Q3 2023 Samsara Inc Earnings Call
All of this business critical data exists in an open platform and can be seamlessly integrated with a robust ecosystem of partners, including Oems It systems insurance providers and vertical specific applications.
This quarter, we reached an important milestone we added 200 partner integration to our platform. This makes sense are the largest open ecosystem for physical operations similar to leading cloud providers.
<unk> cloud platforms that exist to deliver actionable insights for workers. So I'm sorry allows physical operations leaders to have a single source of truth as their system of record for physical operations.
As the scale of our data compounds, we're able to refine our analytics models to deliver even richer insights and innovation for our customers.
This quarter, we launched a proactive driver coaching solution.
It is powered by our data asset and our advanced AI capabilities with it customers can take a preventative approach to driver safety technology solutions like this help build safe habits on the road empower drivers to own their coaching experience and act as a differentiator for companies as they look to attract and retain talent.
But we're not only focused on building products. We're also focused on building our company for the long term.
Digitally transforming the world of physical operations isn't going to happen overnight to.
To be a multi decade partner for our customers, we must become a self sustaining company.
This was our 10th consecutive quarter of delivering year over year improvements to our non-GAAP operating loss in both dollars and margins.
Over that same period, we've scaled IRR over three X from $222 million to $724 million, we're committed to operating efficiently on our path to profitability.
Our customers were focused on investing in the highest ROI areas of our business.
We also continue to invest in our people.
<unk> has become a destination of choice for top tier talent. This quarter, we welcomed Steve Pickle as <unk> first chief people officer.
Steve joins us from Salesforce, where he oversaw global people strategy and operations and help double sales forces head count.
He has experienced leading and growing large scale transformative teams and cultures will be instrumental as we grow and develop our talent pool.
We benefit from a flexible workplace model at Samsung and have offices in North America, Europe and Asia.
By expanding our operations, we leveraged the efficiencies of our global talent.
This allows us to bolster customer support and accelerate region specific go to market strategies.
It's been an exciting quarter of efficient growth across our product offerings partnerships executive leadership and global footprint.
We are proud to serve a diverse and resilient range of essential industries.
<unk> customers keep our world running and we're here to help keep them running safely efficiently and sustainably by streamlining their operations, reducing their cost tax and providing clear and direct ROI.
I'd like to end with a thank you to all stem science as well as our customers partners and investors for your continued support.
While there is much to be proud of today I know the best is yet to come.
I'll now hand, it over to Dominic to go over the financial highlights for the quarter.
Sand it as a reminder, please refer to our shareholder letter press release and Investor presentation at investors Dot <unk> Dot com for additional information on our Q3 results and financial guidance.
Q3 was highlighted by strong topline growth and continued operating efficiency improvements are durable and increasingly efficient growth demonstrates the large and growing opportunity for digital transformation across the world the physical operations.
Global economic uncertainty persists, we exceeded our expectations for key topline and profitability metrics by providing quick time to value and meaningful ROI savings for our customers.
Q3, ending <unk> was $724 million growing 47% year over year in Q3 revenue was 170 million growing 49% year over year.
Several factors drove our strong topline performance in Q3 first we continue to focus on serving large physical operations customers. In Q3, we eclipsed 1000 large customers and now have 1113 customers with more than 100 K of IRR a record quarterly increase of 100.
<unk> 24, and a record annual increase of 398, representing 56% year over year growth.
Next same Sarah is increasingly utilized as the system of record for physical operations and multi product transactions continue to significantly contribute to our topline growth in Q3 six of our 10 largest transactions included subscriptions to tour more products more broadly more than 70% of core.
<unk> and more than 90% of large customers subscribe to two or more applications and more than 50% of large customers subscribed to three or more applications.
We're also seeing multi product strength at scale at the end of Q3, our two connected fleet applications video based safety and vehicle telematics each represented more than $300 million of IRR.
Additionally, our emerging products contributed more than 14% of net new ACD in Q3, including our third largest ever equipment monitoring transaction.
And while just over 10% of <unk> comes from non fleet products today customer adoption is much higher almost half of multi product core customers and two thirds of multi product large customers already subscribed to non fleet products.
This demonstrates our product breadth and opportunity for for further expansion as customers bring additional assets onto the <unk> platform.
