Q3 2020 Earnings Call
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Thanks, Josh Good afternoon, and welcome to doors third quarter fiscal 20 point earnings Conference call.
Joining me today, our teams, though doors, Chief Executive Officer, and Palace slow Czars, Chief Financial Officer. The purpose of today's calls for us and provide some color on our third quarter results as well provide our financial outlook for fourth quarter and the remainder of beer.
Our discussion I responses today will include forward looking statements such a reminder, our actual results could differ materially as an adult a variety of factors.
You can find information regarding those factors in the earnings release, we issued today.
Recent 10 coupon what does he see.
Finally, we'll be referring to several non-GAAP financial measures today and reconciliations to the related GAAP measures are included in our earnings release for a copy of our earnings release when store as E filing a replay of today's call or to learn more about.
Please visit our Investor Relations website at Investor, Florida.
And with that let me turn it over to Tim.
Thank you.
Welcome to our third quarter earnings call for fiscal 2020 .
Fleet to say that we had another solid quarter.
In Q3, we continue to key customers.
We were recognized for technology leadership by one of the top industry analysts and we continue to see strong interest in subscription businesses from the best companies in the world across multiple industries.
This resulted in subscription revenues of 54 million, representing 25% growth year over year as we improved our non-GAAP operating income quarter over quarter in ahead of expectations.
Hi, there were covered some of the specific financial details later on the call, but overall it was a solid quarter as we continue to lay the foundation for sustained long term growth.
Today's call I plan to provide updates on a few key areas that we previously talked about.
First our sales leadership transition specifically the hiring of our new Chief revenue Officer.
Second progress on the integration between our flagship products feeling the retro and third the adoption we are see with our emerging platforms.
So first let me talk about what we saw this quarter in terms of overall market trends.
In Q3, we continue to see signs supporting our central thesis and there continues to be in early but broad shift to subscription business models, but is playing out across multiple industries and unlike traditional ERP systems that are proving to be true in flexible hours solutions are uniquely positioned to need.
Well company to succeed in this new economy.
In our core technology vertical hardware software, we continue to have market leadership for any company at scale.
For example, this quarter, we kicked off with deployments that sauna. The word of management software company Sonat started off 50 years ago would they simple billing system, but the more successful they became the more complex there needs to be Kid.
And they switched over to swear to better scale their business.
But of course, what's exciting about the subscription economy.
It is it's just the technology story as I've noted on prior calls approximately half of our customers are now outside of the high Tech vertical.
The manufacturing, we continue to see strong growth coming from the Internet of things well connected devices, our north Central platform offers many factors not only a faster to launching new connected services, but more importantly, it also gives them a platform to quickly iterative innovate actually learn from the marketplace.
In Q3, we go lives with Johnson controls and Stanley Black <unk> Decker.
Well these launches feel similar to catch the initial go lives from a couple of years ago I began with simple data services to a handful of U.S. based dealers.
Today CAD onboarded over 180 dealers globally launching new bundled services that includes GPS location machine utilization fuel burn analysis engine monitoring and overall maintenance management per machine Cat is a shining example, without.
Companies use or the mission critical solution iterative and expand the subscription offerings unlock growth and increased customer value.
Transportation, including auto manufacturers, we continue to see a shift toward access not ownership.
This quarter were excited to have to go lives with amazing brands like Keith.
Yeah, Chrysler has wallets Harley Davidson motorcycles.
Begets the vehicle manufacturers in the World are turning to Zora launched digital services connect with their drivers unlock new revenue opportunities.
And while we're not ready to call. It a full blown vertical for us yet we continue to see utility companies move away from static product offerings towards flexible energy as a service models and cute I mean, you saw us issue press releases.
So I'd go back one of the world's largest manufacturers a building materials as we help them move into the business of smart buildings and launch consumption based services, such as a subscription seating and water solutions.
Well, it's amazing and it's really utility company, which we are helping grow through new offerings and flexible energy plans.
