Q2 2022 Asana Inc Earnings Call
Particular, our enterprise business is growing more rapidly than our overall growth rate and thus, becoming a larger and larger portion of our business overtime.
We remain committed to building the most effective most scalable work management platform capable of serving organizations of all sizes around the world.
Evidence of our progress includes our continued success with the industry's largest appointments plus our end user adoption rate now at over $2 5 million paid seats.
As a result, we're raising our top line guidance for fiscal year, 2023 to $544 million to $547 million.
Representing a growth rate of 44% to 45%.
We expect currency headwinds to continue to be a significant factor this year, excluding the currency impact our guidance would represent 46% to 47% growth.
We're winning across important industries, and with iconic enterprise meters, and where we have the greatest leverage we're focusing growing and investing to win.
The growth we've seen over the last several quarters is being driven by both the trends we see in the market and the way our product strategy delivers on what companies need as a result.
Companies are investing in solutions that offer time to value help them do more with their technology stack and better align their employees around the work that matters and the bigger the company the more true this becomes.
We recently performed an analysis of how our enterprise customers get value from Sona and found that the vast majority are using it to cross functional collaboration.
I share this with you because this is truly how we're most differentiated from other work management software.
These tools make it easy to track single projects for single teams in contrast, more than half of all work attracting Masada is cross functional in nature.
This number jumps to over 60% for customers spending more than $100000 and we see an even higher proportion of this cross functional collaboration features we built as we've moved upmarket including goals and portfolios.
So I'll also create share clarity and accountability at every level.
Leaders have to know how the work being done delivers on business priorities.
Sort of uniquely Douglas because the Warcraft creates a map for all of the work in your organization, including where it stands the people responsible and how it connects all the way up to companywide goals.
It's incredibly powerful, especially when its critical to keep a large team in sync around changing plants.
Dishonour platform serves as a critical hub for your most important business applications, helping customers make better use of existing investments and giving employees a single place to track requests across email chat documents and other frequently used applications.
<unk> is built on the foundation of safety security and performance at scale that global enterprises expect.
Companies are continuing to recognize us as an essential partner for smelting modern work challenges.
This is why we continue to improve on and expand functionality as required by the largest and most complex organizations.
We have a strong fiscal year 2023 product cycle and on October 11th we will be giving investors a preview of how we'll be delivering even more value in three big ways that help companies successfully execute on their top priorities.
First by helping decision makers quickly understand the health of strategic work across the organization.
<unk> is already the number one product according to the <unk> enterprise objectives, and key results software market and.
Whereabouts make it even better.
Customers will soon be able to use the salesforce for goals integration, our first out of the box integration with us on our goals with work happens in Salesforce. The progress of late goals <unk> will be automatically updated making it easier to monitor impact and make informed decisions.
Leaders will also be able to get a bird's eye view of goals and universal reporting, including the ability to report filter and group goals metadata.
We're also rolling out all new integrations from Sona partners that help our customers improve their productivity and quality of work across their applications.
New rules integrations with Gmail, Patriot, <unk>, Twilio and more automate work across tools to help teams stay connected and remove bottlenecks.
Contact switching between tools. It makes it hard for individuals to stay focused on the work itself and oftentimes causes that work to fall through the cracks.
With the new Asada for workplace integration with meta teams can create a solid path receive project notifications and C link previews for important status or milestone updates right from workplace.
Our new independent report by nucleus download of Sonic and cut the time it takes to complete a project by as much as 60% and increased project load by up to 25% without adding stack.
The study also found that users have us on a reduced areas by as much as 90% when automating complex processes.
And the third thing to note about our product roadmap. This fall is that were further elevating security privacy and compliance.
<unk> now offers data residency options and flexibility in Australia, and Japan to meet customers' needs. In addition to EMEA.
We're also supporting global organizations with enhanced mobile data controls. So admins can ensure data stay secure with biometric authentication and restricted detached from sharing while empowering employees to work from Nissan App anywhere.
For companies that store consume and transmit personal health information for different business processes Sona fans to introduce a HIPAA compliant offering this fall.
And our new API and partnerships will provide <unk> leaders with data loss prevention E discovery and archiving solutions for increased control and support of security and compliance controls, while still facilitating important cross functional connection.
I'll close by acknowledging that we are actively managing our business and staying vigilant as we carefully navigate through the current macroeconomic cycle.
We'll continue to balance growth and profitability, which includes managing our investments conscientiously, while maintaining our leadership in product innovation and vision.
And now I'll turn it over to Anne.
Thanks, Dustin it's the conversations we have with our customers that make us confident in our investments in product innovation as we move up market. Our product strategy has successfully evolved to address customers' growing needs. These.
These market product announcements will help to further drive adoption of our business and enterprise tiers.
In Q2, the U S region and enterprise segment led our overall growth.
This is a good indication that assignment is a great market fit for organizations today, especially with the challenges and opportunities they are facing now and going forward.
