Q2 2022 AvePoint Inc Earnings Call

[music].

Good afternoon, and welcome to the Asbury Inc.

First quarter 2022 earnings conference call.

All participants will be in Mercury normally mode should you need a sector. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions.

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Please note. This event is being recorded I would now like to turn the conference over to Mark Griffin.

Please go ahead.

Thank you good afternoon, and welcome to athletes second quarter 2022 earnings call.

Today, we'll be discussing the results announced in our press release issued after the market close.

With me on the call. This afternoon is the Chief Executive Officer, Dr. T J, Jill and Jim Cathy <unk> Chief Financial Officer.

T J will begin with a brief review of the business results second quarter ended June 32022.

Jim will then review the financial results for the second quarter, followed by the company's outlook for the third quarter and full year of 2022, we will then open up 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.

We encourage you to review the Safe Harbor statements contained in our press release for a more complete description.

All material in the webcast is the sole property and copyright of <unk>.

With all rights reserved.

Please note that this presentation describes certain non-GAAP measures.

Including non-GAAP operating income and non-GAAP operating margin, which are not measured measures prepared in accordance with the U S. GAAP.

The non-GAAP measures are presented in this presentation as we believe they provide investors with a means of evaluating and understanding how the company's management evaluates the company's operating performance.

non-GAAP measures should not be considered in isolation from as substitutes for or superior to the financial measures prepared in accordance with U S. GAAP.

Well listen if you do not have a copy of the quarter ended June 30th Press release, you may obtain one by visiting the Investor Relations section of the company's website.

With that let me turn the call over to T. J.

Thank you Mark and thank you to everyone joining us on the call today.

Last call I close by reinforcing how important it is to grow while being prudent with expenditures in the highly dynamic market. We're in.

Today amidst the challenging and uncertain macroeconomic environment.

Lease to Sherry <unk> continued to show its proven ability to do just that.

Our total revenue for the quarter was $55 7 million at the upper end up our guidance and would have exceeded our guidance range if not for the strong FX headwinds we faced in the quarter.

This was driven by strong SaaS revenue of $27 6 million up 34% from the same period of 2021, we grew total 28% year over year to $178 two Matt.

Technology plays an important role for organizations across every sector every customer I speak with believes there is a real opportunity to overcome today's challenges with technology that secure digital collaboration data sustains connections between people and insurance business resiliency.

Transform data and collaborations so users can be more productive with our latest cloud services and drive efficiency in delivery and management of those services for infrastructure and operations leaders.

We do this through the Apple and confidence platform, which helps organizations using cloud services, including Microsoft who spot, Google Salesforce and more than a half dozen additional cloud collaboration platforms move faster become more agile reduce cost and improve productivity with.

With Gartner predicting spending on public cloud services to grow more than 20% in 2022, the appling confidence platform and our purpose built industry solutions are well positioned to enable organizations to collaborate with confidence in the modern workplace.

Organizations in every industry continue to choose our resilient suite to ensure business continuity and compliance with data retention and other regulatory guidelines with that point, a global leader you're recruiting services can confidently accelerate adoption of its sales force environment by complying with Cdpr and reducing the threat of downturn.

Which can cost the organization 5 million euros per day.

Federal agencies like National Endowment for the Humanities have strict retention policies to address regulations, such as the freedom of information Act. They can quickly and confidently recover years old Microsoft <unk> files necessary to its worked with that point.

We continue our work with Asian development Bank to protect its 15 terabytes of data to mitigate risks from ransomware attacks ensure business continuity, maintaining the public trust and protect its reputation.

Our fidelity Sweet preserves data integrity as organizations transform from one system to the next capturing data for compliance or integrating SaaS applications to streamline the way users work with that point the IRS migrated multiple workloads from legacy systems to Microsoft <unk> to modernize its collaboration.

<unk>.

<unk> also worked with one of the worlds most recognizable food producers with more than 20 production facilities across the U S, Canada and Bahamas to migrate Microsoft <unk> five following the acquisition that here too all GDP, our regulations and privacy laws, all while ensuring business continuity during the transformation.

Our control suite provides differentiated value to infrastructure and operations leaders delivering central services at scale as a result organizations can better maximize their digital transformation investments with greater control over their budgets licenses users and workspace, we're accelerating adoption of our <unk>.

