PagerDuty(PD) - A Deep Dive

PagerDuty is a recent IPO (April 2019) that has been written about on this board, on Ticker Target, and elsewhere in the stratosphere. My initial reaction was that PagerDuty performed similar functions in the space that EverBridge (EVBG) is expanding, so I decided to dive further into the company.

I have no position in PD and hope this will spark a deeper dive or further insights.

Data Sources for this analysis
S1: https://www.sec.gov/Archives/edgar/data/1568100/000162828019…
Website: https://www.pagerduty.com/

PagerDuty (PD): The Company
In a nutshell, PagerDuty is developing an API pulls digital signals from customer systems back to PagerDuty’s platform that turns this digital signals into a common format that it can compare, contrast, and correlate what data points drive what decision.

PagerDuty then has the capability to automatically launch workflows for organizing people to respond to the event.

PagerDuty does not create these workflows and details, rather, it provides an API that is focused on developers as the customer (think TWLO).

For example: Okta, Slack, and Box use PagerDuty to automate incident response when a service is seeing issues. Developers connect the systems to PagerDuty, PagerDuty monitors the information coming across, and when the signals detected require a response, PagerDuty automatically sends the notification to the appropriate personnel (as defined by the Developer).

I suspect one of the differentiation points here is that PagerDuty actively seeks to build integrations into systems to provide real-time response versus to a centralized human who then has to notify the teams that are on-call / standby.

Less Traditional Example: Good Eggs monitors digital signals for warehouse operations and development teams to analyze signals from refrigeration units that allow personnel to be dispatched if an issue is detected, reducing food waste and ensuring food stays fresh into delivery.

Just a Fool’s Take: I immediately started thinking of the ways I could use this API in the energy space to automate the analysis of signals to automate responses based on condition, etc. Many of the issues PagerDuty points out below as legacy issues that it has an advantage over are very real to me. That said, energy is not a space PagerDuty plays in currently

PagerDuty (PD): Why Us?
From S1: Technology has expanded from on-premise to anything software-enabled, all generating digital signals in the form of machine data. These digital signals can present insights into events that impact customer experience and business operations. Interpreting and taking action on these signals is the responsibility of cross-functional teams that span software developers, IT, customer support, security operations and increasingly, business operations departments and industrial operations. Teams must be able to focus on and separate important signals from the “noise” of billions of events and orchestrate the right actions in real time. This is digital operations management.

Our platform collects signals from virtually any software-enabled system or device, correlates and interprets signals to identify events, and engages the right team member to take action in real time. Mining machine data and human response data to embed analytics, machine learning, and automation in the platform.

We created our product to focus on software developers, who are the owners and architects of the digital experience and transformation and are the key players in the DevOps movement.

Focus Areas (from S1):

  • Event Intelligence
  • Incident Response
  • On-Call Management
  • Business visibility
  • Analytics

Advantages (From S1):

  • Built for Real-Time
  • 10 year’ and over 11,000 customers’ worth of data allowing for benchmarking, product development, analytics, and insights into customer needs
  • 300 integrations across technology ecosystem (AWS, Datadog, HashiCorp, NewRelic, Splunk, bi-directional with Atlassian, Salesforce, ServiceNow, and Slack
  • Breadth of functionality
  • Enabling Proactive response
  • Secure, resilient, and scalable
  • Designed for user
  • Technology agnostic

Growth Strategy:


- Land new customers across enterprises of all sizes
- Expand usage within our existing customer base across developers and IT user group
    - Create additional use cases from other developers
    - Upsell to higher priced packages and additional products
- Introduce new products and functionality
    - increase reach of integrations
    - innovate the platform to offer further insights
    - Build out a broader ecosystem of offerings
- International growth in EMEA, Asia Pacific, and Japan

PagerDuty (PD): By the Numbers
All numbers by PagerDuty are reported according to ASC 606 per PD S1


**Revenue**
**Quarter Ending   Revenues(MM)   Growth**
April 30, 2017       17.1
June 30, 2017        18.6
Sept 30, 2017        20.9
Dec 31, 2017         23.0
**Fiscal 2018          79.6**

