Pager Duty (PD) Q1 2020 Earnings (Pt. 1)

Quick note: when companies report earnings they report them according to whatever fiscal year they are on. Pager Duty reported Q1 fiscal 2020 earnings on June 6th, 2019.

Our Position

I initially learned about Pager Duty while it was a private company from a retweet by Meagan Eisenberg who is the Chief Marketing Officer (CMO) of a private company called TripActions (keep an eye out for their inevitable IPO). I am a huge fan of her from her time as CMO at MongoDB and because she seems like an all around great leader and person. We recorded a podcast episode together where we talked a bit about her career and what TripActions is all about.

Meagan is an innovative thinker and also an advisor to some tech startups so when I saw that she was a fan of Pager Duty I wanted to learn more.

So I committed the immortal investing sin and bought shares on IPO day in April 2019. What a terrible decision! Everyone on t.v. claims investing in IPOs is a huge mistake. I’m being a bit dramatic, but the point I’m trying to emphasize is that statistics can be important to a point…but I never just blindly follow them. The statistics say most people who buy into companies on their IPO day lose money over the next year or so. While that may be the case, I don’t take that as “never buy an IPO”. I treat IPOs just like any other investment.

If I love the business and think it will become more important and much larger in the future, I consider buying shares.

Shares owned: 637Average purchase price: $42.68Cost basis: $27,200Current share price: $54.45Current position size: $34,700 (7.1% of portfolio // medium sized position)Unrealized gain: $7,500 (28%)

And here’s when I purchased these shares to show how I think about building up a position as I learn more about it. Notice, the price was higher with each buy.April 11, 2019: Bought @ $36.96 May 1, 2019: Bought @ $46.70 May 13, 2019: Bought @ $48.35

Q1 2020 Results

I’ll start with the prepared statement because CEO Jennifer Tejada uses some verbiage that confirms one of my reasons for investing. I believed that by coming public and raising some cash, PD would have an opportunity to accelerate revenue growth, grow their market, and develop new products to build momentum for the future.

First Quarter Fiscal 2020 Financial Highlights

Green Flags: Revenue growth accelerated, both GAAP and Non-GAAP gross margin improved. We want to see these numbers stay consistent or continue to improve.

Yellow Flags: Both GAAP and Non-GAAP operating and net losses were higher as a percentage of revenue than the year prior. Net cash used in operations was also higher as a percentage of revenue and negative free cash flow was also higher as a percentage of revenue.

All of that is acceptable as long as the ranges stay reasonable while the company is growing. However, I’ll keep an eye on these numbers to see if they improve as the company scales.

• Revenue: Total revenue was $37.3 million, up 49% year-over-year.

• Gross Margin: GAAP gross margin was 85.3% up 80 basis points compared to the first quarter of fiscal 2019. Non-GAAP gross margin was 85.7% compared to Non-GAAP gross margin of 84.7% in the first quarter of fiscal 2019.

• Operating Loss: GAAP operating loss was $12.7 million, or 34.1% of revenue, compared to $7.0 million, or 28.0% of revenue, in the first quarter of fiscal 2019. Non-GAAP operating loss was $7.9 million, or 21.2% of revenue, compared to $3.8 million, or 15.3% of revenue, in the first quarter of fiscal 2019.

• Net Loss: GAAP net loss was $12.1 million, compared to $6.6 million in the first quarter of fiscal 2019. GAAP net loss per share was $0.37, compared to $0.32 in the first quarter of fiscal 2019. Non-GAAP net loss was $7.3 million, compared to $3.4 million in the first quarter of fiscal 2019. Non-GAAP net loss per share was $0.22, compared to $0.16 in the first quarter of fiscal 2019.

• Cash Flow: Net cash used in operations was $7.6 million, or 20.3% of revenue, compared to $4.3 million, or 17.2% of revenue, in the first quarter of fiscal 2019. Free cash flow was negative $8.8 million, or 23.5% of revenue, compared to negative $4.7 million, or 18.8% of revenue, in the first quarter of fiscal 2019.

• Cash and Cash Equivalents were $338.0 million as of April 30, 2019.

Recent Highlights

Nothing major here, but it’s what I wanted to see. Growing customers, product innovation, and ecosystem/partner expansion.

• Customer Growth: PagerDuty had over 11,600 customers as of April 30, 2019. New and expansion customers include Zendesk, Yahoo! Japan, SoundCloud, TripActions, Aveanna Healthcare, Vocalink, and REA Group.

• Product Innovation: PagerDuty delivered enhancements to Event Intelligence that use automation and machine learning to more quickly recognize and prevent potential incidents. We added one-touch conferencing to Modern Incident Response to connect teams quickly and introduced status communications and live service updates to keep impacted teams informed in real-time. Additionally, through new bi-directional integrations, we enable NOCs, DevOps, Security Ops, and Customer Support to more effectively respond to incidents together.

• Ecosystem Expansion: PagerDuty’s partner ecosystem surpassed 350 integrations, including more than 25 integrations for Security Operations teams and deeper integrations with ServiceNow and Slack.

• Awards: PagerDuty was selected as a Best Place to Work in the Bay Area by the San Francisco Business Times and won a Gold Stevie award for excellence in customer support.

Conclusion

It was a strong quarter and I am more comfortable owning shares now that I have seen a quarterly report. I think management is exceptional, the company has a great culture, and exciting new products which will help it continue to attract and retain great talent.

I’ll cover the conference call in part 2 sometime this week.