PagerDuty’s third quarter results for 2025 were met with a negative market reaction, as management acknowledged ongoing headwinds in customer retention and seat-based license reductions, particularly among large enterprise clients undergoing major reorganizations. CEO Jennifer Tejada described the quarter’s retention outcome as “unsatisfying,” explaining that while fewer customers left the platform, those who did downgrade tended to make larger cuts tied to widespread layoffs and budget caution. Management also pointed to increased adoption of usage-based products and operational efficiency improvements, but these were not enough to offset the contraction from seat license compression.
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PagerDuty (PD) Q3 CY2025 Highlights:
- Revenue: $124.5 million vs analyst estimates of $125 million (4.7% year-on-year growth, in line)
- Adjusted EPS: $0.34 vs analyst estimates of $0.24 (39.1% beat)
- Adjusted Operating Income: $35.55 million vs analyst estimates of $26.08 million (28.5% margin, 36.3% beat)
- Revenue Guidance for Q4 CY2025 is $123 million at the midpoint, below analyst estimates of $127.4 million
- Management raised its full-year Adjusted EPS guidance to $1.12 at the midpoint, a 9.3% increase
- Operating Margin: 6.5%, up from -8.7% in the same quarter last year
- Customers: 15,398, up from 15,322 in the previous quarter
- Annual Recurring Revenue: $497 million vs analyst estimates of $508.3 million (2.9% year-on-year growth, 2.2% miss)
- Billings: $117.7 million at quarter end, in line with the same quarter last year
- Market Capitalization: $1.08 billion
While we enjoy listening to the management's commentary, our favorite part of earnings calls are the analyst questions. Those are unscripted and can often highlight topics that management teams would rather avoid or topics where the answer is complicated. Here is what has caught our attention.
Our Top 5 Analyst Questions From PagerDuty’s Q3 Earnings Call
- Jeff Van Rhee (Craig Hallum) asked about the drivers behind declining dollar-based net retention. CEO Jennifer Tejada explained it was largely due to large-scale customer reorganizations leading to significant seat reductions, despite improved logo retention.
- Mike Richards (RB) inquired whether usage-based pricing could help recapture lost revenue before customer renewals. Tejada responded that longer agreements allow proactive engagement and that usage-based products, such as AI ops, are seeing over 50% year-over-year growth.
- Andrew Sherman (TD Cowen) questioned whether recent seat reductions were a one-time event or could persist. Tejada noted that while the absolute number of downgrades is declining, large-scale reorganizations are expected to remain a challenge, but proactive engagement should help mitigate future impacts.
- Miller Jump (Truist) asked if AI adoption was delaying headcount investments among customers. Tejada said most reductions were tied to cost-cutting and operating margin improvements, but acknowledged that increasing automation could make seat-based models less relevant over time.
- Oscar Savedra (Morgan Stanley) sought clarity on the timeline for usage-based models offsetting seat compression. CFO Howard Wilson said the transition will take time, with partial offset expected in the current renewal-heavy quarter, but not enough to drive immediate growth.
Catalysts in Upcoming Quarters
In the coming quarters, the StockStory team will focus on (1) signs of stabilization in seat-based license reductions among large enterprise customers, (2) evidence that usage-based and multi-year agreements are driving incremental revenue and improved retention, and (3) continued progress in operating margin expansion fueled by efficiency initiatives and product mix shifts. The pace of adoption for new AI-driven features and professional services will also be key indicators of future performance.
PagerDuty currently trades at $11.81, down from $15.19 just before the earnings. Is the company at an inflection point that warrants a buy or sell? The answer lies in our full research report (it’s free for active Edge members).
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