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PagerDuty, Inc. (PD 2.03%)
Q4 2020 Earnings Call
Mar 18, 2020, 5:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good afternoon. My name is Shontelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the PagerDuty fourth-quarter 2020 earnings call. [Operator instructions] Please be advised that today's conference is being recorded.

[Operator instructions] I will now turn the conference over to Stacey Finerman, vice president, investor relations. Please go ahead.

Stacey Finerman -- Vice President, Investor Relations

Thank you. Good afternoon, and thank you for joining us on today's conference call to discuss PagerDuty's fiscal fourth quarter and year-end 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. I would also like to mention that we are joining you remotely today from our home offices.

I've been informed from our conference call provider that there have been some technical difficulties with the increased Internet use. We apologize for any difficulties. And if there is any clarification needed, please reach out to us at [email protected]. Statements made on this call include forward-looking statements.

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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 belief 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 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 recently filed 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

Thank you, Stacey. We are living and working in an unprecedented environment as we confront the evolving global impact of the COVID-19 pandemic. We hope you are all safe and well and appreciate you being on the call today. At PagerDuty, we've undertaken a number of measures to manage effectively through this, especially as it relates to protecting our people, engaging our customers and supporting them as they respond to the people, economic and business impacts, and also doing what we can to support our communities and slow the spread of the virus.

On March 10th, we enacted a mandatory work-from-home policy alongside travel and event restrictions already in place, and we have enacted a crisis governance operating framework. Given we designed products for unplanned work and infinite response, we were well prepared to a great extent for remote distributed work, such that we are able to focus on helping our customers as many of them transition to work from home. As developer and operations teams shift to distributed working, we have seen some interest in leveraging PagerDuty to ensure ongoing digital performance and uptime. In addition to sharing best practices with our community, we've kicked off several philanthropic initiatives through our social impact program PagerDuty.org.

Today, we're announcing that we are providing 23 platform team licenses to healthcare companies to aid them in managing surge in their digital environments and supporting them and their crisis response team. The last few days have been extraordinarily, culminating this week in metro area lockdowns, federal travel bans and record-setting market disruption. It's too early in the cycle to have clarity on the true medium and long-term impact of the fluid and macro environment. This makes it increasingly difficult to forecast the market and the subsequent impact on our business.

This is a situation that's changing by the day. And while we see some early indicators of changing demand signals, we see nothing material to date. While our business is not subject to significant industry concentration outside of software and tech, which represents a third of our revenue. We have meaningful business in retail, e-commerce and financial services, and it's too early to call how these industries will fare.

Additionally, we cannot measure or ignore the potential for disruption of market productivity and decline that may come from ongoing mandatory work from home policies, school and business closures and illness. We remain unwavering in our mission to help companies manage their digital operations more effectively. Outages and poor customer experiences are financially unacceptable, even more so in the current environment. Thousands of centralized operations teams have been distributed overnight as a result of coronavirus and addressing these challenges is PagerDuty's core expertise.

The addressable market we pioneered and serve remains large and early while we estimate it at $100 million, and we know our customers and prospects need our resilient, scalable platform to manage mission-critical unplanned work now more than ever. We've recently seen examples of customers self-serving licenses to expand new teams rapidly, but it's too early to tell whether this is material or coincidental. What we do know is our customers trust us and value the efficiency, cost savings and customer experience assurance we help them achieve. Turning to the quarter.

We are proud of our strong year-end results with Q4 revenue increasing 36% year over year and full-year revenue growing 41% over fiscal 2019. We recently achieved a major milestone, surpassing 500,000 users on our platform with our average revenue per user increasing again this year for the third consecutive year. This underscores both the value that PagerDuty delivers to users and the successful adoption of our platform by customers of all sizes across verticals and geographies. Cloud adoption, the need to manage increasing complexity, mainstream DevOps adoption and progressing digital transformation continue to create tailwinds for us in fiscal 2020 as we extended our lead in Digital Operations Management.

As trust is increasingly a valuable currency for consumers, PagerDuty helps our customers establish and sustain trust with their customers. During the year, we also saw a meaningful uptake of our new products. As a reminder, these include Modern Incident Response to orchestrate real-time work across distributed teams. Our AIOps solution, Event Intelligence, visibility for situational awareness and our advanced analytics solution for optimizing operational and team health and productivity.

Demand for all of our new products was particularly strong from new enterprise customers, as they leverage unique data, automation and learnings from our platform. Of the top 100 new customers we partnered with in fiscal 2020, 68 of them subscribe to more than one product. In Q4, we continued to advance our road map and deepen our competitive moats. We deployed new market-first feature in our Service Directory, a single dynamic repository for service information, which accelerates full-service ownership across teams.

This includes new information objects like current service health, trended service performance, service ownership, service-specific incident history, event rules and new runbooks. We released the latest version of our Salesforce integration, opening up some new use cases by enabling Salesforce customers to go beyond our previous service cloud integration, connecting PagerDuty to Salesforce marketing cloud, commerce cloud, Quip and more. We also released new enhancements to make real-time workflows more customizable and flexible for various teams and operating model. These enhancements address the challenges of HybridOps environments, where companies have both centralized IT teams and DevOps teams with very different processes.

This allows DevOps teams to leverage Agile for distributed work while also supporting seamless coexistence with centralized IT Ops team all on the PagerDuty platform. Business response is a new feature that's particularly relevant at this time. Business response allows stakeholders like leaders in senior management to receive context on the health of business services in real-time, in an easy-to-use app on their mobile device. We launched this functionality in July and have already seen 60% of eligible customers use this feature set.

