PagerDuty Inc.

09/04/2025 | Press release | Distributed by Public on 09/04/2025 04:01

Quarterly Report for Quarter Ending July 31, 2025 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of operations of PagerDuty, Inc. and its wholly-owned subsidiaries, and subsidiaries in which PagerDuty, Inc. holds a controlling interest ("PagerDuty," "we," "us" or "our") should be read in conjunction with our unaudited consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements and related notes in our Annual Report on Form 10-K for the year ended January 31, 2025. You should review the sections titled "Special Note Regarding Forward-Looking Statements" above in this Quarterly Report on Form 10-Q for a discussion of forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, adverse effects on our business and general economic conditions as identified below, and those discussed in the section titled "Risk Factors" included in our Annual Report on Form 10-K. The last day of our fiscal year is January 31. Our fiscal quarters end on April 30, July 31, October 31 and January 31. Except as otherwise noted, all references to fiscal 2026 refer to the year ended January 31, 2026.
Overview and Business Model
PagerDuty, Inc. is a global leader in digital operations management, enabling customers to achieve operational efficiency at scale and transform critical work for modern enterprises. The PagerDuty Operations Cloud combines artificial intelligence ("AI") operations ("AIOps"), automation, customer service operations, and incident management with a generative AI assistant to create a flexible, resilient, and scalable platform to protect revenue and improve customer experience, accelerate innovation, improve operational efficiency, and mitigate risk of operational failures.
Today, nearly every business is a digital business. From retail to financial services, from travel and entertainment to supply chain logistics, everyday commerce relies on an incredibly complex network of digital infrastructure, systems, software, and teams. And while that complexity is only increasing, the need for those digital operations to be resilient is also rising, as organizations face pressure to meet escalating customer expectations, resolve incidents proactively, and deliver innovation without increasing costs. In this environment, the ability to anticipate, orchestrate, and resolve time-sensitive, critical and unplanned work before it escalates is a critical requirement for success.
Since our founding in 2009, we have expanded our capabilities from a single product focused on on-call management for developers to a multi-product platform that crosses the silos of development, information technology ("IT") infrastructure and operations, security, customer service, and business operations and reaches executive stakeholder roles across an organization. Today, we collect data and digital signals from virtually any software-enabled system or device and leverage AI and machine learning to correlate, process, and predict opportunities and incidents. Using incident management, automation, AI operations, and customer service operations, our platform for digital operations brings together the right people with the right information so they can resolve issues and act on opportunities in minutes or seconds from wherever they are. In addition, our generative AI capabilities allow organizations to manage mission-critical tasks smarter and faster.
We have spent more than a decade building deep product integrations to our platform, and our ecosystem now includes over 700 direct integrations to enable our customers to gather and correlate digital signals from virtually any software-enabled system or device. This allows technical teams to collect digital signals from nearly any system or platform in their environment, and without the effects of context switching. Those same integrations connect with popular collaboration tools and business applications, as well as all types of technology stacks to drive automation of work.
We generate revenue primarily from cloud-hosted software subscription fees. We also generate revenue from term-license software subscription fees. PagerDuty has a land-and-expand business model that leads to viral adoption and expansion of our products. Although the PagerDuty platform can be used by any size of company, from small to mid-market to enterprise companies, we have increasingly focused our go-to-market motion, including our field sales team, on serving enterprise customers.
The PagerDuty sales and customer success teams drive expansion to additional users, new use cases, and additional products, as well as upgrades to higher-value plans. Our enterprise customers account for the majority of our revenue today. The PagerDuty platform is central to customer initiatives targeted at incident management transformation, operations center modernization, automation standardization, and customer experience operations. Our platform provides the technology to solve the customer problems underlying these and many other business initiatives.
Macroeconomic Environment
Our business and financial performance has and may continue to be subject to the effects of worldwide macroeconomic conditions, including, but not limited to, global inflation and heightened interest rates, tariffs and trade wars, existing and new laws and regulations, and economic uncertainty and volatility globally and in the jurisdictions in which we do business.
We will continue to monitor the direct and indirect impacts of these or similar circumstances on our business and financial results. For additional information on the potential impact of macroeconomic conditions on our business, see Part II, Item 1A, Risk Factors.
Key Business Metrics
We review the following key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.
While these metrics are based on what we believe to be a reasonable representation of our customer base for the applicable period of measurement, we rely on a third party to validate legal entities using the best available data at period end, and therefore, these metrics are subject to change as new information becomes available. In addition, we are continually seeking to improve our methodology, which may result in future changes to our key metrics.
Annual Recurring Revenue ("ARR")
We believe ARR is a key metric to measure our business performance because it is an indication of our ability to maintain and expand our relationships with existing customers and generate new business. We define ARR as the annualized recurring revenue of all active contracts at the end of a reporting period.
