PD Q3 Deep Dive: Guidance Cut Amid Seat Compression and Go-To-Market Transition

Digital operations platform PagerDuty (NYSE:PD) met Wall Streets revenue expectations in Q3 CY2025, with sales up 4.7% year on year to $124.5 million. On the other hand, next quarter’s revenue guidance of $123 million was less impressive, coming in 3.4% below analysts’ estimates. Its non-GAAP profit of $0.33 per share was 35% above analysts’ consensus estimates.

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StockStory’s Take

PagerDuty’s third quarter results for 2025 were met with a negative market reaction, as management acknowledged ongoing headwinds in customer retention and seat-based license reductions, particularly among large enterprise clients undergoing major reorganizations. CEO Jennifer Tejada described the quarter’s retention outcome as “unsatisfying,” explaining that while fewer customers left the platform, those who did downgrade tended to make larger cuts tied to widespread layoffs and budget caution. Management also pointed to increased adoption of usage-based products and operational efficiency improvements, but these were not enough to offset the contraction from seat license compression.

Looking ahead, PagerDuty’s updated guidance reflects continued caution, with management anticipating further pressure from large customer reorganizations and delayed recovery in seat-based expansions. Tejada emphasized proactive efforts to engage customers ahead of renewals and a shift toward usage-based and multi-year agreements, stating, “We are not waiting for [customers] to tell us they have challenges. We are in there all the time asking questions.” CFO Howard Wilson noted that while the company expects some stabilization, seat-based pressure will likely persist in the near term, but believes the evolving pricing model and expanding platform usage will support growth over time.

Key Insights from Management’s Remarks

Management attributed the quarter’s mixed results to persistent seat license reductions among large clients, counterbalanced by growth in usage-based products, operational discipline, and early success with go-to-market changes.

• Enterprise seat compression: PagerDuty faced significant seat-based license reductions as large customers underwent layoffs and budget cuts, resulting in larger downgrades even as customer churn and downgrades by count declined. Management noted these reductions were challenging to forecast and required more proactive engagement with affected organizations.
• Shift to usage-based pricing: The company accelerated its transition from traditional seat-based to usage-based and multi-year platform agreements. This approach allowed PagerDuty to expand with customers facing headcount reductions, offering more flexible pricing and aligning customer spend with business value, especially for those adopting AI and automation features.
• New product traction: PagerDuty launched over 150 platform enhancements, including its agentic end-to-end incident management suite and AI ops solutions. Early customer feedback was positive, with notable adoption among AI-native companies and legacy enterprises seeking operational resilience.
• Operational efficiency gains: Structural efficiency initiatives, supported by increased automation and modern software, contributed to improved operating margins and GAAP profitability. Management expects to continue expanding margins as these initiatives mature.
• Go-to-market transformation: The appointment of a new Chief Revenue Officer and a more focused customer success approach enabled deeper engagement with key accounts. Management reported progress in acquiring new logos and driving expansion through bundled services and professional support, particularly within high-value enterprise segments.

Drivers of Future Performance

PagerDuty’s near-term outlook is shaped by ongoing seat license headwinds, a gradual shift toward consumption-based models, and continued operational discipline.

• Seat license contraction risk: Management expects persistent pressure from large enterprise customers reducing seat counts due to reorganizations and budget constraints. While improvements in logo retention are encouraging, the size of individual downgrades remains a concern, and further seat-based contraction is anticipated in the next quarter.
• Transition to usage-based agreements: The ongoing rollout of flexible, usage-based pricing and multi-year contracts is expected to mitigate some risks associated with seat compression. Management believes this model will better capture expanding platform usage and create a foundation for future growth as customers adopt more advanced features.
• Margin expansion focus: PagerDuty is prioritizing efficiency initiatives and shifting investments toward high-growth products and customer success. The company’s goal is to sustain operating margin improvements and achieve durable profitability even as revenue growth moderates during the business model transition.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will focus on (1) signs of stabilization in seat-based license reductions among large enterprise customers, (2) evidence that usage-based and multi-year agreements are driving incremental revenue and improved retention, and (3) continued progress in operating margin expansion fueled by efficiency initiatives and product mix shifts. The pace of adoption for new AI-driven features and professional services will also be key indicators of future performance.

PagerDuty currently trades at $14.43, down from $15.19 just before the earnings. Is there an opportunity in the stock?Find out in our full research report (it’s free for active Edge members).

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