In Q4, we continue to make progress in enterprise, while also serving the world's most innovative companies. We landed or expanded business with Anheuser-Busch, Booking.com, American Express, Netflix, Vanguard, CrowdStrike, ADP, Snowflake, Peleton, BioDesk, Shopify and TripActions to name a few. In enterprise, we signed an expansion deal with a top 20 Internet retailer and Fortune 500 company who was already using Modern Incident Response. Knowing for its ability to delight customers looking for a variety and stylish affordable home furnishing, the customer was using a homegrown system that was manual, disjoint and time consuming.

The new CTO led the initiative to transform legacy systems to best-in-breed platforms. Now Event Intelligence automatically group to incidence substantially reducing the time to mobilize the team, resulting in significant cost savings, which we estimate to be over $2 million in labor cost alone per year. The CTO advised us that competitors could not offer these capabilities or comparable cost savings. Last quarter, we also built on our strong leadership foundation, hiring Joe Militello, formerly at Pivotal as our first chief people officer to help us deliver on our people's first cultural value while scaling the business.

Dave Justice, our new chief revenue officer, started in December, and has been focused on sales leadership and execution, especially in the enterprise and mid-market. Dave is partnering closely with Julie Herendeen, our CMO and already strengthening our high velocity land and expand with the market motion. On this note, I'm pleased that our performance for tenured salespeople remain strong, and that the initiatives we put in place in the past two quarters, including new sales enablement programs and tools to support overall rep effectiveness are bearing positive results. Dave has recently hired a new head of sales operations, and has applied increased standardization and rigor to our sales process.

In Q4, we saw several teams deliver excellent performance, and we continue to focus on bringing all of our teams up to the same high standard. Looking to fiscal 2021, we remain focused on the tremendous opportunity ahead of us, while we see both challenge and opportunity in the current environment. In order to extend this lead, we are focused on three priorities: first, continuing to win in enterprise and mid-market; second, becoming the de facto platform for real-time work; and third, continuing to expand our reach beyond DevOps and IT. First, the world's largest companies rely on PagerDuty, with nearly 60% of the Fortune 100 and nine of the Fortune 10 as customers, enterprise and mid-market continued to present significant growth opportunity.

PagerDuty is uniquely positioned to solve the complex problems of the world's largest companies, balancing being easy to use and deploy with demands of scale, resilience and security and advanced features that speed automation and transformation. Our user-friendly e-commerce model, combined with our platform approach has led to both rapid growth and retention in the high 90s as industry leaders tightly integrate to and standardize on the PagerDuty platform. Our success in enterprise demonstrates that PagerDuty has become an essential component of the world's enterprise infrastructure. For example, a Fortune 500 human resources software company began using PagerDuty two years ago, growing from a 20 user self-service land to 2,500 users this year.

They started like many of our large customers do in a team of developers responsible for mobile applications. However, as the company continues this digital transformation journey, it require platforms that enable them to innovate faster, orchestrate and automate urgent mission-critical work and provide great customer experiences in every moment. In anticipation of a strategic product launch, they sought an enterprise-grade platform that could scale with their growth and replaced a lower cost, less feature-rich solution with PagerDuty's Digital Operations Management bundle. Adopting our Incident Management product, as well as Visibility and Analytics gives leaders, stakeholders -- leaders and stakeholders real-time context into performance and reliability at all times.

Second, we are focused on becoming the de facto platform for real-time work across small, medium and large companies. As we've discussed before, there are many providers that help companies monitor infrastructure and analyze logs to understand the health and parts of IT or services or that route standardized noncritical workflows with ticketing solutions. These are all valuable services, some of which we use in our day-to-day operations. However, when companies face issues that are unpredictable, customer-facing and time-sensitive they need a real-time solution that orchestrates teams, machines and data in a coordinated, automated way.

This is especially important for distributed teams and for teams responsible for revenue-generating applications and technology. PagerDuty uniquely addresses these needs by leveraging machine learning, a decade of data and best practices automatically bring together the right people with the right information to solve problems and address opportunities as they occur. To date, our competitive moats include our trusted reputation for delivering resilience at scale, PagerDuty's ease-of-use and the platform security and out-of-the-box interoperability across cloud and on-prem technology environments. In FY '20, we deepened these moats, investing in business response, Service Directory, a best-in-class mobile user experience and the largest integration ecosystem in the category.

We continue to execute on an ambitious road map this year, further leveraging machine learning in new ways, building additional automation and auto remediation features, improving our user experience and expanding our application ecosystem to support developers and users across functions. These product investments address critical challenges that our customers face in digital transformation, including DevOps, ITOM and AIOps. Our third priority is to continue expanding our platform beyond DevOps and IT teams. While customers usually initiate service with PagerDuty, within DevOps, 16% of our customers apply PagerDuty to additional mission-critical work in other functions like security and customer service, especially with issues that impact reputation risk come into play.

As we've seen increasing demand, we've invested in integrations and workflows to support new use cases like PagerDuty for Customer Service in partnership with Salesforce and Zendesk, as well as PagerDuty for security operations. You can expect to see us advance our road map in these areas through continued investment in our robust APIs, our developer ecosystem to encourage the Devs to build more functionality on top of PagerDuty and in strategic partnerships. An example of this is a global enterprise software company used by property and casualty insurance carriers, provides essential information for its customers to power their businesses. Reliability is of the utmost importance as their customers expect perfection for this longtime PagerDuty customer.

They started using PagerDuty in their cloud operations team, then expanded the product development and engineering to support the company's cloud adoption initiative. More recently, the company rolled out PagerDuty to their customer support representatives who are now empowered with real-time context and information to manage inbound inquiries from their customers more quickly and effectively. In the midst of an unpredictable macro environment and the coronavirus pandemic, PagerDuty's heritage as a distributed company, built for real-time, unpredictable incidents and unpredictable incidents sees us well prepared to maintain business continuity as all of our team now work remotely. To date, the coronavirus situation has not diminished our ability to provide services to customers, and we remain committed to the high levels of service and reliabilities our customers expect.

