PagerDuty Earnings 2020-10-31

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

pd-20201031

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________

FORM 10-Q

_________________________

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2020


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-38856

PAGERDUTY, INC.

(Exact name of registrant as specified in its charter)

_________________________


Delaware						27-2793871
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

600 Townsend St., Suite 200

San Francisco, CA 94103

(844) 800-3889

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

_________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, $0.000005 par value

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically on its corporate Web site every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

☐

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

The total number of shares of common stock outstanding as of December 1, 2020, was 81,932,793.

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PAGERDUTY, INC.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION


Item 1	Financial Statements (unaudited)	5
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Operations and Comprehensive Loss	6
	Condensed Consolidated Statements of Stockholders’ Equity	7
	Condensed Consolidated Statements of Cash Flows	9
	Notes to Condensed Consolidated Financial Statements	11
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3	Quantitative and Qualitative Disclosures about Market Risk	46
Item 4	Controls and Procedures	47

Part II - OTHER INFORMATION


Item 1	Legal Proceedings	48
Item 1A	Risk Factors	48
Item 2	Unregistered Sale of Equity Securities and Use of Proceeds	50
Item 6	Exhibits	50
	Signatures	52

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, or this Form 10-Q, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which statements involve substantial risk and uncertainties. All statements contained in this report other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth and trends, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan,” “potentially,” “likely,” and similar expressions are intended to identify forward-looking statements.

Forward-looking statement contained in this Form 10-Q include, but are not limited to, statements about our expectations regarding:

•the effect of uncertainties related to the novel coronavirus and resulting COVID-19 pandemic on U.S. and global markets, our business, operations, revenue results, cash flow, operating expenses, demand for our solutions, sales cycles, customer retention, and our customers’ businesses;

•trends in key business metrics, including number of customers and dollar-based net retention rate, and non-GAAP financial measures and their usefulness in evaluating our business;

•trends in revenue, cost of revenue, and gross margin;

•trends in operating expenses, including research and development, sales and marketing, and general and administrative expense, and expectations regarding these expenses as a percentage of revenue;

•our existing cash and cash equivalents and cash provided by sales of our subscriptions being sufficient to support working capital and capital expenditures for at least the next 12 months;

•our ability to successfully identify, acquire, and integrate companies and assets;

•our ability to service the interest on our convertible notes and repay such notes, to the extent required;

•our efforts to maintain proper and effective internal controls;

•our ability to expand our operations and increase adoption of our platform internationally;

•our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United States and internationally;

•the increased expenses and administrative workload associated with being a public company; and

•other statements regarding our future operations, financial condition, and prospects and business strategies.

Such forward-looking statements are based on our expectations as of the date of this filing and are subject to a number of risks, uncertainties and assumptions, including but not limited to, risks detailed in the “Risk Factors” section of this Form 10-Q. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission, or the SEC, that disclose risks and uncertainties that may affect our business. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Form 10-Q may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely on forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or may not occur. Although we

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believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. In addition, the forward-looking statements in this Form 10-Q are made as of the date of this filing, and we do not undertake, and expressly disclaim any duty, to update any of these forward-looking statements for any reason after the date of this Form 10-Q or to conform these statements to actual results or revised expectations.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

PAGERDUTY, INC.

Condensed Consolidated Balance Sheets

(in thousands)


	As of October 31, 2020		As of January 31, 2020
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	336,657	$	124,024
Accounts receivable, net of allowance for doubtful accounts of $1,479 and $810 as of October 31, 2020 and January 31, 2020, respectively	41,500		37,128
Investments	219,601		227,375
Deferred contract costs, current	11,209		9,301
Prepaid expenses and other current assets	11,926		7,163
Total current assets	620,893		404,991
Property and equipment, net	12,148		12,369
Deferred contract costs, non-current	17,529		16,387
Lease right-of-use assets	25,790		—
Goodwill	71,946		—
Intangible assets, net	27,508		—
Other assets	2,083		1,651
Total assets	$	777,897	$	435,398
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	5,111	$	6,434
Accrued expenses and other current liabilities	11,337		7,197
Accrued compensation	24,877		13,911
Deferred revenue, current	104,337		87,490
Lease liabilities, current	5,152		—
Total current liabilities	150,814		115,032
Convertible senior notes, net	214,211		—
Deferred revenue, non-current	3,387		5,079
Lease liabilities, non-current	27,775		—
Other liabilities	7,152		7,349
Total liabilities	403,339		127,460
Commitments and contingencies (Note 11)
Stockholders’ equity:
Common stock	—		—
Additional paid-in capital	599,886		487,008
Accumulated other comprehensive income	634		137
Accumulated deficit	(225,962)		(179,207)
Total stockholders’ equity	374,558		307,938
Total liabilities and stockholders’ equity	$	777,897	$	435,398

