Looking at PagerDuty (PD)

Investment Analysis Clubs Saul’s Investing Discussions
1

Greetings,
I am interested to see what other investors on this board think about PagerDuty (PD).

I bought shares of PagerDuty in July, and those shares are now down by 47%.
But the company seems to have great potential, so I am not considering selling; I am actually considering buying additional shares. My confidence in the company is based on my impression of the company and the product, not on the financial data. (Part of the reason I am posting here is to learn how to evaluate the financial data.)

Below I have posted:

  • recent financial data
  • a link to an interview of PD CEO buy Jim Cramer
  • a link to the transcript of the most recent earnings call (with extract explaining the business)

PD Third Quarter FY 2020 results:
https://investor.pagerduty.com/news/news-details/2019/PagerD…

Key stats from these results:
Revenue: Total revenue was $42.8 million, up 37% year-over-year.
Gross Margin:
— GAAP gross margin was 84.5%.
— Non-GAAP gross margin was 85.2% compared to Non-GAAP gross margin of 85.5% in the third quarter of fiscal 2019.
Operating Loss:
— GAAP operating loss was $16.7 million, or GAAP operating margin of negative 39.0% , compared to a $16.0 million loss, or GAAP operating margin of negative 51.1% , in the third quarter of fiscal 2019.
— Non-GAAP operating loss was $9.3 million, or non-GAAP operating margin of negative 21.9%, compared to a $5.8 million loss, or non-GAAP operating margin of negative 18.5%, in the third quarter of fiscal 2019.
Net Loss:
— GAAP net loss was $15.3 million, compared to $15.4 million in the third quarter of fiscal 2019.
— GAAP net loss per share was $0.20, compared to $0.71 in the third quarter of fiscal 2019.
— Non-GAAP net loss was $7.9 million, compared to $5.2 million in the third quarter of fiscal 2019.
— Non-GAAP net loss per share was $0.10, compared to $0.24 in the third quarter of fiscal 2019.
Cash Flow:
— Net cash provided by operations was $3.4 million, or 8.0% of revenue, compared to net cash provided by operations of $2.8 million, or 9.0% of revenue, in the third quarter of fiscal 2019.
— Free cash flow was positive $2.3 million, or 5.3% of revenue, compared to positive $0.2 million, or 0.5% of revenue, in the third quarter of fiscal 2019.
Cash and Cash Equivalents and Investments were $346.1 million as of October 31, 2019.

For the fourth quarter of fiscal 2020, PagerDuty currently expects:
• Total revenue of $44.5 million - $45.5 million, representing a growth rate of 32% - 34% year-over-year
• Non-GAAP net loss per share of $0.06 - $0.07, assuming approximately 77 million shares

For the full fiscal year 2020, PagerDuty currently expects:
• Total revenue of $165 million - $166 million, representing a growth rate of 40% - 41% year-over-year
• Non-GAAP net loss per share of $0.38 - $0.39, assuming approximately 65 million shares

Interview of the PD CEO by Mad Money’s Jim Cramer:
https://www.youtube.com/watch?v=5PUUw3Hr1Rc

Key take-aways from video:

  • PD partners/customers include Slack, Zendesk, Okta
  • In the context of talking about these partners/customers, Jim Crammer says, “Everybody speaks so highly of your company.” (I assume that he is talking about the CEO’s of these other companies.)

PAGERDUTY, INC. (PD) Q3 2020 Earnings Call Transcript
https://www.fool.com/earnings/call-transcripts/2019/12/06/pa…

Key excerpt from transcript that explains what PagerDuty does:
There are several great solutions in the market that address different and sometimes related challenges associated with digital transformation, including many of the companies that went public this year. We recognize it can be hard to discern how we complement each other. Some companies, like our customers Datadog, Cisco, AppDynamics, New Relic, show you health of all your IT services in a single pane of glass. Others, like ServiceNow and Jira will give you standard workflows to route your customer service and help desk ticketing.

These are all valuable services, but when there is an unpredictable customer-facing, time-sensitive, mission-critical work, analytics and sequential ticketing are limited by manual detection, a lack of speed, inflexibility and the absence of data-driven intelligent work orchestration. PagerDuty is different because we go beyond finding a signal in the noise to automate and orchestrate the cross-functional work of people all the way through to a resolution in service of the end customer experience. Only PagerDuty can do this because, as the central nervous system of the software ecosystem, we consume the superset of data from all the different technology services our customers use through over 350 integrations to build a holistic understanding of our customers’ digital health. When we recognize symptoms of a service becoming unhealthy, we pattern match the situation against 10 years of data on how IT services perform and how humans respond to them.

So we can bring together a small team of only the right owners and subject matter experts armed with the right detailed technical and business context and help from AI-based automation to action solutions and resolve issues proactively. Our long-standing customer and partner, Sumo Logic, illustrates this point well. They expanded their use of PagerDuty in the third quarter by purchasing our digital operations package. As a SaaS business relied heavily – relied on heavily by developers to understand the performance of their applications, it’s critical their platform is highly reliable at scale.

