Hello, everyone. Thank you for joining us and welcome to PagerDuty Second Quarter Fiscal Year 2027 Earnings Conference Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, please press star 1 again. I will now hand the conference over to Christine Clunan, Investor Relations Manager. Christine, please go ahead.

Good afternoon, and thank you for joining us to discuss PagerDuty's second quarter fiscal year 2027 results. With me on today's call are John DiLullo, PagerDuty's Chief Executive Officer, and Erin Prengel, our Chief Financial Officer. Before we begin, let me remind everyone that statements made on this call include forward-looking statements based on the environment as we currently see it which involve known and unknown risks and uncertainties that may cause our actual results, performance, or achievements to be materially different from those expressed or implied by these forward-looking statements. These forward-looking statements include our growth prospects, future revenue, operating margins, net income, cash balance, and total addressable market, among others. represent our management's belief and assumptions only as of the date such statements are made, and we undertake no obligation to update these. During today's call, we will discuss non-GAAP financial measures, which are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in our earnings release, which can be found on our investor relations websites. Further information on these and other factors that could cause the company's financial results to differ materially are included in filings we make with the Securities and Exchange Commission, including our most recently filed Form 10-K and our subsequent filings made with the SEC. With that, I will turn the call over to John.

Thank you, Christine. Good afternoon, everyone, and thanks for joining us today. Before I turn to the results for the quarter and provide an update on our progress, I would like to extend my humble thanks to PagerDuty's customers, our investors, our employees, and our board of directors. I recently celebrated my first 100 days at PagerDuty, and I'm grateful every day for the warm welcome I've received and the amazing opportunity with which I've been entrusted. Eric will walk through the full financial details on Q2 and the remainder of FY27 later in the call. But first, I wanted to open with a few highlights from the quarter. I was especially proud of several things in Q2, including our sales teams delivering incremental new customer wins and existing customer expansions. These exceeded guidance and powered our ARR over the $500 million milestone for the first time. We also saw brisk new customer acquisition through our online sales efforts, continued growth in our population of enterprise accounts with ARRs over $100,000 and expansion of our sales overseas. Retention rates improved sequentially, event traffic on the platform grew nicely both quarter over quarter and year over year, and adoption of our operations cloud usage-based platform continued to gain traction, growing meaningfully quarter over quarter. I was also proud of how fiscally disciplined the team remained all quarter, exceeding guidance on operating margin and EPS. We see a clear path to our 30% long-term non-GAAP operating margin target, and we expect to accelerate progress toward it in Q3 and Q4 as we realize the impact of the restructuring we announced earlier today. In my short time here, one thing is clear. This is an extraordinary moment for technology, propelled by the speed, scale, and impact of AI. We exist to keep mission-critical digital ecosystems resilient and running. And just as the internet transformed commerce and the smartphone transformed communications, AI coding tools are now transforming how enterprise software gets built and run. That shift is a massive opportunity for PagerDuty. Today's digital workloads are significantly more complex than their predecessors. They fail differently, they fail at higher rates, and they are far more difficult to debug. As a result, production software disruptions and application outages have become incredibly costly board-level events. Over the next decade, Organizations will move from managing hundreds of critical services to thousands and eventually tens of thousands of interconnected services, workflows, and autonomous agents, each one creating more decisions, more automation, and more operational risk. At that scale, a new risk layer emerges. Autonomous agents making and executing decisions across systems at machine speed that multiply operational complexity and drastically magnify the consequences when something goes wrong. The stakes have never been higher, and today's leaders recognize what is at risk. 95% say reducing incidents and speeding recovery is now a source of competitive advantage, and 77% plan to increase their investment in operational resilience over the next 12 months. The question is not whether this emerging complexity and these incident landscapes will need to be managed. The question is how. And we believe this is exactly where PagerDuty's opportunity is expanding the fastest. Our platform uniquely scales to address the changing dynamics of AI-fueled enterprise software operations. With more than 15,000 paying customers relying on the PagerDuty platform, including nearly two-thirds of the Fortune 100, we see firsthand the massive volume of AI-generated enterprise software now being deployed and exactly how it's evolving. Increasingly, code is not only being written by AI, it is being tested by AI. And in a growing number of cases, it is even being released to productions. with minimal human review. Enterprises are not simply running more software. They are running more dynamic software, software that generates actions, triggers workflows, and increasingly leverages non-deterministic, agentic processes in its execution. During the quarter, we sharpened PagerDuty's focus on our customers and specifically their emerging requirements. Namely, we have pivoted the company to focus relentlessly on just three things. First, building products that our customers love. Second, activating go-to-market motions that convert and expand. And third, optimizing every expense that doesn't directly aid to the first two focus areas. Our mantra is build, sell, optimize. And every roadmap bet Every go-to-market investment and every dollar of spend now gets tested against these three objectives. Regarding our first focus area, building, this quarter alone we shipped major upgrades to our autonomous SRE agent, our incident management lifecycle integration, and our agentic solution for simplifying on-call shift management. The bigger story this quarter is the upcoming general availability of the PagerDuty Operations Cloud, our usage-based AI-powered platform that automates and orchestrates the entire incident management lifecycle. Over the past few quarters, we've shared our progress on Operations Cloud, continuing to invest in innovation that moves PagerDuty from incident detection to incident prevention. As I mentioned earlier, Operations Cloud sales accelerated in Q2 and customers are telling us what makes the offering unique. Operations Cloud is one integrated platform architected around the two things reliability