PagerDuty, Inc 10-Q for FY2022 Q3
PagerDuty, Inc. (PD)
10-Q
2021-12-08
For: 2021-10-31
View Original
Added on
April 08, 2026
About this 10-Q
PagerDuty, Inc filed this 10-Q on December 8, 2021, covering the quarter ended October 31, 2021 (FY2022 Q3).
Headline figures
Quarter ended October 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $71.76M
- up 33.5% from $53.77M a year earlier
- Net loss
- $26.34M
- compared with a net loss of $20.61M a year earlier
- Diluted EPS
- -$0.31
- compared with -$0.26 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-Q
_________________________
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended October 31, 2021
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number: 001-38856
(Exact name of registrant as specified in its charter)
_________________________
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||
(844 ) 800-3889
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
_________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically on its corporate Web site every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
x | Accelerated filer | o | ||||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
The total number of shares of common stock outstanding as of December 6, 2021, was 85,980,013 .
PAGERDUTY, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 | ||||||||
Item 2 | ||||||||
Item 3 | ||||||||
Item 4 | ||||||||
Part II - OTHER INFORMATION
Item 1 | ||||||||
Item 1A | ||||||||
Item 2 | ||||||||
Item 6 | ||||||||
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, or this Form 10-Q, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which statements involve substantial risk and uncertainties. All statements contained in this Form 10-Q other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth and trends, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan,” “potentially,” “likely,” and similar expressions are intended to identify forward-looking statements.
Forward-looking statement contained in this Form 10-Q include, but are not limited to, statements about our expectations regarding:
•the effect of uncertainties related to the novel coronavirus and resulting COVID-19 pandemic on U.S. and global markets, our business, operations, revenue results, cash flow, operating expenses, demand for our solutions, sales cycles, customer retention, and our customers’ businesses;
•trends in key business metrics, including number of customers and dollar-based net retention rate, and non-GAAP financial measures and their usefulness in evaluating our business;
•trends in revenue, cost of revenue, and gross margin;
•trends in operating expenses, including research and development, sales and marketing, and general and administrative expense, and expectations regarding these expenses as a percentage of revenue;
•our existing cash and cash equivalents and cash provided by sales of our subscriptions being sufficient to support working capital and capital expenditures for at least the next 12 months;
•our ability to successfully identify, acquire, and integrate complementary companies, technologies, and assets;
•our ability to service the interest on our convertible notes and repay such notes, to the extent required;
•our efforts to maintain proper and effective internal controls;
•our ability to expand our operations and increase adoption of our platform internationally;
•our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United States and internationally;
•the increased expenses and administrative workload associated with being a public company; and
•other statements regarding our future operations, financial condition, and prospects and business strategies.
Such forward-looking statements are based on our expectations as of the date of this filing and are subject to a number of risks, uncertainties and assumptions, including but not limited to, risks detailed in the “Risk Factors” section of this Form 10-Q and in our Annual Report on Form 10-K. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission, or the SEC, that disclose risks and uncertainties that may affect our business. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Form 10-Q may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely on forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or may not occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. In addition, the forward-looking statements in this Form 10-Q are made as of the date of this filing, and we do not undertake, and expressly disclaim any duty, to update any of these forward-looking statements for any reason after the date of this Form 10-Q or to conform these statements to actual results or revised expectations.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
PAGERDUTY, INC.
Condensed Consolidated Balance Sheets
(in thousands)
| As of October 31, 2021 | As of January 31, 2021 | ||||||||||
| (unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Investments | |||||||||||
Accounts receivable, net of allowance for doubtful accounts of $ | |||||||||||
| Deferred contract costs, current | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Deferred contract costs, non-current | |||||||||||
| Lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Accrued compensation | |||||||||||
| Deferred revenue, current | |||||||||||
| Lease liabilities, current | |||||||||||
| Total current liabilities | |||||||||||
| Convertible senior notes, net | |||||||||||
| Deferred revenue, non-current | |||||||||||
| Lease liabilities, non-current | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 11) | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive (loss) income | ( | ||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
Total liabilities and stockholders’ equity | $ | $ | |||||||||
See Notes to Condensed Consolidated Financial Statements
5
PAGERDUTY, INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share data)
(unaudited)
| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Other expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Loss before (provision for) benefit from income taxes | ( | ( | ( | ( | |||||||||||||||||||
| (Provision for) benefit from income taxes | ( | ( | |||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||
| Unrealized (loss) gain on investments | ( | ( | ( | ||||||||||||||||||||
| Total comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share, basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Weighted average shares used in calculating net loss per share, basic and diluted | |||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
6
PAGERDUTY, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
(unaudited)
| Three Months Ended October 31, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balances as of July 31, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options and restricted stock agreements | — | — | — | ||||||||||||||||||||||||||||||||
Vesting of restricted stock units, net of employee payroll taxes | — | ( | — | — | ( | ||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balances as of October 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Nine Months Ended October 31, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balances as of January 31, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| — | — | ( | — | ( | |||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options and restricted stock agreements | — | — | — | ||||||||||||||||||||||||||||||||
Vesting of restricted stock units, net of employee payroll taxes | — | ( | — | — | ( | ||||||||||||||||||||||||||||||
| Shares issued related to a business combination | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Issuance of common stock in connection with employee stock purchase plan | — | — | — | ||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
Balances as of October 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
7
| Three Months Ended October 31, 2020 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balances as of July 31, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options and restricted stock agreements | — | — | — | ||||||||||||||||||||||||||||||||
| Vesting of restricted stock units, net of employee payroll taxes | — | ( | — | — | ( | ||||||||||||||||||||||||||||||
| Shares issued related to a business combination | — | — | — | ||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balances as of October 31, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Nine Months Ended October 31, 2020 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balances as of January 31, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options and restricted stock agreements | — | — | — | ||||||||||||||||||||||||||||||||
| Vesting of restricted stock units, net of employee payroll taxes | — | ( | — | — | ( | ||||||||||||||||||||||||||||||
| Vesting of early exercised options | — | — | — | — | |||||||||||||||||||||||||||||||
| Equity component of convertible senior notes, net of issuance costs | — | — | — | — | |||||||||||||||||||||||||||||||
| Purchases of capped calls related to convertible senior notes | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Shares issued related to a business combination | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with employee stock purchase plan | — | — | — | ||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balances as of October 31, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
8
PAGERDUTY, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Nine Months Ended October 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of deferred contract costs | |||||||||||
Amortization of debt discount and issuance costs (1) | |||||||||||
| Stock-based compensation | |||||||||||
| Non-cash lease expense | |||||||||||
| Other | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Deferred contract costs | ( | ( | |||||||||
| Prepaid expenses and other assets | ( | ( | |||||||||
| Accounts payable | ( | ||||||||||
| Accrued expenses and other liabilities | ( | ||||||||||
| Accrued compensation | |||||||||||
| Deferred revenue | |||||||||||
| Lease liabilities | ( | ( | |||||||||
| Net cash (used in) provided by operating activities | ( | ||||||||||
| Cash flows from investing activities | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Capitalization of internal-use software costs | ( | ( | |||||||||
| Business acquisitions, net of cash acquired | ( | ( | |||||||||
| Proceeds from maturities of held-to-maturity investments | |||||||||||
| Purchases of available-for-sale investments | ( | ( | |||||||||
| Proceeds from maturities of available-for-sale investments | |||||||||||
| Proceeds from sales of available-for-sale investments | |||||||||||
| Net cash provided by (used in) investing activities | ( | ||||||||||
| Cash flows from financing activities | |||||||||||
Proceeds from issuance of convertible senior notes, net of issuance costs paid of $ | |||||||||||
| Purchases of capped calls related to convertible senior notes | ( | ||||||||||
| Proceeds from employee stock purchase plan | |||||||||||
| Proceeds from issuance of common stock upon exercise of stock options | |||||||||||
| Employee payroll taxes paid related to net share settlement of restricted stock units | ( | ( | |||||||||
| Net cash (used in) provided by financing activities | ( | ||||||||||
| Net increase in cash, cash equivalents, and restricted cash | |||||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | $ | |||||||||
| Supplemental cash flow data: | |||||||||||
| Cash paid for income taxes | $ | $ | |||||||||
| Cash paid for interest | $ | $ | |||||||||
| Non-cash investing and financing activities: | |||||||||||
| Vesting of early exercised options | $ | $ | |||||||||
| Purchase of property and equipment, accrued but not yet paid | $ | $ | |||||||||
| Costs related to issuance of convertible senior notes, accrued but not yet paid | $ | $ | |||||||||
| Stock-based compensation capitalized in internal use software | $ | $ | |||||||||
| Bonuses capitalized in internal use software | $ | $ | |||||||||
(1) During the first quarter of fiscal 2022, the Company early adopted ASU 2020-06 which resulted in the elimination of amortization of debt discount on our 1.25 % Convertible Senior Notes (the “Notes”) from February 1, 2021.
See Notes to Condensed Consolidated Financial Statements
9
PAGERDUTY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Description of Business and Basis of Presentation
Description of Business
PagerDuty, Inc. was incorporated under the laws of the state of Delaware in May 2010.
PagerDuty acts as the central nervous system for the digital enterprise. PagerDuty harnesses digital signals from virtually any software-enabled system or device, combines it with human response data and orchestrates teams to take the right actions in real time. The Company’s products help organizations improve operations, accelerate innovation, increase revenue, mitigate security risk, and deliver a great customer experience.
As used herein, “PagerDuty”, “we”, “our”, “the Company” and similar terms include PagerDuty, Inc., unless the context indicates otherwise.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The condensed consolidated balance sheet as of January 31, 2021 was derived from the audited consolidated financial statements as of that date but does not include all of the information and notes required by GAAP for complete financial statements. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended January 31, 2021, included in the Company’s Annual Report on Form 10-K, filed with the SEC.
The condensed consolidated financial statements include the results of PagerDuty, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.
In the opinion of management, the information contained herein reflects all adjustments necessary for a fair presentation of the Company’s financial position, results of operations and comprehensive loss, statements of stockholders’ equity, and cash flows. The results of operations for the three and nine months ended October 31, 2021 are not necessarily indicative of the results to be expected for the full year ending January 31, 2022 or for any other interim period, or for any future year.
The Company’s fiscal year ends on January 31. References to fiscal 2022, for example, refer to the fiscal year ending January 31, 2022.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make, on an ongoing basis, estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. The Company’s most significant estimates and judgments involve the fair value of stock awards, period of benefit for amortizing deferred contract costs, the determination of the allowance for doubtful accounts, the provision for income taxes, including the related valuation allowance and any uncertain tax positions, fair value of acquired assets and assumed liabilities, impairment of goodwill and intangible assets, the incremental borrowing rate for lease liabilities, and estimates related to our revenue recognition, such as the assessment of performance obligations in our revenue arrangements and the fair value assigned to each performance obligation, among others. Management bases its
10
In December 2019, the novel coronavirus and resulting disease (“COVID-19”) was reported and in March 2020 the World Health Organization declared it a pandemic. The Company considered the impact of COVID-19 on the assumptions and estimates used and determined that there were no material adverse impacts on the condensed consolidated financial statements during the three and nine months ended October 31, 2021 and 2020. As events continue to evolve and additional information becomes available, our assumptions and estimates may change materially in future periods.
