Pagerduty's 2026 Q2 Earnings Call: Contradictions in Enterprise Transition, AI Adoption, and Sales Strategy

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

Date of Call: None provided

Financials Results

• Revenue: $123.0M, up 6% YOY
• Gross Margin: 86%, at the high end of the 84%–86% target range
• Operating Margin: 25%, up 800 basis points YOY (vs 17% in the prior year)

Guidance:

• Q3 revenue expected at $124M–$126M (4%–6% YOY growth)
• Q3 net income per diluted share expected at $0.24–$0.25 (implies ~21% operating margin)
• FY26 revenue expected at $493M–$497M (5%–6% YOY), narrowed from $493M–$499M
• FY26 net income per diluted share expected at $1.00–$1.04 (implies 21%–22% operating margin; prior $0.95–$1.00 and 20%–21%)
• Expect incremental ARR in 2H to be significantly higher than 1H
• Expect DBNR to remain ~102% in 2H
• Q3 trailing 12-month billings growth ~7%
• Expect GAAP operating margin at/near breakeven in 2H; GAAP profitable for full year in FY27
• Share repurchase authorization expanded to $200M

Business Commentary:

* Revenue Growth and Profitability: - PagerDuty reported revenue of $123,000,000 for Q2, representing 6% growth year over year. - The company achieved GAAP profitability for the first time, and their non-GAAP operating margin reached 25%, surpassing guidance and expanding by 800 points year-over-year. - This growth was driven by consistent operational discipline and the fundamental strength and durability of their business model, particularly in managing mission-critical operational risk.

• Annual Recurring Revenue (ARR) and Customer Expansion:
• Annual recurring revenue increased to $499,000,000, reflecting 5% year-over-year growth.
• The customer base, particularly the high-value segment spending over $100,000, expanded to 868 customers, increasing by 20 customers sequentially and 48 year-over-year.

• The expansion was supported by strong net new customer additions, with the first half totaling 208, nearly three times the customer adds of the previous fiscal year.

• Platform Usage and Transition to Usage-based Pricing:

• Platform usage grew over 25% year over year, driven by the critical role of the operations cloud in enterprise infrastructure.
• The shift towards usage-based pricing models, such as AI ops, is growing above 60%, aligning revenue with customer value realization.

• This transition is intended to better monetize the platform's value as customers increasingly rely on automation and AI solutions, reducing the need for seat-based licensing.

• Native AI Companies and Strategic Partnerships:

• Native AI companies now contribute 2% of total ARR, with more than half of the top 50 AI companies being PagerDuty customers.
• Strategic partnerships, such as the integration with Amazon Q, enhance the platform's capabilities through data connectors and advanced chat assistants.
• These partnerships validate PagerDuty's role in the emerging AI ecosystem and demonstrate its effectiveness in addressing the complex challenges faced by native AI companies.

Sentiment Analysis:

• Company achieved first GAAP-profitable quarter and 25% non-GAAP operating margin; revenue up 6% YOY. However, ARR grew 5% YOY and DBNR fell to 102% (from 104% in Q1) due to elevated churn/downgrades and seat optimization. Q3 guide implies 4%–6% growth and 21% margin; FY guide narrowed on revenue but raised on EPS/margins. Management expects 2H ARR improvement and GAAP profitability for FY27.

Q&A:

• Question from Sanjit Singh (Morgan Stanley): Why is growth in your segment lower and slower to rebound vs adjacent IT ops peers, and what gives you confidence in improving trends?
  Response: New and expansion bookings rose 15% sequentially, net new logos accelerated, and platform usage is up >25% while seat-based downgrades persist; shifting to usage-based pricing should better monetize value and support reacceleration in FY27.

• Question from Sanjit Singh (Morgan Stanley): What are the CRO’s near-term priorities and is disruption from go-to-market changes embedded in the outlook?
  Response: New CRO will drive enterprise transformation and performance consistency, with flatter structure, tighter AE/CSM alignment, focus on retention, and scaling AI-led products; no material disruption indicated.

• Question from Koji Keda (Bank of America): How would you characterize the quality and composition of ARR today?
  Response: ARR is more enterprise (>75% from customers >$500M revenue), more multiproduct (>65% from 2+ products), increasingly multiyear, ~70% from incident management, and includes growing native AI customers.

• Question from Koji Keda (Bank of America): What underpins confidence in accelerating trailing 12-month billings in 2H?
  Response: Expect significantly higher incremental ARR in 2H plus Q4 renewal seasonality, targeting ~7% TTM billings growth.

• Question from Jacob Robert (William Blair): How will the transition to usage-based pricing progress and what’s customer feedback?
  Response: It will be gradual via renewals (many multiyear); customers are receptive, usage-priced products are growing ~60%, and flexible licensing/credits align price to value realization.

• Question from Jacob Robert (William Blair): How are you mitigating seat downgrades during large 2H renewals?
  Response: Improved account management and renewal rigor, growing platform usage to support retention, and flexible packaging to provide broader product access even with fewer users.

• Question from Jeff Van Rhee (Craig-Hallum): What drives the expected 2H improvement; does consumption shift help near term?
  Response: More tenured reps are boosting pipeline quality; early traction in AIOps, PD Advance, and four agents supports broader platform sales, with AI-native momentum and new CRO expected to enhance execution.

• Question from Jeff Van Rhee (Craig-Hallum): Detail the traction with AI-native customers contributing ~2% of ARR.
  Response: AI-natives across models, infrastructure, and apps start small and expand for automation and resilience at scale, validating PagerDuty as central to AI operations.

• Question from Kingsley Crane (CGF): Will higher-quality pipeline affect sales cycles and close rates?
  Response: Enterprise motion increases back-end seasonality and deal size, but with >60% rep tenure, conversion is improving and multi-quarter pipeline is stronger, balanced against large renewals.

• Question from Mike Richards (RBC): How will core incident management pricing evolve—seats, usage, or both?
  Response: Likely a hybrid of platform and usage with credits to ensure predictability; approach will iterate over time while seeding AI features across plans and leveraging PLG.