PagerDuty is for people, and we are at our best when the rest of the world is down. In uncertainty and volatility, we see opportunity, we are clear-eyed and pragmatic. We remain focused on our long-term objective of building an enduring company and are optimistic about the large market that remains in front of us. With that, I'd now like to turn the call over to our CFO, Howard, who will walk us through the financial results.


Howard Wilson -- Chief Financial Officer

Thank you, Jennifer. We are pleased with our fourth-quarter fiscal 2020 results. Revenue for the fourth-quarter increased 36% year over year to $45.9 million, beating the high end of our guidance. Growth was driven by new customers, new users and new product adoptions.

Our non-GAAP gross margins, which are industry leading, were at 87%. Our non-GAAP EPS came in at negative $0.03 per share ahead of our guidance. Once again, we managed cash with operating cash flow up $2 million in the fourth quarter. We saw a 14% increase in total net customer additions on a year-over-year basis to 12,774 customers, in line with the growth rates we've seen over the last two years.

We had 20 more customers with ARR above $100,000 in Q4, taking us to 323 customers, a growth rate of 42% year over year. Customers with over $1 million in ARR increased by 50% year-over-year to 18 in the quarter. Both of these metrics demonstrate our strength in upper mid-market and enterprise. Our dollar-based net retention rate for the quarter was 122%.

This healthy net retention rate represents our customers' commitment to us, our high renewal rates and low churn. We attribute most of the decline from the third quarter number to pockets of sales execution in specific territories, where we've not managed to cover our existing accounts as effectively. From a competitive perspective, we're pleased to see churn remaining below 5% on an annualized basis. Annual revenue -- average revenue per customer increasing for eight successive quarters with average revenue per user continuing a two-year positive trend, and our non-GAAP gross margins continuing above 85%.

We continue to drive our programs to improve sales productivity and rent, so that our newer sales reps can perform, as well as our more experienced reps who have continued to perform at high levels of productivity. With the improvements we are seeing, we expect dollar-based net retention in the first quarter to land within a range of 120% to 123%. Our international revenue grew 52% year over year, in line with last quarter. Once again, we had another exceptional quarter in Europe, an example of a territory where our sales team continues to perform well and where we continue to invest in sales.

I will now turn to the detailed financial results. These results are on a non-GAAP basis. Our GAAP financial results, along with a reconciliation between GAAP and non-GAAP results can be found in our earnings release. In the fourth quarter, non-GAAP gross margin was 87%.

We are proud that we can be so efficient in delivering a highly scalable, reliable, resilient and secure platform to over 12,700 customers around the world with high levels of redundancy in a complex technology environment supporting over 350 integrations. Our best-in-class growth margins are made possible by our cloud-native architecture, our DevOps approach to production and programmatic approach to customer success and support. We anticipate continuing to deliver gross margins between 84% and 86%. Given the large market opportunity in digital operations, we look to invest in areas that help capture share.

However, over the long term, as we scale, we expect to reap the benefits of our operating leverage. In the fourth quarter, non-GAAP operating expenses were $44 million compared to $32 million in the fourth quarter of fiscal 2019, a 36% increase, which was in line with our revenue growth of 36%. Non-GAAP research and development expenses for Q4 were $12 million compared to $8 million in the same year ago period, representing an increase of 46% year over year. As Jen mentioned, two of our priorities for fiscal 2021 are to be the de facto platform for real-time work in digital operations and expand our reach beyond DevOps and IT teams.

Therefore, we will continue to invest in product innovation. Non-GAAP sales and marketing expenses for Q4 were $22 million and grew by 41% compared to Q4 of fiscal 2019 of $16 million. On an absolute basis, this number came down quarter over quarter, the prior quarter reflecting expenses of our annual industry conference. We intend to build on our investments in this area, especially when it comes to making it easier for our customers to do business with us, expanding our capabilities to deliver a unique online experience throughout the customer journey.

Given the improvements we've seen recently in sales force productivity, we will continue to invest in sales and sales enablement. Non-GAAP general and administrative expenses for Q4 were $10 million for the quarter and increased 16% year over year, a significant improvement from the 37% year-over-year increase we reported in the third quarter.Our non-GAAP operating loss in the quarter was $4 million compared to a loss of $3 million in the same quarter last year. Our non-GAAP operating margin was negative 9% in Q4 and negative 9% in the same period of last year. Non-GAAP net loss for the fourth quarter was $3 million or a net loss of $0.03 per basic share compared to a non-GAAP net loss of $3 million or a net loss of $0.14 per share in the fourth quarter of last year.

We generated $2 million in operating cash flow in the fourth quarter compared to just over $600,000 in the prior year. This represents three straight quarters of positive operating cash flow. Free cash flow was negative $180,000 in Q4, roughly the same compared to last year. Free cash flow margin was slightly negative at 0.4% compared to negative 0.6% in the same quarter last year.

As we previously mentioned, capital expenditures did increase by 1.2 million to almost 2 million for the quarter as we recently completed the build-out of our new Atlanta offices. Turning to the balance sheet. We ended the quarter with $351 million in cash, cash equivalents and investments, up 224 million from the end of fiscal year 2019. This was primarily driven by proceeds raised in our initial public offering, as well as positive working capital.