Still very much in emerging industry for us, but we've already made enrolled with other major utility players around the world such as origin energy Sanan eight you a and centric.
In November we wrapped up our 2019 subscribed World tour with over 5000 people registered for all these events in 16 cities worldwide.
Secret in pilot you keep studies from Siemens Rico Schneider electric Softbank, you'd be solved and many others.
Why are these companies turning to us simply put its because of our technology and.
And this quarter I'm pleased to see that for the third time in a row, we were named a leader in the Forrester wave report.
Now if you look at the report titled Sad between Technology is LIBOR, Egypt for business agility, you'll see forest are recognized as.
We're having both the best technology offering and the largest presence in the marketplace.
This is why our customers around the world are coming to us and I couldn't agree more with the reports court thesis your ability to keep up with market changes in the quality of your customer experience will depend on agile billing technology everything from customer trust to the accounts of the company's accounting.
It's on the line.
Partially goes all to know that our product strategy is aggressive nothing good good for firms that are looking for a new system a record for the recurring customer relationships, where CRM and E are the key players supporting goals.
We also called out or even Watson functionality mentioning that customer references we spoke with especially developers silicon powered by these new platform capabilities. This is a validation for his work. That's also a validation study yet untapped potential of our market today the analyst community recognize it.
The customer focused subscription models are absolutely fundamental digital transformation, but they require a completely different set of tools and solutions that Steve ERP based systems, our central thesis continues to play out.
Switching gears on previous earnings calls I've talked about the changes, we're making to strengthen our underlying business. The captured this opportunity. So let me spend a few minutes providing updates there.
First let's talk about sales leadership.
As you all know we spent a considerable amount of time searching for Wright Chief revenue officer to elevate our field organization and I could not be happier with the results of our search.
We're excited to have or new the CRL Robbie trial onboard he's a recognized leader within the enterprise software industry. He's worked with some of the biggest companies in the world on digital transformation and he understands scale and how to build it Robbie really proven track record from Adobe ability World class enterprise sales teams for subscription.
Businesses.
We've also previously talked about the importance of system integrators to our future growth.
I'm incredibly pleased that we hired a new head of global alliances James wants and BBD Records at previous Sats companies James successfully change that implementation model from internal deployments to a significant part handled by partners and now it's part of Robiskie team is working with a few children partners that.
In our go to market relationships.
Of course, Robbie and James are joining outstanding group of tenured sales in sales leaders as well you putting Richard Terry lawyer, who has been the bedrock of our North American sales grew for almost a decade, Kevin Niblock, our SVP of sales operations in go to market expert John Phillips, who continues to provide amazing leadership in Europe .
We are laying the groundwork in building the infrastructure to capture the broad demand we continue to see in the marketplace for subscription solutions.
Of course give a number of new books on the team it will take us sometime for the people in groups that shell and really become effective.
What we have now is in my biased opinion, the best sales leadership team in the industry ready to meet our customers whatever they are in their subscription churn launching a new service modernizing the billing system driving large sales scale digital transformation automating the recognition of revenue.
Second.
Let me provide an update on the integration of Rep Pro and Billy I.
I mentioned on the last call. The integration technology is complete and today, we're making steady progress with our customer implementations.
We started all the paused implementations are targeting to deliver on our customers timelines. In fact, we've completed the technical integration phase with a number of customers and freedom than Siemens Liveperson and modernizing medicine are expected to be operationally life, using retro and billing.
In the next couple of months this is exciting.
Customers now have an end to end automated solution to handle all their suspicion needs from quote to cash to billing to revenue automation, we're working hard to get these customers operationally light on an integrated product by early next year.
We'll take some time, but once these customers are operationally life and using the integrated solution. We can start cross selling our retro product into ours or a billing customer base.
