PAGERDUTY, INC. (PD) Q1 2022 Earnings Call Transcript

PAGERDUTY, INC. (PD 3.54%)
Q1 2022 Earnings Call
Jun 03, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Christine Cloonan

Good afternoon, and thank you for joining us to discuss PagerDuty's first-quarter fiscal 2022. 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, Christine, and thank you to all of you for joining us today. What a difference a year has made for PagerDuty. We're seeing industries, companies, and communities actively recovering after more than 15 months of hardship and uncertainty. We also recognize the effects of the pandemic continue to challenge many regions around the world.

Yesterday, PagerDuty, along with coalition partners, launched the Go Give One challenge to raise $5 million for international COVID-19 vaccine distribution. We know the only way forward is together. At the same time, reopening trends, coupled with the ongoing tailwinds of digital acceleration, DevOps transformation, and cloud adoption, are directly benefiting PagerDuty's business. The growth of hybrid work, the combination of remote and co-located work is emerging as a new tailwind for our business as companies build new muscle to manage the increased complexity of decentralized collaboration and geographically distributed work.

Building off a strong close to fiscal 2021, we beat both our top and bottom-line guidance for the first quarter. Year-over-year revenue growth was 28%, demonstrating the resilience of our business through the pandemic. Total dollar-based net retention was 121%, and enterprise dollar-based net retention was above 125%. As we progress to a post-pandemic world, PagerDuty is well-positioned as one of the few key platforms that CIOs and CTOs are investing in for the future.

We are on a path to becoming a $1 billion leader, focused on modern digital operations. This success is a testament to the ingenuity of our customers, our users, our partners, and our employees. We deeply appreciate their trust, confidence, and dedication. In the last year, the world had to embrace new ways to work.

Today, every company is a software company, managing a complex digital ecosystem. Digital operations are now business operations with PagerDuty as a central infrastructure for our customers. As a result, our deal sizes are growing. Compared to the same period a year ago, the number of customers investing more than $1 million is up 55%, and customers investing more than $100,000 with us are up 32%.

The macro-environment and market landscape continued to move in our favor. We're deepening the trust and loyalty of our core developer users, while many customers expand the use of PagerDuty for customer service and SecOps teams. Our investment in AIOps and automation enables teams to prevent unnecessary work and empowers our users to intelligently mobilize their teams in critical moments. These and other new capabilities provide unmatched real-time context and visibility around incidents.

Our vision to move teams beyond the incident response toward proactive orchestration of their expertise, on time-sensitive, mission-critical challenges is fast becoming a reality. PagerDuty is evolving into the leading ubiquitous platform for real-time work as users and teams apply our technology to a diverse and growing set of use cases across teams and functions throughout a business. Our growth in enterprise reflects these advantages with average revenue per user in expansion transactions up approximately 40% over last year, returning to pre-pandemic levels. Our capabilities fortify organizational resiliency.

Just as over 70% of IT decision-makers have named digital resiliency as a top priority for this year according to a recent IDC survey. This is true across vertical industries where we've continued to see momentum, including financial services, software and Internet, automotive, e-commerce, and more recently, healthcare and biotech. Our freemium offering continues to drive new platform usage. New free and paid accounts on the platform grew by nearly 30%.

We saw particular strength in mid-market with new logos up 33% over last year and new users per logo at the highest point in three years. Our land and expand flywheel continues to deliver growth with both disruptive innovators and industry leaders due to our thought leadership and credibility within the developer community. In Q1, we added new enterprise customers, including Albertsons, Jaguar Land Rover, and Truist Financial; start-ups, Drizly, Lunchbox, and Pony.ai became PagerDuty customers this quarter as well. We expanded our relationship with customers, including Bell Canada, KPMG New Zealand, and Legal Zoom.

It's especially encouraging to see our largest customers expand their investments in PagerDuty at the fastest rate of all of our customer segments. Total ARR for customers investing over $1 million with us grew by 59% year over year and 13% quarter over quarter, demonstrating the significant expansion opportunity with existing customers as we expand across functions, managing different kinds of real-time work. Several cryptocurrency companies now leverage PagerDuty to ensure uptime and reliability of critical customer-facing services, apps, and transactions. For blockchain companies, uptime is money.

The world's latest -- the world's largest cryptocurrency business based in the U.S., eToro, based in the U.K., and Malta's Binance have all adopted our platform. They're using PagerDuty to coordinate teams managing the urgent real-time work that ensures the viability of the world's newest currencies. These teams are decentralized and distributed. So they turn a PagerDuty to streamline their incident response across the organization and move from reactive operations to preventative ones.

Automotive is another emerging growth sector for PagerDuty. One of the most admired automotive companies in the world is steadily expanding its reliance on our digital operations platform. We now support the critical customer-facing services delivered in vehicle and on app for this Global 500 connected car company. As the company adopts full agile development across geographically diverse product and engineering teams, they leverage PagerDuty to ensure a delightful customer experience.

Last year, a Fortune 500 auto parts company introduced contactless pickup across its 5,000 retail locations. Riding a wave of increased demand, they rolled out a new mobile application and made multimillion-dollar investments in digital channels. As the company pivoted its business model, it shows PagerDuty's platform, including Event Intelligence, to manage a small pilot with their cloud team to prioritize incident management. Since then, the company has expanded multiple times across its cloud and central IT teams, driving the projected annual return on investment of over 250%.

One of the largest freight rail lines in the U.S. adopted PagerDuty in Q1. This Fortune 200 logo is using a new digital platform to manage the operations of 8,000 locomotives and 32,000 miles of railways. PagerDuty is the real-time operations platform they've selected to empower their teams with full-service ownership.