See Notes to Condensed Consolidated Financial Statements

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PAGERDUTY, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share data)

(unaudited)


	Three Months Ended October 31,				Nine Months Ended October 31,
	2020		2019		2020		2019
Revenue	$	53,772	$	42,750	$	154,272	$	120,425
Cost of revenue	7,685		6,634		21,285		18,226
Gross profit	46,087		36,116		132,987		102,199
Operating expenses:
Research and development	16,156		12,619		46,705		35,160
Sales and marketing	34,024		27,425		88,271		72,378
General and administrative	17,746		12,765		45,899		38,464
Total operating expenses	67,926		52,809		180,875		146,002
Loss from operations	(21,839)		(16,693)		(47,888)		(43,803)
Interest income	974		1,427		3,375		4,283
Interest expense	(4,133)		—		(5,741)		—
Other (expense) income, net	(449)		245		(861)		346
Loss before benefit from (provision for) income taxes	(25,447)		(15,021)		(51,115)		(39,174)
Benefit from (provision for) income taxes	4,839		(244)		4,360		(725)
Net loss	$	(20,608)	$	(15,265)	$	(46,755)	$	(39,899)
Other comprehensive (loss) income:
Unrealized (loss) gain on investments	(422)		(50)		497		(50)
Total comprehensive loss	$	(21,030)	$	(15,315)	$	(46,258)	$	(39,949)
Net loss per share, basic and diluted	$	(0.26)	$	(0.20)	$	(0.59)	$	(0.65)
Weighted average shares used in calculating net loss per share, basic and diluted	79,937		75,992		78,835		61,628

See Notes to Condensed Consolidated Financial Statements

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PAGERDUTY, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

(unaudited)


	Three Months Ended October 31, 2020
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balances as of July 31, 2020	79,355,627	$	—	$	546,169	$	1,056	$	(205,354)	$	341,871
Issuance of common stock upon exercise of stock options and restricted stock agreements, net of repurchases	782,554	—		3,938		—		—		3,938
Vesting of restricted stock units, net of employee payroll taxes	146,174	—		(2,591)		—		—		(2,591)
Shares issued related to a business combination	1,499,651	—		38,875		—		—		38,875
Other comprehensive loss	—	—		—		(422)		—		(422)
Stock-based compensation	—	—		13,495		—		—		13,495
Net loss	—	—		—		—		(20,608)		(20,608)
Balances as of October 31, 2020	81,784,006	$	—	$	599,886	$	634	$	(225,962)	$	374,558


	Nine Months Ended October 31, 2020
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balances as of January 31, 2020	77,793,540	$	—	$	487,008	$	137	$	(179,207)	$	307,938
Issuance of common stock upon exercise of stock options and restricted stock agreements, net of repurchases	2,069,446	—		9,709		—		—		9,709
Vesting of restricted stock units, net of employee payroll taxes	240,116	—		(4,334)		—		—		(4,334)
Vesting of early exercised options	—	—		507		—		—		507
Equity component of convertible senior notes, net of issuance costs	—	—		68,478		—		—		68,478
Purchases of capped calls related to convertible senior notes	—	—		(35,708)		—		—		(35,708)
Shares issued related to a business combination	1,499,651	—		38,875		—		—		38,875
Issuance of common stock in connection with employee stock purchase plan	181,253	—		3,558		—		—		3,558
Other comprehensive income	—	—		—		497		—		497
Stock-based compensation	—	—		31,793		—		—		31,793
Net loss	—	—		—		—		(46,755)		(46,755)
Balances as of October 31, 2020	81,784,006	$	—	$	599,886	$	634	$	(225,962)	$	374,558

