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PAGERDUTY, INC. (NYSE:PD)
Q2 2021 Earnings Call
Sep 02, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Hello, everyone. And welcome to the PagerDuty second-quarter fiscal year 2021 earnings call. I'd like to remind everyone, this call is being recorded. And at this time, I'll hand it over to Willa McManmon, investor relations at PagerDuty.

Willa McManmon -- Investor Relations

Good afternoon. And thank you for joining us to discuss PagerDuty second-quarter fiscal 2021. With me on today's call are Jennifer Tejada, PagerDuty's chairperson and chief executive officer, and Howard Wilson our chief financial officer. Statements made on this call include forward-looking statements that 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. In addition, during today's call, we will discuss non-GAAP financial measures which 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 a tool 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 is 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 Form 10-Q.

With that, I'll turn the call over to Jennifer.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Thank you, Willa. And thank you all for joining us on Zoom today. We're thrilled to see you and appreciate our partners' Zoom for enabling us to engage with you face to face. I'm grateful, our team, and our employees are healthy, and I hope you all are well too.

We recognize how fortunate we are and our thoughts go out to all those who are affected by COVID and the current environment while acknowledging the unprecedented near-term market uncertainty. Today, I will focus on the elements of our business we can control and how we are strengthening our company as we again execute against our strategy to become the de-facto platform for digital operations. Despite extraordinary market dynamics, our customers remain loyal as reflected in our retention rates and revenue growth. Digital transformation is accelerating, becoming imperative for our customers as they shift to an e-commerce led business model.

McKinsey recently reported that e-commerce penetration has grown by 10 years in the last three months. Literally, overnight. Many of our customers have been faced with two competing imperatives rapidly accelerating their digital initiatives, and cutting costs. We see customers' responses to this on a continuum, from the most impacted customers reducing users to some simply applying conservatism by delaying user expansion or pausing new initiatives.

At the other end of the spectrum are many teams leveraging the situation as an accelerator for change, and doubling down on PagerDuty as a foundational operations platform. PagerDuty is essential to an online business where the stakes are now higher than ever. We are building from a foundation of trust where our platform has reliably supported, unprecedented scaling in video conferencing, e-commerce, telemedicine, communication, software, and home delivery services.As the central nervous system for our customer's digital ecosystem, PagerDuty is the first line of defense in protecting revenue. We have emerged as the central aggregator for nearly all signals across the digital landscape, from monitoring and observer ability to security, logs, tickets, and even sentiments.

PagerDuty is the only platform that aggregates signals, analyzes events, and intelligently orchestrates real-time work across different teams to close the loop and ensure a perfect digital experience every time. In today's world, trust is the most valuable currency between brands and consumers, and companies and their employees. PagerDuty operationalizes customer trust for the companies we serve. This is why we are fast becoming a business priority for CTOs and CIOs where DevOps and IT underpin digital business revenue and customer experience.

This quarter, we demonstrated strong revenue growth of 26% despite a tough market, as well as demonstrable product leadership with our average revenue per customer growth for the 14th consecutive quarter. We achieved an 87% non-GAAP gross margin demonstrating the value of the PagerDuty platform, and we've made solid progress upselling our digital operations package. With speed expansion of 179% year on year, now comprising 15% of total RIR. While investing in growth, we again increase our operating leverage, achieving a year-over-year operating margin improvement of 11 percentage points, and positive operating cash flow of $2 million.

We also strengthened our balance sheet through our convertible debt offering augmented by improved operating efficiencies. This financial wherewithal affords us the opportunity to extend our market position in an uncertain economy where the return on investment is paramount to customers. We are progressing well against our increasingly relevant strategic priorities. The first of which is, winning in the enterprise segment.

Never have large companies been under more pressure to modernize IT supporting the shift in revenue mix to digital. We are seeing evidence of this with customers like, comprehensive health management, and the New York Times upgrading to our digital operations management plan in this quarter, and SAP who expanded their digital ops users. Second is validating our position as the de-facto platform for real-time work. With everyone living, working, and learning online, the incident volume has skyrocketed, and work has become increasingly unstructured and unpredictable.

