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PAGERDUTY, INC. (NYSE:PD)
Q3 2021 Earnings Call
Dec 03, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, everyone, and welcome. Thank you for joining in. While our attendees are piling in pretty quickly, just a quick technical announcement. For your viewing enjoyment, we highly recommend that you change to side-by-side mode in Zoom.

[Operator instructions] And in just a moment, you'll hear from Head of PagerDuty's IR, Willa McManmon.

Willa Mcmanmon -- Investor Relations

Good afternoon, and thank you for joining us to discuss PagerDuty's third-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, which 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.

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 are included in filings we make with the Securities and Exchange Commission. With that, I'll turn the call over to Jennifer.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Thank you, Willa. Can you hear me OK? Thank you, Willa, and thanks to all of you who have joined us today. We are proud of our Q3 results and as we were well above our guidance and consensus as many large enterprises seem to find a new normal returning to strategic investments in PagerDuty's digital operations platform. We are confident this momentum will continue throughout Q4.

I'm personally grateful for the health of our customers, our teams, and families as we all face this pandemic together, and I extend our hope that you and your families are safe and well. Building on a strong start, momentum continued throughout Q3, led by strength in the enterprise and mid-market segments. Year-on-year revenue was 26% and dollar-based net retention improved from 116% in the previous quarter to 119%. Our leading indicators, including pipeline, web traffic, and combined free and paid customer acquisition growth have trended positively.

Our teams performed well across the globe with an outperformance in North America and EMEA and strong growth in Asia Pacific. In our third quarter since appointing new go-to-market leadership, improved sales execution resulted in increased productivity, close rates, and average revenue per customer. The reception to new products we launched in September exceeded our expectations, especially the response to our expanded automation and auto remediation capabilities with the acquisition of Rundeck, which we closed in October. Rundeck creates a new and distinct land opportunity for us with an enterprise and mid-market DevOps and IT teams and expands our total addressable market to include automation use cases within and beyond incident management.

This deepens our competitive moat. PagerDuty's guiding value, championing the customer, was rewarded this quarter. Many of our largest customers made strategic investments to expand on our digital operations plan, which leverages advanced product capabilities utilizing AI to deliver automation and quantifiable return on investment. In Q3, we captured reinvigorated demand across most regions, segments, and verticals, including deals above $1 million in both tech and financial services with a large deal momentum in retail as well.

Four of the five largest software companies in the world expanded on PagerDuty in the quarter to accelerate their DevOps transformation to full-service ownership. This included a very significant expansion deal with Salesforce, who is rolling out PagerDuty's digital operations plan to over 10,000 employees, including multiple teams outside of engineering in support of their ongoing mandate to ensure great customer experiences. We also made excellent progress in our shift from on-call automation to our digital operations platform as customers continue to embed PagerDuty as a central infrastructure. Our digital operations plan accounted for nearly three quarters of our net new ARR, up a striking 65% from last year.

We added industry leaders and innovators, including Belcorp, Chanel, CRED, Lego, LegalZoom, and MSCI. We saw significant ongoing expansion with customers, including Discovery Communications, DocuSign, Pearson, Datadog, Yahoo! Japan and Vanguard, who increased their use of PagerDuty to accelerate operations maturity and performance across their businesses. We also saw digital acceleration increase. Every organization is grappling with the new reality that were once structured, planned, and predictable is now increasingly unstructured, unplanned and cross functional.

The shift to digital-first is a one-way door. Consumers appreciate the safety and convenience of life online and they have little patience for a less-than-perfect experience. Yet the team's responsible for seamless digital operations face historical increases in events which, when unmanaged, can cost more than $0.5 million per minute. Our customers' event and API traffic was up 135% year on year, yet our Event Intelligence solution is helping to prevent events from progressing into incidents.

Even under this increase in traffic, PagerDuty has continued to deliver resilience at scale, maintaining 4 times reliability to the business for our customers. This is critical as the PagerDuty platform essentially operationalizes trust for our clients with their customers, while reducing the cost of their operations meaningfully. According to IDC, PagerDuty customers are realizing a two-month payback period with an average benefit of over $3 million annually and a three-year ROI of nearly 800%. IDC also estimates the profound shift to digitization will account for 65% of global GDP by 2022.

This drives three strategic imperatives for our customers which are long-term tailwinds for PagerDuty: digital acceleration, cloud migration, and DevOps transformation. Our digital operations platform empowers new customers across verticals and geographies as they tackle these imperatives. One of Australia's largest banks with over $600 billion in assets is rolling out PagerDuty across multiple teams with the potential for thousands of users in a multiyear partnership on our digital operations plan. PagerDuty provides them with rich real-time insights to proactively automate and respond to incidents where every minute of downtime is critical.

Our platform leverages AI to proactively reduce alerts and resolution times for incidents, increasing the productivity of their DevOps, ITOps, and deployment teams while saving a projected $1.5 million annually. As a reminder, most of our new customer lands are greenfield, the mark of a nascent market, where many companies are still early in their DevOps transformation. MSCI is a leading provider of decision support for the global investment community undergoing an executive-led DevOps transformation. They replaced their in-house tools with PagerDuty to scale up over 1,000 users with our workflow automation.

