Executive Summary / Key Takeaways

• PagerDuty is strategically transforming from a high-velocity, single-product vendor to a multi-product, value-centric platform leader focused on the enterprise, leveraging its AI-driven Operations Cloud to address the escalating complexity and cost of digital outages.
• Recent financial results demonstrate strong operational discipline with expanding non-GAAP operating margins (20% in Q1 FY26) and free cash flow generation, positioning the company for GAAP profitability despite near-term revenue growth moderation (8% in Q1 FY26, guided 5-7% for FY26).
• The shift to larger, multi-year, multi-product enterprise deals, while strategically beneficial for long-term value and retention (DBNR 104% in Q1 FY26, expected 103-105% for FY26), has introduced timing and execution challenges, impacting near-term revenue linearity and requiring enhanced sales force effectiveness.
• PagerDuty's differentiated technology, including its proprietary data model, embedded AI/ML, and new generative AI capabilities (PagerDuty Advance, Agentic AI), provides quantifiable benefits (e.g., reduced incident duration, high ROI for customers) and serves as a key competitive moat against broader or less specialized rivals.
• Management is focused on accelerating enterprise adoption, demonstrating AI monetization, and improving sales execution and efficiency, anticipating improved growth momentum in the second half of FY26 as the enterprise sales force matures.

Setting the Scene: The Operations Cloud in a Complex Digital World

PagerDuty, Inc., founded in 2010, initially carved out a niche by providing essential on-call management for developers. Over the past decade, the company has evolved significantly, expanding its capabilities to become a global leader in digital operations management. At the heart of this evolution is the PagerDuty Operations Cloud, a multi-product platform designed to manage the urgent and mission-critical work inherent in modern, digital businesses. This transformation was a strategic response to the increasing complexity of digital infrastructure – from cloud migrations and distributed architectures to the proliferation of CI/CD pipelines and the emergence of generative AI co-development. In this environment, operational resilience is no longer a technical detail but a CEO imperative, directly impacting customer experience and revenue.

The Operations Cloud addresses this challenge by collecting data and digital signals from virtually any software-enabled system or device, leveraging powerful machine learning to correlate, process, and predict opportunities and issues. Through integrated incident management, event management, automation, and AIOps, the platform connects the right people with the right information to resolve issues in minutes or seconds. The recent addition of generative AI capabilities via PagerDuty Advance and Agentic AI further enhances the platform's ability to manage mission-critical tasks smarter and faster. With over 700 direct integrations, PagerDuty is deeply embedded in the operational workflows of its customers, enabling technical teams to gather signals without context switching and connecting to collaboration tools and business applications to drive automation.

This strategic shift towards a comprehensive platform for digital operations has positioned PagerDuty at the center of key customer initiatives, including incident management transformation, operations center modernization, and automation standardization. While the company historically relied on a high-velocity, land-and-expand model, particularly effective in SMB and mid-market segments, changing enterprise buying behaviors – marked by centralized purchasing authority and increased scrutiny – necessitated a move towards a more strategic, top-down value selling motion focused on multiyear, multiproduct platform partnerships. This transition, while challenging, is aimed at capturing the significant market opportunity in helping enterprises achieve operational efficiency at scale, protect revenue, and mitigate the escalating costs of disruption.

Technological Differentiation and Innovation

PagerDuty's core technological advantage lies in its proprietary data model, built over 15 years of processing real-time operational data. This extensive dataset, combined with embedded machine learning and AI, forms the foundation of the Operations Cloud, enabling capabilities that differentiate PagerDuty from competitors.

The platform's ability to ingest and correlate digital signals from a vast ecosystem of tools allows for intelligent alert grouping and noise reduction, ensuring that teams focus on genuine signals. The latest version of Global Intelligent Alert Grouping, leveraging neural networks, aims to deliver heightened precision in isolating signals and accelerating resolution.

AIOps, a key component of the Operations Cloud, leverages this data and ML to automate triage and predict potential issues. This capability is deeply integrated into the operational workflow, enabling automated triage and orchestration of response. Customers are increasingly using AIOps for use cases beyond incident response, such as optimizing observability spend by identifying signal versus noise and prioritizing tech debt reduction based on operational risk. AIOps grew about 20% year-on-year in Q2 FY25, demonstrating its increasing adoption and value.

Automation capabilities, including an expanded library of templates, workflows, and runbooks, address manual, repetitive tasks like log diagnostics and container management. This frees up valuable engineering time and reduces operational overhead.