2. Summary of Significant Accounting Policies
Concentrations of Risk and Significant Customers
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, available-for-sale investments, and accounts receivable. All of the Company’s cash and cash equivalents and investments are invested in money market funds, U.S. Treasury securities, commercial paper, corporate debt securities, or U.S. Government agency securities that management believes to be of high credit quality.
No single customer accounted for 10% of the total accounts receivable balance as of October 31, 2021 or January 31, 2021. No single customer represented 10% or more of revenue for the three and nine months ended October 31, 2021 or 2020.
Related Party Transactions
Certain members of the Company’s Board of Directors serve as directors of, or are executive officers of, and in some cases are investors in, companies that are customers or vendors of the Company. The Company recognized $1.1 million of revenues associated with related parties during the nine months ended October 31, 2021 and billed $2.2 million to entities associated with related parties during the nine months ended October 31, 2021. Other related party transactions were not material for the three and nine months ended October 31, 2021 and 2020.
Significant Accounting Policies
There have been no significant changes to our significant accounting policies as compared to those described in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021, other than as set forth below.
Stock-Based Compensation
The Company recognizes compensation expense for all stock-based payment awards, including stock options, restricted stock units (“RSUs”), and performance stock units (“PSUs”), based on the estimated fair value of the award on the grant date.
The Company estimates the fair value of stock options issued to employees on the date of grant using the Black-Scholes option pricing model, which is impacted by the estimated fair value of the Company’s common stock, as well as certain assumptions including the expected volatility over the term of the option awards, the expected term of the awards, risk-free interest rates and the expected dividend yield. Assumptions and estimates used in the determination of the fair value of stock options are as follows:
11
Expected volatility—Expected volatility is a measure of the amount by which the stock price is expected to fluctuate. Since the Company does not have sufficient trading history for its common stock, it estimates the expected volatility of its stock options by taking the average historical volatility of a group of comparable publicly traded companies over a period equal to the expected life of the options.
Expected term—The Company determines the expected term based on the average period the stock options are expected to remain outstanding, generally calculated as the midpoint of the stock options’ vesting term and contractual expiration period, as the Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior.
Risk-free rate—The Company uses the U.S. Treasury yield for its risk-free interest rate that corresponds with the expected term.
Expected dividend yield—The Company utilizes a dividend yield of zero , as it does not currently issue dividends and does not expect to in the future.
The Company estimates the fair value of RSUs and PSUs at our stock price on the grant date.
The Company estimates the fair value of shares to be issued under the employee stock purchase plan (the “ESPP”) on the first day of the offering period using the Black-Scholes valuation model, which is impacted by the estimated fair value of the Company’s common stock, as well as certain assumptions including the expected volatility over the term of the offering period, the expected term of the awards, risk-free interest rates and the expected dividend yield. Assumptions used in the determination of the fair value of the ESPP are the same as those used in the determination of the fair value of our stock options.
The Company generally recognizes compensation expense for employee stock-based payment awards on a straight-line basis over the period during which an award recipient is required to provide services in exchange for the award (generally the vesting period of the award), with the exception of PSUs which are recognized using the accelerated attribution method. The Company accounts for forfeitures as they occur.
The fair value of each non-employee stock option is estimated at the date of grant using the Black-Scholes option pricing model and is not remeasured over the vesting term. Assumptions used in valuing non-employee stock options are generally consistent with those used for employee stock options with the exception that the expected term is over the contractual life.
12
Company’s condensed consolidated statements of operations or condensed consolidated statements of cash flows. Refer to Note 10, “Debt and Financing Arrangements” for further information.
| As of January 31, 2021 | ASU 2020-06 Adoption Adjustment | As of February 1, 2021 | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Outstanding principal | $ | $ | $ | |||||||||||||||||
| Unamortized debt discount and issuance costs | ( | ( | ||||||||||||||||||
| Net carrying amount | $ | $ | $ | |||||||||||||||||
| Equity | ||||||||||||||||||||
| Additional paid-in-capital | $ | ( | $ | $ | ( | |||||||||||||||
| Accumulated deficit | ( | ( | ||||||||||||||||||
Recently Issued Accounting Pronouncements
In October 2021, the FASB issued Accounting Standard Update No. 2021-08 (“ASU 2021-08”), Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 (Revenue from Contracts with Customers). At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The ASU is part of the FASB's simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. ASU 2021-08 will be effective for annual reporting periods beginning after December 15, 2022. Early adoption is permitted, including adoption in an interim period. The adoption of the standard will impact future business combinations and require the Company to measure acquired contract assets and liabilities in accordance with ASC 606. The Company does not expect the adoption of ASU 2021-08 to have a material impact on the consolidated financial statements.
3. Cash, Cash Equivalents, and Investments
Cash, cash equivalents, and investments consisted of the following:
| As of October 31, 2021 | As of January 31, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Cash and cash equivalents | |||||||||||
Cash | $ | $ | |||||||||
Money market funds | |||||||||||
| Commercial paper | |||||||||||
| U.S. Treasury securities | |||||||||||
| Total cash and cash equivalents | $ | $ | |||||||||
| Available-for-sale investments: | |||||||||||
| U.S. Treasury securities | $ | $ | |||||||||
Commercial paper | |||||||||||
Corporate debt securities | |||||||||||
| Total available-for-sale investments | $ | $ | |||||||||
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The following tables summarize the Company’s investments’ adjusted cost, net unrealized gains (losses), and fair value by significant investment category as of October 31, 2021 and January 31, 2021. Gross realized gains or losses from sales of available-for-sale securities were not material for the three and nine months ended October 31, 2021.
| As of October 31, 2021 | |||||||||||||||||
| Cost Basis | Unrealized Loss, Net | Recorded Basis | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Available-for-sale investments: | |||||||||||||||||
| U.S. Treasury securities | $ | $ | ( | $ | |||||||||||||
| Commercial paper | ( | ||||||||||||||||
| Corporate debt securities | ( | ||||||||||||||||
| Total available-for-sale investments | $ | $ | ( | $ | |||||||||||||
| As of January 31, 2021 | |||||||||||||||||
| Cost Basis | Unrealized Gain (Loss), Net | Recorded Basis | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Available-for-sale investments: | |||||||||||||||||
| U.S. Treasury securities | $ | $ | $ | ||||||||||||||
| Commercial paper | ( | ||||||||||||||||
| Corporate debt securities | |||||||||||||||||
| Total available-for-sale investments | $ | $ | $ | ||||||||||||||
The following tables present the Company’s available-for-sale securities by contractual maturity date as of October 31, 2021 and January 31, 2021:
| As of October 31, 2021 | |||||||||||
| Cost Basis | Recorded Basis | ||||||||||
| (in thousands) | |||||||||||
| Due within one year | $ | $ | |||||||||
| Due between one to five years | |||||||||||
| Total | $ | $ | |||||||||
| As of January 31, 2021 | |||||||||||
| Cost Basis | Recorded Basis | ||||||||||
| (in thousands) | |||||||||||
| Due within one year | $ | $ | |||||||||
| Due between one to five years | |||||||||||
| Total | $ | $ | |||||||||
As of October 31, 2021, there were 65 available-for-sale securities in an unrealized loss position, one of which was in a continuous unrealized loss position for the last 12 months. The total unrealized loss related to these securities was $0.2 million. Unrealized losses for securities that were in an unrealized loss position as of January 31, 2021 were not material.
When evaluating investments for impairment, the Company reviews factors such as the extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s
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4. Fair Value Measurements
The Company measures its financial assets and liabilities at fair value each reporting period using a fair value hierarchy that prioritizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value, as follows:
Level 1—Valuations based on observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
Level 2—Valuations based on inputs that are directly or indirectly observable in the marketplace.
Level 3—Valuations based on unobservable inputs that are supported by little or no market activity.
The following tables present information about the Company’s financial assets that are required to be measured or disclosed at fair value using the above input categories:
| As of October 31, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| U.S. Treasury securities | |||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Included in cash equivalents | $ | ||||||||||||||||||||||
| Included in investments | $ | ||||||||||||||||||||||
| As of January 31, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| U.S. Treasury securities | |||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Included in cash equivalents | $ | ||||||||||||||||||||||
| Included in investments | $ | ||||||||||||||||||||||
The Company’s assets that are measured by management at fair value on a recurring basis are generally classified within Level 1 or Level 2 of the fair value hierarchy.
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The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. As of October 31, 2021 and January 31, 2021, the Company’s Level 2 securities were priced by pricing vendors. These pricing vendors utilize observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs like market transactions involving identical or comparable securities.
The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable, and accounts payable approximate fair value due to their short-term maturities and are excluded from the fair value table above.
Convertible Senior Notes
As of October 31, 2021, the estimated fair value of the Notes was approximately $369.3 million. The fair value was determined based on the quoted price for the Notes in an inactive market on the last trading day of the reporting period and is considered as Level 2 in the fair value hierarchy.
5. Goodwill and Acquired Intangible Assets
There have been no changes in the carrying amount of goodwill since January 31, 2021.
Acquired intangible assets subject to amortization as of October 31, 2021 were as follows:
| Cost | Accumulated Amortization | Net | Weighted Average Remaining Useful Life | |||||||||||||||||||||||
| (in thousands) | (in years) | |||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | ||||||||||||||||||||||
| Developed technology | ( | |||||||||||||||||||||||||
| Trademarks | ( | |||||||||||||||||||||||||
| Total acquired intangibles, net | $ | $ | ( | $ | ||||||||||||||||||||||
6. Business Combinations
On October 1, 2020, the Company completed the acquisition of Rundeck Inc (“Rundeck”), a leading provider of DevOps automation for enterprise. The Company acquired Rundeck for purchase consideration of $95.5 million in a combination of cash and common stock. The acquisition was accounted for as a business combination and the total purchase consideration was allocated to the net tangible and intangible assets and liabilities based on their fair values on the acquisition date and the excess was recorded as goodwill. This resulted in increases of $72.1 million to goodwill, $21.8 million to customer relationships, $5.6 million to developed technology, and $0.4 million to trademarks.
From the date of the acquisition, the financial results of Rundeck have been included in and are immaterial to our condensed consolidated financial statements. Pro forma revenue and results of operations have not been presented because the historical results are not material to our condensed consolidated financial statements in any period presented.
The Company did not complete any acquisitions in the three and nine months ended October 31, 2021.
