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Hello, everyone. Thank you for joining us, and welcome to PagerDuty Second Quarter Fiscal Year 2027 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Christine Cloonan, Investor Relations Manager. Christine, please go ahead.

Good afternoon, and thank you for joining us to discuss PagerDuty's Second Quarter Fiscal Year 2027 results. With me on today's call are John DiLullo, PagerDuty's Chief Executive Officer; and Eric Prengel, our Chief Financial Officer.

Before we begin, let me remind everyone that statements made on this call include forward-looking statements based on the environment as we currently see it, which involve known and unknown risks and uncertainties that may cause our actual results, performance or achievements to be materially different from those expressed or implied by these forward-looking statements.

These forward-looking statements include our growth prospects, future revenue, operating margins, net income, cash balance and total addressable market, among others, and represent our management's belief and assumptions only as of the date such statements are made, and we undertake no obligation to update these.

During today's call, we will discuss non-GAAP financial measures, which are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in our earnings release, which can be found on our Investor Relations website.

Further information on these and other factors that could cause the company's financial results to differ materially are included in filings we make with the Securities and Exchange Commission, including our most recently filed Form 10-K and our subsequent filings made with the SEC.

With that, I will turn the call over to John.

Thank you, Christine. Good afternoon, everyone, and thanks for joining us today. Before I turn to the results for the quarter and provide an update on our progress, I would like to extend my humble thanks to PagerDuty's customers, our investors, our employees and our Board of Directors.

I recently celebrated my first 100 days at PagerDuty, and I'm grateful every day for the warm welcome I've received and the amazing opportunity with which I've been entrusted. Eric will walk through the full financial details on Q2 and the remainder of FY '27 later in the call. But first, I wanted to open with a few highlights from the quarter. I was especially proud of several things in Q2, including our sales teams delivering incremental new customer wins and existing customer expansions.

These exceeded guidance and powered our ARR over the $500 million milestone for the first time. We also saw brisk new customer acquisition through our online sales efforts, continued growth in our population of enterprise accounts with ARRs over $100,000 and expansion of our sales overseas.

Retention rates improved sequentially. Event traffic on the platform grew nicely both quarter-over-quarter and year-over-year and adoption of our Operations Cloud usage-based platform continued to gain traction, growing meaningfully quarter-over-quarter. I was also proud of how fiscally disciplined the team remained all quarter, exceeding guidance on operating margin and EPS.

We see a clear path to our 30% long-term non-GAAP operating margin target, and we expect to accelerate progress toward it in Q3 and Q4 as we realize the impact of the restructuring we announced earlier today. In my short time here, one thing is clear. This is an extraordinary moment for technology, propelled by the speed, scale and impact of AI.

We exist to keep mission-critical digital ecosystems resilient and running. And just as the Internet transformed commerce and the smartphone transformed communications, AI coding tools are now transforming how enterprise software gets built and run. That shift is a massive opportunity for PagerDuty.

Today's digital workloads are significantly more complex than their predecessors. They fail differently. They fail at higher rates, and they are far more difficult to debug. As a result, production software disruptions and application outages have become incredibly costly board-level events. Over the next decade, organizations will move from managing hundreds of critical services to thousands and eventually tens of thousands of interconnected services, workflows and autonomous agents, each one creating more decisions, more automation and more operational risk.

At that scale, a new risk layer emerges, autonomous agents making and executing decisions across systems at machine speed that multiply operational complexity and drastically magnify the consequences when something goes wrong. The stakes have never been higher, and today's leaders recognize what is at risk. 95% say reducing incidents and speeding recovery is now a source of competitive advantage and 77% plan to increase their investment in operational resilience over the next 12 months.

The question is not whether this emerging complexity and these incident landscapes will need to be managed. The question is how. And we believe this is exactly where PagerDuty's opportunity is expanding the fastest. Our platform uniquely scales to address the changing dynamics of AI-fueled enterprise software operations. With more than 15,000 paying customers relying on the PagerDuty platform, including nearly 2/3 of the Fortune 100, we see firsthand the massive volume of AI-generated enterprise software now being deployed and exactly how it's evolving.

Increasingly, code is not only being written by AI, it is being tested by AI. And in a growing number of cases, it is even being released to production with minimal human review. Enterprises are not simply running more software, they are running more dynamic software, software that generates actions, triggers workflows and increasingly leverages nondeterministic agentic processes in its execution.

During the quarter, we sharpened PagerDuty's focus on our customers and specifically their emerging requirements. Namely, we have pivoted the company to focus relentlessly on just three things: first, building products that our customers love; second, activating go-to-market motions that convert and expand; and third, optimizing every expense that doesn't directly aid to the first two focus areas.

Our mantra is build, sell, optimize and every road map bet, every go-to-market investment and every dollar of spend now gets tested against these three objectives. Regarding our first focus area, building, this quarter alone, we shipped major upgrades to our autonomous SRE agent, our incident management life cycle integration and our agentic solution for simplifying on-call shift management.

The bigger story this quarter is the upcoming general availability of the PagerDuty Operations Cloud, our usage-based AI-powered platform that automates and orchestrates the entire incident management life cycle. Over the past few quarters, we've shared our progress on Operations Cloud, continuing to invest in innovation that moves PagerDuty from incident detection to incident prevention.

As I mentioned earlier, Operations Cloud sales accelerated in Q2, and customers are telling us what makes the offering unique. Operations Cloud is one integrated platform architected around the two things reliability actually requires, resilience and prevention. To reflect that distinction, we're renaming Operations Cloud to the PD Reliability Platform when it is released to general availability later this quarter.

The PD Reliability Platform is the next generation of Operations Cloud, an AI-first integrated platform where blended teams of agents and humans detect, investigate and remediate incidents together. It doesn't just help enterprises respond faster. It helps them prevent the next disruption before it happens, and dozens of customers are already realizing value from this approach.

Our SRE agent prominently sits at the center of the platform. This is one of the hottest emerging categories in the industry, and PagerDuty's approach is powerfully differentiated. The PagerDuty SRE agent builds on an understanding of our customers' applications and infrastructure, learns from the existing knowledge base, reads production telemetry and builds operational memory from every past incident.

Uniquely, it detects disruptions early using proprietary ML-based signal intelligence to mobilize agents and start investigating autonomously. Upon general availability scheduled for this fall, the PD Reliability Platform will be available to every customer for purchase, including our self-serve community. Our usage-based pricing democratizes access to critical agentic capabilities and now gives every customer the benefit of our most advanced features from day 1 rather than treating each as a separate upsell.

In the long run, we believe this approach will drive higher adoption and foster greater customer loyalty. Periodically, we'll share details on the adoption and performance of the PD Reliability Platform.

On our second focus area, selling, we're launching a vibrant new marketing campaign this quarter, continuing to prioritize hiring for sales capacity and adding more forward deployed engineers into the field. Our ecosystem keeps growing. Anthropic, Cursor and LangChain are integrating alongside us and AI native leaders like CoreWeave and Anduril are building on PagerDuty. At the same time, our team continues to hone their skills in developing use cases and sales plays for the native AI capabilities.

Lastly, in our third focus area, optimizing, we're carefully examining every investment across PagerDuty and aligning it with our revenue and operating margin objectives. As part of that effort, this week, we completed a meaningful workforce restructuring. These are never easy decisions, but we believe they leave the company stronger, sharpening our focus and prioritizing investment on the sales and engineering work that matters most.

Of note, we focused on maintaining our quota-bearing sellers and our product teams addressing the most robust growth opportunities. Affected roles were concentrated in support functions now being automated and in areas where process simplification and tool consolidation allowed us to reduce our resource footprint.

With the help of AI, we are improving the quality of service we deliver to our customers, strengthening retention and in turn, yielding durable productivity gains. Autonomous support deflection, faster code creation and frontier model deployments have already driven a dramatic improvement in our internal case handling capabilities and a significant reduction in our own support backlog. When combined with a broad reevaluation of our software estate and other fixed and variable service costs, these gains free up real capacity. Capacity we're reinvesting directly into our fastest-growing products and the go-to-market opportunities with the greatest yield.

It's early days, but we do believe that our Q2 results provide a meaningful signal that our strategy is already gaining traction. I want to provide our investors a clear way to pace and measure our progress. First, we will strengthen retention rates by delighting customers with great products and excellent support.

Second, we will scale platform adoption to drive revenue and additional customer value with a reinvigorated PLG motion and a step function improvement in our demand generation efforts.

And third, as one and two take hold, we will drive ARR acceleration. We are focused on driving platform adoption and customer satisfaction as well as improving critical metrics such as net new ARR, DBNR, large customer growth and non-GAAP operating margin.

Earlier, I mentioned that this quarter, we saw brisk new paying customer acquisition, growth in our customer population with ARRs over $100,000 and growth in our sales overseas. Before Eric shares more detailed financials, I wanted to provide a few concrete examples. A leading diversified financial services firm signed a roughly $850,000 3-year usage-based Ops Cloud agreement, automating its incident management strategy with our ML-based signal detection and autonomous SRE capabilities.

In an industry where reliability, compliance and uptime are nonnegotiables, this is another example of a sophisticated buyer choosing PagerDuty as its reliability platform. In Japan, a leading bank undergoing a major digital transformation chose PagerDuty on the strength of our SRE automation capabilities.

In a business where operational resilience is the product itself. This was a multiproduct win spanning incident management, AIOps, automation and analytics, all anchoring a customer-owned efficiency thesis of reducing operating expense by 40%, a direct validation of our AI narrative.

One of the world's largest enterprise software platforms for workflow automation signed a 36-month agreement worth nearly $3 million, one of our largest new logo wins so far this year. Its significance goes beyond size. It reflects growing recognition among the largest platform companies that resilience and incident management are hard to replicate in-house and that PagerDuty is the trusted source when companies decide to buy rather than build.

We also won a fast-growing U.K. AI infrastructure provider that had previously bet on a start-up competitor to reduce costs. This customer was quite outspoken. They shared that PagerDuty earned this business back handily based on our reliability, superior integration and our SRE agent and AI-assisted operations capabilities. Beyond the numbers, we continue to receive strong external validation this quarter.

We won two SaaS awards, Best enterprise-level SaaS product and Best SaaS solution for IT and DevOps. Forrester named us as one of the notable vendors in their AIOps platform landscape for Q2. IDC featured us in their latest market overview of cloud-native software engineering solution, and we also earned spots in the 2026 Inspiring Workplaces list across multiple geographies.

In closing, I want to thank all of our employees for their incredible contributions this quarter. Their work is what helped us to delight our customers and is further proof that reliability isn't just a feature we sell, it's who we are. I also want to thank our customers for trusting us with their most critical operations, our partners for growing alongside us and our shareholders for their continued confidence as we invest in the next phase of PagerDuty's growth. We are proud of this quarter and even more excited about what's ahead.

And with that, now I'll turn it over to you, Eric.

Thank you, John, and good day, everyone. I'm excited to be here at PagerDuty. I've been close to PagerDuty for over 7 years going back to the IPO process where I supported the company from the banking side. It has always been clear to me that this is an outstanding company with a fantastic culture. I watched from the outside as the products evolved and PagerDuty maintained its market leadership position. And over that same period, the opportunity in front of the company has only grown.

Today, as the market shifts towards AI-driven operations, PagerDuty is positioned at the center of that transformation with a massive opportunity in front of us. I'm excited to be working alongside this team to build long-term value for our customers, shareholders and employees.

Now on to the details of the quarter and our outlook. Unless otherwise stated, all references in my remarks to our operating margins, gross margins, net income and net income per diluted share 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.

Revenue was $124.4 million, up 1% year-over-year, exceeding the top end of our guidance, with international revenue contributing about 30% of the total. Gross margin was 85%, which is within our target range, and non-GAAP operating margin was $29.5 million, a 24% operating margin, above the high end of our guidance.

On a GAAP basis, net income was $4.7 million, our fifth consecutive quarter of GAAP profitability. Our confidence stems from the positive signs in the business with annual recurring revenue crossing the $500 million milestone, ending at $501 million, an increase of $6 million in the quarter. Dollar-based net retention was 98%, up sequentially and annualized gross retention also improved sequentially. As we implement the new build, sell optimize approach that John highlighted, we were pleased to see positive results across a number of key metrics in the business in Q2.

Customers spending over $100,000 annually grew to 884, an increase of 24 since Q1 '27. In terms of cash flow for the quarter, cash from operations was $37 million and free cash flow was $33 million, representing a 26% free cash flow margin.

Turning to the balance sheet. We ended the quarter with $470 million in cash, cash equivalents and investments. On a trailing 12-month basis, billings was $501 million, an increase of 1% compared to a year ago. Total RPO was $426 million, $1 million higher than year-over-year. Of this amount, approximately $309 million is expected to be recognized over the next 12 months, which represents a 5% year-over-year increase versus Q2 FY '26.

During the quarter, we repurchased nearly 800,000 shares for $7.6 million. As of the end of Q2, we still have $92.4 million remaining of the $100 million share repurchase authorization. We remain committed to managing dilution. Accordingly, we are focused on both what we repurchase and what we issue.

As John mentioned earlier, we underwent a workforce restructuring this week, which will allow us to prioritize key sales and engineering investments. I want to provide you with further financial details on the workforce restructuring John mentioned. The reduction impacted approximately 15% of our workforce concentrated in noncustomer-facing roles while focusing on maintaining our quota capacity and product development expertise.

We expect to recognize approximately $5.5 million to $7.5 million in restructuring charges, primarily severance and related costs, with the majority recognized in Q3 and substantially complete by the end of Q4. On a run rate basis, we expect significant savings, which gives us room to reinvest in the areas of the business growing fastest while also supporting the margin guidance I'll walk through in a moment.

And now turning to guidance. For the third fiscal quarter of 2027, we expect revenue in the range of $123 million to $125 million, with the midpoint approximately flat year-over-year and net income per diluted share attributable to PagerDuty, Inc. in the range of $0.34 to $0.36. This implies an operating margin of 26.5% to 27.5%.

For the full fiscal year 2027, we expect revenue in the range of $491.5 million to $496.5 million, with the midpoint approximately flat year-over-year. We have raised the low end of our FY '27 revenue guidance to reflect the confidence we have in the business and the strength we have seen so far in the first half performance. We expect net income per diluted share attributable to PagerDuty, Inc. in the range of $1.33 to $1.37 for FY '27, an increase primarily based on cost reductions associated with the restructuring we undertook this week.

This implies operating margin guidance of 25% to 26% for FY '27, an increase to our prior operating margin guidance of 24% to 25% and accelerating our trajectory to our target operating margin of 30%.

Additionally, we wanted to provide an update on our outlook for operating cash flow. Going into FY '27, we provided some points to assist with modeling, suggesting that our free cash flow margin would be 2 to 4 points lower than it was in FY '26. With the restructuring and cost savings we undertook this week, we now expect our free cash flow margin to be in line with our FY '26 free cash flow margin.

Let me leave you with what matters most. Retention is stabilizing, new business demand is strong, and we're optimizing for profitable growth while returning cash to investors through buybacks. AI increases the criticality of PagerDuty, making us more relevant, not less. We're early in this journey, but we're increasingly confident that the advent of the AI era will prove to be a powerful tailwind for PagerDuty. And with that, we'll open the call for Q&A.

[Operator Instructions] Your first question comes from the line of Kingsley Crane from Canaccord.

Great. Great to see the results. John, you've talked about in the prepared remarks, blended teams of agents and humans in the PD Reliability Platform. I just want to get your take if having humans in the loop is a core tenet you want to keep over time? Or how much is that dictated by customer readiness? And then in terms of PagerDuty being a control plane for AI, like to what extent do you think there's an opportunity to govern or orchestrate third-party agent execution?

Thanks for the question. As far as the first part of having humans in the loop, especially in the handling of cases, that feels like a very natural motion for us right now that seems to be received and embraced a little bit better by customers as they're leaning into autonomous agents and autonomous workload protection. And so that feels like the right motion for us now as we move to more and more autonomy ultimately.

There's another element there also, there's RLHF, right, reinforcement learning that we're able to derive as we go side-by-side with our customers and learn from the actions that they're actually taking and that potentially gives us the opportunity to provide higher fidelity down the road. As for ultimately including fully autonomous solutions, we certainly are seeing some of that now on some simple cases or on cases that are often repeated.

That is some of the customers that are leveraging our SRE agent in autonomous mode are getting some of the best ROIs, I'd say, and seeing some of the most rapid acceleration. I think over time, the amount of autonomous will go up. But for right now, it doesn't really change our plan. This is -- the way we've introduced it feels very natural both to us and to our customers.

Great. That's helpful. And then just to follow up for Eric, really great to be working with you again, first of all. But just -- so on the Ops Cloud or Reliability Cloud Platform conversions, we have a couple of quarters now of data. Just curious how you're thinking about ARR -- change in ARR at the point of conversion, like how wide that dispersion could be when a customer converts?

Thanks, Kingsley. Really appreciate the question. And so as you think about Ops Cloud, we think about it as a big opportunity to not just have our customers use our product and use the products they're using, but for them to actually use more of our products and to try new products that they weren't able to use before. So they're getting a lot more value out of our capabilities than they were before.

And one thing I'd call out, we didn't give an explicit metric around Ops Cloud or usage this quarter. It's not something that we're going to report regularly, but we did see strength in that business. We saw it to continue to do well and grow nicely. It actually grew double digits on a total basis. So it was very positive and something that we're happy to see.

Kingsley, I would add to that also as part of the PD Reliability Platform, what Eric said is 100% right. We're seeing an incredible amount of energy in that -- in the Ops Cloud space and now on the PD Reliability Platform. But it's also democratizing AI.

And so it's giving all of our customers, including the customers that we work with in PagerDuty online, access to these AI capabilities. And we do think it's going to be a catalyst for even more adoption down the road. But it was a great question, Kingsley. Really appreciate it.

Your next question comes from the line of Andrew Sherman from TD Cowen.

Eric, congrats on the new job and good to work with you again. John, it would be great to get an update on customer feedback on the usage-based model and how aggressively you think you could push this in the second half and really how much usage grows for the customers that are already on it? And then bigger picture, the pipeline of enterprise deals in the second half, how is that looking?

Thanks, Andrew. Thanks for joining the call. We -- first of all, since I've been here, I've been spending a lot of time with customers, as you would imagine, and met dozens of them and through them -- talking through with them their adoption plans. Certainly, the hurdle or the barrier for people to experience our product and to experience our AI and our Agentic solutions is much lower in the AI, the AI cloud model because they get the opportunity to experience it in a bite-size consumed way. It's also a very natural way to align value with usage. And so very powerful from that perspective.

I would also say that the customers that we are seeing, in particular, the enterprises that are adopting it, we do see a nice trend, a nice usage trend as their time with the product continues. And I would also just say that -- as far as your question about the pipeline and the momentum that's building in the product, it is building.

I mean we saw meaningful growth on a quarter-on-quarter basis. But also, you may have noticed that we had a significant increase in our number of 100,000 customers on a quarter-on-quarter basis. And a lot of those sales opportunities were initiated and encouraged by the -- by customers embracing the AIOps solution. So very, very comfortable with the progress that we're making there and the outlook.

That's great. And Eric, on the gross retention, good to see that moving in the right direction, especially net rev retention to 98%. Not asking you to guide for the second half, but do you think that can keep improving in the second half? And what gives you the confidence of that?

Yes. Thanks for the question, and great to be working with you again. We were happy with what we saw on the net revenue, the dollar-based net retention that going up to 98%, which is a nice inflection and stabilization. And it's actually 2 quarters in a row that we've talked about the gross revenue retention being up. So that's a really nice trend that we've seen.

As you think about that, I think about it as a sign, hopefully, for stabilization in the business. And we're really focused on continuing to improve both gross retention and dollar-based net retention over both the immediate term and long term, and it's something that's been a big focus for me and John as we start to -- as we're spending a lot of time on that part of the business.

Yes. I would add that the magic ingredient seems to be having -- we have a collection of solutions, AI solutions for PagerDuty, adding that together with this new consumption model, this new Ops Cloud consumption model, seems to be the magic elixir for -- also for better retention, and that's definitely helping us.

Your next question comes from the line of Sanjit Singh from Morgan Stanley.

Congrats on the nice improvement quarter-over-quarter, especially on the net new ARR side. John, as you spent some time now with the business, just from a portfolio perspective and you look at the different areas where the Ops Cloud sort of plays in and the different capabilities, are there other areas that you sort of as potential adjacencies for PagerDuty to drive continued growth?

Or are there areas where you guys may pull back on and sort of rationalize? I know you guys did the headcount reduction to invest more. And so I just want to get a sense of, one, where those investments are directed? And then two, where else does PagerDuty have a right to win?

That's a great question. So I'll break it out in a couple of ways. We're doing and adding a lot of capabilities to our core product. And some of those have AI capabilities as a component of them. And I'll break out our AI capabilities into two tranches. One would be AI for PagerDuty. That's using AI to make the PagerDuty experience more rich, more proactive, more preventative.

And the second one is PD for AI or PagerDuty for AI solutions. And in particular, when you're talking about where do we have the right -- I think we really have the right in the PD4 AI category. And I'll point to a couple of things, but you think about the sheer volume of software that's being added and written and created right now and then also think through the fact that a lot of this is nondeterministic software. It tends to break more often. It's much more fragile.

We think that's going to create an incredible opportunity for us as these workloads, these agentic nondeterministic workloads start to enter production. The other element that I would also say is as these workloads come into production, we know they're going to fail differently. They're going to -- people are going to worry about other things like drift, like hallucination, like token runaway, like PII leakage, all these areas.

And so the tsunami hasn't maybe hit quite yet, but we know that these AI workloads are starting to enter production in a lot of our enterprise accounts. And so I think that's going to be one of the greatest areas for us to get further penetration.

Yes. No, that's super interesting. And my next question for Eric. First, congrats on the role. Excited to see you on PagerDuty. When I think about sort of the headwinds to the business over the last several years, some of that's obviously been on the seat side of the equation. And obviously, Ops Cloud with the consumption model can address a lot of that.

But just in terms of like where we are on the headwind from seat trend, do you feel like we're kind of past the worst of it when it comes to that? How do you sort of see the rest of the year playing out from a seat perspective?

Yes, it's a great question, Sanjit, and it's a pleasure to be working with you again. I think that Ops Cloud and that usage model is a great way for us to kind of take away some of the challenges that we've historically experienced around seat compression. This quarter, we saw a lot of positivity as you saw, dollar-based net retention sort of inflected upwards. Gross retention was positive. And so we were really happy to see that. I think we're doing a lot of work that John talked about with the product, and I think that's going to make us stickier and help us in terms of our traction with our customers.

But I think ultimately, as you think about the way that the world is changing and that we're moving more towards AI, which is a place where we think we can be a massive beneficiary, we're going to be moving away from so much of that seat pressure and moving more towards a world in which people are getting benefit from us and using us on a usage basis and using our AI capabilities, and that's really what's going to drive our growth.

I would just add to that, that we had a rough couple of quarters. We still have a lot of work to do and not necessarily signaling that, that work is over at this point. But we do see the new products gaining traction, and we do feel like the business is stabilizing in the last 2 quarters in particular, I think, have alluded to that. But we know -- we -- like I said, we still have work to do, Sanjit, but I appreciate the question.

Your next question comes from the line of Jonathan Ngo from Truist Securities.

This is Jonathan Ngo, Truist Securities in for Miller Jump. Congrats on the great quarter, a lot of positive points. I wanted to ask maybe around some of those 100,000 customer adds in the quarter. And can you maybe walk us through like some of the specifics driving those adds maybe between product-led growth and go-to-market?

Yes, sure. I think -- thanks for the question, Jonathan. I appreciate it. We saw a mix, which I really liked seeing. It wasn't like -- all of them came through the PLG motion or from PD Online or they weren't all graduations. We saw a very good mix. We even saw -- I think the sales team is really starting to get their confidence. They're starting to understand the sales process. They're familiar with how to quote and characterize the usage-based products. And so I would say it was broad. There were some marquee names in there.

