Q2 2022 UserTesting Inc Earnings Call
Good day, everyone and welcome to the user testing second quarter 2022 earnings conference call. Please note that this event is being recorded for opening remarks and introductions I will now turn the call over to Erica Mannion at Sapphire Investor Relations. Please go ahead.
Thank you and good morning, with me today from user testing or Andy Mcmillan, Chief Executive Officer, and John <unk>, Chief Financial Officer, Andy will begin with a brief review of the business results for the second quarter ended June 32022.
John will then review the financial results for the second quarter, followed by the company's outlook for the third quarter and full year 2022, We will then open the call for questions.
Please note that this call will include forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations.
For a discussion of material risks and other important factors that could affect our actual results. Please refer to the risk factors contained in our SEC filings available on the SEC's website, and our Investor Relations section of our website as well as the risks and other important factors discussed in today's press release additional information will also be set forth.
And our quarterly report on Form 10-Q to be filed for the quarter ended June 32022.
All material contained in the webcast is the sole property and copyright abuse, you're testing with all rights reserved.
Please note. This discussion includes certain non-GAAP measures, including non-GAAP net loss and non-GAAP net loss per share, which are not measures prepared in accordance with U S. GAAP.
We have included non-GAAP measures in this discussion as we believe that they provide investors with the means of evaluating and understanding how the company's management evaluates the company's operating performance.
These non-GAAP measures should not be considered in isolation from as substitutes for or superior to financial measures prepared in accordance with U S. GAAP.
Information regarding reconciliation of non-GAAP to GAAP measures can be found in the press release that was issued this morning on our Investor Relations section of our website now I would like to turn the call over to Andy.
Thank you Erica and thanks to everyone for joining us on our call today, we're doing our call today from our European headquarters in Scotland, John and I are here meeting with our team and with some of our customers. Our international revenue grew 55% year over year in the second quarter and is now 21% of our total revenue our office in Edinburgh is our second largest office.
Globally, and we're looking forward to spending some time with this team.
We reported a record second quarter with revenue of $48 million up 36% year over year subscription revenue reached $45 million, an increase of 40% year over year. This represents our sixth consecutive quarter of year over year subscription revenue growth of 40% or greater our non-GAAP operating margin of minus two.
92% was much better than the minus 31% midpoint guidance. We previously provided as we managed expenses more tightly in the quarter given the uncertain economic climate.
Our calculated billings were $53 million up 27% year over year, and our net dollar retention rate was 112% down from 117% in the prior quarter and year over year.
Broadly speaking most of the reduction in net dollar retention rate was due to delayed decisions around expansion deals gross retention was stable among our larger customers, but as you would expect we did see higher churn amongst smaller customers in the last part of the quarter, we saw customers broadly reassess their second half budgets, which extended our sales cycles, while we continue to see good interest and need for.
For our platform concerns about the macroeconomic environment will likely persist for the next few quarters.
Our sales performance over the past two years has been strong we were able to accelerate our subscription revenue growth rate nearly every quarter. Since late 2019, coupled with consistent sales efficiency. We continued to invest heavily in our sales and marketing organization over that time, even though those investments extended the company's path to profitability.
However, as a result of the uncertain economic environment, we reduced our global employee base by approximately 7% in July primarily in our sales and marketing organization.
This reduction will reduce sales capacity and some supporting functions, but we believe it will accelerate our path to profitability as a business and better position us to weather an extended economic downturn.
Economic conditions improve we expect to shift our focus to scaling the organization as we have done in the past.
I'd like to take a moment to thank the impacts in place or contributions to the company and all of the support they provided to our customers.
Specific to the second quarter, we have some great new wins and growth transactions, including Chase Bank minute media Pearson Pixar rocket Central tailored brands train line in Woolworths were very excited to have these customers adopting and expanding the usage of our human insight platform.
We ended the quarter with 376 large customers, which we categorize as those spending more than 100000 in IRR, which is a 51% increase year over year. In total we now have approximately 2550 customers on the platform up 27% from one year ago.
We continue to invest in our platform and believe it is the leading platform in the market today to help companies understand the driving forces behind customer behavior, and deliver actionable insights to make smarter and faster business decisions. Our July market release included some great feature enhancements, including instant insights, which accelerates post test analysis by automatically detecting Pat.
<unk> anomalies and servicing key insights within the video base customer experienced narrowed as the instant insights are presented in a dashboard, allowing customers to quickly identify important takeaways from their test.
These are testing platform is now also available in French for both customer and contributor experiences testing will be conducted in French with French speaking contributors, giving customers the ability to reach more people around the world.
We also launched a new user interface and our self service single sign on to provide better governance for enterprise scale deployments new card sorting capabilities. So users can view video feedback alongside card sorting metrics and gather more comprehensive understanding of contributors mental models and a new native media asset testing feature that allows companies to test more sensitive.