actually requires, resilience and prevention. To reflect that distinction, we're renaming Operations Cloud to the PD Reliability Platform when it is released to general availability later this quarter. The PD reliability platform is the next generation of operations cloud, an AI-first integrated platform where blended teams of agents and humans detect, investigate, and remediate incidents together. It doesn't just help enterprises respond faster. It helps them prevent the next disruption before it happens. and dozens of customers are already realizing value from this approach. Our SRE agent prominently sits at the center of the platform. This is one of the hottest emerging categories in the industry, and PagerDuty's approach is powerfully differentiated. The PagerDuty SRE agent builds on an understanding of our customers' applications and infrastructure, learns from the existing knowledge base, reads production telemetry and builds operational memory from every past incident. Uniquely, it detects disruptions early using proprietary ML-based signal intelligence to mobilize agents and start investigating autonomously. Upon general availability scheduled for this fall, the PD reliability platform will be available to every customer for purchase, including our self-serve community. Our usage-based pricing democratizes access to critical agentic capabilities and now gives every customer the benefit of our most advanced features from day one, rather than treating each as a separate upsell. In the long run, we believe this approach will drive higher adoption and Foster Greater Customer Loyalty. Periodically, we'll share details on the adoption and performance of the PD reliability platform. On our second focus area, selling, we're launching a vibrant new marketing campaign this quarter, continuing to prioritize hiring for sales capacity and adding more forward deployed engineers into the field. Our ecosystem keeps growing. Anthropic, Cursor and Langchain integrating alongside us, and AI native leaders like CoreWeave and Anduril are building on PagerDuty. At the same time, our team continues to hone their skills in developing use cases and sales plays for the native AI capabilities. Lastly, in our third focus area, optimizing, we're carefully examining every investment across PagerDuty and aligning it with our revenue and operating margin objectives. As part of that effort, this week we completed a meaningful workforce restructuring. These are never easy decisions, but we believe they leave the company stronger, sharpening our focus, and prioritizing investment on the sales and engineering work that matters most. Of note, we focused on maintaining our quota-bearing sellers and our product teams addressing the most robust growth opportunities. Affected roles were concentrated in support functions now being automated and in areas where process simplification and tool consolidation allowed us to reduce our resource footprint. With the help of AI, we are improving the quality of service we deliver to our customers. Strengthening retention and, in turn, yielding durable productivity gains. Autonomous support deflection, faster code creation, and frontier model deployments have already driven a dramatic improvement in our internal case handling capabilities and a significant reduction in our own support backlog. When combined with a broad reevaluation of our software estate and other fixed and variable service costs, these gains free up real capacity. Capacity we're reinvesting directly into our fastest growing products and the go-to-market opportunities with the greatest yield. It's early days, but we do believe that our Q2 results provide a meaningful signal that our strategy is already gaining traction. I want to provide our investors a clear way to pace and measure our progress. First, we will strengthen retention rates by delighting customers with great products and excellent support. Second, we will scale platform adoption to drive revenue and additional customer value with a reinvigorated PLG motion and a step function improvement in our demand generation efforts. And third, as one and two take hold, we will drive ARR acceleration. We are focused on driving platform adoption and customer satisfaction as well as improving critical metrics such as net new ARR, DBNR, large customer growth, and non-GAAP operating margin. Earlier I mentioned that this quarter we saw brisk new paying customer acquisition, growth in our customer population with ARRs over $100,000, and growth in our sales overseas. Before Eric shares more detailed financials, I wanted to provide a few concrete examples. A leading diversified financial services firm signed a roughly $850,000 three-year usage-based ops cloud agreement automating its incident management strategy with our ML-based signal detection and autonomous SRE capabilities. In an industry where reliability, compliance, and uptime are non-negotiables, this is another example of a sophisticated buyer choosing PagerDuty as its reliability platform. In Japan, a leading bank undergoing a major digital transformation chose PagerDuty on the strength of our SRE automation capabilities. In a business where operational resilience is the product itself, This was a multi-product win spanning incident management, AI ops, automation and analytics, all anchoring a customer-owned efficiency thesis of reducing operating expense by 40%, a direct validation of our AI narrative. One of the world's largest enterprise software platforms for workflow automation signed a 36-month agreement worth nearly $3 million, one of our largest new logo wins so far this year. Its significance goes beyond size. It reflects growing recognition among the largest platform companies that resilience and incident management are hard to replicate in-house. and that PagerDuty is the trusted source when companies decide to buy rather than build. We also won a fast growing UK AI infrastructure provider that had previously bet on a startup competitor to reduce costs. This customer was quite outspoken. They shared that PagerDuty earned this business back handily based on our reliability, superior integration, and our SRE agent and AI-assisted operations capabilities. Beyond the numbers, we continue to receive strong external validation this quarter. We won two SAS awards, Best Enterprise-Level SAS Product and Best SAS Solution for IT and DevOps. Forrester named us as one of the notable vendors in their AIOps platform landscape for Q2. IDC featured us in their latest market overview of cloud-native software engineering solutions, and we also earned spots in the 2026 inspiring workplaces list across multiple geographies. In closing, I want to thank all of our employees for their incredible contributions this quarter. Their work is what helped us to delight our customers and is further proof that reliability isn't just a feature we sell, It's who we are. I also want to thank our customers for trusting us with their most critical operations, our partners for growing alongside us, and our shareholders for their continued confidence as we invest in the next phase of PagerDuty's growth. We're proud of this quarter and even more excited about what's ahead. And with that, now I'll turn it over to you, Eric.