Digital workplace program by Automating service delivery for a fortune 50 company specializing in engineering solutions with more than 336 manufacturing locations in 50 countries.

We're also helping our large multinational manufacturing company based in Germany manage its growing SaaS operations and increase Microsoft 305 adoption for <unk> 6500 employee workforce spread across 40 sites.

During the quarter, we reinforced our commitment to help businesses continue to mitigate risks protect business critical applications and drive productivity with added support for protecting Microsoft Azure workloads, which capture more than 20% of all public cloud spend.

Also added four of our existing solutions on Microsoft App source.

<unk> cloud marketplace, providing tailored line of business solutions.

This creates a more seamless experience for businesses shortens their purchasing cycle and helps them combat evolving workplace trends and challenges quicker.

We also continued to garner industry recognition for our innovation. This quarter, we were named a leader in online backup software by <unk> and their representative vendor in the 2020 to garner market guide for backup as a service or work powering digital transformation led to our recognition as a finalist for the 2022 micros.

Well part of the year awards in the education and government categories chosen from more than 3900 nominations across 100 countries.

Our purpose built platform powering inspiring and transformative learning experiences when that 2022 at Tech Breakthrough award one of the world's most prestigious award programs recognizing outstanding educational products at the end of June we completed our acquisition of United Kingdom based combine knowledge, a leader in the development and delivery of.

Collaboration education and support we're confident this move will enable us not only to bring a robust end to end experience to our customers to accelerate adoption of their investments in digital transformation, but also advance our SaaS modern learning product lines domain expertise around corporate learning and higher education.

We continue to see a powerful snowball effect from our growing channel business launched just over one year ago, which provides small and mid sized businesses with the same enterprise grade technology available to fortune 500 businesses.

Our channel ecosystem expansion is continued in line with our geographic and market segment expansion, our MSP business primary focus on the SMB market continuous as robust year over year triple digit <unk> growth amidst a environment of tremendous consolidation.

We're finding that as larger MSP already best it without point acquire smaller Msp's, we continue to be chosen as a partner of choice for scale efficiency and security.

We continue to meet the needs of our evolving channel ecosystem with Apple <unk> certification program as of end of the quarter has resulted in 1100 locations and more than 3000 hours of training completed this means more partner engineers pre sales teams and product specialists have been trained in our industry, leading technology too.

Best use it to design custom solutions that enable them to source more business and <unk> competitors.

We also saw success with our existing customer base as they continue their cloud transformation and look to gain more value from their own cloud investments.

We worked with a 10 year customer of ours, a fortune 100 financial services organization known for serving the unique needs of nonprofit institutions and educators across the United States to create a secure collaboration service in its new Microsoft <unk> deployment the.

The number of our customers with over 100000, yet <unk> increased to 383 in Q2 up 34% year over year.

Before Jim goes over the numbers I want to touch on the share repurchase activity through June 32022, we have repurchased approximately $10 million in shares.

Shares since announcing our share repurchase plan in summary, we continue to execute on our mission to enable organizations to collaborate with confidence in the modern workplace in this uncertain macroeconomic times.

With that I'll turn it over to Jim to discuss our financial results in more detail.

Thank you T J and good afternoon, everyone as I review, our second quarter results. Today. Please note that I'll be referring to non-GAAP metrics unless otherwise noted.

A reconciliation of GAAP to non-GAAP financials is included in today's earnings release, which is available on our website.

Total revenues for the second quarter ended June 32022 were $55 7 million up 23% year over year and up 31% in constant currency within total revenue SaaS revenue came in at $27 6 million up 34% year over year and up.

43% in constant currency SaaS revenue constituted 50% of total revenue compared to 45% of total revenue last year term license revenue came in at $14 million up 26% year over year or 33% in constant currency and constituted 25% of total.

Revenue compared to 24% of total revenue last year.

As a reminder, more than 50% of our revenue comes from international operations, which do business in currencies other than the U S dollar predominantly Japanese yen euro and the British pound during the quarter, we experienced a strong foreign exchange headwind due to the strength of the dollar which affected revenue by approximately.

<unk>, 3% this.

This headwind is primarily against our revenue and <unk> metrics and not our profitability metrics due to the global nature of our operations.

As of quarter end, we had total IRR of $178 2 million representing growth of 28% from a year ago and 29% adjusting for FX impacts.

