline growth. Converting these multi-year, multi-product agreements is a top priority as the benefits compound in future quarters and represent the manifestation of our customers aligning with us on a joint vision for a more resilient future over a longer commitment period. The comprehensive agreements we secured earlier in the year laid the foundation for sequential improvements in both Enterprise and Commercial gross retention, leading to dollar-based net retention of 107%. As our ramped capacity has increased throughout the year, the number of accounts with ARR greater than $500,000 has risen by approximately 20%, driven by product up-sell and cross-sell. In Q3, AIOps, Automation, and Customer Service Ops contributed more than 40% to incremental ARR. In October, Forrester quantified the monetary benefits of the Operations Cloud through research with our enterprise customers. As more enterprises adopt multiple products across the broader platform, they realize an average return on investment of nearly 250% over three years, with a payback period of less than one year. This adoption enables enterprises to achieve high availability and significant financial returns. Product Development during the quarter continued to deliver innovation across the platform, further enhancing the value customers realize from the Operations Cloud. We are addressing several CIO imperatives, including incident management transformation, operations center modernization, and automation standardization. PagerDuty Advance, our generative AI offering, is now integrated across the platform to automate triage, expedite incident response, summarize communications, and reduce the cost and time to take action. Our generative AI assistant leverages an extensive proprietary data model along with the context of an incident lifecycle to make recommendations and answer common questions. This new unified chat experience with PagerDuty Advance built-in, enables teams to manage an entire incident from within Slack or Microsoft Teams. It was encouraging in the quarter to close our first paid PagerDuty Advance customers. Our new version of the Operations Console supports operations center modernization by providing comprehensive visibility, which minimizes context-switching and enhances focus. The latest version of Global Intelligent Alert Grouping is generating significant interest by leveraging neural networks to deliver heightened precision, effectively isolating signals and accelerating resolution. Recognizing that many of our largest customers are investing in automation standardization, we expanded our automation library in Q3. This includes more templates and workflows, as well as runbooks that automate common dev and IT activities. These enhancements address manual, repetitive, and time-consuming tasks such as consolidating log diagnostics, container management, and database management. Industry analysts continue to recognize our product leadership as our customers adopt new and existing capabilities of the Operations Cloud, especially AIOps. Recently, we were included among the top 25 solutions in Forrester's AIOps Landscape report, and GigaOm named PagerDuty a Leader for the third consecutive year in its annual GigaOm Radar for AIOps. AIOps and automation are vital as data-driven decision-making and advanced analytics set a new standard for operations. These trends are accelerating the pace and precision of corrective actions in IT while paving the way for long-term, preventive solutions. The Enterprise segment continued to grow above the average with particular strength in our core verticals Software and Technology, Financial Services, and Telecommunications. From a geographic perspective, EMEA is emerging as a source of stability that we believe is building a foundation for higher growth in FY '26. Customers within our high-value segments continued a consistent trend of six-figure expansions during the quarter. For example, a leading digital travel company strengthened its partnership with PagerDuty through a multi-year renewal and expansion agreement. This renewal strengthens the long-term strategic partnership, allowing both organizations to continue collaborating effectively. The company leverages the Operations Cloud for scaled service ownership, aligning with its 'build it and own it' culture. A top-tier financial services firm also expanded its relationship with PagerDuty, selecting us as its incident response platform. Our unique ability to support both central and distributed teams elevated PagerDuty to become their preferred platform. This marks the sixth expansion in five years, with the organization increasing users by nearly three times over this period. Continuing to lead through innovation, a cybersecurity firm has expanded its use of PagerDuty twice in the last 12 months, integrating products such as AIOps, Incident Management, and Customer Service to transform their incident management workflow. The decision to standardize on PagerDuty was driven by the need to prevent and reduce outages, provide quicker customer updates, and increase operational resilience. By moving away from multiple tools and manual processes, our customer has standardized their resolution process, resulting in reduced operational costs, improved efficiency, and a reduction in risk to the overall business. During the quarter, we welcomed two new leaders to PagerDuty: Rukmini Reddy, SVP of Engineering, and Pritesh Parekh, Chief Information Security Officer. Rukmini brings a wealth of experience, most recently as the SVP of Engineering at Slack for the past four-plus years. Pritesh joins us from Delphix, where he was the Chief Trust & Security Officer and SVP of Engineering. Their contributions will enable us to continue positioning the Operations Cloud as a strategic asset for all our customers. Fortune's Best Workplaces recognized us as a top 25 company for Women in their small and medium designation. We also continue to make progress with impact customers, with over 500 from the non-profit sector as of Q3. And we received validation from the Science Based Targets initiative for our commitments to reduce our operational and supply-chain carbon emissions. We are well-positioned to exit FY '25 with ARR growth poised for reacceleration, supported by rising retention, high-caliber sales hiring, and a robust pipeline. Following several quarters of stability, our primary focus is to deliver strong fourth quarter net-new ARR and to carry this momentum into FY '26. I look forward to seeing many of you at AWS ReInvent next week, where I will be speaking during Matt Garman's keynote about our longstanding partnership and co-innovation. I want to thank our shareholders, customers, partners and employees for their continued support. With that, I'll turn the call to Howard and look forward to your questions.