ARR was as follows as of the dates indicated (in millions):
As of July 31,
2025 2024
ARR
$ 498.9 $ 474.0
Number of Customers
We believe that the number of customers using our platform, particularly those that have subscription agreements for more than $100.0 thousand in ARR, are indicators of our market penetration, particularly within enterprise accounts, the growth of our business, and our potential future business opportunities. We define a customer as a separate legal entity, such as a company or an educational or government institution, that has an active subscription with us or one of our partners to access our platform. In situations where an organization has multiple subsidiaries or divisions, we treat the parent entity as the customer instead of treating each subsidiary or division as a separate customer. Increasing awareness of our platform and its broad range of capabilities, coupled with the fact that the world is always on and powered by increasingly complex technology, has expanded the diversity of our customer base to include organizations of all sizes across virtually all industries. Over time, enterprise and mid-market customers have constituted a greater share of our revenue. The total number of paid customers and the number of customers with greater than $100.0 thousand in ARR were as follows as of the dates indicated:
As of July 31,
2025 2024
Customers 15,322 15,044
Customers with greater than $100.0 thousand in ARR
868 820
Dollar-based Net Retention Rate
We use dollar-based net retention rate to evaluate the long-term value of our customer relationships, since this metric reflects our ability to retain and expand the ARR from our existing paid customers. Our dollar-based net retention rate compares our ARR from the same set of customers across comparable periods.
We calculate dollar-based net retention rate as of a period end by starting with the ARR from the cohort of all paid customers as of 12 months prior to such period end ("Prior Period ARR"). We then calculate the ARR from these same customers as of the current period end ("Current Period ARR"). Current Period ARR includes any expansion and is net of downgrades or churn over the last 12 months but excludes ARR from new customers in the current period. We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the dollar-based net retention rate. The dollar-based net retention rate was as follows as of the dates indicated:
Last 12 months ended July 31,
2025 2024
Dollar-based net retention rate
102 % 106 %
Results of Operations
Three months ended July 31, 2025 compared to three months ended July 31, 2024
The following table sets forth our results of operations for the periods indicated and as a percentage of revenue (in thousands, except percentages):
Three months ended July 31,
2025 2024
Revenue $ 123,411 100.0 % $ 115,935 100.0 %
Cost of revenue(1)
19,001 15.4 % 20,080 17.3 %
Gross profit 104,410 84.6 % 95,855 82.7 %
Operating expenses:
Research and development(1)
30,897 25.0 % 35,088 30.3 %
Sales and marketing(1)
44,456 36.0 % 50,966 44.0 %
General and administrative(1)
25,491 20.7 % 25,828 22.3 %
Total operating expenses 100,844 81.7 % 111,882 96.5 %
Income (loss) from operations 3,566 2.9 % (16,027) (13.8) %
Interest income 6,149 5.0 % 7,516 6.5 %
Interest expense (2,286) (1.9) % (2,363) (2.0) %
Other income (expense), net 120 0.1 % 117 0.1 %
Income (loss) before provision for income taxes 7,549 6.1 % (10,757) (9.3) %
(Benefit from) provision for income taxes (1,865) (1.5) % 427 0.4 %
Net income (loss) $ 9,414 7.6 % $ (11,184) (9.6) %
Net loss attributable to redeemable non-controlling interest (161) (0.1) % (272) (0.2) %
Net income (loss) attributable to PagerDuty, Inc. $ 9,575 7.8 % $ (10,912) (9.4) %
Less: Adjustment attributable to redeemable non-controlling interest (202) (0.2) % 2,330 2.0 %
Net income (loss) attributable to PagerDuty, Inc. common stockholders $ 9,777 7.9 % $ (13,242) (11.4) %
______________
(1) Includes stock-based compensation expense as follows (in thousands):
Three months ended July 31,
2025 2024
Cost of revenue $ 1,213 $ 1,508
Research and development 9,560 11,842
Sales and marketing 5,285 8,116
General and administrative 9,902 10,900
Total $ 25,960 $ 32,366
Revenue
We generate revenue primarily from cloud-hosted software subscription fees. We also generate revenue from term-license software subscription fees. Revenue generated from term-license software subscription fees is not material. Our subscriptions are typically one year in duration but can range from monthly to multi-year. Subscription fees are driven primarily by the number of customers, the number of users per customer, and the level of subscription purchased. We generally invoice customers in advance in annual installments for subscriptions to our software. Revenue related to our cloud-hosted software subscriptions is recognized ratably over the related contractual term beginning on the date that our platform is made available to a customer. For our term-license software subscriptions, we recognize license revenue upon delivery, and software maintenance revenue ratably, typically beginning on the start of the contractual term of the arrangement.
Due to the low complexity of implementation and integration of our platform with our customers' existing infrastructure, revenue from professional services has not been material to date.