Media and gather feedback on unreleased assets like video and audio files before launching them to the public.
We also released new templates focused on customer expectations around inflation. The template bundle is ideal for decision makers and consumer focused companies include prebuilt test plants that help our customers one understand how customers are changing their preferences habits and priorities in reaction to higher inflation in the market and second bolster customer loyalty in may.
Confident decisions on a repackaging of product or service by collecting proactive customer feedback on changes.
Organizations can still use user testings prebuilt sample questions as is or customize the templates to address their specific business needs. We now have over 100 rebuilt testing templates available on the platform.
Turning to use cases, a large luxury fashion house tested a virtual try on feature for clothing and use the insights decreased customer interactions and better personalized content and so on increase in their app store rating to a $4 nine I'll also highlight a large global meal delivery company that is now testing, 90% of all App and research initiatives through user testing.
Hey estimate of 400% increase in the speed of receiving insights and completing research projects the speed and quality of insights on our platform allows companies to incorporate external testing of prototypes marketing campaigns and other experiences into workflow processes to ensure human insight as a regular part of these processes and helps them to achieve greater certainty that they are built.
The best experiences and achieving their desired outcomes.
So despite the broad economic climate, we continue to focus on delivering value to our customers and the things. We can control I've spent many hours with customers over the past quarter and had been energized by the satisfaction. They have expressed to me now more than ever. It is important that companies know how their customers feel and why we are continuously innovating on our platform to help companies gain actual <unk>.
Sites, so they can make smarter and faster business decisions. The human insight platform helps companies optimize the use of human insight. So they can better understand what is driving customer behavior and adapt to changes in the market with that I'll turn it over to John to discuss our financial results in more detail.
Thank you Andy and thank you everyone for joining the call today, let's begin with the key financial highlights.
As Andy mentioned revenue for the second quarter was a record $48 million, an increase of 36% compared to the prior year period.
Description revenue of $45 million increased 40% compared to the prior year period.
Our net dollar based revenue retention rate was 112% in the second quarter down from 117% in the second quarter of 2021.
For context, our average net dollar retention rate in 2020 was 110% in what was a tougher economic year and then be proved to an average of 118% in 2021, which was a much better economic here.
So the 112% is within the historical range of what we have seen during more challenging economic environments.
Calculated billings were $53 million, an increase of 27% year over year.
As Andy mentioned, we believe concerns around the economic environment resulted in a lower close ratio than what we've seen in the past and again this was more pronounced among our smaller customers and with closing new customer wins.
As I talked about operating loss free cash flow gross margins and expenses I'll be referring to non-GAAP measures unless otherwise specified a reconciliation of GAAP to non-GAAP measures is included in today's earnings press release.
Operating loss in the second quarter was $10 6 million, which compares to $10 million in the prior year period.
Operating margin was minus 22%, which compares favorably to minus 29% in the year ago period.
We continued to show meaningful progress on our path to profitability and this quarter's results were better than our original expectations as we started to restrict certain discretionary spend in the quarter with a tightening economic environment.
Free cash flow was minus $1 3 million in the quarter with a free cash flow margin of minus 3%.
We ended the quarter with $164 million in cash.
We've had some volatility in our free cash flow over the past few quarters with changes in our collection rates and some large payments impacting working capital. So I believe the first half free cash flow measures are more representative of a normalized trend for the first six months ended June 30, the free cash flow margin was minus.
19% compared to minus 30% for the prior year period.
The six month measures are more closely aligned with our non-GAAP operating margins, but also show the progress we have made on our path to profitability.
Gross margin in the second quarter was 78% and subscription gross margin was 82% up roughly 400 basis points compared to the year ago period.
Turning to operating expenses sales and marketing was 63% of revenues in Q2 compared to 57% in the prior year period, we have increased spend in this area for a couple of years now and with the changing economic environment. Most of our restructuring efforts have been focused in this area.
The reduction in employees will reduce sales capacity of our team, but we believe it will help to make the investments we have made more efficient.
We still have some large in person events planned in the third and fourth quarters, but we expect to see more leverage in 2023.
We continue to see some leverage in R&D expense in the second quarter, which was 21% of revenue compared to 27% in the prior year period.
G&A expense was 16% of revenue in the second quarter compared to 18% in the prior year period.
Now onto guidance, we are lowering our revenue guidance for the full year of 2022 by approximately 4% to a new range of 190 million to $193 million, representing a new growth rate of 29% to 31% year over year.
For the third quarter, we expect revenue of $47 5 million to $48 5 million or a growth rate of 23% to 26% year over year.
For the full year, we are improving our expected non-GAAP operating margins by 400 basis points to a new range of minus 25% to minus 23%.
