PagerDuty, Inc. Price & Performance (PD)

Further information on these and other factors that could cause the company's financial results differ materially are included in the filings we make with the Securities and Exchange Commission including our most recently filed Form 10 ks [indiscernible] With that, I will turn the call over to Jennifer.

Thank you, Tony, and good afternoon, and thanks for joining us today. I'm proud to share that PagerDuty delivered our third consecutive year of non GAAP profitability demonstrating the fundamental strength and durability of our business model. We achieved 9% annual growth in both revenue and ARR ARR, while expanding our non GAAP operating margin by nearly 500 basis points to 18%. With free cash flow margin expanding from 15% to 23%, we see the culmination of the fiscal year as a clear testament to our operational discipline and efficient growth strategy. Looking at Q4 specifically, I'm pleased to report we exceeded our guidance ranges delivering $121,000,000 in revenue and a strong non GAAP operating margin of 18%. We added $11,000,000 in incremental ARR bringing our total annual recurring revenue to $494,000,000 While we're seeing some near term moderation in growth as we evolve our enterprise sales transformation the fundamental drivers of our business remain strong. Our strategic position at the center of digital operations gives me confidence in our ability to build momentum into the second half of the fiscal year. Enterprise traction continues to improve as we execute on our strategic shift towards multiyear, multi product platform partnerships.

The power of our operations cloud is evident in expanding product adoption, with multi product customers now driving 65% of total ARR, up from 62% last year, marking a substantial seven percentage point increase since fiscal twenty twenty three.

These customer relationships continue to validate our strategy with 72 customers now exceeding $1,000,000 in ARR and eight forty nine customers investing more than $100,000 annually. Most notably, ARR from customers spending over $100,000 grew 12% year on year, now representing 71% of total ARR. The combination of our expanding platform capabilities, strong customer relationships and significant headroom for growth within our installed base underscores the opportunity ahead of us. Let me share the three catalysts that will drive further ARR growth and diversify First, we're laser focused on optimizing our field organization's efficiency. This includes executing an enterprise sales transformation and ensuring our new strategic reps reach full productivity. Second, we delivered new platform monetization strategies that further extend our competitive differentiators and better align with the transformative value we deliver to customers, including our new AI capabilities and frictionless packaging structure. Third, we're building momentum in our commercial segment through targeted digital The fundamental opportunity ahead remains robust. We continue to see a $50,000,000,000 total addressable market as organizations accelerate their digital operations modernization to avoid the escalating cost of a disruption. We successfully executed several key initiatives in fiscal twenty twenty five, but I want to be clear, our revenue performance did not meet our initial expectations primarily due to go to market execution that fell short of our historically high standards.

While we are in a meaningful transition to an enterprise focused top down value selling motion, we also adapted to a volatile macro environment. We've seen encouraging proof points with several strategic wins However, we haven't scaled this motion across our entire enterprise organization at the pace we intended. This transformation of our go to market approach in the face of these macro headwinds has created near term pressure on growth. While this transition hasn't been easy and we still have work ahead, the early success we're seeing from our ramped enterprise representatives is a strong signal that we're on the right path. As you know, I spend a significant portion of my time with customers, and what's encouraging and becoming increasingly evident is that operational maturity and central to the enterprise business strategy and to revenue acquisition. We're seeing this play out in compelling new use cases, customers leveraging our platform for customer service operations, using PD Advanced for predictive incident management, and implementing automated remediation at scale. The addressable market is substantial and we're still in the early innings of this opportunity. The numbers tell a compelling story. AIOps, automation and customer service operations maintained over 40% contribution to incremental ARR for two consecutive quarters.

This validates our platform strategy widens our competitive modes and shows how our product creates tangible value for customers. While market demand remains strong, we instituted a number of changes during the second half of FY twenty twenty five to improve our execution. In addition to sales leadership improvements across most of our theaters, I became more directly involved with teams to drive three key improvements. Transforming our go to market practices, redefining our approach to sustainable value capture and sharpening our product teams focus on monetizing our innovation. That said, I want to be clear that while we're executing with urgency and the majority of these changes are underway, we expect the financial impact to materialize gradually over time. Given this reality and our commitment to operational discipline, we've taken a pragmatic approach to our full year outlook. The pace of our platform innovation also represents our sense of urgency and commitment to building on our leadership position. Just weeks into FY twenty six, we announced a game changing expansion of our AI capabilities that puts PagerDuty at the forefront of intelligent operations with new PagerDuty AI agents. These AI agents aren't just another chatbot or basic automation tool.

They're sophisticated partners that work alongside human responders to intelligently identify, triage and resolve high value operational issues. We're launching these three specialized agents, one focused on site reliability engineering, another on operations analysts, analysis and a third on scheduling optimization, all powered by our proprietary technology, our foundational data model and deeply integrated into our automation workflows. What's exciting is how these innovations align with what our enterprise customers are telling us they need, intelligent automation that enhances human capability on a highly secure and resilient platform. Our customers now partner with us to mature beyond response to prevention and revenue optimization. To accelerate adoption, we've democratized access to our AI and automation capabilities by streamlining our incident management plans. This advance embeds these powerful features across all paid tiers, because we believe every organization, regardless of size, should have access to enterprise grade AI centric digital operations capabilities within a single, secure and scalable platform. We also introduced an AI use case library featuring field tested prompts deepening our integration with several key ecosystem partners including Slack, Zoom and Amazon Q. These integration partnerships are key differentiators and exciting because they see new use cases across our customer base.

