Mission
Our mission is to connect teams to real-time opportunity and elevate work to the outcomes that matter.
What they do
PagerDuty acts as the central nervous system for the digital enterprise.
PagerDuty harnesses digital signals from virtually any software-enabled
system or device, combines it with human response data, and orchestrates
teams to take the right actions in real time. Our products help organizations
improve operations, accelerate innovation, increase revenue, mitigate security
risk, and deliver great customer experience.
Revenue
2018 17.1 18.6 20.9 23
2019 25 27.7 31.2 33.8
Revenue growth (%)
2019 46 49 49 47
Gross margin (%)
2018 85 84 84 83
2019 84 86 85 86
Oper. margin (%)
2018 -17 -27 -28 -28
2019 -15 -15 -18 -9
Net expansion rate
2018 140 138 136 134
2019 136 138 139 140
customers with ARR> $100K
2018 108 121 132 144
2019 160 181 203 228
* cloud based
* international revenue is 23%
* cash flow was -$5.6 M for 2019 (-$11.8 M year before)
* 11,212 customers (up appr. 400 for the quarter)
* 4.6/5.0 glassdoor rating with CEO 100% approval
* Founder was CEO until 2016
* Founder is now CTO and on board
* Company claims TAM of $25 B, which is 85 M seats x ave $/seat
* adopted 606 accounting method already
* IPO price has it at about $1.5 B company, P/S of about 13
* IPO is Thursday (according to Yahoo)
This company is a true land and expand sales model, with only about 10% of sales from new customers.
I think there is a lot to like with this company. I really like the rev. growth, high net retention rate,
improving margins, founder is still there, growing market.
Will the price stay close to the offering price, that is the question.
Jim
24 Likes
Thanks Jimbo for writing that up.
Did they just start up their SaaS biz in 2018? Looking back, they started their biz in 2009.
Good revenue growth, but to be considered hypergrowth, shouldn’t we expect even greater revenue growth at those smaller dollar revenue numbers?
I’m not 100% sure, but I think they have been a Saas business from the beginning. They talk in their S1 about competitive advantages, and list being built on the cloud from the beginning, thus they are better at managing cloud assets.
I consider growing 46-49% each quarter excellent growth, and am very happy with that, even if it’s a smaller base. The key is how long can they grow at that rate? If the market is big enough, and they can grow in the high 40’s for years, its going to be a stock I want to own.
This is my main concern with PagerDuty, how big is the market.
They say $25B (I’m always skeptical of company TAM claims), by multiplying 85 M people x the average revenue/user. They have about 350,000 users in 11,000 customers now. So if 85 M is correct, there is no issue.
Some other thoughts:
Management
The founder running the company until 2016, then shifting to the CTO role with an experienced CEO coming in.
*absolutely love this, tells me the company makes good decisions, most founders are technical experts and not necessarily the best at running the company. Good companies figure this out. (Tesla comes to mind)
The company and management have great reviews on glassdoor.
Backers
I always like when the companies I invest in have backers I respect.(have proven they know what they are doing with results, could be from this board, Motley Fool, etc.)
*PD has Andressen Horowitz as a backer, one of the best venture firms.
Competition
It looks like PagerDuty is the clear leader. Atlassian acquired Opsgenie and Splunk acquired VictorOps to compete, but not an issue for me right now because they are the leader.
Market
I see this market as something every company will need in the future. As companies move to the cloud, and have their digital assets controlled on the cloud, they need a tool to monitor how those assets are doing and quickly flag when there is a problem. So I see the TAM growing.
There is a really good review on Gartner, from a CTO of a SAAS business with customers around the globe. They can’t afford to have a 24/7 call center to monitor everything non stop, so they use Pagerduty. They have automated their processes and use Pagerduty to alert them when there is an issue.
https://www.gartner.com/reviews/market/digital-forensics-inc…
They are in 33% of the fortune 500 now, so room to grow.
PagerDuty has a land and expand marketing strategy.
Clearly the right choice for them with 140 retention rate and growing. Land, customers love your product and expand.
Also, the S&M spend as a percent of sales is dropping (5% improvement last year), while maintaining sales grow, so they have the right S&M model.
Product market fit
Improving gross margins, high growing retention rate, getting leverage as they grow. check
Clearly I think there is a lot to like, but how big is the market? TBD
Jim
7 Likes
Great write up Jim. If you don’t mind me asking, where did you get the Q4 2019 numbers? The S1 I found only had the first 3.
Thanks.
On the SEC website. They released the initial S1, but have released 2 amended versions with more information, including the 4Q numbers, expected offering price, etc.
