PagerDuty (PD) Q1 2023 Earnings Call Transcript

PagerDuty (PD 0.14%)
Q1 2023 Earnings Call
Jun 02, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Christine Cloonan

[Audio gap] 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 -- Chief Executive Officer

Thank you, Christine. Our strong FY '23 Q1 results extended our momentum from last fiscal year. Revenue grew 34%, an acceleration from Q1 in FY '22 and our fourth consecutive quarter of growth over 30%. Our operating leverage is increasing as we scale, with operating margin improving over 600 basis points year on year as we progress toward our goal of profitability for the full year FY '24.

Our long-term tailwinds, digital acceleration, cloud adoption and DevOps transformation are top priorities for organizations worldwide. We continue to capture demand from a large TAM as companies strive for efficiency and productivity. As a result, we're raising our full year top and bottom-line guidance ranges. I want to thank our teams around the world who remain laser-focused on measurable customer success or measurable customer outcomes and continue to execute well.

As always, I want to recognize our customers and partners. They placed their trust in PagerDuty, and our success is driven by their success. Our customers are incredibly loyal. Our gross retention remains above 95%, as it has for over five years.

Customer expansion was also strong during the quarter, with dollar-based net retention increasing to 126%, above 120% for the sixth consecutive quarter. The mid-market and enterprise segments continue to drive growth, with customers spending more than $100,000 annually in ARR, up 43% year over year. These consistently strong results are driven by a robust demand environment, market-leading multiproduct platform innovation and in-period field execution from our go-to-market teams. Our customers' digital transformation and cloud adoption initiatives are strategic multiyear projects.

In order to innovate to deliver superior customer experiences and optimize talent, they require a platform for action that orchestrates and automates their digital operations. PagerDuty is essential infrastructure in their drive toward digital maturity and a strategic partner accelerating long-term digital transformation. Our market conditions remain favorable. Digital infrastructures are increasingly more complex and interdependent, driving demand for our platform throughout our customer base and across our target markets.

Digital transformation is often underpinned by distributed architectures, data density and continuous deployment, resulting in service proliferation outpacing human capacity. Developers, SREs, IT and security teams and leadership are overwhelmed. Interrupt work, which is unplanned, unstructured, time-sensitive, yet often mission-critical, has quickly emerged as the standard mode of operations for knowledge workers. Surging incidents, customer expectations and demand for innovation, all compete for developer attention, where manual firefighting is the enemy of innovation.

Unmanaged, this interrupt work and its impact on in-house experts can hamper growth and stifle strategic high-value initiatives. Built on the foundation of our digital operations platform, PagerDuty's operations cloud enables both orchestration and automation for all types of interrupt work by leveraging our proprietary data set and extending our integration ecosystem. The operations cloud is quickly becoming the standard for modern work. It's cloud native, designed to simplify the complex, built for distributed organizations, easy to deploy and trusted by developers and technical leaders behind your favorite brands.

PagerDuty is the most trusted and resilient digital operations platform at scale with nearly 670 integrations serving both traditional DevOps use cases and new ones like robotics and data operations. Our AI-based insights and workflow automation rapidly identify time-sensitive opportunities and incidents, while freeing up capacity and improving efficiency. In this tight telling environment, this has become increasingly important. During Q1, a leading online recruiting platform significantly expanded their deployment with us.

As typical with our customers, they initially implemented PagerDuty for their site reliability engineering teams in 2014. They upgraded to our digital operations plan this quarter on the back of several user expansions. With the addition of event intelligence, they've already achieved 22% reduction in events. We project an expected ROI of nearly $2 million in the first year.

This rapid speed to value is a hallmark of PagerDuty products. In our March product release, we highlighted new process automation solutions now generally available. Process automation on-prem 4.0 enhances security, stability and usability, while making it simple for our customers to handle incident response and service request use cases across geographically distributed infrastructure, including those who require 0 trust communication. We also released PagerDuty Runbook Automation, a new cloud native SaaS offering that provides customers with a fast start to process automation that is both highly secure and available without having to manage automation infrastructure.