Over the last several months I have been on the road spending time with our customers around the world.
They shared with me are amazing. These are just a couple of key observations first our conversations and enterprises are moving up the authority <unk> digital transformation is mainstream and work management is an essential component of that.
And enterprises as Duston said with the data cross functional collaboration is not a thing they do it's everything they do in order to run their business processes.
It is a critical platform that allows companies to work the way things get done cross functionally the market fit is clear.
Second we are closing deals with some of the largest and most recognized brands in the world. Some of the most prominent and successful companies across industries, such as media automotive financial services and telecom are choosing as Donna to help them grow compete and leverage their tech stack investments. We now have 462 customers spending over one one.
Hundred thousand on an annualized basis and these larger deals represent our fastest growing customer cohort.
105% year over year.
Third tomorrow customers use us on at the more they realize value and this increase was product adoption. We are seeing more new users joined existing Astana enterprise deployments and quickly collaborate cross functionally with colleagues our dollar based net retention rate for customers over 100000 is well above 145%.
And fourth is a beloved brand customers love us on it and want us to win one customer who runs an operational team said <unk> has been a game changer for our organization, we've been able to streamline how request for products come to our team and move away from never ending email chains with overlapping voices and culture at it. Thanks Ana.
Our brand equity is remarkable overall, we continue to see strong demand and we are closing deals with large customers and we have strong engagement across our user base.
As I look across our customer base, we are seeing broad cross industry adoption with significant traction in fortune 100 customers of which over 80% use us on them.
Some of the most important companies in the world are adopting and expanding with us on it this year to call out a few one of the worlds largest automotive manufacturers is a growing customer they are using us on enterprise and R&D divisions to improve clarity across the organization about the status of various initiatives and how theyre progressing towards their goals.
A well known and one of the largest container shipping line and vessel operators is another six figure customer they're using us on enterprise for critical customer contract logistics workflows to ensure shipments are fulfilled in their warehouse and distribution divisions.
One of the largest global grocery and convenience store chains headquartered in Europe is using us on it enterprise in their online shopping division to ensure efficient execution with cross functional workflows across sales and operations.
And one of the largest telecommunications companies has thousands of employees using us on enterprise for managing their global supply chain initiatives orchestrating their field technicians and retail operations in fact in the technology space overall eight out of the top 10 tech companies in the world are Astana paying customers.
We're also gaining early traction with financial services companies that are using us on it to help automate critical operational workflows saving time and increasing productivity in Q2 Morningstar again expanded their use of Astana across research operations marketing and client services. We also signed an expansion deal in Q2 with one of the largest hedge fund.
Headquartered in New York, and Chicago, and we are in conversations with other large north American and European banks.
We are seeing an impact in health care industry as well as Duston mentioned, we expect to have a HIPAA compliant offerings broadly available in a few months, which we expect to enhance our position with health care customers going forward.
Other big industry that has been going through significant Digitization is media and the media world, bringing their product to market as their core service and it needs to be done faster and more effectively to stay competitive.
The strategic partner of choice for several major media companies in Q2, we closed a deal with Vox media, they've now expanded in up tier tests on an enterprise using us on it to ensure their core workflows for revenue generating partnerships from RFP process to deal close.
<unk> CBS , which is now part of Paramount and discovery along with other premium media brands are all customers were proud to partner with as they embrace the future of work.
As I noted earlier telecom is another vertical where we have strong traction in Q2, we closed a deal with one of Asia Pacific's largest telcos.
The land deal and another big industry win for us.
So in Q2, we won three U K, a British telecommunications and Internet service provider.
They are deploying hundreds of enterprise seats.
We are also deployed in the largest telco in the world who expanded their seats this quarter and of course, there is T mobile and existing customer using us on it for developing strategies to launch new products.
These companies are leaders in their respective industries and know what it means to leverage innovation and technology to be fast responsive and effective.
Work is cross functional and companies need a platform that allows teams to collaborate across the organization.
They're choosing us on it because they believe us on it is the best platform available for work management.
Well, it's hard to predict how the current macro environment is going to impact our various customers in the short term. We believe the long term secular trends in digital transformation remain intact and the importance of work management software will continue to grow.
We remain committed to our long term strategy. We believe we can win the category as the awareness grows and our unique capabilities to meet customer needs, providing time to value in weeks not years and high ongoing return on investment with that I'll hand, it over to Tim.
Thank you Ann Q2 revenue growth showed continued strength in the business overall.
Revenues came in at $134 9 million up 51% year over year.
This puts us at an annualized quarterly revenue run rate of $540 million over half of $1 billion.
Revenue from the U S grew 59% year over year accounting for 60% of our total revenue.
International grew 39% year over year accounting for 40% of our revenue.
Currency impacted our international growth rate by roughly 400 basis points.
The overall revenue growth rate by 200 basis points.
International growth would have been 44% year over year and total revenue growth would have been 53% year over year without the impact of currency.
