PagerDuty, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2020 third quarter and nine months ended October 31, 2019. Financial statements are unaudited. PagerDuty provides a subscription-based real-time operations platform; it reported 12,436 customers at quarter-end.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $42.8 million | $31.2 million | $120.4 million | $84.0 million |
| Gross margin | 84% | 85% | 85% | 85% |
| Operating loss | $16.7 million | $16.0 million | $43.8 million | $35.9 million |
| Net loss | $15.3 million | $15.4 million | $39.9 million | $34.5 million |
| Operating cash flow | $3.4 million | $2.8 million | $(2.0) million | $(6.2) million |
| Free cash flow | $2.3 million | $0.2 million | $(5.2) million | $(9.5) million |
At October 31, cash and cash equivalents were $176.3 million and investments were $169.7 million, totaling $346.1 million in cash, cash equivalents and investments. Total liabilities were $115.5 million, including $80.6 million of deferred revenue. The balance sheet reports no debt balance. Current assets were $393.5 million versus current liabilities of $106.3 million. Accumulated deficit was $168.8 million.
Q3 basic and diluted net loss per share was $0.20, compared with $0.71 a year earlier; the comparison is affected by the substantially larger post-IPO weighted-average share count. The IPO closed April 15, 2019, raising $213.7 million net, and preferred stock converted into common stock.
Changes versus the prior comparable periods
- Revenue grew 37% in Q3 and 43% in the first nine months. Management attributed growth mainly to expansion among existing customers, including more users and product functionality, and secondarily to new customers.
- Customer count increased to 12,436 from 10,806; customers above $100,000 ARR rose to 303 from 203. Dollar-based net retention declined to 129% from 139%.
- Q3 gross margin declined one percentage point to 84%, primarily due to higher hosting costs; nine-month gross margin held at 85%.
- Q3 sales and marketing expense rose 46% to $27.4 million, reflecting hiring, variable sales compensation and infrastructure. Nine-month sales and marketing expense rose 53% to $72.4 million. This was the largest operating expense.
- Q3 operating loss widened to $16.7 million, while net loss was broadly flat year over year. For the nine months, net loss increased to $39.9 million from $34.5 million.
- Q3 operating cash flow and free cash flow were positive; both remained negative for the nine-month period, though cash use improved year over year. Nine-month investing cash outflow increased substantially because of purchases of investments, not solely operating investment.
Outlook, commentary, risks and unusual items
- Management said existing cash, investments and subscription cash receipts should fund working capital and capital expenditure needs for at least 12 months. The filing provides no specific revenue, earnings or margin guidance.
- Management expects sales and marketing expense to increase in dollars and remain the largest operating expense for the foreseeable future; it also expects continued investment in product development, infrastructure, customer support, and public-company capabilities.
- The company has a history of operating losses and negative operating cash flows and cautions that it may not achieve or sustain profitability. Key risks include competition and pricing pressure, dependence on its On-Call Management product, customer renewal and expansion, service availability and cybersecurity, and privacy and regulatory compliance.
- In July 2019, PagerDuty entered a non-cancellable Atlanta office lease with $14.4 million in minimum payments through July 2028. Total future minimum operating lease payments were $42.6 million. The company expected adoption of the new lease standard in February 2020 to add right-of-use assets and lease liabilities.
- Stock-based compensation was $7.3 million in Q3 and $19.4 million for nine months. Prior-year comparisons included $5.5 million of stock-based compensation tied to employee share transfers and a $6.2 million non-cash charitable contribution warrant expense during the nine months of 2018.
- No material pending legal proceedings were reported; management stated disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether customer retention stabilizes and enterprise customer growth continues, given the decline in dollar-based net retention to 129%.
- Whether revenue growth can offset rising sales, marketing, infrastructure and public-company costs and improve GAAP operating performance.
- Whether positive quarterly operating cash flow is sustained across the full year, considering nine-month operating and free cash flow remained negative.
- How investment balances, office lease commitments and adoption of lease accounting affect future liquidity and reported liabilities.
- The scale and future effects of stock-based compensation and potential dilution; 77,230,071 common shares were outstanding as of November 29, 2019.