Earnings Call
PagerDuty, Inc. (PD)
Earnings Call Transcript - PD Q3 2023
Operator, Operator
Good afternoon and thank you for joining us to discuss PagerDuty's Third Quarter Fiscal Year 2023 Results. With me on today's call are Jennifer Tejada, PagerDuty's Chairperson and Chief Executive Officer, and Howard Wilson, PagerDuty's Chief Financial Officer. Before we begin, I want to remind everyone that statements made on this call include forward-looking statements based on the current environment, which involve known and unknown risks and uncertainties that may cause our actual results, performance, or achievements to materially differ from those expressed or implied. These forward-looking statements include our growth prospects and future revenue, among other things, and represent our management's beliefs and assumptions only as of the date they are made, with no obligation to update these statements. During today's call, we will discuss non-GAAP financial measures, which are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in our earnings release. Further information on these and other factors that could cause the company's financial results to differ materially is included in our filings with the Securities and Exchange Commission, including our most recently filed Form 10-K and 10-Q, as well as subsequent filings. With that, I will turn the call over to Jennifer.
Jennifer Tejada, CEO
Thanks, Tony and thanks everyone for joining us today. We are pleased to report another quarter of strong results as we continued to execute on our Operations Cloud. Revenue grew 31% year-over-year to $94 million above the high end of our guidance, marking our sixth straight quarter of growth above 30%. In Q3, we achieved non-GAAP profitability a quarter ahead of our previous guidance with $3 million in operating income, an improvement of 1,000 basis points over Q3 last year. We exceeded the high-end of our guidance ranges for both top and bottom line and realized our profitability milestone a quarter ahead of schedule. We continued to see strength in our focused segments, mid-market and enterprise, with our customer cohorts spending over $100,000 in ARR growing 31% over last year. Total free and paid customers on our platform grew 22% year-over-year, with dollar-based net retention at 123% as our customers continued to expand users and adopt more products and services. In the quarter, more than half of our ARR came from customers with two or more products. While the macro environment is likely to remain a headwind for our business in the near-term, we continue to see positive trends underpinning our performance and remain bullish about both long-term opportunities and our balanced growth investment plans. First, we continued to see strong growth in incident response. Cloud adoption and digital acceleration are enduring multiyear initiatives; DevOps transformation is now required to achieve the efficiency demanded by this macro environment. PagerDuty is essential infrastructure leading to some large digital transformation wins in traditional industries, which I will discuss later. Second, we saw solid adoption of new products, especially automation and our AIOps solution, where customers chose the efficiency and effectiveness of our integrated operations cloud offering ahead of point solutions. Third, our low cost of ownership and fast time to return on investment makes PagerDuty more attractive to customers than expensive long deployment solutions. Our sales pipeline is strong heading into Q4 for both incident response and new products. Finally, we have positioned ourselves well to navigate the challenging macro environment, achieving profitability by improving our cost structure such that we can continue to invest in growth capacity and product innovation. During Q3, we extended our competitive lead as we balanced strategic investments in product innovation growth, while also significantly improving operating leverage. Our results this quarter demonstrate the continued strength of our value proposition for enterprises and our team’s ability to execute with an increasingly efficient go-to-market motion. PagerDuty's Operations Cloud underpins operational resilience and digital maturity for our customers in a moment when they need it more than ever. Automation capabilities integrated across every aspect of the platform reduce time and effort spent by technical employees managing interrupt work and translate to both money saved and better experiences for their customers. Our ability to orchestrate digital operations across the entire enterprise makes PagerDuty the platform onto which companies are consolidating previously fragmented technology spending. As organizations come under pressure to protect revenue, prioritize IT spending and do more with less, our customers have made it clear they consider PagerDuty essential. This was validated as we closed a record number of mid-market and enterprise expansion transactions, managed churn well below 5% of starting ARR and increased both average revenue per user and average revenue per customer. Our mission to revolutionize operations has always been grounded in building a durable growth company, while improving the efficiency of our go-to-market and general and administrative spend. We are investing to deepen our competitive moat through innovation in AIOps, automation, customer service operations, and flexible workflows that help teams across the enterprise manage interrupt work. Our efforts over the past year to sustainably lower our cost structure with new lower cost, high talent locations like Lisbon will enable ongoing operating leverage improvement similar to the pace we have delivered this financial year. In a volatile macro environment, we are controlling the controllables with the objective of continuing to make demonstrable progress from the early 30s towards operating as a Rule 40 company. Given our role as essential infrastructure, our loyal customer base, competitive track record, and innovation roadmap, we are positioned to weather this environment well. We are confident that we will emerge stronger as a high performing profitable