Our core <unk> ended the quarter at $166 6 million up 26% year over year.

As customers continue their cloud transformation and expand their SaaS operations. Our average core <unk> per account continues to grow as well at quarter end. The average core <unk> per account was approximately $39500, which represented an increase of 10% year over year.

This growth was driven by 383 customers with IRR of over $100000 up 34% from the prior year period.

Our core <unk> dollar based net retention rate for the quarter was 106 were 107% adjusted for FX impacts.

Now, let's review the income statement in more detail gross profit in the quarter was 41 million representing a gross margin of 73, 6% compared to 74, 8% in the year ago period. The slight margin decline is the result of our business mix and the impact of FX.

Going forward, we are continuing to drive our sales efforts towards our fastest growing revenue stream. Our SaaS solutions at the same time, we expect service revenue as a percentage of overall revenue to decline by transitioning more of these services to our channel partners, resulting in overall margin improvement.

Sales and marketing expenses were $23 8 million or 43% of revenue compared to 42% of revenue a year ago. This represents an increase of $4 6 million year over year. This was driven by an increase in head count and personnel related expenses as we expanded our sales and customer success organization.

<unk> as well as additional marketing spend as we invested in both our media and event strategies.

We've grown our sales and marketing head count by 8% year over year. The increase in head count has resulted in a $2 $2 million increase in total compensation, primarily driven by salary and benefits.

Programmatic spend in marketing is up $1 8 million year over year, primarily driven by brand awareness efforts and marketing events.

R&D expense was $6 9 million or 12% of revenue compared to 8% or $3 8 million in a year ago period, a year over year increase of $3 1 million or <unk>, 81%, our head count was up 54% compared to last year as we continue to invest in the developed.

<unk> of innovative technologies that help our customers stay competitive amidst evolving workplace trends in digital transformation.

G&A expense was $11 million or 20% of revenue compared to 16% or $7 3 million in the year ago period. This.

<unk>, an increase of $3 7 million year over year. The increase in G&A expense largely reflects an increase in people and infrastructure related expenses associated with being a public company in the current year versus being a private company a year ago, including an approximate 18% increase in our head count.

Okay.

non-GAAP operating loss was $1 3 million compared to an operating income of $3 3 million in the year ago period.

Turning to the balance sheet and cash flow, we ended the quarter with $246 6 million in cash and short term investments.

Cash used in operations was approximately $475000 in the quarter, while free cash flow, which includes capex was a negative $1 $7 million.

Our use of cash in the quarter was in line with our expectations.

In Q2, we continued to purchase shares under our stock buyback program and through June 32022, we have repurchased approximately one 9 million shares at an aggregate purchase price of approximately $10 million.

I would now like to turn to our outlook for the third quarter and the full year 2022.

We are confident in the long term durability and predictability of our growth at the same time, we want to be cautious given the recent macro headwinds we saw in the last couple of weeks of the quarter.

Our revised guidance assumes these trends will continue for the remainder of the year. Since March 31, 2022, we've seen an incremental strengthening of the U S dollar, resulting in foreign exchange headwind in fiscal 'twenty. Two we now expect the total FX impact to be approximately $4 $8 million on our <unk>.

<unk> and approximately $5 million on our revenue.

For the third quarter total revenue is expected to be in the range of $62 million to $64 million or approximately 17% year over year growth, 23% adjusted for constant currency non-GAAP operating income is expected to be in the range of $1 million to $2 million.

And for the full year 2022 total revenue is expected to be in the range of $230 million to $234 million or approximately 21% year over year growth, 26% adjusted for constant currency non-GAAP operating income is expected to be in the range of a loss of $3 five.

5 million to income of $1 million.

<unk> is expected to be in the range of $202 million to $206 million or approximately 28% year over year growth, 31% adjusted for FX impact.

In summary, I am proud of our team for another strong quarter, we continue to see strong demand for our solutions as we remained focused on delivering value to organizations, who continue to put their trust in us.

With that we'll open up the call for questions operator.

We will now begin the question and answer session.

To ask a question.

These press Star then one on your telephone keypad.

You are using a speakerphone please pick up your handset before pressing the keene.

To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

The first question is from Brian Essex with Goldman Sachs. Please go ahead.

Great. Good afternoon, and thank you for taking the question.

T J, Jim Congrats on the results nice nice consistent performance on the backdrop of a lot of macro uncertainty.