Our platform innovation strategy, coupled with our maturing solution selling approach, contributed to a sequential improvement in large deal momentum in Q4. This performance demonstrates our position as the digital operations leader trusted by the world's largest and most innovative companies. Let me share a few customer highlights from the quarter that showcase how enterprises are expanding their use of PagerDuty and the measurable value we're delivering. One of North America's largest financial institutions, a long standing customer customer recently made a significant three year enterprise wide commitment to PagerDuty following their successful initial deployment of AIOps across digital, wealth management and capital markets. The results speak for themselves. A 28% reduction in incident duration and 43% decrease in human effort through our AI driven automation capabilities, with a projected ROI of 400%, this expansion across the full PagerDuty Operations Cloud validates PagerDuty's strategic role in digital operations and demonstrates how our platform drives measurable value at scale. I'm excited to highlight a global semiconductor supplier a leader in AI innovation who significantly expanded their partnership with PagerDuty, to standardize incident management across their AI, cloud and data center operations. What's compelling about this expansion is how they're leveraging our platform to automate real time response to improve system resilience and to reduce overall operational overhead.

All critical capabilities for supporting their groundbreaking AI initiatives. The scale of this commitment, more than tripling their 7 figure is impressive. It's exactly the kind of strategic partnership that demonstrates the transformative value we deliver to the world's largest and most innovative companies. In Europe, I'm thrilled to share that a major telecommunications provider scaled to become a $1,000,000 ARR customer in just their first year with PagerDuty. What's noteworthy about this win is that they chose to expand with us over incumbent consolidators, specifically because of our platform's ability to deliver rapid time to value, manage unstructured data, and deliver superior operational outcomes. Within just six months, we successfully integrated with our existing ITSM [indiscernible] across IT and network operations, supporting hundreds of responders without requiring additional headcount. This is a perfect example of why customers choose PagerDuty over legacy vendors, We deliver specialized operational intelligence and automation that generic IT tools cannot match. Our seamless integration with existing tools continues to be a key differentiator in these competitive enterprise opportunities. One final example comes from a global media Their relationship is compelling given how they've leveraged the capabilities of PD Advanced, to transform their digital operations. This customer journey illustrates how illustrates well how our investments in enterprise incident management from enhanced security and authentication to AI and advanced workflow capabilities are meeting the sophisticated needs of complex large scale operations.

This pattern of expansion isn't unique. In highly regulated industries, operational resilience is mission critical.

Organizations are choosing PagerDuty not only for incident management, but as their strategic platform for intelligent digital operations. Turning to our market momentum, we kicked off PagerDuty On Tour twenty twenty five in London last month with upcoming events across Sydney, Tokyo and San Francisco. Markets that represent significant enterprise opportunities. These events are powerful forums where enterprise leaders and practitioners experience first hand the full capabilities of our Operations Cloud platform. Featured at these events are the testimonials of our customers who are leveraging our latest innovation We intentionally shifted this area to Q1 this year, positioning us to build pipeline momentum early and capitalize on the growing The timing is especially important as we continue to evolve our enterprise go to market motion. These events give us the opportunity to engage directly with both executives and users demonstrate our expanded platform value proposition and reinforce our position as the leader in digital operations. Our culture of community responsibility earned notable recognition again this quarter. Five Big Innovation Award. Our Impact segment serving education and nonprofit customers grew 25% to nearly 600 organizations globally. Excited about the most recent additions we've made to strengthen our leadership leadership team. We welcome David Williams as SVP of product to drive our AI and automation initiatives, bringing his exceptional experience and in scaling enterprise SaaS platforms and deep AI expertise [indiscernible] Alison Corley as our Chief Customer Officer with nearly three decades of customer success leadership from companies like Smartsheet, Workday and My Additionally, Sarah Franklin joined our board in December with her impressive track record as the CEO of Lattice and former President and Chief Marketing Officer of Salesforce, where she helped scale the business while building the vibrant Trailblazer community.

These appointments come at a pivotal time as we innovate on PD Advance and accelerate enterprise expansion. I'm confident the combined experience will support us in our pursuit of the significant market opportunity ahead. Lastly, we've initiated a search for Chief Revenue Officer that we are our leadership, people, processes and systems are optimally positioned to sustain and grow our market share. As a part of this transition, Jeremy Kemet, our SVP of Global Field Operations, will be leaving PagerDuty at the end of fiscal fiscal Q1. Over the past eight years, Jeremy has been an invaluable leader and we're grateful for his dedication, his vision and the strong foundation he has helped to build. While we faced some execution challenges, we've taken decisive action to improve sales efficiency, and fully capture the value of expanding our operations cloud platform. The catalysts for growth are in place. We strengthened our leadership team, enhanced our go to market motion, and we're seeing strong early interest in our AI agents from enterprise customers. Looking ahead, I'm confident in our strategy and our ability to execute. We're laser focused on three priorities: building and converting a robust pipeline, accelerating enterprise adoption, and demonstrating how our platform innovations drive measurable customer value.

