Recent IPO PagerDuty Comes Out of the Gate Strong

MarketsMotley Fool

PagerDuty (NYSE: PD) is a cutting-edge company with a not-so-cutting edge name. The company's software-as-a-service (SaaS) model enables IT departments to respond in the most effective manner possible to problems on companies' websites, servers, and other connected applications.

This week, investors got their first chance to see how the company can perform as a public entity. The results from the first quarter earnings release were decidedly optimistic.

Continue Reading Below

PagerDuty earnings: The raw numbers

Before we get into the details, let's look at how the company performed on the headline numbers.

Metric Q1 2018 Q1 2019 Growth
Revenue $25 million $37 million 49%
EPS* ($0.16) (0.22) Loss expanded 38%
Free Cash Flow ($4.7 million) ($8.8 million) Loss expanded 87%

It's never great to see losses expanding at such a fast rate, but that's only part of the story. Right now, PagerDuty is still a very small company with just over $130 million in trailing sales. It's spending continuously and quickly to capture enormous opportunities in its niche. That's why operating expenses grew at a 59% clip, even faster than the company's impressive 49% revenue growth.

Investors are mostly willing to endure the money-losing pain for two reasons:

  1. PagerDuty has very impressive gross margins, which clocked in at 85% during the first quarter. This means that once management taps the breaks on spending, sales will drop right to the bottom line.
  2. The company benefits from both high switching costs and network effects. When a company comes to rely on PagerDuty for identifying and fixing glitches, it's loath to switch. And as the company collects more data on such incidents, its predictive AI becomes even more powerful.

That helps to explain why investors are willing to give the company a market cap of over $3 billion, even though profitability is still years away.

What else happened during the quarter?

Management announced a number of important tidbits in its earnings release. These included:

  • The number of customers with annual contracts worth over $100,000 grew 51% to 242.
  • Dollar-based net retention rate clocked in at 137%.
  • The total number of customers grew 468 to finish at 11,600.
  • PagerDuty's partner ecosystem had over 350 total integrations.
  • The company released enhancements to its Event Intelligence and Modern Incident Response tools.

Speaking on the company's conference call Thursday afternoon, CEO Jennifer Tejada also highlighted some interesting use cases. An oil and gas company started using PagerDuty's technology to monitor maintenance needs and respond to operational issues. And another company -- this time a cement company -- started using PagerDuty to help make sure time-sensitive deliveries were made.

These use cases highlight how versatile the company's technology may become outside of its core segment of IT departments.

Looking ahead

Management laid out expectations for the second quarter and fiscal year that highlight continued growth.

Metric Q2 2019 FY 2019
Revenue $39 million $162 million
EPS* ($0.10) ($0.37)

If the company were to hit the mid-point of its revenue estimates, it would represent 41% YoY growth in the second quarter, and 38% YoY growth for the year. While profitability might still be a far-off goal, investors will likely be willing to show patience with this type of growth.

10 stocks we like better than PagerDuty, Inc.When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and PagerDuty, Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of March 1, 2019

Brian Stoffel owns shares of PagerDuty, Inc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.