And I guess could you.

Sure and I guess.

On that point could you help us understand what youre seeing from a macro perspective I understand the FX.

What we've heard across the software landscape with regard to longer sales cycles more scrutiny.

Enterprise budgets more more layers of approval needed to get deals done and then to the extent that you might fill in.

U S currency of U S dollars.

Perhaps product, becoming more expensive for some of the key.

Customers outside the U S. Maybe if you could frame some of those points out that would be super helpful.

Sure.

And Brian Let me address it first and then T. J can can add some commentary on top is lower so I think.

Partly what you just said obviously, we're seeing some or most of all of that in various different pieces. The first obviously is FX, we called that out in the remarks, just just prior to the question. So we definitely see that as a headwind.

To see that continuing for the second half of the year. So for sure. That's definitely an impact we did see at the end of the second quarter. Some elongation of some sales cycles. So we would expect to see that to continue into the second half of the year as well and I think we're trying to be prudent and conscientious of that.

And really when you think about it that's what we've built into thinking about the second half of the year. Those were two key factors in our thinking FX.

Obviously the headwind on the.

Global macroeconomic environment that we're in right now geopolitical influences trying to be conservative to a certain degree, but also taking that into account and.

<unk> that in what we expect to deliver and then what obviously, we're sharing in terms of guidance and then maybe the third thing that is also influencing our kind of thinking internally and those first two are definitely much more macro driven and the third one is maybe a little bit more internally focused where we're seeing a lot more of our customers.

And the mix in terms of product mix, we actually sold more migration product in the first half than we were anticipating which has an impact for us and I think you and I have talked about this we don't include migration and our IRR, so that product since the mix shifted and we actually sold more which is greater customers were demanding it and we were there.

There to satisfy it but it obviously has an impact on <unk>.

And we saw that in Q really Q1, and Q2 and we're expecting to see that continue through the second half of the year. So we've also brought that into our thinking and kind of adjusted our guidance even on <unk> to include both the first two macro.

Conditions, and then also the third which is a little bit more specific to us. So.

So we've kind of factored all of those things into our thinking.

Yes.

Thanks for that.

Thanks for the question Im sorry comment yeah.

I just wanted to comment on overall, the macro conditions that Jim outlined are things that we cannot control, but things that we can control.

So I just came back from a tour in EMEA.

Our Munich office to meet with our EMEA management team as well as Japan.

First time since.

Since Covid pandemic, the overall tenure of.

All of our sales leaders and our partners are one of bullishness in optimism. So there is still tremendous demand.

The shift to cloud and the need for <unk> ability to help our customers to scale and deploy across hybrid <unk>.

Complex scenarios.

Specialty also in Japan, where they are a couple of years behind.

The Europeans in term of going to cloud. So a lot of the partners are looking to us to help them accelerate that digital transformation. So macro aside we think that by continuing to invest in new channel.

Bye.

Allow us to scale and mitigate some of these macro conditions, but overall, the Microsoft cloud market.

<unk> vast and the opportunity in front of us remaining very very large.

Right No Super helpful. Thank you T J and maybe maybe if I could have you maybe follow up on that.

Our CIO is thinking from a budget scrutiny perspective, I mean, a lot of enterprises are under pressure to operate more efficiently and cut costs.

What is what is the kind of ROI framework that theyre looking at when you're looking at.

Your migration platform is that accelerating adoption I mean, that's certainly think that particularly.

As they migrate.

To kind of a more SaaS centric platform that is going to enable.

Easier deployment and consumption of the platform, but what is that initial.

That they have to get over in terms of.

Is Roy a compelling driver or is this something that they are just already committed to and that's what's driving the momentum.

There is definitely an ROI drivers.

There is some momentum to consolidate environments cio's need to support both on Prem and cloud.

This plays well into our wheelhouse of being a platform provider not only do we make it very cost effective efficient for them to migrate from legacy as well as different cloud platforms into Microsoft cloud, but of course once there with our new entrust product line, which is one of our fastest growing product line.

Allow them to do license that entitlement management, and delegate administration, which effectively lower the cost of running in cloud So ROI and platform consolidation definitely plays apart of course, there is also been consolidation in our ecosystem as everyone know.

Especially in the MSP space.

There. The partners are also looking for consistent track record of steady platforms.

