PagerDuty (PD) Investment Memo
Meera Equities 12.22.2020
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Investment Thesis
PagerDuty checks off so many boxes for us - great recurring revenue, mission-critical enterprise software, pricing power, and strong retention. Additionally, PagerDuty is a pioneer in the “Digital Operations Management” space and leverages key technologies like machine learning and AI in a scalable software package. We believe this space will continue to grow which has only been accelerated by the COVID-19 pandemic.
Company Description
PagerDuty acts as the central nervous system for the digital enterprise. PagerDuty collects machine-generated data from virtually any software-enabled system or device, combine it with human response data, correlating and interpreting this data to understand issues and opportunities that need to be addressed in real-time. Using machine learning and automation, PagerDuty brings together the right information and people to act on opportunities in minutes and seconds, not hours.
Qualitative
Overview
Sector: Technology
Industry: Software Applications
Competitors: SPLK, TEAM
Strategy: Continue to Pioneer Digital Operations Management
Translate digital events into actions that reduce cost, protect revenue, & improve the customer experience.
Deliver strong ROI by reducing incidents, decreasing time to resolution, and improving employee productivity.
Capitalize on post-COVID digital acceleration to be a tailwind to growth.
Business Model: Land & Expand
PagerDuty’s online self-service model is the primary mechanism for landing new customers and enabling teams to get started without assistance.
The self-service model is complemented with a high velocity inside the sales team.
PagerDuty uses a combination of digital and field marketing tactics to drive expansion by increasing users, new product adoption, and broader or new use cases.
Market: Digital Operations Management
PagerDuty was built with developers who are the owners and architects of the digital experience and transformation.
Over 12,000 customers ranging from startups to around 60% of the Fortune 100.
Digital Operations and incident management are $100B and $25B markets respectively.
PagerDuty has over 323 customers that are contracted for more than $100K each in ARR up from 144 in 2018.
Moat/Differentiation:
Built for real-time
PagerDuty has a rich repository of machine-generated data and human response data from nearly 11 years and more than 12,000 customers’ worth of data.
Over 350 integrations across the technology ecosystem helping collect data from a wide range of software-enabled systems and devices
End-to-end digital operations management – harness digital data, make sense of data, respond & engage team, and analyze team actions.
Proactive – leading shift from efficient response to proactive and predictive action.
Secure, resilient, and scalable – infrastructure includes two cloud providers, three communication networks, and two DNS providers.
X-Factor: Sticky
PagerDuty has over a 95% renewal rate
PagerDuty is viewed by its customers as a “Mission Critical” infrastructure.
PagerDuty customers experience an ROI of 731% over a 3-year contract with payback in only 4 months.
PagerDuty customers on average experience $356,553 in savings per year for a team of 10.
Due to its sticky and essential nature, PagerDuty can exert pricing power over its customers and competitors.
PagerDuty has a dollar-based net retention rate of 122%
Cash Cow: Subscription Revenue
PagerDuty generated over $189M TTM in revenue. Up 33% TTM.
PagerDuty generates its revenue very efficiently with an 87% gross margin
Over 99% of revenue comes from subscription services, making their revenue streams very predictable
Growth Opportunities:
Win in enterprise & mid-market business segments
Become the platform for real-time work
Expand reach beyond DevOps & IT
Grow international presence
Quantitative
Risks
PagerDuty is not yet profitable.
PagerDuty is a pioneer in the “Digital Operations Management” space but is a smaller company and could face competition from larger companies moving into the space with more resources.
PagerDuty derives almost all its revenue from a single product, On-Call Management.
As the company continues to expand into the mid to large enterprise market sales cycles could lengthen.
Learn Something
Company Materials: 10-K | Annual Meeting Presentation | Investor Relations
The Twenty Minute VC: AGERDUTY CEO JENNIFER TEJADA ON A LEADER’S RELATIONSHIP TO RISK, INSECURITY, MAKING DECISIONS WITH IMPERFECT DATA & WHAT SUCCESSFUL BOARD MANAGEMENT LOOKS LIKE
The Motley Fool: PagerDuty in 5 Charts
Net Dollar Retention: A SaaS metric that reveals the health of your business and its growth potential.
