PAGERDUTY, INC. (PD) Q3 2020 Earnings Call Transcript

PAGERDUTY, INC. (PD 3.12%)
Q3 2020 Earnings Call
Dec 05, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the PagerDuty third-quarter 2020 earnings conference call. [Operator instructions] I will now turn the conference over to Stacey Finerman.

Please go ahead.

Stacey Finerman -- Vice President of Investor Relations

Good afternoon, and thank you for joining us on today's conference call to discuss PagerDuty's fiscal third-quarter financial results. With me on today's call are Jennifer Tejada, PagerDuty's chairperson and chief executive officer; and Howard Wilson, the company's chief financial officer. Statements made on this call include forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

Forward-looking statements represent our management's beliefs and assumptions only as of the date such statements are made, and we undertake no obligation to update these forward-looking statements. In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their closest GAAP equivalents.

For example, other companies may calculate non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation between GAAP and non-GAAP financial measures is available in our earnings release. Further information on these and other factors that could affect the company's financial results are included in filings we make with the Securities and Exchange Commission from time to time, including the section titled Risk Factors in the company's most recent quarterly Form 10-Q previously filed with the SEC. Now I'd like to turn the call over to our CEO, Jennifer Tejada.

Jennifer?

Jennifer Tejada -- Chairperson and Chief Executive Officer

Thanks, Stacey, and thank you, everyone, for joining us this afternoon on our third-quarter earnings call. Q3 was a strong quarter as revenue grew 37% year over year to $43 million. I'd like to share three highlights in the quarter. First, customer growth remains consistently strong as we scale.

We ended the quarter with over 12,400 customers, up 15% year over year, and grocers remained remarkably steady over the past seven quarters. We also saw sustained robust growth with our enterprise and mid-market customers that have annual recurring revenue, or ARR, above $100,000, growing 49% year over year, similar to the growth we delivered in the second quarter. These two customer metrics that show a sustained growth rate on an increasing base demonstrate the durability in our revenue growth. Next, we closed some terrific large strategic deals in the quarter, continuing to solidify our leadership position in enterprise.

We're now partnering with two of the three largest contract -- defense contractors in the world and two of the five largest investment banks after a new win in each of these sectors. These wins, both Fortune 100 companies, have a combined value of almost a million in ARR. The requirements to do business in huge multinational, highly regulated verticals are not inconsequential, and our multiyear enterprise tech investments born in the cloud architecture and go-to-market model set us apart. Both companies chose us for breadth of our platform, especially our machine learning and automation-based features, our ease of use, our proven resilience in security at scale and our referenceable enterprise track record for value realization.

Our go-to-market teams continue to win expansion business in our base through a laser focus on customer success, resulting in an 81% increase in customers that spend over $500,000 in ARR a year with us. This quarter, we won a significant expansion in partnership with a large global software company headquartered in Europe. The relationship started with a U.S. subsidiary, and they have now expanded users and upgraded to the digital operations package in the European business to support their global growth and enhance the trust their customers place in their software and services.

We continue to see growing demand for our digital operations offering as customers realize measurable value through reducing incidents and by advancing their digital transformation efforts. This underscores the expansive and early addressable market we see in digital operations management this quarter, where 45% of the net new ARR was attributed to digital operations package. This bundle includes our platform, our workflows and modern incident respons, our AIOps solution, event intelligence, which leverages machine learning to automate work; visibility, which quantifies business impact in real-time, and our analytics product, which provides recommendations on improving digital operations management and metrics to benchmark against other teams. We are proud of our revenue growth rate and net dollar retention as they rank highly within our peer group.

That said, we see an opportunity to stabilize our dollar-based net revenue retention. As we mentioned in Q2, we front loaded sales hires in the first half of the year to increase our sales capacity. However, we didn't ramp those salespeople as fast and as effectively as we could have in territories with significant expansion upside, and this impacted sales productivity, which put pressure on our expansion revenue. This is an execution issue that we're working on, not a competition issue, evidenced by our customer retention rate that has remained constant at well above 95%, meaning we churn far less than 5% of customer ARR in any given year and also validated by our gross margins that remain best in class at 85% for the last six quarters.

Over the last few months, we implemented the following initiatives that are delivering early but encouraging improvements in more effectively ramping salespeople. First, we doubled down on sales enablement leadership, programs and tools to ramp new reps faster. Second, we continued our efforts to simplify and differentiate our platform and messaging in an increasingly noisy market, including more clearly articulating return on investment for PagerDuty and making self-service and discovery of new products easier for all of our customers. Finally, I'm very excited to share that we have strengthened our senior leadership team in sales with the appointment of our first chief revenue officer, Dave Justice, a high-caliber global sales leader from Salesforce and Cisco with significant depths in commercial and enterprise sales and experience in infrastructure, security and customer service.

Dave will join us in early January, and I expect him to be an excellent complement and partner to our CMO, Julie Herendeen, who has expertise in growth, digital and high-velocity B2B marketing. We remain incredibly excited about our opportunity to extend our lead in digital operations management, a market where we see a total addressable market of at least 25 billion for incident response alone and 100 billion when you consider all the teams across the company that are part of managing digital operations. Let me explain what we mean by digital ops and why PagerDuty is in a unique position. An always-on world and customer impatience result in every company needing to be a technology company.