Thank you, Jenn, 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. In the third quarter, we continued to solidify our Enterprise motion and stabilize the contribution from our Commercial segment. This success, along with strong operating margin expansion and improved visibility from building a robust Q4 pipeline, were key highlights for the quarter. Revenue for the quarter was $119 million, up 9% year-over-year. The contribution from international was 28% of total revenues, up from 27% in the year-ago period. Annual recurring revenue exiting Q3 grew 10% year-over-year to $483 million. We anticipate a similar growth rate in Q4, slightly below the 11% rate we had been tracking toward. As our business becomes increasingly focused on the Enterprise segment, we continue to learn and adjust our expectations regarding typical seasonality. Our precision in handling large deals is improving as Enterprise momentum builds. We delivered 107% dollar-based net retention, above our Q3 expectation and in line with our expectation for the full fiscal year. Similar to last quarter, Enterprise DBNR remained 10 points above our Commercial segment. Customers spending over $100,000 in annual recurring revenue grew to 825, up 6% from a year ago. Total paid customers remained relatively flat year-over-year at 15,050 as growth in Enterprise was offset by a modest decline in the number of Commercial accounts. Free and paid companies on our platform grew to over 30,000, an increase of approximately 11% compared to Q3 of last year. Q3 gross margin was 86%, at the high end of our 84% to 86% target range. Operating income was $25 million or 21% of revenue, compared to $15 million or 14% of revenue in the same quarter last year. The outperformance relative to our guidance was driven by delays in headcount starts, and timing of marketing and consulting expenses. In terms of cash flow for the quarter, cash from operations was $22 million, or 19% of revenue, and free cash flow was $19 million, or 16% of revenue. We continue to expect free cash flow margin for the full fiscal year to be ahead of our operating margin by a couple of percentage points. Turning to the balance sheet, we ended the quarter with $542 million in cash, cash equivalents and investments. In Q3, we repurchased 3.8 million shares from our $100 million repurchase plan, and at the end of the quarter, $1.5 million of the total amount authorized to be repurchased remained available. On a trailing 12-month basis, billings were $478 million, an increase of 9% compared to a year ago, slightly below our 10% target. With respect to Q4, we anticipate trailing 12-month billings growth to be approximately 9%. At the end of Q3, total RPO was approximately $405 million. Of this amount, approximately $278 million, or 69%, is expected to be recognized over the next 12 months. As a reminder, as of FY '25, our RPO disclosure includes contracts with an original term of less than 12 months. Applying the current definition to the year-ago period, total RPO increased 35% on a like-for-like basis over Q3 FY '24, which would have been $298 million. Turning to our guidance. For the fourth quarter fiscal 2025, we expect revenue in the range of $118.5 million to $120.5 million, representing a growth rate of 7% to 8%. And net income per diluted share attributable to PagerDuty, Inc. in the range of $0.15 to $0.16. This implies an operating margin of 13%. For the full fiscal year 2025, we are raising the midpoint of revenue with an updated range of $464.5 million to $466.5 million, representing a growth rate of 8%. This compares to the range previously provided of $463 million to $467 million. And we are increasing our expectation for net income per diluted share attributable to PagerDuty, Inc. to $0.78 to $0.79. This implies an operating margin of 16% and compares to our prior guide of $0.67 to $0.72 and 14%, respectively. Reflecting on the year so far, we have stabilized ARR growth at 10%, maintained steady DBNR, and moderated growth headwinds in the Commercial segment. Additionally, we have significantly expanded our operating margins while continuing to mature and grow our Enterprise pipeline. Exiting the year with a 10% ARR growth rate provides a strong foundation for the upcoming fiscal year. With that, I will open up the call for Q&A. Josh, are you going to queue our...