growth company, leading operations cloud for modern enterprises. In November, we announced early availability of more flexible incident workflows that enables PagerDuty customers to tailor workflows to different use cases and automate steps when a major incident occurs. We launched capabilities to reduce noise and improve developer productivity, so our customers can take back hours of engineering time. Overtime flexible workflows will be the primary solution to enable non-technical teams to manage interrupt work. Earlier this week at AWS Reinvent, we also announced automation actions for PagerDuty AWS customers. These capabilities improve resiliency and increase the use of best practices, all while saving developer time. FreedomPay, a data-driven commerce platform, is saving the equivalent of four people's dedicated time, making their critical processes more reliable and removing the risks of human error by automating tasks with PagerDuty. During Q3, a Fortune 100 global security and aerospace company nearly doubled its PagerDuty usage footprint on digital operations and signed a multi-year contract. This long-term PagerDuty customer is realizing a return on investment in excess of 30 times its annual spend with us. In the last 18 months, this customer significantly reduced its meantime to resolve incidents, translating into tens of millions of dollars in savings. Their expansion with PagerDuty was explicitly due to our ability to reduce their costs while also freeing up time for their innovation teams. In the quarter, an Australian-based home improvement retailer in the midst of a large scale digital transformation expanded its investment with PagerDuty. The customer has nearly doubled its PagerDuty footprint since its initial deployment in 2020. This quarter, we adopted PagerDuty process automation to address more advanced use cases, including automated diagnostics and auto remediation. They expect to increase engineering productivity and resolve incidents faster as we advance their digital maturity. Also during the quarter, a multinational Fortune 200 wireless technology innovator turned to PagerDuty to consolidate digital operations on an integrated platform for action. The company sought a more flexible solution that could provide faster time to value, lower maintenance costs, visibility across multiple departments, and ultimately consolidate their technology spending. They had been using a point solution for AIOps in their IT service center for several years, but upgraded to PagerDuty digital operations, automated actions, and event intelligence, replacing that vendor and signing a multi-year six-figure investment. Their expansion to PagerDuty enables them to automatically detect, action and manage all in the same platform. PagerDuty is central to their technology strategy to exponentially scale services while keeping service costs low. They anticipate payback in less than a quarter and a return on investment of nearly 500% within the first year. Our value proposition has proven resilient even as decision making within organizations becomes more cautious. PagerDuty's Operations Cloud is the only platform integrating incident response, AIOps, and automation. We deliver tangible ROI and fast time to value, help mature our customers’ digital operations and deliver operational resilience, which is critical in today's environment. As customers realize the initial value, they adopt new products, expand users and move towards more advanced use cases. In an environment where it's much easier to sell more to current customers than find new ones, we have several new products to attach as the result of our recent innovation and a large underpenetrated opportunity within our installed base. The operating leverage PagerDuty exhibited during the third quarter is the outcome of structural changes implemented throughout the past several years to generate profitable growth. We have responded to the recent changes in the demand environment by accelerating the implementation of several efficiency initiatives, including standardizing our go-to-market motions across regions, opening lower cost, high talent employee locations, improving our digital marketing returns and refining our R&D investments. We continue to expand our operating margins as we move forward into the next fiscal year. Our long-term operation cloud strategy balances growth and profitability. We were recently recognized on several fronts for progress that will also support success in FY ‘24. Earlier this week, we were honored at AWS Reinvent to receive the Rising Star award celebrating significant year-over-year growth in our business on the AWS marketplace, and we expect our momentum with AWS to continue. Our investment in attracting and retaining top talent, creating an exclusive workspace and ensuring a healthy company culture manifests in the success of our teams. During the quarter, we won multiple Stevie Awards including for special achievement in workplace health and well-being and for best Corporate Social Responsibility strategy. This fall Trust Radius recognized PagerDuty as a tech care awards winner for our ongoing commitment to corporate social responsibility. Finally, G2 named PagerDuty a leader in incident response, AIOps, and workload automation. Our results from Q3, the persistence and long-term tailwinds and customer demand for our high ROI, fast time to value platform reinforce our confidence in our ability to both execute well in the near-term and emerge even stronger. Even as we scale efficiently, we know that innovation fuels our competitive advantage. PagerDuty is the partner our customers trust on their worst days; it is our responsibility and our privilege to deliver for them. As we move into FY ’24, we expect to continue monetizing our product investments as customers see value from PagerDuty's Operations Cloud. I want to thank our customers for their trust and partnership and I want to recognize our global teams for their dedication to championing our customers for their resilience and great execution this quarter. With that, I will turn the call to Howard and look forward to your questions.