In fact, customers are using our platform more, and resolving incidents more quickly. We've seen a steady increase in incidents since the beginning of shelter in place with the cost of every minute of disruption on the rise. Despite this increase, our customers have leveraged our platform to reduce their average time to resolve incidents by approximately 15% over the same period. Our ROI has never been more clear, validated in Q2 expansions by customers benefiting from the macro trends like DoorDash, Nordstrom, One Medical, Peloton, and Coursera.

Finally, we continue to expand our reach beyond dev ops. Our primary focus and first use case with engineers championing PageDuty up and across their organizations. Digital acceleration means all hands on deck for SRE, IT, customer support, and ultimately leadership which long-term bodes well for us. Within the enterprise, PageDuty adopters such as Cisco, Electronic Arts, and Video, and Vanguard continue to advance their operational maturity.

Adding users on our platform as we help them improve labor productivity and incident response time, as well as incident prevention. In fact, we've seen expansion across approximately one-third of our enterprise customer logos in each of the last six quarters. Lowes a new logo for the quarter uses PageDuty to support their Engineering and Pps teams in managing the challenges that come with increased online demand from homeowners retrofitting our new reality.In addition, an existing customer one of the largest home improvement retailers in the US expanded to a multi-year enterprise agreement using PageDuty's predictive analytics to ensure high reliability for their e-commerce systems and other use cases like real-time inventory orchestration. PageDuty's insights are game-changing for traditional brick and mortar businesses as customers have become more conditioned to what you want when you want it world.

We also benefit from the secular transition across many verticals like online education. In Q2, a UK based education and publishing company that's evolved from a brick-and-mortar textbook producer to an online education platform adopted PageDuty to unify their global monitoring, engineering, infrastructure, and operations teams, driving Dev Ops best practices including service ownership across all IT services. PageDuty brings Engineering teams closer to business outcomes, shifting operations from reactive to preventative, and ensuring real-time operational visibility across all services like class registration and research downloads. There, PagerDuty integrates with many partners like Microsoft teams, New Relic, Slack, and ServiceNow.

In the quarter, a major US broadcast network expanded its relationship with us to minimize disruptions in live broadcasting services to speed collaboration with their affiliates, and to improve the quality of their digital services. PageDuty acts as their operations cloud to ensure customer-facing issues are resolved immediately measured in seconds not minutes. A Fortune 200 biotech company, another new logo is using us for use cases that span multiple teams, including manufacturing at scale, working with process engineers, and mechanics that operate their medical production equipment. We help them mitigate disruption by providing greater awareness and faster better-coordinated responses.

We reduce costly manufacturing downtime, a return on investment that can be realized in as little as a day. In Q2, our total customers grew by 11%, despite the macro-environment. New customer wins and expansions resulted from positive strides in our go-to-market as evidenced by improvement in sales execution, including pipeline quality and close ratios. Our ramping rep productivity has improved dramatically.

Beginning in Q1, and improved sequentially as well. A positive validation that our efforts in enablement and shift to value selling are paying off. That said, we had a challenging start to the quarter with macro conditions driving conservatism on the part of enterprise buyers. We saw lower than typical pipeline conversion, some lengthened sales cycles, and higher than normal churn and contraction especially in small business and hard-hit verticals.

In these circumstances, we prioritized long-term customer relationships over short-term gains and worked closely with our customers to help them navigate the crisis. The quarter got progressively stronger with momentum building in our pipeline as well. Growth in the quarter was driven in part by consistent strong execution in EMEA, and a solid result in our North American mid-market segment where competitive win rates have increased. As customers adopt products that deepen our moat, like events intelligence, modern incident response, and the digital operations plan.

This quarter, progressive mid-market customers like the real upgraded to digital operations management in transformational strategic engagements. Coinbase, Fastly, ACTA, Pinterest, Rubrik, Datadog, Monzo Bank, and Twilio continue to place their trust in PageDuty with expansion in the corner. While they are too many external uncertainties call it market recovery reentered August with better pipeline coverage, and also saw one of our largest enterprise lands ever. The adoption of our digital operations management plan by one of the largest mortgage providers in the US.

In addition, results from our first major virtual events EMEA Summit in June were promising. With over 11,000 registrants from more than 70 countries, more than three times the previous year. Going virtual extended our reach and we expect another great response. September 21st through the 24th for our North American Summit with nearly 5,000 registrants confirmed, almost five times more than last year's attendance.