There were -- we continue to see growth with our frontier with company -- frontier models, frontier model companies that have embraced the technology. And I would say that the diversity of the 24 new enterprise accounts that we added on a quarter-on-quarter basis was probably -- you alluded to it there was probably one of the most reassuring things.

And then great. Just one more follow-up. So I know Anthropic was named again as an expand this quarter amongst many great others. Can you maybe walk us through like what products have expanded to you and how these larger enterprises are kind of expanding their platform breadth with PagerDuty?

Yes. No, it's a great question. And I want to be careful not to share anything proprietary or any intellectual property there. But what I will say -- what I would share with you is that I think this is evidence that we're doing a great job at the component that I mentioned, PD for AI or PagerDuty for AI. And so these are some pretty interesting new novel use cases that the frontier models are exploring.

And I think we have most of the big ones as customers and are really enjoying learning right alongside of them, seeing the energy in the business is exciting. And like I mentioned, I think we're learning alongside of them things that we can -- tactics that we can help in our other customers. So the relationships are very strong and progressive. And I would say that mutually beneficial as well.

Your next question comes from the line of Jeff Van Rhee from Craig-Hallum Capital Group.

Maybe just a few for me. On the sales front in terms of sales cycles, what are you seeing with respect to competition and really what customers are asking? I'm really just kind of curious, change in sales cycles, duration, competitive landscape and sort of the dialogue with the customers, concerns, things they are asking you about?

That's a great question, Jeff. Competition is always there. It's an interesting space to be in, but we're doing -- I think we're really enjoying this environment. And I actually think that competition helps you to hone your skills and focus the work that you're doing. What I would point to, in particular, is we are seeing underlying elements of our platform coming together in a very positive way. We see, for instance, we see continued utilization and event throughput on the platform growing very nicely.

We also see customers with idle agents or agents -- excess agents that they bought, we see that population coming down and down. And so the number of idle agents in a customer's estate is getting smaller. I think those two things are actually helping us and helping our win ratios and our speed of deal closure pretty dramatically, and we saw some of that this quarter. If there's not excess usage and if there is some pent-up demand inside the accounts, the sales cycles move a little bit faster. And so it was definitely a feature, I think, of this quarter.

Yes. Got it. Maybe one last for me. Eric, on the reduction in force, what is the gross savings? Just trying to get a sense of the gross savings and then how much you're reinvesting? I think you referenced you're going to be doing that?

Yes, great question. And we're not disclosing explicitly the gross savings, but what I will tell you is this. In Q2, we had a 23.7% non-GAAP operating margin. Our guidance for Q3 is between 26.5% to 27.5% for our non-GAAP operating margin. So think about that as a 3.5 point increase. So it's a nice increase on the year.

Additionally, our full year guide before -- at Q2, we've been talking about a 24% to 25% non-GAAP operating margin. We went ahead and raised that by a full point because of what we're seeing in terms of savings. So now it's 25% to 26% and free cash flow is doing something similar, where we said at the beginning of the year that we thought we'd be 2 to 4 points behind where our free cash flow margin was in FY '26. Now we're saying that we're going to be in line. So a meaningful increase in terms of the bottom line.

In addition to that, we're going to be taking some of those savings and reinvesting them so we're going to invest both on the product side as there's a lot that we're doing with the phrases that John very well coined, AI for PD and PD for AI, and we're also going to be putting money into the go-to-market motion.

So we're going to see a nice uptick on operating margin, which is going to get us to hopefully accelerate that path to the 30% target margin that we talked about, and we're also going to see the ability to reinvest in the business. So a lot to be excited about.

[Operator Instructions] There are no further questions at this time. I will now turn the call back to John DiLullo, Chief Executive Officer, for closing remarks. John, please go ahead.

All right. Thank you, and thanks for the great questions. We sincerely appreciate your participation today. If there's something to take away from this call, I think it should be that we are focused on building a great company, delighting our customers and rewarding our investors.

Today, we gave you a glimpse of the green shoots emerging and early signs that our build, sell, optimize strategy are taking root. But we're even more excited about what's ahead, and we look forward to chatting more in the quarters that follow. Thank you so much for joining our Q2 call. We'll see you next quarter.

This concludes today's call. Thank you for attending. You may now disconnect.

Hi, everybody. My name is Koji Ikeda. I am one of the software analysts here at Bank of America on the research side. I am thrilled to have Jennifer Tejada, Executive Chair.

Yes.

It's the right title now, John Duo.

DiLullo.

DiLullo, who is the new CEO of PagerDuty. Thanks so much for doing this. Super appreciate it. So there is a CEO succession plan going on here. .

I guess first question, maybe to Jen, why did you feel now is the right time to make this succession? And then, John, I'm going to ask you a couple of questions.

Yes. Thank you for the question. Well, now is the right time because of really two things. One, we felt that we've stabilized the retention -- some of the retention challenges that we've seen in the business. And we're starting to see growth levers accelerate. So whether you look at 5 consecutive quarters of more than 600 new logos, starting to see some of the green shoots that we're seeing through our pricing transition going from a seat-based pricing model to a platform and usage-based pricing model, things in the business were starting to really point in a positive direction. And that gave the Board and I comfort provided we could find a great leader that we felt would be the right person to lead the company through its next chapter of growth. And John is that leader and have become even more convicted about that in being able to work with them over the last several weeks.

He's somebody that comes to us with a deep expertise and academic background in engineering that has worked in infrastructure and cyber software for many, many years. He's the multi-time CEO, multi-time Section 16 officer, has worked in private and public companies, high growth, also scale and just had a really unique mix of skills and experiences that we felt would really benefit the company and customers and shareholders.

So those two things coming together, along with the fact that we've been running kind of a thoughtful succession planning process for some time made it actually a pretty easy decision. He's also a nice guy. Like we've enjoyed -- I mean we're enjoying working together. So that's been great.

Awesome. Thanks for that. And John, what did you see? What sparked your interest? Tell us a little bit about your journey that led you to the stage today.

Well, I will tell you that I've been a customer before and I've enjoyed using the product. I've also been a partner. And you could have pushed me over with a feather when I got the call. I don't believe that this was really happening. Jen is an iconic figure in the valley here, and as they've done some amazing things with the company. But not only did I know the company, I know the space that it's in. And I'm super excited about everything that's happening in software right now in software development and all the new code that's being deployed, all the all the new capabilities. And along with that volume of code and volume of new capabilities comes a lot of surface area and a lot of opportunity for risk in the operation of the infrastructure. And I got a feeling that the asset was kind of underappreciated. I think that's the vibe that I had because I see PagerDuty as a company that's going to help enterprises really liberate all of the capabilities that they're going to be able to enjoy with AI and it didn't feel like that was necessarily being communicated in the price of the -- in the way investors were valuing the company. So I couldn't have been happier.

Since I've joined, I've gotten to know the people, I'm blown away by the capability of the people. I can't believe the level of connections we have within large enterprises and how customers value us, how customers are rooting for us. It's been the most exciting 3 weeks and 2 days in my entire career.

Good segue into my next question. I was going to start with how many days have been on the job.

There has been a holiday in there. So it's -- we'll say, 16 days.

16. Okay. 16 days. You've done a lot. You've done your due diligence. You've been here for 16 days. How would you categorize high level, some of your most near-term initiatives that you want to act on, these are the things I want to do. And then, how are you thinking about the long term?

Well, the short term is all about listening right now, and that's what I'm focused on is trying to understand exactly how our customers use the product, what are their care about? What are the elements of the business and product features that they care the most about. And so that is super important. But I'm also listening to the organization. I'm also listening to our partners. I'm really getting out and exploring everything.

My #1 focus is working with Jen on the smooth transition. And so she has kept me incredibly busy. And I can't -- I mean, the first week, we did PagerDuty on tour, and we got out and met a lot of customers. The second week, she listed me off to our Champions Club where I got to meet all the top performers in the company at a recognition event. And then we had earnings last week. So she...

Perfect onboarding plan. This is 16 days.

16 days, yes. So but she manages to work into the weekends as well as you can imagine. But -- and then this week, we have our quarterly business reviews.

Next week, we have a Board meeting.

And next week, we have a Board meeting. So the schedule has really been quite ambitious, and Jen has been really thoughtful, and it's all written out if you want to a 30-page document. But it's -- we're -- I'm really happy with the progress that we're making, and I feel like I've never been involved in anything quite so good. I shared with somebody the other day the last -- this is my fourth CEO job. The first 3, somebody basically handed me an empty Manila folder and said, "Good luck." And I'm really -- I couldn't be more happy with the way that the team is handling this and working side by side with Jen is amazing.

I'm so appreciative that you made time out of your busy schedule. I think you have going on dig it out.

It wasn't an option. They carpooled up.

It's in the transition plan, Koji. .

So I'm most curious about, you mentioned during the early days that you spoke with a lot of customers. And so maybe tell us a little bit about what was most refreshing that you were hearing from the customers out there as you were speaking with them?

This is an emotional type of a thing I'll tell you, but the customers have an emotional investment, I think, in the company. I mean, they really want it to be successful. They really want to see us enjoy success and to continue to help them and to continue to thrive with them. They count on us on their worst days. Our customers rely on us. And that over years, you build up an incredible reservoir of trust and loyalty and that is one of the things that has really resonated with me, just how loyal our customers are. The other thing is we are operating at a very high level inside the company. So you amount of the number of CEOs that proactively reached out to Jen and subsequently reached out to me and said, yes, we're here for you. I said, "Well, that's interesting because I'm the vendor in some ways." But they really do want to see us succeed and that I don't know, Jen, I think that's probably something you experienced as well, and that's a great tailwind to come into a new role.

Yes. I'd say, too, in the last year, 18 months, dialogue shifted a little to customers talking about improving their DevOps and modernizing their digital environments to help us get ready for deploying AI at scale. A lot of our largest customers are still in experimentation mode, and as they start to really contemplate what it means to deploy AI at scale in production, in highly regulated environments, in high stakes customer environments, the operational stakes go up meaningfully and the financial stakes of that go up meaningfully as well. So they're looking for thought leadership. They're looking for someone who can scale and meet that moment. .

And that's -- that, I think, has started to show up in the types of customers we're expanding with in the quarter. We talked about an automotive company, a manufacturer, a large, highly regulated financial institution, et cetera. And historically, these were not target verticals for the company. We were really focused on early adopters, tech e-commerce, travel and hospitality, transportation, et cetera. But we're seeing some of the largest of the Fortune 100, Fortune 200 come to us and say, "Okay, now we have to really expedite our modernization to gain the benefit that AI promises, but if we're going to do this at production scale, we have to be able to operate effectively." And so that's really interesting. And then at the same time, when you look at the new logo land numbers, a lot of that is coming from AI start-ups.

And the difference between the class of AI startups that we're seeing versus the classes of software startups we saw over the past several years is they have a higher requirement for resiliency and reliability earlier in their growth curve, because if their products don't work, they lose trust and they lose business. It's very different than when you're shipping your MVP like the first viable offering to market.

AI fails differently. It's harder to identify when it fails. But when it fails, the blast radius tends to be wider, it can have a much broader financial impact, much faster than traditional software failures.

You said something interesting there, Jen, where I've talked to a lot of customers over the years, and I concur. Customers love PagerDuty. You guys are one of the biggest brands in your category for sure. And you mentioned something right there about these companies scale quickly and failure is bad for the brand. Does that drive for your category to go directly to the most well-known brand right from the start because a lot of other technologies like you hear them, "Hey, maybe we'll use this tool, and then we'll graduate to this tool and this tool, and there's kind of a path, but PagerDuty...

Certainly, I would say that the more recognized brands have higher exposure of a public failure. So you've all been in an airport where an airline has a public failure and operation stop. And it used to be that a failure in the tech stack didn't impact flight operations. But now because of automation, everything from crew routing, to catering, to boarding, to the safety checklist before you take off, all of that is flowing through software. So something central in the infrastructure or central in that ecosystem fails, the business stops. And that's probably the biggest change as people have gone from being worried about protecting their brand's reputation to actually preserving revenue and mitigating risk associated with compliance misses and escalations. It's not just about saving money and lost time anymore. It's actually that many of the financial transactions that drive business outcomes rely heavily on a very complex web of technology where the dependencies are unclear.

And so when there's a failure, it's not always obvious, what's driving that failure. And so observability is a part of that, but observability only gets you so far. And you've actually got to be able to quickly reduce the blast radius of that failure. You've got to be able to resolve the issue, and then prevent that issue from reoccurring. And so the big brands have become much more sensitive to this.

The other thing we've seen happen over the last several years is these large, more traditional consumer brands or big banking brands, they're hiring more technical leadership. So the CIO used to come out of consulting or the big 4 or program management, et cetera. And increasingly, they're coming out of the cloud hyperscalers, they're deeply technical. They've built Prad, and they're reinventing the way these companies do business. So they're more likely to engage in a conversation around how do you operate your infrastructure, your digital environment, now your AI environment more effectively and more efficiently.

You guys just reported first quarter results last Thursday. Nice share reaction positively on Friday. We have Howard in the room, CFO Howard in the room instance. So I will ask you maybe highlight the key metrics, but Howard, you could always jump in just in case. So if you get -- make sure we get the numbers right. Key takes.

I mean, I think, the key metrics, we beat the top end of guidance, both top and bottom line, significant beat on operating margin at 25%, and raised our op margin guide. We also are seeing significant, I think, leverage in both free and operating cash flow, 37%, 36% there. We're very encouraged by the sequential improvement in gross retention. Retention has been an area we've been focusing on as a lot of our customers have been impacted by it's really the number of jobs and people that they're licensing and so on a traditional seat-based licensing model. That's been a headwind that we've been working through. And then I'd say that we've also seen a really positive reaction to the new Operations Cloud pricing model we put in place, and we shared that 10% of our total ARR is now coming from usage-based products. So that's the first sort of milestone we've kind of put out into the public markets. .

The other thing that's been encouraging is where we're moving customers that are larger than $100,000 in spend from more of a traditional a la carte start with instant management and maybe add new products and services to more value-driven total Operations Cloud offering. We not only removed the friction of seat-based usage and seat-based license administration, where the CIO goes and passes a tin cup from one department to another to make sure that different departments can afford to be licensed, that friction goes away. So you see this opening of new use cases, but it also means that customers on the new operations, cloud packaging have access to all of our products and services.

And that's driving a more rapid adoption of our usage-based products, including PagerDuty Advance, which is our AI offering, which includes our Agentic solutions, but also things like our event management solutions, AI, ops, et cetera. So the feedback there has been, I think, very positive as well. And I think the demand signals continue to be strong, 5 consecutive quarters of new logos above 600%, I think is enviable to any software SaaS company. And we're demonstrating that we can win in both native AI. So the fastest-growing AI providers are engaging with us and also the largest enterprises in the world, and those are going to be our focus areas.

Still work to do, absolutely, but it feels like it's an inflection point, and then a good turning point for the company in terms of the strength of the foundation that we want to accelerate growth on.

One thing I think about, and I think you guys talk about it this way, too, is AI is an operational risk layer. I mean, you can do a lot of cool things with AI, but boy, can it cause a lot of problem?

It is the new operational risk layer.

What's the easy way to think about an example of how that plays out in the PagerDuty world? And how does PagerDuty help solve that?

Yes. And I think we're very early in that curve. AI becomes even more of a tailwind when you start to see it failing at production scale. And so right now, people are trying to manage AI in, I would say, well cordoned off experiments, particularly in large enterprise, right? But even the frontier models who work with us, they are becoming more and more concerned about the elasticity of the platform, like can we scale to meet their volumes? Can we scale to meet their needs. And we've been able to demonstrate through many cycles of growth, whether it was the rideshare platforms and multisided marketplaces that drove a lot of traffic on the platform or the semiconductor players, who are managing not just IT and DevOps but also supply chain operations on PagerDuty.

As more and more scale and ingest and events flow across our platform, we're still scaling at 86% gross margins because we have an architectural advantage in terms of how we consume and manage compute, but also because the architectural strategy was designed for reliability and resilience at scale.

And as people start to ship more and more AI into their production environments and into their more regulated environments, those operational failures become much more expensive from a top line revenue loss or revenue capture conversion perspective from a compliance risk mitigation standpoint, and then also from cost because when AI does fail, customers tend to retreat and try something that they feel like they can put their trust in. So we're seeing increasing demand on the platform in terms of usage, whether that's number of events, transiting the platform, number of automated workflows, et cetera. And frankly, the number of users is going up as well, but it's simply not the best, I think, economic metric associated with the value that our platform provides in a world that becomes much more automated. And part of our architectural advantage is our platform doesn't really care if it's dealing with a person or an agent, right? It just cares that it's an encrypted secure transaction.

So you mentioned scale. Maybe that is one of the answers to this question. And so you just won 600 new customers, too. So clearly, they see something in PagerDuty that's driving them to you. And it sounds like scale might be one of them, but I just want to make sure when you are winning the customers, what are the 1, 2 or 3 core things that they always tell you, we are picking you because of your ability to do this.

Yes. Part of it is ecosystem, the fact that out of the box, we connect through our APIs to over 700 of the most important solutions in the market. And just to give you an example, like we have a lot of customers that connect us into their ticketing systems, their help desks, their observability providers. And we're, in some cases, on generation 15 of an upgrade integration. It's not simply data flow. And so that means that you can bidirectionally propagate anything that happens in an incident workflow in both systems. So your system of record is capturing it. You've got an audit trail from a compliance perspective, but you can also respond and triage an incident in minutes and seconds as opposed to like waiting for something to come out of a ticketing queue.

So that ecosystem has mattered to a lot of customers because it reduces the cost to deploy, it improves the time to value and reduces the total cost of ownership over time compared to systems you have to custom build a lot of these things. And then the second thing is they look at the future road map, and they say, great, your chat first, they're very excited about the Agentic SRE, because instead of a person being called an agent is the first responder to triage is this a new and novel incident? Is this a familiar incident? Can we solve this immediately with an automated workflow or run book? Or do we need to bring more people into the call? So they can see those tasks being completed.

And because our SRE agent runs on our data model, which has more than a decade of context in it, it's going to outperform the other sort of generic SRE agents you see out in the marketplace that run on public LLMs in terms of speed, accuracy and fidelity. So they get really excited about that because we can show them that running in their own incident data.

I think the last thing is it's future-proof. They look at the investments we're making in our MCP-driven AI ecosystem. So much in the same way we built a context moat through our API ecosystem. We've already got more than 30 partners through our MCPs. We've been out in market now for a year. And that means that like our customers who are building their own agents, they can engage with our agents, they can use our platform. And I love that like people are making news talking about headless environments, but we have customers that have been working with us in a headless fashion for years because they want to use a chat-first experience. And they want to use an agent-first experience, that's fine, too.

You mentioned data there, your data moat. On one side, I always think about companies that talk about decades of data as a differentiator out there. On the other hand, I think about the explosion of data that's going to come that could also power kind of this Agentic future. What's more important, the historical data, the future data? Or is it a combination of both? Like how do you guys think about your moat?

So like data for data's sake is not an advantage. it's do you have the context from multiple types of data and multimodal data that enables you to solve problems faster or enables your agents to solve problems faster? So there's genuine domain knowledge, and there are kind of 3 kinds of incidents that a customer is going to encounter, ones that are very familiar. You've seen them before. They repeat themselves all the time, by the way, more than half the incidents on our platform have occurred before. And that's not because people are stupid. It's because these failures tend to -- the root cause tends to not be identified and the failures continue to surface themselves in different ways. And then there's partially understood failures whereas you recognize some of the pattern, but there are still things that are happening that are new. And then there's totally new and novel failures.

And I think the percentage of new and novel failures as a result of AI is exploding. It's going to proliferate. And so you need more context to triage those. You can't simply rely on pattern recognition, human memory and tribal knowledge. And that's where the context of understanding how people operate, how agents operate, where dependencies tend to fail together, why certain events storm to become major incidents and others don't, which workflows solve certain incidents, where fragility lives in an organization's infrastructure. Those are all things that our platform knows because every time an incident runs on that platform, it's learned.

And that also leads to, as I mentioned earlier, speed in resolving an incident, and that really matters. If a major incident is costing you more than $1 million a minute, right, you want to resolve the number of minutes or $1 million an hour or whatever the case may be, and that could be in lost revenue, not cost. The faster you can compress the time that incident is having an impact on your business, the better it is. And then accuracy. If you, in trying to solve one incident cause another because of poor fidelity in terms of what your platform is telling your agent to do and what your agent is allowed to do, that's -- or what your people do, people make mistakes as well.

So you guys have Agentic SREs out there. I kind of view that journey as SREs as an assist, like, "Hey, we'll help you." And then like, hey, we'll help you. And then the goal is autonomous SREs, like where are we in that journey, not only from the technological capabilities to do that, which is probably beyond what customers are willing to do today.

Yes. I think the customer is the governor on that, not the technology. So deploying an autonomous SRE is not a technical difficult problem, and we can do it internally, et cetera, and some of our customers are asking for it, but the vast majority of customers want human-in-the-loop automation. They want to be able to manage the permissions around what an SRE agent can do. But what you see in the adoption kind of pathway of a customer is they'll start with a very kind of protective and conservative mindset around what they'll want to allow an SRE to do, and then they see it start to work, and they very quickly get used to it running on its own. So I don't -- I think that's a this year, next year problem that gets solved. I don't think it's a long-term problem.

There's also a lot of learning. The agent has the ability to learn. So it's reinforcement learning with human feedback. And so you get better and better. Every time you handle an incident. And so you also get a persistent memory of the incident that lives in the platform as well. And that has some real potential value down the road.

Is that persistent memory shared across your customers? Meaning will all customers benefit from all incidents happening on the platform?

They do benefit from the general model, but we don't share -- obviously don't share one customer's data with another customer.

Got it. Okay. So full thesis, trying to think about it from an AI tailwind perspective. What's the best way to think about how AI is a benefit, long-term tailwind for PagerDuty?

I think as you -- this idea of as AI moves to production scale, you're going to see the failure landscape explode much in the same way the cyber landscape is exploding. And the incidents that our customers have to manage are going to become much more complex, higher stake. We're already seeing. Like if we just look at the usage data on our platform, more incidents, more frequent incidents, more major incidents and larger blast radius associated with those incidents. And we think we're in very early days. Like we haven't really seen the tipping point towards really production scale outside of maybe the frontier models and some of the pure plays that we're working with in the AI native space. So I think that's one.

The second is really monetization, right? Because the usage growth and demand signals are there. It's getting through this transition of being able to go from monetizing the number of users in the platform license to the platform to monetizing the usage itself. And that's where we're starting to see that. We can see that in the cohort of customers that have made the switch, right? We also still have a lot of early customers that are happy to grow on a seat-based licensing model. It's simple. It's easy to administer and deploy when you're small, and they're growing, but at a certain point in time and probably sooner in the life cycle now than we would have done it in the past, we want our customers to have access to the whole platform, be thinking about the platform itself as the operational control plane for their enterprise.

Yes. You guys disclosed 10% of ARR as part of the new pricing model now.

Coming from customers on usage-based pricing.

Yes. How do we think about the balance of that as that continues to become a greater portion of ARR versus potential seat compression and the growth curve that's all kind of underlying that?

Yes. I mean we're in a transition, but you can see we shared that gross retention improved sequentially and that we expect to continue to improve throughout the year. We believe that dollar-based net retention stabilized in the quarter and it's going to start improving through the course of the year. So I think we're coming out of the hard -- the most difficult part of that transition where we're working through the seat-based headwinds, but didn't have our usage-based pricing ready for prime time. And now as we're releasing that into more customer cohorts, we expect that to benefit growth.

I should know the answer to this question, but I can't remember. Is there a goal of percentage of ARR that...

Not one that we've shared publicly, but yes.

Okay.

Yes. I'm so filtering. I like that.

I tried.

I like that. That was really a nice way.

