PagerDuty Inc

NYSE:PD

Earnings Call Transcript 2020-Q4

[Operator]

Good afternoon. My name is Chantal, and I will be your conference operator today. At this time, I would like to welcome everyone to the PagerDuty Fourth Quarter 2020 Earnings Call. [Operator Instructions] Thank you.

I will now turn the conference over to Stacey Finerman, Vice President, Investor Relations. Please go ahead.

[Stacey Finerman, VP, IR]

Thank you. Good afternoon, and thank you for joining us on today's conference call to discuss PagerDuty's fiscal fourth quarter and year-end financial results.

With me on today's call are Jennifer Tejada, PagerDuty's Chairperson and Chief Executive Officer; and Howard Wilson, the Company's Chief Financial Officer. I would also like to mention that we are joining you remotely today from our home offices. I have been informed from our conference call provider that there have been some technical difficulties with the increased Internet use. We apologize for any difficulties, and if there is any clarification needed, please reach out to us at [e-mail].

Statements made on this call include forward-looking statements. Forward-looking statements 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. Forward-looking statements represent our management's belief and assumptions only as of the date such statements are made and we undertake no obligation to update these forward-looking statements.

In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their closest GAAP equivalents. For example, other companies may calculate non-GAAP financial measures differently or may use or may use measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison.

A reconciliation between GAAP and non-GAAP financial measures is available in our earnings release. Further information on these and other factors that could affect the Company's financial results are included in filings we make with the Securities and Exchange Commission from time-to-time, including the section titled Risk Factors in the Company's most recently filed Form 10-Q previously filed with the SEC.

Now, I'd like to turn the call over to our CEO, Jennifer Tejada. Jennifer?

[Jennifer Tejada, CEO]

Thank you, Stacey.

We are living and working in an unprecedented environment as we confront the evolving global impact of the COVID-19 pandemic. We hope you are all safe and well and appreciate you being on the call today.

At PagerDuty, we've undertaken a number of measures to manage effectively through this, especially as it relates to protecting our people, engaging our customers and supporting them as they respond to the people, economic and business impact and also doing we can to support our communities as flow the spread of the virus. On March 10, we enacted a mandatory work from home policy alongside travel and event restrictions already in place, and we have enacted a crisis governance operating framework.

Given we design products for unplanned work and the incident response, we were well prepared to a great extent for remote distributed work, such that we're able to focus on helping our customers, as many of them transition to work from home. As developer and operations, teams shift to distributed working have seen some interest in leveraging PagerDuty to ensure ongoing digital performance and uptime.

In addition to sharing best practices with our community, we've kicked off several philanthropic initiatives through our social impact program, PagerDuty.org. Today, we are announcing that we are providing 23 platform team licenses to healthcare companies to aid them in managing surge in their digital environments and supporting them and their crisis response teams.

The last few days have been extraordinary, culminating this week and metro area locked downs, federal travel ban and record-setting market disruption. It's too early in the cycle to have clarity on the true medium and the long-term impact of the fluid macro environment, which makes it increasingly difficult to forecast the market and the subsequent impact on our business.

This is the situation that's changing by the day. And while we see some early indicators of change in demand signals, we see nothing material to date. While our business is not subject to significant industry concentration outside of software and tech, which represents one-third of our revenue, we have a meaningful business in retail, e-commerce and financial services. And it's too early to call how these industries will fair.

Additionally, we cannot measure or ignore the potential for disruption in our market productivity decline that may come from ongoing mandatory work from home policies, school and business closures and illness.

We remain unwavering in our mission to help companies manage their digital operations more effectively. Outages and poor customer experiences are financially unacceptable, even more so in the current environment. Thousands of centralized operations teams have been distributed overnight as a result of coronavirus, and addressing these challenges is PagerDuty's core expertise.

The addressable market, we pioneered in serve remains large and early when we estimate at $100 million, and we know our customers and prospects meet our resilient scalable platform to manage mission-critical unplanned work now more than ever. We've recently seen examples of customer self-serving licenses to expand new teams rapidly.

But it's too early to tell whether this is material or coincidental. What we do know is our customers trust us and value the efficiency, cost savings and customer experience assurance we help them achieve.

Turning to the quarter, we're proud of our strong year-end results with Q4 revenue increasing 36% year-over-year and full-year revenue growing 41% over fiscal 2019. We recently achieved a major milestone, surpassing 500,000 users on our platform with our average revenue per user increasing again this year for the third consecutive year. This underscores both the value that PagerDuty delivers to users and the successful adoption of our platform by customers of all sizes across verticals and geographies.

Cloud adoption need to manage increasing complexity, mainstream DevOps adoption and progressing digital transformation continue to create a tailwind for us in fiscal 2020 as we extended our lead in digital operations management. As trust is increasingly available currency for consumers, PagerDuty helps our customers establish and sustain trust with their customers.

During the year, we also saw a meaningful uptake of our new products. As a reminder, these include modern incident response to orchestrate real-time work across distributed teams. Our AI app solution again intelligence, visibility for situational awareness and our advanced analytics solution for optimizing operational and team health and productivity. Demand for all of our new products was particularly strong from new enterprise customers, as they leverage unique data, automation and learnings from our platform.

Of the top 100 new customers we partnered within fiscal 2020, 68 of them subscribed to more than one product. In Q4, we continue to advance our roadmap and deepen our competitive motes. We deployed new market first features in our service directory, a signal dynamic repository for service information, which accelerates full-service ownership across teams. This includes new information objects like current service health, trended service performance, service ownership, service-specific incident history, event rules history, event rules and new rent books.