PagerDuty will help MSCI reduce their projected thousands of incidents monthly, improving availability, reducing user-generated tickets by 50% and decreasing the number of ServiceNow tickets by 65%. Like many of our customers, MSCI embraced PagerDuty to reduce their reliance on manual processes and antiquated ticketing systems that cannot address the business-critical customer-facing issues, which require real-time insights, action, and automation. We also grow through serving new teams and use cases, particularly within customer service and SecOps and Rundeck's runbook automation. Glovo, a language service provider that connects doctors and patients with interpreters, adopted our new PagerDuty for customer service solution as they pivoted in response to COVID.

Before, Glovo was used at the doctor's office, but saw increasing demand for telemedicine. This resulted in a spike in incidence and customer dissatisfaction with their video platform. So they turned to PagerDuty to drastically improve workflows between customer support and engineering teams. Additionally, PagerDuty's Event Intelligence has enabled automated escalation, allowing teams to focus on building out and scaling new products and services while reducing disruptions by more than 60%.

Now Glovo proactively resolve issues, providing a great experience for doctors and patients uninterrupted. At Summit in September, we unveiled new capabilities resulting in a strong pipeline growth, including service dependency insights, machine learning-based recommendations, and change management insights. While most of our customers have accelerated their digital transformation, the reality is they have infrastructure and digital assets that span data centers and multiple private and public clouds. We are the only solution provider enabling incident prevention by capturing and consolidating insights from across these environments, simplifying complex data, and intelligently actioning and automating work.

This quarter, we cemented our leadership position at the center of our customers' hybrid, cloud and on-prem ecosystems with new partnerships. Along with Rundeck, we achieved over 500 ecosystem integrations, many of which were built by partners like CloudFlare, Freshworks, Puppet, and Symphony, who are helping us force-multiply PagerDuty's platform. Q3 was also a record quarter for partner sell-through as we expanded our presence with channel partners through joint campaigns. We welcomed Tata Consultancy Services, one of the top global systems integrators in the world, to our growing partner ecosystem.

They are developing apps to support industries beyond our core verticals, selling and implementing PagerDuty. We also continued to expand our relationships with cloud providers, including this week's announcement as a launch partner for Amazon DevOps Guru. PagerDuty leverages the outputs from DevOps Guru, automating the workflow and enabling customers to comprehensively manage their cloud, hybrid and on-prem environments. Not only has PagerDuty been available in the AWS marketplace for over the last few years, this quarter, we released new integrations to AWS Control Tower and AWS Outpost to help customers on their cloud migration journeys.

These integrations and partnerships validate our platform and help extend our reach to new markets and channels. During the quarter, we advanced programs to improve representation and equality at PagerDuty. In September, we open-sourced our first annual diversity report, not to imply that we have all the answers, rather in an effort to hold ourselves accountable and share what we have learned with other companies seeking to put sustainable programs in place. We also enlisted as a founding partner of the Board Challenge, a movement to improve the representation of Black directors on corporate U.S.

boards. This week, we announced the appointment of Dr. Alec Gallimore to PagerDuty's board of directors. As the Robert J.

Vlasic Dean of Engineering at the University of Michigan, Alec has a unique view on where engineering and software are headed and we are thrilled to welcome him. Through PagerDuty.org, we announced over $0.5 million in new grants to support voter engagement, time-critical healthcare, and to match employee giving. Overall, Q3 was a great quarter for PagerDuty and an important inflection point. I am both optimistic and confident in our growing market leadership position where innovation has expanded our TAM well beyond alerting and on-call to AIOps, automation, and more broadly, digital operations.

I am confident in our new opportunity with our enhanced automation offering opening up new use cases while being additive to our leadership in incident response. And most importantly, I have huge trust and confidence in our incredibly committed and resilient team who continue to focus on solving important customer problems while raising the bar, deepening our leadership bench and building on the innovative, diverse, and inclusive culture that differentiates us. I am grateful to our team, our customers, our users, and energized by the bright future ahead of us. Howard, over to you.

Howard Wilson -- Chief Financial Officer

Thank you, Jennifer. We saw strong momentum in the market and in our business in Q3, with revenue growth up 26% year over year to $54 million, coming in above the high end of our guide. Our international business was strong, with robust revenue growth of 36% year over year, driven by expansion. We also saw increasing economies of scale as we streamline our business.

Non-GAAP gross margin came in at 87% in the quarter, above our target range of 84% to 86%. Non-GAAP operating margin improved markedly at negative 12% versus negative 22% in the prior year, and non-GAAP EPS was ahead of our guidance at negative $0.09 per share. We delivered positive operating cash flow of $5 million in the third quarter and we were free cash flow positive by $5 million. Beginning early in Q3, we saw customers shift back to strategic projects, where improved expansion, along with our Rundeck acquisition, helped lift our dollar-based net retention rate quarter-on-quarter to 119%, this despite the COVID-related churn and contraction we noted in Q2.

We saw particular strength among our enterprise customers where dollar-based net retention increased sequentially above 120% as several large customers doubled down with PagerDuty in support of their digital initiatives and DevOps transformation. In addition, for the seventh consecutive quarter, approximately one-third of our enterprise customers expanded with us. Average deal size grew in the quarter, and churn and contraction improved significantly, returning to pre-COVID levels. Our new free offering has been well received and the number of companies benefiting from our platform, both paid and free, grew by more than 18% over the prior year.