April 30, 2018       25.0       (+46%)
June 30, 2018        27.7       (+49%)
Sept 30, 2018        31.2       (+49%)
Dec 31, 2018         33.8       (+47%)
**Fiscal 2019          117.8      (+48%)**

Just a Fool’s Take: This all looks very steady, no issues here


**Gross Margin**
**Quarter Ending   Gross Margin**
April 30, 2017       85%
June 30, 2017        84%
Sept 30, 2017        84%
Dec 31, 2017         84%
**Fiscal 2018          84%**

April 30, 2018       84%
June 30, 2018        86%
Sept 30, 2018        85%
Dec 31, 2018         86%
**Fiscal 2019          85%**

Just a Fool’s Take: These are fantastic Gross Margin’s, meaning that PagerDuty is growing Gross Profit at a rate of 41% per year


**Dollar Based Net Retention Rate**
**Quarter Ending   Dollar Based Net Retention Rate**
April 30, 2017       140%
June 30, 2017        138%
Sept 30, 2017        136%
Dec 31, 2017         134%
**Fiscal 2018          137%**

April 30, 2018       136%
June 30, 2018        138%
Sept 30, 2018        139%
Dec 31, 2018         140%
**Fiscal 2019          138%**

Just a Fool’s Take: These are fantastic numbers, nobody is going to argue with them.

From S1 on Dollar Based Net Retention Rate: Net Retention Rate as a key metric because most of its growth is derived by Net Revenue Retention Rate. Further, PagerDuty notes that its sales staff is focused at the enterprise level and deepening integrations, by selling use cases, in order to expand revenue spend.

PagerDuty relies on “self servicing” to initiate positions with small and medium businesses.


**Customer Growth**
**Quarter Ending   Number of Customers**

Dec 31, 2017         9,793

April 30, 2018       10,139
June 30, 2018        10,454
Sept 30, 2018        10,806
Dec 31, 2018         11,212  (+14%)

Just a Fool’s Take: PagerDuty claims to have infiltrated 33% of Fortune 500 companies, so the slow growth isn’t surprising here. It is my first concern regarding TAM that I’m hoping folks may comment on**. More on that later**

While customer growth is important, PagerDuty specifically asks that their traction be measured by Customers with an ARR > $100,000


**Customer's >$100,000 ARR Growth**
**Quarter Ending   Number of Customers    Growth**

April 30, 2017       108                   
June 30, 2017        121
Sept 30, 2017        132
Dec 31, 2017         144

April 30, 2018       160                     +48%
June 30, 2018        181                     +50%
Sept 30, 2018        203                     +54%
Dec 31, 2018         228                     +58%

Just a Fool’s Take: This is what I like to see, accelerating growth of larger customers. This is the proof point that the product is diving deeper into organizations, and the investment in enterprise sales and marketing is finding success. This was a nugget of information I was seeking

Net Profit
Fiscal Year Ending Profit(MM)

Fiscal 2018 -$38
Fiscal 2019 -$41

Just a Fool’s Take: PagerDuty states they are investing for growth. Their growth strategy is to acquire new international customers (international accounted for 19% and 23% of revenue in 2018 and 2019 respectfully) and to invest in R&D to build out their API and sell use cases to enterprise. It is not surprising that they are not profitable at this stage

Other Interesting Numbers to Dive Further Into
380,000 paid users on the system
~$300 average revenue per user
10 largest customers represent 11% of all revenue
No single customer greater than 5% revenue
A customer is defined as an entity with an active subscription or a subscription through a partner. Customers with multiple departments and/or affiliates are rolled up at the parent level

PagerDuty: The Grey Areas
Total Addressable Market and Competition
PagerDuty claims a $25B TAM. This is calculated based on 85 million potential users by the average revenue per user.

Diving deeper into the 85 million potential users, we find

  • 22.3 million global software developers
  • 18 million information and communication technology skilled workers
  • 43.7 million customer support and success workers
  • 1.2 million security operations workers

Just a Fool’s Take: I am not buying 85 million. I would agree that the 22.3 million global software developers and the 1.2 million security operation workers are potential users… but the other two are too vague for me. I’ll give them a TAM that is ~1/3 of what they stated… for a TAM of $7.5B.

I’ll further extrapolate that PagerDuty, given its competition (see below) assumed PagerDuty can win 10% of these users… which feels fair given that not all users are part of incident response, etc.