Two to invest and be strategic with and they're also at a point.

Shining through.

Got it very helpful. Thank you so much.

Thanks, Brian .

The next question is from Jason Ader with William Blair. Please go ahead.

Yes. Thank you good afternoon guys.

I wanted to ask first about the.

The macro commentary from Microsoft's about softness in the SMB space, you talked about an elongation of sales cycles I'm, assuming you were talking about enterprise, but you're also seeing some slowdown in the SMB and then just a clarification you talked about last couple of weeks of July I'm assuming.

It's also continued through the first six weeks of this quarter is that fair to say.

Yes, I'll make the first comment yes, the elongation deal cycle are more on the enterprise side and increasingly our mid market SMB side as the fast growing.

And bigger percentage of our business. So we don't see that on the SMB side in fact, we actually see because of the consolidation in the market and on the SMB side.

Actually you are picking up again, three digits continue that fast pace seat growth.

We are offering some campaigns and <unk>.

And tips for partners to switch over to us even faster in the F&B side. So we don't see any slowdown on the SMB side for US again, it's a big market. So we have a small sliver.

It's for us to grab market share and I'll leave it to Jim to answer that part, yes, So and then on the.

I think the other piece was the elongation in terms of continuation for the last two weeks.

Yeah.

We saw at the end of the quarter.

Yes, we're baking that in we're still seeing some in.

We're planning, we're assuming Jason that that continues through the second half of the year and again trying to be conservative. That's what we're seeing now it may turn it may change, but we're planning as if it's going to continue and we've kind of baked that into the to the guidance.

Good Thank you and then.

T J, how do you interpret the increased momentum in migration products.

Is it just the lingering impact of Covid kind of accelerating the shift to cloud or is there something else going on there.

Yes, it's really interesting.

<unk> increased demands the migration, especially in EMEA.

There is quite a bit of momentum there across hybrid deployments.

There are a lot of big migration deals across our enterprise customers.

Continuing to pick up pace in consolidation of platforms. We think part of that is the ROI driven.

So it's yes, it's a very interesting phenomenon.

Yes, unusually Jason we see more of it focused on new customers coming in where they are coming in as a.

The tip of the spear being migration in lot of cases, but in the first two quarters of this year and particularly the second quarter, we saw more of our existing customers.

Using our migration products, right and engaging us there, which is a little different than in the past and I think it goes to what some what T. J was saying again trying to derisk, a little bit and be more focused and have a hybrid solution on their end migration is a key element to be able to do that.

So so you just you interpret it as acceleration to cloud.

Yeah exactly exactly so yes, the customers existing customers that may be in the cloud a little bit already but now theyre just kind of saying you know what we've got to just get there faster.

And consolidation as well so absolutely gotcha okay.

And then last one for me just for U T J, which specific Skus are you seeing the most of momentum I know you've talked about that in the past and while it's kind of a kind of a.

A real time view on.

What's doing really well and your product set.

Yeah I mentioned this hall in trust.

Product portfolio, which is part of our control suite continue to gain real good momentum.

It's along the lines of SaaS management, where.

We're increasingly invest into that area to essentially help customers once they are in cloud to better.

Control costs and better control access patterns and delegation and also a multi tenant management, so as customers get into cloud and realize the nuances.

Data sprawl that becomes a very important topics. So we continue to see control suite to be a fast growing SKU of course, having said that our resiliency suite as we mentioned before in the last couple of quarters is 50% of our business, which is led by a backup as a service.

With a ransomware detection and recovery capabilities. So that continues to be a big piece of our revenue.

Very good thanks, guys. Good luck.

Thanks, Jason.

Our next question is from Derrick Wood with Cowen and company. Please go ahead.

Great.

Thanks, Congrats on a solid quarter I wanted to ask about the progression of the new Hunter farmer model and just trying to think of potential headwinds or tailwind. So I guess one how.

Sales retention has been trending through these changes and then two assuming most account changes have been made how are you feeling about setting up for kind of stronger upsell cross sell and in the second half.

Okay, yes so.

Question.

Hum.

Hunter Farmer specialization model as we mentioned earlier the accounts are all allocated it does take time for the new account owners of.

Existing patched to introduce themselves to the customers that you establish a relationship to do the upsell and cross sell.

So youre absolutely right. It does take time to do that and we expect.