As a result, our customers continue to move more of their services to the cloud, constantly iterating on their apps to provide the best customer experience. In parallel with this market transition, modern work has changed with mix shifting from planned and structured work to emergent, mission-critical, spontaneous and unstructured work. PagerDuty is the only partner that leverages machine learning to orchestrate teams on complex issues across multiple business units and geographies, converting a deluge of data into insightful action in seconds and minutes. Digital operations are increasingly costly and complex to manage, and the stakes are high, where a minute of disruption can cost 200,000 to 500,000 in revenue.

This requires a long-term partner that sits above the rest of the technology ecosystem acting as a central nervous system, orchestrating all these critical workflows simultaneously and cutting through the noise. PagerDuty is in the unique position to work for large complex enterprises, as well as innovative start-ups because we've been architected for the cloud with enterprise-grade resilience and security at scale. While our customers frequently start with on-call management to accelerate their agile transformation, we increasingly see customers adopting our additional digital operations management products to support their digital transformation programs and business outcomes. The gap actually started with 1,500 PagerDuty business platform seats to support a dev ops you build it, you own it culture.

Early success with PagerDuty led the company to add another 1,000 users. As we expanded our product capabilities with greater intelligence and automation, Gap saw that they could realize further value by leveraging our digital operations package to reduce major incidents that could cost millions of dollars. Gap now uses PagerDuty to directly connect product and IT teams, as well as distribution centers, creating smarter, more streamlined approach to handling incidents. We estimate that this digital operations upgrade will save Gap millions of dollars per year.

There are several great solutions in the market that address different and sometimes related challenges associated with digital transformation, including many of the companies that went public this year. We recognize it can be hard to discern how we complement each other. Some companies, like our customers Datadog, Cisco, AppDynamics, New Relic, show you health of all your IT services in a single pane of glass. Others, like ServiceNow and Jira will give you standard workflows to route your customer service and help desk ticketing.

These are all valuable services, but when there is an unpredictable customer-facing, time-sensitive, mission-critical work, analytics and sequential ticketing are limited by manual detection, a lack of speed, inflexibility and the absence of data-driven intelligent work orchestration. PagerDuty is different because we go beyond finding a signal in the noise to automate and orchestrate the cross-functional work of people all the way through to a resolution in service of the end customer experience. Only PagerDuty can do this because, as the central nervous system of the software ecosystem, we consume the superset of data from all the different technology services our customers use through over 350 integrations to build a holistic understanding of our customers' digital health. When we recognize symptoms of a service becoming unhealthy, we pattern match the situation against 10 years of data on how IT services perform and how humans respond to them.

So we can bring together a small team of only the right owners and subject matter experts armed with the right detailed technical and business context and help from AI-based automation to action solutions and resolve issues proactively. Our long-standing customer and partner, Sumo Logic, illustrates this point well. They expanded their use of PagerDuty in the third quarter by purchasing our digital operations package. As a SaaS business relied heavily -- relied on heavily by developers to understand the performance of their applications, it's critical their platform is highly reliable at scale.

They use PagerDuty to orchestrate teams for immediate response to incidents when seconds matter, and they increasingly leverage PagerDuty to prevent events from storming to become major customer disrupting issues. Now that we've set the stage for you in terms of the sizable opportunity and explained why PagerDuty is in such a unique position, I'll talk about how we capture the opportunity by winning in enterprise, increasing our revenue from new products and validating our position as a horizontal platform. First, we need to win in enterprise, where today we serve 58% of the Fortune 100 after adding another two companies this quarter and 38% of the Fortune 500. In these accounts, significant expansion opportunity exists for both user upsell and new product cross-sell.

Enterprise, like our other segments, is greenfield and a growing opportunity for us. Our deals are largely uncontested as our competitors lack the product depth, track record and resilience at scale to serve this segment. We are cloud-native, architected or highly resilient 24/7 operations and have never had a maintenance window. We implement change in production because our customers can't afford even moments when they lack visibility and awareness of their digital operations.

This is one of the many critical requirements to support the always-on world and is one of the reasons our customers continue to trust us as a mission-critical platform partner year in and year out. In addition to our strength in self-service and small- and medium-sized businesses, we see significant upside in mid-market and enterprise. This is precisely where sales execution comes in way. Our enterprise sales motion builds on but differs from our frictionless direct-to-developer sales motion as our field-based teams, engaging with developer teams and senior leadership alike, addressing the strategic needs of economic buyers and the technical needs of product users.

For our enterprise and for our mid-market customers, realizing value quickly while meeting security, administration and compliance requirements on large businesses is critical. Our solution meets these needs as illustrated by a recent IDC study that shows PagerDuty enterprise customers averaged $3.6 million in annual business savings and revenue risk mitigation, a four-month payback period and a 731% ROI over three years. As we strengthen our senior sales leadership with the appointment of Dave Justice as chief revenue officer, we will help more of the Global 2000 manage their digital operations, optimizing revenue and customer experience and significantly reducing operational expense in the process. Next, we are increasing our revenue from new products: modern incident response, our AIOps solution, event intelligence, visibility for situational awareness and analytics for measuring operational and team health and productivity, all of which build upon data and learnings from our platform.