The fundamentals of our business remain strong with the strategic initiatives we put in place combined with our track record for operational discipline, we're well positioned to capture the significant market opportunity ahead. I'll close by thanking our customers who are achieving remarkable results and our dedicated employees who make these outcomes possible. Our strategic partners and our shareholders for their continued support as we accelerate our enterprise transformation. With that, I'll turn the call to Howard and look forward to your questions.

Thank you, Jane, and good day to everyone joining us on this afternoon's call. Unless otherwise stated, all references to our expenses and operating results on this call are on a non GAAP basis, and are reconciled to our GAAP results in the earnings release that was posted on our Investor Relations website before the call. As Jen articulated, we expect the catalyst for high performance to be consistent improvements in sales productivity. Over the past twelve months, we have successfully reconfigured our sales organization to be an enterprise focused sales team. Hiring to the right profile of quota carriers while remaining within the existing expense envelope, a strategy we will maintain FY '26. With a significant portion of quota carriers joining in the second half, our focus has shifted from hiring, onboarding and enablement to rigorous account management and sales execution. As a greater mix of our field becomes fully ramped in proactively championing the operations cloud, we are laying the foundation for increased momentum in the second half. Today's announcement of a new $150,000,000 share rep program is a clear signal of confidence from our Board and management team in the FY twenty twenty six plan and the durability of our free cash flow.

Please note the $100,000,000 repurchase program announced in Q2 of FY twenty twenty five was completed during the fourth quarter. Moving to results. Revenue for the quarter was $121,000,000 up 9% year over year. International revenue increased 10% annually contributing 28% of total revenue. Annual recurring revenue exiting Q3 grew 9% year over year to $494,000,000 We delivered 106 percent dollar based net retention, fractionally below our expectation for the full fiscal year. I'm encouraged by the improving trend of annualized gross retention over the past four quarters. As well as enterprise dollar based net retention continuing to outpace the commercial segment by approximately 10 percentage points. Customers spending over $100,000 in annual recurring revenue grew to eight forty nine, up 6% from a year ago. This was our strongest quarterly performance of the fiscal year with 24 additions to the cohort. Total paid customers increased by 64 to 15,114 in Q4. Free and paid companies on our platform grew to over 31,000 an increase of approximately 10% compared to Q4 of last year. In terms of metrics that we provide on an annual basis, headcount increased to twelve forty two up 5% year over year.

Customers with annual recurring revenue over $1,000,000 increased to seven two, up 24% compared to Q4 of last year. Annual recurring revenue from customers using two or more paid products was 65%, up from 62% in FY '24. In Annual recurring revenue contribution from incident management was 70% of the total compared to 73% in FY 'twenty four. And the contribution from our $100,000 cohort was 71% up from 70% in FY '24. Q4 gross margin was 86% at the high end of our 84% to 86% target range. Operating income was $22,000,000 or 18% of revenue compared to $11,000,000 or 10% of revenue in the same last year. The outperformance relative to our guidance was driven by delays in headcount starts and timing of marketing and consulting expenses. In terms of cash flow for the quarter, cash from operations was $31,000,000 or 26% of revenue, free cash flow was $29,000,000 or 24% of revenue. Turning to the balance sheet we ended the quarter with $571,000,000 in cash, cash equivalents, and investments. [indiscernible] On a trailing twelve month basis, billings were $485,000,000 an increase of 8% compared to a year ago. With respect to Q1, we anticipate twelve months billings growth to be At the end of Q4, total remaining performance obligations approximately $440,000,000 Of this amount, approximately $3.00 $2,000,000 or 69% is expected to be recognized over the next twelve months.

As a reminder, as of FY 2025, our RPO disclosure includes contracts with an original term of less than twelve months. Applying the current definition to the year ago period, total RPO increased 21% on a like for like basis over Q4 FY 'twenty four, which would have been $364,000,000 To provide some context before turning to guidance, [indiscernible] importantly, we have daily revenue recognition, and Q1 of FY twenty six is three days short than Q4 of FY twenty five. The impact of this is approximately $3,000,000 less revenue in Q1, and $3,000,000 higher revenue in the remainder of the year.

For the fiscal for the first quarter fiscal twenty twenty six, we expect revenue in the range of $118,000,000 to $120,000,000 representing a growth rate of 6% to 8%. And net income per diluted share attributable to PagerDuty Inc. In the range of $18 to 19¢ For the full fiscal year 2026, we're initiating guidance of revenue in the range of $500,000,000 to $5.00 $7,000,000 representing a growth rate of 7% to 8%. And net income per diluted share attributable to PagerDuty Inc. In the range of $90 to 95¢. This implies an operating margin of 19% to 20%.

