W. Miller Jump

Miller Jump questioned whether seat count headwinds are purely layoff-driven or if AI is pushing out headcount investments, and the trajectory of bottom-line gains and potential for future operating margin improvements.

Answer

Jennifer Tejada (Chairperson and CEO, PagerDuty) observed a focus on improving operating margin and reducing costs among customers, with a natural evolution towards automation reducing the tie between value proposition and seat-based licensing. Howard Wilson (CFO, PagerDuty) expressed pride in the sixth consecutive year of operating margin improvement and achieving GAAP profitability, committing to optimizing spend and making strategic investments for continued good results.

W. Miller Jump of Truist Securities asked for more detail on the enterprise churn, specifically the nature of customer downgrades, their breadth, and timing within the quarter. He followed up by asking about expectations for the net retention rate moving forward.

Answer

CEO Jennifer Tejada clarified the issue in enterprise was primarily downgrades, not churn, citing some 'anomalistic' events like customer mergers alongside macro caution, but stressed it was mainly due to PagerDuty's own execution. CFO Howard Wilson added that new post-sale processes should mitigate future issues and guided for a dollar-based net retention rate between 103% and 105% for the fiscal year.

William Miller Jump, on for Joel Fishbein, asked for a comparison of pipeline visibility and deal composition versus a year ago. He also inquired about any changes in contract terms that might be affecting the billings growth metric.

Answer

CFO Howard Wilson described the improvement in pipeline visibility as 'night and day' compared to a year ago, with visibility now stretching into Q3 of the next fiscal year. He noted the pipeline has a healthy mix but with a focus on larger deals. Regarding billings, he explained that fluctuations are caused by the timing of multiyear deals and the practice of co-terming expansion contracts to a customer's anniversary date, which can result in shorter-term billings for a larger ARR commitment.

Miller Jumps inquired about the distribution of use cases between cloud and self-managed deployments, asking if they skew differently despite strong performance in both. He also asked about the seasonal element of the monthly subscription revenue downtick in Q2.

Answer

CFO Navam Welihinda stated that while there's quarter-over-quarter variability, there hasn't been a meaningful change in the mix trajectory between cloud and self-managed use cases. He reiterated that the sales team is incentivized to meet customers where they are, and both segments are expected to contribute to sales-led subscription revenue targets. Regarding monthly subscription, Navam explained it primarily serves smaller SMB self-serve customers and is expected to remain flat, with sales-led subscription revenue being the key focus.

Miller Jumps asked about the distribution of use cases (security, observability, AI) between cloud and self-managed consumption, and if they skew differently. He also inquired about any seasonal element or other factors behind the downtick in monthly subscription revenue in Q2 for the last two years.

Answer

CFO Navam Welihinda stated there's quarter-over-quarter variability but no meaningful change in the mixed trajectory, as sales teams are incentivized to meet customers where they are, and both cloud and self-managed are expected to grow. He explained that monthly subscription primarily serves smaller SMB self-serve customers and is expected to be flat, with sales-led subscription revenue being the primary focus for guiding the business.

W. Miller Jump asked about the consumption trends when customers adopt Artifactory as a central AI model registry and requested an update on the key AI technology customer mentioned in the previous quarter.

Answer

CEO Shlomi Ben Haim explained that using Artifactory as a model registry is a major opportunity, similar to the shift to containers, that increases platform stickiness as customers consolidate all binaries. He also revealed that the previously mentioned AI customer had doubled their annual commitment with JFrog in just one quarter, demonstrating rapid expansion.

William Miller Jump requested details on the current sales pipeline's volume and value compared to the prior year. He also asked if the company was altering its investment strategy in response to macroeconomic uncertainty.

Answer

CEO Shlomi Haim noted that the trend of large enterprises signing bigger platform deals continues, with the pipeline growing and sizable deals expected in the second half. CFO Ed Grabscheid affirmed that JFrog's DNA is to balance profitability and investment, and the conservative top-line guidance means any overachievement would flow to the bottom line.

Miller Jump sought to reconcile commentary about a slowdown in self-managed deals with the segment's strong performance in the quarter. He also asked about the dynamics of vendor consolidation opportunities.