Howard Wilson, CFO
Thank you, Jen, and good day to everyone joining us on this afternoon's call. Our third quarter results demonstrate the agility of PagerDuty and our commitment to profitable growth. The combination of our ongoing programmatic efforts and our operational agility enabled us to reach the profitability target put forth during our Q4 FY ‘22 call one quarter earlier, while preserving our strategic growth investments. Evidence that PagerDuty's Operations Cloud is well positioned to meet our customers’ challenges reducing cost, protecting revenue, retaining talent, and enabling them to do more with less. Unless otherwise stated, all references to our expenses and operating results are on a non-GAAP basis and are reconciled to our GAAP results in the earnings release that was posted before the call. Revenue was $94 million in the third quarter, up 31% year-over-year. The contribution from international was 23% of total revenues, compared to 24% in Q3 of last year, reflecting the challenging economic environment in Europe. Our customers continued to expand with us, adding new users and new products. We had a record number of customers expand with us this quarter. While many of these transactions were on the smaller side, the volume of customers demonstrating their reliance on PagerDuty even in a challenging environment is a further testament to our durable growth. We saw the most strength in our North American mid-market and enterprise business and PagerDuty online our self-service business. We did notice an increase in customer approval requirements, particularly with large deals. We delivered dollar-based net retention in Q3 of 123%, compared to 124% in the same period one year ago. We expect dollar-based net retention to be at or above 120% for Q4. Customer spending over $100,000 in annual recurring revenue grew to $710,000 and is up 31% from a year ago, demonstrating our ongoing strength in mid-market and enterprise. Total paid customers increased by 5% annually to 15,265, compared to 6% in the year ago period. Free and paid companies on our platform grew to over 23,000, an increase of approximately 22%, compared to Q3 last year. Q3 gross margins of 85% remained within our target range of 84% to 86%. Operating income was $3 million or 3% of revenue, an improvement compared to a loss of $5 million or negative 7% of revenue in the same quarter last year. Please note the fully diluted share count associated with Q3 profitability was 101 million weighted average shares. Operating margin outperformed by 600 basis points compared to the high-end of our guidance range for the quarter as we accelerated our scaling initiatives, refining our go-to-market model, leveraging our global locations, and increasing use of automation. We usually experience a sequential improvement in operating income from Q3 to Q4. However, this year, we expect operating income to decline marginally in Q4. This is primarily due to our investment in AWS Reinvent, as well as the full quarter of expenses from third quarter hires. Now turning to cash, third quarter cash from operations was nearly breakeven at negative $0.4 million, compared to $3 million in Q3 of last year. Free cash flow was negative $2 million, compared to positive $2 million in the year ago period. We expect positive free cash flow in the fourth quarter. Turning to the balance sheet, we ended the quarter with $459 million in cash, cash equivalents, and investments. Total deferred revenue ended the quarter at $180 million, up 26% year-over-year. Quarterly calculated billings were $104 million, which was an increase of 29% year-over-year, ending above the 20% to 25% range provided during last quarter's call. This result includes approximately $2.6 million in prepaid multi-year billings. Adjusting for this, the increase was 26% and also above the range provided. Last year in Q4, we had strong 30% billings growth that included $3.2 million of multi-year prepaid contracts that are not available for renewal this period. Given a tougher compare and adjusting for the volatile macro, we expect billings growth for Q4 to be approximately 20%. Given quarter-to-quarter fluctuations in billings associated with our culture and practices, we focus on trailing 12-months billings. On a trailing 12-months basis, billings were $385 million, an increase of 30% compared to a year ago and above the 27% estimate previously provided. We expect trailing 12-months billings growth exiting the fourth quarter to be at or above 25% over last year. Turning now to our guidance. Our guidance reflects our understanding and consideration of the impacts of the current evolving uncertain macro environment. For the fourth quarter of fiscal 2023, we expect revenue in the range of $98 million to $100 million, representing a growth rate of 25% to 27% and net income per diluted share, attributable to PagerDuty, Inc. in the range of $0.02 to $0.03 with fully diluted shares outstanding of approximately $102 million. This implies an operating margin in the range of 1% to 2%. For the full fiscal year 2023, we expect revenue in the range of $368 million to $370 million, representing a growth rate of 31%, and we’re improving guidance for net loss per share attributable to PagerDuty, Inc. to $0.01 to breakeven with basic shares outstanding of approximately $90 million and fully diluted shares outstanding of approximately $101 million. This implies an operating margin of negative 1% to breakeven for the year. Before I close, I would like to thank our customers for their continued partnership and our teams across the globe who champion our rapid pace of innovation positions us to realize our vision to transform critical work and revolutionize operations. We remain confident in our Operations Cloud strategy, the market opportunity, and our performance as we continue to demonstrate profitable growth, expanding our operating leverage in Q4 and are in a strong position to achieve a similar level of improvement in the next financial year. With that, I will open up the call for Q&A.