Our multiple engines for growth have served us well in expanding our footprint and gaining market share. International growth was robust in Q1 with particular strength in EMEA. While extending our global reach, our focus on enterprise continues to pay off as we added new customers to the over 60% of Fortune 100 and over 40% of Fortune 500 companies that already rely on PagerDuty. Each of these businesses are undertaking their own journeys toward thriving in a digital-first world, and PagerDuty is a critical part of that journey.

In addition to new logos, we're also expanding our reach across companies with new use cases identified and adopted by our users. The number of customer service users is up 41% year over year. During the quarter, we launched new features to the PagerDuty for Zendesk application, which now delivers real-time updates and visibility directly to agents within Zendesk. This allows teams to proactively communicate with customers as soon as the service is impacted.

Teams at DoorDash, Netflix, and OutSystems have all adopted our customer service offering this quarter. Customers, including Okta, Cisco, and Zscaler also expanded their customer service teams' use of PagerDuty. Product innovation and expansion is our most exciting growth engine, especially AIOps, automation, and our integration ecosystem, which connects us as an operations hub to all things digital. We are seeing strong demand for our automation solution with Rundeck now integrated into our global sales motion, enabling cross-selling.

PagerDuty Rundeck customers are able to solve problems through automation in real time, innovating faster while improving their margins. Rundeck is performing well, landing new enterprise customers, including Fortune 500 health information company and an international land with a large enterprise utility business based out of Australia. We continue to see strong update -- uptake of PagerDuty security offering as SecOps teams are confronted with ever-increasing phishing, malware, and ransomware attacks. One SecOps team at a large online education platform uses PagerDuty to guard against more than 7,000 different phishing variants per month.

These teams now fully automate blacklist updates without the need for expert knowledge or admin access, significantly reducing enterprise risk while saving valuable time. ARR for our digital operations platform increased 93% over last year, with ARR for Event Intelligence growing 200% year over year. In the first quarter, we announced a number of features to build on the already powerful services in Event Intelligence, including next-generation service dependencies, providing context and visibility both upstream and downstream based on past incidents. PagerDuty automatically advises operators on resolution next steps, saving time, and improving customer satisfaction.

Our automated triggers, also new this quarter, automate tasks using custom actions that allow responders to orchestrate work across teams, reduce time spent -- reducing time spent on resolving incidents and improving service availability. During the quarter, we expanded our digital ecosystem. According to Gartner, the domain-agnostic AIOps platform is emerging as a stand-alone market, distinct from domain-centric platforms due to the flexibility of ingesting increasingly diverse data sets. PagerDuty is domain agnostic and maintains the broadest ecosystem in the market with over 560 integrations.

These include new integrations with JFrog pipelines for change events, CrowdStrike for SecOps, and Monte Carlo for data observability. These integrations demonstrate our scalability and extensibility and are a key reason why our customers choose us as a central infrastructure for their digital operations. Our social impact, inclusion, diversity, and equity efforts across the company and community remain core to our culture and our success. This quarter, we contributed both time and money to advance equality for Asian-American and Pacific Islanders.

We also celebrated Black Futures Month led by the efforts of our Array Employee Resource Group. Our social impact arm invested $1 million toward equitable COVID-19 vaccine access and distribution, committing financial support alongside product credits and technical expertise. Three of these grantees, International Medical Corps, Trek Medics International, and Nexleaf Analytics are already leveraging PagerDuty's platform in their life-saving work. Trek Medics executive director said, "It's clear we've got eyes out for us in both expected and unexpected places with PagerDuty, making our systems more resilient." For an organization where a resilient platform can make the difference in delivering time-critical care, it's exactly the type of impact we're proud to make.

In the quarter, we added 15 new impact customers. These nonprofit and mission-driven organizations work in lockstep with our time-critical health grantees and leverage PagerDuty's platform in their life-saving work. A recent IDC report cited PagerDuty's commitment to social impact as setting an industry standard. We will continue to make this a pillar of our culture.

Finally, we are looking forward to our Annual PagerDuty Summit, which kicks off a little earlier this year on June 22. We're expecting more than 15,000 attendees from across the globe at this all-digital and free event. We're thrilled to welcome global thought leaders, including David Solomon, the CEO of Goldman Sachs; Clara Shih, the CEO of Service Cloud at Salesforce; Armon Dadgar, the co-founder and CTO of HashiCorp; and Adam Grant, best-selling author, host of the work-life podcast and leading organizational psychologists. Over three days, we'll host conversations on the future of work, the future of business, and the future of PagerDuty.

We're hosting a Financial Analyst Day on June 24, where we will share more detail on our Summit announcements as well as on our road map to becoming a $1 billion ARR business. With that, I'll turn the call over to Howard.

Howard Wilson -- Chief Financial Officer

Thank you, Jen. We started the year strong with results that exceeded the high end of our guidance and our momentum continues. The last three quarters of solid execution and robust business momentum gives us confidence that we can accelerate the top line while maintaining best-in-class gross margins and improve operating margins over the long term. Revenue of $64 million grew 28% year over year, driven by strong expansion, particularly in the enterprise and mid-market, with customers adding users, adding new products, and upgrading to our digital operations plan.

We continue to see strong growth in software and technology, financial services, retail, media and entertainment, and telecommunications with above-average growth in healthcare, life sciences, and biotech. The transportation sector, negatively impacted by the pandemic, is showing evidence of recovery, but travel and hospitality seems to be taking longer. International revenue grew 38% year over year to a total 25% of our revenue. A major contributor to our growth is expansion within our existing customer base.