Before moving to questions, I would like to provide assistance with modeling FY 'twenty six. Firstly, we plan to fully update and share our long term projections later this year. However, in advance of doing that, we have updated our long term operating margin target increasing it from 20% to 30%. Specifically, with respect to FY '26, our EPS guidance incorporates a non GAAP tax rate of 22% for each quarter of FY '26. Represents approximately $0.04 of EPS in Q1 and $0.21 in FY '26. [indiscernible] Interest payments on our 2028 convertible notes are made semiannually in arrears in Q1 and Q3. And the remaining balance of $58,000,000 from our 2025 convertible notes is due in the second quarter. Reflecting on the fiscal year, we encountered certain challenges [indiscernible] However, we strategically implemented targeted initiatives that have enabled us to eliminate inefficiencies and deliver enhanced capabilities across the Operations Cloud. While we expect revenue momentum to build steadily, our focus on driving incremental ARR across both enterprise and commercial segments positions us with a resilient foundation for sustained long term growth this fiscal year.

Thank you, team. Howard and Jen, we are returning to questions and we have panelists that have already raised their hand to the rest of our analysts. Please go ahead and raise your hand to be included in the queue. And we're going to turn first to Andrew Sherman at TD Cowen. Andrew? Please go ahead.

Great. Thanks. Good to see you. Jen, maybe just given all the macro changes in the last six weeks or so, we'd love to hear an update on what you're seeing in the market and any change to your business. I don't think you have much government business, but would love to hear any observations on that Yeah.

I think it's too soon to tell whether the current tariff environment will have a derivative effect on how customers approach spending. So we've [indiscernible] a higher ROI, short payback period and the ability to see true efficiency. And efficiency has been a theme in almost all of the large deals that we've done. Although, I'd also say that our customers have matured their digital the digital aspects of their business such that when I talk to senior leaders and I'm out in the market with our customers a lot, I'm hearing a lot more about revenue optimization. How do I ensure revenue capture It's not just about making sure that your web are available, but making sure that a transaction can be completed, that you actually have a value trade that is closed through that process. And so, I think for us, it just is going to continue to be a focus on execution, making sure we're delivering great account engagement with our largest accounts that we understand the challenges that they're facing and that we have multi threaded relationships with those with those customers. But at this point, we're kind of used to a volatile macro. So it's sort of business as usual.

Okay, great. One more for you. You have a bunch of new sales leaders in the different regions. You're now looking for a CRO. Kind of migrated everyone to the same enterprise, playbook, but maybe just touch on how those reps are ramping to productivity? Do you need to hire more reps? Any other go to market tweaks to start the year? At all?

Sure. It's a great question. Thank you for that. So we made a number of changes over the course of the year across many of our major theaters and those folks have now been in seat and really understand the product and platform. And I've also been leading what I'd call a talent rotation. If you think about it, historically, our enterprise play still leveraged our high velocity velocity land and expand motion, and we started with a single product and would add on other products. But buying behavior changed and that required us to build more of a top down platform value led sale. And so part of the talent rotation that we've been through over the course of the last couple of quarters has been to identify top down platform reps who have experience and a significant track record, also with networks and relationships in our largest customers. And those hires where the profile has been updated, we're seeing them ramp faster [indiscernible] So we have a number of hires already made that will be ramped through the back half of this year. And I think that puts us in a good position from a capacity perspective. It's also fair to say, and I know our sales leadership team would say this is true, I am laser focused on identifying opportunities for increased effectiveness and productivity as well as efficiency.

So that's ramp, that's pipe conversion, pipe quality, making sure that we standardize the way we go to market, but also inspecting our largest accounts to ensure that our account engagement, is meets the high standards that our customers expect because when we have strong account engagement, we grow and we see the platform effect take hold.

Great. Thanks, Jen.

Thank you.

Thanks, team. We are moving next to Koji Ikeda from Bank of America. Koji, please join us.

Yes. Hey, thanks guys. For taking the questions.

So maybe the first one there on the competitive front, we saw on the news out there that one of the the legacy vendors tucked away in a large org organization might be going end of life here. Pretty shortly. And so from a high level how should we be thinking about this as a potential opportunity for PagerDuty?

Well, I think the first thing to think about is [indiscernible] been primarily in the product marketing space and in the sales side of things, we've continued to improve our retention levels. We also I believe, have the strongest and most differentiated platform for large enterprise. But I'm not really surprised by this move because we've seen it before. We've seen it when other other acquisitions have been made and then retired. And I think it just goes to some of the the product and differentiation and advantages that we been able to demonstrate year over year, not the least of which that we're able to scale reliably and securely for large enterprise and deliver the type of resilience that these customers expect. When it really matters. And that's hard to do. It's an expensive exercise, and we've been able to do it while delivering solid gross margins above 85%. I think when we I said this earlier, but when we do a good job from an account engagement perspective, and we're multi threaded across, both practitioners, but also strategic and economic buyers, we win very effectively. And so it's about scaling those standards for go to market, those standards for account engagement, throughout our installed base and really going after the value capture and monetization of the platform innovation.