These releases build on our incident response and AIOps offerings and enable enterprises to accelerate their digital operations from manual and reactive toward proactive and preventative. PagerDuty is the only cloud native digital operations platform to combine automation across observability, engagement and action, with the ability to service diverse teams across the enterprise. The integration of automation is an essential step in bringing customers along their digital operations maturity journey. Our process automation customers start by using PagerDuty to capture and automate common repetitive tasks and to diagnose and remediate recurring incidents.

For example, automating diagnostics to fix an online shopping cart failure. Quantifiable cost savings and efficiency gains then spur expansion of PagerDuty beyond DevOps, IT and SRE teams to realize gains in other areas of the business, most commonly in security and customer service. SailPoint, an identity security platform, has been a PagerDuty customer for nearly a decade. This quarter, they deployed PagerDuty event intelligence in addition to expanded use of Incident Response for their customer support teams.

This enabled them to consolidate what were 50 individual incidents into a single incident and achieve an 85% reduction in overall incidents, while improving their time to acknowledge and resolve them. PagerDuty is helping SailPoint achieve their true service ownership and to communicate to customers more proactively during incidents. Regardless of company size or existing commitments, our customers tend to repeatedly expand our relationship as they move up the digital operations maturity curve. Even our largest customers expand their investment in PagerDuty through new product adoption, user expansion and new use cases.

Every customer presents a new expansion opportunity as digital acceleration initiatives span the entire enterprise. Demonstrating this land-and-expand motion, a leading financial service institution launched PagerDuty in 2019 with an initial purchase for group delivering applications for high-value clients, then expanded rapidly across other teams through several additional purchases to over $1 million in ARR. As it became evident that teams on PagerDuty resolving issues up to 75% faster, they made an additional seven figure investment this quarter. They added thousands of new users, standardizing on PagerDuty for incident response, and deployed AIOps and automation across multiple teams.

Relationships like this drive our high dollar-based net retention rates, a measure of our durable and growing relationships with our customers. PagerDuty's operations cloud now offers four land products and multiple cross-sell and upsell expansion opportunities, while delivering value for customers at all five stages of their digital maturity curve, be it manual, reactive, responsive, proactive and preventative. This quarter, we bolstered our executive leadership team with two key hires. Katherine Calvert joined PagerDuty as our Chief Marketing Officer, bringing deep experience in brand building and go-to-market execution for award-winning SaaS companies.

She owns extending our leadership by developing brand awareness, trust and demand for PagerDuty's operations cloud in the C-suite and with developers across the world's most innovative start-ups and largest industry leaders. We also appointed Shelley Webb as the company's new senior vice president and General Counsel. Shelley fortifies our position around security and privacy. She has deep leadership experience in legal and policy strategy across litigation, contracts, M&A and compliance, while being highly regarded for driving impactful business results with top customers and strategic partners.

In April, PagerDuty released our second annual Impact Report, detailing the company's ongoing commitment to philanthropy, our employee engagement and volunteerism and our ESG commitments. In 2021, we deployed funding to more than 660 organizations globally, 75% of which were led by women and leaders of color. 92% of Dutonians volunteered time or donated to a cause, resulting in more than 5,000 volunteer hours. We also announced the launch of PagerDuty Impact Labs, a new program that provides funding, product credits, volunteer technical support to time-critical health partners with a specific focus on leveraging our product and technical expertise to ensure critical time-sensitive care to patients in need.

Our social impact work also reminds our teams that success for our customers extends beyond financial returns. PagerDuty customer, Cambridge Cognition, is a U.K.-based neuroscience company that quantifies the cognitive health of patients for healthcare organizations. PagerDuty enables them to quickly identify suicide risk factors through patient survey data and engage clinicians if patients need immediate attention, while ensuring HIPAA and GDPR compliance. Using PagerDuty, Cambridge Cognition delivers real value and saves lives.

Our mission to revolutionize operations and build customer trust by anticipating the unexpected in an unpredictable world has never been more timely or relevant. Given the economic background, companies need to grow profitably by both increasing their velocity and improving their efficiency. We are in the best position at the right time with a proven, resilient, scaled, cloud native platform to address the needs of the digital-first economy. The current environment calls for heightened financial discipline, and we are actively evaluating our expenses to ensure an agile, lean cost structure that supports our ongoing investments in innovation and growth.