Answer

CEO Shlomi Haim described customers as being in a 'twilight zone,' where they remain on-premise because they cannot yet execute their strategic cloud migration, not because they prefer it. On consolidation, he explained that customers want to move from multiple point solutions to the JFrog platform, a gradual process that often involves running solutions in parallel before fully switching.

W. Miller Jump inquired about the early contribution of the new 'strike teams' to the pipeline and the criteria used to determine where these specialized teams are most beneficial.

Answer

CFO Jim Benson confirmed they are already seeing a notable impact from the strike teams, particularly with logs. The criteria for creating a team include the product's novelty, the sales team's familiarity, and whether a specialized team can accelerate customer consumption and sales productivity, as is the case for logs and application security.

W. Miller Jump from Truist Securities asked if the large AI customer's move to Confluent Platform implies an architectural advantage for AI on-premise. He also asked for clarification on how DSP is seeing strong uptake while overall Cloud revenue decelerates.

Answer

CEO Jay Kreps stated the AI customer's move was unique to their circumstances and not a structural trend, as the AI opportunity exists across both Cloud and Platform. Regarding DSP traction, Kreps explained that the optimization headwinds are primarily affecting large, existing Kafka installations, which is a separate dynamic from the growth of new DSP workloads. He noted that while DSP is smaller, its growth is in the early days of a sustained run, whereas optimization efforts eventually taper off.

Miller Jump from Truist Securities asked whether customers were increasing their engagement with Informatica for GenAI initiatives. He also sought to clarify if an increase in GenAI-related business was explicitly factored into the financial guidance for the second half of the year.

Answer

CEO Amit Walia confirmed that customers are not slowing down AI initiatives and are actively using the IDMC platform for GenAI projects, with adoption gradually increasing. CFO Mike McLaughlin clarified that while there is no specific line item for AI bookings in the 2025 model, the growing pipeline and pre-production usage for AI capabilities contribute to the overall confidence in meeting the full-year cloud guidance.

William Miller Jump of Truist Securities asked whether partial renewals, where a customer reduces their spend, remain in the pipeline as opportunities for future recovery.

Answer

CEO Amit Walia confirmed that these situations are absolutely seen as recovery opportunities, emphasizing the importance of not losing the customer entirely. CFO Mike McLaughlin added that the IPU-based consumption model makes this recovery frictionless, as customers can simply purchase more capacity for new use cases without renegotiating contracts for specific products.

William Miller Jump asked about the evolution of the go-to-market strategy, particularly regarding strategic accounts, and inquired about customer churn activity during the quarter.

Answer

CEO Matthew Cain described an evolving go-to-market motion that balances heavy investment in large strategic accounts with a more efficient, digitally-driven approach for the broader funnel, leveraging tools like the perpetual free tier. He stated the company feels great about its current capacity. CFO Gregory Henry reported that customer loss and downsell (churn) were in line with expectations, reinforcing that the higher churn event in Q2 was an anomaly.

Asked about the sales motion for consolidation deals and for high-level thoughts on key drivers for the 2025 model.

Answer

The CEO explained that consolidation discussions are driven by both proactive outreach from the customer success team and reactive conversations during renewal cycles. The CFO advised that priorities for 2025 remain consistent and suggested using the implied Q4 exit growth rate as a proxy for modeling the next year.

Asked if accelerating hyperscaler growth could be a leading indicator for SolarWinds and questioned the decision to reiterate the full-year revenue guidance despite a strong Q1 performance.

Answer

While hyperscaler growth could be a tailwind, it is not a primary driver of the business at this time. The full-year revenue guidance was maintained not because of deal pull-ins but as a conservative measure given external macroeconomic uncertainties, with potential for updates later in the year.

Asked about further instances of large customer contract rightsizing, confidence that last quarter's event was a one-off, and the renewal outlook for Q3.

Answer

While the general software optimization cycle continues, the specific large customer contract rightsizing from Q1 was an unusual event and was not repeated in Q2. Gross retention improved in Q2 compared to Q1.