UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________

FORM 10-Q

_________________________

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended October 31, ~~2021~~2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-38856

PAGERDUTY, INC.

(Exact name of registrant as specified in its charter)

_________________________


Delaware						27-2793871
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

600 Townsend St., Suite 200

San Francisco, CA 94103

(844) 800-3889

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

_________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, $0.000005 par value

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically on its corporate Web site every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

The total number of shares of common stock outstanding as of ~~December 6, 2021,~~November 30, 2022, was ~~85,980,013.~~89,975,860.

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PAGERDUTY, INC.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Part II - OTHER INFORMATION


Item 1	Legal Proceedings	4645
Item 1A	Risk Factors	4645
Item 2	Unregistered Sale of Equity Securities and Use of Proceeds	4748
Item 6	Exhibits	4748
	Signatures	4950

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, or this Form 10-Q, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which statements involve substantial risk and uncertainties. All statements contained in this Form 10-Q other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth and trends, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan,” “potentially,” “likely,” “target,” and similar expressions are intended to identify forward-looking statements.

Forward-looking statement contained in this Form 10-Q include, but are not limited to, statements about our expectations regarding:

•the impact of an economic downturn or recession, rising inflation or significant market volatility in the global economy on our customers, partners, employees and business;

•the effect of uncertainties related to the novel coronavirus and resulting COVID-19 pandemic on U.S. and global markets, our business, operations, revenue results, cash flow, operating expenses, demand for our solutions, sales cycles, customer retention, and our customers’ businesses;

•trends in key business metrics, including number of customers and dollar-based net retention rate, and non-GAAP financial measures and their usefulness in evaluating our business;

•trends in revenue, cost of revenue, and gross margin;

•trends in operating expenses, including research and development, sales and marketing, and general and administrative expense, and expectations regarding these expenses as a percentage of revenue;

•our existing cash and cash equivalents and cash provided by sales of our subscriptions being sufficient to support working capital and capital expenditures for at least the next 12 months;

•our ability to successfully identify, acquire, and integrate complementary companies, technologies, and assets;

•our ability to service the interest on our convertible notes and repay such notes, to the extent required;

•our efforts to maintain proper and effective internal controls;

•our ability to expand our operations and increase adoption of our platform internationally;

•our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United States and internationally;

•the increased expenses and administrative workload associated with being a public company; and

•other statements regarding our future operations, financial condition, and prospects and business strategies.

Such forward-looking statements are based on our expectations as of the date of this filing and are subject to a number of risks, uncertainties and assumptions, including but not limited to, risks detailed in the “Risk Factors” section of this Form 10-Q and in our Annual Report on Form 10-K. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission, or the SEC, that disclose risks and uncertainties that may affect our business. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions,

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the future events and trends discussed in this Form 10-Q may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

~~Table of Contents~~

You should not rely on forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or may not occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. In addition, the forward-looking statements in this Form 10-Q are made as of the date of this filing, and we do not undertake, and expressly disclaim any duty, to update any of these forward-looking statements for any reason after the date of this Form 10-Q or to conform these statements to actual results or revised expectations.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

PAGERDUTY, INC.

Condensed Consolidated Balance Sheets

(in thousands)


		As of October 31, 2021		As of January 31, 2021			As of October 31, 2022		As of January 31, 2022
		(unaudited)					(unaudited)
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	359,738	$	339,166	Cash and cash equivalents	$	262,333	$	349,785
Investments	Investments	185,545		221,112		Investments	197,104		193,571
Accounts receivable, net of allowance for doubtful accounts of $1,218 and $1,188 as of October 31, 2021 and January 31, 2021, respectively		53,965		55,119
Accounts receivable, net of allowance for credit losses of $1,515 and $1,809 as of October 31, 2022 and January 31, 2022, respectively						Accounts receivable, net of allowance for credit losses of $1,515 and $1,809 as of October 31, 2022 and January 31, 2022, respectively	72,628		75,279
Deferred contract costs, current	Deferred contract costs, current	15,075		12,330		Deferred contract costs, current	18,007		16,672
Prepaid expenses and other current assets	Prepaid expenses and other current assets	11,833		10,587		Prepaid expenses and other current assets	13,545		9,777
Total current assets	Total current assets	626,156		638,314		Total current assets	563,617		645,084
Property and equipment, net	Property and equipment, net	14,625		12,639		Property and equipment, net	18,339		18,229
Deferred contract costs, non-current	Deferred contract costs, non-current	22,703		19,257		Deferred contract costs, non-current	26,968		26,159
Lease right-of-use assets	Lease right-of-use assets	21,360		24,691		Lease right-of-use assets	15,141		20,227
Goodwill	Goodwill	72,126		72,126		Goodwill	118,862		72,126
Intangible assets, net	Intangible assets, net	24,008		26,633		Intangible assets, net	40,029		23,133
Other assets	Other assets	1,108		1,783		Other assets	1,054		1,490
Total assets	Total assets	$	782,086	$	795,443	Total assets	$	784,010	$	806,448
Liabilities and stockholders’ equity
Liabilities, redeemable non-controlling interest, and stockholders’ equity						Liabilities, redeemable non-controlling interest, and stockholders’ equity
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	9,564	$	5,747	Accounts payable	$	7,692	$	9,505
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	11,167		9,627		Accrued expenses and other current liabilities	12,884		13,640
Accrued compensation	Accrued compensation	32,253		28,372		Accrued compensation	34,955		35,327
Deferred revenue, current	Deferred revenue, current	137,353		123,686		Deferred revenue, current	175,380		162,881
Lease liabilities, current	Lease liabilities, current	5,554		5,262		Lease liabilities, current	6,438		5,637
Total current liabilities	Total current liabilities	195,891		172,694		Total current liabilities	237,349		226,990
Convertible senior notes, net	Convertible senior notes, net	280,615		217,528		Convertible senior notes, net	282,445		281,069
Deferred revenue, non-current	Deferred revenue, non-current	5,497		6,286		Deferred revenue, non-current	4,335		7,343
Lease liabilities, non-current	Lease liabilities, non-current	22,438		26,542		Lease liabilities, non-current	14,155		20,912
Other liabilities	Other liabilities	4,256		5,666		Other liabilities	3,826		3,159
Total liabilities	Total liabilities	508,697		428,716		Total liabilities	542,110		539,473
Commitments and contingencies (Note 11)		0		0
Commitments and contingencies (Note 12)						Commitments and contingencies (Note 12)
Redeemable non-controlling interest (Note 3)						Redeemable non-controlling interest (Note 3)	1,551		—
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Common stock	Common stock	—		—		Common stock	—		—
Additional paid-in capital	Additional paid-in capital	593,508		614,494		Additional paid-in capital	696,169		616,467
Accumulated other comprehensive (loss) income		(191)		343
Accumulated other comprehensive loss						Accumulated other comprehensive loss	(3,136)		(669)
Accumulated deficit	Accumulated deficit	(319,928)		(248,110)		Accumulated deficit	(452,684)		(348,823)
Total stockholders’ equity	Total stockholders’ equity	273,389		366,727		Total stockholders’ equity	240,349		266,975
Total liabilities and stockholders’ equity		$	782,086	$	795,443
Total liabilities, redeemable non-controlling interest, and stockholders’ equity						Total liabilities, redeemable non-controlling interest, and stockholders’ equity	$	784,010	$	806,448

See Notes to Condensed Consolidated Financial Statements

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PAGERDUTY, INC.

Condensed Consolidated Statements of Operations ~~and Comprehensive Loss~~

(in thousands, except per share data)

(unaudited)


		Three Months Ended October 31,				Nine Months Ended October 31,					Three Months Ended October 31,				Nine Months Ended October 31,
		2021		2020		2021		2020			2022		2021		2022		2021
Revenue	Revenue	$	71,760	$	53,772	$	202,887	$	154,272	Revenue	$	94,203	$	71,760	$	269,827	$	202,887
Cost of revenue	Cost of revenue	12,039		7,685		34,433		21,285		Cost of revenue	18,007		12,039		52,090		34,433
Gross profit	Gross profit	59,721		46,087		168,454		132,987		Gross profit	76,196		59,721		217,737		168,454
Operating expenses:	Operating expenses:									Operating expenses:
Research and development	Research and development	24,554		16,156		68,062		46,705		Research and development	35,004		24,554		100,307		68,062
Sales and marketing	Sales and marketing	40,176		34,024		118,224		88,271		Sales and marketing	47,118		40,176		143,001		118,224
General and administrative	General and administrative	19,808		17,746		56,680		45,899		General and administrative	26,616		19,808		77,316		56,680
Total operating expenses	Total operating expenses	84,538		67,926		242,966		180,875		Total operating expenses	108,738		84,538		320,624		242,966
Loss from operations	Loss from operations	(24,817)		(21,839)		(74,512)		(47,888)		Loss from operations	(32,542)		(24,817)		(102,887)		(74,512)
Interest income	Interest income	705		974		2,306		3,375		Interest income	1,382		705		2,760		2,306
Interest expense	Interest expense	(1,350)		(4,133)		(4,045)		(5,741)		Interest expense	(1,360)		(1,350)		(4,072)		(4,045)
Other expense, net	Other expense, net	(729)		(449)		(1,931)		(861)		Other expense, net	(172)		(729)		(1,326)		(1,931)
Loss before (provision for) benefit from income taxes	Loss before (provision for) benefit from income taxes	(26,191)		(25,447)		(78,182)		(51,115)		Loss before (provision for) benefit from income taxes	(32,692)		(26,191)		(105,525)		(78,182)
(Provision for) benefit from income taxes	(Provision for) benefit from income taxes	(150)		4,839		(378)		4,360		(Provision for) benefit from income taxes	(112)		(150)		1,302		(378)
Net loss	Net loss	$	(26,341)	$	(20,608)	$	(78,560)	$	(46,755)	Net loss	$	(32,804)	$	(26,341)	$	(104,223)	$	(78,560)
Other comprehensive (loss) income:
Unrealized (loss) gain on investments		(222)		(422)		(534)		497
Total comprehensive loss		$	(26,563)	$	(21,030)	$	(79,094)	$	(46,258)
Net loss per share, basic and diluted		$	(0.31)	$	(0.26)	$	(0.94)	$	(0.59)
Net loss attributable to redeemable non-controlling interest										Net loss attributable to redeemable non-controlling interest	(262)		—		(362)		—
Net loss attributable to PagerDuty, Inc.										Net loss attributable to PagerDuty, Inc.	$	(32,542)	$	(26,341)	$	(103,861)	$	(78,560)
Net loss per share, basic and diluted, attributable to PagerDuty, Inc.										Net loss per share, basic and diluted, attributable to PagerDuty, Inc.	$	(0.36)	$	(0.31)	$	(1.18)	$	(0.94)
Weighted average shares used in calculating net loss per share, basic and diluted	Weighted average shares used in calculating net loss per share, basic and diluted	85,092		79,937		83,979		78,835		Weighted average shares used in calculating net loss per share, basic and diluted	89,285		85,092		88,200		83,979

See Notes to Condensed Consolidated Financial Statements

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PAGERDUTY, INC.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)


	Three Months Ended October 31,				Nine Months Ended October 31,
	2022		2021		2022		2021
Net loss	$	(32,804)	$	(26,341)	$	(104,223)	$	(78,560)
Unrealized loss on investments	(1,050)		(222)		(1,952)		(534)
Foreign currency translation adjustments	(374)		—		(515)		—
Total comprehensive loss	$	(34,228)	$	(26,563)	$	(106,690)	$	(79,094)
Less comprehensive loss attributable to redeemable non-controlling interest:
Net loss attributable to redeemable non-controlling interest	(262)		—		(362)		—
Foreign currency translation adjustments, attributable to redeemable non-controlling interest	2		—		5		—
Comprehensive loss attributable to redeemable non-controlling interest	(260)		—		(357)		—
Comprehensive loss attributable to PagerDuty, Inc.	$	(33,968)	$	(26,563)	$	(106,333)	$	(79,094)

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PAGERDUTY, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

(unaudited)
Three Months Ended October 31, 2021
Common Stock Additional
Paid-in
Capital Accumulated Other Comprehensive Income (Loss) Accumulated
Deficit Total
Stockholders’
Equity
Shares Amount
Balances as of July 31, 2021 84,801,124 $ — $ 578,728 $ 31 $ (293,587) $ 285,172
Issuance of common stock upon exercise of stock options and restricted stock agreements 724,725 — 4,286 — — 4,286
Vesting of restricted stock units, net of employee payroll taxes 269,436 — (7,616) — — (7,616)
Other comprehensive loss — — — (222) — (222)
Stock-based compensation — — 18,110 — — 18,110
Net loss — — — — (26,341) (26,341)
Balances as of October 31, 2021 85,795,285 $ — $ 593,508 $ (191) $ (319,928) $ 273,389


	Three Months Ended October 31, 2022
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balances as of July 31, 2022	88,928,089	$	—	$	672,126	$	(1,712)	$	(420,142)	$	250,272
Issuance of common stock upon exercise of stock options	328,471	—		2,137		—		—		2,137
Vesting of restricted stock units, net of employee payroll taxes	709,089	—		(9,864)		—		—		(9,864)
Other comprehensive loss	—	—		—		(1,424)		—		(1,424)
Stock-based compensation	—	—		31,770		—		—		31,770
Net loss attributable to PagerDuty, Inc.	—	—		—		—		(32,542)		(32,542)
Balances as of October 31, 2022	89,965,649	$	—	$	696,169	$	(3,136)	$	(452,684)	$	240,349

Nine Months Ended October 31, 2021
Common Stock Additional
Paid-in
Capital Accumulated Other Comprehensive Income (Loss) Accumulated
Deficit Total
Stockholders’
Equity
Shares Amount
Balances as of January 31, 2021 82,882,424 $ — $ 614,494 $ 343 $ (248,110) $ 366,727
Cumulative effect adjustment due to adoption of ASU 2020-06 (Note 2) — — (68,478) — 6,742 (61,736)
Issuance of common stock upon exercise of stock options and restricted stock agreements 2,010,991 — 12,508 — — 12,508
Vesting of restricted stock units, net of employee payroll taxes 677,323 — (18,619) — — (18,619)
Shares issued related to a business combination 2,073 — — — — —
Issuance of common stock in connection with employee stock purchase plan 222,474 — 4,889 — — 4,889
Other comprehensive loss — — — (534) — (534)
Stock-based compensation — — 48,714 — — 48,714
Net loss — — — — (78,560) (78,560)
Balances as of October 31, 2021 85,795,285 $ — $ 593,508 $ (191) $ (319,928) $ 273,389

~~See Notes to Condensed Consolidated Financial Statements~~


	Nine Months Ended October 31, 2022
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balances as of January 31, 2022	86,758,380	$	—	$	616,467	$	(669)	$	(348,823)	$	266,975
Issuance of common stock upon exercise of stock options	1,513,581	—		8,728		—		—		8,728
Vesting of restricted stock units, net of employee payroll taxes	1,349,991	—		(22,187)		—		—		(22,187)
Shares issued related to an asset acquisition	62,972	—		—		—		—		—
Issuance of common stock in connection with the Employee Stock Purchase Plan	280,725	—		5,736		—		—		5,736
Other comprehensive loss	—	—		—		(2,467)		—		(2,467)
Stock-based compensation	—	—		87,425		—		—		87,425
Net loss attributable to PagerDuty, Inc.	—			—		—		(103,861)		(103,861)
Balances as of October 31, 2022	89,965,649	$	—	$	696,169	$	(3,136)	$	(452,684)	$	240,349

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		Three Months Ended October 31, 2020																		Three Months Ended October 31, 2021
		Common Stock			Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit				Total Stockholders’ Equity				Common Stock					Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders’ Equity
		Shares	Amount								Shares								Amount
Balances as of July 31, 2020		79,355,627	$	—			$	546,169						$	1,056			$	(205,354)		$	341,871
Balances as of July 31, 2021																			Balances as of July 31, 2021	84,801,124			$	—		$	578,728		$	31		$	(293,587)		$	285,172
Issuance of common stock upon exercise of stock options and restricted stock agreements	Issuance of common stock upon exercise of stock options and restricted stock agreements	782,554	—		3,938				—			—				3,938			Issuance of common stock upon exercise of stock options and restricted stock agreements	724,725			—		4,286			—			—			4,286
Vesting of restricted stock units, net of employee payroll taxes	Vesting of restricted stock units, net of employee payroll taxes	146,174	—		(2,591)				—			—				(2,591)			Vesting of restricted stock units, net of employee payroll taxes	269,436			—		(7,616)			—			—			(7,616)
Shares issued related to a business combination		1,499,651	—		38,875				—			—				38,875
Other comprehensive loss	Other comprehensive loss	—	—		—				(422)			—				(422)			Other comprehensive loss	—			—		—			(222)			—			(222)
Stock-based compensation	Stock-based compensation	—	—		13,495				—			—				13,495			Stock-based compensation	—			—		18,110			—			—			18,110
Net loss	Net loss	—	—		—				—			(20,608)				(20,608)			Net loss	—			—		—			—			(26,341)			(26,341)
Balances as of October 31, 2020		81,784,006	$	—	$	599,886			$	634		$	(225,962)			$	374,558
Balances as of October 31, 2021																			Balances as of October 31, 2021	85,795,285			$	—	$	593,508		$	(191)		$	(319,928)		$	273,389

Nine Months Ended October 31, 2020
Common Stock Additional
Paid-in
Capital Accumulated Other Comprehensive Income Accumulated
Deficit Total
Stockholders’
Equity
Shares Amount
Balances as of January 31, 2020 77,793,540 $ — $ 487,008 $ 137 $ (179,207) $ 307,938
Issuance of common stock upon exercise of stock options and restricted stock agreements 2,069,446 — 9,709 — — 9,709
Vesting of restricted stock units, net of employee payroll taxes 240,116 — (4,334) — — (4,334)
Vesting of early exercised options — — 507 — — 507
Equity component of convertible senior notes, net of issuance costs — — 68,478 — — 68,478
Purchases of capped calls related to convertible senior notes — — (35,708) — — (35,708)
Shares issued related to a business combination 1,499,651 — 38,875 — — 38,875
Issuance of common stock in connection with employee stock purchase plan 181,253 — 3,558 — — 3,558
Other comprehensive income — — — 497 — 497
Stock-based compensation — — 31,793 — — 31,793
Net loss — — — — (46,755) (46,755)
Balances as of October 31, 2020 81,784,006 $ — $ 599,886 $ 634 $ (225,962) $ 374,558


