Description

PagerDuty excels in incident response and preventing accidents from occurring at enterprises. They are integrated with 600+ software systems, such as AWS, Slack, Datadog, New Relic, Zendesk, etc. By evaluating digital signals and combining it with response data—teams can be orchestrated to take the right actions in real time through e-mail, SMS, and phone with critical information to prevent or alleviate an emergency.

PagerDuty was founded by three Canadian former Amazon developers in 2009 who provided on-call support for in-house applications. Most other companies were also frustrated with the inefficiencies of their existing on-call response. To meet this demand, PagerDuty was developed and emerged from Y Combinator's Winter 2010 batch. It is now among the Mountain View accelerator's 10 most valuable alumni.

Ten years later, in 2019, Pagerduty was publicly listed. What’s particularly telling in the S-1 is that they have ambitions to make their platform more automated and analytics based. PagerDuty has a formidable team to execute this plan.

Scaling with automation despite onboarding users requiring tailored solutions

PagerDuty was experiencing explosive growth (1M in sales in 2012, 80M in 2018, 261M in 2021) and faced the challenge of implementing extremely tailored onboarding support for new users at scale.

Hailey Hickman, a program manager, designed a way for PagerDuty to remain a self-service platform. Using Twilio Segment’s bi-directional Pendo integration, Hickman personalizes messages to cater to specific needs.

By rolling out a series of guides Pendo with user behavioral data captured by Twilio Segment, Hickman has designed a responsive, guide-based onboarding system that adapts as each user completes actions in-app. The presentation looks different for each user depending on what they’ve already learned to do in the software. 

For PagerDuty’s mobile app— the approach netted at 178% increase in downloads when users were shown a guide.

In addition to this, PagerDuty acquired Rundeck for 100M in October 2020 to improve on solving difficult, time sensitive challenges for DevOps teams by using automation. This makes their interface more user friendly without running a bunch of system commands, scripts, or runbooks. You can directly tie PD to event data.

Pager Duty’s breadth of customers isn’t just tied to IT and finance. For SCADA systems, PD can link up to a company’s fire and water automation to know within 30 seconds of a water leak or a punctured pvc pipe. PD also has clients who operate grocery store chains and utilities in the Mid-West.

PagerDuty won’t implode when hitting critical mass in a variety of industries.

In 2021, PD processed 41 billion events and API requests, and improved average customer’s resolution time by 20%. The customer has a payback period of less than half a year.

The right people

Of the 3 founders, 2 continue to hold a substantial amount of shares. Founder Andrew Miklas has stepped down from management to enter the VC realm, but still owns 5.1% of the company.

Founder Alex Solomon remains and serves as the CTO with 3.6% shares. He previously served as CEO until 2016, and stepped down to let Jennifer Tejada take up the role (5% shares).

"Adding Jennifer to PagerDuty is like adding octane to jet fuel," says Andreessen Horowitz cofounder Marc Andreessen. "Working with PD's brilliant founder Alex [Solomon] and colleagues, we think she'll turn a stealth success into a cornerstone industry franchise."

With CEO Jenn Tejada, PagerDuty's hopes to expand its name outside of the growing DevOps community. While PagerDuty's not a household name, it's a known quantity among operations engineers, working with more than 13,300 customers such as IBM, GE, Red Bull and WeWork and partnering with more than 250 companies such as Microsoft, Zoom, Cisco and Slack.

In addition, the most recent member which brings great value to PagerDuty’s team is chief product officer, Sean Scott, who was previously Amazon’s VP of shopping experience for 2 decades.  

Sean was VP of Shopping Experience Technology, where he was responsible for Amazon’s home page, product pages, cart, and check out experiences. Sean also introduced Autonomous Delivery, where he led a team of robotics and software experts to develop a fully-electric and autonomous delivery.

In addition, PagerDuty has a superior sales team—just do a bit of scuttlebutt or calling yourself. Their sales team will demo and call your entire team and won’t leave you alone— they’re so persistent you’ll have to beat them away.

The market

PagerDuty’s total addressable market is over 25 billion. This is calculated by multiplying the company’s estimate of 85 million potential users by our average revenue per user (approx USD294).

Note that average revenue per user is different from customer. Average revenue per customer has increased from $85,000 in Q1 of 2020 to $110,000 in Q1 of 2022.

Of the 85 million users, approximately 44 million are customer service users, 20 million are IT and 20million in security. Since IPO, average revenue per user has went up 43%. PagerDuty currently claims less than 5% penetration in these markets.

PagerDuty’s pricing vs. Competitor’s

While Pagerduty leads most competitors by revenue, the 2 other formidable competitors are OpsGenie, which was acquired by Atlassian for 295M, and VictorOps (now renamed Splunk On-Call) for 120M by Splunk.

Atlassian specializes in version control with Bitbucket, which is a competitor to Microsoft’s Github. Splunk has always been in monitoring and analytics.