The following sets forth our revenue for the periods indicated (in thousands, except percentages):
Three months ended July 31,
Change
2025 2024
$
%
Revenue $ 123,411 $ 115,935 $ 7,476 6.4 %
Revenue increased primarily due to growth from existing customers, which was driven by an increase in the number of users and upsell of additional products and services.
Cost of Revenue and Gross Margin
Cost of revenue primarily consists of expenses related to providing our platform to customers, including personnel expenses for operations and global support, payments to our third-party cloud infrastructure providers for hosting our software, payment processing fees, amortization of capitalized software costs, amortization of acquired developed technology, and allocated overhead costs for facilities, information technology, and other allocated overhead costs. We will continue to invest additional resources in our platform infrastructure and our customer support and success organizations to expand the capability of our platform and ensure that our customers are realizing the full benefit of our offerings. The level and timing of investment in these areas could affect our cost of revenue in the future.
Gross profit represents revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin may fluctuate from period to period as our revenue fluctuates, and as a result of the timing and amount of investments to expand the capacity of our third-party cloud infrastructure providers and our continued efforts to enhance our platform support and customer success teams.
The following sets forth our cost of revenue and gross margin for the periods indicated (in thousands, except percentages):
Three months ended July 31,
Change
2025 2024
$
%
Cost of revenue $ 19,001 $ 20,080 $ (1,079) (5.4) %
Gross margin 84.6 % 82.7 %
The decrease in cost of revenue is primarily due to: (i) a decrease of $1.7 million in amortization of acquired intangible assets; and (ii) a decrease of $1.1 million in outside services spend for the customer service team; offset by (iii) an increase of $1.0 million in hosting, software, and telecom costs; and (iv) an increase of $0.6 million in personnel costs as a result of an increase in headcount.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel expenses are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation expense, and sales commissions. Operating expenses also include amortization of acquired intangible assets, acquisition-related expenses, allocated overhead costs for facilities, shared IT related expenses, including depreciation expense, and certain company-wide events and functions.
The following table sets forth our operating expenses for the periods indicated (in thousands, except percentages):
Three months ended July 31,
Change
2025 2024
$
%
Operating expenses:
Research and development
$ 30,897 $ 35,088 $ (4,191) (11.9) %
Sales and marketing
44,456 50,966 (6,510) (12.8) %
General and administrative
25,491 25,828 (337) (1.3) %
Total operating expenses $ 100,844 $ 111,882 $ (11,038) (9.9) %
Research and development: Research and development expenses consist primarily of personnel costs for our engineering, product, and design teams. Additionally, research and development expenses include outside services, depreciation of equipment used in research and development activities, acquisition-related expenses, and allocated overhead costs. We expect that our research and development expenses will generally increase in dollar value as our business grows.
Research and development expenses decreased primarily due to a decrease of $4.1 million in personnel costs as a result of a decrease in headcount and a decrease in stock-based compensation.
Sales and marketing: Sales and marketing expenses consist primarily of personnel costs, costs of general marketing activities and promotional activities, travel-related expenses, amortization of acquired intangible assets, allocated overhead costs, and credit loss expense. Sales commissions earned by our sales force that are considered incremental and recoverable costs of obtaining a subscription with a customer are deferred and amortized on a straight-line basis over the expected period of benefit, which we have determined to be four years. We expect that our sales and marketing expenses will generally increase in dollar value and continue to be our largest operating expense for the foreseeable future as we expand our sales and marketing efforts.
Sales and marketing expenses decreased primarily due to: (i) a decrease of $3.1 million in personnel costs, driven largely by a decrease in stock-based compensation; (ii) a decrease of $1.9 million in outside services spend due to higher leverage of internal resources; and (iii) a decrease of $1.3 million in training and travel-related costs; and (iv) a decrease of $0.5 million in marketing costs for media campaigns during the current period; offset by (v) an increase of $0.3 million in costs to support the business and related infrastructure, which include allocated overhead costs.
General and administrative: General and administrative expenses consist primarily of personnel costs and outside services fees for finance, legal, human resources, information technology, and other administrative functions. In addition, general and administrative expenses include non-personnel costs, such as legal, accounting, and other professional fees, hardware and software costs, certain tax, license and insurance-related expenses, acquisition-related expenses, and allocated overhead costs. We expect that our general and administrative expenses will increase in dollar value as our business grows. However, we expect that our general and administrative expenses will decrease as a percentage of our revenue over the longer term, as we expect our investments to allow for improved efficiency for future growth in the business.
General and administrative expenses decreased primarily due to: (i) a decrease of $0.3 million in training and travel-related costs; (ii) a decrease of $0.1 million in insurance, business taxes and licenses costs; (iii) a decrease of $0.1 million in personnel costs, driven largely by a decrease in stock-based compensation; and (iv) a decrease of $0.1 million in outside services spend due to higher leverage of internal resources; offset by (v) an increase of $0.3 million in costs to support the business and related infrastructure, which include allocated overhead costs.