	Nine Months Ended October 31, 2021
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balances as of January 31, 2021	82,882,424	$	—	$	614,494	$	343	$	(248,110)	$	366,727
Cumulative effect adjustment due to adoption of ASU 2020-06	—	—		(68,478)		—		6,742		(61,736)
Issuance of common stock upon exercise of stock options and restricted stock agreements	2,010,991	—		12,508		—		—		12,508
Vesting of restricted stock units, net of employee payroll taxes	677,323	—		(18,619)		—		—		(18,619)
Shares issued related to a business combination	2,073	—		—		—		—		—
Issuance of common stock in connection with employee stock purchase plan	222,474	—		4,889		—		—		4,889
Other comprehensive loss	—	—		—		(534)		—		(534)
Stock-based compensation	—	—		48,714		—		—		48,714
Net loss	—	—		—		—		(78,560)		(78,560)
Balances as of October 31, 2021	85,795,285	$	—	$	593,508	$	(191)	$	(319,928)	$	273,389

See Notes to Condensed Consolidated Financial Statements

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PAGERDUTY, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)
Nine Months Ended October 31,
2021 2020
Cash flows from operating activities
Net loss $ (78,560) $ (46,755)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization 6,160 3,352
Amortization of deferred contract costs 10,651 7,894
Amortization of debt discount and issuance costs (1)
1,350 4,493
Stock-based compensation 47,866 31,735
Non-cash lease expense 3,331 3,299
Other 2,592 1,897
Changes in operating assets and liabilities:
Accounts receivable 360 (3,879)
Deferred contract costs (16,842) (10,944)
Prepaid expenses and other assets (857) (3,605)
Accounts payable 3,836 (210)
Accrued expenses and other liabilities (79) 2,224
Accrued compensation 3,760 7,689
Deferred revenue 12,878 12,475
Lease liabilities (3,812) (2,959)
Net cash (used in) provided by operating activities (7,366) 6,706
Cash flows from investing activities
Purchases of property and equipment (1,376) (3,402)
Capitalization of internal-use software costs (2,701) (328)
Business acquisitions, net of cash acquired (160) (49,656)
Proceeds from maturities of held-to-maturity investments — 28,040
Purchases of available-for-sale investments (150,608) (153,254)
Proceeds from maturities of available-for-sale investments 156,616 123,352
Proceeds from sales of available-for-sale investments 27,380 9,285
Net cash provided by (used in) investing activities 29,151 (45,963)
Cash flows from financing activities
Proceeds from issuance of convertible senior notes, net of issuance costs paid of $8,835 — 278,665
Purchases of capped calls related to convertible senior notes — (35,708)
Proceeds from employee stock purchase plan 4,889 3,558
Proceeds from issuance of common stock upon exercise of stock options 12,517 9,709
Employee payroll taxes paid related to net share settlement of restricted stock units (18,619) (4,334)
Net cash (used in) provided by financing activities (1,213) 251,890
Net increase in cash, cash equivalents, and restricted cash 20,572 212,633
Cash, cash equivalents, and restricted cash at beginning of period 339,166 124,024
Cash, cash equivalents, and restricted cash at end of period $ 359,738 $ 336,657
Supplemental cash flow data:
Cash paid for income taxes $ 126 $ —
Cash paid for interest $ 1,797 $ —
Non-cash investing and financing activities:
Vesting of early exercised options $ — $ 507
Purchase of property and equipment, accrued but not yet paid $ 823 $ 274
Costs related to issuance of convertible senior notes, accrued but not yet paid $ — $ 470
Stock-based compensation capitalized in internal use software $ 848 $ —
Bonuses capitalized in internal use software $ 121 $ —

~~(1)~~ During the first quarter of fiscal 2022, the Company early adopted ASU 2020-06 which resulted in the elimination of amortization of debt discount on our 1.25% Convertible Senior Notes (the “Notes”) from February 1, 2021.


	Nine Months Ended October 31,
	2022		2021
Cash flows from operating activities
Net loss attributable to PagerDuty, Inc.	$	(103,861)	$	(78,560)
Net loss attributable to redeemable non-controlling interest (Note 3)	(362)		—
Net loss	(104,223)		(78,560)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	12,778		6,160
Amortization of deferred contract costs	14,178		10,651
Amortization of debt issuance costs	1,376		1,350
Stock-based compensation	86,478		47,866
Non-cash lease expense	2,913		3,331
Tax benefit related to release of valuation allowance	(1,330)		—
Other	1,686		2,592
Changes in operating assets and liabilities:
Accounts receivable	3,048		360
Deferred contract costs	(16,323)		(16,842)
Prepaid expenses and other assets	(2,934)		(857)
Accounts payable	(1,117)		3,836
Accrued expenses and other liabilities	(1,350)		(79)
Accrued compensation	(624)		3,760
Deferred revenue	8,635		12,878
Lease liabilities	(3,783)		(3,812)
Net cash used in operating activities	(592)		(7,366)
Cash flows from investing activities
Purchases of property and equipment	(3,755)		(1,376)
Capitalization of internal-use software costs	(2,725)		(2,701)
Business acquisition, net of cash acquired	(66,262)		(160)
Asset acquisition	(1,845)		—
Purchases of available-for-sale investments	(155,310)		(150,608)
Proceeds from maturities of available-for-sale investments	149,625		156,616
Proceeds from sales of available-for-sale investments	—		27,380
Net cash (used in) provided by investing activities	(80,272)		29,151
Cash flows from financing activities
Investment from redeemable non-controlling interest holder	1,908		—
Proceeds from employee stock purchase plan	5,736		4,889
Proceeds from issuance of common stock upon exercise of stock options	8,459		12,517
Employee payroll taxes paid related to net share settlement of restricted stock units	(22,187)		(18,619)
Net cash used in financing activities	(6,084)		(1,213)
Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash	(504)		—
Net (decrease) increase in cash, cash equivalents, and restricted cash	(87,452)		20,572
Cash, cash equivalents, and restricted cash at beginning of period	349,785		339,166
Cash, cash equivalents, and restricted cash at end of period	$	262,333	$	359,738

Supplemental cash flow data:
Cash paid for income taxes	$	130	$	126
Cash paid for interests	$	1,797	$	1,797
Non-cash investing and financing activities:
Purchase of property and equipment, accrued but not yet paid	$	828	$	823
Stock-based compensation capitalized in internal use software	$	947	$	848
Bonuses capitalized in internal use software	$	263	$	121
Receivables for cash in-transit on stock options	$	269	$	9

See Notes to Condensed Consolidated Financial Statements

910

Table of Contents

PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Description of Business and Basis of Presentation

Description of Business

PagerDuty, Inc. was incorporated under the laws of the state of Delaware in May 2010.

PagerDuty ~~acts as the central nervous system~~is a digital operations management platform that manages urgent and mission-critical work for ~~the~~a modern, digital ~~enterprise.~~business. PagerDuty ~~harnesses~~collects data and digital signals from virtually any software-enabled system or device ~~combines it with human~~and leverages powerful machine learning to correlate, process, and predict opportunities and issues. Using incident response, ~~data~~event management, and ~~orchestrates teams to take~~automation, the Company brings together the right ~~actions~~people with the right information so they can resolve issues and act on opportunities in ~~real time. The Company’s products help organizations improve operations, accelerate innovation, increase revenue, mitigate security risk, and deliver a great customer experience.~~minutes or seconds from wherever they are.

As used herein, “PagerDuty”, “we”, “our”, “the Company” and similar terms include PagerDuty, Inc., unless the context indicates otherwise.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The condensed consolidated balance sheet as of January 31, ~~2021~~2022 was derived from the audited consolidated financial statements as of that date but does not include all of the information and notes required by GAAP for complete financial statements. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended January 31, ~~2021,~~2022, included in the Company’s Annual Report on Form 10-K, filed with the SEC.

The condensed consolidated financial statements include the results of ~~PagerDuty, Inc. and~~the Company, its wholly owned ~~subsidiaries.~~subsidiaries, and subsidiaries in which the Company holds a controlling interest. All intercompany balances and transactions have been eliminated ~~upon~~in consolidation.

In the opinion of management, the information contained herein reflects all adjustments necessary for a fair presentation of the Company’s financial position, results of operations and comprehensive loss, statements of stockholders’ equity, and cash flows. The results of operations for the three and nine months ended October 31, ~~2021~~2022 are not necessarily indicative of the results to be expected for the full year ending January 31, ~~2022~~2023 or for any other interim period, or for any future year.

The Company’s fiscal year ends on January 31. References to fiscal ~~2022,~~2023, for example, refer to the fiscal year ending January 31, ~~2022.~~2023.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make, on an ongoing basis, estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. The Company’s most significant estimates and judgments involve the ~~fair value of stock awards,~~ period of benefit for amortizing deferred contract costs, the determination of the allowance for ~~doubtful accounts,~~credit losses, the provision for income taxes, including the related valuation allowance and any uncertain tax positions, fair value of acquired assets and assumed liabilities, impairment of goodwill and intangible assets, ~~the incremental borrowing rate for lease liabilities,~~ and estimates related to our revenue recognition, such as the assessment of ~~performance obligations in our revenue arrangements and the fair value assigned to each performance obligation, among others. Management bases its~~

1011

Table of Contents

PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

performance obligations in our revenue arrangements and the fair value assigned to each performance obligation, among others. Management bases its estimates on historical experience and on various other assumptions which management believes to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

~~In December 2019,~~Foreign Currency Translations

The functional currency for the ~~novel coronavirus and resulting disease (“COVID-19”) was reported and in March 2020~~large majority of the ~~World Health Organization declared it a pandemic. The~~Company's foreign operations is the U.S. dollar, although the Company ~~considered~~has one subsidiary use the ~~impact of COVID-19 on the assumptions and estimates used and determined that there were no material adverse impacts on the condensed consolidated financial statements during~~local currency as its functional currency for the three and nine months ended October 31, ~~2021~~2022. When a consolidated entity’s functional currency is the local currency, the Company translates the foreign functional currency financial statements to U.S. dollars using the exchange rates at the balance sheet date for assets and ~~2020. As events continue to evolve~~liabilities, the period average exchange rates for revenues and ~~additional information becomes available, our assumptions~~expenses, and ~~estimates may change materially in future periods.~~the historical exchange rates for equity.

2. Summary of Significant Accounting Policies

Concentrations of Risk and Significant Customers

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, available-for-sale investments, and accounts receivable. All of the Company’s cash and cash equivalents and investments are invested in money market funds, U.S. Treasury securities, commercial paper, corporate debt securities, or U.S. Government agency securities that management believes to be of high credit quality.

No single customer accounted for 10% of the total accounts receivable balance as of October 31, ~~2021~~2022 or January 31, ~~2021.~~2022. No single customer represented 10% or more of revenue for the three and nine months ended October 31, ~~2021~~2022 or ~~2020.~~2021.

Segment Information

The Company manages its operations and allocates resources as 1one operating segment. The Company’s chief operating decision maker (“CODM”) is its chief executive officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance, and allocating resources. Refer to Note ~~16,~~17, “Geographic Information” for information regarding the Company's long-lived assets and revenue by geography.

Related Party ~~Transactions~~Transaction

Certain members of the Company’s Board of Directors serve as directors of, or are executive officers of, and in some cases are investors in, companies that are customers or vendors of the Company. The Company ~~recognized $1.1~~billed $1.6 million ~~of revenues~~and $2.2 million to entities associated with related parties during the nine months ended October 31, 2022 and 2021, ~~and billed $2.2~~respectively. The Company recognized $1.1 million ~~to entities~~of revenue associated with related parties during the nine months ended October 31, 2021. Other related party transactions were not material for the three and nine months ended October 31, ~~2021~~2022 and ~~2020.~~2021.

Significant Accounting Policies

There have been no significant changes to our significant accounting policies as compared to those described in our Annual Report on Form 10-K for the fiscal year ended January 31, ~~2021,~~2022 other than as set forth below.

~~Stock-Based Compensation~~Redeemable Non-Controlling Interest

During the quarter ended July 31, 2022, the Company established a joint venture with Japan Cloud Computing II L.P. (the “Investor”) in Japan (“PagerDuty K.K.”), which is a variable interest entity, obtaining a 51% controlling interest. The Company ~~recognizes compensation expense for all stock-based payment awards, including stock options, restricted stock units (“RSUs”), and performance stock units (“PSUs”), based on~~has consolidated the ~~estimated fair value~~financial results of the ~~award on the grant date.~~

The Company estimates the fair value of stock options issued to employees on the date of grant using the Black-Scholes option pricing model, which is impacted by the estimated fair value of the Company’s common stock, as well as certain assumptions including the expected volatility over the term of the option awards, the expected term of the awards, risk-free interest rates and the expected dividend yield. Assumptions and estimates used in the determination of the fair value of stock options are as follows:

~~Table of Contents~~

~~PAGERDUTY, INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~Expected volatility~~—Expected volatility is a measure of the amount by which the stock price is expected to fluctuate. Since the Company does not have sufficient trading history for its common stock, it estimates the expected volatility of its stock options by taking the average historical volatility of a group of comparable publicly traded companies over a period equal to the expected life of the options.

~~Expected term~~—The Company determines the expected term based on the average period the stock options are expected to remain outstanding, generally calculated as the midpoint of the stock options’ vesting term and contractual expiration period, as the Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior.

~~Risk-free rate—The Company uses the U.S. Treasury yield for its risk-free interest rate that corresponds with the expected term.~~

~~Expected dividend yield—The Company utilizes a dividend yield of zero, as it does not currently issue dividends and does not expect to in the future.~~

~~The Company estimates the fair value of RSUs and PSUs at our stock price on the grant date.~~

The Company estimates the fair value of shares to be issued under the employee stock purchase plan (the “ESPP”) on the first day of the offering period using the Black-Scholes valuation model, which is impacted by the estimated fair value of the Company’s common stock, as well as certain assumptions including the expected volatility over the term of the offering period, the expected term of the awards, risk-free interest rates and the expected dividend yield. Assumptions used in the determination of the fair value of the ESPP are the same as those used in the determination of the fair value of our stock options.

The Company generally recognizes compensation expense for employee stock-based payment awards on a straight-line basis over the period during which an award recipient is required to provide services in exchange for the award (generally the vesting period of the award), with the exception of PSUs which are recognized using the accelerated attribution method. The Company accounts for forfeitures as they occur.

The fair value of each non-employee stock option is estimated at the date of grant using the Black-Scholes option pricing model and is not remeasured over the vesting term. Assumptions used in valuing non-employee stock options are generally consistent with those used for employee stock options with the exception that the expected term is over the contractual life.

~~Recently Adopted Accounting Pronouncements~~

~~In August 2020, the FASB issued Accounting Standard Update No. 2020-06 (“ASU 2020-06”),~~ ~~Debt—Debt with Conversion Options (“Subtopic 470-20”) and Derivatives and Hedging—Contracts in Entity’s Own Equity (“Subtopic 815-40”)~~, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity's own equity. ASU 2020-06 also improves and amends the related Earnings Per Share guidance for both Subtopics. The ASU is part of the FASB's simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The Company early adopted ASU 2020-06 as of February 1, 2021 using the modified retrospective approach. As a result of the adoption of ASU 2020-06, the Convertible Notes due July 2025 (the “Notes”) are no longer bifurcated into separate liability and equity components in the October 31, 2021 condensed consolidated balance sheets. Rather, the $287.5 million principal amount of the Company’s Convertible Notes was classified only as a liability in the October 31, 2021 condensed consolidated balance sheets. Upon adoption, the Company recognized an increase to long-term debt of $61.7 million, a decrease to additional paid in capital of $68.5 million, and a decrease in accumulated deficit of $6.7 million on its condensed consolidated balance sheets as of February 1, 2021. The adoption did not affect thejoint venture.

Table of Contents

PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

~~Company’s~~The agreements with the non-controlling interest holders of PagerDuty K.K. contain redemption features whereby the interest held by the non-controlling interest holders is redeemable either (i) at the option of the non-controlling interest holders or (ii) at the option of the Company, both beginning on the tenth anniversary of the initial capital contribution. The balance of the redeemable non-controlling interest is reported at the greater of the initial carrying amount adjusted for the redeemable non-controlling interest's share of earnings or losses and other comprehensive income or loss, or its estimated redemption value. The resulting changes in the estimated redemption amount are recorded with corresponding adjustments against additional paid-in-capital due to the absence of retained earnings. The carrying amount of the redeemable non-controlling interest is recorded on the Company's condensed consolidated ~~statements of operations or condensed consolidated statements of cash flows. Refer~~balance sheets as temporary equity. There were no adjustments attributable to ~~Note 10, “Debt~~redeemable non-controlling interest in the three and ~~Financing Arrangements”~~ ~~for further information.~~

As of January 31, 2021 ASU 2020-06 Adoption Adjustment As of February 1, 2021
(in thousands)
Liabilities
Outstanding principal $ 287,500 $ — $ 287,500
Unamortized debt discount and issuance costs (69,972) 61,736 (8,236)
Net carrying amount $ 217,528 $ 61,736 $ 279,264
Equity
Additional paid-in-capital $ (614,494) $ 68,478 $ (546,016)
Accumulated deficit (248,110) 6,742 (241,368)
nine months ended October 31, 2022.

Recently ~~Issued~~Adopted Accounting Pronouncements

In ~~October 2021,~~March 2022, the FASB issued Accounting Standard Update No. ~~2021-08~~2022-01 (“ASU 2021-08”), Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 (Revenue from Contracts with Customers). At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The ASU is part of the FASB's simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The Company early adopted ASU ~~2021-08 will be effective for annual reporting periods beginning after December 15, 2022. Early adoption is permitted, including adoption in an interim period.~~2022-01 as of February 1, 2022 using the prospective method. The adoption of the standard ~~will impact future business combinations and require~~impacted the accounting for the acquisition of Catalytic, Inc. (“Catalytic”) requiring the Company to measure acquired contract assets and liabilities in accordance with ASC 606. The ~~Company does not expect the~~ adoption of ASU 2021-08 todid not have a material impact on the condensed consolidated financial statements.

3. Redeemable Non-Controlling Interest

In May 2022, the Company established a joint venture, PagerDuty K.K, which is a variable interest entity. The Company obtained a 51% controlling interest and has consolidated the financial results of the joint venture.