Operator, Operator
Okay. And it looks like several of our analysts have queued for questions already. We will start with Joel Fishbein from Truist. Joel, if you'd like to kick us off? Okay. Actually, let's move over to Sanjit from Morgan Stanley. Do you want to kick us off in our Q&A session, please?
Sanjit Singh, Analyst
Yes. I'll try. Can you hear me?
Operator, Operator
We've got you.
Sanjit Singh, Analyst
Congratulations to the team for achieving profitability ahead of schedule; it's great to see. Jen, in your remarks, you mentioned a phrase I really appreciate: controlling the controllables, as well as discussing the balance between growth and profitability in relation to the Rule of 40. Looking at this quarter, we have 31% growth and a 3% operating margin, which indicates we are making progress. However, as we consider 2023, it appears to be a rather uncertain year for the software sector, which is beyond our control. With that in mind, how do you plan to navigate the operating framework based on the Rule of 40 and continue to make progress in the upcoming year and beyond?
Jennifer Tejada, CEO
Thanks for the question. We are very proud of the quarter. I believe we executed well in a fairly uncertain environment, and customers continued to show their demand for a platform like ours with record expansion, including a significant number of expansion transactions and our large customer cohort, with customers spending over $100,000 and our annual recurring revenue growing by 31%. We still feel confident about our top line because we provide a platform that delivers quick value and higher returns on investment. Additionally, we have been working for several quarters to enhance the overall efficiency and productivity of our business, and we are beginning to see improvements in our go-to-market efforts, particularly in marketing and sales. We continue to drive growth and demand while building customer loyalty but now with better operating leverage. We have positioned ourselves well so that regardless of macroeconomic conditions, we can continue to enhance the efficiency and productivity of the company. While we are not providing guidance for fiscal year 2024, the Rule of 40 is a crucial goal for me and the team, and we are highly focused on achieving it.
Sanjit Singh, Analyst
Makes total sense, and just as a follow-up as we think about some of the components that drive growth at PagerDuty in a seat-based model, you've seen a lot of headlines in terms of pretty sizable layoffs with the big tech, if the overall employment picture across the United States is still looking pretty solid, how do we think about when we see layoffs within engineering departments with big tech? Is that something that's going to be a modest impact or more noise? Should we look at the broader employment picture to assess that risk in terms of the expansion opportunities within the PagerDuty model? Or is it something to be more concerned about as we see some of these layoffs accelerating among tech and other companies?
Jennifer Tejada, CEO
Well, there are three characteristics of our business I will point you to. One is we have a very diverse customer base. So while we do have customers in high tech that represent a portion of a very diverse set of verticals, we saw tech, retail, financial services, and other verticals perform quite well in the quarter. The diversity of our customer base, I think, is a strength in an environment like this and it certainly was during the pandemic. Second, I would say when you look at our customer base and you look at the number of tech workers within our customer base, we're largely underpenetrated in that total addressable market. Even if we were to see headcount compressed much more dramatically, we still have huge opportunity just within the installed base from a headcount perspective, but also from a new product attach and new use case attach. So we don't see layoffs, for instance, as having a material impact on demand. Lastly, when you look across the developer community, the total addressable market that we measure is 25 million developers around the world, and we are in single digits of penetrating that TAM. This is an early and nascent category. We think it's a huge opportunity; developers tend to be the last heads to go when customers take action. When you look at the broader employment situation across the market, the diversity of our customer base really puts us in a good position, but at the end of the day, it really comes down to that TAM inside our installed base is still very large.
Sanjit Singh, Analyst
I appreciate the thoughts there. Congrats on the quarter.
Operator, Operator
Okay. Next we'll hear from Matt Hedberg at RBC. Matt, you can go ahead.