This give PagerDuty a $750MM potential revenue run rate (in my eyes), compared to the $117.8MM is a 6x return from today.

Competition:
PagerDuty’s greatest competition is a business that relies on excel spreadsheets, manual processes, and a centralized watch office of some sort to handle these types of alerting… working in an environment where “reactive is just fine”

However, as the world becomes more decentralized, and security becomes more scrutinized, this will change. As it does, the following are listed as competition in the S1:

Atlassian through its acquisition of OpsGenie
Splunk through its acquisition of VictorOps
ServiceNow (limited)

I would add Everbridge through its IT Alerting module (I may follow up with an analysis here as Everbridge’s IT Alerting is growing at a clip of 60% in its early days of the expansion strategy into this space)

Conclusion
PagerDuty is fairly priced and growing at an great pace with excellent margins and dollar based net retention rate.

PagerDuty runs an exciting business model - targeting developers - that allows others to drive the R&D for the company, build the use cases, and steer product development similar to TWLO.

My concern is related to the overall TAM of its singular offering and curiosity as to how they will expand. There is also competition. Finally, I’m not sure how I should feel about their self-service approach to new customers. And the fact that they are in 33% of the Fortune 500 companies already.

I look forward to continue to monitor this IPO and see how it executes. As stated in my above analysis, I can think of use case expansion.

I’m also already invested in Everbridge, and I think a win for PagerDuty is a win for Everbridge, as they are both attacking the same issue - getting the right information to the right people at the right time to respond to incidents. PagerDuty has more attractive growth and margins than Everbridge, but less offerings and less penetration into the existing customer base from an enterprise level.

Just a Fool
Long EVBG
No position PD

59 Likes

Great write up JAF.

I took a similar look at PD. I came to many of the same conclusions as you and ended up purchasing a starting spot. The one area I reached a little different conclusion was the competition. As you mentioned, the S1 clearly lists OpsGenie (Atlassian), VictorOps (Splunk) and ServiceNow. You also felt there was some overlap with EVBG. I view a larger part of EVBG’s business as response to real-world events, which is why they talk about government and military customers. PD’s main business struck me as more of a response to IT events, almost like an extension of systems monitoring. I read PD’s business as having more similarity to New Relic or possibly some Elastic’s use cases, at least as far as the technology is concerned. Granted I might be totally wrong, but that was my read. Maybe some of our tech friends can help clarify that for us.

Here are the figures I recorded (many similar to you, just in table format):


Revenues							% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	 	 	 	 	 		2017	 	 	 	 	0
2018	$17.11	$18.59	$20.92	$23.02	$79.63		2018	 	 	 	 	 
2019	$25.02	$27.74	$31.23	$33.83	$117.82		2019	46.3%	49.3%	49.3%	46.9%	48.0%

Op Expenses						Op Ex % Revenues				
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	 	 	 	 	 		2017	 	 	 	 	 
2018	$25.96	$26.17	$25.37	$27.73	$105.23		2018	151.8%	140.8%	121.3%	120.5%	132.1%
2019	$28.13	$36.80	$42.58	$35.39	$142.89		2019	112.4%	132.6%	136.3%	104.6%	121.3%

Deferred Revenues				
	Q1	Q2	Q3	Q4	YR
2017	 	 	 	 	 
2018	 	 	 	$38.17	 
2019	 	 	$51.75	 	 

Customers							% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	 	 	 	 	 		2017	 	 	 	 	0
2018	8,779	9,146	9,444	9,793	 		2018	 	 	 	 	 
2019	10,139	10,454	10,806	11,212	 		2019	15.5%	14.3%	14.4%	14.5%	 

Customers ARR >$100K					% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	 	 	 	 	 		2017	 	 	 	 	0
2018	108	121	132	144	 		2018	 	 	 	 	 
2019	160	181	203	228	 		2019	48.1%	49.6%	53.8%	58.3%	 

GAAP Gross Profit						% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	 	 	 	 	 		2017	 	 	 	 	0
2018	$14.62	$15.69	$17.55	$19.06	$66.91		2018	 	 	 	 	 
2019	$21.14	$23.83	$26.63	$28.97	$100.57		2019	44.6%	51.9%	51.8%	52.0%	 