The following table summarizes the activity in the redeemable non-controlling interest for the period indicated below:


	Three Months Ended October 31, 2022		Nine Months Ended October 31, 2022
	(in thousands)
Balance at beginning of period	$	1,811	$	—
Investment by redeemable non-controlling interest	—		1,908
Net loss attributable to redeemable non-controlling interest	(262)		(362)
Foreign currency translation adjustments	2		5
Balance at end of period	$	1,551	$	1,551

4. Cash, Cash Equivalents, and Investments

Cash, cash equivalents, and investments consisted of the following:

As of October 31, 2021 As of January 31, 2021
(in thousands)
Cash and cash equivalents
Cash $ 297,777 $ 184,308
Money market funds 59,961 139,870
Commercial paper 2,000 —
U.S. Treasury securities — 14,988
Total cash and cash equivalents $ 359,738 $ 339,166
Available-for-sale investments:
U.S. Treasury securities $ 39,217 $ 45,026
Commercial paper 39,778 34,598
Corporate debt securities 106,550 141,488
Total available-for-sale investments $ 185,545 $ 221,112

Table of Contents

PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)


	As of October 31, 2022		As of January 31, 2022
	(in thousands)
Cash and cash equivalents
Cash	$	118,604	$	268,091
Money market funds	141,730		73,194
Commercial paper	1,999		5,500
U.S. Treasury securities	—		3,000
Total cash and cash equivalents	$	262,333	$	349,785
Available-for-sale investments:
U.S. Treasury securities	$	50,569	$	41,105
Commercial paper	31,638		39,483
Corporate debt securities	108,964		112,983
U.S. Government agency securities	5,933		—
Total available-for-sale investments	$	197,104	$	193,571

The following tables summarize the Company’s investments’ adjusted cost, net unrealized ~~gains (losses),~~losses, and fair value by significant investment category as of October 31, ~~2021~~2022 and January 31, ~~2021.~~2022. Gross realized gains or losses from sales of available-for-sale securities were not material for the three and nine months ended October 31, ~~2021.~~2022.


		As of October 31, 2021							As of October 31, 2022
		Cost Basis		Unrealized Loss, Net		Recorded Basis			Cost Basis		Unrealized Loss		Recorded Basis
		(in thousands)							(in thousands)
Available-for-sale investments:	Available-for-sale investments:							Available-for-sale investments:
U.S. Treasury securities	U.S. Treasury securities	$	39,221	$	(4)	$	39,217	U.S. Treasury securities	$	50,685	$	(116)	$	50,569
Commercial paper	Commercial paper	39,791		(13)		39,778		Commercial paper	31,918		(280)		31,638
Corporate debt securities	Corporate debt securities	106,724		(174)		106,550		Corporate debt securities	111,124		(2,160)		108,964
U.S. Government agency securities								U.S. Government agency securities	5,998		(65)		5,933
Total available-for-sale investments	Total available-for-sale investments	$	185,736	$	(191)	$	185,545	Total available-for-sale investments	$	199,725	$	(2,621)	$	197,104


		As of January 31, 2021							As of January 31, 2022
		Cost Basis		Unrealized Gain (Loss), Net		Recorded Basis			Cost Basis		Unrealized Loss, Net		Recorded Basis
		(in thousands)							(in thousands)
Available-for-sale investments:	Available-for-sale investments:							Available-for-sale investments:
U.S. Treasury securities	U.S. Treasury securities	$	45,023	$	3	$	45,026	U.S. Treasury securities	$	41,147	$	(42)	$	41,105
Commercial paper	Commercial paper	34,607		(9)		34,598		Commercial paper	39,528		(45)		39,483
Corporate debt securities	Corporate debt securities	141,139		349		141,488		Corporate debt securities	113,565		(582)		112,983
Total available-for-sale investments	Total available-for-sale investments	$	220,769	$	343	$	221,112	Total available-for-sale investments	$	194,240	$	(669)	$	193,571

The following tables present the Company’s available-for-sale securities by contractual maturity date as of October 31, ~~2021~~2022 and January 31, ~~2021:~~2022:

As of October 31, 2021
Cost Basis Recorded Basis
(in thousands)
Due within one year $ 145,249 $ 145,192
Due between one to five years 40,487 40,353
Total $ 185,736 $ 185,545

Table of Contents

As of January 31, 2021
Cost Basis Recorded Basis
(in thousands)
Due within one year $ 171,498 $ 171,837
Due between one to five years 49,271 49,275
Total $ 220,769 $ 221,112
PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)


	As of October 31, 2022
	Cost Basis		Recorded Basis
	(in thousands)
Due within one year	$	150,320	$	148,732
Due between one to five years	49,405		48,372
Total	$	199,725	$	197,104


	As of January 31, 2022
	Cost Basis		Recorded Basis
	(in thousands)
Due within one year	$	154,692	$	154,455
Due between one to five years	39,548		39,116
Total	$	194,240	$	193,571

As of October 31, ~~2021,~~2022, there were 6592 available-for-sale securities in an unrealized loss position, 127 of which ~~was~~were in a continuous unrealized loss position for the last 12 months. The total unrealized loss related to ~~these~~the 27 securities was ~~$0.2~~$1.0 million. ~~Unrealized losses for~~As of January 31, 2022, there were 69 available-for-sale securities ~~that were~~ in an unrealized loss position, asseven of ~~January 31, 2021~~which were ~~not material.~~in a continuous unrealized loss position for the last 12 months. The total unrealized loss related to the seven securities was $0.7 million.

When evaluating investments for impairment, the Company reviews factors such as the extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s

~~Table of Contents~~

~~PAGERDUTY, INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

intent to sell, or whether it is more likely than not that the Company will be required to sell, the investment before recovery of the investment’s amortized cost. No impairment loss has been recorded on the securities included in the tables above, as the Company believes that any decrease in fair value of these securities is temporary and the Company expects to recover at least up to the initial cost of the investment for these securities. The Company has not recorded an allowance for credit losses, as the Company believes any such losses would be immaterial based on the high-grade credit rating for each of its marketable securities as of the end of each period.

4.5. Fair Value Measurements

The Company measures its financial assets and liabilities at fair value each reporting period using a fair value hierarchy that prioritizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value, as follows:

Level 1—Valuations based on observable inputs that reflect quoted prices for identical assets or liabilities in active markets.

Level 2—Valuations based on inputs that are directly or indirectly observable in the marketplace.

Level 3—Valuations based on unobservable inputs that are supported by little or no market activity.

The following tables present information about the Company’s financial assets that are required to be measured or disclosed at fair value using the above input categories:

As of October 31, 2021
Level 1 Level 2 Level 3 Total
(in thousands)
Money market funds $ 59,961 $ — $ — $ 59,961
U.S. Treasury securities — 39,217 — 39,217
Commercial paper 2,000 39,778 — 41,778
Corporate debt securities — 106,550 — 106,550
Total $ 61,961 $ 185,545 $ — $ 247,506
Included in cash equivalents $ 61,961
Included in investments $ 185,545

Table of Contents

As of January 31, 2021
Level 1 Level 2 Level 3 Total
(in thousands)
Money market funds $ 139,870 $ — $ — $ 139,870
U.S. Treasury securities 14,988 45,026 — 60,014
Commercial paper — 34,598 — 34,598
Corporate debt securities — 141,488 — 141,488
Total $ 154,858 $ 221,112 $ — $ 375,970
Included in cash equivalents $ 154,858
Included in investments $ 221,112
PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)


	As of October 31, 2022
	Level 1		Level 2		Level 3		Total
	(in thousands)
Money market funds	$	141,730	$	—	$	—	$	141,730
U.S. Treasury securities	—		50,569		—		50,569
Commercial paper	1,999		31,638		—		33,637
Corporate debt securities	—		108,964		—		108,964
U.S. Government agency securities	—		5,933		—		5,933
Total	$	143,729	$	197,104	$	—	$	340,833
Included in cash equivalents							$	143,729
Included in investments							$	197,104


	As of January 31, 2022
	Level 1		Level 2		Level 3		Total
	(in thousands)
Money market funds	$	73,194	$	—	$	—	$	73,194
U.S. Treasury securities	3,000		41,105		—		44,105
Commercial paper	5,500		39,483		—		44,983
Corporate debt securities	—		112,983		—		112,983
Total	$	81,694	$	193,571	$	—	$	275,265
Included in cash equivalents							$	81,694
Included in investments							$	193,571

The Company’s assets that are measured by management at fair value on a recurring basis are generally classified within Level 1 or Level 2 of the fair value hierarchy.

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~~PAGERDUTY, INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. As of October 31, ~~2021~~2022 and January 31, ~~2021,~~2022, the Company’s Level 2 securities were priced by pricing vendors. These pricing vendors utilize observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs like market transactions involving identical or comparable securities.

The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable, and accounts payable approximate fair value due to their short-term maturities and are excluded from the fair value table above.

Convertible Senior Notes

As of October 31, ~~2021,~~2022, the estimated fair value of ~~the~~our 1.25% Convertible Senior Notes due 2025 (the “Notes”) was approximately ~~$369.3~~$282.6 million. The fair value was determined based on the quoted price for the Notes in an inactive market on the last trading day of the reporting period and is considered as Level 2 in the fair value hierarchy.

~~5. Goodwill and Acquired Intangible Assets~~

~~There have been no changes in the carrying amount of goodwill since January 31, 2021.~~

~~Acquired intangible assets subject to amortization as of October 31, 2021 were as follows:~~

Cost Accumulated Amortization Net Weighted Average
Remaining Useful Life
(in thousands) (in years)
Customer relationships $ 21,800 $ (2,362) $ 19,438 8.9
Developed technology 5,600 (1,213) 4,387 3.9
Trademarks 400 (217) 183 0.9
Total acquired intangibles, net $ 27,800 $ (3,792) $ 24,008

For the three months ended October 31, 2021 and 2020, amortization expense related to intangible assets was $0.9 million and $0.3 million, respectively. For the nine months ended October 31, 2021 and 2020, amortization expense related to intangible assets was $2.6 million and $0.3 million, respectively.

6. Business Combinations

On ~~October 1, 2020,~~March 8, 2022, the Company completed the acquisition of ~~Rundeck Inc (“Rundeck”),~~Catalytic, a ~~leading~~ provider of ~~DevOps~~a no-code/low-code workflow automation ~~for enterprise.~~application. The Company acquired ~~Rundeck~~Catalytic for purchase consideration of ~~$95.5~~$68.8 million in ~~a combination of cash and common stock.~~cash. The acquisition was accounted for as a business combination and the ~~total purchase consideration was allocated to the net tangible and intangible~~acquired assets and liabilities ~~based on~~were recorded at their preliminary fair values on the acquisition date and ~~the~~any excess was recorded as goodwill. The values

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of the date of this Quarterly Report on Form 10-Q and may be adjusted during the measurement period of up to 12 months from the date of acquisition as further information becomes available. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill. As of October 31, 2022, the primary area that remains preliminary relates to the valuation of certain tax-related items.

The following table presents the preliminary fair values of acquired assets and liabilities recorded in the Company’s condensed consolidated balance sheet as of the acquisition date:


	(in thousands)
Cash and cash equivalents	$	2,506
Accounts receivable and other assets	801
Prepaid and other current assets	841
Intangible assets	21,800
Goodwill	46,736
Accounts payable and other liabilities	(408)
Deferred revenue	(856)
Other tax liabilities	(1,322)
Deferred tax liability	(1,330)
Total purchase consideration	$	68,768

The goodwill was primarily attributed to the value of synergies created with the Company’s current and future offerings. Goodwill is not deductible for income tax purposes.

In connection with the acquisition, the Company recognized a net deferred tax liability for approximately $1.3 million, generated primarily from the difference between the tax basis and fair value of the acquired intangible assets, which increased goodwill. As the Company has a full valuation allowance as of October 31, 2022, the Company recorded an income tax benefit for this net deferred tax liability in the condensed consolidated statement of operations for the nine months ended October 31, 2022. Refer to Note 16, "Income Taxes", for further information.

The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition:


	Fair Value		Useful Life
	(in thousands)		(in years)
Developed technology	$	19,200	3
Customer relationships	$	2,600	10

This business combination resulted in increases of ~~$72.1~~$46.7 million to goodwill, ~~$21.8 million to customer relationships, $5.6~~$19.2 million to developed technology and ~~$0.4~~$2.6 million to ~~trademarks.~~customer relationships. The Company also entered into holdback agreements with the two founders of Catalytic with $3.4 million held back in cash which are subject to the recipients’ continued service with the Company and thus excluded from the purchase price and will be recognized ratably as research and development expense over the required two-year service period.

From the date of the acquisition, the financial results of ~~Rundeck~~Catalytic have been included in and are immaterial to ~~our~~the Company’s condensed consolidated financial statements. Pro forma revenue and results of operations have not been presented because the historical results are not material to ~~our~~the condensed consolidated financial statements in any period presented.

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The Company did not complete any ~~acquisitions~~other business combinations in the three and nine months ended October 31, ~~2021.~~2022.

7. Goodwill and Acquired Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended October 31, 2022 are as follows:


	Goodwill
	(in thousands)
Balance as of January 31, 2022	$	72,126
Goodwill resulting from business combination	46,736
Balance as of October 31, 2022	$	118,862

Acquired intangible assets subject to amortization consist of the following:


	As of October 31, 2022
	Cost		Accumulated Amortization		Net		Weighted Average Remaining Useful Life
	(in thousands)						(in years)
Customer relationships	$	24,400	$	(4,709)	$	19,691	8.1
Developed technology	24,800		(6,462)		18,338		2.5
Trademarks	400		(400)		—		0.0
Assembled workforce	2,527		(527)		2,000		1.6
Total acquired intangibles, net	$	52,127	$	(12,098)	$	40,029


	As of January 31, 2022
	Cost		Accumulated Amortization		Net		Weighted Average Remaining Useful Life
	(in thousands)						(in years)
Customer relationships	$	21,800	$	(2,907)	$	18,893	8.7
Developed technology	5,600		(1,493)		4,107		3.7
Trademarks	400		(267)		133		0.7
Total acquired intangibles, net	$	27,800	$	(4,667)	$	23,133

For the three months ended October 31, 2022 and 2021, amortization expense related to intangible assets was $2.6 million and $0.9 million, respectively. For the nine months ended October 31, 2022 and 2021, amortization expense related to acquired intangible assets was $7.4 million and $2.6 million, respectively.

1618

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

7.8. Property and Equipment, Net

Property and equipment, net, consisted of the following:


		As of October 31, 2021		As of January 31, 2021			As of October 31, 2022		As of January 31, 2022
		(in thousands)					(in thousands)
Leasehold improvements	Leasehold improvements	$	13,246	$	12,767	Leasehold improvements	$	15,599	$	15,392
Computers and equipment	Computers and equipment	7,425		6,562		Computers and equipment	9,168		7,483
Furniture and fixtures	Furniture and fixtures	3,040		3,017		Furniture and fixtures	4,774		4,686
Capitalized internal-use software	Capitalized internal-use software	5,180		1,355		Capitalized internal-use software	9,389		6,136
Gross property and equipment (1)	Gross property and equipment (1)	28,891		23,701		Gross property and equipment (1)	38,930		33,697
Accumulated depreciation and amortization	Accumulated depreciation and amortization	(14,266)		(11,062)		Accumulated depreciation and amortization	(20,591)		(15,468)
Property and equipment, net	Property and equipment, net	$	14,625	$	12,639	Property and equipment, net	$	18,339	$	18,229

(1) Gross property and equipment includes construction-in-progress for leasehold improvements and capitalized internal-use software of ~~$2.7~~$4.6 million and ~~$1.5~~$6.9 million that had not yet been placed in service as of October 31, ~~2021~~2022 and January 31, ~~2021,~~2022, respectively. The costs associated with construction-in-progress are not amortized until the asset is available for its intended use.

Depreciation and amortization expense was ~~$1.3~~$1.8 million and ~~$1.0~~$1.3 million for the three months ended October 31, 2022 and 2021, respectively. Depreciation and ~~2020, respectively,~~amortization expense was $5.1 million and $3.4 ~~million and $2.9~~ million for the nine months ended October 31, 2022 and 2021, ~~and 2020,~~ respectively.

In the nine months ended October 31, 2022, the Company recorded an impairment charge of $0.7 million on its capitalized internal-use software included in construction-in-progress. It was determined that the developed technology would not be placed in service as the technology was replaced with the acquired technology of Catalytic.

8.9. Deferred Contract Costs

Deferred contract costs, which primarily consist of deferred sales commissions, were ~~$37.8~~$45.0 million and ~~$31.6~~$42.8 million as of October 31, ~~2021~~2022 and January 31, 2022, respectively. Amortization expense for deferred contract costs was $4.9 million and $3.9 million for the three months ended October 31, 2022 and 2021, respectively. Amortization expense for deferred contract costs was ~~$3.9~~$14.2 million and ~~$2.8 million for the three months ended October 31, 2021 and 2020, respectively, and~~ $10.7 ~~million and $7.9~~ million for the nine months ended October 31, ~~2021~~2022 and ~~2020,~~2021, respectively. There was no impairment charge related to the costs capitalized for the periods presented.

9.10. Leases

Operating Leases

The Company has entered into various non-cancellable operating leases for its office spaces with lease periods expiring between fiscal ~~2022~~2023 and fiscal 2029. The operating lease agreements generally provide for rental payments on a graduated basis and for options to renew, which could increase future minimum lease payments if exercised.

Lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The lease right-of-use assets also include any lease payments made and exclude lease incentives such as tenant improvement allowances.

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The operating leases typically include non-lease components such as common-area maintenance costs. The Company has elected to include non-lease components with lease payments for the purpose of calculating lease right-of-use assets and liabilities, to the extent that they are fixed. Non-lease components that are not fixed are expensed as incurred as variable lease payments.

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~~PAGERDUTY, INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

Leases with a term of one year or less are not recognized on our condensed consolidated balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.

The following table presents information about leases on the condensed consolidated balance sheet.


		As of October 31, 2021		As of January 31, 2021			As of October 31, 2022		As of January 31, 2021
		(in thousands)					(in thousands)
Assets	Assets					Assets
Lease right-of-use assets	Lease right-of-use assets	$	21,360	$	24,691	Lease right-of-use assets	$	15,141	$	20,227
Liabilities	Liabilities					Liabilities
Lease liabilities	Lease liabilities	5,554		5,262		Lease liabilities	6,438		5,637
Lease liabilities, non-current	Lease liabilities, non-current	22,438		26,542		Lease liabilities, non-current	14,155		20,912

As of October 31, ~~2021,~~2022, the weighted average remaining lease term was ~~5.0~~3.9 years and the weighted average discount rate used to determine the net present value of the lease liabilities was 3.7%.

The following table presents information about leases on the condensed consolidated statement of operations.


		Three Months Ended October 31,				Nine Months Ended October 31,					Three Months Ended October 31,				Nine Months Ended October 31,
		2021		2020		2021		2020			2022		2021		2022		2021
		(in thousands)									(in thousands)
Operating lease expense	Operating lease expense	$	1,401	$	1,448	$	4,173	$	4,335	Operating lease expense	$	1,371	$	1,401	$	4,293	$	4,173
Short-term lease expense	Short-term lease expense	304		105		473		665		Short-term lease expense	484		304		1,342		473
Variable lease expense	Variable lease expense	313		335		628		998		Variable lease expense	285		313		957		628

The following table presents supplemental cash flow information about the Company’s leases.