We released the latest version of our Salesforce integration, opening up several new use cases by enabling Salesforce customers to go beyond our previous service cloud integration, connecting PagerDuty to Salesforce Marketing Cloud, Commerce Cloud, Quip and more. We also released enhancements to make real-time workflows more customizable and flexible for various teams and operating models. These are advancements address the challenges of hybrid ops environments where companies have both centralized IT teams and DevOps teams with very different processes.

This allows DevOps teams to leverage agile for distributed work, while also supporting seamless coexistence centralized IT ops team all on the PagerDuty platform. Business Response is a new feature that particularly relevant at this time. Business Response allows stakeholders like leaders and senior management to receive context on the health of business in real-time in an easy to use app on their mobile device. We launched this functionality in July and have already seen 60% of eligible customers use this feature set.

In Q4, we continued to make progress in the enterprise while also serving the world's most innovative companies. We landed or expanded business with [indiscernible] Booking.com, American Express, Netflix, Vanguard, CrowdStrike, ADP, Snowflake, Peloton, IOdesk, Shopify and TripActions to name a few.

In enterprise, we signed an expansion deal with the top 20 Internet retailer and Fortune 500 company was already using Modern Incident Response. Known for its ability to delight customers looking for variety and stylish, affordable home furnishing, the customer was using a homegrown system that was manual disjoint and time-consuming. The new CTO led the initiative to transform legacy systems to best in breed platform.

Now, I mentioned intelligence, automatically groups incidents substantially reducing the time to mobilize a team, resulting in significant cost savings, which we estimate to be over $2 million in labor costs alone per year. The CTO advise us that competitors could not offer these capabilities for comparable cost savings.

Last quarter, we also built on our strong leadership foundation, hiring Joe Militello, formerly at Pivotal as our first Chief People Officer to help us deliver on our people first growth for value while scaling the business. Dave Justice, our new Chief Revenue Officer started in December and has been focused on sales leadership and execution, especially in the enterprise and mid-market. Dave is partnering closely with Julie Herendeen our CMO, and already strengthening our high-velocity land and expand go-to-market motion.

On a next note, I'm pleased the performance for tenured salespeople remain strong and that the initiatives we put in place in the past two quarters, including new sales enablement programs and tools to support overall [indiscernible] are bearing positive results. Dave has recently hired a new Head of Sales Operations and has applied industry standardization and rigor to our sales process. In Q4, we saw several teams deliver excellent performance and we continue to focus on bringing all of our teams up to the same high standards.

Looking to fiscal 2021, we remain focused on the tremendous opportunity ahead of us, while we see both challenge and opportunity in the current environment. In order to extend the suite, we are focused on three priorities, first, continuing to win in enterprise and mid-market; second, becoming the dissective platform for real-time work; and third, continuing to expand our reach beyond DevOps and IT team.

First, the world's largest companies rely on PagerDuty with nearly 60% of the Fortune 100 and nine of the Fortune 10 as customers, enterprise and mid-market continue to present significant growth opportunity. PagerDuty is uniquely positioned to solve the complex problems of the world's largest companies, balancing being easy to use and deploy with demand and scale resilience and security and advanced features that speed automation and transformation.

Our user-friendly e-commerce model combined with our platform approach has led to both rapid growth in retention in the high '90s as industry leaders tightly integrate to and standardize on the PagerDuty platform. Our success in enterprise demonstrates that PagerDuty has become an essential component of the world enterprise infrastructure.

For example, a Fortune 500 human resources software company began using PagerDuty two years ago, growing from a 20 user self-service land to 2,500 users, this year. They started like many of our large customers do in a team of developers responsible for mobile applications.

However, as the Company continues this digital transformation journey, it require platforms and enable them to innovate faster, orchestrate and automate urgent mission-critical work, and provide great ex-customer experiences in every moment. In anticipation of a strategic product launch, they thought an enterprise-grade platform that could scale with their growth and replaced a lower cost less feature-rich solution with PagerDuty's digital operations and management bundle. Adopting our incident management product, as well as visibility and analytics, gives leaders, stakeholders - leaders and stakeholders real-time context into performance and reliability at all times.

Second, we are focused on becoming the de facto platform for real-time work across, small, medium and large companies. As we've discussed before, there are many providers that help companies monitor infrastructure and analyze logs to understand the health parts of IT or services or that route standardized non-critical workflows with ticketing solutions. These are all valuable services, some of which we use in our day-to-day operations.

However, when companies face issues that are unpredictable, customer-facing and time-sensitive, they need a real-time solution that orchestrates team, machines and data in a coordinated automated way. This is especially important for distributed teams and for teams responsible for revenue-generating applications and technology.

PagerDuty uniquely addresses these needs by leveraging machine learning, a decade of data and best practices automatically bring together the right people with the right information to solve problems and address opportunities as they occur.

To date, our competitive moat include our trusted reputation for delivering resilience at scale, PagerDuty's ease of use and the platform security and out of the box interoperability across cloud and on-prem technology environments. In FY '20, we deepen these moats, investing in Business Response, Service Directory, our best-in-class mobile user experience and the largest integration ecosystem in the category.

We continue to execute on an ambitious roadmap this year, further leveraging machine learning in new ways, building additional automation and other remediation features, improving our user experience and expanding our application ecosystem to support developers and users across functions. These product investments address critical challenges that our customers face in digital transformation, including DevOps, Python and AI.

