Q2 2023 Samsara Inc Earnings Call
<unk> bring more data into our platform, we're able to provide an increasing number of actionable insights and fundamentally re imagine the way our customers do business.
Take Liberty Energy for example, with them Sarah as their system of record and our open API Liberty energy created a custom integration they've connected real time operations data from their machines to their tax software.
As a result, they can more accurately represent their operations and more accurately report to the government because of this one integration Liberty energy expects to save $10 million every year.
They have unlocked a new level of operational visibility and this single integration more than pays for their <unk> investment.
We are delivering more value for customers by creating the largest open ecosystem for physical operations. This quarter, we announced new OEM partnerships with two of the largest U S. Automakers still anticipate general motors as well as thermo King a global leader in transport temperature control systems.
With our increasing data asset we're excited to scale, our product offerings and double down on product innovation.
This quarter, we continued to invest in our product leadership by hiring Jeffrey Hausmann as Chief product Officer from service now and appointing Karen CCAR as our company's first chief strategy Officer.
<unk> strong background in cloud operations data analytics and infrastructure technologies will help us as we scale.
Kieran has led our product team since founded in his new role as Chief strategy Officer. He will continue leading new product incubation and development.
We're also building capacity to serve increasing customer demand.
We're seeing a remote work model unlock access to the global talent pool.
As a result Q2 was also our best hiring quarter since the pandemic began.
I'd like to end with a thank you to all <unk> as well as our customers partners and our investors for your continued support we are still in the early stages of our tremendous market opportunity to digitally transform the world of physical operations I'm looking forward to what will achieve next with.
With that I'll now hand, it over to Dominic to cover the financial highlights from the quarter.
Thanks, and as a reminder, please refer to our shareholder letter press release and Investor presentation at investors thought Tim sorry, Dot com for additional information on our Q2 results and financial guidance.
Q2 was highlighted by strong topline growth and continued operating efficiency improvements. However, the quarter was also impacted by broader macroeconomic headwinds, which contributed to some instances of elongated sales cycles, such as higher levels of required deal approval longer trial periods and intensified ROI validation compared to periods of <unk>.
Stronger economic growth.
<unk> said that we saw no significant change in pipeline conversion or win rates for most of our core customers and demand remains robust we continue to be well positioned to directly reduce our customers' operating costs in an inflationary environment and our results reflect the importance of digital transformation, taking place across the world of physical opera.
<unk>.
Q2, ending <unk> with $663 million growing 52% year over year in Q2 revenue was $154 million also growing 52% year over year.
Several factors drove our strong topline performance in Q2.
The first of which was a continued focus on landing and expanding with large customers. We now have 989, 100, K plus <unk> customers, a quarterly increase of <unk> 92, and an annual increase of 374 or 61% year over year growth more specifically, we saw strength within our largest.
<unk>, we ended Q2 with 41 $1 million plus <unk> customers, a record quarterly increase of 7% and almost doubling over the past year. While the majority of these additions were customer expansions. We also landed two new million dollar plus our logos, who are now top 15 customers one of the world.
Largest screen and equipment companies and a top 10 less than truckload transportation carrier net.
Next multi product transactions continue to significantly contribute to our topline growth showing the strength of our connected operations cloud in the market.
Eight of our 10 largest deals in Q2 included subscriptions to two or more products and five of the top 10 deals included three or more products more broadly more than 70% of core customers and more than 90% of large customers subscribe to multiple applications. We're also seeing multi product strength at scale are.
Video based safety product cross the $300 million <unk>.
Milestone and vehicle telematics ended at more than $250 million of IRR and.
And finally, while this was another strong quarter for our core products are emerging products stood out in Q2.
We saw a quarterly record 17% of net new HCV come from our non fleet applications, including our second and third largest equipment monitoring deals ever in fact, while non fleet applications are more than 10% of our.
Our customer adoption is much higher.
Almost half of our core multi product customers and almost two thirds of our large multi product customers subscribed to non fleet products. This shows the breadth of our customer adoption and we see a significant opportunity to expand the depth of adoption within our customer base by monetizing a broader set of non vehicle assets.