Excuse me, folks. Yes, of course. Here we are in our Q&A. Sanjit Singh, we're going to start with you. If you can go ahead and unmute, please?

Yeah. Can you hear me?

Yes, we can. Hi, Sanjit.

We can hear you, Sanjit. Yeah, hi.

Good to hear from you again. Sorry, I'm not sure why the video isn't working. Give me one sec. Okay. Hopefully, that's better. Jenn, when we think about like how the year has trended, and we were sort of expecting acceleration in the back half. If you look at the broader ecosystem, whether we call it the DevOps ecosystem or look at what some of the observability players, none of them are accelerating, but they all seem to be talking about, when it comes to seat expansion, stable quarter-on-quarter trends. If you get the hyperscalers all growing solidly in the double digits. Observability guys growing in the double digits. The DevOps platforms growing solidly in the double digits. And so, when you think about like why we're still sort of, at least, in revenue, high-single-digit territory and ARR on 10%, what do you think is the disconnect there with where you guys are playing versus some of the adjacent markets that you guys are pretty close to?

Yeah. Well, thanks for the question, Sanjit. I mean, first of all, I would say, there were a lot of positives in the quarter. We did see stabilization across all segments, including Commercial, which has historically been a bit of a headwind. We saw improved dollar-based net retention and strong transaction volume in our $100,000-plus cohort. And Enterprise, I'll just remind you, is continuing to grow well above the average growth. Customers who spend more than $500,000 grew over 20% in the quarter. The verticals in Enterprise, tech, financial services, and telco, were also very strong. And we continue to see competitive win rates be very good. I would say, in this quarter, the one area where I would like to see improvement in the future is large deal conversion. So, unlike many of the past quarters, we saw a handful of large deals push. They are not lost, but they did defer, which defers some of that reacceleration. But having said that, I think you really need to look at the Enterprise business and see how that's growing as Commercial becomes less and less of a headwind to the business. And we were pleased to see that segment stabilize this quarter and even returned to growth.

I appreciate the context. I'd like to discuss PagerDuty Advance. Although it's still early, could you explain the customer adoption strategy and how you plan to drive that? Additionally, when it comes to monetization for PagerDuty Advance, what potential pricing increase or ARPU growth do you expect when Incident Management and Customer Service customers adopt the advanced features?

Sure. So, as a reminder, like we have been deploying machine learning and AI in our platform for many years, not the least of which in AIOps, which has been a continued sort of new product strength for our business and also a differentiator for the Operations Cloud. And that is built on a proprietary data model that creates a pretty significant moat for us in terms of our platform's ability to make recommendations to leverage now generative AI chat capabilities for us to seed features across the platform. So, it can be simple things like asking the platform when an incident starts, what's changed, right, where, historically, that would take many, many minutes, maybe several hours to figure out. The platform can service that almost immediately. And as you know, in incident response, time really is money. So, I think when we think about the opportunities in generative AI, it's to continue to land AIOps and attach it to our core Incident Management customers, to start to drive usage across the entire platform through these generative AI features that simply reduce the time associated with triaging and resolving an incident, but also reduce the number of people that need to be involved in that incident itself. And then, probably the single biggest opportunity as it relates to generative AI is the core Operations Cloud use case for AI operations within a customer. Our customers are deploying LLMs. They're deploying their own RAG models. We're starting to see the launch of agentic AI and agents in use in the customer. And all of those initiatives create risk. They have operational risks associated with them. That technology needs to be monitored and needs to be managed, and it's proliferating at a much faster scale than traditional software. And so, the use case around our customers' use of agentic and generative AI, I think, represents a growth opportunity on the core Operations Cloud. And that, I think, over time, will give us both a strong competitive positioning because of all the things we do across the multiproduct platform, but also some pricing power through that differentiation in those use cases.

