Earnings Call Transcript - PD Q1 2021

Operator, Operator

Good afternoon. My name is Chantal, and I will be your conference operator today. At this time, I would like to welcome everyone to the PagerDuty First Quarter 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. Thank you. I will now turn the conference over to Stacey Finerman. Please go ahead.

Stacey Finerman, Moderator

Good afternoon. And thank you for joining us on today’s conference call to discuss PagerDuty’s fiscal first quarter of 2021. With me on today’s call are Jennifer Tejada, PagerDuty’s Chairperson and Chief Executive Officer; and Howard Wilson, the company’s Chief Financial Officer. Statements made on this call include forward-looking statements. Forward-looking statements 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. Forward-looking statements represent our management’s belief and assumptions only as of the date such statements are made and we undertake no obligation to update these forward-looking statements. In addition, during today’s call, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their closest GAAP equivalents. For example, other companies may calculate non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as a tool for comparison. A reconciliation between GAAP and non-GAAP financial measures is available in our earnings release. Further information on these and other factors that could affect the company’s financial results are included in filings we make with the Securities and Exchange Commission from time to time, including the section titled Risk Factors in the company’s most recently filed Form 10-Q. Now, I’d like to turn the call over to our CEO, Jennifer Tejada. Jennifer?

Jennifer Tejada, CEO

Thank you, Stacey, and thank you, everyone, for joining us today. I hope that you, your families, and your colleagues are safe and healthy. Like many of you, we are in our 13th week working from home. I am appreciative of how our team has adapted to progress our mission and of how our industry has come together sharing ideas, solving unprecedented challenges, and protecting our employees and community. This incredible human experiment of which we are all just a small part has provided lessons that leave us forever changed. Lessons in courage, resilience, creativity, camaraderie, and efficiency, but also lessons in loss, in the cost of being underprepared, uncoordinated, and the human cost of time. For PagerDuty, the pandemic and recession have reinforced our values, which center around leadership, inclusion and equality, accountability, innovation, and the success of our customers and our people. We have always believed trust and time are society’s most valuable currencies, and never has this been more true. Our mission to elevate teams to the work that matters most is more relevant than ever as every business seeks survival, fights to protect its hard-won customers, and adapts to operate more efficiently and safely in order to protect lives and jobs. When the pandemic began earlier this year, every business was compelled out of necessity to become an operations company, going digital overnight, relying on cloud-based services and driving 100% of revenue through digital e-commerce. In a matter of days, global enterprises had to find ways to meet customer expectations under unprecedented surges in web and app traffic, while supporting enterprise productivity, responsiveness, and security, all while their employees work from home. This is digital operations, a megatrend that pre-COVID was unfolding over years and is now transforming in weeks and months, even in some of the most traditional industries. PagerDuty was built for this. When we designed the platform to automatically detect the unpredictable, coordinate disparate teams to troubleshoot difficult problems under pressure, and resolve mission-critical issues in minutes, we created the digital operations management category. Over the last decade, our platform has become an essential component of critical infrastructure for many of the world’s most innovative and admired companies, and increasingly the central nervous system for the digital ecosystem. We uniquely correlate digital events for our customers from the cloud, web, apps, infrastructure, IoT, and security, and translate them into action that reduces costs, protects digital revenue, and ensures our customers can meet the expectations of their customers. With digital acceleration and remote work, detecting and responding to incidents, as well as preventing them has become even more central to weathering the current environment and to long-term business success. Today I will discuss how we have adapted to this unique environment, I will highlight our strong results, recap our spring platform release, I will review how we are progressing our priorities, and I will talk about a few things we are doing to help our customers and community emerge from the crisis stronger. In February, we implemented a crisis management framework with workstreams focused on employee safety, customer engagement, scenario planning, platform innovation, resiliency, and business continuity. During the first week of March, our leadership team made the decision to close all of our global offices and within 24 hours we transitioned to an entirely remote workforce. Having already been 20% remote with a distributed engineering team, a cloud-native platform, a zero-trust security stance, and a very strong culture with highly engaged employees, we made this transition relatively seamlessly. In fact, we have seen increased productivity in some parts of the business, where we leverage modern cloud platforms to engage customers and agile product development and DevOps methodology to innovate. While it’s too early to measure the relative impact, we pivoted all of our customer and industry events to digital, including our inaugural EMEA Summit coming up this month and our 5th Annual Summit Event in September. More generally, we have led with empathy and put people first, substantially increasing engagement levels of employees and customers. Don’t get me wrong. In no way has this been easy, and I am keenly aware that every person experiences the current environment differently based on their circumstances. We expect to continue to face uncertainty, unpredictable challenges, and potential headwinds which I will discuss shortly. That said, I am very proud of our team, especially the way they quickly adapted to serve our customers remotely and of our corresponding results as we remain clear-eyed and pragmatic in the first fiscal quarter of 2021. Revenue for the first quarter increased 33% on a year-over-year basis to $50 million, and our focus on operating leverage continued to pay off as we dramatically improved our non-GAAP operating margin by 12 percentage points year-on-year. In addition to posting strong growth in what tends to be a seasonally lighter quarter, we ended the period nearly breakeven on operating cash flow, demonstrating the long-term durability of our business. Our healthy new customer acquisition continued to show strength, validating the large and early total addressable market for digital operations management. PagerDuty is an essential cloud service for digital businesses. We ended Q1 with 13,060 customers, growing 12% year-over-year in a tough market, and while we experienced more churn than usual in SMB, we also had very strong new logo acquisition results in enterprise. Despite market dynamics, we continued to see robust year-on-year growth in new customer ARR above 55% as companies double down