PagerDuty, Inc. 2027 Q2 Earnings Call

Christine, please go ahead. Good afternoon, and thank you for joining us to discuss PagerDuty's second quarter fiscal year 2027 results.

With me on today's call are John DiLullo, PagerDuty's Chief Executive Officer, and Eric Prengel, our Chief Financial Officer. Before we begin, let me remind everyone that statements made on this call include forward-looking statements based on the environment as we currently see it, which involve known and unknown risks and uncertainties that may cause our actual results, performance, or achievements to be materially different from those expressed or implied by these forward-looking statements. These forward-looking statements include our growth prospects, future revenue, operating margins, net income, cash balance, and total addressable market, amongst others, and represent our management's belief and assumptions only as of the date such statements are made, and we undertake no obligation to update these.

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, which can be found on our investor relations website. Further information on these and other factors that could cause the company's financial results to differ materially are included in filings we make with the Securities and Exchange Commission, including our most recently filed Form 10-K and our subsequent filings made with the SEC. With that, I will turn the call over to John.

Thank you, Christine. Good afternoon, everyone, and thanks for joining us today. Before I turn to the results for the quarter and provide an update on our progress, I would like to extend my humble thanks to PagerDuty's customers, our investors, our employees, and our board of directors. I recently celebrated my first 100 days at PagerDuty, and I'm grateful every day for the warm welcome I've received and the amazing opportunity with which I've been entrusted. Eric will walk through the full financial details on Q2 and the remainder of FY 2027 later in the call. First, I wanted to open with a few highlights from the quarter. I was especially proud of several things in Q2, including our sales teams delivering incremental new customer wins and existing customer expansions. These exceeded guidance and powered our ARR over the $500 million milestone for the first time.

We also saw brisk new customer acquisition through our online sales efforts, continued growth in our population of enterprise accounts with ARR over $100,000, and expansion of our sales overseas. Retention rates improved sequentially, event traffic on the platform grew nicely both quarter-over-quarter and year-over-year, and adoption of our PagerDuty Operations Cloud usage-based platform continued to gain traction, growing meaningfully quarter-over-quarter. I was also proud of how fiscally disciplined the team remained all quarter, exceeding guidance on operating margin and EPS. We see a clear path to our 30% long-term non-GAAP operating margin target, and we expect to accelerate progress toward it in Q3 and Q4 as we realize the impact of the restructuring we announced earlier today. In my short time here, one thing is clear, this is an extraordinary moment for technology, propelled by the speed, scale, and impact of AI.

We exist to keep mission-critical digital ecosystems resilient and running. Just as the internet transformed commerce and the smartphone transformed communications, AI coding tools are now transforming how enterprise software gets built and run. That shift is a massive opportunity for PagerDuty. Today's digital workloads are significantly more complex than their predecessors. They fail differently, they fail at higher rates, and they are far more difficult to debug. As a result, production software disruptions and application outages have become incredibly costly board-level events. Over the next decade, organizations will move from managing hundreds of critical services to thousands, and eventually tens of thousands of interconnected services, workflows, and autonomous agents, each one creating more decisions, more automation, and more operational risk. At that scale, a new risk layer emerges.

Autonomous agents making and executing decisions across systems at machine speed that multiply operational complexity and drastically magnify the consequences when something goes wrong. The stakes have never been higher, and today's leaders recognize what is at risk. 95% say reducing incidents and speeding recovery is now a source of competitive advantage. 77% plan to increase their investment in operational resilience over the next 12 months. The question is not whether this emerging complexity and these incident landscapes will need to be managed. The question is how. We believe this is exactly where PagerDuty's opportunity is expanding the fastest. Our platform uniquely scales to address the changing dynamics of AI-fueled enterprise software operations.