In addition to our strong topline performance, we continue to focus on driving operating efficiency improvements across our business as we scale as a result, we saw strong year over year leverage across all functions. Our Q2 non-GAAP gross margin was 73% a year over year improvement of one percentage point primarily for.
Some product optimizations improved one time commercial strategies and larger scale.
Our operating margin was negative 13%, an annual improvement of more than 50% or approximately 17 percentage points year over year, driven by leverage across all functions.
And our adjusted free cash flow margin improved by more than 20 percentage points year over year over the past couple of years free cash flow margin begin to lag operating margin due to the global supply chain disruption and the associated increase in components and logistics costs. However, we started to see free cash flow margin converging in Q2 of this year and we.
Spect that trend to continue with supply chain improvements as a result, we believe operating margin is a good leading indicator for profitability, while we continue to navigate our supply chain constrained environment.
Okay now turning to guidance for Q3, we expect total revenue to be between 154 and $156 million representing year over year growth between 35% and 37% and non-GAAP operating margin to be approximately negative 20%.
Based on our Q2 results and increased forecast clarity for the second half of the year, we're raising our full year revenue guidance to be between $610 and $614 million or between 42% and 43% year over year growth.
In addition to increasing our topline guidance, we continue to focus on achieving savings through improved operating efficiencies. As a result, we're also raising our FY 'twenty three non-GAAP operating margin guidance to negative 18%.
And finally, we also included some additional modeling notes for Q3 and full year FY 'twenty three in our shareholder letter.
To wrap up while we're operating in an uncertain macroeconomic environment. We are pleased with our performance in the first half of the year. We are digitizing the world of physical operations and our cloud is becoming our customers' system of record.
As a result, we remain committed to driving durable growth along with improved operating efficiencies on our path to profitability with that I'll hand, it over to Mike to moderate Q&A.
Thank you Dominic we will now open the line for questions. When it's your turn please limit your questions to one question and one follow up question.
The first question today comes from Alex Zukin at Wolf, followed by Matt at William Blair.
Hey, guys can you hear me okay.
Yes, yes perfect.
Perfect.
Look I think really strong quarter congrats.
One of the standout features.
That I saw at least was how much of the net new HCV is coming from kind of the emerging product category.
And you spoke about multiple million dollar deals where were those upsells came together so I guess.
For investors that are looking to kind of dream the platform dream longer term was it did you feel like.
That was more of a focus internally at a push from a go to market team was it a pull from customers looking to do more with the platform and as it was this an inflection point type of quarter was it just a confluence of events because particularly on a macro backdrop.
That seems that's a really really strong and I've got a quick follow up.
So Alex I'll take that one this is Sanjay I would say it was probably more pull than push from us in general our sales team is a generalist organization, they're able to sell all the products and really focus on solving customer problems. We saw customers realize that they can digitize more of their physical operations in terms of other non vehicle fleet assets for <unk>.
Sample trailers generators compressors bulldozers yellow iron equipment, using construction and so on so I think now the market is starting to realize that this expands well beyond just fleets of vehicles to all kinds of operational assets and that coal is what we see reflected in that 17% of net new ACB, we're going to continue to invest in that product line and make sure it's well integrated.
And our platform and connected across all the reports and Apis, but I think this is a bit more of the market starting to realize you can digitize a lot more I think that we've tried to call. This out in Investor day and in the shareholder letter I think what gets US excited is that while non fleet applications is over 10% of our IRR, we're seeing a much higher.
Customer adoption, so almost 50% of our.
Multi product core customers and almost two thirds of our.
Multi product large customers are already using a non fleet application and we called out in the letter.
Lot of these are coming through expansions and so one of our top five customers who is already using us for <unk>.
Telematics and for safety and equipment has decided to bring some additional non vehicle assets online and it was an expansion to a large customer and so I think were based on the adoption that we're already seeing where we're really excited about the ability to go back to our existing customers and bring online a broader set of assets.
That makes a lot of centers and it's great to see.
I guess just a follow up.
Tom for you just wanted to understand when you think about when you see the macro sensitivities that you've talked about the elongated sales cycles, clearly net new <unk> in the quarter was very strong.