The introduction of PagerDuty Advance, the company's suite of generative AI capabilities, further extends its technological lead. Embedded across the platform, PagerDuty Advance automates tasks like summarizing incident communications (leveraging transcripts from Zoom (ZM) and Microsoft Teams (MSFT) via the AI Scribe agent), expediting incident response, and reducing the cost and time to take action. The generative AI assistant leverages the proprietary data model and incident lifecycle context to provide recommendations and answer questions within a unified chat experience (integrated with Slack and Teams). Early access feedback has been strong, highlighting the significant time-saving potential – estimated to save enterprise teams hundreds of hours, equating to millions of dollars annually.

Looking ahead, PagerDuty is on track to launch three additional AI agents (Site Reliability Engineering, Operations Analysis, Scheduling Optimization agents) in Q2 FY26. These agentic AI capabilities are designed to work alongside human responders, picking up whole tasks and workflows to further automate incident response and potentially reduce the need for human intervention in routine tasks. Management believes these agents will be mission-critical for companies building and scaling AI operations, further expanding the platform's relevance.

The "so what" for investors is clear: PagerDuty's deep investment in AI and its proprietary data model create a significant competitive moat. Quantifiable benefits demonstrated by customers, such as a 28% reduction in incident duration and 43% decrease in human effort through AI-driven automation (for a global banking institution), projected ROI exceeding 500% over 3 years for one customer and over 300% for another, and the platform's proven resilience under extreme load (1,400% increase in workflows during a major outage with no disruption or cost surge), translate directly into tangible value for customers. This value proposition supports PagerDuty's ability to drive multi-product adoption, secure larger, multi-year contracts, and potentially command pricing power, underpinning its long-term growth strategy and competitive positioning.

Competitive Landscape and Positioning

The digital operations management market is dynamic and competitive, with PagerDuty competing against a mix of direct and indirect rivals. Key direct competitors include established players with broader IT management suites like ServiceNow (NOW) and Atlassian (TEAM), cloud monitoring specialists like Datadog (DDOG), and data analytics platforms like Splunk (SPLK) (now part of Cisco (CSCO)).

PagerDuty positions itself as a best-in-breed, specialized platform for real-time operations and incident response, emphasizing its AI-driven capabilities, operational resilience at scale, and neutrality. Unlike some competitors tied to specific cloud ecosystems or broader IT service management frameworks, PagerDuty integrates signals from virtually any source – including all major observability providers, cloud platforms, and ticketing systems. This neutrality is a key differentiator, particularly for large enterprises using diverse technology stacks, providing them with an independent, correlated view of their operational health.

Quantitatively, while competitors like Datadog and ServiceNow have demonstrated higher revenue growth rates (Datadog 25-30%, ServiceNow 20-25%) and often stronger operating margins (Datadog 10-15%, ServiceNow 15-20%) compared to PagerDuty's recent 9% annual revenue growth and -10.16% TTM operating margin, PagerDuty highlights its specific operational performance metrics as competitive advantages. Its ability to handle massive incident workflow surges without disruption (1,400% increase during a major outage) demonstrates a level of resilience at scale that management argues is a difficult moat for others to cross. The quantifiable ROI and efficiency gains delivered by PagerDuty's platform (e.g., 28% reduction in incident duration, 400%+ ROI) are critical in winning strategic enterprise deals against both established platform players and emerging challengers, as seen in recent wins with major financial institutions and AI companies.

The competitive intensity is particularly noticeable in the mid-market and SMB segments, where some offerings are more price-led and lack the depth of AI or proven scalability of PagerDuty's enterprise platform. While the SMB segment has been a headwind for PagerDuty with elevated churn and downgrades, the company is implementing targeted digital acquisition strategies and leveraging its streamlined packaging to stabilize this segment.

PagerDuty's strategic focus on the enterprise, coupled with its differentiated technology and emphasis on delivering measurable operational and financial value, aims to solidify its position as the trusted platform for intelligent digital operations, even as larger players expand their offerings and new AI-focused startups emerge. The increasing contribution of AIOps, Automation, and Customer Service Ops to incremental ARR (over 40% in recent quarters) validates the success of its multi-product strategy and its ability to widen its competitive moat beyond core incident management.

Financial Performance and Operational Details

PagerDuty's recent financial performance reflects a company in strategic transition, balancing investment in its enterprise platform and go-to-market motion with a strong focus on operational efficiency and profitability.

For the first quarter of fiscal year 2026, PagerDuty reported revenue of $120 million, an 8% increase year-over-year, landing at the top of its guidance range. Annual Recurring Revenue (ARR) grew 7% year-over-year to $496 million. Dollar-based net retention (DBNR) was 104% in Q1 FY26, impacted by higher-than-expected enterprise downgrades and commercial churn, a dip from the 106-107% seen in prior quarters.

