PagerDuty IPO: Growing At A Fast Pace - PagerDuty, Inc. (Pending:PD)


With two competitors acquired in 2018, PagerDuty (PD) seems a company that growth investors should review. There seems to be demand for the type of software developed by PagerDuty. On top of it, with a GAAP gross profit margin of 85% and 48% revenue growth, the company’s financial figures should interest the market quite a bit. In this article, Wilsonville Capital finds details about the recent acquisition of peers and assess the potential market capitalization of PagerDuty.



Source: Prospectus



Source: Prospectus

Business

Incorporated in Delaware and founded in 2010, PagerDuty offers a cloud computing SaaS incident response platform for large and small corporations. The company casts its systems with the following words in the prospectus:

PagerDuty acts as the central nervous system for the digital enterprise. PagerDuty harnesses digital signals from virtually any software-enabled system or device, combines it with human response data, and orchestrates teams to take the right actions in real time. Our products help organizations improve operations, accelerate innovation, increase revenue, mitigate security risk, and deliver great customer experience.” Source: Prospectus

The company’s platform was designed to help teams. It obtains signals from software of devices, interprets the information, identifies events and alerts qualified personnel. With machine data technology and machine learning algorithms, the software is able to learn from new events. In this way, it innovates and increases performance.

The figures reported by PagerDuty in the prospectus should be appreciated by growth investors. After only 8 years of operations, the company works in 91 countries and has 11,212 customers, 33% of them are included in Fortune 500. The image below provides further details on this matter:

Source: Prospectus

Income Statement

In the nine months ended October 31, 2018, the company reported $83 million, 48% more than that in the same time period in 2017. In the year ended January 31, 2018, PagerDuty reported $79 million. While the revenue growth is interesting, the most appealing seems to be gross profit margin. In the year ended January 31, 2018, the gross profit was equal to $66 million, comprising 85% of the total amount of revenue.

The bottom line is not that interesting. In 2018, with $33 million in research and development and $47 million in sales and marketing, the company reported net losses of -$38 million. While revenues are growing at a higher pace than net losses, the company is still far from reaching a break-even point. This may not be appreciated by value investors. The image below provides further details on the income statement.

Source: Prospectus

With regards to the cash flow, value investors may not appreciate that the company reported a CFO of -$11.8 million. It is also relevant noting that stock-based compensations were equal to -$18 million. The image below provides further details on this matter:

Source: Prospectus

Balance Sheet

With an asset/liability ratio of 1.4x, the financial situation of PagerDuty seems stable. The cash in hand of $43 million reported in January 2018 is also beneficial. It represents 54% of the total amount of assets. The list of assets is shown in the image below:

Source: Prospectus

On the liability side, it is beneficial that PagerDuty does not seem to report a lot of contractual obligations and does not seem to have debt. Like many other software companies, the largest liability is deferred revenue, $36 million. As shown in the image below, the total amount of liabilities is $54 million:

Source: Prospectus

The list of contractual obligations is shown below. The total amount is equal to $47 million, which does not seem small. However, the company should make these payments in the future. The liquidity risk does not seem to exist. The image below provides the list of contractual obligations:



Source: Prospectus

Equity Structure

PagerDuty did not use debt to finance its operations, but it did sell convertible securities. More precisely, the company sold warrants and redeemable convertible preferred stock. Investors may worry about the potential stock dilution of convertible securities. With this in mind, it seems necessary explaining that they should get converted into common stock after the IPO. The lines below provide further details on this matter:

Immediately prior to the completion of the initial public offering (IPO) contemplated by the Company, all of the outstanding shares of its redeemable convertible preferred stock will automatically convert into 41,273,345 shares of common stock, based on the shares of the redeemable convertible preferred stock outstanding as of October 31, 2018. In addition, warrants to purchase 648,092 shares of the Company’s common stock will be automatically net exercised immediately prior to the completion of the IPO at the exercise price of $0.01 per share.” Source: Prospectus

Many Stakeholders

The list of shareholders is beneficial as several venture capital firms decided to trust the company. Directors own only 16% of the total amount of equity and the rest is owned by seven institutional investors. It means that the float is not expected to be low and shareholders are not expected to fear volatility risk. In addition, there are many shareholders and none of them owns more than 50% of the total shares outstanding. So, the Board of Directors is not expected to be controlled. The image below provides further details on the list of shareholders:

Source: Prospectus

Use Of Proceeds

The company expects to use the proceeds to develop new products and increase sales efforts among other purposes. It seems very beneficial that none of the existing shareholders is expected to sell shares. The image below provides further details on this matter:

The principal purposes of this offering are to increase our financial flexibility, create a public market for our common stock, and facilitate our future access to capital markets. We currently intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures. We cannot specify with certainty all of the particular uses for the remaining net proceeds to us from this offering. Such purposes are expected to include additional investments to further develop our platform, including the introduction of new products and functionality, and to expand our inside and field sales teams and customer success team to drive new customer adoption, expand use cases and integrations, and support international expansion.” Source: Prospectus

Ties With Zendesk

The company seems to have ties with Zendesk, Inc. (ZEN), a software development company, which provides SaaS products for organizations. ZEN has a market capitalization of $9.28 billion and its CFO is a member of the Board of Directors of PagerDuty.

Source: Prospectus

According to the prospectus, this director was selected because of her expertise. Ms. Gomez also serves in the Board of Directors of Smartsheet Inc. (SMAR) and has worked for Visa (V) and Salesforce.com (CRM) among others. The lines below provide further details on this matter:

Ms. Gomez was selected to serve on our board of directors because of her extensive experience working in the technology sector and senior leadership experience at technology companies and public companies.” Source: Prospectus

This information seems very relevant. It shows that the company is well connected and talented people accepted to work for PagerDuty. PagerDuty is a new corporation and many traders may pass on this name because the brand is not known. It seems a mistake. There seem to be well-known partners helping out the company. It seems an opportunity for those investors, who read the prospectus carefully.

Competitors And Valuation

PagerDuty reports two competitors, OpsGenie, acquired by Atlassian (TEAM), and VictorOps, acquired by Splunk (SPLK). OpsGenie was acquired for $295 million. It is shown in the image below from a press release published on September 4, 2018:

Source: Press Release

Further details on the acquisition are shown below. The amount of sales of OpsGenie was not reported. The amount of intangible assets is equal to $87.9 million and the goodwill registered was equal to $189 million.



Source: 10-Q From TEAM

The total amount of net assets without goodwill is equal to $172 million. OpsGenie was valued at $295 million, so 1.7x its net assets. PagerDuty’s net assets amount to $107 million. With this in mind, the company should be valued at more than $181 million.

VictorOps was acquired for $120 million. The lines below were taken from Splunk’s 10-Q:



Source: 10-Q Splunk

The amount of goodwill registered in this transaction was massive and the net assets were equal to only $1.7 million. It means that the company had a large amount of liabilities and the synergies of Splunk were expected to be very large. Using this transaction to assess the valuation of PagerDuty does not make sense.

Conclusion

With a GAAP gross profit margin of 85% and 48% revenue growth, PagerDuty should be followed closely after the IPO. In addition, the industry in which PagerDuty operates seems to be quite interesting right now. In 2018, two of the company’s competitors were acquired by large software companies, Atlassian and Splunk. With this in mind, after the IPO, if the valuation of the company is too low, PagerDuty may be targeted by large operators. It seems an interesting situation. Finally, these two transactions provide valuable information about the potential valuation of PagerDuty.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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