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7. Property and Equipment, Net
Property and equipment, net, consisted of the following:
| As of October 31, 2021 | As of January 31, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Leasehold improvements | $ | $ | |||||||||
| Computers and equipment | |||||||||||
| Furniture and fixtures | |||||||||||
| Capitalized internal-use software | |||||||||||
Gross property and equipment (1) | |||||||||||
| Accumulated depreciation and amortization | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
(1) Gross property and equipment includes construction-in-progress for leasehold improvements and capitalized internal-use software of $2.7 million and $1.5 million that had not yet been placed in service as of October 31, 2021 and January 31, 2021, respectively. The costs associated with construction-in-progress are not amortized until the asset is available for its intended use.
Depreciation and amortization expense was $1.3 million and $1.0 million for the three months ended October 31, 2021 and 2020, respectively, and $3.4 million and $2.9 million for the nine months ended October 31, 2021 and 2020, respectively.
8. Deferred Contract Costs
9. Leases
Operating Leases
The Company has entered into various non-cancellable operating leases for its office spaces with lease periods expiring between fiscal 2022 and fiscal 2029. The operating lease agreements generally provide for rental payments on a graduated basis and for options to renew, which could increase future minimum lease payments if exercised.
Lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The lease right-of-use assets also include any lease payments made and exclude lease incentives such as tenant improvement allowances.
The operating leases typically include non-lease components such as common-area maintenance costs. The Company has elected to include non-lease components with lease payments for the purpose of calculating lease right-of-use assets and liabilities, to the extent that they are fixed. Non-lease components that are not fixed are expensed as incurred as variable lease payments.
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The following table presents information about leases on the condensed consolidated balance sheet.
| As of October 31, 2021 | As of January 31, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Assets | |||||||||||
| Lease right-of-use assets | $ | $ | |||||||||
| Liabilities | |||||||||||
| Lease liabilities | |||||||||||
| Lease liabilities, non-current | |||||||||||
As of October 31, 2021, the weighted average remaining lease term was 5.0 years and the weighted average discount rate used to determine the net present value of the lease liabilities was 3.7 %.
The following table presents information about leases on the condensed consolidated statement of operations.
| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Operating lease expense | $ | $ | $ | $ | |||||||||||||||||||
| Short-term lease expense | |||||||||||||||||||||||
| Variable lease expense | |||||||||||||||||||||||
The following table presents supplemental cash flow information about the Company’s leases.
| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | $ | $ | $ | |||||||||||||||||||
10. Debt and Financing Arrangements
Convertible Senior Notes
On June 25, 2020, the Company issued $287.5 million in aggregate principal amount of the Notes in a private offering pursuant to an Indenture dated June 25, 2020 (the “Indenture”). The total net proceeds from the debt offering, after deducting initial purchaser discounts and debt issuance costs, paid or payable by us, were $278.2 million.
The Notes are senior, unsecured obligations of the Company and accrue interest payable semiannually in arrears on January 1 and July 1 of each year, beginning on January 1, 2021, at a rate of 1.25 % per year. The Notes will mature on July 1, 2025, unless such notes are converted, redeemed or repurchased earlier. The Notes are convertible into cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election in the manner and subject to the terms and conditions provided in the Indenture.
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Holders of the Notes may convert all or any portion of their Notes at their option at any time prior to the close of business on April 1, 2025, only under the following circumstances:
•During any fiscal quarter commencing after the fiscal quarter ended October 31, 2020 (and only during such fiscal quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130 % of the conversion price on each applicable trading day;
•During the five business day period after any ten consecutive trading day period (the measurement period) in which the “trading price” (as defined in the Indenture) per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;
•If the Company calls such Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or
•Upon the occurrence of specified corporate events, as noted in the Indenture.
On or after April 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the Notes may convert all or any portion of their Notes at any time, regardless of the foregoing circumstances.
The conversion rate will initially be 24.9507 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $40.08 per share of common stock. The conversion rate is subject to adjustment under certain circumstances in accordance with the terms of the Indenture, but will not be adjusted for accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Notes in connection with a fundamental change, as defined in the Indenture.
The Company may not redeem the Notes prior to July 6, 2023. The Company may redeem for cash all or any portion of the Notes, at its option, on a redemption date occurring on or after July 6, 2023 and prior to the 41 st scheduled trading day immediately preceding the maturity date, if the last reported sale price of the common stock has been at least 130 % of the conversion price for the Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100 % of the principal amount to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes.
If the Company undergoes a fundamental change (as defined in the Indenture), holders may require the Company to repurchase for cash all or any portion of their Notes at a fundamental change repurchase price equal to 100 % of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The Indenture contains customary terms and covenants, including that upon certain events of default occurring and continuing, the trustee or the holders of at least 25 % in aggregate principal amount of the outstanding Notes may declare the entire principal of all the Notes plus accrued and unpaid interest to be immediately due and payable.
Prior to the adoption of ASU 2020-06 on February 1, 2021 and in accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated using a discount rate of 7.30 %, which was determined by measuring the fair value of a similar debt instrument that does not have an associated conversion feature. The carrying amount of the equity component representing the conversion option was $70.8 million and was determined by deducting the fair value of the liability component from the par value of the Notes. The equity component was not remeasured as long as it continued to meet the conditions for equity classification, and the equity component was recorded in additional paid-
19
in-capital in the accompanying condensed consolidated balance sheet. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, was amortized to interest expense at an annual effective interest rate of 7.88 % over the contractual terms of the Notes. The interest rate was based on the interest rate of similar liabilities at the time of issuance that did not have associated convertible features. The debt component was classified as a long-term liability as of January 31, 2021.
Prior to the adoption of ASU 2020-06 on February 1, 2021 and in accounting for the issuance costs of $9.3 million related to the Notes, the Company allocated the total amount incurred to the liability and equity components of the Notes based on their relative values. Issuance costs attributable to the liability component were $7.0 million and were amortized to interest expense using the effective interest method over the contractual term of the Notes. Issuance costs attributable to the equity component were $2.3 million and were netted with the equity component in additional paid-in capital.
On February 1, 2021, the Company elected to early adopt ASU 2020-06 based on a modified retrospective transition method. Under such transition, prior-period information has not been retrospectively adjusted.
In accounting for the Notes after adoption of ASU 2020-06, the Notes are accounted for as a single liability, and the carrying amount of the Notes is $280.6 million as of October 31, 2021, with principal of $287.5 million, net of unamortized issuance costs of $6.9 million. The Notes were classified as long-term liabilities as of October 31, 2021. The issuance costs related to the Notes are being amortized to interest expense over the contractual term of the Notes at an effective interest rate of 1.93 %.
The net carrying amount of the liability component of the Notes as of October 31, 2021 (post-ASU 2020-06 adoption) and as of January 31, 2021 (pre-ASU 2020-06 adoption) was as follows:
| As of October 31, 2021 | As of January 31, 2021 | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Principal | $ | $ | ||||||||||||||||||
| Less: unamortized debt discount | ( | |||||||||||||||||||
| Less: unamortized issuance costs | ( | ( | ||||||||||||||||||
| Net carrying amount | $ | $ | ||||||||||||||||||
The net carrying amount of the equity component of the Notes as of October 31, 2021 (post-ASU 2020-06 adoption) and as of January 31, 2021 (pre-ASU 2020-06 adoption) was as follows:
| As of October 31, 2021 | As of January 31, 2021 | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Proceeds allocated to the conversion options (debt discount) | $ | $ | ||||||||||||||||||
| Less: issuance costs | ( | |||||||||||||||||||
| Carrying amount of the equity component | $ | $ | ||||||||||||||||||
Interest expense recognized related to the Notes is as follows:
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| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Contractual interest expense | $ | $ | $ | $ | |||||||||||||||||||||||||
| Amortization of debt discount | |||||||||||||||||||||||||||||
| Amortization of debt issuance costs | |||||||||||||||||||||||||||||
| Total interest expense related to the Notes | $ | $ | $ | $ | |||||||||||||||||||||||||
Capped Call Transactions
In connection with the offering of the Notes, the Company entered into privately negotiated capped call transactions (the “Capped Calls”) with certain financial institution counterparties (the “Option Counterparties”). The Capped Calls are generally intended to reduce or offset the potential dilution to the common stock upon any conversion of the Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. For accounting purposes, the Capped Calls are separate transactions, and not part of the terms of the Notes. The Capped Calls are recorded in stockholders’ equity and are not accounted for as derivatives. The cost of $35.7 million incurred to purchase the Capped Calls were recorded as a reduction to additional paid-in capital in the accompanying condensed consolidated balance sheet.
The Capped Calls each have an initial strike price of approximately $40.08 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls have an initial cap price of $61.66 per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, approximately 7.2 million shares of our common stock. The Capped Calls are subject to automatic exercise over a 40 trading day period commencing on May 2, 2025, subject to earlier termination under certain circumstances.
11. Commitments and Contingencies
Legal Matters
From time to time in the normal course of business, the Company may be subject to various claims and other legal matters arising in the ordinary course of business. The Company investigates these claims as they arise and accrues estimates for resolution of legal and other contingencies when losses are probable and estimable. The Company is not currently a party to any legal proceedings and does not anticipate any pending or threatened litigation that would be expected to have a material adverse effect on its financial condition, results of operations, or cash flows.
Warranties and Indemnification
The Company has entered into service-level agreements with a portion of its customers defining levels of uptime reliability and performance and permitting those customers to receive credits if the Company fails to meet the defined levels of uptime. To date, the Company has not experienced any significant failures to meet defined levels of uptime reliability and performance as a result of those agreements and, as a result, the Company has not incurred or accrued any material liabilities related to these agreements in the financial statements.
In the ordinary course of business, we may agree to indemnify customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties. As permitted under Delaware law, we have entered into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees. No demands have been made upon us to provide indemnification under such agreements, and there are no claims that we are aware of that could have a
21
12. Deferred Revenue and Performance Obligations
The following table presents the changes to the Company’s deferred revenue:
| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Deferred revenue, beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Billings | |||||||||||||||||||||||
| Deferred revenue assumed in the Rundeck acquisition | |||||||||||||||||||||||
| Revenue recognized | ( | ( | ( | ( | |||||||||||||||||||
| Deferred revenue, end of period | $ | $ | $ | $ | |||||||||||||||||||
For the three months ended October 31, 2021 and 2020, the majority of revenue recognized was from the deferred revenue balances at the beginning of each quarter. For the nine months ended October 31, 2021 and 2020, approximately half of revenue recognized was from the deferred revenue balance at the beginning of each period.
As of October 31, 2021, future estimated revenue related to performance obligations for cloud-hosted and term-license software subscriptions with terms of more than one year that are unsatisfied or partially unsatisfied at the end of the reporting periods was approximately $123.0 million. The Company expects to satisfy the substantial majority of these unsatisfied performance obligations over the next 24 months and the remainder thereafter. The Company applied the optional exemption for subscriptions with terms of less than one year.