We also announced two new capabilities this quarter, intelligent dashboards and intelligent triage. Intelligent dashboards is new to our analytics product and leverages 10 years of data through its spotlight recommendation engine that teams can use for future improvements such as stopping unactionable alerts, fixing repeat issues and improving escalation practices. It also provides managers with built-in benchmarks to see how their teams compare to peers in the organization and across their industry. intelligent triage is new within event intelligence and provides additional context into issues so teams know how to prioritize their work and can reduce the time between detection and resolution of an issue, significantly cutting outage time and mitigating the risk of business impact.

All of our products help businesses mature their digital operations and deliver greater return. When customers use these products, they mature from reacting to incidents more efficiently to proactively managing their digital operations and preventing problems before they arise. As I mentioned before, we've also seen some great signals here recently with regards to our ability to upsell these products as 45% of the net new ARR we booked in the quarter was attributed to the digital operations bundles. Last but not least, we continue to validate our position as a horizontal platform.

What we mean by horizontal is that customers increasingly apply our solutions to teams and challenges well beyond the purview of dev ops and IT. In the third quarter, we launched PagerDuty for customer service in partnership with Salesforce and Zendesk. This follows the launch of PagerDuty for security operations in February. Customer service management is a significant opportunity for us as those teams that are on the front lines of ensuring customer experience and rapidly resolving customer impacting issues is a cross-functional effort.

Being a horizontal platform also means being applicable to all companies with time-sensitive critical work. That means -- that brings to mind another new customer partnership we initiated in the quarter with a top 20 U.S. city municipality. Think about essential services like power, gas and water where always on is both a physical and virtual must have.

Historically, the city would be notified of issues by a customer with little visibility into the underlying causes. Service outages were costly, and it would take upwards of 45 minutes to coordinate teams after a power outage before they even start to triage the issue. Using PagerDuty, this city redesigned its digital operations with the help of our expert service team, so they can address issues quickly and productively. And PagerDuty modern incident response-- with PagerDuty modern incident response, the city can automatically run response plays to resolve issues before customers are impacted, significantly reducing the time from detection to resolution and mitigating revenue impact.

One additional highlight from the quarter was our annual summit industry conference in San Francisco, where we built significant sales pipeline valued in the millions. This is our biggest and best summit yet with over 1,200 attendees, a 40% increase from the previous year. Customers were supportive and excited about the new innovations we announced and our investments in customer service through deeper integrations with Salesforce and Zendesk. As we close out the calendar year, we at PagerDuty want to wish our entire community of users, customers, employees, partners and shareholders a safe, happy and uneventful holiday period.

Over the holidays, we will continue to help our customers reduce the financial, customer and employee impact of emergent work. We're also keenly aware that the holidays can be difficult for those in need, so in honor of our customers, we're supporting the delivery of time-sensitive healthcare for those in need by donating $25,000 each to VillageReach and medic mobile, two of our Pagerduty.org partners. With that, I'd like to turn the call over to our CEO, Howard Wilson. Howard -- or CFO.

Howard Wilson -- Chief Financial Officer

CFO.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Howard Wilson.

Howard Wilson -- Chief Financial Officer

Thank you, Jennifer. We are pleased with our third quarter fiscal 2020 results. Revenue for the third quarter increased 37% year over year to 42.8 million, beating the high end of our guidance. Strong new customer acquisition, new product adoption and healthy growth in international geographies, particularly EMEA, all contributed to our strong results.

Our non-GAAP gross margins, which are industry leading, remain strong at 85%. Our non-GAAP EPS came in at negative $0.10 per share, in line with our guidance. We continue to add to our track record of managing capital efficiently, generating positive cash flow again this quarter. We saw a 15% increase in total customers on a year-over-year basis to 12,436 customers.

We were pleased to see further evidence of our success in the enterprise with customers above $100,000 in ARR, up 49% year over year to 303 customers. As Jen mentioned, growth in both total customers and larger customers were in line with the growth rates we've exhibited for several quarters now, demonstrating our ability to grow off a bigger base. Our dollar-based net revenue retention for the quarter was 129%. This metric will fluctuate relative to the amount of new business versus expansion we do in a quarter and the variabilities of customer buying patterns. As Jen mentioned in her remarks, some of the challenges we faced with ramping new sales reps has led to suboptimal execution on the expansion opportunity in our installed base, which has created some downward pressure on this metric.

However, we are pleased to see our tenured sales reps continue to drive significant new and expansion deals. For example, we added two new customers in the Fortune 100, bringing us to 58, and increased the number of customers who spend over $500,000 in annual recurring revenue with us by 81% year over year. In fact, this quarter was our largest quarter for annual recurring revenue from new customers. Our international revenue grew 52% year over year.

This was an exceptional quarter for our EMEA region including one of our largest deals for the quarter with a global enterprise software company based in Europe. I will now turn to the detailed financial results. These results are on a non-GAAP basis. Our GAAP financial results, along with the reconciliation between GAAP and non-GAAP results, can be found in our earnings release.

In the third quarter, non-GAAP gross margin was 85%, in line with the third quarter of last year. Our cloud-native architecture, dev ops approach to production and programmatic approach to customer success drives our efficient operating model. We look to run our business at between 84% and 86% gross margins. When it comes to managing the operating expense side of the business, we take a balanced approach to growth and profitability.