Thank you, John, and good day, everyone. I'm excited to be here at PagerDuty. I've been close to PagerDuty for over seven years, going back to the IPO process, where I supported the company from the banking side. It has always been clear to me that this is an outstanding company with a fantastic culture. I watched from the outside as the product evolved and PagerDuty maintained its market leadership position. And over that same period, the opportunity in front of the company has only grown. Today, as the market shifts towards AI-driven operations, PagerDuty is positioned at the center of that transformation with a massive opportunity in front of us. I'm excited to be working alongside this team to build long-term value for our customers, shareholders, and employees. Now onto the details of the quarter and our outlook. Unless otherwise stated, all references in my remarks to our operating margins, gross margins, net income, and net income per diluted share are on a non-GAAP basis. and are reconciled to our GAAP results in the earnings release that was posted in our investor relations website before the call. Revenue was $124.4 million, up 1% year over year, exceeding the top end of our guidance, with international revenue contributing about 30% of the total. Gross margin was 85%, which is within our target range, and non-GAAP operating margin was $29.5 million, a 24% operating margin, above the high end of our guidance. On a GAAP basis, net income was $4.7 million, our fifth consecutive quarter GAAP profitability. Our confidence stems from the positive signs in the business, with annual recurring revenue crossing the $500 million milestone, ending at $501 million, an increase of $6 million in the quarter. Dollar-based net retention was 98% up sequentially, and annualized gross retention also improved sequentially. As we implement the new build, sell, optimize approach that John highlighted, We were pleased to see positive results across a number of key metrics in the business in Q2. Customers spending over $100,000 annually grew to $884, an increase of 24 since Q1 27. In terms of cash flow for the quarter, cash from operations was $37 million, and free cash flow was $33 million, representing a 26% free cash flow margin. Turning to the balance sheet, We ended the quarter with $470 million in cash, cash equivalents, and investments. On a trailing 12-month basis, Billings was $501 million, an increase of 1% compared to a year ago. Total RPO was $426 million, $1 million higher than year-over-year. Of this amount, approximately $309 million is expected to be recognized over the next 12 months, which represents a 5% year-over-year increase versus Q2 FY26. During the quarter, we repurchased nearly 800,000 shares for $7.6 million. As of the end of Q2, we still have $92.4 million remaining of the $100 million share repurchase authorization. We remain committed to managing dilution. Accordingly, we are focused on both what we repurchase and what we issue. As John mentioned earlier, we underwent a workforce restructuring this week, which will allow us to prioritize key sales and engineering investments. I want to provide you with further financial details on the workforce restructuring John mentioned. The reduction impacted approximately 15% of our workforce, concentrated in non-customer facing roles, while focusing on maintaining our quota capacity and product development expertise. We expect to recognize approximately $5.5 million to $7.5 million in restructuring charges, primarily severance and related costs. with the majority recognized in Q3 and substantially complete by the end of Q4. On a run rate basis, we expect significant savings, which gives us room to reinvest in the areas of the business growing fastest while also supporting the margin guidance I'll walk through in a moment. And now turning to guidance. For the third fiscal quarter of 2027, we expect revenue in the range of $123 million to $125 million. with the midpoint approximately flat year over year and net income per diluted share attributable to PagerDuty, Inc. in the range of $0.34 to $0.36. This implies an operating margin of 26.5% to 27.5%. For the full fiscal year 2027, we expect revenue in the range of $491.5 million to $496.5 million with the midpoint approximately flat year over year. We have raised the low end of our FY27 revenue guidance to reflect the confidence we have in the business and the strength we have seen so far in the first half performance. We expect net income per diluted share attributable to PagerDuty, Inc. in the range of $1.33 to $1.37 for FY27, an increase primarily based on cost reductions associated with the restructuring we undertook this week. This implies operating margin guidance of 25% to 26% for FY27. An increase to our prior operating margin guidance of 24% to 25% and accelerating our trajectory to our target operating margin of 30%. Additionally, we wanted to provide an update on our outlook for operating cash flow. Going into FY27, we provided some points to assist with modeling, suggesting that our free cash flow margin would be two to four points lower than it was in FY26. With the restructuring and cost savings we undertook this week, We now expect our free cash flow margin to be in line with our FY26 free cash flow margin. Let me leave you with what matters most. Potential is stabilizing, new business demand is strong, and we're optimizing for profitable growth while returning cash to investors through buybacks. AI increases the criticality of PagerDuty, making us more relevant, not less. We're early in this journey, but we're increasingly confident that the advent of the AI era will prove to be a powerful tailwind for PagerDuty. and with that we'll open the call for Q&A.

