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
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
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
- 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
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.
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
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)
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
No position PD