Third and finally, let me provide an update on the momentum of our central platform offering you talked a lot about the importance of our platform strategy on the last call. We have an incredibly diverse group of customers spread across a number of different industries and the number industry shifting to assist descriptions keeps growing dots.
What makes the opportunity so excited.
That's a result of this diversity, it's really important we provide the weight tools allow our customers a customized and extend the source solution into their businesses, whether you're a digital media company or just real manufacture for a software provider.
Kevin admitted a developer time that we can save our customers on custom coding can go towards building new features for near end customers since our platform. One six months ago, we've seen nearly 100 customers adopt the platform capabilities. These companies are using our tools to orchestrate a bench importantly manual processes and their see immediate quantified.
Will result in terms of operational efficiencies for example, shipped stead mini media there one of the one of the largest media groups and Scandinavia, they're using our workflow tools to automate reconciliation to a custom payment gateway Steven in both time and money.
The sports analysis software company Dusters hundreds of thousands of teams around the world is using the source central platform to save over 100 hours a month by automating their upsell processes and motor trend group is using north central to move credit card, we try and logic out of expenses middleware and giving them a single.
At some shoot for their questions processes.
At the door platform is helping our customers work smarter by extending and integrating our system and data model into the core of their business.
In closing I remain incredibly excited about what we're building here, where we are headed we needed early bed that the subscription business models pioneered by SASSA media and technology companies would eventually spreads to every industry and we see validation of this everyday business headlines in the analyst reports.
And most importantly in our customer base today, we're making for the system a record for all customer centric businesses.
Innovating on a platform strategy allows those out loud any company to customize and extend our solutions to meet their unique business demand, whether there are motorcycle manufacturer or in energy utility.
We now have the right team, we have the right technology and we're going after a huge market that is in early stages of each transformational shift from products to services.
Now, let me turn it over to tighter to take you through the financial details.
Thanks team as you can see we're continuing to deliver on our financial goals and improve our operational execution as I typically do I'll start my comments today by reviewing our key operating metrics.
Customers over 100000 AC dollar based retention and process transaction will now move toward financial results and finish with our outlook for the fourth quarter and remainder fiscal year.
Starting with customers.
Great.
Represent 8% or not recur.
As you heard from team. We recently brought on our Chief revenue Officer wrong, We're all working hard to prove ourselves institution.
Really excited about Rabin Celsion, that's coming together, but we also know that it will take some time for the team operational effectiveness consistently when your customers purchased deals.
Looking at how we expand with our customers are dollar based retention ended at 106% slightly down from the prior quarter.
Partially due to stronger compares from the prior periods and also result in the past cross sell activity and so we work through the rest for expiration deployments and get our customers operations slot.
We believe that this metric, we're increasing along right as we strengthened our customer success or develop additional features but this metric will see near term pressure as we work to improve our upsell cross execution.
Lastly, our systems process $11.2 billion, a transaction volume in the quarter would represent 29% growth year over year. This continues to be the biggest driver of our upsell efforts with our customers as transaction borrowings actually grows and their businesses grow as reminder, our revenue does not track linearly with transaction volume growth.
Because our customers typically realized price inefficiencies that they scale.
But this allows us to participate as one of our customers over time.
Also important to point out that there can be quarterly fluctuations or even seasonality impacts as patrick caused by different filling policies are large large customer go lives in any given quarter.
Because of this dynamic is on how to look a transaction volume on a trailing 12 month basis, which results in 30% growth.
Now, let's talk about how these operating metrics flow through to our Q3 financial results.
He noted earlier subscription revenue grew 25% 74 million in the quarter. This includes a onetime benefit of 1.3 million related to a contract that we put in our previous Q3 guidance calculations, which will not be currency quarters.
Professional services revenue decreased 3% to 17.8 billion as I go to market changes will take time to be realized on the services side.
This resulted in total revenue of 71.8 billion or 17% growth year over year.