We will now begin the question and answer session. Please limit yourself to one question and one follow up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, please press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. And if you're muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Kingsley Crane from Canaccord. We are just opening up your line. Please go ahead.

Great. Great to see the results. John, you've talked about, in a prepared remark, blended teams of agents and humans in the PD reliability platform. I just want to get your take if having humans in the loop is a core tenant you want to keep over time, or how much is that dictated by customer readiness? And then in terms of PagerDuty being a control point for AI, to what extent do you think there's an opportunity to govern or orchestrate third-party agent execution?

Thanks for the question. As far as the first part of having humans in the loop, especially in the handling of cases, That feels like a very natural motion for us right now that seems to be received and embraced a little bit better by customers as they're leaning into autonomous agents and autonomous workload protection. And so that feels like the right motion for us now as we move to more and more autonomy. Ultimately, there's another element there also. There's RLHF, reinforcement learning. that we're able to derive as we go side by side with our customers and learn from the actions that they're actually taking. And that potentially gives us the opportunity to provide higher fidelity down the road. As for ultimately including fully autonomous solutions, we certainly are seeing some of that now on some simple cases or on cases that are often repeated. That is some of the customers that are leveraging our SRE agent in autonomous mode are getting some of the best ROIs, I'd say, and seeing some of the most rapid acceleration. I think over time, the amount of autonomous will go up, but for right now, it doesn't really change our plan. The way we've introduced it feels very natural both to us and to our customers.