on operations seeking easy to deploy solutions that accelerate digital business while reducing costs. Trust is paramount for our customers and our sustained investments and reliability, resilience, and security at scale became increasingly relevant as threat vectors and remote users multiplied. Our customers remained incredibly loyal, with renewal rates consistently high at over 95% and even higher for our enterprise customers. We are truly grateful for the trust that our customers place in us, and not only did we continue to deliver our services in Q1 without interruption, we also accelerated our roadmap and several initiatives to support COVID-specific use cases, like crisis management, virtual network operations, and providing free licenses for healthcare customers. Businesses cannot afford missed opportunities or disruptions, and because of this, major incident management now has the attention of CEOs and Boards. PagerDuty has become a necessity because our platform empowers users to build and maintain trust with their customers. During Q1, our customers saw incidents spike anywhere from 2 times to 11 times the incident frequency we observed pre-COVID. Yet in the face of more incidents than usual, our customers resolve them 20% faster by leveraging PagerDuty to proactively anticipate and address incidents, ensuring that they continue to serve their customers in the face of cost-cutting, remote working, and growing digital demand. There is no better example of this than Zoom Communications, where Eric Yuan and his team have scaled to support not only the daily use of businesses going remote but also the distance learning of many of our children. Zoom’s corporate CIO, Sunil Madan, said that PagerDuty’s automation and intelligence has made their teams so efficient and effective that they have actually improved their time to resolve incidents despite the massive increase in people using Zoom. Winston Churchill said, "Never Waste a Crisis." And we believe digital acceleration and the imperative to improve operational performance will continue well beyond this pandemic. As companies learn from the rapid pivots they undertook this quarter, we expect digitalization, cloud adoption, DevOps, security, distributed architectures, and remote working to continue to advance post-vaccine. All of these accelerating megatrends are tailwinds for us and drivers for investment in PagerDuty, especially as recovery begins. According to a recent Fortune study, 63% of Fortune 500 CEOs believe the crisis will accelerate their digital transformation. As a result, we see leaders increasing their focus on efficiency and productivity, seeking more automation across their businesses. We advanced our automation roadmap in our spring release, adding new capability to our AIOps solution, announcing the general availability of Intelligent Triage, launching new integrations, and enhancing our dynamic Service Directory and Business Response solutions so that more teams across the company can benefit from PagerDuty. Our customers’ challenge is not a lack of data, but rather how to make sense of it all in seconds and to address the root cause of an issue. PagerDuty’s advanced capabilities now recommend resolution tactics, trigger run books, orchestrate actions that provide diagnostics, and even resolve problems without human intervention. During the quarter, we published new bidirectional integrations with IT automation partners, Pliant.io, Rundeck, and Ayehu, building on our successful AWS EventBridge integration and strengthening our position as the central nervous system for the digital enterprise. A timely example of revolutionary automation is Faithlife, a technology platform that enables faith-based organizations to transform in-person gatherings into online experiences. Religious organizations have been unable to congregate for worship due to shelter-in-place orders. So the company saw a dramatic increase in usage as thousands of the users joined online services. They began using our AIOps solution Event Intelligence to reduce event noise, leverage context, and direct time-sensitive work to engineering teams. After only two months, Faithlife was able to reduce the number of incidents being routed to engineering teams by over 36%, automating manual work, reducing labor costs by an estimated $114,000 per year, and preventing incidents from disrupting the customer’s experience. If you can automate work, you don’t have to rely on static workflows. In Q1, we launched a new integration with Microsoft Teams that enables responders and stakeholders to resolve incidents and stay informed with PagerDuty and Teams rather than switching between services. Not only are users automatically alerted to incidents, they also receive context on the incident including whether it has happened before, how it was resolved, and who worked on it previously. User and account permissions are synced between Teams and PagerDuty ensuring secure communication and safe information sharing. Now all incident response activities in Teams are captured in PagerDuty’s post-mortem application, saving time and improving the quality of information used to help team members prevent future incidents and continuously improve. Intelligent Triage, part of our Event Intelligence product, provides visibility and coordination for teams working related incidents, as well as providing valuable contacts from past or related incidents. In a distributed world, where teams own and operate separate but interconnected services, Intelligent Triage ensures each team understands how their service impacts those operated by others and vice versa. It significantly reduces duplicative and counterproductive efforts between teams and according to benchmarking by IDG, cuts time to resolve from 80 minutes to as little as 5 minutes. We are confident that the macro trends I mentioned earlier present tailwinds for PagerDuty over the medium- and long-term. And at the same time we balance our optimism and position of strength with the potential headwinds we see in the near term. The diversity of segments and verticals within our customer base presents strengths with less than 7% of ARR coming from the most impacted industries. That said, we have seen delays in some enterprise and mid-market opportunities as large companies grapple with both the economic impact of their business models and conservative spending in light of market uncertainty. We expect these companies to accelerate their investments in digital operations when the time is right for them and are focused on building long-term partnerships. While we saw a noticeable increase in churn in our small business segment, which is about 20% of ARR, our overall churn remains best-in-class, below 5% on an annualized basis. We may continue to see higher than usual churn in this segment given the economic backdrop. Reiterating the long-term relevance and durability of our business, software and technology, advertising and marketing, e-commerce, federal and national government, consumer products and services, healthcare, industrial and manufacturing, and non-profit segments all delivered strong growth sequentially. Software and technology was particularly strong in Q1, with the Who's Who of modern B2B platforms expanding their business with PagerDuty, including Salesforce, Shopify, Twilio, Datadog, Dropbox, Cisco, SAP, Okta, DocuSign, NetApp, Workday, Xavier, and HashiCorp. We also saw encouraging signs from our customers whose need for PagerDuty dramatically increased as a result of the pandemic. One large Midwestern electronics retailer