Matt Hedberg, Analyst
Sure. Thanks for the question. Jen, go blue.
Jennifer Tejada, CEO
Go blue! Did anybody see my call?
Matt Hedberg, Analyst
Okay, that was exciting stuff for a big fan, certainly fun to see, congrats on that, congrats on the quarter. Howard, maybe a question for you, could you talk a little bit more about the linearity of the quarter? And maybe how November trended thus far versus maybe past Novembers?
Howard Wilson, CFO
Yes. So the pattern of linearity when we look through Q3, it was not unlike what we saw in Q2. I think some of the factors I referenced in our call on Q2 played out in Q3 in terms of just some of the decision-making processes within the customer base took a little bit longer, but there was at least a steady momentum as we moved through the quarter, particularly in the last month of the quarter. I think the thing that really stood out for me was that our customers are doing so many different expansion transactions with us, whether it's adding users or adding products. So we had a record number of expansions for the quarter, but those tended to be smaller, which really indicated that our customers are applying a level of consideration to the purchases they make. Still, we are going to charge durable growth; they continued to make those purchases and continue to grow with PagerDuty. So that was for us a really positive sign and we expect that trend to continue.
Matt Hedberg, Analyst
Got it. Maybe just one other guidance question. I appreciate the billings guide for Q4 and normalizing for the multi-year prepay. Yes, I guess thinking more about the assumptions in your guidance, are you assuming that we kind of get a December and in your case January budget flush? Just sort of curious, are you assuming things kind of stay the same from a demand perspective? Just a little bit more perspective on that?
Howard Wilson, CFO
Yes, I mean we typically do see that for companies with calendar year ends that there is a certain amount of increased activity in December; December is never a quiet month for us, even with the holidays, and January again ends up being for those companies that are able to gain access to new budgets tends to also create a fair amount of momentum for us. We're still expecting that trend to continue even within the current macro environment in how that plays out exactly in terms of what people are prepared to spend and the size of checks they're prepared to write, we'll have to see. But certainly our pipeline is really strong coming into Q4 and we certainly see that customers' interest, particularly in our platform as a mechanism to be able to help them reduce spend or for them to be able to be more efficient or consolidate spend across a number of niche vendors is coming to the fore.
Matt Hedberg, Analyst
Got it. Thanks a lot. Congrats guys.
Howard Wilson, CFO
Thanks. Thanks, Matt.
Jennifer Tejada, CEO
Thanks, Matt.
Operator, Operator
Okay. Next, can we hear from Joel Fishbein at Truist. If you would like to go.
Joel Fishbein, Analyst
I apologize for the technical difficulties earlier and congratulations on the excellent results and the surprise in operating margin. Howard, great job. Jennifer, in this challenging environment and with macro uncertainty, which Howard you pointed out during the call, how are you approaching the balance between growth and profitability right now? What should we consider regarding future margins? I know we tend to ask for more, so I wanted to put that out there. Given that you have significant milestones ahead, I would love to hear your thoughts on how we should view this moving forward. Thank you.
Jennifer Tejada, CEO
Well, I'll take a crack at that and then Howard you can jump in. First of all, we are incredibly proud to hit the profitability milestone this quarter, a quarter early. It was a lot of work from a lot of people across the organization to structurally improve our cost base, not just make sweeping headcount changes, for instance. I want to congratulate our teams, because they've been incredibly disciplined with our capital allocation, which has enabled us to continue to invest in innovation. You've seen a slew of new products and services that we've come out within the last couple of quarters. We now have an installed base that is available for us to attach those products and services. So from a growth perspective, a lot of that investment is right time, right place for us to go-to-market in an environment where our offerings which improve efficiency, improve productivity, and reduce revenue risk are very relevant and timely. So I feel like we've put ourselves in as good a position as we can be in, given the macro and while I can’t see the future or tell you what's going to happen next week or tomorrow, I can tell you our customers are incredibly engaged. I've been spending a lot of time with customers. In the last couple of weeks, we had a large team at Reinvent where customers really want to learn about automation; it was a strong quarter for automation. And you see that in that large customer cohort of customers spending over $100,000, growing 31% and also the expansion volumes. So we are still absolutely investing in growth, but being very disciplined and balanced around capital allocation to ensure we can progress against our Rule 40 goal and that we can demonstrate that we are a profitable, durable growth company long-term.