Because you haven't told us, that's why I remember. Growth levers. So how do we think about growth levers, maybe enterprise, PLG, new AI products? Is there something that you're leaning in more versus the other? Or how do we think about that?

I think the Operations Cloud, like giving our best and largest customers access to the whole platform instead of going through this sequential sort of a la carte menu that is very traditional in SaaS. It produces a lot of friction for adoption and growth. I think having a new CEO with fresh eyes and fresh energy is a benefit. I mean, honestly, like when you think about this transition, you have the benefit of continuity in terms of our relationships, all of our stakeholders, talent, et cetera, but I want to be out of the way so that John can make the meaningful changes that he wants to make.

I feel like it was a great 10-year run. We 10x the company in 10 years, went from a single app to a multi-app platform that is the leader in digital operations and becoming the leader in AI operations. But I think it's still very early days for the company in terms of where the upside is. And one thing I've been consistent about since before our IPO is this is a long game. Like this business will have a legacy that lives well beyond me or Howard or any of the people here. It's because it is essential infrastructure for the largest companies in the world and the most innovative and important disruptors in the world. And so those 2 segments I think, remain important growth levers for us as well.

I'm going to sneak in one more. I know we're over time here, but you guys are GAAP profitable. It does sound like you're hitting an inflection here on growth and the new pricing model. How do we think about the balance between growth and profitability and really around, as demand improves, what are you -- is there some sort of trigger out there where you may be like, do we take -- do we slow profitability down and invest more for growth?

Yes. I think it will be a good question to ask John, next quarter. But what I would say is we have very consistently over many, many quarters, demonstrated operating leverage. And that's not through announcing ginormous job cuts, et cetera. It's been through structural programs. It is part of the culture and how we operate that we want to continue to optimize. And John was just telling our team this morning that you're either building something, you're selling something and we're optimizing something. And we've been building and optimizing, I think, really well.

We're very well positioned to accelerate growth. And now it's about making sure that we can monetize effectively. But I don't think if you surveyed our entire Board or our leadership team, there would be any question that we see ourselves as a growth company, and we'll continue to grow responsibly.

And Koji, I would just add, before I embarked on this whole CEO thing, I was a 4x CRO, 3x in a public company. So I definitely have a growth agenda and I see a growth opportunity, but it's all been disciplined growth. So I do think that there -- I think it is a great opportunity to really navigate that where we can break and gas at the same time and in the right proportion to give the best result back to the investors.

And they're really -- like we're already seeing a significant uptick in the velocity of our feature deployment as a result of using AI in our own development team, right? So AI leverage inside the company, not just in the products super important to us, and we're finding lots of interesting ways to do more with the same, do more with less or do something differently and better.

We've talked a lot about the benefit of adding agentic agents to drive automation in the workflows, but also by leveraging this technology, we can interpret signal with a lot more clarity and be much more nuanced in determining when a customer is having a problem or proactive and preventative. And those are all new opportunities that await us down the road.

Makes sense. We're all out of time. Jennifer, John, thank you so much for doing this. Appreciate it, and we'll catch up soon.

Thanks for having me.

Thank you.

Thank you.

Good afternoon and thank you for joining us to discuss PagerDuty's First Quarter and Fiscal Year 2027 Results. With me today on today's call are Jennifer Tejada, PagerDuty's Executive Chair; John DiLullo, PagerDuty's Chief Executive Officer; and Howard Wilson, our Chief Financial Officer.

Before we begin, let me remind everyone that statements made on this call include forward-looking statements based on the environment as we currently see it, which involves known and unknown risks and uncertainties that may cause our actual results, performance or achievements to be materially different from those expressed or implied by these forward-looking statements.

These forward-looking statements include our growth prospects, future revenue, operating margins, net income, cash balance and total addressable market, among others and represent our management's beliefs and assumptions only as of the date such statements are made, and we undertake no obligation to update these.

During today's call, we will discuss non-GAAP financial measures, which are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in our earnings release, which can be found on our Investor Relations website.

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

Thank you, Christine. Good afternoon, and thanks for joining us today. Before we discuss our results, I want to acknowledge the leadership change we announced mid-May. After 10 years as CEO, I've transitioned to Executive Chair. And today, I'm pleased to introduce PagerDuty's new CEO, John DiLullo. We're already partnering well, and the transition is off to a great start.

John's appointment is the result of a deliberate and comprehensive succession process that I initiated with the Board some time ago. John stood out as a proven leader with a unique combination of technical depth, operational discipline and go-to-market experience. Prior to joining PagerDuty, he served as CEO of both public and private companies, most recently Deepwatch and previously LiveVox in Lastline. Having been a customer and a partner in the past, he brings firsthand bold of pay-for-Duty's role in our market of our potential as well as an understanding of how our customers operate in increasingly complex mission-critical environments. With the business poised for profitable growth acceleration now is the right time for this transition. The Board and I are confident John is the right leader to build on PagerDuty's momentum towards our next phase of growth.

I'll turn it over to John for his brief remarks.

Thank you, John. I am very excited to join you today. As Jennifer mentioned, I've known and followed PagerDuty for years. as both a customer and as a partner. And I've long admired the role that the company plays at a center of modern digital operations. That perspective has only deepened in the weeks since I joined, as I spent time with Jen, the Board and the broader team.

What stands out to me is the strength of the foundation, a trusted brand and enviable customer base and a platform that sits at the core of real-time, mission-critical operations. As digital environments become more and more complex and the pace of innovation accelerates with AI and automation volumes climbing, we expect platform usage to continue to grow.

With our transition to usage-based pricing underway, usage growth should translate to revenue growth over time. And I believe PagerDuty is exceptionally well positioned to extend its leadership. In my past CEO and leadership positions, I focus on scaling organizations, strengthening execution and aligning closely with customer needs. That experience has illuminated for me a clear opportunity to build on the momentum already underway at PagerDuty.

In the near term, my priority is simple, listen, learn and engage. I'm spending time with employees, with customers and with partners to deepen my understanding of our market and our business. I'm incredibly excited about what lies ahead and confident in our ability to capture the opportunity in front of us. I look forward to spending time and partnering with our analysts and shareholders frequently in the quarters ahead.

Thank you, John. I look forward to connecting on to our shareholder community and callbacks and at our next investor conference. With this leadership transition, I have reflected on my time at PagerDuty. Over the last decade, we've evolved from a company with a single product, less than $50 million in revenue, and a few thousand customers to the leading AI-first operations platform, generating nearly $500 million in profitable revenue. We strengthened our core franchise, digital operations management by embedding AI and automation into the platform driving greater customer outcomes and increasing differentiation.

In doing so, we have become a strategic partner and the AI control plane for our clients. In Q1, PagerDuty delivered results that exceeded the top end of guidance for both revenue and non-GAAP operating margin. Quarterly revenue was $121 million, up 1% year-over-year and annual recurring revenue was $496 million, flat year-over-year. we grew non-GAAP operating margin to 25% through consistent discipline, structural efficiency initiatives and AI adoption.

We see a clear path to our long-term target of 30% non-GAAP operating margin as we increase our own operational AI leverage and drive customer usage of our ad platform. We are confident that our product enhancements and pricing improvements initiated last year, notably the introduction of the new usage-based Operations Cloud and PagerDuty Advance Pricing and packaging will accelerate revenue growth.

As a reminder, we have historically offered individual products, enterprise incident management, customer service operations and runbook automation via sea-based licensing, while we sell event intelligence and AI products through a usage-based model, our full suite of products are now available through an integrated platform with usage-based pricing. Usage-based products, which include AI Ops, PagerDuty Advance and Operations Cloud, now account for nearly 10% of our total ARR.

To date, early customer adoption of the new Operations Cloud plan has unlocked more value for customers and growing the ARR because it incentivizes the use of multiple products. This underscores the large opportunity ahead of us with our new pricing framework as a key driver of ARR growth acceleration.

The new Operations Cloud offering deployed with professional services and support plays a critical role in helping expand customers' use of the full platform. Customers who choose the Operations Cloud, gain new access to all of our products via a more flexible platform license. Removing the friction related to adding users across departments. This leads to new operational use cases, which ultimately drive increased usage. Our usage-based model is also predictable for customers. They start with a level of usage across the integrated product line, which can increase the value realized during the term of the contract. Usage elements include events, AI actions and automated workflows.

As customers automate more work, PagerDuty scales with the value delivered through AI, event intelligence and automation, while mitigating the risks associated with the customer needing to reduce user count. In addition, customers who deploy the operations Cloud with our new professional services model see an over 80% improvement in time to value and 50% higher product engagement compared to those who self-implement. We are encouraged by these results and the initial customer conversions this year, which are leading to larger multiyear more strategic commitments. The customers who have adopted the new Ops Cloud offering experienced broad platform engagement. The majority of our early cohort are actively using more capabilities across incident management, infinite workflows, event intelligence and agents with teams broadening both the breadth of features they rely on and the number of users operating within the platform day-to-day.

These customers are integrating the operations Cloud more deeply into how their organizations work. reflecting the value of a deliberate customer-first approach to migration and onboarding. One of the clear signals of customer momentum in Q1 came from a Fortune 500 automotive manufacturer. -- previously a customer on a fee-based plan that migrated to the Operations Cloud offering.

Within the lease of closing, the customer realizes the value of their initial purchase with expansion into a subsidiary. We expect that customer to purchase even more usage during their contract term. leading growth indicators continue to underpin momentum, giving us confidence in both ongoing demand and increasingly successful traction with our strategies to accelerate growth, including refining our enterprise sales motion, flexible usage-based contracts and significant new platform feature releases like our chat-first incident management and our SRE agents.

Recent product innovation has led to strategic wins as more established, highly regulated businesses like banks operating more like tech companies. a Fortune 100 financial institution expanded with us to support a new FRE model deployment. PagerDuty's ability to support the company's high-efficiency operational goals and the bank shift towards the modern SRE model led to a 6-figure early renewal and enterprise-wide expansion.

Strategic wins like these underscore why we continue to win new customers. For the fifth consecutive quarter, we acquired over 600 new customers and total customers on the platform grew 14% year-over-year. We continue to see progress in our international markets, specifically Asia Pacific and Japan where enterprise focus has led to a marquee land of a television broadcasting and media company, which we expect will expand over time.

In the North American and EMEA markets, our efforts to stabilize retention and accelerate new and expansion business are bearing fruit. Large enterprises in the retail and the automotive sectors as well as fast-growing native AI and defense tech companies like CoreWeave and [ Inderal ], are benefiting from the value and resilience that PagerDuty provides.

A long-term strategic retailer in North America executed a renewal and expansion with us on the Operations Cloud and -- running automation with a multiyear 7-figure agreement. This win was also a total competitive displacement. PagerDuty aligned its integrated automation platform with the customers' executive leadership and corporate initiatives to support their objectives of advanced operational efficiency. A leading global automotive manufacturer in EMEA turned to PagerDuty as they standardize incident management across their global IT operations. This expansion is critical as the company transitions to a fully electric vehicle range retiring always on reliability to avoid costly plant disruptions.

Previously, their incident response was fragmented across silo teams, which created operational blind spots. With PagerDuty, the customer benefits from standardized incident response, 24/7 global coverage and clear accountability for faster resolution times. The adoption of PagerDuty by innovative AI companies as new lands and expansions demonstrates how our platform meets the evolving needs of the AI era.

Innovative AI start-ups who joined the platform during the quarter included [ Lifespan, Dropdown AI and Signal AI ] is the new operational risk layer for enterprise. It's accelerating software development and deployment at unprecedented velocity, leading to a new magnitude of complexity in the production environment.

In addition to being higher in volume and more complex, AI-driven failures can be less predictable and less visible. And no customer segment is immune. AI failure and large enterprises can become major operational failures due to automation.

Even AI native firms are vulnerable to disruptions eroding the trust in AI products. This creates more demand for the PagerDuty platform drives increased event in instant volume and ultimately increases usage. Their in-sell platform better positioned than the PagerDuty Operations Cloud, to resolve these operational failures and even prevent them before the disruption happens.

PagerDuty is at the forefront of autonomous operations. The 3 pillars of our platform strategy, our AI and automation, full life cycle incident management and platform and ecosystem extensibility. Our FRE agent launched in October highlights our focus on AI and automation, acting as a virtual responder, the FRE agent gather signals across the tech stack performs approved remediation and maintains an operational shared memory to learn from has incidents. The chat native interface in Slack and Microsoft teams directly integrated to AI agents and post infinite reviews creates a full life cycle experience and modernizes the responder experience.

Our AI ecosystem supported by marquee partnerships, including Anthropic, can, cursor and line-chain enables PagerDuty agents to interact across whatever AI-enabled surface a developer chooses.

PagerDuty has fast to come the new control plane for AI, helping customers to orchestrate and manage agents with context clarity and fidelity that made us the category leader first for incident management and then for digital operations. Those agents are now running at machine speed, where they can reason and act with or without human involvement. According to PagerDuty research, expensive cascading failure scenarios can cost enterprises more than $1 million an hour. PagerDuty is paving the way for unprecedented business continuity and resilience for customers moving towards autonomous operations.

The operations cloud connects everything from developer tools, monitoring and systems of record. Then it intelligently orchestrates resources with AI to drive faster, smarter decisions to issues are identified even before code ships. If and when a problem does arise in production, the platform analyzes the context and resolve issues expeditiously it automatically updates systems of record for compliance and reporting.

In this era of fast-moving technological disruption, intelligence and automation work together to keep operations running smoothly, protecting revenue and reputation. This product innovation and our new pricing combined have been key to attracting new customers and encouraging existing customers to expand.

Australia's leading digital bank became a PagerDuty customer in the quarter at on the platform with a 7-figure multiyear deal. This engagement underscores PagerDuty's position as a strategic operations partner. Prior to deploying PagerDuty, the customer experienced several major outages unmanageable with a homegrown incident management system by adopting pay-for-duty into management, AI Ops and runbook automation, the customer is reducing systemic risk. A leading not-for-profit financial services organization in North America expanded its relationship with us in a multiyear, multimillion dollar contract for the PagerDuty Operations Club.

Access to the full PagerDuty platform via the Operations Cloud offering enables the customer to align its operational maturity goals to the platform's capabilities. The breadth of the platform gives the customer the confidence to consolidate multiple point solutions to spend with PagerDuty. A global consulting company and customers since 2018, renewed a 6-figure expansion this quarter. PagerDuty's best agreed bidirectional interoperability with their system of record, was the winning competitive advantage over an observability vendor.

PagerDuty is improving the end user experience by reducing downtime and driving operational transformation. Our platform mitigates systemic risks not only for enterprise customers, but also for our over 650 non-for-profit customers, in turn, helping them to amplify their mutant-driven impact. In Q1, we announced our latest impact cohort, including grants to nonprofits focused on health care, humanitarian aid and crisis response. PagerDuty was recognized for its workplace culture and industry leadership. Inspiring Workplaces named PagerDuty as an employer of choice. 2026 [ give-your-own ] radar for incident response platforms and PagerDuty a leader and outperformer for the fourth consecutive year. For teams dealing with noise observability, coordination breakdowns or immediate response, this acknowledgment is a clear signal that PagerDuty is leading the market in the evolution to a first operations.

In Q1, we improved gross retention sequentially, demonstrate an ongoing new customer acquisition momentum and delivered strong expansion in our key markets, large enterprise and AI native. Our disciplined execution and product innovation led to consistent margin expansion.

Before I hand it over to Howard, I want to thank all of our current and past coverage analysts and investors for your support and counsel. This is my 29th and like the last earnings call with PagerDuty. And while it hasn't always been easy, it has always been professional, constructive and even fun. You held us to a high standard, and I've learned enormously from this community. I appreciate your investment in PagerDuty and both your past and ongoing support of our team.

Leading PagerDuty for the last 10 years has been an honor and a joy. We have navigated countless market transitions while continuing to innovate for our customers, expanding our customer base from less than 5,000 when I started to more than 36,000 strong today.

Together, we've shaped the industry. First is a leading voice for DevOps then defining the digital operations category and most recently, leading the market in AI first operations. We grew the company more than tenfold while expanding our profitability and we became the definitive category leader, one that evolved from a single cloud app to an AI-first platform the most important and innovative companies in the world, trust and rely on.

I'm really proud of our people, past and current and grateful to our customers, many of whom I partner with personally for their trust. In transitioning to Executive Chair, I'm incredibly grateful for the opportunity to be part of an outstanding team, and I'm optimistic for the enormous opportunity ahead. I've had the opportunity to get to know John, and we've already built a strong partnership. He has my complete confidence and support in leading the next chapter for PagerDuty, and I believe he will earn yours too. Thank you.

And with that, I will turn it over to you, Howard.

Thank you, Jen, and good day to everyone joining us on this afternoon's call. Before I dive into the financials, I want to thank Jim for her exceptional leadership, partnership and stewardship of PagerDuty over the years. I share her enthusiasm in welcoming John to the executive team.

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.

Before reviewing our first quarter financial results, I want to highlight a meaningful inflection point in our business model transformation. The operations, cloud pricing and packaging completed its first full quarter in limited general availability. Early results showed traction. The ARR of customers on this model nearly doubled from Q4 to Q1. And of our customers spending over $100,000 a year, over 15 have transitioned to the model, which gives us confidence in the business model transformation to usage-based pricing. Moving to results.

In the first quarter of FY '27, we delivered solid performance, exceeding our revenue and operating margin guidance ranges. We continue to see strong demand signals in particular, new customer acquisitions, existing customer expansion and platform usage growth. Our customer success and product initiatives contributed to an improvement in our gross retention from Q4 to Q1, and we expect this to gradually improve through the year.

Revenue for the quarter was $121 million, up 1% year-over-year with international revenue increasing 3% annually, contributing 29% of total revenue. Q1 gross margin was 86% at the high end of our 84% to 86% target range. Operating income was $30 million or 25% of revenue compared to $24 million or 20% of revenue in the same quarter last year. This margin expansion reflects our rigorous focus on efficiency and operational execution.

GAAP net income was $10.2 million, our fourth consecutive quarter of GAAP profitability. We're continuing our progress on the path to sustained GAAP profitability. Annual recurring revenue in Q1 was $496 million, in line with the amount in the year ago period. customers spending over $100,000 in annual recurring revenue was $860 million, up 1% year-over-year.

Dollar-based net retention was 97%, we expect our continued customer success and renewal initiatives, along with our operations cloud pricing to result in stabilization of DBNR and for it to gradually increase throughout the year. Total paid customers grew to 15,380 in Q1, adding 133 net new customers since the year ago period.

Free and paid customers on our platform grew to over 36,000 an increase of approximately 14% compared to Q1 of last year. In terms of cash flow for the quarter, cash from operations was $44 million or 37% of revenue and free cash flow was $41 million or 34% of revenue. This strong cash generation gives us the financial stability and flexibility to continue to invest in our go-to-market transformation and AI product development while maintaining our commitment to shareholder returns.

Turning to the balance sheet. We ended the quarter with $444 million in cash, cash equivalents and investments. On a trailing 12 months basis, billings were $497 million, an increase of 1% compared to a year ago. At the end of Q1, total RPO was approximately $441 million increasing 3% year-over-year. Of this amount, approximately $316 million or 72% is expected to be recognized over the next 12 months. $100 million or 23% over months 13 to 24 and the remainder thereafter.

During the quarter, we repurchased 8.5 million shares for $63 million and completed the authorized $200 million share repurchase program. We view our current valuation as a compelling opportunity. Looking ahead, our strong balance sheet provides us significant flexibility to execute on our priorities while returning capital to shareholders. And today, we've announced our latest $100 million share repurchase program.

Now turning to guidance. For the second quarter fiscal 2027, we expect revenue in the range of $122 million to $124 million, with the midpoint approximately flat year-over-year. and net income per diluted share attributable to PagerDuty, Inc. in the range of $0.29 to $0.31. This implies an operating margin of 22% to 23%.

For the full fiscal year 2027, we expect revenue in the range of $488.5 million to $496.5 million, with the midpoint essentially flat year-over-year. This is the same range as previously provided. And net income per diluted share attributable to PagerDuty, Inc. in the range of $1.27 to $1.32 an increase based on the reduced share count as a result of the completion of the buyback program. This implies an operating margin of 24% to 25%.

Before moving to questions, I would like to provide assistance with modeling FY '27. On cash flow, Q1 free cash flow was elevated primarily due to overperformance on collections which we expect to normalize in Q2.

On operating margin, part of the Q1 overperformance was due to marketing program spend, which we expect to deploy in Q2. Our Q1 performance demonstrates the rigorous focus on efficiency and operational execution that underpins our business, leveraging a solid balance sheet healthy cash balance and strong free cash flow generation, we possess the financial agility required to fuel our AI product development and go-to-market transformation, all while supporting a seamless transition of leadership.

With that, I will open up the call for Q&A.

[Operator Instructions]. And our first question comes from the line of Morgan Stanley's analysts, Sanjit Singh, your line is open.

This is Christian Darrow on for Sanjit. I want to ask about the net retention rates. Really nice to see the gross retention rate improvement that you called out, but the net retention rate did take a step down from last quarter. So just curious what gives you that confidence on the recovery and the deviation on the pension side?

Sure. Thanks for the question, Chris, and I really appreciate it. It's nice to see you. One, we have really started to see good progress with our early cohort in the pricing transition. So I spoke about a number of customers in prepared remarks, who frankly, had come to us with a view of potentially needing to downgrade as a result of seat-based pressure. And following their ability to understand the flexibility and access to new products on the platform as well as the flexibility based on usage-based pricing, they actually expanded with us in the time frame. And we're quite early in that transition, but it is progressing well.

As a reminder, we kicked up early access in Q3, limited general availability in Q4, and we've opened that up to a much broader set of customers this term in this quarter. In addition, we're seeing very strong demand signals. So Howard mentioned is our fifth consecutive quarter of over 600 new customer logos. Those tend to be early adopters. There are demonstrations that our PLG motion is still a competitive advantage, but also that the most innovative developers and native AI start-ups are choosing PagerDuty.

And as we know from history, those types of new customers tend to grow organically as they expand their businesses themselves. And then lastly, what we're also seeing is the benefit of improving the way we renew customers, offering multiyear, multiproduct agreements. So we started to mitigate some of that risk over time. Our customer base is also in transition. We have some segments of the customer base that are under more financial pressure than others, including like midsized SaaS, for instance.

But what we are seeing is -- so really encouraging new demand from really large enterprises in verticals that we had historically focused on, you heard me talk about 2 automotive manufacturers. We're seeing something similar in financial services as well as in health care. And then the last thing that I'll say is, for our customers where AI operations is becoming an important demand driver, many of them are just now starting to move from what I'd call the experimentation phase where there is less risk to deploy AI in production at scale.

When you start to scale AI into production environment, the risk spike pretty significantly as the complexity and the potential blast radius of issues. And that's why we really see customers start to lean in on their investments. So that is still in front of us. That's why we see potentially some short-term transition with customers moving from seat-based to usage-based but long-term AI being a true tailwind for the business.

And Christian, just one additional point that I would add is that we monitor closely the growth in usage on our platform. And again, this quarter, we saw that continue to increase. So that validates the approach that we're taking around moving to our flexible operations car pricing model. And the early results from that have been strong. So we saw from Q4 to Q1 nearly doubling the ARR of customers who were on that model. And so we do think that not only will this be good in terms of helping us mitigate some of the pressure around gross retention because of seat-based compression, it actually creates a really good foundation for growth because we've seen with most of those customers that we've moved into that model that they, in fact, were able to renew that at higher values, doing an expansion at the same time.

So right now, we're dealing with both of these things in parallel because not every customer in our base is exactly the same. They're dealing with different dynamics. And it's really encouraging to see a lot of those native AI companies and a lot of enterprises, as Jen mentioned, they are continuing to increase the investment in PagerDuty even whilst we might be dealing with some other customers who are in the transitional phase.