13. Common Stock and Stockholders’ Equity
Equity Incentive Plans
The Company has two equity incentive plans: the 2010 Stock Plan (the “2010 Plan”) and the 2019 Equity Incentive Plan (the “2019 Plan”, collectively the “Stock Plans”). Upon completion of the Company’s initial public offering (“IPO”) in April 2019, the Company ceased granting awards under the 2010 Plan, and all shares that remained available for future issuance under the 2010 Plan at that time were transferred to the 2019 Plan. The 2019 Plan superseded and replaced the 2010 Plan. As of October 31, 2021 and January 31, 2021, the Company was authorized to grant up to 23,156,318 shares and 18,059,506 shares of common stock, respectively, under the Stock Plans.
The Company currently uses authorized and unissued shares to satisfy stock award exercises and settlement of RSUs and PSUs. As of October 31, 2021 and January 31, 2021, there were 14,102,032 shares and 13,060,282 shares available for future issuance under the Stock Plans, respectively.
Shares of common stock reserved for future issuance are as follows:
| October 31, 2021 | |||||
| Outstanding stock options and unvested RSUs and PSUs | |||||
| Available for future stock option, RSU, and PSU grants | |||||
| Available for ESPP | |||||
| Total common stock reserved at October 31, 2021 | |||||
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Stock Option Activity
Stock option activity is as follows:
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Outstanding at January 31, 2021 | $ | $ | |||||||||||||||||||||
| Granted | $ | ||||||||||||||||||||||
| Exercised | ( | $ | |||||||||||||||||||||
| Canceled | ( | $ | |||||||||||||||||||||
| Outstanding at October 31, 2021 | $ | $ | |||||||||||||||||||||
| Vested as of October 31, 2021 | $ | $ | |||||||||||||||||||||
The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options on the date of grant. The Company accounts for forfeitures as they occur. The following assumptions were used to calculate the fair value of employee stock option grants made during the periods:
| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Expected dividend yield | % | % | % | % | |||||||||||||||||||
| Expected volatility | |||||||||||||||||||||||
| Expected term (years) | |||||||||||||||||||||||
| Risk-free interest rate | |||||||||||||||||||||||
Stock options granted during the three months ended October 31, 2021 and 2020 had a weighted average grant date fair value of $19.01 and $23.04 per share, respectively. The aggregate intrinsic value of stock options exercised during the three months ended October 31, 2021 and 2020 was $27.3 million and $19.0 million, respectively.
Stock options granted during the nine months ended October 31, 2021 and 2020 had a weighted average grant date fair value of $18.76 and $14.64 per share, respectively. The aggregate intrinsic value of stock options exercised during the nine months ended October 31, 2021 and 2020 was $73.4 million and $42.0 million, respectively.
The intrinsic value for options exercised is the difference between the market value of the stock and the exercise price of the stock option at the date of exercise.
As of October 31, 2021, there was approximately $21.6 million of total unrecognized compensation cost related to unvested stock options granted under the Stock Plans, which will be recognized over a weighted average period of 2.3 years.
Restricted Stock Units
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| Number of RSUs | Weighted Average Grant Date Fair Value Per Share | ||||||||||
| Outstanding at January 31, 2021 | $ | ||||||||||
| Granted | $ | ||||||||||
| Vested | ( | $ | |||||||||
| Forfeited or canceled | ( | $ | |||||||||
| Outstanding at October 31, 2021 | $ | ||||||||||
The fair value of RSUs is based on the fair value of the underlying shares on the date of grant. The Company accounts for forfeitures as they occur.
As of October 31, 2021, there was $208.2 million of unrecognized stock-based compensation expense related to unvested RSUs, which is expected to be recognized over a weighted average period of 3.1 years based on vesting under the award service conditions.
Performance Stock Units
| Number of PSUs | Weighted Average Grant Date Fair Value Per Share | |||||||||||||
| Outstanding at January 31, 2021 | $ | |||||||||||||
| Granted | $ | |||||||||||||
| Vested | $ | |||||||||||||
| Forfeited or canceled | ( | $ | ||||||||||||
| Outstanding at October 31, 2021 | $ | |||||||||||||
In April 2021, the Company granted 127,309 PSUs, with a weighted-average grant date fair value of $41.17 per share, to certain employees of the Company for which the ultimate number of units that will vest are determined based on the achievement of performance at the end of the stated performance period. The performance condition is based on the level of achievement of a Company target related to PagerDuty’s operating plan for fiscal 2022. The PSUs will vest over a three-year period, subject to continuous service with the Company.
During the three and nine months ended October 31, 2021, the Company recorded stock-based compensation expense for the number of PSUs considered probable of vesting based on the expected attainment of the performance targets.
As of October 31, 2021, total unrecognized stock-based compensation cost related to PSUs was $3.0 million. This unrecognized stock-based compensation cost is expected to be recognized using the accelerated attribution method over a weighted-average period of approximately 1.3 years.
Employee Stock Purchase Plan
In April 2019, the Board of Directors adopted and approved the 2019 ESPP, which became effective on April 11, 2019. The ESPP generally provides for 24 -month offering periods beginning June 15 and December 15 of each year, with each offering period consisting of four six-month purchase periods. On each purchase date, eligible employees will purchase the shares at a price per share equal to 85 % of the lesser of (1) the fair market value of the Company’s stock as of the beginning of the offering period or (2) the fair market value of the Company’s stock on the purchase date, as defined in the ESPP.
During the three months ended October 31, 2021 and 2020, the Company recognized $0.8 million and $1.1 million of stock-based compensation expense related to the ESPP, respectively. During the nine months ended
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October 31, 2021 and 2020, the Company recognized $3.9 million and $3.9 million of stock-based compensation expense related to the ESPP, respectively.
During the three months ended October 31, 2021 and 2020, the Company withheld $2.2 million and $1.7 million in contributions from employees, respectively. During the nine months ended October 31, 2021 and 2020, the Company withheld $7.2 million and $5.2 million, respectively.
During the three months ended October 31, 2021 and 2020 there were no purchases related to the ESPP. During the nine months ended October 31, 2021, 222,474 shares of common stock were issued under the ESPP at a weighted average purchase price of $21.98 . During the nine months ended October 31, 2020, 181,253 shares of common stock were issued under the ESPP at a purchase price of $19.63 per share.
Stock-Based Compensation
Stock-based compensation expense included in the Company’s condensed consolidated statements of operations is as follows:
| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Cost of revenue | $ | $ | $ | $ | |||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
In the three and nine months ended October 31, 2020, we recorded a one-time stock-based compensation expense of $3.1
14. Net Loss per Share
The following table presents the calculation of basic and diluted net loss per share:
| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands, except per share data) | |||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
Weighted average shares used in calculating net loss per share, basic and diluted | |||||||||||||||||||||||
| Net loss per share, basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Since the Company was in a loss position for the periods presented, basic net loss per share is the same as diluted net loss per share as the inclusion of all potential common stock outstanding would have been anti-dilutive.
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Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows:
| As of October 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | |||||||||||
| Shares subject to outstanding common stock awards | |||||||||||
| Convertible senior notes | |||||||||||
| Restricted stock awards purchased with promissory notes | |||||||||||
| Restricted stock issued to Rundeck key personnel | |||||||||||
| Shares issuable pursuant to the 2019 employee stock purchase plan | |||||||||||
| Total | |||||||||||
15. Income Taxes
The Company's provision for income taxes for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, the Company makes a cumulative adjustment in such period.
The Company's quarterly tax provision, and estimate of its annual effective tax rate, is subject to variation due to several factors, including variability in pre-tax income (or loss), the mix of jurisdictions to which such income (or loss) relates, changes in how the Company does business, and tax law developments. The Company's estimated effective tax rate for the year differs from the U.S. statutory rate of 21% as a result of our U.S. losses for which no benefit will be realized, our foreign operations which are subject to tax rates that differ from those in the U.S, as well as the benefit for non-U.S. income tax credits.
The Company recorded income tax expense of $0.2 million for the three months ended October 31, 2021, and an income tax benefit of $4.8 million for the three months ended October 31, 2020. The Company recorded income tax expense of $0.4 million for the nine months ended October 31, 2021 and an income tax benefit of $4.4 million for the nine months ended October 31, 2020.
16. Geographic Information
Revenue by location is determined by the billing address of the customer. The following table sets forth revenue by geographic area:
| Three Months Ended October 31, | Nine Months Ended October 31, 2021 | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| United States | $ | $ | $ | $ | |||||||||||||||||||
| International | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
Other than the United States, no other individual country accounted for 10% or more of revenue for the three and nine months ended October 31, 2021 or 2020. As of October 31, 2021, 84 % of the Company’s long-lived assets, including property and equipment and right-of-use lease assets, were located in the United States, and 16 % were
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17. Subsequent Events
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations together should be read in conjunction with our condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended January 31, 2021, filed with the SEC on March 19, 2021. You should review the sections titled “Special Note Regarding Forward-Looking Statements” above in this Quarterly Report on Form 10-Q for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Factors that could cause or contribute to such differences include, but are not limited to, impacts on our business and general economic conditions due to the current COVID-19 pandemic, those identified below, and those discussed in the section titled “Risk Factors” included in Part II, Item 1A below. The last day of our fiscal year is January 31. Our fiscal quarters end on April 30, July 31, October 31 and January 31.
Overview
PagerDuty is a digital operations management platform that empowers the right action, when seconds matter.
Our platform, which includes our auto remediation software, is the best way to manage urgent, mission-critical work—and keep digital services always on. It sits at the center of a company’s digital ecosystem ingesting signals and using machine learning and automation to automate real-time work, predict and avoid downtime. We enable teams to reduce outages, improve productivity and accelerate digital transformations.
We collect data from virtually any software-enabled system or device and combine it with human response data, correlating and processing it to understand digital opportunities and issues that need to be addressed in real time. Using the world’s broadest integrations, event management, automated remediation and diagnostics, and human driven runbook automation, we bring together the right people with the right information so they can resolve issues and act on opportunities in minutes and seconds, not hours, days or even weeks like legacy solutions.
Since our founding in 2009, we have expanded our capabilities from a single product focused on on-call management for technical teams to one that serves many roles across the company, delivering a real-time source of truth to security, customer service, and executive stakeholders alike. We have grown from an on-call tool into a full digital operations management platform, spanning incident response, on-call management, business visibility, advanced analytics, and AI Ops capabilities across automation and event management to reduce the noise, interruptions and redundant tasks from our customer’s lives. We have invested in developing the scalability, reliability, and security of our platform, allowing us to address the needs of even the largest and most demanding customers. We have spent years building deep product integrations to our platform, and our ecosystem now includes over 600 direct integrations to enable our customers to gather and correlate digital signals from virtually any software-enabled system or device. Those same integrations allow us to connect with popular collaboration tools and business applications, as well as all types of technology stacks to drive automation of work.