We've planned over thirty-five sessions a diverse lineup of speakers, and several exciting product announcements, including advances in AIOps, automation, enterprise collaboration, and customer service. For the first time, we will offer free PagerDuty to university courses, including Incident Commander certification. The more integrations we provide to our customers the more PagerDuty becomes an essential infrastructure. We now offer over three hundred and seventy integrations and a deep bench of product partners.

In the quarter, we saw notable customer adoption of integrations in Dev and ITOps, Zendesk and Salesforce service cloud and the Customer Service space, and AWS in SecOps. In August, we expanded our integrations with Zoom, Microsoft Teams, and Slack. Security partners such as StackRox and HackerOne published new integrations for cloud security and DevSecOps as we continue to see security teams adopt PageDuty to reduce cyber risk. During the quarter, we introduce new capabilities, including dependency aware related incidents which make it easier for responders to understand the scope of an issue triaged faster, and coordinate better.

We also released an expanded analytics API that provides more granular access to incident data allowing customers to support it into business intelligence systems where they can manage and learn from incident history and trends. We continue to focus on our community in the quarter. With additional inclusion diversity and equity programs underscoring our commitment to expand diversity and representation in our employee base, our leadership team, and our board, as well as encouraging diversity within our suppliers and investors. We and pagerduty.org provided financial support to philanthropies, including three to one employee donation match to the NAACP, and contributions to the Atlanta Food Bank, San Francisco's Guide, London based St.

Mungo's, and Toronto's Daily Food Bank. While 2020 continues to be a year of uncertainty, PageDuty is firmly focused on growth with our customer success as our North Star. While we can't forecast the return to more predictable conditions, we continue to be well-positioned to benefit from and see validation of the long-term tailwinds of digital acceleration, cloud migration, and DevOps. We are seeing green shoots as customers turn their focus to embracing the incredible velocity required by e-commerce, remote working, and digital acceleration where we are truly their strategic long-term partner.

We remain confident in our strategy and optimistic about our growth. We hope you will join us to learn more at Summit 2020 where you can hear from an incredible lineup of speakers and innovators, including Brett Taylor, the president of Salesforce, Nora Jones, co-founder, and CEO of Jeli, Eric Yuan, the founder and CEO of Zoom, Derrick Johnson, the president of the NAACP, and Stewart Butterfield, the co-founder, and CEO of Slack. We look forward to updating you on our progress and appreciate your ongoing interest in a partnership in PagerDuty. With that, I'd like to turn it over to Howard.

Howard Wilson -- Chief Financial Officer

Thank you, Jennifer. And thank you all for joining us today. Revenue for the second quarter increased 26% year over year to $50.7 million. As Jenn discussed, we are optimistic about the tailwinds we are seeing that the macro environment remains challenging and uncertain.

As the quarter progressed, we noted strong bookings momentum and strong pipeline generation. We saw a particularly bright spot in international with revenue growing 34% year over year, driven specifically by strength in EMEA. We added over 13,000 customers year over year closing the quarter with 13,346 customers, an increase of 11% in a challenging macro environment. We continue to see strong growth in large customers with those above $100,000 in ARR growing 35% year over year to $369,000.

We were delighted with the efficiency we are seeing in the business across a number of fronts. In the quarter, our non-GAAP gross margin was 87%. We also saw a significant improvement in our non-GAAP operating margin to just under negative 7% versus negative 18% in the prior year. Our non-GAAP EPS came in at negative $0.04 per share well ahead of our guidance.

This as we continue to manage expenses prudently, invest in innovation in R&D, and grow in go-to-markets. In four of the last five quarters including in Q2, we've delivered positive operating cash flow with a positive cash flow of $2 million in the second quarter. Our dollar-based net retention rate for the quarter was 116%. COVID related churn and downgrades impacted the rate by at least two percentage points.

So we estimate that our underlying rate was at least 118%. We saw a number of customers in the quarter with clear financial hardship who we supported in recognition of our long-term relationship, although this has a short term top-line impact. Our customers rely on PagerDuty, and we believe demonstrating partnership now will serve us well in the future and create additional value over the long term. Our overall retention rate above 95% remains incredibly strong.