Howard Wilson, CFO
Yes, and what I would add to Jen's comments, is if you have a look at the achievement this year where our guide points to 700 basis points to 800 basis points improvement over last year, we've really laid the foundation to continue to improve and expand our margins into next year and I don't expect the rate of change around that improvement to slow down. And along with that, even this year, we expect our free cash flow to be one or two points better than where we end from an operating margin perspective. And for us that becomes a point of focus for next year: how do we ensure that our free cash flow margins are also continuing to be strong? So I think we've laid a really good foundation. We will give you more detailed guidance, of course, on our Q4 call, but you can see from the pattern that we've been following how we expect to continue to execute.
Joel Fishbein, Analyst
Okay. Just to follow-up real quickly, just makes it sound like, just to be clear that you are not giving up any growth for the fact that you're profitable, so that we can continue to see some leverage and the strong growth that you've been delivering.
Howard Wilson, CFO
Yes. We're not providing any specific guidance on growth for next year. We provided the guide for this year, but we certainly again, to Jen's comment, control in what we can control. We know that we have created an operating model that is sustainable for the long-term, and we expect to be sustainably profitable and be a profitable grower. Of course, the macro is an environment that is subject to all kinds of things.
Joel Fishbein, Analyst
Thank you so much.
Howard Wilson, CFO
Thanks, Joel.
Jennifer Tejada, CEO
Thanks, Joel.
Operator, Operator
Okay. Next we'll hear from Chad with Craig Hallum. Chad Bennett, go ahead.
Chad Bennett, Analyst
Thank you for taking my questions and congratulations on the successful quarter and profitability. It appears that acquiring new customers is proving to be more challenging in the current environment, and your net new customer additions seem to be lower compared to previous quarters. However, you expressed strong optimism about opportunities for cross-selling and upselling, as well as potential in the pipeline. While net expansion is slightly decreasing, as it is compared to impressive previous numbers, how should we view overall revenue growth in relation to net expansion, particularly in light of a tougher climate for attracting new customers? I understand there may be timing considerations, but should we anticipate reduced contributions from new customers in the upcoming three to four quarters?
Howard Wilson, CFO
Yes. Chad, what I would say is that if you look at our business, our growth primarily comes from expansion. So we tend to have a small land and customers grow with us over time, so lands are important but expansion is always the near-term opportunity for us from a growth perspective. When we look at lands, what's also important for us is the right kind of lands. This last quarter, we had over 100 enterprise and mid-market lands that we saw as really healthy and strong, which lays a good foundation for us for the future. So the contribution from new logos, within the first year, always remains relatively small. New logos for us, of course, the fact that we do have such a strong installed base that is able to take up new products and add users and can do that with ease and can get to value really quickly, I think puts us in a good place.
Chad Bennett, Analyst
Got it. And then maybe, any more color, we've heard from a lot of calls in this space on renewal and expansion conversations with customers and how customers are being a little more cautious on seat expansion and so forth. I'd love your commentary on that; just kind of what you're hearing, but specifically in the tech sector where you're seeing some pretty healthy layoffs and whatnot. I know you guys are fairly horizontal from a vertical standpoint, but just any commentary on renewal discussion and seat expansion? Thanks.
Jennifer Tejada, CEO
Well, you saw that I’ve been talking to a lot of customers lately. We continued to see churn below 5% of starting ARR, so very strong retention of the base renewals. Those conversations continued to go well, record number of expansions as customers are looking for new ways to automate more, because they are being asked by their own leadership to do more with less. I think all of the automation we've built into the platform from detection to orchestration and all the way through to auto remediation is super relevant and timely in this moment. What I would tell you is it's more that there are just more approvals in the process. We don't see deals moving out of the pipeline. We don't see deals going to competition. We just see things taking longer, because there's more diligence associated with how these deals get done. In the long term, that may be good for us because more senior people are going to understand what PagerDuty does and what our value proposition is. It is a little annoying right now when you think you're done and then you find out there are two more approvers you have never met before that need to go through just because they're trying to control and constrain spend at the top. What this has shown me in the conversations that I've had with customers is that we truly are essential infrastructure. We saw that even during the pandemic when customers, sort of, pump the brakes while they were trying to figure out everything else that they had to sort out at the beginning of the pandemic, when you see those additional approvals come out, we ultimately win the day. Like I said, it's just taking a little bit longer. I really like what I'm seeing now in terms of engagement around some more advanced use cases. I think the market probably doesn't understand yet how important flexible workflows are, which we aid recently; flexible workflows enable a huge opening of lots of different use cases for our customers to leverage PagerDuty. It's one of the most requested feature sets that we've been asked for over the years and it's really building catalytic capability and IP into the core platform. So I'm really excited about the discussions that we're having there as well.