Our platform is sticky because it distributes real-time, mission-critical work, which is why we continue to have a renewal rate above 95%. The mix of our business continues to shift toward predictable contracts with the proportion of customers on term contracts versus month-to-month consistently increasing, ending the quarter with 87% of our revenue coming from customers on term contracts versus 82% a year ago. Robust expansion drove year-over-year quarterly billings growth of 32%, trailing 12-month billing growth of 24%, and remaining performance obligations of 45%, all strong leading indicators of the tailwinds we have discussed in the past. The large expansion, some of them multiyear with enterprise customers, underscore the growing importance of cloud adoption, digital acceleration, and DevOps transformation.

Customers investing more than $100,000 a year with us grew 32% and customers over $500,000 grew 40%, compared to Q3 last year. Non-GAAP operating expenses were $53 million, compared to $46 million in the prior year, a 16% increase versus 26% year-over-year growth in revenue, demonstrating leverage in our land and expand business model and sustainable operating efficiencies. Non-GAAP research and development expenses were $13 million, compared to $11 million in the same period a year ago, an 18% increase over the prior year. We place a high value on innovation and we'll continue to invest to ensure product differentiation and competitive advantage.

Non-GAAP sales and marketing expenses were $28 million, or 51% of revenue, compared to 59% of revenue in the prior year. We continue to balance investment here with top line growth and the demand thickness in the markets. Non-GAAP, general and administrative expenses were $12 million for the quarter or 23% of revenue as compared to 22% in the prior year. Our non-GAAP operating loss was $6 million compared to a loss of $9 million in the same quarter last year.

Our non-GAAP operating margin was negative 12% in Q3 versus negative 22% in Q3 of 2020. This was in part due to reduced spend on travel and shift in program spend because of COVID, as well as, our ongoing initiatives to scale efficiently. Non-GAAP net loss improved to $7 million, a net loss of $0.09 per share, compared to a non-GAAP net loss of $8 million, a net loss of $0.10 per share in the third quarter of last year. Turning to the balance sheet.

We reported $5 million in positive operating cash flow in the third quarter, above the same quarter of fiscal 2020 of $3 million. Free cash flow increased by 100% to $5 million in Q3, compared to $2 million in Q3 of fiscal 2020 with a free cash flow margin of 8%, well above the 5% in the third quarter of last year, which demonstrates the efficiency of our business model and improved leverage as we scale. We ended the quarter with $556 million in cash, cash equivalents, and investments. For the full year, we expect to be operating cash flow positive for the first time and we're excited about our ability to generate positive operating cash flow while still investing in innovation.

As Jennifer mentioned, we completed our acquisition of Rundeck this quarter. The integration is on track and progressing to plan, and we are fired up by the overwhelming enthusiasm from our customers around this powerful combination and even more so by the value we can bring to our customers through enhanced automation and self-remediation. With Rundeck, we expect to see increased demand for our platform and ample opportunities for new cross-sell within the expanded TAM it brings. Given the momentum in the third quarter, stronger demand signals in the market and our confidence in our pipeline and team, we are raising fourth-quarter fiscal 2021 guidance.

We expect revenue in the range of $57 million to $58 million, representing a growth rate between 24% and 26% versus the fourth fiscal quarter of 2020. Non-GAAP net loss per share is expected to be in the range of $0.11 to $0.12 with basic shares outstanding of approximately 82 million. This implies an operating loss margin in the range of 14% to 16%. This incorporates expense adjustments associated with the acquisition of Rundeck this past quarter.

For the full-fiscal year '21, we expect revenue of $211 million to $212 million, which at the midpoint represents a 27% growth rate. Non-GAAP net loss per share is expected to be in the range of $0.29 to $0.30, with basic shares outstanding of approximately 80 million. This implies an operating loss margin of 11%. Before I turn to Q&A, let me reiterate Jennifer's comments on the tailwinds that drive our business.

DevOps transformation, digital acceleration and cloud migration are not nice-to-haves for our customers. They're imperatives that are critical to their success and these tailwinds are returning to pre-COVID momentum. PagerDuty's platform plays a unique role at the center of these shows, reducing complexity, managing unplanned critical work, improving productivity and ensuring top-line business outcomes. We are confident that we will continue to see these tailwinds drive our business as we reaccelerate our growth in the coming year.

With that, I will open up the call for Q&A.

Questions & Answers:


Operator

[Operator instructions] It looks like we're going first to Joel Fishbein with Truist. Joel? Joel, I just need you to unmute.

Joel Fishbein -- Truist Securities -- Analyst

Sorry, I'm unmuted now.

Operator

Thank you.

Joel Fishbein -- Truist Securities -- Analyst

Congrats on the great results. Jennifer, I'm going to -- I'll start with you. You know your very, very upbeat report this quarter, I can hear it in your voice. I can hear it in Howard's voice as well.

What would your be -- coming out of COVID, what do you think the -- are your top priorities to scale PagerDuty from here?

Jennifer Tejada -- Chairperson and Chief Executive Officer

Well, that's a great question, and it's nice to see you, Joel. Well, I think, one, we have to continue to deliver innovation for our customers. We have, I think, widened the moat between other competitors that are really focused on on-call and you can see that in the adoption of our digital operations platform plan. So continuing to bring innovation, particularly around AIOps automation to certain use cases is going to be really important to us.