Our EMEA region was particularly successful driving high rates of adoption of the digital operations plan this quarter. And we saw predictable user expansion in APJ with one example being a large enterprise bank growing with PagerDuty for the fourth consecutive quarter. As we continue to move upmarket, we see two strong trends. Firstly, customers are moving toward longer-term contracts.

For the ninth consecutive quarter, the positive shift of month to month to annual contracts continued. Annual contracts comprise 87% of our revenue versus 85% a year ago and 79% two years ago. Our remaining performance obligations, which grew 52% versus the same period a year ago reflect momentum in multi-year deals. Secondly, our average revenue per customer has increased for each of the last nine quarters.

Our enterprise dollar-based net retention was once again above 125% with overall dollar-based net retention of 121%. As a reminder, for fiscal year 2022, we expect dollar-based net retention to vary by quarter in the range of 118% to 124%. Trailing 12 months billings of 257 million grew 23% from a year ago. Quarterly billings grew at a more modest 11% due to several large early renewals that were executed in Q4, as we mentioned in prepared remarks last quarter.

As we previously said, we look at trading 12 months billings to eliminate some of the noise associated with the variable timing of renewals and co terms. We expect Q2 billings growth to be between 25% and 35% and trailing 12 months billings ex in Q2 to be at or above 27%. The number of companies on the platform, both paid and free, grew by close to 30% for the same period a year ago. Although it's in its early stages, our free offering is creating a larger funnel for customer acquisition, and the conversion rates from free to paid are better than we expected.

The total paid customer growth increased 7% year over year, with solid performance in enterprise and mid-market. Customers spending over $100,000 a year and customer spending over $1 million a year, grew by 32% and 55%, respectively, another proof point of our strength in enterprise and midmarkets. Our non-GAAP EPS loss was $0.08, and our non-GAAP operating margin was negative 9%, ahead of our Q1 guide and ahead of consensus. Non-GAAP gross margin remained best-in-class above 85% for the quarter, consistent with our target range of 84% to 86%.

I will now turn to the detailed non-GAAP financial results. For the quarter, our non-GAAP operating expenses were $60 million compared to $47 million a year ago, primarily due to investments in our go-to-market strategy and product development. Research and development expenses were $16 million or 24% of revenue compared to $13 million or 26% of revenue in the same period a year ago. R&D expenses are up 21% as we continue to invest in expanding our platform in the areas of AIOps, automation, customer service, and our integration and workflow ecosystem.

We expect to grow our investment in R&D during this year. Sales and marketing expenses were $32 million or 51% of revenue compared to $24 million or 49% of revenue in the prior year, up 33% year over year as we invested in go-to-market resources and marketing programs. We expect a noticeable increase in marketing expenses in Q2 of this year as we move our user conference, PagerDuty Summit, which was typically held in Q3, to the end of June. In addition, we launched a brand campaign, which will increase above-the-line advertising costs.

And we expect sales and marketing as a percentage of revenue to be lower in the back half of the year. General and administrative expenses were $12 million for the quarter or 19% of revenue compared to $10 million or 20% of revenue in the prior year. We anticipate exiting the year with a low expense-to-revenue ratio for G&A. Our Q1 non-GAAP operating loss was $6 million compared to a loss of $4 million in the same quarter last year.

Our operating margin was negative 9% compared to negative 8% in Q1 of 2021. Our Q1 net loss came in at $6 million, a net loss of $0.08 per share compared to a net loss of $3 million, a net loss of $0.04 per share in the first quarter of last year. Turning to the balance sheet. We ended the quarter with $557 million in cash, cash equivalents, and investments, with improvements in both operating and free cash flow.

Operating cash flow was $2 million compared to negative $185,000 in the same quarter a year ago. Free cash flow increased by nearly 90% to negative $350,000 in the first quarter, driven by improvements in working capital and the deferral of investments in new and existing offices. That said, we expect to dip in and out of positive operating cash flow during FY '22. In particular, for Q2, with the increased spend in sales and marketing referenced earlier, interest payments on our convertible debt, and prior acquisition-related payments, we expect operating and free cash flow to be negative.

With increased sales and marketing spend to support the shift in timing for our user conference and brand campaign investments, we expect an increase in our operating loss in Q2 and therefore, lower operating margin than Q1. However, we expect our operating margin to improve in the back half of the year so we exit the year in line with our full-year guidance. Turning now to guidance. For the second quarter of fiscal 2022, we expect revenue in the range of $64.5 million to $66.5 million, which, at the midpoint, represents a 29% year-over-year growth rate.

Non-GAAP net loss per share in the range of $0.15 to $0.16, with basic shares outstanding of approximately 84 million. This implies a non-GAAP operating loss margin in the range of 18% to 20%. For the full fiscal year 2022, we expect revenue of $267 million to $272 million, which, at the midpoint, represents a 26% year-over-year growth rate. Non-GAAP net loss per share of $0.36 to $0.42 with basic shares outstanding of approximately 84 million.

This implies a non-GAAP operating loss margin of 10% to 12%. Before I turn to Q&A, I'd like to remind you of the tailwinds that drive our business. Digital acceleration, cloud migration, and DevOps transformation are imperatives critical to our customers' success. PagerDuty's platform plays a unique role at the center of these shifts, redefining workflow, moving teams from an old way to a new way of doing things.

Our platform prevents unnecessary work through multiple levels of automation, creates unequal context across the customers' environments, and orchestrates work with precision. We reduce complexity, improve productivity and ensure top-line business outcomes. This gives me confidence that the momentum we've seen in the past three quarters is set to continue, and we are well-positioned to see sustained robust growth. As Jen mentioned, we're excited to update you in more detail at our Analyst Day on June 24 and hope that you'll be able to join us at our Summit conference earlier that week.