Our third priority is to continue expanding our platform beyond DevOps and IT teams. While customers usually initiate service with PagerDuty, within DevOps 16% of our customers apply PagerDuty to additional mission-critical work in other functions like security and customer service, especially when issues that impact reputation risk come into play.

As we've seen increasing demand, we've invested in integrations and workflows to support new use cases like PagerDuty for customer service in partnership with Salesforce and Zendesk, as well as PagerDuty for security operations. You can expect to see us advance our roadmap in these areas through continued investment in our robust APIs, our developer ecosystem to encourage DevOps to build more functionality on top of PagerDuty, and in strategic partnership. An example of this is a global enterprise software company used by property and casualty insurance carriers provides essential information for its customers to power their businesses.

Reliability is of the utmost importance as their customers expect perfection for this long time PagerDuty customer. We started using PagerDuty in their cloud operations team, then expanded the product development and engineering to support the Company's cloud adoption initiatives. More recently, the Company rollout PagerDuty to their customer support representatives who are now empowered with real-time context and information to manage inbound inquiries from the customers more quickly and effectively.

In the midst of an unpredictable macro environment and the coronavirus pandemic, PagerDuty's heritage as a distributed company built for real-time, unpredictable incidents sees us well prepared to maintain business continuity, as all of our teams now work remotely.

To date, the coronavirus situation has not diminished our ability to provide services to customers. And we remain committed to the high levels of service and reliabilities our customers expect. PagerDuty is for people and we are at our best when the rest of the world is down. In uncertainty and volatility, we still see opportunity, we are clear-eyed and pragmatic. We remain focused on our long-term objective of building an enduring company and are optimistic about the large market that remains in front of us.

With that, I'd now like to turn the call over to our CFO, Howard, who will walk us through the financial results. Howard?

[Howard Wilson, CFO]

Thank you, Jennifer.

We are pleased with our fourth quarter fiscal 2020 results. Revenue for the fourth quarter increased 36% year-over-year to $45.9 million, beating the high end of our guidance. Growth was driven by new customers, new users and new product adoption. Our non-GAAP gross margins which are industry-leading were at 87%. Our non-GAAP EPS came in at negative $0.03 per share, ahead of our guidance.

Once again, we managed cash with operating cash flow of $2 million in the fourth quarter. We saw a 14% increase in total net customer additions on a year-over-year basis to 12,774 customers, in line with the growth rates we've seen over the last two years. We had 20 more customers with ARR above $100,000 in Q4, taking us to 323 customers, a growth rate of 42% year-over-year. Customers with over $1 million in IRR increased by 50% year-over-year to 18 in the quarter. Both of these metrics demonstrate our strength in upper mid-market and enterprise.

Our dollar-based net retention rate for the quarter was 122%. This healthy net retention rate represents our customers' commitment to us are high renewal rates and low churn. We attribute most of the decline from the third quarter number to pockets of sales execution in specific territories where we have not managed to cover our existing accounts as effectively.

From a competitive perspective, we are pleased to see churn remaining below 5% on an annualized basis. Annual revenue - average revenue per customer increasing for eight successive quarters with average revenue per user continuing a two-year positive trend. And our non-GAAP gross margins continuing above 85%.

We continue to drive our programs to improve sales productivity and rent so that our newer sales reps can perform as well as our more experienced reps who have continue to perform at high levels of productivity. With the improvements, we're seeing, we expect dollar-based net retention in the first quarter to land within a range of 120% to 123%.

Our international revenue grew 52% year-over-year in line with last quarter. Once again, we had another exceptional quarter in Europe, an example of a territory where our sales team continues to perform well and where we continue to invest in sales.

I will now turn to the detailed financial results. These results are on a non-GAAP basis. Our GAAP financial results along with the reconciliation between GAAP and non-GAAP results can be found in our earnings release.

In the fourth quarter, non-GAAP gross margin was 87%. We are proud that we can be so efficient in delivering a highly scalable, reliable, resilient and secured platform to over 12,700 customers around the world with high levels of redundancy in a complex technology environment supporting over 350 integrations. Our best-in-class gross margins are made possible by our cloud-native architecture, our DevOps approach to production, and programmatic approach to customer success and support.

We anticipate continuing to deliver gross margins between 84% and 86%. Given the large market opportunity in digital operations, we look to invest in areas that help capture share. However, over the long-term, as we scale, we expect to reap the benefits of our operating leverage. In the fourth quarter, non-GAAP operating expenses were $44 million compared to $32 million in the fourth quarter of fiscal 2019, a 36% increase, which was in line with our revenue growth of 36%.

Non-GAAP research and development expenses for Q4 were $12 million compared to $8 million in the same year-ago period, representing an increase of 46% year-over-year. As Jane mentioned, two of our priorities for fiscal 2021 are to be the de facto platform for real-time work in digital operations and expand our reach beyond DevOps and IT teams. Therefore, we will continue to invest in product innovation.

Non-GAAP sales and marketing expenses in Q4 were $22 million and grew by 41% compared to Q4 of fiscal 2019 of $16 million. On an absolute basis, this number came down quarter-over-quarter, the prior quarter, reflecting expenses of our annual industry conference.

We intend to build on our investments in this area, especially when it comes to making it easier for our customers do business with us, expanding our capabilities to deliver a unique online experience throughout the customer journey. Given the improvements we've seen recently in Salesforce productivity, we will continue to invest in sales and sales enablement.

Non-GAAP general and administrative expenses for Q4 were $10 million for the quarter and increased 16% year-over-year, a significant improvement from the 37% year-over-year increase, we reported in the third quarter.