I mentioned this as a sort of background around our freemium plan. Because we have such strong gross margins, it's given us room to experiment with freemium and I was really excited to see that the combination of new free and paid accounts grew 18% year over year. That really is our effort toward expanding our reach. We need to build our brand, but it's such -- it's still such an early market with over 45 million developers and IT personnel out there.

We've got to go find them and get them on the platform. So acquisition and marketing to build our brand and help the market understand what we do, I think, is very important. And then lastly, I will always say this every call, our customers count on us to be resilient at scale. And if COVID has shown us nothing else, it's shown us that even when we saw a significantly increased incidence, more than 40% growth in incidence, 135% growth in events and API traffic this quarter, the platform continued to work and operate very, very well.

But as we continue to scale with customers who are very important, spending more and more time and having more people on our platform, we have to continue to produce those high operational outcomes.

Joel Fishbein -- Truist Securities -- Analyst

Great. Just one quick follow-up. In this Cyber Monday, apparently, a lot of e-commerce companies had some very difficult time serving their customers. And I was just curious if you've seen an uptick in inbounds as early -- as late as this week as a result of some of these e-commerce companies struggling to keep up with some of their challenges that they had from an IT perspective.

Jennifer Tejada -- Chairperson and Chief Executive Officer

This is precisely why branding is so important for us and we did have a reasonably strong quarter in retail, I think I mentioned that in my comments. Retail and e-commerce will continue to be a really important segment for us. I would say this, I think that we're just seeing, sort of scratching the surface. Now that everybody is ported their businesses into a digital environment, they now have to figure out how to operate them successfully.

And it's early in that journey for many of our customers, which is why we believe that we're going to continue to see momentum and long-term tailwinds, particularly, as it relates to hardening up the operations behind digital acceleration. Supporting our customers in cloud adoption and cloud migration, which you've seen, continues to grow and then DevOps transformation, which is still very early.

Joel Fishbein -- Truist Securities -- Analyst

Great. Thank you so much.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Thank you.

Operator

Thank you, Joel. And next, we'll go to Kingsley Crane, Kingsley with Berenberg.

Kingsley Crane -- Berenberg -- Analyst

Hi, congrats on the quarter. Thanks for taking my questions. First one would be the excellent traction with partner ecosystem integrations. A number of companies, CloudFlare, Freshworks, Symphony.

Are you seeing any particular areas that you have the most traction or that's surprising you the most?

Jennifer Tejada -- Chairperson and Chief Executive Officer

Some of the areas -- we always look at our partner ecosystem to sort of see where the market is going and we've seen a lot of interest in security and customer service, which is why you see us investing in those areas. Automation continues to be, I think, a big opportunity. But I think what you'll also see is that, when you think about PagerDuty more generally as a platform that helps automate the detection of real-time unplanned unstructured work and automate those workflows of getting that work to the right distributed team and making sure it gets resolved, so closing the loop. You start to see lots of new use cases, where partners are discovering a PagerDuty integration can help them close the loop on, either the analytics that they provide or the services that they're trying to enable.

And so I think, we'll continue to see that as a trend. I'm really excited to see more and more partners building on PagerDuty.

Kingsley Crane -- Berenberg -- Analyst

That's really encouraging. And then one quick follow-up would be really encouraging to hear the strength in the largest enterprises. In this segment, are you hearing anything new? Is it that win rates are improving against competitors like Opsgenie? Or is it really just that these customers are recognizing the best-in-class ROI?

Jennifer Tejada -- Chairperson and Chief Executive Officer

Well, I'll remind you of a couple of things. One, most of our new lands are greenfield. So we're often replacing manual behaviors or spreadsheets, etc. So again, still early and a lot of customers are starting to accelerate their DevOps transformation because their teams are now working remotely, their businesses are now digital.

We also don't see much competition from Atlassian and others in enterprise, and more than 80% now, I think, of our users are enterprise users. So that's been an area that we have talked about as a strategic focus for over the last two, three years and it's nice to see that starting to manifest itself. But I really do think that the leverage of our data, which is, I think, a big differentiator over a decade of data on responders, workflows, events, and incidents themselves with AI and some of the solutions that we put out into the market over the last year or two has started to mature and gain traction and that's been a big part of it. I would also tell you that a lot of these large enterprises in that shift to digital are starting to add not just new products and services, but new teams.

They bring their DevOps first and then maybe their IT operations teams, often security. We're increasingly seeing interest from customer service teams and that's -- you're starting to see PagerDuty leverage more and more across the organization.

Kingsley Crane -- Berenberg -- Analyst

OK. But --

Howard Wilson -- Chief Financial Officer

And I think, Jen, the one thing I would just add to that, Kingsley, is that we've been remarkably consistent in terms of having our enterprise and mid-market customers expand with us. And you know, again, this is another quarter where we saw roughly a third of them expand with us, which is always good to see. But we have seen companies sort of getting back to pre-COVID type activity, right? So the sorts of projects that were associated with the things that Jen mentioned like DevOps transformation or cloud migration, those projects are back on the table happening, and that's certainly proving to be a tailwind for us. And that's helping kind of sustain that 80% of our revenue coming from the enterprise and mid-market segment.