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

Questions & Answers:

Operator

Thank you so much, Howard, and thank you to our analysts for joining us. [Operator instructions] The first hand I see raised comes from Chad Bennett at Craig-Hallum. Chad, we'll come to you.

Chad Bennett -- Craig-Hallum Capital Group LLC -- Analyst

Great. Thanks for taking my questions. So Howard, maybe just on -- not to harp too much or focus too much on billings, especially quarterly. But I do recall and you mentioned that you had some early renewals in the fourth quarter that probably elevated, right, fourth-quarter billings to some extent.

But just is there any way to quantify that impact, you know, whether the negative impact in the current quarter or normalize it over the last couple of quarters and what the billings growth rate would be?

Howard Wilson -- Chief Financial Officer

So Chad, it's -- you know, we haven't specifically broken it down that way. You can see that our billings fluctuate from quarter to quarter. And as we had seen within Q4, we did bring forward some of those and that did create the 41% growth rate in billings in Q4. That's the reason why we look at the trailing 12 months and also why we decided to provide some guidance on where we see billings falling in each quarter.

So for Q2, we see it falling within the range of 25% to 35% growth. And that's because we are dealing with, one, renewals that represent potential for billings; we have a co-term arrangement with our customers. That also means that there's some fluctuation. So it's hard to predict exactly which will co-term.

But when we look at the longer-term view, the trailing 12 months at the end of Q2, we see that being at or above 27%. So that lines up more with the growth rates that we see from a revenue perspective.

Chad Bennett -- Craig-Hallum Capital Group LLC -- Analyst

And then maybe one follow-up for me. Just maybe for Jennifer. So just on the SecOps and the contact center penetration and growth that you're seeing, I mean the user growth numbers are very robust. Are those recall -- I don't recall if you've talked about in the past, but are those net new logos to PagerDuty? Or are they expansionary use cases within the base?

Howard Wilson -- Chief Financial Officer

You're on mute, Jen.

Jennifer Tejada -- Chairperson and Chief Executive Officer

In some cases, those are new logos, but in most cases, it is expansion. The vast majority of our customers start out on a DevOps use case and then realize that they can leverage PagerDuty's sort of platform for unstructured, real-time, mission-critical work in other areas. And customer service has become quite a natural adjacency. You may recall that last year in September at Summit, we announced PagerDuty for Customer Service as a separate SKU and we've started to provide more product marketing and more education for customers around that, where historically adoption had been largely organic and kind of viral within accounts.

Chad Bennett -- Craig-Hallum Capital Group LLC -- Analyst

Thanks. Thanks for providing the secondary metrics that you guys did behind both users and products. That was great. Thanks.

Jennifer Tejada -- Chairperson and Chief Executive Officer

You're welcome.

Howard Wilson -- Chief Financial Officer

Josh, who is our next -- who has our question? 

Operator

Thank you, Howard. I see a hand up from Matt Stotler from William Blair.

Matt Stotler -- William Blair -- Analyst

Hey, guys. Yes, thank you for taking my questions.

Howard Wilson -- Chief Financial Officer

Hey, Matt.

Matt Stotler -- William Blair -- Analyst

Good to see you. So maybe a couple of higher-level questions. One, you talked about continued penetration of the installed base as being kind of a primary opportunity for growth going forward, and you gave some helpful examples, including that one in the previous answer there. How do you think about what overall penetration looks like in the installed base today? And what are your initiatives to kind of continue to recognize that opportunity over time?

Jennifer Tejada -- Chairperson and Chief Executive Officer

I think this is something we don't talk enough about the fact that we don't have a single customer that's sold out because, you know, we look at the ability to penetrate customers across their entire engineering workforce, which includes developers as well as IT, then we see expansion into security teams and security operations centers, customer service, etc. And then we also see a lot of customers using us for use cases that we don't imagine in different parts of the organization. There's a large software company that uses us, for instance, in legal, a large financial services company that uses us for physical security, another software company that I know that uses us for managing the process of closing out commercial contracts at the end of the quarter. So as more and more of these use cases sort of develop across the organization, we see the TAM expanding inside customers.

The other thing that I would say is developer headcount continues to grow. I mean despite some of the challenges we saw over the last year, as every company becomes a software company, we see more developers, more tech workers getting hired, and those are natural users for PagerDuty. So there's even growth within headcount growth. So I think it's very early in terms of the penetration, even with our largest customers.

And you can see that in just the expansion rate of our customers that invest over $1 million in ARR with us.

Matt Stotler -- William Blair -- Analyst

Right, right. That's helpful. And then maybe as a follow-up. You mentioned the automated triggers, which is relatively new, and automation is obviously a great opportunity for you to continue adding value for your customers.

So would love to get your thoughts on kind of what remains in terms of workflow automation opportunities to continue to drive that value forward?

Jennifer Tejada -- Chairperson and Chief Executive Officer

I think one of the things that's hard about incident response is that the work comes at you, it's unexpected. You can't plan for it. It tends to be unstructured. It tends to be a cross-functional teams and certain expertise across the business involved.

And we're very early in our automation journey, but we're leveraging the foundation of 12 years of proprietary data on people, on workflows, on events themselves. The multiyear investment we've made in Event Intelligence, which helps us consolidate and correlate the signals coming in, but then orchestrate, automatically orchestrate, our work to the right people within the organization. Some of the new features that we've been talking about more recently are where we take learning in the platform from previous incidents and apply that in the second, in the moments that our customers need it when they're trying to solve a similar incident, including direction on what to do next. And that is sort of automagical to me, if you ask me.