For the third quarter, we expect non-GAAP operating margins in the range of minus 29% to minus 27%.
For the full year, we expect non-GAAP net loss per share to be between minus <unk> 31, and minus 33.
Assuming 144 million weighted average shares outstanding.
For the third quarter, we expect non-GAAP net loss per share between minus nine and minus 10.
Assuming $144 5 million weighted average shares outstanding.
We expect to incur restructuring costs of approximately $1 5 million in the third quarter related to cash severance.
Plan to treat that restructuring expense as an adjustment to non-GAAP financial measures and therefore is excluded from our guidance.
Overall, we had some good results for the quarter, we believe the uncertainty around the macroeconomic environment impacted us in the last few weeks of the quarter and those conditions will likely continue until uncertainties subside.
We have shown the growth potential of our platform with six consecutive quarters of year over year subscription growth of 40% or greater and still believe in the market opportunity ahead. It is critical for organizations to have great experiences for customers prospects employees and others user testing is pioneering a better.
Way to help companies do that with our human insight platform.
I'll now turn the call over to the operator for questions.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line.
He's been the question queue, you May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the starkey one moment. Please while we poll for questions.
Our first question is with Elizabeth quarter from Morgan Stanley . Please proceed with your question.
Hi, Thanks for the question first just from a more high level can you speak to the defensibility of spend for user testing and most where does it user testing really sitting within kind of the IP budget prioritization and where those dollars are coming from and then second kind of more specifically you mentioned churn at the low end to the customer segment can you comment on what.
You're seeing it in terms of the top of funnel kind of new customer demand just given some of the I T budgets are coming under greater scrutiny and some of those dollars might be for us it may be harder to come by.
Sure. Thanks Elizabeth.
I would start by saying I think a lot of the budget for user testing actually tends to come through in R&D team as opposed to more traditional it spend and what we see is that our R&D teams leverage user testing often through either design or design ops or some kind of research team and we tend to be one of the primary tools.
Specially for our research team to get their job done efficiently. So I think it is a pretty mission critical tools for people in those roles and we tend to see more of those dedicated roles and more established sort of enterprise customers and so I think that sort of speaks to the the churn aspect as we mentioned with smaller companies, which might have somebody sort of doing this some of the time versus in a scaled organizations.
<unk>, where you have a <unk>.
Search team or design research teams, where this is a key part of their workflow for shipping product that we see them being mission critical in those environments and that sort of reflected in the numbers I think to your second point on demand. We continue to see strong demand at the top of the funnel for the product I think there is an increased need if you will to understand.
Customers' changing behaviors, we launched some template as we mentioned on the call around understanding your customers.
You have impact of inflation on your product and so we continue to see really strong demand.
Top of the funnel and our marketing channels and most of what we talked about it.
Just the slowdown in budgets getting approved do we found that to be generally true of the budget overall with the organizations. We were working with not with the budget specific to user testing, we heard a lot of folks say our whole department is doing a second half budget review and once we're through that review our deal cycle will go through that evaluation at that point.
We continue to see good good top of funnel demand.
Great. Thank you for the color.
Thank you.
Our next question is from Terry Tillman with choice Securities. Please proceed with your question.
Hey, everyone. This is actually Joe Meares on for Terry Thanks for taking the question.
You talked about this a bit in the prepared remarks, but just curious how much of the revenue outlook is driven by less new customer activity versus our pool weakness and how is the international business performing.
And as the macro more or less impacting there's still emerging part of your business. Thank you.
I would say as far as <unk> versus customer acquisition.
I think it's less driven by an RP issue.
What we mentioned on the call is that I think the SMB segment and one of the unique things about our business as we sell in every segment. We saw a really really small companies all the way to the biggest enterprises in the world.
Thank you.
Typically true economic cycles, it's a lot more dynamic at the lower end of the market with smaller companies, who might restrict spending as a matter of life and death for their company to survive and so I think in that segment.
<unk> kind of small business in particular.
There will be tougher logo acquisition for them for acquisition of all kinds of software products and so that's why we reduced our investment in that team as part of our restructuring and that's where we see the bigger impact as opposed to kind of a degradation of our.
And on your second point, we saw a pretty similar impact geographically, we actually saw strong performance out of our international business.
Raul and I think it's again more segment, driven then driven by geography for us.
Super helpful. Thank you.
Yeah.
Our next question is from DJ Hynes with Canaccord.
<unk> Genuity. Please proceed with your question.
Hey, good morning, guys.
It's at the high end of the market can you remind us how much customer coexistence you have with firms like qual tricks in and is there any signs that those buyers are consolidating spend around bigger platforms. Instead of point solutions like I know you don't solve the same problems, but I'm curious if you're sensing any kind of close to and I was thinking in this environment.