We've already invested on to capture some of that white space opportunity within the installed base.

Got it. Thank you. And maybe a follow-up for Howard. When I look at the guide and I quickly kind of punch in numbers in our model, I think it does imply accelerating growth in the second half just based on the commentary to with the sales capacity. Is that the right way to think about the guide? And then outside of sales capacity ramping, what else are you seeing maybe in the pipeline that's giving you the confidence to guide like that?

Yes, sure. So thanks Koji. And maybe just to give you how I've thought about guidance for this year, some of the building blocks for us. With us exiting the year with an ARR growth rate of 9%, I factored that into how we would see the evolution of ARR through the year, including incremental ARR being added through the year that would lead to an acceleration in the back half of the year. So that you're quite right in terms of expecting that trajectory. When I look at Q1 in isolation, I would think that the incremental error that we we will deliver will still result in a high single digit level growth rate in ARR for Q1.

So we're thinking about this phasing as the hiring that we did in the back half of the year comes fully online to be able to then support the higher growth through the back half of the year. What gives me confidence in that is one, we've seen improved management of both our pipeline from a velocity and from a quality perspective, and we expect the initiatives that we have around that to continue with the sales leadership that we have brought on board, recently. And then I think the other aspect of it is when I just look at the numbers in terms of success we've had customers above 100 ks where we've had a growth rate in ARR of those customers of 12% year over year And we've seen the that become a larger portion of 71% of our ARR, it proves that the strategic focus that we have on the enterprise is what really is going to to underpin our growth. So those factors together have been factored into how we've thought about guidance for the year.

Got it.

Yes. No, thank you for that.

Yes, great growth on that 1,000,000 plus customer on a year over year basis. So definitely see it there. Thanks guys. Appreciate it.

Thank you. Cody.

Okay. Thank you, Cody. And we're moving next to Sanjit Singh from Morgan Stanley. Sanjay, please join us.

Yeah. Thank you for taking the question. And just talking about some of the metrics on how the business is evolving. You're now getting 30% of your ARR outside of incident management. Was wondering if you can provide any color and detail on what offerings are sort of leading the charge in that 30% bucket, number one. And then Jen, Patriot two d Advanced, what is that doing to your deal sizes from an uplift perspective when they are included in your renewal or expansion opportunities?

Sure. So from a product perspective, AIOps has really been an important attach product for us because unlike some of the point solutions out there or some of some of the observability plays that you'll see, RAA solution is deeply integrated into the entire operational workflow from detection to automated triage, the orchestration of bringing the right people, into a response and increasingly the right agents into a response. And then the automation all the way through to resolution, right? When you and use a point solution or you just look at it from an insights perspective, you're not actually closing the loop on the work that has to get done to both prevent, you know, financial challenges or costs in your business, but also to in order to optimize the revenue that you're trying to generate through your digital assets. So that I think has been a really important and strategic plan for us to continue to grow not only how our customers invest with us, but how they think about the platform. Automation is another, and automation isn't just the product process automation solution that we have, but also automated incident workflows across the board. And then I think the role that, PD Advanced is playing is really helping our responders to compress the amount of time it takes.

To diagnose or triage and then respond to an incident to also, be more efficient in how they communicate more broadly with the [indiscernible] efficiency builder. But as customers get used to using it and we drive more features through PD Advanced as well as agents, I think you'll start to see that have an impact on growth. And you'll recall that we're testing, or actually we're in market with consumption based pricing in this case. And so I think it's a really good complement to the current flexible pricing model that we have.

And that makes a ton of sense. My one quick follow-up was when we looked at some of your customer highlights this quarter, saw the term multiyear agreement, right, kind of across the board. Is that a shift? Is this part of the upmarket shift that you guys are making? Is this something intentional or is this something that the customer is naturally pulling you towards? Is it not a way to drive increased gross retention and stickiness terms of the retention rates.

This has been very intentional. If you remember, the vast majority of our business that was termed was a single year, and that was kind of part of that land and expand high velocity frictionless motion. But as we got into larger enterprise, one, the process in a top down strategic sourcing environment to renew is administratively more heavy. So it's it's we're incented to have customers engage with us over long periods of time. And what we also found was that customers want certainty. And, you know, they it's it's, I think, harder than people might imagine to change a platform like ours out. We're deeply integrated in some cases all the way through to runtime. And they don't want to be surprised by either our product roadmap or pricing, etcetera. And so when we started the process of really encouraging our go to market organization and our renewals organization to work towards multiyear agreements, what we found was our customers were highly engaged and very well aligned in that regard. So it has been a concerted effort that we measure. And we have a significant portion now of our term contracts that are multiyear. And that's something we're going to continue to focus on.

But the the number one, the first principle there too is long term relationships are more profitable and they tend to be more valuable on both sides.

Makes total sense. And I would just add to that, not only does the signal a strategic relationship from our perspective for the customer, it also signals a strategic relationship. So we've seen since we started with this quarter of quarter in terms of the number of contracts that are covered from a multiyear perspective.