Our platform is easy to adopt and scalable for businesses of all sizes. We generate revenue primarily from cloud-hosted subscription fees with the majority of our revenue from such arrangements. We also generate an immaterial amount of revenue from term license software subscription fees. We offer a three-tiered range of pricing plans aligned with our customers’ needs and the sophistication of their digital operations. In addition, our Rundeck automation offering is available on a term license software subscription basis. We also offer a “freemium” plan for less than five users to introduce new users to the platform. We have a land-and-expand business model that leads to
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viral adoption of our products and subsequent expansion. Our online self-service model is the primary mechanism for landing new customers and enabling teams to get started without assistance. We complement our self-service model with high-velocity inside sales focused on small and medium businesses, a commercial team focused on mid-market customers, and a field sales team focused on enterprise customers. Our mid-market and enterprise customers account for the majority of our revenue today. These teams drive expansion to additional users, additional teams, and new use cases, as well as upsell premium functionality.
COVID-19 Update
In December 2019, a novel coronavirus and the resulting disease (“COVID-19”) was reported, and in January 2020, the World Health Organization characterized COVID-19 as a pandemic.
The extent and continued impact of the COVID-19 pandemic on our business continues to depend on certain developments including the duration and spread of the pandemic; government responses to the pandemic; the widespread availability and distribution of vaccines; impact on our customers and our sales cycles; industry or employee events; and effect on our partners and vendors, all of which are uncertain and cannot be predicted. While our revenues, billings, and earnings are relatively predictable as a result of our subscription-based business model and the majority of our revenues are generated from annual subscriptions, the effect of the COVID-19 pandemic, along with the seasonality we historically experience, may not be fully reflected in our results of operations and overall financial performance until future periods, if at all. In addition, while the majority of our revenues are generated from annual subscriptions, we have seen, and may continue to see, greater variability in the demand of our product from small and medium business customers. While we see risks associated with more highly impacted companies and industries, we are also seeing new interest from other organizations, driven by rapidly changing work and business environments. As workforces have transitioned to working from home in a distributed model, PagerDuty has become an increasingly critical service.
The majority of our employees continue to work remotely in order to minimize the spread of COVID-19 among our employee base and comply with local regulations within the United States and internationally. As we continue to monitor the local regulations related to COVID-19, we have begun to release travel restrictions on business-related travel, allowing certain employees to travel on a voluntary basis. We have also extended our paid time off and sick leave benefits for employees directly impacted by COVID-19 or caring for children or a member of their household impacted by COVID-19. In addition, we have provided allowances to our employees to cover expenses related to transitioning to a work from home environment. We also continue to offer local employee assistance programs to employees if needed. These changes remain in effect and could extend into future quarters. The impact, if any, of these and any additional operational changes we may implement to facilitate remote work is uncertain, but changes we have implemented have not affected and are not expected to affect our ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures.
Since 2020, we have shifted to virtual-only events and experiences, including shifting Summit, our global customer conference series. We have typically relied on marketing and promotional events such as Summit and other in-person conferences, events, and meetings to facilitate customer sign-ups and generate leads for potential customers, and we cannot predict whether virtual marketing events and phone or virtual sales interactions will be as successful as in-person events and meetings or for how long, nor the extent to which the COVID-19 pandemic may continue to constrain our marketing, promotional, and sales activities.
On March 27, 2020, the former President of the United States signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which includes several significant provisions for corporations, including modifications to the limitation on business interest expense and the usage of net operating losses, and a payment deferral of employer payroll taxes. We elected to defer the payment of employer payroll taxes in the nine months ended October 31, 2020. We are no longer deferring the payment of our employer payroll taxes. We have begun to pay the amounts deferred and will continue these payments during the fiscal years ending January 31, 2022 and 2023.
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Refer to Item 1A, “Risk Factors” for further discussion of the possible impact of the COVID-19 pandemic on our business.
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Key Business Metrics
We review the following key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.
While these numbers are based on what we believe to be a reasonable representation of our customer base for the applicable period of measurement, we rely on a third party to validate legal entities, which uses the best available data at period end, and therefore is subject to change as new information becomes available. In addition, we are continually seeking to improve our methodology, which may result in future changes to our key metrics.
Our key metrics include the results of Rundeck, to the extent applicable, beginning on the acquisition date of October 1, 2020.
Number of Customers
We believe that the number of customers using our platform, particularly those that have subscription agreements for more than $100,000 in annual recurring revenue (“ARR”), are indicators of our market penetration, particularly within enterprise accounts, the growth of our business, and our potential future business opportunities. We define ARR as the annualized recurring value of all active contracts at the end of a reporting period. We define a customer as a separate legal entity, such as a company or an educational or government institution, that has an active subscription with us or one of our partners to access our platform. In situations where an organization has multiple subsidiaries or divisions, we treat the parent entity as the customer instead of treating each subsidiary or division as a separate customer. Increasing awareness of our platform and its broad range of capabilities, coupled with the fact that the world is always on and powered by increasingly complex technology, has expanded the diversity of our customer base to include organizations of all sizes across virtually all industries. Over time, enterprise and mid-market customers have constituted a greater share of our revenue.
| As of October 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Customers | 14,486 | 13,725 | |||||||||
| Customers greater than $100,000 in ARR | 543 | 401 | |||||||||
Dollar-based Net Retention Rate
We use dollar-based net retention rate to evaluate the long-term value of our customer relationships, since this metric reflects our ability to retain and expand the ARR from our existing customers. Our dollar-based net retention rate compares our ARR from the same set of customers across comparable periods.
We calculate dollar-based net retention rate as of a period end by starting with the ARR from the cohort of all customers as of 12 months prior to such period end, or Prior Period ARR. We then calculate the ARR from these same customers as of the current period end, or Current Period ARR. Current Period ARR includes any expansion and is net of downgrades or churn over the last 12 months but excludes ARR from new customers in the current period. We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the dollar-based net retention rate. The calculation of dollar-based net retention rate includes the Current Period ARR of Rundeck customers to the extent that they were PagerDuty customers as of 12 months prior to period end.
| Last 12 Months Ended October 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
Dollar-based net retention rate for all customers | 124 | % | 119 | % | |||||||||||||||||||
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Components of Results of Operations
Revenue
We generate revenue primarily from cloud-hosted software subscription fees with the majority of our revenue from such arrangements. We also generate an immaterial amount of revenue from term license software subscription fees. Our subscriptions are typically one year in duration but can range from monthly to multi-year. Subscription revenue is driven primarily by the number of customers, the number of users per customer, and the level of subscription purchased. We generally invoice customers in advance in annual installments for subscriptions to our software. For our cloud-hosted software subscriptions, we recognize subscription revenue ratably over the term of the subscription period beginning on the date we grant access to our platform, assuming that all other revenue recognition criteria have been met. For our term-license software subscriptions, we recognize license revenue upon delivery and software maintenance revenue ratably, typically beginning on the start of the contractual term of the arrangement.
Due to the low complexity of implementation and integration of our platform with our customers’ existing infrastructure, revenue from professional services has been immaterial to date.
Cost of Revenue
Cost of revenue primarily consists of expenses related to providing our platform to customers, including personnel expenses for operations and global support, payments to our third-party cloud infrastructure providers for hosting our software, payment processing fees, amortization of capitalized internal-use software costs, amortization of acquired developed technology, and allocated overhead costs for facilities, information technology, and other allocated overhead costs. We will continue to invest additional resources in our platform infrastructure and our customer support and success organizations to expand the capability of our platform and ensure that our customers are realizing the full benefit of our offerings. The level and timing of investment in these areas could affect our cost of revenue in the future.
Gross Profit and Gross Margin
Gross profit represents revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin may fluctuate from period to period as our revenue fluctuates, and as a result of the timing and amount of investments to expand the capacity of our third-party cloud infrastructure providers and our continued efforts to enhance our platform support and customer success teams.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel expenses are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation expense, and sales commissions. Operating expenses also include amortization of acquired intangible assets, acquisition-related expenses, allocated overhead costs for facilities, shared IT related expenses, including depreciation expense, and certain company-wide events and functions.
Research and development
Research and development expenses consist primarily of personnel costs for our engineering, product, and design teams. Additionally, research and development expenses include contractor fees, depreciation of equipment used in research and development activities, acquisition-related expenses, and allocated overhead costs. We expect that our research and development expenses will increase in dollar value as our business grows.
Sales and marketing
Sales and marketing expenses consist primarily of personnel costs, costs of general marketing activities and promotional activities, travel related expenses, amortization of acquired intangible assets, allocated overhead costs, and bad debt expense. Sales commissions earned by our sales force that are considered incremental and recoverable
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costs of obtaining a subscription with a customer are deferred and amortized on a straight-line basis over the expected period of benefit, which we have determined to be four years. We expect that our sales and marketing expenses will increase in dollar value and continue to be our largest operating expense for the foreseeable future as we expand our sales and marketing efforts.
General and administrative
General and administrative expenses consist primarily of personnel costs and contractor fees for finance, legal, human resources, information technology, and other administrative functions. In addition, general and administrative expenses include non-personnel costs, such as legal, accounting, and other professional fees, hardware and software costs, certain tax, license and insurance-related expenses, acquisition-related expenses, and allocated overhead costs. We expect that our general and administrative expenses will increase in dollar value as our business grows. However, we expect that our general and administrative expenses will decrease as a percentage of our revenue over the longer term as we expect our investments to allow for improved efficiency for future growth in the business.
Interest Income
Interest income consists of income earned on our cash and cash equivalents and interest earned on our short-term investments which consist of U.S. Treasury securities, commercial paper, corporate debt securities, and U.S. Government agency securities.
Interest Expense
Interest expense consists primarily of contractual interest expense and amortization of debt issuance costs on our 1.25% Convertible Senior Notes (the “Notes”) due 2025. Refer to Note 10, “Debt and Financing Arrangements” for additional details.
Other (Expense) Income, Net
Other (expense) income, net primarily consists of accretion income and amortization expense on our available-for-sale investments and foreign currency transaction gains and losses.
(Provision for) Benefit from Income Taxes
(Provision for) benefit from income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business. We maintain a full valuation allowance on our net federal and state deferred tax assets as we have concluded that it is more likely than not that the deferred tax assets will not be realized. (Provision for) benefit from income taxes also includes the deferred tax liability associated with acquired intangible assets from the Company’s acquisitions.