Yeah, I mean, we coexist often with some type of tool for doing quantitative analysis is kind of a survey type tool, we often coexist with some kind of analytics or measurement tool. So folks want to know what people are clicking on in their apps and things like that those are often even used by different teams in an organization.
Our tool is primarily used by design research team a UX research team to really get feedback on how people interact with a UI that might not even be in production. We see a lot of prototype testing on our platform again, what youre, just not going to be able to do with production and analytics or for example, you can't survey of your customer base about a UI they've never seen before.
So we don't see a lot of displacement risk from a consolidation standpoint, I think for us. It's really just around companies continuing to invest in those those teams that are that are supporting the UX research efforts that are going on in their product organizations. Yeah makes sense and that's helpful color and then John a follow up for you. If you look at sales and marketing spend as a percent of revenue.
What do you think is the right level for this business going forward.
Well, yes, so we have a path to profitability that we've outlined in the IPO. We added a slide back into our investor deck I'm, just kind of our mid term model as well as our long term model and we're on a path to get that to 45% of revenue over X period of time.
We've seen it increase more recently.
As we've invested in that over the last couple of years, but the efficiency metrics were really in line for all of these quarters up until more recently so when we saw the softness come in this quarter. We look at the outlook. We said no now now we're finding that outside of those bands of efficiency that are comfortable for us we made adjustments.
But over time.
We are on a march that line to about 45% of revenues.
Our mid term model got it okay. Thank you guys.
Thank you.
Our next question comes from Arjun Bhatia with William Blair. Please proceed with your question.
Awesome. Thanks, guys for taking the question just going back to the expansion.
Our point.
It seems like some of the weakness is having is that purely driven by deals being pushed out or are you are you seeing any signs of down sell from existing customers that are reducing existing contracts.
At renewal and just as a follow up to that I'm curious if there's any specifics that you would point out in terms of customer verticals, if theres any differences that you're seeing there.
Yeah.
Last part first I don't think we saw a pronounced difference in any specific set of verticals.
At least nothing that's jumped out right at the end of the quarter. So I'd say nothing dramatic there in terms of.
The kind of expansion revenue impacts on N R. R.
It's tough to delineate that question because I think what we heard from our customers that didnt make those transactions was we're redoing our second half budget is what we heard a lot of teams say much like we did at user testing, where we restructured a bit for the second half and so those teams are basically telling us as we redo those budgets, obviously the head count tied to.
Doing things like UX research require our tools, so if theres a head count impact there there could feasibly be some impact on us.
Number of seats needed or something like that but for the most part on the expansion deals. It was largely just delayed decision.
And so those projects go through an evaluation once new budgets are deployed.
We're only a few weeks into this quarter, but you know in most of these deals were back into a cycle of ensuring that they understand the ROI of our purchase and sort of trying to get those cycles executed. So it's I would say, it's largely delayed decision versus any kind of.
Accuracy of current spend.
Okay.
Got it that's very helpful. And then John maybe one for you just on the on the guidance.
As youre looking at assumptions for the back half are you thinking that what we saw in Q2 continues are you anticipating that.
This gets worse.
The macro gets worse as we as we push into that into the back half and I'd love to hear a little bit more color maybe in terms of just.
Some of the customer.
Budget restructuring that's going on in.
That could happen in the back half.
And in terms of what you're what you're baking into your assumptions.
Yes.
Our guide assumes that the softness that we saw really.
That came in in the last few weeks of the quarter. When we started the quarter we had our.
Sales team was calling a different number in the world kind of shifted.
Meaningfully towards the end of the last months of the quarter. When we do most of our deals. So we're carrying that softness through to the end of the year and as our kind of the current assumption that we built into into the guide.
And then what was the other part of that question.
On the budget I think yes, I think you mostly answered it but I'm just.
Oh, yes.
What we heard is if people are reevaluating budgets like again the deals that we were anticipating closing.
The feedback was that the.
A lot of companies are kind of pausing purchase decisions and reevaluating.
And then we just held our.
Our annual sales kickoff meeting.
Last week. It was our first time, we've got our wholesales team together into two and a half years I believe and I got to sit in on a lot of the sales.
Our sales team kind of.
Discussions and there's really I thought there's a lot of confidence and optimism more more so in Q4.
Then.
And then a lot of worries about the macro environment. So that was again more at the global and enterprise level that I was sitting into those teams. So I'd love to hear their confidence their focus.
The need so.
But our guidance assumes that we see softness during the year and we'll see how this plays out with the with the economy in these decisions need to be made with our customers potential customers.
Got it alright, perfect. Thank you very much for taking my questions.
Thank you.
Our next question comes from pendulum borrow with J P. Morgan. Please proceed with your question.