Yeah. And Sanjit, maybe I can just follow on the specific area that you covered around our generative AI and the model that we're using there. So, when we moved this to general availability a few months back, we allowed customers on certain plans the option to opt in to the generative AI to PD Advance. And the motion that we have is that they start off with a certain amount of free credits, if you like, that allow them to get started and actually try out the capabilities. And we've had a really good response from customers on that, and that's led to then customers actually contracting with us. We had our first customers this quarter. We've actually contracted to be able to have the ongoing use beyond that free allocation, if you like. And at this stage, because it's not linked only to Incident Management, but really is across the platform, means that someone who is using the Operations Cloud across Automation, across AIOps and Incident Management, they have access to a capability that responds relative to the platform that they're using. So, we have priced that independently and not as a factor of the products that they have.

Understood. Thank you, Howard.

Thank you.

Thanks, Sanjit.

Thank you. And next, we're going to hear from Rob Oliver with Baird. Go ahead, Rob.

Hi, good afternoon. Can you guys hear me okay?

Yeah.

Yeah. Hi, Rob.

Hello, Jenn. Hello, Howard. It's great to see both of you. I appreciate your time. I have a couple of questions. First, Jenn, regarding the large enterprise customer conversions that you mentioned earlier, which Sanjit also referenced, it seems to be a common challenge right now. We're hearing that salespeople need to be well-versed in procurement and legal aspects, among other areas, and this creates difficulties. I'm curious if you've noticed any trends or insights related to those deals, especially in comparison to the Forrester ROI study, where we frequently hear that having a clear ROI is essential. Any insights you can share about what you're seeing with those deals and the reasons for any delays would be helpful. I also have a follow-up for Howard.

In this market environment, I agree with you, Rob. It seems necessary to aim for perfection, even though perfection is unattainable. However, we receive very strong feedback regarding the proof of value. The focus is on guiding our economic buyers or executive sponsors through their processes, ensuring we overcome every challenge and maintain communication. Our performance has been consistent over the past several quarters. For instance, our customers who spend over $500,000 with us grew by 20% in the last quarter, and the number of transactions above $100,000 has also remained steady. We are successfully securing these larger deals, although some of the biggest ones have been postponed. On a positive note, we have received excellent feedback about our competitive positioning, especially concerning AIOps, Customer Service Ops, and new generative AI features that excite clients. These features are not only enjoyable but significantly save time in incident response. We will continue to improve in several areas, starting with pipeline generation. We enter Q4 with the strongest pipeline I have seen in many, many quarters. Additionally, we are managing the pipeline rigorously to ensure we can close deals as promised. Finally, I am dedicating a lot of time to executive sponsorship. We have established a new executive sponsor program to ensure that beyond the sales team, our entire executive team is involved in various customer and prospect relationships, enabling us to anticipate new challenges during the purchasing process.

Great. That's helpful. I appreciate the insights on the executive sponsorship program. Howard, just as a follow-up, it's nice to see a strong performance this quarter. I believe your team has done well in being cautious. There seems to have been an opportunity to adjust the full year range slightly higher, but it only increased at the low end. I would like to understand the factors influencing that decision better. I'm completely fine with it; I just want to know if there's any expectation that the deals Jenn and I discussed might shift to fiscal year '26, or if there's a more conservative approach to consider. Thank you.

I believe it's important to take a cautious approach in this environment to ensure we are providing numbers we can confidently stand behind. We’ve considered our existing subscription deals, but some variability arises from our month-to-month transactions and our Professional Services delivery. This quarter, we needed to evaluate the delivery schedule, especially with the holiday period in mind. Additionally, our self-managed process automation deals may also impact revenue. Taking all these factors into account has allowed us to adjust our expectations for the full year, and while we are pleased to have improved our midpoint, we will continue to approach Q4 with the same careful consideration.

Great. Okay. Thanks, guys. I appreciate it. Jenn, good luck...

Thanks, Rob.

Nice to see you.

Thank you, team. Next, we're going to hear from Koji Ikeda from Bank of America.

Hey, Jennifer. Hey, Howard. Thanks for taking the questions.

Hey, Koji.

Hi. Great to see you. A couple of questions from me.

Hi, Koji.

Hi, Jennifer. I wanted to dig in a little bit more here on the deal deferrals in the fact that it gets me a little bit worried when I think about deferred deals and the compounding effect if it doesn't get back to some sort of normalized closure level. And so, what's kind of giving you that confidence that the deal deferrals that you're seeing today, you're going to be able to get back to closing them sometime in the next, I don't know, months or quarters or whatever it may be?