Three Months Ended October 31, Nine Months Ended October 31,
2021 2020 2021 2020
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities $ 1,581 $ 1,524 $ 4,724 $ 3,811


	Three Months Ended October 31,				Nine Months Ended October 31,
	2022		2021		2022		2021
	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities	$	1,601	$	1,581	$	4,840	$	4,724

~~10.~~11. Debt and Financing Arrangements

Convertible Senior Notes

On June 25, 2020, the Company issued $287.5 million in aggregate principal amount of the Notes in a private offering pursuant to an Indenture dated June 25, 2020 (the “Indenture”). The total net proceeds from the debt offering, after deducting initial purchaser discounts and debt issuance costs, paid or payable by us, were $278.2 million.

The Notes are senior, unsecured obligations of the Company and accrue interest payable semiannually in arrears on January 1 and July 1 of each year, beginning on January 1, 2021, at a rate of 1.25% per year. The Notes will mature on July 1, 2025, unless such notes are converted, redeemed or repurchased earlier. The Notes are

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

convertible into cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election in the manner and subject to the terms and conditions provided in the Indenture.

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~~PAGERDUTY, INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

Holders of the Notes may convert all or any portion of their Notes at their option at any time prior to the close of business on April 1, 2025, only under the following circumstances:

•During any fiscal quarter commencing after the fiscal quarter ended October 31, 2020 (and only during such fiscal quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

•During the 5five business day period after any 10ten consecutive trading day period (the measurement period) in which the “trading price” (as defined in the Indenture) per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;

•If the Company calls such Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or

•Upon the occurrence of specified corporate events, as noted in the Indenture.

On or after April 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the Notes may convert all or any portion of their Notes at any time, regardless of the foregoing circumstances.

The conversion rate will initially be 24.9507 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $40.08 per share of common stock. The conversion rate is subject to adjustment under certain circumstances in accordance with the terms of the Indenture, but will not be adjusted for accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Notes in connection with a fundamental change, as defined in the Indenture.

The Company may not redeem the Notes prior to July 6, 2023. The Company may redeem for cash all or any portion of the Notes, at its option, on a redemption date occurring on or after July 6, 2023 and prior to the 41st scheduled trading day immediately preceding the maturity date, if the last reported sale price of the common stock has been at least 130% of the conversion price for the Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes.

If the Company undergoes a fundamental change (as defined in the Indenture), holders may require the Company to repurchase for cash all or any portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

The Indenture contains customary terms and covenants, including that upon certain events of default occurring and continuing, the trustee or the holders of at least 25% in aggregate principal amount of the outstanding Notes may declare the entire principal of all the Notes plus accrued and unpaid interest to be immediately due and payable.

~~Prior to~~The Company accounts for the ~~adoption of~~Notes as a single liability in accordance with ASU 2020-06 ~~on February 1, 2021~~“Accounting for Convertible Instruments and Contracts in accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated using a discount rate of 7.30%, which was determined by measuring the fair value of a similar debt instrument that does not have an associated conversion feature. The carrying amount of the equity component representing the conversion option was $70.8 million and was determined by deducting the fair value of the liability component from the par value of the Notes. The equity component was not remeasured as long as it continued to meet the conditions for equity classification, and the equity component was recorded in additional paid-Entity’s Own Equity”.

1921

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

~~in-capital in the accompanying condensed consolidated balance sheet.~~ The excess of the principal amount of the liability component over its carrying amount, or the debt discount, was amortized to interest expense at an annual effective interest rate of 7.88% over the contractual terms of the Notes. The interest rate was based on the interest rate of similar liabilities at the time of issuance that did not have associated convertible features. The debt component was classified as a long-term liability as of January 31, 2021.

Prior to the adoption of ASU 2020-06 on February 1, 2021 and in accounting for the issuance costs of $9.3 million related to the Notes, the Company allocated the total amount incurred to the liability and equity components of the Notes based on their relative values. Issuance costs attributable to the liability component were $7.0 million and were amortized to interest expense using the effective interest method over the contractual term of the Notes. Issuance costs attributable to the equity component were $2.3 million and were netted with the equity component in additional paid-in capital.

On February 1, 2021, the Company elected to early adopt ASU 2020-06 based on a modified retrospective transition method. Under such transition, prior-period information has not been retrospectively adjusted.

~~In accounting for the Notes after adoption of ASU 2020-06, the Notes are accounted for as a single liability, and the~~ carrying amount of the Notes is ~~$280.6~~$282.4 million as of October 31, ~~2021,~~2022, with principal of $287.5 million, net of unamortized issuance costs of ~~$6.9~~$5.1 million. The Notes were classified as long-term liabilities as of October 31, ~~2021.~~2022. The issuance costs related to the Notes are being amortized to interest expense over the contractual term of the Notes at an effective interest rate of 1.93%.

The net carrying amount of the ~~liability component of the~~ Notes as of October 31, ~~2021 (post-ASU 2020-06 adoption)~~2022 and as of January 31, ~~2021 (pre-ASU 2020-06 adoption)~~2022 was as follows:

As of October 31, 2021 As of January 31, 2021
(in thousands)
Principal $ 287,500 $ 287,500
Less: unamortized debt discount — (63,664)
Less: unamortized issuance costs (6,885) (6,308)
Net carrying amount $ 280,615 $ 217,528

~~The net carrying amount of the equity component of the Notes as of October 31, 2021 (post-ASU 2020-06 adoption) and as of January 31, 2021 (pre-ASU 2020-06 adoption) was as follows:~~

~~As of October 31, 2021~~

~~As of January 31, 2021~~

~~(in thousands)~~

~~Proceeds allocated to the conversion options (debt discount)~~

—

~~70,768~~

~~Less: issuance costs~~

—

~~(2,290)~~

~~Carrying amount of the equity component~~

—

~~68,478~~


	As of October 31, 2022		As of January 31, 2022
	(in thousands)
Principal	$	287,500	$	287,500
Less: unamortized issuance costs	(5,055)		(6,431)
Net carrying amount	$	282,445	$	281,069

Interest expense recognized related to the Notes is as follows:

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~~PAGERDUTY, INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~


		Three Months Ended October 31,				Nine Months Ended October 31,					Three Months Ended October 31,				Nine Months Ended October 31,
		2021		2020		2021		2020			2022		2021		2022		2021
		(in thousands)									(in thousands)
Contractual interest expense	Contractual interest expense	$	898	$	898	$	2,695	$	1,248	Contractual interest expense	$	899	$	898	$	2,696	$	2,695
Amortization of debt discount		—		2,943		—		4,088
Amortization of debt issuance costs	Amortization of debt issuance costs	452		292		1,350		405		Amortization of debt issuance costs	461		452		1,376		1,350
Total interest expense related to the Notes	Total interest expense related to the Notes	$	1,350	$	4,133	$	4,045	$	5,741	Total interest expense related to the Notes	$	1,360	$	1,350	$	4,072	$	4,045

Capped Call Transactions

In connection with the offering of the Notes, the Company entered into privately negotiated capped call transactions (the “Capped Calls”) with certain financial institution counterparties (the “Option Counterparties”). The Capped Calls are generally intended to reduce or offset the potential dilution to the common stock upon any conversion of the Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. For accounting purposes, the Capped Calls are separate transactions, and not part of the terms of the Notes. The Capped Calls are recorded in stockholders’ equity and are not accounted for as derivatives. The cost of $35.7 million incurred to purchase the Capped Calls were recorded as a reduction to additional paid-in capital in the accompanying condensed consolidated balance sheet.

The Capped Calls each have an initial strike price of approximately $40.08 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls have an initial cap price of $61.66 per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, approximately 7.2 million shares of our common stock. The Capped Calls are subject to automatic exercise over a 40 trading day period commencing on May 2, 2025, subject to earlier termination under certain circumstances.

~~11.~~12. Commitments and Contingencies

Legal Matters

From time to time, ~~in the normal course of business,~~ the Company may be subject to various claims and other legal matters arising in the ordinary course of business. The Company ~~investigates these claims as they arise and~~ accrues estimates for resolution of legal and other contingencies when losses are probable and estimable. The outcomes of legal proceedings are subject to significant uncertainties. The Company is not currently a party to any pending legal proceedings ~~and does not anticipate any pending~~for which management believes the outcome, individually or ~~threatened litigation that~~in the aggregate, would ~~be expected to~~ have a material adverse effect on its business, operating results, cash flows, or financial ~~condition, results~~condition.

Table of ~~operations, or cash flows.~~Contents

Warranties and Indemnification

The Company has entered into service-level agreements with a portion of its customers defining levels of uptime reliability and performance and permitting those customers to receive credits if the Company fails to meet the defined levels of uptime. To date, the Company has not experienced any significant failures to meet defined levels of uptime reliability and performance as a result of those agreements and, as a result, the Company has not incurred or accrued any material liabilities related to these agreements in the financial statements.

In the ordinary course of business, wethe Company may agree to indemnify customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by ~~us,~~the Company, or from intellectual property infringement claims made by third parties. As permitted under Delaware law, ~~we have~~the Company has entered into indemnification agreements with ~~our~~its directors and certain officers and employees that will require ~~us,~~the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees. No demands have been made upon usthe Company to provide indemnification under such agreements, and there are no claims that ~~we are~~the Company is aware of that could have a

~~Table of Contents~~

material effect on ~~our~~its consolidated balance sheets, consolidated statements of operations and comprehensive loss, or consolidated statements of cash flows.

~~12.~~13. Deferred Revenue and Performance Obligations

The following table presents the changes to the Company’s deferred revenue:


		Three Months Ended October 31,				Nine Months Ended October 31,					Three Months Ended October 31,				Nine Months Ended October 31,
		2021		2020		2021		2020			2022		2021		2022		2021
		(in thousands)									(in thousands)
Deferred revenue, beginning of period	Deferred revenue, beginning of period	$	134,002	$	101,180	$	129,972	$	92,569	Deferred revenue, beginning of period	$	169,534	$	134,002	$	170,224	$	129,972
Billings	Billings	80,608		57,636		215,765		166,747		Billings	104,384		80,608		278,462		215,765
Deferred revenue assumed in the Rundeck acquisition		—		2,680		—		2,680
Deferred revenue assumed in the Catalytic acquisition										Deferred revenue assumed in the Catalytic acquisition	—		—		856		—
Revenue recognized	Revenue recognized	(71,760)		(53,772)		(202,887)		(154,272)		Revenue recognized	(94,203)		(71,760)		(269,827)		(202,887)
Deferred revenue, end of period	Deferred revenue, end of period	$	142,850	$	107,724	$	142,850	$	107,724	Deferred revenue, end of period	$	179,715	$	142,850	$	179,715	$	142,850

For the three months ended October 31, ~~2021~~2022 and ~~2020,~~2021, the majority of revenue recognized was from the deferred revenue balances at the beginning of each quarter. For the nine months ended October 31, ~~2021~~2022 and ~~2020,~~2021, approximately half of revenue recognized was from the deferred revenue balance at the beginning of ~~each~~the period.

As of October 31, ~~2021,~~2022, future estimated revenue related to performance obligations for cloud-hosted and term-license software subscriptions with terms of more than one year that are unsatisfied or partially unsatisfied at the end of the reporting periods was approximately ~~$123.0~~$174.3 million. The Company expects to satisfy the substantial majority of these unsatisfied performance obligations over the next 24 months and the remainder thereafter. The Company applied the optional exemption for subscriptions with terms of less than one year.

~~13.~~14. Common Stock and Stockholders’ Equity

Equity Incentive Plans

The Company has 2two equity incentive plans: the 2010 Stock Plan (the “2010 Plan”) and the 2019 Equity Incentive Plan (the “2019 Plan”, collectively the “Stock Plans”). Upon completion of the Company’s initial public offering (“IPO”) in April 2019, the Company ceased granting awards under the 2010 Plan, and all shares that remained available for future issuance under the 2010 Plan at that time were transferred to the 2019 Plan. The 2019 Plan superseded and replaced the 2010 Plan. As of October 31, ~~2021~~2022 and January 31, ~~2021,~~2022, the Company was

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authorized to grant up to ~~23,156,318~~28,626,857 shares and ~~18,059,506~~23,343,378 shares of common stock, respectively, under the Stock Plans.

The Company currently uses authorized and unissued shares to satisfy stock award exercises and settlement of RSUs and PSUs. As of October 31, ~~2021~~2022 and January 31, ~~2021,~~2022, there were ~~14,102,032~~13,340,710 shares and ~~13,060,282~~14,185,048 shares available for future issuance under the Stock Plans, respectively.

Shares of common stock reserved for future issuance are as follows:


			October 31, ~~2021~~2022
Outstanding stock options and unvested RSUs and PSUs			~~15,563,023~~16,970,374
Available for future stock option, RSU, and PSU grants			~~14,102,032~~13,340,710
Available for ESPP			~~2,721,649~~3,185,930
Total common stock reserved at October 31, ~~2021~~2022			~~32,386,704~~33,497,014

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Stock Option Activity

Stock option activity is as follows:


		Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value			Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
						(in thousands)							(in thousands)
Outstanding at January 31, 2021		11,177,838	$	8.25	6.9 years	$	452,452
Outstanding at January 31, 2022								Outstanding at January 31, 2022	8,375,866	$	9.28	6.1 years	$	198,828
Granted	Granted	151,296	$	42.05				Granted	24,882	$	34.22
Exercised	Exercised	(2,010,991)	$	6.19				Exercised	(1,513,561)	$	5.77
Canceled	Canceled	(323,928)	$	17.81				Canceled	(136,356)	$	14.62
Outstanding at October 31, 2021		8,994,215	$	8.94	6.3 years	$	295,119
Vested as of October 31, 2021		6,831,241	$	6.49	5.9 years	$	240,896
Outstanding at October 31, 2022								Outstanding at October 31, 2022	6,750,831	$	10.05	5.5 years	$	100,491
Vested as of October 31, 2022								Vested as of October 31, 2022	5,956,791	$	8.49	5.2 years	$	97,979

The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options on the date of grant. The Company accounts for forfeitures as they occur. The following assumptions were used to calculate the fair value of employee stock option grants made during the periods:


		Three Months Ended October 31,				Nine Months Ended October 31,					Three Months Ended October 31,			Nine Months Ended October 31,
		2021		2020		2021		2020			2022	2021		2022		2021
Expected dividend yield	Expected dividend yield	—	%	—	%	—	%	—	%	Expected dividend yield	N/A	—	%	—	%	—	%
Expected volatility	Expected volatility	46.0%		43.0% - 44.1%		43.8% - 46.5%		43.0% - 44.1%		Expected volatility	N/A	46.0%		47.1%		43.8% - 46.5%
Expected term (years)	Expected term (years)	6.1		3.7 - 6.1		6.1		3.7 - 6.1		Expected term (years)	N/A	6.1		6.1		6.1
Risk-free interest rate	Risk-free interest rate	1.11%		0.20% - 0.39%		1.04% - 1.16%		0.20% - 0.47%		Risk-free interest rate	N/A	1.11%		2.50%		1.04% - 1.16%

No stock options were granted during the three months ended October 31, 2022. Stock options granted during the three months ended October 31, 2021 ~~and 2020~~ had a weighted average grant date fair value of $19.01 ~~and $23.04~~ per ~~share, respectively.~~share. The aggregate intrinsic value of stock options exercised during the three months ended October 31, 2022 and 2021 ~~and 2020~~ was ~~$27.3~~$6.4 million and ~~$19.0~~$27.3 million, respectively.

Stock options granted during the nine months ended October 31, ~~2021~~2022 and ~~2020~~2021 had a weighted average grant date fair value of ~~$18.76~~$16.46 and ~~$14.64~~$18.76 per share, respectively. The aggregate intrinsic value of stock options exercised during the nine months ended October 31, 2022 and 2021 was $37.0 million and ~~2020 was~~ $73.4 million, ~~and $42.0 million,~~ respectively.

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The intrinsic value for options exercised is the difference between the market value of the stock and the exercise price of the stock option at the date of exercise.

As of October 31, ~~2021,~~2022, there was approximately ~~$21.6~~$9.7 million of total unrecognized compensation cost related to unvested stock options granted under the Stock Plans, which will be recognized over a weighted average period of ~~2.3~~1.8 years.

Restricted Stock Units

A summary of the Company’s RSU activity and related information is as follows:

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		Number of RSUs	Weighted Average Grant Date Fair Value Per Share			Number of RSUs	Weighted Average Grant Date Fair Value Per Share
Outstanding at January 31, 2021		3,971,128	$	23.60
Outstanding at January 31, 2022					Outstanding at January 31, 2022	6,028,201	$	34.77
Granted	Granted	4,097,275	$	41.79	Granted	5,716,516	$	31.03
Vested	Vested	(677,323)	$	25.31	Vested	(1,310,826)	$	34.09
Forfeited or canceled	Forfeited or canceled	(1,057,674)	$	27.65	Forfeited or canceled	(1,815,857)	$	33.77
Outstanding at October 31, 2021		6,333,406	$	34.50
Outstanding at October 31, 2022					Outstanding at October 31, 2022	8,618,034	$	32.60

The fair value of RSUs is based on the fair value of the underlying shares on the date of grant. The Company accounts for forfeitures as they occur.

As of October 31, ~~2021,~~2022, there was ~~$208.2~~$269.0 million of unrecognized stock-based compensation expense related to unvested RSUs, which is expected to be recognized over a weighted average period of ~~3.1~~2.9 years based on vesting under the award service conditions.

Performance Stock Units

On March 8, 2022, the Compensation Committee of the Board certified the results of PagerDuty’s operating plan for the fiscal year ended January 31, 2022. Based on the results, the PSUs granted in April 2021 (“2021 PSU Awards”) were earned at an attainment of 129%.

A summary of the Company’s PSU activity and related information is as follows:


		Number of PSUs	Weighted Average Grant Date Fair Value Per Share			Number of PSUs	Weighted Average Grant Date Fair Value Per Share
Outstanding at January 31, 2021		—	$	—
Outstanding at January 31, 2022					Outstanding at January 31, 2022	117,701	$	41.17
Granted(1)	Granted(1)	127,309	$	41.17	Granted(1)	767,409	$	32.64
Vested	Vested	—	$	—	Vested	(40,007)	$	41.17
Forfeited or canceled	Forfeited or canceled	(9,608)	$	41.17	Forfeited or canceled	(42,225)	$	40.66
Outstanding at October 31, 2021		117,701	$	41.17
Performance adjustment for 2021 PSU Awards					Performance adjustment for 2021 PSU Awards	34,332	$	41.17
Outstanding at October 31, 2022					Outstanding at October 31, 2022	837,210	$	33.38
(1)This amount represents awards granted at 100% attainment.					(1)This amount represents awards granted at 100% attainment.