Hey, Thank you for taking the questions.
I wanted to understand I think you've talked about a reduction in sales capacity.
Is that largely associated with the with the low end of the sales pyramid trying to understand why reduce sales capacity as demand is there and and maybe ready ready when the macro improves that the close rates improve.
Yeah, I mean, just to take the last little bit quickly, we've shown an ability as a management team to be able to ramp up sales capacity and make it quite productive in the past driving growth rates up and things like that so one we went into this thought process knowing that as we have more certainty. We can always ramp demand back up and we haven't seen that's shown the ability to do that to ramp up.
Capacity starting to ramp up demand to.
To your first point I think it's <unk>.
Important to sort of recognize as John said that in the last month of Q2, maybe the last half of Q2, which is very different than it was a difference in terms of people again, telling us that they were re planning the second half of the year I expect that that will be very different than the second half of the year starts people, how budgets will be selling into those budgets, but we wanted to be.
A little defensive if you will on our path to profitability. We think it's important that we are committed to being on a path to profitability and so we sat down and said what do we know what is our best.
Defensive strategy for ensuring that we can have strong sales productivity that we can have a path to profitability, where we're showing progress along that path.
That led us to trying to manage the kind of dynamic aspect of the lower end of the market. So that demand that we see I don't know how much of that demand in the lower end of the market changes or it comes through as deals in the second half of the year and so until we see that happen and then again its easy that's actually the end of the market, where it's easier for us to ramp up capacity.
They have lower ramp times.
Faster time to value and we hire.
<unk> sales reps, and so John and I and the team felt like it was the right approach for us to again be.
Sense of of that path to profitability to reduce some of our exposure to that diagnosis at the low end of the market to see what happens as we go through the next couple of quarters and if we see strength in that into the market. We know we have a great product that solves a real need at that end of the market. We can ramp capacity back up if we don't see that then we're in a defensive position already.
Where we can manage our sales productivity in our path.
It's a profitability.
Understood and then one follow up on the on the India side on expansion.
I wanted to understand if there is a difference in the expansion metrics between customers who are.
Using the flex based pricing model versus seat based pricing model in those discussions a little bit different I understand that number of seats might be pressured as their layoffs and all that but flex based I guess is should be a little bit.
Not affected by that.
I think that's definitely there is some truth to that I would say historically the seat based pricing model was also a little bit chunkier because it was a high priced seek and so think of that being sort of a lumpier model that people are doing a lot of dedicated testing of a small number of seats at a much higher price point those decisions to add another seat.
Step changes versus our new model and part of what customers like the flexibility, it's easy to just add a little bit more capacity. If the team is testing a little bit more add another cedar too. If he has got some people coming on board and so I think it's a little lumpier with the seat based model, but I wouldnt necessarily.
<unk> say that one model lends itself to expansion on the other does not.
Had good expansion revenue in the enterprise under both models historically and I think that will continue.
Got it thank you.
Our next question is it Brent Barkman with Piper Sandler. Please proceed with your question.
Yeah.
Thank you good morning, Andy I know decisions to reduce head count are tough ones to make but.
Clearly I appreciate the decision to take more of a defensive stack stands just given the dynamic environment. We're in but one thing that stood out to me this quarter, though was the the momentum in the enterprise 41, net new enterprise adds is an all time record sell up over 50% year over year.
Can you walk us through kind of maybe the linearity does does that imply a lot of those wins came in in April and May and then and then.
June July sort of slowed a little bit what walk us through maybe what you saw on what youre seeing and specifically that enterprise cohort that at the surface looks really strong.
Yes, I don't know that there was specific linearity there I definitely think we had.
Even some substantive deals late in the quarter that were expansion deals that did.
Pushed the decision into Q3, I want to imply necessarily those or even a given these are again decisions that got re visited this quarter. So I definitely think there was an opportunity.
To improve that number if we hadn't seen some of the slowdown in the re budgeting that was happening I think its a consistent trend we've seen and it reflects frankly a lot of the investments we're making in the product I think at this point, we're really providing a unique solution in terms of thinking about what we do is a real enterprise platform that companies can tie ins.
Two development workflow can tie into sort of how a larger organization makes decisions and frankly, we've been selling for a while now there's an evangelical sale with an ROI that is based on how to make these engineering teams more productive by building. The right thing early on and I think that message resonates even in these kind of economic headwind type environments.
So I think that's an area where frankly we.
We had line of sight to even improve on those numbers, if we had seen.
Less headwinds on decision, making and I think we're going to continue to lean into our enterprise business going forward I think that really represent.
Even stronger unit economics, just inherently that end of the market always tends to have.
Stronger gross retention rates better up sell rates and so again I think part of our mindset of being defensive on our path to profitability is leaning into that success in the enterprise maybe to make a small point, we're not exiting the SMB space at all we just have some we've reduced our sales capacity there some really more focused on.