Before moving on to guidance, I would like to make a comment on the impact of the coronavirus. As of today, we have not seen any direct material impact pertaining to coronavirus. As Jen mentioned, we have implemented a temporary work-from-home policy across all our locations; and either postponed, canceled or moved to virtual participation in sales pipeline generating events, all of this in an effort to support our community. At this time, it is difficult to accurately assess any impact beyond the first quarter.

We are, of course, monitoring the situation daily with a view to understanding the impact from top of funnel, to bookings, to revenue, to capital allocation and cash flow. When we look at the full year, we have assessed the exposure of our business to some of the highly impacted industries, such as travel and hospitality, manufacturing and energy, and we have limited exposure today. We have also reviewed daily and weekly trends in our web traffic trial volume, conversion and pipeline and have seen no material change at the current time. However, given the uncertainty at this time, it is very difficult to assess the potential future impact from significant major macroeconomic shifts that could arise from coronavirus.

Our guidance for revenue is as follows: for the first quarter of fiscal 2021, revenue is expected to be in the range of 48 million to $49 million, representing a growth rate of 29% to 31% year over year. For the full-year fiscal 2021, revenue is expected to be in the range of $208 million to $213 million, representing a growth rate of 25% to 28% year-over-year. Non-GAAP net loss per share is expected to be in the range of $0.08 to $0.09 for the first fiscal quarter and in the range of $0.25 to $0.31 for the full fiscal year 2021. Basic shares outstanding for Q1 and the full-year fiscal 2021 are expected to be 78 million and 79 million, respectively.

I want to make a few additional remarks about guidance. Our current EPS guidance for the year assumes a non-GAAP operating margin of negative 10% to negative 12% for the fiscal year. This represents an improvement of six points at the midpoint over the negative 17% we posted in fiscal 2020. Although we plan on investing in the business, especially in R&D, as well as go-to-market, we will be prudent in managing our costs.

Our current EPS guidance for the year also assumes a significant decline in other income, which primarily includes interest income and cash taxes from 5.9 million in fiscal 2020 to $0.9 million in fiscal 2021, owing to a lower interest rate environment, an increase in interest expense related to the adoption of the new lease standard and increases in taxes. With that, I will open up the call for Q&A.

Questions & Answers:


[Operator instructions] Your first question comes from Matt Hedberg with RBC Capital Markets. Your line is open.

Matt Hedberg -- RBC Capital Markets -- Analyst

OK, guy's thanks for taking my questions and our thoughts go out to everybody I pulled at this point. Jen, I wanted to just drill into a comment you made earlier. I mean, obviously, you guys had good results this Q4. And you said that there's some -- maybe some early indication of the change in demand, but then you said there's nothing much more -- not much to know it, I believe you said.

I'm wondering if you can expand a little bit more on that comment. And also, you guys have a strong e-commerce model. Maybe talk to us about how you're set up to do better than others with less travel?

Jennifer Tejada -- Chairperson and Chief Executive Officer

Matt, and thanks so much for your question, and I hope all of you are well and safe. As always, appreciate you being with us today. We know that it's a pretty challenging time out there in the market. So thanks for your question regarding that.

I think the way that we think about it is, we look at our pipeline on a daily basis, we look at things like our web traffic, as well as our trials and the conversion rate on those trials. And all of that looks healthy and frankly, looks normal, kind of traditional run rate. In some cases, we even had customers reaching out to us through self-service to buy emergency new seats -- to spin up new teams because they're now distributed or because they're using us for crisis response. On the other hand, we've had a very small number of deals delay or push out a month, because either their legal teams are super busy or they have budget uncertainty, but that's no different than what we would see in any quarter.

So again, like not material, could be coincidental, could be kind of like everyday business. So we just want to be transparent, but at the same time, say, we can't find a material change today. We feel good about the health pipeline we have going into Q1. And frankly, it's been interesting in talking to the sales team over the last couple of days.

There's a lot of activity. They are setting a lot of virtual meetings. We have very healthy transaction volume in the last couple of weeks. And to your point, the benefit of being self-service is that our customers don't require a sales rep if they want to add new teams or spin up new capability with new licenses.

And likewise, the vast majority of our land comes through e-commerce. And in times like this, when you're looking for a platform that can help you manage surge because your food delivery service or crisis response, because your team is now distributed, PagerDuty fits squarely in there in that space and has, I think, a very strong reputation for reliability in an environment that's increasingly uncertain.

Matt Hedberg -- RBC Capital Markets -- Analyst

That's great. I mean, I think it really speaks to, I think, how mission-critical your platform is for people getting work done. And I think it will be great to see how it performs here. And maybe, Howard, a follow-up for you.

I see really strong gross margins. And a question that we get, and I know you get all the time is the competitive landscape. It doesn't appear to me that there was really any impact from discounting, just kind of given your strong gross margin. But maybe can you talk a little bit more, everybody always ask about Splunk and Atlassian.

Maybe a little bit more there. And is there anything happening from a pricing perspective that you're seeing?

Howard Wilson -- Chief Financial Officer

Thanks, Matt. There's really been no material change in the environment in terms of pricing or competition. Obviously, there's always some level of competition. We see some of the folks that you mentioned from time to time, often, though, in the SMB side of the market rather than in the enterprise.

And I think for us, when we look at, one, the gross margins that you mentioned, but also just the fact that our average revenue per user continues to go up. If we look at that trend line over the last couple of years, I think it's clear the customers are seeing the value that we're delivering. And I think that we've always had competitors who would compete on price. We've always taken the angle that we compete on value.

And I think even some of the studies that have been done, we had IDC do a study for us, where it showed that for enterprise customers that they could achieve over $3.5 million-$6 million in annual business value with an ROI of 731%. So I think there's a clear business value case and particularly when you are dealing with those larger enterprises.