Non-Operating Expenses
The following table sets forth our non-operating income (expenses) for the periods indicated (in thousands, except percentages):
Three months ended July 31,
Change
2025 2024
$
%
Interest income $ 6,149 $ 7,516 $ (1,367) (18.2) %
Interest expense $ (2,286) $ (2,363) $ 77 (3.3) %
Other income, net
$ 120 $ 117 $ 3 2.6 %
(Benefit from) provision for income taxes
$ (1,865) $ 427 $ (2,292) (536.8) %
Interest income: Interest income consists of accretion income and amortization expense on our available-for-sale investments, income earned on our cash and cash equivalents, and interest earned on our short-term investments which consist of U.S. Treasury securities, commercial paper, corporate debt securities, and U.S. Government agency securities.
Interest income decreased primarily due to a decrease in interest-earning cash balances in the current quarter.
Interest expense: Interest expense consists primarily of contractual interest expense and amortization of debt issuance costs on our 1.25% Convertible senior notes due 2025 (the "2025 Notes") that were repaid during the three months ended July 31, 2025 and the contractual interest expense and amortization of debt issuance costs on our 1.50% Convertible Senior Notes due 2028 (the "2028 Notes") that were issued in October 2023.
Interest expense decreased primarily due to an decrease in interest expense related to the Convertible Notes, driven by the repayment of the 2025 Notes during the three months ended July 31, 2025.
Other income, net: Other income, net primarily consists of foreign currency transaction gains and losses.
The change in other income (expense), net was due to fluctuations in foreign currency during the period.
(Benefit from) provision for income taxes: (Benefit from) provision for income taxes consists primarily of income taxes in certain foreign and U.S. jurisdictions in which we conduct business. We maintain a full valuation allowance on our net federal and state deferred tax assets as we have concluded that it is more likely than not that the deferred tax assets will not be realized for all years presented.
The change in (benefit from) provision for income taxes was primarily driven by foreign, federal, and state income taxes. The provision may fluctuate to the extent the mix of earnings fluctuates between jurisdictions with different tax rates.
Six months ended July 31, 2025 compared to six months ended July 31, 2024
The following table sets forth our results of operations for the periods indicated and as a percentage of revenue (in thousands, except percentages):
Six months ended July 31,
2025 2024
Revenue $ 243,216 100.0 % $ 227,107 100.0 %
Cost of revenue(1)
38,185 15.7 % 39,423 17.4 %
Gross profit 205,031 84.3 % 187,684 82.6 %
Operating expenses:
Research and development(1)
64,945 26.7 % 72,611 32.0 %
Sales and marketing(1)
94,501 38.9 % 99,465 43.8 %
General and administrative(1)
52,346 21.5 % 53,368 23.5 %
Total operating expenses 211,792 87.1 % 225,444 99.3 %
Loss from operations
(6,761) (2.8) % (37,760) (16.6) %
Interest income 12,160 5.0 % 14,496 6.4 %
Interest expense (4,650) (1.9) % (4,511) (2.0) %
Other income (expense), net 234 0.1 % (134) (0.1) %
Income (loss) before provision for income taxes 983 0.4 % (27,909) (12.3) %
(Benefit from) provision for income taxes (1,052) (0.4) % 620 0.3 %
Net income (loss) $ 2,035 0.8 % $ (28,529) (12.6) %
Net loss attributable to redeemable non-controlling interest (378) (0.2) % (478) (0.2) %
Net income (loss) attributable to PagerDuty, Inc. $ 2,413 1.0 % $ (28,051) (12.4) %
Less: Adjustment attributable to redeemable non-controlling interest (867) (0.4) % 9,247 4.1 %
Net income (loss) attributable to PagerDuty, Inc. common stockholders $ 3,280 1.3 % $ (37,298) (16.4) %
______________
(1) Includes stock-based compensation expense as follows (in thousands):
Six months ended July 31,
2025 2024
Cost of revenue $ 2,310 $ 3,264
Research and development 19,400 23,064
Sales and marketing 11,504 16,063
General and administrative 18,499 22,915
Total $ 51,713 $ 65,306
Revenue
The following sets forth our revenue for the periods indicated (in thousands, except percentages):
Six months ended July 31,
Change
2025 2024
$
%
Revenue $ 243,216 $ 227,107 $ 16,109 7.1 %
Revenue increased primarily due to growth from existing customers, which was driven by an increase in the number of users and upsell of additional products and services.
