PagerDuty, Inc. — Q3 Fiscal 2023 Form 10-Q
Reporting period: Three and nine months ended October 31, 2022. Fiscal year ends January 31. Financial statements are unaudited and prepared under U.S. GAAP. Unless stated otherwise, amounts below are in U.S. dollars.
Business context
PagerDuty provides a digital operations management platform, with revenue primarily from cloud-hosted subscription fees and also from term-license subscriptions. The company describes a land-and-expand model, with growth from new customers and increased adoption and product purchases by existing customers.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Revenue | $94.2 million | $71.8 million | $269.8 million | $202.9 million |
| Gross margin | 81% | 83% | 81% | 83% |
| Operating loss | $32.5 million | $24.8 million | $102.9 million | $74.5 million |
| Net loss attributable to PagerDuty | $32.5 million | $26.3 million | $103.9 million | $78.6 million |
| GAAP net loss per share | $0.36 | $0.31 | $1.18 | $0.94 |
- Revenue grew 31% year over year in Q3 and 33% for the nine-month period. Management attributed growth to new and existing customers, including more users and upselling additional products and services.
- Cost of revenue increased faster than revenue, contributing to a two-percentage-point decline in gross margin. Q3 cost of revenue rose 50%, with higher personnel costs, acquired-intangible amortization and hosting-related costs among the drivers.
- Operating expenses increased 29% in Q3 and 32% for the nine months. Nine-month stock-based compensation was $86.5 million, compared with $47.9 million in the prior-year period.
- Non-GAAP operating income was $3.0 million in Q3 versus a $5.0 million loss a year earlier; for the nine months, the non-GAAP operating loss was $2.7 million versus $20.6 million. These company-defined measures exclude specified expenses, including stock-based compensation and acquired-intangible amortization.
Cash flow, liquidity and debt
- For the nine months, operating cash flow was negative $0.6 million, compared with negative $7.4 million a year earlier. Free cash flow, as defined by the company, was negative $7.1 million versus negative $11.4 million. Q3 operating cash flow was negative $0.4 million.
- Cash and cash equivalents were $262.3 million and investments were $197.1 million at October 31, 2022, totaling $459.4 million. Cash, cash equivalents and restricted cash declined $87.5 million from January 31, 2022.
- Management stated that cash, investments and expected subscription cash receipts should support working capital and capital expenditures for at least the next 12 months.
- Convertible senior notes had $287.5 million principal and a $282.4 million net carrying amount. The notes bear 1.25% interest and mature July 1, 2025. Current liabilities were $237.3 million; total liabilities were $542.1 million.
- Deferred revenue was $179.7 million at period end, including $175.4 million current. Remaining performance obligations on qualifying subscriptions were approximately $174.3 million, with the substantial majority expected to be recognized over the next 24 months.
Material changes and unusual items
- PagerDuty acquired Catalytic, a workflow-automation provider, on March 8, 2022, for approximately $68.8 million in cash. The acquisition added $46.7 million of goodwill and $21.8 million of acquired intangible assets; purchase accounting remained preliminary for certain tax-related items. Catalytic’s results were described as immaterial to the consolidated statements.
- The company established a Japan joint venture, PagerDuty K.K., with a 51% controlling interest and consolidated its results. A redeemable non-controlling interest of $1.6 million was reported at October 31.
- A $0.7 million impairment charge was recorded for capitalized software development that would not be placed in service after technology acquired with Catalytic replaced it.
- Q3 interest income increased as market interest rates rose. The company reported unrealized investment losses in comprehensive income but no impairment charge, stating it expected to recover at least the investments’ cost.
- Management reported no material pending legal proceedings, no material changes to contractual obligations, and no off-balance-sheet financing arrangements.
Outlook, risks and controls
- The filing provides no specific revenue, earnings or cash-flow guidance. Management’s stated liquidity outlook is that available cash, investments and subscription receipts are expected to cover needs for at least 12 months.
- Risks highlighted include economic weakness, inflation, rising interest rates and reduced customer IT spending; COVID-19-related uncertainty; international expansion and compliance challenges; foreign exchange exposure; and cybersecurity risks, including risks associated with geopolitical conflict. Management said Russia-related customers represented an immaterial portion of revenue and did not expect a material business impact from the conflict at the time of filing, while warning that worsening disruption could affect results.
- Management stated disclosure controls and procedures 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 revenue growth and customer expansion persist, particularly as dollar-based net retention was 123%, down from 124% a year earlier; customers above $100,000 ARR increased to 710 from 543.
- Whether gross margin stabilizes after declining to 81% from 83%, and how hosting, personnel and acquired-intangible costs evolve.
- How operating cash flow and free cash flow trend, including the effects of deferred contract costs and subscription billings.
- The effect of stock-based compensation, which was $86.5 million for the nine months, on dilution and the interpretation of non-GAAP results.
- Progress integrating Catalytic, final purchase-accounting adjustments, and performance of the Japan joint venture.
- Liquidity needs and the terms and repayment or conversion implications of the 2025 convertible notes.