Dec. 6, 2019, 4:57 p.m. EST

10-Q: PAGERDUTY, INC.

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our final prospectus related to our initial public offering, or IPO, dated April 11, 2019, or the Prospectus, filed with the SEC pursuant to Rule 424 (b) under the Securities Act of 1933 (File No. 333-230323). You should review the sections titled "Special Note Regarding Forward-Looking Statements" above in this Quarterly Report on Form 10-Q for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included in Part II, Item 1A below. The last day of our fiscal year is January 31. Our fiscal quarters end on April 30, July 31, October 31 and January 31. Overview Our mission is to connect teams to real-time opportunity and elevate work to the outcomes that matter. We act as the central nervous system for the digital enterprise, providing for real-time operations. We collect digital signals from virtually any software-enabled system or device, correlate and interpret these signals, and combine them with human response data, orchestrating teams to take the right actions in real time. We mine machine data and human response data to embed analytics, machine learning, and automation within our platform. Our platform learns from every incident, allowing teams to be proactive and incorporate best practices into their operations to improve performance. Our products help organizations improve operations, accelerate innovation, increase revenue, mitigate security risk, and deliver great customer experience. Since our founding in 2009, 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 to address the needs of even the largest and most demanding customers. We have over 350 integrations with ecosystem partners that enable our customers to gather and correlate digital signals from virtually any software-enabled system or device. As of October 31, 2019, we had over 12,000 customers - ranging from startups to Fortune 50 companies. Our customers use our products across a broad range of use cases such as DevOps, Security, IT Operations, Business and Internet of Things. Our platform is easy to adopt and scalable for businesses of all sizes. We generate revenue primarily through sales of subscriptions to our software. We offer a range of pricing plans aligned with our customers' needs and their digital operations maturity. We have a land and expand business model that leads to viral adoption of our products and subsequent expansion. Our online self-service model is the primary mechanism for landing new customers, and enabling teams to get started without assistance. We complement our self-service model with a high-velocity inside sales team focused on the midmarket and small and medium business, and a field sales team focused on enterprise customers. These teams drive expansion to additional users, additional teams, and new use cases, as well as upsell premium functionality.

Key Business Metrics







                                                  As of October 31,
                                                   2019         2018
        Customers                                12,436        10,806
        Customers greater than $100,000 in ARR      303           203
        


Dollar-based Net Retention Rate







                                                                    Last 12 Months Ended October 31,
                                                                       2019                  2018
        Dollar-based net retention rate for all customers                129 %                 139 %
        Components of Results of Operations
        Revenue
        


for facilities, information technology, and other overhead costs. We will continue to invest additional resources in our platform infrastructure and our customer support and success organizations to expand the capability of our platform and ensure that our customers are realizing the full benefit of our offerings. The level and timing of investment in these areas could affect our cost of revenue in the future.

Other Income, Net







                                                   Three Months Ended October 31,            Nine Months Ended October 31,
                                                      2019                 2018                2019                 2018
        Revenue                                $        42,750       $        31,229     $      120,425       $       83,993
        Cost of revenue(1)                               6,634                 4,599             18,226               12,396
        Gross profit                                    36,116                26,630            102,199               71,597
        Operating expenses:
        Research and development(1)                     12,619                14,578             35,160               30,101
        Sales and marketing(1)                          27,425                18,738             72,378               47,351
        General and administrative(1)                   12,765                 9,264             38,464               30,052
        Total operating expenses                        52,809                42,580            146,002              107,504
        Loss from operations                           (16,693 )             (15,950 )          (43,803 )            (35,907 )
        Interest income                                  1,427                   318              4,283                  596
        Other income, net                                  245                   372                346                1,087
        Loss before provision for income taxes         (15,021 )             (15,260 )          (39,174 )            (34,224 )
        Provision for income taxes                        (244 )                (115 )             (725 )               (310 )
        Net loss                               $       (15,265 )     $       (15,375 )   $      (39,899 )     $      (34,534 )
        ______________
        