Lastly, we continue to see strong expansion within our customer base, including upsells of existing products across a broader set of assets and cross sells of additional products. As a result, 55% of Q3 net new <unk> came from existing customers and our dollar based net retention rate for our core customers and law.
Customers remained above our target of 115 and 125% respectively.
Our largest Q3 customer expansion was a $1 million plus upsell to a fortune 500 telecommunications provider with no incumbent solution the customer selected <unk> to help them reduce fuel costs and maintenance spending improved safety through speeding reduction and decreased carbon emissions from idling.
As a result, we expect the customer will achieve a three six X return on investment.
In addition to delivering topline growth, we continue to focus on driving operating efficiency improvements across our business as we scale as a result, we saw year over year leverage across all major functions.
Q3, gross margin was 74% a year over year improvement of two percentage points, primarily from product and supply chain optimization and larger scale.
Q3, operating margin was negative, 10% and annual improvement of more than 60% or 16 percentage points year over year, driven by leverage across all functions and Q3 adjusted free cash flow margin was negative, 9% and annual improvement of more than 75% or 29 percentage points year over year.
Italy from continued improvements in the global supply chain and working capital working capital optimizations.
In Q3, adjusted free cash flow margin converged with operating margin and we expect these metrics to be more closely aligned moving forward.
We also achieved rule of 40 in the quarter, a milestone that demonstrates our focus on efficient growth. While we're pleased with this accomplishment in Q3. Our goal is to continue making improvements that allow us to achieve rule of 40 consistently on a quarterly and annual basis.
Okay now turning to guidance based on our Q3 results and increased forecast clarity for the last fiscal quarter of the year, we're raising our revenue and profitability guidance, both in dollars and margin.
For FY 'twenty, three we're raising our revenue guidance to be between 636, and $638 million or between 48% and 49% year over year growth.
We're improving our full year operating margin guidance to approximately negative, 14% and we're raising our EPS guidance to be between negative 16 and 17.
Based on our updated full year FY 'twenty three guidance Q4 implied revenue is expected to be between $170 and $172 million or between 35% and 37% year over year growth Q4 operating margin is expected to be approximately negative 16% and EPS is expected to be beaten.
Queen negative $5 six.
Looking to next year based on our current outlook and after analyzing various scenarios. We believe current consensus estimates for high Twenty's percent FY 'twenty for revenue growth is appropriately derisked on our next earnings call. We will provide more detailed FY 'twenty four guidance based on our actual Q4 performance and our.
Finalized operating plan.
And finally, we also included some additional modeling notes for Q4 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 year to date, 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.
Stability with that I'll hand, it over to Mike to moderate Q&A. Thank you Dominic we will now open the lineup for questions. When it's your turn please limit your questions to one main question and one follow up question.
The first question today comes from Bob Wang at Morgan Stanley , followed by Sterling Audit Moffett Nathanson.
Hi, Thanks for taking my question and congratulations on a strong quarter, maybe if I can just focus.
Focus a little bit all net new way our last quarter. Obviously, you had a much more difficult comp for a net new way or can you talk about <unk>.
There were any impacts to net new <unk> this quarter, such as macro environment elongated cycles or anything particular that that could be called out.
I'm trying to have a better understanding of what could be the potential run rate of net new <unk> going forward.
Sure Hey, Bob It's Dominic So I'd say a few things on the Q2 earnings call. We mentioned that we were seeing some.
Along Asian of sales cycles that the demand was still very strong the pipeline was very strong that conversion in one way, it's really strong, but we are seeing.
Longer free trial periods.
<unk> levels of approval and really <unk>.
Analyzing ROI analysis with with with much more rigor, we continued to see a similar amount of sales cycles and similar kind of links in Q3, So no real change in Q3 versus where we were in Q2.
So that's kind of the point I would make on macro and the second is really again back to our overall sales capacity and so obviously we've.
We've really been focused on hiring this year in building more sales capacity that is ramping that we think will provide more productivity as we get into FY 'twenty four but it is still not as ramps. It generally takes about four quarters for sales reps to ramp and so that obviously is also having an impact on our Q3 results.
Thanks, that's very clear just for my follow up on that point actually.
Is it fair to say that the elongated sales cycle is not that customers are canceling.
There are discussions with you, but rather just dragging out of the conversation and if so is it fair to assume that in the first half next year or second half next year that you will see a lot of these delayed deals to be completed.
