PagerDuty(PD) - 2021 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Presents PagerDuty's unaudited condensed consolidated financial statements for the quarterly period ended July 31, 2020 Condensed Consolidated Balance Sheets Total assets increased to $719.2 million from $435.4 million as of July 31, 2020, driven by convertible notes and rising liabilities Condensed Consolidated Balance Sheets (in thousands) | | As of July 31, 2020 | As of January 31, 2020 | | :--- | :--- | :--- | | Total current assets | $661,275 | $404,991 | | Total assets | $719,187 | $435,398 | | Total current liabilities | $129,771 | $115,032 | | Convertible senior notes, net | $210,976 | $— | | Total liabilities | $377,316 | $127,460 | | Total stockholders' equity | $341,871 | $307,938 | | Total liabilities and stockholders' equity | $719,187 | $435,398 | Condensed Consolidated Statements of Operations and Comprehensive Loss Revenue grew 25.6% for the quarter ended July 31, 2020, resulting in a net loss of $14.7 million Statements of Operations Highlights (in thousands) | | Three Months Ended July 31, 2020 | Three Months Ended July 31, 2019 | Six Months Ended July 31, 2020 | Six Months Ended July 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $50,714 | $40,361 | $100,500 | $77,675 | | Gross Profit | $44,077 | $34,255 | $86,900 | $66,083 | | Loss from Operations | $(13,449) | $(14,381) | $(26,049) | $(27,110) | | Net Loss | $(14,688) | $(12,570) | $(26,147) | $(24,634) | | Net Loss per Share | $(0.19) | $(0.17) | $(0.33) | $(0.45) | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity increased to $341.9 million for the six months ended July 31, 2020, driven by convertible notes and stock compensation - Key drivers for the change in stockholders' equity during the six months ended July 31, 2020 include the issuance of convertible senior notes, stock-based compensation, purchase of capped calls, and the period's net loss[18] Condensed Consolidated Statements of Cash Flows Operating cash flow improved to $1.9 million provided, with $251.2 million provided by financing activities from convertible notes Cash Flow Summary (in thousands) | | Six Months Ended July 31, 2020 | Six Months Ended July 31, 2019 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $1,862 | $(5,407) | | Net cash used in investing activities | $(475) | $(36,715) | | Net cash provided by financing activities | $251,227 | $218,168 | | Net increase in cash, cash equivalents, and restricted cash | $252,614 | $176,046 | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, $287.5 million convertible notes, new lease accounting, and geographic revenue breakdown - In June 2020, the Company issued $287.5 million in 1.25% Convertible Senior Notes due 2025, with net proceeds of $278.2 million after discounts and costs[35][82] - The company adopted the new lease accounting standard (Topic 842) on February 1, 2020, resulting in the recognition of a $29.1 million operating right-of-use asset and a $35.9 million operating lease liability[46] - No single customer accounted for 10% or more of total accounts receivable or revenue for the periods presented[39] Revenue by Geography (in thousands) | | Six Months Ended July 31, 2020 | Six Months Ended July 31, 2019 | | :--- | :--- | :--- | | United States | $77,269 | $61,060 | | International | $23,231 | $16,615 | | Total | $100,500 | $77,675 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance for the three and six months ended July 31, 2020, covering key metrics, COVID-19 impact, and trends COVID-19 Update Increased churn and declining users due to COVID-19 led to operational changes like remote work and virtual events - The company has seen an increase in churn and a decline in the number of users, believed to be associated with the impact of COVID-19, and anticipates potential declines in customer demand and spending[131] - In March 2020, all offices were temporarily closed, and employees transitioned to remote work; the company also converted its global customer conference, Summit, to a virtual event[133][135] Key Business Metrics Customers grew to 13,346 as of July 31, 2020, but dollar-based net retention rate decreased to 116% due to COVID-19 Customer Count | | As of July 31, 2020 | As of July 31, 2019 | | :--- | :--- | :--- | | Customers | 13,346 | 12,045 | | Customers > $100k in ARR | 369 | 274 | Dollar-based Net Retention Rate | | Last 12 Months Ended July 31, 2020 | Last 12 Months Ended July 31, 2019 | | :--- | :--- | :--- | | Dollar-based net retention rate | 116% | 132% | Results of Operations Revenue grew 26% for the quarter and 29% for the six-month period, with improved gross margin and reduced operating