increased their PagerDuty spend as a result of pivoting to curbside pickup. Education customers like Closera and the University of Texas also increased their spend to prevent service interruptions as online demand increased. We remain focused on the priorities we communicated on past calls, winning in enterprise, validating our position as the de facto platform for real-time work, and expanding our reach beyond DevOps and IT. In Q1, we continued to make progress in the enterprise, while our credibility in supporting digital acceleration and distributed team orchestration for both new and core use cases led to new customer wins, including LabCorp, Carrefour, Infosys, NBCUniversal, and CHANEL. We announced our new partner program for managed service providers, kicking off with Carahsoft, Estuate, Connect Consulting, and vCORE. This program will help enterprises scale and accelerate their digital transformation initiatives and extend the reach of our go-to-market strategy for mid-market and enterprise. Our international investments continue to pay off, especially in enterprise. Our EMEA team has done an excellent job in leading with PagerDuty's value proposition to secure new customers and expansion deals. One example is a leading European retail bank with tens of thousands of employees and millions of customers. Previously, the bank relied on many legacy monitoring solutions that created a deluge of alerts. We estimated that 70% of these alerts were unacceptable noise. But without processing automation, significant time and money were being wasted. With PagerDuty deployed, alerts were reduced by 85% and the mean time to respond to incidents was reduced from 30 minutes to 5 minutes, resulting in significant operational efficiency. According to our estimates, this saved the customer $3 million annually, a 338% return on investment. Many of our customers seek to turn disruption into opportunity, and we see these industries experiencing increased demand, such as streaming media, grocery delivery, distance learning, and healthcare. Companies in these sectors need to handle real-time issues more efficiently to ensure great customer experiences. For instance, a long-term PagerDuty customer in the food delivery space continues to expand every quarter, with this quarter being no exception. Discovery Inc., with a global reach in more than 220 countries, has seen unprecedented demand for their brands, like TLC, Food Network, and HDTV, as well as digital services like Motor Trend on-demand and Discovery GO. They expanded their business with us in Q1, standardizing on PagerDuty across their digital product team to manage their digital operation, automating previously manual incident management post-mortem, and operations reporting work. They now automatically route all critical unplanned work through our platform, reducing incidents by 94% and reducing the time to acknowledge an incident from 54 minutes to 5 minutes. So teams can focus on new products and innovation. Personally, I was thrilled to watch Discovery broadcast the recent space launch last Saturday. While we never could have imagined the post-COVID world, it has accelerated opportunities for us to expand our platform beyond DevOps and IT teams. Some examples include crisis management, frontline healthcare worker identification, logistics and supply chain operations management. I am sure many of you, like me, have found exercise and wellness important during the shelter-in-place; on-demand fitness is in all of our homes with few brands more pervasive than Peloton. For years, Peloton has been using PagerDuty to manage its digital services. As customer demand grew, Peloton began using PagerDuty to track shipments to their customers, ensuring a smooth delivery process and increasing overall efficiency and productivity. We continue to see longtime customers apply PagerDuty in the new use cases including customer service where time matters. The cloud-based observability company recently expanded its use of PagerDuty to its customer support and experience management team to manage urgent escalations for their most important customers. Last quarter, we added 26 new integrations published by partners across a range of use cases including dev, IT, security, and IoT, with total integrations now over 375. In the quarter, we took proactive measures to reduce our expense run rate and reallocate capital resulting from travel and event cancellations. We continue to hire and grow our workforce in a balanced way including several new go-to-market leaders, which we announced in recent weeks. Last week, we welcomed Manjula Talreja to the leadership team as our first Chief Customer Officer. With our strong balance sheet and low burn rate, we continue to make prudent investments in go-to-market and product innovation that we believe will deliver market share gains and robust business returns. Although current circumstances limited our ability to interact in person during the quarter, we are not limited in our ability to support those directly impacted by the pandemic. We were honored to support frontline responders such as in the State of Virginia, where PagerDuty was used to establish an emergency IT helpdesk for field-based intensive care units. We also partnered with a European government health service testing program for COVID-19, enabling effective support of all regional drive-through test sites and online registration. We now provide 24x7 situational awareness for a complex system supporting the national COVID-19 response by enabling teams to quickly detect and resolve issues ensuring efficient and effective patient care. We remain committed to supporting our communities through our 1% pledge. In Q1, PagerDuty made financial contributions to the CDC Foundation, Médecins Sans Frontières, the UN Foundation WHO Fund, and Stop the Spread, all aligned with our focus on improving time-critical global health. In addition, our employees continue to participate in community service despite the lockdown. In March, I was able to join many of my colleagues in PagerDuty’s First Virtual Volunteer Week. Our team organized 20 volunteer opportunities with 11 global partners, and a big thank you to the employees who gave over 450 hours in a single week to help others. We continue to extend our lead this quarter, growing efficiently despite unprecedented conditions. In the absence of a widely available vaccine, the market remains volatile and uncertain. What we are certain about is our unwavering commitment to our customer success, the long-term durability of our business underpinned by a large and growing market opportunity, our central position in the digital ecosystem, our easy-to-deploy platform, our low-friction land and expand business model, and our strong balance sheet. Most of all, PagerDuty is differentiated by our culture and people, who have shown incredible resilience, grit, ingenuity, and compassion through every turn in our journey. We are prepared to weather whatever comes and to seize our advantage and emerge strong. Finally, I feel it’s important to mention that all of us at PagerDuty stand with the black community against racism, violence, and hate now and into the future. We will continue to advocate for change through financial support like our recent contributions to Black Lives Matter and the NAACP, through setting an example in inclusive leadership, and by demanding equality in the tech industry and social justice in our communities. With that, I’d now like to turn the call over to our CFO, Howard, who will walk through the financial results. Howard?