That's great color. I appreciate it. Thank you so much.

Thanks, Sanjay.

Thank you. Moving next to Kingsley Crane. Kingsley from CGF. Go ahead, Kingsley.

Thanks.

Hey, Jen. Hey, Howard. Thanks for taking the question.

Hope my video isn't spotty, but I want to touch on PagerDuty Advance. When I think about the naming of AGENTIC SRE and AGENTIC Operations Analyst, I think it begs the question, do you feel like these capabilities are compelling enough to demonstrate replacement of an analyst at the customer level, Just kind of curious if that's how they're being positioned and then how to think about customer ROI and how that flows into pricing?

Yes, they're really being positioned as being complementary to human responders. And I think what's what's important is a lot of incident response is working through complexity and trying to understand dependencies to identify, contributing factors to a failure is very rarely straightforward. And very rarely are major incidents isolated to a single team. And so you have these kind of unique data issues or problem solving issues where a single responder doesn't have visibility to what's going on across teams. But an AgenTek responder leveraging a foundational data model could get to at least get pointed in the right direction faster and start to make recommendations, take down what I would call simpler tasks first, but also support the process of complex problem solving. So we see these things being complementary as opposed to more of a replacement orientation. And at the same time, we see customers looking to reduce the blast radius of major incidents, meaning how long an incident runs, the impact that an incident has across their customer base or their risk profile, whether it's compliance, for instance, or, issues around customer trust. And so anything that you can do to help teams resolve a problem faster, but also learn from it and prevent it from happening again is important.

And that's something that we've done by including Jelly's feature set inside of our incident management solution. So today, we see it as complementary, but certainly there are going to be tasks that a number of responders right now have to undertake that are repeatable, menial, lower value that these agents can pick up. That I don't think will reduce the need for talented engineers to be part of these major incidents when they happen because they do require a lot of these solutions require high judgment. [indiscernible] That's really interesting. And then second one, you talked last quarter about incentivizing some customers initially with some free credits to use GenAI. Had some good response there. Just kind of curious if that initiative Howard, I'll let you take that.

Yes, sure. So, Kingsley, what we we've done is that in terms of some of the most recent packaging announcements that we've made, fact, just last month in February, that in fact was a change in our lineup to be able to provide all paid customers with access to the operations cloud. And that included elements, of course, of PD Advanced. So all customers end up with a like a certain amount of usage that they can get before they would then convert to be to paying incremental use. So we believe that's a strong model for allowing customers to be able to understand the value that they're going to get within their own environment with their context and can see what it will surface for them. And that's leading to really good discussions and in fact expansion on deals as a result of them having that access.

Great to hear. Thank you.

Okay. Thank you. Moving next to JPMorgan, we have a Pendulum Bora joining us. Pendulum, go ahead.

Great.

Yes, thank you for taking the questions. Good to see you guys.

Jennifer, I want to ask you a little bit on the sales execution you had highlighted or talked about in the prepared remarks a couple of times. You maybe elaborate exactly what execution issues have you kind of faced? And are you doing as you step into the new year specifically to fix those, issues. And then Howard, maybe talk about just the bookings cadence that you have seen. And I'm trying to think about the assumptions around the guidance, around NRR. And are you baking in a little bit of a caution given what we have seen over the last two weeks on macro?

Sure. So I'll start. From a sales execution perspective, what we've talked about is, one, having to adapt to a change in the way our customers buy. So historically, we were able to grow in Enerfy enterprise meaningfully with that land and expand high velocity motion, really targeting, the technical user, the technical buyer within the organization. When the market shifted and customers really started to vendors into more of a procurement led sale. We just shift the way we engage. At the same time, we were going through a transition from being a technical product sale to developers to a multiproduct platform sale to economic buyers. And what we learned when the land and expand motion didn't meet the requirements of our customers' buying behavior was that we needed to change the profile of rep to be successful. And we found that when we've done that, when we've hired a rep who has the background of selling multiproduct platforms top down through more of a traditional technology leaders organization, they're more successful in selling the operations cloud in driving a multiyear, 6 or 7 figure agreement. And so we've been going through that talent rotation And we've also found that the more experienced a rep is in that sort of top down selling motion, the more likely they are to ramp faster than previous cohorts.

So that's that's one part of it. I think the second part of it is when when you're not selling high in the organization and you can rely on the DevOps community, almost in a singular way, don't really have visibility to what else is going on inside of inside of a large organization. And by by engaging more closely and building account management that is multi threaded across personas that really helps us understand what's going on in the entire picture for the CIO or CTO. We've been able to better match to their budgeted initiatives. And again, when we do that, our our success rates are higher. And so that's a big part of what we're doing. It is more about transforming to a true platform sales motion. Even simple things like attaching services and making sure that customers are deployed effectively because even though our platform is relatively simple to deploy compared to large legacy, platforms. These organizations that we're deploying into themselves are complex. And they sometimes need more support in doing that. But in the land and expand frictionless motion, you're not selling a lot of services. So it's just it's really more the evolution of how the market moved, how we need to move as a result of that and are having the opportunity to monetize a multiproduct platform to sustainably capture value at the same time that the market requires different vendor support model, I guess, is a good way to put it.