Got it. That's very helpful. And then, John, I know it's still early, but what are some of your key learnings so far as you've gone to ramp up here? And any idea around what your key priorities or key changes that you're looking to make at the organization are.

Yes. Thanks for the question, Chris. It's really early days for me. I'm just starting to get to know the team and to listen and learn to all the great things that the company is doing. But I will say that I was very excited to get the call. And I've been a customer multiple times to have a good understanding of the product. And I think firsthand, I realize what's the capabilities of the product and what the platform are and how deeply integrated it is into the operations of so many leading companies.

And I think one of the things, and you've heard it a couple of times already on the call that the number of new logos and the amount of -- the amount of utilization of the platform, the market dynamics that we're and that we exist in are very, very favorable. AI continues to accelerate the creation of growth and the automation workflows, autonomous systems and just more software, more dependent, is more automation means more inference, more compute and that all is going to lead to just greater need for resilience and orchestration and real-time operational response, which is just what PagerDuty does better than anybody else.

And I think to some extent, I think the company is a little bit perhaps underappreciated by investors. And I think working together with the team and Jen's just been great during the transition as Howard and the whole team, but I think we have a great opportunity here to unlock value, and I just couldn't be more excited.

And our next question comes from the line of Jonathan Ingo with Truist.

This is Jonathan on from Milena -- I wanted to ask a little bit about profitability. So you guys have been GAAP profitable for a while now, and you're targeting 30% operating margins. considering kind of like the heavy R&D needed for like agented products, how are you balancing the need for product velocity with head -- growth and commitment to margin expansion.

I'll take a shot at that and then Howard, you can jump in. I mean, one, we didn't just start building our AI products. We have been building AI into the platform for several years. We've built a distinct advantage through the proprietary context in our own model that comes from more than a decade of capturing insights and information from workflows, developers themselves, events that we ingest and how incidents are resolved. So we've been making investments over many, many years to put ourselves in an incredibly strong competitive position.

In addition, Rukmini Reddy, our Head of Engineering, has really been leading the charge in deploying AI and throughout our own developer community and our entire her development organization uses AI to expedite their and amplify their creativity. And that's led us to be able to deploy and deliver more features at a higher velocity than we have in the past. Of course, we have a high standard for resiliency. So we maintain our commitment to security, resilience and reliability at scale. That hasn't changed.

But our ability to unlock new features, whether it's chat-first incident management experience from end-to-end or increasing the capabilities of our genic solution like our SRE agent, we're able to do that on a lower cost basis than we have in the past. We're also deploying AI throughout the company and using it in ways to create efficiency. And as you know, Howard and I have been focused for many years on structural programs to make the business more efficient long term to support our ability to continue to invest in R&D.

And I disclosed in my comments and open up to Howard with the fact that we see ourselves as a growth company and as a category leader, we know that the market expects us to innovate, and that's not changing. That's something that John and I, I think, are very well aligned on and you should continue to see new products and features coming out of PagerDuty at a similar case than what you've seen in the past few quarters.

Yes. And I would just add to Jen's comments, we've always taken a balanced view on capital allocation. So that sometimes means that you have to change the places where we invest within an organization. And the one strength that we have that stands out as PagerDuty is our gross margin. So we're operating at gross margins typically around 85%, 86%. We continue to fine-tune of the use of our infrastructure and that then creates room for us to continue to expand the services that we deliver, while still maintaining best-in-class gross margins.

And then the work that our team has been doing internally by deploying AI aggressively in terms of the work that they do, particularly within our engineering team means that we've created a lot more capacity, and that capacity has allowed us to increase pace of innovation. So it's a combination of factors that we do, but always with that view to saying like, where are we able to drive or optimize so that we can improve our productivity in other areas to create room to invest in a different space.

Our next question comes from the line of Andrew Sherman with TD Cowen. Andrew?

It's been great working with you, and John, congrats on your new role. The 10% of ARR from consumption was great to get that number. Maybe just touch on the -- how -- where do you think that can get to by the end of this year? Or what do you have a certain cohort customers that you're targeting? And what's resin their receptiveness to expanding under this new model and comfort with the price and the cost and the usage and all that.

Yes, sure. And well, there's a lot in that question, Andrew, but let me try and cover what I can. -- yes, look, it's great for us to see that we're nearly 10% of our ARR coming from those usage-based products. We haven't put a specific number out there in terms of where we want to get to by the end of the year. but it's clearly an area of focus for us because, one, it delivers a lot of value to our customers. the overarching message that we hear from customers as they move to our operations or pricing, is that the access to all of our products, removing that friction just makes it easier for them to mark towards the goal of operational resilience and deliver the best experiences to their customers.

So there's a strong customer appeal to being able to have full access to the platform. What we are expecting, though, is we are expecting that growth to be able to help not only mitigate some of the retention that I spoke about earlier, but also accelerate our growth as a company. Because what we've seen, if I just look at 2 quarters of data in terms of operations at pricing is not going to be definitive. But the focus that we've had on a relatively small set of customers compare to our overall customer base has yielded really promising results.

And so our expectation is that we will continue, in particular, to have a look at our customers that are spending more than $100,000 a year with that. Those are the ones who stand to benefit greatly from this model, but it's not only going to be that cohort of customers. But certainly, our expectation that we will make meaningful progress with each period as we go through the year. We're not committing to report on this every quarter, but we will be doing periodic updates just so that folks can get a flavor on how that condition is going.

Okay. That's helpful. And maybe for Jen. The AI native customers have been a good topic for you. I think you gave a number last year, it was 2% or 3% of ARR. Any update to that and you named some of them, including one that just went public. But would love to hear like how they came to you and their usage of the platform and kind of the validation of your technology and how that can spread to some other customers in this cohort, too.

Sure. Thanks for the question, Andrew, nice to see you again. Here's the thing that's been really interesting. One is some of these native AI companies are feeling really fast. And in the old days of like software V2, start-up software companies did not have big concerns around product resilience or reliability of scale because it took them a long time to get to scale. They just wanted to get the minimum viable product out in the market and move very different if you're a fronter, or a rapidly scaling a agenetic company because your product has to work all the time or you erode trust and can't expand can't grow.

So we're seeing the appetite for resilience at scale coming much earlier in the growth cycle of these native AI companies. And thereby, some of them are expanding faster regardless of what their headcount or their people size is doing.

The second thing that we're seeing is the most demanding developers are choosing the best-in-breed offering, early. And that's happening through our PLG motion. So we don't talk so much about our PLG product-led growth motion so often because we have been so focused on enterprise retention enterprise expansion. But it is one of the competitive advantages that PagerDuty has had for a very long time that we land through the developer community for the user and then expand organically on a very simple pricing model until that customer is ready to mature into a multiproduct offering. And so that all of the PLG motion, that flywheel, you can see working 5 quarters with more than 600 new logos like that's not an accident. And we continue to place a lot of focus around the expansion opportunity of those customers through our commercial business, which Catherine Calvert leaves.

And then at the same time, some of these AI natives are moving into enterprise size quickly. So you also have to have the go-to-market model to support them and the pricing flexibility so that they start applying you to new use cases more quickly. When you have this very patient growth model where you start out on call and then you add incident management, then event intelligence.

With the App Cloud platform, you can access all of those products at one time. And what we're finding with our largest enterprise customers who are using them is it's leading to new use cases faster because they don't have the friction of having to go to apartments department to get permission or authority to spend on more users. So we've seen manufacturing operations. We've seen security ops. We've seen business ops. We've seen customer support lots of things. show up with the operations Cloud that historically would have taken us many years to get to in kind of a traditional product-led life cycle or sales cycle. So that's also been very encouraging.

And then the last thing I'd say is that, over the last few quarters, we've started to see some of these, call it, 4 to 100 very large enterprise companies come to us who traditionally were late to the digital operations party, right? And they're expediting their modernization efforts so that they can benefit from AI transformation. And these are manufacturing, highly regulated industries in financial services and health care, right, with state, local government, et cetera. So some of these traditionally sort of move verticals as it relates to adopting new products are moving faster. And again, the operations, cloud pricing and packaging is there at the right moment for that to meet that demand.

Excellent. Great to hear. Thank you.

And thank you for your questions and participation today. Jennifer will turn it to you for your final remarks.

Yes. Thank you, everybody, for your questions. The fundamentals of our business continue to strengthen. We have a durable balance sheet, expanding operating margins and a clear strategy to navigate and win in the AI first world. AI is the new risk leader for enterprise. And as the control plane for AI, we are well positioned to support enterprise resilience across our customers' strategic digital and AI operations. Our focus on a usage-based model is gaining traction, and our product velocity continues to widen our competitive mode.

I have the utmost confidence in John as the new CEO and in our people, and I'm energized by the significant opportunity ahead and excited for PagerDuty's next chapter of growth and innovation.

Thank you so much for joining us today.

Good afternoon, and thank you for joining us to discuss PagerDuty's Fourth Quarter and Full Year Fiscal 2026 results. With me on today's call are Jennifer Tejada, PagerDuty's Chairperson and Chief Executive Officer; and Howard Wilson, our Chief Financial Officer.

Before we begin, let me remind everyone that statements made on this call include forward-looking statements based on the environment as we currently see it, which involve known and unknown risks and uncertainties that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

These forward-looking statements include our growth prospects, future revenue, operating margins, net income, cash balance and total addressable market, among others, and represent our management's beliefs and assumptions only as of the date such statements are made, and we undertake no obligation to update these.

During today's call, we will discuss non-GAAP financial measures, which are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in our earnings release, which can be found on our Investor Relations website.

Further information on these and other factors that could cause the company's financial results to differ materially are included in filings we make with the Securities and Exchange Commission, including our most recently filed Form 10-K as well as our subsequent filings made with the SEC.

With that, I'll turn the call over to Jennifer.

Thank you, Christine. Good afternoon, and thanks for joining us today.

Fiscal 2026 was a transformational year for PagerDuty. We stabilized ARR in Q4 and accelerated new and expansion business, ending the year with solid fourth quarter results. In our first GAAP profitable year, we continued to increase operating margin through disciplined execution, while advancing our AI-first operations for mission-critical work.

In Q4, we delivered $125 million in revenue, up 3% year-over-year and 24% non-GAAP operating margin, both above our guidance ranges. Total annual recurring revenue ended the year at $499 million, with an increasing contribution from enterprise customers.

Throughout the year, we expanded non-GAAP operating margin by nearly 700 basis points through consistent discipline, structural efficiency initiatives and AI adoption. We see a clear path to our long-term target of 30% non-GAAP operating margin, as we increase our own operational AI leverage and drive our customers' consumption of our AI platform.

Leading growth indicators in the quarter were increasingly encouraging. Total platform customers grew significantly to over 35,000 total paid and free customers, up 14% year-over-year. Improved conversion from both free to paid and total top of funnel led to over 600 new customers, including AI natives and enterprises, accelerating 17% year-over-year. These segments combined are high value and high propensity to grow.

We expanded with AI natives and AI-first companies like Anduril, CoreWeave, Snowflake and Scale AI. Companies across the globe demonstrated deep trust in PagerDuty. In EMEA, Banco Santander, Bupa and Vodafone are just a few that expanded. Likewise, our Asia Pac and Japan teams experienced success through strategic deals, including an expansion with JR East Railway Information Systems and one of Australia's largest banks.

New and expansion performance in the quarter was our strongest for the fiscal year, up 6% from the previous year and sequentially up 37%. Underpinning our Q4 new and expansion bookings momentum were large 6- and 7-figure opportunities. We signed over 40 deals worth $100,000 or more in the quarter, almost twice the average of prior quarters in the year, showing progress towards reaccelerating growth.

By year's end, the cohort of customers spending $1 million or more in ARR has increased up -- has increased to 79, up 10% year-over-year, while 861 customers now spend over $100,000 annually, an increase of 1% year-over-year. This segmentation is important. The modest growth in the $100,000 customers reflects churn in the midsized spend range, but double-digit growth at the $1 million range shows we're making real progress with our highest value enterprise customers, exactly where we're focused for growth.

While seat-based compression continued to impact some of our installed base, we're attracting customers with higher propensity to grow -- that are higher propensity to grow on the platform with flexible consumption-led pricing.

Our new pricing model makes it more compelling for customers to land new business and expand existing accounts on the platform. As a result, in Q4, we secured several large multiyear agreements with new pricing.

Our flex pricing enables frictionless scaling between human responders, agents and automated solutions, as well as access to new products, better aligning value to business outcomes.

One of the world's largest toy makers was seeking resilience at scale after a $10 million loss in both revenue and costs caused a manufacturing outage -- caused by a manufacturing outage. In Q4, they signed a $4.5 million TCV multiyear renewal with PagerDuty, leveraging our Flex pricing.

In North America, we signed a $2.7 million multiyear expansion with one of the world's leading telecommunications providers, more than doubling their ARR with PagerDuty. By aligning the platform with the customers' highest priority challenges, driving cost efficiency across networks and capitalizing on AI goals, PagerDuty is now their AI operations platform, addressing both enterprise efficiency and AI risks.

PagerDuty was built for a world, where every business is digital and every digital business at scale needs to anticipate and respond to urgent critical operational challenges immediately, intelligently and automatically. That need is not going away. What is changing is that AI is the new operational risk layer for business, where resilience and automation are paramount.

Customers must improve their resilience posture in a more volatile operating environment. PagerDuty meets the rising standards for platform resilience that large enterprise and AI leaders expect. They trust PagerDuty because we provide the platform to solve these problems.

Incident response, while powerful, is no longer sufficient. Customers need an enterprise-grade platform that automatically and accurately detects and diagnoses issues. Large enterprises and high-growth AI natives require resilience at scale to engender both customer trust and revenue continuity.

PagerDuty provides an autonomous cloud-native engine for mission-critical operations. By unifying incident, event and service management, PagerDuty drives efficiency in high-stakes enterprise environments. PagerDuty's customers are consolidating their AIOps, alerting, automation investments into the Operations Cloud, reducing their need for high-cost service desks, people leading operations centers and multiple observability vendors.

Our AI value proposition resonates and customers are doubling down. What differentiates PagerDuty as a platform for action is how we integrate agents, data, governance, teams and workflows in real-time autonomous operations.

PagerDuty does the work for customers, dramatically reducing observability costs by eliminating noisy duplicative alert. Our platform acts immediately on the high-fidelity signals that matter automatically and responsibly.

AI hyperscalers, including a large cloud and edge computing platform, a frontier large language model provider and the leading unified data and AI platform provider didn't just choose us. They expanded multiple times throughout the year.

Likewise, AI start-ups like Decagon, Etched and Rogo continue to scale on PagerDuty. This repeat expansion is a compelling leading indicator that AI is a net tailwind as to how ops cloud and expansion consumption-based pricing drives growth.

During the year, we expanded our relationship with a long-time customer, the world's largest digital infrastructure company. They signed another 7-figure multiyear expansion, deploying PagerDuty's process automation as the central orchestration platform for their new global automation architecture. We won the business because the platform demonstrated both technical security and also met their stringent security and compliance requirements.

Our past innovation led to category creation and leadership in DevOps and digital apps. We're executing on a similar long game opportunity, pioneering the AIOps ops category for enterprise. Once again, we have a deep moat context. Competitors can imitate features or build limited agents on public LLMs. But without PagerDuty's decade-plus advantage of data, incident and service context, they cannot reliably deliver accurate, high fidelity and resilient outcomes.

Our combination of historical incident data and AI agent context gives our customers the benefit of deep operational history and shared agent-to-agent memory in every response. Last year alone, our platform processed billions of events, nearly 1 billion incidents and millions of incident workflows. This proprietary context advantage, combined with our growing AI ecosystem positions PagerDuty uniquely, especially in the large enterprise segment.

Case in point, a global semiconductor supplier that is pioneering Agentic automation, selected PagerDuty in a landmark $1 million AI-driven expansion on a multimillion dollar base.

More than half of the investment is attributed to our Agentic capabilities as the customer transforms incident management to an AI orchestrated workflow and also uses PagerDuty to streamline supply and GPU utilization. This deal demonstrates the dual AI opportunity we're capturing.

Our agents automate incident management, while PagerDuty serves as the control claim for AI operations more broadly. Two different use cases, both mission-critical, both expanding.

AI is the new risk layer for enterprise. It's more complex and it feels differently than traditional software. And our platform is designed for the unique scale and materiality of AI operations. It automatically surfaces the relevant data and context to prevent failures before a human can even engage.

We were first to market over 6 months ago with the capability of our model context protocol server and agent-to-agent functionality, advancing AI orchestrations to correlate events and drive automated actions.

Early adopters from complex enterprises like NVIDIA are using PagerDuty Advance to speed resolution. IDC's recent report on AI agents in IT service management names PagerDuty and confirms what we're hearing from customers. organizations prioritize AI agents that can reason, plan and take action reliably, exactly what our 4 agents deliver.

By enabling customers to operate their critical AI investments, including models, infra environments and agents resiliently and confidently, our agents take enterprises to the next frontier of AI operations.

Our SRE agent now acts as a virtual responder for hundreds of clients. It resolves incidents autonomously. It learns from past incidents, it predicts failures and it progressively automates work. As these customers burn down their initial credits, ongoing consumption becomes a growth engine.

Today, we announced the expansion of our AI ecosystem. Our platform agents now seamlessly engage with leading AI data platforms and enterprise applications, including over 30 new AI partners. Three marquee partnerships demonstrate the power of the ecosystem in action, Anthropic, Claude, Cursor and LangChain.

Through these partnerships, PagerDuty handles increasingly complexity -- increasing complexity in customer environments, solves problems faster and delivers a complete platform based on a level of intelligence no other competitor can match.

AI is transforming digital operations to proactive operations. Issues need to be caught earlier and resolved faster because the complexity, cost and blast radius of AI failure is higher. AI workloads provide challenges only solvable by a platform offering real-time orchestration and operational maturity.

In fiscal year 2026, the diversity of wins across the AI ecosystem, infrastructure leaders, emerging start-ups and AI-enabled enterprises demonstrate PagerDuty is the operations platform for choice for AI natives to ensure their products scale reliably and responsibly. PagerDuty is the new control plane for AI operations in the enterprise.

In Q4, we strengthened our leadership with the appointment of Scott Aronson to our Board and Chris Ferro, as our Chief Legal Officer to our executive team. Both bring functional and business expertise essential to our operational performance.

Our search for a new Financial Officer is progressing well with several accomplished financial leaders in advanced stages of consideration. We expect to appoint a candidate in Q2. In the meantime, Howard remains steadfast in his commitment as CFO and to support a smooth succession during the year.

Our innovation and culture earned significant industry recognition again. PagerDuty ranks #1 in Built In's Best Places to Work list. Gartner named PagerDuty as a representative vendor in 2 recent research reports focused on AI agents for site reliability engineering. This recognition reflects our position, as a credible enterprise-ready platform as AI SREs approach mainstream adoption.

PagerDuty now serves more than 650 nonprofit organizations worldwide. SIRUM, the largest redistributor of surplus medicine, uses our Operations Cloud to avail over $300 million in medicine to more than 500,000 patients across the country. Other leading nonprofits across critical sectors, including emergency response, health care and education are leveraging our AI platform to schedule and strengthen their impact.

Throughout the year, we continued to invest in product priorities that drive long-term customer value. First, deepening our AI capabilities and integrating them seamlessly into the platform; second, expanding automation; and third, broadening the ways customers can use PagerDuty across their organizations.

We see meaningful opportunities to extend our platform beyond its perception, as an incident response solution into an AI operations platform for broader operational workflows. like manufacturing throughput, network reliability, AI infrastructure utilization and FinOps to name a few, where urgency, intelligent orchestration and accountability are critical.

So as we look to FY '27, our business priorities are clear. First, we continue to strengthen our core franchise, digital operations management, where our brand, scale and enterprise trust remain significant advantages. Second, we continue embedding AI and automation into the platform to drive better customer outcomes and increasing differentiation. Third, we are expanding the role that PagerDuty plays across enterprise by addressing a broader set of urgent high-value operational use cases, including AI operations. And finally, we do all of this with continued discipline, leveraging AI ourselves in our own operations to expand capacity and efficiency.

PagerDuty drives enterprise resilience with a compounding advantage, where contacts drives better automation, agents take smarter action and customers move closer to autonomous operations.

We made significant advancements in our platform and are optimistic that our reinvigorated go-to-market team continues to build momentum in new and expansion business, while also improving gross retention.

The long-term opportunity in front of us is compelling. Modern organizations depend on resilient digital and AI operations, and that challenge is only growing for our customers. PagerDuty is positioned to successfully support customers and their leadership teams in navigating AI complexity, mitigating risk and capitalizing on transformational growth.

As we enter FY '27, I'm confident in our people, our strategy, our execution and our position in the market. We have a category-leading platform, a proprietary data advantage, accelerated product innovation and a go-to-market transformation that is bearing fruit. FY '27 is about scaling what's working and capturing that opportunity ahead.

And with that, I'll turn it over to Howard.

Thank you, Jen, 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 reviewing our fourth quarter and full year financial results, I want to highlight the durability of our business model. We achieved our first full year of GAAP profitability, a testament to our operational discipline. We expect to maintain full year GAAP profitability in FY '27. This financial strength allows us to return capital to shareholders, while simultaneously funding our transformation.

In FY '26, we repurchased approximately 10 million shares under our $200 million repurchase plan, leaving roughly $63 million of the authorized amount available at quarter end. Our consistent cash generation and a strong cash position allow us to advance our enterprise transformation and invest in AI regardless of the macro environment, while returning capital to shareholders.

Moving to results for the quarter, we delivered revenue of $125 million, up 3% year-over-year, with international revenue increasing 6% year-over-year, contributing 29% of total revenue.

Annual recurring revenue exiting Q4 grew 1% year-over-year to approximately $499 million. Despite the macro headwind of seat compression in some of our customers, our enterprise strategy is working. Customers spending over $100,000 in annual recurring revenue grew to 861, up 1% year-over-year. More importantly, the ARR from this cohort, including our largest, most strategic customers increased to 72% of total ARR. Customers with ARR over $1 million increased to 79, up 10% year-over-year. This shift towards larger, stickier enterprise relationships is central to our long-term growth thesis.

Moving to profitability, GAAP net income was $11 million, our third consecutive quarter of GAAP profitability. We're continuing our progress on the path to sustained GAAP profitability.

Dollar-based net retention was 98%, impacted by lower gross retention, as we had anticipated going into the quarter. However, we have implemented specific programmatic renewal initiatives and strengthened customer management to reverse this trend. We expect gross retention to improve in Q1 with steady progress through the year. Consequently, we expect DBNR to stabilize in Q1 and increase gradually throughout the year.

Total paid customers grew to 15,351, representing a 2% increase year-over-year. Free and paid companies on our platform grew to over 35,000, an increase of approximately 14% year-over-year, providing a healthy funnel for future conversion.

Continuing with Q4 results, non-GAAP gross margin was 87%, exceeding the high end of our 84% to 86% target range. Non-GAAP operating income was $30 million or 24% of revenue compared to $22 million or 18% of revenue in the same quarter last year. The outperformance is not accidental. It reflects our rigorous focus on efficiency and operational execution.

In terms of cash flow, cash from operations was $25 million or 20% of revenue and free cash flow was $23 million or 18% of revenue. This strong cash generation gives us the financial flexibility to invest in our go-to-market transformation and AI product development, while maintaining our commitment to shareholder returns.

Turning to the balance sheet, we ended the quarter with $470 million in cash, cash equivalents and investments. During the quarter, we repurchased 8 million shares for $99 million. We view our current valuation as a compelling opportunity, and we're utilizing our cash position to reduce share count.

On a trailing 12-month basis, billings were nearly $496 million, an increase of 2% compared to a year ago. At the end of Q4, total RPO was approximately $449 million, increasing 2% year-over-year. Of this amount, approximately $314 million or 70% is expected to be recognized over the next 12 months. $106 million or 24% over months 13 to 24 and the remainder thereafter.