Did you feel an impact or a headwind from those things on net new <unk> would've been stronger if.
If not for that <unk>, what's the right way to think about comparing net new where our seasonality linearity on a go forward basis with that macro backdrop.
We are definitely seeing elongated sales cycles, and so customers are using more rigor as their as they're going through the process of signing the contract. They are really making sure that there <unk>.
Down on the ROI analysis, there at times, asking to do longer trials, and making sure that they've got the right internal resources to go through the deployment and so that theyre getting the ROI as quickly as possible.
So we definitely saw some elongated sales cycles and that probably had some impact on the top line I think specifically we were a little stronger in some areas. So we called out non fleet applications. It was a pretty good international quarter, we talked about the large customer momentum. It was a strong renewals quarter, we were a little softer in some of.
Other areas and really that came in with our smallest customers small customer segments is a little bit more impacted by macro but I think we're also excited of it for the year. We're ahead on our profitability goals and that really allowed us to move up or our full year guidance and so we've got some really good kind of levers, where we can make adjustments to how we are.
Spending money based on what we're seeing from from topline performance.
Perfect. Thank you guys congrats on a great quarter. Thanks, Greg.
Our next question comes from Matt William Blair, followed by Bob at Morgan Stanley .
Hey, great. Thanks, guys for taking my questions and great quarter wanted to first ask on the two 1 million plus new logos that you added in the quarter have you ever signed.
Deals of this size and then with these customers are they just larger than some of the customers that you've added in the past and that's what drove the large deal size are there. Other factors that made these customers feel comfortable committing to that large of a deal initially.
So we called out we now have 41 customers paying more than a $1 million of several of those landed as new logos at more than $1 billion of IRR, though it tends to be the majority of those were expansions to existing customers that have added more assets over time I think.
We did out of all of last year FY 'twenty two throughout the entire year, we did $2 million plus new logos, all all year and we just did two in Q2 and I would expect more to come in the back half of the year and so.
We have the ability to land at that size or have customers kind of expand and I think it's just a testament to the investments that we've made and really going after the enterprise segment going after large customers. There is a lot of go to market investment required. There is a lot of R&D investment required and these deals just take time to come together and so we're.
Really happy to see that.
Those investments in that effort paying off in Q2.
Okay, Great and just a follow up on the margin guidance. So it implies back.
Back half being a lower margin than the second quarter is that just a strong hiring quarter in Q2 layering on in the back half or are there. Other factors. There. We should think about yes, I think its two things one.
While Q2 was a record hiring quarter for us a lot of it was backend loaded so you'll see more of that expense hit in Q3, and there was also some timing of expenses that we had thought would hit in Q2 that ultimately are going to happen more in the back half of the year I think what we would just focus investors on is really the full year guidance was minus 20% for operating.
<unk> is now improving to minus 18% and we effectively the entire implied operating profit beat in Q2 is effectively flowing through to to have that full year margin go up to negative 18%.
Great. Thanks, guys I appreciate it thank you.
Our next question comes from Bob at Morgan Stanley followed by Michael at Wells Fargo.
Okay.
Bob I think you're on mute.
Sorry can you hear me now, yes, we can hear you okay sorry.
Again, congratulations on a solid quarter most of my questions were answered, but just one quick question.
Sure.
For a $1 million plus customers understand that most of those deals take a long time too.
Come to fruition.
Or are there.
Any large deals on the horizon lets say in the next six months that could dramatically impact.
Our growth trajectory going forward do you see any macro impact on those large deals in the second half.
No I mean, I think if you look at our overall customer base today, we don't have any massively large customers that are driving a significant portion of our IRR and so I don't expect there to be any sort of large material swing deals that could have a material impact on the trajectory of our ore for the rest of the year.
Alright, Thank you very much that's helpful.
Thanks, Bob Our next question comes from Michael at Wells Fargo, followed by cash at Goldman.
Hey, there thanks.
Taking the question and nice job with the Q2 results.