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	Three Months Ended October 31, 2019
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balances as of July 31, 2019	76,227,101	$	—	$	462,665	—		$	(153,502)	$	309,163
Issuance of common stock upon exercise of stock options and restricted stock agreements, net of repurchases	920,730	—		2,965		—		—		2,965
Vesting of restricted stock units, net of employee payroll taxes	897	—		(4)		—		—		(4)
Vesting of early exercised options	—	—		335		—		—		335
Stock-based compensation	—	—		7,347		—		—		7,347
Other comprehensive loss	—	—		—		(50)		—		(50)
Net loss	—	—		—		—		(15,265)		(15,265)
Balances as of October 31, 2019	77,148,728	$	—	$	473,308	$	(50)	$	(168,767)	$	304,491


	Nine Months Ended October 31, 2019
	Redeemable Convertible Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity (Deficit)
	Shares	Amount		Shares	Amount
Balances as of January 31, 2019	41,273,345	$	173,023	23,189,921	$	—	$	59,938	$	—	$	(128,868)	$	(68,930)
Issuance of common stock upon exercise of stock options and restricted stock agreements, net of repurchases	—	—		2,086,075	—		5,750		—		—		5,750
Vesting of restricted stock units, net of employee payroll taxes	—	—		1,080	—		(14)		—		—		(14)
Exercise of common stock warrants	—	—		737,807	—		—		—		—		—
Repayment of promissory note	—	—		—	—		515		—		—		515
Issuance of common stock in connection with initial public offering, net of underwriting discounts and issuance costs	—	—		9,860,500	—		213,697		—		—		213,697
Conversion of convertible preferred stock to common stock in connection with initial public offering	(41,273,345)	(173,023)		41,273,345	—		173,023		—		—		173,023
Vesting of early exercised options	—	—		—	—		1,007		—		—		1,007
Stock-based compensation	—	—		—	—		19,392		—		—		19,392
Other comprehensive loss	—	—		—	—		—		(50)		—		(50)
Net loss	—	—		—	—		—		—		(39,899)		(39,899)
Balances as of October 31, 2019	—	$	—	77,148,728	$	—	$	473,308	$	(50)	$	(168,767)	$	304,491

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PAGERDUTY, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Nine Months Ended October 31,
	2020		2019
Cash flows from operating activities
Net loss	$	(46,755)	$	(39,899)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	3,352		1,675
Amortization of deferred contract costs	7,894		5,499
Amortization of debt discount and issuance costs	4,493		—
Stock-based compensation	31,735		19,392
Non-cash lease expense	3,299		—
Other	1,897		(383)
Changes in operating assets and liabilities:
Accounts receivable	(3,879)		4,333
Deferred contract costs	(10,944)		(10,945)
Prepaid expenses and other assets	(3,605)		(4,864)
Accounts payable	(210)		(1,386)
Accrued expenses and other liabilities	2,224		2,464
Accrued compensation	7,689		5,619
Deferred revenue	12,475		16,520
Lease liabilities	(2,959)		—
Net cash provided by (used in) operating activities	6,706		(1,975)
Cash flows from investing activities
Purchases of property and equipment	(3,402)		(3,190)
Capitalization of internal-use software costs	(328)		—
Business acquisitions, net of cash acquired	(49,656)		—
Purchases of held-to-maturity investments	—		(45,736)
Proceeds from maturities of held-to-maturity investments	28,040		8,950
Purchases of available-for-sale investments	(153,254)		(132,706)
Proceeds from maturities of available-for-sale investments	123,352		—
Proceeds from sales of available-for-sale investments	9,285		—
Net cash used in investing activities	(45,963)		(172,682)
Cash flows from financing activities
Proceeds from issuance of convertible senior notes, net of issuance costs paid of $8,835	278,665		—
Purchases of capped calls related to convertible senior notes	(35,708)		—
Proceeds from initial public offering, net of underwriters' discounts and commissions	—		220,086
Payments of costs related to initial public offering	—		(5,603)
Proceeds from employee stock purchase plan	3,558		—
Proceeds from repayment of promissory note	—		515
Proceeds from issuance of common stock upon exercise of stock options	9,709		5,750
Employee payroll taxes paid related to net share settlement of restricted stock units	(4,334)		(14)
Net cash provided by financing activities	251,890		220,734
Net increase in cash, cash equivalents, and restricted cash	212,633		46,077
Cash, cash equivalents, and restricted cash at beginning of period	124,024		130,323
Cash, cash equivalents, and restricted cash at end of period	$	336,657	$	176,400