At 64% growth revenue from customer spending 5000 or more on an annualized basis is a good leading indicator of our core growth.
This cohort represented 72% of our revenues in Q2 up from 66% in a year ago quarter speaks to our success as we continue to move upmarket.
The revenue growth for this cohort of customers in the U S grew even faster at 73% year over year.
We now have over 131000 paying customers at the end of Q2.
Proximately 5000 in the quarter.
We have 18040 customer spending 5000 or more on an annualized basis up 41% year over year.
We now have 1141 customers spending 50000 or more on an annualized basis up 91% year over year.
Our largest customers remain our fastest growing cohort, we have 462 customer spending 100000 or more on an annualized basis and the customer cohort is growing at 105% year over year.
We believe this metric is a good proxy for our enterprise business and you can expect us to continue updating this number in coming quarters.
As a reminder, we define these customer cohorts based on an annualized GAAP revenue in a given quarter.
We will be sunsetting, the use of 50000, plus and total customer stats over the next two quarters and instead plan to use 5000, plus and 100000 plus stats as key indicators for the health of our business moving forward as we believe they are more aligned to our core business growth and future success with enterprise customers.
We will continue to disclose the current metrics on our IR website through the end of the fiscal year.
Our dollar based net retention rates remained strong across every cohort.
Our overall dollar based net retention rate was over 120%.
Customer spending 5000 or more our dollar based net retention rate was over 130%.
And among customer spending 50000 or more our dollar based net retention rate was over 145%.
As a reminder, our dollar based net retention rate is a trailing four quarter average calculation.
As I turn to expense items and profitability I would like to point out that I'll be discussing non-GAAP results and the balance of my remarks.
Gross margins came in at 91% improved from 89, 2% in the year ago quarter.
Research and development was $50 4 million or 37% of revenue, we continue investing to win and fuel innovation and our proprietary technology, which will help us deliver on our vision.
Sales and marketing was $94 7 million or 70% of revenue.
We frontloaded many of our customers facing roles this year to build sales capacity and infrastructure for the second half and beyond.
G&A was $39 1 million or 29% of revenue.
Which includes $2 5 million in costs related to a reduction in the size of our recruiting team.
Excluding the onetime costs G&A as a percentage of revenue would have been 27%.
Operating loss was $62 6 million and operating loss margin was 46%.
Net loss was $64 3 million and our net loss per share was 34.
Moving onto the balance sheet and cash flow cash.
Cash and marketable securities, including long term investments at the end of Q2 were approximately $239 million.
Our remaining performance obligations or <unk> was $261 6 million up 53% from the year ago quarter.
87% of our appeal will be recognized over the next 12 months.
That current portion of our RPM grew 55% from the year ago quarter.
Total deferred revenue at the end of Q2 was $210 2 million.
Up 51% year over year.
While we don't normally comment on calculated billings since currency has such a significant impact this quarter.
Wanted to call out that calculated billings grew 43% year over year, when we factor in the currency impact.
Our free cash flow is defined as net cash from operating activities less cash used in property and equipment and capitalized software costs, excluding nonrecurring items in Q2 free cash flow was negative $42 3 million or negative 31, 3% on a margin basis.
Moving onto our outlook for Q3 fiscal year 2023, we expect revenues of $138 5 million to $139 5 million.
Representing growth rates of 38% to 39% year over year.
We expect non-GAAP loss from operations of $66 million to $63 million, which is a significant decline in growth of operating expenses year over year.
We are targeting flat operating margins quarter over quarter at the midpoint.
And we expect net loss per share of <unk> 33 to 32, assuming basic and diluted weighted average shares outstanding of approximately $203 million, which includes the newly issued shares.
For the full fiscal year 2023, we expect revenues to be 544 million to $547 million.
Representing a growth rate of 44% to 45% for the full year.
We expect FX to negatively impact our full year growth by approximately 200 basis points.
Excluding the currency impact our growth would've been 46% to 47% year over year.
We expect operating loss margins to be between 45% to 44% for the full fiscal year.
As you can see from our guidance, we frontloaded our investments for the year.
You should expect two percentage points of operating loss margins improvements in the second half of the year versus the first half and.
And even more improvements next year.
In addition, as you have seen in today's press release, we announced a private placement by our CEO .
Dustin purchased approximately 19 million shares of class a common stock at $18 16 per share, which was the closing trading price of our class a common stock on Friday September <unk> 2022.
This investment of $350 million will increase our cash balance to over $585 million in total.
We believe this additional capital will provide sufficient funding to execute on our current strategies and for us to achieve positive free cash flow, which we are targeting before the end of calendar year 2024.
In addition here are some of the major initiatives, we have undertaken as part of our focus on efficiencies.
We've moderated head count growth significantly and Youll begin to see it manifest in G&A and R&D expenses first.
We've already slowed headcount growth from 13% sequentially in Q1, two 5% in Q2, showing a change in momentum and highlighting our commitment to expense management.