Turning to margins total non-GAAP gross margin improved slightly to 58% compared to the prior quarter, we maintained healthy non-GAAP subscription gross margins, 70% consistent with the last two quarters on non-GAAP personal service gross margins were negative 5% down sequentially due to lower usage.
Great a onetime one item benefited our non-GAAP operating margin improved four percentage points quarter over quarter to negative 10% at ahead of expectations. This improvement was due to both higher revenue and lower expenses, we utilized quarter.
Most of the lower expenses are savings driven by actively managing our cost base, but we also had some marketing programs and service provider cost some of the latest future quarters, we're investing for durable long durable long term growth schedule manner increased operating leverage in the business.
Looking at our self sufficiency indicator.
For instance index. It was 2.2 through Q3, a slight increase versus the prior quarter.
As a reminder, this metric is calculated by dividing our trailing 12 months non-GAAP sales and marketing expense of 94.8 million.
By the year over year, increasing trailing 12 month subscription revenue of 43.1.
We want to reduce this number over the long term the signifies respect glass to acquire each incremental dollars.
But as we work through many of the changes in the sales organization go to market activities in the near term. This metric may increase until we develop our operational steel.
Now, let's turn the billings of free cash flow.
Calculate subscription billings for Q3 were 61.8 billion, representing 22% growth year over year.
Higher rate of early renewals increased annual mix, resulting in a tailwind for two percentage points.
As we've talked about four quarterly billings can fluctuate due to these factors and they create a benefit they created benefit for Q3.
And also result in a headwind in future quarters. These factors tend to normalize over longer period of time, so look at subscription billings over the past 12 months growth was 24%.
Going forward, we expect full year fiscal year 20 calculated subscription billings growth is slightly above 20%.
Longer term, we expect to subscription billings growth to be in line with subscription revenue growth.
Turning to our cash flow Q3 free cash flow is negative 5.1 million compared to nine or 10.3 million in Q3 last year.
This improvement was partially driven by increased efficiency, our operate mall and favorable timing difference.
One item to call out on Capex and third facilities.
Capex was 8.6 million for Q3 higher than prior quarters. As this included 6.5 million in cost related to building out our new HQ is capex amount was offset by 5.2 million reimbursements received for tenant improvements, which are reported in our operating cash flow, resulting in a net impact of negative 1.3.
I'd like to free cash flow facilities related spend in the quarter.
Look it on sequential basis free cash flow improved more than 6 million versus Q2.
Improvement was primarily driven by the timing of SPP purchases of lower expenses in the quarter.
As a reminder, we ever cash flow tightening benefit related to our DSPP partner in the first and third quarters of each year and a detriment second fourth quarters of each year.
SPP timing benefit contribute approximately 4.5 going into the improvement versus Q2.
For the full year, we now expect free cash flow to be negative 35 million 5 million improvement compared to our expectations for the Q2 earnings call. Excluding the facilities spend of 7 million related to our HCV.
We expect free cash flow negative 28 for the year.
We ended the quarter with 170.4 free cash cash equivalents.
Before we funded against our current operating plan.
Lastly, our fully diluted share count as of the ended the quarter October 30, Onest 2019 was approximately 125 million using the treasury stock.
As Tim mentioned earlier, we're really excited about ourselves to him coding and we said we brought on board.
We have a lot of fiscal year 21 find work to complete though so we'll hold off on providing commentary on our outlook for next year into our Q4 earnings call.
Now for our guidance numbers for Q4 fiscal 2000.
The Q4, we're currently expecting total revenue of 71 million to 72.5 million.
Description revenues 54 million to 55 million.
non-GAAP operating loss of 11 million to 10 million.
This loss reflects the seasonal impact of a higher expense base that we see in the fourth quarter due to merit increases are payroll taxes. This also includes 600000 additional rent expense associated with our HCV.
Our non-GAAP non-GAAP net loss per share we expect lemons.
11 cents to nine cents is weighted average shares I'll save approximately 13.5 right.