~~In April 2021, the~~The Company ~~granted 127,309~~grants PSUs ~~with a weighted-average grant date fair value of $41.17 per share,~~ to certain employees of the Company for which the ultimate number of units that will vest are determined based on the achievement of performance at the end of the stated performance period. The performance condition is based on the level of achievement of a Company target related to PagerDuty’s operating ~~plan for fiscal 2022.~~plan. The PSUs ~~will~~ vest over a three-year period, subject to continuous service with the Company. The number of shares of the Company’s stock that will vest based on the performance condition can range from 0% to 200% of the target amount. Compensation expense for PSUs with performance conditions is measured using the fair value at the

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date of grant and recorded over the vesting period under the graded-vesting attribution method, and may be adjusted over the vesting period based on interim estimates of performance against the performance condition.

During the three and nine months ended October 31, 2022 and 2021, the Company recorded stock-based compensation expense for the number of PSUs considered probable of vesting based on the expected attainment of the performance targets.

As of October 31, ~~2021,~~2022, total unrecognized stock-based compensation cost related to PSUs was ~~$3.0~~$9.4 million. This unrecognized stock-based compensation cost is expected to be recognized using the accelerated attribution method over a weighted-average period of approximately 1.3 years.

Employee Stock Purchase Plan

In April 2019, the Board of Directors adopted and approved the 2019 ESPP, which became effective on April 11, 2019. The ESPP generally provides for 24-month offering periods beginning June 15 and December 15 of each year, with each offering period consisting of 4four six-month purchase periods. On each purchase date, eligible employees will purchase the shares at a price per share equal to 85% of the lesser of (1) the fair market value of the Company’s common stock as of the beginning of the offering period or (2) the fair market value of the Company’s common stock on the purchase date, as defined in the ESPP.

During the three months ended October 31, ~~2021~~2022 and ~~2020,~~2021, the Company recognized $1.2 million and $0.8 million, ~~and $1.1 million~~respectively, of stock-based compensation expense related to the ~~ESPP, respectively.~~ESPP. During the nine months ended

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October 31, ~~2021~~2022 and ~~2020,~~2021, the Company recognized ~~$3.9~~$3.4 million and $3.9 million, respectively, of stock-based compensation expense related to the ~~ESPP, respectively.~~ESPP.

During the three months ended October 31, ~~2021~~2022 and ~~2020,~~2021, the Company withheld $2.1 million and $2.2 million, ~~and $1.7 million~~respectively, in contributions from ~~employees, respectively.~~employees. During the nine months ended October 31, ~~2021~~2022 and ~~2020,~~2021, the Company withheld $7.7 million and $7.2 million, ~~and $5.2 million, respectively.~~respectively, in contributions from employees.

During the three months ended October 31, ~~2021~~2022 and ~~2020~~2021 there were no purchases related to the ESPP. During the nine months ended October 31, 2022, 280,725 shares of common stock were issued under the ESPP at a purchase price of $20.43 per share. During the nine months ended October 31, 2021, 222,474 shares of common stock were issued under the ESPP at a weighted average purchase price of ~~$21.98. During the nine months ended October 31, 2020, 181,253 shares of common stock were issued under the ESPP at a purchase price of $19.63~~$21.98 per share.

Stock-Based Compensation

Stock-based compensation expense included in the Company’s condensed consolidated statements of operations is as follows:

Three Months Ended October 31, Nine Months Ended October 31,
2021 2020 2021 2020
(in thousands)
Cost of revenue $ 861 $ 488 $ 2,560 $ 1,095
Research and development 6,183 2,807 16,230 7,459
Sales and marketing 4,606 6,254 12,961 11,409
General and administrative 6,128 3,910 16,115 11,772
Total $ 17,778 $ 13,459 $ 47,866 $ 31,735

~~In the three and nine months ended October 31, 2020, we recorded a one-time stock-based compensation expense of $3.1 million related to the modification of certain option awards.~~


	Three Months Ended October 31,				Nine Months Ended October 31,
	2022		2021		2022		2021
	(in thousands)
Cost of revenue	$	1,937	$	861	$	4,948	$	2,560
Research and development	10,824		6,183		30,066		16,230
Sales and marketing	8,004		4,606		22,533		12,961
General and administrative	10,679		6,128		28,931		16,115
Total	$	31,444	$	17,778	$	86,478	$	47,866

~~14.~~

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15. Net Loss per Share

The following table presents the calculation of basic and diluted net loss per ~~share:~~share attributable to PagerDuty, Inc.:


		Three Months Ended October 31,				Nine Months Ended October 31,					Three Months Ended October 31,				Nine Months Ended October 31,
		2021		2020		2021		2020			2022		2021		2022		2021
		(in thousands, except per share data)									(in thousands, except per share data)
Numerator:	Numerator:									Numerator:
Net loss		$	(26,341)	$	(20,608)	$	(78,560)	$	(46,755)
Net loss attributable to PagerDuty, Inc.										Net loss attributable to PagerDuty, Inc.	$	(32,542)	$	(26,341)	$	(103,861)	$	(78,560)
Denominator:	Denominator:									Denominator:
Weighted average shares used in calculating net loss per share, basic and diluted	Weighted average shares used in calculating net loss per share, basic and diluted	85,092		79,937		83,979		78,835		Weighted average shares used in calculating net loss per share, basic and diluted	89,285		85,092		88,200		83,979
Net loss per share, basic and diluted		$	(0.31)	$	(0.26)	$	(0.94)	$	(0.59)
Net loss per share, basic and diluted, attributable to PagerDuty, Inc.										Net loss per share, basic and diluted, attributable to PagerDuty, Inc.	$	(0.36)	$	(0.31)	$	(1.18)	$	(0.94)

Since the Company was in a loss position for the periods presented, basic net loss per share is the same as diluted net loss per share as the inclusion of all potential common stock outstanding would have been anti-dilutive.

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Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows:


		As of October 31,			As of October 31,
		2021	2020		2022	2021
		(in thousands)			(in thousands)
Shares subject to outstanding common stock awards	Shares subject to outstanding common stock awards	15,448	15,995	Shares subject to outstanding common stock awards	16,970	15,448
Convertible senior notes	Convertible senior notes	7,173	7,173	Convertible senior notes	7,173	7,173
Restricted stock awards purchased with promissory notes		—	124
Restricted stock issued to Rundeck key personnel		139	278
Restricted stock issued to acquire key personnel				Restricted stock issued to acquire key personnel	63	139
Shares issuable pursuant to the 2019 employee stock purchase plan	Shares issuable pursuant to the 2019 employee stock purchase plan	163	150	Shares issuable pursuant to the 2019 employee stock purchase plan	202	163
Total	Total	22,923	23,720	Total	24,408	22,923

~~15.~~16. Income Taxes

The Company's provision for income taxes for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, the Company makes a cumulative adjustment in such period.

The Company's quarterly tax provision, and estimate of its annual effective tax rate, is subject to variation due to several factors, including variability in pre-tax income (or loss), the mix of jurisdictions to which such income (or loss) relates, changes in how the Company does business, and tax law developments. The Company's estimated effective tax rate for the year differs from the U.S. statutory rate of 21% as a result of our U.S. losses for which no benefit will be realized, our foreign operations which are subject to tax rates that differ from those in the ~~U.S,~~U.S., as well as the benefit for non-U.S. income tax credits.

The Company recorded an income tax expense of $0.1 million and $0.2 million for the three months ended October 31, 2022 and 2021, ~~and~~respectively. The Company recorded an income tax benefit of ~~$4.8~~$1.3 million for the ~~three~~nine months ended October 31, ~~2020. The Company recorded~~2022, and income tax expense of $0.4 million for the nine months ended October 31, ~~2021 and an~~2021. The income tax benefit ~~of $4.4 million for~~recorded in the nine months ended October 31, ~~2020.~~2022 was primarily due to a reduction in the Company’s valuation allowance from the increase in the deferred tax liability associated with the acquired intangible assets from the acquisition of Catalytic, resulting in a $1.3 million deferred tax benefit.

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~~16.~~17. Geographic Information

Revenue by location is determined by the billing address of the customer. The following table sets forth revenue by geographic area:


		Three Months Ended October 31,				Nine Months Ended October 31, 2021					Three Months Ended October 31,				Nine Months Ended October 31,
		2021		2020		2021		2020			2022		2021		2022		2021
		(in thousands)									(in thousands)
United States	United States	$	54,287	$	40,966	$	153,048	$	118,234	United States	$	72,267	$	54,287	$	206,127	$	153,048
International	International	17,473		12,806		49,839		36,038		International	21,936		17,473		63,700		49,839
Total	Total	$	71,760	$	53,772	$	202,887	$	154,272	Total	$	94,203	$	71,760	$	269,827	$	202,887

Other than the United States, no other individual country accounted for 10% or more of revenue for the three and nine months ended October 31, ~~2021~~2022 or ~~2020.~~2021. As of October 31, ~~2021, 84%~~2022, 89% of the Company’s long-lived assets, including property and equipment and right-of-use lease assets, were located in the United States, and ~~16%~~11% were

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located in Canada. As of January 31, ~~2021, 87%~~2022, 86% of the Company’s long-lived assets, including property and equipment and right-of-use lease assets, were located in the United States and ~~13%~~14% were located in Canada.

~~17.~~18. Subsequent Events

The Company has evaluated subsequent events through December ~~8, 2021.~~2, 2022.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations together should be read in conjunction with our condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended January 31, ~~2021,~~2022, filed with the SEC on March ~~19, 2021.~~17, 2022. You should review the sections titled “Special Note Regarding Forward-Looking Statements” above in this Quarterly Report on Form 10-Q for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Factors that could cause or contribute to such differences include, but are not limited to, impacts on our business and general economic conditions due to the current COVID-19 pandemic, those identified below, and those discussed in the section titled “Risk Factors” included in Part II, Item 1A below. The last day of our fiscal year is January 31. Our fiscal quarters end on April 30, July 31, October 31 and January 31.

Overview

PagerDuty is a digital operations management platform that ~~empowers the right action, when seconds matter.~~

~~Our platform, which includes our auto remediation software, is the best way~~manages urgent and mission critical work for a modern, digital enterprise. We empower teams to ~~manage urgent, mission-critical work—and keep digital services always on. It sits at the center of a company’s digital ecosystem ingesting signals and using machine learning and automation~~respond rapidly to ~~automate real-time work,~~incidents to resolve or avoid customer issues, reduce noise, predict and avoid ~~downtime. We enable teams to reduce outages,~~performance degradation, improve productivity, and accelerate digital ~~transformations.~~transformation.

Today, nearly every business is a digital business. As such, organizations are under pressure to enhance their digital operations in order to meet escalating customer expectations, resolve incidents proactively and free up time for innovation projects. This means critical, time sensitive, and unpredictable work needs to be detected and orchestrated.

We collect data and digital signals from virtually any software-enabled system or device and ~~combine it with human response data, correlating~~leverage powerful machine learning to correlate, process, and ~~processing it to understand digital~~predict opportunities and ~~issues that need to be addressed in real time.~~issues. Using ~~the world’s broadest integrations,~~incident response, event

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management, ~~automated remediation~~ and ~~diagnostics, and human driven runbook~~ automation, we bring together the right people with the right information so they can resolve issues and act on opportunities in minutes ~~and~~or seconds ~~not hours, days or even weeks like legacy solutions.~~from wherever they are.

Since our founding in 2009, we have expanded our capabilities from a single product focused on on-call management for ~~technical teams~~developers to ~~one~~a multi-product platform that ~~serves many roles across the company, delivering a real-time source of truth to~~crosses silos into IT operations, security, customer service, and executive ~~stakeholders alike.~~stakeholder roles across the organization. We have ~~grown~~evolved from an on-call tool into ~~a full~~the platform for digital operations, ~~management platform, spanning incident response, on-call management, business visibility, advanced analytics, and AI Ops capabilities across automation and event management to reduce~~which resides at the ~~noise, interruptions and redundant tasks from our customer’s lives. We have invested in developing the scalability, reliability, and security~~center of ~~our platform, allowing us to address the needs of even the largest and most demanding customers.~~ a company’s technology ecosystem.

We have spent ~~years~~more than a decade building deep product integrations to our platform, and our ecosystem now includes over ~~600~~700 direct integrations to enable our customers to gather and correlate digital signals from virtually any software-enabled system or device. This allows technical teams to collect digital signals from any system or platform in their environment, and without the effects of context switching. Those same integrations ~~allow us to~~ connect with popular collaboration tools and business applications, as well as all types of technology stacks to drive automation of work.

~~Our platform is easy to adopt and scalable for businesses of all sizes.~~ We generate revenue primarily from cloud-hosted subscription ~~fees with the majority of our revenue from such arrangements.~~fees. We also generate ~~an immaterial amount of~~ revenue from ~~term license~~term-license software subscription fees. We offer a three-tiered range of pricing plans aligned with our customers’ needs and the sophistication of their digital operations. In addition, our Rundeck automation offering is available on a term license software subscription basis. We also offer a “freemium” plan for less than five users to introduce new users to the platform. We have a land-and-expand business model that leads to

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viral adoption of our products and subsequent expansion. Our online self-service model is the primary mechanism for landing new customers and enabling teams to get started without assistance. We complement our self-service model with high-velocity inside sales focused on small and medium businesses, a commercial team focused on mid-market customers, and a field sales team focused on enterprise customers. Our mid-market and enterprise customers account for the majority of our revenue today. These teams drive expansion to additional users, ~~additional teams, and~~ new use cases, and add-on products, as well as upsell ~~premium functionality.~~to higher value plans.

COVID-19 Update

~~In December 2019, a novel coronavirus and the resulting disease (“COVID-19”) was reported, and in January 2020, the World Health Organization characterized COVID-19 as a pandemic.~~

The ~~extent and continued impact of the~~ COVID-19 pandemic on our business continues to depend on certain developments including the duration and spread of the pandemic; government responses to the pandemic; the widespread availability and distribution of vaccines; impact on our customers and our sales cycles; industry or employee events; and effect on our partners and vendors, all of which are uncertain and cannot be predicted.continued during fiscal year 2023. While our ~~revenues,~~revenue, billings, and earnings are relatively predictable as a result of our subscription-based business model and the majority of our revenues are generated from annual subscriptions, the ~~effect~~effects of the COVID-19 pandemic ~~along with the seasonality we historically experience,~~ may ~~not be fully reflected in~~have a delayed impact on our results of ~~operations~~operations. We continue to ascertain the long-term impact of the COVID-19 pandemic on our business. We continue to focus on supporting our employees, customers, and ~~overall financial performance until future periods, if at all. In addition, while the majority of~~community.

As our ~~revenues are generated from annual subscriptions,~~offices have now reopened, we have ~~seen,~~incurred incremental expenses related to onsite services and ~~may continue to see, greater variability in~~related in-office costs. However, the demand of our product from small and medium business customers. While we see risks associated with more highly impacted companies and industries, we are also seeing new interest from other organizations, driven by rapidly changing work and business environments. As workforces have transitioned to working from home in a distributed model, PagerDuty has become an increasingly critical service.

~~The~~ majority of our employees continue to work remotely in order to minimize the spread of COVID-19 among our employee base and comply with local regulations within the United States and internationally. As we continue to monitor the local regulations related to COVID-19, we have begun to release travel restrictions on business-related travel, allowing certain employees to travel on a voluntary basis. We have also extended our paid time off and sick leave benefits for employees directly impacted by COVID-19 or caring for children or a member of their household impacted by COVID-19. In addition, we have provided allowances to our employees to cover expenses related to transitioning to a work from home environment. We also continue to offer local employee assistance programs to employees if needed. These changes remain in effect and could extend into future quarters. The impact, if any, of these and any additional operational changes we may implement to facilitate remote work is uncertain, but changes we have implemented have not affected and are not expected to affect our ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures.

Since 2020, we have shifted to virtual-only events and experiences, including shifting Summit, our global customer conference series. We have typically relied on marketing and promotional events such as Summit and other in-person conferences, events, and meetings to facilitate customer sign-ups and generate leads for potential customers, and we cannot predict whether virtual marketing events and phone or virtual sales interactions will be as successful as in-person events and meetings or for how long, nor the extent to which the COVID-19 pandemic may continue to constrain our marketing, promotional, and sales activities.

On March 27, 2020, the former President of the United States signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which includes several significant provisions for corporations, including modifications to the limitation on business interest expense and the usage of net operating losses, and a payment deferral of employer payroll taxes. We elected to defer the payment of employer payroll taxes in the nine months ended October 31, 2020. We are no longer deferring the payment of our employer payroll taxes. We have begun to pay the amounts deferred and will continue these payments during the fiscal years ending January 31, 2022 and 2023.

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Refer to Item 1A, “Risk Factors” for further discussion of the possible impact of the COVID-19 pandemic on our business.

Recent Events

We are closely monitoring the invasion of Ukraine by Russia in February 2022 and its global impacts. While the conflict is still unfolding and the outcome remains highly uncertain, we do not believe the Russia-Ukraine conflict will have a material impact on our business and results of operation. However, if the Russia-Ukraine conflict continues or worsens, leading to greater global economic disruptions and uncertainty, our business and results of operations could be materially impacted. Our customers in Russia represented an immaterial portion of our net assets and total consolidated revenue both as of and for the three and nine months ended October 31, 2022 and January 31, 2022.

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Key Business Metrics

We review the following key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.

While these numbers are based on what we believe to be a reasonable representation of our customer base for the applicable period of measurement, we rely on a third party to validate legal entities, which uses the best available data at period end, and therefore is subject to change as new information becomes available. In addition, we are continually seeking to improve our methodology, which may result in future changes to our key metrics.

Our key metrics include the results of ~~Rundeck,~~Catalytic, to the extent applicable, beginning on the acquisition date of ~~October 1, 2020.~~March 8, 2022.

Number of Customers

We believe that the number of customers using our platform, particularly those that have subscription agreements for more than $100,000 in annual recurring revenue (“ARR”), are indicators of our market penetration, particularly within enterprise accounts, the growth of our business, and our potential future business opportunities. We define ARR as the annualized recurring value of all active contracts at the end of a reporting period. We define a customer as a separate legal entity, such as a company or an educational or government institution, that has an active subscription with us or one of our partners to access our platform. In situations where an organization has multiple subsidiaries or divisions, we treat the parent entity as the customer instead of treating each subsidiary or division as a separate customer. Increasing awareness of our platform and its broad range of capabilities, coupled with the fact that the world is always on and powered by increasingly complex technology, has expanded the diversity of our customer base to include organizations of all sizes across virtually all industries. Over time, enterprise and mid-market customers have constituted a greater share of our revenue.


		As of October 31,			As of October 31,
		2021	2020		2022	2021
Customers	Customers	14,486	13,725	Customers	15,265	14,486
Customers greater than $100,000 in ARR	Customers greater than $100,000 in ARR	543	401	Customers greater than $100,000 in ARR	710	543

Dollar-based Net Retention Rate

We use dollar-based net retention rate to evaluate the long-term value of our customer relationships, since this metric reflects our ability to retain and expand the ARR from our existing customers. Our dollar-based net retention rate compares our ARR from the same set of customers across comparable periods.

