PagerDuty, Inc. — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended October 31, 2020. The company provides a subscription-based digital operations platform. Dollar amounts are in millions except per-share data and customer metrics.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | First nine months FY2021 | First nine months FY2020 |
|---|---|---|---|---|
| Revenue | $53.8 | $42.8 | $154.3 | $120.4 |
| Gross margin | 86% | 84% | 86% | 85% |
| Operating loss | $(21.8) | $(16.7) | $(47.9) | $(43.8) |
| Net loss | $(20.6) | $(15.3) | $(46.8) | $(39.9) |
| Basic and diluted loss per share | $(0.26) | $(0.20) | $(0.59) | $(0.65) |
- Q3 revenue rose 26% year over year, attributed to new and existing customers, including increased users and product upselling. Nine-month revenue rose 28%.
- Q3 operating expenses increased 29% to $67.9 million; research and development rose 28%, sales and marketing 24%, and general and administrative 39%. Headcount growth and acquisition-related costs contributed to increases.
- Q3 non-GAAP operating loss was $6.3 million versus $9.3 million a year earlier; non-GAAP net loss was $6.9 million versus $7.9 million. These company-defined measures exclude, among other items, stock-based compensation.
- For the first nine months, operating cash flow was positive $6.7 million, versus negative $2.0 million. Free cash flow, as defined by the company, was $3.0 million versus negative $5.2 million.
Balance sheet, liquidity, and financing
- At October 31, cash and cash equivalents were $336.7 million and investments were $219.6 million, totaling $556.3 million. Total assets were $777.9 million; current liabilities were $150.8 million.
- PagerDuty issued $287.5 million principal amount of 1.25% convertible senior notes due 2025. Net carrying value at quarter-end was $214.2 million after unamortized discount and issuance costs. Q3 interest expense was $4.1 million, including debt discount and issuance-cost amortization.
- The company spent $35.7 million on capped calls intended to reduce potential dilution from note conversions. Management stated that cash, investments, and subscription cash flows should fund working capital and capital expenditures for at least 12 months.
- Deferred revenue was $107.7 million, including $104.3 million current. The company reported no material off-balance-sheet financing arrangements.
Material changes, outlook, and risks
- Dollar-based net retention fell to 119% from 129% a year earlier. Customers totaled 13,725, up from 12,436; customers with more than $100,000 ARR increased to 401 from 303.
- On October 1, PagerDuty acquired Rundeck for $95.3 million in cash, stock, and other consideration. The acquisition added $71.9 million of goodwill and $27.8 million of identifiable intangible assets; purchase accounting remained preliminary. Integration and realizing expected benefits are risks.
- COVID-19 effects remained uncertain. Management cited increased churn and fewer users, particularly potential variability in small and medium business demand, and warned of possible lower customer spending, shorter contracts, longer sales cycles, and payment terms. Remote work and virtual sales and marketing could also affect operations and demand.
- Q3 included a $3.1 million one-time stock-based compensation charge for modification of certain option awards and $1.6 million of acquisition transaction costs. A $5.1 million tax benefit related to Rundeck-acquired intangible assets contributed to the reported tax benefit.
- The filing provides no specific revenue, profit, or margin guidance. Management expects operating expenses to increase in dollars as the business grows. It reported effective disclosure controls and no material pending legal proceedings.
Important facts for investors to verify
- Whether revenue growth can continue while net retention has declined, and whether churn or lower user counts worsen.
- Whether the Rundeck acquisition integrates successfully and delivers the expected product and commercial benefits; monitor final purchase accounting and goodwill.
- How stock-based compensation, acquisition costs, and convertible-note accounting affect reported losses, dilution, and cash generation.
- Whether operating cash flow and liquidity remain adequate if COVID-19-related customer or collection pressures increase.
- Review the full note terms, including conversion, repurchase, and redemption provisions, and the capped-call limits on potential dilution.