Howard Wilson, CFO

Thank you, Jennifer. We are pleased with our first quarter fiscal 2021 results. Revenue for the first quarter increased 33% year-over-year to approximately $50 million, reaching the high end of our guidance. We had another good quarter internationally with revenue growing 47% year-over-year. New customer acquisition was strong, increasing 12% on a year-over-year basis to 13,060. For us, this demonstrates the trust customers have in our platform to manage their services, support their business, deal with the spike in incidents, or pivot more of their business online. Our non-GAAP gross margin for the quarter was 87%, above our target range and remains industry-leading. We saw a significant improvement in our non-GAAP operating loss margin to just under 9%, down from 21% in the first fiscal quarter of 2020. Our non-GAAP EPS came in at negative $0.04 per share, well ahead of our guidance as we managed expenses prudently in light of the COVID-19 pandemic. After delivering three consecutive quarters of positive operating cash flow, our Q1 operating cash flow was near breakeven at approximately negative $200,000. Despite the macro backdrop, we continued to see growth with our largest customers, with new customer adds in enterprise accelerating over the last three quarters. We added 25 more customers with ARR above $100,000 compared to Q4 FY'20, taking us to 348 customers, a growth rate of 44% year-over-year. Customers with over $500,000 in ARR increased by 46% year-over-year to 57 in the quarter. Our dollar-based net retention rate for the quarter was 121%, in line with the range we provided in our Q1 earnings call of 120% to 123%. This healthy net retention rate represents our customers’ commitment to us, our high renewal rates, and low churn. In future quarters, we are likely to report our net retention rates as falling within a range. Reflecting the current economic environment, late in the quarter we saw some large customers halt expansion discussions as they attended to the realities of an overnight remote workforce and the sudden business impact of stay-at-home orders. Although in the short term we may see some downgrades from budget cuts and layoffs, we believe that PagerDuty represents a strong partner in this environment as we can support customer goals through automation, labor cost reduction, and support for distributed teams. As we mentioned last quarter, the diversity of our customer base is a strength. Some industries, such as software and technology, media and entertainment, and healthcare are showing good momentum. However, we have seen some impact in directly affected industries such as travel and hospitality, transportation and logistics, and energy and utilities. Combined, these make up approximately 7% of our ARR. Additionally, we have seen SMB companies, which represent approximately 20% of our ARR, coming under increasing pressure with an increase in churn. Despite this, we are pleased that our churn ARR representing customers who have left us remains below 5% on an annualized basis. I will now turn to the detailed financial results. These results are on a non-GAAP basis. Our GAAP financial results along with a reconciliation between GAAP financial results can be found in our earnings release. In the first quarter, non-GAAP gross margin was 87%. Our best-in-class growth margins were made possible by cloud-native architecture, a DevOps approach to production, and a programmatic approach to customer success. Our goal is to deliver gross margins between 84% and 86%, and you should anticipate us to land in this range in future quarters. We also expect that over the long term as we scale, we will reap the benefits of our operating leverage. In the first quarter, non-GAAP operating expenses were $47 million, compared to $40 million in the first quarter of fiscal 2020, a 19% increase which was significantly lower than our revenue growth of 33%. Non-GAAP research and development expenses for Q1 were $13 million, compared to $10 million in the same year-ago period, representing an increase of 28% year-over-year. We will continue to invest in product innovation to bolster our capabilities, particularly in automation and AIOps. Non-GAAP sales and marketing expenses for Q1 were $24 million and grew by 24%, compared to Q1 of fiscal 2020, up from $20 million. This equates to sales and marketing as a percentage of revenue improving to 49% of revenue down from 53% of revenue. Given the evolving market dynamics, we have obviously moved towards more digital marketing and we will continue to monitor the best areas of spending in order to drive ROI. Non-GAAP general and administrative expenses from Q1 were $10 million for the quarter, remaining flat year-over-year, reducing expenses as a percentage of revenue to 20%, as we continue to scale and improve overall operating margins. Our non-GAAP operating loss in the quarter was $4 million, compared to a loss of $8 million in the same quarter last year. Our non-GAAP operating margin was negative 9% in Q1, a significant improvement from the negative 21% we saw in the same period of last year, as we continue to scale our operations. Non-GAAP net loss for the first quarter was $3 million or a net loss of $0.04 per share, compared to a non-GAAP net loss of $7 million or a net loss of $0.22 per share in the first quarter of last year. We reported negative $185,000 in operating cash flow in the first quarter, compared to negative $8 million in the prior year. We are pleased with our ability to manage costs in such turbulent times. Free cash flow was negative $3 million in Q1, an improvement compared to the negative $9 million free cash flow loss we reported in Q1 of fiscal 2020, largely driven by the year-over-year improvement in operating cash flow offset by incremental CapEx to complete the build-out of the Atlanta office. Free cash flow margin was negative 6%, compared to negative 23% in the same quarter last year. Turning to the balance sheet, we ended the quarter with $351 million in cash, cash equivalents, and investments, essentially flat compared to the end of fiscal year 2020. Now before I discuss guidance, I’d like to comment on what we are seeing in our customer and prospect base. Over the past quarter, we have seen some new patterns emerge. From an industry perspective, we have seen some verticals continue to expand even accelerating, and others contract. However, we have seen more pronounced general trends in terms of company size. For example, we have seen strong customer acquisition in the enterprise but a notable slowing of expansion in some of our customers. Whereas in SMB, we have seen good customer acquisition and expansion amidst higher churn. While we still see strong demand for our platform and strong retention rates, at the same time we are also seeing some headwinds in this evolving macro environment, and as such, we continue to take a balanced approach to our quarterly and annual guidance. We are broadening the range of full year guidance for revenue, lowering the bottom end of the range and maintaining the top end of the range we provided in our Q4 earnings call. For the second quarter fiscal 2021, we expect revenue in the range of $50 million to $51 million, which at the midpoint would represent a 25% growth rate from the second fiscal quarter of 2020. Non-GAAP net loss per share is expected to be in the range of $0.06 to $0.07 for the second fiscal quarter, with basic shares outstanding in Q2 expected to be 39 million. This implies an operating loss margin of 10% to 12%. For the full year of fiscal 2021, we expect revenue in the range of $204 million to $213 million, which at the midpoint represents a 25% growth rate for the full year 2021. Non-GAAP net loss per share is expected to be in the range of $0.25 to $0.30, and this implies an operating loss margin of 10% to 12%. Basic shares outstanding are expected to be 79 million. We are very well placed for continued growth. We have a loyal customer base. The subscription-based business model and our digital operations management offering are even more relevant as companies increasingly rely on their digital assets. We have a strong balance sheet, and we will invest both in our platform and our go-to-market capabilities with a view to extending our leadership. With that, I will open up the call for Q&A.