Before the acquisition, in 2018, the revenue of Pagerduty’s competitors were—

When evaluating these three, Pager duty was way ahead of the game, but very costly. Victor Ops (prior to Splunk acquiring them) was very no frills— cost was good, but features (especially integrations were lacking), and Ops Genie (prior to them getting acquired by Atlassian) was a good middle ground, priced within our budget, had integration with our monitoring and chat platform and was not difficult to use.

After acquisition, OpGenie became a lower priced options for customers that was compatible with jira/bitbucket. OpsGenie is probably the cheapest right now, and if price is a consideration small teams will definitely opt for it.

PagerDuty is the most established I think, and previously had an interface that was old and cumbersome. If enterprises are looking for a full incident management solution, Pagerduty is the one.

PagerDuty has overcome these pricing problems with a freemium model and has updated its user interface to be more sleek and user friendly.

Expansion of product offerings

PagerDuty has expanded their capabilities from a single product focused on on-call management to a scalable and reliable real-time operations platform, spanning event intelligence, incident response, on-call management, business visibility, and analytics. PagerDuty currently still derives a substantial portion of their revenue from On-call management.

Event Intelligence – correlate events into a single incident and suppression of notification of useless events

On-Call Management – Mobile app response

Modern Incident Response – Post mortem best practice analysis, generates a ticket in ServiceNow

Analytics and Visibility – Health Dashboards with key performance metrics with some predictive abilities.

Customer growth

Pagerduty now serves more than 60% of the Fortune100, and over 40% of the Fortune 500 with more than 700,000 users on the platform.

As of July 31, 2019, the company was servicing 12,045 customers. Two years later PagerDuty boasts 14,486 paying customers and over 18,000 total customers. There is ample opportunity to monetize the nearly 4,000 additional companies using the platform.

Several customer revenue tiers PagerDuty has separated into—

-          Below 100k, 14,000 customers

-          For clients above 100k in ARR (543 customers), PD is growing at about 35% (Dec 2021 earnings call)

-          Above 500k, over 90% (June 2021 earnings call)

-          Above 1M (26 large enterprises), 44-55% yoy (June 2021 earnings call)

In 2021, 543 customers were customers providing an ARR of over $100,000. Only 26 were over a million, and the majority, or about were much smaller in ARR.

Net Retention and growth of existing customers

The dollar-based net retention rate is total current period ARR divided by the total prior period ARR for the customer cohort. Top quartile SaaS businesses observe a net dollar retention of 120%+ and the top decile achieve 140%+.

For the nine-months ending October 31, 2018 dollar-based net retention rate of 139%. Current net retention rate is around 124-126%. This means that current customers are increasing spending significantly each period, on average. PagerDuty also reports a strong renewal rate of 95%.

Risks

Despite a high debt to equity, the levels are still manageable— total debt is 308M as of December 2021, of which 280M are unsecured senior convertible notes maturing in July 2025, and 28M in lease liabilities. PagerDuty may not redeem the notes prior to July 6, 2023.

In terms of liquidity, PD has 431M of working capital. Excluding cash (185M), working capital is 246M.

The quick ratio has improved from 1x in 2018 to 3x in 2021 and average days payable has shrunk from 125 days in 2019 to 60 days in 2021.

What worries me is an unforeseen incumbent coming up with something that disrupts the entire industry.

Where will PagerDuty be 10 years from now? What is it worth?

PagerDuty  CEO Jenn Tajada has indicated her target is 1 billion in revenue within 3-4 years in June 2021’s analyst earnings call. I this growth is sustainable for decade, but will eventually plateau. In addition, I think reach a billion in 5-7 years would be a more conservative and reasonable assumption if only organic growth was considered.  

PagerDuty had a revenue of 261M in 2021. Consider in 2012, they only had sales of 1M. Fast forward a couple of years and they should be at half a billion. Is this explosive growth sustainable? There are moments where the company generates a positive cash flow, but they are still not profitable.

With such high gross margins, by the time PagerDuty hits a billion in revenue, will they have something to show for profitability? It’s the SG&A that’s extremely large which holds back any operating earnings, but this is also part of PagerDuty’s strategy combined with a freemium model. They’re not going to raise prices too significantly anytime soon.

Pagerduty was once worth 1 billion in most pessimistic times of 2020, but has risen back to its IPO capitalization of 3 billion. It can achieve a valuation of 5 to 10 billion if it continues improving its products while maintaining the same organic growth and customer retention. 20-30B would be an over-reach based on current performance.

Unless a catastrophic events happens, it seems like they’ve have the right team to propel and distinguish themselves over Splunk's On-Call and Altlassian’s OpsGenie.

Catalyst

-Upgrades to services for increased automation and analytics.

-Increased integration with other software platforms will only make their product "stickier" 

-The right team to propel growth. PagerDuty, with its founder as CTO and Jenn Tajada will map out the right strategy without ruining long term prospects. 

-If you have the right people, product, and strategy-- it is just a matter of time.