PagerDuty S-1 Analysis — An IPO Alert

PagerDuty, a leading provider of digital operations management, filed for a $100M IPO, with the amount as a placeholder. Designed for teams, the PagerDuty platform collects signals from virtually any software-enabled system or device, correlates and interprets signals to identify events, and engages the right team members to take action in real time. PagerDuty helps teams with on-call management and incident response. The company has over 10.8K customers, 350K paid users, and generated $107M revenue over the last twelve months (LTM) as of October, 2018. Founded in 2009, PagerDuty has over 524 employees and is headquartered in San Francisco, CA.

Over the past few years PagerDuty has expanded its portfolio beyond its flagship alerting product. The company now has five products including On Call Management, Modern Incident Response, Event Intelligence, Visibility, and Analytics.

PagerDuty believes their market opportunity is around $25B. The company calculated the TAM by multiplying its estimate of 85M potential users by its average revenue per user of ~$294 for the financial year ended January 31, 2019. PagerDuty currently claims less than 1% penetration in these markets.

In the alerting space, PagerDuty’s main competition is OpsGenie (acquired by Atlassian for $295M in Sep. 2018) and VictorOps (acquired by Splunk for $120M in June 2018).

We named modern incident response software a key 2019 trend. In this category PagerDuty competes with at least four early startups and JiraOps.

PagerDuty is growing extremely quickly while being highly efficient — the company credits their GTM strategy of combining self-service with viral adoption and a high-velocity sales model. The company achieved $84M revenue over nine months ending October 31, 2018, up from $57M over the previous nine-month period, a 48% increase.

Customer count grew 14% from 9.4K to 10.8K over the same nine-month period.

Customers with greater than $100K ARR dramatically increased 54% YoY. As of January 2019, their customers represented one-third of the Fortune 500, demonstrating they can sell to businesses of various sizes.

One thing that stood out to us was the business’ sound dollar-based net retention rate of 139% for the nine-months ending October 31, 2018. The dollar-based net retention rate is total current period ARR divided by the total prior period ARR for the customer cohort. Our recent research found that the top quartile of SaaS businesses observe net dollar retention of 120%+ and the top decile achieve 140%. PagerDuty’s 139% net retention rate places it near the top decile of SaaS businesses.

PagerDuty achieved an average revenue per user for the fiscal year ended January 31, 2019 of $294. We expect the average revenue per user to expand over time as the business’ new product lines including Modern Incident Response, Event Intelligence, Visibility, and Analytics gain traction.

Moving on to gross margin, which equals revenue minus the cost of goods sold that includes things like hosting costs and customer support. The median publicly traded software company is at 71%. PagerDuty achieved an 85% gross margin for the nine-months ended October 2018.

Of each operating expense item, PagerDuty spends the most on S&M at 56%. PagerDuty has a sales efficiency coefficient of 0.­­70. As a reminder, the sales efficiency coefficient measures gross profit increase over a period divided by sales & marketing investment. The company has an incredibly strong magic number of 0.9.

In terms of net income margin, PagerDuty is around -41% for the last nine months, an improvement from -53% for the equivalent period a year earlier.

In September 2018, PagerDuty achieved a $1.3B valuation when it closed a $90M Series D financing led by T. Rowe Price Associates and Wellington Management. Earlier venture investors Accel, Andreessen Horowitz, and Bessemer Venture Partners also joined the round, which brought the company’s total funding to $173 million.

According to the S-1, financial investors currently own about 55% of the company. A16Z owns 18.4%, Accel owns 12.3%, Bessemer owns 12.2%, Baseline Ventures has 6.7%, and Harrison Metal owns 5.3%.

When publicly traded PagerDuty will most likely be valued on a multiple of forward revenue given their high growth and negative profit margins. Given we don’t have a next twelve months (NTM) revenue forecast for PagerDuty, we will be applying historical multiples.

We expect the business to be compared to Elastic and Atlassian. Elastic is a recently IPO-ed open source softwere log management solution, so we thought it was a good comparison. Atlassian has been publicly traded for a few years and sells collaboration and workflow software to developers and DevOps teams similar to PagerDuty’s customer base.

Our analysis suggests PagerDuty’s enterprise value will be at least $2.5B+, a healthy 2X markup from its last round. We averaged the EV/LTM revenue multiple for Elastic and Atlassian and applied it to PagerDuty’s LTM revenue.

After a ten-year journey, PagerDuty has built a healthy SaaS business targeting developers and DevOps teams. Revenue growth remains strong. We are impressed by the growth of $100K ARR customers and net dollar retention. Gross margin is top-tier, and S&M is improving. Overall, we are excited to see how the first DevOps startup to IPO in 2019 performs.