Kingsley Crane -- Berenberg -- Analyst

Awesome. Great. Thanks, guys. Congrats again.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Thank you.

Howard Wilson -- Chief Financial Officer

Thanks, Kingsley.

Operator

Thank you. [Operator instructions] Ray McDonough from Credit Suisse.

Ray McDonough -- Credit Suisse -- Analyst

Great. Thanks for taking the questions and congratulations on a strong quarter. Jen, I noticed after your Summit in September, the landing page of your website changed to include some solutions by industry. Should we think of those changes as more of a targeted form of marketing? Or are there broader changes on the horizon either from a go-to-market perspective or from a packaging perspective? How should we think about that?

Jennifer Tejada -- Chairperson and Chief Executive Officer

Well, I appreciate you noticing that. I know the marketing team will be thrilled to hear that someone is actually looking and paying attention to what happens on the website. We definitely see some strength in certain verticals that tend to be digitizing faster, so to speak, seeing more of their business moving to digital apps. And yoiu know we've talked in the past a lot about the tech and consumer Internet, e-commerce, retail, financial services has been a really strong performing category for us and I think two things have really happened.

One, customers are becoming more willing to talk about their stories and share what's working for them. And we really want to open source some of their learnings so that our other customers can move faster and that's a big part of what we do from a customer marketing perspective. But also, I think there are so many different ways that you can apply PagerDuty, helping some of these vertical industries understand the sort of natural places to start. You know, where do I kick off my use case makes a lot of sense.

But we haven't had to verticalize the product and I think this is a really important differentiator for PagerDuty. It's very easy to use. It's very easy to deploy. You can be up and running in five or 10 minutes on PagerDuty, start to add teams, etc.

So it doesn't require us to have to verticalize or package the product. But I think getting the word out on how customers are leveraging PagerDuty and really importantly, and you've heard me talk about the IDC Research today, like the kinds of ROI our customers seeing. I would tell you that increasingly, our large customers are growing tired of having to pay huge multiyear licensing fees and wait three to four years to get ROI and we talk about in enterprise a two-month payback with an ROI of over 800%. And I think, you know, if you're someone championing a new SaaS solution in your organization, being able to quantify that kind of return is really helpful.

Ray McDonough -- Credit Suisse -- Analyst

That makes a ton of sense and I appreciate the color. And maybe if I could, Howard, one for you. Just a little bit of house cleaning, if I could, around the acquisition. Could you comment on how many of your customer adds in the quarter came from Rundeck? And to the extent that there was significant overlap, could you comment on whether or not there is ARR contribution in your expansion rate this quarter?

Howard Wilson -- Chief Financial Officer

Yeah. So thanks, Ray. So obviously, we closed the Rundeck acquisition in October, right? So its contribution to the quarter was relatively small and not really material. In terms of the customers that they brought along, we did share details of Rundeck have a relatively small customer base.

It's an early company, so again, not a material number of ads. They certainly delivered a positive contribution to our overall ARR, but we don't disclose our ARR specifically, but there have been -- certainly, there's a positive impact with that. And I think the piece that I'm most excited about is that it's such a logical combination that when I have discussions with customers, accounts around executive sponsor, they feel really positive about how this is actually going to help them sort of close that loop from detect to remediate by having PagerDuty and Rundeck as part of a -- one family.

Ray McDonough -- Credit Suisse -- Analyst

Makes sense. Thanks again for taking my questions. I appreciate it.

Howard Wilson -- Chief Financial Officer

Thank you, Ray.

Operator

Great. Thank you, Ray. Next, we'd like to go to Sterling Auty from J.P. Morgan. Sterling?

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

Yeah. Hi, guys. Howard, maybe just to follow up and put a fine point on it. I didn't quite catch, in terms of the Rundeck acquisition.

What would be the revenue contribution that you would expect in the fourth quarter because people want to understand how it impacted guidance?

Howard Wilson -- Chief Financial Officer

Yeah. So we haven't provided a breakdown of Rundeck in terms of what the specific revenue contribution would be. What we did say at the time of doing the acquisition that we saw this as being a company on an annual basis that would have revenue within the high single-digits. So that's kind of the extent to which we've disclosed on that.

And you'll see when our 10-Q comes up, we have spoken about the opening deferred revenue balance of $2.7 million that came across from Rundeck.

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

All right. Well, I just want to make sure. So if you think about organically where the guidance is for next quarter, would you say that you guided up organically and then added Rundeck? Or was there some --

Howard Wilson -- Chief Financial Officer

It was a combination. It was a combination of improving performance of PagerDuty and the addition of Rundeck.

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

All right. Perfect. And if I could sneak one last one and Jennifer for you. The comment about 80% of the customers being enterprise, I think that's very helpful.

Would you say then, given the increase in net dollar retention, that the headwinds from SMB are now behind you and that's going to lead to the acceleration?

Jennifer Tejada -- Chairperson and Chief Executive Officer

I think, you know, one, 80% of our users come from enterprise, so just want to --

Howard Wilson -- Chief Financial Officer

80% of our revenue, 80% of our revenue.

Jennifer Tejada -- Chairperson and Chief Executive Officer

80% of our revenue, sorry. It's a good thing I bring Howard with me everywhere. But I want to point to the strength in enterprise expansion. Our enterprise net dollar-based retention is up over 120%, so we definitely are seeing that strength in expansion.