Operator, Operator

Our first question comes from Bhavan Suri with William Blair & Co. Your line is open.

Bhavan Suri, Analyst

Hey, guys. Thanks for taking my question, and it’s good to see sort of the net retention rates stabilizing and the upside in the quarter. So thank you for that. I just wanted to touch a little bit around the sales enablement and productivity. You have been rolling out a bunch of sales enablement initiatives to address execution pressures and expansion activity, it sounds like from the comments you just said, you are making some progress there. Just a little more about what is the nature of those initiatives and sort of were there any incremental changes to your quarter that David Justice's announcement made? And then what level of success are you seeing now, being a couple of quarters in terms of productivity picking up? Hello?

Howard Wilson, CFO

Hi. Jen, you may be muted.

Jennifer Tejada, CEO

Hi, Bhavan. Hi, Bhavan…

Bhavan Suri, Analyst

Hi. Did you guys hear that? Hi.

Jennifer Tejada, CEO

We did.

Bhavan Suri, Analyst

I can. I thought for a second I had dropped you…

Jennifer Tejada, CEO

No, no, no. Thank you so much for your question. So, David has been here, Dave Justice is our new Chief Revenue Officer. Although I suspect he feels the honeymoon is well and truly over. He’s been here for almost five months, and he’s brought a tremendous amount of rigor and process to our sales organization, which has been great to see. One of the biggest contributions I think he has made to date has been in deepening our leadership bench. So we have brought in a new Head of Sales Operations, a new Head of North America, and most recently we announced Manjula Talreja, who will be leading our Customer Success and Professional Services. I think all those things bode well to continuing to improve sales productivity. New ARR was very strong in the quarter, which I am thrilled about; that demonstrates the demand in the market. Our focus on hiring the right profile and ramping them more effectively is definitely starting to pay off. Having said that, with the macro condition sometimes it’s hard to see causalities. So we look at pipeline and pipeline is very strong. We are also having a lot of conversations with customers. So I have seen 15 customers in the last two weeks, for instance, and it’s nice to see the engagement with customers continue despite the economic backdrop. Finally, I would say that we have spent quite a bit of investment in enabling our sales force to focus on value and really demonstrating quantifiable business value, which is extremely timely, I guess, in this environment where we have customers that are really looking for cost efficiency and improvements in productivity, and this is something that PagerDuty delivers in a highly quantifiable way. So that’s also led to some improvement.

Bhavan Suri, Analyst

No. That’s great. And I am going to add one more to that. You are talking about the enablement, the valued partner program. A few weeks back you just announced our expanded partner program for system integrators, MSPs, some new partners you added, just an update on the ecosystem and strategy and then maybe I know it’s early, but the early interest you are seeing from the guys you just added and prospective partners around deploying sort of this type of solution more broadly within enterprises?