Supplemental cash flow data:
Cash paid for income taxes	$	—	$	53
Non-cash investing and financing activities:
Vesting of early exercised options	$	507	$	1,007
Purchase of property and equipment, accrued but not yet paid	$	274	$	347
Costs related to issuance of convertible senior notes, accrued but not yet paid	$	470	$	—
Costs related to initial public offering, accrued but not yet paid	$	—	$	342
Non-cash purchases of property and equipment	$	—	$	2,364
Fair value of common stock issued as consideration for a business combination	$	38,875	$	—
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets
Cash and cash equivalents	$	336,657	$	176,347
Restricted cash—included in other assets	—		53
Total cash, cash equivalents, and restricted cash	$	336,657	$	176,400

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See Notes to Condensed Consolidated Financial Statements

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Description of Business and Basis of Presentation

Description of Business

PagerDuty, Inc. was incorporated under the laws of the state of Delaware in May 2010.

PagerDuty acts as the central nervous system for the digital enterprise. PagerDuty harnesses digital signals from virtually any software-enabled system or device, combines it with human response data and orchestrates teams to take the right actions in real time. The Company’s products help organizations improve operations, accelerate innovation, increase revenue, mitigate security risk, and deliver a great customer experience.

As used herein, “PagerDuty”, “we”, “our”, “the Company” and similar terms include PagerDuty, Inc., unless the context indicates otherwise.

Initial Public Offering

On April 15, 2019, the Company completed its initial public offering (“IPO”), pursuant to which the Company issued and sold 9,860,500 shares of common stock, inclusive of the over-allotment option, at a public offering price of $24.00 per share. The Company received net proceeds of $213.7 million, after deducting underwriters' discounts and commissions of $16.6 million and other issuance costs of $6.4 million. Immediately prior to the closing of the Company’s IPO, all shares of the redeemable convertible preferred stock automatically converted into 41,273,345 shares of common stock.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The condensed consolidated balance sheet as of January 31, 2020 was derived from the audited consolidated financial statements as of that date but does not include all of the information and notes required by GAAP for complete financial statements. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended January 31, 2020, included in the Company’s Annual Report on Form 10-K, filed with the SEC.

The condensed consolidated financial statements include the results of PagerDuty, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.

In the opinion of management, the information contained herein reflects all adjustments necessary for a fair presentation of the Company’s results of operations, financial position, cash flows, and statements of stockholders’ equity. The results of operations for the three and nine months ended October 31, 2020 are not necessarily indicative of the results to be expected for the full year ending January 31, 2021 or for any other interim period, or for any future year.

The Company’s fiscal year ends on January 31. References to fiscal 2021, for example, refer to the fiscal year ended January 31, 2021.

Convertible Senior Notes

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

In June 2020, The Company issued $287.5 million aggregate principal amount of 1.25% Convertible Senior Notes due 2025 (the “Notes”). Refer to Note 10 , “Debt and Financing Arrangements ” for additional details.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make, on an ongoing basis, estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. The Company’s most significant estimates and judgments involve the valuation of the Company’s stock-based awards, including the determination of fair value of common stock (prior to the closing of the IPO) and the fair value of the employee stock purchase plan (“ESPP”) expense, period of benefit for amortizing deferred contract costs, the determination of the allowance for doubtful accounts, the provision for income taxes, including the related valuation allowance and any uncertain tax positions, fair value of the liability and equity components of the Notes, fair value of acquired assets and assumed liabilities, impairment of goodwill and intangible assets, the incremental borrowing rate for lease liabilities, and estimates related to our revenue recognition, such as the assessment of performance obligations in our revenue arrangements and the fair value assigned to each performance obligation, among others. Management bases its estimates on historical experience and on various other assumptions which management believes to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

In December 2019, the novel coronavirus and resulting disease (“COVID-19”) was reported and in March 2020 the World Health Organization declared it a pandemic. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, and impact on our employees, as discussed in more detail in the Overview section of our Management’s Discussion and Analysis. During the three and nine months ended October 31, 2020, this uncertainty resulted in a higher level of judgment related to our estimates and assumptions related to the estimate of credit losses for accounts receivable. As of the date of issuance of the financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, judgments, or revise the carrying value of our assets or liabilities. These estimates may change as new events occur and additional information is obtained and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our financial statements.