For the full fiscal year, revenue was nearly $493 million, up 5% year-over-year. Gross margin was 86%, in line with the year ago period. GAAP net income was $174 million. This includes a onetime income tax benefit of $169 million from the release of a valuation allowance.

Operating income was $121 million or 25% of revenue compared to $83 million or 18% of revenue a year ago. This marks our fourth consecutive year of increased non-GAAP profitability, and we are closing in on our long-term non-GAAP operating margin target of 30%.

Operating cash flow was approximately $115 million or 23% of revenue compared to $118 million or 25% of revenue in the year ago period. Free cash flow was nearly $103 million or 21% of revenue compared to $108 million or 23% of revenue in the year ago period.

In terms of metrics that we provide on an annual basis, ARR from customers using 2 or more paid products was 66%, up from 65% in FY '25. ARR contribution from incident management was 70% of the total, in line with FY '25. Validating our enterprise focus, the contribution from our [indiscernible] cohort was 72%, up from 71% in FY '25.

We have made sustainable operational progress by transitioning customers to flexible usage-based pricing and programmatic renewal management, which we expect to improve retention. While overall paid users on our platform increased modestly year-over-year, we anticipate that the macro trends around seat compression will impact some of our customers in the near term.

Our fiscal 2027 outlook reflects a prudent view of this environment. However, the early adoption of our Operations Cloud usage-based pricing and our new AI products gives us confidence that we will partially offset seat compression and drive gradual ARR improvement through the year, as customers transition and scale.

Essentially, we are transitioning the business model to be less reliant on seats and more driven by consumption and value. As a result, for the year, the midpoint of our revenue guide represents essentially flat growth, but with a higher quality of earnings and continued margin expansion. We're expecting modest operating margin improvements and an 8% increase in EPS.

For the first quarter fiscal 2027, we expect revenue in the range of $118 million to $120 million, with the midpoint essentially flat year-over-year and net income per diluted share attributable to PagerDuty, Inc. in the range of $0.23 to $0.25. This implies a non-GAAP operating margin of 19% to 20%.

For the full fiscal year 2027, we are initiating guidance with revenue in the range of $488.5 million to $496.5 million with the midpoint essentially flat year-over-year. Net income per diluted share attributable to PagerDuty, Inc. in the range of $1.23 to $1.28. This implies a non-GAAP operating margin of 24% to 25%.

Before moving to questions, I would like to provide assistance with modeling FY '27. On cash flow, we expect free cash flow margin to be approximately 2 to 4 percentage points lower than FY '26, primarily due to lower interest income, higher facilities CapEx and timing of payments. Our EPS guidance now incorporates a non-GAAP tax rate of 20% for each quarter of FY '27.

The fundamentals of our business are strong. We have a durable balance sheet, expanding operating margins and a clear strategy to navigate AI taking center stage. The go-to-market changes we've made, combined with our product innovation in AI operations positions us to capture the significant opportunity ahead.

In FY '27, we are laser-focused on steady improvement in retention, reaccelerating ARR growth, expanding margins and achieving full year GAAP profitability. I'm confident in our people and super excited about the future for PagerDuty.

With that, I will open up the call for Q&A.

Thank you so much, Howard and Jennifer. We're going to turn to questions from the analysts joined into the call. We'll start with our representative from Morgan Stanley, Sanjit Singh. Sanjit, please go ahead.

I wanted to get a sense on the flex space pricing, the consumption pricing. What's been the receptivity from your customers, particularly your larger ones? They also want to solve for predictability. And so I just want to get the feedback on the receptivity of the flex space pricing.

And then do you have a -- as we think about this year, do you have a -- is there a way to think about what percentage of the base will be on the new pricing model by the end of the year?

Sure. Thanks for the question. Flex pricing has been received very positively by large enterprise. And I mentioned earlier the strength of large deals in the quarter and the $1 million-plus spend cohort growing in the teens.

I think what is driving it is, one, those customers really appreciate the reduction of friction and access to new products. And by taking away the friction of counting heads or seats, they actually can go after new use cases. So we talked about a large semiconductor provider that's using us in their supply chain environment and their GPU utilization.

We've had a very large manufacturer using us for manufacturing operations. And some of these really, really large enterprises that are somewhat asset-heavy are seeing opportunities to not just attack digital operations, but also traditional operations and AI operations, really anything that is software-enabled.

In terms of the transition itself, you all have seen these types of transitions in the past. The leading indicators give us a lot of confidence. Those leading indicators are large deals, ARR improvement through the year, gross retention improvement that we expect through the year, success with AI natives, AI-first companies, large enterprise as well as new acquisition and expansion. And those are the measures on which I would track our progress and how we're tracking our progress in moving through the base in that transition.

At the same time, we're acquiring very attractive new customers that are expanding with us regularly through the year. And we've talked about large frontier LLM model providers. We've talked about native AI applications, some of the folks in the AI infrastructure space, but again, continuing to win in enterprise.

Finally, what I would say with regard to the pricing transition, we're getting much more practice with it. And as we scale that through the sales force, we expect it to continue to improve.

Awesome. And then just more broadly, I'd love to get the team's perspective on what's the best way to create shareholder value from here and the strategy for that. So I guess what I'm alluding to is, is there is a view here that we're going to be focusing on $1 million customer cohorts, maybe get smaller from a customer base perspective, but focus on really just the high end and drive margins as you sort of laid out to 30% over time? I just want to understand like what the -- what your view is on how you create -- the best way to create shareholder value given where you are from a growth and margin and free cash flow.

Sure. Well, revenue and dollar-based net retention are lagging indicators. The leading indicators around growth, particularly in the segments we care about, large enterprise, the AI-first companies, AI natives, which are new, but they grow fast and they have a higher requirement for resilience and fidelity than the traditional software start-ups did.

So we have a different moat in that segment than we had a traditional VC-backed software start-ups. So both those segments are important to us, and we see them as high value and high propensity to grow.

Make no mistake about it, we are focused on reaccelerating growth, but being selective in those segments that we think are going to return value to shareholders and help build sticky value in the company. And at the same time, you can expect us to continue to execute with a high level of operational efficiency. So I think it's profitable growth.

We're focused on the long-term opportunity around capturing this new category, we believe, is AI operations. And as I said, we have a lot of large enterprise customers that are still trying to get through digital transformation. Like they're not done with that and have moved on to all things AI. They actually are still trying to move towards a more efficient way of operating digitally.

We're very excited about the products that we have out in the market. And frankly, software can be a little bit of a depressing place right now. There's a lot of people in Silicon Valley that are gloomy about the sort of rotation out of software. We are fired up. We just launched our spring release.

We have PagerDuty on Tour happening in London today, and it will be rolling out to other cities. And we're out in the market with real Agentic products that work on a highly advantageous foundational data model that is very hard to replicate and performing at really solid gross margins as well as improving our operating margin. So it's a long game.

And like I said, you should really measure us and judge the progress that we're making in reaccelerating growth on those large deals, ARR improvement through the year, gross revenue retention through the year, success with those AI natives and large enterprise customers and then the new logo acquisition and expansion where we saw a lot of momentum in the quarter.

Next, we'll be joined by -- joining us from CGF, Kingsley Crane.

Many of us saw the news earlier this week about the all-hands meeting AWS related to reliability concerns in large part due to AI coding. So as enterprises are shipping faster but with AI, but potentially breaking more, this seems like this should play directly into your strengths. But the question is, I guess, like where are customers at regarding that right now? Has this dawned on them yet? And then has the impending onset of these issues affected how they view your strategic value?

Yes. I agree with you, and I've said this in the past, I'm going to keep saying it. With AI, the environments that our customers have to deliver products and services in are becoming increasingly more complex and less manageable by human beings, right?

So automation, automated detection, intelligent orchestration of issues and challenges and auto remediation is becoming increasingly more important because human teams simply can't manage the scale.

And we do believe that it is very much a tailwind for the business. We are seeing that in some of these larger deals that we're doing, but it's not well reflected in a seat-based pricing model.

So the transition of moving to a platform model that also benefits from the consumption of more and more of our new products and easier access to those products across new use cases is important. And that's where we're seeing those leading indicators like new customer acquisition and expansion improving meaningfully from Q3 to Q4, and we think they will continue to improve over the course of the year.

To your point, when you ask where customers are, I would say there's still an underestimation of how hard it is going to become to deliver enterprise resilience that customers, regulators and others expect.

I was with a customer at a large bank, a large global bank the other day, and they were talking about how they're trying to bring together both enterprise resilience, operational resilience and technological resilience, and they have different manual efforts across all 3, but they're sort of colliding as you see complexity enter every function within a business, cyber threats going up, et cetera. So having a platform that can help manage all of that, but also get you to more autonomous remediation or recovery, I think, is going to become increasingly important.

And those large enterprises, they tend to want one strategic partner who's best at this, but also who can demonstrate resilience in the face of this complexity. And that's where we have an architectural advantage.

We've proven over time that despite public service failures, significant failures in different parts of industry and different parts of the world, we're still able to provide for our customers what they need and then business has just turned [indiscernible ]. We've never had a maintenance window. We've never said, oh, we're going to be down for the next several hours, while we ship something new.

And I think I would also just add to that, Kingsley, today, we made an announcement around our AI ecosystem. And 3 of the partners that Jen mentioned in that are really focused very much on how do you using the model context protocol of agent-to-agent interaction or else even some of these products, whether it's Anthropic, Claude or Cursor or LangChain being able to, ahead of code being deployed, have it actually be tested for a risk score so that you're actually getting into the cycle of fixing problems before they happen.

And that's really what PagerDuty is all about, is being able to help companies have the resilience that they need regardless of what stage in the life cycle the issue could occur. So those are really exciting developments.

And the work that we've done around the AI ecosystem is because we recognize the need for the shift left, if you like, in the developer life cycle so that you can, in fact, build for resilience. So we're certainly well aligned to that, not only when something goes wrong, but actually helping support the prevention of any issues.

Yes. That's helpful. I mean, it does seem like reliability is getting harder to ignore.

It's definitely.

And just -- but just one more, just to bridge that into pricing since you mentioned it, and it was nice to hear that you signed several multiyear deals with flexible pricing. Just curious on pacing and the strategy around that. Like could you be more aggressive? Or is there potentially a wholesale shift away from seats toward a like-for-like consumption model? I realize that could be difficult to pull off.

Yes. We're not going to talk about timing per se because it really -- a lot of it depends on how customers demonstrate readiness to go. But what was encouraging in Q4 coming out of our launch of flexible pricing in previous quarter is that we're seeing large customers that might otherwise have downgraded based on their seat license requirements actually expand meaningfully because of the access to new products and services and the ability to allow different parts of the organization to deploy PagerDuty against new use cases. So we will be working very aggressively to get that in the hands of our larger customers.

And then at the same time, I wouldn't say seats are entirely dead. We have small customers that want a really simple pricing model. They want a way to be able to frictionlessly get on the platform and get going, and that's still available to them.

But what the flexible pricing platform has enabled us to do is start with the full operations cloud. And a big part of the draw, which is creating the leading indicator momentum there is the fact that they're able to immediately get access to our Agentic SRE, immediately access PagerDuty Advance and start to get the benefit of the MCP protocol, the server and agent-to-agent engagement.

The other thing that I would say is fidelity and resilience and the way our platform operates continues to serve us well in terms of creating moat that makes it harder for smaller players or less technical players to come into the enterprise space. And we continue to invest in that as well.

And our team puts up with our development team and our infrastructure team is under a lot of stress to constantly deliver that high level of resilience. But what's different is we've seen small AI companies raise their standard because the trust around how their products and services work, making sure their AI doesn't thrift, there isn't hallucination. It works the way it's supposed to. Their agents are operating reliably. That is a whole use case for the platform.

Yes. And Kingsley, I'd make just a couple of comments because as we mentioned before, we were -- with any pricing transition, we've been very thoughtful in terms of engaging our customers and understanding what their requirements are. So Q4 was the first time that we were specifically targeting customers with our flexible pricing model. And the response has been really positive.

One, as Jen said, it's giving people access across the whole platform. But certainly, the momentum that we're seeing there is strong. And we will -- that will be our first port of call in terms of how we address with large customers, how they expand and grow with us. And we would -- we anticipate by the end of this fiscal year that a meaningful portion of our ARR will be under the new licensing model.

Excellent. Thank you, team. We do have some additional hands raised. [Operator Instructions] Next from Truist, we'll hear from Miller Jump.

So I guess maybe just pivoting to the go-to-market side a little bit. Now we've had a full quarter with Todd as CRO. I'm wondering kind of where we stand on execution changes there and kind of time line to impact? And then if you could share anything on incentive changes for the year ahead.

You're on mute, Jen.

[indiscernible] you're on mute [ this ] every time. I'll start and Howard, if you want to jump in, that's great. I'm really pleased with how the go-to-market organization has really risen to the occasion here, both in embracing the new flex pricing model because it's a big change and really taking that to customers proactively, not waiting to be asked and more programmatically getting in front of customers 3, 4 quarters out around their renewals so that there aren't surprises if the customer is going through their own business transition and needs a different type of offering from us.

And importantly, really focusing on large strategic platform deals. And you see that in Q4, really not just the ability to compose these opportunities with customers and find some of these new use cases, but to convert them and then build on them. So that transformation, which, to some extent, started before Todd, but has accelerated under his leadership is something that I'm really pleased with.

And we are really trying to incent our customer success and post-sale organization to focus on gross retention, while incenting our go-to-market organization to focus on growth. You'll recall, we also took our PagerDuty Online or what we would call our product-led growth business and moved it under Katherine Calvert, and that business is performing well. That part of our business is also driving a lot of the new logo acquisition by getting some of our new products and services in front of prospective customers right away.

So I mentioned in prepared remarks, we're seeing better free-to-paid conversion. The free-to-paid -- the free numbers are up, but we're converting them more effectively. So that part of the funnel, I think, is performing better and we're also converting new logos more effectively than we have in the past by having those 2 teams focused on different things, but moving towards improving gross retention over the year, improving ARR over the year and continuing to build on the momentum we're seeing in new logos and in expansion.

I would say that we put the organization through a lot of change, and I'm really proud of how the employees are rising to the occasion. It leaves me very energized and encouraged and frankly, inspired.

And to have -- you can go on YouTube and see our SRE agent at work. Our new products, our first-class chat experience that we announced in our spring release today, they're all out there. You can watch them. They're real. This is not something that we're talking about doing someday, and they're deeply integrated into the platform.

So I know I'm having a little bit of a connection problem. So hopefully, this comes through. But I do want to double click. I know it's not at the high, high end, but the [indiscernible] customers that did churn off in that mid-level you've talked about, first of all, was that full churn or partial churn? And then second of all, do you have insight into where they're going [indiscernible].

Yes. It's always a mix in that midrange. You have some segments of the market that are under a lot of pressure there, where headcounts are really coming down. And so that drives some of the seat-based downgrades.

Also, as a result of being under pressure, they become more and more price sensitive, right? If they have more basic requirements, they can choose to go to a lower cost provider because they don't care as much about the resilience per se, although I think that is starting to change. And we can be more aggressive there as well from a pricing perspective. We've got room in our gross margin. And one of the things we talk about is taking a more offensive stance there.

But to be clear, I think the value to be had and the drivers of growth for the business are really around driving that platform into large enterprise and continuing to demonstrate that we are the operations platform of choice for AI natives and AI first.

From [indiscernible] George McGreehan.

It's George McGreehan on for Koji Ikeda at Bank of America. I wanted to kind of double-click on the expectation for gross revenue retention to stabilize. I guess, could you maybe share like any color you have in terms of how customer conversations are sounding regarding their hiring plans for this year?

Their hiring for this year will matter less and less as we move to more of the platform and consumption-based licensing. I mean, interestingly enough, we have customers that are hiring software developers. So -- and we see the mix of software developers on our platform increasing.

And I think what the role is changing to some extent. But it's really less about what they're hiring for us and more about how do they prioritize enterprise resilience, how are they thinking about continuing to build automation. And we're hearing a lot from customers wanting to shift left. They want to go from simply responding to small events and minor incidents faster to preventing them from even consuming people's time.

So they're using -- like when I look at our usage metrics on the platform, more incident workflows, more events flowing through the platform, et cetera. So you can see that demand there.

I would also say, like when I talk to executives, they're in a pinch, right? They've got boards saying use more and more AI, but they've also got their regular saying, you better use that AI responsibly.

And so they're really looking for partners, who can help them manage both delivering on that upside opportunity using AI in their products and services and internally themselves, but doing it in a way that's responsible. And when something does go wrong, they can minimize that blast radius, right? That is more of the kind of conversation that we're having.

And when Todd came on board, he and I saw over 100 customers in his first 90 days here. And one of the things he said to me was our customers want to do more with us. So continue to consolidate things like event management, event consolidation, orchestration, automation, runbook automation, workflow automation and now auto remediation with our Agentic solution is a big part of that strategy. So they can start consolidating some of their operational requirements on to us.

The other thing is looking at those new use cases. And that's really been led by our largest customers saying, I need to figure out how to solve this problem, and we'd like to solve it with you.

And -- that all makes sense. And kind of just on the -- as we move to consumption-based pricing and understanding that that's a smaller piece of the business today. But if you could maybe provide color on how underlying usage trends look for PagerDuty and maybe how that's contemplated in 2027 revenue guidance?

Yes. So Howard mentioned this in his comments, our 2027 revenue guidance is conservative. And because we're going through this pricing transition, the leading indicators are somewhat clouded by the lagging indicators in that transition, and we're still operating in a pretty volatile macro environment. So we've tried to be really thoughtful about that.

But coming back to your question around like how does GRR improve over the course of the year, a lot of the work that we've already done is going to serve us. So one, moving customers to multiyear agreements. It means that we have less revenue available to renew in any quarter going forward through the year.

Two, giving customers the option of flex pricing and moving them to products and services that have a very clear ROI. When you start to actually be able to automate work that required people, teams, operations centers to do, it gets easier for executives to show the hard cost savings.

And then also, we're seeing this realization that resilience is not just a risk that needs to be -- that resilience isn't just about mitigating risks of things going wrong and not responding to them well, but it's also about unlocking value and growth. And that's certainly true for the AI natives and the AI-first companies that see like if we can demonstrate trust in these products and services, we can sell more.

Yes. And George, just one comment from me is why this pricing change makes sense for us and for our customers is because more work is happening on the platform. The amount of work that happens on our platform compared to our competitors, there's no comparison. We do billions of events. We have nearly 1 billion incidences last year. We do millions of workflows each month. So our customers are using the platform more.

And often, the discussions that we're having with our customers is that they, in fact, have had to make hard choices around headcount. But PagerDuty has enabled them to do so because we're actually doing more of the work for them. We're automating work that was previously done by humans.

Now when we start showing them how they can use our platform more broadly, then they have the opportunity to expand with us, but in fact, generate incremental savings for themselves and get to better levels of resilience.

So it's an interesting conversation that we've had and the early conversations we've had with customers and the success we had in Q4 around the new licensing model have been super positive because there's a very clear correlation to how they're thinking about managing work in their organization, how they're thinking about resilience. So I think it's -- we'll continue to just see momentum build around that transition.

[ Got me with those initials ]. Thanks for joining us from BofA, George. [Operator Instructions] Next up, we are going to hear from Craig-Hallum. We have Vijay Homan.

This is Vijay on for Jeff. I just wanted to circle back to the go-to-market effort. Obviously, you guys have your leadership team set there. I'm just wondering, should we expect to see any jump in the spend commensurate with that sales motion? Or will the focus be on reallocating existing resources and potentially even seeing savings there?

Yes. So Vijay, it's certainly a case of us reallocating capital. We're still, as per our guide, looking at demonstrating improvements in terms of operating margin this next year. We've done a fair amount of work with Todd and Katherine on the sales and marketing front around how we can be more efficient as a business, how we can leverage AI ourselves, how we're able to organize our teams to be more effective with a very clear distinction in terms of the responsibilities across those teams. So we would expect to see, again, improvements in terms of sales and marketing efficiency as we go into this next year.

Great. And then just one more for me. As far as enterprise, I think it was the second consecutive quarter, the number of customers with more than $100,000 ARR kind of ticked down. Obviously, you're alluding to some potential improvement in the coming year. I was wondering if you could just elaborate on kind of the puts and takes in the pipeline there.

Sure. And I'll go first, and Jen, you can jump in. What we do see within that [ $100,000 ] cohort, we obviously had some customers, where there might have been a modest contraction, which took them down below the [ $100,000 mark ]. That has sometimes happened, particularly for maybe a mid-market customer, who has ended up in that cohort and is now under intense pressure from a cost perspective. But at the same time, we have others that matriculate into that category.

A lot of our focus has been, though, on the top end of that cohort and making sure that we're putting in place contractual arrangements with our largest, most important customers in order to help them take more benefit of the platform, increase the value they're getting from PagerDuty and typically in large multiyear deals.

So what we would expect to see is that, that cohort will continue to grow over time, but we're certainly going to be focusing a lot more of our attention on sort of the larger 6- and 7-figure customers and how do we help them mature and grow at a greater pace.

Okay. Thank you, team. It looks like that rounds us out for the day. Appreciate your time. Jennifer, we'll turn it over to you for any final remarks to close this out.

Thank you. AI is the new risk layer for enterprise. And as the control plane for AI operations, we are well positioned to support enterprise resilience across our customers' strategic digital and AI operations with both large enterprises and AI natives.

The leading indicators in Q4 demonstrate the momentum from new customer acquisition and expansion, our pricing transition, our product velocity and expansion into cutting-edge use cases that continue to widen our competitive moat. We are energized by the opportunity AI presents for PagerDuty and confident in our ability to capture it.

Before I close, I want to take a moment to recognize Howard Wilson's leadership. and his contribution to PagerDuty for nearly a decade. Together with our team, we've built the company from a single product, $50 million in revenue and a few thousand customers to the leading AI operations platform for enterprise, generating nearly $500 million in profitable revenue with over 35,000 customers.

And while Howard has been our CFO since 2018, he has seen -- he's been a tremendous partner and visionary leader who has supported almost every function across our company at some point in time.

His infinite passion for our mission, his advocacy for our customers as well as for our people and Howard's unwavering integrity leave an indelible legacy and a strong foundation for us to continue building on.

His personal imprint in our business will continue to shine through the incredible team that he's built and the many capable leaders he has developed and mentored here. I know you all will join me in thanking Howard for his leadership and his stewardship of PagerDuty. Thank you all, and have a great day.

Good afternoon, and thank you for joining us to discuss PagerDuty's Third Quarter Fiscal Year 2026 Results. With me on today's call are Jennifer Tejada, PagerDuty's Chairperson and Chief Executive Officer; and Howard Wilson, our Chief Financial Officer.

Before we begin, let me remind everyone that statements made on this call include forward-looking statements based on the environment as we currently see it, which involve known and unknown risks and uncertainties that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. These forward-looking statements include our growth prospects, future revenue, operating margins, net income, cash balance and total addressable market, among others, and represent our management's belief and assumptions only as of the date such statements are made, and we undertake no obligation to update these.

During today's call, we will discuss non-GAAP financial measures which are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in our earnings release, which can be found on our Investor Relations website. Further information on these and other factors that could cause the company's financial results to differ materially are included in filings we make with the Securities and Exchange Commission, including our most recently filed Form 10-K as well as our subsequent filings made with the SEC.

With that, I will turn the call over to Jennifer.

Thank you, Christine. Good afternoon, and thanks for joining us today. In the third quarter, PagerDuty delivered revenue of $125 million, up 5% year-over-year. Non-GAAP operating margin of 29% exceeded guidance, expanding 750 basis points over last year. We also achieved GAAP profitability for the second consecutive quarter, evidence of disciplined execution and a durable profitable growth model.

Annual recurring revenue of $497 million represents 3% year-on-year growth. New and expansion bookings were consistent with the first half, offset primarily by customers rightsizing seat licenses amidst budget caution.