Our churn and contraction rates excluding COVID impacts were flat to trending down compared to historic trends which are a function of our diverse customer base that spans many industries and segments. We see good momentum across software and technology, media and entertainment, financial services, and healthcare. However, we continue to see an impact on affected industries such as travel and hospitality, professional services, and energy utilities. Combined these makeup approximately 7% of our ARR.

In addition, the SMB segment continues to be under pressure. In the second quarter, the non-GAAP gross margin was 87%. Our goal is to deliver a gross margin between 84% and 86%. So this level of performance demonstrates our market power and positions us to experiment with and flex our pricing.

You can expect us to make announcements around this in the coming weeks. In the second quarter, non-GAAP operating expenses were $48 million compared to $42 million in the second quarter of fiscal 2020. A 15% increase demonstrating leverage in our business model with our revenue growth of 26%. Non-GAAP research and development expenses in Q2 were $13 billion compared to $10 million in the same year-ago period, a 28% increase year over year.

We place a high value on innovation, and we'll continue to invest to ensure product differentiation and competitive advantage. We continue to advance our innovation in preventing unnecessary work through automation and delivering actionable AIOps capabilities. Non-GAAP sales and marketing expense for Q3 was $25 million, or 49% of revenue compared to 53% of revenue in the prior-year quarter. Non-GAAP general and administrative expense was $10 million for the quarter or 20% of revenue as compared to 25% in the prior year.

Our non-GAAP operating loss in the quarter was $3.5 million, compared to a loss of $7.1 million in the same quarter last year. Our non-GAAP operating margin was negative 7% in Q2, versus negative 18% in the same period last year. This was due in part to reduce spending travel and marketing related to COVID but primarily driven by ongoing initiatives to operate more efficiently across the business. Non-GAAP net loss for the second quarter with $3 million, or a net loss of $0.04 per share, compared to a non-GAAP net loss of $5 million, or a net loss of $0.07 cents per share in the second quarter of last year.

We reported $2 million in positive operating cash flow in the second quarter in line with the second quarter of fiscal 2020. Free cash flow is $1.4 million in Q2, compared to $1.3 million in Q2 of fiscal 2020 with a free cash flow margin of 3% in line with the second quarter of last year. Turning to the balance sheet. We ended the quarter with $602 million in cash, cash equivalents, and investments.

In June, we completed a convertible debt offering raising $242 million in net cash proceeds. This was an opportunistic fundraise based on the low-interest rate environment that allows us to expand our focus on strategic investments, including M&A. Let me now turn to guidance. Firstly, a couple of comments.

The guidance we provided on EPS takes into account the convertible debt offering. So there will be some incremental cash interest expense impacting our non-GAAP net loss and non-GAAP EPS. However, we still target our non-GAAP operating loss margin of 10% to 12% for the full year, an improvement from 17% last year. For the third-quarter fiscal 2021, we expect revenue in the range of $52 million to $53 million which at the midpoint would represent a 23% growth rate versus the third fiscal quarter of 2020.

Non-GAAP net loss per share is expected to be in the range of $0.10 to $0.11 with basic shares outstanding of $79 million. This implies an operating loss margin in the range of 13% to 15%, excluding the impact of cash interest expense related to the convertible debt, this range would be a loss of $0.09 to $0.10. For fiscal 2021, we expect revenue of $206 million to $211 million which at the midpoint represents a 25% growth rate. Non-GAAP net loss per share is expected to be in the range of $0.27 to $0.30 with basic shares outstanding of $79 million.

This implies an operating loss margin of 10% to 12%, excluding the impact of cash interest on the convertible debt, the range would be a loss of $0.25 to $0.28. Our number one focus is our customers ensuring that they can be successful and reaffirming the trust that they have in us to underpin their business that has become increasingly, rigidly dependent. We remain focused on growth and I'm encouraged by the early signs we're seeing an increased market demand sales momentum and customer use case expansion. With that, I will open up the call for Q&A.

Questions & Answers:


Operator

Our first question is from Sterling Auty with JP Morgan.

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

Thanks. Hi, guys. So in terms of what you're seeing in macro, and what you're seeing close rates et. Cetera.