Resulting in somewhat of.
A higher than normal growth rate.
Our deals or <unk> and such.
No again, yet so the pipeline is strong and the conversion and win rates remain at historic levels. So we're not seeing the pipeline reduced and we're not seeing that pipeline not converting all of that is still happening. It's just taking a little bit longer and again I would really categorize that Q3 looked very much like Q2, it did not get worse.
But those deals are still closing and theyre not taking much longer to close we're talking weeks, maybe maybe months and so some of the deals that we saw that we thought could have landed in Q2 ultimately closed at the beginning of Q3. So these aren't things that are that are pushing all the way into and to enter into next year. Okay. Thank you again again.
Gratulation around the corner.
Our next question today comes from Sterling Auty of Moffett Nathanson, followed by Alex Zukin networks.
Yeah. Thanks, Hi, guys. So just wondering when you look at the big customers that you landed in the quarter what budgets are they funding these projects out of and the reason why I asked I was wondering how that prioritization will kind of carry through into next year, given the tougher macro outlook.
Okay.
Hey, Sterling. This is Sandra so our customers are concentrated within the operations organization. So it could be VP of operations or our COO and thats typically the budget that it comes out of this is the same budget by the way that also is related to their accident insurance payouts their operating efficiencies in the capital equipment they are buying.
For us there's a direct correlation between adopting our platform and being able to save money and gain ROI in those areas. So it's that same buyer at that same kind of budget center.
Excellent and then just a follow up would be geographically do you think that theres going to be a different level of impact on demand.
Light of the macro headwinds.
We're not seeing that we have a focus in North America, Canada U S. Mexico, and then Western Europe . This was actually our best international quarter slightly above.
About 15% of our net new ACD came internationally and it was pretty well spread amongst those different geographies and so it's not a.
Tremendously meaningful portion of our overall net new ACD, but it is.
A good chunk and it is growing quickly and we're not seeing a lot of change on the international front.
Understood. Thank you.
Alright. Our next question comes from Alex Zukin at Wolf, followed by Matt Pfau at William Blair.
Hey, guys, Nebraska, Yes, yes perfect.
Perfect. So I guess, maybe just one day.
Just better understanding again, the tone of the macro Dom it sounds like the macro the sales cycle.
Rick has been roughly static from your comment.
Previously from Q2 to Q3, but I guess, how is that trending in November versus may be end of October because you did have the largest amount of 100000 customer adds in the quarter, while others are calling out difficulty with closing larger deals. So it's somewhat counterintuitive.
I'm just.
If you could comment on kind of what that trend line is starting to stabilize it had kind of net new level.
Or are you assuming it to get worse.
Yeah, Hey, Alex.
So again I think that.
Our business is holding up really well, we're really pleased with the Q3 results. When we look at our customer demand. The overall pipeline the conversion rates that the win rates all of those remain strong. Obviously, we're pleased with the Q3 results we were able to increase our guidance for Q4 and for full year.
FY 'twenty three and.
And so we're seeing we're seeing good strength and we're not seeing it.
It deteriorate and I think a big reason that we're <unk>.
Seen good momentum is because as we as we outlined in some of the key studies, we have really fast ROI customers are getting payback within months.
And they're using our solution to find real hard ROI savings they were able to reduce their operational expenses and then in this environment.
That often can get prioritized.
Got it and then.
For my second question will be a bit of a smart <expletive> question, but given the fact that you called out consensus estimates as they are.
Ruler for next year kind of being in the right range from a risk perspective, I guess I want to question, whether the consensus estimates around margins are also the right way to think about.
Derisking and then particularly in the context of your comments about the rule quarter, yes.
Yes, I would just say look we want to get through Q4, we want to see order results are we want to finalize our FY 'twenty four operating plan and then we'll come back in three months and we will give more detailed guidance across top line and margins.
I think you've seen our performance, we improved adjusted free cash flow margin by more than 75% over the last year. This is a really big focus for US. We're really proud of the fact that we got to rule of 40 in Q3, we need to be able to to make improvements to sustain that but.
You can expect us to continue to make improvements on that as we go into FY 'twenty four as well.
Perfect Congrats Scott.
Our next question comes from Matt Pfau at William Blair, followed by Kirk <unk> at Evercore.