We accelerated our product innovation and operational efficiency in the market, which extends our leadership in the increasingly important and complex digital and emerging AI operation space. In order to build long-term and near-term shareholder value in an evolving budgetary environment, we're focused on 3 objectives: One, expanding operating and free cash flow margins as we further increase operational efficiency; two, extending our product advantage and surface area in AI operations and incident management; and three, scaling the initial successes in our go-to-market transformation to drive faster adoption of the full PagerDuty Operations Cloud and effectively monetizing the value we created for customers.

This will be our sixth consecutive year of expanding operating margins as part of our commitment to profitable growth. Structural efficiency initiatives are accelerating product and business execution while lowering our cost base. With the added benefit of modern software and AI, we expect to continue expanding operating margin towards our long-term target of 30%.

Demand for our platform remained strong with double-digit year-over-year growth in new customer acquisition and in total paid and free customers. Customer retention and growth remain our top priority. While the number of customers expanding with us each quarter has remained consistent throughout the year, we're focused on increasing our average transaction size by more effectively attaching new usage-based products like AIOps and PagerDuty Advance and by driving adoption through new professional services and customer success playbooks.

Targeted customer retention efforts, including a more efficient, proactive coverage model, delivering high demand features and flexible pricing have stabilized customer loyalty and retention. That said, seat license compression continues to be our most significant challenge in large enterprises, where budget caution and rightsizing have had the most impact on our incident management business.

During the quarter, we mitigated longer-term risk by leveraging multiyear agreements, expanding to a broader product footprint, and including professional services to ensure fast time to value. We are scaling this motion with a refined adoption and value realization program through the customer success team while at the same time, enabling the field to focus on our agentic offering, both of which will support improved retention and growth over time. We have also sharpened renewal forecasting to identify, measure and address risk earlier in what is now a multi-quarter cycle.

On a strong foundation of financial and operational discipline, we extended our product advantage in end-to-end incident management and AI and agentic operations. In the past, AIOps referred to modern event management techniques that support root cause analysis and incident triage. Now in an environment where trillions are being deployed on AI investments, yet enterprise resilience is more important than ever, the need for a new operating model has emerged. Agentic orchestration is one of many new operational aspects that enterprises must manage. The new ecosystem required to support AI includes energy, storage, compute, data management, large language models, applications, agents and the systems to test, control and run AI solutions safely and responsibly.

Connected intelligent orchestration and operations of the entire AI stack and the functional automation applications across the business create new surface area that PagerDuty is uniquely positioned to support. The Operations Cloud connects seamlessly via our integration ecosystem and our model context protocol, or MCP. It intelligently detects potential disruptions and drifts and orchestrates human-led agent-based and model-centric events to prevent and resolve issues. This is the new era of AI operations, real-time orchestration and action across AI agents, applications and infrastructure. We continue to invest in our road map to ensure our position as a central nervous system for both digital and AI operations going forward.

PagerDuty pioneered and defined the incident management space starting in DevOps and expanding to enterprise IT, security and business operations in service of supporting the largest and most innovative companies in building resilience at scale. In October, we leased over 150 platform enhancements in the industry's first agentic end-to-end incident management offering. Customers can now leverage PagerDuty agents to address unstructured high-value time-critical work at every point in the value chain.

PagerDuty agents have the unique advantage of being built on our open and neutral ecosystem of more than 700 integrations, leveraging the broadest context on causes and resolution of incidents in order to take the most effective actions. Early traction and positive customer feedback on PagerDuty's agents demonstrate the need for agentic solutions to scale operations effectively. This is especially critical as a higher volume of code is being shipped with AI.

We deepened our AI ecosystem leadership in the quarter with an initial partner -- as an initial partner in the Glean MCP directory. This enables teams to adopt and accelerate value realization of the Operations Cloud.

PagerDuty is also the first incident management and operations platform integrated into Spotify's developer portal for Backstage, which positions us at the forefront of modern development. Spotify noted that this fundamentally helps the organization shift from reactive to proactive issue prevention. Developers can now initiate triage, escalate and resolve incidents without leaving their workflow.

Our road map prioritizes standards-based enterprise-grade interfaces for discovery and control, deep workflow integration in developer, agentic and operations tooling and an automation fabric that seamlessly weaves human responders and autonomous agents together. Compared to point solutions, PagerDuty capabilities and use cases span functions such as supply chain, IoT, storage and security. Recent global infrastructure outages also highlight the differentiated resilience that we provide every day.

Go-to-market excellence is critical to our success. We're transforming the way we go to market, especially in enterprise, where we've seen ongoing customer budget caution and organizational rightsizing and change. Over the midterm, we are establishing PagerDuty as the enterprise operations platform for AI. In the near term, we're transitioning from a traditional single-year seat-based license model to a multiyear platform usage model.

On a year-over-year basis, our go-to-market execution has improved. In Q3, we advanced customer acquisition, adding 284 net new customers year-to-date, nearly 4x the total in FY '25, validating demand for our products and services.

Leading AI native companies like Perplexity and Anyscale continue to choose PagerDuty as their primary operations platform. We've also continued to grow our high-value customer base, those spending over $100,000 per year with us by 5% year-over-year to 867 customers.

During the quarter, we welcomed Todd McNabb to PagerDuty as our Chief Revenue Officer. He and the team are focused on accelerating this transformation to improve our land, realize and expand motion, activating new partners to support this effort. In his first 30 days, we have seen nearly 40 customers together and expect to see over 100 by the end of the year. It's clear from those conversations that our customers want to do more with us and need both our expertise and support to realize the full value of our platform.

Initial progress in our shift from seat-based to usage-based pricing is encouraging. Flexible operations cloud packaging enables customers to seamlessly scale between human responders, agents and automated solutions without needing to precisely predetermine users and product mix. This better aligns with our customer investments to business outcomes rather than head count and licenses.

In the quarter, customers across industries made multiyear commitments to PagerDuty. A leading AI native company's multiyear renewal and expansion this quarter demonstrates the need for best-in-class and AI operations -- digital and AI operations in a high-growth segment, where proven scale, resilience and strategic partnership are required.

PagerDuty safeguards enterprise resilience at a global scale that competitors cannot match as the company's engineering footprint expanded rapidly from research focused to a global production platform supporting hundreds of millions of users. They required a strategic partner to support their unprecedented operational scale. As AI has accelerated, they have joined our $1 million ARR cohort.

A Fortune 25 global automotive leader selected PagerDuty for a multiyear agreement as it modernizes enterprise operations, optimizes manufacturing operations and advances electric and autonomous vehicle initiatives. PagerDuty won via executive alignment and enterprise-grade capabilities to support operations beyond software teams to manufacturing and the dealer network. Critical to our selection was fast time to value, integration with their native ITSM system, Slack-first workflow automation and our strong track record of scale deployments in manufacturing.

One of Australia's largest banks and a PagerDuty customer since July 2024 expanded for the second time this year during Q3 to support their ambitious growth goals. The bank added several thousand enterprise incident management licenses in a multiyear partnership, increasing their investment by nearly $1 million in ARR. The deployment is transforming operations from reactive and manual to preventative with scaled service ownership across the entire organization. PagerDuty is the bank's enterprise platform for AI.

In the competitive gaming industry, a leading digital entertainment platform with millions of daily active users selected PagerDuty's Operations Cloud with flexible pricing to enhance operational resilience. Moving beyond seat-based licensing constraints, the customer chose PagerDuty's usage-based offering to reduce expansion friction and to better align their investment with business value, automating more work as they target 99.99% availability and reduced operational toil by 20%. Developers can now focus on innovation rather than operational issues.

Our focus and sustained investment continue to yield returns in talent, critical drivers of long-term value creation. PagerDuty's recognition among Fortune's Best Workplaces Top 50 included this quarter's placement in the small and medium company list in technology and validates our ability to attract and retain the high-caliber employees essential to deepening our competitive moat in digital operations and expanding our offerings in AI operations.

Building on the digital operations category we pioneered, AI operations is a natural growth platform to support our long-term strategy and profitable growth goals. Progress in our go-to-market transformation, along with flexible enterprise and usage-based pricing support both midterm growth and ongoing margin expansion. While these efforts will take time to be fully realized, we're executing from a position of strength, including product leadership, expanding operating margins and a strong balance sheet. Our unique platform offering and improvements in underlying execution underpin our confidence in accelerating profitable growth.

I'd like to share one additional leadership update that Howard Wilson, CFO, has decided to retire during the next financial year. Howard has been at PagerDuty for 9 years and has been instrumental in growing the business to nearly $500 million in ARR. His impact has been deep and broad as he's led PagerDuty through our successful 2019 IPO and in achieving critical milestones, including positive cash flow, significant operating margin expansion, profitability and in recent quarters GAAP profitability. During his tenure, Howard has built and led incredibly capable teams in finance, corporate strategy, operations and customer success. He has opened international markets, helped to shift PagerDuty from product to platform and led us in acquiring several companies. We have started the search for a new CFO and Howard is committed to supporting a smooth succession during the 2027 financial year.

With that, I'll turn it over to Howard, and we look forward to your questions.

Thank you, Jen, and good day to everyone joining us on this afternoon's call. Before reviewing our third quarter financial results, I want to highlight our strong operational discipline reflected in our second quarter of GAAP operating margin profitability. We expect to be GAAP profitable for the full year next fiscal year.

And now, 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.

Moving to results. Revenue for the quarter was $125 million, up 5% year-over-year. Q3 GAAP net income was $160 million. This includes a onetime income tax benefit of $154 million from the release of the valuation allowance. International revenue increased 7% year-over-year contributing 29% of total revenue. Annual recurring revenue exiting Q3 grew 3% year-over-year to $497 million. Although we expected incremental ARR to be higher, there was more pressure on seat licenses and smaller expansion deal sizes this quarter.

We delivered 100% dollar-based net retention compared to 102% in Q2. DBNR was negatively impacted by lower gross retention. We expect this pressure on DBNR to continue in Q4. Customers spending over $100,000 in annual recurring revenue increased 5% year-over-year, resulting in 867 by quarter end. Total paid customers grew to 15,398 in Q3, growing 2% year-over-year. Paid and free customers on our platform grew to over 34,000, an increase of approximately 13% compared to Q3 of last year.

Q3 gross margin was 87%, above the high end of our 84% to 86% target range. The overachievement demonstrates PagerDuty's ability to drive its own operational efficiency, while ensuring that the platform improves that of our customers. We expect gross margin in the long term to return to within our target range as we invest further in customer success management.

Operating income was $36 million or 29% of revenue compared to $25 million or 21% of revenue in the same quarter last year. The outperformance reflected our focus on increased productivity and operational execution with lower payroll and other personnel costs.

In terms of cash flow for the quarter, cash from operations was $25 million or 20% of revenue, and free cash flow was $21 million or 17% of revenue.

Turning to the balance sheet. We ended the quarter with $548 million in cash, cash equivalents and investments. In Q3, we repurchased 2.4 million shares under our $200 million repurchase plan. And at the end of the quarter, $162 million of the total amount authorized to be repurchased remained available. Consistent cash generation and a strong cash position provides a solid foundation for us to advance our enterprise transformation while returning capital to shareholders. Trailing 12-month billings were $496 million, an increase of 4% compared to a year ago.

With respect to Q4, we anticipate trailing 12 months billings year-over-year growth to be flat. At the end of Q3, total RPO was approximately $450 million, increasing 2% year-over-year. Of this amount, approximately $287 million or 69% is expected to be recognized over the next 12 months, $101 million or 24% over months 13 to 24 and the remainder thereafter.

Now turning to guidance. When we provided guidance at the end of Q2, we underestimated the current headwinds to retention. Although the number of customers churning and downgrading is trending downwards, the dollar value of the contraction, driven by seat-based reductions and customer budget caution has been larger than we forecast. As a result, we are lowering our top line guidance. To improve visibility, we have made changes to our renewal process and implemented operational changes to drive earlier customer engagement.

In addition, in line with our ongoing focus on efficiency, we are increasing our full year net income and operating margin guidance. So for the fourth quarter fiscal 2026, we expect revenue in the range of $122 million to $124 million, representing a growth of 0% to 2%. And net income per diluted share attributable to PagerDuty, Inc. in the range of $0.24 to $0.25. This implies an operating margin of 21%. For the full fiscal year 2026, we now expect revenue in the range of $490 million to $492 million, representing a growth rate of 5%. The compares to the range previously provided of $493 million to $497 million. And net income per diluted share attributable to PagerDuty, Inc. in the range of $1.11 to $1.12. This implies an operating margin of 24%. This compares to our prior guide of $1 to $1.04 and 21% to 22%, respectively.

This quarter, we expanded margins beyond targets, delivered our second consecutive quarter of GAAP profitability and generated strong cash flow capital we've been returning to shareholders. At the same time, we are making the strategic investments that position the business to reaccelerate ARR growth while maintaining our disciplined financial profile.

In summary, we are expanding margins, generating cash and progressing the pricing and go-to-market transitions that support durable growth. We are executing from a position of strength with product leadership, disciplined capital allocation and a strong balance sheet, while staying tightly aligned to customer outcomes.

On a personal note, as Jen mentioned, I intend to retire next year. My journey at PagerDuty has been one of incredible growth, and I'm proud of what we have accomplished. I appreciate our customers, partners, investors and our employees for their support, and I'm committed to supporting Jen and team in a smooth succession.

With that, I will open up the call for Q&A.

Thank you, team. We have a number of hands raised already. Analysts, please feel free to raise your hand to be added to the queue. First, we'll hear from Jeff Van Rhee. Jeff, can I have you open up your line, joining us from Craig-Hallum.

Yes, there we go. I appreciate you taking the questions. And Howard, congrats, 9 years, great run. Wish you all the best. I hope you're doing what you do coming out of here. So Jen, just talk to me about the DBNR, the trend of deceleration there or declines and as Howard addressed, some gross churn issues that sounds like you're trying to figure out, how do you, from a leadership standpoint, evaluate what's going on there and compare it maybe to past periods where you've seen buyers be more cautious about spend, pulling in the reins to say, "Okay, this is like something we've seen before," or "Hey, this is something different here. What's going on?" And how is that thought process for you right now?

Yes. Thanks for the question, Jeff. And as we said, like we have a lot to be proud of in the quarter with a very strong bottom line results, 29% op margin, up 800 basis points over -- year-over-year, 70% free cash flow. But we're unsatisfied with our retention effort at this -- or our retention outcome from this quarter. It is a little different than anything that we've seen in the past in that what we saw this quarter was improvement around logo retention, so less customers leaving the platform and actually less absolute customers downgrading, but the customers that did downgrade tended to be larger downgrades in size tied to pretty significant reorganizations. And those reorganizations, you're hearing about them in the news every day, they come with sometimes thousands of jobs leaving a business, a lot of leadership turnover and change. And that's made it hard to anticipate the scale and scope of those.

Having said that, some of the things that we have done to better understand what's happening in those customers is, one, take a multi-quarter view on renewal planning with the customer so that as those customers make changes, we're moving in lockstep with them. Two, giving them an alternative from a flexible pricing perspective. I talked about a gaming platform in prepared remarks, where they came to us with this challenge, we're changing our organization pretty significantly and want to reduce seat-based licensing. And by moving the seat-based licensing conversation off the table, in service of usage and a platform license, we're actually able to expand within in the quarter. So as we scale that motion, we expect this to improve as well.

But overall, I'm confident in the long-term outlook because we see the same customers increasing their usage on products and features. So even though there may be less seats in the renewal, their actual usage of the platform is actually improving. And we've seen several examples of that.

In addition, you've seen we've really upped our focus on new customer acquisition. And that really I think, reinforces our product leadership and our market leadership, not just in digital operations, but also in this broader new evolving category called AI operations, where I think we're going to continue to be the choice of not only AI natives who can find less expensive offerings in the market, but also large enterprises that want to grow with us.

So we are really focused on those large customers and making sure we can anticipate any changes that might be coming and focus on flexible pricing and multiyear agreements to support them and to reduce risk over time with those longer-term agreements.

Helpful if I could sneak one other in. From a sales standpoint, not long ago, I know you were watching the maturity of the sales reps as what you thought would be kind of a key indicator when they hit their productivity. I think 60% at that time had been there a year. And I'm curious, now, you obviously have got some new leadership, relatively new in the sales or when sitting in the CEO chair, what are the indicators that you're watching most closely there for sales? What are you expecting? What are you looking for there?

Number one is what are customers telling us? What are they telling us about their ability to leverage and get value from the platform? How do they feel about their account coverage and continuity in terms of their engagement with PagerDuty? Are they getting the support that they need, both pre and post sale? And so Todd and I have really been focused on listening to and getting out and talking to our largest customers, and that's been not only very well received, but we've been, I think, pleasantly surprised by the love people have for our products and services, but also the admission that some of the challenges with adoption and realization is not purely due to PagerDuty's engagement model, but also the fact that their organizations are changing pretty rapidly. So they're asking for more proactive help in that area.

From a field perspective, I think Allison Corley, who joined us a few quarters ago as Chief Customer Officer, has really gotten their legs under the desk and has really gotten customer success oriented around a much deeper understanding of how customers are actually faring from a pure platform health perspective, and that's enabled us to have higher-level conversations with customers earlier in the process, but also to swarm customers with the care they need, even if their organizations have changed meaningfully.

And in the sales organization, Todd is really doubling down on what we call land, realize and expand, making sure that our reps who have ramped have the support that they need to really go after growth and expansion, focus on new product attachment, particularly those usage-based products, but also services attachment to ensure faster time to value for our large customers as we close and move on. And we've seen that result in some really great wins this quarter. I talked about an automotive manufacturer that's doing some really interesting stuff with us and that's a ramped rep who really understands the platform, but is also leading into not just our core incident management, but our new AI and automation features.

Next, we'll turn to the representative from RBC. Could you please introduce yourself and join the call.

It's Mike Richards on for Matt. I guess just to start understanding that you're making these changes to sort of get ahead of renewals moving forward. I was wondering maybe -- and it's early with these seat-based compressions, is there an opportunity to go back into these accounts before their next renewal to offer the usage-based pricing or services where you can sort of get back what you lost...

Absolutely. The -- one of the benefits of longer-term agreements is it gives us more time to go in during the period proactively with not only new pricing and packaging offerings, but also more flexibility to get across products and new add-ons. And we have seeded several thousand customers with our PagerDuty Advance products and services and seeing really good engagement there. And in fact, had a lot of success with our SKU that you're aware of called AIOps, which is really about event management, event correlation and root cause analysis, but that is -- that was our first usage-based pricing offering, and that's growing over 50% year-over-year, and it's been consistently growing on a solid base. It's not a small revenue product. So absolutely, this gives us an opportunity to be more proactive.

And in fact, the vast majority of customers that Todd and I have seen together are nowhere near a renewal. We're talking about getting feedback on the product, how can we help them attach to new use cases, how do we understand what they're trying to accomplish. And they're telling us a lot of the same things. One, we're actually starting -- we're moving from experimentation to deploying AI investments, and we need to do that in a safe and responsible way, and we need your help doing it. A lot of interest in the MCP, which was released for general availability earlier in the quarter. And also a lot of positive feedback in a very significant feature-based release across our entire platform. I think this is the largest release in the company's history, frankly, and that has been made possible through our developer's own use of AI.

So absolutely proactive. It's a team sport, and we have Allison, Todd and their teams, along with Katherine, who leads our digital-first business, and all of the executive sponsors in the business really focused on making sure that there are no surprises, and we're not turning up to the party late.

That's great to hear. And then, Howard, just a quick one for you. Just in terms of guidance assumptions, are you assuming that the dollar-based churn that you're seeing now from seat-based compression is sort of stabilizing from here? Or are you assuming that it continues to worsen?

Yes. So what -- our guidance has factored in sort of the visibility that we have today around dollar-based net retention through Q4, and that is driven primarily by the renewal rate. And we -- the visibility that we have around those renewals is now sort of taking us out further and earlier into the process. So that gives us a lot of confidence in the guidance that we've given. So we haven't provided a specific number around dollar-based net retention, but we do expect that some of the seat-based pressure that we've had will continue in Q4.

Turning next to Andrew Sherman with TD Cowen.

Great. Good to see you. How much -- Jen, how much of the surprise in the quarter from some of the reorgs and the layoffs? It sounds like the pressured seats, how much of that do you view as like one time because some big companies had layoffs? And how much is -- like is all of this kind of out of your control? Or are there things that you can do to kind of pinpoint this? It sounds like some of the earlier renewals will help. And I know there's a big renewal base in Q4. So how do you kind of prevent that happen in Q4, too?

A great question, Andrew. And it's nice to see the real Andrew Sherman. We see a name and then see a different face. So thanks for being here today. We already are making some progress by being more proactive and explicit in going to customers before they come to us to say they have problems. And I mentioned earlier that the absolute number of customers downgrading and of customers leaving the platform has improved and has decreased over the quarter. So that is, I think, a good leading indicator. We also are not waiting for customers to tell us that they've got challenges. We're in there all the time asking questions with the pod model now that includes the sales rep, the solutions consulting, in some cases, their first-line managers as well as the customer success manager. And where we're engaging with premium support and professional services that also gives us better visibility, So we do expect that to improve.

What we're also seeing generally is just what our customers sort of referred to as being cautious about their budget because they just don't -- they're uncertain about where that's going to be in the next couple of quarters. So by getting further out in advance of renewals, we also can capture budget even ahead of renewal timing. So like I said, we do expect it to improve. I don't expect the macro to change meaningfully, and we're prepared. And I think in a very strong position from a financial perspective with the durable balance sheet, very strong operating margins and free cash flow to work through this process with our customers.

Okay. And then on the consumption change, you talked a bunch about it last quarter, too, but it sounds like consumption of the platform was still healthy. Is that the case? And how are you kind of -- how quickly can you move to this consumption model so that the seat pressure becomes less and less of a headwind?

Yes. We're seeing usage go up across almost every usage metric on the platform and also that new customer growth that we talked about earlier, both in terms of new logo lands as well as net new customers and new -- and free and paid customers all growing in double digits. That is heartening in terms of demand for the product. And I would just remind you that it's not a one-dimensional shift from seat-based to usage-based because we have a lot of new customers and frankly, growing customers that are very happy on a seat-based model where we don't see these tailwinds. We're really seeing them the most pronounced in the very largest customers. We have thousands and thousands of employees and therefore, reorganizations that might impact thousands of employees that then cause seat-based compression for us.

The other thing that I would say is as we move from single year to multiyear again, that gives us more time to seed some of these usage-based products. And a number of our customers who are engaging in usage-based have credits that they'll be burning down which we expect will then convert to ARR. So we'll get some benefit as those customers spend more time and have more experience with these usage-based solutions. And with our agentic incident management suite now in the marketplace, that gives us more surface area to grow in.

Maybe just to emphasize one of the points that Jen made there, when we see these customers who had the seat reductions, the good thing is that they're staying with PagerDuty because they recognize us as the leader in terms of how they manage their AI operations today. What we have seen is that as we start moving them to our flexible licensing model, they have access to more product footprint than they would have been in the past. And as they have access to more of that product footprint, it allows them then to use more of the platform. And that we expect over time is going to then lead to them growing with us further. So whilst their base might have shrunk for now, in fact, they're setting themselves up with the foundation to really grow as they continue to scale their operations.

Next, from Truist, we have Miller Jump.

Howard, congrats on your next steps. I'm going to annoy you guys and ask another question about the seat count headwinds. But I guess the question is really, it sounds like it's purely layoff driven. And from that perspective, would you characterize all of these as businesses that are more challenged or was there any evidence you're starting to see that AI is potentially pushing out investments in head count in some of these businesses?

Generally speaking, what I'm seeing, if I try and correlate customers that are making changes to what we're seeing in their earnings announcements, et cetera, there's really a focus on improving operating margin, reducing costs and sort of rethinking how they might be attacking different efforts across the business. Frankly, we're also building more and more automation into the platform as well, right, which over time, means that seat-based licensing isn't really as well tied to the value proposition that we're delivering. So this is natural evolution, but it's more pronounced when you see a large customer with a significant head count reduction that come to us.