I guess the question is, as we move past COVID, would you expect reacceleration in the business.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Sterling, thanks for that question. And I think that given the environment that we're in, we've seen tremendous utilization of our platform. It's up from the level of utilization in our platform. It's up dramatically, and it's working very well under huge pressure.

And we think that creates a major tailwind for long-term development even if it's not resulting in immediate revenues. Our platform over the last several months has scaled to support macro beneficiaries like Zoom and Twilio, DoorDash, Okta, these scale crowd strength to name a few. We also saw a third of our mid-market and enterprise customers still expanding in the corner, and they have been doing that over the last six quarters like clockwork. So we feel like we're in a stronger position to benefit from those tailwinds long term.

We've also improved our business execution and our maturity across the board, especially where sales execution is versus a year ago. And we've seen a lot of large enterprise customers continue to invest. So while it was a challenging quarter in the beginning, we've seen momentum building month on month. We entered August with a very strong pipeline.

And as I mentioned in my prepared remarks, we landed a very large strategic enterprise deal in the months. So we feel like we're in a very good position long term. And that is a durable business long term that we'll be able to weather the storm. And like I said then, benefit from those tailwinds over time.

Operator

Our next question is from Bhavan Suri with William Blair.

Bhavan Suri -- William Blair and Company -- Analyst

Hey, guys. Thanks for taking my question. And the way I show on the bottom line two, given this environment that's what a background noise that's going on somewhere in the house.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Ok.

Bhavan Suri -- William Blair and Company -- Analyst

But I did want to talk about your comments about the pipeline and coverage. You've obviously seen it grow linearly. Some sense of what does the coverage ratio looks like prior to COVID in comparison to all be there. And is the pipeline where you'd like it to be, or how close are we to getting to a more normalized pipeline cadence, especially given the ramp that David Justice team have done.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Yes. We're -- like I said earlier, our new reps are ramping much more effectively than they did in the past, and we are seeing -- we do continue to see some of our more successful teams continue to perform very well. Pipeline coverage is very strong going into the quarter. So we feel confident that we can deliver a good outcome in the quarter.

I think what I would say is, it's too early to call recovery because of the uncertainties in the macro environment as opposed to our ability to execute. But I am encouraged with what I'm seeing in terms of our competitive win rates for instance in mid-market, and the fact that there's been going up. And at the same time, the fact that we're seeing really strong product attach for digital operations management, we saw an 18% product attach to the DigitalOps plan this quarter. And we've also continued to see momentum around new use cases customers with use cases outside of DevOps are roughly around 18% as well.

Bhavan Suri -- William Blair and Company -- Analyst

Got it.

Howard Wilson -- Chief Financial Officer

Yes. Maybe, Jenn, I could just add one of the tunes that we gave notice with COVID. Obviously, we've had to make a shift from pipeline generating field-based events, and we did one of our first major online or virtually events without the EMEA summit where we had over a thousand registrants from 70 countries. And we saw that having a very positive impact on pipeline out of the gate.

And so, as we've made this transition to being formal virtually, we've seen some very positive momentum in terms of pipeline build even in the absence of traditional field events.

Jennifer Tejada -- Chairperson and Chief Executive Officer

While we've been on the call today, a team text me we went over 5,000 attendees today. So we're expecting a good audience for the summit in later this month.

Bhavan Suri -- William Blair and Company -- Analyst

That's awesome. And I appreciate the color on the pipeline. It's really helpful. One other question.

Jenn, you focus a lot on mid-market. in the past you've talked about we go online piece, we've got enterprise but the attach rate to mid-market. So maybe give us a little color --we got a change in sales presence as David saying there's a piece of this market that's really interesting in the middle, it's never thought about this, or is that just doing better the enterprise. Just some color why the choice to focus on that and what's going on.

Jennifer Tejada -- Chairperson and Chief Executive Officer

I don't want you to misunderstand. I mean our focus continues to be an enterprise and mid-market. We had some I think really nice expansions in the enterprise. I mentioned DAs and Cisco and a number of others.

What was interesting about mid-market is I think like I said, we are competing more effectively. We mean a huge shift to value selling, and we're starting to see mid-market customers really adopt a more strategic transformational position on leveraging paid your duties. So starting to move up our product set, and across these cases. And I think that's just been an encouraging sign, particularly in North America this year.