In the near term, we are more focusing on investing in areas that will help us scale our growth as we look to take advantage of the opportunity ahead of us. However, over the long term, as we scale, we expect to reap the benefits of operating leverage. In the third quarter, non-GAAP operating expenses were $46 million compared to $32 million in the third quarter of fiscal 2019. Non-GAAP research and development expenses for Q3 were $11 million compared $8 million in the same year-ago period, representing an increase of 39% year over year.

Innovation has been and will continue to be a top priority for us as we continue to extend our lead in real-time operations. We expect R&D to increase in Q4 both in total dollars and as a percentage of revenue. Non-GAAP sales and marketing expenses for Q3 were $25 million and grew by 43% compared to Q3 of fiscal 2019 of $18 million. As we discussed on our Q2 earnings call, we plan for incremental discretionary spend for our annual industry conference.

We set a new record for attendance and sales pipeline generation and for above-the-line advertising for our brand campaign. We expect sales and marketing to decline in Q4 back to a run rate close to Q2 and to decrease as a percentage of revenue as we continue to scale our sales team and improve productivity. Non-GAAP general and administrative expenses for Q3 were $9 million for the quarter and increased 37% year over year, a more modest increase than the two previous quarters given our investment in head count and systems in the latter part of FY '19 in anticipation of being a public company. We expect general and administrative expenses to increase slightly in Q4.

Our non-GAAP operating loss in the quarter was $9 million compared to a loss of $6 million in the same quarter last year. Our non-GAAP operating margin was negative 22% in Q3 and negative 18% in the same period of last year, primarily driven by investments in go to market and increases in research and development. Over the longer term, we expect improvement in operating margin. Non-GAAP net loss for the third quarter was $8 million or a net loss of $0.10 per basic share compared to a non-GAAP net loss of $5 million or a loss of $0.24 per share in the third quarter of last year.

The drop-in interest rates negatively impacted EPS by about $0.01 this quarter. We generated $3.4 million in operating cash flow in the third quarter compared to 2.8 million in the prior year. Free cash flow was 2.3 million in Q3 compared to $200,000 last year. Free cash flow margin was a positive 5% compared to positive 1% in Q3 last year.

Working capital improvements were a major driver here as we continue to manage capital efficiently. As we mentioned on our last earnings call, we are still expecting an increase in capital expenditures related to our office build-outs. This will negatively impact free cash flow in the short term. On a long-term basis, we will work toward sustainable free cash flow.

Turning to the balance sheet. We ended the quarter with $346 million in cash, cash equivalents and investments, up $218 million from the end of fiscal year 2019. This was primarily driven by proceeds raised in our initial public offering as with positive working capital. Moving on to guidance for the fourth quarter of fiscal 2020 and the full fiscal year 2020.

Revenue is expected to be in the range of $44.5 million to $45.5 million for the fourth fiscal quarter, and with -- see our full fiscal year 2020 end in the range of 165 to $166 million. Non-GAAP net loss per share is expected to be in the range of $0.06 to $0.07 for the fourth fiscal quarter and in the range of $0.38 to $0.39 for the full fiscal year 2020. Basic shares outstanding for Q4 and the full-year fiscal 2020 are expected to be 77 million and 65 million, respectively. With that, Jennifer will make some closing comments.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Thanks, Howard. In closing, I've just spent the last three days in Las Vegas with our partner, Amazon Web Services, and a number of our largest and most innovative customers at AWS re:Invent. Every conversation reinforced the importance of cloud adoption and digital transformation. Andy Jassy also reminded us in his keynote Tuesday of how early we are in the cloud migration journey with only 3% of the world's $3.7 trillion IT spend in the cloud today.

97% of that market is still on-prem, and with cloud migration being one of PagerDuty's most popular customer use cases, I've never been more optimistic about the opportunity we have in front of us. We are focused on the long game of building a company that generates measurable value for our customers through innovation that solve the big problems and on delivering durable growth on a cash-efficient business model. Given the innovation we continue to build into our platform, this quarter's uptake on digital operations management and our growth in enterprise, it's truly an exciting time for PagerDuty. Operator, you can now please open the call up for Q&A.

We're happy to take your questions.

Questions & Answers:

Operator

[Operator instructions] Our first question is from the line of Bhavan Suri from William Blair.

Bhavan Suri -- William Blair and Company -- Analyst

Hey, guys. Thanks for my questions, and congrats on the David Justice hire. Obviously, he did great things at Cisco and Salesforce, so that should bode well, so a nice job there. I guess I want to touch on sales and sort of the things you brought up here in terms of execution, and as you guys think about building a business for the long term, I don't care about the next couple of quarters because these things do take some time.