We calculate dollar-based net retention rate as of a period end by starting with the ARR from the cohort of all customers as of 12 months prior to such period end, or Prior Period ARR. We then calculate the ARR from these same customers as of the current period end, or Current Period ARR. Current Period ARR includes any expansion and is net of downgrades or churn over the last 12 months but excludes ARR from new customers in the current period. We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the dollar-based net retention rate. The calculation of dollar-based net retention rate includes the Current Period ARR of ~~Rundeck~~Catalytic customers to the extent that they were PagerDuty customers as of 12 months prior to period end.

Last 12 Months Ended October 31,
2021 2020
Dollar-based net retention rate for all customers 124 % 119 %


	Last 12 Months Ended October 31,
	2022		2021
Dollar-based net retention rate for all customers	123	%	124	%

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Components of Results of Operations

Revenue

We generate revenue primarily from cloud-hosted software subscription fees with the majority of our revenue from such arrangements. We also generate ~~an immaterial amount of~~ revenue from ~~term license~~term-license software subscription fees. Our subscriptions are typically one year in duration but can range from monthly to multi-year. Subscription ~~revenue is~~fees are driven primarily by the number of customers, the number of users per customer, and the level of subscription purchased. We generally invoice customers in advance in annual installments for subscriptions to our software. ~~For~~Revenue related to our cloud-hosted software subscriptions ~~we recognize subscription revenue~~is recognized ratably over the related contractual term ~~of the subscription period~~ beginning on the date ~~we grant access to~~that our platform ~~assuming that all other revenue recognition criteria have been met.~~is made available to a customer. For our term-license software subscriptions, we recognize license revenue upon delivery and software maintenance revenue ratably, typically beginning on the start of the contractual term of the arrangement.

Due to the low complexity of implementation and integration of our platform with our customers’ existing infrastructure, revenue from professional services has been immaterial to date.

Cost of Revenue

Cost of revenue primarily consists of expenses related to providing our platform to customers, including personnel expenses for operations and global support, payments to our third-party cloud infrastructure providers for hosting our software, payment processing fees, amortization of capitalized internal-use software costs, amortization of acquired developed technology, and allocated overhead costs for facilities, information technology, and other allocated overhead costs. We will continue to invest additional resources in our platform infrastructure and our customer support and success organizations to expand the capability of our platform and ensure that our customers are realizing the full benefit of our offerings. The level and timing of investment in these areas could affect our cost of revenue in the future.

Gross Profit and Gross Margin

Gross profit represents revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin may fluctuate from period to period as our revenue fluctuates, and as a result of the timing and amount of investments to expand the capacity of our third-party cloud infrastructure providers and our continued efforts to enhance our platform support and customer success teams.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel expenses are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation expense, and sales commissions. Operating expenses also include amortization of acquired intangible assets, acquisition-related expenses, allocated overhead costs for facilities, shared IT related expenses, including depreciation expense, and certain company-wide events and functions.

Research and development

Research and development expenses consist primarily of personnel costs for our engineering, product, and design teams. Additionally, research and development expenses include contractor fees, depreciation of equipment used in research and development activities, acquisition-related expenses, and allocated overhead costs. We expect that our research and development expenses will increase in dollar value as our business grows.

Sales and marketing

Sales and marketing expenses consist primarily of personnel costs, costs of general marketing activities and promotional activities, travel related expenses, amortization of acquired intangible assets, allocated overhead costs, and bad debt expense. Sales commissions earned by our sales force that are considered incremental and recoverable

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costs of obtaining a subscription with a customer are deferred and amortized on a straight-line basis over the

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expected period of benefit, which we have determined to be four years. We expect that our sales and marketing expenses will increase in dollar value and continue to be our largest operating expense for the foreseeable future as we expand our sales and marketing efforts.

General and administrative

General and administrative expenses consist primarily of personnel costs and contractor fees for finance, legal, human resources, information technology, and other administrative functions. In addition, general and administrative expenses include non-personnel costs, such as legal, accounting, and other professional fees, hardware and software costs, certain tax, license and insurance-related expenses, acquisition-related expenses, and allocated overhead costs. We expect that our general and administrative expenses will increase in dollar value as our business grows. However, we expect that our general and administrative expenses will decrease as a percentage of our revenue over the longer term as we expect our investments to allow for improved efficiency for future growth in the business.

Interest Income

Interest income consists of income earned on our cash and cash equivalents and interest earned on our short-term investments which consist of U.S. Treasury securities, commercial paper, corporate debt securities, and U.S. Government agency securities.

Interest Expense

Interest expense consists primarily of contractual interest expense and amortization of debt issuance costs on our 1.25% Convertible Senior Notes due 2025 (the “Notes”) ~~due 2025.~~. Refer to Note ~~10,~~11, “Debt and Financing Arrangements” for additional details.

Other (Expense) Income, Net

Other (expense) income, net primarily consists of accretion income and amortization expense on our available-for-sale investments and foreign currency transaction gains and losses.

(Provision for) Benefit ~~from~~From Income Taxes

(Provision for) benefit from income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business. We maintain a full valuation allowance on our net federal and state deferred tax assets as we have concluded that it is more likely than not that the deferred tax assets will not be realized. (Provision for) benefit from income taxes also includes the reduction in our valuation allowance from the increase in the deferred tax liability associated with acquired intangible assets from ~~the Company’s~~our acquisitions.

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Results of Operations

The following table sets forth our condensed consolidated statements of operations data for the periods indicated:


		Three Months Ended October 31,				Nine Months Ended October 31,					Three Months Ended October 31,				Nine Months Ended October 31,
		2021		2020		2021		2020			2022		2021		2022		2021
		(in thousands)									(in thousands)
Revenue	Revenue	$	71,760	$	53,772	$	202,887	$	154,272	Revenue	$	94,203	$	71,760	$	269,827	$	202,887
Cost of revenue(1)	Cost of revenue(1)	12,039		7,685		34,433		21,285		Cost of revenue(1)	18,007		12,039		52,090		34,433
Gross profit	Gross profit	59,721		46,087		168,454		132,987		Gross profit	76,196		59,721		217,737		168,454
Operating expenses:	Operating expenses:									Operating expenses:
Research and development(1)	Research and development(1)	24,554		16,156		68,062		46,705		Research and development(1)	35,004		24,554		100,307		68,062
Sales and marketing(1)	Sales and marketing(1)	40,176		34,024		118,224		88,271		Sales and marketing(1)	47,118		40,176		143,001		118,224
General and administrative(1)	General and administrative(1)	19,808		17,746		56,680		45,899		General and administrative(1)	26,616		19,808		77,316		56,680
Total operating expenses	Total operating expenses	84,538		67,926		242,966		180,875		Total operating expenses	108,738		84,538		320,624		242,966
Loss from operations	Loss from operations	(24,817)		(21,839)		(74,512)		(47,888)		Loss from operations	(32,542)		(24,817)		(102,887)		(74,512)
Interest income	Interest income	705		974		2,306		3,375		Interest income	1,382		705		2,760		2,306
Interest expense	Interest expense	(1,350)		(4,133)		(4,045)		(5,741)		Interest expense	(1,360)		(1,350)		(4,072)		(4,045)
Other expense, net	Other expense, net	(729)		(449)		(1,931)		(861)		Other expense, net	(172)		(729)		(1,326)		(1,931)
Loss before (provision for) benefit from income taxes	Loss before (provision for) benefit from income taxes	(26,191)		(25,447)		(78,182)		(51,115)		Loss before (provision for) benefit from income taxes	(32,692)		(26,191)		(105,525)		(78,182)
(Provision for) benefit from income taxes	(Provision for) benefit from income taxes	(150)		4,839		(378)		4,360		(Provision for) benefit from income taxes	(112)		(150)		1,302		(378)
Net loss	Net loss	$	(26,341)	$	(20,608)	$	(78,560)	$	(46,755)	Net loss	$	(32,804)	$	(26,341)	$	(104,223)	$	(78,560)
Net loss attributable to redeemable non-controlling interest										Net loss attributable to redeemable non-controlling interest	(262)		—		(362)		—
Net loss attributable to PagerDuty, Inc.										Net loss attributable to PagerDuty, Inc.	$	(32,542)	$	(26,341)	$	(103,861)	$	(78,560)

______________

(1) Includes stock-based compensation expense as follows:


		Three Months Ended October 31,				Nine Months Ended October 31,					Three Months Ended October 31,				Nine Months Ended October 31,
		2021		2020		2021		2020			2022		2021		2022		2021
		(in thousands)									(in thousands)
Cost of revenue	Cost of revenue	$	861	$	488	$	2,560	$	1,095	Cost of revenue	$	1,937	$	861	$	4,948	$	2,560
Research and development	Research and development	6,183		2,807		16,230		7,459		Research and development	10,824		6,183		30,066		16,230
Sales and marketing	Sales and marketing	4,606		6,254		12,961		11,409		Sales and marketing	8,004		4,606		22,533		12,961
General and administrative	General and administrative	6,128		3,910		16,115		11,772		General and administrative	10,679		6,128		28,931		16,115
Total	Total	$	17,778	$	13,459	$	47,866	$	31,735	Total	$	31,444	$	17,778	$	86,478	$	47,866

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The following table sets forth our condensed consolidated statements of operations data expressed as a percentage of revenue:


		Three Months Ended October 31,				Nine Months Ended October 31,					Three Months Ended October 31,				Nine Months Ended October 31,
		2021		2020		2021		2020			2022		2021		2022		2021
Revenue	Revenue	100	%	100	%	100	%	100	%	Revenue	100	%	100	%	100	%	100	%
Cost of revenue	Cost of revenue	17		14		17		14		Cost of revenue	19		17		19		17
Gross profit	Gross profit	83	%	86	%	83	%	86	%	Gross profit	81	%	83	%	81	%	83	%
Operating expenses:	Operating expenses:									Operating expenses:
Research and development	Research and development	34		30		34		30		Research and development	37		34		37		34
Sales and marketing	Sales and marketing	56		63		58		57		Sales and marketing	50		56		53		58
General and administrative	General and administrative	28		33		28		30		General and administrative	28		28		29		28
Total operating expenses	Total operating expenses	118		126		120		117		Total operating expenses	115		118		119		120
Loss from operations	Loss from operations	(35)		(41)		(37)		(31)		Loss from operations	(35)		(35)		(38)		(37)
Interest income	Interest income	1		2		1		2		Interest income	1		1		1		1
Interest expense	Interest expense	(2)		(8)		(2)		(4)		Interest expense	(1)		(2)		(2)		(2)
Other expense, net	Other expense, net	(1)		(1)		(1)		(1)		Other expense, net	—		(1)		—		(1)
Loss before (provision for) benefit from income taxes	Loss before (provision for) benefit from income taxes	(36)		(47)		(39)		(33)		Loss before (provision for) benefit from income taxes	(35)		(36)		(39)		(39)
(Provision for) benefit from income taxes	(Provision for) benefit from income taxes	—		9		—		3		(Provision for) benefit from income taxes	—		—		—		—
Net loss	Net loss	(37)	%	(38)	%	(39)	%	(30)	%	Net loss	(35)		(37)		(39)		(39)
Net loss attributable to redeemable non-controlling interest										Net loss attributable to redeemable non-controlling interest	—	%	—		—	%	—
Net loss attributable to PagerDuty, Inc.										Net loss attributable to PagerDuty, Inc.	(35)	%	(37)	%	(38)	%	(39)	%

__________

Note: Certain figures may not sum due to rounding.

Comparison of the Three Months Ended October 31, ~~2021~~2022 and ~~2020~~2021

Revenue

Three Months Ended October 31,
2021 2020 Change % Change
(dollars in thousands)
Revenue $ 71,760 $ 53,772 $ 17,988 33 %


	Three Months Ended October 31,
	2022		2021		Change		% Change
	(dollars in thousands)
Revenue	$	94,203	$	71,760	$	22,443	31	%

Revenue increased by ~~$18.0~~$22.4 million, or ~~33%~~31%, for the three months ended October 31, ~~2021~~2022 compared to the three months ended October 31, ~~2020.~~2021. The increase in revenue was attributable to a combination of growth from both new and existing ~~customers, including customers from the Rundeck acquisition.~~customers. Growth from existing customers iswas attributable to both increases in the number of users and upsell of additional products and services.

Cost of Revenue and Gross Margin

Three Months Ended October 31,
2021 2020 Change % Change
(dollars in thousands)
Cost of revenue $ 12,039 $ 7,685 $ 4,354 57 %
Gross margin 83 % 86 %

Cost of revenue increased by $4.4 million, or 57%, primarily due to an increase of $2.1 million in personnel expenses as a result of increased headcount, increases of $1.1 million in hosting, software, and telecom costs and


	Three Months Ended October 31,
	2022			2021			Change		% Change
	(dollars in thousands)
Cost of revenue	$	18,007		$	12,039		$	5,968	50	%
Gross margin	81		%	83		%

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~~$0.4~~Cost of revenue increased by $6.0 million, or 50%, primarily due to an increase of $2.5 million in ~~outside services, both~~personnel expenses as a result of ~~which are~~increased headcount and salaries, an increase of $1.7 million in amortization of acquired intangible assets, primarily related to the acquisition of Catalytic, and an increase of $0.9 million in hosting, software, and telecom costs related to the support of the continued growth of the business and related ~~infrastructure, and an increase of $0.2 million in other costs.~~infrastructure.

Research and Development


		Three Months Ended October 31,											Three Months Ended October 31,
		2021			2020			Change		% Change			2022			2021			Change		% Change
		(dollars in thousands)											(dollars in thousands)
Research and development	Research and development	$	24,554		$	16,156		$	8,398	52	%	Research and development	$	35,004		$	24,554		$	10,450	43	%
Percentage of revenue	Percentage of revenue	34		%	30		%					Percentage of revenue	37		%	34		%

Research and development expenses increased by ~~$8.4~~$10.5 million, or ~~52%~~43%, for the three months ended October 31, ~~2021~~2022 compared to the three months ended October 31, ~~2020.~~2021. The increase was primarily driven by an increase in personnel expenses of ~~$6.8~~$8.9 million as a result of increased headcount and salaries to support our continued investment in our platform and a ~~$0.9~~$1.3 million increase in costs to support the growth of the business and related infrastructure, which includes allocated overhead costs.

Sales and Marketing


		Three Months Ended October 31,											Three Months Ended October 31,
		2021			2020			Change		% Change			2022			2021			Change		% Change
		(dollars in thousands)											(dollars in thousands)
Sales and marketing	Sales and marketing	$	40,176		$	34,024		$	6,152	18	%	Sales and marketing	$	47,118		$	40,176		$	6,942	17	%
Percentage of revenue	Percentage of revenue	56		%	63		%					Percentage of revenue	50		%	56		%

Sales and marketing expenses increased by ~~$6.2~~$6.9 million, or ~~18%~~17%, for the three months ended October 31, ~~2021~~2022 compared to the three months ended October 31, ~~2020.~~2021. This increase was primarily due to an increase of ~~$3.2~~$6.6 million in personnel expenses driven by headcount growth, increased salaries, and amortization of deferred contract costs, ~~partially offset by a one-time stock-based compensation charge due to the modification of certain option awards incurred in the third quarter of the prior fiscal year,~~ an increase of ~~$1.9~~$0.8 million in costs to support the growth of the business and related infrastructure which includes allocated overhead costs, an increase of $1.4 million in outside services due to a higher volume of activities to assist with the continued growth of the business, an increase of $0.4 million in travel and other program related costs as a result of increased travel due to reduced travel restrictions related to the COVID-19 pandemic, and an increase of $0.4 million in amortization of intangibles related to the acquisition of Rundeck. This was partially offset by a decrease in marketing expenses of $1.3 million primarily due to a change in timing of our annual Summit conference.

~~General and Administrative~~

Three Months Ended October 31,
2021 2020 Change % Change
(dollars in thousands)
General and administrative $ 19,808 $ 17,746 $ 2,062 12 %
Percentage of revenue 28 % 33 %

General and administrative expenses increased by $2.1 million, or 12%, for the three months ended October 31, 2021 compared to the three months ended October 31, 2020. The increase was driven by an increase of $4.3 million in personnel expenses as a result of increased headcount and an increase of $0.4$0.6 million in travel and other program related costs as a result of increased travel due to reduced travel restrictions related to the COVID-19 pandemic. This was partially offset by a decrease in outside services of ~~$1.8~~$0.6 million.

General and Administrative


	Three Months Ended October 31,
	2022			2021			Change		% Change
	(dollars in thousands)
General and administrative	$	26,616		$	19,808		$	6,808	34	%
Percentage of revenue	28		%	28		%

General and administrative expenses increased by $6.8 million, or 34%, for the ~~majority of which was due to transaction costs related~~three months ended October 31, 2022 compared to the ~~Rundeck acquisition,~~three months ended October 31, 2021. The increase was driven by an increase of $7.2 million in personnel expenses as a result of increased headcount and salaries and an increase of $0.6 million in outside services. This was partially offset by a decrease of $1.2 million in costs to support the business and related infrastructure which includes allocated overhead costs.

Interest Expense

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~~Interest Expense~~


	Three Months Ended October 31,
	2022		2021		Change		% Change
	(dollars in thousands)
Interest expense	$	1,360	$	1,350	$	10	1	%

Three Months Ended October 31,
2021 2020 Change % Change
(dollars in thousands)
Interest expense $ 1,350 $ 4,133 $ (2,783) (67) %

Interest expense was consistent for the three months ended October 31, 2022 compared to the three months ended October 31, 2021 and related to contractual interest and amortization of debt issuance costs for the Notes.

Interest Income and Other Expense, Net


	Three Months Ended October 31,
	2022		2021		Change		% Change
	(dollars in thousands)
Interest income	$	1,382	$	705	$	677	96	%
Other expense, net	$	(172)	$	(729)	$	557	76	%

Interest income increased by $0.7 million and other expense, net decreased by ~~$2.8~~$0.6 million for the three months ended October 31, ~~2021~~2022 compared to the three months ended October 31, ~~2020, due to the adoption of Accounting Standard Update (“ASU”) 2020-06. Refer to~~ ~~Note 2, "Summary of Significant Accounting Policies", for additional details.~~

~~Interest Income and Other (Expense) Income, Net~~

Three Months Ended October 31,
2021 2020 Change % Change
(dollars in thousands)
Interest income $ 705 $ 974 $ (269) (28) %
Other expense, net $ (729) $ (449) $ (280) 62 %

~~Interest~~2021. The increase in interest income ~~decreased by $0.3 million and other expense, net increased by $0.3 million for the three months ended October 31, 2021 compared to the three months ended October 31, 2020,~~was primarily due to ~~lower~~higher interest rates on our cash, cash equivalent and investment balances in the current year. The decrease in other expense, net was due to higher accretion on our cash, cash equivalent and investment balances in the current year, offset by changes in foreign currency rates.