This quarter, sorry.

Bhavan Suri -- William Blair and Company -- Analyst

Awesome. Awesome. Thank you, guys. Thanks for taking my questions.

Appreciate it.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Thanks, Bhavan.

Operator

Our next question is from Rob Oliver with Baird.

Rob Oliver -- William Blair & Company -- Analyst

Thank you, guys, very much for taking my question. Jenn, one for you. At the EMEA summit, you guys spent -- it seemed to us anyway a lot of time focused on the ROI and the message around ROI with the customers. And you have said on the last quarter's call that you guys weren't seeing any competitive issues at Enterprise.

So I guess I'd ask for just an update on how the competitive landscape looks in the enterprise. And how is that ROI message resonating with those most important enterprise customers. I just had a very quick follow up.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Yes. I think ROI has become increasingly important because you have these customers that are trying to adjust to supporting remote workers at the same time they're shifting their business to digital. They're having to accelerate a bunch of transformation that they had planned over years into months, and at the same time the complexity of the digital ecosystem they're building. All of this is getting more complicated, and it's proliferating.

And so I think our ROI has become more pronounced in that environment not less. But I think in the past, we were a little shy about sharing like what are the labor and productivity savings that you get as a result of reducing the amount of noise coming into a team. Reducing the number of people that have to be made available for incidents, and really shifting from being reactive and trying to respond more quickly to being proactive. So I think ROIs become more and more important.

As customers are looking to also find cost savings in this environment, we found that approvals are moving up the stack. And so making sure that you have a business case for PageDuty over the long term is really important. And the last thing that I would say is that our ROI is actually very measurable. It's very tangible.

You can look at what the cost of a minute is in digital business, and demonstrate real returns if you reduce the time it takes to respond and resolve an incident. If you reduce the number of people that need to be leveraged to do that if you automate more and more of that process. So what we're really trying to do is quantify that automation, and our customers really appreciate that.

Rob Oliver -- William Blair & Company -- Analyst

Great. That's helpful, Jenn. Thank you. And then Howard, I just had a very quick follow up for you.

You guys clearly sound as if the quarter got a lot better and indeed likely the beginning of this quarter with the close of the fig leaf it was mortgage provider, and Jenn had mentioned green shoots. And I think some of the questions that came prior to me from a veteran analyst that everyone's trying to figure out what the normalized growth rate is here. So Howard, as you look at the back half of the year, guidance obviously we're in a pandemic. But just trying to get a sense with the green shoots, and with the linearity improvement throughout the quarter.

How you might speak to that guide. Thanks.

Howard Wilson -- Chief Financial Officer

Sure. Thanks, Rob. I'm really confident in the guidance that we've provided for the quarter and for the full year. We have been prudent and balanced.

As you know, we've demonstrated throughout our short history as a public company in terms of not knowing what we don't know in terms of the macro environment. So we have had to look at the environment in that context that we are very happy with the momentum that we're seeing in the business. The things that Jenn alluded to both in terms of improvements around sales pipeline generation, and sales execution. All of those bode well for us as a company.

Rob Oliver -- William Blair & Company -- Analyst

Great. Thank you, guys, very much.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Thanks, Rob nice to see you.

Rob Oliver -- William Blair & Company -- Analyst

See you.

Operator

Our next question is from Sanjit Singh with Morgan Stanley.

Sanjit Singh -- Morgan Stanley -- Analyst

Hi, Jennifer. Hi, Howard. It's good to talk to you both again. My question is just a compare and contrast Q1 versus Q2 in terms of what you saw on the Enterprise vs.

the digital engine vs. mid-market. What was the -- what was different about Q2 versus Q1. And then, as the quarter started to improve, where was that strength in terms of those various segments.

Was it the cohorts that we could start the quarter that improved. What segment of the business started to see better conversion.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Sure. I'll take a crack at them, and Howard, if you want to jump at any time let me know. It's nice to see you Sanjit. What I would say is, early in the quarter we started to see more significant turns and contractions than we've seen in the past.

And as you know, our churn is still best in class. Very Limited, very high retention rate among our customers, but more contraction particularly in very small business and in affected industries. And also, starting to see in the quarter, we saw some of our sales cycles lengthen. So, pipeline pushing for instance.