We are focused on leveraging the existing infrastructure that we've built over the last several quarters for example, ensuring our sales reps are successfully ramped.
We're also pacing at our other investments in various geographic markets and prioritizing the highest ROI go to market initiatives.
We are actively working to drive more leverage in our cost structure and have taken significant measures to manage spend.
With strong top line growth high gross margins and our focus on increased efficiencies. We believe we are on a solid path to generating free cash flow.
Importantly, there are no changes to our long term product strategy that has to date helped us succeed at being the most scalable and most widely deployed platform across our space.
For example, we will continue to invest in product and marketing activities to support the momentum behind our enterprise product announcement in October .
These will continue to drive high growth and success in the enterprise.
With that I'll hand, it back to Dustin for some final closing remarks.
Thanks, Tim.
Im investing further in us on it because I strongly believe the market opportunity is enormous and that the aircraft is the best possible solution for helping enterprises achieve their most important goals, which always involve cross functional workflows and necessitate clarity at every level.
The market is ready and our customers are validating our strategy every day.
Finally, I know our team is the very best and work management and hungry to achieve our mission.
We're still in the earliest stages and we intend to win.
And with that I'll turn it back to the operator for questions.
Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad.
Any reason that you would like to remove that question. Please press star followed by two <unk>.
Again to ask a question press star one we.
We do ask that each participant limit themselves to one question and one follow up question.
We will pause here briefly ask questions are registered.
Our first question is with Brent <unk> from Piper Sandler Brent Your line is open.
Thank you good afternoon.
Wanted to double click into the large customer cohort triple digit growth in 100000 plus.
Our customers.
Sounds like cross functional collaboration is really resonating beer.
What is driving the momentum in large customers I guess for maybe Ed or invested in.
And are there things you can do to.
Maybe emphasize the strength in large enterprise redirect some sales and marketing dollars to what appears to be a segment of the market, where you are having a tremendous amount of success.
Yes, thanks for that question.
Nothing.
I mean, I think a lot of it is really the product strategy, which is really shines a differentiated from our competitors. When you have large organizations because theyre doing more strategic cross functional work.
And we're finding that the majority of all collaborative activity it.
It's cross functional in nature, I think you were finding that value proposition and using it.
And so it.
We want to make that.
A nice feedback loop. So we're investing further in the product roadmap to emphasize.
The functionality, that's most use cross functionally and so it's things like gold and we're doing a launch around that includes in both recruitment of October .
Improving portfolios, that's a lot of our roadmap over the next year is going to is going to make those even more powerful improving.
Improving reporting talk a little bit about being able to report on Golden reporting, but all others. There's a lot of great things there.
That really helps us really accentuate the value of the Warcraft for these large organizations make it more useful to larger teams make it more useful to senior leaders and executives.
And then we feed that right back into into our sales approach, so teaching with LTE and help to do value based selling around.
Not only the productivity increases you can get to probably but to the insight and clarity. We can we can give to senior leaders as they are able to understand.
We sort of think of it.
Upper levels of that.
Of the aircraft or what we spoke of procurement of clarity.
So there is a lot more we can do there and then getting that right back into our marketing approach as well.
Having more messages that appeal to large organizations, making sure we're targeting our spend in channels that can find.
Those types of personas and buyers.
And then having that feed all the way through the customer journey.
Thank you and then just a follow up here for Sam it's great to see the additional $385 million cash include fusion. It sounds like this provides a healthy bridge.
The free cash flow how are you thinking about getting there in the next two years, where are you going to drive the most of the improvement 70% of revenue tied to the sales and marketing still things on a relative basis to peers is is that really where you see you can drive the most amount of leverage here.
Efficiency over the next couple of years any color there on how you get to positive free cash flow within two years would be helpful. Thanks.
Yeah, Hey, Brian . This is Tom quick question. So what I would say is we're really we're incredibly focused on gaining efficiencies across all the across the whole organizations.
I think where youll first see where gains and efficiencies in the operating income statement is G&A and R&D and then over time that you can expect us to.
Improvement in sales and marketing as we kind of focus and divert our attention of moving upmarket.
As you can see the momentum that we've seen in North America and in enterprise, which grew 59%. Those are the areas that we're going to continue to double down and invest in and in those markets, where the payback may be longer or the ROI.
Maybe more more unknown I think you'll see us pull back investments and so what we're trying to be really mindful of the investments that we're making but also have a really rigorous focus around what we can get with the existing infrastructure.
Our next question is with Alex Zukin from Wolfe Research.
Alex Your line is open.
Perfect Hey, guys.
Can you hear me okay.
Can you guys hear me okay.
Yes, we can hear you.
Perfect.
Maybe it doesn't just.
The first one for you for you guys as you think about the Congress as you're having conversations with senior leaders at some of your larger customers or prospects. When you think about kind of the kinds of conversations you are having and how they dovetail with the prospects for a tougher macro.