Jennifer Tejada, CEO

Well, thank you. I really appreciate you picking up on that because partnerships and expanding our ecosystem have been an area of focus this year, but it’s still quite early for us. We have largely been an independent distribution business for most of our lifetime as a company. What I would say is, all of these partners see a tremendous opportunity to support customers as they have accelerated their digital transformation. So I mentioned in my prepared comments that many of our customers are pulling forward strategic projects that historically they would have planned to unfold over years now, into months and weeks, and there’s a lot of change management and transformation that comes with that. So I think our partners see an opportunity to be part of the journey with PagerDuty, particularly as digital operations management, DevOps transformation, and cloud adoption all become accelerated macro trends within these customers. We continue to invest in partnerships with the cloud service providers as well. So I am really encouraged with both the level of interest, but also the opportunity, which is still early for us at this point.

Bhavan Suri, Analyst

Awesome. Thank you, guys. Appreciate you taking my questions. Thank you.

Operator, Operator

Your next question comes from Matt Hedberg with RBC Capital Markets. Your line is open.

Matt Hedberg, Analyst

Thank you for taking my questions, and I'm glad to hear everyone is doing well. Jen, since your software and platform are essential, especially during COVID, I have two questions. Can you provide more details about the delays you experienced in expansion? Additionally, could you discuss your pipeline growth and any demand trends through May, considering the strong customer interest resulting from COVID?

Jennifer Tejada, CEO

Sure. And it’s a mixed bag when you look across segments. I mean, enterprises continue to be a strong segment for us and new, where I frequently mention that we don’t see a lot of competition on the land or customer acquisition motion; we are often replacing a greenfield environment. And so we definitely saw that demand signal where new customers were saying, “Oh, shoot, I really need an incident management environment. I need to do a better job of managing my digital operations,” and this is because a lot of prospects and customers were literally moving to a 100% e-commerce environment overnight out of necessity, just given COVID in the economic backdrop. And what we also saw in that was some enterprise customers who had their hands full dealing with their digital transition or their transition to working from home or the requirements and look at how all of their physical environments like manufacturing environments etc. needed to be managed. So you just saw a lot of people really struggling to tackle all of the sort of time-critical issues that they had as a result of COVID sort of unfolding the way it did and some of those customers said, “Yeah, I need some more time to get this done.” We had a couple of deals slip because we couldn’t get availability from their legal team to even finalize documents, because they were working on organizational restructuring, for instance. But we didn’t see deals go away; we just saw deals delay and I think that’s important. And I think as customers get back into a groove where they can focus on strategic initiatives, we still see that business being there and long-term see all of these tailwinds working in our favor, whether we are talking about accelerated cloud adoption, the digital acceleration I mentioned, the need to manage security in a hybrid environment, and then the shift to e-commerce. I think many of our customers who shifted to a 100% e-commerce model are not going to shift back to the brick-and-mortar balance that they had before, so all of those things bode well for us long-term. From a pipeline perspective, we see transactions, like the number of transactions in volume looking good. But it still remains to be seen how long it’s going to take us to close or to drive those transactions into business.

Matt Hedberg, Analyst

That makes a lot of sense and it just seems like your relevancy is even more important today and maybe there are some pauses now, but that certainly could accelerate post-COVID. I guess, Howard, I know billings isn’t a perfect measure for you guys for lots of reasons, but you calculated billings, it looks like you grew sort of mid-30s, that was even above where your revenue grew. Can you talk about what drove sort of strong growth in deferred revenue?

Howard Wilson, CFO

Yeah. So, Matt, as I mentioned, when we chatted previously, our billings is, of course, we are pleased when we see a number like this where it’s around 35% growth and even when we look at it on a trailing 12 months basis, it also sits around the 35% mark. So that’s a good place for us to be. I think for us there’s a cyclical nature to our billings given both the timing of renewals and also the fact that we have this model where customers typically co-term when they expand. So we have this constant realignment that happens. Look, we have seen some good positive trends. We have seen some customers who have been month-to-month customers make the transition to being annual customers. So again, not a huge swath of those, but those kinds of things are always positive.

Matt Hedberg, Analyst

Super helpful. Thanks, guys.

Operator, Operator

Your next question comes from Sterling Auty with JP Morgan. Your line is open.

Sterling Auty, Analyst

Hi guys. So just wondering what did you experience in terms of initial deal size in the quarter especially during once the pandemic was hitting?

Jennifer Tejada, CEO

In terms of deal size, I think we saw people move quickly on smaller transactions and take more time to look at larger transactions. What I have seen particularly in the last several weeks is a continued interest in strategic deals, but a real focus on wanting to make sure the value proposition can be quantified. And a shift in a lot of the conversations from ‘We need the technology, we need the DevOps methodology’ to ‘I want to improve my labor cost, I want to improve my cost efficiency; I need to ensure that all of my network operation center workers just went home and they are distributed, I need you to help me with that.’ So there is a little bit of, I think, a shift in focus in that regard. And like I said, when you look across our customer base, across the different industry verticals and the different segments, they are all experiencing this pandemic and the recession associated with it in different ways. Our small business has been hit hardest. A lot of our enterprise customers, some of those verticals are doing very well and in fact accelerating their initiatives. So you really have to kind of treat every customer differently.

Sterling Auty, Analyst

Okay. And then I was intrigued by you made, I think, some remarks in your prepared remarks about critical events. It sounds like maybe you are expanding the use cases or platform, are you looking to get into more of the segments that we would traditionally see EventBridge competing in?

Jennifer Tejada, CEO

That’s a great question. And I just want to make sure you can hear me okay as you were breaking up a little bit. Am I clear?

Sterling Auty, Analyst

It’s a little choppy, but not bad.