Yeah. And I think just to add on to Jen's comments, because as a CFO, I want to make sure that we're not doing this at a rate that's going to be too expensive. So So we're committed to improving our sales and marketing efficiency even to the extent that as we entered this year, we made some changes to reduce our run rate so that we could in fact continue our evolution into this full enterprise sales motion, but really by optimizing the existing additive expense that we're going through, but rather it's a case that we've been reconfiguring the resources that we have to be able to deliver this alignment with how our customers are buying.

And then I think, pendulum to your question, how to think about bookings bookings through the year. We've taken a view on bookings that anticipates a number of things taking place. One is based on the success that we've already seen with our larger customers, we want to build on that success with larger customers. So we've seen, if you like, the the enterprise health indicators such as the one I mentioned around customers above 100 ks growing at a faster rate, the customers that we have below that. So we will continue our efforts in that space. And our sales team is really focused on enterprise customers and being able to grow that base. And we have a significant percentage of reps who we hired within the back half of last year who will be ramping through the first February and we expect to see them in contributing to our overall growth in in ARR, particularly in the back half of the year. Along with that, in terms of our commercial motion, we've taken another look at how can we take advantage of some of the recovery we've seen in the commercial, the SMB space in particular, And so we have a renewed digital first experience that we're delivering there.

We've had packaging that now makes a lot of the product accessible even to customers who are in that SMB space so that they can get broader use of the platform at a at a reasonable price. So we anticipate being able to use the that motion to in fact also contribute to growth and that will ramp through the year as well.

Just to be clear, for the guidance that you provided, are you assuming a similar macro than what you have seen? Or are you assuming We've taken what I would call like a prudent view Obviously, you can never anticipate everything And even within the current environment, we've tried to sort of model impacts and try and understand how how things could play out. They're not always very clear for software and technology as you would know in terms of how they will play out. So but we have tried to indeed factor in a view that there's some things that we can control and our focus is on what can we control and how can we drive performance through those elements.

Thank you very much.

Thanks, Pendjalim.

Thank you. And next we'll hear from Nick Altman with Scotiabank. Nick, please join us. Welcome.

Hey.

Awesome. Thank thank you. I I wanted to go back to Sanjay's question around 30% of ARR exiting the year being outside of incident management. When we think about the ARR sort of framework or the color you provide and we look at the 2025 ARR mix, I think it implies like a little bit over 60% of the net new ARR in the year was from outside of incident management. And so you think about this year's guide and kind of what you're baking in for net new ARR, how should the mix look in 2026 versus this year? Maybe kind of unpack the assumptions around incident management versus non incident management as it pertains to net new ARR?

And before Howard jumps in on guidance, I just want to make a clear [indiscernible] from a customer perspective is the customer applying PagerDuty's kind of traditional incident management solution to new call it, horizontal use cases. And probably the best example is the the AI centric operations that they now are trying to manage. They're managing RAG models, LLMs, their own agents, their own AI driven apps. And what you're seeing through that is a ton of increased complexity. And so that, for instance, is an example of you might still use our core incident management solution, but it's going to drive net new usage because it's a different use case than a traditional use case. The same thing is true for security operations, right? We have a lot of security teams that leverage our products and services for something that would be considered outside of the core of technology generated incident management. And as we as we adopt more of a blended consumption and seat based or platform usage model, we'll start to get some of the benefit of the value that we create through those new horizontal use cases. And so just want to be clear that just because incident management is core and we're selling new products and services on top of it, we also still have the opportunity to grow incident management through applying that same technology to different problems across the organization.

So sorry, Howard, go ahead.

Yeah, well, you started with exactly what I was going to say around the use cases. So yes, and I think that's the important part, Nick, because as we've thought about this in terms of the sales team's area of focus, certainly being able to drive those new use cases that utilize our full operations management approach, which includes incident is going to be key. If we just look back over the last couple of quarters, we've consistently seen more than 40% of the incremental ARR in the quarter coming from our AI ops automation and customer service ops offerings. So when we've looked into this next year, we're expecting that that trend will continue that it will still continue to be a you know, a strong contributor to the incremental piece. And as we factor in newer offerings like PD Advanced, which is small today, that will start taking will become an additive share to that piece outside of instant management. As we move into monetizing agentic AI, that will, again, will probably add a mix into what would be incident management today.

Okay. No. That's super helpful. And then just a clarification question. Appreciate the color on ARR this year. If we look at the net new ARR seasonality for 2025 versus 2024 is a little bit different. Obviously, there's some of the go to market stuff you mentioned macro still a little bit cautious, but anything else we should be keeping in mind as we look at sort of the net new ARR seasonality for 2026? And maybe call out if there's any anomalies, deal slippage, etcetera. Maybe skew the seasonality in 2025? Thanks.