Okay, great. Thanks for taking my questions everyone I appreciate it.
Just two both related so I'll ask them at the same time first of all if we look at the operating efficiencies that youre, achieving maybe you can just help us understand where exactly those are coming from and specifically are there any change to your hiring plans that are driving those and then as we look at the margin guidance.
For the fourth quarter, it implies operating margin worse than Q3.
Maybe you can just help us understand whats behind the guidance there for Q4. Thanks.
Yeah, Hey, Matt So it's domenick.
Again, so on when we think about kind of our operating margin improvement for the quarter. Obviously, we had some outperformance in revenue, which definitely helped US we had some savings around gross margin came in a little bit better than expected and then within within our operating expenses really across the board.
We're focused on.
On just overall operating.
Efficiency improvements, but also some non personnel related spend so can we get.
Can we find.
Software spend that we're in.
Utilizing can we think about our.
Unused real estate can we think about being more thrifty around things like <unk> and events and so those are all areas of focus and projects that we've built to drive some of the operating efficiency improvements that you've seen.
In terms of the Q4 guide I would really just focus investors on the full year guide versus the kind of seasonality between Q3, and Q4 and so overall operating margin for the year was negative 18% previously now it's negative 14%.
We are basically passing through.
The $14 million of beat in Q3, plus another $6 million for Q4, So I would I would really.
Focus investors on the the full FY 'twenty four.
For 'twenty three guidance.
Versus the kind of Q3 versus Q4 seasonality.
Perfect I appreciate it.
Okay.
Our next question comes from Kirk <unk> at Evercore, followed by Derrick Wood at Cowen.
Okay.
Hey, guys, let's say Peter Berg Manfre Kirk I appreciate taking the questions here.
You guys are delivering pretty pretty strong NR rates I'm, just curious how you kind of characterize the balance between.
Customers starting to go deeper with some of your mortgage ancillary products versus.
Just as these customers grow and they are adding new vehicles.
Safety and telematics solutions there.
I would assume.
Our customer adds going vehicles, and if they're using you for safety.
That's just the automatic adjacent right there.
But just curious kind of how much those ancillary products are driving that if at all.
This is standard by the way so it's really a mix, we see customers, adding additional assets to the platform as they continue to expand their operations and additional applications. So quite often will land with two or more applications, but in many cases some of these customers if they're larger, especially they have a single project they start.
With might be telematics or video based safety or maybe even equipment monitoring and then from there once they get familiar with the platform to see how much value and ROI. It drives they want to expand us kind of across their entire operations. So I would say, it's a pretty healthy mix between those two cases of expanding the number of seats or assets on the platform as well as expanding applications.
And maybe I'll just add in one more just our overall go to market motion in a way that we kind of incentivize the sales reps is really just.
Commission rate tied to overall net new HCV, so whether that's a new logo or an expansion to an existing customer.
They are incentivized to go out and get as much net new ACD as possible and we're seeing really good balance right now as we as we mentioned 55% of our net new ACD in Q3.
We're tied to expansions to existing customers and so really good balance between kind of net news to be coming from new logos as well as existing customers.
That's really helpful color, maybe just a quick follow up if I could international still represents a pretty nice area for potential expansion when taking sort of a longer term view just curious if youre looking at western Europe or elsewhere, what are the key barriers to adoption in those other regions versus what you're seeing domestically.
If any.
Is it just a matter of getting more reps on the ground over there just curious about the dynamics there.
So the use cases are remarkably similar to what we have here in the U S and in North America, and Western Europe or the customers are still focused on safety efficiency and sustainability. There are some regions specific features some language changes that we have to make theres. Some different regulatory compliance remains for our workflows, but I would say, 80% 85% of the product.
Is very similar and now we're beginning that invest of.
Getting more quota carrying capacity on the ground and also increasing our base of reference customers. So I think with time, you'll see us grow into that Tam.
Taking it slow and we're also focusing on our efficiency as we grow.
Great. Thank you.
Okay.
Our next question comes from Derrick Wood at Cowen followed up by Matt Swanson at RBC.
Great. Thanks, guys and congrats on a solid quarter.
It does feel like the broader supply chain conditions have eased a bit it sounds like you guys are seeing that.
With your operations as well just curious as companies don't have to deal with the supply chain disruptions seen over the last couple of years and maybe is there kind of recouping, some better cash flow and market visibility how is that impacting.