Great, that's helpful. And just to follow up for Eric, really great to be working with you again, first of all. So on the ops cloud or reliability cloud or platform conversions, we have a couple quarters now of data. Just curious how you're thinking about ARR, changing ARR at the point of conversion, like how wide that dispersion could be when a customer converts. Thanks.

Thanks, Kingsley. I really appreciate the question. And so as you think about OpsCloud, we think about it as a big opportunity to not just have our customers use our product and use the product they're using, but for them to actually use more of our products and to try new products that they weren't able to use before. So they're getting a lot more value out of our capabilities than they were before. One thing I'd call out, we didn't give an explicit metric around OpsCloud or usage this quarter. It's not something that we're going to report regularly, but we did see strength in that business. We saw it to continue to do well and grow nicely. It actually grew double digits on a total basis. So it was very positive and something that we're happy to see.

Great. Thank you.

Kingsley, I would add to that also, as part of the PD reliability platform, what Eric said is 100% right. We're seeing an incredible amount of energy in the ops cloud space and now in the PD reliability platform. But it's also democratizing AI. So it's giving all of our customers, including the customers that we work with in PagerDuty Online, access to these AI capabilities. And we do think it's going to be a catalyst for even more adoption down the road. But it was a great question, Kinkley. Really appreciate it.

Your next question comes from the line of Andrew Sherman from TD Cohen. Your line is open. Please go ahead.

Oh, great. Thanks, guys. And Eric, congrats on the new job. and good to work with you again. John, would be great to get an update on customer feedback on the usage-based model and how aggressively you think you could push this in the second half and really how much usage grows for the customers that are already on it. And then bigger picture, the pipeline of enterprise deals in the second half, how's that looking?

Thanks, Andrew. Thanks for joining the call. First of all, since I've been here, I've been spending a lot of time with customers, as you would imagine, and met dozens of them and talking through with them their adoption plans. Certainly, the hurdle or the barrier for people to experience our product and to experience our AI and our agentic solutions is much lower in the AI class. and the AI cloud model because they get the opportunity to experience it in a bite-sized, consumed way. It's also a very natural way to assign aligned value with usage. And so very powerful from that perspective. I would also say that the customers that we are seeing, in particular the enterprises that are adopting it, we do see a nice trend, a nice and many more. Thank you very much. 100,000 customers on a quarter-on-quarter basis. And a lot of those sales opportunities were initiated and encouraged by customers embracing the AIOps solution. So very, very comfortable with the progress that we're making there and the outlook.

That's great. Thanks. And Eric, on the gross retention, good to see that moving in the right direction. especially net rent retention to 98%. Not asking you to guide for the second half, but do you think that can keep improving in the second half and what gives you the confidence of that?

Yeah, thanks for the question and great to be working with you again. You know, we were happy with what we saw on the net revenue, the dollar-based net retention, that going up to 98%, which is a nice inflection and stabilization. And it's actually two quarters in a row that we've talked about the gross revenue retention being up. So that's a really nice trend that we've seen. You know, as you think about that, I think about it as a sign, hopefully, for stabilization in the business. And we're really focused on continuing to improve both gross retention and dollar-based net retention over both the immediate term and long term. And it's something that's been a big focus for me and John as we start to, you know, as we're spending a lot of time on that part of the business.

Yeah, I would add that the magic ingredient We have a collection of solutions, AI solutions for PagerDuty. Adding that together with this new consumption model, this new OpsCloud consumption model, seems to be the magic elixir also for better retention. And that's definitely helping us.

Awesome. Thanks, guys.

Your next question comes from the line of Sanjit Singh from Morgan Stanley. Your line is open. Please go ahead.