We've already closed some of the deals, and this is something we've consistently managed well over the past several quarters. Our transactions over $100,000 have performed strongly. However, some of our largest deals have taken longer than expected or have been split into multiple transactions within a short timeframe. We are demonstrating to our customers the flexibility to conduct business in a manner that suits them and focusing on building long-term relationships. Despite the challenging macro environment in recent quarters, we've improved our execution on multi-year agreements, showcasing our ability to engage with customers over the long term, which enhances our opportunities for cross-selling and up-selling. Even though some larger deals didn't close this period, we experienced several solid six-figure expansions with major customers who have expanded multiple times in the last couple of years. Our business has historically grown through a high volume of expansions rather than relying solely on large deals, and the core Enterprise business continues to perform robustly. As for areas of improvement, we will maintain a strong focus on pipeline management. I mentioned our executive sponsor program, and we are also exploring ways to enhance our capacity more effectively through training and managing improvements. Several new theater leaders have been in place for a few quarters and have adjusted well, instilling confidence in the team's ability to convert the strong pipeline we have this quarter.

Got it.

And I would just jump in and add to that. Koji, we've made a number of investments in terms of sales leadership this last year. We have a new theater lead in the last kind of six months for EMEA, for North America, and for the public sector. And we've hired strong enterprise leaders, and they're certainly making a difference in terms of helping build sales capability. And when I just look at the pipeline numbers, for example, for Q1 for next year, the pipeline, as we go into Q1 for next year, is almost 50% higher than what it was at the start of Q1 last year. So, building that pipeline into future quarters at a high value, that's what gives us greater certainty on the ability to execute against those larger deals.

Got it. Now that's a nice data point on the pipeline. And so a follow-up question here is on your target operating model, maybe for Jennifer or Howard, whoever wants to take it. I'm looking at the slide in the deck, and you guys are essentially at your target operating model. And so, I am a believer in the TAM that you guys are addressing. I do believe there's the potential here for you guys to accelerate growth here sometime over the medium term. And so, how do you think about kind of balancing being at the target operating model with this growth opportunity ahead of you? Are we essentially at peak margins for a while and incremental upside could be invested into growth, or I guess how do we think about that balance?

I'm encouraged by the stabilization across all segments. Our business can be divided into two segments. In Enterprise, we've undergone a significant transition against a challenging macroeconomic backdrop. However, we now have a strong narrative surrounding the Operations Cloud. Solution selling has become our standard go-to-market approach, and we've refined our representative profile, which enhances our strategic selling execution compared to the past. This improvement is reflected in our strong competitive win rates. At the same time, we're committed to improving both the speed and efficiency of ramping our capacity. Our goal is to be a profitable growth business focused on reacceleration, while also seeking ways to drive efficiency. In the Commercial segment, we are beginning to see stabilization, better retention rates, and even a return to growth among smaller businesses. These factors give us optimism about our ability to accelerate growth next year while effectively managing operating margins. Howard, I’ll let you add to that.

Yeah. So, I think, just to build on what Jenn said, Koji, we see that the market opportunity is still strong, and we see the opportunity to reaccelerate growth. And so, when I think about our long-term model, we certainly are getting close to that operating margin on an annual basis. And so, we would continue to look at how do we balance growth with profitability. We want to continue to make progress in terms of expanding our operating margins even into next year, but not at the expense of being able to feed the growth. So, even through this year in what has been a tougher economic environment, we continue to invest in sales and invest in capacity because we have confidence in the ability to, in fact, go after more business in the market.

Thank you. Thanks so much.

Thanks, Koji.

Thanks, Koji.

Wonderful. Next, we'll hear from Jeff Van Rhee at Craig-Hallum. Jeff, please go ahead.

Great. Thanks. I'll add my congrats, and thanks for taking the questions. You called out EMEA as being a bright spot. Would you call that out as really macro-driven sales execution? Talk a bit more about what's going on and what's driving the improvement.

Now, we have a new leader in the EMEA theater, and he's really brought a lot of rigor and a real focus on pipeline generation and standardizing our go-to-market motion there in a way that is demonstrating results across segments in the market. And I do think that the macro is easing as well. And so, those two things together, good execution and potentially an easy macro across both large Enterprise and the Commercial segments. It's really the first time we've said in several quarters that we're excited about EMEA. So...

That's great to hear. Yeah, no doubt. And sort of along those lines, I think last quarter, you gave an early glimpse into '26. I think you said ARR and billings growth of over 10%. I think, Howard, you just commented a little bit about margins. Any other color, even at the fringes, you'd be willing to share about how we should be thinking about '26 at this point?