With more than 15,000 paying customers relying on the PagerDuty platform, including nearly two-thirds of the Fortune 100, we see firsthand the massive volume of AI-generated enterprise software now being deployed and exactly how it's evolving. Increasingly, code is not only being written by AI, it is being tested by AI. In a growing number of cases, it is even being released to production with minimal human review. Enterprises are not simply running more software, they are running more dynamic software that generates actions, triggers workflows, and increasingly leverages non-deterministic agentic processes in its execution. During the quarter, we sharpened PagerDuty's focus on our customers, and specifically their emerging requirements. Namely, we have pivoted the company to focus relentlessly on just three things. First, building products that our customers love. Second, activating go-to-market motions that convert and expand.

And third, optimizing every expense that doesn't directly aid to the first two focus areas. Our mantra is build, sell, optimize, and every roadmap bet, every go-to-market investment, and every dollar of spend now gets tested against these three objectives. Regarding our first focus area, building, this quarter alone, we shipped major upgrades to our autonomous SRE Agent, our incident management lifecycle integration, and our agentic solution for simplifying on-call shift management. The bigger story this quarter is the upcoming general availability of the PagerDuty Operations Cloud, our usage-based AI-powered platform that automates and orchestrates the entire incident management lifecycle. Over the past few quarters, we've shared our progress on Operations Cloud, continuing to invest in innovation that moves PagerDuty from incident detection to incident prevention. As I mentioned earlier, Operations Cloud sales accelerated in Q2, and customers are telling us what makes the offering unique.

Operations Cloud is one integrated platform architected around the two things reliability actually requires, resilience and prevention. To reflect that distinction, we're renaming Operations Cloud to the PD Reliability Platform when it is released to general availability later this quarter. The PD Reliability Platform is the next generation of Operations Cloud, an AI-first integrated platform where blended teams of agents and humans detect, investigate, and remediate incidents together. It doesn't just help enterprises respond faster. It helps them prevent the next disruption before it happens. And dozens of customers are already realizing value from this approach. Our SRE Agent prominently sits at the center of the platform. This is one of the hottest emerging categories in the industry, and PagerDuty's approach is powerfully differentiated.

The PagerDuty SRE Agent builds on an understanding of our customers' applications and infrastructure, learns from the existing knowledge base, reads production telemetry, and builds operational memory from every past incident. Uniquely, it detects disruptions early using proprietary ML-based signal intelligence to mobilize agents and start investigating autonomously. Upon general availability, scheduled for this fall, the PD Reliability Platform will be available to every customer for purchase, including our self-serve community. Our usage-based pricing democratizes access to critical agentic capabilities and now gives every customer the benefit of our most advanced features from day one rather than treating each as a separate upsell. In the long run, we believe this approach will drive higher adoption and foster greater customer loyalty. Periodically, we'll share details on the adoption and performance of the PD Reliability Platform.

On our second focus area, selling, we're launching a vibrant new marketing campaign this quarter, continuing to prioritize hiring for sales capacity and adding more forward-deployed engineers into the field. Our ecosystem keeps growing. Anthropic, Cursor, and LangChain are integrating alongside us. And AI native leaders like CoreWeave and Anduril are building on PagerDuty. At the same time, our team continues to hone their skills in developing use cases and sales plays for the native AI capabilities. Lastly, in our third focus area, optimizing, we're carefully examining every investment across PagerDuty and aligning it with our revenue and operating margin objectives. As part of that effort, this week, we completed a meaningful workforce restructuring. These are never easy decisions, but we believe they leave the company stronger, sharpening our focus, and prioritizing investment on the sales and engineering work that matters most.

Of note, we focused on maintaining our quota-bearing sellers and our product teams addressing the most robust growth opportunities. Affected roles were concentrated in support functions now being automated, and in areas where process simplification and tool consolidation allowed us to reduce our resource footprint. With the help of AI, we are improving the quality of service we deliver to our customers, strengthening retention, and in turn, yielding durable productivity gains. Autonomous support deflection, faster code creation, and frontier model deployments have already driven a dramatic improvement in our internal case-handling capabilities and a significant reduction in our own support backlog. When combined with a broad reevaluation of our software estate and other fixed and variable service costs, these gains free up real capacity. Capacity we are reinvesting directly into our fastest-growing products and the go-to-market opportunities with the greatest yield.