That will uplift the upsell and cross sell dollar values in the second half of the year of course, Jim also talk about the occurrence.

Migration projects that were part of the up sell into existing accounts, we see a lot more.

Migration of existing customers. So that's part of the equation, even though that doesn't necessarily contribute to our our number today.

So yes, so the in term of churn though.

Thats a very good question, we like all tech companies are experiencing.

Higher than historical churn.

Historically, we're actually much.

Better than our industry peers in terms of controlling <unk>.

High retention, but Q1 and Q2 this year, we do see higher than usual churn for us, even though compared to our industry peers, we're still below those churn rates.

Having said that though we are now in Q3, starting to see that come down.

Because the market is cooling and we do see some tech companies announcing either hiring freezes are shedding of workforces. So we see that.

Churn pressure going down second half of the year.

Okay P. J. Thanks helpful color, Jim one for you if I look at your guidance for Q3, and the full year, we obviously come back in the queue.

Q4 and <unk>.

<unk> kind of flat revenue quarter on quarter.

So you saw a similar dynamic last year, but historically.

I did think that was one time last year historically you did.

Sequential strength in Q4 can you just talk about the good dynamics on that revenue progression.

And then just.

The guidance would insinuate that you're kind of exiting Q4 with about mid upper teens revenue growth, but you're guiding to 31% IRR growth at year end, so it's a pretty big Delta.

Could you talk about why that's such a big Delta and how we should think about that essentially converging in 2023.

Yes, so maybe the first the first piece of that first in terms of thinking about Q3 and Q4. So I think again. This is where we're really trying to be conscientious and youre right that historically, we would think about Q3 being a strong quarter because of our public sector and that being a driver of key.

Driver in Q3, and then Q4 historically being.

Software industry, Q4, being being stronger and what we're trying to do there is really just be conscientious and be somewhat cautious in terms of the.

The bigger macro environment as to what's happening and so just trying to be a little bit conservative there and not get out over our skis too far so.

Again, that's really the pullback there is just trying to to address it in that way.

So again nothing more than that then really no major shift we would still be be thinking about it the same way in the longer term environment that our Q3 would be strong in our Q4 would ultimately be stronger but in this year based on what we're seeing in the market right now, we're just trying to be conservative.

And then in terms of IRR. So we definitely have this mix in terms of IRR and revenue.

And so again, we're just seeing that that as we lay out the forecast for the rest of the year, we do have a little bit of that mix that will show us roughly getting to 31% about 28%.

Without FX impact and in about 31%, assuming the FX impact so.

That's really just the forecast of where we are and what we see in those dynamics were being as conservative as we can on the revenue side and think we are still being conservative on the IRR side, but we're going to get to that 31% and as I mentioned I think theres three impacts on IRR, we've got the FX impacts.

We have the macroeconomic environment that we are trying to shift a little bit downward and then the third component is the migration component to our business that we don't include in IRR. So those three components are impacting but again I think we feel pretty strong about getting to the 28% pre FX and then taking into account FX get.

To that 31.

Okay alright, thank you.

Thanks Derek.

The next question is from FERC.

Churn with Evercore. Please go ahead.

Yes, thanks very much.

Two questions for me I guess T. J just to start can you just talk a little bit more about some of those enterprise deals that are getting seeing elongated sales cycles is it price sensitivity from the buyer is it additional approval from.

From higher up.

Are there I guess are there things you all can do from a sales perspective to help make sure that those type of deals.

Pushed out too long or don't get pushed aside for say three six months in I guess.

You saw some of that elongation has the ones that maybe you thought would close in June start to close in July I am just trying to get a sense on what are maybe the driving factors there and if any of those start to settle out a little bit.

Right Great question overall, we're actually pretty happy with the momentum of our enterprise continued business.

The elongation in some of the accounts are due to the additional approval process. While we think actually continue to help us as our additional focus around security. So actually recently, we just obtained another level of security certification.

So those type of cloud ops and cloud security validation really helps move along this approval process in large enterprises, along with obviously data sovereignty in multiple instances around the world.

So yes, we are working to streamline some of the process of our side.

Including click throughs agreements and also another.

New Avenue would find to be able to accelerate approval process is leveraging channel. So we have leveraged channel for medium to small businesses, but now we're looking at also leveraging channel for large enterprise customers will happen is when those large enterprise customers typically have a procurement through partner.