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Results of Operations
The following table sets forth our condensed consolidated statements of operations data for the periods indicated:
| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Revenue | $ | 71,760 | $ | 53,772 | $ | 202,887 | $ | 154,272 | |||||||||||||||
Cost of revenue(1) | 12,039 | 7,685 | 34,433 | 21,285 | |||||||||||||||||||
| Gross profit | 59,721 | 46,087 | 168,454 | 132,987 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
Research and development(1) | 24,554 | 16,156 | 68,062 | 46,705 | |||||||||||||||||||
Sales and marketing(1) | 40,176 | 34,024 | 118,224 | 88,271 | |||||||||||||||||||
General and administrative(1) | 19,808 | 17,746 | 56,680 | 45,899 | |||||||||||||||||||
| Total operating expenses | 84,538 | 67,926 | 242,966 | 180,875 | |||||||||||||||||||
| Loss from operations | (24,817) | (21,839) | (74,512) | (47,888) | |||||||||||||||||||
| Interest income | 705 | 974 | 2,306 | 3,375 | |||||||||||||||||||
| Interest expense | (1,350) | (4,133) | (4,045) | (5,741) | |||||||||||||||||||
| Other expense, net | (729) | (449) | (1,931) | (861) | |||||||||||||||||||
| Loss before (provision for) benefit from income taxes | (26,191) | (25,447) | (78,182) | (51,115) | |||||||||||||||||||
| (Provision for) benefit from income taxes | (150) | 4,839 | (378) | 4,360 | |||||||||||||||||||
| Net loss | $ | (26,341) | $ | (20,608) | $ | (78,560) | $ | (46,755) | |||||||||||||||
______________
(1) Includes stock-based compensation expense as follows:
| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Cost of revenue | $ | 861 | $ | 488 | $ | 2,560 | $ | 1,095 | |||||||||||||||
| Research and development | 6,183 | 2,807 | 16,230 | 7,459 | |||||||||||||||||||
| Sales and marketing | 4,606 | 6,254 | 12,961 | 11,409 | |||||||||||||||||||
| General and administrative | 6,128 | 3,910 | 16,115 | 11,772 | |||||||||||||||||||
| Total | $ | 17,778 | $ | 13,459 | $ | 47,866 | $ | 31,735 | |||||||||||||||
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The following table sets forth our condensed consolidated statements of operations data expressed as a percentage of revenue:
| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenue | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||
| Cost of revenue | 17 | 14 | 17 | 14 | |||||||||||||||||||
| Gross profit | 83 | % | 86 | % | 83 | % | 86 | % | |||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 34 | 30 | 34 | 30 | |||||||||||||||||||
| Sales and marketing | 56 | 63 | 58 | 57 | |||||||||||||||||||
| General and administrative | 28 | 33 | 28 | 30 | |||||||||||||||||||
| Total operating expenses | 118 | 126 | 120 | 117 | |||||||||||||||||||
| Loss from operations | (35) | (41) | (37) | (31) | |||||||||||||||||||
| Interest income | 1 | 2 | 1 | 2 | |||||||||||||||||||
| Interest expense | (2) | (8) | (2) | (4) | |||||||||||||||||||
| Other expense, net | (1) | (1) | (1) | (1) | |||||||||||||||||||
| Loss before (provision for) benefit from income taxes | (36) | (47) | (39) | (33) | |||||||||||||||||||
| (Provision for) benefit from income taxes | — | 9 | — | 3 | |||||||||||||||||||
| Net loss | (37) | % | (38) | % | (39) | % | (30) | % | |||||||||||||||
__________
Note: Certain figures may not sum due to rounding.
Comparison of the Three Months Ended October 31, 2021 and 2020
Revenue
| Three Months Ended October 31, | |||||||||||||||||||||||
| 2021 | 2020 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Revenue | $ | 71,760 | $ | 53,772 | $ | 17,988 | 33 | % | |||||||||||||||
Revenue increased by $18.0 million, or 33%, for the three months ended October 31, 2021 compared to the three months ended October 31, 2020. The increase in revenue was attributable to a combination of growth from both new and existing customers, including customers from the Rundeck acquisition. Growth from existing customers is attributable to both increases in the number of users and upsell of additional products and services.
Cost of Revenue and Gross Margin
| Three Months Ended October 31, | |||||||||||||||||||||||
| 2021 | 2020 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Cost of revenue | $ | 12,039 | $ | 7,685 | $ | 4,354 | 57 | % | |||||||||||||||
| Gross margin | 83 | % | 86 | % | |||||||||||||||||||
Cost of revenue increased by $4.4 million, or 57%, primarily due to an increase of $2.1 million in personnel expenses as a result of increased headcount, increases of $1.1 million in hosting, software, and telecom costs and
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$0.4 million in outside services, both of which are related to the support of the continued growth of the business and related infrastructure, and an increase of $0.2 million in other costs.
Research and Development
| Three Months Ended October 31, | |||||||||||||||||||||||
| 2021 | 2020 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Research and development | $ | 24,554 | $ | 16,156 | $ | 8,398 | 52 | % | |||||||||||||||
| Percentage of revenue | 34 | % | 30 | % | |||||||||||||||||||
Research and development expenses increased by $8.4 million, or 52%, for the three months ended October 31, 2021 compared to the three months ended October 31, 2020. The increase was primarily driven by an increase in personnel expenses of $6.8 million as a result of increased headcount to support our continued investment in our platform and a $0.9 million increase in costs to support the growth of the business and related infrastructure, which includes allocated overhead costs.
Sales and Marketing
| Three Months Ended October 31, | |||||||||||||||||||||||
| 2021 | 2020 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Sales and marketing | $ | 40,176 | $ | 34,024 | $ | 6,152 | 18 | % | |||||||||||||||
| Percentage of revenue | 56 | % | 63 | % | |||||||||||||||||||
Sales and marketing expenses increased by $6.2 million, or 18%, for the three months ended October 31, 2021 compared to the three months ended October 31, 2020. This increase was primarily due to an increase of $3.2 million in personnel expenses driven by headcount growth and amortization of deferred contract costs, partially offset by a one-time stock-based compensation charge due to the modification of certain option awards incurred in the third quarter of the prior fiscal year, an increase of $1.9 million in costs to support the business and related infrastructure which includes allocated overhead costs, an increase of $1.4 million in outside services due to a higher volume of activities to assist with the continued growth of the business, an increase of $0.4 million in travel and other program related costs as a result of increased travel due to reduced travel restrictions related to the COVID-19 pandemic, and an increase of $0.4 million in amortization of intangibles related to the acquisition of Rundeck. This was partially offset by a decrease in marketing expenses of $1.3 million primarily due to a change in timing of our annual Summit conference.
General and Administrative
| Three Months Ended October 31, | |||||||||||||||||||||||
| 2021 | 2020 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| General and administrative | $ | 19,808 | $ | 17,746 | $ | 2,062 | 12 | % | |||||||||||||||
| Percentage of revenue | 28 | % | 33 | % | |||||||||||||||||||
General and administrative expenses increased by $2.1 million, or 12%, for the three months ended October 31, 2021 compared to the three months ended October 31, 2020. The increase was driven by an increase of $4.3 million in personnel expenses as a result of increased headcount and an increase of $0.4 million in travel and other program related costs as a result of increased travel due to reduced travel restrictions related to the COVID-19 pandemic. This was partially offset by a decrease in outside services of $1.8 million, the majority of which was due to transaction costs related to the Rundeck acquisition, and a decrease of $1.2 million in costs to support the business and related infrastructure which includes allocated overhead costs.
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Interest Expense
| Three Months Ended October 31, | |||||||||||||||||||||||
| 2021 | 2020 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Interest expense | $ | 1,350 | $ | 4,133 | $ | (2,783) | (67) | % | |||||||||||||||
Interest expense decreased by $2.8 million for the three months ended October 31, 2021 compared to the three months ended October 31, 2020, due to the adoption of Accounting Standard Update (“ASU”) 2020-06. Refer to Note 2, "Summary of Significant Accounting Policies", for additional details.
Interest Income and Other (Expense) Income, Net
| Three Months Ended October 31, | |||||||||||||||||||||||
| 2021 | 2020 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Interest income | $ | 705 | $ | 974 | $ | (269) | (28) | % | |||||||||||||||
| Other expense, net | $ | (729) | $ | (449) | $ | (280) | 62 | % | |||||||||||||||
Interest income decreased by $0.3 million and other expense, net increased by $0.3 million for the three months ended October 31, 2021 compared to the three months ended October 31, 2020, primarily due to lower interest rates on our cash, cash equivalent and investment balances in the current year.
Comparison of the Nine Months Ended October 31, 2021 and 2020
Revenue
| Nine Months Ended October 31, | |||||||||||||||||||||||
| 2021 | 2020 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Revenue | $ | 202,887 | $ | 154,272 | $ | 48,615 | 32 | % | |||||||||||||||
Revenue increased by $48.6 million, or 32%, for the nine months ended October 31, 2021 compared to the nine months ended October 31, 2020. The increase in revenue was attributable to a combination of growth from both new and existing customers, including customers from the Rundeck acquisition. Growth from existing customers is attributable to both increases in the number of users and upsell of additional products and services.
Cost of Revenue and Gross Margin
| Nine Months Ended October 31, | |||||||||||||||||||||||
| 2021 | 2020 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Cost of revenue | $ | 34,433 | $ | 21,285 | $ | 13,148 | 62 | % | |||||||||||||||
| Gross margin | 83 | % | 86 | % | |||||||||||||||||||
Cost of revenue increased by $13.1 million, or 62% for the nine months ended October 31, 2021 compared to the nine months ended October 31, 2020. The increase is primarily due to an increase of $7.4 million in personnel expenses as a result of increased headcount, increases of $2.5 million in hosting, software, and telecom costs and $1.3 million in outside services, both of which are related to the support of the continued growth of the business and related infrastructure, and an increase of $0.7 million in amortization of intangibles related to the acquisition of Rundeck.
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Research and Development
| Nine Months Ended October 31, | |||||||||||||||||||||||
| 2021 | 2020 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Research and development | $ | 68,062 | $ | 46,705 | $ | 21,357 | 46 | % | |||||||||||||||
| Percentage of revenue | 34 | % | 30 | % | |||||||||||||||||||
Research and development expenses increased by $21.4 million, or 46%, for the nine months ended October 31, 2021 compared to the nine months ended October 31, 2020. The increase was primarily driven by an increase in personnel expenses of $17.6 million as a result of increased headcount to support our continued investment in our platform, a $2.2 million increase in costs to support the growth of the business and related infrastructure, which includes allocated overhead costs, and an increase of $1.3 million in outside services due to a higher volume of activities to assist with the continued growth of the business.
Sales and Marketing
| Nine Months Ended October 31, | |||||||||||||||||||||||
| 2021 | 2020 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Sales and marketing | $ | 118,224 | $ | 88,271 | $ | 29,953 | 34 | % | |||||||||||||||
| Percentage of revenue | 58 | % | 57 | % | |||||||||||||||||||
Sales and marketing expenses increased by $30.0 million, or 34%, for the nine months ended October 31, 2021 compared to the nine months ended October 31, 2020. This increase was primarily due to an increase of $16.3 million in personnel expenses driven by headcount growth and amortization of deferred contract costs partially offset by a one-time stock-based compensation charge due to the modification of certain option awards incurred in the third fiscal quarter of the prior fiscal year, an increase in marketing expenses of $5.3 million due to increased volume of marketing and advertising activities, an increase of $3.9 million in costs to support the business and related infrastructure which includes allocated overhead costs, an increase of $3.5 million in outside services due to a higher volume of activities to assist with the continued growth of the business, and an increase of $1.6 million in amortization of intangibles related to the acquisition of Rundeck.