I mean, it's been fairly consistent youre, adding 90 more than 90 customers consistently each quarter on the on the 100 K customer metric you mentioned, 60% of the expansion there with existing customers. Maybe you can just now I'm going to touch on the visibility you have into that expansion path with the existing customer base and is there anything that.
Youre seeing that would suggest the change at all on how you would expect that trend on net new versus expansion mix to trend.
From here we.
Got a really nice balance right now of our net new ACD coming from.
From about half from expansions have from from new logos and it's been pretty consistent over the last several quarters over the last year and so I would expect that to ultimately.
Roll forward, there is such a large opportunity in front of us of landing new customers and the typical buying pattern is is that as a land and expand so they'll start with one product or a certain set of assets and maybe they'll start with and one one subsidiary one geography, and then they'll roll out more over time and as they.
Value out of the same star platform, they'll they'll add more assets onto the platform and so.
We think that that that.
That motion that customer adoption motion will will continue.
That's great and just.
Small smaller follow up on the op margin versus free cash flow margin relationship you did a good job in providing us with some useful disclosure at the Investor day around the dynamics there the commentary suggest that supply chain impacts.
Impacts maybe starting to normalize on the margin and that gap starting to shrink can you just walk us through what Youre seeing there currently and how we should think about modeling a few scenarios there or anything to be mindful of just in the back half of the year.
Some of these new assumptions Paul so.
Michael why don't I start with the kind of context on the supply chain of Dominic wants to add on any details on free cash flow versus operating margin. We are seeing improvement in our upstream supply chain. So it's been fairly consistent over the last couple of months are key components, we have greater visibility into a lot of the smaller passive components are more readily available on the market.
And the automotive components had been actually the most challenging to procure and we're seeing signs of recovery, especially as we look forward to early calendar year 'twenty three.
And then on top of that we've been able to manage our costs a little bit better in terms of stabilizing and shifting more of our freight to ocean as opposed to buy air So.
Think the way that we're thinking about it is while we are not out of the woods yet costs are still elevated from where they were a couple of years ago. We are seeing that recovery happen in the supply chain.
Showing through in the cash flow.
And I would just again point to the shareholder letter in the Investor deck, where we've got the chart with the gross margin operating margin and free cash flow margin at the bottom of this table that shows kind of a difference between operating margin and free cash flow margin you can see like in Q2 of last year. The GAAP was <unk>.
16%.
At Investor Day, and in Q1, we talked about the Q1 FY 'twenty three difference was 18% and now its down to 12% in Q2, I would expect that gap to continue to shrink in Q3 and Q4 as the sands at the point, we get more visibility over over supply chain and.
Operating a more kind of normal environment.
That's great nice job off thanks. Thank.
Thank you Alright, our next question comes from cash at Goldman.
Followed by Matt at RBC.
Okay.
Cash you're on mute.
Yes.
Okay, let's move forward, let's go to Matt at RBC.
Yeah.
Hey, this is a nice to hear from Matt Hedberg can you hear me. Okay. Yes, we can hear you.
Yeah.
I wanted to ask about.
Just a follow up question on the elongated deal cycles that you noted did you see that play out any specific initiate a wanted more or less broad based.
I would say.
We've seen has been broad based it's not any particular industry, whether it's transportation energy utilities or even the local governments. We serve I would say everyone is making sure they've got that ROI case lined up and that they have their teams ready to deploy and I think Dominic highlighted that's the sort of underlying reason that again not specific to a single industry.
Got it and then could you talk about how sustainable the digitization trend in physical operations has been in an unstable macro environment, how do the customer conversations evolve in such an environment.
So I would say this trend towards Digitization has been a kind of long arc and its continuing they are actually seeing more opportunities and business reasons to drive the digitization as you think about challenges in the supply chain I mentioned, it a little bit earlier in the call, but it is hard to procure trailers, it's hard to procure equipment in this environment and so.
We see customers trying to be more efficient with our asset utilization I think they're also thinking about their own cash and can they take some of those underutilized assets and remarket them sell them off in other words to raise cash and reinvest in their business. We also see fuel prices have fluctuated quite a lot over the last quarter and really over the past year, we've seen some recovery now, but even if.