Matt Hedberg -- RBC Capital Markets -- Analyst

Best of luck, thanks.

Howard Wilson -- Chief Financial Officer

Thanks Matt.


Next question comes from Sterling Auty with JP Morgan. Your line is open.

Sterling Auty -- J.P. Morgan -- Analyst

Yeah, thanks. Hi guys, both in your prepared remarks and in your answer to Matt. I guess, I walk away thinking that you didn't actually provide any cushion in the numbers from COVID-19. Is that the right interpretation? Or do you estimate, especially with some of the exposures, even in those smaller industries, did you actually build in some impact into the guidance?

Jennifer Tejada -- Chairperson and Chief Executive Officer

Sterling, this is Jen. I'll start off, and then Howard can jump in if he'd like. It's a great question. And I will tell you that we have been modeling scenarios day in and day out for the last several days.

The market has been evolving very quickly. So we've provided our -- we've used our traditional methodology, but then also try to look at all the leading indicators that we can see in our environment. And since we're a SaaS business, large portion of our deals are created and closed in the same quarter. So it's difficult to look two and three quarters out and have any certainty around what things could look like.

We don't have a crystal ball. And because we do feel good about the healthy pipeline we have going into Q1, what we've tried to do is be very balanced. But I will tell you that initially, we were looking at a higher guide. And just given the nature of what's happening in the market, where we think there could be risk around employee productivity across the industry or cost-cutting measures, etc., we just applied some balance in thinking about that, but we feel good about the prudent and balanced guideline -- guidance we put in place.

Howard Wilson -- Chief Financial Officer

Jen, I would -- sorry, Sterling, I was just going to add, the one thing, we have taken a very specific look at industries, and obviously, something like travel and hospitality and energy are areas of exposure, maybe part of manufacturing. But when we look at sort of travel and hospitality and energy, that's kind of less than 3% of our revenues today. So we have sort of tried to factor in some modest changes in the behavior in certain sectors, but obviously we haven't been able to build guidance around some dramatic macro change.

Sterling Auty -- J.P. Morgan -- Analyst

That makes sense. And then just one follow-up. Net dollar retention, thank you for the guidance, by the way, I think that makes sense. But how much of that where it's kind of settling out is that you are starting to see those larger deal size initially, so maybe taking some of the expand and putting it in the land versus anything else? Because it sounds like your gross retention was very high.

Howard Wilson -- Chief Financial Officer

Yes. So I think you point to a couple of things. I think we have definitely seen -- and I think I might have mentioned this on the last call, we have seen an increase in larger lands, which means that the runway for the expand changes, like particularly as we move more of our business into the enterprise. So that's been -- that's a positive for us as a company since we've seen, like, good traction in terms of our new business.

And that does mean that that window for expansion is a little bit longer. That being said, we have been transparent about the fact that we did have -- with some of the changes that we made in the sales team in the early half of the year, which have now started to settle down. We did have some pockets of sales territory that were not being covered as effectively as we would like.

Sterling Auty -- J.P. Morgan -- Analyst

Thank you.


Your next question comes from Rob Oliver with Baird. Your line is open.

Rob Oliver -- Baird -- Analyst

Thank you very much for taking my question. Just a couple. First for Jen. Jen, I know Howard got a question earlier on the competitive landscape regarding pricing, but I just wanted to maybe dive in a little bit deeper.

On last quarter's call, you had mentioned, I believe, that the competitive landscape had gotten a bit noisy. You did not use that term this quarter. And I just wanted to get a sense for if you've noticed any change in the competitive landscape? And certainly, it sounds as if you guys feel a little bit more confident about it and just wanted to see what if, in fact, changed?

Jennifer Tejada -- Chairperson and Chief Executive Officer

Thank you, Rob, for your question, and I hope you're doing well. We have not seen a significant change. And in fact, I think we're starting to hit our stride in being more articulate about the Digital Operations Management category and about our positioning in terms of what we do from a real-time work perspective compared to others out there that help reduce some of the confusion in the market. We are very consistent in the fact that we usually land within the developer community and then start to expand beyond DevOps to security and IT and customer service and other areas.

I would say that our -- there's a great network effect that we're starting to see, where customers who've used PagerDuty at one company, become leaders at a large enterprise that's going through transformation and they see PagerDuty as a must-have. And I also think that the market increasingly is getting more sophisticated itself in understanding the difference between a highly scalable, reliable, easy-to-use solution that's deeply integrated into most of enterprise infrastructure in the world versus a lower cost offering. I'd also just point out that -- and we say this over and over again, but I don't think we can say it enough that the vast majority of our deals are greenfield and do land through e-commerce. It's a large market where it's significantly underpenetrated, and we see a tremendous amount of opportunity.

Rob Oliver -- Baird -- Analyst

Appreciate it. And then, Howard, one for you. I know you've been pointing us toward those enterprise deals, which constitute a larger upfront land. As we look at the billings growth this quarter, which was solid.

We saw a jump in, like, long-term deferred revenues. I'm just curious if that's consistent with the move toward the enterprise? If that's something we should expect to continue? Or if there were any other factors at play in that mix of short-term and long-term deferred?

Howard Wilson -- Chief Financial Officer

Sure. Thanks, Rob. So Rob, I think in terms of -- obviously, when we look at the -- if we just look at the growth of the number of customers that we have above $100,000, we now have 323 there. We saw a 58% growth in our customers above $500,000.

50% growth in our customers above $1 million. Those are all pointing the fact that we are gaining a stronger foothold in the enterprise. And so I think that is going to be -- that's going to play out in terms of us finding these larger deals with bigger organizations, and that is going to change that profile.

Rob Oliver -- Baird -- Analyst

Thanks again guys.