We are committed to delivering both durable top-line growth while improving our operating leverage as we scale and to become profitable in Q4 and for the full year in FY '24. Our focus will remain on customer success. We exist to empower teams with the time and efficiency to build the future. We anticipate sustained demand for our products and services, as our customers seek to efficiently accelerate their digital businesses and more efficiently manage their operations in an evolving macroeconomic climate.

Traveling to see our teams and customers has reinforced my confidence in our people, our customers and partners, and our multiple engines for growth. Our vision for an equitable world where we transform critical work, so all teams can delight their customers and build trust, is realized more each day. We're excited to share more about PagerDuty at our annual Summit Series beginning on June 7 and encourage our investors to join us virtually. With that, I'll turn the call over to Howard, and I look forward to your questions.

Howard Wilson -- Chief Financial Officer

Thank you, Jen, and good day to everyone joining us on this afternoon's call. We continued our cadence of strong quarterly execution and delivered rock-solid financial results in the first quarter of fiscal 2023. In an environment of scarce talent and rising costs, the expanding functionality of the PagerDuty digital operations management platform covering the full cycle of detection to auto-remediation is allowing customers to revolutionize their operations. Overall, the value proposition of our platform in incident response, AIOps, customer service ops and Automation continues to resonate with customers who are intent on driving innovation, efficiency and productivity.

As we expand our platform, we open up new avenues for both land and add-on opportunities such as with our new process automation releases this past quarter. As I go through our results for the quarter, unless otherwise stated, all references to our expenses and operating results are on a non-GAAP basis and are reconciled to our GAAP results in the earnings release that was posted before the call. Revenue was $85 million in the first quarter, up 34% year over year, an acceleration of more than 600 basis points over Q1 of the prior fiscal year. International revenues remained sequentially unchanged at 24% of total revenues.

We delivered dollar-based net retention in Q1 at 126% compared to 121% in the same period one year ago. This marks the sixth consecutive quarter of DBNR above 120%, and we expect to continue to be at or above 120% throughout this fiscal year. Q1 ended with 655 customers with annual recurring revenue or ARR over $100,000, up 43% from a year ago. We ended Q1 with 15,040 paid customers, up 8% compared to a year ago, our second quarter of sequential increase.

Free and paid companies on our platform grew to over 21,000, an increase of 26% year over year, with free continuing to provide a funnel for future paid growth. Our Q1 gross margin at 84% was once again within our target range of 84% to 86%, and we expect gross margin for Q2 to be at a similar level as Q1. Our operating loss was $2 million or 3% of revenue, an improvement compared to a loss of $6 million or 9% of revenue in the same quarter last year. Compared to our first quarter guidance, operating margin was favorable due to improved sales and marketing efficiency and headcount growth shifting materially to the second quarter.

We reiterate our expectations for better than breakeven in Q4 and non-GAAP profitability in FY '24. One final note on operating margin before moving to cash. The joint venture announced after the close of Q1 to establish PagerDuty Japan with our partner, Japan Cloud, is expected to reduce full fiscal year operating margin by approximately 100 basis points. Now to cash.

First quarter cash from operations was negative $3 million, and free cash flow was negative $6 million. As a reminder, Q2 is seasonally our highest cash consumption period due to outflows from ESPP, annual vendor renewals, payments on the convertible debt and summit. Similar to last year, we expect operating cash flow and free cash flow to improve in Q3 and Q4. Turning to the balance sheet.

We ended the quarter with $467 million in cash, cash equivalents and investments. The sequential decrease in this metric is from our acquisition of Catalytic, which closed during Q1. Total deferred revenue ended the quarter at $167 million, up 33% year over year. Quarterly calculated billings were $82 million, which was an increase of 38% year over year, exceeding the high end of the range we provided during last quarter's call.

This included approximately $3 million of benefit from early renewals and revenue from Catalytic. We expect billings growth for Q2 to be in the range of 25% to 30%. On a trailing 12 months basis, billings were $344 million, an increase of 34% compared to a year ago and above the estimate previously provided. We expect trailing 12 months billings growth exiting the second quarter to be at or above 30% over last year.