Environment, a lot of companies are talking about lengthening sales cycles, and the enterprise or larger deals that get these scoped and I think even some investors.
They're asking us questions about mission critical must haves versus nice to haves, there's a healthy amount of debate in terms of where this type of software falls in that category. So.
It's a long way of asking what kinds of conversations are you kind of seeing right now how is that impacting sales cycles. If at all or is it actually helpful to you and then I have a quick follow up.
Yeah, Hey, Alex it's Ann Thanks for that question I'll start off so I mean, we're conscious that the macro environment is clearly impacting software purchasing overall, but what we're seeing and work management is it's still early and seeing some of the highest growth given the problems that we solve our persistence. So.
Been able to be on the road meeting with customers, which has been great and I think what we're seeing the response to as Duston mentioned is our differentiated product strategy. So specifically conversations around goals with the CEO or CIO, who are trying to figure out how they can rapidly adjust plans and cascade those throughout the.
And so that with us on other able to do that in a really agile fashion and so the conversations we're having are much more about how they can respond in this environment quickly.
Asked a specific question about deal of cycle time, and certainly as we move up market and are working on larger deals we're going to see that those cycle times are event longer than where we've come from and we're also monitoring that because customers are scrutinizing spend but overall in terms of higher level conversations, we're having and organizations.
Been very positive because of our golf product.
Perfect and then I guess just another.
Question around the incremental profit profile of the company I guess as we think more.
With more out year focused youre, calling around I think exiting calendar 'twenty, five or getting to cash flow profitability in calendar 'twenty five.
Where.
What kind of a balance of growth to profitability or are you contemplating that entails is that you get to profit to breakeven and you stay there funding a higher growth rate or.
Is the is the goal to kind of start to get closer to that long term operating margin target.
That you are able to accelerate that progress driven by the move up market and the contribution profile of these higher margin customers.
Hey, this is dustin.
Wanted to clarify actually that the timeline, we laid out was.
Before 2020 calendar 2025, so by the end of calendar 2024.
And.
That's in the foreseeable future, but it's also a long way out so it's a little hard to predict exactly how we'll manage the business.
As we cross the line, but we want to make sure that we're managing cash well.
And investing in our best growth opportunities and as you said, that's going to happen naturally as we gave up market because theres so much better.
Sort of cost profile for those larger customers.
I certainly hope to.
How real margins and not just sort of be holding line, but.
We also are in it to win the category and so we're going to look for the opportunities to invest in growth and it'll depend somewhat on on what's available.
At that moment in time.
So I think the long run the long range profit margins, we'd given in the past also come with a slower growth rate. So I think that that that should hopefully be a sort of favorable trade off for investors either way either we're growing really quickly and so we decided to continue investing in that growth or growing somewhat slower and then we will seek to expand the margin.
While.
Our next question is with Andrew de Gasperi from Baron Burt.
Andrew Your line is open.
Yeah, Hi, everyone just on the framework for the full year guidance. I was just wondering are you assuming any worsening conditions in the back half of the.
And maybe could you also discuss whether in terms of the customer metrics is China in any way meaningfully increased or has it stayed steady.
Follow up.
Yeah.
Andrew This is Tim I would say with respect to guidance what we've baked in is really the momentum that we're seeing in North America and enterprise and then also then adjusted our outlook for international particularly in Europe .
We also feel really good about our operating margin guidance, knowing that we have a number of different levers within our control and with respect to the net retention rate.
We're expecting it to hold steady we havent seen any dramatic.
Changes of deterioration there at the moment and feel really good about the especially on the large enterprise and larger pain accounts, where the.
That expansion will continue to hold above a 145%.
I would just say the biggest unknown quite frankly, and probably for all the different software companies.
Is the degree of the economic impact in Europe is it will it be contained within Europe or will it have a cascading effect and we just don't know, but hopefully that provides what I just kind of comment that will provide some additional color on how we thought about guidance.
Great and then maybe just in terms of your investment I was just wondering of the size of it itself makes sense I guess to to build a buffer to get to free cash flow positive, but are you expecting to.
To continue to invest here from time to time and that's on a going forward.
Hey, that's a great question.
I don't think I can say anything about what the future holds but this is.
Really big investment relative to past investments they've made and.
It's not something I'm looking to do is sort of like an ongoing program.
But just.
When it makes sense.
From the Investor standpoint.
And just wanted to reiterate that.
I've talked about this a little bit last call, but these are always somewhat slow.
Diligent decisions for me.
And it's really about the long term potential of the stock.
And how big the market opportunity is.
And so I just think it's important to always always viewed through that lens, rather than a reaction to short term changes in the market.
Our next question is from Brent Thill from Jefferies. Brent Your line is open.
Thanks, Dustin just following up on your ownership obviously.
Considerable stake that you've made over over time and I guess many are curious why not broaden the base did you did you consider opening this to a broader list of investors just walk through kind of your thoughts.