2. Summary of Significant Accounting Policies

Concentrations of Risk and Significant Customers

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, held-to-maturity investments, available-for-sale investments, and accounts receivable. All of the Company’s cash and cash equivalents and investments are invested in money market funds, United States (“U.S.”) Treasury securities, commercial paper, corporate debt securities, or U.S. Government agency securities that management believes to be of high credit quality.

No single customer accounted for 10% of the total accounts receivable balance as of October 31, 2020 or January 31, 2020. No single customer represented 10% or more of revenue for the three and nine months ended October 31, 2020 or 2019.

Segment Information

The Company manages operations and allocates resources as one operating segment. The Company’s chief operating decision maker (“CODM”) is its chief executive officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance, and allocating

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

resources. Refer to Note 16, “Geographic Information” for information regarding the Company's long-lived assets and revenue by geography.

Significant Accounting Policies

There have been no significant changes to our significant accounting policies as compared to those described in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020, other than as set forth below.

Convertible Senior Notes

The Notes are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 470-20, Debt with Conversion and Other Options. Pursuant to ASC Subtopic 470-20, issuers of certain convertible debt instruments, such as the Notes, that have a net settlement feature and may be settled wholly or partially in cash upon conversion are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component of the instrument is computed by estimating the fair value of a similar liability without the conversion option using a market-based approach. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the instrument. The difference between the principal amount and the liability component represents a debt discount that is amortized to interest expense over the respective term of the Notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the issuance costs related to the Notes, the allocation of issuance costs incurred between the liability and equity components was based on their relative values.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount, net of allowance for doubtful accounts. The allowance is based upon historical loss patterns, the age of each past due invoice, and an evaluation of the potential risk of loss associated with delinquent accounts. The allowance also reflects current market conditions and reasonable and supportable forecasts of future economic conditions. As of October 31, 2020, our allowance reflects considerations related to the COVID-19 pandemic and may increase in future periods as we ascertain future impacts to our customers and business. The allowance for doubtful accounts was $1.5 million and $0.8 million as of October 31, 2020 and January 31, 2020.

Business Combinations

The Company applies the acquisition method of accounting for business combinations. Under this method of accounting, all assets acquired and liabilities assumed are recorded at their respective fair values at the date of the acquisition. We allocate the purchase consideration to the net tangible and identifiable intangible assets. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable.

Goodwill, Acquired Intangible Assets, and Impairment of Long-Lived Assets

Goodwill. Goodwill represents the excess purchase consideration of an acquired business over the fair value of the net tangible and identifiable intangible assets. Goodwill is evaluated for impairment annually in the fourth quarter, and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Triggering events that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate or a significant decrease in expected cash flows. No impairment charges were recorded during the three and nine months ended October 31, 2020 and 2019.

Acquired Intangible Assets. Acquired intangible assets consist of identifiable intangible assets, primarily developed technology and customer relationships, resulting from our business acquisition. Intangible assets are recorded at fair value on the date of acquisition and amortized over their estimated useful lives.

