PagerDuty Continues Growth And Sees Potential Buyer Behavior Change

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Short Take

PagerDuty (PD) went public in April 2019 and recently reported its FYE Q4 2020 financial results.

The firm provides enterprise IT departments with an automated incident response system for their software system deployments.

Management is seeing early signs of customer demand for its monitoring capabilities as a function of the Covid-19 outbreak and its effects on enterprise and middle-market company operations.

Until we learn whether these customer behavior changes are permanent or transitory, my bias on the stock is Neutral.

Company

San Francisco, California-based PagerDuty was founded in 2009 by three ex-Amazon developers to help businesses enhance operations and mitigate security risk through the use of data analytics, machine learning as well as automation.

Management is headed by Director and CEO Jennifer G. Tejada, who has been with the firm since 2016 and is currently also a board member at Puppet Labs and The Estée Lauder Companies.

PagerDuty has developed an incident response platform that collects, correlates and interprets signals from software-enabled devices or systems to identify events and combines it with human response data to engage the right team members to take action in real time.

Below is a brief overview video of PagerDuty’s offerings:

Source: PagerDuty

PagerDuty has a global customer base consisting of 10,800 organizations and its platform is used by 350,000 paid users, including teams across IT, software developers, security operations, customer support as well as business operations departments and industrial operations.

According to a 2018 market research report by Markets and Markets, the global incident response services market was valued at $13.4 billion in 2018 and is projected to reach $33.8 billion by 2023, growing at a very strong CAGR of 20.3% between 2018 and 2023.

The main factors driving market growth are the weight of financial losses post incident occurrence, the increasing incidence of security breaches as well as the need to adhere to increased regulations.

Major companies that provide incident response services include:

Recent Performance

PD’s topline revenue by quarter has steadily risen since the firm went public in early 2019, as the chart shows here:

(Source: Seeking Alpha)

Gross profit by quarter has steadily trended upward along with revenue growth:

(Source: Seeking Alpha)

Sequential operating losses by quarter have worsened, with the exception of the most recent quarter ended January 31, 2020, which was still slightly worse than the same quarter in 2018:

(Source: Seeking Alpha)

Earnings per share (Diluted) have improved, with the firm’s best result in the most recent reporting quarter:

(Source: Seeking Alpha)

Since its IPO, PD’s stock price has fallen 52.62 percent vs. the U.S. Software market’s rise of 6.9 percent and the overall U.S. market’s drop of 14.6 percent, as the chart below indicates:

(Source: Simply Wall Street)

Commentary

In its last earnings call, management highlighted the challenges the business faces as a result of the Covid-19 outbreak and its effects on their operations, with many employees working from home amid other effects.

CEO Tejada also mentioned that they’ve ‘seen examples of customer self-serving licenses to expand new teams rapidly,’ although it is too early to determine if this is a significant trend or merely transitory.

As to its financial results, the company grew revenue at 41% for the fiscal year. This was less than the previous fiscal year’s revenue growth rate of 48%, although the firm is increasing its average revenue per user.

Its dollar based net retention rate for the most recent quarter was 122%, a drop from its pre-IPO level of 140% but still a strong figure, resulting in negative net churn on a revenue basis.

The firm’s international revenue grew by 52% for the fiscal year, a promising result based largely on its European operation as management continues to invest resources in sales and marketing there.

For fiscal 2021, management seeks to increase its business in large enterprises and middle-market companies (read: no focus on small customers) as well as expanding its product suite beyond DevOps and IT.

Notably, Tejada referred to ‘rapid growth in retention in the high 90’s as industry leaders tightly integrate to and standardize on the PagerDuty platform.’

The company will also focus on ‘becoming the de facto platform for real-time work’ for companies needing to monitor processes at an increasing level and in more complex environments.

PD’s stock performance since its IPO was initially quite positive but turned to dismal since June 2019.

I suppose it isn’t surprising as operating losses continued to worsen throughout the middle and end of 2019.

What is perhaps most remarkable is the lack of significant stock selloff in the past few weeks as the overall market has sold off sharply.

It’s difficult to know why, but my guess is that investors may believe PD may fare better in a more distributed operating environment going forward as a result of the Covid-19 outbreak.

If so, it is hard to quantify that possible upside catalyst at this point. It’s simply too early to tell if there will be ‘new normal’ that will benefit firms such as PD in the quarters ahead.

Until we can get more color from management and see the results show up in the financials, my bias on the stock is Neutral at its current level.

 

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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