But as you look at the pieces playing out over the next, say, 12 to 24 months, maybe a couple of years, I'd love to get some color or understanding of your confidence levels of returning to sort of the NDRR growth rates you had and the net dollar retention rates you had and the growth rates you had driven by sort of that improvement in sales price. I mean just some understanding of how you think that will play out over the next 12, 24 and sort of what gives you confidence in those -- returning at those rates. Thank you.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Sure. I'll start with market demand and the market opportunity because we're in a very strong leadership position that we're extending, particularly as it relates to mid-market and enterprise where our direct go-to-market motion is unique in that we can land customers through self-service, expand them rapidly at lower values but then deploy a direct sales organization that really provides a strong focus on customer success. And when you start with a strong market position in a market where there's like a growing demand, in my view, and then add to that the fact that we're going from strength to strength from a product perspective where we've built the trust and the foundation of our business on our first product on call management that are starting to see real validation of our ability to expand the platform to help companies solve problems beyond dev ops and IT in areas like customer service and security and others, we're very excited about that opportunity to grow within the base that we've already landed. And not a single one of those customers has sold out.

It's early days in the journey with all of them. So bringing on a strong leader like Dave, who comes to us with significant at-scale global leadership experience but also the technical domain expertise, I think just presents a really unique opportunity. It gives me a lot of confidence. I'd also mention that our sales team is doing a very good job.

We still had a terrific quarter growing at 37%. We're still very efficient in the way we go about it. And we're landing larger deals. You look at our customer cohort, up over 100,000 growing at 49% and customers over 500,000 growing at 81%, that's a very strong base to drive our execution improvement on top of.

So I feel very optimistic about our ability to stabilize that net dollar retention rate and continue to build our position in what I think is a very early but exciting market.

Bhavan Suri -- William Blair and Company -- Analyst

Got it. Got it. And then one quick follow-up. Obviously, you started to roll out a number of very compelling use-case-based solutions, basically for cloud operations, basically for customer business intelligence -- business response, sorry.

I just like to understand early interest in those solutions and the pricing monetization strategy for those solutions.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Sure. There's been very strong interest in those solutions because they were built on the basis of customer demand. Our customers told us things like when we're working through an incident that has the technology-centric origin, we need to be able to communicate with the balance of the business so that they can start to execute on the commercial response, whether that's communicating with their customers, managing the legal or the public risk associated with these incidents that can have a material impact on business. And so Business Response, for instance, was designed to take the intelligence that's happening within a response, automate the communication of that intelligence, so you don't take responders away from solving really big, important problems but get stakeholders in the loop quickly so that they can take action.

And I think the important thing there is that it is about the ability to drive action automatically through the right people in the right moment. And so we're talking about microseconds, seconds and minutes. So there's been strong interest in that. There's been very strong interest in PagerDuty for security.

In fact, that, again, came from demand where customers are already using us in security, even though we weren't designed for that. So we've really built out our integration stack there to support those teams, who are trying to work collectively with the IT and dev ops organization to make sure they're coordinated in improving their response times and reducing the threat of business loss within their businesses. And what we're seeing -- the other thing I would just add is, as we develop our ability to engage more effectively with senior leadership across our customer base, and we're talking about CIOs, CTOs, even in some cases CFOs, they're asking for a broader platform of services where they can take the success they've seen within the developer and IT community and drive that kind of efficiency, operational improvement and execution capability across to other teams within their organization. And I think that conversation tends to start with trust on the basis of the users that are already using PagerDuty, love PagerDuty and they want to see that business impact in other parts of the organization.

Howard Wilson -- Chief Financial Officer

And then, Bhavan, this is Howard. I might just comment on the pricing aspect of this. In terms of -- our platform is not -- this doesn't represent new products for us. This is the great thing about these new use cases as they emerge.

The platform being a horizontal platform that can be applicable to any number of use cases means that the same pricing applies regardless of the use case. And so, we -- essentially, the work that we do is to ensure that we have the right kinds of integrations available to support this use case or we work with customers as they build custom integrations using our open API to be able to access the platform appropriately.

Jennifer Tejada -- Chairperson and Chief Executive Officer

And suffice to say, you can expect to see that monetize through the expansion of new users in new teams and new functions or divisions in a business that we don't serve today and, in some cases, in services where we're going to help those organizations get up and running.

Bhavan Suri -- William Blair and Company -- Analyst

Gotcha, gotcha. Very helpful. Thank you, guys appreciate it.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Thank you.

Howard Wilson -- Chief Financial Officer

Thanks, Bhavan.

Operator

And your next question is the line of Matt Hedberg from RBC Capital Markets.

Matt Hedberg -- RBC Capital Markets -- Analyst

Oh, hey guys. Thanks for taking my question. Jen, it looks like Dave is a great addition to the team, and it was certainly good to see the growth in large deals. I think that was really impressive, obviously growing a lot faster than even revenue.

I'm curious on the sales reps' productivity. Obviously, you noted that they aren't ramping quick enough, but tenured reps are doing better. I'm curious if you can comment on -- with the capacity that you've added, do you have the right mix of newer reps? I guess, secondarily, how quickly do you expect this cohort to ramp under Dave's leadership? And are there any other broader changes that Dave needs to make to really position yourself for this next leg of growth?

Jennifer Tejada -- Chairperson and Chief Executive Officer

I think we need to continue to do what we do well and -- but do it very efficiently and quickly. So we front loaded the hiring in the first two quarters of the year and did not digest the elephant fast enough. And so, it took some of our reps a longer period of time to ramp. But having said that, I'm really pleased with their progress and how they're coming up to speed.