Your next question comes from Sanjit Singh with Morgan Stanley. Your line is open.

Sanjit Singh -- Morgan Stanley -- Analyst

Hi, thank you for taking the question and hope everyone on the team is safe during this time. Jen, on your script, you sort of mentioned some interesting metrics around the expansion outside of DevOps. I think 16% of customers outside of DevOps, you hit 500,000-plus users. And so as we sort of stand here, a year plus out of IPO, can you talk to some of the usage, use cases, the usage activity on the platform? Like, how is the usage of the PagerDuty platform different today versus a year ago, two years ago? What are sort of the emerging use cases that you're seeing?

Jennifer Tejada -- Chairperson and Chief Executive Officer

Thanks, Sanjit, for the question, and I hope you're well. So I would just say, two years ago, I think we were well-known as being a solution for DevOps for the developer community and operations teams for managing on-call management and automating real-time work within the developer community. I think as the engineering community has really led the way in helping other parts of the organization, see the opportunity to leverage a platform that can connect into almost any modern software environment, help detect issues or opportunities, orchestrate the right people in moments, drive the right outcome for the business and increasingly leverage machine learning to identify things before they become major issues, so start to move from being purely reactive to preventative, then the rest of the organization starts finding ways to apply that technology. And some examples would be where we have customers that are using our Salesforce integration within their customer service organization, and it starts with just being able to have visibility in context to an issue with a consumer-facing application or consumer-facing digital product to realizing that the same platform that their developer peers use could be leveraged for reducing customer case load or the response time to support customer issues.

In security, we see many SecOps teams and DevSecOps teams using PagerDuty within their SOC, their security operations center, but also from more of a distributed and proactive perspective, to deploy kind of a DevSecOps mindset in everything that they do. And then we have really unique use cases. We've talked about one in the past, where a large oil and gas organization uses us to manage the efficiency of their fuel trucking terminals. We have a payments customer that uses us for their physical security team, as well as legal.

We have a large software company that uses us to manage the real-time workflow across the legal team when they're trying to finalize contracts across business units. And the common stream is it's a real-time unpredictable burst of work. In a distributed organization, you don't necessarily know who the right people are you need, PagerDuty figures that out for you. It orchestrates the work.

It captures anything that goes on in that workflow and enables you to learn from that and go forward. And I think one of the things we did this year was really improve our mobile user experience. We are the only platform that allows you to run an entire incident from a mobile device, which makes it easier for more and more nontechnical users to start leveraging PagerDuty. And of course, recently, we're hearing more and more stories about customers using us in their crisis response teams, given what's going on and using us to try and spin up distributed TechOps teams who have historically been together in the network operations center.

Sanjit Singh -- Morgan Stanley -- Analyst

Very interesting. It makes total sense. And then for my follow-up question for Howard. I guess, I'm going to try to bundle two of these -- two questions into one, if you don't mind, Howard.

But what I'm trying to think through, as we think about how the environment could unfold over the next couple of quarters. When I think about the business being self-service, and at the same time, more of the business coming from larger customers, whether it's larger mid-market customers or enterprise customers, how do I marry those two things together in the sense that can these large enterprise customers expand in a way that's meaningful to the business in terms of renew the business via self-service motion? Or do they need more handholding, more a direct sales presence? Just want to sort of think through that. And the follow-up to that is, in a situation where things do take another leg down, what is sort of the contingency operating plan in terms how you think about managing the model?

Howard Wilson -- Chief Financial Officer

All right. Well, thanks, Sanjit, and good to hear from you as always. So I think you've hit on a very interesting point. Because I think just to remind folks, the majority of our lands actually come through our e-commerce or self-service model.

And that's been something that's been kind of the mainstay of the business. What we did do about two years ago is we actually implemented the ability for customers to self-serve regardless of whether they were new or existing and being able to cover that regardless of their size. And so we're definitely seeing more of our customers using that self-service motion to acquire. In fact, we even had within this past quarter, we had deals within the hundreds of thousands that were actually happening via self-service.

So where the customer was actually making that purchase online and was able to then complete that transaction without having to sign an order form or do any paperwork. So we certainly have that capability there. I think we need to continue to educate our customer base on the fact that that is available to them and that that is a mechanism that they can use. But we do see a steady stream.

It's one of the things I watch everyday is a steady stream of online transactions as they come in. To your second question, in terms of trying to think about contingency in the model, obviously, we've built out a number of different scenarios. We don't have that crystal ball, which I wish we did, but we might have built out a number of scenarios to help us sort of assess how those impacts could play out. But right now, it's just modeling, right? We don't have enough data, real data.

We don't have enough history as a company to be able to take into account some of the impacts that we may see over time.

Jennifer Tejada -- Chairperson and Chief Executive Officer

And by history, Sanjit, Howard means the company is not old enough to have been through the many recessions, Howard and I have lived through. The one thing that's certain about a difficult environment is you know that at some point in time, it will end. And I think a lot of what we're focused on is making sure we continue to think like a growth company. We apply a growth mindset.

We continue to invest sensibly in product innovation and sales and marketing, that we keep a very close handle on expenses and a watch daily, as we mentioned, and in some cases, weekly on leading indicators. But know that at some point in time, the certain thing about a market environment like this is going to end, and we need to come out of it strong and continue on our path to building an enduring company.

Howard Wilson -- Chief Financial Officer

Yes, and I think the one thing maybe just to the one thing I would just add is that we have a history of being really capital efficient. We have been very successful in terms of managing even in periods of very high growth, managing our cash very carefully. We've had three quarters now being cash flow positive. If we look at the full year, we were almost cash flow positive for the full year.