Customer conversations and willingness to do more digital transformation kind of initiatives.
So the customer view on this is supply chain has been.
An area of focus mainly because they are trying to get better visibility, but in terms of the value that our platform offers a lot of it is tied to labor. So if you think about these industries, whether it's construction or oil and gas or field services. There are people intensive as much of their asset intensive and what we're able to do is help them go find 10% to 15% operator.
Efficiencies out in the field, we're able to help them save money on fuel, which is when they're operating those assets and then also around things like carbon reporting. So those are all unrelated to supply chain constraints. So I would say theres multiple sorts of value on our platform.
While getting better asset utilization has been one of the many pillars of problems in terms of the sensor hub platform. It's not the only ones. So we still have a very broad based appeal and we're able to drive very fast time to Rois, we talked about earlier across more than just visibility to supply chain.
Great.
Maybe one for you the.
Really great to see that the net revenue retention rate on 100 gig customers.
Stable over a 125%.
Anything how do you feel about the durability of this number or anything to be aware of tougher comps or.
Given the macro do you feel that this is a pretty good sustainable level from here going forward.
We do yes, we feel confident in being over $1 15 for core customers in 125 plus four.
For our large customers and again, we are just seeing a really good balance of.
Net we see coming from from new logos, but also more than half of it again in Q3 coming from our.
Our existing customers and.
We're seeing a lot of the large customers continue to come back and once they've realized ROI on one use case for one product continue to add more products and use cases and find additional ways to save money and so.
More and more of our business is coming from 100, K plus customers, 47% of our overall IRR is driven from that customer cohort now and you can see how that's increased over the last.
A couple of years.
Great well done thanks.
Our last question today comes from Matt Swanson at RBC.
Yes, thanks, guys.
Matt Swanson on for Matt Hedberg I was just wondering if you could kind of net net the macro impact for us we've talked a lot about ROI in the prepared remarks, obviously the results were showing a lot of durability.
Would you describe parts of this macro tailwind I guess and then how are you thinking about the macro and that Q4 guidance, but also in that early color for 2024.
I would just say again, we're really pleased with the results for Q3 and the momentum in the business right now that customer demand has remained strong.
Our pipeline our conversion and win rates have been really strong and so we're very pleased with the results and obviously, we reflected that in Q4 as we raised our guidance for that quarter and for full year.
We do recognize that there is a lot of macro uncertainty and so we want to make sure that we were given a little bit of color.
Into next year based on how we're thinking about things as well is going through some different scenario analysis and.
And we feel good with where the kind of consensus FY 'twenty for revenue growth rates are right now in the high 20%.
<unk>.
We feel good about that based on what we're seeing right now and if I can just add one or two things. While we are seeing customers very much focused on cost reductions and efficiency.
In the World of operations. These are evergreen problems are always trying to find ways to be safer reduce their cost of insurance theyre trying to find ways to be more efficient whether that's in terms of how they serve their customers or how much they spend on fuel and then the same thing around sustainability. So while there is a lot that's front of mind because of the current macro with our customers I've just been spending a lot of time out in the <unk>.
<unk> spent time with these customers. They are saying these are fundamental challenges in operations and that's why they're digitizing theyre trying to move from kind of paper to a more modern platform to get better visibility into these kinds of problems.
That's super helpful. And then it was great to see the success that you had about the market for both 100 K customers as well as the growing percentage of IRR is there any difference I guess on the other side of the market in terms of macro impact or anything else for the smaller deal sizes you call.
No I think again the same problems that the large customers are grappling with the same with kind of our mid market customers as well they are looking for ways to reduce cost lower.
Costs are insurance premiums or reduce accidents meet increasingly meet their sustainability goals.
I would point you to just the overall mix.
Mix coming from 100, K plus customers continues to move up but it's moving up kind of like a percentage point every quarter, which means that the customer is paying below 100 care also growing really really quickly.
And driving a lot of our overall growth, we're just seeing a little bit more growth from the from the large customer segment.
Alright, I appreciate the color congrats on the quarter.
This concludes our question and answer portion. Thank you all for 10 year Q3 fiscal year 2023 earnings call. If you have any follow up questions you can email us at IR at <unk> Dot com. Thanks again <unk>.
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