PagerDuty's Q2 2026 Earnings Call: Contradictions Emerge on Sales Execution, AI Adoption, Pricing Strategy, and Usage-Based Pricing Transition

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 03, 2025

Financials Results

• Revenue: $123M, up 6% YOY
• Gross Margin: 86%, at the high end of the 84%-86% target range
• Operating Margin: 25% (non-GAAP), up from 17% in the prior year (~800 bps expansion)

Guidance:

• Q3 FY26 revenue expected at $124M–$126M (4%–6% YOY).
• Q3 net income per diluted share: $0.24–$0.25; implies ~21% operating margin.
• FY26 revenue guided to $493M–$497M (5%–6% YOY; prior $493M–$499M).
• FY26 net income per diluted share: $1.00–$1.04; implies 21%–22% operating margin (raised from $0.95–$1.00 and 20%–21%).
• Q3 trailing 12-month billings growth expected ~7%.
• H2 incremental ARR expected to be significantly higher than H1.
• Dollar-based net retention expected ~102% in H2.
• Expect at/near GAAP operating margin profitability in H2; GAAP-profitable full FY27.

Business Commentary:

• Record Revenue and Profitability:
• PagerDuty reported revenue of $123 million for Q2, representing a 6% year-over-year increase, marking its first quarter of GAAP profitability with a non-GAAP operating margin of 25%.

• This growth was driven by a focus on profitable growth, operational discipline, and the fundamental strength of its business model.

• ARR and Customer Expansion:

• The company's ARR increased to $499 million, reflecting 5% year-over-year growth.
• Despite churn pressures, encouraging trends include new and expansion bookings increasing by 15% sequentially, net new customer additions of 208 in the first half, and the high-value customer base expanding to 868 customers.

• This expansion demonstrates elevated churn, but also positions PagerDuty for future growth, particularly in the AI ecosystem.

• Penetration in AI Ecosystem:

• Native AI companies contributed 2% of total ARR, growing rapidly, with more than half of the Fortune 50 AI companies being PagerDuty customers.

• This validation of PagerDuty's central role in the AI ecosystem is attributed to its scalable resilience and ability to support the evolving market.

• Operational Discipline and Efficiency:

• PagerDuty achieved a gross margin of 86%, reflecting increased efficiency in its technical architecture, and cash flow of $34 million or 28% of revenue.
• This is a result of operational discipline and focus on increasing efficiency, which supports the company's strategy to drive margin expansion and cash flow.

Sentiment Analysis:

• Company achieved first-ever GAAP profitability and 25% non-GAAP operating margin (+800 bps YOY) with strong cash flow. However, ARR growth was 5% YOY with DBNR at 102% (down from 104% in Q1) due to elevated churn/downgrades from seat optimization. Guidance calls for modest revenue growth (5%–6%) while expecting H2 ARR to improve and margins to expand; DBNR to remain ~102%.

Q&A:

• Question from Sanjit Singh (Morgan Stanley): Why is growth slower than peers in adjacent IT ops and when does it reaccelerate?
  Response: Seat-based downgrades are pressuring growth, but platform usage is >25% YOY and new/expansion bookings rose 15% sequentially; shifting to usage-based pricing supports reacceleration targeted for FY27.

• Question from Sanjit Singh (Morgan Stanley): Mission for the new CRO and any disruption risk?
  Response: CRO will drive the enterprise GTM transformation, improve consistency and retention, and scale AI-led product adoption; org layers were reduced and alignment improved to enable continuity, especially in North America.

• Question from Koji Ikeda (BofA Securities): How would you characterize ARR quality today vs FY23?
  Response: Higher quality: >75% of ARR from enterprise customers, >65% from customers with 2+ products, more multiyear deals, and growing exposure to native AI plus new verticals (e.g., pharma/healthcare).

• Question from Koji Ikeda (BofA Securities): What gives confidence TTM billings can accelerate?
  Response: H2 incremental ARR expected to be significantly higher as enterprise motion matures and Q4 renewals seasonality lifts billings; targeting ~7% TTM billings growth.

• Question from Jacob Roberge (William Blair): How will the transition to usage-based pricing roll out and what’s customer feedback?
  Response: It will be gradual, tied to renewals and multiyear terms; customer receptivity is strong, with usage-priced products growing ~60% and flexible enterprise licensing easing adoption.

• Question from Jacob Roberge (William Blair): How do you mitigate seat downgrades during the transition?
  Response: Tighten account management and retention rigor, monetize growing usage, and use flexible licensing to give access to more products, offsetting fewer seats.

• Question from Andrew Sherman (TD Cowen): What drives H2 improvement and timing of consumption benefits?
  Response: More tenured reps (60%+ at 1+ year), early traction in AIOps/PD Advance/agents, stronger international and new logo momentum, and native AI wins underpin H2; broader consumption benefits build into FY27.

• Question from Andrew Sherman (TD Cowen): How are AI-native customers adopting and expanding?
  Response: They span models, infrastructure, apps, and agents; often start small then scale for end-to-end automated incident management, valuing resilience and reducing human toil.

• Question from William Kingsley Crane (Canaccord Genuity): Progress in customer service ops beyond IT/Dev?
  Response: CS Ops increasingly attaches to platform deals as sales lead with Operations Cloud; PD Advance and agents (e.g., SRE, Shift) are boosting adoption across functions.

• Question from William Kingsley Crane (Canaccord Genuity): Traction with GenAI motions and credits?
  Response: Ecosystem breadth (MCP, Amazon Q GA) enables richer triage, research, and post-incident automation; customers are using agents in new workflows, expanding use cases.

• Question from Jeff Van Rhee (Craig-Hallum): Trend in platform usage growth?
  Response: Usage metrics (events, automated workflows, incident volume) are rising with complexity; customers aim to cut MTTR and major incidents, adopting automation more broadly.

• Question from Jeff Van Rhee (Craig-Hallum): Why a NA sales leadership change despite higher rep tenure?
  Response: International execution improved faster; NA needed more disciplined continuity and renewal management—new leader brings rigorous enterprise sales practices to reaccelerate growth.

• Question from Jeff Van Rhee (Craig-Hallum): How intense is seat optimization and what’s next?
  Response: Pressure has been consistent and likely persists for a few quarters due to tech job declines and automation; PD is countering via cross-sell, new logo lands, and vertical expansion.

• Question from William Miller Jump (Truist Securities): Impact of higher-quality pipeline on cycles and close rates?
  Response: Enterprise deals are larger and can be longer, but conversion should improve as reps ramp; some regions already show shorter cycles; balancing large renewals with strategic new wins.

• Question from William Miller Jump (Truist Securities): Size of renewal cohort and pipeline into H2?
  Response: Q3/Q2 renewals are similar; Q4 is the largest renewal quarter; Q4 pipeline is strong with better qualification and some evidence of cycle shortening.

• Question from Michael Steven Richards (RBC Capital Markets): How will core incident management pricing evolve—fully usage or hybrid?
  Response: Likely a hybrid of platform-based plus usage/credits to ensure predictability; credits will be tuned iteratively; AI features seeded across plans with ongoing PLG motion.