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

Great. Thank you.

Operator

OK. Next we have a hand up from Matt Stotler. I'm sorry, I don't have your organization. If you could let those of us that don't know, know where you're calling from.

Matt Stotler -- William Blair -- Analyst

Yeah. Hey, Jenny, Howard. Thanks for taking the question. Matt Stotler, William Blair.

I guess first to start off, you guys have highlighted some, I guess, use case-specific solutions recently, including customer service, cloud operations, business response. Obviously, some of these are still relatively early innings, but would love to maybe get some thoughts on early interest from customers, how meaningful do you think these could be over time?

Jennifer Tejada -- Chairperson and Chief Executive Officer

Well, as I mentioned earlier, Matt, and thank you for the question. We have been -- we've been really excited about how customers are receiving some of our new products and services, but they all come from us hearing from customers, these are problems that they don't have solutions for yet. So we don't build something unless customers are already signaling reasonable demand. And the uptake of these new solutions that we've talked about in the last year that you mentioned has exceeded our expectations.

You know, I would tell you that when you think about everything that's out there in the industry, it's often been hard for us to explain to the market how we're different because there's this kaleidoscope of monitoring and observability providers. There are ticketing systems, etc., and I think as we start to build out these use cases, it becomes much more clear how customers can leverage us in a different way. I think with COVID, because everybody is working and living and learning from home, the concept that time really matters has also really helped to create more awareness and understanding around what we do in terms of, not just detecting an issue, but orchestrating and automating the workflow to get that issue to the right team at the right point in time. Automating more and more of the diagnosis around that and with Rundeck, effectively, is starting to drive some safe, self-healing and auto remediation within those incidents or issues.

And things are popping up that you don't plan for all across the business, not just driven by technology problems within the dev team, and that's where we're seeing some of that use case expansion.

Matt Stotler -- William Blair -- Analyst

Right. Right. That's helpful. And then just a quick follow-up.

You gave some commentary around the new pricing model. Obviously, it sounds like the early response to the freemium structure has been positive. Can you talk about kind of looking forward, any mechanisms that you have in place to start converting those freemium customers? Or how you think about kind of making those free users into paying customers?

Jennifer Tejada -- Chairperson and Chief Executive Officer

Yeah. So we're lucky that we have a hybrid go-to-market motion. So you know for us, this starts with product-led growth and my teams are so sick of hearing me talk about this. But the product has to be so easy to use and work so well that it helps customers and users discover more functionality and more features.

And so freemium is intended to help customers sample what our platform can do, but then the product should allow them with -- to expand with things like the 500 integrations or adding more teams or starting to identify new use cases. And equally, we have, I think, a really well-performing sales organization, including our commercial teams that are focused on our mid-market customers and our enterprise team. Obviously, focused on enterprise that really do everything they can to, not annoy a user who's finding their own way through the product just fine, but really support large strategic initiatives that -- where customers are really trying to transform. And one of the things we noticed in the last quarter, particularly in even mid-market, was that customers are having more strategic conversations with us around transformative efforts, where they're really trying to change how they work, where they're trying to accelerate their way to the future of work, which is a lot more automated than it has been in the past and where they really understand kind of the need to improve their operational performance to support these customer experiences that are now primarily happening in a digital environment.

Matt Stotler -- William Blair -- Analyst

Thanks, Jen.

Howard Wilson -- Chief Financial Officer

And maybe I can just add to that, Jen. When we look at the -- it's still early days for us with this free plan, but we've seen really good conversion rates so far. We haven't been -- you know, we don't disclose them, but they're better than expected and better than what we have heard reported in the industry. So it's looking strong.

Matt Stotler -- William Blair -- Analyst

Great. Thanks again.

Operator

Thank you. And next, we'd like to hear from Sanjit Singh from Morgan Stanley. Sanjit, please go ahead.

Keith Weiss -- Morgan Stanley -- Analyst

Excellent. Thank you for taking the questions. This is actually Keith Weiss sitting in for Sanjit, if you didn't notice.

Howard Wilson -- Chief Financial Officer

I was --

Jennifer Tejada -- Chairperson and Chief Executive Officer

Not only was Sanjit different, but Keith was different. We got your --

Keith Weiss -- Morgan Stanley -- Analyst

I -- you know what, I actually dressed up as Howard Wilson for Halloween. So I want to ask about your digital operations plan. You guys saw really good uptick of that year on year, a nice uptick in terms of the amount of net new ACV coming from that plan. Can you talk to us a little bit about what that does to the initial deal sizes kind of how is that impacting your landings, if you will, with these new customers?

Jennifer Tejada -- Chairperson and Chief Executive Officer

Howard, do you want to take that?

Howard Wilson -- Chief Financial Officer

Yeah, sure. It's -- I think there are a couple of things, Keith, on that one. One is that often for our customers, they could still land in one of our other plans like our professional or in our business plans. So sometimes, we do see customers land in those plans and then upgrade to digital operations as part of a natural migration as they mature.

What is exciting, though, is that our digital operations plan includes our most advanced functionality and capabilities and that's what really sets us apart from the competition. It widens the moat between us and any of the other players. So it gives companies to take advantage of features that allow them to be more predictive, more proactive in terms of how they manage their environments. It allows them to leverage machine learning to be able to solve problems much faster.