Cost of Revenue and Gross Margin
The following sets forth our cost of revenue and gross margin for the periods indicated (in thousands, except percentages):
Six months ended July 31,
Change
2025 2024
$
%
Cost of revenue $ 38,185 $ 39,423 $ (1,238) (3.1) %
Gross margin 84.3 % 82.6 %
The decrease in cost of revenue is primarily due to: (i) a decrease of $2.8 million in amortization of acquired intangible assets; and (ii) a decrease of $1.6 million in outside services spend for the customer service team; offset by (iii) an increase of $1.2 million in personnel costs as a result of an increase in headcount; (iv) an increase of $0.9 million in hosting, software, and telecom costs; (v) an increase of $0.5 million in costs to support the business and related infrastructure, which include allocated overhead costs; and (vi) an increase of $0.3 million in amortization of capitalized software.
Operating Expenses
The following table sets forth our operating expenses for the periods indicated (in thousands, except percentages):
Six months ended July 31,
Change
2025 2024
$
%
Operating expenses:
Research and development
$ 64,945 $ 72,611 $ (7,666) (10.6) %
Sales and marketing
94,501 99,465 (4,964) (5.0) %
General and administrative
52,346 53,368 (1,022) (1.9) %
Total operating expenses $ 211,792 $ 225,444 $ (13,652) (6.1) %
Research and development: Research and development expenses decreased primarily due to: (i) a decrease of $7.1 million in personnel costs as a result of a decrease in headcount and a decrease in stock-based compensation; and (ii) a decrease of $0.9 million in costs to support the business and related infrastructure, which include allocated overhead costs; offset by (iii) an increase of $0.4 million in training and travel-related costs.
Sales and marketing: Sales and marketing expenses decreased primarily due to: (i) a decrease of $4.0 million in outside services spend due to higher leverage of internal resources; (ii) a decrease of $2.3 million in personnel costs primarily due to a decrease in stock-based compensation; (iii) a decrease of $1.3 million in training and travel-related costs; offset by (iv) an increase of $2.0 million in marketing costs for media campaigns during the current period; and (v) an increase of $0.8 million in costs to support the business and related infrastructure, which include allocated overhead costs.
General and administrative: General and administrative expenses decreased primarily due to: (i) a decrease of $2.8 million in personnel costs, driven largely by a decrease in stock-based compensation; (ii) a decrease of $0.3 million in in training and travel-related costs; and (iii) a decrease of $0.2 million in insurance, business taxes and licenses costs; offset by (iv) an increase of $1.9 million in outside services spend; and (v) an increase of $0.6 million in costs to support the business and related infrastructure, which include allocated overhead costs.
Non-Operating Expenses
The following table sets forth our non-operating income (expenses) for the periods indicated (in thousands, except percentages):
Six months ended July 31,
Change
2025 2024
$
%
Interest income $ 12,160 $ 14,496 $ (2,336) (16.1) %
Interest expense $ (4,650) $ (4,511) $ (139) 3.1 %
Other income (expense), net
$ 234 $ (134) $ 368 (274.6) %
(Benefit from) provision for income taxes
$ (1,052) $ 620 $ (1,672) (269.7) %
Interest income: Interest income decreased primarily due to a decrease in interest-earning cash balances in the current quarter.
Interest expense: Interest expense decreased primarily due to an decrease in interest expense related to the Convertible Notes, driven by the repayment of the 2025 Notes during the three months ended July 31, 2025.
Other income (expense), net: The change in other income (expense), net was due to fluctuations in foreign currency during the period.
(Benefit from) provision for income taxes: The change in (benefit from) provision for income taxes was primarily driven by foreign, federal, and state income taxes. The provision may fluctuate to the extent the mix of earnings fluctuates between jurisdictions with different tax rates.
Non-GAAP Financial Measures
In addition to our results determined in accordance with United States generally accepted accounting principles ("U.S. GAAP" or "GAAP"), we believe the following non-GAAP financial measures are useful in evaluating our operating performance. We use the below referenced non-GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their U.S. GAAP results. The non-GAAP financial information is presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with U.S. GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. The principal limitation of these non-GAAP financial measures is that they exclude significant expenses that are required by U.S. GAAP to be recorded in our financial statements. In addition, they are subject to inherent limitations as they reflect the exercise of judgment by our management about which expenses are excluded or included in determining these non-GAAP financial measures. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with U.S. GAAP.
Specifically, we exclude the following from historical and prospective non-GAAP financial measures, as applicable:
Stock-based compensation: PagerDuty utilizes stock-based compensation to attract and retain employees. It is principally aimed at aligning their interests with those of its stockholders and at long-term retention, rather than to address operational performance for any particular period. As a result, stock-based compensation expenses vary for reasons that are generally unrelated to financial and operational performance in any particular period.
Employer taxes related to employee stock transactions: PagerDuty views the amount of employer taxes related to its employee stock transactions as an expense that is dependent on its stock price, employee exercise and other award disposition activity, and other factors that are beyond PagerDuty's control. As a result, employer taxes related to employee stock transactions vary for reasons that are generally unrelated to financial and operational performance in any particular period.