And again, kind of the beginning of what we think of as safe self-healing, not just helping orchestrate what team should do, but doing some of that work for them through the assistance of some of the product technology we've tucked in with Rundeck.

Matt Stotler -- William Blair -- Analyst

Got it. Thanks, again.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Thanks for showing up.

Operator

OK. Next, we'll go to Keith Weiss at Morgan Stanley.

Keith Weiss -- Morgan Stanley -- Analyst

Thank you for taking the question. I guess this is one for Howard. And not to beat a dead horse but I'll beat it a little bit. The tone on the conference call is very positive.

It sounds like new customer initiatives are going very well. But some of that is offset in sort of metrics we look at like billings by sort of a weaker renewal base. Is it a correct takeaway that sort of the new business side of the equation is strong, if you will, that's exceeding your expectations? And then I have a follow-up on sales strategy.

Howard Wilson -- Chief Financial Officer

Yes. So I mean the comment I would make is that we do have seasonality in terms of our renewals at the best of times. And Q1 is typically our smallest quarter and Q4 is our largest. So from a billings perspective, the available base is smaller.

And so that affects billings. And also because we have the pull forward, that was the other impact. So I would say that that's an important context when you think about billings. When we look at our business, though, our churn rates remained really low.

So our renewal rate is above 95%, right? So business is strong in terms of our existing base. If you look at our dollar-based net retention at 121%, we're clearly expanding. But then the new business additions are also tracking really well. So we're seeing strength in terms of new business, and that gives us the confidence, both in terms of our guidance, but also being prepared to give the kind of billings guidance that we are doing now.

Keith Weiss -- Morgan Stanley -- Analyst

Got it. Got it. That sounds great. And then on -- I guess, on go-to-market.

You guys talked about some really good strength in terms of the customer service use cases and the security use cases. I was just wondering, how does that fit with it? I know you guys just made a big hire, Timm Hoyt, to head up Global Partners. How does that sort of align with the partner strategy? Because it seems it would be a pretty natural kind of fit security operations, going with some of the security guys, customer service going guys like Zendesk. How do those two fit together? Any early indications on success in getting those partners to contribute a little bit more in new deals and deal generation?

Jennifer Tejada -- Chairperson and Chief Executive Officer

We think about our partnership ecosystem on a couple of levels, right? There is our technical ecosystem where we approach integration to this product. And that's allowed us to build this domain-agnostic kind of central independent hub of connections that allow us to really consume the signal from just about anything. So some of the early partnerships that were foundational for our SecOps offering or customer service offering started in the integration ecosystem. And then as we see those grow in popularity, they become more strategic partners.

And you've heard us talk about Zendesk in the past, Salesforce in the past. We mentioned CrowdStrike today, etc.. So having Timm on board allows us to lean into longer-term strategic and go-to-market partnerships there that build on top of the technical ecosystem that we have. And then we also look at the hyperscalers, the cloud providers.

And I think in the past, we've shared some of the momentum that we have with partners like AWS where we think there's an opportunity not just to build product together and integrate really effectively into their cloud service environment, which helps customers as they're migrating to the cloud move much faster with significantly less risk, but it also -- you know, it evolves into potential go-to-market opportunities. So having Timm here puts us in a position, I think, to really build on some of the go-to-market efforts that we have under way, and really start to build -- broaden our reach to the market as opposed to doing it all independently ourselves.

Keith Weiss -- Morgan Stanley -- Analyst

Got it. That sounds great. Thank you so much, guys.

Howard Wilson -- Chief Financial Officer

Thanks, Keith.

Operator

Thank you. Next, we'll hear from Sterling Auty with J.P. Morgan.

Sterling Auty -- JPMorgan Chase & Co. -- Analyst

Yeah. Thanks a lot, guys. Just one high-level question from my side. So you mentioned acceleration a couple of times.

What do you think is changing in the business fundamentals that has you positioned to be confident to talk about the possibility of accelerating the growth?

Jennifer Tejada -- Chairperson and Chief Executive Officer

It's a combination of the demand signal and the macro trends that we see. I mean we've always talked about digital transformation, DevOps transformation, and cloud adoption being long-term tailwinds for us. And our customers are very early in their journeys even if they've pulled forward projects that were expected to take multiple years. As the pandemic, you know, has sort of started to slow down and people are more in recovery, we've seen our customers making more strategic investments there.

In addition, as I mentioned in my prepared remarks, hybrid work creates an additional layer of complexity, right? Because your teams are now more distributed. You don't know who's where, when in the moment, etc. And so when time really matters, when you're having a route -- real-time issues, and by the way, there are more real-time issues in digital business than there are in brick-and-mortar business that time matters, then we think that is also a new tailwind for us. From an execution perspective, I'm really proud of what we've seen across all of our theaters and segments.

I mean if you look at enterprise, which is an area we've been focusing heavily on, we continue to build on our customer base within the Fortune 100 and the Fortune 500, adding new customers this quarter, on top of what was already a pretty strong metric, 60% of the Fortune 100 and 40% of the Fortune 500. And again, those customers are early. We know the TAM inside those accounts from an expansion perspective is large. Freemium is working really well in the start-up community.

It's removed all the friction for start-ups to continue to leverage PagerDuty as part of their, you know, get up and going sort of toolkit from a DevOps perspective. And then lastly, we're executing well in the regions. EMEA performed exceptionally well this last quarter. International, in general, is growing.