As the quarter progressed, we saw pipeline start to build more like what we're used to. And we're also starting to see churn and contraction and start to return to more typical rates within the business. But again, just given where the market is and the macro, it's hard to know whether that is the long-term trend, or if that's something that is happening at the moment. So we're watching that very carefully.

September typically is a very good month for building pipelines for us because of the summit. So we're very excited about that. And we have some really incredible product announcements coming as well. And a number of customers that will be sharing their stories and their best practices really around that ROI that we're getting.

And what we're increasingly excited about is the progress that we're making on the digital operations management skews. So to your point, Q1 versus Q2, we saw a stronger attach rate on DigitalOps. We're starting to see that market starts to really look at event intelligence and DigitalOps as more strategic and more transformational. We continue to see strong performance in EMEA.

That's been a really, really good market for us. And in certain segments within the enterprise that we're really pleased to see the consistency of expansion. Having a third of our mid-market and enterprise customers expand every quarter, including last quarter for the last six quarters, I think bodes really well for a long term relationship that we have with customers. So I would say again, saw improvement in the momentum over the course of the quarter, and a strong start to this quarter.

So, looking forward to leaning into that momentum, and trying to continue that throughout the quarter.

Howard Wilson -- Chief Financial Officer

And maybe I can just add to that just for folks to be clear. When we think about our segments SMB for us represents companies that have got $50 million, or less in annual company revenues, and that represents 20% of our business today. That was an area that was -- we started to see that being coming under pressure in Q1, and that continued into Q2. But we starting to see some improvement in that segment which was one of the segments that just because of the macro experience is a significant amount of pain.

Sanjit Singh -- Morgan Stanley -- Analyst

That's super helpful. And then as my follow up question. Jenn, one thing that we talk about software is that digital because more important customers accelerate to the cloud at least that's the intention and that's the whole. So without being playing economic forecast.

When the economy does recover what data points you guys looking yet internally to give you confidence that that's going to play out in a positive way for PagerDuty. In terms of those being accelerators for the business as it was Dave Justice is doing. Is it some of the product analysis that is coming out with that hit on those points. What you guys get internally that says when the economy does recover we're going to be in a stronger position.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Well, you mentioned Dave justice. I mean he's now been in the business for a couple of quarters and he has really deepened the leadership bench for us. Manjula Talreja for instance who now leads to customer success. I mean that's a really important part of driving expansion.

It's making sure that customers are successful with the license that they acquire, and that they know how to adapt and leverage best practices to get them to maximize their ROI. He's really built a strong leadership team that's not just improved the rigor in the business but the focus on the pipeline on long term customer value. And I'm encouraged by the new customer lands. That could be a lot worse than it is, and seeing some of the more strategic customers lands, Genentech in the quarter, as well as the large mortgage company that we mentioned this last month.

Like it's good to see that those investments are still happening. And I think it just comes down to how well we can progress opportunities in the pipeline, and likewise how well we can create demand. So we look at top of the funnel pretty carefully. And I'm -- the last couple of months are really encouraging.

Right. In terms of what we're seeing, there's no doubt that our customers have been preoccupied with the shift of working from home. And a very quick shift to being 100% e-commerce. And as that starts to become the new normal, I think they get back to more strategic infrastructure investments and strategic DevOps investments.

I am also really encouraged with what we're seeing in security use cases and customer service. And that's still very naissance to us. But when you put that together with DigitalOps and new use cases that increase our stickiness. And then finally, you're going to hear us talk more about this than we did in the last quarter as well.

But AIOps and event management continues to be I think an important control plane for our business in an area where we have a different philosophy from our product perspective instead of a small team and a central IT organization analyzing past events. We're democratizing event management, and analytics and predictive analytics to everybody on the platform so that they can prevent major events from becoming incidents. And that in and of itself I think has a terrific ROIs. Everybody moves to digital.

Sanjit Singh -- Morgan Stanley -- Analyst

Appreciate it. Thank you, Jenn.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Thank you.

Operator

Our next question is from Joel Fishbein with SunTrust.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Are you there, Joel.

Operator

We'll come back to you, Joel. The next question is from Hannah Rudoff with DA Davidson.