On just meeting the demand that comes inbound that has approved budget and can spend so we're being more pragmatic there, but certainly not.
Abandoning that into the market either.
Until that makes sense and then John I guess for you as you think about the.
The downtick in an hour or this quarter.
Is that been impacted at all by enterprise customers may be reducing capacity and consumption on the platform as it is it all mostly just SMB any color there youre seeing relative to NR trends in those two.
Different cohorts.
Yeah. So as we've mentioned the SMB segment, our smaller customers.
The softest area, we saw we saw.
More churn.
Unit economics are generally lower that area at the enterprise level, though again youre exactly right. We are really really happy with the progress in the expansion of our large customers those over $100000 of IRR all time record increase.
The land and expand is working well in that area, we let us come in let us prove our worth and then we will expand beyond that I'll remind you in the S. One we disclosed that our top 30 customers had a median land of $50000 and today those top 30 customers have a medium median <unk> $800000. So let.
It's come in let us let US show you the value and then let us expand so that continues to work well at the enterprise level.
But yes.
With the flex pricing model the idea of the flex pricing model is to give our customers flexibility in what is right for them and so it is going to be easier for them to flex.
Flex down in down markets as they need to and flex up in up markets and so that debt.
Situation exists, but we still think it's a better model than as Andy said, the chunky news of a pretty expensive unlimited license that we still have both both both plans out there. So whatever is right for the customer they can choose that plan. Most people have moved to the flex model, particularly at the enterprise because it's easier for them to <unk>.
Spanned and grow and it'll also be view them to flex down.
Annual contract value, but I'm pretty happy with kind of how we're set up in the enterprise space in particular.
Makes sense thanks for the comments.
Certainly.
Our next question comes from Brian Peterson with Raymond James. Please proceed with your question.
Hi, Good morning, gentlemen, thanks for taking the question so John I wanted to double click maybe a little bit on the pipeline. We're hearing a lot from other companies that some VC backed customers may be struggling with budgets.
Curious as you look at the pipe more broadly how much of it is just maybe some some customers just sort of evaluating and taking a pause or or is it a certain amount that may have more structural challenges in terms of spend.
Any sense for how that splits out.
Well, not specifically, but again.
Yes, there was a.
A surprising kind of pause and shift and reevaluation that we saw towards the end of the quarter.
Our view our concern was more than the SMB side might have a harder time to get over the hurdle and that's why we decided to make the restructuring action that again reduced.
Quota carrying capacity in the SMB segment, primarily we're more optimistic as we look out that pipeline at the larger enterprise.
It comes through but.
But it's still it's still pretty uncertain, we have good confidence from our sales team.
But more of those deals are looking looking at like Q4 deals and Brian . This is Andy just add.
Doubleclick on John's point part of our philosophy on this has been to sort of manage the size of our SMB team right now to what we see is essentially being more inbound demand people are reaching out to us that how funding or have used user testing before they have conviction already they are great accounts for us with better close rates faster sales cycles better renewal.
Rates frankly with customers that come in with that mindset, while we had been doing in a in a.
Blooming market with lots of VC funding was doing a lot of outreach we were outbound. It you could you could call anybody who recently got funding and pitch them user testing and they're like yes that makes sense were trying to whatever figure out product markets that launched a second product and we started a sales cycle and a lot a lot of our thinking is that's going to be tougher sledding going forward. So we reduced some of that.
Outbound in STR infrastructure, we kind of rightsize. The team. If you will so that you know on an SMB goes through our funnel and qualifies that they're well funded they've got budgets they've got projects they've got need we've got salespeople there to close those deals, but I think the idea that you can just pick up the phone and open up crunch base and start ringing up startups in there.
To have funding to spend on new projects I think that's just a big change in mentality and I think we're right to make that shift.
Absolutely yeah that makes a ton of sense, maybe just a follow up I know theres a lot of time between now and October but I think we're all looking forward to getting together in New Orleans.
Any thoughts on what an in person user conference could mean in terms of prospects or expansion or products that I just love to get your thoughts on on the user conference as a potential catalyst. Thanks guys.
Yes, I am extremely excited about our upcoming user conference in mid October it's in New Orleans, we call it the human insight summit.
It's something we've had in the works for a while we had planned to do our first ever global user conference in 2020, when Covid hit and obviously it was it was delayed because of that the prior year. We had run three regional conferences that we are a smashing success for us. They were all sold out event spend waiting lists we really got the sense of that.
Point that as the established leader in this space there was a lot of demand and desire for people to get together both about our products, but also about the space to share best practices and understanding it was really driven in many ways like the rest of the decisions. We make it user testing you know from our customers wanting to get together and so it feels now like there's a lot of pent up <unk>.