Our non-GAAP operating loss in the quarter was $4 million compared to a loss of $3 million in the same quarter last year. Our non-GAAP operating margin was negative 9% in Q4 and negative 9% in the same period of last year. Non-GAAP net loss for the fourth quarter was $3 million or a net loss of $0.03 per basic share compared to a non-GAAP net loss of $3 million or a net loss of $0.14 per share in the fourth quarter of last year.

We generated $3 million in operating cash flow in the fourth quarter, compared to just over $600,000 in the prior year. This represents three straight quarters of positive operating cash flow. Free cash flow was negative $180,000 in Q4, roughly the same compared to last year. Free cash flow margin was slightly negative at 0.4%, compared to negative 0.6% in the same quarter last year. As we previously mentioned, capital expenditures did increase by $1.2 million to almost $2 million for the quarter, as we recently completed the build-out of our new Atlanta offices.

Turning to the balance sheet, we ended the quarter with $351 million in cash, cash equivalents and investments, up $224 million from the end of fiscal year 2019. This was primarily driven by proceeds raised in our initial public offering, as well as positive working capital.

Before moving on to guidance, I would like to make a comment on the impact of the coronavirus. As of today, we have not seen any direct material impact pertaining to coronavirus. As Jen mentioned, we have implemented a temporary work from home policy across all our locations and either postponed, canceled or moved to virtual participation in sales pipeline generating events. All of this in an effort to support our community.

At this time, it is difficult to accurately assess any impact beyond the first quarter. We are of course monitoring the situation daily with a view to understanding the impacts from top of funnel to bookings, to revenue, to capital allocation, and cash flow.

When we look at the full year, we have assessed the exposure of our business to some of the highly impacted industries such as travel and hospitality, manufacturing and energy, and we have limited exposure today. We have also reviewed daily and weekly trends in our web traffic trial volume conversion and pipeline, and have seen no material change at the current time.

However, given the uncertainty at this time, it is very difficult to assess the potential future impact from significant major macroeconomic ships that could arise from coronavirus.

Our guidance for revenue is as follows. For the first quarter of fiscal 2021, revenue is expected to be in the range of $48 million to $49 million, representing a growth rate of 29% to 31% year-over-year. For the full-year fiscal 2021, revenue is expected to be in the range of $208 million to $213 million, representing a growth rate of 25% to 28% year-over-year.

Non-GAAP net loss per share is expected to be in the range of $0.08 to $0.09 for the first fiscal quarter, and in the range of $0.25 to $0.31 for the full fiscal year 2021. Basic shares outstanding for Q1 and the full-year fiscal 2021 are expected to be $78 million and $79 million, respectively.

I want to make a few additional remarks about guidance. Our current EPS guidance for the year assumes a non-GAAP operating margin of negative 10% to negative 12% for the fiscal year. This represents an improvement of six points at the midpoint over the negative 17% we posted in fiscal 2020. Although we plan on investing in the business, especially in R&D, as well as go-to-market, we will be prudent in managing our costs.

Our current EPS guidance for the year also assumes a significant decline in other income, which primarily includes interest income and cash taxes from $5.9 million in fiscal 2020 to $0.9 million in fiscal 2021, owing to a lower interest rate environment, an increase in interest expense related to the adoption of the new lease standard and increases in taxes.

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

[Operator]

[Operator Instructions] Your first question comes from Matt Hedberg with RBC Capital Markets. Your line is open.

[Matt Hedberg, RBC Capital Markets]

Jenn, I wanted to just drill into a comment you made earlier. I mean obviously, you guys had good results this Q4, and you said there is some - maybe some early indication of a change demand, but then you said there is nothing much more - not much to note, I believe you said. I'm wondering if you can expand a little bit more on that comment. And also, you guys have a strong e-commerce model, and maybe talk to us about how you are set up to do better than others with less travel.

[Jennifer Tejada, CEO]

Hi, Matt. And thanks so much for your question. And I hope all of you are well and safe as well. We appreciate you being with us today. We know that it's a pretty challenging time out there in the market. So thanks for your question regarding that.

I think the way that we think about it is, we look at our pipeline, on a daily basis. We look at things like our web traffic, as well as our trials and the conversion rate on those trials, and all of that looks healthy, and frankly looks normal kind of traditional run rate. In some cases, we even had customers reaching out to us through service to by emergency new seats to spin new teams because they're now distributed or because they're using us for crisis response.

On the other hand, we've had a very small number of deals delay or push out a month because either their legal teams are super busy or are they have budget uncertainty. But that's no different than what we would see in any quarter. So again like not material, could be coincidental, could be kind of like everyday business. So we just want to be transparent. But at the same time, say we can't find a material change today. We feel good about the help pipeline we have go to Q1.

And frankly, it's been interesting in talking to the sales team over the last couple of days, there is a lot of activity there, setting a lot of virtual meetings, and we have very healthy transaction volumes in the last couple of weeks. And to your point, the benefit of being self-service is that our customers don't require a sales rep if they want to add new teams or spin up new capability with new licenses.

And likewise, the vast majority of our land comes through e-commerce. And in times like this, when you're looking for a platform that can help you manage surge because your food delivery service or crisis response because your team is now distributed, PagerDuty sits squarely in there - in that space and it has I think a very strong reputation for reliability in an environment that's increasingly uncertain.