Amortization of acquired intangible assets: PagerDuty views amortization of acquired intangible assets as items arising from pre-acquisition activities determined at the time of an acquisition. While these intangible assets are evaluated for impairment regularly, amortization of the cost of purchased intangibles is an expense that is not typically affected by operations during any particular period.
Acquisition-related expenses: PagerDuty views acquisition-related expenses, such as transaction costs, acquisition-related retention payments, and acquisition-related asset impairment, as events that are not necessarily reflective of operational performance during a period. In particular, PagerDuty believes the consideration of measures that exclude such expenses can assist in the comparison of operational performance in different periods which may or may not include such expenses.
Amortization of debt issuance costs: The imputed interest rates of the Company's convertible senior notes (the "2025 Notes" and the "2028 Notes" or, collectively, the "Notes") was approximately 1.91% for the 2025 Notes and 2.13% for the 2028 Notes. This is a result of the debt issuance costs, which reduce the carrying value of the convertible debt instruments. The debt issuance costs are amortized as interest expense. The expense for the amortization of the debt issuance costs is a non-cash item, and we believe the exclusion of this interest expense will provide for a more useful comparison of our operational performance in different periods.
Restructuring costs: PagerDuty views restructuring costs, such as employee severance-related costs and real estate impairment costs, as events that are not necessarily reflective of operational performance during a period. In particular, PagerDuty believes the consideration of measures that exclude such expenses can assist in the comparison of operational performance in different periods which may or may not include such expenses.
Shareholder matters: PagerDuty views certain charges, including third-party legal, consulting, and advisory fees, related to shareholder activity that are outside of the ordinary course of our business and expenses related to a cooperation agreement as events that are not necessarily reflective of operational performance during a period. PagerDuty believes that such charges do not have a direct correlation to the operations of the Company's business and may vary in size depending on the timing, results, and resolution of such shareholder matters. The consideration of measures that exclude such expenses can assist in the comparison of operational performance in periods which may or may not include such expenses.
Adjustment attributable to redeemable non-controlling interest: PagerDuty adjusts the value of redeemable non-controlling interest of its joint venture PagerDuty K.K. according to the operating agreement. PagerDuty believes this adjustment is not reflective of operational performance during a period and exclusion of such adjustments can assist in comparison of operational performance in different periods.
Income tax effects and adjustments: Based on PagerDuty's financial outlook for fiscal 2026, PagerDuty is utilizing a projected non-GAAP tax rate of 22%. PagerDuty uses a projected non-GAAP tax rate in order to provide better consistency across the interim reporting periods by eliminating the impact of non-recurring and period specific items, which can vary in size and frequency. PagerDuty's estimated tax rate on non-GAAP income is determined annually and may be adjusted during the year to take into account events or trends that PagerDuty believes materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, material changes in the geographic mix of revenue and expenses and other significant events.
Non-GAAP gross profit and non-GAAP gross margin
We define non-GAAP gross profit as gross profit excluding the following expenses typically included in cost of revenue: stock-based compensation expense, employer taxes related to employee stock transactions, amortization of acquired intangible assets, and restructuring costs. We define non-GAAP gross margin as non-GAAP gross profit as a percentage of revenue.
The following table presents the calculation of non-GAAP gross profit and non-GAAP gross margin for the periods indicated (in thousands):
Three months ended July 31, Six months ended July 31,
2025 2024 2025 2024
Gross profit $ 104,410 $ 95,855 $ 205,031 $ 187,684
Add:
Stock-based compensation 1,213 1,508 2,310 3,264
Employer taxes related to employee stock transactions 30 39 68 83
Amortization of acquired intangible assets 601 2,268 1,874 4,675
Restructuring costs - (2) - (2)
Non-GAAP gross profit $ 106,254 $ 99,668 $ 209,283 $ 195,704
Revenue $ 123,411 $ 115,935 $ 243,216 $ 227,107
Gross margin 84.6 % 82.7 % 84.3 % 82.6 %
Non-GAAP gross margin 86.1 % 86.0 % 86.0 % 86.2 %

Non-GAAP operating income and non-GAAP operating margin
We define non-GAAP operating income as loss from operations excluding stock-based compensation expense, employer taxes related to employee stock transactions, amortization of acquired intangible assets, acquisition-related expenses, which include transaction costs, acquisition-related retention payments, and asset impairment, restructuring costs, and shareholder matters, which are not necessarily reflective of operational performance during a given period. We define non-GAAP operating margin as non-GAAP operating income as a percentage of revenue.