expenses as a percentage of revenue Revenue Growth | Period | 2020 Revenue | 2019 Revenue | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Three Months | $50,714 | $40,361 | $10,353 | 26% | | Six Months | $100,500 | $77,675 | $22,825 | 29% | - Gross margin for the three months ended July 31, 2020 improved to 87% from 85% in the prior year, attributed to efficiency from the company's cloud-native infrastructure[160] - Operating expenses as a percentage of revenue decreased from 121% to 113% for the three-month period and from 120% to 112% for the six-month period year-over-year, primarily due to revenue growing faster than expenses[158] Non-GAAP Financial Measures Non-GAAP operating loss was $3.5 million (a -7% margin) with positive free cash flow of $1.4 million for Q2 FY2021 Reconciliation of GAAP Operating Loss to Non-GAAP Operating Loss (in thousands) | | Three Months Ended July 31, 2020 | Three Months Ended July 31, 2019 | | :--- | :--- | :--- | | Loss from operations (GAAP) | $(13,449) | $(14,381) | | Add: Stock-based compensation | 9,968 | 7,233 | | Non-GAAP operating loss | $(3,481) | $(7,148) | | Non-GAAP operating margin | (7)% | (18)% | Free Cash Flow (in thousands) | | Three Months Ended July 31, 2020 | Three Months Ended July 31, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $2,047 | $2,159 | | Less: Purchases of property and equipment | (579) | (829) | | Less: Capitalization of internal-use software costs | (111) | — | | Free cash flow | $1,357 | $1,330 | Liquidity and Capital Resources Liquidity totaled $601.6 million as of July 31, 2020, bolstered by $287.5 million convertible notes, sufficient for the next 12 months - Principal sources of liquidity as of July 31, 2020, were cash, cash equivalents, and investments totaling $601.6 million[185] - In June 2020, the company issued $287.5 million in convertible notes, resulting in net proceeds of $242.5 million after deducting discounts, issuance costs, and the purchase of capped calls[184] - A substantial source of cash is from deferred revenue, which stood at $101.2 million as of July 31, 2020[187] Item 3. Quantitative and Qualitative Disclosures about Market Risk No material changes in market risk, except for interest rate risk from the $287.5 million convertible senior notes - The primary new market risk is interest rate risk related to the $287.5 million in convertible senior notes issued in June 2020; the fair market value of these fixed-rate notes will generally decrease as interest rates rise and increase as they fall[206] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of July 31, 2020, with no material changes to internal control over financial reporting - The CEO and CFO concluded that as of July 31, 2020, the company's disclosure controls and procedures were effective at a reasonable assurance level[208] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[210] Part II - OTHER INFORMATION Item 1. Legal Proceedings The company is not currently a party to any material pending legal proceedings - PagerDuty is not a party to any material pending legal proceedings[212] Item 1A. Risk Factors No material changes to risk factors, except for new risks related to the $287.5 million convertible notes and potential dilution Risks Related to our Outstanding Convertible Notes Risks of $287.5 million convertible notes include insufficient cash flow, repurchase obligations, potential stock dilution, and counterparty risk - The company may not have sufficient cash flow to make scheduled payments on its debt, including the $287.5 million in convertible notes, or to repurchase the notes if required[215] - Conversion of the notes into common stock could dilute the ownership interests of existing stockholders[219] - The company is subject to counterparty risk with the financial institutions involved in the capped call transactions, which are intended to reduce dilution from the notes[224] - Accounting for the convertible notes (under ASC 470-20) requires separating the debt and equity components, resulting in non-cash interest expense that will reduce reported net income or increase net loss[225] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There have been no material changes in the planned use of proceeds from the company's IPO - There have been no material changes in the planned use of proceeds from the company's IPO[232] Item 6. Exhibits Provides an index of exhibits filed with the Quarterly Report on Form 10-Q, including convertible notes indenture and CEO/CFO certifications - The Exhibit Index lists documents filed with the report, including the Indenture for the 1.25% Convertible Senior Notes due 2025 and CEO/CFO certifications[237]