[Matt Hedberg, RBC Capital Markets]

I mean I think it really speaks to I think the - how mission-critical your platform is for people getting work done. And I think it'll be great to see how it performs here. And maybe Howard, a follow-up for you. Obviously, really strong gross margins and a question that we get and I know you get all the time, because of the competitive landscape. It doesn't appear to me that there was really any impact from discounting, just kind of given your strong gross margins. But maybe can you talk a little bit more, everybody always asks about Splunk and Atlassian, and maybe a little bit more there. And is there any - is there anything happening from a pricing perspective that you're seeing?

[Howard Wilson, CFO]

Thanks, Matt. And you know there's really been no material change in the environment in terms of pricing or competition. Obviously, there is always some measure of competition, and we see some of the folks that you mentioned from time-to-time often though in the SMB side of the market rather than in the enterprise.

And I think for us when we look at one, the gross margins that you mentioned, but also just the fact that our average revenue per user continues to go up, if we look at that trend line over the last couple of years, I think it's clear the customers are seeing the value that we're delivering.

And I think that you know, we've always had competitors who would compete on price. We've always taken the angle that we compete on value. And I think even some of the studies that have been done, we had IDC did a study for us which showed that for enterprise customers that they could achieve over $3.56 million in annual business value with an ROI of 731%. So I think there is a clear business value case, and particularly when you are dealing with those larger enterprises.

[Operator]

Your next question comes from Sterling Auty with JPMorgan. Your line is open.

[Sterling Auty, JPMorgan]

Both in your prepared remarks and in your answer to Matt, I guess I walk away thinking that you didn't actually provide any cushion in the numbers from COVID-19. Is that the right interpretation? Or did you estimate, especially with some of the exposures even in those smaller industries? Did you actually build in some impact into the guidance?

[Jennifer Tejada, CEO]

Hi, Sterling. This is Jen. I'll start off and then Howard can jump in if he like. It's a great question. And I will tell you that we have been modeling scenarios day-in and day-out for the last several days. The market has been evolving very quickly. So we've used our traditional methodology, but then also tried to look at all the leading indicators that we can see in our environment. And since we're a SaaS business, a large portion of our deals are created and closed in the same quarter, so it's difficult to look two and three quarters out and have any certainty around what things could look like.

We don't have a crystal ball. And because we do feel good about the healthy pipeline, we have going into Q1, what we've tried to do is be very balanced. But I will tell you that initially, we were looking at a higher guide and just given the nature of what's happening in the market and where we think there could be risk around employee productivity across the industry or cost-cutting measures, et cetera, and we just applied some balance and thinking about that. But we feel good about the prudent and balanced guideline - guidance we put in place.

[Sterling Auty, JPMorgan]

Great. And I think that's --

[Howard Wilson, CFO]

Jen, I would - sorry, Sterling. I was just going to add the one thing we have taken a very specific look at industries and obviously, something like travel and hospitality and energy are areas of exposure, maybe parts of manufacturing. But when we look at sort of travel and hospitality and energy, that's kind of less than 3% of our revenues today. So we have sort of try to factor in some modest changes in the behavior in certain sectors. But obviously, we haven't been able to build guidance around some dramatic macro change.

[Sterling Auty, JPMorgan]

And then just one follow-up, net dollar retention. Thank you for the guidance, by the way. I think that makes sense. But how much of that where it's kind of settling out is that you are starting to see those larger deals size initially, so maybe taking some of the expand and putting it in the land versus anything else because it sounds like your gross retention was very high?

[Howard Wilson, CFO]

Yes. So I think you point to a couple of things. I think we have definitely seen and I think I might have mentioned this on the last call, we have seen an increase in larger lands which means that the runway for the expand changes where particularly as we move more of our business into the enterprise, so that's been - that's a positive for us as a company since we've seen like good traction in terms of on new business. And that does mean that window for expansion is a little bit longer.

I mean, that being said, we have been transparent about the fact that we did have - with some of the changes that we made in the sales team in the early half of the year, which is now starting to settle down. We did have some pockets of sales territory that we're not being covered as effectively if you would like.

[Operator]

Your next question comes from Rob Oliver with Baird. Your line is open.

[Rob Oliver, Baird]

Just a couple. First for Jen. Jen, I know, Howard got a question earlier on the competitive landscape regarding pricing. But I just wanted to maybe dive in a little bit deeper on last quarter's call. You had mentioned, I believe that the competitive landscape had gotten a bit noisy, you did not use that term this quarter, and I just wanted to get a sense for, if you've noticed any change in the competitive landscape and certainly, it sounds as if you guys feel a little bit more confident about it and just wanted to see what, if in fact change. Thanks.

[Jennifer Tejada, CEO]

Thank you, Rob, for your question. And I hope you're doing well. We have not seen a significant change, and in fact, I think we're starting to hit our stride and being more articulate about the digital operations management category and about our positioning in terms of what we do from a real-time work perspective compared to others out there that help reduce some of the confusion in the market.

We are very consistent in the fact that we usually land within the developer community and then start to expand beyond DevOps to security and IT and customer service and other areas. I would say that there is a great network effect that we're starting to see where customers who use PagerDuty at one company become leaders that a large enterprise is going through a transformation, and they see PagerDuty as a must-have.

And I also think that the market increasingly is getting more sophisticated itself in understanding the difference between a highly scalable, reliable, easy to use solution that's the deeply integrated into most of the enterprise infrastructure in the world versus a lower-cost offering.

I'd also just point out that, and we say this over and over again, but I don't think we can say it enough that the vast majority of our deals are greenfield and do land through e-commerce. It's a large market where it's significantly under-penetrated, and we see a tremendous amount of opportunity.