We'll take a closer look at the price of diesel it's elevated and so many of our customers are saying can we become more efficient and more sustainable in other words to use less fuel.
Using all of this data so I would say these are all of this sort of tailwind effects that we have that are in favor of digitization.
Simply these customers going through a transformation, it's new for them.
Got it thank you.
Alright.
Our next question comes from Derek at Cowen followed by Kirk <unk> at Evercore.
Great. Thanks for taking my question Congrats guys on a strong quarter. Sanjay you mentioned that you guys hired a new chief product Officer came from service now Randy IP operations portfolio.
Are there any new product strategies to call out or anticipate coming down the pike and <unk>.
In particular.
This notion of maybe having tiered pricing and going after new monetization strategies, just any thoughts to share on potential new pricing and packaging strategies.
So Derek for US. This is about building for the long term kind of view and we're really excited to have Jeff on board because he has seen the scale that we're approaching now as we continue to grow as a company. We're also serving many more of these larger more complex customers, who have these million dollar plus ACB footprints and there is an opportunity there to continue.
On new products and new innovation, we don't have any specific pricing model changes or new packages to announce on this call, but it is something we are thinking about which is as we continue to invest in R&D whats the right way to package and price those innovations and so thats something that Jeff will work on over the next couple of years.
Great. Thanks, Dan one for you.
Just in terms of your assumptions within guidance.
With regards to the macro I mean are you expecting conditions to say stay the same through the year slight elongation of sales cycles, but.
No material impact of demand I guess, maybe.
Little slower weakness at the lower end better durability at the at the upper end, but any thoughts on what.
It puts you put into the guidance for second half.
So I think our view is that for the second half of the year, we think that the.
The customer demand the pipeline the win rates all of those things. We expect we expect to remain strong because of this this trend digital transformation in the world of physical operations, we don't think Thats going away and again this is a.
Our solution that plays really well in this type of environment, where we can help customers directly reduce their operating costs. We also do expect that the macro headwinds broader uncertainty are going to continue that elongated sales cycles.
We expect that that will continue as there is kind of economic uncertainty.
I think the way that we view it though is while we can't control the broader macro impact we are really using this as an opportunity to drive even more profitability and so that is something that is really within our control and we'll balance the way that we kind of spend money based on based on what we're seeing on the on the top line, we were able to raise our.
<unk> margin or free cash flow margin for the rest of the year and we're continuing to look for ways to find other efficiencies within our business.
Well done thank you.
Thanks, Eric.
That question comes from Kirk at Evercore, followed by Allied J P. Morgan.
Alright. Thanks, guys. This is actually Peter Berkeley on for Kirk I. Appreciate you taking my questions here.
Obviously, you're getting a lot of questions about the macro.
So kind of just following along that train of thought intuitively it would make sense that the telematics piece of the business.
What sort of hold up better given companies are looking for ways to rein in their spending and so having the ability to make more informed decisions regarding fuel efficiency in the way would be helpful.
So just curious is that a fair characterization and if not is there anything that you guys would call out.
Relates to strengthen any other products specifically.
So Peter this is Sanjay.
It's interesting I was just on a customer tour, where Jeff and I visited probably eight or 10 customers in a pretty short time span and there was a lot of interest not just for telematics, but also our safety products turns out people get in accidents, regardless of interest rates and so they are thinking about how do they manage those insurance payout costs thats, a very real business problems for them.
We talked about some of the value proposition of connected equipment getting better asset visibility. So I'd say its really all of these pillars are working in favor and we are seeing that as we land new customers. There. They are landing as multi product transactions. So we.
Hear from our customers are investing in that platform digitization across their operations not just specifically telematics and that's exactly what we're building towards.
Okay, Great. That's helpful color I appreciate that.
If I can sneak in one more maybe.
You guys, obviously have a pretty impressive growth trajectory, but again, just curious given the dynamics and the macro today.
How you're sort of thinking about that ramp to profitability.
Was wondering if there's any levers in particular you'd call out.
Or is it more kind of on the flip.
Flip side so.
<unk> sort of full steam ahead from your guys' perspective in terms of investing for growth.