For the full year fiscal 20, we're currently expecting total revenue of 276.7 million 678.2 billion subscription revenue to 6 million tool sets.
non-GAAP operating loss of 40.8 million to 39.9.
non-GAAP net loss per share 37 cents to 35 cents sort of weighted average shares outstanding.
Definitely on or 11 point it seems like.
With that we're happy to take your questions operator.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone if you would like to withdraw. Your question you may across the County. Your first question comes from Richard Davis with Canaccord. Please go ahead. Your line is open.
Hi, Thanks.
Very much.
So once you referenced kind of integrated into the.
Platform and you have all the because now the CRL lined and stuff like that you and I've talked about this before is there a thought in terms of will there be a change in the pricing like life to pay more I mean, how should I get the module that counts, but how would shut I think about your pricing model will that change at all or do you have any thoughts on go to market in that regard. Thanks. So much.
Yes.
Right now.
We have no current plans and changing.
Our pricing and so the way we sell our products as we sell products.
You, obviously know given what we do that we do believe in the power pricing to build long term sustainable model. So somebody always looking at but at this point weve, replacing the way. It is yes. Richard this is how we we always look at price right reiterate retire learn from our customer base.
With ramp ROE right that is an add on and that is one of our flagship product. So it is painful cuts are not having it is also me.
But we constantly look at pricing, we constantly iterate that.
Based on what we think about customers and I appreciate the valuable give them.
Super. Thank you so much I'll, let other people ask questions appreciate it.
Your next question comes from stands Blocky with Morgan Stanley . Please go ahead. Your line is open.
Yeah Blocky with Morgan Stanley . Please go ahead your line is open.
Apologies.
Sorry, this is Eric on for Stan Zlotsky.
Regarding the downtick and net retention this quarter last quarter, you called out a higher number than usual of customers rightsizing and kind of recycling their commitments after starting to larger transaction volumes in the year ago period did you see a similar dynamic this quarter and did that play into net retention.
I just had Arctic answer no we've.
We did call out a couple of down so last quarter. We also said that you know going forward, we kind of gave a heads up that we could see some some pressure on on this number.
This quarter because at the same thing just now so there wasn't anything dramatic.
That we would we called out this quarter just some year over year comp comparisons that are tough and that kind of just normal course of business.
Got it thank you.
Your next question comes from friends filled with Jefferies. Please go ahead. Your line is open.
Hi, this is enough soda on for Brent. So thank you again for taking my question.
Hey, Hey, teenage.
Just a couple of questions. One was on you know I know in the previous calls you guys outlined some of these initiatives on those sales side.
Now that you hired Robby.
Is he is a sort of implementing those same initiatives.
Or is it getting izzy being given more leeway in terms of what he can and cannot employment.
And then the second one was for Tyler.
Our team that's well you know now the two recruited James Hello.
He is building out the aside pipeline.
Well that lead to foster deployment times, if you will.
And you know over the longer term do that help ease out the deployment process.
Thank you yeah, absolutely going to feel the first one I mean as you can imagine I am.
Incredibly pleased to be able to handle the rains on some of the projects that we've been doing.
And handed off to a true professional like Robby.
I would say that an art.
The process of coming together of interviewing.
We certainly found that were very aligned in our and our thinking but I would also say that Robbie comes from.
Barton minute Adobe, where he is selling to the largest companies in the world on digital transformation projects right and this is a big part of our growth and we see success on how to scale.
Sales process that is more about that type of complex sale and so I think he's taking what we've done not certainly expect him to us it to bring it to two to two entirely new level.
Drives a growth of our company and so I wouldn't say you know that that we should we expect these an undue everything we did but I would say that I, just really expect them to add to it and make it much longer.
Yeah look like I can talk to that as the last as the second part of the question which was around.
The addition of our new head of alliances James it's kind of.
Well, we expect to happen there I think you specifically asked do we expect a point, it's hard to get shorter.