Turning now to our guidance. For the second quarter of fiscal 2023, we expect revenue in the range of $87 million to $89 million, representing a growth rate of 29% to 32%, net loss per share in the range of $0.09 to $0.08 with basic shares outstanding of approximately 88 million. This implies an operating margin in the range of negative 9% to negative 8%. For the full fiscal year 2023, we are increasing revenue guidance to $364 million to $369 million, representing a growth rate of 29% to 31%.

We are improving guidance for net loss per share to $0.21 to $0.17 with basic shares outstanding of approximately 89 million. This implies an operating margin of negative 5% to negative 3%. We continue to deliver strong revenue growth while actively driving efficiencies across the company. We've improved operating margin year over year and will continue to do so each quarter.

Ensuring a lean cost structure, so we can continue to fund innovation is a leadership priority. I want to thank our customers for their trust in us and our team for delivering another outstanding quarter of product innovation and go-to-market execution. I remain confident in our business and performance, given the current market demand, the acceleration of our product innovation, strong tailwinds and our consistent execution. With that, I will open up the call for Q&A.

Unknown speaker

Thank you. And to our analysts, please feel free to raise your hand so that you can be added to the queue. And first, we're going to turn to Matt Hedberg at RBC. Let me bring you at, Matt.

Go ahead.

Hey. This is Simran Biswal for Matt Hedberg. Thanks for taking our question. I was wondering if you could talk a little bit more about the overall demand environment and how you feel about the pipeline in the second half.

Jennifer Tejada -- Chief Executive Officer

Sure. Thanks for being here today. I'll take this and Howard, if you want to add anything, please do. We've continued to see a very strong demand environment.

We haven't seen any change in the demand signals from our customers. I think that is driven by the long-term tailwinds that we've talked about before, digital acceleration, DevOps transformation and cloud adoption. These digital transformation projects are multiyear projects, and they're going to continue. I'd also say that our customers are looking for solutions that help them automate, reduce their costs, their cash burn and improve their productivity.

And the investments that we've made in innovation over the last several years have really put us in a good position for this moment. And frankly, I'd add that PagerDuty really has become a central infrastructure for most of our customers. So we see them continuing to invest and in fact, like I said, double down in areas like event intelligence, customer service ops and automation. So, so far, very consistent demand environment.

Unknown speaker

Great. Thank you.

Jennifer Tejada -- Chief Executive Officer

Pleasure.

Unknown speaker

Next we'll be going to Sanjit with Morgan Stanley. Sanjit, please go ahead.

Sanjit Singh -- Morgan Stanley -- Analyst

Thank you for taking the questions. And really very clean and crisp and well-executed quarter in Q1. I just wanted to pick up on just how you guys are thinking about a potential slowdown. I think in your script, Jen, you said the demand environment looks pretty great to you.

Some companies are just trying to embed the risk of a potential slowdown into their guidance. And so maybe, Howard, maybe comment on how you are at least encapsulating maybe some of those risks into the guide? And then for Jen, the question for you would be around, on one hand, the value proposition is around automation. We have supply demand imbalance between engineers and the number of services that these engineers support, which is sort of the long-term tailwind. At the same time, we're seeing a lot of companies sort of go through layoffs.

If you look at the tech space, the pickup in layoffs over the last three or four weeks has dramatically increased. I'm wondering if you can sort of give us your view as to does that represent a risk to the business in the near term versus what seems like a clear value proposition that you're going to have to automate more to support all of these mission-critical services.

Jennifer Tejada -- Chief Executive Officer

Yeah. I mean, obviously, we're going to continue to monitor the macro environment very carefully. We're spending a lot of time talking to customers, kind of understanding where they're at. But mostly what I'm hearing in the market is, there's still a very tight talent market for software engineers.

People have moved most of their revenue models to digital experiences. Those digital transformation efforts are still well and truly in train and in fact, in some cases, being accelerated, because they deliver long-term cost savings and productivity improvements. So we continue to see this, like I said, strong demand for applications and services that help you improve the productivity of your existing headcount, free them up to focus on important innovation work. And in fact, Interrupt Work is a big part of the problem, and it's not going to go away regardless of the market cycle we're in.