Yeah. Over and above what we've shared, our philosophy is really to think about how do we increase our growth rate above 10% into next year, but also continuing to expand operating margins. Obviously, the timing of the ARR growth acceleration is a little bit variable, and we haven't given any fixed timeline on that piece, but those are certainly the parameters to think about. We're exiting this year at 10% ARR growth. Just a reminder, of course, whilst our business is mainly subscription, we do have a portion that's been growing around services as we deliver more professional services into our customer base that are longer-term services as opposed to short-term technical services, but that sort of will help you frame the complexion of how that revenue could fall out.

Okay. All right. Then just last for me. On the Commercial side, when you look at the potential drivers for that business, I mean, are we talking heavily, heavily weighted to employment in the tech sector? How do we think about drivers to accelerating that to growth? And how much you can control versus how much is waiting for employment to improve?

We are not depending on employment improvements. Instead, we are focusing on the leading indicators in the Commercial segment, where we are noticing better retention. Customers are finding clear benefits from our value proposition, especially with the recent enhancements to our Incident Management product, including the addition of Jeli, our postmortem automation, and chat experience. Certain parts of the market, especially VSB and SMB, can be quite sensitive to pricing and face significant capital constraints, but it's encouraging to see that this environment is stabilizing. In areas where we employ sales assist strategies within the Commercial sector, we are experiencing strong competitive win rates, which is also positive. We observe opportunities in various business sectors that are digital, particularly within the mid-market segment, though we are not exclusively focused on technology there; that's more evident in the very small startup segment. Additionally, we notice strength in subsegments like well-funded native generative AI startups, the crypto space, online travel and hospitality, and e-commerce. This indicates that within the Commercial segment, we possess considerable vertical diversity and not much customer concentration.

Helpful. Great. I'll leave it there. Thank you.

One thing I would add, Jeff, is that when we look at our product portfolio across the Operations Cloud, we're now getting a little bit of a balance in terms of not everything is user base, but we have products that are on a consumption basis, and that applies even in the Commercial segment. So that does remove some of the direct relationship to user base or employment growth.

Yeah. Got it. Thanks so much.

Thank you.

Thank you.

Thank you. Next, we're turning to Andrew Sherman with TD Cowen. Go ahead, Andrew.

Great. Thanks. Good to see you. Congrats on the quarter. The 40% of net new ARR from the new products was a strong, healthy number. Maybe rank order which products within that and kind of what's driving the strength behind those? And should we expect to see attach rates continue to increase? And can that help deals get bigger even as they're working through the pipeline?

I'll start by saying that this can help deals grow even as they progress through the pipeline. We're noticing many expansions that include multiple new products alongside services. It's crucial to focus on attach rates within our existing base and to identify opportunities to introduce new products, not only at renewal but throughout the contract duration. This approach is an essential part of how our team executes. I previously mentioned that one of the strategies we're implementing is to train and enable our sales force to discuss with customers the initiatives they have allocated budget for, such as incident management transformation or standardizing automation practices. Our CIOs, especially in enterprise and mid-market sectors, have funding for these initiatives. This allows us to come in and demonstrate how we can assist them, with AIOps being a significant component. Automation is about integrating the various automation tools within the business. Customer Service Ops focuses on enhancing the performance of customer-facing agents, ensuring they can efficiently relay information to teams solving issues or to customers wanting to know about incident statuses. Additionally, we're embedding some of our generative AI features into these products, which is generating interest, trials, and user engagement.

That's great. And Howard, great to hear the Enterprise NRR is 10 points higher. Does that include mid-market or not as well? And SMB was 16% of ARR last Q4. It's obviously lower now, but when does that SMB drag drop out of the model enough such that your NRR can flow back up?

When we discussed the Enterprise, the dollar-based net retention specifically referred to companies with revenues over $500 million. This expands upon our previous discussions about the Enterprise since our sales team is now concentrating on these larger companies. It's encouraging to see this development, as it includes what we previously identified as the upper end of the mid-market. Regarding the Commercial segment, which encompasses SMB, we are beginning to observe improvements from this quarter. After experiencing four consecutive quarters of negative year-over-year growth, we are now seeing stability on a quarter-over-quarter basis. This indicates that the challenges we faced are diminishing, allowing us to capitalize on the strengths in the Enterprise while anticipating growth in the Commercial segment once again. This improvement will contribute positively to our overall growth rate.