The first thing is that he is relatively new with Robby our Robbins organization that we're really excited to have much more we are seeing as we've mentioned.
A lot of great traction that you side, but then the these kind of.
Partnership to take time to build.
It might sound counterintuitive, but in some cases, the deployments might actually get bigger because but the just size will be taking them over so that may not necessarily the on our piano. The reason is either just some large digital transformations that is where it just be a pizza of an entire stack that we're now see just size wanting to build into.
Architecture.
So we look at this same how can we be expert services and always maybe be involved but just major size trained up as possible.
I'm sorry, we're also working on that.
So we're just launching and in that case trying to reduce the cards deployment getting their minds fastest possible.
Utilizing our technologies as we're actively working on that as well.
Got it thank you.
Uh huh.
Your next question comes from Chris Merwin with Goldman Sachs. Please go ahead. Your line is open.
Hi, Thanks, very much for taking my questions I.
I wanted to ask that Zora platform.
We'll go to see that these are group meeting.
A few months back, but just just curious like.
Any.
These cases, you can highlight so far any potential customers using the product how we should think about.
The option trending there thank you.
Yeah.
That's about the platform. This is obviously an area that work et cetera, but I'm really excited about we tried to highlight a few examples from the call and so there's one about a media company.
On that really look too.
To move a lot of.
Collections process. He is if you will into into into the system, we highlighted a.
I'll handle a sports media South software company that was really automated a whole bunch of different Latanoprost Ses and then we highlighted motor trend group.
We look capacity, we're up to about 100 customers I would say that are that are using the platform actively and this is really up from zero when we launch this in.
In June or a handful of beta customers. If you will and so really pleased the progress and as you can expect the whole purpose. The platform is to allow customers to do the last mile customization and so the diversity.
But we're starting to see is this is exploding I mean, we're seeing companies try.
Utility metering, we're seeing companies track on been numbers are cars right in the system through Lucas logic capability, and so really pleased with what we're seeing in the kind of tied to the question before we also do believe that this is a big part of.
You know to work was that size right that there is actually more customization has to be done done trimmed a lot more customization and that's where the yes, I simply step in and I didn't help us through a lot that work.
Chris is just a follow up.
We're super excited what we're seeing with the customers even actually left we're learning as well from customers, but we are early in the monetization strategy strategy journey on.
We're charging for by were.
I don't want so we're not looking to optimize that yet because we are learning about how our customers are using that will evolve over time. So wouldn't agree on my last couple of cost.
That's still costs.
Okay. That's great. Thanks, and maybe just former follow up on on verticals I apologize if if if this was addressed.
Before we are just happened between a couple of calls metal.
And any.
New industries or.
Certain projects or new businesses within.
New industries, where you're starting to see more more traction.
Richard Richard you are getting more optimistic about that you'd call out.
Yes so.
We see a lot of buys a lot of industries. So you'll see some financial services industry agencies, and healthcare industries right, but I would say those are.
You know more isolated went osprey right now we're certainly monitory at the one that we were now we're seeing more traction during the quarter, we seem to announce a couple of more customers is utilities.
And there's something about utilities that are moving away from pricing models that have been fix or or 10 2030 years into more of these dynamics energy as a service models.
And so we announced two we had to press releases this quarter right with.
With two utility companies.
And.
When France, and one in Australia, and that really joins a bunch of all the companies like origin centric a two way and so we're keeping our eye on utility and seeing if that does become emerging vertical for us.
Okay, great. Thanks, Dan appreciate it.
As a reminder, if you'd like to ask a question at this time. Please press Star then the number one on your telephone calls for a few moments ago pile any remaining questions.
We currently have no further telephonic questions at this time, we'll turn the call back to management for closing remarks.
Great. Thanks, so much for joining us today, and we look forward to hearing from you Weve listening. If you have any questions and we'll talk to you last quarter.
This concludes today's conference call. Thank you for joining us now disconnect.