Yeah, thank you for taking the questions, and congrats on the nice improvement quarter over quarter, especially on the net UAR side. John, as you've spent some time now with the business, just from a portfolio perspective, and you look at the different areas where the Ops Cloud sort of plays in and the different capabilities, are there other areas that you sort of see as potential adjacencies for PagerDuty to drive continued growth? Or are there areas where you guys may pull back on and sort of rationalize? I know you guys did the headcount reduction to invest more. And so I just want to get a sense of, one, where those investments are directed. And then, two, where else does PagerDuty have a right to win?

That's a great question.

I'll break it out in a couple of ways. We're doing and adding a lot of capabilities to our core product. And some of those have AI capabilities as a component of them. And I'll break out our AI capabilities into two tranches. One would be AI for pager duty. That's using AI to make the pager duty experience more rich, more proactive, more preventative. And the second one is PD for AI or PagerDuty for AI solutions. And in particular, when you're talking about where do we have the right, I think we really have the right in the PD for AI category. And I'll point to a couple of things, but you think about the sheer volume of software that's being added and written and created right now. And then also think through the fact that a lot of this is non-deterministic software. It tends to break more often. It's much more fragile. We think that's going to create an incredible opportunity for us as these agendic, non-deterministic workloads start to enter production. The other element that I would also say is as these workloads come into production, we know they're going to fail differently. People are going to worry about other things like drift, like hallucination, like token runaway, like PII leakage, all these areas. And so the tsunami hasn't maybe hit quite yet, but we know that these AI workloads are starting to enter production in a lot of our enterprise accounts. And so I think that's going to be one of the greatest areas for us to get further penetration.

Yeah, I know that's super interesting. And my next question for Eric, first, congrats on the role. I'm excited to see you on Team PagerDuty. When I think about some of the headwinds to the business over the last several years, some of that's obviously been on the seat side of the equation. And obviously, OpsCloud with the consumption model can address a lot of that. But just in terms of where we are on the headwind from C-Trend, do you feel like we're kind of past the worst of it? When it comes to that, how do you sort of see the rest of your playing out from a seat perspective?

Yeah, it's a great question, Sanjit, and it's a pleasure to be working with you again. You know, I think that OpsCloud and that, you know, usage model is a great way for us to kind of take away some of the challenges that we've historically experienced around seat compression. This quarter, we saw a lot of positivity as you saw dollar-based net retention sort of inflected upwards. Gross retention was positive, and so we were really happy to see that. I think we're doing a lot of work that John talked about with the product, and I think that's going to make us stickier and help us in terms of our traction with our customers. But I think ultimately, as you think about the way that the world is changing and that We're moving more towards AI, which is a place where we think we can be a massive beneficiary. We're going to be moving away from so much of that seat pressure and moving more towards a world in which people are getting benefit from us and using us in a usage basis and using our AI capabilities. And that's really what's going to drive our growth.

I would just add to that that we had a rough couple of quarters. We still have a lot of work to do and not necessarily... You know, signaling that that work is over at this point, but we do see the new products gaining traction, and we do feel like the business is stabilizing in the last two quarters in particular. I think I've alluded to that, but, you know, we know, like I said, we still have work to do, Sanjit, but I appreciate the question.

Your next question comes from the line of Jonathan Ngo from Truist Securities. Your line is open. Please go ahead.

Hi, this is Jonathan Ngo, Truist Securities in for Miller Jump. Congrats on the great quarter. A lot of positive points. I wanted to ask maybe around some of those 100K customer ads in the quarter. And can you maybe walk us through like some of the specifics driving those ads, maybe between product led growth and go to market?

Yeah, sure. I think, thanks for the question, Jonathan. Appreciate it. We saw a mix, which I really liked seeing. It wasn't like all of them came through the PLG motion or from PD Online or they weren't all graduations. We saw a very good mix. We even saw, I think the sales team is really starting to get their confidence. They're starting to understand the sales process. They're familiar with how to quote and characterize the usage-based products. And so I would say it was broad. There were some marquee names in there. We continue to see growth with our frontier models, frontier model companies that have embraced the technology. And I would say that the diversity of the 24 new enterprise accounts that we added on a quarter-on-quarter basis was probably, you know, you alluded to it there, was probably one of the most reassuring things.