Chad Bennett, Analyst
Got it. Well, thanks, kudos again on the quarter.
Howard Wilson, CFO
Thank you, Chad.
Jennifer Tejada, CEO
Thank you, Chad.
Operator, Operator
Okay. And we'll hear next from Matt Stotler with William Blair.
Matt Stotler, Analyst
Thank you for taking the questions. You know, Jen, that's actually a good segue because my first question here is going to be on Catalytic. Obviously, it seems like some pretty compelling capabilities that you acquired there. I would love to get an update kind of on the overall integration progress timeline, but also how those capabilities are impacting the conversations you're having with customers and potentially contributing to the expansion we're seeing in the user base at this point?
Jennifer Tejada, CEO
One of the critical success factors for us has always been to make the app that our users are engaging with as simple and usable as possible, because they are often using us in a moment of significant duress or stress. For me, it felt like a really natural next step to move into no code or low code workflow automation, because you can't get much simpler than drag and drop. What we've learned, particularly as we've gone into large enterprise, highly regulated industries with very specific requirements where they want to use us for risk mitigation or in healthcare environments, is they want to change what has been historically a very deterministic workflow. Flexible workflows and no-code workflows really open up a lot of that opportunity for us and just make it easier for customers to deploy PagerDuty's automation into different types of incident response processes and more broadly, different types of interrupt work. I can't tell you, maybe that's because I'm from the Midwest and Catalytic as a Chicago company, but we're thrilled with that team. It's a great group of technologists, and we're thrilled with how well they're advancing and progressing. In fact, our automation product had a much improved quarter this quarter as well. Last quarter I think we talked about automation deals being a little larger and taking a little bit longer; this quarter we saw strong attach there. So really good to see some of those inorganic investments starting to take hold within the broader business.
Matt Stotler, Analyst
That's very helpful. And then maybe one on the federal vertical specifically, historically something you guys have talked about as a kind of a key part that $1 billion growth aspiration. Obviously, with the government fiscal year ending Q3, we'd love to just get kind of a broader update on progress there and maybe contribution that you're seeing today.
Jennifer Tejada, CEO
Today, Federal is a small part of our total ARR. We do see a lot of customers in SLED, state and local government education and we are underway with our FedRAMP certification process, which I think will open up more and more opportunities in Federal, so that's more of a forward-looking opportunity in my view. I talked earlier in my prepared remarks about a large aerospace company, a Fortune 100 company, and what I loved about that deal is they are a customer that was able to tell us they realized tremendous return on investments 30 times their initial investment and a very high ROI. So they really doubled down on our products and services. We'd like to see that kind of advancement in these tightly regulated industries because it demonstrates how truly horizontal PagerDuty can be. Howard, if you have anything to add there?
Howard Wilson, CFO
No, I think you've covered it.
Matt Stotler, Analyst
Great, thank you again.
Operator, Operator
Okay, thank you. And next, we would like to welcome Fred Lee from Credit Suisse.
Fred Lee, Analyst
All right, Hey Jennifer. Hey, Howard.
Howard Wilson, CFO
Hey, Fred, how are you?
Jennifer Tejada, CEO
Hey, Fred.
Fred Lee, Analyst
Hey, if you’re in Scottsdale this week, hopefully we’ll see you in Phoenix at the game, right?
Jennifer Tejada, CEO
Maybe, maybe, I hope so.
Fred Lee, Analyst
Hey, listen. So actually apologies in advance if you addressed this already. I missed the first part of all. Last quarter you called out the digital operations business accelerated year-over-year nicely, and I was wondering how the business trended in the quarter and through the first month of this quarter if the shape of the uptake is changeable?
Howard Wilson, CFO
Yes, so I can comment on that Fred. In terms of digital operations, right, digital operations skew if you like is one of the opportunities for customers to acquire additional products. So it's the add-on from our business plan that allows customers to incorporate the event intelligence product amongst some other capabilities. We continued to see strong demand for that, particularly as customers are keen to leverage the capabilities of our event intelligence, our AIOps solution, which helps them be more efficient and helps them respond more quickly to issues. This quarter, again, we saw a strong multi-product attach which is, Jen commented in her script that more than 50% of our ARR is coming from customers with two or more products, and that attachment is across AIOps and across the process automation piece.