Some of the deals we mentioned today came from relatively new reps who are working under more tenured managers. And so, I think that creates a platform for us to continue to improve. And I think Dave will come into the business and look to lean into the things that we do well and identifying process, new opportunities to improve and build process where we don't have process and ensure that the way we go to market and engage with our customers continues to be focused on their success and on value but really continuing that shift from selling on the basis of technology and feature and function to selling on the basis of driving business outcomes and realizable quantifiable value. But I think it's like any other fast-growing business.

There are always new things you have to learn how to do as you get bigger and things that we can be better at and be smarter. And despite the execution issues we have, we delivered a traffic quarter. And I'm very proud of that. I think it gives Dave a really good foundation to start from and hit the ground running.

Matt Hedberg -- RBC Capital Markets -- Analyst

That's helpful. And then the digital operation disclosure was super helpful. I'm wondering, can you talk about what happens to spend when a customer moves to more of this platform approach and maybe what the sales cycles look like? I assume this is more of like an upsell like -- or maybe as a new sell into a new account. But curious on kind of the sales cycles for these more broader platform sales versus point-based sales.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Sure. It depends -- I think it varies from one customer to the next. So one example I can think of with a large retailer, they started on our first solution with several hundred users. They expanded to over 1,000 users.

They started to see the benefits of event intelligence, in particular, in a trial, the benefits of automation and machine learning, which allow you to do things like see a series of alerts that would historically be treated like five or six separate work streams. Using machine learning, we consolidate those alerts and recognize that they're actually one particular issue and get that to the small cross-functional team that can resolve it instead of getting 100 people involved in a process, which is inefficient and takes a long time. And so, they thought through a trial the benefit of that simple example of machine learning and automation, and that led to them exploring other solutions in the platform. The other area where we see a lot of interest, particularly from leadership, CIOs and CTOs, is in our analytics product, which helps you understand the true cost of your operations and the health.

So for instance, we see a lot of customers that use the cloud to abstract legacy systems so that they don't have to invest dollars and replatform there and can shift that investment into new customer-facing application innovation. Unfortunately, what can often happen is those legacy platforms are actually creating drags for all of their other new services. And you think you may be saving yourselves $5 million a year, but you're actually costing yourself $30 million in unplanned work and lost revenue due to disruption. So analytics brings all of that to the surface and also can help you heat map the health of your team, so recognize people who may be burning out sooner, benchmark one team against another to understand why you have some teams that are very efficient and productive and some that aren't.

And that's tied to real operational expense and top line deliverables. And so, lots of interest there in having a single source of the truth where, historically, all of that information has been delivered to executives manually. And so, I think that's the other shift, Matt, is that we tend to see a more senior buyer getting involved in the process of a platform play. And because more and more of the CIOs and CTOs leading these large organizations are very technical, they recognize the value of PagerDuty being loved by the developer community and our technology and innovation being well ahead of the rest of the market, and so there's a lot of confidence that comes with that.

The sales cycle doesn't necessarily have to be dramatically longer either. Often in an expansion situation, it plays within the average of our traditional sales cycles. We have recently seen some larger lands with big multinational companies where they start on digital operations as opposed to starting with the entry point. We'd like to see more of that because we think those customers realize value faster.

Matt Hedberg -- RBC Capital Markets -- Analyst

Super helpful. Thanks a lot.

Operator

And our next question is the line of Rishi Jaluria from D.A. Davidson.

Hannah Rudoff -- D.A. Davidson -- Analyst

Hey, guys this is Hannah on for Rishi. This is Hannah on for Rishi. Just, first, I was wondering if you could talk about traction with your PagerDuty for customer service and what expectations you have for the next 12 months, say.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Yes. We've had -- thank you for the question, Hannah. It's nice to hear a female voice in the Q&A queue. I would say that we've had very good traction.

We only just released PagerDuty for customer service in September at our event. And I think both we, Zendesk and Salesforce have been very encouraged by the results. I think within the first few weeks, we saw over 30 new customers sign up to those services, and these are customers that hadn't been using us within their customer service teams in the past. So I think that's a really good early indicator, but we won't be providing detail on that as a separate line item in the future.

Having said that, if you just think about how these set of problems play themselves out in customer service, identifying a customer issue before the customer does it for you is a really important value proposition for our customers. And then resolving customer cases, that process that you need to go into, one, looks a lot like an incident resolution process, so our customer service teams kind of see that as being analogous and leverage what they're learning from their developer counterparts. And two, more and more of the problems that customer service teams are trying to solve for their end customers have a technology-centric origin. Something in the app didn't work.

My order didn't get delivered as it arrived. My car didn't show up, whatever the case may be. So there -- the customer service teams are now inextricably linked with the app development and IT teams in a business, and that's providing a lot of momentum there for us.

Hannah Rudoff -- D.A. Davidson -- Analyst

Okay. Great. That's helpful. And then it sounds like you have a lot of opportunities both inside the base and with new customers.

Wondering if you could talk about how you prioritize these two in balance.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Yes. Well, the good thing is because we have self-service land motion through our digital marketing engine, there -- you don't always have to trade off one for the other. The vast majority of our customers land by coming to us through a qualified search. They already have a set of problems.

They know our reputation. They start with a trial and experience the product, and then they swipe a credit card and go. And so that doesn't take time away from the sales rep. And then our sales teams are more focused on pure expansion and really driving upside.