So on one hand -- it's interesting. It's kind of a dichotomy even within some of the same accounts. On one hand, we'll see the rightsizing as a headwind, but the same customer will then come to us and say, "Our #1 priority is resilience. So now that we've gotten the contract rightsized, how can you help us improve?" And to Howard's point, we almost see immediate growth opportunities following that sort of resizing. And so I think it is a temporal thing because we've seen our -- we've even seen customers who have significantly reduced their spend with us come back a year later and only to build back up.

We're also seeing a number of opportunities where we're winning competitor replacement even where the competitor was less expensive but not serving the resilience proposition. And if you think back just over the last 8 to 12 weeks, there have been a number of public service failures where we're the only platform that is still standing and resilient in those environments because of all of the architectural redundancy we've built into the product. And so that sort of reinforces the tailwind that is operational resilience as a priority.

Makes sense. I guess I want to ask one about the bottom line for Howard. Obviously, a big step-up that you're now projecting this year. Point well taken about 30% is kind of that long-term target that you're working towards. I know you're not guiding the year ahead, but can you talk about trajectory at all and just the potential for these types of gains in the future versus how you would expect it to ramp?

Yes. Well, thanks, Miller. We are proud of the properties that we've made. I mean this is like our sixth consecutive year of us continuing to drive that improvement in terms of operating margin. And we also have looked to cross the threshold around GAAP profitability for the full year next year. So this has been like a steady program that we've been running. We're not setting expectations for next year. But what I can tell you is that we remain committed to looking at ways in which we can optimize the spend within the business and deliver good results. So we're continuing to make investments in the things that are important for us in terms of our customers, our transition and our product, and you can expect to see more of that.

Next, we'll hear from the representative from Morgan Stanley. Again, please introduce yourself, I think, you're a new face for us.

I'm Oscar Saavedra on for Sanjit Singh. And congratulations from me to you, Howard, as well. Hope that you get to do some fun stuff in your retirement.

I'm planning to.

I guess my first question -- with regards to guidance for Q4 right now calling for 1% of growth at the midpoint. I was wondering like how much of that is based on what you're seeing in the pipeline in terms of the upcoming big renewal quarter versus maybe a bit more conservatism around maybe the time line to when that usage-based part of the model will begin to offset the seat pressure that you're seeing?

Yes, sure. So when we look at the guide that we provided for Q4, we have factored in the visibility we have around renewals. Q4 is our largest quarter in terms of renewals. We do expect that as we transition customers to the new pricing and packaging model that, that will mitigate the impacts of some of the contraction that we've seen and set those customers up for growth. We're not expecting that to have a major impact in Q4. So whilst we're moving customers to this new pricing, that obviously is not something that you just turn on instantly. But we're making good progress, and we're working with a large number of customers who have renewals in this quarter around moving into that new model.

But we have factored in both looking at the engagement that we're having with customers and early engagement, we started with them now months ago with some of the changes we've implemented and also having a look at the customer's own state of usage and adoption of the platform to try and make sure that we can be really targeted to help drive and improve their adoption. So we are expecting some of the same patterns that were emerging in Q3 would still persist to some extent in Q4. We're still expecting to see stabilization in that the number of customers that are downgrading or churning, we've got a good handle on that. And we're looking at ways in which we can mitigate any contraction.

Got it. And maybe as a follow-up, Jennifer, you talked about improvement in customer logo retention and seeing less absolute customers downgrading in size. I was just wondering like if you can sort of -- how do you square that with the downticking we saw in the customer spending over $100,000 in ARR?

Yes. It really comes down to just the impact of downsells at the larger end of the market and customers, I think, are expanding at a similar rate that they have in the past, but they're smaller expansions and a little more cautious than they have been in the past. So it's on us to work with them to see the value from those investments quickly so that they can continue to build on them.

I also believe that as Allison has gotten closer to the business, she's identifying more opportunity in the base, particularly, as it relates to giving customers exposure to new products and services across the platform, and that's something that we're working to do a better job of attaching.

And turning next to BofA. Again, please introduce yourself and ask your question.

It's George McGreehan on for Koji Ikeda. So I wanted to ask about the agentic suite and kind of the tailwind that, that might be to consumption as we kind of shift to consumption just among the products and features that are generally available today, MCP server, Shift Agent, et cetera. Do you kind of see any difference in the way that customers that are engaging with those products are using the platform today? Maybe any increase? Or is that early? And then also on the other hand, just in terms of how the suite further differentiates PagerDuty from the competition, do you see that kind of showing up in your competitive win rates today? Or is maybe that too early?

Yes, we're seeing -- thank you for the question, George. We're seeing really positive response to the agentic suite for a couple of reasons. One, most agents that you'll hear about in and around the incident management space can only work across the environments that they're built in. And because of our 700-plus strong integration ecosystem and the data that we've built over many, many years focused on incident management, our agents are able to leverage a much broader context to determine what is truly a challenge to troubleshoot and triage that and ultimately resolve it. And with the benefit of MCP, can work hand-to-hand, agent to agent with other platforms, whether it's one of the cloud providers or hyperscalers or in the case of Glean, who we mentioned earlier, where the agents are able to work together seamlessly, right?

The other thing is our products and services have always been human in the loop or human in the lead. And so the user can see the agent at work and engage in that process, which builds trust and what we're seeing is that then drives more usage and more adoption and then more usage. So it is a bit of a self-fulfilling cycle in that regard.

And I think from a competitive standpoint, because -- it's not a single SRE agent. We have an agentic Scribe, an agentic Shift Agent that takes a lot of the pain out of scheduling and escalation development. We've got an agentic analyst that helps you understand actually what's going on during an incident, what's happened in the past and how you can apply some of those learnings very quickly, like during the incident instantaneously. And then, of course, the SRE who is doing some of the work. And you can imagine where this can go over time now that we're able to add and scale agents on this platform.

So I do believe it's quite unique in the market, and also resilient like all of our products and services are. So that we're really excited about. And with other usage-based products like AIOps, what we saw was a pretty steady growth over a period of time by first seeing the product, getting customers to try it and use it and then getting them to consume, in the case of AIOps, more events in the case of the agentic suite, more credits. So we do we do expect to see those customers grow as they get a hang of using, not just the agents, but also our generative offering as well, which all lives under the PagerDuty Advance umbrella.

And then to your question around where are we confident. One, it's just seeing the usage patterns even on a smaller base, healthy growth. Two, customers have helped us design these agents. So all of our PD Advance products and services started in an early design program. So they basically were built in service of what our customers told us they need. So we're meeting the demand in the market first in many cases. And likewise, they're more intuitive to sell, in some cases, than maybe some of our more technical automation offerings of the past. So the field is really excited, learning how to talk about them, how to show customers how to try them, get them enabled and get customers discovering them in product.

Okay. Team, I believe we have one more question queued up from William Blair. Is that Jacob on the line, feel free to turn your video on and unmute?

Yes. This is Jacob Zerbib on for Jacob Roberge. You touched on the solid momentum with new logo adds this year. Could you give us some more color on how these logos are landing in terms of size relative to prior years, especially as you're prioritizing larger deals and multiyear commitments?

Yes, this is one of the things that I look at every quarter. And frankly, we're seeing good new logo acquisition across all of our segments. And remember that the way we land customers is often through our digital-first or self-service environment and then they will either grow unaided within the digital-first organization or they will grow through the -- with the help and support of the go-to-market organization. So we're seeing both showing promising growth.

And what I would say is I had a look last week at just the batch of new customers this quarter. And I was really pleased to see this balanced mix between new AI natives, some of the hottest companies you're hearing about, some of the fastest scaling companies in the world. I think we mentioned in Anyscale, you may be familiar with Ray and Perplexity. But also, we're really continuing to see a lot of diversity across industry verticals and digital-first customers as well as more traditional companies that are deep in the middle of transformation. In some of our markets, we've seen some really good competitive replacements where other point solutions have not served customers as they've scaled and we've been able to provide them with a much more resilient, broader product offering. So it really is a pretty balanced base of customers. Howard, anything that you would add there.

Yes. And I would say that the size of land can vary, as Jen said, like sometimes we have small customers where it may be a few hundred or a few thousand dollars, but within this quarter, we also had a few customers above $100,000. So lands that were large lands, so those tend to be in the enterprise segment, sometimes that's also a mix that can be a more traditional type of industry, but certainly, a lot of the software and technology and AI leaders also tend to come in at some of the higher values north of $500,000.

Got it. Just one more on my end. You had a meaningful decline in stock-based comp this quarter. I guess, as you're positioning for GAAP profitability, should we expect this level of stock-based comp like on a forward basis?

You can expect stock-based comp to decline. The rate of decline will be different as we sort of move forward through the end of this year and into next year, but that is the trend that you can anticipate.

Yes. And as you know, that's a lagging indicator. It's the result of pretty significant effort over the last several years that you sort of see show up in the out years. And we're continuing to be committed to managing stock-based comp effectively as part of our profitable growth ambition.

Howard, Jen, we've made it through another batch of questions. Jen, can I turn it over to you for any final remarks?

Yes, sure. Thank you. Thanks, everybody, for joining us today. We feel we are uniquely positioned to support enterprise resilience across our customers' strategic digital and AI operations. Our product velocity and expansion into cutting-edge use cases continue to widen our competitive moat. We're central, ubiquitous, neutral, connected and everywhere. And the strength of our P&L and balance sheet ensures that we are able to drive differentiated customer value in any market cycle.

I just want to mention that we are grateful for the trust of our shareholders, the ingenuity and dedication of all of our employees and the support from our customers and partners. And we wish you a wonderful Thanksgiving. Thank you, everyone.

Good afternoon, and thank you for joining us to discuss PagerDuty's Second Quarter Fiscal Year 2026 Results. With me on today's call are Jennifer Tejada, PagerDuty's Chairperson; and Chief Executive Officer; and Owen Wilson, our Chief Financial Officer.

Before we begin, let me remind everyone that statements made on this call include forward-looking statements based on the environment as we currently see it. which involve known and unknown risks and uncertainties that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. These forward-looking statements include our growth prospects, future revenue, operating margins, net income, cash balance and total addressable market, among others, and represent our management's belief and assumptions only as of the date such statements are made, and we make -- and we undertake no obligation to update these.

During today's call, we will discuss non-GAAP financial measures, which are in addition to and not a substitute for or superior to, measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in our earnings release, which can be found on our Investor Relations website. Further information on these and other factors that could cause the company's financial results to differ materially are included in filings we make with the Securities and Exchange Commission, including our most recently filed Form 10-K as well as our subsequent filings made with the SEC. With that, I will turn the call over to Jennifer.

Thank you, Tony. Good afternoon, and thanks for joining us today. In the second quarter, PagerDuty delivered revenue of $123 million, representing 6% growth year-over-year. Most notably, we achieved GAAP profitability for the first time in our company's history, while our non-GAAP operating margin reached 25%, exceeding both guidance and year-over-year expansion by 800 points. These milestones demonstrate our focus on driving profitable growth our consistent operational discipline and the fundamental strength and durability of our business model. Annual recurring revenue increased to $499 million, representing 5% year-over-year growth.

Our ARR performance and dollar-based net retention of 102% reflect elevated churn and downgrades despite the decline in DBNR, driven largely by customer seed optimization and cost containment initiatives, several encouraging trends are emerging that demonstrate expansion in our customer base and position us for future growth. First, new and expansion bookings increased by more than 15% sequentially; second, similar to Q1, net new customer additions were strong, raising the first half total to 208, nearly 3x the customer adds of fiscal year '25; and third, our high-value customer base spending over $100,000, expanded to 868 customers, increasing by 20 customers sequentially and 48% year-over-year.

The underlying demand for our platform continues to expand significantly with usage growing over 25% year-over-year, demonstrating the critical role the Operations Cloud plays in enterprise infrastructure. Even as revenue growth has been tempered by seed optimization initiatives across our customer base, this divergence between platform utilization and seat count validates our strategic shift towards usage-based pricing models that better align our revenue to customer value realization.

Several initiatives underpinning these encouraging trends include usage-based AI ops, which is growing above 60% and flexible enterprise licensing and AI automation capabilities now integrated across all operation cloud plans. This comprehensive approach creates a natural expansion opportunity that help drive cross-selling of our generative and agenetic AI offerings while ensuring customers can scale their usage in alignment with their needs. We advanced our enterprise go-to-market transformation in Q2 with marked improvement across our international theaters, demonstrating continued platform demand and improving sales execution.

Our sales team continues to mature and ramp with over 60% of our enterprise reps now tenured at least 1 year. However, our Americas sales leader performance has been inconsistent, prompting us to appoint a new leader in North America sales in late July, and implement organizational changes, flattening our structure to increase agility and to accelerate decision-making and customer responsiveness in this critical market. Platform usage growth in both volume and use case diversity, demonstrates that the work itself is mission-critical for enterprise operations. In fact, one of PagerDuty's key differentiators, our ability to orchestrate and automate the resolution of incidents is more valuable than ever in a world where complexity is increasing. We are becoming the central nervous system for the AI native ecosystem from frontier models to code assistance and agents, the growth in the volume of code, applications, services, systems and agents, along with the unpredictability of these environments, requires an operations platform that anticipates complexity mitigates risk and automates at a very different scale than we have seen historically.

PagerDuty does this today. Our traction with native AI companies illustrates this point and validates our midterm growth acceleration thesis. As a segment, native AI leaders now contribute 2% of total ARR and is growing rapidly. These companies represent the entire AI value chain from infrastructure to application and a genetic delivery. They are choosing PagerDuty for our proven scale resilience and ability to anticipate the enormous technical and customer demands of this evolving market. Central to acquiring and expanding customers is product innovation.

In addition to ongoing releases in automated incident management are 4 new AI agents, shift, scribe, insights and SRE will GA this quarter. early access customers have provided encouraging feedback as we focus on customer adoption. All agents will be released with usage-based pricing models. Our ecosystem has advanced through strategic partnerships, most notably Amazon [ Q ] reached general availability as our first agentic AI partnership. The Amazon Q integration offers over 40 data connectors, enabling customers to leverage their enterprise data and knowledge bases through PD Advance, our chat assistant and our agents. We are uniquely positioned as the incident automation platform that's integrated with Amazon Q, enabling customers with both solutions to leverage additional data as part of the operations life cycle from diagnosis through triage to resolution. We continue to have the depth and breadth of integrations with more recent additions for Backstage, Azure SRE, arise and more. We've unlocked new ecosystem use cases with the recent release of our model contact protocol, our MCP server.

For example, incident responders use our advanced chat assistant to correlate incidents with related GitHub deployments, Salesforce customer tickets and dependent service impacts, providing comprehensive situational awareness that accelerates resolution. We are enhancing strategic partnerships, leveraging MCP with Microsoft Azure, Amazon Cloud Smith and observability vendors to incorporate Azure resources and telemetry data into a genetic diagnostics and SRE agent remediation. Our customers continue to optimize their digital operations, improving customer experience and mitigating the escalating cost of disruption. In the rapidly evolving AI space, a specialized cloud infrastructure provider for AI and machine learning workloads selected PagerDuty with a 6-figure multiyear commitment.

This customer was navigating daily high event volume while working to meet its availability commitments for compute-intensive workloads. Growing event volume made it noisy and incredibly difficult to prioritize what matters most, a problem that traditional monitoring solutions couldn't effectively handle. PagerDuty AIOps is a game changer with automated intelligent correlation and orchestration, transforming overwhelming event volume into actionable insights and service recovery. AI-augmented event correlation helped ensure reliable AI infrastructure services for the company while dramatically improving operational efficiency. This strategic relationship validates PagerDuty's central role in the emerging AI ecosystem and demonstrates the relevance of our proven resilience and effectiveness in addressing the most complex challenges facing native AI companies today.

In the highly regulated telecommunications sector, a Singaporean telco leader selected PagerDuty's Operations Cloud for a transformative 6-figure 3-year IT modernization initiative. With PagerDuty, the customer is addressing critical inefficiencies that led to customer experience issues and regulatory risk, instigating funding of their first major investment in modern incident management. This comprehensive deployment of enterprise incident management, AIOps and gold services, automated their incident response workflows, reducing time to resolution from 30 to 40 minutes to just 2 minutes delivering significant annual cost savings that far exceed their platform investment.

PagerDuty deployment not only enhances their existing ITSM investment, but also ensures regulatory compliance with evolving Singapore telco standards, positioning them for continued innovation in the competitive Southeast Asian market. This selection validates our enterprise-grade capabilities in a mission-critical infrastructure environment where reliability and rapid response are paramount. A global financial infrastructure and data providers expanded their PagerDuty relationship with a significant 6-figure agreement to modernize their operations capabilities and support their 0 risk operational objective. Given that disruptions impact global markets and create regulatory risk, this customer required enterprise-grade incident life cycle management that could seamlessly integrate with their existing technology.

PagerDuty's comprehensive platform integrations and automated incident management directly address this critical requirement. This strategic expansion instantiates PagerDuty as the central nervous system for their complex multivendor operational environment, helping them to deliver against arduous regulations and reduce enterprise risk. The customer's decision to deepen their PagerDuty investment exemplifies our market leadership in the most sophisticated and demanding environments. On the innovation front, PagerDuty was named AIOps Platform of the Year in the 2025 AI Breakthrough Awards and was shortlisted for the 2025 SaaS awards in multiple categories, including best AI-powered SaaS solution and best enterprise-level SaaS product.

PagerDuty.org continues to grow its customer base, now serving more than 650 nonprofit organizations globally. Reflecting these efforts, PagerDuty was honored with the 2025 TrustRadius Tech Cares award recognizing our meaningful contributions to communities, employees and the environment. We are pleased to announce the appointment of an exceptional enterprise-focused leader to accelerate our go-to-market transformation.

Todd McNab will join our leadership team as Chief [indiscernible] Officer later this month. Todd brings more than 25 years of experience scaling companies across diverse industries with a proven track record of driving growth within enterprise organizations. He will lead our global go-to-market organization, including sales, service, customer support and success. Todd's addition to our leadership team represents another significant step forward in our growth trajectory and reinforces our dedication to building a world-class organization serving the most important enterprises of our time. Our strengths are clear: a strong and growing customer base and unparalleled track record of resilience at scale, an industry-leading innovative platform for managing mission-critical operational risk. Our leading indicators demonstrate improved execution this past quarter, including a second quarter of strong paid account additions, growth in $100,000 accounts and international performance that exceeded our targets. Moreover, our focus on profitable growth and operational execution is driving significant expansion in margins, providing consistent cash flow and supporting our expanded capital return authorization. As we advance our enterprise transformation, the fundamental strengths of our business underscoring our progress, our expanding margins, our first GAAP profitable quarter and disciplined capital allocation that mitigates dilution while positioning us for growth acceleration. These results, coupled with the compelling demand trends we see in platform usage demonstrate our critical position in the emerging AI ecosystem and reinforce my confidence in our outlook.

Thank you to our customers for your loyal partnership, our shareholders for your ongoing investment in our future. and our employees for your dedication. With that, I'll turn the call over to Owen, and I look forward to your questions.

Thank you, Jen, and good day to everyone joining us on this afternoon's call. Before reviewing our second quarter financial results, I want to highlight our strong operational discipline translating to our first quarter of GAAP operating margin profitability. We expect to be at or near this level in the second half before being GAAP profitable for the full year next fiscal year. And now, 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.

Moving. To results. Revenue for the quarter was $123 million, up 6% year-over-year. International revenue increased 12% annually, contributing 29% of total revenue. Annual recurring revenue exiting Q2 grew 5% year-over-year to $499 million. In the second half of the fiscal year, we expect incremental ARR to be significantly higher than the first half. The maturing of our enterprise sales motion in conjunction with our new North America leader and a more agile structure underpins this expectation. We delivered 102% dollar-based net retention compared to 104% in Q1. DBNR was negatively impacted by lower gross retention, largely as a result of downgrades. We expect dollar-based net retention to remain at this level in the second half as our pricing and packaging becomes better aligned with customer value realization.

Customers spending over $100,000 annually in annual recurring revenue increased by 20% from Q1 or up 6% year-over-year, resulting in 868 by quarter end. Total paid customers grew to 15,322 in Q2, adding 75 net new customers. Free and paid companies on our platform grew to over 33,000, an increase of approximately 13% compared to Q2 of last year. Q2 gross margin was 86% at the high end of our 84% to 86% target range, reflecting the uniquely efficient technical architecture we have developed to service our customers.

Operating income was $31 million or 25% of revenue compared to $20 million or 17% of revenue in the same quarter last year. The outperformance reflected our focus on increased efficiency and operational execution with lower payroll and other personnel costs. In terms of cash flow for the quarter, cash from operations was $34 million or 28% of revenue, and free cash flow was $30 million or 24% of revenue. Turning to the balance sheet. We ended the quarter with $568 million in cash, cash equivalents and investments.

During the second quarter, we retired the remaining $58 million of convertible debt issued in June 2020. We are generating significant consistent cash flow, which leaves us well positioned to execute our enterprise transformation while also returning capital to shareholders. The Board has expanded our current share repurchase program to $200 million, providing us with increased flexibility to opportunistically repurchase shares in the open market subject to market conditions and legal constraints.

On a trailing 12-month basis, billings were $496 million, an increase of 6% compared to a year ago. just below our target of 7% for the quarter. With respect to Q3, we anticipate trading 12 months billings growth to be approximately 7%. At the end of Q2, total RPO was approximately $425 million, increasing 5% year-over-year. Of this amount, approximately $295 million or 69% and is expected to be recognized over the next 12 months. $100 million or 24% over months 13 to 24 and the remainder thereafter.

Now turning to guidance. For the third quarter fiscal 2026, we expect revenue in the range of $124 million to $126 million, representing a growth rate of 4% to 6%. We and net income per diluted share attributable to Page Duty Inc. in the range of $0.24 to $0.25. This implies an operating margin of 21%. For the full fiscal year 2026, we now expect revenue in the range of $493 million to $497 million, representing a growth rate of 5% to 6%. This compares to the range previously provided of $493 million to $499 million. And net income per diluted share attributable to PagerDuty Inc. in the range of $1 to $1.04. This implies an operating margin of 21% to 22%. This compares to our prior guide of $0.95 to $1 and 20% to 21%, respectively.

We remain focused on the path to accelerating ARR growth confidence in continuing to expand margins and achieve GAAP profitability in FY '27 and with consistent cash flow being able to return capital to shareholders, all while delivering market-leading innovation. With that, I will open up the call for Q&A.

[Operator Instructions] Our first question will turn to -- well, we had a hand up from Sanjit Singh over at Morgan Stanley.

Can you hear me now, Jennifer?

Yes.

Yes. Sorry about that. Apologies. But video is not working for whatever reason. Nothing to look at anyway. So we know what you look like when we think about like the trend of the business, I guess the message that I'm hearing specifically with the GAAP profitability targets is that this can be a much more profitable business going forward and totally hear you on the second half improvements in terms of ARR. When I think of like the IT operations category, which includes incident management, AI ops, obviously, the observability guys. When I look at some of the other parts of IT ops, it sounds like business is stabilizing. Some of that's due to AI native customers and their customer bases ramping like it is for you guys. Why is it -- what do you feel like in this segment of the market growth is on an absolute basis, lower and maybe quicker to, let's say, rebound versus some of your peers in adjacent markets.