I've lived through a few of these market cycles. I'm old enough to have been around for 2000 and 2008, etc. And in this case, our customers have stronger balance sheets. They are, like I said, very committed to their digital transformation programs because they are business imperative, and we have become essential infrastructure.

And so we see strong pipeline looking ahead. And we see customers that continue to look to us to help them find ways to improve their productivity and shrink their spend where they can. And that's where we're staying focused. And you can see that in both the stickiness of our platform, gross retention above 95% for years, right, when I talk about essential infrastructure and likewise, strong attach.

But to your point, we, like other companies, are going to be judicious about our expenses and our discretionary spend, really focused on having an agile cost base that we can grow from and remain very committed to both profitability in Q4 and for the full year FY '24, but also in continuing to improve our operating leverage as we demonstrate that we are a durable growth company.

Sanjit Singh -- Morgan Stanley -- Analyst

I really appreciate the thoughts there. Thank you very much.

Jennifer Tejada -- Chief Executive Officer

My pleasure.

Unknown speaker

Next we'll hear from Matt Stotler with William Blair. Matt, go ahead.

Matt Stotler -- William Blair and Company -- Analyst

Yeah. Hey, Jen. Hey, Howard. Thanks for taking the questions.

Maybe just to start with one on the Catalytic acquisition. So you talked about this a little bit already. It seems like a very compelling extension of the workflows that you can address into your finance, HR, supply chain, etc. Would love to get maybe just more granular thoughts on how this expands, I guess, effectively your TAM or your wallet share within the customer base as well as the stickiness of the platform.

Jennifer Tejada -- Chief Executive Officer

I can take a just crack at that and then, Howard, if you want to jump in. I mean, first of all, one of the things that Catalytic does for us is it allows us to increase the flexibility in the workflows for our existing customers. So it brings more applicability and, I think, utility to our Incident Response teams. And that's super important, because the types of incidents that they're seeing, the capability and the skill sets of the types of people working on those incidents is sort of widely variable.

And so that's super important. But to your point, it also enables us to add users across the business for different types of use cases. And by having flexible no-code workflow offering, it also means that we're not governed by our own ability to create verticalized workflows or products. And so I think that does expand our TAM over time.

But we're very focused on making sure that we can continue to grow with our core audience and enable those adjacent teams to start to build for themselves and over time build an ecosystem of different use cases on the platform. And you can start to see early leading indicators of that in our integration ecosystem, where I mentioned we had an integration for a robotics provider this quarter and an integration in data operations. So those things are just starting to build on top of the platform without us having to drive them directly.

Howard Wilson -- Chief Financial Officer

Yeah. And I would just add that you'll be able to see some of the ways in which Catalytic is already starting to be embedded in our platform at our Summit events that start next week. So we're not selling Catalytic today as a stand-alone product, but the intent, as we discussed when we did the acquisition, was really to put that technology into the platform and then to be able to drive the different use cases where our customers are already taking us to those different use cases, but this just makes it a whole lot easier.

Matt Stotler -- William Blair and Company -- Analyst

Right. That's super helpful. And then just one follow-up on the partner ecosystem. Obviously, you've talked about AWS recently.

But I guess, for the past 12, 18 months, we've also had Deloitte. Tata on the SI side, on the ISV side, Microsoft, Salesforce and others. Any update on that ecosystem, the influence that ecosystem is having on your business and how you see some of those key partnerships trending going forward?

Jennifer Tejada -- Chief Executive Officer

We really try and be focused and prioritize key partners. And one of the reasons that we've talked specifically about Salesforce, for instance, is because they've been a great partner as we've rolled out our customer service Operations offering. So we really look for our partners who are the best in what they do and who have shared values and kind of a shared value proposition where we can go to the market together in a very strategic way. I think our customers have grown to really depend on us for highly reliable, scaled offerings that very quickly deliver return on investment.

And so you'll continue to see us be very focused there. Similar with AWS, there's an obvious large opportunity around cloud adoption and cloud migration there. And again, shared value set, shared audience, so just a good pairing. And we're going to continue to double down, and likewise, look for opportunities with other partners where it's meaningful for us.