Fred Lee, Analyst
And just a quick follow-up, do you find that AIOps tend to behave from a demand perspective, more acyclical versus is it a response? Or are they more similar in terms of the pro-cyclicality relative to the environment? Thank you.
Howard Wilson, CFO
Yes, I'm not aware of any noticeable differences in how buying behavior changes around that. It often relates to the maturity of the customer. We have a maturity model that we often discuss with customers, guiding them from being reactive to becoming predictive. As companies progress through their journey, the event intelligence AIOps products seem to align naturally with that progression. Whether they are ready at that stage or aiming to become proactive, the Event Intelligence product fits in very well. Sometimes, it's more about that than anything else. Jen, do you have anything to add?
Jennifer Tejada, CEO
No, I think you nailed it. It's more about digital maturity and how an organization is organized. Some teams are early adopters of analytics in the flow of a production environment, while others have more of a centralized mindset where they will analyze incidents after they happen and then try and affect learning by integrating AIOps into the core operations platform. It means you can do both. The product serves at high scale both distributed teams and centralized teams and where we saw some momentum this quarter was a number of customers that have paid for point solutions in the AIOps space and seen the value of being able to not only leverage AIOps from an analytics perspective and learning perspective but being able to action on that data and information immediately inside the same platform without context switching. That is a huge time saver and money saver. It is potentially a way to get to predictive much faster, because the idea of AIOps is you're looking at events and preventing those event storms from becoming major incidents rather than just learning from incidents after they happen. So having AIOps, incident response, and automation all integrated into one platform is one of the things that makes us really unique and drives a lot of value.
Fred Lee, Analyst
Thank you very much and very nice quarter, especially in this environment.
Jennifer Tejada, CEO
Thank you.
Howard Wilson, CFO
Thank you, Fred.
Operator, Operator
Okay, thank you. And next, we will round out today's Q&A with Rob Oliver with Baird. Rob, please go ahead.
Rob Oliver, Analyst
Great. Can you guys hear me okay?
Howard Wilson, CFO
We can.
Jennifer Tejada, CEO
Yes, hi Rob.
Rob Oliver, Analyst
Okay, thanks for taking my question. I wanted to discuss the vendor consolidation point that you mentioned. It's the second consecutive quarter that you've brought it up, and I wanted to explore it further. Clearly, you have extensive coverage, and many of us are facing companies that might be impacted by that trend if the environment becomes difficult. However, it seems like you might be experiencing the opposite effect. Could you specify what areas this applies to? Is it AIOps, where we have a mix of private and public vendors, and you have a significant brand and platform advantage? Or does it pertain to digital operations in a broader sense? Any additional insights would be appreciated. Thank you.
Jennifer Tejada, CEO
Yes. We're seeing it in AIOps for sure and more broadly in spaces across the incident response lifecycle or digital operations lifecycle where a lot of point solutions have popped up and they do one thing, maybe they do on-call or maybe they do SRE or maybe they do AIOps or something else. We even have customers that ask us to help them leverage our event intelligence data to understand which of their observability tools are adding the most value because they have a lot of observability and telemetry instrumentation in their environment and they are looking for ways to reduce duplication. I think that is kind of a key theme; nobody wants to have three of the same thing if they could be effective with one, right? I agree with your thesis that we are benefiting from a consolidation perspective. I think it's not just because we have multiple solutions on the platform; it's because our platform is easy to deploy, fast time to value, and frankly delivering a very high ROI in a short order. I think that's very attractive to our customers right now as opposed to some of the larger, longer cycle, long deployment environments they would need to be in, where they've got to bring in a lot of contractors to help them get up and running.
Rob Oliver, Analyst
Got it, okay. I appreciate that color. Thanks guys for squeezing me in.
Jennifer Tejada, CEO
Thank you. It's great to see you.
Operator, Operator
Okay. Jennifer, can we turn to you for final comments?
Jennifer Tejada, CEO
Sure. Well, I just want to say thank you so much for all your questions, and to all of you who have joined us today on our earnings call. We are very proud of our results and we continue our track record of durable growth, and I'm pleased that we're demonstrating that ability to balance growth with expanding operating margins and achieving profitability a quarter ahead of our previous guidance. In this environment, I think PagerDuty's Operations Cloud is very well positioned, because we help customers with mission critical challenges; we help them protect their revenue and reduce their own cost run rate. Importantly, I want to thank our customers for their trust in us and again just thank all of our lieutenants around the globe for their hard work, their resilience, and for delivering another successful quarter for PagerDuty. Thank you.