It's definitely the former I mean, this has become a big priority for US internally, we've got a number of projects underway to really.
Accelerate our timeline to breakeven.
I think.
And we've shown that our operating margin improved by more than 50% year over year.
More than 20 percentage points of free cash flow improvement and so it is it is a big focus we expect to see continued leverage year over year, and and where folks are marching towards that towards breakeven.
That's helpful. Thank you guys.
Thank you Sir.
Our next question comes from J P. Morgan followed by cash at Goldman.
Great. Thank you so much for taking my question. My first question I was curious, which verticals are you seeing particular strength in right now and where might there be possible weaknesses.
I'll, let this is Sanjay I would say in general we're seeing strong demand across industry segments, I wouldnt necessarily call out a single vertical.
And again, we've talked about some of the themes and Digitization.
There are different dynamics at play in each of the markets. We serve labor shortages are kind of common across the board, but I don't know Dominic if you have any other sort of color on that yes, I mean, I think there is digitizing.
<unk>.
The world of physical operations like moves across all of the segments every industry right now is looking for ways to improve efficiency to lower cost regardless of industry and that's really what we're building towards and what we're selling into and so we're seeing.
Really strong customer demand across all verticals.
That's really helpful. Thank you so much and as a quick follow up I was curious does the profit profitability of verticals differ materially or certain verticals considered more profitable than others.
No. It's the same I mean, if you just think about our overall cost stack are our cloud cost or cellular costs. The Iot device costs are the way that we compensate go to market.
R&D all of that is.
Is the same across all verticals, it's a horizontal industry wide.
That form.
Great. Thank you so much thanks.
Thanks Alan.
Let's try back to that last question with cash.
Can you hear me Okay, Yes, we can hear you great alright. Thank you so much thanks for taking the question.
Great improvement in operating margin and free cash flow.
Progress here or just ask you given that you didn't see any big challenges in your business, maybe the value proposition of the product is so high that I Wonder if you are in a position to actually raise prices and that would be absorbed by the market, which would be obviously, great for helping the profitability.
Wondering if you've given thought to that proposition and also secondly, your input costs I mean at what point does the supply situation, but George situations settled down and we're already starting to hear inventory buildup at lower cost.
What point would that would be passed along to you.
As you potentially if you are raising prices input costs could also go down where are we in that or is that a stretch. Thank you. So much.
Sure So cash I'll start and maybe Dominic can add on in general we do look at pricing and strategy.
Every year or so and Thats something thats just been built into the company as we continue to invest in R&D, you will see us introduce new packages for customers and what we're thinking about different pricing strategies as we go and penetrate the market. We don't have any specific changes that are being announced today, but that is something thats on our mind and it's something we've always thought about I don't know Dominick ironic.
Maybe on the second one on the on the on the input cost I think the supply chain.
Availability is improving somewhat youre, starting to see again free cash flow margin converged back into operating margin and again, we expect that to continue in the second half of the year is as the supply chain.
Continues to improve but that is why I think we were trying to point investors and analysts to look at non-GAAP operating margin is kind of a leading indicator of where we expect profitability to be because in the longer term we do expect.
Free cash flow and an operating margin to convergence out thats kind of the the leading indicator of where we expect things to be and just if I can tack on one more thing I'm just incredibly proud of how well the team worked together to ensure that we have supply.
Maintaining our gross margins, we've been able to maintain the gross margin profile in the low seventies in spite of all these supply chain issues and fulfill our customer demand. So that's not been an easy task lot of creativity required beyond it seems but I think we managed well through it.
Wonderful. Thank you so much.
Thanks, guys. So this concludes the question and answer portion. Thank you all for attending our Q2 fiscal year 2023 earnings call before I. Let you go have a short announcement for upcoming conferences, we will be part doesn't mean, the Wolf TMT conference on September seven.
Evercore Technology conference on September 7th and the Goldman Sachs Community Copia Technology Conference on September 13, we look forward to seeing you at one of these events in person.
That's it for today's meeting if you have any follow up questions can E mail us directly at IR at <unk> Dot com. Thanks again <unk>.
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