They use PagerDuty to orchestrate teams for immediate response to incidents when seconds matter, and they increasingly leverage PagerDuty to prevent events from storming to become major customer disrupting issues.

17 Likes
2

Brooklyn108 –

Welcome to the board. That’s a pretty thorough write up of PagerDuty. Thanks for the taking the time to put it together.

I owned PD from April through July of 2019 and you can find my thoughts in my reviews for those months if you’d like. I sold in July partly because “PD’s 49.6% growth last quarter [was] one of the lower rates in my portfolio despite having the smallest revenue base upon which to build." My last comment was in September when I dropped PD from my main watch list ”after disappointing earnings that saw growth drop from 49% to 45% with what I view as a real chance to be below 40% next quarter. At a run rate that’s still under $200M, that level of performance just isn’t good enough to fight for a spot in my portfolio right now.”

That looks like the right call so far as revenue growth fell to 36.9% in their last release. I did jot down some quick notes for my records at that time. Here they are:

  • big revenue drop
  • EPS miss (they basically came at the bottom end of their EPS guide; that’s a no-no in a beat-and-raise environment)
  • guide for bigger FY EPS loss
  • mentioned sales execution issues on call

Being honest, those issues combined with the disappointing headline numbers dropped PD off my radar completely. You stated in your writeup "(Part of the reason I am posting here is to learn how to evaluate the financial data.)” That’s a wise outlook because the financial data is vitally important to understanding the general health of the companies you invest in. I’d suggest you start with Saul’s recently updated Knowledgebase posts from a few days ago if you haven’t read them already (first one here: https://discussion.fool.com/knowledgebase-2019-part-1-34381924.a…). In addition, I’d suggest searching back and reading through the numerous monthly portfolio reviews or company earnings reports recaps you’ll find on this board. It’s very relevant in this case because I believe PD’s numbers are one of the big reasons it’s down the 47% you mention.

Here are the revenue numbers showing declining growth rates:


Revenues							% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR

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%
2020	$37.31	$40.36	$42.75	 	 		2020	49.1%	45.5%	36.9%

In addition, here are a couple other metrics that weren’t progressing as well as I would have liked:


Op Ex as a % of Revenues		
	Q1	Q2	Q3	Q4	YR

2018	151.8%	140.8%	121.3%	120.5%	132.1%
2019	112.4%	132.6%	136.3%	104.6%	121.3%
2020	119.4%	120.5%	123.5%	 	 

Net Retention Rate			
	Q1	Q2	Q3	Q4	YR

2018	140%	138%	136%	134%	 
2019	136%	138%	139%	140%	 
2020	137%	132%	129%

PagerDuty is also running strong losses, but that’s not unusual at all for a young SaaS company. The problem is the slowdowns they are seeing are happening much earlier than most of the other companies discussed here. Their annual revenue run rate last quarter isn’t even $170M yet. That’s MUCH earlier than just about any other company in this space. For instance, CRWD and DDOG are growing more than twice as fast at revenue run rates more than twice as big. That doesn’t necessarily mean you should dump all your money into CRWD or DDOG. It simply means it’s important you are able to put PD’s performance in some sort of perspective. I believe you mentioned in another thread you are somewhere around 50 stocks and looking to consolidate further. Educating yourself on the basics of reviewing the numbers will go a long way in helping you make that happen.

As mentioned above, I’m not really paying much attention to PD since its last earnings report. However, there might be others here who can make a better case for the stock. If so, I hope they’ll chime in to fill in any gaps I didn’t cover.

Good luck.

41 Likes
3

My confidence in the company is based on my impression of the company and the product, not on the financial data. (Part of the reason I am posting here is to learn how to evaluate the financial data.)

It’s a myth that the best company and the best product win the day. It’s the product that people buy that can win the day. That intelligence can be deduced from the Financial Statements. You don’t need a deep understanding of accounting, just sufficient to inform an investing decision. As mentioned above, Saul’s Knowledge Base outlines what those metrics are.

Slowing revenue is a most definitive no-no!

Denny Schlesinger

9 Likes
4

Hi Stocknovice and Denny,
Thanks very much for the feedback and insights. They are very helpful.

Stocknovice,
Thanks especially for the detailed analysis. I just discovered this board in July, so I missed your earlier comments on PagerDuty. But I will go back and look them up. I have also been slow to read through Saul’s Knowledge Base, but I will do this now as well. Just doing this little bit of research on my own has been eye opening. I am tremendously grateful to Saul and everyone else on this board for providing this space to learn how to do this.

I did mention in another post that I have about 50 stocks now. So I am in the process of evaluating my holdings and figuring out what I should really hold onto.

Best,
Bill

2 Likes