Jennifer Tejada, CEO

Okay. Well, what we are seeing is a number of our customers who are already using us for business response, meaning the escalation of an issue from the technology team to business leadership or communication, marketing, legal risk management. They use us for crisis management. So really orchestrating their leadership to make sure employees were healthy and well, etc. We haven’t explicitly gone after the mass notification market, but we have seen customers pull us into that use case more frequently as a result of COVID, and it kind of just depends on the circumstance. I think what is really important is PagerDuty is already there in your engineering organization, in your IT organization, and it’s trusted, and so from a natural adjacency to then leverage it for other time-sensitive urgent important work across the business.

Sterling Auty, Analyst

Got it. Thank you.

Operator, Operator

Your next question comes from Rob Oliver with Baird. Your line is open.

Rob Oliver, Analyst

Hey. Great. Thank you, guys, very much for taking my question. Jen, Churchill also said, 'give us the tools and we will get the job done.' So it sounds like you guys are falling into that category. Sorry, history buff couldn't resist…

Jennifer Tejada, CEO

I love that guy. I almost wish that coordinated too.

Rob Oliver, Analyst

Yes. I guess we are all craving that. So I wanted to double down a little bit on some of my other colleagues and researchers have been asking about, which is on some of the nature, some of the new wins this quarter. You mentioned a large retailer going curbside. I think I probably bought a couple of Chromebooks for my kids at that retailer. So I just want to get a sense for how much of the lands or expansions this quarter were so-called crisis buys, or were these things that were already in the pipeline? Just trying to separate out kind of because clearly there is kind of two sides to the COVID coin in there is those that reacted quickly to do some things, just trying to maybe tease that out a little bit.

Jennifer Tejada, CEO

I have a few thoughts. We noticed several sectors perform exceptionally well this quarter, particularly software, technology, and retail, especially in e-commerce. I spoke with a large retailer today that operates over 2,000 stores, and they have been recognized as an essential service during this period. They are making significant strategic moves in their digital business and have continued to grow with us. This illustrates how a customer is committed to investing in digitization and effectively managing their operations. It's crucial for them to deliver on their service promises, whether that's curbside or online, much like how telecom companies use our services to enhance logistics and ensure customer satisfaction throughout their journey. Most of our deals were created and finalized this quarter, apart from our larger enterprise agreements. While many of these were influenced by COVID, the pandemic has only heightened the necessity for businesses to quickly identify issues and efficiently manage their digital operations. We saw a significant acceleration in cloud adoption among our customers, who were compelled to transition to fully e-commerce environments. PagerDuty plays a critical role in supporting these digital services. As I mentioned earlier, as these companies evolve into digital and operational entities, our services are essential to their success. This clearly highlights the opportunity in our market and the ongoing relevance of what we offer, suggesting strong long-term potential as customers grow more comfortable with making larger investments again.

Rob Oliver, Analyst

Great. That’s really helpful. And I just had one quick follow-up for Howard just on the SMB churn side. Any color around that in terms of, it’s obvious that there are going to be some SMBs that are going to be pressured and we are going to have to rationalize usage across the board? Any feedback — I am sure you guys are aggressively asking those customers why they churned in and you guys were not the cheapest solution in the market, maybe it’s okay that those customers leave, but just get a sense for whether those were competitive, whether it was macro-related or any color there would be helpful? Thank you guys very much.

Howard Wilson, CFO

Yeah. Sure. Thanks, Rob. From the analysis that we have had to date, it seems as though a large percentage of this is being macro-related. I think the pressure that’s being felt among the SMB companies. For us, we look at SMB as companies with revenue under $50 million. They have been under a lot of stress during this crisis. And it’s not surprising that they would be looking to either cut costs in some way or look for some sort of savings, and so we haven’t been too surprised by that. But while we mentioned that it hasn’t been an overwhelming amount, if I were to give you some indication, the churn that we have had out of SMB remains below 10% on an annualized basis.

Rob Oliver, Analyst

Thanks a lot, Howard.

Operator, Operator

Your next question comes from Rishi Jaluria with D.A. Davidson. Your line is open.

Hannah Rudoff, Analyst

Hi, guys. This is Hannah on for Rishi today. Thank you for taking my question. So in terms of customer concentration, can you talk about the dynamics you are seeing there? I am just curious about the balance between inbound customer requests wanting to deploy PagerDuty versus outbound direct sales versus your self-serve motion?

Jennifer Tejada, CEO

Well, I will start with that, Hannah, and Howard you can jump in as you like to. And Hannah, it’s great to have you on the call today. The vast majority of our lands come through our digital e-commerce environment. These tend to be very well-qualified buyers. They are developers. They are people responsible for application services or infrastructure that want to make sure they have eyes and ears and can very quickly detect and get in front of issues before they become business-impacting incidents. Our customers are able to grow in a frictionless way with us, and one of the customers I was actually speaking with today was talking about how they love it when a solution grows organically inside the business because the product is so utilitarian and users love it and adopt it and then they can take a more strategic approach and grow it over time. And that’s how a lot of our customers land and expand. They land through digital e-commerce. They then grow organically to a point at which a salesperson will get involved and start to look for strategic initiatives like cloud migration, new application development, new product launches, DevOps transformation, etc., where you start to see more standardization on the product. So it really is a mix. But we continue to see a lot of visits come to PagerDuty through word of mouth, through the reputation of our business, because we have built trust over many, many years such that a lot of our users are with us in their fourth or fifth company where they have brought PagerDuty into that organization.