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Impairment of Long-Lived Assets. The carrying amounts of our long-lived assets, including property and equipment, lease right-of-use assets, capitalized internal-use software, and acquired intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful lives are shorter than originally estimated. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If long-lived assets are considered impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair value. If we reduce the estimated useful life assumption for any asset, the remaining unamortized balance would be amortized or depreciated over the revised estimated useful life.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases, (“Topic 842”) (“ASU 2016-02”), which would require lessees to recognize most leases on their balance sheets, whether operating or financing, while continuing to recognize the expenses on their income statements in a manner similar to current practice. The guidance states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The Company adopted the standard using the optional alternative method on a prospective basis with an effective date as of the beginning of the Company’s fiscal year, February 1, 2020, and applied it to the operating leases that existed on that date. Prior year comparative financial information was not recast under the new standard and continues to be presented under ASC 840. The Company elected to utilize the package of practical expedients available for expired or existing contracts which allowed the Company to carryforward historical assessments of (a) whether contracts are or contain leases, (b) lease classification, and (c) initial direct costs. The Company elected to apply the short-term lease exception for all leases. Under the short-term lease exception, the Company will not recognize right-of-use assets or lease liabilities for leases that, at the acquisition date, have a remaining lease term of 12 months or less. As a result of implementing this guidance, the Company recognized a net operating right-of-use asset of $29.1 million and a $35.9 million operating lease liability in its condensed consolidated balance sheets as of February 1, 2020. The adoption of this guidance did not affect our condensed consolidated statements of operations or our condensed consolidated statements of cash flows. Refer to Note 9 , “Leases” for further information.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (“Topic 326”) Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. This guidance also requires new disclosures for financial assets measured at amortized cost, loans, and available-for-sale debt securities. The Company adopted the standard as of the beginning of the Company’s fiscal year, February 1, 2020. The adoption of this guidance did not have a material impact to the condensed consolidated financial statements. In connection with the adoption, for purposes of identifying and measuring impairment, the policy election was made to exclude accrued interest from both the fair value and amortized cost basis of our available-for sale debt securities. Such accrued interest is recorded in prepaid expenses and other current assets.

In January 2017, the FASB released Accounting Standards Update No. 2017-04, Intangibles— Goodwill and Other (“Topic 350”) which simplifies the subsequent measurement of goodwill, eliminating Step 2 from the goodwill impairment test. Previously, under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments of ASU 2017-04, an entity performs its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit’s fair value.. The amendments in this update were effective for an entity’s annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, or fiscal year 2021 for the Company. The Company performs their impairment test on goodwill in the fourth quarter of each fiscal year.

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

In August 2018, the FASB issued Accounting Standards Update No. 2018-13, Fair Value Measurement (“Topic 820”) (“ASU 2018-13”), which modifies the disclosure requirements for fair value measurements for certain types of investments. We adopted this standard in the first quarter of fiscal year 2020. The adoption did not have an effect on our consolidated financial statements.

In December 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (“Topic 740”): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intends to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for the Company beginning in fiscal 2022, although early adoption is permitted. The Company early adopted the standard as of the beginning of the Company’s fiscal year, February 1, 2020. The adoption of this guidance did not have a material impact to the condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

In August 2020, the FASB issued Accounting Standard Update No. 2020-06, Debt—Debt with Conversion Options (“Subtopic 470-20”) and Derivatives and Hedging—Contracts in Entity’s Own Equity (“Subtopic 815-40”) (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity's own equity. ASU 2020-06 also improves and amends the related Earnings Per Share guidance for both Subtopics. The ASU is part of the FASB's simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. ASU 2020-06 will be effective for annual reporting periods beginning after December 15, 2021. Early adoption is permitted, but not before annual reporting periods beginning after December 15, 2020. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

3. Cash, Cash Equivalents, and Investments

Cash, cash equivalents, and investments consisted of the following:


	As of October 31, 2020		As of January 31, 2020
	(in thousands)
Cash and cash equivalents
Cash	$	214,469	$	2,131
Money market funds	108,200		118,899
U.S. Treasury securities	13,988		2,994
Total cash and cash equivalents	$	336,657	$	124,024
Available-for-sale investments:
U.S. Treasury securities	$	34,055	$	24,987
Commercial paper	29,910		20,132
Corporate debt securities	155,636		149,248
U.S. Government agency securities	—		4,973
Total available-for-sale investments	$	219,601	$	199,340
Held-to-maturity investments:
U.S. Treasury securities	$	—	$	9,016
Commercial paper	—		5,985
Corporate debt securities	—		13,034
Total held-to-maturities investments	$	—	$	28,035
Total investments	$	219,601	$	227,375

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following tables summarize the Company’s investments’ adjusted cost, net unrealized gains, and fair value by significant investment category as of October 31, 2020 and January 31, 2020. Gross realized gains or losses from sales of available-for-sale securities were not material for the three and nine months ended October 31, 2020.