Our recommendations engine within that is really powerful. Our ability to help them get a view on what's happening in terms of change and service dependencies in the environment. All of those features are unique and special and so I think that's driving the interest and the growth in the digital operations plan because there isn't anything else like it.

Keith Weiss -- Morgan Stanley -- Analyst

Right.

Jennifer Tejada -- Chairperson and Chief Executive Officer

And in terms of the lands, most of our customers still land on a relatively simple product and proposition. It's usually still a developer that wants to manage new service or is moving a payload to the cloud or as part of a transformation initiative. One of the nice things about the Rundeck acquisition is it gives us a new and a secondary land motion. You don't have to come in through the PagerDuty product only, you can come in through Rundeck.

So we're excited about that land opportunity as well. And you'll continue to see us focus on keeping the product easy to use and easy to understand even as we add new features and lots of new technology to the product. I think customers are starting to really appreciate the leverage on the data in the platform and how it can really shift them quickly from being reactive to proactive. And we've seen that in both some of the larger strategic deals we've done this quarter, but you'll also see it in-house some of our customers.

You'll hear us repeat the same names expanding quarter after quarter after quarter and that's where we know we've really caught a customer that needs our support in the transformation.

Keith Weiss -- Morgan Stanley -- Analyst

Got it. Got it. Got it. And then drilling down, specifically the Event Intelligence product, how is that uptake going? Are you seeing good traction with that?

Jennifer Tejada -- Chairperson and Chief Executive Officer

Yes. I think so. I'll let Howard speak to that specifically.

Howard Wilson -- Chief Financial Officer

Yeah. So some of our customers up to take our business plan or professional plan with Event Intelligence as an add-on. And that, again, we're continuing to see good momentum. The Event Intelligence is also included in our digital operations plan and that's part of the attraction there.

The Event Intelligence uptake has been driven largely by people wanting to be able to get to a problem faster and being able to reduce the noise because our customers will have this huge array of monitoring tools in their environment, as Jen called it, kaleidoscope of monitoring applications around them. And so to be able to filter in or get that noise down is really critical and getting the right person onto the right problem and that's what Event Intelligence enables. So we're seeing good momentum with that product.

Keith Weiss -- Morgan Stanley -- Analyst

Got it. And then if I could just sneak one last one in. Any like an update in terms of the traction outside of the core kind of IT operations use case. We talked way back when about sort of the potential of sort of broader use cases for PagerDuty.

Any update on sort of incremental traction you guys have been seeing with that?

Howard Wilson -- Chief Financial Officer

Yeah. So we have -- I mean, qualitatively, we continue to see good momentum and good growth in the security SecOps-type environments and in the customer service environment, which led to us creating customer service SKU, if you like. We haven't actually got any figures that we're reporting on within this particular season, but we'll save it for an Analyst Day. We can give people a bit more with diagnostic on that.

Keith Weiss -- Morgan Stanley -- Analyst

That's a good look, either. Thank you very much, guys.

Howard Wilson -- Chief Financial Officer

Yeah.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Thank you.

Operator

Thanks for the fun there. And Matt, we want to go to you next, Matt. Matthew Hedberg with RBC Capital Markets.

Matt Hedberg -- RBC Capital Markets -- Analyst

Hi, guys. Thanks for taking my questions. You know, Jen, obviously, hearing you talk about an inflection point and confidence and momentum continuing. It's really great to hear.

It seems to me like it's a combination of just perhaps better buying but also better execution and I know Dave has been there now for a while. Could you talk about the specifics on like what you can control versus the environment? Because it almost feels to me like you feel better about both aspects. But even if COVID cases spike, your ability to execute seems higher as well. I'm just sort of curious on Dave's contributions thus far.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Sure. Well, that's absolutely right. That even as COVID cases spike and we obviously can't predict the macro environment, I think both our customers and we are better prepared for sort of whatever comes. And I have to hand it to Dave and the entire go-to-market team, including customer success, who really led with empathy and trying to understand what customers are going through because all of our customers are experiencing this a little differently.

We still have cruise lines and airlines in our business space. We also have companies that are up 300%, 400% as a result of being COVID benefactors. And when you look at the diversity of all of that, it really means that our teams have to be really dialed into what customers are prioritizing and what they care about. And I think, Dave has not only hired well and up-leveled some of our leadership across our sales teams, he supported some of our talent that was here before.

He's brought in folks like Manjula Talreja, who are really up-leveling our customer service and he often talks about this. It sounds very boring, but just being rigorous in the hygiene of managing the operations of day-to-day sales is really important and so forecast accuracy has improved. And then finally, I would say, Dave and the team are really prioritizing a focus on value on helping our customers really understand that quantifiable ROI. We often for customers build them a business value assessment and then we go back and we look at how are we delivering on that business value assessment.

And so when you think about the sort of contradiction that our customers are in where they're trying to expand their digital offering and grow their revenue in this environment and at the same time, reduce their cost base and become more efficient, those two things can really be in conflict of one another. PagerDuty helps you with both and it's been important for our teams to work hard to help our customers understand that. But I'm really pleased with how the team is going and equally, I would say, the product organization delivered a lot of innovation at summit that was really received by our customers. And the balance of our organization, I think you'd be lying if you didn't say people are fatigued by shutdowns and by not being able to go into the office and collaborate, etc., and our team has really continued to grind and show a lot of grit in putting us in a better position going forward.