General and Administrative
| Nine Months Ended October 31, | |||||||||||||||||||||||
| 2021 | 2020 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| General and administrative | $ | 56,680 | $ | 45,899 | $ | 10,781 | 23 | % | |||||||||||||||
| Percentage of revenue | 28 | % | 30 | % | |||||||||||||||||||
General and administrative expenses increased by $10.8 million, or 23%, for the nine months ended October 31, 2021 compared to the nine months ended October 31, 2020. The increase was driven by an increase of $10.5 million in personnel expenses as a result of increased headcount, an increase in outside services of $1.9 million, the majority of which was due to non-recurring strategic consulting fees, and an increase in insurance, business taxes and licenses of $0.8 million due to a higher volume of activities to support the continued growth of the business. This was partially offset by a decrease of $3.2 million in costs to support the business and related infrastructure which includes allocated overhead costs.
Interest Expense
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| Nine Months Ended October 31, | |||||||||||||||||||||||
| 2021 | 2020 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Interest expense | $ | 4,045 | $ | 5,741 | $ | (1,696) | (30) | % | |||||||||||||||
Interest expense decreased by $1.7 million for the nine months ended October 31, 2021 compared to the nine months ended October 31, 2020, primarily due to the adoption of ASU 2020-06. Refer to Note 2, "Summary of Significant Accounting Policies", for additional details.
Interest Income and Other (Expense) Income, Net
| Nine Months Ended October 31, | |||||||||||||||||||||||
| 2021 | 2020 | Change | % Change | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Interest income | $ | 2,306 | $ | 3,375 | $ | (1,069) | (32) | % | |||||||||||||||
| Other expense, net | $ | (1,931) | $ | (861) | $ | (1,070) | 124 | % | |||||||||||||||
Interest income decreased by $1.1 million and other expense, net increased by $1.1 million for the nine months ended October 31, 2021 compared to the nine months ended October 31, 2020, primarily due to lower interest rates on our cash, cash equivalent and investment balances in the current year.
Non-GAAP Financial Measures
In addition to our results determined in accordance with U.S. GAAP, we believe the following non-GAAP financial measures are useful in evaluating our operating performance. We use the below referenced non-GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their U.S. GAAP results. The non-GAAP financial information is presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with U.S. GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. The principal limitation of these non-GAAP financial measures is that they exclude significant expenses that are required by U.S. GAAP to be recorded in our financial statements. In addition, they are subject to inherent limitations as they reflect the exercise of judgment by our management about which expenses are excluded or included in determining these non-GAAP financial measures. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with U.S. GAAP.
Non-GAAP Gross Profit and Non-GAAP Gross Margin
We define non-GAAP gross profit as gross profit adjusted for stock-based compensation expense and related employer taxes, and amortization of acquired intangible assets. We define non-GAAP gross margin as non-GAAP gross profit as a percentage of revenue.
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| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Gross profit | $ | 59,721 | $ | 46,087 | $ | 168,454 | $ | 132,987 | |||||||||||||||
| Add: | |||||||||||||||||||||||
| Stock-based compensation | 861 | 488 | 2,560 | 1,095 | |||||||||||||||||||
| Employer taxes related to employee stock transactions | 22 | 14 | 78 | 23 | |||||||||||||||||||
| Amortization of acquired intangible assets | 280 | 93 | 840 | 93 | |||||||||||||||||||
| Non-GAAP gross profit | $ | 60,884 | $ | 46,682 | $ | 171,932 | $ | 134,198 | |||||||||||||||
| Gross margin | 83 | % | 86 | % | 83 | % | 86 | % | |||||||||||||||
| Non-GAAP gross margin | 85 | % | 87 | % | 85 | % | 87 | % | |||||||||||||||
Non-GAAP Operating Loss and Non-GAAP Operating Margin
We define non-GAAP operating loss as loss from operations plus our stock-based compensation expense and related employer taxes, amortization of acquired intangible assets, and acquisition-related expenses, which include transaction costs and acquisition-related retention payments, which are not necessarily reflective of operational performance during a given period. We define non-GAAP operating margin as non-GAAP operating loss as a percentage of revenue.
| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Loss from operations | $ | (24,817) | $ | (21,839) | $ | (74,512) | $ | (47,888) | |||||||||||||||
| Add: | |||||||||||||||||||||||
| Stock-based compensation | 17,778 | 13,459 | 47,866 | 31,735 | |||||||||||||||||||
| Employer taxes related to employee stock transactions | 695 | 383 | 2,086 | 787 | |||||||||||||||||||
| Amortization of acquired intangible assets | 875 | 292 | 2,625 | 292 | |||||||||||||||||||
| Acquisition-related expenses | 442 | 1,786 | 1,356 | 1,786 | |||||||||||||||||||
| Non-GAAP operating loss | $ | (5,027) | $ | (5,919) | $ | (20,579) | $ | (13,288) | |||||||||||||||
| Operating margin | (35) | % | (41) | % | (37) | % | (31) | % | |||||||||||||||
| Non-GAAP operating margin | (7) | % | (11) | % | (10) | % | (9) | % | |||||||||||||||
Non-GAAP Net Loss
We define non-GAAP net loss as net loss plus our stock-based compensation expense and related employer taxes, amortization of debt issuance costs, amortization of acquired intangible assets, acquisition-related expenses, which include transaction costs and acquisition-related retention payments, which are not necessarily reflective of operational performance during a given period, and acquisition-related tax benefit.
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| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Net loss | $ | (26,341) | $ | (20,608) | $ | (78,560) | $ | (46,755) | |||||||||||||||
| Add: | |||||||||||||||||||||||
| Stock-based compensation | 17,778 | 13,459 | 47,866 | 31,735 | |||||||||||||||||||
Amortization of debt discount and issuance costs (1) | 452 | 3,235 | 1,350 | 4,493 | |||||||||||||||||||
| Employer taxes related to employee stock transactions | 695 | 383 | 2,086 | 787 | |||||||||||||||||||
| Amortization of acquired intangibles assets | 875 | 292 | 2,625 | 292 | |||||||||||||||||||
| Acquisition-related expenses | 442 | 1,786 | 1,356 | 1,786 | |||||||||||||||||||
| Acquisition-related tax benefit | — | (5,058) | — | (5,058) | |||||||||||||||||||
| Non-GAAP net loss | $ | (6,099) | $ | (6,511) | $ | (23,277) | $ | (12,720) | |||||||||||||||
(1) During the first quarter of fiscal 2022, we early adopted ASU 2020-06 which resulted in the elimination of amortization of debt discount on the convertible senior notes from February 1, 2021.
Free Cash Flow
We define free cash flow as net cash (used in) provided by operating activities, less cash used for purchases of property and equipment and capitalized internal-use software costs. In addition to the reasons stated above, we believe that free cash flow is useful to investors as a liquidity measure because it measures our ability to generate or use cash in excess of our capital investments in property and equipment in order to enhance the strength of our balance sheet and further invest in our business and potential strategic initiatives. A limitation of the utility of free cash flow as a measure of our liquidity is that it does not represent the total increase or decrease in our cash balance for the period. We use free cash flow in conjunction with traditional U.S. GAAP measures as part of our overall assessment of our liquidity, including the preparation of our annual operating budget and quarterly forecasts and to evaluate the effectiveness of our business strategies.
| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Net cash provided by (used in) operating activities | $ | 2,650 | $ | 4,844 | $ | (7,366) | $ | 6,706 | |||||||||||||||
| Less: | |||||||||||||||||||||||
| Purchases of property and equipment | (85) | (110) | (1,376) | (3,402) | |||||||||||||||||||
| Capitalization of internal-use software costs | (784) | (217) | (2,701) | (328) | |||||||||||||||||||
| Free cash flow | $ | 1,781 | $ | 4,517 | $ | (11,443) | $ | 2,976 | |||||||||||||||
| Net cash provided by (used in) investing activities | $ | 5,092 | $ | (45,488) | $ | 29,151 | $ | (45,963) | |||||||||||||||
| Net cash (used in) provided by financing activities | $ | (2,529) | $ | 663 | $ | (1,213) | $ | 251,890 | |||||||||||||||
Liquidity and Capital Resources
Since inception, we have financed operations primarily through sales of our cloud-hosted software subscriptions, net proceeds we have received from sales of equity securities, and the issuance of our Notes.
On April 15, 2019, upon the closing of our IPO, we received net proceeds of $213.7 million, after deducting underwriters' discounts and commissions of $16.6 million and other issuance costs of $6.4 million.
On June 25, 2020, we issued $287.5 million aggregate principal amount of convertible senior notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The total net
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proceeds from the sale of the Notes, after deducting the initial purchasers’ discounts and debt issuance costs of $9.3 million, and purchases of the Capped Calls of $35.7 million, were $242.5 million.
As of October 31, 2021, our principal sources of liquidity were cash and cash equivalents and investments totaling $545.3 million. We believe that our existing cash and cash equivalents, investments, and cash provided by sales of our subscriptions will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including the effects of the COVID-19 pandemic, our subscription growth rate, subscription renewal activity, including the timing and the amount of cash received from customers, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced product offerings, and the continuing market adoption of our platform. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies. We may be required to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operations, and financial condition.
A significant majority of our customers pay in advance for our cloud-hosted and term license software subscriptions. Therefore, a substantial source of our cash is from our deferred revenue, which is included in the liabilities section of our condensed consolidated balance sheet. Deferred revenue consists of the unearned portion of customer billings, which is recognized as revenue in accordance with our revenue recognition policy. As of October 31, 2021, we had deferred revenue of $142.9 million, of which $137.4 million was recorded as a current liability and expected to be recorded as revenue in the next 12 months, provided all other revenue recognition criteria have been met.
Cash Flows
The following table shows a summary of our cash flows for the periods presented:
| Nine Months Ended October 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | |||||||||||
| Net cash (used in) provided by operating activities | $ | (7,366) | $ | 6,706 | |||||||
| Net cash provided by (used in) investing activities | $ | 29,151 | $ | (45,963) | |||||||
| Net cash (used in) provided by financing activities | $ | (1,213) | $ | 251,890 | |||||||
Operating Activities
Our largest source of operating cash is cash collection from sales of our cloud-hosted and term license software subscriptions to our customers. Our primary uses of cash from operating activities are for personnel expenses, marketing expenses and hosting and software expenses. In the last several years, we have had periods in which we generated negative cash flows from operating activities and have supplemented working capital requirements through net proceeds from both private and public sales of equity securities and issuance of the Notes.