Despite the slight moderation in top-line growth metrics, profitability saw significant improvement. Non-GAAP operating margin reached 20% in Q1 FY26, exceeding the target by 500 basis points. This follows a strong fiscal year 2025, where the company achieved its third consecutive year of non-GAAP profitability, expanding non-GAAP operating margin by nearly 500 basis points to 18% and free cash flow margin from 15% to 23%.

Breaking down the operational expenses in Q1 FY26:

• Cost of revenue decreased slightly to $19.18 million (16% of revenue) from $19.34 million (17.4% of revenue) in Q1 FY25, primarily due to lower amortization of acquired intangibles and outside services, partially offset by increased personnel and infrastructure costs. Gross margin remained strong at 84%.
• Research and development expenses decreased to $34.05 million (28.4% of revenue) from $37.52 million (33.8% of revenue), mainly due to lower personnel costs (headcount and stock-based compensation).

• Sales and marketing expenses increased to $50.05 million (41.8% of revenue) from $48.50 million (43.6% of revenue), driven by higher marketing costs and severance, partially offset by reduced outside services.
• General and administrative expenses decreased to $26.86 million (22.4% of revenue) from $27.54 million (24.8% of revenue), primarily due to lower stock-based compensation, offset by increased outside services.

The decrease in personnel costs across R&D and G&A, alongside disciplined spending in sales and marketing, contributed to the significant margin expansion.

Liquidity remains strong. PagerDuty ended Q1 FY26 with $597 million in cash, cash equivalents, and investments. Cash from operations was $31 million (26% of revenue), and free cash flow was $29 million (24% of revenue). This robust cash generation provides significant flexibility to execute on strategic priorities and return capital to shareholders. The company initiated a new $150 million share repurchase program in March 2025, following the completion of a prior $100 million program in Q4 FY25. A notable upcoming obligation is the repayment of the $57.5 million principal of the 2025 Convertible Senior Notes maturing in July 2025, which is classified as a current liability.

Operational metrics highlight the strategic shift's impact. The number of customers spending over $100,000 in ARR grew 5% year-over-year to 848 in Q1 FY26. This cohort represented 71% of total ARR in FY25 and grew 12% year-on-year in that period, demonstrating the success in expanding relationships with larger customers. Total paid customers increased by 27 net new in Q1 FY26, the strongest acquisition in eight quarters, driven by targeted enhancements in the commercial digital acquisition strategy. However, the SMB segment continues to present headwinds with elevated churn and downgrades, although management noted signs of stabilization and improving demand signals in Q1 FY26, particularly from well-funded native AI startups.

The shift to enterprise has also impacted sales cycles and linearity, making quarters more back-end loaded. This timing issue, coupled with large deal deferrals seen in Q3 FY25 and lower enterprise gross retention in Q1 FY26, has influenced near-term revenue expectations.

Outlook and Guidance

PagerDuty's outlook reflects a pragmatic view of the ongoing strategic transformation and market dynamics, balancing confidence in the long-term opportunity with acknowledgment of near-term execution variability.

For the second quarter of fiscal year 2026, PagerDuty expects revenue in the range of $122.5 million to $124.5 million, representing a growth rate of 6% to 7%. Net income per diluted share is guided between $0.19 and $0.20, implying an operating margin of 17%.

For the full fiscal year 2026, the company updated its guidance, now expecting revenue in the range of $493 million to $499 million, representing a growth rate of 5% to 7%. This is a slight reduction from the prior range of $500 million to $507 million. Net income per diluted share for the full year is now expected between $0.95 and $1.00, implying an operating margin of 20% to 21%, an increase from the prior guidance of $0.90 to $0.95 and 19% to 20%.

Management attributes the updated revenue outlook primarily to the transitional dynamics in their go-to-market motion and Q1 execution challenges, which have a flow-on effect throughout the year. The shift to enterprise deals introduces more seasonality and less linearity, meaning improvements in bookings in the back half of the year will largely translate into revenue benefits in the following fiscal year.

Despite the near-term revenue adjustment, management remains confident in the underlying business trajectory and expects to deliver improved growth in the second half of FY26. This confidence is based on several factors:

• The maturing enterprise sales force: Over 60% of enterprise reps are expected to have at least a year of experience by the end of Q2 FY26. This increased seniority and value-centric selling approach are anticipated to drive meaningful improvement in enterprise contribution.
• Pipeline strength: Management noted strong pipeline generation, with pipeline for Q1 FY26 being almost 50% higher than the prior year. Efforts are focused on improving pipeline quality and velocity.
• Strategic catalysts: Continued focus on demonstrating product market fit for AI through monetization, enhancing the enterprise engagement model, and leveraging automation/AI internally are expected to drive efficiency and growth.
• SMB stabilization: While still a headwind, signs of stabilization and targeted digital acquisition efforts are expected to moderate the drag from this segment.