Those agreements and Keith.

<unk> has already pre negotiated so actually abstract out kind of the negotiation on our side, we're going to try that as well as a way to accelerate deal cycles. We think that's a really potential good way to leverage channel.

That's helpful and Jim can you just remind us.

When you have deals that come up for renewal from a SaaS perspective.

Christine.

You are correct that you guys can.

Can use our I guess our issue.

If you have those levers are you pulling right now or are you trying to leave them alone I guess can you just give us a sense of kind of how you guys think about pricing right now from a product perspective.

Sure. Good question, Kurt can you were breaking up on our end a little bit there, but I think I got the gist of your question around contracts up for renewal pricing. So so I will tell you Theres a couple a couple of things we're doing there. So one is in most of our new contracts and even going back into last year, we are building in price.

Escalations into the contracts so that when they are up for renewal there is a effectively a feature already built in for an escalation. So that's number one and then when we think about pricing. So there are certain areas in our product suites, where we can.

<unk> pricing, where it's not as competitive and then there are other areas where it is competitive. So we look at the pricing really on a on a product by product basis, not just a across the board and he can we raise prices or not it's literally on a product by product basis, and then in each individual account.

We're looking at them as they are up for renewal, what's the value proposition the engagement all of those things to consider where we can improve.

Improve our pricing and margin.

Looking to do that but again the biggest key for US is building it into the contracts upfront. It was something we started more than more last year and it continues now again, having that built in gives us the best chance.

When it's up for renewal.

That's helpful and actually if I could.

You are quite your answer to derek's question on sort of the <unk> <unk>.

Are you seeing anything different right now in terms of your government customers maybe in the way they think about SaaS.

Products versus say term deals are the way they want to be sold do you see any change in that this year, obviously have an impact on Rev. Rec. So I was just kind of curious how you guys are thinking about that thanks.

Yes, thanks Kurt.

So so right now no I mean, I think overall I would say that.

So we're not seeing any changes there that's a group that historically has done some hybrid as well and not a complete migration over to SaaS. So when I think of our percentage. When you look at our Q2 revenue allocation kind of splits between SaaS and term, which would be our hybrid piece I think youre going to see.

See similar trends in Q3, and Q4, so I wouldn't I wouldn't expect any any significant change there I would expect it to be similar to Q2.

Thank you.

Our next question is from <unk> <unk> with Maxim Group. Please go ahead.

Yeah. Thanks, so customer at Northland capital markets, that's alright.

So yeah.

You ever growth for incremental <unk> has been flattish for one H 'twenty two.

And your updated guidance.

Implies that that incremental anr are accelerates to about 30% in 2022.

Have you seen evidence yet that that acceleration incremental.

It's starting to play through.

Yes, we are seeing it already.

So kind of alluding to some of the.

The slowdown we saw at the end of Q2, but we are seeing in terms of the pipeline build and all of those kind of let's call them, leading indicators that we would see going into Q3, and Q4 are really strong and so give us that confidence that that those numbers that you just alluded to for Q3 and <unk>.

Q4.

Are very attainable.

Got it great.

And then on a year over year basis, your sales and marketing was up.

Quite a bit year over year, but on a cumulative basis it was down.

What's going on there in terms of the Q2 trajectory on sales and marketing.

So theres two elements right. One is there is an FX component to it.

That we on the expense side right actually benefit from so that's one component and then the second component.

Just the way some of the timing of our expenses work, so youre going to see a bigger tick up in Q3.

For some of those expenses some of our marketing expenses kind of just have a.

Obviously, you have a timing issue to them in terms of when they are actually incurred and then we also obviously as TJ alluded to.

Higher than expected turnover.

In some areas of the business, including sales.

And thats been now rectified, but but we saw some of that impact in Q2 as well so part of its timing part of it is FX.

And again Youre going to see obviously, you'll see improvements there in Q3, you're going to see continued investments, including more marketing spend but again that was just related to timing.

Okay, Great and I presume that you do not have any FX hedging programs in place correct.

Currently no we don't have any any hedging programs that we're working on and if you think about it we have a little bit of a natural hedge built in between our revenue and expenses as you've as you've seen even in Q2.

Great. Okay. Thank you.

The next question is from Brett block with Cantor Fitzgerald. Please go ahead.

Hi, Jim how are we doing just a couple questions for me first very head count has been pretty big increase was kind of across all.