So you're starting to see all of our growth engines kind of come together and sort of hum in a rhythm that we like to see.

Sterling Auty -- JPMorgan Chase & Co. -- Analyst

Makes sense. Thank you.

Operator

OK. Derrick Wood with Cowen and Co.

Derrick Wood -- Cowen and Company -- Analyst

Great. Thanks. I wanted to ask on verticals, and it sounds like you're seeing nice recovery, but one area is travel, but still lagging maybe. Can you talk about how much exposure you have there? And how much of a headwind that is? And I mean we're getting vaccinations, and I think travel is going to start picking up.

I mean do you think that's an area that could really start to improve looking at the next couple of quarters?

Howard Wilson -- Chief Financial Officer

Yeah --

Jennifer Tejada -- Chairperson and Chief Executive Officer

It's -- go ahead, Howard.

Howard Wilson -- Chief Financial Officer

Yes. Yes. So Derrick, you know, at the start of the pandemic, we did share like a quantification of affected industries at the time for us, which included travel and hospitality, transportation, and at that stage, energy. And that was like a 7% to 8% of our revenues.

So travel is a subset of that. We have seen a return now for two quarters in transportation. And travel is improving, but it's not at the level as it was a year ago. So we are seeing a positive trend.

So as those businesses start to come online, that will naturally generate a certain amount of demand for us as a company, but it hasn't represented a large portion stand-alone.

Jennifer Tejada -- Chairperson and Chief Executive Officer

And I would just add, Derrick, when I look at the diversity of our customer base and the vertical opportunities, some of the things that I think are newer to our business, one, we're really seen over the last several quarters' success in highly regulated industries like financial services, where the barriers to entry for SaaS providers are higher. You have to demonstrate a level of resiliency and security, etc., and scale to be successful in those kinds of accounts. You know, we saw a number of new customers and expansions in healthcare and biotech, and other highly regulated industry. And then even logistics, I mentioned one of the U.S.'s largest freight railway lines, you wouldn't think of them as being a forward-thinking, digital-first company, but in fact, they're having to make that transformation right now.

And so some of those more industrial or highly regulated verticals are additive to our more well-known strengths in software and Internet, retail, e-commerce, etc.

Derrick Wood -- Cowen and Company -- Analyst

Yes. That's great to hear. Another question on go-to-market. I mean it sounds like you're seeing good strength in mid-market and premium conversion and enterprise.

But clearly, the enterprise is a bigger push for you guys. Does that -- as you kind of work on bigger deals, have more top-down selling approaches, does that create more seasonality in the business toward back half? Is it longer sales cycles? Does it change the seasonal profile within a year for you guys?

Jennifer Tejada -- Chairperson and Chief Executive Officer

Howard, do you want to take that?

Howard Wilson -- Chief Financial Officer

Yes. Sure. So you're right in that the -- often when dealing with the enterprises, you can end up with a longer sales cycles, but the majority of our deals are still typically found and closed within a quarter, right, so even within the enterprise. So obviously, there are outliers, particularly in the highly regulated industries, those tend to take much longer, procurement cycles are longer.

So we don't see it as having a particular impact in terms of seasonality. What it does change is that those deals in the enterprise tend to be larger, right? So they tend to buy on a, call it, an initiative basis or for a particular deployment. So that means that they buy upfront of their requirements. So it takes a bit longer for them to get the licenses or the users deployed, which means that the time from the initial purchase to the expansion is a bit longer from what we would typically expect.

So that puts a bit of pressure on dollar-based net retention because our traditional model, which was largely driven by developers making small add-on purchases team by team, meant you had a steady set of expansions. This moves like the expansion events are to be less frequent, but tend to be larger.

Jennifer Tejada -- Chairperson and Chief Executive Officer

But I do think, when we look at enterprise and our focus in enterprise, one of the things it does point to is acceleration in the business because you're landing logos with much more expansion opportunity than, you know, as a percentage of the total mix than we had in the past. And I'd like to see some of these large organizations where the initial land might be larger, but the expansions are more strategic. They tend to be, you know, more widespread use cases, for instance.

Derrick Wood -- Cowen and Company -- Analyst

Great. Thanks for taking my questions.

Howard Wilson -- Chief Financial Officer

Thanks, Derrick.

Operator

OK. And joining us by telephone, Rob Oliver with Baird. Rob? 

Rob Oliver -- Baird -- Analyst

Great. Thanks. Can you guys hear me OK?

Jennifer Tejada -- Chairperson and Chief Executive Officer

Yes.

Howard Wilson -- Chief Financial Officer

We can.

Rob Oliver -- Baird -- Analyst

OK. Great. Thanks. Sorry to not fully participate in the party here.

But I appreciate your time. You know, Jen, just a high-level question for you and then I had one follow-up. I mean you've really been kind of a thought leader throughout the pandemic on, you know, issues relating to work, you know, seeing you had multiple panels talking about work-life balance, work from home. And I know you have a pretty strong cadre of other Silicon Valley CEOs, if not beyond Silicon Valley.

And I'm just curious, you know, when -- it seems like there's a lot of uncertainty right now about how exactly things are going to shake out. And I'm just curious as to what you're hearing as probably have your kind of finger on the pulse of this probably more than anyone, you know? Where are people in terms of where employees are going to end up? And then I guess, more importantly, relative to your company, like -- are we in a position now where whether there's some pent-up demand likely as we do make decisions around hybrid and teams end up being split up?

Christine Cloonan

Can we have the next speaker? 

Jennifer Tejada -- Chairperson and Chief Executive Officer

Go ahead, Rob, I can hear you OK. 