And occasionally, our sales teams will engage with a new land like the large defense contractor I mentioned, where they wanted more help. They didn't want to start with an online trial. They really wanted to be handheld through the process. And in that particular case, we came out with a much larger land.

So it sort of varies. But we see both landing new customers, especially in mid-market and enterprise, where the expansion opportunity is much larger, as an area where we want to continue to focus by simplifying what our product does and how it works and driving account-based marketing into prospects that we think could be interesting and at the same time, continuing to make it really easy for both customers and prospects alike to discover our product, discover new product and try them online if they don't want to engage with a salesperson. And if you've met developers, they often don't really want to talk to salespeople. They just want to use the product and go.

And so I think the last thing I would underscore there is our growth is product led. We win on the basis of the breadth of our platform, the depth of our technology and our track record for delivery. And that's something that will not continue to change. We are very focused on innovation.

On listening hard to what customers are asking us for but also thinking about what's around the corner from them and pre-empting some of the things we think they're going to need in the future.

Hannah Rudoff -- D.A. Davidson -- Analyst

Great. Thank you, guys, so much.

Operator

And our next question, line of Keith Weiss from Morgan Stanley.

Keith Weiss -- Morgan Stanley -- Analyst

Hey, guys. Thank you for the taking questions Sitting in for Sanjit this evening. You had a nice quarter in terms of sort of new customer additions. Jen, two questions, I have for you.

One was in terms of [Inaudible] coming onboard, it sounds like he's an addition to the sales management team, kind of like being a top selling organization. What are the new kind of capabilities or -- that you're looking for him to bring to the equation versus what you guys were implementing before? What is it that he adds to the overall equation, No. 1? And No. 2, on the reduction in kind of the net expansion rate, all the issues you're having there, I usually assume net expansion happens kind of moving between sales rep.

You have a sales rep that sells into account, and then a lot of the expansion comes from it and continuing to sort of switch forward with that account, and then you identify the opportunity. So I was wondering kind of like new sales rep ramping up would have an issue with net expansion. What am I getting wrong in that equation in terms of the connection between kind of new guys [Audio gap].

Jennifer Tejada -- Chairperson and Chief Executive Officer

So I mean, I'm going to try and repeat your question because the line was a little difficult to hear. I think your first -- the first part of your question, it was about what additional qualities or capabilities does Dave Justice bring to the table for our existing organization. Let me start there. So first of all, Dave brings not just sales leadership experience but general leadership experience from two of the best-performing enterprise software companies on the planet.

And whenever we look to bring a new leader into the organization, it starts with company leadership. It starts with can we find someone who's a terrific fit to the culture, who can help us recruit the best talent but more importantly, will also develop our talent internally. And Dave has very strong reputation for developing leadership within the organizations that he's worked in. But as I mentioned, he also has the unique combination of both global go-to-market experience in all of the segments that we engage in but also deep domain expertise.

And those two things together are quite hard to come by. He complements Steven Chung, who's been with us for some time, been largely focused on scaling a direct sales organization that, frankly, didn't exist when Steven got here. And some of our other leaders who have been at smaller companies or run smaller parts of the organization within those companies. Dave comes to us with significant scale but within the large companies he's been in, he's built a number of important businesses.

So he led the security go-to-market organization for Cisco as it acquired a number of new businesses and really started to build out more of a software footprint there. He's leading one of the largest parts of the go-to-market organization for Salesforce most recently, and we think they're both terrific companies that we admire. So I think he brings scale. He's got a lot of experience in leading in future that we want to build for ourselves.

But he's also spent time in modern SaaS and sort of sees the opportunity to build a machine that's unstoppable here. And I'm very excited about just his fit to our culture, which is one that's very oriented around customer championship that is designed around taking the lead and not waiting to be asked and importantly, centers around inclusive leadership. So I think he's going to be a great addition to an already strong team that I'm very, very proud of. I think your second question was really hard to understand.

So what I think I heard you say was can you break down what's driving some of the pressure on net dollar retention and -- is that right?

Keith Weiss -- Morgan Stanley -- Analyst

Yes. So I'm sorry about that, about the background noise. So I'm just trying to understand the connection. I normally associate net expansion with like an existing sales rep has already sold an account and then he continues to [Inaudible] the accounts.

So I was trying to understand why, like new sales guys ramping up would be impact on net expansion versus kind of like new customer additions where it looks like you guys did really well.

Jennifer Tejada -- Chairperson and Chief Executive Officer

So our direct go-to-market sales organization is not hundreds of people. It's pretty -- it's still emerging. And what I would say is, as you grow a sales organization, scale an organization, you're changing territories and slimming those territories down and dividing them as you add more capacity. So you often have a new rep in a territory than another rep who's maybe been promoted into management has run in the past.

So that new rep is essentially green with a new set of accounts and coming up to speed on the product and the services in the market. And our buyers are very technical. So they also have to be deeply technically engaged as well. And historically, our reps have ramped very efficiently and very quickly.

But as we've added more reps, I think we've just had to systematize that enablement process more effectively. And so that's put some of the pressure on net dollar attention where the expansion opportunity is there. We are just not executing on it as quickly as we could and having to provide management oversight to help bring those reps up to speed faster. Our existing tenured reps who have been here one year, two years, three years and our existing reps, they're still performing at the same high productivity levels we saw in the past.