<unk> for that event to happen I know our team is really excited we're looking forward to welcoming people and what I think will really be the.
Industry level conference on why human insight is so important so thanks, thanks for bringing it up and asking about it we're really excited about it.
Thanks Eddie.
Our next question comes from Rob Oliver with Baird. Please proceed with your question.
Hey, guys good morning, Andy.
Andy for you guys. One of the success stories I think for user testing has been a.
Use case expansion, which you guys have said.
Come up often in our checks with some of your biggest accounts just curious recognizing that that the majority of the weak this year as SMB.
When you look the sales feedback and pipeline.
Is there any maybe amongst some of your posts devote tumors. There is perhaps a slowing of that use case.
Within those accounts.
And.
Or kind of rationalization.
Utilization of timing on some of those deals and then a quick follow up for John .
Yeah. Good question, Rob I think it's been less about.
Valuation specific use cases, and deciding that they don't provide value and it really does feel like a T.
Tale of several different scenarios as we mentioned sort of new logo acquisition in SMB was maybe our most challenging area and again, that's more kind of selling the initial use case than an expansion place I think in existing customers that are growing well, we actually saw a lot of was was this thought of moving even beyond individual use case expansion to kind of this strategy.
Thinking about the overall workflow and how do you tie user testing into <unk>.
Product development process of your prototyping process and that involves kind of several use cases, and so I think we're continuing to see that which was reflected in sort of the strength that we saw in enterprise relative to to SMB. We do however continue to be nimble about what use cases, we are demonstrating on the platform and I think that's part of the power of being a flexible tool like we are.
And again I mentioned that the inflation templates that we launched and there are many others where companies are saying hey, if the world changes, we want to be able to understand users. So we put those use cases out in front of what we're selling.
Great. Okay, I appreciate that and then John .
Just a question on that.
Some of the mechanics or impact of the sales head count and sales and marketing head count. So you guys had been ramping sales and marketing fairly meaningfully and I think.
We're sort of looking at that and saying, Okay. You know we get into the back half and early 'twenty three there's going to be a cohort of salespeople that are going to be.
Up to speed and ready to really really.
Sales can you.
Okay, I realize it's delicate but just was curious as to.
How you thought about the rationalization in sales and marketing where these.
More existing folks or some of the newer folks was it geographical base, where you saw pockets of weakness, but there would be would be helpful. Thank you.
Yes, so so you're right Rob the last two quarters, Q4, Q1, where some of the biggest hiring quarters. We've had in the history of the company. So we were positioning the company for.
Big growth and probably for the first time may be getting ahead of the demand curve, but again, we had a really good 2021 and we're optimistic.
Going through and then.
And then really the.
The war started in February and again things started to get really soft really quick as we reevaluated that we had a lot of thought.
Both bottoms up and top down as to what is the right size of the different sales teams in the different segments and different geographies to make sure that.
We're efficient with our spend in our in our sales team that remains is set up to be successful.
And.
I think that more was certainly more was done in the SMB space.
And then any other space and then it was probably more so in the U S lesser than some of the <unk>.
National geographies, but that was about about the breakup.
Yes, the only thing I'd add to that.
It's a good answer John is that we also have.
It's not just the quota carrying salespeople when we think about making these changes we have ratios like most companies in every one of these roles are supporting functions.
Solutions consultants and sales.
Sales development reps, str's and folks like that and so.
We sort of made the changes.
Keeping those ratios consistent so for every rep, we might have taken out of our SMB space. There were some other roles impacted to that supported that function and so it's.
And we're pretty focused as John said and sort of where we saw some of the.
More dynamic market aspects of the of the SMB space and really that adjustment to the sales spend is to decrease the growth rate, we still expect in our models to have an.
An increase in sales and marketing spend in absolute dollars in Q3 relative to Q2 and Q4 relative to Q3. So we're still growing we're still investing in all categories. It's really again, we had some really big hiring in Q4 Q1, we're pulling that growth rate back a little bit more of a defensive.
<unk> and then and then making sure that our sales efficiency is within our range, but we are continuing to grow the spend and partly that's also because we had our first.
Sales kickoff event in two years that we held in Q3 that was very productive and then Q4 will have our first in person.
The conference as well so those those are also part of the the <unk>.
Spend profile for the second half of the year.
Great color. Thank.
Thank you guys I appreciate it.
Thanks, Rob.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Brian Schwartz with Oppenheimer. Please proceed with your question.
Thank you for taking my questions. This morning, Andy.
Andy just wanted to double click on the delayed decisioning that youre, saying I think we're hearing it in the commentary as well the Q&A is it fair to assume that that was more pronounced in North America.
A little bit, but again I think it was.