Rob Oliver -- Baird -- Analyst

Yeah. That's my question. I'm just curious if -- you know, around pent-up demand and, you know, what your view is or what you're hearing relative to, you know, how work's shaking out with some of your contacts? And then I have a follow-up.

Jennifer Tejada -- Chairperson and Chief Executive Officer

I think it depends on the type of company. If you look at companies that already were significantly oriented around a digital business model, like SaaS, like software, Internet, apps, etc., they're already used to digital environments. There's not a lot of pressure on teams to get back to the office, and those employees are demanding flexibility. You know, many employees have already moved to lakes and mountains and places outside of urban centers where they want to have the flexibility and the freedom to work where they want to work.

And at the same time, they want to be able to come together to collaborate with people, you know, on a regular basis and enjoy the sort of joy of being together. I think there are other industries that are pushing much harder to get people back in office out of necessity, manufacturing for environment, or some verticals out of culture that historically had more of a co-located culture. And what we're seeing is CEOs are sort of running a number of experiments, you know, trying to figure out, does it make sense to require people to be back a few days in the office and only -- and with their team? Or are they going to say, no, we're digital first and you can primarily work from remote locations and come in and meet your team four times a year? So I've seen just about every policy or concept on the continuum in terms of what that's going to look like. And I think there's still a lot to figure out through the North American summer and as children return to school and, you know, kids get back, whether or not employees will want to return to the workforce -- or to the workplace more regularly.

I don't think we know the answer to that yet. And I think people have sort of moved away from making big broad-reaching statements about it, sort of talking about some of the experiments that they're running. A few things I know for sure. Flexibility is now a table stake.

If you can't give employees the flexibility and the choice of where they work, then you will not be competitive for the best employees in the market. Second, the geographical barriers to great talent have been broken down as have the sort of barrier to change for employees to move from one place to the other. So you have to compete on your mission and your vision and the opportunity, but you do have the ability to go after talent in other locations. What that means in terms of pent-up demand potentially is more distributed teams, not less.

Because it's actually easy when everybody is working the same way. When everybody is remote and everybody is one square, one box in the video conference, it's pretty predictable and reliable. When you've got some teams in the office, some teams at a co-working space, and some people at home, etc., how do you make sure the employee experience is equitable? How do you make sure that collaboration can happen on a timely basis? That's where I think we see this as a big tailwind and the big opportunity because the pure distribution of teams and not knowing where current experts are and how to get a hold of them, means you're going to become reliant on PagerDuty for that orchestration.

Rob Oliver -- Baird -- Analyst

OK. That's really helpful color. Thanks. And then, you know, Howard, I had one follow-up for you as well.

You talked about kind of the success on the freemium side and the conversion there. And then you guys also talked in your prepared remarks about Rundeck and how you've been satisfied with Rundeck and also just generally the growth of software developers, which is something we kind of different yet as an industry. But just curious if there's any patterns you're able to glean when you look at that freemium, you know, user base? Obviously, you've got a much larger extended, you know, 60,000-plus user base of Rundeck that's also nonpaying. And if there's anything you guys are seeing when you look at that to try to, you know -- as that becomes sort of more cohesive.

Thanks.

Howard Wilson -- Chief Financial Officer

Thanks, Rob. I think the thing that's been fascinating to look at with our free offering is just how easy it's become for developers to start using the platform. So it seems strange that when we had an offering that I called the almost-free offering when people were paying, you know, $120 for a year for five users, that, that created a barrier. So when I look through the list of companies each week as we have more users on the free offering, it looks like a list of start-up companies, right? You can read through the list, you can tell from the name, some of the crazy names that these must all be start-ups, and a lot of them very clearly identified in tech.

So the thing that is interesting to us is just to see that the acknowledgment that developers had around PagerDuty as being a key part of how they work, it's certainly manifesting itself in free. And so we feel very positive about that trend in terms of seeing that we actually have created more access. And for those early stage companies that are going to be the next big disruptive player, they're already PagerDuty customers in a sense, and that's an important part of our competitive moat.

Rob Oliver -- Baird -- Analyst

Thanks, again, guys.

Operator

Thank you. Next, we'll hear from Matt Hedberg at RBC. Matt?

Matt Hedberg -- RBC Capital Markets -- Analyst

Hey, guys. Thanks for taking my questions. Hey, Jen. Hey, Howard.

Good to see both of you. You know, in the prepared remarks, you talked about strength in Europe. And I know you guys fired up a new European data center earlier this year. Curious on what drove the strength and how you think about potential growth in Europe with an increased focus there?

Jennifer Tejada -- Chairperson and Chief Executive Officer

Well, we actually launched data residency in Europe. We do not have physical data centers.

Matt Hedberg -- RBC Capital Markets -- Analyst

I see.

Jennifer Tejada -- Chairperson and Chief Executive Officer

We are native cloud humans. We don't do those physical things. But, you know, some of the things that I think are happening in EMEA. One, the same trends that we see sweeping across North America in terms of distributed work, in terms of digital first, they're all happening in EMEA as well.

And we've been able to grow our capacity on the ground and I think grow our presence in that market, such that we've seen a really nice distribution of landing commercial customers, particularly in areas like food delivery, but also large European software companies. And we're really starting, I think, to get traction as a player of note in that market. Strong leadership, very consistent performance, great access to talent, all of those things have been important. And at the same time, we see growth opportunities in places like Germany where we have very small field on the ground but a lot of opportunity.

I mean I'm pretty excited about some of the strides that we're making in automotive, for instance, because I think that's an area of opportunity for us in places like Germany. So we've also seen good performance in our APJ team. And again, historically, that's been a very small team. So you're seeing us invest to try and expand into international quickly, and that's another -- one of those growth engines that I think is driving momentum and acceleration for the business.

