PagerDuty, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended July 31, 2020 (the second quarter and first half of fiscal 2021). Figures are unaudited; dollar amounts below are in millions unless noted.
Business context
PagerDuty sells subscriptions to a digital operations platform that detects and interprets signals from software-enabled systems and coordinates responses. Its land-and-expand model combines self-service sales with inside and enterprise sales. Revenue is primarily subscription revenue, generally recognized over subscription terms.
Financial performance
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Revenue, 2020 / 2019 | $50.7 / $40.4; up 26% | $100.5 / $77.7; up 29% |
| Gross margin, 2020 / 2019 | 87% / 85% | 86% / 85% |
| Operating loss, 2020 / 2019 | $(13.4) / $(14.4) | $(26.0) / $(27.1) |
| Net loss, 2020 / 2019 | $(14.7) / $(12.6) | $(26.1) / $(24.6) |
| Net loss per share, 2020 / 2019 | $(0.19) / $(0.17) | $(0.33) / $(0.45) |
For the quarter, operating expenses rose 18% to $57.5 million, while revenue grew 26%; operating loss narrowed. Net loss increased, partly reflecting $1.6 million of interest expense on the newly issued convertible notes and lower interest income. Stock-based compensation was $10.0 million for the quarter and $18.3 million for the half year.
For the six months, operating cash flow was positive $1.9 million, compared with an outflow of $5.4 million a year earlier. Free cash flow, as defined by the company, was negative $1.5 million versus negative $7.4 million. Cash and cash equivalents were $376.6 million and investments were $224.9 million at July 31, totaling $601.6 million. Deferred revenue was $101.2 million.
At July 31, total assets were $719.2 million, total liabilities $377.3 million, and stockholders’ equity $341.9 million. The balance sheet included $211.0 million of convertible notes, net of discounts and issuance costs, against $287.5 million principal outstanding.
Material changes and operating metrics
- Revenue growth came from both new and existing customers, including increased user counts and product upsells. Customers totaled 13,346, up from 12,045 a year earlier; customers with more than $100,000 ARR increased to 369 from 274.
- Dollar-based net retention fell to 116% from 132%, indicating slower expansion and/or greater downgrades or churn among existing customers.
- Gross margin improved, which management attributed to efficiency from its cloud-native infrastructure. Operating expenses increased, primarily with employee headcount and continued platform and infrastructure investment.
- In June 2020, the company issued $287.5 million of 1.25% convertible senior notes due 2025 and purchased $35.7 million of capped calls intended to reduce potential conversion dilution, subject to a cap. The notes have an initial conversion price of approximately $40.08 per share; the capped-call cap price is approximately $61.66.
- Adoption of lease accounting standards added operating lease right-of-use assets and liabilities; the company reported $34.1 million of lease liabilities at July 31.
Outlook, risks and contingencies
Management stated that cash, investments, and subscription cash flows should cover working capital and capital expenditure needs for at least the next 12 months. It did not provide specific revenue or earnings guidance in the supplied filing text.
Management said the full effect of COVID-19 remained uncertain. It reported increased churn and a decline in users believed to be associated with the pandemic, with possible further variability in small and medium business demand, reduced customer spending or contract duration, longer payment terms, and customer workforce reductions. Remote work, travel limits, and conversion of customer events and sales activities to virtual formats could also affect productivity and customer acquisition. Pandemic-related uncertainty contributed to increased judgment around receivables and credit-loss estimates; the allowance for doubtful accounts rose to $1.7 million from $0.8 million at January 31.
Key debt risks include the potential need for cash to settle conversions or repurchase notes after a fundamental change, and dilution if conversions are settled in shares. Capped-call protection is subject to a cap and counterparty credit risk. The company reported no material pending legal proceedings and no material off-balance-sheet financing arrangements. Management assessed disclosure controls as 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 the 116% dollar-based net retention rate and pandemic-related churn or user declines stabilize or worsen in subsequent periods.
- Whether customer growth and revenue expansion continue while operating expenses and stock-based compensation grow.
- The cash-flow trajectory, including whether positive operating cash flow is sustained and how deferred revenue and collections develop.
- The terms and potential cash, dilution, and refinancing consequences of the $287.5 million convertible notes, including conversion conditions and capped-call protections.
- Whether COVID-19 materially affects demand, sales cycles, customer payment behavior, and credit-loss estimates.