On a free cash flow basis, we were around 3% negative for the full year. So because we have that mantra and that approach, I think that puts us in good stead as things unfold in the economy.

Sanjit Singh -- Morgan Stanley -- Analyst

Appreciate all the color, Jen and Howard. Thank you very much.

Howard Wilson -- Chief Financial Officer

Thanks, Sanjit.


Your next question comes from Rishi Jaluria with D.A. Davidson. Your line is open.

Rishi Jaluria -- D.A. Davidson -- Analyst

Hey, Jennifer, Howard. Thank you so much for taking my questions and I'll echo my colleagues in hoping that everyone is doing well and staying safe. Wanted to start with the comment, Howard that you made on travel, hospitality, energy being less than 3% of revenue. Maybe you could expand a little bit on that.

Does that include things that might be on the surface considered tech companies, but under the hood are in travel, transport, hospitality, etc.? So if you think of like a reference customer like Priceline or any of the OTAs something like Airbnb or something like Uber and Lyft that, again, we think of as tech companies on the surface, but under the hood are things are going to be really impacted by kind of social distancing and the fact that cities like ours are in locked down mode. And then I've got a follow-up.

Howard Wilson -- Chief Financial Officer

Yes. Sure, Rishi. And I think you've hit upon an interesting thing. It's a challenge of industry clarification, right, that comes in.

So when we look at sort of those when we're talking about travel and hospitality, it's those folks that would fall more fairly and squarely within the line -- within the likes of traditional travel and hospitality, hotel groups, airlines, those types of functions. Where you have that crossover platform type of companies like -- the likes of the ride-sharing companies and so forth, they do fall within a different bucket. And from our perspective, what we're doing is the models that we've been running, the scenarios that we've been looking at, we're trying to sort of be fairly granular in terms of trying to pull those out.

Rishi Jaluria -- D.A. Davidson -- Analyst

OK, got it. Got it. That's helpful. And then I'm just thinking through the net expansion rate, you talked about 120% to 122% number for next quarter, which mean we could see some stability or even at the high end of that range improvement, relative to what we saw this quarter.

Maybe going beyond Q1, how should we be thinking about this metric? And can you -- is there, I guess, a possibility to expect that number to tick up? A, because of better sales execution? And then B, the fact that you're going to be lapping the impact of the two large customers who moved off PagerDuty on to their own acquired solutions?

Howard Wilson -- Chief Financial Officer

Yes. So thanks, Rishi. For now, we've taken a view that we would like to provide some or set expectations around what we'd see for this next quarter. Given the uncertainty in the current market, we feel that it would not be prudent for us to try and stretch beyond this next quarter.

Rishi Jaluria -- D.A. Davidson -- Analyst

OK, that's helpful. Thank you so much.


[Operator instructions] Your next question comes from Bhavan Suri with William Blair. Your line is open.

Bhavan Suri -- William Blair and Company -- Analyst

Hey guys, thanks for taking my question. I guess, I just want to take a step back. And obviously, we're going through some crazy times. But I'd love to understand the conversations you might be having with large enterprises, existing or new.

Let's say, OK, right now we can't do anything because we're dealing with our infrastructure, our demands and remote people. But this is clearly something we should have had in place or should have in place coming out of it. And so sort of let's fast forward, and again, none of us actually know when, but let's fast forward at some point in time. Like when you look at the potential demand or the conversations of the interest, what are customers saying? Are you seeing that from customers saying, hey, a system that monitors all this and manages it for us, that tells us what's going to happen, alerts us.

Is there sort of a conversation happening with large enterprises there? Or is it still too early? I'd love to understand sort of how you might be thinking about that? How you're hearing about it? Obviously, we're all optimistic, but love to understand what's actually happening.

Jennifer Tejada -- Chairperson and Chief Executive Officer

We just had a -- thanks for the question. We just had a conversation with a very large customer this past week. And the conversation went something like this. We're looking for other ways to find cost savings, so we can invest more in PagerDuty because we think over time, PagerDuty will reduce significant cost for us this year.

So we're looking to deploy it more broadly across the organization than it has been in the past, and we're trying to accelerate that as a result of the current environment. Now that is one data point, and it is very early days. Another example I'll give you is a company that provides navigational capability that recently self-served tens of licenses even though they're fully deployed on a recent purchase that they've done with us in the past. And we checked in with the account team.

And essentially they have a new distributed team that is used to be in a central market is now out in the wild in their home, and so they're putting -- bringing that team onto PagerDuty. We've also seen the acquisitions like the new logo engine is holding up. Like I said, trials are holding up. And there's a lot of conversation around using PagerDuty for use cases outside of DevOps and IT and one being crisis response.

And I can speak to how we're using PagerDuty as an organization in this kind of environment. So we're using PagerDuty within our crisis response governance team, so our crisis leadership team and the four work streams underneath that that include employees and public affairs, financial management, engaging our customers and then product and system stability. All of those teams are on PagerDuty rotations, such that if we needed to get immediate information across those teams quickly to drive immediate action that will happen on the PagerDuty platform. It's not happening across 16 communicating platforms, SMS, etc.

It's also highly reliable so that we know we can get in contact with the right people for the right issues. And I do think that there's the potential to see more than that. But again, I would just encourage everybody to be balanced in the way they think about this because it is early. We don't have a crystal ball.

The way I thought about the world a week ago is different than the way I thought about the world yesterday, which is different today. And I think the most important thing is that we have a team and a culture that is used to managing unpredictable big incidents that is expected to be highly resilient. And so we're pretty calm in this environment, even though it's psychologically, I think, difficult for most individuals, and I've been really proud of how our team responded. We gave them 24 hours notice on March 9th to -- that they would work from home.