Jim
Hi Guys,
Here is the answer from the S1:
PagerDuty was founded by three former Amazon.com developers who were often asked to provide on-call support for their applications. Frustrated with the inefficiencies of existing solutions and the resulting negative impact of these solutions on their day-to-day lives, they started PagerDuty with the goal of building effective, easy-to-use software that enhances the lives of on-call responders while improving their productivity and work-life balance. Since our founding in 2009, we have evolved our platform, constantly innovating and improving the value we deliver to customers. We have expanded our capabilities from a single product focused on on-call management to a real-time operations platform, spanning event intelligence, incident response, on-call management, business visibility, and analytics. We have invested in developing the scalability, reliability, and security of our platform, allowing us to address the needs of even the largest and most demanding enterprise customers. We have spent years building deep integrations into over 300 ecosystem partners so that our customers can use PagerDuty to gather and correlate digital signals from virtually any software-enabled system or device.
https://discussion.fool.com/hi-austin-thanks-for-reminding-me-ab…
Best,
Matt
3 Likes
“Clearly I think there is a lot to like, but how big is the market? TBD”
The combination of numbers they’re giving gives me pause.
350k users/11k clients/33% of the Fortune 500
That’s an average user base of 32 users per client, which seems reasonable to me. I use PD (and have for a couple of years now, FWIW I’m a fan of the product itself) and my company (midsize) has around 70 users on PD amongst our various Ops/SA/NOC on-call teams, maybe a bit more. Could I see that number growing for my own company? Yes, maybe upwards to ~100, but not much more at our current level.
Here’s the thing though, sticking with an avg. of 32 users per client, you’d need 2,671,429 clients to get to that 85M user TAM. Up the avg. per client to 100 ppl and you still need 850k clients. That’s a LOT of companies, and it just doesn’t add up to me, especially when most clients would be smaller and thus have significantly fewer ppl who would need to use PD.
PD already has 33% of the Fortune 500 accounted for, so they can’t possibly do better than a triple on the F500 client count. Much of the growth HAS to be from a) smaller/midsize clients, b) increasing the users per client average (at odds with point a as the more companies you land, the smaller, on average, they will become), or c) increasing spend per client AND, perhaps more importantly, per user.
How quickly can they jump from 11,000 clients to 33,000 clients or 44,000 clients? “with only about 10% of sales from new customers.” and “(up appr. 400 for the quarter)” For the second quote, it translates to 13+years to get to 33k at that rate…, forget 850k clients, let alone 2.67 million. That rules out both A and B in my eyes, unless there is a huge acceleration on the horizon for both landing new clients AND increasing the average number of users per client.
So that leaves C, increasing spend per client/user. They seem to be doing a good job of that now, but I’m skeptical that they can rely on this as the key to providing long term, consistently high growth. 79MM in 2018 revenue between 11k clients is a ~$7,100 average spend. The question I’m asking myself is “How much more would smaller and midsize companies, the bulk their client base, be willing to spend for this service annually?” How high might that average go? I’m not savvy on the full breath of their product offering or (obviously) what they might unveil down the road, but based on what I do know, I’m skeptical that the average spend will jump significantly (and quickly). I’m skeptical of that TAM and don’t see how they get there.
If you’ve read this whole post, thanks for bearing with me through my first contribution to the board. Looking forward to others thoughts on this, whatever they may be. If there are holes in my analysis (almost definitely), please poke them. I like PD and am rooting for them, but I don’t have a high conviction based on the above. If any of my math is off, my apologies in advance.
27 Likes
Thanks so much for the post Tech. Look forward to reading and learning more from you
Serendipitously landed on this article today (published a few days ago) regarding the anticipated IPO. More high-level than deep-dive, but learned that there will only be one class of voting shares.
PagerDuty: 5 things to know before the DevOps company’s IPO: https://www.marketwatch.com/story/pagerduty-5-things-to-know…
The following passage caught my attention:
“Sales of subscriptions to our On-Call Management product account for substantially all of our revenue,” the company said in the S-1 filing. “We expect these subscriptions to account for a large portion of our revenue for the foreseeable future.”
I don’t know how “advanced” that single product is, and how different/better it may be compared to the competition, mostly TEAM and SPLK at this time.
So, I’m pretty intrigued, but still need to learn more and get “comfortable” with it before pulling the trigger.
John
The following passage caught my attention:
“Sales of subscriptions to our On-Call Management product account for substantially all of our revenue,” the company said in the S-1 filing. “We expect these subscriptions to account for a large portion of our revenue for the foreseeable future.”
David Skok warned about this sort of thing. According to Skok SaaS must have more than one product or more than one version of a product to be able to up-sell to increase the customers’ LTV to at least three times the cost of acquiring the customer – the “expand” part of land and expand.
Denny Schlesinger
6 Likes
I don’t know how “advanced” that single product is, and how different/better it may be compared to the competition, mostly TEAM and SPLK at this time.