So we feel really good about our ability to get them there. We just needed to improve the process around it. And then the last thing that I mentioned that has some pressure on net dollar retention is just the flow-through of some of those large competitors that we mentioned last quarter that left the platform.

Keith Weiss -- Morgan Stanley -- Analyst

Got it. That's super helpful. Thank you.

Jennifer Tejada -- Chairperson and Chief Executive Officer

No problem. Thank you.

Operator

[Operator instructions] Our next question is from the line of Rob Oliver from Baird.

Rob Oliver -- Robert W. Baird and Company -- Analyst

Great. Thank you, guys, for taking my question. One for Jennifer and then a quick follow-up for Howard. Jennifer, you mentioned on the call, and I think you mentioned last quarter as well that most of your deals are still uncontested.

I'm assuming when you get to the sort of scale of the large bank and large aerospace and defense contractor, that's probably not the case. And what I'm curious to know is where there are other vendors clearly in there, does you guys being an independent sort of neutral third-party resonate to the sale? And could we drill down a little more into the sales process. I also thought it was really unique that the aerospace and defense contractor had not been a customer before with large initial lands. So would love to get a little bit more color on those deals and the sales motion.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Sure. So you are -- so a couple of things. One, thank you for the question because I actually like talking about this part of the process. So you're absolutely right that our customers appreciate the fact that we are a neutral third party that we take signals from any software-enabled environment across not only the 350-plus out-of-the-box integrations we've built but custom integrations that customers will build using our API keys.

And they like the fact that they're coming in through kind of one catchment then being consolidated and correlated using our machine learning, our event intelligence to turn those events into insightful, actionable work that then gets orchestrated to the right people. So that neutrality, we believe, is very important, and our customers reinforce that. The first part of your question, though, around the presumption that as you move into larger enterprise, it's actually more competitive. The opposite is actually the case.

As we move up in the larger enterprise. There's nobody else there because there isn't another platform that is proven at scale with tens of thousands of users in a highly regulated environment that does what we do and is liked by the user community. And so, we really don't see much competition there. In the case of the defense contractor that you mentioned, it's a great example of one of our more tenured reps who has been tremendously successful selling our first product but learned through some other customer relationships about the opportunity to go more broad in the account to new use cases and has taken that knowledge and applied it and been working with this particular contractor for a period of time in helping them to see, one, what's the size of the problem, like how much does it cost you when something doesn't work the way it's supposed to work.

And these could be machine automation systems. These can be life and death situations, not just IT and technology situations. So there, it's a high-stakes game. Reliability and trust become very, very important in that.

And I think this particular salesperson, who we're very proud of, leans hard into that value proposition. But also, really through the process, I think one of the things I'm most proud of about our sales culture and the team that Steven and our sales leaders have built to date is that these are people that genuinely want to partner with their customers and help them be successful. They're in their effective partners, thought partners. They're often hands on helping customers get up and running, and that lends to a long-term mindset and a long-term relationship that I don't think you can get to in a 100% frictionless environment.

I think you need that kind of account management and relationship, but we try and do it in a very efficient way. Did I answer the whole question?

Rob Oliver -- Robert W. Baird and Company -- Analyst

You did. That's great. Jennifer, really appreciate the color. And then just a quick follow-up, Howard, for you.

You did call out EMEA as particularly healthy in the quarter. And I know it sounds like you guys signed up a pretty exciting deal with a large software company. Was it more broad-based than that? And can you talk a little bit to that as a trend? Or was it more of kind of that deal?

Howard Wilson -- Chief Financial Officer

Yes. So this is actually interesting. This is a global software company where we were already broadly deployed within one of their subsidiaries, and they started a process with us, which ends up being a little bit longer than our regular process because they were fairly rigorous in terms of the evaluation. Their subsidiary had been using more of our standard offering and hadn't taken the full set of offering, including the event intelligence and modern incident response on those components.

And so, in this deal, the team was very thorough in terms of evaluating what they were going to get out of it in terms of both management capability and ability to be more proactive with their business. And so, there was an example of a customer then who strategically signed up for our digital operations plan with a view to being able to deploy across a fairly broad set of users at the outset but was a very large population that we could still get to.

Rob Oliver -- Robert W. Baird and Company -- Analyst

Great, very helpful. Thank you both very much.

Operator

[Operator instructions] And there are no final questions at the time. I will now turn the conference back over to Ms. Finerman for closing remarks.

Stacey Finerman -- Vice President of Investor Relations

Great. And thank you, everyone, and thank you for taking the time for our call. I know a lot of you are busy with many other calls today, and have a great night.

Jennifer Tejada -- Chairperson and Chief Executive Officer

And happy holidays.

Operator

[Operator signoff]

Duration: 56 minutes

Call participants:

Stacey Finerman -- Vice President of Investor Relations

Jennifer Tejada -- Chairperson and Chief Executive Officer

Howard Wilson -- Chief Financial Officer

Bhavan Suri -- William Blair and Company -- Analyst

Matt Hedberg -- RBC Capital Markets -- Analyst

Hannah Rudoff -- D.A. Davidson -- Analyst

Keith Weiss -- Morgan Stanley -- Analyst

Rob Oliver -- Robert W. Baird and Company -- Analyst

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