Comparison of the Nine Months Ended October 31, ~~2021~~2022 and ~~2020~~2021

Revenue

Nine Months Ended October 31,
2021 2020 Change % Change
(dollars in thousands)
Revenue $ 202,887 $ 154,272 $ 48,615 32 %


	Nine Months Ended October 31,
	2022		2021		Change		% Change
	(dollars in thousands)
Revenue	$	269,827	$	202,887	$	66,940	33	%

Revenue increased by ~~$48.6~~$66.9 million, or ~~32%~~33%, for the nine months ended October 31, ~~2021~~2022 compared to the nine months ended October 31, ~~2020.~~2021. The increase in revenue was attributable to a combination of growth from both new and existing ~~customers, including customers from the Rundeck acquisition.~~customers. Growth from existing customers iswas attributable to both increases in the number of users and upsell of additional products and services.

Cost of Revenue and Gross Margin


		Nine Months Ended October 31,											Nine Months Ended October 31,
		2021			2020			Change		% Change			2022			2021			Change		% Change
		(dollars in thousands)											(dollars in thousands)
Cost of revenue	Cost of revenue	$	34,433		$	21,285		$	13,148	62	%	Cost of revenue	$	52,090		$	34,433		$	17,657	51	%
Gross margin	Gross margin	83		%	86		%					Gross margin	81		%	83		%

Cost of revenue increased by ~~$13.1~~$17.7 million, or ~~62%~~51%, for the nine months ended October 31, ~~2021~~2022 compared to the nine months ended October 31, ~~2020.~~2021. The increase iswas primarily due to an increase of ~~$7.4~~$5.4 million in personnel expenses as a result of increased headcount and salaries, an increase of $4.5 million in amortization of intangibles related to acquisitions, increases of ~~$2.5~~$4.2 million in hosting, software, and telecom costs and ~~$1.3~~$0.7 million in outside services, both of which are related to the support of the continued growth of the business and related infrastructure, and an increase of ~~$0.7~~$0.9 million in ~~amortization of intangibles~~other expenses, primarily related to ~~the acquisition of Rundeck.~~increased merchant fees.

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Research and Development


		Nine Months Ended October 31,											Nine Months Ended October 31,
		2021			2020			Change		% Change			2022			2021			Change		% Change
		(dollars in thousands)											(dollars in thousands)
Research and development	Research and development	$	68,062		$	46,705		$	21,357	46	%	Research and development	$	100,307		$	68,062		$	32,245	47	%
Percentage of revenue	Percentage of revenue	34		%	30		%					Percentage of revenue	37		%	34		%

Research and development expenses increased by ~~$21.4~~$32.2 million, or ~~46%~~47%, for the nine months ended October 31, ~~2021~~2022 compared to the nine months ended October 31, ~~2020.~~2021. The increase was primarily driven by an increase in personnel expenses of ~~$17.6~~$26.8 million as a result of increased headcount and salaries to support our continued investment in our platform, a ~~$2.2~~$3.8 million increase in costs to support the growth of the business and related infrastructure, which ~~includes~~included allocated overhead costs, an increase of $1.1 million in travel related costs as a result of increased travel due to reduced travel restrictions related to the COVID-19 pandemic, and an increase of ~~$1.3~~$0.7 million acquisition-related impairment charge related to software development not placed in ~~outside services due to a higher volume of activities to assist with the continued growth of the business.~~service.

Sales and Marketing


		Nine Months Ended October 31,											Nine Months Ended October 31,
		2021			2020			Change		% Change			2022			2021			Change		% Change
		(dollars in thousands)											(dollars in thousands)
Sales and marketing	Sales and marketing	$	118,224		$	88,271		$	29,953	34	%	Sales and marketing	$	143,001		$	118,224		$	24,777	21	%
Percentage of revenue	Percentage of revenue	58		%	57		%					Percentage of revenue	53		%	58		%

Sales and marketing expenses increased by ~~$30.0~~$24.8 million, or ~~34%~~21%, for the nine months ended October 31, ~~2021~~2022 compared to the nine months ended October 31, ~~2020. This~~2021.This increase was primarily due to an increase of ~~$16.3~~$21.6 million in personnel expenses driven by headcount growth, increased salaries, and amortization of deferred contract costs, partially offset by a one-time stock-based compensation charge due to the modification of certain option awards incurred in the third fiscal quarter of the prior fiscal year, an increase in marketing expenses of $5.3 million due to increased volume of marketing and advertising activities, an increase of ~~$3.9~~$4.1 million in travel and other program related costs as a result of increased travel due to reduced travel restrictions related to the COVID-19 pandemic, and an increase of $3.7 million in costs to support the business and related infrastructure, which ~~includes~~included allocated overhead ~~costs, an increase~~costs. This was partially offset by a decrease in marketing expenses of ~~$3.5~~$3.6 million primarily due to decreases in brand campaigns and digital marketing and a decrease of $1.1 million in outside ~~services due to a higher volume of activities to assist with the continued growth of the business, and an increase of $1.6 million in amortization of intangibles related to the acquisition of Rundeck.~~services.

General and Administrative


		Nine Months Ended October 31,											Nine Months Ended October 31,
		2021			2020			Change		% Change			2022			2021			Change		% Change
		(dollars in thousands)											(dollars in thousands)
General and administrative	General and administrative	$	56,680		$	45,899		$	10,781	23	%	General and administrative	$	77,316		$	56,680		$	20,636	36	%
Percentage of revenue	Percentage of revenue	28		%	30		%					Percentage of revenue	29		%	28		%

General and administrative expenses increased by ~~$10.8~~$20.6 million, or ~~23%~~36%, for the nine months ended October 31, ~~2021~~2022 compared to the nine months ended October 31, ~~2020.~~2021. The increase was driven by an increase of ~~$10.5~~$20.9 million in personnel expenses as a result of increased headcount ~~an increase in outside services of $1.9 million, the majority of which was due to non-recurring strategic consulting fees,~~and salaries and an increase of $1.5 million in ~~insurance, business taxes and licenses~~travel related costs as a result of ~~$0.8 million~~increased travel due to ~~a higher volume of activities~~reduced travel restrictions related to ~~support~~ the ~~continued growth of the business.~~COVID-19 pandemic. This was partially offset by a decrease of ~~$3.2~~$2.3 million in costs to support the business and related infrastructure which includes allocated overhead costs.

Interest Expense

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Nine Months Ended October 31,
2021 2020 Change % Change
(dollars in thousands)
Interest expense $ 4,045 $ 5,741 $ (1,696) (30) %


	Nine Months Ended October 31,
	2022		2021		Change		% Change
	(dollars in thousands)
Interest expense	$	(4,072)	$	(4,045)	$	(27)	1	%

Interest expense was consistent for the nine months ended October 31, 2022 compared to the nine months ended October 31, 2021 and related to contractual interest and amortization of debt issuance costs for the Notes.

Interest Income and Other Expense, Net


	Nine Months Ended October 31,
	2022		2021		Change		% Change
	(dollars in thousands)
Interest income	$	2,760	$	2,306	$	454	20	%
Other expense, net	$	(1,326)	$	(1,931)	$	605	31	%

Interest income increased by $0.5 million and other expense decreased by ~~$1.7~~$0.6 million for the nine months ended October 31, ~~2021~~2022 compared to the nine months ended October 31, ~~2020,~~2021. The increase in interest income was primarily due to ~~the adoption of ASU 2020-06. Refer to~~ ~~Note 2, "Summary of Significant Accounting Policies", for additional details.~~

~~Interest Income and Other (Expense) Income, Net~~

Nine Months Ended October 31,
2021 2020 Change % Change
(dollars in thousands)
Interest income $ 2,306 $ 3,375 $ (1,069) (32) %
Other expense, net $ (1,931) $ (861) $ (1,070) 124 %

Interest income decreased by $1.1 million and other expense, net increased by $1.1 million for the nine months ended October 31, 2021 compared to the nine months ended October 31, 2020, primarily due to lowerhigher interest rates on our cash, cash equivalent and investment balances in the current year.

The decrease in other expense, net was due to higher accretion on our cash, cash equivalent and investment balances in the current year, offset by changes in foreign currency rates.

Non-GAAP Financial Measures

In addition to our results determined in accordance with U.S. GAAP, we believe the following non-GAAP financial measures are useful in evaluating our operating performance. We use the below referenced non-GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their U.S. GAAP results. The non-GAAP financial information is presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with U.S. GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. The principal limitation of these non-GAAP financial measures is that they exclude significant expenses that are required by U.S. GAAP to be recorded in our financial statements. In addition, they are subject to inherent limitations as they reflect the exercise of judgment by our management about which expenses are excluded or included in determining these non-GAAP financial measures. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with U.S. GAAP.

Non-GAAP Gross Profit and Non-GAAP Gross Margin

We define non-GAAP gross profit as gross profit adjusted for stock-based compensation expense and related employer taxes, and amortization of acquired intangible assets. We define non-GAAP gross margin as non-GAAP gross profit as a percentage of revenue.

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Three Months Ended October 31, Nine Months Ended October 31,
2021 2020 2021 2020
(in thousands)
Gross profit $ 59,721 $ 46,087 $ 168,454 $ 132,987
Add:
Stock-based compensation 861 488 2,560 1,095
Employer taxes related to employee stock transactions 22 14 78 23
Amortization of acquired intangible assets 280 93 840 93
Non-GAAP gross profit $ 60,884 $ 46,682 $ 171,932 $ 134,198
Gross margin 83 % 86 % 83 % 86 %
Non-GAAP gross margin 85 % 87 % 85 % 87 %


	Three Months Ended October 31,						Nine Months Ended October 31,
	2022			2021			2022			2021
	(in thousands)
Gross profit	$	76,196		$	59,721		$	217,737		$	168,454
Add:
Stock-based compensation	1,937			861			4,948			2,560
Employer taxes related to employee stock transactions	38			22			79			78
Amortization of acquired intangible assets	1,949			280			5,314			840
Non-GAAP gross profit	$	80,120		$	60,884		$	228,078		$	171,932

Gross margin	81		%	83		%	81		%	83		%
Non-GAAP gross margin	85		%	85		%	85		%	85		%

Non-GAAP Operating ~~Loss~~Income (Loss) and Non-GAAP Operating Margin

We define non-GAAP operating ~~loss~~income (loss) as loss from operations plus our stock-based compensation expense and related employer taxes, amortization of acquired intangible assets, and acquisition-related expenses, which include transaction costs, ~~and~~ acquisition-related retention payments and acquisition-related asset impairment, which are not necessarily reflective of operational performance during a given period. We define non-GAAP operating margin as non-GAAP operating ~~loss~~income (loss) as a percentage of revenue.

Three Months Ended October 31, Nine Months Ended October 31,
2021 2020 2021 2020
(in thousands)
Loss from operations $ (24,817) $ (21,839) $ (74,512) $ (47,888)
Add:
Stock-based compensation 17,778 13,459 47,866 31,735
Employer taxes related to employee stock transactions 695 383 2,086 787
Amortization of acquired intangible assets 875 292 2,625 292
Acquisition-related expenses 442 1,786 1,356 1,786
Non-GAAP operating loss $ (5,027) $ (5,919) $ (20,579) $ (13,288)
Operating margin (35) % (41) % (37) % (31) %
Non-GAAP operating margin (7) % (11) % (10) % (9) %


	Three Months Ended October 31,						Nine Months Ended October 31,
	2022			2021			2022			2021
	(in thousands)
Loss from operations	$	(32,542)		$	(24,817)		$	(102,887)		$	(74,512)
Add:
Stock-based compensation	31,444			17,778			86,478			47,866
Employer taxes related to employee stock transactions	583			695			1,756			2,086
Amortization of acquired intangible assets	2,628			875			7,431			2,625
Acquisition-related expenses	902			442			4,554			1,356
Non-GAAP operating income (loss)	$	3,015		$	(5,027)		$	(2,668)		$	(20,579)

Operating margin	(35)		%	(35)		%	(38)		%	(37)		%
Non-GAAP operating margin	3		%	(7)		%	(1)		%	(10)		%

Non-GAAP Net ~~Loss~~Income (Loss) Attributable to PagerDuty, Inc.

We define non-GAAP net ~~loss~~income (loss) attributable to PagerDuty, Inc. as net loss attributable to PagerDuty, Inc. plus our stock-based compensation expense and related employer taxes, amortization of debt issuance costs, amortization of acquired intangible assets, acquisition-related expenses, which include transaction costs, ~~and~~ acquisition-related retention payments and an acquisition-related asset impairment, which are not necessarily reflective of operational performance during a given period, and ~~acquisition-related~~the income tax ~~benefit.~~effect of non-GAAP adjustments.

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Three Months Ended October 31, Nine Months Ended October 31,
2021 2020 2021 2020
(in thousands)
Net loss $ (26,341) $ (20,608) $ (78,560) $ (46,755)
Add:
Stock-based compensation 17,778 13,459 47,866 31,735
Amortization of debt discount and issuance costs (1)
452 3,235 1,350 4,493
Employer taxes related to employee stock transactions 695 383 2,086 787
Amortization of acquired intangibles assets 875 292 2,625 292
Acquisition-related expenses 442 1,786 1,356 1,786
Acquisition-related tax benefit — (5,058) — (5,058)
Non-GAAP net loss $ (6,099) $ (6,511) $ (23,277) $ (12,720)

~~(1)~~ ~~During the first quarter of fiscal 2022, we early adopted ASU 2020-06 which resulted in the elimination of amortization of debt discount on the convertible senior notes from February 1, 2021.~~


	Three Months Ended October 31,				Nine Months Ended October 31,
	2022		2021		2022		2021
	(in thousands)
Net loss attributable to PagerDuty, Inc.	$	(32,542)	$	(26,341)	$	(103,861)	$	(78,560)
Add (Less):
Stock-based compensation	31,444		17,778		86,478		47,866
Amortization of debt issuance costs	461		452		1,376		1,350
Employer taxes related to employee stock transactions	583		695		1,756		2,086
Amortization of acquired intangible assets	2,628		875		7,431		2,625
Acquisition-related expenses	902		442		4,554		1,356
Income tax effect of non-GAAP adjustments	—		—		(1,330)		—
Non-GAAP net income (loss) attributable to PagerDuty, Inc.	$	3,476	$	(6,099)	$	(3,596)	$	(23,277)

Free Cash Flow

We define free cash flow as net cash (used in) provided by operating activities, less cash used for purchases of property and equipment and ~~capitalized~~capitalization of internal-use software costs. In addition to the reasons stated above, we believe that free cash flow is useful to investors as a liquidity measure because it measures our ability to generate or use cash in excess of our capital investments in property and equipment in order to enhance the strength of our balance sheet and further invest in our business and potential strategic initiatives. A limitation of the utility of free cash flow as a measure of our liquidity is that it does not represent the total increase or decrease in our cash balance for the period. We use free cash flow in conjunction with traditional U.S. GAAP measures as part of our overall assessment of our liquidity, including the preparation of our annual operating budget and quarterly forecasts and to evaluate the effectiveness of our business strategies.


		Three Months Ended October 31,				Nine Months Ended October 31,					Three Months Ended October 31,				Nine Months Ended October 31,
		2021		2020		2021		2020			2022		2021		2022		2021
		(in thousands)									(in thousands)
Net cash provided by (used in) operating activities		$	2,650	$	4,844	$	(7,366)	$	6,706
Net cash (used in) provided by operating activities										Net cash (used in) provided by operating activities	$	(448)	$	2,650	$	(592)	$	(7,366)
Less:	Less:									Less:
Purchases of property and equipment	Purchases of property and equipment	(85)		(110)		(1,376)		(3,402)		Purchases of property and equipment	(815)		(85)		(3,755)		(1,376)
Capitalization of internal-use software costs	Capitalization of internal-use software costs	(784)		(217)		(2,701)		(328)		Capitalization of internal-use software costs	(988)		(784)		(2,725)		(2,701)
Free cash flow	Free cash flow	$	1,781	$	4,517	$	(11,443)	$	2,976	Free cash flow	$	(2,251)	$	1,781	$	(7,072)	$	(11,443)
Net cash provided by (used in) investing activities		$	5,092	$	(45,488)	$	29,151	$	(45,963)
Net cash (used in) provided by financing activities		$	(2,529)	$	663	$	(1,213)	$	251,890
Net cash (used in) provided by investing activities										Net cash (used in) provided by investing activities	$	(7,220)	$	5,092	$	(80,272)	$	29,151
Net cash used in financing activities										Net cash used in financing activities	$	(7,965)	$	(2,529)	$	(6,084)	$	(1,213)

Liquidity and Capital Resources

Since inception, we have financed operations primarily through sales of our cloud-hosted software subscriptions, net proceeds we have received from sales of equity securities, and the issuance of ~~our~~the Notes.

On April 15, 2019, upon the closing of our IPO, we received net proceeds of $213.7 million, after deducting underwriters' discounts and commissions of $16.6 million and other issuance costs of $6.4 million.

On June 25, 2020, we issued $287.5 million aggregate principal amount of ~~convertible senior notes~~the Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The total net

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proceeds from the sale of the Notes, after deducting the initial purchasers’ discounts and debt issuance costs of $9.3 million, and purchases of the Capped Calls of $35.7 million, were $242.5 million.

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As of October 31, ~~2021,~~2022, our principal sources of liquidity were cash and cash equivalents and investments totaling ~~$545.3~~$459.4 million. We believe that our existing cash and cash equivalents, investments, and cash provided by sales of our subscriptions will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. We believe we will meet longer-term expected future cash requirements and obligations, through a combination of cash flows from operating activities and available cash and short-term investment balances. Our future capital requirements will depend on many factors, including the effects of the COVID-19 pandemic, our subscription growth rate, subscription renewal activity, including the timing and the amount of cash received from customers, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced product offerings, and the continuing market adoption of our platform. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies. We may be required to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operations, and financial condition.

A significant majority of our customers pay in advance for our cloud-hosted and ~~term license~~term-license software subscriptions. Therefore, a substantial source of our cash is from our deferred revenue, which is included in the liabilities section of our condensed consolidated balance sheet. Deferred revenue consists of the unearned portion of customer billings, which is recognized as revenue in accordance with our revenue recognition policy. As of October 31, ~~2021,~~2022, we had deferred revenue of ~~$142.9~~$179.7 million, of which ~~$137.4~~$175.4 million was recorded as a current liability and expected to be recorded as revenue in the next 12 months, provided all other revenue recognition criteria have been met.