But we -- focus is really important to me right now, keeping our teams focused on the priorities that can deliver near and long-term return on investment, super important.

Matt Stotler -- William Blair and Company -- Analyst

Thanks for taking the questions.

Jennifer Tejada -- Chief Executive Officer

Thanks, Matt.

Unknown speaker

OK. Next hearing from Chad Bennett, Chad from Craig-Hallum.

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

Hey, guys. Thanks for taking my questions.

Howard Wilson -- Chief Financial Officer

Hey, Chad.

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

It looks like I'm glowing -- I'm glowing about your quarter, but I'm not really glowing. So...

Jennifer Tejada -- Chief Executive Officer

I really like your background, Chad. The branding.

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

Yeah. I have to say that, because I know it looks odd. So anyway, yes, I mean, the -- I mean, very clean quarter, like a prior questioner said, and the secondary metrics look like very, very strong. I guess one of the secondary metrics that looked very strong was the customers over $100,000 ACV, almost double year over year and uncharacteristically up from Q4 sequentially, up like 20% or 10%.

Like what -- I mean what kicked in this quarter in terms of that -- for a Q1 to come out of the gate, I think that's strong. Was there something from a cross-sell, upsell standpoint that obviously kicked up on net retention or just customers just -- cohort graduating up to that $100,000 plus class? Like was there something that really triggered that type of strength in a Q1?

Jennifer Tejada -- Chief Executive Officer

I think it's really the consistency with which we're executing. Even our transactional business, Chad, like so many of our customers start small. They land with a small deal, that -- then those teams expand usage. Then it becomes a standard in engineering.

And then they start to look to add new products. They often trade up to digital operations Management. And then over time, we see other teams like customer service Ops come into play as well. And I think we're just doing a more and more effectively.

If you think about over the last, call it, 12 quarters, all of the innovation and investment that we've talked about, you're starting to see those investments really start to pay out. And I'm just really proud of both our engineering teams and our go-to-market teams, because we pushed them really hard over the last couple of years. And it's great to see the attach rate, more than 50% of our customers have more than two products. It's good to see the multiproduct platform strategy really coming to life.

Howard, I don't know if you have anything to add to that?

Howard Wilson -- Chief Financial Officer

Yeah. I would add in, as a product-led growth company, I think we're seeing the benefits of that showing up, too, because we've made it easier for customers to make smaller incremental purchases, right? So they don't have to go and do the big tickets purchase like out of the gate. They can do a small purchase, but then they can easily grow with us. So self-service is available to all of our customers, not only in the SMB space.

And also we've improved our product -- in-product discovery so that an existing customer, for example, can trial event intelligence and can see whether it makes sense for them. So that also means that it's making multiproduct more accessible. And so that really complements the efforts of the sales team, because now the product is helping do some of the lifting. So the sales team is really being set up well to be able to engage with the customer in something that the customer can already see the value of.

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

Got it. And then maybe one follow-up with a couple of subsegments for Howard. So 126% net expansion popped up. And I think historically, you've always said the main driver of net expansion has always been user growth, right? And -- but we've -- like Jennifer said, a ton of product innovation over the last two plus years.

You've got Rundeck, you've got AIOps, you've got customer service and a lot of things going on, event intelligence and so forth. How do you think about cross-sell, upsell in terms -- or I guess, is it moving the needle on net expansion in a bigger way? And how should we think about that going forward?

Howard Wilson -- Chief Financial Officer

Yeah. So it's still -- you've highlighted the combination of factors. So user expansion is still the most obvious way, because the success with one team often leads us to success with another team. But as we've been able to broaden the platform and to be truly multiproduct, that is playing a bigger part.

So we are seeing an increasing number of customers using multiple products, and that ARR coming from multiproduct customers has continued to increase. As we said in the last call the end of Q4, we had over 50% of our ARR coming from customers with two or more products. So that's definitely proving to be an additional driver from an expansion perspective. But the other dimension not to lose sight of is things like customer service Ops, right? We've created like a new land with customer service Ops.

We've created a new land with automation. And those effectively are able to come into PagerDuty on their own to begin with. And so there's now multiple ways of expanding with PagerDuty. It's not as though you have to start in Incident Response and go from there.