[Rob Oliver, Baird]

And then, Howard, one for you. I know you've been pointing us towards those enterprise deals which constitute a larger upfront land. As we look at the billings growth this quarter, which was solid, we saw a jump in like long-term deferred revenues. And just curious if that's consistent with the move towards the enterprise if that's something we should expect to continue? Or if there were any other factors at play in that mix of short-term and long-term deferred? Thank you guys very much, and I appreciate it.

[Howard Wilson, CFO]

Sure. Thanks, Rob. So, Rob, I think in terms of, obviously, when we look at the - if we just look at the growth of the number of customers that we have above 100,000, we now have 323 there. We saw a 58% growth in our customers above 500,000, 50% growth in our customers above $1 million. Those are all, pointing to the fact that we are gaining a stronger foothold in the enterprise. And so I think that is going to be - that's going to play out in terms of finding these larger deals with bigger organizations and that is going to change that profile.

[Operator]

Your next question comes from Sanjit Singh with Morgan Stanley. Your line is open.

[Sanjit Singh, Morgan Stanley]

Thank you for taking the question. And hope every one of the team is safe during this time. Jen on your script, you sort of mentioned some interesting metrics around the expansion outside of DevOps, I think 16% of customers outside of DevOps if you hit 500,000 plus users. And so as we sort of stand here you know, a year plus out of IPO, can you talk to some of the usages, use cases, the usage activity on the platform, like how is the usage of the PagerDuty platform different today versus a year ago, two years ago? What are sort of the emerging use cases that you're seeing?

[Jennifer Tejada, CEO]

Thanks, Sanjit for the question. And I hope you're well. So I would just say, two years ago, I think we were well known as being a solution for DevOps for the developer community and operations teams for managing on-call management and automating real-time work within the developer community.

I think as the engineering community has really led the way in helping other parts of the organization, see the opportunity to leverage a platform that can connect in the almost any modern software environment, help detect issues or opportunities, orchestrate the right people in moments to drive the right outcome for the business and increasingly leverage machine learning to identify things before they become major issues, so start to move from being purely reactive to preventative. Then the rest of the organization starts finding ways to apply that technology.

And some examples would be where we have customers that are using our Salesforce integration within their customer service organization, and it starts with just being able to have visibility in context to an issue with a consumer-facing application or consumer-facing digital product to realizing that the same platform that they're developer peers use could be leveraged for reducing customer caseload or the response time to support customer issues.

In security, we see many SecOps teams and DevSecOps teams using PagerDuty within their SOC, their security operation center, but also for more of a distributed and proactive perspective to deploy a kind of a DevOps mindset in everything that they do. And then we have really unique use cases. We've talked about, one in the past where a large oil and gas organization uses us to manage the efficiency of their fuel trucking terminals.

We have a payments customer that uses us for their physical security team as well as legal. We have a large software company that uses us to manage the real-time workflow across the legal team when they're trying to finalize contracts across business units.

And the common stream is, it's a real-time unpredictable burst of work. In a distributed organization, you don't necessarily know who the right people are you need. PagerDuty figures that out for you. It orchestrates the work it captures, everything that goes on in that workflow and enables you to learn from that and go forward.

And I think one of the things we did this year was really to improve our mobile user experience. We are the only platform that allows you to run an entire incident from a mobile device, which makes it easier for more and more non-technical users to start leveraging PagerDuty. And of course, recently we're hearing more and more stories about customers using us in their crisis response teams given what's going on and using us to try and spin up distributed TechOps team, who have historically been together in a network operation center.

[Sanjit Singh, Morgan Stanley]

Very interesting, and it makes total sense. And then for my follow-up question for Howard. I guess I'm trying to bundle two of these two questions into one if you don't mind, Howard. But what I'm trying to think through, as we think about how the environment could unfold over the next couple of quarters. When I think about the business being self-service and at the same time, more of the business coming from larger customers whether it's larger mid-market customers or enterprise customers. How do I marry those two things together in the sense that can these large enterprise customers expand in a way that's meaningful to the business in terms of the new business via self-service motion, or do they need more hand-holding, more a direct sales presence and sort of think through that. And the follow-up to that is, in a situation where things do take another leg down, what are the sort of the contingency operating plan in terms of how you're thinking about managing the model?

[Howard Wilson, CFO]

Well, thanks Sanjit, and good to hear from you as always. So I think you've hit on a very interesting point because I think just to remind folks, the majority of our lands actually come through our e-commerce or self-service model. And that's been something that's been kind of the mainstay of the business.

What we did do about two years ago is we actually implemented the ability for customers to self-serve regardless of whether they were a new or existing and being able to cover that regardless of their size. And so we've definitely seen more of our customers using that self-service motion to acquire. In fact, we even had within this past quarter, we had deals within the hundreds of thousands that were actually happening via self-service.

So we have a customer who is actually making that purchase online and was able to then - and complete that transaction without having to sign an order form or do any paperwork. So we certainly had that capability there. I think we need to continue to educate our customer base on the fact that that is available to them, and that is a mechanism that they can use. But we do see a steady stream. It's one of the things I watch every day is a steady stream of online transactions as they come in.

And to your second question, in terms of trying to think about contingency in the model, obviously, we've built out a number of different scenarios. We don't have that crystal ball, which we did. But we've tried to build out a number of scenarios to help us sort of assess how those impacts could play out. And - but right now, it's just modeling, right. We don't have enough data - real data. We don't have enough history of the Company to be able to take into account some of the impacts that we may see over time.