Okay. Thank you.

Thanks, Andrew.

Thank you.

Thank you. Next, we'll hear from Jacob Roberge with William Blair. Jacob, please go ahead.

Hi, guys. This is Jacob Zerbib on for Jake Roberge. Thank you for taking my questions. I just wanted to touch on the competitive dynamics here with Datadog's solution being on the market for a little bit. I'm sure you've heard about that. And they are your customers, so we know that. But you just have you seen them more? And any color on win rates here would be helpful.

Yeah. Thanks for the question, Jacob. I appreciate it. Look, it's a big and early market. It's not a zero-sum game. And we're confident in our strength in Enterprise, where our customers value the fact that we're neutral and independent, that we ingest signals from all observability providers, cloud and hyperscalers, ticketing systems, et cetera, and that we can provide them with an independent view of what's happening in their organization, regardless of who they choose to invest in from a monitoring standpoint. We've also demonstrated our ability to be resilient at scale, even with the largest, most challenging enterprises in the world. And that matters when you're counting on a platform for instant management when things are not working. And that has proven to be a difficult moat for others who have tried to come into the space to cross. We also benefit from 15 years of data that is now part of our foundational data model, where we've embedded machine learning and AI. And frankly, I'm spending a lot of time with customers in the field. I'm not hearing a lot about it. I do think that some of the work that we've done around multiyear commitments and multiproduct sort of long-term relationship building with our customers also puts us in a good stead. Now that doesn't mean there won't be customers who are price-sensitive. That's always the case, but even the lower end of the market, from a Commercial perspective, seems to be stabilizing, and we're encouraged by the competitive win rates that we see there. So, I always live by the saying, only the paranoid survive, but I've also been through this multiple times with players coming into the market. And I think we have demonstrated by proving that we are resilient, secure and deliver high-fidelity automation at scale, and that is really important to our customers in the use cases they leverage us for.

Got it. That's it for me. Thank you.

Thank you.

Wonderful. Turning next to Nick Altmann with Scotiabank. Nick, please unmute and go ahead.

Hey, how are you guys?

Yeah, good. Thanks.

Great. Thanks for taking the question. Jenn, you've kind of talked in the past about how you guys are focused on controlling what you can control. The margins have obviously improved a lot. And you guys have also kind of talked about, regardless of the macro environment, ARR reacceleration is still on your site. And so, my question kind of builds off of Koji's, but when you think about the growth versus margin trade-off, what would kind of cause you, or what are the kind of signals that you could potentially see that would make you guys sort of reinvest in product or go to market to maybe drive a sharper degree of reacceleration?

Yeah. I mean, I'm always watching our time to ramp capacity. I'm watching sales productivity very carefully. We're looking for longer contract duration, which we've seen a lot of improvement on, but also keeping an eye on sales cycle time. And just a reminder, like we've made very significant investments in new products and still have a lot on the truck to monetize in terms of attaching to customers that are very happy with their initial incident response investment but opportunity to do more. And I think AIOps, Customer Service Ops, Automation all represent great opportunities to be growth drivers for us. And equally, I think generative AI is something that users are getting more accustomed to. And we're getting a lot of great feedback about the ability to do things like just ask PagerDuty in a simple chat environment, like what changed, who's impacted, where historically that would have been a treasure hunt involving five or six or ten people, sometimes many more, on a live call. So, as we automate more and more of that, I think it makes the product more interesting and sticky across different use cases and across different functions. I'd love to invest behind improving sales productivity, shorter ramp, and shorter sales cycles. And those are some of the leading indicators that I'm looking for, but I'm also encouraged by the stabilization across all of our segments. I think that the stabilization that we've seen forms a very strong foundation for growth reacceleration, particularly in upper mid-market and enterprise. And we're going to continue to focus on the developer experience. So, I'd love to be investing more in growth, but I want to make sure that we're executing well and utilizing that capital very wisely.

Awesome. Thanks. And then the large deals sort of pushing or taking longer to close, that makes a lot of sense. When you think about sort of the ACV expansion within those deals, I know you had sort of mentioned that a couple had already closed, any sense as to kind of how that expansion rate for some of these larger transactions kind of looks relative to just large deals in general?

Sorry, I lost the end of your question, Nick. I heard you ask something about the expansion rate.