                                              Three Months Ended October 31,     Nine Months Ended October 31,
                                                   2019              2018             2019              2018
        Cost of revenue                      $           303     $       71     $           773     $      202
        Research and development                       1,462          6,567               3,760          7,680
        Sales and marketing                            2,295          1,198               6,084          2,964
        General and administrative                     3,287          2,340               8,775         11,233
        Total                                $         7,347     $   10,176     $        19,392     $   22,079
        


The following table sets forth our condensed consolidated statements of operations data expressed as a percentage of revenue:







                                                  Three Months Ended October 31,           Nine Months Ended October 31,
                                                     2019                 2018               2019                 2018
        Revenue                                      100  %               100  %             100  %               100  %
        Cost of revenue                               16                   15                 15                   15
        Gross margin                                  84  %                85  %              85  %                85  %
        Operating expenses:
        Research and development                      30                   47                 29                   36
        Sales and marketing                           64                   60                 60                   56
        General and administrative                    30                   30                 32                   36
        Total operating expenses                     124  %               136  %             121  %               128  %
        Loss from operations                         (39 )                (51 )              (36 )                (43 )
        Interest income                                3                    1                  4                    1
        Other income, net                              1                    1                  -                    1
        Loss before provision for income taxes       (35 )                (49 )              (33 )                (41 )
        Provision for income taxes                    (1 )                  -                 (1 )                  -
        








        Revenue         42,750                     31,229    $ 11,521        37 %
        


Revenue increased by $11.5 million, or 37%, for the three months ended October 31, 2019 compared to the three months ended October 31, 2018. The increase in revenue for the three months ended October 31, 2019 was primarily attributable to the growth from existing customers and, to a lesser extent, from the revenue attributable to new customers. Growth from existing customers is attributable to both increases in the number of users and upsells of additional functionality. Cost of Revenue and Gross Margin







                              2019                2018         Change     % Change
                                    (dollars in thousands)
        Cost of revenue        6,634                4,599     $ 2,035        44 %
        Gross margin              84 %                 85 %
        


Cost of revenue increased by $2.0 million, or 44%, for the three months ended October 31, 2019 compared to the three months ended October 31, 2018. This increase was primarily due to an increase of $0.9 million in personnel expenses as a result of increased headcount, an increase of $0.6 million in hosting, software, and telecom costs, and an increase of $0.4 million in allocated overhead costs, all of which to support the continued growth of the business

and related infrastructure. The decrease in gross margin is primarily due to increased hosting fees as we invest in our infrastructure.







        Research and Development
                                    Three Months Ended October 31,
                                       2019                 2018           Change      % Change
                                               (dollars in thousands)
        Research and development $       12,619       $       14,578     $ (1,959 )     (13 )%
        Percentage of revenue                30 %                 47 %
        


Research and development expenses decreased by $2.0 million, or 13%, for the three months ended October 31, 2019 compared to the three months ended October 31, 2018 and decreased as a percentage of revenue. Excluding a one-time charge in stock based compensation expense of $3.8 million recorded for the three months ended October 31, 2018 in connection with the common stock transfer (Note







        Sales and Marketing
                                 Three Months Ended October 31,
                                    2019                 2018          Change     % Change
                                           (dollars in thousands)
        Sales and marketing   $       27,425       $       18,738     $ 8,687        46 %
        Percentage of revenue             64 %                 60 %
        


Sales and marketing expenses increased by $8.7 million, or 46%, for the three months ended October 31, 2019 compared to the three months ended October 31, 2018. This increase was primarily due to an increase of $6.0 million in personnel expenses as a result of increased headcount to support our go-to-market strategy and increased variable compensation for our sales personnel (including amortization of deferred contract costs). Sales and marketing expenses also increased in the three months ended October 31, 2019 due to increased allocated overhead costs of $1.4 million to support the continued growth of the business and related infrastructure, a $0.8 million increase due to additional outside professional services, a $0.4 million increase in travel related expenses reflecting the increase in headcount, and a $0.4 million increase in hosting and software costs. These increases were partially offset by a decrease in bad debt expense of $0.4 million.