Sure. Thanks for the question. I mean the things that I see that are very encouraging that give me confidence our success during the quarter in new and expansion revenue and new logo adds. So we are starting to see that recovery and interest in the base. New and expansion was up 15% sequentially for the quarter. And as I mentioned, new customer logos were up over -- I got to find the number, but more than 3x of what we saw in the full year last year, and we're only halfway through the year. So we are seeing the new and expansion muscle flexing again. We also saw very promising progress in our international regions who contributed above target for the quarter. It's really been North America that we're still in progress in I think, developing some improvements. And what I'd say happening is happening there where the retention pressure has been, is that majority of that is seat-based optimization-driven downgrades as opposed to customers leaving the platform. So this transition that we're making to usage-based pricing is both important but also a much better way to align value that customers realize on the platform with monetization. And one of the things that gives me confidence there is when I look at actual platform usage and the demand signals that show what our customers are actually doing on the platform in our core products, things like event flows, automated incident workflows, we see platform usage growing more than 25% and in some cases, over 100%. And this is not new products that I'm talking about. These are new features and automation that we've delivered into the platform on the core automated incident management life cycle. So as we better align monetization or a pricing mechanism to that value realization, I see that as a path to recovering and reaccelerating growth in FY '27.

That's great. And I really encourage you to hear the progress on the new logo front for the first half of the year. I guess my follow-up to this question is, congrats on the hire of the new Chief Revenue Officer. -- in terms of how you think about the sort of mission statement for him in the first 6 months for the balance of this fiscal year and then going into next fiscal year, you talk about some of the initiatives and potentially the magnitude of change on the sales force and whether any potential sort of disruption is sort of embedded in the outlook?

Yes. Well, having been the interim CRO for the last quarter, I'm sure the sales teams are very excited about their new boss. But it did give me an opportunity to gain a number of valuable insights. I mean one is -- we have to accelerate our transformation in to meet our customers where they are, anticipate their needs and demonstrate consistent account coverage on -- with our economic buyers, but also continue to serve the needs of the developer community that uses our product. For Todd, I think job one will be to continue that enterprise transformation and drive more consistency in the performance of the team. But we have made a number of changes in the last quarter that lend themselves to a more efficient and more agile sales organization. We reduced some layers. And we've also done some work to make sure that we have more consistent alignment of our account executives and our customer success managers with our most important and our growing accounts. So I think that we've created a good kind of landing spot for Todd and I also thank Todd with his domain expertise, having worked in the AI Ops space, having worked in infrastructure in VMware, in large enterprise in global strategic accounts. He really is the right CRO for the moment, and we undertook an extensive search. So I'm really excited to see him starting later this month. And as I said, I think the priorities will be leading us through that enterprise transition and really taking what we've learned and where we're seeing progress in the international markets and working with our new North American leader to ensure we can also drive that improvement in North America. The teams are working really hard there. And I think we're going to see that market start to show progress. Really focused on customer love and customer retention, working closely with our Chief Customer Officer is now Allison has now been in the seat for over a quarter. So retention is the second thing. And the third thing is instantiating the adoption of our AI-led products in the market. We're going to be in the market in GA this quarter with our 4 new agents alongside of PagerDuty Advance, and that's an exciting monetization opportunity for us.

Next, we're going over to Koji Ikeda from Bank of America.

The first question I have for you is about quality of ARR. You just hit $500 million or just about $500 million this quarter. And when I look back in the model, you were at a little over $400 million at the end of fiscal '23. And so how would you categorize the quality of the components of ARR today, which I think can help frame how NRR and other growth metrics like billings can stabilize and improve from here?

I mean I'll start and then Howard can jump in. We have made a significant shift in our business towards what I think of as large long-term profitable customers being the largest enterprise companies in the world. And we've had to learn a lot of new things as we've made transition in a market that has been somewhat uncertain and volatile and exciting in many ways. And at the same time, like those customers are the ones that rely heavily on us. for managing their own products and services and operational environments in an ecosystem that's becoming more complex and more unpredictable. And the other thing that I would say is we're starting to see really large companies that come out of more traditional technology backgrounds moving into this market and investing in incident management for the first time. So I talked about one of those companies today, but we also have seen a large pharma organization investing for the first time with us in the last few quarters doing a large expansion this quarter. And in the past, that was not even a vertical that was in our focus, and we've started to see larger lands in pharma and health care, for instance. So I do think the quality of ARR improves because we are landing and expanding in more of these large enterprise customers complemented by the success that we've had in the native AI segment, where now more than half of the Fortune 50 AI companies or PagerDuty customers. These are companies like [indiscernible], scale AI Core, that are also continuing to expand as they grow with us. So that's what I would offer you, Howard, anything you want to add there?

Yes. And I would say, Koji, when I think about it over that period, we've expanded our presence in the enterprise. So when we look at at our ARR today, more than 75% is coming from what we would term enterprise companies. So those are our customers that have revenues over $500 million. So we've seen that shift. And so our exposure to the SMB market, which has been more volatile, we've been able to manage that to some extent while still being able to attract and bring those folks on board. The other aspect that I would say is that we've become increasingly multiproduct. So we have more than 65% of our ARR is coming from customers with 2 or more products. So we've had success in getting these other products into more of the customer base. And that bodes well in terms of being able to expand our footprint with our customers as we bring on our genic offerings and our other AI-based offerings. And then further, I would say that when I look at it from a product perspective, and we've shared this number previously, today, around 70% of our ARR is coming from incident management. So we have a growing portion that's coming from those other products as well. The other characteristic that I think is worth noting is that we've made a concerted effort to move more routinely, particularly for larger deals to multiyear. So we've seen a steady improvement in terms of the number of our contracts where customers are making arrangements for multiyear 2 or 2- or 3-year agreements.

And maybe the follow-up here, which I think you gave the answer to, but I just want to make sure that it's addressed is that you did kind of bring in the top end of the guide a couple of million. But Howard, when I listened to your prepared remarks, you're essentially guiding trailing 12-month billings to accelerate from the second quarter. And so I guess, is there anything more specific or anything else that you needed to call out that's giving you the confidence that trailing 12 months billings could accelerate from here?

Yes. So we expect that even coming into this year that by the end -- by the back half of the year, we would have more of the building blocks in place in terms of our enterprise transition. So I look at the incremental ARR expectations for the back half of the year, we expect those to to be significantly higher what they were in the first half of the year. So that contributes to improved billings performance. We also have Q4 as a large billings quarter for us because from a seasonality perspective, that is one of our biggest quarters for renewals. So those things contribute to our view on the trading 12-month billing. So we expect that to be around 7%.

Next, we'll hear from Jacob Roberge with William Blair.

You all talked a lot about needing to transition to more of a usage-based model. I guess the question is, how do you see that progressing over the next few years? And then for customers that you've spoken to about that transition, what's been the feedback thus far? Is this something that they're an willing for? Or will there be a bit of an education period for customers?

Well, obviously, we won't be able to move all customers at the same time because customers tend to like to make these transitions in their renewal cycle. So this will be a gradual process over the next couple of years, particularly given A lot of our customers are now multiyear. I think this quarter, 45% of our revenue was multiyear. And so -- but I would tell you that customers are very open to it, and we can see that in our existing usage-based pricing, where our products that have uses-based pricing grew 60% in the quarter. So what we try and do is see the customer with a starting point and then give them the opportunity to grow their usage as they need it. as opposed to it being associated with a number of people on the platform. And the reality is, as we've added more and more automation to the platform, the platform is doing some of the work of the people that customers are licensing and they understand that, right? It's also easier for them to articulate the business case for the investment in our platform if it is tied more directly to value realization. So so far, I would say that customer feedback has been encouraging. And we're already into that process to some extent because all of our new products over the last 18 months, 2 years, including PagerDuty Advance and our Gentek offering that is in this quarter are usage-based along with AIOps. Plus, we've been working with our large customers to deliver more flexible custom pricing particularly as it relates to helping them leverage flexibility across products so that they're not licensed specifically one single way for everything and have to try and administer those trade-offs themselves. So as we've open up to more flexible licensing engagements, that's also opened up the discussion for what customers are looking for. And that's really educated us in terms of what our offering needs to look like going forward.

Okay. That's helpful. And then you talked about the second half improvements in net new RB based on the recent go-to-market changes, increasing rep tenure than some of those net new comments. But just in terms of the larger renewals that are coming up in the back half of the year, given that transition to the usage-based model might take some period of time, is there anything that you're looking to do to help mitigate some of the seed downgrade issues that you saw this quarter as you're making your way through that transition?

Sure. And I'm frustrated by the downgrades. I think we can always do a better job of delivering consistent account management, making sure our customers are successful in the first 14 or 90 days and every day. of their contract life cycle, making sure that we do a better job of monetizing growing usage and value creation for our customers is super important. But I'm also excited to see that our usage-based products are growing even within our base and that usage of the platform is growing because that lends itself to your point, to more retention within the base. Having [indiscernible], our Chief Customer Officer, now in seat for more than a quarter. She's actually with our customers in Europe this week. She's also putting more rigor and discipline around getting ahead of these renewals and planning for them and working jointly with customers on a road map to growth. And there will always be challenges. I mean, not all of our customers have businesses that are going well. Some customers are still looking for cost optimization. But what's really encouraging is the fact that at the same time, we're focused on improving retention and and working through this monetization transition, we're also seeing new and expansion strengthening, right? That 15% sequential growth the 200-plus net new logos in the first half and the fact that that's 3x what we saw last year. For me, that gives me a lot of confidence in our path and the fact that we're able to continue to have strategic conversations with our customers even when sometimes the short-term impact is not what we'd like the long-term relationship is growing. So overall, I'm really encouraged. And we've got a lot of work to do in the back half, but we've got the right team to do it and our go-to-market organization as well as our product innovation teams are working really hard.

And Jacob, I would just add from a pricing perspective, one of the aspects of the new pricing models that we are rolling out are about increasing flexibility for the customer. So historically, when our customers purchase, they were buying, if you like, a narrow product or a narrow plan. We've been upgrading our packaging progressively to be able to see different aspects of our platform, whether it's the instant management, the AI, AIOps automation across multiple plans. And included in this initiative, particularly around renewals as we go into Q4 is to help customers take advantage of the flexible licensing, which would then give them access to more product which would then also allow them to. It would mitigate, if you like, some of the impacts of potentially less users because they'd be gaining access to more products and that would deliver greater value [indiscernible]

[Operator Instructions] Andrew Sherman, we're going to you with TD Cowen.

Great. Thanks. Good to see you all. Congrats on the -- good to see the better execution in the quarter. We'd love to dive a little deeper, Jen, into the second half drivers that you're talking about here. Is the shift to consumption going to start for some customers in the second half and that can start to help drive some better growth out of them? Or it's more of a next year event. I think you made a comment that it can help accelerate growth next year? And then what signals in the pipeline or aspects about your renewal cohort in Q4 are giving you the confidence that a lot of these deals can close?

Yes. Thanks, Andrew. Nice to see you. I would say, one, we know coming into the back half that we have % of our enterprise reps already more than 1 year in tenure, whereas they were ramping in the first half. and that lends itself to stronger account coverage, more higher quality pipeline and more liquidity in the pipeline. So that's something that we have been working towards now for some time. I think the usage-based pricing will take time to develop, but where we're already seeing early positive signs in products -- the new products, attached products that are out in the market, like AI ops, for instance, PagerDuty Advance. And we're starting to see some really exciting adoption of the 4 PagerDuty Advance agents describe SRE insights, and I forgot one. [indiscernible] thank you, the [indiscernible] agent. And these things automate more and more of some of the toil and the Argos work that happens during a major incident, but also in advance of the incident, the sort of noncrisis work that goes on in the platform. And so that adoption, I think, will contribute to our ability to talk about broader platform opportunities. The last thing I would say is really encouraging to see new and expansion improvement is the board, especially in our international regions and new logo lands really showing up in the first half. And I think that's a demonstration of the cut-through we're getting with native AI companies. So when you think about our traction with AI natives, the fact that we're demonstrating we're important and central to the emerging AI ecosystem, the strong adoption that we're starting to see in our EA usage growth on the platform and making progress on this enterprise transition with the new CRO and the [indiscernible], those are the things that are giving me confidence for the back half.

Yes. That's great to hear. And on that AI native, the 2% of ARR was interesting as well as the over half of the biggest 50 AI companies. It sounds like how quickly did some of these become customers? Was this part of like this quarter itself? And maybe just talk about their usage of the platform, which products how quickly they've kind of expanded already in some cases and how this kind of validates the PagerDuty platform as central to AI like you just mentioned.

Yes. What's been really interesting is these customers span from the frontier models that we all know of. I mentioned anthropic earlier. Infrastructure solutions like scale AI, some of the applications that sit on top genic platforms that we're seeing. And even we don't include this in the 450 AI companies, but even some of our more traditional customers are making significant investments in their genic offerings and looking for support to manage those solutions in production. So -- but what we see is sometimes they may start with a lower cost solution and realize that it won't scale. They're starting small with us in our digital first commercial. They come in through top of funnel and then grow over time. But what we're hearing is real deep interest in automation. The fact that it's an end-to-end automated incident management solution and that we are leveraging AI as well and using our own proprietary model to help automate more and more of the solution. So they're not having to have hundreds of people involved in their incident response. It really does enable them to focus on research, to focus on innovation, focus on product, but at the same time, build trust because, as you know, when these models, these agents when something goes wrong, and it does because you're shipping more velocity through the benefit of code assistance or using your own automation, you want to manage it effectively in the market and be able to transparently tell your customers that you're building a resilient offering. And so those are some of the the trends we're seeing. But what I like about it is we're seeing a diversity of customers choose PagerDuty, like I said, from the models to the agents, the apps in the middle and some of the most important infrastructure solutions. And those conversations have been great.

Next from CGF will hear from [indiscernible].

So as you sell more strategic platform deals, I just want to check in on the user groups outside of IT and dev, can you speak to the success you've had in customer service ops recently? And just how core is that at this point to the strategy and rig selling growth?

Yes. We continue to see that as an add-on, particularly when our sales organization and the customers are aligning around -- the whole platform as a starting point. We used to sell sequentially. We used to start with almost on call, then incident response, then a broader incident management offering than AIOps than customer service ops. And the new breed of sales reps are really going higher in the organization earlier, having the conversation around different solution areas like IT modernization or improving the efficiency or automating the central IT operations center, even working with security teams or customer service to really just improve the automation of how quickly a customer can move from understanding they have an issue. And as you know from many calls, many of our customers' experience learning about a major incident from their customers first, despite the huge investments they've been making in observability. And that continues to be a driver for the customer service ops solutions. So we are seeing that attach with Operations Cloud, but I'm also really excited with the increased usage that we're seeing on PagerDuty Advance customers getting more used to using generative AI to kind of talk to the platform as it's working through -- as they're working through an incident and the response that we've seen to our PD advance agents, particularly the Agent SRE and agent shift agent.

Yes. that's really encouraging. And then on some of the [indiscernible] products, I think that you've incentivized customers with some credits that's resulted in some great responses. In many cases, customers have started to use more. So I'm just kind of curious what traction you've seen with that motion recently and how that's balanced with more of a product with [indiscernible]

Yes. One of the things we're seeing is an expansion of the ecosystem play. So I mentioned the MCP server opening us up to new use cases, where our genic solution can work with others, whether it's gathering information from a GitHub repository or working with a sales force ticket or engaging with customers' internal knowledge bases or information sources. So it allows you to do a lot more of the triage and research associated with managing an issue more effectively. It also enables you to automate more of the post-incident learning and preventing that fragility from appearing again in the form of a major incident. So we're starting to see customers using us differently than they have in the past. And the GA of Amazon Q, the Amazon Q integration, I think, was important in that regard this quarter.

Next, with Craig-Hallum, we have Jeff Van Rhee.

So a couple for me. First, just a couple of numbers questions. On the platform, I think you mentioned the usage was up 20% year-over-year this quarter. What was that in the prior few quarters?

So we haven't reported that on a regular basis. And we look at usage across a couple of different tenants. We look at event flow across the platforms, how much information and data are we managing? We also look at automated incident workflows and incidents that are running. And something that I have shared in the past is that the pure number of incidents is growing across the platform because complexity is growing. As you have customers who are using code assistance, they're simply shipping and deploying more change, and that has a tendency to drive both more events, but also those events conspire to become incidents. What customers are looking to do actually is reduce the number of major incidents and reduce the time those incidents take to resolve and the blast radius associated with those incidents. So I talked about a customer earlier who went from mean time to resolution, which was 30 to 40 minutes down to a couple of minutes, right? And that's what you want. You want to really constrain the business impact of an incident by reducing the time that it disrupts your customer experience or creates inefficiencies across the business. Some of the growth that we're seeing is increasing over time, particularly as it relates to automated incident workflows. And that's a sign that our customers have become more open to and are readily adopting and using automated incident workflows where they historically were doing that manually.

Got it. You referenced, I think, in the past few quarters, this -- we're going to get to 60% of our our base sales reps being a year in tenure. Now that was going to be a very thing you got there and it sounds like in some respects, it did what you thought it was going to do. And then on the inverse of that, obviously made this leadership change in terms of North American sales. So help me just contrast those because it sounds like there certainly was some aspect of what's playing out in the sales organization that you weren't happy with in the North American markets.

Sure. I mean I will tell you that we -- the progress in the international markets has come sooner and faster than in North America. Now they are smaller, so potentially more agile in their ability to adapt and and adapt to a different market environment. But at the same time, I think we have the opportunity to be more disciplined in terms of the way we manage customer continuity, account coverage, continuity, scaling retention or retention practices anticipating some of the work that needs to be done ahead of renewals. I just demonstrating to our customers that not only should they expect but also be able to realize significant value from our products and services. And so the first that we brought in to lead North America came out of HashiCorp, VMware runs a very disciplined sales model and is very focused on reaccelerating growth.

Okay. And maybe just last for me. The -- you mentioned the seed optimization issues that you're taking on from your customers. Just talk maybe just about some of the chronology there. Like how is that intensity played out -- how did it play through the quarter? Kind of where are we now? Has it just been a steady level of intensity in terms of see optimization that peaked in some of that pressure lessening? How would you define that trend?

Yes. I think it's been pretty consistent this year, but it really is tied to the decline in new job growth particularly across tech workers. And also in some cases, we have customers that are making significant headcount reductions as a result of either their financial goals or their use of automation as well. And like I said, when we're building automation on the platform, seats just isn't a great monetization metric for the value that we create through automating this work and getting people out of some of these these workflows. I think we'll continue to see pressure on seat-based licensing over the next couple of quarters, but we're anticipating it. more effectively and cross-selling more effectively. And likewise, it's a very large TAM. There's a big opportunity to land new customers, whether they're native AI companies that are growing very fast and are super well funded and not so much worried about headcount or even seeing some of these more traditional verticals coming towards us like health care and pharma. We haven't talked much about public sector federal, but I think there's -- there remains opportunity there. And what I've seen, particularly from our international teams is they're doing a really good job of starting with the Operations Cloud. I'm seeing usage-based AI ops attached to most enterprise deals. I'm seeing customer service ops and seeing better attach on services, et cetera. So it also comes down to the quality of our execution and the scalability of that execution, how we engage with customers in a repeatable way. So having Allison here in the seat is helpful, too.

Thank you for second question. We talked about higher quality pipeline going to the back half I guess I'm curious, do you expect that to have any impact on the sales cycle or flow rate. I imagine the higher quality but also you're selling bigger [indiscernible]

Yes. Miller, we got a little static on your line. So I'm going to repeat the question. I think I got it. And you're asking, given higher quality pipeline in the back half, what do we expect? Do we expect conversion rates to improve? How do we think about sales cycle time, et cetera. So as you shift to more of an enterprise motion, you do tend to have more back-end seasonality in the year. The software industry has trained our customers over time that the bigger deals happen as the year progresses. So we do see improvement in the go-to-market organization forecasting and building deals multiple quarters out. I mean just 2 years ago, half of our revenue was created and closed inside a quarter, right? And now more of our revenue is coming through multi-quarter pipeline opportunities that do take a little longer. But our strategic, we're even seeing some of our enterprise lands are a little larger than they've been in the past. So they're starting a little bigger. It might take a little longer, but then we expect that there is also more growth opportunity there. So I do think that conversion rates on the pipeline could improve through the back half. We would expect it to giving reps have ramped and more than 60% of our reps have been here for more than a year. And we've seen some of that conversion improvement already in the international regions. We are excited about some of the larger deals that are in the pipeline. And at the same time, we've got large renewals to work through. So there's a balance to be struck. But the most important thing to me is that -- our sales teams are maniacally focused on customer engagement and on spending more time understanding their customers. We -- we recently have insisted on a return to working in person again because our customers are working in person. And that uptick in customer engagement absolutely starts to show up in terms of more pipeline, higher quality opportunities, better managed opportunities. And that's something that I know Todd will continue to focus on as he comes on board.

If you can hear me, Howard, the follow-up questions for you. Just anything you can give us on the rides on the pipeline and the [indiscernible]

I think, Mel, your question was any commentary on the size of the pipeline and the renewal base right for the back half of the year. So just in terms of renewals, our Q3 and Q2 are typically of similar size, give or take a few million. But Q4 is our largest quarter in terms of renewals, but we are planning for that. In terms of pipeline, we've seen really good pipeline, strong pipeline development, particularly as these larger opportunities, we anticipate that they will take longer to close. And our team is anticipating that and the level of qualification around larger deals is improving. We've actually seen in some regions, some improvement in terms of sales cycle, sales cycle getting a little shorter. When I see that over a couple of quarters, I don't know whether to believe it and see it as a trend. But certainly, those disciplines are resulting in better management of deals. And particularly, when I look out into Q4, we have a strong build of pipeline for the fourth quarter.

Okay. And I think we will round things out today, hearing with a representative from RBC. If you could just identify yourself, I'll switch your game up.

It's Mike Richards on for Matt. It's encouraging to see you guys move to the usage-based pricing model. I think a lot of us agree that sea-based models need to move there over time. and acknowledging that a lot of the new product, if not all the new products are usage-based already. Specifically, how are you thinking about core incident management? Is it going to be fully usage based? Is it going to be some combination of seats and usage? Just any specifics around what that will look like for the core Internet management products.

We're still working through that and having a lot of conversations with customers. But right now, it looks like it will be some form of platform-based and usage based. And we're even using credits with some of our AI products. One of the things that we want to make sure we do is give our customers predictability. We've seen a lot of customers coming to us looking to try and reduce the preservability spend and avoid overages and lock in with observability players because of the unpredictability of that spend in check size. And so we've tried to learn from a lot of the usage and consumption-based models that are out there. But we have a pretty good track record so far with the AIOps. Some of the things that take time to dial in is what's the right level of credit if you give a customer too many credits up first, they grow slower. If you don't give them enough, you have a sort of upside surprise that they don't particularly like. So -- but with incident management because a lot of our incident management, we already track things like events and workflows. -- platform usage, et cetera, we have a number of metrics that we can work with there. And we're also trying to look ahead at how will our AI-led products shape the way people use the platform. So -- that's why I would see this more as an iteration as opposed to like 1 sudden event that happens. We've been working through this transition to usage base now for more than a year with AIOPs and PagerDuty Advance and and now the agents, and we'll just continue to iterate as we learn. The other thing that we have done is see a lot of our advanced products and services in all of our pricing plans. So that customers to get access to those AI-led features. They get access to automation even in our lowest plans. And finally, I think the team, particularly our commercial team is doing a really good job in product-led growth. We spend a lot of time on these calls talking about sales-led growth because that's where enterprise is. But in terms of growth hacking, automating the customer journey, driving free to paid conversion, we've seen some bright spots there as well, and we're learning a lot from that motion too. And that's where we sometimes meet the native AI folks for the first time. .

That rounds us out today. Jennifer will turn it to you for any final comments.

Thank you. Thanks, everybody, for joining us today. We appreciate you sticking around the whole hour. I mean our priorities, my priority is obviously monetization to really capture that value that we see coming from growing demand on the platform, driving AI adoption with our customers, really focusing on retention and customer love. -- and making sure that as a result, we are positioning PagerDuty as a central to and the central nervous system for the emerging AI ecosystem. But we have a lot of confidence in our outlook. We're really encouraged by what we're seeing, and we appreciate the support from our investors and the trust from our customers and also the incredibly hard work from our employees and partners. So thank you all, and have a great week.