Yes, sure. So we would expect the seasonality to follow the pattern This last year, it was kind of roughly equal each quarter. My expectation is that it'll probably ramp gradually through the year as we move through the end of the year. Given some of the changes that we've made in terms of the sales team. So that will mean that we'll start to see that increase gradually through the year.

Thank you.

And one last call to our panelists to raise their hands in the Zoom platform to be queued for any remaining questions. We do have another from Jeff Van Rhee at Craig Hallum. Jeff, go ahead.

Great. Thanks for taking the questions. Hey, guys. Good to see you. Sorry about the light. You're catching sunset just perfect. Behind me here, so be it. Just a few for you. Maybe Howard, just on on the pipeline. I think you commented last quarter that the pipeline was up percent year over year. Just any update on the state of the pipeline here?

Yes. So we've entered this year with strong pipeline because I factored in the pipeline for the full year against the full year guidance range that we have provided. The Q1 pipeline that we started the quarter with was higher than what we had the year before. We've got the team to focus a lot more on quality of pipeline and how do we improve pipeline velocity so that you don't see this pattern of of deals moving just from one quarter to the next. So certainly, you know, we're in a good place, but my perspective, of course, is that sales teams need to keep on building pipeline, marketing teams need to keep on contributing to that pipeline. And hence our focus even in bringing some of our events like PD on tour or Peugeot tour to earlier in the year so that we can actually leverage some of that earlier creation of pipeline in the year to benefit this fiscal. Yeah.

Is the, Jenn, is the intensified focus on all the sales change, I guess two questions. More a result of your dissatisfaction with the lead gen side or with the close rates and the way you're managing cycles as they as they go through? And then maybe just kind of along the lines of that question, just kind of a soft observation, but it seemed last year, mid year, you were a little more satisfied with the execution in terms of how you were addressing the move to selling to procurement and the CFO type sale And it seems now there's more or less there's less satisfaction maybe just kind of take those two on, if you would.

I'm never satisfied. There's always an opportunity for us to continue to improve our execution. What I would say, if you look at our cohort over 100 ks and our cohort spending more than $1,000,000 like those are examples of where we're executing very well, where we're delivering higher retention rates, higher growth rates, we're building more strategic relationships, there are multi product platform, multiyear relationships. And what I want to see is a scale that across the entire, install base in an accelerated way and in a very efficient way. And what we found is it works when we have the right profile of rep. It works when we're driving the right level of rigor. And in inspection around account engagement, around pipeline quality and pipeline conversion. And we just really got a standard to assist organization. We can't execute well in pockets. Right? So that so that is that is part of it. I'm really proud of the effort that our go to market organization undertakes because this isn't an easy transition. We operated one way really successfully for a long time. I mean, most people would have said our flywheel and the land and expand motion was a strength and it's still a strength in our lower down market in SMB and and VSP, where we can manage that almost in an automated way from a digital perspective.

But as our customers see us as a more strategic vendor, we have to be consistent in the way we engage, in the way we build networks across deliver and deploy our products and services and in the way we ensure our customers know they've realized value. I think there are going to continue to be opportunities for us to evolve our pricing to better align our pricing with the value we actually demonstrate and deliver for our customers. And that's something that we're working on. But as we've improved, as I mentioned, the rep profile and brought in leaders who are experienced in an enterprise platform kind of top down motion, we're seeing really promising results. So it's about scaling that, and it's about doing it with with a lot of efficiency and an eye on productivity. And that's what we're going to be laser focused on.

Yes. Understood. And congrats on the efficiency. I mean, the profitability improvements in the free cash flow for the year, real nice improvement prior year. Just one last, if I could, Howard, on the I guess on the SMB commercial side, just I don't I want to make sure I heard you right. Is that viewed to be a growth engine not an engine, but it will grow in this fiscal year, is that the assumption?

That is the assumption. If you recall, Jeff, we went through a period where we'd seen negative growth year over year in that segment like for four consecutive quarters. And we've started to see like modest recovery in that space, and we expect that to continue. I mean, it's not going to be the major contributor to our growth this next year. Clearly, enterprise is where we are focused. But we did think there was an opportunity to revisit how we were managing that segment to try and get more out of that segment, particularly since a lot of that segment for us is tech startups and with the AI enthusiasm, there were a lot of AI startups who are starting to become customers of us in that segment. And will grow into the larger customers and hopefully enterprise customers one day too.

Great.

Well, thanks for taking the questions and for tolerating the Thank you, Jeff. Thank you all of our panelists for joining and Howard and Jennifer will wrap up here. And Jen, turning over you for any final remarks.

Thanks, Josh. Well, thank you all once again for joining us today. Our strategic focus on innovation with our strengthening leadership team and enhanced go to market motion positions us well for future growth. Our momentum of our tenured enterprise field reps demonstrates the compelling value of our platform, particularly in our large and strategic enterprise customers. We remain committed to executing our strategy while building on the strong foundation of customer success, employee dedication, and partner collaboration and doing it effectively and efficiently. I sincerely appreciate your continued engagement as we advance our mission to revolutionize digital operations. Thank you, and have a great day.