And great. Just one more follow-up. So I know Anthropic was named again as an expanded quarter amongst many great others. Can you maybe walk us through, like, what products have expanded to you and how these larger enterprises are kind of expanding their platform breadth with PagerDuty? Thank you.

Yeah, no, it's a great question. I want to be careful not to share anything, you know, proprietary or any intellectual property there. But what I will say, what I would share with you is that I think this is evidence that we're doing a great job at the component that I mentioned, PD for AI or PagerDuty for AI. And so these are some pretty interesting new novel use cases. that the frontier models are exploring. And I think we have most of the big ones as customers and are really enjoying learning right alongside of them. Seeing the energy in the business is exciting. And like I mentioned, I think we're learning alongside of them things that we can, tactics that we can help in our other customers. So the relationships are very strong and progressive. And I would say that mutually beneficial as well.

Thank you so much and congrats again.

Thank you. Your next question comes from the line of Jeff VanRee from Craig Hallam Capital Group. Your line is open. Please go ahead.

Great. Thanks for taking the questions. Maybe just a few for me. On the sales front in terms of sales cycles, what are you seeing with respect to competition? and really what customers are asking. I'm really just kind of curious, change in sales cycles, duration, competitive landscape, and sort of the dialogue with the customers, concerns, things they're asking you about.

That's a great question, Jeff. You know, competition is always there. It's an interesting space to be in, but we're doing, I think, you know, we're really enjoying this environment. I actually think that competition helps you to, and many more. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. We also see customers with idle agents or excess agents that they've bought. We see that population coming down and down. And so the number of idle agents in a customer's estate is getting smaller. I think those two things are actually helping us and helping our win ratios and our speed of deal closure pretty dramatically. And we saw some of that this quarter. If there's not excess use, and if there is some pent-up demand inside the accounts, the sales cycles move a little bit faster. And so it was definitely a feature, I think, of this quarter.

Yeah. Got it. Maybe one last from me. Eric, on the reduction in force, what is the gross savings? You're trying to get a sense of the gross savings and then how much you're reinvesting. I think you referenced you're going to be doing that.

Yeah, great question. And we're not disclosing explicitly the Gross Savings, but what I will tell you is this. In Q2, we had a 23.7% non-GAAP operating margin. Our guidance for Q3 is between 26.5% to 27.5% for our non-GAAP operating margin. So think about that as a 3.5 point increase. So it's a nice increase on the year. Additionally, our full year guide, before at Q2, we'd been talking about a 24% to 25% non-GAAP operating margin. We went ahead and raised that by a full point because of what we're seeing in terms of savings. So now it's 25, 26%. And free cash flow is doing something similar where we said at the beginning of the year that we thought we'd be two to four points behind where our free cash flow margin was in FY26. Now we're saying that we're going to be in line. So a meaningful increase in terms of the bottom line. In addition to that, we're going to be taking some of those savings and reinvesting them. So we're going to invest both on the product side, as there's a lot that we're doing with the phrases that John very well coined, AI for PD and PD for AI. And we're also going to be putting money into the go-to-market motion. So we're going to see a nice uptick on operating margin, which is going to get us to hopefully accelerate that path to the 30% target margin that we talked about. And we're also going to see the ability to reinvest in the business. So a lot to be excited about.

Yeah, sure. Great. Thanks. Congrats and congrats on a lot of the underlying metrics showing some good stability or improvement. So congrats on the quarter. Thank you. Thank you.

At this point we would like to remind everyone if you would like to ask a question to please press star one. I will hold for a moment. There are no further questions at this time. I will now turn the call back to John DiLullo, Chief Executive Officer, for closing remarks. John, please go ahead.

All right, thank you, and thanks for the great questions. We sincerely appreciate your participation today. If there's something to take away from this call, I think it should be that we are focused on building a great company, delighting our customers, and rewarding our investors. Today we gave you a glimpse of the green shoots emerging and early signs that our build, sell, optimize strategy are taking root. But we're even more excited about what's ahead, and we look forward to chatting more in the quarters that follow. Thank you so much for joining our Q2 call. We'll see you next quarter.

This concludes today's call. Thank you for attending. You may now disconnect. Goodbye.