You can actually start in another place and expand from there.

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

Yeah. Got it. Got it. Well, thanks and great job again.

Howard Wilson -- Chief Financial Officer

Thank you, Chad.

Jennifer Tejada -- Chief Executive Officer

Thanks, Chad.

Unknown speaker

OK. Next, we'll hear from Shrenik Kothari.

Shrenik Kothari -- Robert W. Baird and Company -- Analyst

This is Shrenik from Baird. Congrats on a great clean quarter, really great enterprise and middle market execution that you just elaborated on, Jen and Howard. On first look, the overall paying customer growth is really strong at 88% year-on-year relative to like typical seasonal trends as well. Just relative to the 100k customer expansions that you saw really strong, just kind of was wondering, the enterprise and go-to-market execution super solid.

But can you talk about the dynamic at play for like customers, a little down market, are less than 100k. Are you seeing more of a macro play on the lower end of the market that we have been hearing from other places, staying at the dynamics? So the top of the funnel is still very strong, growing 26%, as you said, Howard, sequentially going to 21,000. So just curious, like is there any macro effects that you see kind of a little bit down market?

Jennifer Tejada -- Chief Executive Officer

So when we look at our SMB business or our very small business segment, that tends to be tech start-ups. Think about it that way. It tends to be smaller companies or smaller teams that are using us for project work. And in fact, in Q1, that business was very strong.

We refer to that as PD Online internally, and the team there is executing incredibly well. And again, I'd have to attribute much of that to our product-led growth motion. The fact that those very small customers can self-serve, try the product, start it free if that's what they prefer, discover new capability. And then PagerDuty very quickly becomes the standard inside of their business and grows with them.

So we haven't seen a change in demand signal there. And in fact, that segment has been performing very robustly.

Shrenik Kothari -- Robert W. Baird and Company -- Analyst

Got it. Thanks for the color, Jen. And just one quick follow-up on the international side. You guys have called it out as your key growth driver and source of expansion, and you have taken initiatives there.

That was like essentially flat at 24% of the total, if I heard that right. Just wondering like about any ForEx impact. And like on constant currency, would that look any different or what it would look like? Yeah.

Howard Wilson -- Chief Financial Officer

Yes, sure. So Shrenik, for us as a company, today, most -- well, all of our contracts are in U.S. dollars. So no matter where our customers are, they contract with us in USD.

So foreign -- FX exposure for us is really limited largely to expenses. However, we do look very closely at our customers and whether the change in the -- or the strengthening of the U.S. dollar is having a negative impact, like is it impacting on their ability to buy. And what we've seen to date is that the value that we drive for our customers is just so high that the fact that it's becoming more expensive in local currencies has not had any material impact on their engagement or the demand.

Shrenik Kothari -- Robert W. Baird and Company -- Analyst

Got it. Got it. Yeah. Thanks, Howard.

Yeah, thanks and congrats again on the great quarter. Appreciate it.

Howard Wilson -- Chief Financial Officer

Thank you.

Jennifer Tejada -- Chief Executive Officer

Thank you.

Unknown speaker

Folks, it looks like that's it for questions today. Jennifer, to you for final comments.

Jennifer Tejada -- Chief Executive Officer

Well, I just wanted to first say how confident I am in our future and optimistic I am about our ability to continue to build a durable and overtime a profitable growth company. I also just wanted to recognize our teams for their great execution and our employee resource groups who recently have celebrated Asian American and Pacific Islander Heritage Month last month and have just kicked off as well Pride Month at PagerDuty. These teams work really hard in addition to their day jobs to make sure that we are celebrating ID&E within our company and around our community, and I personally appreciate it. With that, I just want to say thanks to our customers and our shareholders and wish you all a great day.

Thanks for being with us today.

Duration: 39 minutes

Call participants:

Christine Cloonan

Jennifer Tejada -- Chief Executive Officer

Howard Wilson -- Chief Financial Officer

Unknown speaker

Sanjit Singh -- Morgan Stanley -- Analyst

Matt Stotler -- William Blair and Company -- Analyst

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

Shrenik Kothari -- Robert W. Baird and Company -- Analyst

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