Segments on a year over year basis, how do you think you're positioned now do you expect that pace of head count growth.

To remain robust or do you expect that to kind of level off.

Yes, so the a lot of the head count growth.

Our investment to into a lower cost regions. So wait for example expanded our.

Vietnam Office in terms of R&D head count as well as our Philippines offers in term of operation support So a lot of the head count come from there.

We are looking at creating redundancy and doing some de risking in the current macro climate here so that would we.

I think it's a short term.

Our situation as we drive towards efficiency over the longer term to potentially consolidate.

Some of the functions rose.

But yes, so but at the same time, though the business growing at a nice clip the market in front of US is massive so we're not looking at slowing down our business growth.

Yes, I think maybe just one one additional comment on that.

So I think if you think of the Q3 and Q4 guidance that we just put out we have.

We obviously kind of broke down revenue to based on the thinking that we've kind of birdie illustrated but we're keeping our operating income guidance the same and so what were.

What we're thinking there is is that we're actually going to manage those expenses. So to answer your question about like the growth. It obviously will decline as a percentage because again, we're going to manage to those original kind of targets for.

non-GAAP operating income and I think it's important that we recognize that in this economic environment right now, where we're we're being conservative and understanding what the revenue could be we also want to take the same approach on our expenses and be much more.

Conscious in terms of how we're investing in understanding that if we're being conservative on the revenue and understanding that there's impacts there. We also need to be prudent on the expenses and so again, so we're doing that and you'll see that reflected in Q3 and Q4.

Understood. Thank you and then on the rebrand.

<unk>, maybe could you maybe remind us how big of a business that is and maybe where that.

<unk> ranks as a priority or maybe a growth driver over the medium term.

Yes, we always said the vertical solutions is one of our growth drivers. We currently just don't disclose those specific business verticals by soup business, that's growing really nicely for us we're actually very excited about that so the rebranding showcases a pivot towards corporate learning and development, which is a much much bigger.

<unk>.

In addition to training management and we're also looking at Linkedin Veeva learning integration. So yes, it's one of our high growth verticals, we always say that on top of our confidence platform. This data orchestration security and governance platform, we're now showcasing vertical.

Solutions as a way to continue to extend and increase into accounts and increased our pool.

So education space is really a shining example of success there.

Okay. That's helpful. And then maybe just one more on the share repurchase activity I guess have you guys continue to by the end of the quarter. How should we think about that going forward is on a predetermined schedule or a bit more ad hoc.

Yeah. Good question, so yes up until through June 30.

About $10 million in that buyback program.

We did continue subsequent to the end of the year or end of June .

And I would expect right now, it's a little bit more systematic but I would expect that we will spend roughly about $10 million.

As well in Q3.

It may be a little bit.

Beauty of the program that we have in place as you know is it gives us flexibility and one of the things we were looking to do in implementing a program. Like this was we did have flexibility. It's been more systematic up until this point, but we do have the flexibility to kind of discontinue restart.

And do a variety of things and that flexibility is good as we think about other uses of cash over the next quarter as well it gives us that flexibility to adjust.

Alright, Thats very helpful. Thanks, guys really appreciate it.

Okay.

This concludes the question and answer session I would now like to turn the conference back over.

Over to T J for any closing remarks.

Thank you.

I would just like to say that we continue to make strong progress on our strategic priorities in this uncertain economic and geopolitical environment throughout our company's history, we have shown our ability to weather dynamic market environments by growing while being prudent with expenditures.

Our go to market strategy positions us well for new logo acquisitions, a growing partner ecosystem and the ongoing expansion of existing customers to whom we deliver exceptional service today. This quarter I had the opportunity to spend time in Munich with our EMEA leadership team and talk about the continued strong demand, we see from our customers and partners as well.

As the value, we are providing with our solutions across complex deployment scenarios for their digital transformation initiatives.

And as I mentioned earlier, just last week I was in Tokyo for the first time since the Colgate pandemic, where I met with all of our top Japanese partners and saw firsthand how excited they are without point being able to help advise them and accelerate their SaaS transformation. This speaks to the robustness of our growing partner ecosystem, we know.

It's a privilege to have our shareholder trust and faith in our ability to navigate the current market conditions focus on consistent execution and ultimately deliver long term shareholder value. Thank you.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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