Hannah Rudoff, Analyst

Great. That’s really helpful. And then what kind of assumptions around the recovery in the guidance and what kind of churn assumptions from the SMB segment are you building in? Do you see it stabilizing or maybe increasing a little going forward?

Howard Wilson, CFO

Yeah. So, Hannah, I will take that. In terms of, when we look at our guidance for the full year, we don’t have the crystal ball that we would very much like to have in terms of being able to be very specific and deterministic around the impacts from the different areas. What we have done though is we have looked at the affected industries. As I mentioned in my prepared remarks, we have exposure of about 7% of ARR related to directly impacted industries. And when we look SMB, as I mentioned, SMB is about 20% of our annual recurring revenue and we have seen increased levels of churn there, but nothing terribly dramatic. In fact, for SMB, the other thing we have seen is increased rates of acquisition and expansion in SMB. So it’s almost the tale of two cities within the SMB right now. So we try to take into account both the macro to the extent that we can understand it, and as you would expect, this is changing almost day-to-day. We have practically balanced and prudent in terms of coming up with a view for the full year and for the next quarter that incorporates those different aspects. But we are feeling confident about our guidance over the full year based on what we can see today.

Hannah Rudoff, Analyst

Great. Thank you both.

Howard Wilson, CFO

Thanks, Hannah.

Jennifer Tejada, CEO

Thank you, Hannah.

Operator, Operator

Our next question comes from Mark Rende. Your line is open.

Mark Rende, Analyst

Hi. This is Mark Rende on for Sanjit. Thanks for taking my question. I guess to quickly kind of follow up on that last question about the assumptions embedded in the guidance. Is there a — maybe quickly is there any kind of way we should be thinking about net expansion in the next quarter, any kind of bookings to put on that? Should we think about it kind of decreasing again? And I know there’s still some of this kind of overhang from the competitor churn. So anything to kind of put a bookend on that would be helpful.

Howard Wilson, CFO

Yeah. Thanks, Mark. As we mentioned last quarter, we have provided a range for the net retention in terms of that being between we expected to land within a range of 120% to 123%, and we came in with 121%. But when we look at this current environment, we feel it’s very difficult to guide to a specific number right now. So what was good for us in this last quarter, I can’t tell you what happened in Q1, was that we did see expansion in SMB, and we did see some difference in behaviors like one enterprise company, a large software company where we had anticipated or planned a large expansion. Because of COVID-19, they ended up taking a decision where they just renewed their multimillion-dollar agreement with us, and they deferred doing that expansion until we get through some of this crisis. So we are at this stage not providing guidance, but pleased with the high renewal rates we continued to see and the positive aspects of the expansion that we have been seeing in segments like SMB.

Jennifer Tejada, CEO

Sure. And I had to add to that, one thing that I think gives us a lot of confidence around the durability of our growth is how well the PagerDuty platform has performed while being tested under unprecedented demand. Many of our customers have seen a surge in traffic, we have talked about the Zoom example, where they were seeing 11 times the number of incidents, and the product is performing very well. So when I am talking to customers, what I am hearing is a lot of appreciation, a lot of confidence, and a desire to want to do more when the time is right for those customers. That gives me a real sense of confidence around the durability of our growth long-term and the fact that as we play the long game, I think these tailwinds, like companies becoming more digital, moving toward e-commerce, and accelerating their cloud and digital transformation, all bode very well for us over the long-term.

Mark Rende, Analyst

Perfect. And then maybe just a quick follow-up, really strong 100K plus ARR customer growth in the quarter obviously, just — and apologies maybe you kind of hit on this already, but was that primarily driven by adoption of the new products like Event Intelligence, visibility of the whole suite, or is that more from the seat expansion side in this quarter, or maybe even just like net new large enterprises realizing the importance of digital operations management particularly in today’s world?

Jennifer Tejada, CEO

It’s both to be frank. We had a very strong new logo acquisition quarter for enterprise, which we are really pleased to see because that creates a lot of expansion opportunity for us in the future. We also saw a very strong adoption; our customers are starting to really leverage Event Intelligence where it’s reducing the amount of noise and number of alerts coming into teams that historically would have been in actionable in ways that saved a lot of money, so that creates a huge labor cost savings and productivity uplift. And then we also saw some really great seat expansion, like a large insurance company in the Midwest. They have been a customer with us since 2016. They added 400 users in the past quarter across several teams, where they are already in multiple development teams and wanted to improve their application support given their move to being more e-commerce oriented in this environment. So we are seeing kind of strength all around. What you didn’t mention in that question was new use cases, and we have seen some really interesting new use cases, including where we are working with a government health organization in Europe to help them with their COVID testing, as well as customer service use cases with the observability customer that I mentioned. So the multiple engines for growth that we have talked about in the past continue to give us a lot of opportunity to both expand our user base on the core product, which, as I said, has become really essential critical infrastructure for our customers, but then also expand our service area with new products and new use cases within the customer base. And then, finally, we saw good strength with our European team again this year; they have continued to really deliver strong performance for us.

Mark Rende, Analyst

Awesome. Thank you.

Jennifer Tejada, CEO

Thank you.

Howard Wilson, CFO

Thanks, Mark.

Operator, Operator

And there are no final questions at this time. I will now turn the conference back over to Ms. Finerman for closing remarks.

Stacey Finerman, Moderator

Thank you, everybody for taking the time to join our call today. Have a great night.

Operator, Operator

This concludes today’s conference call. You may now disconnect.