The beauty of PD is it’s relative simplicity. It’s a scheduler and a notification system. Each team sets up their own on-call schedule, whether weekly, biweekly, whatever, along with level 2 & 3 points of contact if level 1 is unreachable. Users put in any/all means of contact they prefer, whether email, phone, text, notification, or a combination of some or all of them. You can even stagger what comes in first, and follow up ones 5, 10, 30 minutes out if you’ve not already acknowledged a prior alert. Very user friendly, easy to create overrides if someone needs to cover you or switch shifts, etc.
I’m not familiar with the recent acquisitions by TEAM and SPLK, but I do use Splunk, Jira, Confluence, etc. in my day-to-day, and we use them in together with PD. Splunk is a data/log aggregator. It’s so much easier to go to splunk to find and analyze logs across your ecosystem, as opposed to manually going into dozens or hundreds of different servers/VMs and searching individual log files for specific software/services depending on the particular issue of the moment. It all gets fed into Splunk, the one-stop shop. From this centralized location, boom, you can setup alerts to notify you when a certain log entry (i.e. error of failure message, high CPU, SQL blocking msg, etc.) pops up. Setup those alerts within PagerDuty and you have a level of issue response automation suitable for rapid handling. Part of the issue handling may involve logging defect tickets in Jira or documenting action steps/resolution/etc. in Confluence (both TEAM).
All that is to say that PD, SPLK, and TEAM are complimentary. I’ll add this as well. I’d think it would be MUCH easier for companies like TEAM or SPLK to replicate what PD does than vice versa. I do not see a big moat for PD. Great software, super user friendly, simple, and easy to use, but if it’s a one-trick pony, as they allude to in the S-1, I’m not sold on it as an investment.
11 Likes
from the article you linked to:
( and a little bit of thinking out loud from me )
The IPO pricing would value the San Francisco-based cloud computing company at up to $1.57 billion.
PagerDuty recorded a loss of $40.7 million, or $1.90 a share, on revenue of $117.8 million in the fiscal year ended Jan. 31, 2019, after a loss of $38.1 million, or $1.91 a share, on revenue of $79.6 million in the same period a year ago.
PagerDuty sees a $25 billion market opportunity of which they have less than 1% now.
as the company outlines in the risks section of its filing, all of its revenue currently comes
just one product.
This gives an EV/S ratio of approximately 13.
Their goal is to get 1% of a $25B TAM, or $250M of sales.
They grew sales at 48% from Jan-18 to Jan-19, so if they maintain that growth rate they would
hit their 1% of TAM goal in 2 years.
The following passage caught my attention:
“Sales of subscriptions to our On-Call Management product account for substantially all of our revenue,” the company said in the S-1 filing. “We expect these subscriptions to account for a large portion of our revenue for the foreseeable future.”
Valid point by Denny, but I’m reading this more as the subscription model being all of their revenue rather than only having one product. The company is obviously doing something to expand their business as their DRR has gone 136%, 138%, 139% and 140% the last 4 Q’s. From the S1:
“We expand within our existing customer base by adding more users (e.g., more developers), creating additional use cases (e.g., developer to IT), and upselling higher priced packages and additional products. Once our platform is deployed, we typically see significant expansion within our customer base. Our dollar-based net retention rate was 140% for the fiscal year ended January 31, 2019.”
and
“The majority of our revenue is generated from our existing customer base. Often our customers expand the deployment of our platform across large teams and more broadly within the enterprise as they realize the benefits of our platform. We believe that our land and expand business model allows us to efficiently increase revenue from our existing customer base. Further, we will continue to invest in enhancing awareness of our brand, creating additional use cases, and developing more products, features, and functionality, which we believe are important factors to achieve widespread adoption of our platform. We have a history of attracting new customers and expanding their use of our platform over time. For example, customers that made their initial purchase during fiscal 2016, 2017 and 2018 grew at a compound annual growth rate, or CAGR, of 39%, 40% and 61%, respectively, through January 31, 2019. For the fiscal year ended January 31, 2019, less than 5% of customers with greater than $100,000 in ARR were new customers, which reflects the typical customer behavior expected of our land and expand business model - starting with a smaller-sized subscription and expanding it over time. Additionally, our dollar-based net retention rate has consistently exceeded 130% over the last three fiscal years.”
I’m still digging through the “additional products” part of that statement. This is an interesting company if the estimated $19-$21 price doesn’t get too crazy by the time it hits the common folk.
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“We expand within our existing customer base by adding more users (e.g., more developers), creating additional use cases (e.g., developer to IT), and upselling higher priced packages and additional products. Once our platform is deployed, we typically see significant expansion within our customer base. Our dollar-based net retention rate was 140% for the fiscal year ended January 31, 2019.”
Thanks, that’s important.
Denny Schlesinger