The upward revision to profitability guidance underscores PagerDuty's commitment to operational discipline and efficiency gains. The company is focused on a clear path to GAAP profitability and has increased its long-term operating margin target to 30%. This is being achieved by optimizing existing spend, improving sales and marketing efficiency, and managing stock-based compensation.

Overall, the outlook signals a period of continued strategic execution and operational refinement. While the full revenue impact of the enterprise transformation and AI innovation may take time to fully materialize due to sales cycles and revenue recognition, the improving profitability and strong balance sheet provide a solid foundation.

Risks and Challenges

Investing in PagerDuty is not without risks, particularly given its ongoing strategic transformation and exposure to external market forces.

A primary risk is the execution of the enterprise go-to-market transformation. While the company has made progress in hiring experienced enterprise reps and refining its sales motion, scaling this across the entire organization at the intended pace has faced challenges. Issues like sales leadership transitions, territory reassignments, and adapting to longer, more complex enterprise sales cycles can impact bookings and revenue growth. The recent dip in enterprise gross retention and elevated commercial churn in Q1 FY26 highlight the ongoing variability in customer retention, which directly impacts ARR and DBNR.

Macroeconomic conditions continue to pose a risk. Global inflation, heightened interest rates, and general economic uncertainty can lead to increased scrutiny on IT spending, longer approval cycles for large deals, and potential downgrades or churn, particularly in more price-sensitive segments like SMB. While PagerDuty's value proposition around operational efficiency and cost reduction is relevant in a downturn, budget constraints can still impact purchasing decisions. International trade policies and anti-U.S. sentiment could also indirectly affect business by impacting customers or increasing operational complexities.

Competition in the digital operations management market is intense. While PagerDuty believes its AI-driven platform, resilience at scale, and neutrality provide a strong competitive moat, rivals like ServiceNow, Atlassian, Datadog, and Splunk offer compelling alternatives or broader suites. PagerDuty must continue to innovate rapidly and effectively communicate its differentiated value to maintain market share and pricing power.

Operational metrics like ARR and DBNR, while key indicators, are subject to assumptions and limitations and may not perfectly predict future revenue. Changes in methodology or external factors could impact their accuracy.

Finally, the success of new product monetization, particularly for PagerDuty Advance and Agentic AI, is not guaranteed. While early feedback is positive, widespread adoption and conversion to paid usage will depend on demonstrating clear, quantifiable value to a broad customer base and navigating potential complexities around data privacy and AI governance.

Conclusion

PagerDuty is navigating a pivotal strategic transformation, shifting its focus and resources towards becoming the leading multi-product Operations Cloud platform for the enterprise. This evolution, driven by the increasing complexity of digital systems and the critical need for operational resilience, leverages the company's core technological strengths in AI, machine learning, and a proprietary data model built over a decade and a half.

While this transition has presented near-term challenges, including variability in revenue linearity, sales execution hurdles, and headwinds in the SMB segment, the underlying strategic rationale remains compelling. The company is demonstrating strong progress in expanding relationships with larger enterprise customers, driving multi-product adoption, and securing valuable multi-year agreements. The recent performance highlights a significant improvement in operational discipline, leading to expanding non-GAAP operating margins and robust free cash flow generation, positioning PagerDuty on a clear path to GAAP profitability.

The updated guidance for FY26 reflects a pragmatic view, acknowledging the timing impacts of the enterprise shift and the need for continued sales execution refinement. However, management's confidence in an acceleration of ARR growth in the second half of the year, supported by a maturing enterprise sales force and a strong pipeline, suggests that the foundational elements for future growth are strengthening.

For investors, the core thesis hinges on PagerDuty's ability to successfully execute its enterprise strategy, effectively monetize its differentiated AI and automation capabilities, and continue to drive operational efficiency. The company's technological edge, particularly its AI-driven platform's proven resilience and ability to deliver quantifiable ROI for customers, provides a significant competitive advantage in a market where the cost of failure is escalating. While risks related to execution, macro volatility, and competition persist, PagerDuty's strategic focus, improving profitability, and strong balance sheet offer a compelling narrative for long-term value creation as it aims to capture the substantial opportunity in intelligent digital operations.