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

Thanks for taking my questions, today. So, Howard and Jenn, you both talked about really strong attendance at the EMEA Summit and the good pipeline that came out of it. I was wondering if you could talk about how maybe that pipeline coming out of the event compared to previous summits that you have had in person. And then maybe what learnings you took from that event that you're going to apply to the North American summit coming up.

And then, if you're worried about replicating things like networking online.

Jennifer Tejada -- Chairperson and Chief Executive Officer

I miss seeing real-life people. I got to tell you. I mean this Zoom is a major improvement over the call, but I really like to get out and see our customers and demonstrate our care for them personally. So I'm still a very frustrating extrovert in that regard.

But I would say, getting a 3x registrant coun, and the engagement that we saw from customers in EMEA is very encouraging. And in fact, as I said, it's really -- we really expanded our reach as opposed to being limited to people who could make it to London in person, and pipeline build I think has been commensurate with that. So, we do expect, I mean I think about it like we had just over 1,000 thousand attendees at the San Francisco summit last year, and we're over 5,000 registrants which are well ahead of us. Like I said, nearly five times where we were last year. So, we will look to convert that, and I think we're in the right place at the right time with the Sales team being a little bit more productive and being a little more focused, and with some exciting products coming out.

In terms of replacing the networking, we've experimented with a lot of different things from wine tasting nights, you name it. And I think everybody would say they would rather be able to get together in person, but at the same time, we get productivity gains. I can see -- I can talk to six customers in a day where I would have had to fly six hours to meet to right in the past. And that's just an example of the way my schedule's changed.

So I think the ability, particularly for our Enterprise team to get on Zoom with people and be able to discuss more strategic relationships. There's a little bit of a productivity upside there. But it's getting -- we're just getting used to the new normal. The good news about our business though is, we do have this high-velocity land and expand motion.

And if you recall the vast majority of our logos land through e-commerce. So that doesn't change. And so I think continuing to build PagerDuty awareness, the summit is a big part of that. It helps us to drive more demand and expand the customer base that we can build upon in years to come.

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

That's helpful. And then just a question for you, Howard. Are you thinking about cost savings exiting the pandemic. I know a lot of companies have talked about the fact that even when we're in a new normal they're going to be doing less travel and more digital engagement.

And Jennifer is just talking about how productive she's been without all the in-person travel. So wondering if you could share your thoughts on that.

Howard Wilson -- Chief Financial Officer

Yes. So, we've given this a fair amount of thought today. And it covers a number of different areas even in terms of our approach to facilities. We've had a number of offices that we have in major hubs which have been the key to our growth and expansion from an employee base.

And so we've looked at that. We've looked at travel. And so we are sort of doing some long-range forecasting both with a more return to, return to something that looks more like we were used to versus where what we're seeing today. But certainly, I think like most companies, we are rethinking our approach to work from home in terms of how do we get the benefits of what we've learned through this situation that we've been in with the pandemic and try to maximize or optimize around that.

But also then seeing how do we complement that with the right kind of in-office experiences where it makes sense. So certainly from a cost perspective, we're looking at what that could look like in a few in ranges of the model.

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

Great. Thank you.

Operator

So we have one more question, and it is from Brian White with Monness Crespi. And is Brian on mute? That we might not have audio from Brian, and if not that would be our last question. So, Brian can you hear me. OK.

Well, I'm going to turn it over back to Jennifer, for closing remarks.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Well, thank you, Matt. And thanks again to the Zoom team for helping us make this possible I know this is always a busy earnings day. There are many people going out, and so I really appreciate all of you spending time with us today. I would just reconfirm, or reaffirm that we are very encouraged by the momentum we've seen in the last couple of months that we see this as a long game, and we're going to continue to focus on our customer success and helping them make the most out of both the opportunities and the challenges that they see in this environment.

And we appreciate all of you being here, and I hope you stay safe and well. Thank you, very much.

Duration: 46 minutes

Call participants:

Willa McManmon -- Investor Relations

Jennifer Tejada -- Chairperson and Chief Executive Officer

Howard Wilson -- Chief Financial Officer

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

Bhavan Suri -- William Blair and Company -- Analyst

Rob Oliver -- William Blair & Company -- Analyst

Sanjit Singh -- Morgan Stanley -- Analyst

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

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