So I am a lot more confident in our execution, but I also like what I'm seeing in pipeline in just the kinds of conversations we're having with customers and how they're sort of settling into their own normal and focusing on some of those strategic, transformative opportunities as well.

Matt Hedberg -- RBC Capital Markets -- Analyst

That is -- that is really, really great to hear. And then I guess, on the Q2 -- on your last call, you know Q2 call, you noted you closed one of your largest enterprise deals ever in August. You maybe addressed it in the prepared remarks, I wasn't quite certain if you hit on that particular customer. If you did or maybe if you didn't, could you maybe shine a little bit more light on that use case? And I don't know if there's any way to scope out what sort of magnitude of a deal that might be, well, it's certainly a great data point.

Jennifer Tejada -- Chairperson and Chief Executive Officer

What I would say is, I was really excited to see customers spending over $1 million with us grew by 33% in the quarter. I think that's a strong number of customers that are spending over $500,000 with us grew by 40%. That particular deal that you're referring to was a large land with a large mortgage provider and a really good example of an organization that already had a reasonably significant digital business, but is now kind of all in on digital and seeing an opportunity in the market because a lot of people are moving around and changing their lifestyles and buying houses with yards or second houses or getting out of suburban -- getting into suburban areas and out of urban areas. And so for that particular customer, it was all about transforming quickly right, like making sure that their operations could support their digital acceleration.

The -- we talked a little bit about the Salesforce relationship that we have, which is a multiyear agreement. And I was really excited to see Salesforce adopt the digital operations plan and look to continue rolling that out across their business. And again, at similar rate , right, really focused on customer experience and want to ensure that PagerDuty can help teams across the business get to issues faster and manage them before they become incidents that impact customers in the business and really just shift to being more proactive operationally.

Matt Hedberg -- RBC Capital Markets -- Analyst

Super helpful. Congrats, guys.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Thank you.

Operator

We do have one more hand up so far. [Operator instructions] Hannah Rudoff with D.A. Davidson. Hannah, please go ahead.

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

Hi, all. Thanks for taking my questions today. It's great to see the solid business momentum this quarter. First question, it's been a few months since your virtual EMEA Summit.

I was wondering if you could talk about how pipeline conversion following the Summit has been and then how pipeline build following your North American Summit was.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Sure. I think we're pleased with pipeline off the back of both of those summits. And in fact, because our Global Summit in September was virtual, that meant we also had a lot of European customers that had joined the EMEA Summit, but also came on to learn more about our new products and services. So you know, we're excited about the interest that we're seeing across -- really across the product and platform set.

Particular interest around Rundeck in automation and just this continued move to reducing toil for the humans in support of getting them to the purposeful mission-driven work they care about. I'm spending quite a bit of time with customers next week "in Europe" via my camera and really looking forward to talking about some of the customers in Europe that are driving transformations. One in particular is a large telecommunications organization that has gone through a massive agile transformation and their CEO is actually joining me to talk about how PagerDuty supported them in their agile transformation. And that's what a use case that we're seeing frequently where top-down nontechnical, but general like business leadership is saying, we have to become more agile, we have to become a tech company.

And suddenly, a product like PagerDuty is on their radar.

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

Great. That's really good to hear. And then on Rundeck, how much integration is there left to do? And what's kind of the time line for that?

Jennifer Tejada -- Chairperson and Chief Executive Officer

Yeah. Well, the first thing I would say is that was our first real acquisition since we've been a public company. And not only did we get it done quickly during an environment where we couldn't get out and even see their office, we closed that deal and still executed well in the quarter, and the integration is actually going very well. We're trying to make sure that we give Rundeck enough room to continue to operate like a start-up and innovate quickly and continue to build out their product, but get the benefit of our distribution environment.

And a lot of the folks on the finance team that have helped to prepare for earnings this week have also really helped to integrate Rundeck and so it's tracking very well.

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

Great. Thank you.

Operator

Well, folks, it looks like that's all the questions that we have from our group today. Howard, Jennifer, I'd like to give you both an opportunity to provide any final comments to our audience today before we wrap up.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Well, I just wanted to say thank you, especially to our analysts. Many of you have given us a lot of feedback, which we've asked for and continue to really appreciate to try and tighten up how we help people understand our journey and where we're going as a company. So thank you so much for that. And to all of our customers, we really appreciate the trust that you put in us and are going to continue to focus on earning that every day.

And I hope all of you continue to remain safe and well, and keep your masks on until the next time we see you. Thank you.

Operator

[Opertor signoff]

Jennifer Tejada -- Chairperson and Chief Executive Officer

Thanks, Josh.

Operator

Happy to help.

Duration: 56 minutes

Call participants:

Willa Mcmanmon -- Investor Relations

Jennifer Tejada -- Chairperson and Chief Executive Officer

Howard Wilson -- Chief Financial Officer

Joel Fishbein -- Truist Securities -- Analyst

Kingsley Crane -- Berenberg -- Analyst

Ray McDonough -- Credit Suisse -- Analyst

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

Matt Stotler -- William Blair -- Analyst

Keith Weiss -- Morgan Stanley -- Analyst

Matt Hedberg -- RBC Capital Markets -- Analyst

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

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