Cash used in operating activities for the nine months ended October 31, 2021 of $7.4 million primarily related to our net loss of $78.6 million, adjusted for non-cash charges of $72.0 million and net cash outflows of $0.8 million due to changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation of $47.9 million, amortization of our deferred contract costs of $10.7 million, depreciation and amortization of property and equipment, capitalized implementation costs, and acquired intangible assets of $6.2 million, and non-cash lease expense of $3.3 million. Changes in operating assets and liabilities reflected cash outflows from a $16.8 million increase in deferred contract costs due to commissions paid on new bookings in line with revenue growth, $3.8 million in payments for operating lease liabilities, and a $0.9 million increase in prepaid expenses and other assets related to timing of payments made in advance for future services. These amounts were partially offset by cash inflows from a $12.9 million increase in deferred revenue resulting primarily from increased
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billings for subscriptions, a $3.8 million increase in accounts payable and accrued expenses and liabilities, and a $3.8 million increase in accrued compensation and related benefits.
Cash provided by operating activities for the nine months ended October 31, 2020 of $6.7 million primarily related to our net loss of $46.8 million, adjusted for non-cash charges of $52.7 million and net cash inflows of $0.8 million due to changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation of $31.7 million, amortization of our deferred contract costs of $7.9 million, amortization of debt discount and issuance costs of $4.5 million, depreciation and amortization of property and equipment, capitalized implementation costs, and acquired intangible assets of $3.4 million, and non-cash lease expense of $3.3 million. Changes in operating assets and liabilities reflected cash inflows from an $12.5 million increase in deferred revenue resulting primarily from increased billings for subscriptions, a $7.7 million increase in accrued compensation and related benefits, and a $2.0 million increase in accounts payable and accrued expenses and other liabilities. This was partially offset by outflows from a $10.9 million increase in deferred contract costs due to commissions paid on new bookings in line with revenue growth, a $3.9 million increase in accounts receivable due to timing of cash collections, a $3.6 million increase in prepaid expenses and other assets related to timing of payments made in advance for future services, and $3.0 million in payments for operating lease liabilities.
Investing Activities
Cash provided by investing activities for the nine months ended October 31, 2021 of $29.2 million consisted of proceeds from sales and maturities of investments of $184.0 million, offset by purchases of available-for-sale investments of $150.6 million, capitalization of internal-use software of $2.7 million, and purchases of property and equipment of $1.4 million primarily for purchases of computers for new employees and to support office space for our San Francisco office.
Cash used in investing activities for the nine months ended October 31, 2020 of $46.0 million consisted of purchases of available-for-sale investments of $153.3 million, net cash paid for the Rundeck acquisition of $49.7 million, and purchases of property and equipment of $3.4 million primarily to support additional office space for our Atlanta office and purchases of computers for new employees. These payments were partially offset by proceeds from maturities and sales of investments of $160.7 million.
Financing Activities
Cash used in financing activities for the nine months ended October 31, 2021 of $1.2 million consisted of $18.6 million in employee payroll taxes paid related to vesting of restricted stock units, partially offset by proceeds of $12.5 million from the exercise of stock options and proceeds from the ESPP of $4.9 million.
Cash provided by financing activities for the nine months ended October 31, 2020 of $251.9 million consisted primarily of net proceeds of $278.7 million related to the issuance of the Notes, proceeds of $9.7 million from the exercise of stock options, and proceeds from the ESPP of $3.6 million. This was partially offset by purchases of the Capped Calls of $35.7 million.
Contractual Obligations and Commitments
There were no material changes during the nine months ended October 31, 2021 to our contractual obligations and other commitments, as disclosed in the Annual Report on Form 10-K for the fiscal year ended January 31, 2021, filed with the SEC on March 19, 2021.
For further information on our commitments and contingencies, refer to Note 11, “Commitments and Contingencies” in the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q.
Indemnification Agreements
In the ordinary course of business, we may agree to indemnify customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties.
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As permitted under Delaware law, we have entered into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees. No demands have been made upon us to provide indemnification under such agreements, and there are no claims that we are aware of that could have a material effect on our consolidated balance sheets, consolidated statements of operations and comprehensive loss, or consolidated statements of cash flows.
Off-Balance Sheet Arrangements
We do not currently have and, as of October 31, 2021 or during the periods presented, did not have any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in accordance with U.S. GAAP. In the preparation of these condensed consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates.
Other than as set forth below, there have been no significant changes to our critical accounting policies described in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021, filed with the SEC on March 19, 2021, that had a material impact on our condensed consolidated financial statements and related notes.
Stock-Based Compensation
The Company recognizes compensation expense for all stock-based payment awards, including stock options, restricted stock units (“RSUs”), and performance stock units (“PSUs”), based on the estimated fair value of the award on the grant date.
The Company estimates the fair value of stock options issued to employees on the date of grant using the Black-Scholes option pricing model, which is impacted by the estimated fair value of the Company’s common stock, as well as certain assumptions including the expected volatility over the term of the option awards, the expected term of the awards, risk-free interest rates and the expected dividend yield. Assumptions and estimates used in the determination of the fair value of stock options are as follows:
Expected volatility—Expected volatility is a measure of the amount by which the stock price is expected to fluctuate. Since the Company does not have sufficient trading history for its common stock, it estimates the expected volatility of its stock options by taking the average historical volatility of a group of comparable publicly traded companies over a period equal to the expected life of the options.
Expected term—The Company determines the expected term based on the average period the stock options are expected to remain outstanding, generally calculated as the midpoint of the stock options’ vesting term and contractual expiration period, as the Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior.
Risk-free rate—The Company uses the U.S. Treasury yield for its risk-free interest rate that corresponds with the expected term.
Expected dividend yield—The Company utilizes a dividend yield of zero, as it does not currently issue dividends and does not expect to in the future.
The Company estimates the fair value of RSUs and PSUs at our stock price on the grant date.
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The Company estimates the fair value of shares to be issued under the ESPP on the first day of the offering period using the Black-Scholes valuation model, which is impacted by the estimated fair value of the Company’s common stock, as well as certain assumptions including the expected volatility over the term of the offering period, the expected term of the awards, risk-free interest rates and the expected dividend yield. Assumptions used in the determination of the fair value of the ESPP are the same as those used in the determination of the fair value of our stock options.
The Company generally recognizes compensation expense for employee stock-based payment awards on a straight-line basis over the period during which an award recipient is required to provide services in exchange for the award (generally the vesting period of the award), with the exception of PSUs which are recognized using the accelerated attribution method and based on management’s judgment around the probability of achievement of a performance condition. The Company accounts for forfeitures as they occur.
The fair value of each non-employee stock option is estimated at the date of grant using the Black-Scholes option pricing model and is not remeasured over the vesting term. Assumptions used in valuing non-employee stock options are generally consistent with those used for employee stock options with the exception that the expected term is over the contractual life.
Recent Accounting Pronouncements
For further information on our recently adopted accounting pronouncements, refer to Note 2, "Summary of Significant Accounting Policies" in the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in our market risk as compared to the disclosures in Part II, Item 7A in our Annual Report on Form 10-K for the year ended January 31, 2021, filed with the SEC on March 19, 2021.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation and supervision of our chief executive officer and our chief financial officer, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our chief executive officer and chief financial officer have concluded that as of such date, our disclosure controls and procedures were, in design and operation, effective at a reasonable assurance level.
Limitations on the Effectiveness of Controls
The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended October 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than as described above.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any material pending legal proceedings. From time to time, we may be subject to legal proceedings and claims arising in the ordinary course of business.
Item 1A. Risk Factors
There have been no material changes from the risk factors described in “Part I. Item 1A., “Risk Factors” in our Annual Report on Form 10-K for the year ended January 31, 2021. The risks described in “Risk Factors” and in any subsequent Form 10-Qs could materially and adversely affect our business, results of operations, financial condition or prospects, and could cause the trading price of our common stock to decline. These risk factors do not identify all risks that we face— our business, results of operations, financial condition or prospects could also be affected by factors that are not presently known to us or that we currently consider to be immaterial. Due to risks and uncertainties, known and unknown, our past financial results may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Items 3, 4, and 5 are not applicable and have been omitted.
Item 6. Exhibits
The documents listed in the Exhibit Index of this Quarterly Report on Form 10-Q are incorporated by reference or are filed with this Quarterly Report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).
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EXHIBIT INDEX
Exhibit Number | Description | Form | File No. | Incorporated by Exhibit Reference | Filing Date | |||||||||||||||||||||||||||
| 8-K | 001-38856 | 3.1 | April 15, 2019 | |||||||||||||||||||||||||||||
| 8-K | 001-38856 | 3.2 | April 15, 2019 | |||||||||||||||||||||||||||||
| Filed herewith | ||||||||||||||||||||||||||||||||
| Filed herewith | ||||||||||||||||||||||||||||||||
| Furnished herewith | ||||||||||||||||||||||||||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | Filed herewith | ||||||||||||||||||||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | Filed herewith | ||||||||||||||||||||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | Filed herewith | ||||||||||||||||||||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | Filed herewith | ||||||||||||||||||||||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | Filed herewith | ||||||||||||||||||||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | Filed herewith | ||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, and 101.PRE). | |||||||||||||||||||||||||||||||
* The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| PAGERDUTY, INC. | |||||||||||
Date: December 8, 2021 | By: | /s/ Jennifer G. Tejada | |||||||||
| Jennifer G. Tejada | |||||||||||
| Chief Executive Officer | |||||||||||
| (Principal Executive Officer) | |||||||||||
Date: December 8, 2021 | By: | /s/ Owen Howard Wilson | |||||||||
| Owen Howard Wilson | |||||||||||
| Chief Financial Officer | |||||||||||
| (Principal Financial and Accounting Officer) | |||||||||||
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Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jennifer G. Tejada, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of PagerDuty, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: December 8, 2021
/s/ Jennifer G. Tejada
Jennifer G. Tejada
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Owen Howard Wilson, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of PagerDuty, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: December 8, 2021
/s/ Owen Howard Wilson
Owen Howard Wilson
Chief Financial Officer
(Principal Financial Officer)
Exhibit 32.1
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Jennifer G. Tejada, the Chief Executive Officer of PagerDuty, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of PagerDuty, Inc. for the fiscal quarter ended April 30, 2019 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of PagerDuty, Inc.
Date: December 8, 2021
/s/ Jennifer G. Tejada
Jennifer G. Tejada
Chief Executive Officer
(Principal Executive Officer)
I, Owen Howard Wilson, the Chief Financial Officer of PagerDuty, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of PagerDuty, Inc. for the fiscal quarter ended April 30, 2019 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of PagerDuty, Inc.
Date: December 8, 2021
/s/ Owen Howard Wilson
Owen Howard Wilson
Chief Financial Officer
(Principal Financial Officer)