This made the most sense.
Tim can you just go through many are asking why are we not seeing more leverage in sales and marketing are still running 70%.
Of revenue, which is extremely high number is it is the throttle just full force because you feel that it's still underpenetrated.
Give us a sense just.
Perhaps on when do you start to see more leverage there because it seems like thats. The biggest line item you can get leverage Arnold.
Yes, maybe I'll start commenting on the sales and marketing and then I'll also take the question related to the funding.
With respect to sales and marketing I think we've mentioned this on the call where we frontloaded many of our.
Sales hiring for this year and the.
Investments was really very much front loaded and we expect.
To have that capacity kind of in the back half and ramp and enable those sales sales rep to be much more productive next year. So I think you should expect kind of the back half maybe Q4 and next year to see more leverage in sales and marketing as we enable those reps and make them be more successful over time.
So thats, one and with respect to the the funding and the different considerations.
A lot of the information is actually in the 8-K, we did have a <unk>.
Special Committee of the independent Board members.
To evaluate all the different options that were available to us and we agree that.
With the special Committee and the board of management that this was the best option, but you should you should definitely read the 8-K and Theres a lot of there's a lot. There's a lot more details related to displacement.
Thanks, Tim.
Our next question is with Steve Enders from Citi.
Your line is open.
Alright, great. Thanks for thanks for taking the question here.
We do think about the VM into fiscal 'twenty five.
And you're reaching kind of breakeven is there any change in kind of the investment plans that youre, making in that would be needed to get there versus kind of what you were thinking before.
And then I guess similarly, as we look at the kind of EBITDA outlook.
So it seems to be trying to get at least on a dollar basis.
How should we think about when that begins to reverse and we spend it may begin to see some.
Leverage has been in the model here.
Yeah, Let me, let me kind of answer the second part of that question first in terms of how the how we would expect them out a model to turn and why you should when you should expect to see leverage.
For the back half of this year, you should expect about two <unk>.
Two points two points improvement in operating margin, but that to see much more significant improvements in our operating margin and free cash flow margin starting next year.
So again, we frontloaded many of the investments that we've made this year, we have moderate dramatically moderated our head count growth, but many of that head count is going to really come online in this back half of next year for us to help drive growth and get a lot more efficiency off the existing infrastructure. So that's it's going to take a little bit of time, but we.
Do see a path to improving operating margin and free cash flow margin and have a plan in place now to get to free cash positive free cash flow before calendar 'twenty for the end of calendar 'twenty four.
And I'll do my best to add some color around.
Okay. There's nothing I'll do my best to add some color around how the plans have changed a.
So a little hard to be concrete about Pittsburgh.
So counter pactual.
But some of the things that.
It's definitely been coming up is it's just more of an emphasis on focusing on where we're strong.
Where we know that we have sort of per channel and geographic profitability dynamics and that comes at Patheon.
Basically an opportunity cost of not investing.
And more speculative areas more emerging markets and I think in a stronger economy.
Those more speculative investments made more sense. They were they were literally there's just more money around the economy.
It goes up on those offers.
We had easier access to capital.
And just with the currency exchanges just mechanically it was more profitable and now just relative to this time last year.
The same number of seats. The same number of customers is going to result in less revenue and profit for us. So we're just focusing.
More of where we're hiring where we're putting programmatic spend.
The developing markets and upmarket.
And as a consequence of that that shortens our.
That shortens our timeline to profitability.
And but it also means we're not sort of doing that the sort of broad.
No go after every segment and every region at the same time.
And so it may mean that there is a bit of a limit to our growth rate in the next couple of years as well relative to the counterfactual.
But again, it's a different economy and so it doesn't make sense to operate with the old plant.
Okay perfect.
Very helpful.
I guess on the if you think about kind of the business and enterprise here.
Adoption and I guess, how have you been kind of seeing that resonate.
In the current environment and how should we kind of think about the mix of expansion.
They came in the quarter.
Im glad to see it.
Versus upgrading into some of those higher priced tiers.
Yeah, Hey, I'll answer that and I'll answer that question, we are seeing strong growth in both business and enterprise tiers. So theyre contributing 67% of revenue in Q2, which is an increase of <unk>.
89% year over year, So that's really positive signal of that especially for larger customers. Those two tiers are really important to them and they're finding a lot of value in that.
And so while we're continuing to make sure from a go to market standpoint that we're adding a lot of value.
In both of those tiers, we had mentioned the upcoming announcements and improvements in gold.
And we see strong adoption of goals driving both of those tiers as well.
Our next question is with George <unk> from Oppenheimer.
George Your line is open.
Thank you for taking my questions and following up on your <unk>.
Cancer can you maybe give us the update on the competitive environment and maybe what youre seeing from a.
While the wallet.
<unk> perspective is.
Is that growing in many cases are pretty much. Thank you.
