Negative Points

• PagerDuty Inc ( NYSE:PD ) completed a workforce restructuring impacting approximately 15% of employees, which may disrupt operations and morale.

• Revenue growth remains sluggish, with Q3 FY27 guidance indicating roughly flat year-over-year growth at the midpoint.

• The company faces ongoing headwinds from seat compression, which has historically pressured revenue and requires a shift to usage-based models to mitigate.

• Dollar-based net retention at 98% remains below 100%, indicating that existing customers are still not expanding their spend sufficiently to offset churn.

• The restructuring charges of $5.5 million to $7.5 million will impact near-term financials, and the company acknowledges there is still significant work to stabilize the business.

Q & A Highlights

Q: John, you've talked about blended teams of agents and humans in the PD Reliability Platform. Is having humans in the loop a core tenet you want to keep over time, or is that dictated by customer readiness? And to what extent do you think there's an opportunity to govern or orchestrate third-party agent execution? A: John DiLullo (CEO): Having humans in the loop feels like a very natural motion for us right now and is embraced better by customers as they lean into autonomous agents. It also allows us to derive reinforcement learning (RLHF) from customer actions for higher fidelity down the road. While we are seeing fully autonomous solutions on simple or repeated cases, the amount of autonomy will increase over time, but it doesn't change our current plan.

Q: On the OpsCloud or Reliability Cloud Platform conversions, how are you thinking about ARR changing at the point of conversion, and how wide could the dispersion be when a customer converts? A: Eric Prengel (CFO): We view OpsCloud as a big opportunity for customers to use more of our products and try new ones they couldn't before, getting more value from our capabilities. While we didn't give an explicit metric this quarter, the business saw strength and grew double-digits on a total basis. John DiLullo (CEO) added that the PD Reliability Platform is democratizing AI, giving all customers, including those in PagerDuty Online, access to these capabilities, which should be a catalyst for more adoption.

Q: Can you provide an update on customer feedback on the usage-based model and how aggressively you could push this in the second half? Also, how is the pipeline of enterprise deals looking? A: John DiLullo (CEO): The barrier for customers to experience our AI and agentic solutions is much lower with the usage-based model because they can experience it in a bite-sized, consumed way, which aligns value with usage. We see a nice usage trend as enterprises continue with the product. The momentum is building, with meaningful quarter-over-quarter growth and a significant increase in $100,000 customers, many of which were initiated by customers embracing the AI Ops solution.

Q: On gross retention, it's good to see it moving in the right direction, especially with net revenue retention at 98%. Do you think this can keep improving in the second half, and what gives you confidence? A: Eric Prengel (CFO): We were happy with the dollar-based net retention inflecting up to 98%, and it's two quarters in a row of gross revenue retention being up. This is a sign of stabilization in the business. We're focused on continuing to improve both metrics over the immediate and long term. John DiLullo (CEO) added that the combination of AI solutions and the new OpsCloud consumption model seems to be the "magic elixir" for better retention.

Q: From a portfolio perspective, are there other adjacencies for PagerDuty to drive growth, or areas where you might pull back and rationalize? Where else does PagerDuty have a right to win? A: John DiLullo (CEO): We break AI capabilities into two tranches: AI for PagerDuty (enhancing the core product) and PagerDuty for AI (PD for AI). We have the right to win in the PD for AI category. With the sheer volume of non-deterministic software being created, which is fragile and breaks more often, we see an incredible opportunity as these agentic workloads enter production. They will fail differently, with concerns like drift, hallucinations, token runaway, and PII leakage, creating a great area for further penetration.

Q: Regarding the headwinds from seat compression, do you feel we're past the worst of it, and how do you see the rest of the year playing out from a seat perspective? A: Eric Prengel (CFO): OpsCloud and the usage model are a great way to take away challenges from seat compression. We saw positivity this quarter with dollar-based net retention inflecting upwards and positive gross retention. As the world moves toward AI, we'll move away from seat pressure and toward a world where people benefit from us on a usage basis. John DiLullo (CEO) added that while they had a rough couple of quarters and still have work to do, the new products are gaining traction and the business is stabilizing.

Q: Can you walk us through the specifics driving the 24 new $100,000 customer adds, perhaps between product-led growth and go-to-market? A: John DiLullo (CEO): We saw a good mix of adds; they weren't all from the PLG motion or PD Online, nor were they all graduations. The sales team is gaining confidence and understanding how to quote usage-based products. There were some marquee names, continued growth with frontier model companies, and the diversity of the 24 new enterprise accounts was one of the most reassuring things.

Q: Anthropic was named as an expand this quarter. Can you walk us through what products they expanded to and how larger enterprises are expanding platform breadth with PagerDuty? A: John DiLullo (CEO): Without sharing proprietary information, this is evidence that we're doing a great job with the "PD for AI" component. Frontier models are exploring novel use cases, and we have most of the big ones as customers. We're learning alongside them and can apply those tactics to help our other customers. The relationships are strong, progressive, and mutually beneficial.

Q: On the sales front, what are you seeing with respect to competition, sales cycles, and what customers are asking for? A: John DiLullo (CEO): Competition is always there, but we're enjoying the environment as it helps hone our skills. We're seeing underlying platform elements come together positively, with continued utilization and event throughput growing nicely. The population of idle agents in customer estates is decreasing. These factors are helping our win ratios and speed of deal closure, as pent-up demand inside accounts moves sales cycles faster.

Q: On the reduction in force, what is the gross savings and how much are you reinvesting? A: Eric Prengel (CFO): We're not disclosing gross savings explicitly, but in Q2 we had a 23.7% non-GAAP operating margin. Our Q3 guidance is 26.5% to 27.5%, a 3.5-point increase. We raised the full-year operating margin guidance by a full point to 25% to 26%. For free cash flow, we now expect to be in line

For the complete transcript of the earnings call, please refer to the full earnings call transcript .