Cash Flows

The following table shows a summary of our cash flows for the periods presented:

Nine Months Ended October 31,
2021 2020
(in thousands)
Net cash (used in) provided by operating activities $ (7,366) $ 6,706
Net cash provided by (used in) investing activities $ 29,151 $ (45,963)
Net cash (used in) provided by financing activities $ (1,213) $ 251,890


	Nine Months Ended October 31,
	2022		2021
	(in thousands)
Net cash used in operating activities	$	(592)	$	(7,366)
Net cash (used in) provided by investing activities	$	(80,272)	$	29,151
Net cash used in financing activities	$	(6,084)	$	(1,213)

Operating Activities

Our largest source of operating cash is cash collection from sales of our cloud-hosted and term license software subscriptions to our customers. Our primary uses of cash from operating activities are for personnel expenses, marketing expenses and hosting and software expenses. In the last several years, we have had periods in which we generated negative cash flows from operating activities and have supplemented working capital requirements through net proceeds from both private and public sales of equity securities and issuance of the Notes.

Cash used in operating activities for the nine months ended October 31, 2022 of $0.6 million primarily related to our net loss of $104.2 million, adjusted for non-cash charges/benefits of $118.1 million and net cash outflows of $14.4 million due to changes in our operating assets and liabilities. Non-cash charges/benefits primarily consisted of stock-based compensation of $86.5 million, amortization of our deferred contract costs of $14.2 million, depreciation and amortization of property and equipment, capitalized implementation costs, and acquired intangible assets of $12.8 million, non-cash lease expense of $2.9 million, other charges of $1.7 million, which consist primarily of the acquisition-related asset impairment and bad debt expense, amortization of debt issuance costs of $1.4 million, and a tax benefit related to the release of our valuation allowance of $1.3 million. Changes in operating assets and liabilities reflected cash outflows from a $16.3 million increase in deferred contract costs due to commissions paid on new bookings in line with revenue growth, $3.8 million in payments for operating lease liabilities, a $2.9 million increase in prepaid expenses and other assets related to timing of payments made in

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advance for future services, and a $3.1 million decrease in accounts payable, accrued expenses and other liabilities, and accrued compensation. These amounts were partially offset by a $8.6 million increase in deferred revenue resulting from increased billings for subscriptions, and a $3.0 million decrease in accounts receivable due to timing of cash collections.

Cash used in operating activities for the nine months ended October 31, 2021 of $7.4 million primarily related to our net loss of $78.6 million, adjusted for non-cash charges of $72.0 million and net cash outflows of $0.8 million due to changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation of $47.9 million, amortization of our deferred contract costs of $10.7 million, depreciation and amortization of property and equipment, capitalized implementation costs, and acquired intangible assets of $6.2 million, and non-cash lease expense of $3.3 million. Changes in operating assets and liabilities reflected cash outflows from a $16.8 million increase in deferred contract costs due to commissions paid on new bookings in line with revenue growth, $3.8 million increase in payments for operating lease liabilities, and a $0.9 million increase in prepaid expenses and other assets related to timing of payments made in advance for future services. These amounts were partially offset by cash inflows from a $12.9 million increase in deferred revenue resulting primarily from increased

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billings for subscriptions, a $3.8 million increase in accounts payable and accrued expenses and liabilities, and a $3.8 million increase in accrued compensation and related benefits.

Investing Activities

Cash ~~provided by operating~~used in investing activities for the nine months ended October 31, ~~2020~~2022 of ~~$6.7~~$80.3 million consisted primarily ~~related to our~~of purchases of available-for-sale investments of $155.3 million, cash paid for the Catalytic acquisition, net ~~loss~~ of ~~$46.8~~cash acquired, of $66.3 million, adjusted for non-cash charges of $52.7 million and net cash inflows of $0.8 million due to changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation of $31.7 million, amortization of our deferred contract costs of $7.9 million, amortization of debt discount and issuance costs of $4.5 million, depreciation and amortizationpurchases of property and equipment ~~capitalized implementation costs,~~of $3.8 million primarily for purchases of computers for new employees and ~~acquired intangible assets~~to support office space for our San Francisco office, capitalization of ~~$3.4~~internal-use software of $2.7 million, and ~~non-cash lease expense~~cash paid for an asset acquisition of ~~$3.3~~$1.8 million. Changes in operating assets and liabilities reflected cash inflows from an $12.5 million increase in deferred revenue resulting primarily from increased billings for subscriptions, a $7.7 million increase in accrued compensation and related benefits, and a $2.0 million increase in accounts payable and accrued expenses and other liabilities. This was ~~partially~~ offset by ~~outflows~~proceeds from ~~a $10.9 million increase~~ ~~in deferred contract costs due to commissions paid on new bookings in line with revenue growth,~~ ~~a $3.9 million increase in accounts receivable due to timing~~maturities of ~~cash collections, a $3.6 million increase in prepaid expenses and other assets related to timing~~investments of ~~payments made in advance for future services, and$3.0 million~~ ~~in payments for operating lease liabilities~~.

~~Investing Activities~~$149.6 million.

Cash provided by investing activities for the nine months ended October 31, 2021 of $29.2 million consisted of proceeds from sales and maturities of investments of $184.0 million, offset by purchases of available-for-sale investments of $150.6 million, capitalization of internal-use software of $2.7 million, and purchases of property and equipment of $1.4 million primarily for purchases of computers for new employees and to support office space for our San Francisco office.

Financing Activities

Cash used in ~~investing~~financing activities for the nine months ended October 31, ~~2020~~2022 of ~~$46.0~~$6.1 million consisted of ~~purchases~~$22.2 million in employee payroll taxes paid related to vesting of available-for-sale investments of $153.3 million, net cash paid for the Rundeck acquisition of $49.7 million, and purchases of property and equipment of $3.4 million primarily to support additional office space for our Atlanta office and purchases of computers for new employees. These payments were partiallyrestricted stock units, offset by proceeds of $8.5 million from ~~maturities~~the exercise of stock options, proceeds from the ESPP of $5.7 million, and ~~sales~~$1.9 million of ~~investments~~cash received from the non-controlling shareholder of ~~$160.7 million.~~

~~Financing Activities~~PagerDuty K.K.

Cash used in financing activities for the nine months ended October 31, 2021 of $1.2 million consisted of $18.6 million in employee payroll taxes paid related to vesting of restricted stock units, partially offset by proceeds of $12.5 million from the exercise of stock options and proceeds from the ESPP of $4.9 million.

Cash provided by financing activities for the nine months ended October 31, 2020 of $251.9 million consisted primarily of net proceeds of $278.7 million related to the issuance of the Notes, proceeds of $9.7 million from the exercise of stock options, and proceeds from the ESPP of $3.6 million. This was partially offset by purchases of the Capped Calls of $35.7 million.

Contractual Obligations and Commitments

There were no material changes during the nine months ended October 31, ~~2021~~2022 to our contractual obligations and other commitments, as disclosed in the Annual Report on Form 10-K for the fiscal year ended January 31, ~~2021,~~2022, filed with the SEC on March ~~19, 2021.~~17, 2022.

For further information on our commitments and contingencies, refer to Note ~~11,~~12, “Commitments and Contingencies” in the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q.

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Indemnification Agreements

In the ordinary course of business, we may agree to indemnify customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties.

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As permitted under Delaware law, we have entered into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees. No demands have been made upon us to provide indemnification under such agreements, and there are no claims that we are aware of that could have a material effect on our consolidated balance sheets, consolidated statements of operations and comprehensive loss, or consolidated statements of cash flows.

Off-Balance Sheet Arrangements

We do not currently have and, as of October 31, ~~2021~~2022 or during the periods presented, did not have any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

We prepare our condensed consolidated financial statements in accordance with U.S. GAAP. In the preparation of these condensed consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates.

~~Other than as set forth below, there~~There have been no significant changes to our critical accounting policies described in Part II, Item 7 in our Annual Report on Form 10-K for the fiscal year ended January 31, ~~2021,~~2022, filed with the SEC on March ~~19, 2021,~~17, 2022, that had a material impact on our condensed consolidated financial statements and related notes.

~~Stock-Based Compensation~~

The Company recognizes compensation expense for all stock-based payment awards, including stock options, restricted stock units (“RSUs”), and performance stock units (“PSUs”), based on the estimated fair value of the award on the grant date.

~~Risk-free rate—The Company uses the U.S. Treasury yield for its risk-free interest rate that corresponds with the expected term.~~

~~Expected dividend yield—The Company utilizes a dividend yield of zero, as it does not currently issue dividends and does not expect to in the future.~~

~~The Company estimates the fair value of RSUs and PSUs at our stock price on the grant date.~~

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The Company estimates the fair value of shares to be issued under the ESPP on the first day of the offering period using the Black-Scholes valuation model, which is impacted by the estimated fair value of the Company’s common stock, as well as certain assumptions including the expected volatility over the term of the offering period, the expected term of the awards, risk-free interest rates and the expected dividend yield. Assumptions used in the determination of the fair value of the ESPP are the same as those used in the determination of the fair value of our stock options.

The Company generally recognizes compensation expense for employee stock-based payment awards on a straight-line basis over the period during which an award recipient is required to provide services in exchange for the award (generally the vesting period of the award), with the exception of PSUs which are recognized using the accelerated attribution method and based on management’s judgment around the probability of achievement of a performance condition. The Company accounts for forfeitures as they occur.

Recent Accounting Pronouncements

For further information on our recently adopted accounting pronouncements, refer to Note 2, "Summary of Significant Accounting Policies" in the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in our market risk as compared to the disclosures in Part II, Item 7A in our Annual Report on Form 10-K for the year ended January 31, ~~2021,~~2022, filed with the SEC on March ~~19, 2021.~~17, 2022.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation and supervision of our chief executive officer and our chief financial officer, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our chief executive officer and chief financial officer have concluded that as of such date, our disclosure controls and procedures were, in design and operation, effective at a reasonable assurance level.

Limitations on the Effectiveness of Controls

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

Changes in Internal Controls Over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended October 31, ~~2021~~2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than as described above.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are not a party to any material pending legal proceedings. From time to time, we may be subject to legal proceedings and claims arising in the ordinary course of business.

Item 1A. Risk Factors

~~There~~Other than the risk factors below, there have been no material changes from the risk factors described in ~~“Part~~Part I. Item 1A., “Risk Factors” in our Annual Report on Form 10-K for the year ended January 31, ~~2021.~~2022. The risks described in “Risk Factors” and in any subsequent Form 10-Qs could materially and adversely affect our business, results of operations, financial condition or prospects, and could cause the trading price of our common stock to decline. These risk factors do not identify all risks that we face— our business, results of operations, financial condition or prospects could also be affected by factors that are not presently known to us or that we currently consider to be immaterial. Due to risks and uncertainties, known and unknown, our past financial results may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.

Unfavorable conditions in our industry or the global economy, or reductions in information technology spending, could limit our ability to grow our business and negatively affect our results of operations.

Our results of operations may vary based on the impact of changes in our industry or the global economy on us or our customers and potential customers. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, financial and credit market fluctuations, rising inflation, rising interest rates, supply chain disruptions, labor shortages, weakening exchange rates, international trade relations, political turmoil, natural catastrophes, health epidemics or pandemics (such as the COVID-19 pandemic), warfare (such asRussia’s invasion of Ukraine),and terrorist attacks on the United States, Europe, the Asia Pacific region, Japan, or elsewhere, could cause a decrease in business investments, including spending on information technology, and negatively affect the growth of our business. In addition, the United States has recently experienced historically high levels of inflation. The rising inflation may increase our supply, employees and facilities costs and decrease demand for our products. Competitors, many of whom are larger and have greater financial resources than we do, may respond to challenging market conditions by lowering prices in an attempt to attract our customers. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on our products. We cannot predict the timing, strength, or duration of any economic slowdown, instability, or recovery, generally or within any particular industry or how any such event may impact our business.

Our current operations are international in scope, and we plan further geographic expansion, creating a variety of operational challenges.

A component of our growth strategy involves the further expansion of our operations and customer base internationally. In each of the fiscal years ended January 31, 2022, 2021, and 2020 customers outside of the United States generated 24%, 24%, and 22%, respectively, of our revenue. We currently have offices in Australia, Canada, Portugal, the United Kingdom (U.K.), and the United States. We are continuing to adapt to and develop strategies to address international markets, but there is no guarantee that such efforts will have the desired effect. As of January 31, 2022, approximately 29% of our full-time employees were located outside of the United States. We expect that our international activities will continue to grow for the foreseeable future as we continue to pursue opportunities in existing and new international markets, which will require significant dedication of management attention and financial resources.

Our current and future international business and operations involve a variety of risks, including:

•changes in a specific country’s or region’s political or economic conditions;

•health epidemics or pandemics, such as the COVID-19 pandemic, influenza and other highly communicable diseases or viruses;

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•continuing uncertainty regarding social, political, immigration, and tax and trade policies in the U.S. and abroad, including as a result of the United Kingdom's withdrawal from the European Union (“EU”);

•the need to adapt and localize our products for specific countries;

•greater difficulty collecting accounts receivable and longer payment cycles;

•potential changes in trade relations, regulations, or laws;

•unexpected changes in laws, regulatory requirements, or tax laws;

•more stringent regulations relating to privacy and data security and the unauthorized use of, or access to, commercial and personal information, particularly in Europe;

•differing and potentially more onerous labor regulations, especially in Europe, where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations;

•challenges inherent in efficiently managing, and the increased costs associated with, an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits, and compliance programs that are specific to each jurisdiction;

•difficulties in managing a business in new markets with diverse cultures, languages, customs, legal systems, alternative dispute systems, and regulatory systems;

•increased travel, real estate, infrastructure, and legal compliance costs associated with international operations;

•currency exchange rate fluctuations and the resulting effect on our revenue and expenses, and the cost and risk of entering into hedging transactions if we chose to do so in the future;

•limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries;

•laws and business practices favoring local competitors or general market preferences for local vendors;

•limited or insufficient intellectual property protection or difficulties enforcing our intellectual property;

•political instability, including military actions;

•terrorist activities;

•exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act, or FCPA, U.S. bribery laws, the UK Bribery Act, and similar laws and regulations in other jurisdictions; and

•adverse tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and cash.

Political actions, including trade protection and national security policies of U.S. and foreign government bodies, such as tariffs, import or export regulations, trade and economic sanctions, quotas or other trade barriers and restrictions could affect our ability to fulfill our contractual obligations and have a material adverse effect on our business. In addition, following Russia’s military invasion of Ukraine in February 2022, NATO deployed additional military forces to Eastern Europe, and the United States, European Union, and other nations announced various sanctions against Russia. The invasion of Ukraine and the retaliatory measures that have been taken, and could be taken in future, by the United States, NATO, and other countries have created global security concerns that could result in a regional conflict and otherwise have a lasting impact on regional and global economies, any or all of which could adversely affect our business. Further, due to political uncertainty and military actions involving

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Russia, Ukraine, and surrounding regions, we and the third parties upon which we rely may be vulnerable to a heightened risk of security breaches, computer malware, social-engineering attacks, supply-chain attacks, software bugs, server malfunctions, software or hardware failures, loss of data or other information technology assets, and other cyber-attacks, including attacks that could materially disrupt our systems and operations, supply chain, and ability to do business. These attacks are expected to occur in the future.

If any of the above risks materializes, it could harm our business and prospects. In addition, our limited experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to further expand our international operations and are unable to do so successfully and in a timely manner, our business and operating results will suffer.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Items 3, 4, and 5 are not applicable and have been omitted.

Item 6. Exhibits

The documents listed in the Exhibit Index of this Quarterly Report on Form 10-Q are incorporated by reference or are filed with this Quarterly Report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).

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EXHIBIT INDEX

Exhibit

Number

Description

Form

File No.

Incorporated by Exhibit Reference

Filing Date

3.1

Amended and Restated Certificate of Incorporation of PagerDuty, Inc.

8-K

001-38856

3.1

April 15, 2019

3.2

Amended and Restated Bylaws of PagerDuty, Inc.

8-K

001-38856

3.2

April 15, 2019

31.1

Certification of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith

31.2

Certification of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith

32.1*

Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Furnished herewith

101.INS

XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

Filed herewith

101.SCH

XBRL Taxonomy Extension Schema Document.

Filed herewith

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

Filed herewith

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

Filed herewith

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

Filed herewith

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

Filed herewith

104

Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, and 101.PRE).

* The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		PAGERDUTY, INC.

Date: December ~~8, 2021~~2, 2022	By:	/s/ Jennifer G. Tejada
		Jennifer G. Tejada
		Chief Executive Officer
		(Principal Executive Officer)

Date: December ~~8, 2021~~2, 2022	By:	/s/ Owen Howard Wilson
		Owen Howard Wilson
		Chief Financial Officer
		(Principal Financial Officer)

Date: December 2, 2022	By:	/s/ Mitra Rezvan
		Mitra Rezvan
		Vice President, Finance and Corporate Controller
		(Principal Accounting Officer)

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Item 1	Financial Statements (unaudited)	5
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Operations ~~and~~	6
	Condensed Consolidated Statements of Comprehensive Loss	67
	Condensed Consolidated Statements of Stockholders’ Equity	78
	Condensed Consolidated Statements of Cash Flows	910
	Notes to Condensed Consolidated Financial Statements	1011
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2728
Item 3	Quantitative and Qualitative Disclosures about Market Risk	4443
Item 4	Controls and Procedures	4544


	Nine Months Ended October 31, 2020
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balances as of January 31, 2020	77,793,540	$	—	$	487,008	$	137	$	(179,207)	$	307,938
Issuance of common stock upon exercise of stock options and restricted stock agreements	2,069,446	—		9,709		—		—		9,709
Vesting of restricted stock units, net of employee payroll taxes	240,116	—		(4,334)		—		—		(4,334)
Vesting of early exercised options	—	—		507		—		—		507
Equity component of convertible senior notes, net of issuance costs	—	—		68,478		—		—		68,478
Purchases of capped calls related to convertible senior notes	—	—		(35,708)		—		—		(35,708)
Shares issued related to a business combination	1,499,651	—		38,875		—		—		38,875
Issuance of common stock in connection with employee stock purchase plan	181,253	—		3,558		—		—		3,558
Other comprehensive income	—	—		—		497		—		497
Stock-based compensation	—	—		31,793		—		—		31,793
Net loss	—	—		—		—		(46,755)		(46,755)
Balances as of October 31, 2020	81,784,006	$	—	$	599,886	$	634	$	(225,962)	$	374,558


	As of January 31, 2021		ASU 2020-06 Adoption Adjustment		As of February 1, 2021
	(in thousands)
Liabilities
Outstanding principal	$	287,500	$	—	$	287,500
Unamortized debt discount and issuance costs	(69,972)		61,736		(8,236)
Net carrying amount	$	217,528	$	61,736	$	279,264

Equity
Additional paid-in-capital	$	(614,494)	$	68,478	$	(546,016)
Accumulated deficit	(248,110)		6,742		(241,368)