It was largely more segment driven then.
Driven so.
Maybe slightly more pronounced in North America, but we also.
What's the number we gave you a 78% of our business in North America. So you said it was sort of end up with a bit of a waiting there and anything we do because it's the majority of the business.
Thank you and then John one follow up for you.
I know you've changed the pricing model I think couple of years ago, but what percentage of the base is still left on that seat based model versus the new pricing the new flex pricing model. Thank you.
Yes, Brian .
It's been adopted more heavily at the enterprise Global account base.
And then the SMB, we're giving people more of a choice. Some people just want to have an easy bite of an unlimited license and not worry about trying to figure out capacity and then some people usually want to switch over so we're still offering both models.
I think that it's the vast majority of the company.
I would say.
60% to 70% is on the flex model.
Thank you.
Thanks, Brad.
Our next question comes from Ian Kim with Loop capital markets. Please proceed with your question. Thank.
Thank you Hey, Andy given the reduction in the sales capacity can you just update us on your partner network strategy.
Yeah, we're definitely continuing to lean into partners as a as an opportunity for us.
Think of that in a couple of different areas, we're continuing to do work.
Starting to see some some early signs of success working with agencies and so you know I hope in a future call. We can call out some specific agency wins that we're doing I don't think we have public Reits to share any of those yet, but we're continuing to work with agencies and really in two ways. One is agencies that actually do some kind of a UX design work in one.
We're able to test that but we also see some interest out of agencies that do more work in the marketing area.
Look at using our platform for forgetting early feedback on on marketing and an editorial comment content.
And then we also think there is.
An opportunity for us to work more in the tech partnership ecosystem as well and you've heard me mention a couple of times I think some of the areas like.
Workflow, where we're seeing companies that progressed from having a person or two in a team that are using user testing to get feedback on something they're working on to saying Hey. This is really something that's part of the way that we want to design something part of the way that we want to build something part of the way we wanted to do needs assessment and so theyre looking at the tools.
That they used to orchestrate those workflows and thinking about how user testing can sit inside those workflows and so those are also partnerships. So we continue to work on.
But I think will bear fruit in the future. So yes very much still.
And in the earlier stages of building out that partner ecosystem, but something we remain committed to and bullish on over the long term.
Okay, Great and then on the number one topic in prior calls, but I guess not today.
Debuted on network can you give us update on the contributor network like the growth trends that you're seeing there in terms of the number of contributors.
Any cost trends.
Associated with the new contributor acquisition as you know.
And then I think we've talked about it before but any plan to charge.
Rates for certain work.
<unk> targeted audience that could command a higher value to their customers.
Yeah, we've continued to see.
Kind of our typical economics around contributor acquisition around contributor payments.
Those kinds of things, so nothing unusual or different there I think that engines running well, we're very happy with it as you see in the numbers from a margins perspective and things like that that continues to all be in line, if not performing a little above what we think the long range plan might be from a margin perspective with the contributor network expense.
We continue to invest in growing the network. So we mentioned I think it was two quarters ago. The investment, we're making in sort of building out a little bit more in Germany.
We're doing a little bit of that with our contributor network now being available in French so youll see some some additional.
Folks coming on from from regions that speak those languages, but again that sort of happens naturally in the business model that we are structured around the contributor network. We also have made investments to make our platform and the technology that supports that network more dynamic one of the things that we released a few quarters ago was the concept of a shorter test, which allowed us to let our.
<unk> run a five minute test, which had a different contributor payment model behind it.
The technology investments, we made in doing that gave us the ability to make more flexible payments. So if we choose to in the future provide different incentive models for different kinds of contributors, we can with that though I would say we find as we go upmarket into more kind of expert network areas. When we often find is people are.
We're looking for other rewards for their feedback either they want to know that they've been hurt or they want to get to know the design team is looking what they are doing versus.
Our payment remediation. So we continue to think that's an interesting opportunity over the long term not necessarily a near term focus, but we have built into our technology the ability to sort of take on different models with different types of contributor networks. Okay.
Great. Thank you so much.
Okay.
Ladies and gentlemen, we have reached the end of the question and answer session and I would now like to turn the call back over to Andy Mcmillan for closing remarks.
Excellent well. Thank you everyone for taking the time to join our call today are John and I were excited to bring the call to you from from Scotland. As we mentioned at the start of the call I just a lot of energy.
Now in our efforts in Europe , and seeing success, there, which has been great. When I also thank you for your interest in user testing and what I think is a really exciting and compelling I think that we're building and continue to roll into our customers here. We look forward to meeting with some of you at the Investor conferences that were attending in August and September . So if you at those events. Please make sure you say heightened John .
And we look forward to updating all of you on our business progress in the quarters ahead. So thank you everyone have a great day.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Goodbye.
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