Yeah. Thanks, so much for that question and we are seeing in our sort of mid market segment in particular that wall to wall, especially as companies are adopting our golf product from a top down perspective that that continues to grow and so as that.
<unk> mentioned a lot of that is due to the fact that we are really helping our customers with their most important cross functional initiative and so the more that that work is being done and it sort of naturally brings in other colleagues who want visibility into golf and then from and then we're providing top down visibility win.
Is that coming in to make sure that they are seeing like where are there bottlenecks where are their opportunities and how they can make planning decisions in a more agile fashion. So as we enter something that we're really excited about is as we enter the season, where a lot of our customers and prospective customers are doing strategic planning they're doing calls.
Danny that's also driving much more interest in <unk>.
And maybe could you give us some perspective on that.
New customer pipeline and I understand the macro uncertainty around expansion or are you seeing any changes with new customer generation.
Yeah. So the way that we really think about our pipeline is we have a lot of opportunity to expand with existing customers. So we are in 80% of fortune 100 customer companies, but we still have a lot of opportunity for growth.
So we have a lot of focus on that opportunity and then the other way that we also think about it in this environment. We are incredibly vigilant in managing and monitoring pipeline on a weekly basis.
Super Grateful to our team around the world on how hard they're working to make sure we're reaching and serving customers really quickly in this environment.
Our next question is from shell believes they rafi from SPN Securities.
Your line is open.
Yeah.
Yes.
So thank you very much so.
Slowdown head count growth materially.
What kind of headcount growth are you anticipating in the back half of the year and then related to that consensus has your revenue growth of 31% next year fiscal 'twenty four.
Do you think the slower head count growth impacts your revenue growth.
Hey, <unk> this is Tim.
So what I would say, it's we again frontloaded in many of our hires this year.
The macro environment has changed.
We're being I would say very rigorous around how those reps are ramping and what markets and how successful they are.
And as we continue to gain more traction and enable those reps to be more successful I think those reps that will in itself helped drive and provide a lot of growth for us.
We're probably not ready right now to kind of provide guidance for next year, we'll do that kind of.
On our Q4 earnings call.
We've given guidance for this year and for the back end for the back half. So hopefully that's enough data to kind of have a sense of how we're thinking about the business.
Yeah.
Okay and secondly.
A lot of your software peers have noted.
The integration and sales cycles deal compression needing more C level approvals, but are you seeing any of that in the United States at least so far and do you anticipate seeing that in the back half of the year.
Hey, Shaun this is Dan I'll answer that.
We're certainly seeing that in this environment and in the buying process, especially in larger enterprise companies. There are more decision makers involved I think we also just expected that as we move up market and serve larger customers.
But we're certainly conscious of that and monitoring.
Our deal cycle times something to also keep in mind as we continue to have a very healthy commercial business, which has much faster cycle close times.
Our next question is with Robert Simmon from da Davidson.
Robert Your line is open.
Hey, Thanks for taking the question.
Kind of following up on the last one what are you seeing in terms of more kind of top of funnel type activity.
<unk>.
And then also on the up.
Things are cheaper.
These reductions in gross churn.
Yeah, I would say on the gross churn, we haven't seen any material change, particularly in our large customers.
Those continue to maintain at low single digits. So I think you know I think that really is a.
Demonstrates the value that we add in the cross functional in nature of the platform and how allows teams to expand.
And I think back to your first point in terms of the top of the funnel that we havent seen any dramatic shifts in top of the funnel certainly I think part of our focus is to continue to move upmarket and win.
Enterprise. So there is I would say kind of a shift a shift even in our own go to market in terms of where we're focusing.
I'll add onto that the way to think about it is we're continuing to turn the dial on our paid acquisition spend to segments and markets that are better aligned with our direct sales motion and customers with higher lifetime value. So so that's maybe how to think about our top of funnel and then to answer your question on free to paid.
Conversion, we're not seeing any change in that quarter over quarter.
Great.
Can I jump in on that one as well real quick.
Pointed out just reading between the lines, sometimes people look at the total customer count is sort of indicative of the top of funnel health.
And I think it's just worth pointing out that when you have a high volume customer business.
Like ours and some of the other work management companies. Those numbers are really dominated by very small customers not just F&B is actually very small businesses, sometimes less than 10 employees.
And so given our shift to be focusing more up market.
Have a good leading indicator indicator for us.
Because.
There can only be 100 total first time paying customers in the fortune 100, and that's really where we're focused so a lot more of our business and our growth over time.
It's focused on expansion.
And that's why we like to report on things like total paid deep.
I think that's a really important metric for evaluating the scale and help us work management companies in the public market.
And Additionally, I think it sort of ties back to the prior question about how we will grow next year a lot of our growth will be in developing and expanding our existing.
Customers not inquire not in acquiring a high volume of new customers.
Would you point out our net dollar retention is over 120%.
Overall, and then again as you get into those bigger customers, where we are growing the fastest that that number just keeps climbing towards the over 145%.