GAAP Gross Margin						Net Retention Rate				
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	 	 	 	 	 		2017	 	 	 	 	 
2018	85.4%	84.4%	83.9%	82.8%	84.0%		2018	140%	138%	136%	134%	 
2019	84.5%	85.9%	85.3%	85.6%	85.4%		2019	136%	138%	139%	140%	 

non-GAAP Operating Income					% Revenues				
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	 	 	 	 	 		2017	 	 	 	 	 
2018	-$2.93	-$5.08	-$5.77	-$6.38	-$20.16		2018	-17.13%	-27.33%	-27.59%	-27.72%	-25.32%
2019	-$3.84	-$4.22	-$5.78	-$3.20	-$17.03		2019	-15.33%	-15.20%	-18.49%	-9.45%	-14.45%

non-GAAP Free Cash Flow					% Revenues				
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	 	 	 	 	 		2017	 	 	 	 	 
2018	 	 	 	 	-$11.80		2018	0.0%	0.0%	0.0%	0.0%	-14.8%
2019	 	 	 	 	-$5.60		2019	0.0%	0.0%	0.0%	0.0%	-4.8%

As I mentioned, I ended up grabbing some shares on day one. I’ve already written it up for my end of month recap, so below is the sneak preview. Thanks for kicking this one off and I’m looking forward to what others might have to say.

PD – My first-ever IPO purchase. PagerDuty provides a real-time platform for monitoring digital assets, identifying events and notifying the right staff when action might be needed. The stock jumped from $24 to $38 before it became publicly available, but even at the elevated price I found it interesting enough to grab a starter spot. The Cliff Notes:

Revenues: 46%, 49%, 49% and 47% the last 4 Q’s. Based on prior results I believe it’s reasonable to estimate a sequential gain of $3M (~9%) next Q. That would mean $36.8M in revenue and continued 47% growth. If they can beat that number by just $700K, revenue growth would accelerate to 50%. I think it’s worth seeing if they can pull it off, especially with the added exposure they’ll get from being a public company.

Operating Expenses: OpEx as a percentage of revenues dropped from 132% last FY to 121% this FY. Last Q’s 105% is the lowest they’ve posted. That doesn’t appear to be out of line with many other young hyper-growth companies I’ve looked over at the same stage.

Customers: They have 11,212 customers growing steadily in the 14-15% range YoY. More promising in my opinion is their growth in customers with ARR >$100K, which has accelerated from 50% to 54% to 58% the last three Q’s and now stands at 228 total. They have plenty of base from which to grow that number, especially when you consider that their…

Retention Rate: …is accelerating. 136%, 138%, 139% and 140% the last 4 Q’s.

GAAP Gross Margins: Plenty strong and holding steady at ~85%.

Non-GAAP Operating Margin: Operating losses as a percentage of revenue are moving in the right direction. Their recently completed FY was -14% vs -25% last year. The last 4 Q’s have been -15%, -15%, -18% and -9%.

Non-GAAP FCF Margin: Also trending the right way at -5% this FY vs -15% last FY.

23 Likes

Thanks for the deep dive JAF! It looks like we pretty much share the same concerns (see my reply to an earlier thread, post 54302).

My take is that there is a lot of “story” and wishful thinking here, and not a ton of substance.

Growth Strategy:

- Land new customers across enterprises of all sizes
- Expand usage within our existing customer base across developers and IT user group
- Create additional use cases from other developers
- Upsell to higher priced packages and additional products
- Introduce new products and functionality
- increase reach of integrations
- innovate the platform to offer further insights
- Build out a broader ecosystem of offerings
- International growth in EMEA, Asia Pacific, and Japan

Let’s try to break these down individually.

- Land new customers across enterprises of all sizes

  • PagerDuty relies on “self servicing” to initiate positions with small and medium businesses.
  • PagerDuty claims to have infiltrated 33% of Fortune 500 companies
  • 14%YOY customer growth

They are telling us that they are not aggressively trying to land a lot of new customers. Maybe they’re aggressively focused on landing the other 2/3 of Fortune 500 companies, thus betting on few big wins in the short to medium term in order to check the box on this growth driver. Win big or go home right? Tinker (post 54917) alluded to just that regarding Couchbase vs Mongo, and I’d agree that is where the focus should be, but essentially writing off all sales efforts for small & medium sized companies (self servicing) is a big lost opportunity imho, and certainly does not put the “aggressive” into an aggressive growth strategy .