[Jennifer Tejada, CEO]

And by history, Sanjit, Howard means we - the Company is not old enough to have been through the many recessions, Howard and I have lived through. The one thing that certain about a difficult environment as you know that at some point in time it will end. And I think a lot of what we're focused on is making sure we continue to think like a growth company, we apply growth mindset, we continue to invest sensibly in product innovation and sales and marketing that we keep a very close handle on expenses and a watch daily as we mentioned is and in some cases weekly on leading indicators.

But know that at some point in time, the certain thing about a market environment like this is going to end and we need to come out of it's strong and continue on our path to building an enduring company.

[Sanjit Singh, Morgan Stanley]

Understood.

[Howard Wilson, CFO]

Yes. And I think one thing maybe just - the one thing I would just add is that we have a history of being really capital efficient. We have been very successful in terms of managing - even in periods of very high growth, managing our cash very carefully. We've had three quarters now being cash flow positive. If we look at the full-year, we were almost cash flow positive for the full-year. On a free cash flow basis, we were around 3% negative for the full-year. So because we have that mantra and that approach, I think that puts us in a good state as things unfold in the economy.

[Operator]

Your next question comes from Rishi Jaluria with D.A. Davidson. Your line is open.

[Rishi Jaluria, D.A. Davidson]

Hi, Jennifer, and Howard, thank you so much for taking my questions. And I'll echo my colleagues and hoping that everyone is doing well on staying safe.

[Howard Wilson, CFO]

Thanks, Rishi.

[Rishi Jaluria, D.A. Davidson]

I want to start with the comment Howard that you made on travel, hospitality, energy being less than 3% of revenue. Maybe if you can expand a little bit on that is that. Does that include things that might be on the surface consider tech companies but under the hood are in travel, transport, and hospitality, et cetera? So if you think of like a reference customer like Priceline or OTAs, something like Airbnb, or something like [indiscernible] that again we think of best tech companies on the surface, but under the hood are things are going to be really impacted by kind of social distancing and the fact that cities like ours are in lockdown mode. And then I've got a follow-up?

[Howard Wilson, CFO]

Yeah. Sure, Rishi. And I think you've hit upon an interesting thing. It's a challenge of industry classifications, right, that comes in. So when we look at sort of those, when we are talking about travel and hospitality, it's those folks that would fall more fairly and squarely within the line-- within the likes of traditional, travel and hospitality hotel groups, airlines, those types of functions.

And where you have the crossover platform type of companies like the likes of the ride-sharing companies and so forth, they do fall within a different bucket. And from our perspective, what we're doing is the model that we've been running, the scenarios that we've been looking at, we are trying to sort of be fairly granular in terms of trying to pull those out.

[Rishi Jaluria, D.A. Davidson]

And then just thinking through the net expansion rate, you talked about 120% to 123% number for next quarter which is we could see some stability or even at the high end of that range improvement relative to what we saw this quarter. Maybe going beyond Q1, how should we be thinking about this metric? And is there, I guess a possibility to expect that number to tick-up, A, because of better sales execution? And then B the fact that you're in the lapping the impact of the two large customers removed off PagerDuty onto their own applied solutions? Thanks.

[Howard Wilson, CFO]

Yes. So thanks, Rishi. For now, we've taken the view that we would like to provide some - well, set expectations around what we see for this next quarter. And given the uncertainty in the current market, we feel that it would not be prudent for us to try and stretch beyond this next quarter.

[Operator]

[Operator Instructions] Your next question comes from Bhavan Suri with William Blair. Your line is open.

[Bhavan Suri, William Blair]

I guess I just wanted to get a step back and obviously we're going through some crazy times. But I'd love to understand the conversations you might be having with large enterprises, existing or new, let's say, okay right now, we can't do anything because we're dealing with our infrastructure, our demands and remote people. But this is clearly something we should have had in place or should have in place coming out of it. And so sort of let's fast forward and again, none of us actually know when, but let's fast forward, some point in time.

Like when you look at the potential demand or the conversations with the interest, what are customers saying, are you seeing that from customers saying, hey, you know, a system that monitors all this and measure it for us, to tell us what's going to happen, alerts us, is there a sort of a conversation happening with large enterprises there? Or is it still too early? I'd love to understand sort of how you might be thinking about that, how you're hearing about color? Obviously, we're all optimistic, but love just on what's actually happening?

[Jennifer Tejada, CEO]

We just had - again, thanks for the question. We just had a conversation with a very large customer this past week. And the conversation went something like this, we're looking for other ways to find cost savings so we can invest more in PagerDuty because we think over time, PagerDuty will reduce significant cost for us this year. So we're looking to deploy it more broadly across the organization than it has been in the past, and we're trying to accelerate that as a result of the current environment.

Now, that is one data point and it is very early days. And another example I'll give you is a company that provides navigational capability that recently self-served tens of licenses, even though they're fully deployed on a recent purchase that they've done with us in the past. And we checked in with the account team and essentially, they have a new distributed team that is used to be in a central market is now out in the wild in their home. And so they're putting - bringing that team on the PagerDuty.

And we've also seen the acquisitions like the new logo engine is holding up, like I said trials are holding up and there is a lot of conversation around using PagerDuty for use cases outside of DevOps and IT, and one being crisis response. And I can't speak to how we are using PagerDuty as an organization in this kind of environment.

So we are using PagerDuty within our crisis response governance team, so our crisis leadership team and the four workstreams underneath that, that include employees and public affairs, financial management, engaging our customers, and then product and system stability.