        General and Administrative
                                      Three Months Ended October 31,
                                          2019                2018          Change     % Change
                                                (dollars in thousands)
        General and administrative $        12,765       $       9,264     $ 3,501        38 %
        Percentage of revenue                   30 %                30 %
        


General and administrative expenses increased by $3.5 million, or 38%, for the three months ended October 31, 2019 compared to the three months ended October 31, 2018. Excluding a one-time charge in stock based compensation expense of $1.4 million recorded for the three months ended October 31, 2018 in connection with the common stock transfer (Note 8), general and administrative expenses would have increased by $4.9 million. The increase quarter over

quarter excluding this one time charge was primarily driven by an increase of $4.3 million in personnel expenses as a result of increased headcount. General and administrative expenses also increased in the three months ended October 31, 2019 due to a $0.3 million increase in the use of outside professional services, and a $0.3 million increase in costs to support the business and related infrastructure which includes allocated overhead costs. Interest Income and Other Income, Net







                                  Three Months Ended October 31,
                                           2019                     2018     Change      % Change
                                            (dollars in thousands)
        Interest income   $            1,427                       $ 318    $ 1,109       349  %
        Other income, net $              245                       $ 372    $  (127 )     (34 )%
        


Interest income increased by $1.1 million for the three months ended October 31, 2019 compared to the three months ended October 31, 2018, primarily due to a higher cash and cash equivalents and investments balance following our IPO. Other income, net decreased by $0.1 million for the three months ended October 31, 2019 compared to the three months ended October 31, 2018. The decrease in other income for the three months ended October 31, 2019 was primarily related to sublease income that we received prior to the sublease expiring in fiscal 2019.







        Revenue $        120,425                 $ 83,993    $ 36,432        43 %
        


Revenue increased by $36.4 million, or 43%, for the nine months ended October 31, 2019 compared to the nine months ended October 31, 2018. The increase in revenue for the nine months ended October 31, 2019 was primarily attributable to the growth from existing customers and, to a lesser extent, from the revenue attributable to new customers. Growth from existing customers is attributable to both increases in the number of users and upsells of additional functionality. Cost of Revenue and Gross Margin







                             2019               2018         Change     % Change
                                   (dollars in thousands)
        Cost of revenue       18,226             12,396     $ 5,830        47 %
        Gross margin              85 %               85 %
        


Cost of revenue increased by $5.8 million, or 47%, for the nine months ended October 31, 2019 compared to the nine months ended October 31, 2018. This increase was primarily due to an increase of $2.3 million in personnel expenses as a result of increased headcount, an increase of $2.0 million in hosting, software, and telecom costs, an increase of $1.0 million in allocated overhead costs, and an increase of $0.2 million in travel expenses, all of which to support the continued growth of the business and related infrastructure.







        Research and Development
                                     Nine Months Ended October 31,
                                       2019                 2018          Change     % Change
                                              (dollars in thousands)
        Research and development $       35,160       $       30,101     $ 5,059        17 %
        Percentage of revenue                29 %                 36 %
        


Research and development expenses increased by $5.1 million, or 17%, for the nine months ended October 31, 2019 compared to the nine months ended October 31, 2018 but decreased as percentage of revenue. Excluding a one-time charge in stock based compensation expense of $3.8 million recorded for the three months ended October 31, 2018 in connection with the common stock transfer (Note 8), research and development expenses would have increased by $8.9 million. The increase year over year excluding this one time charge was primarily driven by an increase of $4.9 million in personnel expenses as a result of increased headcount to support our continued investment in our platform. Research and development expenses also increased in the nine months ended October 31, 2019 due to a $0.7 million increase in outside professional services, and an increase of $0.4 million in travel costs. Costs to support the continued growth of the business and related infrastructure increased $2.6 million in the nine months ended October 31, 2019, which includes allocated overhead costs.







        Sales and Marketing
                                  Nine Months Ended October 31,
                                    2019                 2018          Change      % Change
                                           (dollars in thousands)
        Sales and marketing   $       72,378       $       47,351     $ 25,027        53 %
        Percentage of revenue             60 %                 56 %
        


Sales and marketing expenses increased by $25.0 million, or 53%, for the nine months ended October 31, 2019 compared to the nine months ended October 31, 2018. This increase was primarily due to an increase of $16.2 million in personnel expenses as a result of increased headcount to support our go-to-market strategy and increased variable compensation for our sales . . .

Dec 06, 2019

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