You mentioned potentially 6x return in revenue run rate. How much do we think might come from the F500 companies versus all the smaller new business they are not aggressively pursuing? I’d be (pleasantly) surprised if their new customer growth dramatically accelerates from their 11,000 & 33% of F500 existing base, but maybe a few very large wins can offset what I otherwise expect to disappoint.

- Expand usage within our existing customer base across developers and IT user group
- Create additional use cases from other developers
- Upsell to higher priced packages and additional products

PD currently offers 4 packages https://www.pagerduty.com/pricing/:
Starter $10/month up to 6 users
Platform $29/user/month
Platform Business $39/user/month
Enterprise $99/user/month

At present they have one main product. I’m sure there are plenty of new use cases for it, but how far can they expand into each individual customer and increase that average user count per customer? Like you, I think the TAM is much smaller than they state.

Also, “Upsell additional products” means nothing until they have additional products to sell.

- Introduce new products and functionality
- increase reach of integrations
- innovate the platform to offer further insights
- Build out a broader ecosystem of offerings

Again, all of this is fluff to me until they announce a new offering or several. “Build out a broader ecosystem of offerings” is the key here. Increasing integrations (works with more apps) and ‘offer further insights’ (more reports/dashboards/etc.) are just complementary tools for the main offering and I don’t see either having a significant effect on TAM, maybe stickiness and minimizing churn though.

- International growth in EMEA, Asia Pacific, and Japan
“Their growth strategy is to acquire new international customers (international accounted for 19% and 23% of revenue in 2018 and 2019 respectfully) and to invest in R&D to build out their API and sell use cases to enterprise.”

Again the plan is to acquire new customers, but how aggressive are they actually going to be? Are they targeting international with the same passive “self service” sales model? Maybe I’m dwelling on that too much, but it just seems to me that there is just too much conflicting information here.

Of course they say their strategy is to aggresively grow new customers, expand them, and release new products to upsell and increase their TAM. Every SaaS company almost HAS to make all of those points as part of their pitch. But when they only have 1 real product to speak of, are growing customers at 14% YOY and ADMIT that they are not actively pursuing customers along all ends of the spectrum, I see those as at least yellow flags that give me pause. Based on those, I’ll be on the sidelines. Their expand rates are ridiculously good. I can’t argue with that, but how likely are those to accelerate versus decelerate? I’d bet they’ll stay flat for a while and then start coming down. So I’m watching for #1 significant acceleration of new customer growth and #2 new product offerings (new use cases isn’t enough for me to get excited).

Cheers,
Marc

9 Likes

Stocknovice, thanks for the additional numbers. It’s clear you see those and are bullish about prospects, while I’m skeptical. I will have to think more on what you wrote when I have more time determine how they mess with my more bearish outlook. I use and like the product, so maybe your info will poke some holes in my take after I’ve had a chance for them to convince me I might be wrong.

Cheers,
Marc

2 Likes

Marc -

I can’t disagree at all with your points, especially on the TAM and overall customer growth. I even made a couple of notes from your initial post (#54302) back when I was reviewing PD before it’s IPO. The fact their total customer base is growing only 14-15% is a potential issue I’ve noted for sure. (As a parallel it’s similar to the issue SMAR has when viewing their domain-based customer count versus their paid cohorts.)

In the short-term I’m relying on PD’s increasing expansion rate and momentum with $100K+ customers to lead the way until the bigger picture clarifies itself. Even with a smaller TAM, I believe their current run rate is small enough to support hyper growth for the next few quarters at least. That being said, any hint of decline in their revenue growth or recent margin improvement would have me heading for the exit in a hurry. That might require me to be nimble, but I’ve got a small enough position that I’m willing to take my chances. More importantly I feel I have the time and requisite ruthlessness to walk away the second I don’t like what I see. I probably wouldn’t have made this purchase if I didn’t believe that to be the case.

I appreciate the skepticism and think the risks you identify are real. Finding the right balance is what these conversations are all about.

Joe

5 Likes