And also, you know, when you start to see multiple theaters, like I said, really kicking into gear at the same time, that's one of the things that makes me very confident about our future and our ability to accelerate the business overall.

Matt Hedberg -- RBC Capital Markets -- Analyst

That's great. Thanks for that. And then I guess, you know, Sean Scott's been with you guys for a little under half a year now and obviously coming from Amazon. You know, I guess, you know, what do you think some of the bigger impacts that he might have on the business now that he's been there for a while? And how do you just kind of see, you know, that Amazon effect rippling through your business?

Jennifer Tejada -- Chairperson and Chief Executive Officer

Yeah. I mean, Sean has been great. He's not even been with us for six months, but he's already helping to drive a lot of focus, particularly in areas around automation, AIOps, and thinking about product-led growth, really thinking about the product experience. And the product experience for users is so important to us because it drives that viral mobile experience that allows teams across the organization to adopt us for use cases that we don't need to imagine.

So when I think about the ubiquity play, that's one of the areas where Sean is really focusing. And at the same time, you know, he's used to running a multi-product BU organization. So we're executing well with Rundeck. We're executing well with some of our newer product development areas.

And, you know, he's also really looking for a lot of talent. You know, there's a talent bench that we want to build in product to support our ability to continue to innovate very quickly over time. Early days for him, and you'll have an opportunity to hear from him at Analyst Day, so you don't have to take my word for it.

Matt Hedberg -- RBC Capital Markets -- Analyst

Good. A little teaser there. Looking forward to that. Thanks, everybody.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Thank you. 

Operator

OK. And it looks like we'll round out our group with Kingsley Crane from Berenberg. Kingsley, thank you for your patience. 

Kingsley Crane -- Berenberg Capital Markets -- Analyst

I'd just like to ask one quick one. So when we think about PD as the central nervous system of the enterprise, there's a lot of companies that also like to think of themselves as that title. So longer term, I would like to hear more on the strategy for continuing to be that for enterprises and then how important automation with things like Rundeck is to that?

Jennifer Tejada -- Chairperson and Chief Executive Officer

So, a couple of thoughts. One, in order for us to really help our customers manage and detect unstructured mission-critical work from anywhere, we have to have the broadest, most independent domain-agnostic ecosystem to pull from. And that is one of PagerDuty's deep moats. When you think about the observability players that are sort of trying to nibble around the edges, maybe the cloud players, the ticketing systems, etc., what they're all trying to skate to where the puck is going, and I'll lean on our Canadian heritage here, we invented the digital ops category.

We essentially invented the hockey game that these folks are trying to play in. So I really feel like we have a distant lead there, that by treating integrations, its product, they essentially become the gateway to workflow. But we're talking about workflow oriented around very time-sensitive work, has to get done quickly, have to orchestrate expertise very quickly because I used the quote earlier, uptime is money. It's millions of dollars that dissipate in, you know, in seconds when you don't get this right.

So I do think that we have a very good opportunity to lead as the center of the sort of digital ecosystem or lead as the digital nervous system for our customers, and we're seeing that. They're deploying us as critical infrastructure inside their businesses where we're integrated to hundreds of services within their business. That then enables us to open up another sort of mode or another, I think, very competitive defense, where we're able to build products and services around service dependencies and around more service management, service automation, full-service ownership in a way that other players are not able to do because they're not architected around both a cloud-native and hybrid service environment. They're often architected around people or the CMDB, etc.

So I think it puts us in a great position. But again, you know, something that we can talk more about at Analyst Day and at Summit. Generally speaking, though, Kingsley, what I would say is our acceleration and some of the virality of our product comes through that ecosystem. It sort of starts with one person wanting to integrate PagerDuty to a specific service and then they realize how easy it is to literally drag and drop to connect to multiple team members, multiple services and it grows from there.

And that virality, that ease of use, quick time to value is clearly one of the things driving momentum in our business.

Kingsley Crane -- Berenberg Capital Markets -- Analyst

So many great points. Thanks for taking my question.

Jennifer Tejada -- Chairperson and Chief Executive Officer

Thank you. 

Operator

OK. Jennifer, that's back over to you for final comments. That rounds out the group today. 

Jennifer Tejada -- Chairperson and Chief Executive Officer

Well, I just want to say thank you to everybody who listened today. I hope you will join us at Summit on June 22 and for our Analyst Day. We are thrilled with the momentum in the business. As I mentioned, we believe and are very confident that the business can accelerate on the back of these macro long-term tailwinds that we see.

And I'm especially proud of our team who have remained very resilient through an incredibly difficult time. And I just want to say thank you. Thank you to our team and to our customers for continuing to partner with us and hold us to a high standard and help us to get better with every day.

Operator

[Operator signoff]

Duration: 58 minutes

Call participants:

Christine Cloonan

Jennifer Tejada -- Chairperson and Chief Executive Officer

Howard Wilson -- Chief Financial Officer

Chad Bennett -- Craig-Hallum Capital Group LLC -- Analyst

Matt Stotler -- William Blair -- Analyst

Keith Weiss -- Morgan Stanley -- Analyst

Sterling Auty -- JPMorgan Chase & Co. -- Analyst

Derrick Wood -- Cowen and Company -- Analyst

Rob Oliver -- Baird -- Analyst

Matt Hedberg -- RBC Capital Markets -- Analyst

Kingsley Crane -- Berenberg Capital Markets -- Analyst

More PD analysis

All earnings call transcripts