The following table presents the calculation of non-GAAP operating income and non-GAAP operating margin for the periods indicated (in thousands):
Three months ended July 31, Six months ended July 31,
2025 2024 2025 2024
Income (loss) from operations $ 3,566 $ (16,027) $ (6,761) $ (37,760)
Add:
Stock-based compensation 25,960 32,366 51,713 65,306
Employer taxes related to employee stock transactions 461 574 1,179 1,277
Amortization of acquired intangible assets 1,233 2,937 3,139 6,085
Acquisition-related expenses 35 259 263 522
Restructuring costs 73 2 3,884 10
Shareholder matters 79 - 2,349 -
Non-GAAP operating income $ 31,407 $ 20,111 $ 55,766 $ 35,440
Revenue $ 123,411 $ 115,935 $ 243,216 $ 227,107
Operating margin 2.9 % (13.8) % (2.8) % (16.6) %
Non-GAAP operating margin 25.4 % 17.3 % 22.9 % 15.6 %
Non-GAAP net income attributable to PagerDuty, Inc. common stockholders
We define non-GAAP net income attributable to PagerDuty, Inc. common stockholders as net income (loss) attributable to PagerDuty, Inc. common stockholders excluding stock-based compensation expense, employer taxes related to employee stock transactions, amortization of debt issuance costs, amortization of acquired intangible assets, acquisition-related expenses, which include transaction costs, acquisition-related retention payments and asset impairment, restructuring costs, shareholder matters, adjustment attributable to redeemable non-controlling interest, and income tax adjustments, which are not necessarily reflective of operational performance during a given period.
The following table presents the calculation of non-GAAP net income attributable to PagerDuty, Inc. common stockholders for the periods indicated (in thousands):
Three months ended July 31, Six months ended July 31,
2025 2024 2025 2024
Net income (loss) attributable to PagerDuty, Inc. common stockholders $ 9,777 $ (13,242) $ 3,280 $ (37,298)
Add:
Stock-based compensation 25,960 32,366 51,713 65,306
Employer taxes related to employee stock transactions 461 574 1,179 1,277
Amortization of debt issuance costs 655 671 1,332 1,279
Amortization of acquired intangible assets 1,233 2,937 3,139 6,085
Acquisition-related expenses 35 259 263 522
Restructuring costs 73 2 3,884 10
Shareholder matters 79 - 2,349 -
Adjustment attributable to redeemable non-controlling interest (202) 2,330 (867) 9,247
Income tax effects and adjustments (9,795) (5,566) (15,317) (10,092)
Non-GAAP net income attributable to PagerDuty, Inc. common stockholders $ 28,276 $ 20,331 $ 50,955 $ 36,336
Free cash flow
We define free cash flow as net cash provided by operating activities, less cash used for purchases of property and equipment and capitalization of software costs. In addition to the reasons stated above, we believe that free cash flow is useful to investors as a liquidity measure because it measures our ability to generate or use cash in excess of our capital investments in property and equipment in order to enhance the strength of our balance sheet and further invest in our business and potential strategic initiatives. A limitation of the utility of free cash flow as a measure of our liquidity is that it does not represent the total increase or decrease in our cash balance for the period. We use free cash flow in conjunction with traditional U.S. GAAP measures as part of our overall assessment of our liquidity, including the preparation of our annual operating budget and quarterly forecasts and to evaluate the effectiveness of our business strategies. There are a number of limitations related to the use of free cash flow as compared to net cash provided by operating activities, including that free cash flow includes capital expenditures, the benefits of which are realized in periods subsequent to those when expenditures are made.
The following table presents the calculation of free cash flow for the periods indicated (in thousands):
Three months ended July 31, Six months ended July 31,
2025 2024 2025 2024
Net cash provided by operating activities $ 33,974 $ 35,769 $ 64,644 $ 64,416
Purchases of property and equipment (874) (637) (1,315) (1,094)
Capitalization of software costs (2,893) (1,849) (4,136) (2,941)
Free cash flow $ 30,207 $ 33,283 $ 59,193 $ 60,381
Net cash used in investing activities $ (7,178) $ (3,800) $ (8,860) $ (6,621)
Net cash used in financing activities $ (59,085) $ (28,944) $ (63,040) $ (35,205)
Liquidity and Capital Resources
Sources and Uses of Liquidity
As of July 31, 2025, our principal sources of liquidity were cash and cash equivalents and investments totaling $567.9 million. We believe that our existing cash and cash equivalents, investments, and net cash generated from our operating activities will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Since inception, we have financed operations primarily through sales of our cloud-hosted software subscriptions, net proceeds received from sales of equity securities, and the issuance of our 2028 Notes. We believe we will meet long-term expected future cash requirements and obligations through a combination of cash flows from operating activities and available cash and short-term investment balances.
Debt and Financing Arrangements
Refer to Note 9. Debt and Financing Arrangements, in the notes to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for discussion of our debt arrangements, including the timing of expected maturity of such arrangements. The $57.5 million principal of our 2025 Notes was repaid by us in cash at maturity during the three months ended July 31, 2025.