	As of October 31, 2020
	Cost Basis		Unrealized Gain, Net		Recorded Basis
	(in thousands)
Available-for-sale investments:
U.S. Treasury securities	$	34,043	$	12	$	34,055
Commercial paper	29,910		—		29,910
Corporate debt securities	155,014		622		155,636
Total available-for-sale investments	$	218,967	$	634	$	219,601


	As of January 31, 2020
	Cost Basis		Unrealized Gain, Net		Recorded Basis
	(in thousands)
Available-for-sale investments:
U.S. Treasury securities	$	24,978	$	9	$	24,987
Commercial paper	20,128		4		20,132
Corporate debt securities	149,124		124		149,248
U.S. Government agency securities	4,973		—		4,973
Total available-for-sale investments	$	199,203	$	137	$	199,340
Held-to-maturity investments:
U.S. Treasury securities	$	9,016	$	—	$	9,016
Commercial paper	5,985		—		5,985
Corporate debt securities	13,034		—		13,034
Total held-to-maturities investments	$	28,035	$	—	$	28,035
Total investments	$	227,238	$	137	$	227,375

All of the Company’s held-to-maturity securities have a contractual maturity of less than one year. The following table presents the Company’s available-for-sale securities by contractual maturity date as of October 31, 2020 and January 31, 2020:


	As of October 31, 2020
	Cost Basis		Recorded Basis
	(in thousands)
Due within one year	$	180,262	$	180,779
Due between one to five years	38,705		38,822
Total	$	218,967	$	219,601


	As of January 31, 2020
	Cost Basis		Recorded Basis
	(in thousands)
Due within one year	$	128,127	$	128,169
Due between one to five years	71,076		71,171
Total	$	199,203	$	199,340

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

When evaluating investments for impairment, we review factors such as length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and our intent to sell, or whether it is more likely than not we will be required to sell, the investment before recovery of the investment’s amortized cost. No impairment loss has been recorded on the securities included in the tables above, as we believe that any decrease in fair value of these securities is temporary and we expect to recover at least up to the initial cost of the investment for these securities. We have not recorded an allowance for credit losses, as we believe any such losses would be immaterial based on the high-grade credit rating for each of our marketable securities as of the end of each period.

4. Fair Value Measurements

The Company measures its financial assets and liabilities at fair value each reporting period using a fair value hierarchy that prioritizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value, as follows:

Level 1—Valuations based on observable inputs that reflect quoted prices for identical assets or liabilities in active markets.

Level 2—Valuations based on inputs that are directly or indirectly observable in the marketplace.

Level 3—Valuations based on unobservable inputs that are supported by little or no market activity.

The following table presents information about the Company’s financial assets that are required to be measured or disclosed at fair value using the above input categories:


	As of October 31, 2020
	Level 1		Level 2		Level 3		Total
	(in thousands)
Money market funds	$	108,200	$	—	$	—	$	108,200
U.S. Treasury securities	13,988		34,055		—		48,043
Commercial paper	—		29,910		—		29,910
Corporate debt securities	—		155,636		—		155,636
Total	$	122,188	$	219,601	$	—	$	341,789
Included in cash equivalents							$	122,188
Included in investments							$	219,601


	As of January 31, 2020
	Level 1		Level 2		Level 3		Total
	(in thousands)
Money market funds	$	118,899	$	—	$	—	$	118,899
U.S. Treasury securities	2,994		34,003		—		36,997
Commercial paper	—		26,117		—		26,117
Corporate debt securities	—		162,282		—		162,282
U.S. Government agency securities	—		4,973		—		4,973
Total	$	121,893	$	227,375	$	—	$	349,268
Included in cash equivalents							$	121,893
Included in investments							$	227,375

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The Company’s assets that are measured by management at fair value on a recurring basis are generally classified within Level 1 or Level 2 of the fair value hierarchy.

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. As of October 31, 2020 and January 31, 2020, the Company’s Level 2 securities were priced by pricing vendors. These pricing vendors utilize observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs like market transactions involving identical or comparable securities.