Jenn, connection seems to have got a little bit shaky. Sorry, Nick, do you want to just repeat that again? We lost you for a moment.

Yeah. So, my question was around these large deals that are getting pushed, right, it makes sense, maybe there's more products in longer-duration contracts. When you think about just like the ACV expansion of those deals, can you just maybe talk high level kind of the makeup of that and how that kind of looks relative to the NRR metric or even just kind of large deals in general?

Yeah. I mean, I'll take a crack at that first, Jenn, and then feel free to jump in. There isn't one single formula that describes what those ACV deals look like because the nature of where the customers coming from can often be quite different. We obviously have a large population of our Enterprise customers who started with us in Incident Management. And as they expand into things like AIOps and into automation, sometimes the value of those products can exceed what they're spending on Incident Management. Then, we have other customers who maybe have landed with us originally in the Automation segment and then they move on to Incident Management and AIOps. And in that case, their initial investment in Automation ends up being smaller than the investment that they make in the others. But what we have found is that the overarching theme is that, as customers adopt more of the Operations Cloud, they certainly get far more value from PagerDuty. And one of the most recent studies that we referenced is the total economic impact report from Forrester, which looked at Enterprise customers and showed a 250% return on investment over three years, with a payback period of less than 12 months. Those customers who are doing this effectively multiproduct adoption are seeing a lot more value. It's far more transformational for them, and that tends to make those customers far more retentive because they're seeing the value. So, for us, getting them onto the multiproduct and often multiyear is an important part of our sales motion.

Awesome. Thank you.

Thanks, Nick.

Thank you.

Okay, folks, we have one more hand raised, Simran Biswal. If you can go ahead and unmute?

Hi, guys. Can you hear me?

Yes, we can hear you. Hi, Simran.

Hi, Simran.

Hey. This is Simran for Matt Hedberg. Congrats on the quarter, and thanks for the question. I just wanted to double-click a little bit more on fourth quarter. First, how have trends been so far a few weeks into November? And then, generally speaking, how does linearity within Q4 look like? And is there some risk that some of these larger deals with more engagement gets pushed into next year? And just around at what assumptions you've built into pipeline conversions?

Certainly. When we consider the linearity for the quarter, we have transitioned from being a company focused on high-velocity, high-volume transactions with less distinct in-quarter linearity. Since moving towards Enterprise, we've observed a change in that linearity, where a larger portion of our business tends to occur at the end of the quarter. We now have various systems and processes established to balance this out. Our aim is to achieve roughly half of our business in the first two months of the quarter. While not all quarters will be consistent, we have set a goal and implemented processes to help us progress towards that target. We do not anticipate unusual linearity in Q4, but the holiday periods can disrupt regular patterns. November can be particularly challenging for North America due to the holiday season, though it remains manageable for Europe. This quarter is a bit atypical in this regard, but we are not expecting anything excessive; typically, the third month is when we see the most activity.

Okay. Great. And just one more question. When we think about the large deals, what does the customer journey typically look like? And how long is the engagement generally for these customers?

It really varies because landing a seven-figure customer is rare. While it has happened, it's usually the case that we start with smaller deals and then grow through expansion over time. One change in our strategy has been to focus on solution selling, the Operations Cloud, and the Enterprise, particularly around funded solution areas that CIOs and CTOs are looking at. We start conversations about all of our products and services and how they can support existing customer initiatives, rather than beginning with a single product and trying to add others later. This approach allows us to move at the customer's pace. Sometimes, a CTO will move quickly, having already chosen us as their standard, wanting an integrated platform without much friction. This can happen in the tech industry. However, in more regulated environments like financial services or government, the process can take significantly longer. There isn't a single way this occurs, but by improving our ability to connect services to our deals, we gain better visibility into customer needs. Working effectively with systems integrators to support us in large transformation discussions is beneficial. Additionally, multiyear agreements provide opportunities for growth and co-term within the contract period, which enhances our engagement with customers.

Great. Thanks, guys. Congrats again.

Thanks, Simran.

Thank you.

Well, as the hour turns, I just would like to thank everybody for joining us today. We are both optimistic and confident that the stabilization that we're seeing builds a solid foundation, a strong foundation for growth reacceleration. I'm grateful to spend this last hour with you and wish you all in North America a happy Thanksgiving, and the rest of you a happy holiday period over the next couple of months. Thanks.