What Happened:

Shares of IT incident response platform PagerDuty (NYSE:PD) fell 5.64% in the morning session after the company reported second quarter results with customer count declining year on year and coming in below expectations. In addition, revenue guidance during the quarter was mostly in line, while non-GAAP EPS guidance was slightly below. Full year guidance was largely maintained. Additionally, gross margin fell, and revenue retention rate decelerated significantly compared to the same quarter last year. During the Q2'2023 conference call, management noted that macro trends that led to the downward FY'2023 revenue revision in the previous quarter persisted. 

On the other hand, revenue and earnings per share (EPS) exceeded expectations during the quarter. 

Overall, it was a weaker quarter, and the results could have been better. Following the results, Baird analyst downgraded the stock's rating from Outperform (Buy) to Neutral (Hold) and lowered the target price from $32 to $25.

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What is the market telling us:

PagerDuty's shares are very volatile and over the last year have had 28 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. 

The biggest move we wrote about over the last year was three months ago, when the stock dropped 17.1% on the news that the company reported first quarter revenue that narrowly beat analysts' revenue estimates. Earnings per share, gross margin, and free cash flow were ahead of consensus. However, the revenue guidance was weak. Next quarter revenue guidance came in below consensus, and the full year revenue guidance also missed and was lowered. It is always a worrisome sign when a company reduces revenue guidance, and in this case, the nearly 5% reduction in full year revenue outlook is a key reason for the stock's move. 

Profitability outlook was better as the full year EPS guidance came in ahead and was raised to $0.60 - $0.65 (up from $0.45 and $0.50), showing that at least with weaker revenue prospects, the company is prioritizing expense efficiency. It sounds like the macro weighed on results, with cost-conscious customers resulting in longer sales cycles, smaller deal sizes, and lower conversion rates. 

Overall it was a mixed quarter and it seemed the market was laser-focused on the revenue outlook.

PagerDuty is down 8.7% since the beginning of the year, and at $23.64 per share it is trading 32.4% below its 52-week high of $34.98 from March 2023. Investors who bought $1,000 worth of PagerDuty's shares at the IPO in April 2019 would now be looking at an investment worth $617.52.

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