The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable and accounts payable approximate fair value due to their short-term maturities and are excluded from the fair value table above.

Convertible Senior Notes

As of October 31, 2020, the estimated fair value of the Notes was approximately $291.7 million. The fair value was determined based on the quoted price for the Notes in an inactive market on the last trading day of the reporting period and is considered as Level 2 in the fair value hierarchy.

5. Business Combinations

On October 1, 2020, the Company completed the acquisition of Rundeck Inc. (“Rundeck”), a leading provider of DevOps automation for enterprise. The acquisition of Rundeck strengthens our product and will enable our customers to resolve faster, reduce costs, and protect the customer experience. The Company acquired Rundeck for purchase consideration of $95.3 million in a combination of cash and common stock. The total purchase price consisted of the following:


	(in thousands)
Cash paid to common and preferred stockholders, warrant holders, and vested option holders	$	51,581
Fair value of common stock transferred	33,941
Fair value of assumed options and restricted stock attributable to pre-combination service(1)	4,934
Fair value of future cash payments to common stockholders attributable to pre-combination service	4,808
Total purchase consideration	$	95,264
(1) The restricted shares are considered to be legally issued and outstanding on the date of issuance.

The fair value of the stock and options recognized as purchase consideration was determined using the closing price of the Company’s common stock on the acquisition date.

In addition to the purchase consideration, a portion of cash and stock for certain Rundeck key personnel attributable to post-combination services is subject to vest over two years from the closing of the acquisition, subject to on-going employee services and achievement of certain performance conditions as follow:

•$3.7 million in future cash payments beginning in the fourth quarter of fiscal year 2021, which the Company will recognize within research and development over the vesting period of two years.

•$3.3 million related to the fair value of restricted stock issued that will vest beginning from the acquisition date, which the Company will recognize as stock-based compensation expense over the vesting period of two years. The restricted shares are considered to be legally issued and outstanding on the date of issuance.

In connection with the acquisition, the Company incurred transaction costs of $1.6 million within the general and administrative line of the Condensed Consolidated Statements of Operations.

The acquisition was accounted for as a business combination and the total purchase consideration was allocated to the net tangible and intangible assets and liabilities based on their fair values on the acquisition date and the excess was recorded as goodwill. The values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of the date of this Quarterly Report on Form 10-Q and may be adjusted during the measurement period of up to 12 months from the date of acquisition as further information becomes available. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill. As of October 31, 2020, the primary area that remains preliminary relates to the valuation of certain tax-related items.

The following table presents the preliminary purchase consideration allocation recorded in the Company’s condensed consolidated balance sheet as of the acquisition date:


	(in thousands)
Cash and cash equivalents	$	1,925
Accounts receivable and other assets	1,879
Intangible assets	27,800
Goodwill	71,946
Accounts payable and other liabilities	(548)

Price	28.24	EPS	-1
Shares	76	P/E	-54
MCap	2,146	P/FCF	-1,087
Net Debt	-176	EBIT	-39
TEV	1,970	TEV/EBIT	-50
TTM 2019-10-31, in MM, except price, ratios

10-Q	2020-10-31	Filed 2020-12-04
10-Q	2020-07-31	Filed 2020-09-03
10-Q	2020-04-30	Filed 2020-06-05
10-K	2020-01-31	Filed 2020-03-19
10-Q	2019-10-31	Filed 2019-12-06
10-Q	2019-07-31	Filed 2019-09-06
10-Q	2019-04-30	Filed 2019-06-07
S-1	2019-03-15	Public Filing

8-K	2020-10-01
8-K	2020-09-20
8-K	2020-09-02
8-K	2020-06-22
8-K	2020-06-16
8-K	2020-06-04
8-K	2020-03-18
8-K	2019-12-11
8-K	2019-12-05
8-K	2019-09-18
8-K	2019-09-05
8-K	2019-06-06
8-K	2019-04-15

EX-31.1	pagerdutyq32020ex311.htm
EX-31.2	pagerdutyq32020ex312.htm
EX-32.1	pagerdutyq32020ex321.htm

PD 10Q Quarterly Report

PagerDuty Earnings 2020-10-31