For customer spending 50 care more and that does translate.
So a similar number better undertake cohort as well.
Yeah.
Our next question is with <unk> Bora from Jpmorgan.
And Julien your line is open.
Great Hey, Thank you for taking the questions.
Youre, obviously seeing really great traction in the large customer front over 80% of Fortune 100.
It is a solid number but your peers. Some of your peers also claims similar kind of a mix or higher how do you see.
Clearly a lot of PWM players probably coexist in number of these very large accounts.
Do you have.
How do you think about the opportunity within these accounts over time, how do you see this kind of game play out.
Yes. Thank you for asking that question I'd love to hear exactly exactly that type of thing.
Our whole product strategy is really designed to give you increasing economy, increasing returns to scale as you deploy a product further into more of the company it really becomes a horizontal.
Infrastructure that's.
Thats used by everyone in the team and it's really just the.
A special difference when you get to this place where you know if you want to.
Somebody or freeing up of information you can trust that they're using a ton of it you don't have to figure out which work management tools first.
And we're seeing a lot of signs of the strength of that.
Including.
What we see is the largest work management deployment in the industry.
We do hear about coexistence with.
Palliative products, but from our experience in talking to these customers and mapping the account those appointments are much smaller.
And to be used in small pockets of the organization tend to be used in siloed functions.
And we've talked about our largest appointment is 100000.
Hundred thousand seats right now on one one single company I haven't heard anything like that.
From these other.
Other competitors that are in theory coexisting with us they tend not to talk about their largest Paul do you want to talk about active users.
Difference in paid seats.
So I feel pretty confident that we have so.
The farthest reach into those big customers and we intend to double down on that stuff.
Yeah.
Understood. Thank you and as you move towards cash flow breakeven.
At the end of by the end of calendar 'twenty four how are you thinking about building the indirect channel how important could that be for this to reach kind of does go as you, especially slowed down hiring maybe.
Maybe help us understand the portion of bookings coming from channel indirect channel today versus what it might be.
And the next two years.
Yeah, I can speak to indirect channels.
It's still a small part of our business, but we're seeing some great Jackson with partners.
All over the World we are.
And have great traction in India throughout Europe , we're seeing a great partners kind of bringing us into both industries and geographies to extend our reach so we will continue to invest in that it's an important part of our business, but I would also just say that we see.
See ourselves is still early in that.
Our next question is with Josh Baer from Morgan Stanley .
Josh Your line is open.
Great. Thanks for the question.
In various software markets over the years, we've seen a pendulum swing of preference as far as best of breed solutions versus suites. So im wondering in your work management market, what's the state of that dynamic between best of breed versus suites and <unk>.
Has that changed over the last three to five months, just given the macro environment. Thanks.
Yes, that's a great question.
We're big believers that companies want the best of breed product for work management.
And.
I've talked to some times over the years about this when we think about.
The various categories within software work management is one of the richest and has the most surface area for product differentiation really achieving differentiated value outcomes for customers.
So I think that it's a dangerous place to sort of compromise in order to bundle it with part of your suite.
We really haven't.
Seeing a whole lot of that behavior right now.
It's difficult that you can think of like particular examples and honestly I thought it would be more of a factor at this stage of the category development just given some of the larger players are.
But really we're still seeing most customers engage with thinking about the work management product itself.
We honestly you did have some customers that are divisions within those.
Those larger organization, that's healthy products that include work management.
So that's on us as the solution for their sort of local teams.
So thats still what it looks like for the foreseeable future I definitely haven't seen anything market change.
As part of the macro context.
Great. Thanks, that's it.
Our next question is with Patrick Walraven from J P. Morgan.
Rick Your line is open.
Oh, Thank you had JMP.
So maybe Andrew it seems like there is there is a major opportunity for us on it probably in the federal government with.
All of those employees in the armed forces.
His astana fed ramp authorized.
<unk>.
And if not where are you in that process and how do you feel about that opportunity.
Okay. Thanks for that question I think we believe that there is an opportunity for sonic everywhere that there's cross functional collaboration and so as we think about which industries and verticals and we're certainly looking to government government is super broad from both local and federal.
We are early in the fed ramp process Duston mentioned.
We're really focused on finishing out HIPAA compliance and for our health care customers, but I think you'll see us take the same approach is looking at demand and interest and then making sure that we're meeting customer needs, especially around things like compliance.
Great. Thank you.
Yeah.
That concludes our Q&A. So I'll now hand, the conference back to Catherine for any closing remarks.
Thanks, everyone for joining us today before I close out I just wanted to remind you. We do have an event on October 11th here in San Francisco with the intimate.
Intimate Q&A with one of our best customers it'll be the CIO and there'll be talking about how they're using a sauna for some amazing strategic initiatives. So look out for the invitation and we're looking forward to seeing you. Thank you.
That concludes today's call. Thank you for your participation you may now disconnect your lines.
Yeah.