All of those teams are on PagerDuty rotation such that if we needed to get immediate information across those teams quickly to drive immediate action that will happen on the PagerDuty platform. It's not happening across 16 communication platforms, SMS et cetera. It's also highly reliable so that we know we can get in contact with the right people for the right issues. And I do think that there is the potential to see more than that.

But again, I would just encourage everybody to be balanced in the way they think about this because it is early. We don't have a crystal ball. The way I thought about the world we could go is different than the way I thought about the world yesterday, which is different today.

And I think the most important thing is that we have a team and a culture that is used to managing unpredictable big incidents that is expected to be highly resilient, and so we're pretty calm in this environment, even though it's psychologically I think difficult for most individuals. And I've been really proud of how our team responded. We gave them 24 hours notice on March 9th to that they would work from home and we really haven't skipped the beat.

And that's not to say that it's not hard for folks, I mean I see kids in the zoom. People are staring into the zoom machine hour after hour. Thank you, Eric, for making this possible for us. But I think we're in a better position than other companies might be just given our culture and the way we work.

[Bhavan Suri, William Blair]

Yes. No, I appreciate that. The comp given the volatility and revolver, I'm sure everyone on this phone is dealt with the kids in the back on the zoom given circumstances. I guess one quick one for either you or Howard. But you've enacted a number of productivity measures, especially getting David Justice on board and everything else to address net retention and net expansion rates. And obviously, the guidance feels pretty stable. Where do you think you are in terms of rolling those out? Is it still pretty early? Do we expect net retention rates or expansion rate to potentially again ex or COVID and everything else would you assume they go up? Do you think with the first inning, do you feel there's have been done well over this quarter and do you think, Q1 is a stable place? And how should we think about those? Thank you.

[Jennifer Tejada, CEO]

I'll take a crack at that and then Howard can jump in. Dave has been with us for eight weeks. But he's been just a fantastic add to the team. His priorities have been really focusing on finalizing some key leadership position on making investments in EMEA, which is performed really well in the enterprise as well as customer success, making sure that we have very strong alignment in marketing with account-based marketing and as well as leveraging our self-service capability, and really also bringing operational rigor to the table, which I think is super important as we look to become a more disciplined organization.

And I - I'm really - again, I will just say, I'm really proud of our sales team. We are very fortunate that we were able to be together this year for sales kick-off before COVID-19 hit. And you know there is a lot of positivity, a lot of accountability and ownership in the tone of people. And really I think a sense that we have the right products for the right set of problems in the right moment in the market, but looking past Q1 is just really hard to do given the level of uncertainty.

So we're going to just continue to focus on executing on what's in front of us on improving productivity and ensuring that our salespeople are well equipped that the marketing messaging we put out into the market is easy to understand and that the product continues to be very easy to use, very secure and very resilient in the current circumstances.

[Howard Wilson, CFO]

And I guess just one quick comment. As I mentioned to Rishi, we see the 122 to 123 rate that we're providing for Q1 as being sort of the zone for Q1. We haven't provided any view beyond that at this time.

[Operator]

Your next question comes from James Wang with ARK Invest. Your line is open.

[James Wang, ARK Invest]

You quoted $100 billion TAM as your kind of long-term target for digital operations management. But right now I think many people view PagerDuty a fairly narrow slice of the products that's addressed. Could you maybe talk about kind of how the R&D? Where that focus is? What do you need to build out? What kind of ultimate vision for what you need to build to achieve to penetrate that TAM?

[Jennifer Tejada, CEO]

Sure. Thanks for the question. As I said earlier, one of our priorities this year is to become the de facto platform for real-time work. That points to a couple of things. One, it's continuing to validate our shift from a single product company to a multi-product platform. And I think we mentioned that of the top 100 new customers we brought on board, 68 of them took more than one product.

The digital operations management skews which really takes you from traditional on-call automation to proactive and then intelligence, really leveraging predictive machine learning capabilities, visibility to give stakeholders across the business context in what's happening and analytics, which really truly help you understand the cost of services.

These are things that people are adopting as a part of that digital operations skew. So I actually think - we actually feel really good about the progress that we're making there. And we also think it's okay that the entry point into our product is that core solution because it is the most reliable and I think most well known and functional solution out in the market.

I think what's also interesting is as that solution becomes intertwined and part of core infrastructure for large companies, people are not looking to change, they're looking to build on it. And our customers are talking to us about how they leverage more and more great platforms to serve them, and ours operates - interoperates very effectively with others.

From a product innovation perspective, as I mentioned service directory, which we announced last fall is the first of its kind. It's a virtual dynamic directory of services was really important industry architectures where you're using virtualization, you may spin up services quickly and send them down no longer need them. And what's really important about it is, it also brings into account the people element, the people ownership of those services, so that when you need to do something, you know who you need to do that.

And then we're going to continue to invest in the developer ecosystem. And one of the things that's maybe not well known about PagerDuty is developers build capabilities and applications on top of PagerDuty all the time, and we haven't created an opportunity for those - them to expose those to other users. And so the dev ecosystem I think will be important in the future as well to really bring the power of the community to the platform.

[Operator]

And there are no final questions at this time. I will now turn the conference back over to Ms. Finerman for closing remarks.

[Stacey Finerman, VP, IR]

Thank you, Operator. And thank you all for joining us today. We did hear some comments but the call was dropping, some of you might have missed something. We will look to post a transcript of this call, so you will be able to follow along. And you are always welcome to reach out to us at [e-mail]. Thank you very much and have a nice day.

[Operator]

This concludes today's conference call. You may now disconnect.