Deferred Revenue
A significant majority of our customers pay in advance for our cloud-hosted and term-license software subscriptions. Therefore, a substantial source of our cash is from our deferred revenue, which is included in the liabilities section of our condensed consolidated balance sheet. Deferred revenue consists of the unearned portion of customer billings, which is recognized as revenue in accordance with our revenue recognition policy. As of July 31, 2025, we had deferred revenue of $229.9 million, of which $227.0 million was recorded as a current liability and expected to be recorded as revenue in the next 12 months, provided all other revenue recognition criteria are met.
Share Repurchase Programs
In March 2025, we announced that our Board of Directors approved a share repurchase program (the "2025 Share Repurchase Program") for the repurchase of shares of our common stock in an aggregate amount of up to $150.0 million. The 2025 Share Repurchase Program does not obligate us to acquire a specified number of shares, and may be suspended, modified, or terminated at any time, without prior notice. The repurchases are expected to be executed from time to time through March 2027, subject to general business and market conditions and other investment opportunities, through open market purchases or other legally permissible means, including through Rule 10b5-1 plans. As of July 31, 2025, no shares had been repurchased under the 2025 Share Repurchase Program and $150.0 million of the total amount authorized to be repurchased remained available.
In August 2025, our Board of Directors approved an additional $50.0 million under the 2025 Share Repurchase Program, thus allowing for the repurchase of shares of the Company's common stock in an aggregate amount of up to $200.0 million. No other changes were made to the program.
The 2025 Share Repurchase Program replaces the share repurchase program approved by our Board of Directors in May 2024 (the "2024 Share Repurchase Program") for the repurchase of shares of our common stock in an aggregate amount of up to $100.0 million. The 2024 Share Repurchase Program did not obligate us to acquire a specified number of shares, and could be suspended, modified, or terminated at any time, without prior notice. Under the 2024 Share Repurchase Program, the Company repurchased a total of 5,223,071 shares of common stock through open market purchases, including through 10b5-1 plans, at an average per share price of $19.15 for a total repurchase price of $100.0 million. During the year ended January 31, 2025, these shares were retired.
Future Contractual Obligations
Our estimated future obligations as of July 31, 2025 include both current and long-term obligations. Our debt obligations total $394.5 million, all of which is long-term. Additionally, we had $1.4 million of irrevocable standby letters of credit outstanding which were fully collateralized by our restricted cash, all of which represents a long-term cash obligation. Under our operating leases, we had a current obligation of $3.6 million and a long-term obligation of $10.2 million. Operating lease obligations primarily represent the initial contracted term for leases that have commenced as of July 31, 2025, not including any future optional renewal periods.
Effect of Exchange Rates
Our changes in cash can be impacted by the effect of fluctuating exchange rates. Foreign exchange had a negative effect on cash in the six months ended July 31, 2024, decreasing our total cash balance by $23.0 thousand as of July 31, 2024, and a positive effect on cash in the six months ended July 31, 2025, increasing our total cash balance by $0.1 million as of July 31, 2025.
Cash Flow Information
The following table sets forth our cash flows for the periods indicated (in thousands):
Six months ended July 31,
2025 2024
$ Change
Net cash provided by operating activities $ 64,644 $ 64,416 $ 228
Net cash used in investing activities (8,860) (6,621) (2,239)
Net cash used in financing activities (63,040) (35,205) (27,835)
Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash 113 (23) 136
Net change in cash, cash equivalents, and restricted cash $ (7,143) $ 22,567 $ (29,710)
Operating Activities
Net cash provided by operating activities improved, primarily due to improvements in our operating loss performance due to the 7.1% increase in revenue, along with our 6.1% decrease in operating expenses. Cash provided by operating activities is subject to variability period-over-period as a result of timing differences, including with respect to the collection of receivables and payments of accounts payable, and other items.
Investing Activities
Net cash used in investing activities increased, primarily due to a decrease in purchases of available-for-sale investments, offset by a decrease in proceeds from maturities of available-for-sale investments and proceeds from sales of available-for-sale investments, along with an increase in capitalized software costs and an increase in purchases of non-marketable equity investments.
Financing Activities
Net cash used in financing activities increased, primarily due to the repayment of our 2025 Convertible Notes during the three months ended July 31, 2025.
Off-Balance Sheet Arrangements
Indemnification Agreements
See Note 10. Commitments and Contingencies, in the notes to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of our indemnification agreements.
Letters of Credit
We had $1.4 million of irrevocable standby letters of credit outstanding as of July 31, 2025. Letters of credit are primarily used as a form of security deposits for the spaces we lease.
Critical Accounting Estimates
For a description of our critical accounting estimates, refer to Part II, Item 7, Critical Accounting Estimates in our Annual Report on Form 10-K for the year ended January 31, 2025. There have been no material changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year ended January 31, 2025.
Recent Accounting Pronouncements
See Note 2. Summary of Significant Accounting Policies, in the notes to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.
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