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Digital operations and incident response vendor PagerDuty has delivered another solid set of earnings, with its Q3 revenues up 33% year-over-year to $72 million. The prospects for PagerDuty look strong, as it pursues a ‘land and expand' strategy that seeks to solve a number of key market challenges. 

PagerDuty essentially operates as an integration platform across a company's operations, which allows for the automation of incident response. This is a challenge that is now getting board level attention, as leaders prioritize system uptime, improved cyber security and proactively tackling customer service issues. 

Whilst PagerDuty traditionally caters to ITOps buyers, it's evident that it is now broadening its reach. Customer service is a key focus for the company, where it announced integration with Saleforce's Service Cloud to orchestrate responses and actions on customer issues, sales opportunities, and other service requests. 

As CEO Jennifer Tejada told analysts on the earnings call this week, PagerDuty is looking to "address the challenges of digital acceleration by operationalizing customer trust". 

She added: 

As customers expand their use of PagerDuty beyond DevOps, the platform tackles workflows across the enterprise and for multiple personas; technical, executive, back office or front office wherever critical unstructured work arises. This enables leaders to keep their teams focused on forward-looking innovation that drives end customer trust and ultimately revenue and growth.

We innovate successfully across use cases and departments. And as we do that PagerDuty grows from the foundation of digital infrastructure to enterprise-wide operations cloud, a company's primary platform for engagement. Our platform is seamless to deploy and purpose built to manage the increasingly complex environments and time-critical challenges underpinning the digital economy.

In Q3, we continued to grow both our foundational presence in DevOps and IT and our functional use cases horizontally and vertically up to executive leadership.

The key highlights from the Q3 results are: 

• Revenue was $71.8 million, an increase of 33.5% year over year.

• GAAP operating loss was $24.8 million; GAAP operating margin of negative 34.6%.

• Total paid customers of 14,486 as of October 31, 2021, compared to 13,725 in the year ago period.

• Customers with annual recurring revenue ("ARR") over $100,000 was 543 as of October 31, 2021, compared to 401 in the year ago period.

For the full fiscal year 2022, PagerDuty currently expects total revenue of $278.5 million - $279.5 million, representing a growth rate of 30% - 31% year over year. 

Opportunities for growth 

Whilst PagerDuty's numbers are relatively modest compared to other vendors, it's clear that there are a number of tailwinds at play that provide it with opportunities for growth. As Tejada noted: 

Increasingly effective execution of our land and expand motion against strong demand from enterprise and mid-market as well as a favorable competitive environment saw third quarter financial results exceed the high-end of our guidance ranges.

With the backdrop of favorable macro conditions including digital acceleration, the talent shortage requiring increased productivity, increasing cyber threats and ongoing cloud migration trends we are confident this momentum will continue and are therefore raising our top and bottom-line guidance for the full year.

Tejada pointed to two Fortune 200 companies that expanded their use of PagerDuty to improve customer experience, where the clients predicted an ROI of between 400% to 650% within three years, with payback periods "as short as three months". Tejada said: 

Time-to-value is a competitive advantage for PagerDuty…through first-class APIs it connects to services across an enterprise's ecosystem immediately providing visibility, workflows, insights and automation that translate to value in days and weeks rather than years.

In addition to this, Tejada explained that PagerDuty's customers typically begin by manually and reactively managing issues as they arrive. The more mature customers predict and prevent issues before they impact customers or the bottom line. She said that most customers are still in the ‘manual and reactive' stage and this means that there is a "long runway for growth within [PagerDuty's] existing customer base. 

Analysts also heard that customers paying more than $500,000 ARR are growing at a similar rate to those in the $100,000+ cohort. 

But it's the customer experience opportunity that's proving to be particularly relevant for PagerDuty's leadership. Tejada said: 

There was a Fortune 50 company where we did a seven-figure deal that was created and closed in the quarter through a reference from another executive…and I think it just points to how strategic customer service has become in a world where you have to win the customer over and over again and demonstrate trust and build their loyalty in a few seconds of a customer experience. If that doesn't work well it's very costly for the company.

This quarter that particular customer expanded from more of a traditional PagerDuty implementation to our customer service offering. And that's seen them really reduce the existence of these code red issues that make their way all the way up to leadership where it's not a very efficient way to handle a problem, if you have to get your executive team involved in it.

But Tejada has her sights on a horizontal approach across the enterprise. She explained: 

Our vision…is to take on more and more of the time-sensitive unstructured mission-critical work that has to happen across an organization. And that is not functionally or use case-specific. Like we absolutely intend to expand our surface area across the enterprise, and we specialize in that unexpected, kind of unpredictable, unstructured work because of our ability to be able to diagnose it and intelligently route it orchestrate it across teams and increasingly automate the response not just the detection or the orchestration.

My take

An impressive set of numbers. But I've mostly been impressed with PagerDuty's strategy to date because of the customer stories that we've heard - from the likes of Gousto, Mary's Meals and Monzo. That's always a good way to catch our attention. I also see a path to much larger revenue numbers for PagerDuty, because of its opportunity beyond ITOps - helping enterprise buyers proactively see problems before they hit the end user, both internally and externally.