And we really haven't skipped a beat. And that's not to say that it's not hard for folks. I mean, I see kids in the Zoom. People are staring into the Zoom machine hour after hour.

Thank you, Eric, for making this possible for us. But I think we're in a better position than other companies might be just given our culture and the way we work.

Bhavan Suri -- William Blair and Company -- Analyst

Yes. No, I appreciate the calm even keel given the volatility, and we've all, I'm sure, everyone on this phone has dealt with the kids in the back on the Zoom given circumstances. I guess, one quick one for either you or Howard. But you've enacted a number of productivity measures, especially getting Dave Justice onboard and everything else to address net retention and net expansion rates.

Obviously, the guidance feels pretty stable. Where do you think you are in terms of rolling those out? Is this still pretty early? Do we expect net retention rates or expansion rates to potentially, again, ex current COVID and everything else, would you have assumed they go up? Do you think we're in the first inning? Do you feel those have been done well over this quarter? And do you think Q1 is a stable place. How should we think about those?

Jennifer Tejada -- Chairperson and Chief Executive Officer

I'll take a crack at that, and then Howard can jump in. Dave has been with us for eight weeks, but he's been just a fantastic add to the team. His priorities have been really focusing on finalizing some key leadership positions, on making investments in EMEA, which has performed really well in enterprise, as well as customer success. Making sure that we have very strong alignment in marketing with account-based marketing and, as well as leveraging our self-service capability and really also bringing operational rigor to the table, which I think is superimportant as we look to become a more disciplined organization.

And so I'm really -- again, I will just say I'm really proud of our sales team. We were very fortunate that we were able to be together this year for sales kickoff before COVID-19 hit. And there's a lot of positivity, a lot of accountability and ownership in the tone of people. And really, I think, a sense that we have the right product for the right set of problems in the right moment in the market.

But looking past Q1 is just really hard to do, given the level of uncertainty. So we're going to just continue to focus on executing on what's in front of us on improving productivity and ensuring that our salespeople are well equipped, that the marketing messaging we put out into the market is easy to understand. And that the product continues to be very easy to use, very secure and very resilient in the current circumstances.

Howard Wilson -- Chief Financial Officer

Yes. And I guess, Bhavan, just one quick comment. As I mentioned to Rishi, we see the 120% to 123% rate that we're providing for Q1 as being sort of the zone for Q1. We haven't provided any view beyond that at this time.

Bhavan Suri -- William Blair and Company -- Analyst

Got it. Thank you guys, appreciate it.

Howard Wilson -- Chief Financial Officer

Thank you.


Your next question comes from James Wang with ARK Invest. Your line is open.

James Wang -- ARK Invest -- Analyst

Hi, Jennifer, you quoted the $100 billion TAM as your kind of long-term target for Digital Operational Management. But right now I think many people view PagerDuty as a fairly narrow slice of the product that's addressed. Can you maybe talk about kind of how the R&D -- where that focus is? What do you need to build out? And what's kind of the ultimate vision for what you need to build to achieve to penetrate that TAM?

Jennifer Tejada -- Chairperson and Chief Executive Officer

Sure. Thanks for the question. As I said earlier, one of our priorities this year is to become the de facto platform for real-time work. That points to a couple of things.

One, it's continuing to validate our shift from a single-product company to a multi-product platform. And I think we mentioned that of the top 100 new customers we brought onboard, 68 of them took more than one product. The Digital Operations Management SKU, which really takes you from traditional on-call automation to proactive Event Intelligence, really leveraging predictive machine learning capabilities, visibility to give stakeholders across business context in what's happening, and analytics which really truly help you understand the cost of services. These are things that people are adopting as part of that digital operation SKU.

So actually I think -- we actually feel really good about the progress that we're making there. And we also think it's OK that the entry point into our product is that core solution because it is the most reliable and I think most well-known and functional solution out in the market. I think what's also interesting is as that solution becomes intertwined and part of core infrastructure for large companies, people are not looking to change it, they're looking to build on it. And our customers are talking to us about how they leverage more and more great platforms to serve them and ours operate -- inter-operates very effectively with others.

From a product innovation perspective, as I mentioned, Service Directory, which we announced last fall, is the first of its kind. It's a virtual dynamic directory of services. It's really important in distributed architectures, where you're using virtualization, you may spin up services quickly and spin them down when you no longer need them. And what's really important about it is it also brings into account the people element, the people ownership of those services so that when you need to do something, you know who you need to do that.

And then we're going to continue to invest in the developer ecosystem. One of the things that's maybe not well-known about PagerDuty is developers build capabilities and applications on top of PagerDuty all the time, and we haven't created an opportunity for those -- them to expose those to other users. And so the dev ecosystem, I think, will be important in the future as well to really bring the power of the community to the platform.


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

Stacey Finerman -- Vice President, Investor Relations

Thank you, operator. And thank you all for joining us today. We did hear some comments that the call was choppy, and some of you might have missed something. We will look to post the transcript of this call, so you will be able to follow along.

And you are always welcome to reach out to us at [email protected]. Thank you very much, and have a nice day.


[Operator signoff]

Duration: 63 minutes

Call participants:

Stacey Finerman -- Vice President, Investor Relations

Jennifer Tejada -- Chairperson and Chief Executive Officer

Howard Wilson -- Chief Financial Officer

Matt Hedberg -- RBC Capital Markets -- Analyst

Sterling Auty -- J.P. Morgan -- Analyst

Rob Oliver -- Baird -- Analyst

Sanjit Singh -- Morgan Stanley -- Analyst

Rishi Jaluria -- D.A. Davidson -- Analyst

Bhavan Suri -- William Blair and Company -- Analyst

James Wang -- ARK Invest -- Analyst

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